2017 Business Law Newsletters

 

October 2017

September 2017

August 2017

June 2017

May 2017

 

Business Newsletter Header
May 2017
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

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In This Issue:

If You Are Doing Business in Europe Are You Complying With The General Data Protection Regulation?

By Jennifer Mullins, CIPP/E, Esq., General Counsel, SafeGuard World International, and Steve Suneson, Esq., Coan, Payton & Payne, LLC

Any Colorado or other US company that has a presence in the European Union (“EU”) should be aware of big changes coming next year with respect to cross-border transfers of personal data from EU individuals. This includes any US business that targets EU individuals in connection with the offering of goods or services. US companies that have subsidiaries and employees in the EU should especially be aware of these changes as such businesses usually will collect and/or transfer personal data of their EU employees to the US. This article is a brief overview of the General Data Protection Regulation (“GDPR”), which becomes effective in May 2018, and associated requirements. 

EU v. US Privacy 

Privacy and protection of personal data is viewed very differently in the EU than in the US. While privacy is generally viewed as a consumer protection issue in the US, it is viewed as a basic human right by the European Commission (“EC”). In the US, laws protecting personal data usually extend no further than requiring a business to inform its customers when a disclosure in violation of its confidentiality obligation has occurred, or is otherwise industry specific (such as for health information, or consumer financial information). The EU, however, takes a comprehensive proactive view with respect to the collection and processing of all personal data of its individuals. For that reason, the EU has for the past two decades used a comprehensive EU Data Protection Directive (“Directive”) which is a comprehensive privacy framework and requested its member states to give effect to the Directive through local legislation. 

The Reach of the GDPR

The GDPR harmonizes the Directive for collecting and processing personal data (as further described below), implements additional accountability and other conditions, and turns the Directive into a formal regulation across all EU member states and, in the process, will affect numerous businesses overseas. US companies with EU subsidiaries and/or EU employees or contractors generally will need to comply. The GDPR will apply in all instances where a company processes personal data in the EU. This includes having a physical facility in the EU, servers doing processing in the EU (except if the data merely “passes through” the EU), or collecting data for providing goods and services to EU data subjects (in which case the collection must be done in accordance with GDPR).

The GDPR is truly a global law because it even applies to businesses established outside the EU if the businesses process personal data of EU individuals (regardless if the processing takes place in the EU or not) in connection with the offering of goods or services to individuals in the EU, or engage in business activities that monitor the EU individuals’ behavior. In the context of goods or services, the GDPR will apply if it is apparent that the US company envisages offering such goods or services to EU individuals, such as when a commercial website uses a language or a currency generally used in one or more member states of the EU; or the website mentions customers or users who are EU individuals, etc. Although this will be determined on a case-by-case basis, merely having a website which can be accessed by anyone in the world, including someone in the EU, is not sufficient.

If a business falls within the purview of the GDPR, that business must then follow one of the permitted methods for cross-border transfer of personal data of EU individuals as set forth in the GDPR and as described below.

Personal Data 

The definition of personal data in the EU includes not only typical personally identifiable information such as name, address, social security number, but also items like criminal record, genetic information, health information, or religious beliefs. Generally, anyone collecting personal data from an individual in the EU (whether customer, employee or otherwise) needs a lawful purpose to do so. A lawful purpose may entail collection by obtaining the consent from the data subject, where the data is necessary to perform a contract, where necessary to comply with a legal obligation, or the collection is in the legitimate interest of the data controller. For example, the collection of employee data may be lawful because the data is necessary to fulfill the employment agreement between employer and employee as well as necessary to comply with a legal obligation (i.e. submission of tax information to tax authorities).

In addition, the GDPR imposes data minimization obligations which mean that the business collecting personal data should only collect no more than necessary in relation to the purpose of such collection. You must notify the data subject of the purpose of collection. Should a business seek to use the information for a different purpose from the original, the business generally must identify the lawful purpose for the secondary use as well. The GDPR also imposes requirements as to retention, accuracy, integrity and accountability with respect to personal data. Under the GDPR, the data subject will gain more expansive rights to access data as well as rights regarding data portability and erasure.

Transferring Data 

In order for personal data to be transferred from the EU to an outside jurisdiction, such as to the US, the US business must first comply with the conditions set forth in the GDPR. The GDPR specifies certain transfer vehicles to ensure that personal data is protected while allowing for movement across the EU border. These obligations flow downstream, meaning that not only must the US business collecting personal data comply, it must also ensure that any processors and sub-processors of such personal data comply with GDPR. There are various methods to achieve compliance under the GDPR. In the US, the most efficient method for achieving adequacy with respect to recurring cross-border transfers of personal data is the certification process pursuant to the US-EU privacy shield. The EU-U.S. Privacy Shield Framework was designed by the U.S. Department of Commerce and EC to provide businesses on both sides of the Atlantic with an efficient mechanism to comply with the GDPR when transferring personal data from the EU to the United States. Click here for more information about the certification process and the privacy shield. (Because Switzerland is outside of the EU, the US has separately negotiated a similar privacy shield with Switzerland.) For example, a US company who establishes a European subsidiary with European employees and maintains HR information of all of its employees at its US headquarters likely will find the certification process under the privacy shield the best method to comply with GDPR. This certification will usually ensure that all such cross-border transfers of personal data are compliant with GDPR. Aside from the certification process, the US company can use standard contractual clauses (containing specific requirements promulgated by the EC), enact binding corporate rules or obtain express consent from the EU individual on a case-by–case basis. The specific method to comply with GDPR will depend on the nature of the US company’s business operations in the EU. Sometimes, it may make sense for a US business to undertake more than one method for GDPR compliance as a matter of caution. 

Consequences for Noncompliance 

Noncompliance with the GDPR will be taken seriously by the EC and will be subject to legal sanctions, including criminal penalties and monetary fines (up to 4% of worldwide revenue). While there are jurisdictional considerations, US companies may thus be subject to legal sanctions for violating the GDPR even without a traditional establishment in the EU such as a subsidiary or branch office. The GDPR requirements also apply to any company, large or small. Therefore, any US company, however small, who is offering goods or services to individuals in the EU or engages in activities which monitor the individuals’ behavior, should be aware of the basic framework of the GDPR and how to comply with it. We recommend that any business that will be affected by GDPR consult an advisor for further information and obtain advice tailored to its specific situation. 

Click here for more information about the GDPR.

The Working Group on Legal Opinions

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

On May 8-9, I attended the semi-annual meeting of the Working Group on Legal Opinions as a representative of the Colorado Bar Association’s Business Law Section. As has been frequently the case over the years and as I have previously reported in this newsletter, this is a meeting of opinion givers and opinion recipients from both coasts of the United States and some of us in the middle. 

Third Party Opinion Letters and “Customary Practice”

The focus of these meetings is on third-party legal opinion letters, frequently referred to as “closing opinions.” These are generally delivered by counsel to one party (the “opinion giver”) to the other party (the “opinion recipient”) to satisfy a condition to the opinion recipient’s obligation to close. This generally puts the opinion giver (a lawyer) in the uncomfortable position of giving legal advice (the opinions contained in the opinion letter) to one not the lawyer’s client. While permitted by the Colorado Rules of Professional Conduct (see Rule 2.3 “Evaluation for Use by Third Parties”) assuming the consent of the lawyer’s client, this is still an uncomfortable position for the lawyer to be in – giving legal advice to a third party.

Closing opinions are prepared and understood in accordance with the customary practice of lawyers who regularly give closing opinions and those who regularly review closing opinions for opinion recipients. “Customary practice” is a fundamental component of Rule 1.1 (Competence) in opinion giving, and consists of two facets –

  • “customary due diligence” which refers principally to the work lawyers are expected to perform to back up their opinions, and

  • “customary usage” which refers to the way certain words and phrases commonly used in closing opinions are understood.

Importantly, the Real Estate and the Business Law Sections of the CBA have adopted the ABA’s Statement on the Role of Customary Practice in the Preparation and Understanding of Third-Party Legal Opinions (63 The Bus. L. (ABA) 1277 (2008)) which says: “Some closing opinions refer to the application of customary practice. Others do not. Either way, customary practice applies.” The Customary Practice Statement also says: “The Restatement [(Third) of the Law Governing Lawyers] treats bar association reports on opinion practice as valuable sources of guidance on customary practice. Customary practice evolves to reflect changes in law and practice.” Colorado does not have any bar association reports on opinion practice, and Colorado lawyers may look elsewhere for that guidance – such as the extensive reports issued by TriBar or the various California reports, all of which (and many others) are available on the ABA’s Legal Opinion Resource Center. The Legal Opinions Committee of the ABA’s Business Law Section and the WGLO are finalizing efforts to adopt a Statement of Opinion Practices which both the Real Estate and Business Law Sections of the CBA have approved, subject to final approval of the final form of the Statement. Perhaps not surprisingly, after six years of drafting, it is almost, but not quite final. A few of its provisions have received late-in-the-day push back from some in the opinion recipients community which are being reconsidered.

Under customary practice, a closing opinion is intended to express the professional judgment of the opinion giver regarding the legal issues addressed by the closing opinion. Importantly, nothing in the opinion should be considered to be a guarantee that, if challenged, a court will reach any particular result. Consequently the use in an opinion of the word “would” or “should” will be interpreted identically under customary practice even though they have different meanings in common language and the dictionary. A legal opinion is not a guarantee that a court will reach the same conclusion as the opinion giver should the legal opinion be challenged. A legal opinion does affirm that the opinion was given in accordance with customary practice, but the application of customary practice can be changed by agreement of the opinion giver and the opinion recipient – but such agreement should be stated in the opinion. For example, in a corporate good standing opinion, many opinion givers state that the opinion is being given “solely in reliance on a certificate from the Secretary of State of Colorado.” Although that is consistent with § 4.1 of the ABA Business Law Section’s Committee on Legal Opinions “Guidelines for the Preparation of Closing Opinions,” 57 The Bus. L. 875, 879 (Feb. 2002), it is frequently stated to ensure mutual understanding. [Interestingly, the Guidelines go on to state that “delivery of those certificates without an opinion ordinarily should be sufficient to satisfy the needs of the opinion recipient.”)

Opinions Contemplating Bankruptcy Reorganization or Liquidation

The morning session included two panels focused on bankruptcy issues in the legal opinion context involving mixed questions of law and fact. Among the questions that could be addressed in a legal opinion given in a bankruptcy planning context are:

  • Is a sale of assets in the pre-bankruptcy context a “true sale” or (when judged under bankruptcy law) a fraudulent transfer or a voidable preference?
  • Are the governance provisions of the SPE sufficient to prevent the SPE from filing bankruptcy without the lender’s consent?
  • If the parent files a bankruptcy, will a special purpose entity (an “SPE”) be consolidated with its parent-debtor or (as the lender to the SPE hopes) will the consolidation with the parent-debtor be avoided consistent with the principles described in the legal opinion given by the borrower’s attorneys (a “non-consolidation” opinion)?

Much discussion surrounded a project underway by the American Institute of Certified Public Accountants (“AICPA”) (The Use of Legal Interpretations As Audit Evidence to Support Management’s Assertion That a Transfer of Financial Assets Has Met the Isolation Criterion in Paragraphs 7-14 of FASB ASC 860-10-40). This was, in part, previously addressed in the 2009 Special Report on the Preparation of Substantive Consolidation Opinions by Structure Finance and Bankruptcy and Corporation Reorganization Committee of the Association of the Bar of the City of New York. As this project and the 2009 report indicate, accountants are looking at asset transfers and are seeking comfort from client companies and their lawyers on the effectiveness of transfers and compliance with the “true sale” requirements. This is necessary from the accountant’s point of view because the accountant needs to know how to treat the transaction in the parent or SPE entity’s financial statements. Where the transaction is voidable in a bankruptcy, the transaction would be accounted for in a significantly different manner than if the transaction is treated as a “true sale” and the SPE is not to be consolidated with the parent following a bankruptcy filing.

During the pendency of a bankruptcy, the debtor has an opportunity to complete a sale of some or all of its assets under Section 363 of the Bankruptcy Code. What about the situation where the governing law or documents require owner approval for such a sale? Section 303 of the Delaware General Corporation Law provides that a bankruptcy court can accomplish such a transaction notwithstanding corporate or entity provisions to the contrary. The Colorado Business Corporation Act does not have a similar provision. Therefore an opinion giver may be asked to opine on whether a court order that is inconsistent with the entity’s governing documents and organizational law negates the requirements for owner vote or board of directors’ discretion. Should the Colorado Business Corporation Act, the Limited Liability Company Act, and other organizational laws in Title 7, C.R.S., be amended to include a provision similar to the Delaware provision?

Opinions on Partnerships and Limited Liability Companies

A panel discussion was held on the new (not yet published) TriBar report on Third-Party Closing Opinions: Limited Partnerships and the new (December 2016) California report entitled Third-Party Closing Opinions: Limited Liability Companies and Partnerships. Both discussions pointed out the difference between an out-of-state lawyer being competent to issue an opinion on corporate law (which is primarily statute-based) as compared to LLCs and partnerships (which are primarily contract-based). One of the most serious issues in California and Delaware, which also applies in Colorado, is that the Secretary of State’s records may not be accurate in reflecting the dissolution of a partnership or an LLC. 

  • Consider a Colorado LLC which has an operating agreement that provides that the LLC will dissolve on the sale of its assets. Several years later, after a sale by the LLC of all of its assets, the owners ignore or forget about the dissolution provision and the LLC acquires and operates a totally different business. Even though the Colorado Secretary of State’s records reflect no dissolution of the LLC, hasn’t it dissolved by agreement? Can it be reconstituted without a filing, or merely by continuing to file periodic reports?

    What about the case where there has been, within a twelve month period, a change of more than 50 percent of the membership interests of an LLC treated like a partnership for tax purposes? That would constitute a dissolution of the LLC for tax purposes. Does that affect whether the LLC remains a viable entity for doing business?

  • Since an operating agreement or a partnership agreement is contractually-based, how comfortable are Colorado lawyers preparing or, even more importantly, giving opinions on, the effectiveness and the enforceability of an operating agreement under Delaware, California, or another state’s law?

In each case, these raise significant concerns for any attorney attempting to give an opinion that an unincorporated entity is “duly formed and validly existing and in good standing under Colorado law and has the power to enter into and to perform its obligations.” The latent issues increase the due diligence obligations to get to the point the opinions can be given, even under Colorado law.

Conclusion

As is the case with each of these seminars I have attended or spoken at, I have again learned a significant amount about national opinion practices and I hope that the information given can help Colorado lawyers whose practice involves giving legal opinions to third-parties.

Business Law Section Now Accepting Nominations for the Cathy Stricklin Krendl Lifetime Achievement Award

The Executive Council of the Colorado Bar Association Business Law Section is now accepting nominations for the Cathy Stricklin Krendl Lifetime Achievement Award. Nominations must be received by June 16, 2017.

This award is bestowed from time to time on a lawyer who has, over an extended period of time, manifested:

  • intellectual and professional excellence in the practice of or scholarship on Colorado business law;
  • the recipient’s generosity of spirit as reflected in the recipient’s participation in and contribution to the advancement of Colorado business law;
  • the recipient’s efforts to enhance the general quality of business law practice by Colorado lawyers; and
  • the recipient’s devotion to the principles of legal professionalism.

Click here for the nomination form. Please return your nomination by June 16, 2017, to Andrew Johnson at ajohnson@ofjlaw.com. Nominations submitted after June 16, 2017, will not be considered.

Business Law Section Activities

Bankruptcy Subsection

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, June 7, 2017 – Noon – 1:00 p.m.

Co-sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please attend a Denver brown bag lunch with our bankruptcy judges and two guest speakers: James T. Burghardt (Moye White LLP) and Curt Todd (Law Office of Curt Todd, LLC). In addition to current matters before the court, the guest panel will present an overview, based on years of experience, of mediation as a tool for resolution of disputes in bankruptcy cases. Topics covered will include styles of mediation and how to pick a mediator for a particular dispute; the kinds of bankruptcy issues that are best suited to mediation; the general advantages and disadvantages of mediation compared to other means of resolving a dispute; the point(s) in the dispute process when mediation is most likely to succeed; what makes for a good mediator -- or a poor one; what the parties and their counsel can do to help a mediation succeed; and what should be done in the event the mediation is successful. Please attend to share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar. This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver CO 80202. There is no cost for this program.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen Vellone Wolf Helfrich & Factor, P.C.) are the current co-chairs of the Bankruptcy Subsection (July 2015 – June 2017). Mr. Larson has successfully completed his two year term. Matthew Faga and Timothy Swanson (Moye White LLP) have been nominated as co-chairs for the Bankruptcy Subsection for the July 2017 – June 2019 term. Additional nominations are welcome, and may be submitted no later than noon on June 7, 2017 by e-mail to mlarson@allen-vellone.com and mfaga@markuswilliams.com. If additional nominations are submitted by that deadline and accepted by the nominee, the Bankruptcy Subsection will hold an election in accordance with the Business Law Section Bylaws.

Financial Institutions, International Transactions, and M&A Subsections

These subsections will take a summer break from their CLE series. There are no programs in June, July and August.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

15th Annual Rocky Mountain Intellectual Property & Technology Institute – Thursday & Friday, June 1-2, 2017 – Westin Westminster Hotel, Westminster, CO

The 2017 Rocky Mountain IP & Technology Law Institute is invaluable for corporate counsel, business law and general practice attorneys. Four simultaneous tracks of sessions, led by practice and thought leaders nationwide, will examine how IP, tech, and transactional law have changed and may impact the advice you give clients about protecting their innovations, commercializing those innovations through licensing, or funding or selling their enterprises.

This program is offered for 15 general CLE credits, including 4 ethics credits. Click here for more information or to register.

2017 Business Law Institute – Save the Dates! – Wednesday and Thursday, September 13-14, 2017 – Grand Hyatt Hotel, Denver

Highlights include:

  • Well-known and respected Dr. Richard L. Wobbekind, Executive Director of the Business Research Division, Senior Associate Dean for Academic Programs, and Associate Professor of Business Economics, Leeds School of Business, University of Colorado, Boulder, addresses The State of Colorado’s Economy – What’s Growing; What’s Not; Trends: Demands
  • The always-popular Honorable Russell E. Carparelli presenting on Negotiation Tactics and Skills for Transactional Lawyers
  • Accomplished In-House Counsel presenting on Effective Partnering Between In-House and Outside Counsel – Keep Out of the In-House Dog House
  • 21 Breakout Sessions, including sessions to help you better advise your start-up clients and to get you up to speed on other areas of the law such as employment, tax, antitrust and intellectual property law
  • Case Law, Legislative and Secretary of State Updates
  • Materials and audio files provided for ALL breakout sessions after the Institute.

Registration info to come soon!

Business Law CLE Homestudies

2017 Securities Conference

2017 Institute on Advising Nonprofit Organizations

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

2017 Cannabis Symposium

Ethical Issues for Attorneys Serving on Nonprofit Boards

Limited Liability Companies in Colorado

Why Are Banks Reluctant to Touch Cannabis Cash?

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com 303-292-2900.

This newsletter is for information only and does not provide legal advice.

2016-17 Business Law Newsletters

Business Newsletter Header
September 2016
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

Escrows vs. Representations and Warranties Insurance: How the Choice Can Alter Deal Dynamics

By Paul Koenig, Co-CEO and Travis Bell, Associate Director, Corporate Development & M&A Transactional Group, SRS Acquiom

Background

The allocation of risk shapes every merger and acquisition, and the backbone of risk allocation is the right of the acquiring company (the “Buyer”) to be indemnified for breaches of the selling company’s representations and warranties (such selling company, the “Seller”). In a standard acquisition of a non-public Seller, the selling securityholders (the “sellers”) bear the indemnification risk. This risk has traditionally been managed using a two-tiered structure: (i) an escrow funded from proceeds due to the sellers 1, and (ii) in the event of a claim beyond the escrow, the right of the Buyer to claw back proceeds from the sellers directly. However, Representations and Warranties Insurance (“RWI”) is emerging as a tool to modify or replace this structure. RWI shifts some or all indemnification risk from the sellers to an insurer, and a policy can be either buy-side or sell-side. When the Buyer is the insured (a buy-side policy), RWI can reduce or eliminate the need for an escrow because an insurer, rather than the sellers, indemnifies the Buyer for covered losses.When the sellers are the insured (a sell-side policy), they remain liable to the Buyer for breaches—typically through the two-tiered structure—but RWI compensates the sellers for covered losses. In both cases, the RWI premium is a percentage of the insured amount, generally 2–5%.

