The Jenner & Block Report
Updates on U.S. Law for the Japanese Legal and Business Communities
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White Collar Defense & Investigation
/ Editors' Note
In this edition, our Featured Development story provides a forecast for U.S. Criminal Antitrust Enforcement following the September 2017 confirmation of Makan Delrahim as the U.S. Justice Department's new top antitrust enforcer by the U.S. Senate.
This issue also covers President Trump's Executive Order imposing additional sanctions on North Korea and its impact on persons or entities that have ongoing dealings with North Korea, including financial institutions. Additional topics include cover actions in Delaware Chancery Court and in the securities indexes that demonstrate a commitment in protecting shareholder voting rights in publicly traded companies, as well as the more narrow application of attorney-client privilege and work product protection outside of the United States. Also discussed are the Department of Justice`s new head of the Fraud Section, along with U.S. Supreme Court updates on arbitration and personal jurisdiction, among other key topics.
We hope that you find these summaries of interest and we thank you for taking the time to review the Jenner & Block Report.
The Jenner & Block Team
/ Featured Development
91Makan Delrahim DOJDOJ
20032005 20173 540
2018DOJ11 3.816500 830695 45
201735 " "DOJ EU
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2018 U.S. Criminal Antitrust Enforcement Forecast: More of the Same
By Gabriel A. Fuentes
As the U.S. Senate in late September voted to confirm Makan Delrahim as the U.S. Justice Department's new top antitrust enforcer after a months-long delay, very little evidence exists to suggest any significant change in the Department's criminal antitrust enforcement policies.
Mr. Delrahim is a former Deputy Assistant Attorney General in the Antitrust Division (from 2003 to 2005) with experience in civil and criminal matters. His nomination by President Trump in March 2017 was not expected to be controversial, but Democratic opposition delayed his confirmation through the summer, as some senators expressed concern about his work as a private lobbyist on several large mergers including Anthem Inc.'s $54 billion merger with Cigna Corp. in the health insurance field.
During the confirmation process, Mr. Delrahim said nothing to suggest any let-up in criminal antitrust enforcement. In the meantime, President Trump's fiscal year 2018 budget proposal slashed the Department of Justice's budget by $1.1 billion, a 3.8% reduction from the previous year, while the Antitrust Division's allocation was to remain at the previous year's level of nearly $165 million. The lack of an actual reduction in the Antitrust Division's budget caused some observers to conclude that the Division was left "unscathed." But a closer examination of the Division's budget documents reveals more: The Division plans to reduce overall staffing from 830 to 695 positions, including a reduction of 45 attorneys. The Division's publicly released "budget summary" did not specify where within the Division the staff and attorney cuts would take place, but the Division's release seemed to go out of its way to state that the reductions would not affect the Division's capabilities to enforce the competition laws.
"ATR will continue its efforts in essential areas in U.S. and global markets to ensure that American consumers and businesses are left with a vibrant and appropriately competitive marketplace," the Division stated in the release. "Vigorous enforcement of criminal antitrust laws will continue to be the number one priority of the Division's Criminal Program. ATR has a history of achieving record-setting prison sentences and criminal fines and expects this trend to continue in FY 2018."
The Antitrust Division's criminal enforcers have stayed active over the past year. In March 2017, the Division used an international meeting of maritime shippers to serve subpoenas upon top executives of five major shipping companies. The DOJ's visit to the San Francisco meeting of the International Council of Containership Operators, known informally as "the Box Club," signaled a continuing interest in investigating possible collusion in the international maritime shipping industry. The subpoenas came amid on ongoing inquiry in the European Union.
The Division has continued to pursue its long-running investigations, including a probe of "noncontainerized" international shipping, or so-called the "roll-on, roll-off" shipping industry. In late September, the Antitrust Division announced a guilty plea from a fifth company in that investigation. The guilty plea from Norway-based Hegh Autoliners AS brought the total criminal fines in that investigation to $255 million. Other companies pleading guilty in the "roll-on, roll-off" investigation have included Japan-based Kawasaki Kisen Kaisha ("K Line") and Nippon Yusen Kabushiki Kaisha ("NYK"). Four executives have pleaded guilty and have been sentenced to prison in the "roll-on, roll-off" investigation, while seven others have been indicted but have not submitted to U.S. jurisdiction for prosecution. Over the summer, in July 2017, the Division also collected its seventh corporate guilty plea in its investigation of price-fixing of electrolytic capacitors. Ten individuals have been charged in the capacitors investigation.
In short, the Division's activities over the past year indicate that criminal antitrust enforcement has continued. While impending staff reductions at the Division including from the ranks of the attorneys may raise questions about whether the Division can do more with less, the Division's new chief enforcer has shown no indication that he wants criminal antitrust enforcement to let up anytime soon.
/ Corporate Update
20161212 CalPERSIAC IAC IAC8%44% CalPERS 2017623IACCalPERS CalPERS
201732IPO IPOIPO172 288.6% 2017727 1FTSE5% 2017731S&P S&P500
Recent Actions Protecting Shareholder Voting Rights
Recent actions in Delaware Chancery Court and in the securities indexes have demonstrated a firm commitment in protecting shareholder voting rights in publicly traded companies. On December 12, 2016, the California Public Employees' Retirement System (CalPERS) filed a lawsuit against IAC/InterActiveCorp (IAC) and its chairman, Barry Diller, after IAC announced recapitalization plans whereby IAC intended to issue a new class of non-voting stock aimed at protecting the Diller family's control over the company. Prior to the recapitalization plan, Mr. Diller possessed 44% of the voting control of IAC while only possessing 8% of the stock. CalPERS claimed that Mr. Diller threatened to block valuable acquisitions if the board of directors did not approve the issuance of a new non-voting class of stock. This non-voting class of stock would have been used for executive compensation and acquisitions but would not have diminished Mr. Diller's control over the company. On June 23, 2017, CalPERS dropped its lawsuit after IAC elected not to go forward with the recapitalization plans. CalPERS' victory demonstrates how litigation can be used as a negotiating tool to preserve shareholder voting rights.
On March 2, 2017, Snap Inc. (SNAP) made its initial public offering (IPO). It was the first IPO in which only non-voting shares were offered to the public. The SNAP IPO was for over 200 million shares of stock at $17 per share, but kept 88.6% of the voting power in the hands of its two co-founders. Lobbyists representing institutional investors and funds immediately called for major indexes to bar non-voting shares from their indexes. On July 27, 2017, FTSE Russell, a unit of London Stock Exchange Group Plc, announced that only stocks with at least 5% of voting rights in the hands of public shareholders will be eligible for inclusion in its indexes. On July 31, 2017, the S&P Dow Jones Indices announced that companies with multiple share classes will not be able to join the S&P 500. These actions by the indexes have been praised by institutional investors as protection against companies
who want to be publicly traded but do not want to give up voting control to public shareholders.
In response to these recent developments, public companies, and private companies that may one day desire to be public, should give even greater attention to how they organize their capitalization and voting structure to avoid costly litigation or inability to be listed on important international indexes.
material adverse changeMAC The Mrs. Fields Brand, Inc. v. Interbake Foods LLC, C.A. 12201-CBMAC 2MAC
Material Adverse Change/Effect MAC (1) (2) 2
1M&AMAC MAC (1)(2) (3)3 In re IBP, Inc. Shareholders Litigation, 789 A.2d 14, 65 (Del. Ch. 2001) M&A
23MAC MAC MAC MAC commercially unviablematerial damage 3
Delaware Court Broadens Application of Material Adverse Change/Effect (MAC) Test to Trademark License Agreement
A material adverse change ("MAC") clause allows parties to avoid their contractual obligations under certain sets of circumstances. In The Mrs. Fields Brand, Inc. v. Interbake Foods LLC, C.A. 12201-CB, the Delaware Court of Chancery recently clarified two important points of law surrounding MAC clauses. The case involved a MAC dispute over a Trademark License Agreement (the "License Agreement"), which granted Interbake Foods LLC an exclusive license to manufacture Mrs. Fieldsbranded cookies for sale in certain retail store channels.