Buy-side policies are the dominant form of RWI today, comprising at least 80% of policies issued annually in the U.S. according to major insurers and market data. Sellers often push for buy-side RWI over sell-side RWI because, among other reasons, buy-side RWI allows sellers to receive the funds at closing that would otherwise be at risk in escrow. In principle, the economic protection afforded to the Buyer is largely the same between an escrow and RWI (subject to both the premium and a deductible when using RWI, both of which the Buyer may require the sellers to bear).3 Deal parties should be aware, however, that using buy-side RWI rather than an escrow can alter traditional deal dynamics in non-economic ways. These include the quality of the Seller's representations and warranties, the likelihood of indemnification claims, the indemnification recovery process, and the ability of serial Buyers to assert claims. These points are discussed in turn below.

Quality of Representations and Warranties

Buyers generally require detailed representations (reps) and warranties from the Seller for two reasons: risk allocation and due diligence. Buyers use reps and warranties to allocate to the Seller as much of the risk as possible regarding information asymmetry about the Seller and potential unknown liabilities, and the Seller naturally wants to avoid as much of this risk as possible. The Buyer can shift more of this risk to the Seller by requiring the Seller to give thorough reps and warranties about its business, with the Buyer having the ability to seek indemnification if it is harmed by inaccuracies. For example, the Buyer may require the Seller to represent that all of the Seller’s patents are valid and free of adverse claims at closing. Even if both parties believe this to be true, the Seller bears the risk for an agreed-upon period following closing that the representation is shown to be inaccurate when made.

In addition, Buyers use reps and warranties to supplement due diligence. That is, Buyers can minimize information asymmetry through a combination of conducting due diligence and requiring thorough reps and warranties. This allows the Buyer to maximize the information it receives about the Seller pre-closing, and the process shakes out disclosures that could trigger additional questions or even result in the renegotiation or termination of the deal. In these ways, a Buyer uses reps and warranties to maximize the probability of a successful deal.

If risk allocation and information-gathering are key drivers of thorough reps and warranties, then a Buyer may question whether it can expect to get the same quality of reps and warranties if RWI replaces or significantly reduces the use of an escrow. One could hypothesize that a Seller may not negotiate as strongly to ensure accurate reps and warranties where its securityholders bear significantly less economic risk if the reps and warranties are wrong. This is the moral hazard problem. Even where the selling securityholders retain some economic risk before RWI is triggered (if they are liable for the deductible4), is it possible that the incentives are such that the Seller will not negotiate as strongly in making its reps and warranties as it would be in the absence of RWI.

While we have no statistical evidence to prove or disprove this hypothesis, a number of leading M&A attorneys have publicly opined on conference panels that, in the attorneys' experience, using RWI rather than an escrow causes sellers to be less vigorous in negotiating reps and warranties. For example, Buyers will often push Sellers to capitulate on issues such as materiality and knowledge qualifiers when RWI is used, with the argument that the insurer rather than the selling securityholders bears the risk. According to these attorneys, this argument often prevails. While this may seem like a win for the Buyer from a risk-allocation perspective, it may be offset by both diminished comfort in the reps and warranties given as well as less thorough information-gathering as discussed above.

Likelihood of Indemnification Claims

The logical extension of the above hypothesis is the question of whether using RWI leads to more indemnification claims compared to using escrows. If RWI causes lower-quality reps and warranties relative to deals with escrows, then more inaccuracies may result in more indemnification claims by the Buyer. Claims can negatively impact the Buyer in three ways. First, they can be costly economically, both in terms of dispute costs and the cost of the breaches incurred. Second, they can distract the Buyer from executing on its post-acquisition strategy, even if the Buyer recovers the economic cost of the claims. Last, the Buyer may be prevented from fully recovering economic costs. For example, if the terms of the RWI policy or acquisition agreement limit the Buyer’s recovery to direct damages, but a breach causes significant indirect damages, then the Buyer may be without recourse for the difference.

Indemnification Recovery Process

A third question is whether the Buyer’s ability to recover for breaches is equivalent between RWI and escrows. The party bearing the risk of loss (whether an insurer or the selling securityholders) may resist paying a claim if a colorable defense is available. Where an escrow is used, the Buyer must show a breach of a rep or warranty and that indemnification is available for such breach under the acquisition agreement. Where RWI is used, the Buyer will need to do the same, but must then also demonstrate that both the type and amount of loss are covered under the insurance policy. RWI policies typically incorporate the indemnification terms of the acquisition agreement, and thus Buyers are usually made whole. However, RWI coverage can include carveouts and exceptions. Further, an insurer may dispute the amount of loss claimed by the Buyer even if the claim subject matter is covered. In these ways, using RWI can add a layer of complexity to disputes compared to escrow-based indemnification.

Ability of Serial Acquirers to Assert Claims

Lastly, serial Buyers may want to consider whether they have the same ability to make claims against RWI as they do against an escrow. The potential exists that a series of material claims by a Buyer against RWI may impact that Buyer's future RWI pricing (i.e., the Buyer's perceived risk profile), similar to the impact of an insured's claims against home or auto insurance. This could have a chilling effect on claims. According to RWI industry professionals, the effect of prior claims on future pricing depends on whether such claims are isolated and justified. A Buyer with a propensity to make claims against RWI without sufficient justification may see higher pricing or have difficulty obtaining RWI going forward.

This chilling effect can similarly apply in an escrow-based deal where parties with whom the Buyer desires to have an ongoing relationship, such as key employees or investors, participate in the escrow. Protecting such relationships by shifting indemnification risk to an insurer is a frequent basis for using buy-side RWI.

Conclusion

Whether an escrow or buy-side RWI is a more appropriate source of indemnification collateral depends on the circumstances of the transaction. In our view, it is not the case that either product is fundamentally better or worse than the other. Rather, it depends on which is a better fit for your transaction. For the reasons above, deal parties should be aware that either option can materially influence the transaction in non-economic ways.


 

[1] Escrows are typically funded with 10–20% of closing proceeds and set aside for one to three years.

[2] Whether the sellers remain liable for excluded matters or for clawbacks above the buy-side RWI limit is negotiated deal-by-deal. Buy-side RWI is often used as a tool to eliminate the post-closing liability of sellers entirely (except for Seller fraud), with the Seller's representations and warranties not surviving past closing.

[3] For additional information on RWI and why parties opt to use it in M&A deals, please click here.

[4] Also known as a "retention".


 

NASDAQ-Listed Companies: Director Compensation Disclosure Rule Change

By Elizabeth Karpinski Vonne, Davis Graham & Stubbs LLP

 

NASDAQ is adopting a rule applicable to its listed companies that will require those companies to publicly disclose compensation or other payments by third parties to board members or nominees in connection with that person's candidacy or service as a director. Under the new rule, NASDAQ-listed companies must disclose the material terms of all third-party compensatory agreements or arrangements for nominees and directors in proxy statements filed on or after August 1, 2016.

Such compensatory arrangements are also known as "golden leashes," and the arrangements vary, but can include compensating directors based on achieving benchmarks such as an increase in share price over a fixed term. NASDAQ believes that golden leash compensation information is important for investors to know before investing in the company and voting for its directors because the third-party compensation arrangements, "potentially raise several concerns, including that they may lead to conflicts of interest among directors and call into question their ability to satisfy their fiduciary duties. These arrangements also tend to promote a focus on short-term results at the expense of long-term value creation."

Companies may generally disclose the information either on the company's website or in the proxy for the next shareholders' meeting at which directors are elected. There are additional details and certain exceptions about these requirements in the rule, and any company that may be subject to the disclosure requirement should consult with its securities counsel. In addition, "compensation" is intended to be construed broadly and includes non-cash compensation and other payments, such as health insurance premiums and indemnification obligations. All NASDAQ-listed companies should update their D&O questionnaires in order to ensure that the information required by the new rule is elicited.

To date, the NYSE has not indicated whether it will follow NASDAQ and require similar disclosure for NYSE-listed companies.


 

All Public Companies: U.S. Business Leaders Release New Corporate Governance “Commonsense Principles”

By Elizabeth Karpinski Vonne, Davis Graham & Stubbs LLP

Another recent corporate governance development, which, like the new NASDAQ rule, includes in its objectives an attempt to temper the influence of shareholder activists, culminated in the release on July 21, 2016 of a letter authored by prominent heads of large companies that sets forth best-practice corporate governance principles that the authors believe every public company should meet.

The letter is titled "Commonsense Principles of Corporate Governance" and is intended to provide a basic framework for sound, long-term-oriented governance. The letter also points out that there is significant variation among public companies and that their approach to corporate governance will inevitably and appropriately reflect those differences.

However, many of the recommendations apply to public companies of all sizes, and can be a challenge for all companies, including: "The board should have the fortitude to replace ineffective directors."

Recommendations not related to improving the performance of boards include encouraging companies to not provide quarterly earnings guidance.

Whether meeting a certain standard of corporate governance will deter activists is an open question. However, the corporate governance practices set forth in the letter could strengthen and increase the long term success of public companies independently of any activist threat, and public companies should review the list of practices and determine whether they and their shareholders could benefit by endeavoring to follow any of the practices which the companies currently do not meet, and how to accomplish them. Click here to access the letter.

Business Law Section Activities

Bankruptcy Subsection

Denver Bankruptcy Bar Brown Bag CLE. The CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado are co-sponsoring a Denver brown bag lunch with our bankruptcy judges.  Please attend to share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar.  This brown bag event will be held on Wednesday, December 7, from Noon - 1:00 p.m. at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver CO 80202.  There is no cost for this program.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen & Vellone, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com


Financial Institutions Subsection

Implementing FinCEN’s Customer Due Diligence Rule - Considerations and Challenges – Wednesday, October 19, 2016 – Noon - 1 p.m.  (option to purchase lunch)

Robert Goecks, MBA, CPA, CAMS, sought-after advisor to financial institutions, will provide important information to help you better advise your clients on the implementation of FinCEN’s Customer Due Diligence Rule. Financial institutions covered by the Rule, required amendments to bank anti-money laundering (AML) programs, identifying beneficial owners and obtaining and maintaining information from them, monitoring transactions, accountability of management, and the evolving expectations of the regulators will be discussed.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the Dates for the November and December Financial Institutions Subsection Luncheon Programs:

Wednesday, November 16, 2016 - Noon - 1 p.m. 

Wednesday, December 14, 2016 - Noon - 1 p.m. 

International Transactions Subsection

Transnational Insolvency – Harmonizing and Unifying the Law on International Trade When Cross-Border Insolvencies Arise – Tuesday, November 8, 2016 – Noon – 1 p.m.

Topics Include:

  • Introduction to Transnational Insolvency — the United Nations Commission on International Trade Law (UNCITRAL), Comity and the Emergence of the Law of Effectively Addressing Cross-Border Insolvency, and Chapter 15 of the United States Bankruptcy Code
  • The Purpose, Implementation and Use of Chapter 15 – Inbound
  • Today’s Use of Chapter 15

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit.

Registration information to come!

M&A Subsection

The Private-Target M&A Landscape - Data, Trends and Challenges – Wednesday, October 5, 2016 – 8:00-9:00 a.m. 

SRS Acquiom collects data on private company mergers that is not available anywhere else. This presentation by Eric Martin, Managing Director, SRS Acquiom, will cover data and trends in deal terms and claim activity for transactions where SRS Acquiom is involved as shareholder representative or payments administrator. The presentation will also cover trends in M&A payments and challenges facing deal parties when evaluating investment options for M&A escrow deposits.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the Date for the November M&A Subsection Program:

Tuesday, November 1, 2016 – 8:00 – 9:00 a.m.

Save the Date for the December M&A Subsection Program:

Broker/Dealer Issues that Arise in M&A Transactions – Tuesday, December 6, 2016 – 8:00-9:00 a.m. The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit.

Registration information to come!

 

Securities Subsection

Dodd-Frank and Investment Adviser Registration: A Look Back and a Look Forward – Monday, November 7, 2016 – Noon to 1:15 p.m.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which, among other things, amended certain provisions of the federal Investment Advisers Act of 1940.  One important change was the repeal of the “private adviser exemption” on which many advisers, including those to many hedge funds, private equity funds, and venture capital funds, relied in order to be exempt from registration under the Act. 

In its place, the Securities and Exchange Commission (SEC) adopted narrower exemptions for certain advisers – e.g., advisers to venture capital funds, family offices, and certain foreign advisers.  These changes caused many other types of advisers which were previously exempt – such as private equity funds, mezzanine debt funds, and certain real estate funds – to register with the SEC.

This event will analyze the evolving contours of these exemptions and the practical experiences of and lessons learned by some of the advisers which became subject to the SEC’s regulatory regime.

The program will be held at The Brown Palace Hotel, 321 17th Street, Denver. This program is offered for 1 general CLE credit.

The cost for CBA Securities Law Subsection members is $34.00 and $54.00 for non-members.  You are also eligible for the lower Subsection Member rate if you are a CBA Business Law Section Member, and request to be added to the Securities Subsection membership roster. If you are not sure if you are a CBA Business Law Section Member, please ask when you RSVP.

Please RSVP to the Colorado Bar Association at lunches@cobar.org, or call 303-860-1115 x727, or click here for more information or to register. The deadline to register is November 4, 2016.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know – Wednesday, October 26, 2016 - 9:00 a.m. - 4:30 p.m.

Compelling reasons for you, your advertising clients, and all marketers to attend this one-day program on the state of advertising law in 2016 include distinguished faculty sharing their expertise concerning: (1) the enforcement activities and consumer protection priorities of the Federal Trade Commission and the Colorado Attorney General; (2) updates on native advertising compliance; (3) the basics of copyrights and trademarks in advertising (4) the use of big data and (5) various topics in advertising compliance.

Attend and you will be better able to navigate the maze of laws, regulations, and court cases at both the state and national level affecting marketers. You will gain insights on the legal risks for advertisers, hear best practices for complying with the law, and receive practical tips for steering clear of lawsuits.

Join us for a day of learning and networking, and stay for a networking reception at the conclusion of the program sponsored by Gibson, Dunn & Crutcher!

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver.  This program is offered for 7 general CLE credits. Click here for more information or to register.

Secrets of Bulletproof Contract Drafting: Better Documents; Less Stress; More Satisfied Clients – Friday, December 9, 2016 - 9:00 a.m. - 4:30 p.m.

In “Secrets of Bulletproof Contract Drafting,” you will learn:

  • The 3 types of ambiguity and their likely sources;
  • 5 linguistic improvements that eliminate semantic ambiguity;
  • 6 strategies for structuring sentences to prevent syntactic ambiguity;
  • 3 methods of avoiding contextual ambiguity;
  • Tried and true methods for identifying and eliminating unnecessary language

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver.  This program is offered for 7 general CLE credits. Click here for more information or to register.

Business Law CLE Homestudies

2016 Business Law Institute

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Business Contracts: A Guide for Lawyers and Business Owners, 2016 Edition

Author: Edward White, Moye White LLP

Encompassing a wide range of business topics, this book provides the practitioner with all the tools needed to prepare business documents used in the formation and operation of businesses. Read more.

Securities Law Deskbook: For Business Lawyers, Public Accountants, and Corporate Management

Author: Herrick K. Lidstone, Jr., Burns Figa & Will PC

This is a practical reference guide to securities law, in one convenient volume. With 17 chapters and hundreds of citations to securities rules, statutes, and cases, it is an essential tool for researching securities regulation, litigation, compliance issues, and much more.  Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

 

Business Newsletter Header
October 2016
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

Significant New Department of Labor Rules for Overtime 

By Elizabeth C. Lewis, Esq., Law Office of E.C. Lewis, P.C.

On May 23, 2016, the United States Department of Labor issued its Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act (the “Overtime Rule”). The biggest change to the current rules for exempt employees is the salary requirement to be exempt from overtime--it is increasing by 200% - from $455.00 a week ($23,660.00 per year) to $913.00 a week ($47,476.00 per year). This change will affect thousands of small businesses that pay individuals less than $47,476.00 and have relied on these individuals to provide more than 40 hours per week of labor without overtime pay.

In order for an employee to be exempt from overtime, she must typically meet a three-prong test. The first prong is that the employee must be paid on a salary basis. The second prong is that the employee must make a minimum salary (which is changing December 1, 2016). The third prong is that the employee must perform duties that fall under the duties test for Executive, Administrative, Professional, Outside Sales, or Computer Employees (known as the “Standard Duties Tests”). There are some exceptions to each of these prongs. For example, teachers, professors, outside sales, and several professionals, such as doctors and lawyers, are exempt from the salary requirements in most cases. For highly compensated employees (those making more than $134,004.00 annually), the duties test is more minimal than for those whose salary falls between $47,476 and $134,004.00 per year.

Salary Test

With few exceptions, in order to be exempt from overtime pay under the FSLA, an employee must make a minimum of $913.00 a week or $47,476.00 per year as of December 1, 2016 (this does not have to be paid weekly, but the pay must average $913.00 a week, so if the employee is paid bi-weekly, the employee would make $1,826.00 for the two week period). This amount must be paid on a salary basis – it cannot be paid on an hourly basis. For example, an employer cannot pay a person no wages one month because work is not available and make up the difference in wages the following month when work is available. Each week, the employee must be paid a minimum of $913.00 provided that the employee is ready, willing, and able to work even if the employer does not have work available. If an employee is not paid the minimum of $913.00 (unless the employee is exempt from the minimum salary requirement), then the employee is automatically entitled to overtime.

Duties Test

In addition to meeting the minimum salary requirements, an employee must meet all of the duties under the exemption that is being sought unless the individual is a highly compensated employee. If even one test is not met, the employer typically cannot classify the individual as exempt from overtime pay. The exempt categories are administrative, computer employees, executive, outside sales, professionals, and highly compensated employees.

Administrative

In order to qualify for an administrative exemption, the employee’s position must meet the following tests:

1.      the employee must be paid a minimum of $913.00 per week as of December 1, 2016;

2.      the employee must perform non-manual labor, typically office work, directly related to the management of the company; and

3.      the employee must have the ability to use discretion and independent judgment in regards to matters that significantly affect the company.

The USDOL further states that for the work to be “directly related” to the management of the company, the work must involve areas such as accounting, advertising, human resources, insurance, purchasing, or other areas that typically need independent judgment by the employee to perform the tasks. These duties can also be performed for the company’s clients, such as would be done by an outsourced human resource professional for an HR company, or financial consultants for an insurance company. The duties do not include manual tasks such as working on a manufacturing line or tasks that do not require independent judgment such as performing retail sales. For example, an executive secretary that has significant control over the scheduling of a CEO’s time and acts as a “gate-keeper” allowing some individuals in but not others, would probably be exempt under the administrative exemption (assuming the salary test was met). However, an employee of a retail store that spends the majority of time as a sales clerk, regardless of his or her job title or salary, would not be exempt under the administrative exemption.

It is important to note that the salary requirement of $913.00 per week may not apply to certain academic administrators. Academic professionals in some cases may qualify as exempt if they meet all of the duties of the administrative exemption and are paid at least the base salary of entrance teachers at the school where they perform the services. The meeting of all of the duties tests may also not apply to highly compensated employees, as further discussed in this article.

Computer Employee

In order to qualify for the computer employee exemption, the employee’s position must meet the following tests:

1.      the employee must be paid a minimum of $913.00 per week as of December 1, 2016;

2.      the employee must be employed as a computer professional whose primary duties consist of computer analysis, programming, and/or engineering where:

a.                   the employee helps create the hardware, software, and functional specifications for the company’s information technology environment;

b.                  the employee helps design, develop, create, test, and/or modify computer programs;

c.                   the employee helps design, test, and/or create the computer’s operating system; or

d.                  the employee does a mixture of the above tasks.

With the computer employee exemption, the individual must possess advanced skills with computer programs and systems. The exemption is not allowed for individuals that merely use computers with their day-to-day job duties (such as word processing programs), but the employee must be actually programing, analyzing, or otherwise using computer programs and systems. Note that the exemption typically does not apply to individuals who manufacture or repair computer hardware unless the majority of their job is actually in creating IT systems.