The License Agreement did not define the words "Material Adverse Change/Effect" or otherwise use
explicit MAC language. The agreement instead contained a representation and warranty from Mrs. Fields that Mrs. Fields "has no knowledge of any...change that is . . . materially adverse to . . . the business...." Interbake argued that Mrs. Fields breached this representation and warranty when it entered into the License Agreement, because the company knew "(1) that its retail cookies tasted awful, and (2) that the value of the Mrs. Fields brand was declining ...." From these facts, the Court made two important holdings.
First, the Court extended the MAC case law developed in the mergers and acquisitions ("M&A") context to the License Agreement. In particular, the Court adhered to the three-part framework articulated by Chief Justice Strine for determining when a MAC clause is triggered: (1) the occurrence of an unknown event that (2) substantially threatens the overall earnings potential of the target in (3) a durationallysignificant manner. In re IBP, Inc. Shareholders Litigation, 789 A.2d 14, 65 (Del. Ch. 2001). The Court did note that in the unique context of license agreements, unlike M&A contracts, the duration should be examined relative to the license agreement's term.
Second, the Court applied the above three-part knowledge, magnitude, and duration test to the License Agreement even though the agreement contained no explicit MAC language. This was because, the Court found, the MAC test's rationale (ensuring MAC's are genuine in order to prevent parties from terminating contracts at-will) was equally applicable to the License Agreement's conditions. The Court went even further to apply the MAC test to another condition that did not use the words "adverse," "change," or "effect." The condition instead allowed for contract termination if there was "material damage" that rendered the License Agreement "commercially unviable." In both instances, the Court found that Interbake failed to overcome the high burden for satisfying the three-part test.
Mrs. Fields Brand, Inc. v. Interbake Foods LLC clarifies that the three-part knowledge, magnitude, and duration test for triggering a MAC clause applies in both M&A contracts and trademark license agreements. It also opens arguments for application of the three-part test to other types of contracts and to clauses that do not contain specific MAC language.
Information rights investor-appointed directors (1)board-representation agreement (2)(3) 3 In Re Oxbow Carbon LLC, Unitholder Litigation Oxbow Carbon
Oxbow Carbon 22 CEO
Oxbow Carbon board-representation agreement
Delaware Court Affirms High Threshold to Limit Information Rights of Directors with Interests Adverse to the Company
Each member of a company's board of directors typically has virtually unrestricted access to the company's books and records. Known as information rights, these rights extend to investor-appointed directors, who may share such company information with the investor. A company may limit a director's information rights in part by three methods: (1) executing a board-representation agreement with the investor, (2) creating a committee that excludes particular directors and (3) claiming the director has become adverse to the interests of the company. The courts have not determined the extent to which information rights can be so limited, but in In Re Oxbow Carbon LLC, Unitholder Litigation ("Oxbow Carbon"), the Delaware Court of Chancery recently clarified the high threshold a company must meet to show a director has become sufficiently adverse to warrant placing any limits on the director's otherwise unfettered information rights.
In Oxbow Carbon, the company withheld certain privileged information from two investor directors and two company-appointed directors, asserting that the adversity exception justified restricting the directors' information rights. The company claimed that the investor directors became adverse after the company and appointing investor took opposite sides in the appointing investor's exit sale. The company also claimed that the respective directors staged a campaign of sabotage against the company and the company's CEO. The conflict came to a head when the company's outside counsel informed the appointing investor that the investor directors were no longer considered clients of the company's counsel.
Although the Court found "meaningful evidence" to support the company's allegations, it explained that neither the investor directors' conflict with respect to the exit sale nor the respective directors' alleged sabotage of the company and its CEO established sufficient adversity to warrant limiting the directors' information rights. Specifically, the Court noted that neither claim "inherently equates to acting contrary to the best interests of the Company." Rather, the Court held that the company failed to show sufficient adversity with respect to the two company-appointed directors to justify any limit on their information rights.
Oxbow Carbon underscores the high threshold required to prove sufficient adversity exists to limit directors' information rights. Rather than rely on the court to discern in retrospect whether and when sufficient adversity arose, companies and investors may wish to consider addressing potential limits on investor directors' information rights in advance through a board-representation agreement. Agreeing on information rights prior to investor directors' installment could save both sides considerable time, effort and cost should future disputes arise.
/ International Trade
9201381082 911 2375
President Trump Issues Expansive North Korea Sanctions Executive Order
On September 20, President Trump signed Executive Order 13810 imposing additional sanctions on North Korea. These measures follow prior sanctions set forth in the August 2, Countering America's Adversaries Through Sanctions Act (which we wrote about in our prior Alert) and by the UN on September 11 through Security Council Resolution 2375.
The measures in the new EO are primarily so-called "secondary sanctions" calling for designation by the US Treasury Department (in consultation with the State Department) of persons or entities that do business with or related to North Korea.
On balance, such sanctions are most likely to impact Chinese and Russian persons or entities that have ongoing dealings with North Korea, including financial institutions. On September 26, OFAC designated eight North Korean banks and 26 individuals under the new sanctions. The entities designated included North Korean banks with Chinese branches and the individual representatives of such banks living outside of North Korea. This follows designations of a number of Chinese and Russian entities and individuals on August 22 under prior sanctions.
In any event, the sanctions against North Korea are now the United States' most expansive economic sanctions program, though most elements of the new sanctions are not self-executing and are still dependent on Treasury Department designations. Companies with global operations should take note of the EO's wide-ranging restrictions.
Read more here.
/ U.S. Supreme Court
Kindred Nursing Centers Ltd. P'ship v. Clark, No. 137 S. Ct. 1421 (2017) AAAFAA FAA
U.S. Supreme Court Invalidates State Rule That Disfavored Arbitration
The U.S. Supreme Court invalidated a state court rule that had held unenforceable arbitration agreements entered into under broad powers of attorney whenever the powers of attorney did not expressly entitle the representative to enter into an arbitration agreement. Kindred Nursing Centers Ltd. P'ship v. Clark, No. 137 S. Ct. 1421 (2017). The Supreme Court found that the state court had singled out arbitration agreements (in this case, in a nursing home contract entered into under a power of attorney) for disfavored treatment under the Federal Arbitration Act (FAA). The Court noted that the FAA establishes an equal treatment principle: a court may invalidate an arbitration agreement based on generally applicable contract defenses, but not on legal rules that apply only to arbitration. The FAA thus preempts any state rule that discriminates on its face against arbitration. Here, by requiring an explicit statement before an agent can relinquish her principal's right to go to court and be bound to arbitrate, the state court improperly had adopted a legal rule that held arbitration agreements to a different standard than other contracts.
BNSF Railway Co. v. Tyrrell, 137 S. Ct. 1549 (2017) FELA 2000 2000 FELA FELA 14Daimler AG v. Bauman, 134 S.Ct. 746 (2014) FELA
Supreme Court: General Personal Jurisdiction Test Applies To All Actions
In BNSF Railway Co. v. Tyrrell, 137 S. Ct. 1549 (2017), plaintiff employees sued the defendant railroad under the Federal Employers' Liability Act (FELA) in Montana state court. The defendant was neither headquartered nor incorporated in Montana, but it did operate more than 2,000 miles of railroad track and employ more than 2,000 workers in Montana. The Montana Supreme Court held that Montana courts could exercise general personal jurisdiction over defendant, ruling that jurisdiction was conferred under either FELA (which authorized suit to be brought in a federal court in the district where "the defendant shall be doing business"), or alternatively, under Montana law, which provides for the exercise of personal jurisdiction over "all persons found within" the State. The U.S. Supreme Court reversed. The Court ruled that the provisions of FELA relied upon by plaintiffs merely established venue for a federal-court action; they did not confer personal jurisdiction on any court. The Court further determined that the Montana courts' exercise of personal jurisdiction under Montana law violated the Due Process Clause of the Fourteenth Amendment. Citing to its earlier ruling in Daimler AG v. Bauman, 134 S.Ct. 746 (2014), the Court reiterated that a court may assert general jurisdiction over a foreign corporation only when its affiliations with the State are so continuous and systematic as to render them essentially at home in the forum State; and other than in "exceptional case[s]," that is generally limited to its place of incorporation and its principal place of business. The Court rejected the argument that this jurisdictional test should not apply to a FELA claim or a railroad defendant, and clarified that this rule applies to all state-court assertions of general jurisdiction over nonresident defendants, and does not vary with the type of claim asserted or business enterprise sued.