Executive

In order to qualify for the executive exemption, the employee’s position must meet the following tests:

1.      the employee must be paid a minimum of $913.00 per week as of December 1, 2016;

2.      the employee must have the duty of managing the company or a department of the company;

3.      the employee must direct and control at least two full time employees (or their equivalents); and

4.      the employee must have the ability to participate in the management of the employees, including having the authority to hire, fire, and promote the employees.

The USDOL further states that the management of the company and/or department must be significant. The employee must be able to control a budget for the company and/or department and have significant say in how that budget is used, such as what tools are going to be purchased, how salaries are determined, and day-to-day oversight of company and/or department expenses. In managing employees, the executive employee may not have the final say over hiring, firing, and other employee issues but the employee’s suggestions must be given considerable weight by those having the final say in such matters.

For small businesses, an owner who owns at least 20% of the company and is actively engaged in controlling the company is considered a bona fide exempt executive by the USDOL.

Outside Sales

In order to qualify for an outside sales exemption, the employee’s position must meet the following tests:

1.      the employee must primarily be performing sales duties, including obtaining orders for the company which will be paid by third parties; and

2.      the employee must not be regularly performing the services at the employer’s place of business.

While outside sales typically involves the sale of the company’s products or services, the USDOL has also stated that outside sales of advertising, such as radio and television spots, applies as outside sales. The outside sales person must not have a regular place of business, such as an office at the employer’s place of business or a home office, where the sales take place but must be personally going to meet with the customer at the customer’s place of business or another location. The outside sales person does not have to have a minimum salary, but the outside sales employee’s pay is typically based on commission.

Professional

There are two types of professional exemptions: learned professionals and creative professionals. In order to qualify for a professional exemption, the employee’s position must meet the following tests for learned professionals:

1.      the employee must make $913.00 per week as of December 1, 2016;

2.      the employee’s duties must require advanced knowledge, be intellectual in character, and require discretion and judgment;

3.      the employee must have advanced knowledge in a field of science or learning; and

4.      the employee’s advanced knowledge must come in the form of advanced learning from an academic institution, or must meet the following tests for creative professionals:

1.      the employee must make $913.00 per week as of December 1, 2016; and

2.      the employee must be primarily providing services in a field where there is significant imagination, artistic or creative endeavor.

For science and learned professionals, the employee typically must have degree in the field from a college or university, such as engineers, pharmacists, and accountants, and must be working in that field. The USDOL specifically has stated that this advanced knowledge cannot be obtained at only a high school level of education and that the exemption does not typically apply to individuals who obtain their skills by experience rather than specialized academic training. For creative professionals, the exemption is on a case-by-case basis, but typically applies to actors, musicians, writers, and others whose employment allows a great degree of creative talent to be exercised by the employee.

It is important to note that the salary requirement of $913.00 per week does not apply to all individuals who fall under a professional exemption. Teachers (including college professors, grade school teachers, and in some cases pre-school teachers), lawyers, and medical doctors who are practicing in the field are exempt from the minimum salary requirements. The meeting of all of the duties tests may not apply to highly compensated employees.

Highly Compensated Employees

In order to qualify for a highly compensated employee exemption, the employee’s position must meet the following tests:

1.      the employee must be paid a salary of at least $134,004.00 per year;

2.      the employee must be performing office or non-manual work; and

3.      the employee must meet one of the duties requirements of an administrative, executive, or professional employee listed above.

A highly compensated employee must only meet one of the requirements of the duties section. For example, the position may allow the employee to manage the operations of a department, but not manage two full time employees. There are special salary requirements regarding bonus and other payments being made towards the salary requirements for highly compensated employees as well.

Update to the Overtime Salary

For all business attorneys that work with clients that have exempt employees, it is important to ensure that the business owner knows about the new salary requirements. This new ruling especially affects those in the health, restaurant, retail, and services industry where companies have in greater numbers relied on the executive exemption for their assistant managers and managers. As of December 1, 2016, anyone that is classified as a manager but not making the minimum salary will be eligible for overtime. In working with companies affected by this rule, there are several options to ensure compliance with the new rule.

The USDOL has stated that one way to comply is to raise all salaries for employees currently exempt as administrative, computer employees, executive and professional employees to the minimum salary of $913.00 per week. While this may make sense for companies that are currently paying close to this amount already, financially this option may not make sense, or even be financially available, to companies that are paying on the lower end of the current exemption salary. For those companies, the choice will be between shifting schedules to ensure that those who are currently exempt but become non-exempt on December 1 do not work more than 40 hours a week, hiring additional individuals to fill the overtime hours currently worked by exempt employees so that no overtime hours are paid, or pay overtime for more than 40 hours in a work week.

When determining between these three options, it is important to work with your client on both the legal and financial implications of the path they choose. For those with currently exempt employees who work close to 40 hours a week, it may be cheapest to change those employees to non-exempt and pay overtime. For example, if a manager is currently making $31,200.00 a year, that manager is making $15.00 an hour. If the manager only works 2 overtime hours on average each week, the additional overtime would work out to $2,340.00 a year (15 [rate per hour] * 1.5 [overtime rate] * 2 [hours per week] * 52 [weeks in a year]). With overtime, the manager would make $33,540.00 per year, significantly less than the required $47,476.00. However, for an employee that currently makes $24,960.00 per year (which averages $12.00 an hour for 40 hours a week per year) and works 20 hours a week of overtime, the result would be paying the employee $18,720.00 a year for overtime. In this case, it may make more financial sense to hire another employee to work the 20 hours per week for $12.00 an hour for a total of $12,480.00 in pay per year, depending on the total cost of employment with benefits. This would keep the total amount of employee pay below the minimum of moving the employee to the new salary requirements.

Conclusion 

All business attorneys representing businesses who have exempt employees making less than the new salary requirement should inform their clients of the upcoming changes. As these changes take place in less than two months, the time is now to inform, mentor, and work with these clients to be in compliance with the new salary requirements. In addition, it is a good time to review whether the exempt employees who are making more than then new salary are truly exempt based on the duties tests.

Franchise-Specific LOI Considerations for a Business Purchase or Sale

By Laura Liss, Esq., Brown & Kannady, LLC

Many business brokers and attorneys use a template letter of intent (“LOI”) when handling a small business purchase or sale, but where a franchise business is being sold, it is advisable to consider additional franchise-specific LOI provisions than those that may be in a standard template.

Among other factors, a franchise-specific LOI typically should consider whether the franchisor will require the buyer to pay different (read: higher) fees than the current franchisee under a new agreement; whether the franchise territory may be modified (read: reduced); the extent to which such higher fees or reduced territory should impact the purchase price; whether and when the buyer will be required to “refresh” or remodel the business premises to current brand standards; and the process required to obtain the franchisor’s consent to the purchase (including review and approval of the buyer) and/or to confirm the franchisor will not exercise any existing right of first refusal to purchase the business.

Impact of Fee and Territory Changes

Most franchise agreements are written for a set term of years, and the fees and territory contained in these agreements typically are fixed during this period of time. Upon a transfer or sale of a franchised business, most franchisors require the new franchisee to sign the then-current franchise agreement, which may contain materially different fees or provide for modifications to the territory upon resale. These occurrences are common, particularly when one of the early franchisees in a system seeks to harvest the value of its investment by selling its rights many years later. The intervening period likely will have brought expanded fees, reduced territories and narrowed franchisor obligations amid the general development and maturity of the franchise system and its business model with which the buyer will have to comply upon the closing.

In order to properly assess and address the fees issue during the LOI stage, you must have a copy of the new franchise agreement that details precisely what these new fees will be. For example, a 1-2 percent increase in royalty fees, plus a 1-2 percent increase in advertising fees, plus the creation of a mandatory local advertising co-op to which 1 percent of gross sales is due (a contribution that was not previously mandatory, but will be for the buyer) likely means that the revenue of the franchised business will decrease by 3 to 5 percent after the sale. Assisting your client to understand this reality - which may involve redoing projections and revising past financial statements in order to capture the true impact of these new fees - is an invaluable step, and should be accomplished prior to arriving at an initial purchase price, to avoid confusing or alienating the seller through a subsequently proposed reduction.

Similar guidance is needed if the territory is to be reduced upon the sale closing, to ensure that the agreed-upon sale price eventually reflects the revenue allocable to that sub-area.

Refresh and Remodeling Costs

Obligations to refresh or remodel the business premises can arise both during the term of the franchise agreement, as well as a condition of renewal of the franchise rights occurring at expiration of the agreement. These obligations - and a desire to avoid their substantial inherent costs – often are among the key motivations that prompt franchisees to sell their businesses. Knowledgeable and informed counsel can help their buyer or seller clients value and apportion these costs appropriately in the deal.

By obtaining a clear picture of the scope of the refresh or full remodel obligations from a design and cost perspective (e.g. are the estimated costs $15,000 or $75,000?), the length of time during which the buyer may be required to cease operations to complete the work (to account for lost revenue), and any fees that will be due to the landlord of the premises or other professionals or for grand reopening marketing, you can help your clients properly allocate the risk and cost between the buyer and seller. Further, an informed understanding as to when the remodel must be completed (e.g., within six months or three years of the sale closing?) should impact the cost-sharing discussions, including whether the seller should be required to complete the work prior to closing.

Attempting to negotiate the purchase of a franchised business in the absence of these data points is inadvisable; detailed discussions with the franchisor regarding post-closing expectations for the premises will accordingly be necessary as early as possible.

Right of First Refusal and General Franchisor Consent Compliance

Last but not least, it will be critical to obtain confirmation of the franchisor’s written declination to exercise its right of first refusal to match the purchase of the franchise business. Virtually all franchise agreements provide the franchisor with the right to match any offer by a third-party, often less the goodwill value, and to repurchase the location rather than allowing the sale to go through. This is a common practice where the franchisor is “un-franchising” itself by retaking outlets to be run as corporate locations, or where a dispute is anticipated regarding a required territory reduction. Both the buyer and seller must be informed of the franchisor’s right of first refusal. In addition, because franchisors typically have the additional right to object to certain aspects of the sale or to the qualifications of the buyer itself, obtaining the franchisor’s prior approval of both the sale terms and the buyer is required.  That means it is critical to communicate with the franchisor early and often during the negotiation of the sale.

South Asian Bar Association of Colorado Program

The Sharing Economy: Lawyers as Intermediaries Between Existing Law and Evolving Economy – Tuesday, November 15 at 5:30 p.m.

Uber, Airbnb, Task Rabbit, Lending Club. The sharing economy has become a powerful player in the marketplace. Peer-to-peer business and sharing of resources may be an efficient use of resources and commodities, but what role do federal laws, regulatory issues and contractual issues serve in the new economy? And how should lawyers advise and assist clients who participate in the sharing economy? Join University of Denver Professors Nancy Leong and Eli Wald to learn about what happens when a fast-moving economy intersects with civil rights, labor laws, and contractual concerns and discuss how attorneys may ethically navigate this new landscape of collaborative consumption.

Dinner, beer and wine will be provided. The program will be held at Gibson, Dunn & Crutcher LLP, 1801 California Street, Suite 4200, Denver. This program is offered for 2 CLE credits, 1 general and 1 ethics (pending). Click here for more information or to register.

Business Law Section Activities

Bankruptcy Subsection

Judge Tallman Retirement Reception – December 1, 2016 at 5:30 p.m.

Please save the date to honor the service of Bankruptcy Judge Howard R. Tallman.  The Bankruptcy Subsection of the CBA and the Faculty of Federal Advocates are sponsoring this reception at the Marriott Denver City Center, 1701 California Street, Denver, CO 80202.  There is no cost to attend.

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, December 7, from Noon - 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Denver brown bag lunch with our bankruptcy judges. Attend to share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar.  This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver, CO 80202.  There is no cost for this program.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen & Vellone, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

High Volatility Commercial Real Estate: Lending Regulations – Wednesday, November 16, 2016 – Noon - 1 p.m.  (option to purchase lunch)

Discussion to include the new U.S. Basel III Rules and impact of the Rules on HVCRE Loans and community banks.  

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the Date for the December Financial Institutions Subsection Luncheon Program:

Wednesday, December 14, 2016 - Noon - 1 p.m. 

International Transactions Subsection

Transnational Insolvency – Harmonizing and Unifying the Law on International Trade When Cross-Border Insolvencies Arise – Tuesday, November 8, 2016 – Noon – 1 p.m.

Topics Include:

  • Introduction to Transnational Insolvency — the United Nations Commission on International Trade Law (UNCITRAL), Comity and the Emergence of the Law of Effectively Addressing Cross-Border Insolvency, and Chapter 15 of the United States Bankruptcy Code
  • The Purpose, Implementation and Use of Chapter 15 – Inbound
  • Today’s Use of Chapter 15

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

M&A Subsection

M&A Post-closing Issues - Anticipate and Avoid – Tuesday, November 1, 2016 – 8 - 9 a.m.

The program will address how "after the deal" disputes and risks can be minimized or avoided by addressing material issues early in the M&A process, including how key provisions regarding such matters as closing balance sheet adjustments, earnout payments, escrow and indemnification in initial documents can benefit your client, whether buyer or seller.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Broker/Dealer Issues that Arise in M&A Transactions – Tuesday, December 6, 2016 – 8 - 9 a.m.

The program will address the issues that can arise when a merger and acquisition transaction involves persons who introduce the acquiring company to the target, and then believe that they should be compensated. The Securities and Exchange Commission staff has taken a strong position that the receipt of any sort of transaction-based compensation leads to a conclusion that the intermediary should be registered as a broker-dealer. While federal courts have looked at other factors, the SEC describes transaction-based compensation as the “hallmark” of broker-dealer activity and required broker-dealer registration.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Securities Subsection

Dodd-Frank and Investment Adviser Registration: A Look Back and a Look Forward – Monday, November 7, 2016 – Noon to 1:15 p.m.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which, among other things, amended certain provisions of the federal Investment Advisers Act of 1940.  One important change was the repeal of the “private adviser exemption” on which many advisers, including those to many hedge funds, private equity funds, and venture capital funds, relied in order to be exempt from registration under the Act. 

In its place, the Securities and Exchange Commission (SEC) adopted narrower exemptions for certain advisers – e.g., advisers to venture capital funds, family offices, and certain foreign advisers.  These changes caused many other types of advisers which were previously exempt – such as private equity funds, mezzanine debt funds, and certain real estate funds – to register with the SEC.

This event will analyze the evolving contours of these exemptions and the practical experiences of and lessons learned by some of the advisers which became subject to the SEC’s regulatory regime.

The program will be held at The Brown Palace Hotel, 321 17th Street, Denver. This program is offered for 1 general CLE credit.

The cost for CBA Securities Law Subsection members is $34.00 and $54.00 for non-members.  You are also eligible for the lower Subsection Member rate if you are a CBA Business Law Section Member, and request to be added to the Securities Subsection membership roster. If you are not sure if you are a CBA Business Law Section Member, please ask when you RSVP.

Please RSVP to the Colorado Bar Association at lunches@cobar.org, or call 303-860-1115 x727, or click here for more information or to register. The deadline to register is November 4, 2016.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

Secrets of Bulletproof Contract Drafting: Better Documents; Less Stress; More Satisfied Clients – Friday, December 9, 2016

In “Secrets of Bulletproof Contract Drafting,” you will learn:

  • The 3 types of ambiguity and their likely sources;
  • 5 linguistic improvements that eliminate semantic ambiguity;
  • 6 strategies for structuring sentences to prevent syntactic ambiguity;
  • 3 methods of avoiding contextual ambiguity;
  • Tried and true methods for identifying and eliminating unnecessary language

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver.  This program is offered for 7 general CLE credits. Click here for more information or to register.

Business Law CLE Homestudies

2016 Business Law Institute

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Business Contracts: A Guide for Lawyers and Business Owners, 2016 Edition

Author: Edward White, Moye White LLP

Encompassing a wide range of business topics, this book provides the practitioner with all the tools needed to prepare business documents used in the formation and operation of businesses. Read more.

Securities Law Deskbook: For Business Lawyers, Public Accountants, and Corporate Management

Author: Herrick K. Lidstone, Jr., Burns Figa & Will PC

This is a practical reference guide to securities law, in one convenient volume. With 17 chapters and hundreds of citations to securities rules, statutes, and cases, it is an essential tool for researching securities regulation, litigation, compliance issues, and much more.  Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

Business Newsletter Header
November 2016
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

Legislative Changes Significantly Impact Ownership and Financing of Colorado Marijuana Businesses

By Jean E. Smith-Gonnell and C. Adam Foster—Hoban Law Group

 

Introduction

In 2010 the Colorado General Assembly enacted the Colorado Medical Marijuana Code, C.R.S. § 12-43.3-101 et seq.  It included a requirement that owners of state-licensed medical marijuana businesses be residents of Colorado for at least two years prior to applying for a new license or change of ownership. C.R.S. § 12-43.3-307(1)(m).  In 2014 the General Assembly extended this two-year residency requirement to ownership of retail marijuana licenses. C.R.S. § 12-43.4-306(1)(k).

Effective January 1, 2017, Senate Bill 16-40 (SB 16-40) removes this two-year residency requirement and permits citizens of other states to own Colorado state-licensed medical and retail marijuana businesses.  This legislative change provides new opportunities for Colorado Licensees to obtain financing and will likely spur consolidation within the industry as well-funded individuals and entities from other states seek to enter the Colorado market. 

This article summarizes SB 16-40 and other recent state legislation that will significantly impact Colorado marijuana law in 2017.  

SB 16-40 Overview

SB 16-40 permits a medical or retail license owner to be either a one-year resident of Colorado or a United States citizen as of the date of the application after January 1, 2017, and forbids an owner from being a publicly traded company.  The prohibition on ownership of licenses by publicly traded companies stems from the requirement that each beneficial owner possess good moral character based on criteria established by statute and the Colorado Department of Revenue Marijuana Enforcement Division (“MED”). See C.R.S. § 12-43.4-306 (setting forth good moral character requirement for retail marijuana license owners). 

SB 16-40 also defines three new categories of MED-recognized investors and owners.  These categories include:

“Direct Beneficial Interest Owner"--a person or closely held business entity that holds an ownership interest in a licensed marijuana business, including officers, directors, managing members, or partners of the licensed marijuana business.  A Direct Beneficial Interest Owner who is a natural person must have been a Colorado resident for at least one year prior to the application date, or be a United States citizen prior to the application date. A marijuana business can be comprised of an unlimited number of Direct Beneficial Interest Owners who are Colorado residents. 

Licensees that have one or more Direct Beneficial Interest Owners who have not been Colorado residents for at least one year prior to their application must have at least one officer who has been a Colorado Resident for at least one year prior to the application, and all officers that have day-to-day control over the marijuana business must also have been Colorado residents for a year before the application. These businesses cannot have more than fifteen Direct Beneficial Interest Owners.  And if a Direct Beneficial Interest Owner is an entity, the entity must be owned entirely by U.S. Citizens prior to the application date.

Additionally, a person who intends to apply as a Direct Beneficial Interest Owner and is not a Colorado resident for at least one year prior to the date of application must first submit a request to the MED for a finding of suitability as a Direct Beneficial Interest Owner prior to submitting their MED application.

“Qualified Limited Passive Investor”—a natural person who is a United States citizen and passive investor owning less than five percent of a marijuana business.

“Indirect Beneficial Interest Owner”—includes current Permitted Economic Interest Holders (an existing statutory category mostly comprised of holders of convertible promissory notes); recipients of commercially reasonable royalties associated with the use of intellectual property by a Licensee, an employee who receives a share of the profits from an employee benefit plan, a qualified institutional investor, or other similar persons as determined by the MED.  This category opens up myriad new possibilities for branding arrangements with celebrities and companies that operate in multiple states. 

SB 16-40 expressly excludes publicly traded companies from owning any portion of a marijuana business.  It then provides for an exception, stating that Qualified Institutional Investors (i.e. banks, insurance companies, etc.) can own up to thirty percent of a licensed marijuana business.

These new provisions and categories are complex, SB 16-40 was sixteen pages long and redlined MED rules implementing the statute clocked in at close to 50 pages.  Attorneys would be well advised to study the text of SB 16-40 and implementing rules closely prior to advising clients regarding these new provisions, or to seek the advice of experienced co-counsel. 

House Bill 16-1211: Marijuana Transporter License

HB 16-1211 created two new categories of state licenses--Medical Marijuana Transporter Licenses and Retail Marijuana Transporter Licenses--effective January 1, 2017.  These Licensees can transport marijuana to and from licensed premises and store marijuana at licensed premises.  They cannot sell marijuana themselves.  Transporter licenses are valid for two years and cannot be transferred. These Licensees can contract with multiple marijuana business.

House Bill 16-1261: Retail Marijuana Sunset

The Sunset Bill made the following notable changes to the Retail Marijuana Code:

  • Allows for trade people within a licensed premise to be reasonably monitored, rather than requiring them to be accompanied on a full-time basis;
  • Implements a new license type—Retail Marijuana Establishment Operator--defined as an entity or person that is not an owner and that is licensed to provide professional operational services to a retail marijuana establishment for a portion of profits;
  • If a Licensee’s product tests positive for substances injurious to health, the Licensee will quarantine the product and notify the MED, which will give the Licensee an opportunity to remediate the product if the test indicated the presence of microbial issues. If the product cannot be remediated, it must be destroyed;
  • Changes marijuana labeling requirements;
  • Sales tax bonds are no longer required;
  • Allows profit-based performance incentives for employees;
  • Non-edible, non-psychoactive retail marijuana products (including ointments, lotions, balms, and other non-transdermal topical products) are not subject to the limitation of one ounce per sale;
  • All customers can purchase up to an ounce equivalent of marijuana flower product, regardless of what state the customer is from;
  • In reviewing applications the MED will now examine whether the applicant is current on their medical or retail marijuana taxes, rather than on any payments owed to the Department of Revenue in general.

Conclusion

The statutory changes described above allow for non-residents to hold an ownership stake in state-licensed Colorado marijuana businesses, open the way for new financing and licensing opportunities, and create whole new categories of licenses.  Colorado attorneys who represent Licensees, financiers or owners of ancillary businesses should become familiar with new statutory provisions and regulations now in order to prepare for a flurry of new transactions and applications for licensure in 2017.       

Securities Exemptions – Amended and Reinterpreted Amendments to Rule 504 and Intrastate Offerings - New Interpretations of Rule 701 and Rule 144(d)

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

On October 26, 2016, the Securities and Exchange Commission (SEC) adopted rules (SEC Rel. 33-10238, the “Adopting Release”) that:

1.     Amended Rule 504 of Regulation D to both: (A) increase the maximum amount of securities which may be sold under the exemption from $1,000,000 to $5,000,000; and (B) disqualify certain bad actors from participation in Rule 504 offerings;

2.     Eliminated former Rule 505 as no longer being necessary given the changes to Rule 504;

3.     Modernized intrastate securities offerings under existing Rule 147; and

4.     Adopted new Rule 147A to broaden the availability of the existing safe harbor for intrastate securities offerings.

Also in October 2016, the SEC staff adopted interpretations that will aid users in the application of:

5.     Rule 701 and its application as a result of merger and acquisition transactions; and

6.     Rule 144(d), and the holding period applicable to individually-negotiated employer stock options.

Effective Dates

The interpretations are effective immediately. The amendments and new rules addressed in the Adopting Release (and the elimination of Rule 505) will be effective at various dates in the first half of 2017:

  • Rule 147 amendments and new Rule 147A will be effective April 20, 2017;
  • The amendments to Rule 504 will be effective January 20, 2017; and
  • The repeal of Rule 505 will be effective May 22, 2017.

Rule 504

Section 5 of the Securities Act of 1933 (the 1933 Act) provides that any offer or sale of securities must be registered or qualify for an exemption from registration.  State laws (including the Colorado Securities Act) provide similarly.

Rule 504 of Regulation D is a widely-used exemption from the registration requirements under the 1933 Act.  Rule 504 (prior to the effectiveness of the amendment increasing the maximum offering to $5,000,000) provides an exemption from the registration requirements of the federal securities laws for eligible companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.  (The original 1982 Rule 504 (SEC Rel. 33-6389, Mar. 8, 1982) provided for a $500,000 maximum; this was raised to $1,000,000 in 1988 (SEC Rel. 99-6758; Mar. 3, 1988).  The $5,000,000 maximum permitted under the amendment is the limit permitted under 1933 Act § 3(b)(1) and cannot be further increased without Congressional approval.)

A company can use this exemption so long as it is not a blank check company, is not subject to the reporting requirements of the Securities Exchange Act of 1934 (the 1934 Act), and is not an investment company.  There are no limitations to the number of investors or investor sophistication requirements in a Rule 504 offering (unlike Rule 506(b) which limits the number of non-accredited investors to 35 and requires them to be “capable of evaluating the merits and risks of the prospective investment).  Rule 504 does not impose any specific information disclosure requirements on issuers, although issuers are well-advised to provide accurate and complete disclosure to investors in any form of offering.  Rule 506(b) imposes scaled disclosure requirements, depending on the size of the offering.  (Rule 506(c) is available for offerings to accredited investors only.)

The Rule 504 exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive “restricted” securities—securities that the purchasers may not freely transfer.  Rule 504 does allow companies to publicly solicit or advertise their securities and to sell securities that are not restricted if one of the following circumstances (as applicable in Colorado) is met:

  • The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors (in Colorado found in C.R.S. § 11-51-304, including the limited offering registration found in Securities Division Rule 51-3.3); or
  • The company sells the securities exclusively in accordance with state law exemptions that permit general solicitation and advertising, so long as the company sells only to “accredited investors” – in Colorado the “Model Accredited Investor Exemption” found at Securities Division Rule 51-3.19.

The amendments will disqualify certain bad actors from participation in Rule 504 offerings.  The Rule 504 disqualification provisions (to be found in Rule 504(b)(3)) will be implemented by referencing the disqualification provisions for Rule 506 (found in Rule 506(d)) which became effective on September 23, 2013.  (As a result, the bad actor triggering events for Rule 504 are substantially the same as found in Rule 506, Regulation A, and Regulation CF (Crowdfunding)).  The triggering events apply to the issuer and other covered persons, such as underwriters, placement agents, and the officers, directors, and significant shareholders of the issuer.  Additionally, even where a person is not disqualified because the disqualification event occurred before the effective date of the amendments to Rule 504, disclosure will still have to be made as contemplated in Rule 506(e).

Other than the increase in the maximum offering amount to $5,000,000 and adding the bad actor disqualification, the form and structure of Rule 504 remains unchanged.  The SEC considered providing an exemption from registration under the 1934 Act § 12(g) and the resultant reporting requirements for companies that grow as a result of Rule 504 offerings.  The SEC determined not to do so, saying:

As the shareholder base of these companies and their total assets grow, we believe that the additional protections that will be provided by registration under Section 12(g) are necessary and appropriate.  (Adopting Release at pg. 80)

Securities issued in offerings conducted pursuant to Rule 504 (adopted under 1933 Act § 3(b)(1)) are not “covered securities” and therefore are subject to the registration requirements of state securities laws unless the state has an exemption from the state’s registration requirements available.  On the other hand, securities issued in Rule 506 offerings (which was adopted under § 4(a)(2)) are “covered securities” under § 18 of the 1933 Act by reason of § 18(b)(4)(F).  As a result, securities offered under Rule 506 are exempt from most state blue sky regulation (although filings and a fee may be required), whereas securities offered under Rule 504 are not.

Rule 505

The final rules set forth in the Adopting Release also repeal Rule 505.  Previously, Rule 505 permitted offerings of up to $5 million annually that must be sold solely to accredited investors or no more than 35 non-accredited investors. As amended, Rule 504 reaches the $5,000,000 offering maximum without the investor limitation in Rule 505.

Rule 505 has only been rarely used.  Rule 505 has always had the dollar limitation and the Regulation A bad actor restrictions – restrictions that were not historically in Rule 506 offerings.  Securities issued pursuant to Rule 505 were not “covered securities” with state securities exemptions.

As a result of the amendments, Rule 504 provides a much more flexible means of raising up to $5,000,000.

Intrastate Securities Offerings

SEC Rule 147 was originally adopted by the SEC to implement the intrastate exemption in Section 3(a)(11) of the 1933 Act. Over time, it has become apparent the rule is too inflexible for wide-spread use in modern times, given the prominence of incorporating outside of the state of the principal place of business, the development of the internet and the advent of crowdfunding.

Rule 147 as amended would remain a safe harbor under Section 3(a)(11) of the Securities Act, so that issuers may continue to use the rule for securities offerings relying on current state law exemptions.   This is important in Colorado where the Colorado Crowdfunding Act (found at C.R.S. § 11-51-308.5) relies on existing Rule 147.  Section 308.5(3)(a)(I) states:

The securities [issued pursuant to the Colorado Crowdfunding Act] must meet the requirements of the federal exemption for intrastate offerings in section 3(a)(11) of the federal “Securities Act of 1933” and the securities and exchange commission’s rule 147 adopted pursuant to said act.

New Rule 147A is an intrastate exemption that is not based on 1933 Act § 3(a)(11).  Therefore, it would not fit within the requirements of C.R.S. § 11-51-308.5 (the Colorado Crowdfunding Act).  By retaining Rule 147, the SEC has facilitated crowdfunding under Colorado and other state crowdfunding acts which were based on Rule 147.

New Rule 147A will be substantially identical to Rule 147 except that it would allow offers to be accessible to out-of-state residents.  The flexibility is important because out-of-state persons can read about internet based offerings even if they are not allowed to invest. New Rule 147A also permits companies to be incorporated or organized out-of-state.

Both new Rule 147A and amended Rule 147 would include the following provisions:

  • A requirement that the issuer has its “principal place of business” in-state and satisfies at least one “doing business” requirement that would demonstrate the in-state nature of the issuer’s business.
  • A new “reasonable belief” standard for issuers to rely on in determining the residence of the purchaser at the time of the sale of securities.
  • A requirement that issuers obtain a written representation from each purchaser as to residency.
  • A limit on resales to persons residing within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser.
  • An integration safe harbor that would include any prior offers or sales of securities by the issuer made under another provision, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering.
  • Legend requirements to offerees and purchasers about the limits on resales.

Securities offered pursuant to Rules 147 or 147A will be subject to state blue sky regulation since they are not covered securities under the 1933 Act § 18.

New Interpretations

In addition to the amendments to Rules 504 and 147 and new Rule147A, the SEC recently issued new interpretations of Rule 701 (Exemptions for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation) and Rule 144(d) (Holding Period for Restricted Securities).

Rule 701.  Many privately-held companies issue stock options as employee incentives – whether in anticipation of going public or to give an incentive for the private company environment.  Subject to certain limitations Rule 701 permits a private company to make an offering of restricted securities to employees, directors, officers and consultants pursuant to a written compensatory plan without registering the offer or sale under the 1933 Act.  Except where the issuer becomes subject to the reporting requirements of the 1934 Act, the securities remain restricted in the hands of the employee, director, officer, or consultant after issuance. 

When Rule 701 is used by a company that then becomes subject to the reporting requirements of either § 13(a) or § 15(d) of the 1934 Act, the Rule 701 securities become publicly tradeable 90 days following the commencement of the issuer’s 1934 Act reporting requirements.  Under new Compliance and Disclosure Interpretation (“C&DI”) 271.04, when a privately-held company that has issued options under Rule 701 is acquired by a public company and the acquiring public company assumes the private company’s outstanding options, the acquiring company can rely on the same Rule 701 exemption for the exercise of the assumed options, and the new issuer’s 1934 Act reports will satisfy the original issuer’s disclosure requirements under Rule 701(e).

Rule 144(d).  Rule 144 provides a safe-harbor for a 1933 Act § 4(a)(1) exemption from the registration requirements of the 1933 Act for sales of securities by persons who are not issuers, underwriters, or dealers of the securities involved.  Rule 144(d) defines the holding period for restricted securities to be eligible for the Rule 144 safe harbor.  There is sometimes confusion when the holding period commences for securities of an issuer received pursuant to an individually-negotiated employment arrangement. 

Under Rule 144(d), the holding period commences when the investment risk for the securities passes to the employee – which is the date that the employee is deemed to have paid for the securities received.  C&DI 532.06 (revised October 20, 2016) offers an interpretation of two common situations:

  • Where the vesting of the securities is conditioned on continued employment or company performance (not tied to the individual’s performance) and the employee pays no further consideration for the securities, the holding period commencement date would be the date of the agreement.
  • Where the awards require additional payment upon exercise, conversion, or settlement, the holding period could commence the date that the additional payment is made.

Conclusion

The securities bar has been waiting for the Rule 504 and 147 amendments and new rules for a significant period of time.  Of the new rules, the most useful will likely be the increase in the maximum offering limits of Rule 504 – making that rule a much more useful tool, whether registered under state law or accomplished pursuant to an exemption from registration (such as Colorado’s Model Accredited Investor Exemption or found in C.R.S. § 11-51-308(1)(p) which exempts from registration offerings accomplished pursuant to an exemption from registration pursuant to 1933 Act § 3(b)(1)). 

Unfortunately, despite quite a bit of press, it appears that crowdfunding under the Colorado Crowdfunding Act remains dormant.  Perhaps these federal amendments will awaken potential participants.

The new and revised C&DIs on Rule 701 and 144(d) will be helpful interpretive guidance in a limited number of circumstances.

Business Law Section Activities

Bankruptcy Subsection

Judge Tallman Retirement Reception – December 1, 2016 at 5:30 p.m.

Please save the date to honor the service of Bankruptcy Judge Howard R. Tallman.  The Bankruptcy Subsection of the CBA and the Faculty of Federal Advocates are sponsoring this reception at the Marriott Denver City Center, 1701 California Street, Denver, CO 80202.  There is no cost to attend.

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, December 7, from Noon - 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Denver brown bag lunch with our bankruptcy judges and a guest speaker: Robert Lantz (Coan, Payton & Payne, LLC). In addition to current matters before the court, our guest(s) will provide an introduction to Chapter 15.  Attend to share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar.  This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver, CO 80202.  There is no cost for this program.

Consumer Bankruptcy Update 2016 – Wednesday, December 21, 2016 – 12:30 – 4:30 p.m.

Co-Sponsored by Stephen Berken, Esq. and the CBA Bankruptcy Subsection

Attend this program if you are a bankruptcy practitioner, an attorney considering bankruptcy practice, a Bankruptcy Trustee or you are interested in learning more, and getting the most up to date information about consumer bankruptcies.

Program topics include:

  • Chapter 7 and 13 Case Law Update
  • Pitfall and Tips from the Trustee’s Perspective
  • Clerk’s Office Update
  • Discharging Taxes and Divorce Obligations
  • Mortgages and Chapter 13
  • Fair Debt Collection Practices Act and Bankruptcy

The program will be held at the Colorado CLE Classroom, 1900 Grant St., 3rd Floor, Denver. This program is offered for 4 general CLE credits. Click here for more information or to register.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen & Vellone, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

The Ethics of Representing the Organization Client - Material Violations of Law – Wednesday, December 14, 2016 – Noon - 1 p.m.  (option to purchase lunch)

A longtime practitioner with expertise in legal ethics and attorney discipline defense, Cecil Morris will present on the ethics of representing the organization client. His discussion will focus on material violations of law, and include: The Rules of Professional Conduct, Sarbanes-Oxley, Dodd-Frank, and the Yates Memo.  

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the Date for the January 2017 Financial Institutions Subsection Luncheon Program:

Wednesday, January 18, 2016 - Noon - 1 p.m. 

International Transactions Subsection

Cross-Border Privacy Law Issues – Tuesday, January 10, 2017 – Noon – 1 p.m.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Lunch is included and there is no cost to members. More information to come!

M&A Subsection

Broker/Dealer Issues that Arise in M&A Transactions – Tuesday, December 6, 2016 – 8 - 9 a.m.

The program will address the issues that can arise when a merger and acquisition transaction involves persons who introduce the acquiring company to the target, and then believe that they should be compensated. The Securities and Exchange Commission staff has taken a strong position that the receipt of any sort of transaction-based compensation leads to a conclusion that the intermediary should be registered as a broker-dealer. While federal courts have looked at other factors, the SEC describes transaction-based compensation as the “hallmark” of broker-dealer activity and required broker-dealer registration.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Tax Section

2016 Annual Ethics Update – Tuesday, December 13, 2016 – Noon – 2:00 p.m.

Co-Sponsored by the Tax, Business, Real Estate, and Trust & Estate Law Sections

Presented by Herrick Lidstone, Jr. and Alec Rothrock. In addition to program content, the James E. Bye Lifetime Achievement Award will be presented to Nancy Crow.

The program will be held at The Brown Palace Hotel, 321 17th Street, Denver. This program is offered for 2 general CLE credits. 

Please RSVP by e-mailing lunches@cobar.org. You may also RSVP online. Click here for more information or to register.

Be sure to log onto the website before registering. Please RSVP by Wednesday, December 6th, 2016. No shows and cancellations received after noon on Friday, December 6th, 2016, will be invoiced for the cost of the program. 

You may participate in this luncheon by telephone. Please indicate when registering that you would like to participate by phone if you wish to do so.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

Secrets of Bulletproof Contract Drafting: Better Documents; Less Stress; More Satisfied Clients – Friday, December 9, 2016

In “Secrets of Bulletproof Contract Drafting,” you will learn:

  • The 3 types of ambiguity and their likely sources;
  • 5 linguistic improvements that eliminate semantic ambiguity;
  • 6 strategies for structuring sentences to prevent syntactic ambiguity;
  • 3 methods of avoiding contextual ambiguity; and
  • Tried and true methods for identifying and eliminating unnecessary language.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver.  This program is offered for 7 general CLE credits. Click here for more information or to register.

Business Law CLE Homestudies

2016 Business Law Institute

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Practitioner's Guide to CO Business Organizations, Second Edition, includes the 2016 Supplement!

Managing Editors: Allen Rozansky and Lee Reichert 

The Guide begins with basic topics that a Colorado practitioner should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations. Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

Business Newsletter Header
December 2016
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

 

Secretary of State’s Year-End Hours

The Secretary of State’s office will be closed on Monday, Jan. 2.

In addition, online services will be unavailable from 11:30 p.m. on Saturday, Dec. 31 until noon on Sunday, Jan. 1. The Secretary of State is conducting yearly maintenance during this time and services like filing and searching are affected. Filing deadlines will not be extended, so be sure to finish your filings before 11:30 p.m. on Dec. 31.

The filing of paper forms, such as mergers, will be unavailable from December 31, 2016 until January 3, 2017. If a filing has an effective date of December 31, 2016, January 1, 2017, or January 2, 2017, it should be submitted before December 30 and include a delayed effective date.

Don’t Neglect these M&A Issues

By Steve Suneson, Coan, Payton & Payne, LLC

Every year a large number of merger and acquisition transactions take place.  Despite the vast number, every M&A transaction presents unique issues and circumstances.  Experienced M&A parties are generally well versed in recurring and heavily negotiated material terms such as indemnity; working capital and other purchase price adjustments; escrows; representations and warranties; treating stock purchases as asset acquisitions for tax purposes to benefit a buyer under Section 338(h)(10) of the Internal Revenue Code; and many other terms.  Some legal issues appear less frequently, however, and may not receive the same attention.  This article focuses on a selection of those M&A issues that are less frequently encountered and less discussed, especially in asset transactions, which could present significant problems if not addressed by the parties.

Bulk Sales/Successor Liability

This issue can be confusing because there are (at least historically) two types of bulk sales laws.  A bulk sales law generally applies if a seller transfers all, or substantially all, of its assets in bulk to a buyer.  One type of bulk sales law existed under Article 6 of the Uniform Commercial Code.  This bulk sales law was intended to protect creditors who were at risk when a merchant sold all its inventory in bulk and could abscond with the sale proceeds, leaving the creditors with no recourse.  Article 6 was repealed in Colorado and in most other states. See C.R.S. Section 4-6-101 et seq.  With the passage of the Uniform Fraudulent Transfers Act (see, e.g., C.R.S. 38-8-101 et seq.) – which provides adequate and often better remedies and protections for creditors - the repeal of Article 6 made sense. 