/ White Collar Defense & Investigations
The Director of The Serious Fraud Office v. Eurasian Natural Resources Corp. LTD,  EWHC 1017 (QB) (May 8, 2017) ENRCSFO ENRC SFO SFO
English Court Orders Production of Interview Notes From Internal Investigation
The attorney-client privilege and work product protection may be applied much more narrowly in other countries than in the U.S., leaving unprotected materials that attorneys here may have assumed would be protected. A recent reminder of this comes by way of The Director of The Serious Fraud Office v. Eurasian Natural Resources Corp. LTD,  EWHC 1017 (QB) (May 8, 2017). The matter arises from a criminal investigation by the Serious Fraud Office (SFO) into corruption allegations involving Eurasian Natural Resources Corporation Ltd. (ENRC). ENRC engaged outside counsel who interviewed numerous employees and reported to ENRC and its board. The SFO later applied for a declaration that certain documents created by the lawyers, including memoranda of the employee interviews, were not privileged and were thus subject to disclosure. Relying on other recent precedents, the High Court generally agreed. The High Court found that the legal advice privilege (comparable to the attorney-client privilege) did not apply because the interviews were not shown to be of employees who were acting as the client's agent for purpose of obtaining legal advice. It found unlike most jurisdictions in the United States that the privilege does not apply to interviews conducted solely to apprise the lawyers of the facts as a predicate for the lawyers' formulation of legal advice. The High Court further found that the materials were not protected as lawyer working papers because, being simply factual descriptions of the interviews, the memoranda did not reflect the legal advice that was provided.
DOJFCPA FBI20151DOJ DOJFBI
DOJ FCPA DOJDOJ11DOJLIBOR
DOJDOJ DOJ201765 DOJ
DOJ Gets New Fraud Section Head
The Department of Justice has a new head of the Fraud Section, the entity primarily responsible for investigating and prosecuting FCPA violations. Outgoing Fraud Section Chief Andrew Weissmann assumed the role in January 2015 after serving as general counsel to the FBI under Robert Mueller. Now almost two and a half years later, Weissmann is stepping down from his position at DOJ to again join Director Mueller, who is leading the investigation into possible collusion between Russia and the Trump campaign.
In Weissmann's absence from the lead role at DOJ's Fraud Section, his deputy Sandra Moser has ascended to the position of Acting Chief. Moser, an 11-year veteran of the Justice Department, began her career practicing law at Drinker Biddle & Reath in Philadelphia and completing two federal clerkships. Moser then worked as an Assistant U.S. Attorney in New Jersey before moving to DOJ, where she worked on fraud matters with an emphasis on FCPA up until her recent promotion upon Weissmann's departure. During her time in the Fraud Division, Moser received commendations for her roles in investigating the manipulation of the LIBOR and a large antitrust conspiracy affecting the U.S. Dollar-to-Euro exchange rate.
With an Acting Chief, the Fraud Section now mirrors the DOJ Civil Rights Division in that it lacks a permanent head. And although the executive branch has been slow to fill empty positions within DOJ as elsewhere in the federal government, the White House announced on June 5, 2017, that the President would nominate Brian Benczkowski to become the new head of DOJ's Criminal Division. Given the recent announcement, it's unclear how long Acting Chief Moser could remain in the Fraud Section's top spot.
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