However, that does not mean a buyer in an asset transaction should ignore bulk sales issues.  Most states maintain separate successor liability statutes for tax purposes triggered by bulk sales.  These bulk sales laws typically protect the state to ensure that any unpaid taxes (usually sales taxes) owed by seller will be paid in connection with the sale to the buyer. States know that a buyer of a business is generally in a better financial position to collect or pay taxes from the sales price than the seller who is quitting the business.  Thus, states usually extend the successor liability to asset sales even if the parties have agreed that buyer is not assuming this liability.  Buyer should therefore carefully review and determine whether any successor liability bulk sales law will apply.  This should occur early, as some states require substantial advance notice to the tax department prior to the closing.  While the exact procedure to avoid successor liability will depend on the state, a few common principles usually apply.  The law will generally require that the parties provide notice of the impending sale, impose certain time limitations for providing such notice, and impose limitations on consummating the transaction until the tax department has either (i) not responded within a certain time or (ii) “cleared” the seller. If tax liability exists, some states may require that a certain sum be withheld or placed in escrow by buyer as a condition to closing.  The obligation to comply with the process may be on the seller or the buyer. In Colorado, for example, the responsibility is imposed on a seller, yet the buyer can also be liable for the seller’s unpaid state tax obligations if the buyer does not withhold sufficient purchase money to cover the amount of unpaid taxes until such time the seller has either produced a receipt from the department of revenue showing that the taxes have been paid, or provided a certificate that shows no taxes are due.  See Colo. Rev. Stat. § 39-26-117(1)(d)(e). Sometimes, parties seek to avoid the time consuming process to notify and transact with the tax department.  In these instances, the buyer can accept a seller’s contractual indemnity for any seller’s tax liabilities (usually with an escrow requirement to assure funds will be available).  However, the drawback of this option is the time and effort to process the claim for any indemnification, and, if tax liability exists, the time and attention the buyer will be required to invest to satisfy the unpaid tax liabilities with the applicable tax department. Proper advance planning regarding bulk sales issues will generally benefit the buyer (and seller) and ensure a smoother closing.    

Foreign Corrupt Practices Act Issues

As a result of increased global trade, international business and legal issues are ever expanding.  Now, even smaller M&A transactions frequently contain an international angle.  A relatively small target company in Colorado may contract with foreign sales representatives, consultants, and/or distributors in connection with its business.  A lower middle market company may even have one or more foreign subsidiaries. As such all buyers should be mindful of potential Foreign Corrupt Practices Act (“FCPA”) violations in connection with a seller’s business.  15 U.S.C. §§ 78dd-(1)(2).

This is not limited to stock transactions.  The DOJ and the SEC, who enforce FCPA violations, take the position that, although the focus in an investigation is generally on the offending target company, successor liability may extend to the buyer in asset transactions.  See “A Resource Guide to the FCPA U.S. Foreign Corrupt Practices Act”, issued by DOJ and SEC (2012).  The probability of successor liability can usually be managed by buyer’s careful due diligence and other mitigating factors.  While a buyer does not need to be an expert on the FCPA, buyers should have a basic understanding of this law.  The FCPA was enacted for the purpose of making it unlawful for certain persons and entities to make payments to foreign government officials to assist in obtaining or retaining a business in the foreign market. Payments to foreign officials that are declared in a foreign country to be part of “doing business” may be prohibited under the FCPA. Any target company who contracts with foreign sales representatives, consultants, or distributors may, depending on the country and nature of business, be susceptible to FCPA violations.  In fact, the majority of enforcement proceedings by the DOJ or SEC involve third parties.  At a minimum, buyers should include a basic review of the target company’s international business dealings in its due diligence to determine if potential FCPA violations may become an issue.  If violations are uncovered, buyer should take appropriate steps (which are beyond the scope of this article).  While a buyer may be tempted to rely on an indemnity from seller for FCPA violations in lieu of due diligence, a seller may not agree to an escrow to assure buyer the indemnity can be satisfied, and dealing with the DOJ or SEC post-closing will take considerable time and effort.  Consideration of this issue will allow buyers to make an informed decision before closing on a transaction.

Transitional Services Agreement

It is common for a buyer to want the principal or key personnel of seller to provide consulting services for a period of time, post-closing, to assist in the transfer of the business, maintain customer relationships, and other matters.  On occasion, however, those consulting services may be insufficient, so the buyer may want the seller to be contractually responsible for systemic transition services relating to the business, such as back office support, training, customer service procedures, and other key aspects of the target company’s business.  In those instances, the parties should enter into an appropriate transition services agreement (either as a stand-alone agreement or as part of the purchase agreement).  The parties should confront the potential issues in connection with the transition services agreement early.  For one thing, the seller will have less motivation to assist a buyer if consideration has already been paid out and/or if few obligations to perform remain at closing.  In addition, the cost of transition services will likely impact the purchase price and should be considered early. 

The parties need also consider the conflicting interests.  From the buyer’s perspective, it will want to ensure that the transition will be seamless and that the day-to-day operations do not experience significant interruptions with customers, vendors, etc.  From the seller’s perspective, it will want to define scope, compensation, and time commitment so it can plan accordingly after closing.  A properly drafted transitional services agreement or contractual provision should generally include scope, the length of time, the seller’s compensation, acceptance criteria, and any allocation of risk.

Gift Cards and Certificates

In any M&A asset transaction involving the retail industry, the buyer should devote some attention to any gift cards and gift certificates issued by seller (together “Gift Cards”).  Gift Card liability may be difficult to assess due to the difficulty in determining the likelihood of redemption.  A buyer may want to reject assumption of those liabilities; however, doing so may result in the successor retail business turning away existing customers who wish to redeem Gift Cards issued pre-closing.  Rejecting the Gift Certificates may harm the relationship with valued customers and the goodwill of the business.  Most buyers will instead elect to assume at least some Gift Card liability and negotiate commercial terms in the APA to reflect the bargain.  Usually, a buyer will conduct appropriate due diligence on the Gift Card liability to project the percentage of outstanding Gift Card liability which is likely to be redeemed.   The buyer will usually want the APA to reflect that the face value of the Gift Cards (subject to any caps or limitations) is being assigned to Buyer, provide Buyer with an appropriate credit against the purchase price, and provide language as to any post-closing adjustments. The failure to deal with this issue may surprise the buyer and could lead to post-closing conflict between buyer and seller.

Transfer of Registered Trademarks

While some target companies may own registered patents or registered copyrights, the majority of target companies own registered trademarks.  For that reason, registered trademarks are usually included in the assets acquired by a buyer.  Because the value in proportion to the other assets may be less significant, a buyer in an asset deal may neglect material trademark issues, such as how to properly assign and transfer registered trademarks.  While the parties will generally draft a bill of sale to transfer title to the assets, buyer should obtain a separate, recordable, trademark assignment from the seller prior to or at closing of the transaction.  The typical bill of sale will not allow the buyer to properly record the transfer of ownership of the trademark with the USPTO. A valid assignment must contain language that the registered trademark is being assigned together with the goodwill of the business to which the mark pertains.  15 U.S.C. § 1060(a).  Under 15 USC 1060(a), the failure to record the assignment with the USPTO within three months after date of the assignment, or prior to a subsequent purchase, means the assignment is void against a subsequent bona fide purchaser without notice.  The failure to draft a separate and sufficiently worded trademark assignment, and record the same with the USPTO, could render the applicable trademarks abandoned, or otherwise negatively affect the right of buyer to use the trademark post-closing. 

These are just some of the issues that even experienced M&A counsel may overlook.  If they are not on your deal checklist, they should be. 

Social Enterprises and Securities Crowdfunding – A Perfect Match

By David Camerucci, Silicon Flatirons Center - Entrepreneurial Fellow, University of Colorado Law School

Social responsibility has played a growing role in consumer purchase decisions for more than 30 years. From Patagonia to The Honest Company, examples of social enterprises abound, and more come to market every day. As consumers put more emphasis on purchasing from socially responsible producers, for-profit social ventures have gained increasingly large shares of their respective marketplaces. The growth in the number of social enterprises wouldn’t be possible without investors who are ready and willing to make values-aligned investments. These investors are a part of the socially responsible investing  movement, which has grown to a multi-trillion-dollar industry over the past 10 years.

Social Enterprises and Access to Capital 

Still, major issues remain unresolved for social enterprises, the most critical of which is access to capital. Early stage financing is key to the success of any startup regardless of social or commercial focus. Social entrepreneurs are finding that social capital simply costs more than commercial capital from traditional investors. Compounding the problem is the lack of an obvious exit strategy for these businesses. This significantly alters the end-game for venture capitalists, angels and private equity investors (collectively, “Traditional Investors”).

Most Traditional Investors don’t see the same potential upside with early stage social ventures for a number of reasons: (i) the risk profile is much higher than the standard venture; (ii) returns are equal to or below returns on traditional ventures resulting in the need for additional capital; (iii) achieving social impact takes significant R&D, which increases burn rates for early stage companies; and (iv) the exit strategy for the investor is unclear. Combine these risk factors with the current regulatory uncertainty around social enterprises, and most Traditional Investors will conclude that there is far too much risk for them to invest.

Beyond the risk factors associated with a venture, other difficulties can arise regardless of the nature of the business. Ventures led by women, young founders, or minorities have historically found that their access to capital is limited. Geographical location is also a major constraint for some entrepreneurs since Traditional Investors prefer to invest close to home. The profit-driven approach of Traditional Investors leads them to non-social ventures, and social entrepreneurs are left to look elsewhere for capital.

Capital from Consumers 

While Traditional Investors have been slow to invest in social enterprises, global consumers have been increasingly shifting their purchasing power towards socially responsible companies. In North America, 42% of consumers are willing to pay more for a product or service from a social responsible company. Not only are purchasing decisions influenced by sustainability claims, but consumer loyalty is greater and less likely to fluctuate with the overall economy. Rising consumer demand and greater brand loyalty ultimately lead to stronger, more stable businesses.

Securities crowdfunding gives consumers who seek out products and services from socially responsible companies the opportunity to become investors in those companies. It gives social entrepreneurs access to capital from investors whose values align with the company, while alleviating concerns that arise from raising capital from Traditional Investors. Similarly, it gives retail investors, who don’t meet the accreditation requirements under Regulation D, a chance to invest in a socially responsible company at an early stage.

A question remains: if Traditional Investors won’t invest, why would non-traditional, retail investors who are likely more risk averse? Reward-based crowdfunding provides some insight here. Reward-based crowdfunding has become an important source of capital for some early-stage companies. The success of over 100,000 Kickstarter campaigns is proof that financial return is only one of a number of considerations taken into account by retail investors. Altruism, community, and entertainment are three of the nonfinancial motivations of retail investors.

Altruism as a Motivation 

Altruism has been an important driver behind donation reward-based crowdfunding.  Altruistic behavior also helps to explain the values-aligned investments made by impact investors, as well as the donation of more than $2 billion to GoFundMe campaigns. Altruism will not only drive retail investors to crowdfunding generally, but will drive a large number of these investors to make values-aligned investments in social ventures.

Additionally, investors may consider social enterprises as an alternative to charitable donations with the added benefit of potentially receiving a return on their investment. Altruistic investors will get the best of both worlds. On the one-hand they will be investing in companies that share the same moral values or value the same initiatives. At the same time, they will have the potential benefit of receiving some return on their investment. Importantly, because their investments are values-based, these investors will be less likely to expect the large returns Traditional Investors seek, and are likely to accept below market returns in exchange for the venture achieving the desired impact. 

Community as a Motivation 

Securities crowdfunding gives the investor the opportunity to be a part of a larger investment community. Specifically, the investors who choose to invest in social enterprises or utilize a funding portal focused on social enterprises will become a part of the small, but growing community of impact investors. The community aspect will allow investors to make group decisions or, less eloquently stated, play follow the leader when making investment decisions. By focusing the community’s money on viable ideas, the community is able to come together and support the best investments much the same way impact investors focus the majority of their money on select investments.

Entertainment as a Motivation 

Another nonfinancial return is derived from entertainment value of selecting an entity to invest in and subsequently monitoring the investment. The entertainment value derived from the investment is no different than the value derived from gambling or playing the lottery. Like the gambler or lottery player, the investor will make a pick and then wait to see if their investment turns out to be successful. Investors in social enterprises might have a slight variation on the standard game because of their moral investment in the success of the cause. If this contributes in any way to their decision making, it will likely reduce their concern with profit. Nonetheless, the entertainment value is increased because of the possibility of both social and financial returns.

The burdensome regulations placed on securities crowdfunding has caused many scholars to question its viability, but given the ulterior motives of retail investors and the rise of socially-responsible products, it may find its best fit in financing social ventures. Whether a platform arises to facilitate these investments remains to be seen.

Business Law Section Activities

Bankruptcy Subsection

Colorado Springs Bankruptcy Bar Brown Bag CLE – Friday, February 24, 2017 from Noon - 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Colorado Springs brown bag lunch with Judge McNamara and Judge Rosania to hear about current bankruptcy issues, potential local rules changes, general clerk’s office/administrative updates, and other recent case law developments.  Please attend to share your ideas, suggestions, questions, issues and concerns on case management, court procedures, and general practice matters. 

This brown bag event will be held at the Federal Courthouse, Courtroom 101, 212 North Wahsatch Avenue, Colorado Springs 80903. There is no cost for this program.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen & Vellone, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

The Economy is Good: Why Think of a Receiver? – Wednesday, January 18, 2017 – Noon - 1 p.m.  (option to purchase lunch)

Attend to better understand how to reduce risk by using receiverships. Also gain insights on how to better represent your foreclosing lender and debtor clients in connection with real estate foreclosures, business asset liquidations, operating company turnarounds, and partnership disputes/litigation.  Take this hour to get up to speed on reducing risks of deterioration, theft or other depletion of value by appointment of receiver in a failed or troubled situation.  

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

International Transactions Subsection

Save the Date for the March 14, 2017 International Transactions Subsection Luncheon Program - Noon - 1 p.m. 

M&A Subsection

The M&A World in 2016 and 2017 – Tuesday, February 7, 2017 – 8 – 9:30 a.m.

Talented investment bankers, Robert Heilbronner, Integris Partners, and Brian Krehbiel, Headwaters MB, will share their expertise on 2016 M&A market expectations compared to what actually happened; the expectations for 2017 from the perspective of Colorado investment bankers; legal issues in M&A transactions; trends in the Colorado M&A market; and structuring and negotiating M&A transactions.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

Limited Liability Companies in Colorado – Friday, January 13, 2017

In this program, you will learn basic drafting concepts and structure; economic rights and obligations, creditors rights; governance and fiduciary/related duties and ethics; securities law issues and answers; operating agreements; and 2016 legislative changes to LLC and partnership Laws.

Each attendee receives a copy of the new second edition of Limited Liability Companies and Partnerships in Colorado by Herrick K. Lidstone Jr. and Allen Sparkman!

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver.  This program is offered for 8 general CLE credits, including 1 ethics. Click here for more information or to register.

CLE Cannabis Symposium – Thursday, February 2, 2017

Program Highlights:

  • The Colorado and National Marijuana Legal Landscape
  • The Regulatory Landscape, Production Management, Market Demand and Compliance
  • Valuation, Banking, Employment and Tax Compliance Issues in Colorado’s Marijuana Industry
  • Banking in the Marijuana Business
  • Basic to Intermediate Real Estate Issues in the Marijuana Industry
  • Examinations, Appeals, and Collections Divisions, Including 280E
  • The Federal Enforcement Landscape and Perspective

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 7 general CLE credits. Click here for more information or to register.

Business Law CLE Homestudies

Consumer Bankruptcy Update 2016

2016 Business Law Institute

Ethical Issues for Attorneys Serving on Nonprofit Boards

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Practitioner's Guide to CO Business Organizations, Second Edition, includes the 2016 Supplement!

Managing Editors: Allen Rozansky and Lee Reichert 

The Guide begins with basic topics that a Colorado practitioner should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations. Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

Business Newsletter Header
January 2017
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

Working Group on Legal Opinions

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

As the representative of the Business Law Section of the Colorado Bar Association, I attended the fall meeting of the Working Group on Legal Opinions Foundation (“WGLO”) in New York City on October 31 and November 1, 2016.  It seems the smartest people in the country attend this semi-annual conference to address the narrow, but complicated, subject of legal opinions.  As the smallest of the “small law firm” members (where small means fewer than 250 lawyers!), I am frequently awed by the members’ contributions to this abstract legal subject.  Much of the work of this group is aspirational, but also very much down to earth and practical. 

When are legal opinions required?  In many cases, lawyers are asked to issue legal opinions in connection with real estate and other financing transactions – opinions to banks regarding the enforceability of loan and collateralization documents; and in connection with some capital-raising and merger/acquisition transactions – also enforceability opinions.  Many lawyers are also asked to include a “no litigation opinion” in their closing opinions – of course, that is not a legal opinion (interpreting law as it applies to a set of facts), but is a factual confirmation that the law firm issuing the opinion is not handling, or is not aware of, any pending (or sometimes threatened) litigation involving the client (“material litigation,” “litigation that may impact the transaction in question,” or other formulation). 

Issues Discussed 

One of the first and most engaging issues discussed at the conference was the process that law firms follow in preparing to issue legal opinions.  Among the questions were:

  • In preparing and issuing legal opinions, do law firms use form opinions – either their own form opinions or form opinions provided by the American College of Real Estate Lawyers (ACREL), TriBar, or guidance from another state? In this connection, it is important to note that Colorado has no state-specific guidance.  Colorado guidance is contained in three articles found in the Colorado Lawyer and one published in this newsletter:
  • “A Proposal on Opinion Letters in Colorado Real Estate Mortgage Loan Transactions,” Edward N. Barad, Chairman, published in The Colorado Lawyer (December 1989) at pg. 2283 (part I) and (January 1990) at pg. 1 (part II);
  • Lidstone and Belak, “Danger Ahead! Legal Opinions for Colorado Lawyers,” 38 The Colorado Lawyer (CBA) No. 4 at 25 (April 2009);
  • Steiner, Signatures, Fraud, and Legal Opinions, Business Law Section Newsletter (Ed Naylor, ed.) April 2012.
  • Garfield, “Third Party Opinion Letters: Limiting the Liability of Opinion Givers,”42 The Colo. L. (CBA) no. 11 at 93 (Nov. 2013).
  • In preparing and issuing legal opinions, whether law firms require an independent review by the firm’s opinion committee or a disinterested partner.

Customary Practice

Legal opinions are based on customary practice, and customary practice in the legal opinion world has a number of bases. As described in the American Law Institute’s Restatement (Third) of the Law Governing Lawyers (§§ 51, 52, and 95), customary practice is an element in determining the meaning of opinion letters and the diligence required to give the various opinions contained in the letter.  In Colorado, unlike many other states, we do not have bar association or similar guidance, so we look elsewhere for “customary practice.”  In 2009 and 2010, the Business Law Section and the Real Estate Section (with CBA approval) adopted the “Statement on the Role of Customary Practice in the Preparation and Understanding of Third-Party Legal Opinions,” 63 The Bus. L. (ABA) 1277 (Aug. 2008) which states: “Some closing opinions refer to the application of customary practice.  Others do not.  Either way, customary practice applies.”

Statement of Opinion Practices

In 2016, a committee consisting of members of the ABA Business Law Section’s Legal Opinions Committee and the WGLO approved for distribution to interested bar and other opinion groups an exposure draft of the “Statement of Opinion Practices” which “describes selected aspects of customary practice and other practices generally followed throughout the United States in the giving and receiving of closing opinions.”  The Business Law and the Real Estate Sections of the CBA have approved the exposure draft, subject to review of the final draft which will be circulated in early 2017.  The Executive Council of the Colorado Bar Association deferred to the two sections’ Executive Councils for final approval.

The Statement of Opinion Practices is drawn principally from two primary documents from the Legal Opinions Committee of the ABA’s Business Law Section: Legal Opinions Principles, 53 Bus. Law. 831 (May 1998), and Guidelines for the Preparation of Closing Opinions, 57 Bus. Law. 875 (Feb. 2002).  The Statement of Opinion Practices is intended to update the Principles in its entirety and selected provisions of the Guidelines.  The Statement says that the other provisions of the Guidelines are unaffected, and no adverse inference should be drawn from their omission from the Statement.

More information will be forthcoming as the Statement is finalized and submitted to the Colorado Bar Association’s Real Estate Section Executive Council and Business Law Section Executive Council for final approval.

Business Law Section Activities

Bankruptcy Subsection

Colorado Springs Bankruptcy Bar Brown Bag CLE – Friday, February 24, 2017 from Noon - 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Colorado Springs brown bag lunch with Judge McNamara and Judge Rosania to hear about current bankruptcy issues, potential local rules changes, general clerk’s office and administrative updates, and other recent case law developments.  Please attend to share your ideas, suggestions, questions, issues and concerns on case management, court procedures, and general practice matters. 

This brown bag event will be held at the Federal Courthouse, Courtroom 101, 212 North Wahsatch Avenue, Colorado Springs 80903. There is no cost for this program.

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, March 1, 2017 from Noon to 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Denver brown bag lunch with our bankruptcy judges, and share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar.  This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver CO 80202.  There is no cost for this program.

Spring Bankruptcy Case Law Update – Wednesday, April 5, 2017 from 4:00 p.m. - 6:00 p.m.

Please save the date for this program which will be held at the Colorado Bar Association, 3rd Floor, 1900 Grant Street, Denver.  This update will be presented by:

  • Honorable Judge Joseph G. Rosania (U.S. Bankruptcy Court)
  • Nicole M. Detweiler (Allen Vellone Wolf Helfrich & Factor, P.C.)
  • Matthew D. Skeen, Jr. (Skeen & Skeen, P.C.)

This program has been submitted for 2 general CLE credits, with a complementary reception to follow.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen Vellone Wolf Helfrich & Factor, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

Bankruptcy Essentials for Lenders - Wednesday, February 15, 2017 – Noon - 1 p.m.  (option to purchase lunch)

Speakers Donald D. Allen, Esq. and James T. Markus, Esq., Markus Williams Young & Zimmermann are Business Bankruptcy Specialists certified by the American Board of Certification and provide guidance on how to better represent secured lenders in bankruptcy proceedings. They will guide you through pertinent bankruptcy law and interesting and unusual bankruptcy case issues and procedures. Plus, these seasoned practitioners will provide you with practical advice, tips, and answer your questions!  

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the date for the March 2017 Financial Institutions Program – Wednesday, March 15, 2017 - Noon - 1 p.m. 

International Transactions Subsection

Save the Date for the March 14, 2017 International Transactions Subsection Luncheon Program - Noon - 1 p.m.  

M&A Subsection

The M&A World in 2016 and 2017 – Tuesday, February 7, 2017 – 8 – 9:30 a.m.

Join us for this annual event as investment bankers from four of Denver’s investment banking firms discuss their thoughts on what they expected to see in the M&A world in 2016, what they actually saw in 2016 and what they expect to see in 2017. The panel will provide their insights on the M&A market, trends in structuring and negotiating M&A transactions, legal issues arising in M&A transactions, particular trends in the Colorado M&A market, and their expectations going forward in 2017.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Cooperatives: A Valuable Tool for the M&A Lawyer’s Toolkit – Tuesday, March 7, 2017 – 8 - 9 a.m.

Business succession planning and business conversion transactions often hinge on tax considerations and sale price, but many business clients also care about their employees, leaving a positive legacy, protecting the hard-earned good will of customers and the community, and leaving the business in the hands of capable management. A centuries-old business model – the Cooperative – is experiencing a renaissance as baby-boomer business owners look to retire and sell, without undermining the seller’s values or legacy. The cooperative entity form is robust, flexible, and optimizable to a wide variety of objectives. The program will explore the hallmarks of a business conversion or M&A transaction for which a cooperative is a suitable or even optimal alternative. We will discuss the corporate, tax, governance, structural, financing, and other considerations of an M&A transaction to or involving the cooperative entity.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the Date for the March 2017 – International Transactions Program – Data Protection, Legal Environment and Impact – Tuesday, March 14, 2017 - Noon - 1 p.m. 

Discussion will include high level cross-border privacy law issues, such as the US-EU privacy shield.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

CLE Cannabis Symposium – Thursday, February 2, 2017 – 9 a.m. – 4:30 p.m.

Program Highlights:

  • The Colorado and National Marijuana Legal Landscape
  • The Regulatory Landscape, Production Management, Market Demand and Compliance
  • Valuation, Banking, Employment and Tax Compliance Issues in Colorado’s Marijuana Industry
  • Banking in the Marijuana Business
  • Basic to Intermediate Real Estate Issues in the Marijuana Industry
  • Examinations, Appeals, and Collections Divisions, Including 280E
  • The Federal Enforcement Landscape and Perspective

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 7 general CLE credits. Click here for more information or to register.

Organizing a Colorado Business 2017 – Thursday, March 16, 2017 – 9 a.m. – 4:30 p.m.

Program Highlights:

  • LLC Versus “S” Corporation
  • Recognizing and Rectifying Common Problems in Startups
  • Building a Brand — Enhancing Company Value
  • Protecting the Company’s Intellectual Property
  • The Ethical Challenges of Working with Startup Companies: Who to Represent and How
  • What to Do When Your Client Cannot Pay by the Hour

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 7 general CLE credits, including 1.2 ethics credits. Click here for more information or to register.

Save the Dates for these Upcoming Programs!

49th Annual Rocky Mountain Securities Conference – Friday, May 5, 2017 - Denver Marriott City Center

Co-sponsored by the U.S. Securities and Exchange Commission and the CBA Business Law Section

Program Highlights:

  • New Administration, New Year, New SEC!
  • Dodd-Frank Retooling or Repeal?
  • Overhauling of Whistleblower Programs?
  • Easing of Post Crisis Rules and More on the Horizon?

More details and registration info to come!

Advising Nonprofit Organizations 2017 – Thursday, May 11, 2017  

Co-sponsored by the Business and Taxation Law Sections of the CBA

More details and registration info to come!

Business Law CLE Homestudies

Limited Liability Companies in Colorado

Consumer Bankruptcy Update 2016

2016 Business Law Institute

Ethical Issues for Attorneys Serving on Nonprofit Boards

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Practitioner's Guide to CO Business Organizations, Second Edition, includes the 2016 Supplement!

Managing Editors: Allen Rozansky and Lee Reichert 

The Guide begins with basic topics that a Colorado practitioner should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations. Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

Business Newsletter Header
February 2017
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

Trademarks in Franchise Systems

By Laura Liss, Esq., Brown & Kannady, LLC

Trademarks are the crux of any franchise, and understanding franchising trademark needs and licenses common in franchise systems helps counsel advise on franchise matters, whether on behalf of a franchisor or a franchisee.

1.              Franchisor Trademark Registrations.  Trademarks are registered in international classes (“Class(es)”) at the United States Patent and Trademark Office (“USPTO”). Classes identify which goods or services the trademark is associated with for its claimed nationwide exclusivity of use. Most franchises understand that they should protect the right to use the trademark in the Class associated with the franchised business, such as lawn care, massage services, restaurant services, etc.

However, fewer emerging franchisors will register additionally for “franchise services,” which is a separate Class and serves to protect the franchise system and franchisor. Failing to register does not mean the franchise cannot use the trademarks to offer and sell franchises, but counsel is advised to review for this Class to see how seriously the franchise is protecting its trademarks. If the franchise is not concerned with these trademarks registrations, it may mean that the franchise is not concerned with other best practices or does not have a solid team advising on its structuring and growth.

2.              Review a Franchisor’s Trademarks for a Prospective Franchisee.  As part of the review of a Franchise Disclosure Document (FDD), counsel is advised to review the trademarks listed in the FDD’s Item 13 disclosure of the primary trademarks licensed to the franchisee for use in the franchised business. While this Item 13 list need not be exhaustive of all the trademarks a franchisee is permitted to use, it should include the primary trademark(s). Counsel is also advised to search generally by the name of the company owning the trademarks to see any broader issues. Two primary reasons for this review are:

A.             Ensure the Franchisee is Permitted to Use the Trademarks.  A review of these trademark applications or registrations may uncover information important to a potential franchisee that would give it pause before investing. Examples of these issues include:

i.               Trademarks were proposed to be licensed to a franchisee for markets where the franchisor had been forced via an Office Action (refusal) and opposition proceeding to waive exclusive trademark rights because of a prior user in these markets who retained the rights to the same name for the same type of business. This limitation had been minimally disclosed in the FDD Item 13, and further review of the USPTO records was necessary and appropriate. Franchisee still invested with this information in mind, but understood it could be sued for its use of the brand in these markets.

ii.              A franchisor whose trademarks were licensed to it by an international brand to run its U.S. franchise operations was in serious jeopardy of being terminated by the licensor. These facts and the litigation were discussed minimally in the FDD Item 13 and Item 2 (litigation disclosures). Upon learning of the potential loss of trademark rights and a review of the litigation, the franchisee ultimately did not invest due to the attendant risks from the loss of the branding if the franchisor lost the case.

B.             Avoid Costly Rebranding.  A trademark review may also uncover information that could require the franchisee to rebrand, a potentially expensive process that can also confuse consumers. This review is important because franchise agreement trademark licensing provisions typically permit the franchisor to require the franchisee to change its name and/or other branding upon minimal notice from the franchisor, so knowing as much as possible about potentially necessary rebranding is important from the outset.

Rebranding is a common outcome after an unfavorable USPTO review of a trademark application because the franchisor will determine it cannot continue the trademark because of refusals issued in the USPTO review process.  Those refusals could be based on other similar pending or registered trademarks, mere descriptiveness, misdescriptiveness, etc. Counsel is advised to review any pending Office Actions or other claims to assess the likelihood of potential rebranding and help the potential franchisee evaluate the related costs (e.g. cost of new exterior and interior signage, cost of new marketing materials, cost to conduct additional marketing to help consumers understand the new brand, etc.).

Because of the importance of trademarks to the franchisor – franchisee relationship, counsel is advised to consider the franchisor’s trademarks and their potential limits to help clients understand how the trademarks can best serve everyone involved. 

Business Law Section Activities

New Lawyers Subsection

Pitch Night 101 – a Business + Law Networking Event for Business Lawyers and Other Business Folks – Wednesday, March 8, 2017 – 6:00 – 9:00 p.m.

Co-sponsored by the CBA Business Law Section, the Silicon Flatirons Student Group, and the Deming Center Venture Fund

Join us for a happy hour at the World Famous Dark Horse Bar and Grill in Boulder. The event will begin with a live pitch from a Colorado startup hoping to raise funds from the Deming Center Venture Fund, followed by a brief Q&A.  Afterwards, there will be plenty of time for law and business students to mingle with lawyers and business professionals.  The Deming Center Venture Fund is a multidisciplinary venture fund on CU's campus that allows students to invest real money in startups throughout the Boulder community. Whether you’re new to these organizations or a veteran tech and business law enthusiast, come mingle with students and professionals alike.  Light beverage and appetizer service will be provided, while supplies last.

Please click here to RSVP (RSVP’s are suggested, but not required). Contact Otto Hanson from the New Lawyers subsection of the CBA Business Law Section; Courtney Merage of the Silicon Flatirons Student Group; or Sean Keefe of the Deming Center Venture Fund for more information.

Bankruptcy Subsection

Colorado Springs Bankruptcy Bar Brown Bag CLE – Friday, February 24, 2017 from Noon - 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Colorado Springs brown bag lunch with Judge McNamara and Judge Rosania for practicing Colorado Springs bankruptcy attorneys. Some of the topics the judges will address include current bankruptcy issues, potential local rules changes, general clerk’s office and administrative updates, and other recent case law developments. Please attend to share your ideas, suggestions, questions, issues and concerns on case management, court procedures, and general practice matters. 

This brown bag event will be held at the Federal Courthouse, Courtroom 101, 212 North Wahsatch Avenue, Colorado Springs 80903. There is no cost for this program.

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, March 1, 2017 from Noon to 1:00 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Denver brown bag lunch with our bankruptcy judges and share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar.  This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver CO 80202.  There is no cost for this program.

Spring Bankruptcy Case Law Update – Wednesday, April 5, 2017 from 4:00 p.m. - 6:00 p.m.

Please join us for this Spring Case Law Update presented by the Honorable Joseph G. Rosania, Nicole M. Detweiler, Esq., and Matthew D. Skeen Jr., Esq.  The program discussions will include recent bankruptcy cases of interest issued by the Supreme Court, the Tenth Circuit Court of Appeals, the Bankruptcy Appellate Panel for the Tenth Circuit, and District Courts and Bankruptcy Courts within the Tenth Circuit.

After the program you are cordially invited to attend a networking reception sponsored by the CBA Business Law Section.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 2 general CLE credits.  Click here for more information or to register.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen Vellone Wolf Helfrich & Factor, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

Why Are Banks Reluctant to Touch Cannabis Cash? – Wednesday, April 19, 2017 – Noon - 1:00 p.m.  (option to purchase lunch)

Speaker: Sundie Seefried, CEO, Safe Harbor Private Banking

Attend this lunch and learn to better understand:

  • The Environment Today in Colorado for Banking the Marijuana Industry
  • Issues, Roadblocks, Challenges and Solutions to Banking Cannabis Cash
  • How to Establish a Legitimate, Compliant Banking Relationship with Marijuana Related Businesses

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Banks and Forgeries: Fundamentals of Forensic Document Examination – Wednesday, March 15, 2017 - Noon - 1:00 p.m. 

Speaker: Mark Songer, D-ABFC, CFC, Forensic Document Examiner

Attend this luncheon program to better understand:

  • The Fundamentals of Forensic Document Examination
  • Fraudulent Items Presented to Banks for Payment
  • How Banks in General Review Items for Forgeries
  • New Methods Financial Institutions are Using to Detect Fraudulent Items
  • Capabilities and Limitations of the Forensic Document Examiner

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

International Transactions Subsection

General Data Protection Regulation – Critical Changes on the Horizon – March 14, 2017 - Noon - 1:00 p.m. 

Get yourself and your clients ready for big changes in European Union data protection requirements. In response to skyrocketing growth in consumer and mobile technology and the accompanying growth of privacy issues and mass cross border data flows, the European Commission took action and crafted the General Data Protection Regulation (GDPR). That regulation applies after May 25, 2018, and includes some of the most stringent data protection laws in the world.

Attend this program and be better prepared to answer your clients’ questions as to how to prepare for, and to comply with, GDPR. Fines for noncompliance are significant and your clients have much to do over the next 14 months.

There is a discount for CBA Business Law Section members!  The program will be held at the Colorado CLE Classroom, 1900 Grant Street Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

Save the date for the May 2017 Program – Tuesday, May 9, 2017 – Noon – 1 p.m.

M&A Subsection

Cooperatives: A Valuable Tool for the M&A Lawyer’s Toolkit – Tuesday, March 7, 2017 – 8:00 - 9:00 a.m.

Business succession planning and business conversion transactions often hinge on tax considerations and sale price, but many business clients also care about their employees, leaving a positive legacy, protecting the hard-earned good will of customers and the community, and leaving the business in the hands of capable management. A centuries-old business model – the Cooperative – is experiencing a renaissance as baby-boomer business owners look to retire and sell, without undermining the seller’s values or legacy. The cooperative entity form is robust, flexible, and optimizable to a wide variety of objectives. The program will explore the hallmarks of a business conversion or M&A transaction for which a cooperative is a suitable or even optimal alternative. We will discuss the corporate, tax, governance, structural, financing, and other considerations of an M&A transaction to or involving the cooperative entity.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

M&A Post Closing Pitfalls and Remedies – Tuesday, April 11, 2017 – 8:00 a.m. - 9:00 a.m.

Speaker: James Drybanski, CFA, Consulting Senior Manager, EKS&H, Denver

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Denver. This program is offered for 1 general CLE credit. More information to come!

Upcoming Colorado CLE Programs

From the Colorado Bar Association

Organizing a Colorado Business 2017 – Thursday, March 16, 2017 – 9:00 a.m. – 4:30 p.m.

Program Highlights:

  • LLC Versus “S” Corporation
  • Recognizing and Rectifying Common Problems in Startups
  • Building a Brand — Enhancing Company Value
  • Protecting the Company’s Intellectual Property
  • The Ethical Challenges of Working with Startup Companies: Who to Represent and How
  • What to Do When Your Client Cannot Pay by the Hour

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 7 general CLE credits, including 1.2 ethics credits. Click here for more information or to register.

49th Annual Rocky Mountain Securities Conference – Friday, May 5, 2017 - Denver Marriott City Center

Co-sponsored by the U.S. Securities and Exchange Commission and the CBA Business Law Section

Program Highlights:

  • New Administration, New Year, New SEC!
  • Dodd-Frank Retooling or Repeal?
  • Overhauling of Whistleblower Programs?
  • Easing of Post Crisis Rules and More on the Horizon?

There is a discount for CBA Business Law Section members! The program will be held at the Denver Marriott City Center, 1701 California Street, Denver. Click here for more information or to register.

Advising Nonprofit Organizations 2017 – Thursday, May 11, 2017

Co-sponsored by the Business and Taxation Law Sections of the CBA

More details and registration info to come!

Business Law CLE Homestudies

Limited Liability Companies in Colorado

Consumer Bankruptcy Update 2016

2016 Business Law Institute

Ethical Issues for Attorneys Serving on Nonprofit Boards

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Bankruptcy Case Law Update

Business Contracts – The Fundamentals

CLE 2017 Cannabis Symposium

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Practitioner's Guide to CO Business Organizations, Second Edition, includes the 2016 Supplement!

Managing Editors: Allen Rozansky and Lee Reichert 

The Guide begins with basic topics that a Colorado practitioner should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations. Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

Business Newsletter Header
February 2017
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor
Business Newsletter Header
March 2017
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

Crowdfunding in Colorado Is Not Working; A Solution Proposed

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

The General Assembly adopted the Colorado Crowdfunding Act (the “CCFA”) in 2015 stating in its legislative declaration (C.R.S. § 11-51-308.5(2)(a)) that “Start-up companies play a critical role in creating new jobs and revenues; and [l]ack of access to capital is an obstacle to starting and expanding small business, inhibits job growth, and has negatively affected the state’s economy.”

Crowdfunding in Colorado is not working and is not living up to the legislative declaration or the expectation of the people involved in its creation.  If equity or debt crowdfunding is still considered important for small business capital formation and jobs creation, a new solution must be found.  My Article (found at https://ssrn.com/abstract=2933748) describes one person’s perspective on the general points listed below, and includes a suggestion for a broader stakeholder discussion on whether crowdfunding in Colorado under the CCFA is worth any more effort.  I also propose a solution involving rulemaking by the Colorado Securities Commissioner rather than a legislative approach, but recognize the increased risks involved as well.

  • Securities Regulation in General is a background for non-securities practitioners.
  • The Colorado Crowdfunding Act discusses the 2015 legislation.
  • Federal Regulation Crowdfunding discusses the more successful federal rule which became effective in May 2016.
  • Why the Lack of Success? discusses issues relating to the CCFA’s lack of success.
  • A Proposal for a Solution suggests the possibility of the Securities Commissioner adopting rules for a smaller crowdfunding exemption with substantially less regulatory oversight.
  • Crowdfunding Pitfalls describes issues that may result in crowdfunding in any form not being very attractive to small businesses.
  • Alternatives to Crowdfunding describes some existing alternatives which may make crowdfunding under the CCFA irrelevant.
  • Conclusion offers my final thoughts on the subject.

Click here to read the full article.

Don’t Miss the Deadline to File a Bankruptcy Proof of Claim

By Mark A. Larson, Allen Vellone Wolf Helfrich & Factor P.C.

A proof of claim in bankruptcy is rather simple to file, protects the rights of the creditor, and can result in devastating consequences if the deadline is missed.  In a Chapter 11 bankruptcy case the debtor-in-possession files its petition listing all of its assets and liabilities, including all creditors who may have a claim in the case.  11 U.S.C. § 521.  The debtor’s schedules provide for the debtor to designate each and every claimant as disputed, contingent, or unliquidated.  The debtor will thereafter file a motion with the bankruptcy court to set a claims bar date.  Bankr.R. 3003(c)(3).  Creditors who are unsecured or whose secured claim is scheduled by the debtor as disputed, contingent, or unliquidated must file their proof of claim on or before the claims bar date in order to have a claim in the bankruptcy proceeding.  Bankr.R. 3002(a) and 3003(c)(2).

Secured Claim Scheduled as Disputed

It is not uncommon or improper for a debtor to legitimately designate a secured claim as disputed, contingent, or unliquidated for a myriad of reasons.  If a secured claim is scheduled by the debtor as disputed, contingent, or unliquidated it is incumbent upon the secured creditor to timely file a proof of claim with the court.  11 U.S.C. § 1111(a).  Failure to timely file a proof of claim by the secured creditor will render the secured creditor’s claim in the bankruptcy as disallowed pursuant to 11 U.S.C. § 1111(a) and Bankruptcy Rule 3003(c)(2) (“[A]ny creditor who fails to [file a proof of claim in connection with a disputed claim] shall not be treated as a creditor with respect to such claim for purposes of voting and distribution.”); see also 11 U.S.C. § 1141(d)(1) (confirmation of the plan of reorganization discharged the debtor from any debt not otherwise provided for in the plan); Adrian & Associates, P.C. v. Qwest Corp., No. CIV. 08-205 MV/WDS, 2010 WL 8445031, at *2 (D.N.M. Oct. 29, 2010) (Rule 3003(c)(2), coupled with Section 1141, discharged creditor’s disputed claim).

Lien Remains

The disallowance of the claim in bankruptcy of a secured creditor who fails to timely file a proof of claim is not an issue which can be disputed.  The secured creditor must concede that it is not entitled to vote on or receive distributions under a plan of reorganization because it failed to timely file a proof of claim.  See Bankruptcy Rule 3003(c)(2).  What is to become of the lien on debtor’s property that secures the indebtedness owed to the secured creditor?  The Tenth Circuit Court of Appeals has determined that the secured creditor’s failure to timely file a claim does not invalidate its lien on the property.  See Hoxworth v. Blinder, 74 F.3d 205, 210 (10th Cir. 1996) (citing In re Tarnow, 749 F.2d 464, 465 (7th   Cir. 1984); see also In re JE Livestock, Inc., 375 B.R. 892, 900 (10th Cir. BAP 2007).  The debtor’s plan of reorganization does not have to provide for any payment to the secured creditor, and confirmation of the plan of reorganization, even a plan of reorganization that does not provide for any payments to the secured creditor, acts to discharge the debtor’s in personam obligation.  See 11 U.S.C. § 524(a)(2) (“A discharge . . . operates as an injunction against the commencement or continuation of an action . . . to collect, recover or offset any such debt as a personal liability of the debtor[.]”).

It is the secured creditor’s failure to timely file a proof of claim that prevents it from receiving distributions under the plan of reorganization.  However, its lien remains intact and the secured creditor is left with the sole remedy to proceed in rem against the secured property of the debtor.  The secured creditor’s lien survives bankruptcy by operation of law.  See, e.g. Johnson v. Home State Bank, 501 U.S. 78, 84 (1991).  Confirmation of the debtor’s plan of reorganization binds all creditors pursuant to 11 U.S.C. § 1141.  The confirmed plan of reorganization becomes a new and binding contract between Debtor and its creditors.  In re Lacy, 304 B.R. 439, 444 (Bankr. D. Colo. 2004).  The proposed plan of reorganization, however, will likely provide that the secured creditor will receive no payments.  Thus, secured creditor will not be able to foreclose upon the liened property post-bankruptcy for failure to make payments because it is owed no payments under the plan of reorganization and the in personam obligation is discharged.  The secured creditor is barred from foreclosing on the liened property during the pendency of the bankruptcy pursuant to 11 U.S.C. § 362 and after the debtor’s plan of reorganization is confirmed pursuant to 11 U.S.C. § 1141. 

Possible Recourse for the Claimant 

The fate of the indebtedness owed to the secured creditor appears to be in a perpetual state of limbo, waiting for a voluntary sale of the secured property in order to obtain payment.  However there is one option available.  The secured creditor must object to confirmation of the plan of reorganization and argue that the plan of reorganization is not feasible.  Pursuant to 11 U.S.C. § 1129(a)(11) a Chapter 11 plan of reorganization must be feasible before it can be confirmed, and feasible means that it must not be likely to be followed by liquidation or further financial reorganization.  In re Gentry, 807 F.3d 1222, 1225 (10th Cir. 2015).  The burden of proof to demonstrate feasibility to obtain confirmation of the plan of reorganization is on the debtor.  Id., citing In re Paige, 685 F.3d 1160, 1177 (10th Cir.2012).  A plan of reorganization might be feasible even if it does not provide for any payments to a disallowed creditor claim and does not have a deadline to sell the secured collateral.

Each and every creditor should file a proof of claim in a timely manner to avoid all of the above consequences and protracted litigation.  Even if you think that a proof of claim is not required, the filing of the proof of claim will preserve the creditors rights and interests in the bankruptcy proceeding.

Business Law Section Activities

ADR Section and Private Companies Subsection

Arbitration and Closely-Held Companies – Friday, April 7, 2017 from Noon – 2 p.m.

Co-sponsored by the ADR Section and the Private Companies Subsection of the Business Law Section

Please join us for a panel discussion moderated by John DeBruyn and panelists Hon. Federico Alvarez (Ret.), Adam Foster, and Anthony Van Westrum. This panel discussion will cover the benefits of arbitration for private companies and offer tips for drafting arbitration clauses.  It will also cover pertinent provisions of the Colorado Alternative Dispute Resolution Act and state and federal case law resolving questions of arbitrability.

This free program will be held at the Colorado CLE 9th Floor Boardroom, 1900 Grant Street, Denver. This program is offered for 2 general CLE credits. Reservations and cancellations for the monthly luncheon must be made prior to noon on Thursday, April 6, 2017 by calling the Colorado Bar Association, 303-860-1115, or by email to lunches@cobar.org. Pizza will be provided by the section for lunch. You may also participate in this luncheon by phone. Prior to the program we will email the materials & CLE affidavit as well as the call-in number. Click here for more information or to register.

Bankruptcy Subsection

Spring Bankruptcy Case Law Update – Wednesday, April 5, 2017 from 4 – 6 p.m.

Please join us for this Spring Case Law Update presented by the Honorable Joseph G. Rosania, Nicole M. Detweiler, Esq., and Matthew D. Skeen Jr., Esq.  The program discussions will include recent bankruptcy cases of interest issued by the Supreme Court, the Tenth Circuit Court of Appeals, the Bankruptcy Appellate Panel for the Tenth Circuit, and District Courts and Bankruptcy Courts within the Tenth Circuit.

After the program, you are cordially invited to attend a networking reception sponsored by the CBA Business Law Section.

The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 2 general CLE credits.  Click here for more information or to register.

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, June 7, 2017 from Noon to 1 p.m.

Co-Sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please join us for a Denver brown bag lunch with our bankruptcy judges and share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar.  This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver CO 80202.  There is no cost for this program.

Introduction to Bankruptcy – Program is on the Western Slope! – May 19, 2017 – 9:55 a.m. – 3:10 p.m.

Learn about bankruptcy law from seasoned western slope bankruptcy practitioners:

  • Pre-Bankruptcy Issues, Including Self-Settled and Third-Party Trusts, Fraudulent Conveyances and Pre-Bankruptcy Estate Planning
  • Chapter 7 Bankruptcy Essentials
  • Chapters 9 and 11 Bankruptcy Essentials
  • Chapter 13 Bankruptcy Essentials
  • Domestic Relations and Personal Injury Matters and Bankruptcy

Special price for CBA Business Law Section members! The program will be held at the Law Office of Brown & Brown, P.C., 1250 E. Sherwood Drive, Grand Junction, CO. This program is offered for 6 general CLE credits. Registration info to come!

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen Vellone Wolf Helfrich & Factor, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

Banks and Forgeries: Fundamentals of Forensic Document Examination – Wednesday, April 19, 2017 - Noon - 1 p.m. (option to purchase lunch)

Speaker: Mark Songer, D-ABFC, CFC, Forensic Document Examiner

Attend this luncheon program and better understand:

  • Fundamentals of Forensic Document Examination
  • Fraudulent Items Presented to Banks for Payment
  • How Banks in General Review Items for Forgeries
  • New Methods Financial Institutions are Using to Detect Fraudulent Items
  • Capabilities and Limitations of the Forensic Document Examiner

Cost is $29 for CBA Business Law Section and Financial Institutions Subsection members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

International Transactions Subsection

Save the date for the May 2017 Lunch Program – Tuesday, May 9, 2017 – Noon – 1 p.m.

M&A Subsection

M&A Pitfalls: Steering Clear of the Traps – Tuesday, April 11, 2017 – 8-9 a.m.

Speakers: James Drybanski, CFA, and Kindal Sullivan, EKSH, Denver

You will learn strategies for avoiding pitfalls when you are representing buyers or sellers in M&A transactions, plus commonly-seen pitfalls arising from carve-out considerations, inventory, working capital, state and local taxes, lack of seller preparation, and resulting deal fatigue. 

There is a discount for CBA Business Law Section and Mergers and Acquisitions Subsection members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

M&A Tax Issues:  Recent Federal Income Tax Developments – Tuesday, May 2, 2017 – 8 - 9 a.m. 

Speaker: Erik R. Edwards, Esq., Polsinelli

Learn the most recent federal income tax developments related to business acquisitions, consolidations and separations. Highlights include Section 336(e) elections for qualified stock dispositions, break-up fees, Section 355 spin-offs, and purchase price allocations. Attend and get up to speed on tax developments from your presenter who has both tax expertise and an entrepreneurial background. Navigate pertinent areas of the federal income tax thicket with an expert, and be prepared for your next M&A transaction! 

Special price for CBA Business Law Section and Mergers and Acquisitions Subsection members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 1 general CLE credit. Registration info to come!

Upcoming Colorado CLE Programs

From the Colorado Bar Association

49th Annual Rocky Mountain Securities Conference – Friday, May 5, 2017 - Denver Marriott City Center

Co-sponsored by the U.S. Securities and Exchange Commission, the CBA Business Law Section, and the Colorado Society of Certified Public Accountants

You would have to travel to Washington DC or New York and pay thousands of dollars to find a conference that offers as much as this for a fraction of the cost.  Reserve your place and be part of this very special event right here in Denver! Register today – seating is limited! 

 Topics include:

  • What’s Ahead for Regulation and the SEC?
  • SEC Enforcement — Current Priorities and Litigation Update
  • Regulated Entities — Industry Developments and SEC’s National Examination
  • Corporation Finance: Policy Update and Regulatory Agenda
  • Professionalism in the Securities Industry: Liability of Gatekeepers
  • Investment Advisers and Private Funds
  • Current Considerations for Corporate Transactions
  • Current Trends in Securities and White Collar Defense
  • General Counsel Viewpoints
  • Accounting and Audit Issues: Hot Topics and Important Updates
  • Ethical Issues for Securities Industry Professionals

There is a discount for CBA Business Law Section members! The program will be held at the Denver Marriott City Center, 1701 California Street, Denver. Click here for more information or to register.

26th Annual Institute on Advising Nonprofit Organizations 2017 – Thursday, May 11, 2017 – 9 a.m. – 4:10 p.m.

Co-sponsored by the CBA Business and Taxation Law Sections, the Colorado Nonprofit Association, and the Colorado Society of Association Executives

Reserve your seat now for a better understanding of:

  • Issues confronting today’s advisors and leaders of nonprofit organizations.
  • Potential solutions and strategies for today’s nonprofit organization to properly structure fiscal sponsorships, to protect itself from civil liability and fraud, to engage in electronic governance, to address issues unique to member organizations, and to assess the risk of accepting financial support from the cannabis industry.
  • Best practices and pitfalls when counseling your nonprofit organization clients and leading your nonprofit organization.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 6 general CLE credits. Click here for more information or to register.

Business Law CLE Homestudies

Why Are Banks Reluctant to Touch Cannabis Cash?

2016 Business Law Institute

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Business Contracts – The Fundamentals

Limited Liability Companies in Colorado

CLE 2017 Cannabis Symposium

Ethical Issues for Attorneys Serving on Nonprofit Boards

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Practitioner's Guide to CO Business Organizations, Second Edition, includes the 2016 Supplement!

Managing Editors: Allen Rozansky and Lee Reichert 

The Guide begins with basic topics that a Colorado practitioner should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations. Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.

Business Newsletter Header
April 2017
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor

 

IN THIS ISSUE:

 

Lenders Should Be Aware of Ag Liens Even if the Borrower is not a Farmer

By Linda M. Zimmermann and Alexis K. Lundgren, Markus Williams Young & Zimmermann LLC

Introduction

In a typical secured transaction, one of the first tasks on a secured lender’s due diligence list is to perform and review the results of a lien search in order to determine what its lien priority will be in the borrower’s assets.  The secured lender will then repeat this search throughout the life of the loan to confirm its lien priority.  In Colorado, most liens, including UCC, judgment, and tax liens, are found through a properly conducted search of the Colorado Secretary of State records[1] and applicable county real property records.  Unfortunately, in Colorado there are other liens, such as agricultural liens, that are not identified in these searches but which have super priority over properly perfected security interests of secured lenders.[2]  Three of these “hidden” agricultural liens, the Perishable Agricultural Commodities Act (“PACA”),[3] the Packers and Stockyards Act (“PASA”)[4] and the Food Security Act (the “FSA”),[5] attach to collateral in such a way that many secured lenders do not even look for them because they are not making an “Ag” loan.

PACA and PASA

The trust created by PACA gives growers and sellers of all perishable agricultural commodities (i.e., fresh fruits and vegetables)[6] a powerful collection tool if used properly.  The PACA trust secures collection of accounts receivable owed to such growers and sellers by requiring commission merchants, dealers, or brokers to hold perishable agricultural commodities, inventories of food and other products derived from perishable agricultural commodities, and receivables and proceeds from the sale of those commodities or products in trust for the benefit of the unpaid growers and sellers until full payment of the sums owed has been made.[7]  If such growers and sellers comply with the requirements of PACA, the trust imposed by PACA grants them priority status with respect to the produce sold, the products derived therefrom, and the proceeds thereof, senior to secured creditors’ claims against the buyers.

PASA does basically the same thing for livestock and poultry producers with respect to accounts receivable owed by packers[8] and live poultry dealers.[9]  The collateral subject to the trust is all livestock purchased by packers and poultry purchased by live poultry dealers, as well as inventories, receivables, and proceeds derived from such livestock or poultry.[10]  One important requirement for the application of PASA is that the sale must be a cash sale and even narrow deviations from this requirement can void the statutory protections.[11]  Unlike PACA, PASA does not require specific language be included in invoices to preserve the PASA trust.[12]  Prior to lending to a packer or live poultry dealer, a lender should understand under what payment terms the packer or live poultry dealer purchases livestock or poultry and adjust the lending terms accordingly.

Although there are no restrictions on who qualifies as a buyer, there are financial exceptions to the protections of both PACA and PASA.  Produce dealers and brokers whose annual produce purchases in any calendar year are less than $230,000 are not subject to PACA.[13]  Packers whose average annual purchases do not exceed $500,000 and live poultry dealers whose average annual sales of live poultry or average annual value of live poultry purchased or subject to a growing arrangement is less than $100,000 are exempt from PASA.[14]

Under PACA and PASA, protected sellers are granted a first priority “non-segregated floating trust” on the commodities sold and the proceeds thereof, including both the accounts receivable[15] from the sale and any products derived from such commodities.[16]  The trust is not defeated if the trust assets are commingled.[17]  Moreover, if a buyer commingles PACA/PASA trust funds, it has the burden of proof regarding any tracing issues that arise.[18]  The PACA trust “applies to all of the purchaser’s produce-related inventory and proceeds regardless of whether the trust beneficiary was the source of the inventory [and] the trust beneficiary is not required to track proceeds.”[19]  The assets of the PACA/PASA trust are not property of the purchaser’s estate under 11 U.S.C. § 541.[20]

Growers/producers protected by PACA/PASA are almost always paid first.  The trust is expansive, covering not only the commodity sold but what it is made into and the accounts receivable derived therefrom and reaching to all other funds in accounts where such proceeds are deposited if commingled and untraceable.  Moreover, unpaid growers/producers can force recipients of trust assets (such as, under certain circumstances, the secured lenders of the purchaser thereof) to disgorge such assets.[21]

Because a properly perfected secured lien under the Uniform Commercial Code is primed by a proper PACA/PASA claim, lenders to any borrower that purchases perishable agricultural commodities, livestock or live poultry, such as food manufacturers, grocery stores or restaurants, must structure their credit facilities to take into consideration the PACA/PASA trust.  In order to mitigate the effects of PACA/PASA, many lenders to buyers/dealers implement a reserve against all unpaid accounts payable owed to growers/producers and require regular reporting which include payables agings, the identity of sellers and suppliers and copies of all PACA/PASA notices and grower waivers.

Food Security Act of 1985

The FSA is another little known federal law that attempts to protect both growers and producers of farm products and their lenders, on the one hand, and those that purchase such products, on the other.  Congress found that “(1) certain State laws permit a secured lender to enforce liens against a purchaser of farm products even if the purchaser does not know that the sale of the products violates the lender’s security interest in the products, lacks any practical method for discovering the existence of the security interest, and has no reasonable means to ensure that the seller uses the sales proceeds to repay the lender; [and] (2) these laws subject the purchaser of farm products to double payment for the products, once at the time of purchase, and again when the seller fails to repay the lender; …”[22]  In other words, before the FSA, a buyer of farm products had no way to determine if the products it purchased were subject to the seller’s lenders’ liens and, therefore, such buyer was at risk for having to pay twice.

Under the FSA, a buyer of farm products[23] from a seller engaged in farming operations in Colorado purchases farm products free and clear of such seller’s lenders’ properly perfected security interests in such farm products (even if such buyer is aware of such security interest) so long as it buys in the ordinary course of business, [24] unless (i) within one year before such sale, such buyer has received from such lender or such seller written notice of such security interests which complies with the FSA and such buyer fails to perform its payment obligations;[25] (ii) such buyer has not registered with the Colorado Secretary of State, and such lender has properly filed an effective financing statement (an “EFS”) with the Colorado Secretary of State’s office;[26] or (iii) such buyer has received a written notice from the Colorado Secretary of State that complies with the FSA and specifies both such seller and each such farm product being sold by such seller as being subject to an EFS or notice, and such buyer does not secure a waiver or release of such security interest.[27]

The FSA addresses the double payment issue identified by Congress by allowing lenders to growers and producers of farm products to preserve their liens on farm products after the sale thereof in the ordinary course if such lenders comply with the FSA’s notice and registration requirements.[28]  Under the FSA, states may opt to be direct notice states or filing states.[29]  Colorado is a filing state and lenders to growers and producers of farm products produced in Colorado may file an EFS with the Colorado Secretary of State to comply with the FSA filing requirements.[30]  An EFS is similar to a UCC-1 and the Colorado form may be filed online.[31]  Like UCC-1 filings, lenders can search EFS filings online.  The Colorado “master list” is a downloadable, searchable report that contains information from all EFS filings that were effective as of the last day of the previous month.[32]

An EFS is not a UCC-1.  Compliance with the FSA does not affect the enforceability of a lender’s underlying security interest.  Therefore, a lender must comply with both the Uniform Commercial Code and the FSA in order to perfect its liens and take advantage of the protections offered by the FSA.

The FSA is a poorly drafted statute and case law is sparse.  To the authors’ knowledge, there is only one reported Colorado decision discussing the FSA.  In Great Plains Nat. Bank, N.A. v. Mount, 280 P.3d 670 (Colo. App. 2012), the court found that a Colorado buyer of cattle produced in Oklahoma (where an EFS was centrally filed) was subject to the Oklahoma Bank’s security interest that extended to after-acquired cattle of a debtor who sold the cattle one day after purchase to the buyer.  Both the buyer and its lender were found to hold interests junior to the Oklahoma Bank’s security interest.  A close reading of the case illustrates how definitions and technical requirements for EFS must be carefully followed.  It also shows how important it is for purchasers (and their lenders) to check UCC and EFS filings in the state where the farm products are produced.

Much like PACA and PASA, the lender to a borrower that purchases farm products must be aware of the FSA and include provisions in its credit agreement to ensure its lien on collateral is not primed by the liens of the secured lenders to the vendors, such as, for example, implementing a reserve against all unpaid accounts payable owed to growers/producers and requiring such a borrower to monitor the “master list” with respect to its vendors, to maintain written records pertaining to purchases of farm products to which an FSA lien is applicable, and to report any receipt of a written notice of any FSA lien or FSA-related claim.[33]

Conclusion

In sum, lenders to borrowers that purchase perishable agricultural commodities, livestock or live poultry must structure their credit facilities to protect against the hidden liens created by PACA, PASA and the FSA.  Without such a structure, lenders could find themselves undersecured or even out of the money in a liquidation, primed by liens of its borrower’s vendors or their lenders.

 

[1] http://www.sos.state.co.us/pubs/UCC/uccHome.html

[2] Colorado Revised Statutes § 4-9-322(g) provides:  “A perfected agricultural lien on collateral has priority over a conflicting security interest in or agricultural lien on the same collateral if the statute creating the agricultural lien so provides.”

[3] 7 U.S.C. § 499a et seq.  For federal regulations under PACA, see 7 C.F.R. § 46.

[4] 7 U.S.C. § 181 et seq.  For federal regulations under PASA, see 9 C.F.R. § 201.

[5] This article specifically discusses 7 U.S.C. § 1631.  For federal regulations under § 1631, see 9 C.F.R. § 205.

[6] PACA protects all fresh fruits and vegetables, including those frozen and/or packed in ice, as well as cherries in brine.  7 U.S.C. § 499a(b)(4).  Neither “fresh fruit” nor “fresh vegetable” is defined under PACA.  PACA does not apply to any fruits or vegetables which have been manufactured into articles of food of a different kind or character.  7 C.F.R. § 46.2(u).  For a list (compiled by the U.S. Department of Agriculture) of fruits and vegetables covered by PACA, see:  https://www.ams.usda.gov/sites/default/files/media/Commodities%20Covered%20by%20PACA.pdf.

[7] 7 U.S.C. § 499e(c)(2).

[8] Packer means “any person engaged in the business (a) of buying livestock in commerce for purposes of slaughter, or (b) of manufacturing or preparing meats or meat food products for sale or shipment in commerce, or (c) of marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce.”  7 U.S.C § 191.  See also In re Coop De Consumidores Del Noroeste, 464 B.R. 525, 528 (Bankr. D. P.R. 2012).

[9] Live poultry dealer means “any person engaged in the business of obtaining live poultry by purchase or under a poultry growing arrangement for the purpose of either slaughtering it or selling it for slaughter by another, if poultry is obtained by such person in commerce, or if poultry obtained by such person is sold or shipped in commerce, or if poultry products from poultry obtained by such person are sold or shipped in commerce.”  7 U.S.C. § 182(10).

[10] 7 U.S.C. § 196(b) (as to livestock); 7 U.S.C. § 197(b) (as to poultry).

[11] For purposes of PASA, a cash sale is one in which the seller does not expressly extend credit to the buyer.  7 U.S.C. § 196(c) (as to livestock); 7 U.S.C. § 197(c) (as to poultry).  See also In re Coop De Consumidores, 464 B.R. at 536-537.  See also 7 U.S.C. § 228b and 228b-1 for specific regulations on time and manner of payment.  These cash sale provisions do not appear in PACA.

[12] In re Coop De Consumidores, 464 B.R. at 544.

[13] See 7 U.S.C. §§ 499a(b)(6) and (7).

[14] See 7 U.S.C. § 196(b); 7 U.S.C. § 197(b).

[15] Because PASA requires a cash sale, technically, under PASA, this should be the amount owed, rather than accounts receivables.

[16] See 7 U.S.C. § 499e(c)(2) (as to produce); 7 U.S.C. § 196(b) (as to livestock); and 7 U.S.C. § 197(b) (as to poultry).  See also In re DKMB, Inc., 95 BR 774,776 (Bankr. D. Colo. 1989); Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063,1067 (2d Cir. 1995).

[17] Endico Potatoes, 67 F.3d at 1067; Boulder Fruit Express & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268, 1272 (9th Cir. 2001).

[18] Sunzone-Palmisano Co. v. M. Seaman Enterprises, Inc., 986 F.2d 1010, 1013-1014 (6th Cir. Ohio 1993).

[19] In re DKMB, Inc., 95 BR at 776.

[20] In re DKMB, Inc., 95 BR at 776; Stanziale v. Rite Way Meat Packers, Inc. (In re CFP Liquidating Estate), 405 B.R. 694, 697 (Bankr. D. Del. 2009).

[21] Endico Potatoes, 67 F.3d at 1068.  Note that currently there is a split in the Federal circuit courts regarding the PACA trust and factoring agreements.  See S&H Packing & Sales Co. v. Tanimura Disrib., 2017 U.S. App. LEXIS 3483 (9th Cir. 2017).

[22] 7 U.S.C. § 1631(a).

[23] The FSA defines “farm product” as “an agricultural commodity such as wheat, corn, soybeans, or a species of livestock such as cattle, hogs, sheep, horses, or poultry used or produced in farming operations, or a product of such crop or livestock in its unmanufactured state (such as ginned cotton, wool clip, maple syrup, milk, and eggs), that is in the possession of a person engaged in farming operations.”  7 U.S.C. § 1631(c)(5).

[24] “Except as provided in subsection (e) and notwithstanding any other provision of Federal, State, or local law, a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.”  7 U.S.C. § 1631(d).

[25] 7 U.S.C. § 1631(e)(1).

[26] 7 U.S.C. § 1631(e)(2).

[27] 7 U.S.C. § 1631(e)(3).

[28] 7 U.S.C. §§ 1631(e).

[29] 7 U.S.C. § 1631 et seq.

[30] Colorado Revised Statutes § 4-9.5-101 et seq.

[31] To file an EFS online, visit https://www.sos.state.co.us/ucc/pages/home.xhtml then click on “Effective Financing Statement” under “File a Financing Statement”.  Additional instructions may be found here: http://www.sos.state.co.us/pubs/UCC/instructions/EffectiveFinancingStatement.html.

[32]  Additional information about the master list may be found here: http://www.sos.state.co.us/pubs/UCC/FAQs/masterlist.html.  To search the “master list”, visit https://www.sos.state.co.us/ucc/pages/home.xhtml and click on “EFS master list” under “Search Records”.

[33] The FSA specifically provides secured lenders to growers and producers of farm products with the right to require such growers and producers to provide a list of buyers and imposes a fine on such growers and producers of the greater of $5,000 or 15% of the value of such products for failure to comply with such a provision.  7 U.S.C. §§ 1631(h).

 


Does That Email Waive Any Confidentiality or Privilege Status?

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

Electronic mail communications are a fact of life in 2017.  There is no getting around this benefit and burden.  Yet careless use of email devices and networks can risk loss of confidentiality and other privileges.  This is especially the case when clients communicate with their lawyers using their employer-established email accounts on office computers or computers they share with others, including in some cases family members.  That client may also store personal emails and information on a business or shared laptop, smartphone, or tablet. 

Recent Marvel Case and Privacy Expectations 

The use of an employer or a shared computer (including a computer found in a public library) or other device which is subject to another’s control may eviscerate the expected confidentiality of electronic communications.  Consider the case of Peerenboom v. Marvel Entm’t, LLC, 2017 BL 82109, N.Y. App. Div. 1st Dept., No. 3435N 162152/15, 3/16/17).  In that case, Marvel’s CEO Isaac Perlmutter exchanged emails with his personal counsel and his wife through Marvel’s email system.  Marvel’s policy specifically allowed employees to receive personal emails, but asserted that Marvel owned all emails on its system, and further reserved the right to audit networks and systems to ensure compliance with its email policies.  Marvel also reserved the right “to access, review, copy and delete any messages or content” and to “disclose such messages to any party (inside or outside the Company).”  An adversary who accused Mr. Perlmutter and his wife of orchestrating a “hate-mail” campaign against him subpoenaed relevant emails from Marvel’s server.

The New York appellate panel found that, based on the Marvel policy, Mr. “Perlmutter lacked any reasonable expectation of privacy in his personal use of the email system of Marvel, his employer, and correspondingly lacked the reasonable assurance of confidentiality that is an essential element of the attorney-client privilege.”  The court also found that, as CEO, Mr. Perlmutter was constructively aware of Marvel’s email policy whether or not he had actual knowledge.

The New York appellate panel also found that Mr. Perlmutter’s use of Marvel’s email system for personal correspondence also waived the confidentiality necessary for the finding of any spousal privilege in the emails between Mr. Perlmutter and his wife.

Attorney-Client Privilege 

The New York court did treat the attorney work product protection differently, stating: “Given the lack of evidence that Marvel viewed any of Perlmutter's personal emails, and the lack of evidence of any other actual disclosure to a third party, Perlmutter's use of Marvel's email for personal purposes does not, standing alone, constitute a waiver of attorney work product protections.”  Absent actual disclosure to a third party, attorney work product protections may stand.  The appellate panel remanded the case to the trial court to review the alleged work product items to see if they are in fact protected.

In reaching this conclusion, the New York appellate panel relied in part on In re Asia Global Crossing, Ltd., 322 B.R. 247, 257 (Bankr. S.D.N.Y. 2005).  In that case, a bankruptcy trustee took over the operations and assets of Asia Global Crossing, including email servers which contained “certain e-mail messages containing allegedly privileged attorney-client communications” (referred to by the court as “Insider Emails”) as well as certain allegedly privileged hard copy documents.  The trustee alleged that Asia Global Crossing’s email policy warned users that “the e-mails were the debtor’s property, the e-mail system was not secure, that third-parties had access to the e-mail system, and that no one was authorized to use the e-mail system to transmit confidential or secret information.”  The trustee also argued that, even without that policy, “the mere use of the company’s e-mail system destroyed or waived any privilege.” The Asia Global Crossings holding established four factors to be considered in determining whether an employee has a reasonable expectation of privacy in email transmitted over a company system:

1.      Does the corporation maintain a policy banning personal or other objectionable use;

2.      Does the corporation monitor the use of the employee’s computer or e-mail;

3.      Do third parties have a right of access to the computer or emails; and

4.      Did the corporation notify the employee, or was the employee aware of, the use and monitoring policies.

Attorney’s Duty to Advise Client of Risks 

Clients may not realize the risk of the loss of attorney-client privilege in communications in this context.  ABA Formal Opinion 11-459 (Duty to Protect the Confidentiality of Email Communications with One’s Client) raises the concern that it may be the lawyer’s obligation to advise the client as to the risks associated with the possible loss of the attorney-client privilege in these circumstances.  Relying on Model Rule 1.6 (and specifically comments [16] and [17]), Formal Opinion 11-459 specifically states:

Given these risks, a lawyer should ordinarily advise the employee-client about the importance of communicating with the lawyer in a manner that protects the confidentiality of e-mail communications, just as a lawyer should avoid speaking face-to-face with a client about sensitive matters if the conversation might be overheard and should warn the client against discussing their communications with others. In particular, as soon as practical after a client-lawyer relationship is established, a lawyer typically should instruct the employee-client to avoid using a workplace device or system for sensitive or substantive communications, and perhaps for any attorney-client communications, because even seemingly ministerial communications involving matters such as scheduling can have substantive ramifications.

Footnote 7 to Formal Opinion 11-459 specifically states that “if the lawyer becomes aware that a client is receiving personal e-mail on a workplace computer or other device owned or controlled by the employer, then a duty arises to caution the client not to do so, and if that caution is not heeded, to cease sending messages even to personal e-mail addresses.”  Under the Formal Opinion (which has not been adopted in Colorado), it is the lawyer’s obligation to protect the client from the client’s own careless acts.

ABA Formal Opinion 11-460 (Duty When Lawyer Receives Copies of a Third Party’s Email Communications With Counsel) addresses the case when an attorney receives communications between an opposing party and counsel which is not transmitted, but rather is stored on a third party (employer-owned, in the case of an employer-employee dispute) computer.  The ABA Formal Opinion acknowledges that in this case Rule 4.4(b) of the Rules of Professional Conduct is not applicable since the email was not “inadvertently sent.”  Formal Opinion 11-460 notes that other law, court decisions, or civil procedure rules, may require disclosure to the opposing party that personal emails have been retrieved from the third-party computer and Rule 1.6(b)(6) of the Rules of Professional Conduct permits disclosure by the attorney.  Where no law requires notification, Formal Opinion 11-460 says that the decision to provide the disclosure must be made by the client following the lawyer’s explanation of the implications of disclosure and available alternatives.

The issues in Formal Opinions 11-459 and 11-460 may be warnings that attorneys may want to consider including in their engagement letters.  Where an attorney is representing an employee in transition from one employer to another employer, the need for the transitioning employee to use separate and personal, non-employer-related, electronic communication facilities, is even heightened.

 

Business Law Section Activities

Bankruptcy Subsection

Introduction to Bankruptcy Law – Program is on the Western Slope! – May 19, 2017 – 9:55 a.m. – 3:10 p.m.

Please attend to learn from our experienced panel of practicing attorneys to gain a better understanding of:

  • How to Handle Chapters 7, 9, 22, and 13 Bankruptcies
  • Pre-Bankruptcy Issues, Including Self-Settled and Third-Party Trusts, Fraudulent Conveyances and Pre-Bankruptcy Estate Planning
  • The Impact of Domestic Relations and Personal Injury Matters on Bankruptcies and Vice Versa

Special price for CBA Business Law Section members! The program will be held at the Law Office of Brown & Brown, P.C., 1250 E. Sherwood Drive, Grand Junction, CO. This program is offered for 6 general CLE credits. Click here for more information or to register.

Denver Bankruptcy Bar Brown Bag CLE – Wednesday, June 7, 2017 – Noon – 1:00 p.m.

Co-sponsored by the CBA Bankruptcy Subsection and the U.S. Bankruptcy Court for the District of Colorado

Please attend a Denver brown bag lunch with our bankruptcy judges and two guest speakers: James T. Burghardt (Moye White LLP) and Curt Todd (Law Office of Curt Todd, LLC).  In addition to current matters before the court, the guest panel will address bankruptcy mediation issues. Please attend to share your ideas, suggestions, questions, issues and concerns, as the judges are seeking input from the bar. This brown bag event will be held at the United States Bankruptcy Court for the District of Colorado, Room 183, 721 19th Street, Denver CO 80202.  There is no cost for this program.

Bankruptcy Subsection Co-Chairs.  Matthew Faga (Markus Williams Young & Zimmermann LLC) and Mark Larson (Allen Vellone Wolf Helfrich & Factor, P.C.) are the co-chairs of the Bankruptcy Subsection (July 2015 – June 2017).  If you have ideas for future subsection events or CLEs, please contact Matt at mfaga@markuswilliams.com or Mark at mlarson@allen-vellone.com.

Financial Institutions Subsection

Banks and Forgeries: Fundamentals of Forensic Document Examination – Wednesday, May 24, 2017 - Noon - 1 p.m. (option to purchase lunch)

Your presenter, Mark Songer, D-ABFC, CFC, Forensic Document Examiner, will provide you with the fundamentals of forensic document examinations and the document examiner’s capabilities and limitations. His discussion will include information as to the number of fraudulent items presented to banks for payment; how banks in general review items drawn on customer accounts for forgeries and new methods financial institutions are using to detect fraudulent items.

Register now so that you and your banking clients know how to better identify forged documents, to present documentary evidence of forgeries, including in a court of law, and to examine forensic expert witnesses and other potential witnesses. 

Cost is $29 for CBA Business Law Section and Financial Institutions Subsection members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

International Transactions Subsection

Cross Border Data Transfers: Be Compliant with the GDPR – Tuesday, May 9, 2017 – Noon - 1 p.m.

Speaker: Jennifer Mullins, General Counsel, SafeGuard World International

Attend this program to prepare yourself and your clients for new requirements regarding data transfers from the European Union to the U.S. Gain insights on how to comply with and how to manage commercial and technological risks under the European Union’s General Data Protection Regulation (GDPR), effective May 25, 2018. Make certain your data transfers comply with some of the most stringent data protection laws in the world, and protect yourself from significant fines.

Cost is $29 for CBA Business Law Section and Financial Institutions Subsection members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

M&A Subsection

M&A Tax Issues:  Recent Federal Income Tax Developments – Tuesday, May 2, 2017 – 8 - 9 a.m. 

Speaker: Erik R. Edwards, Esq., Polsinelli

Learn the most recent federal income tax developments related to business acquisitions, consolidations and separations. Highlights include Section 336(e) elections for qualified stock dispositions, break-up fees, Section 355 spin-offs, and purchase price allocations. Attend and get up to speed on tax developments from your presenter who has both tax expertise and an entrepreneurial background. Navigate pertinent areas of the federal income tax thicket with an expert, and be prepared for your next M&A transaction! 

Special price for CBA Business Law Section and Mergers and Acquisitions Subsection members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 1 general CLE credit. Click here for more information or to register.

The Financial Institutions, International Transactions and M&A Subsections will take a summer break from their CLE series. There are no programs in June, July and August.

Upcoming Colorado CLE Programs

From the Colorado Bar Association

49th Annual Rocky Mountain Securities Conference – Friday, May 5, 2017 - Denver Marriott City Center

Co-sponsored by the U.S. Securities and Exchange Commission, the CBA Business Law Section, and the Colorado Society of Certified Public Accountants

You would have to travel to Washington DC or New York and pay thousands of dollars to find a conference that offers as much as this. This conference is a fraction of the cost.  Reserve your place and be part of this very special event right here in Denver! Register today – seating is limited! 

Topics include:

  • What’s Ahead for Regulation and the SEC?
  • SEC Enforcement — Current Priorities and Litigation Update
  • Regulated Entities — Industry Developments and SEC’s National Examination
  • Corporation Finance: Policy Update and Regulatory Agenda
  • Professionalism in the Securities Industry: Liability of Gatekeepers
  • Investment Advisers and Private Funds
  • Current Considerations for Corporate Transactions
  • Current Trends in Securities and White Collar Defense
  • General Counsel Viewpoints
  • Accounting and Audit Issues: Hot Topics and Important Updates
  • Ethical Issues for Securities Industry Professionals

There is a discount for CBA Business Law Section members! The program will be held at the Denver Marriott City Center, 1701 California Street, Denver. Click here for more information or to register.

26th Annual Institute on Advising Nonprofit Organizations 2017 – Thursday, May 11, 2017 – 9 a.m. – 4:10 p.m.

Co-sponsored by the CBA Business and Taxation Law Sections, the Colorado Nonprofit Association, and the Colorado Society of Association Executives

Reserve your seat now for a better understanding of:

  • Issues confronting today’s advisors and leaders of nonprofit organizations.
  • Potential solutions and strategies for today’s nonprofit organization to properly structure fiscal sponsorships, to protect itself from civil liability and fraud, to engage in electronic governance, to address issues unique to member organizations, and to assess the risk of accepting financial support from the cannabis industry.
  • Best practices and pitfalls when counseling your nonprofit organization clients and leading your nonprofit organization.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 6 general CLE credits. Click here for more information or to register.

Protecting Fiduciaries and Clients from Investment Fraud – Friday, May 12, 2017 

A good financial advisor/client relationship is invaluable. Most advisors treat their clients fairly. They provide solid advice that leads to good returns, and they are rewarded with referrals from satisfied clients. But too often fiduciaries and clients are victims of fraud and abuse.

Preventing fraud before it happens is the best strategy. Arm yourself with the best information by attending this program! Find out about a trustee’s duty to delegate the investment function prudently, and get real-life examples of investment fraud and exploitation. Learn how best to vet your financial advisor, and finally discover their compensation system.

There is a discount for CBA Business Law Section members! The program will be held at the Colorado CLE Classroom, 1900 Grant Street, Suite 300, Denver. This program is offered for 7 general CLE credits. Click here for more information or to register.

Save the Dates for the 2017 Business Law Institute
September 13-14, 2017
Grand Hyatt Hotel, Denver
Registration info to come soon!

Business Law CLE Homestudies

Why Are Banks Reluctant to Touch Cannabis Cash?

Advertising Law 2016: What Advertisers and the Lawyers Who Advise Them Need to Know

Business Contracts – The Fundamentals

Limited Liability Companies in Colorado

CLE 2017 Cannabis Symposium

Ethical Issues for Attorneys Serving on Nonprofit Boards

Bankruptcy Case Law Update

Check out the complete catalog of CLE Homestudies – search by practice area or credits!

Colorado CLE Books

Practitioner's Guide to CO Business Organizations, Second Edition, includes the 2016 Supplement!

Managing Editors: Allen Rozansky and Lee Reichert 

The Guide begins with basic topics that a Colorado practitioner should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations. Read more.

Review our complete catalog of business law books.

Contributions for future newsletters are welcome.
Contact Ed Naylor at ed.naylor@moyewhite.com  303-292-2900.

This newsletter is for information only and does not provide legal advice.