Holme Roberts & Owen LLP : Client Newsletter 4th Quarter 2009

Client Newsletter 4th Quarter 2009

October 2009

To Our Clients and Friends:

We are delighted to provide you with another update of legal developments that may affect your business. As we steadily progress towards a new year, we know that you are deeply engaged in the pursuit of your personal, business, and entrepreneurial passions. While you attend to the big picture, our attorneys make it their business to explore the critical details. These are just a few of the essential informational nuggets we’ve uncovered in areas such as intellectual property, mergers and acquisitions, international law, the environment, and more. We discuss them here along with their implications for you and the year that lies ahead.

Choose from the topical links below or scroll through the entire letter.

HRO Dublin
Mergers & Acquisitions
CleanTech / Environmental - Energy Stimulus Dollars
Securities Law: Corporate Governance
International Law
Intellectual Property
Patent Law
Personal Tax & Estate Planning

HRO Becomes First U.S. Law Firm to Open Office in Ireland

On October 2, 2009, our Denver office announced the formation of Holme Roberts & Owen Solicitors in Dublin, Ireland. HRO is again breaking new ground as the first U.S. law firm to open an office in Ireland. Dublin is HRO’s third office in the European Union and 10th location worldwide.

HRO has fostered strong working relationships with our Dublin-based colleagues to ensure all clients receive seamless international service. Partners James S. Wolsey, Tony Grant, and Of Counsel Kate O’Brien will enhance HRO’s legal services for the European Union, the United Kingdom, and Asia. The team’s extensive international experience includes lawyers qualified in New York, Hong Kong, England, Wales, and Ireland. The Dublin team will draw on the additional expertise of over 230 lawyers based in nine other strategically positioned offices in Boulder, Colorado Springs, Denver, Los Angeles, London, Munich, Phoenix, Salt Lake City, and San Francisco.

The Dublin office opening broadens HRO's already considerable European presence to include a third major European Union city, while the firm continues to thrive in key business and financial hubs in the Western United States. HRO's commanding hold in core areas, such as commercial law and securities, litigation, intellectual property, and business law and finance, including sports and entertainment transactions, receives a significant boost from the Dublin opening.

Said firmwide Managing Partner Kenneth Lund of the new office: “Our excitement with the Dublin opening cannot be overstated. Our colleagues James Wolsey, Tony Grant, and Kate O’Brien present a rare opportunity to dramatically expand HRO’s footprint in Europe and beyond. Joining hundreds of Western U.S. businesses operating in Ireland, HRO now provides a unique ability to service the needs of the business community. We are privileged to welcome the Dublin office into the HRO family.”

HRO Dublin
Mergers & Acquisitions | CleanTech/Environmental - Energy Stimulus Dollars
Securities Law: Corporate Governance | International Law | Intellectual Property
Patent Law | Personal Tax & Estate Planning
Top of Page

Mergers and Acquisitions

While general Mergers and Acquisitions (M&A) activity was significantly down from the levels seen in 2008, we have recently observed some positive signs. M&A activity has inched up in July over June. One positive is that anecdotal evidence suggests that the so-called "valuation gap" between what sellers expect for their businesses and what buyers are willing to pay has been shrinking. This has been due in part to the use of earnouts and seller financing. In addition, certain industries have shown signs of increased activity. For example, the tech industry has shown an approximately five-fold increase in M&A activity between the first and second quarters of 2009. That being said, M&A levels for that industry are still significantly below 2008 and 2007 levels. As we head into 2010, a number of issues will continue to challenge the M&A markets. For most, the crucial question is when the credit markets will loosen so that financial buyers (and strategic buyers to a lesser extent) have access to the leverage that is the lifeblood for their transactions.

A number of additional issues exist, however, that M&A practitioners should monitor closely. One of these issues is increased regulation and other government responses to the economic downturn. Many federal agencies such as the EPA and DOJ have requested increases in their enforcement budgets and/or have gone on public record indicating that they will increase enforcement actions and reviews. Also, the Obama administration is attempting to create new regulatory bodies such as a consumer protection agency responsible for financial products that would be added to existing bank regulators like the Federal Reserve and the FDIC. It remains to be seen whether hedge funds and private equity funds will also face increased regulation, but it is certain that increased regulation in other industries will affect their acquisitions as well as those of strategic buyers. HRO continues to follow and analyze these developments for our clients so that we can best advise on how they might affect the types of acquisitions they pursue and the best methods for the execution, implementation, and post-closing integration of acquisitions.

While we all wait for the M&A and broader financial markets to rebound, several sophisticated acquirers are reviewing their internal procedures, especially with respect to the execution of M&A transactions. For example, many institutions use acquisition-related agreements that have become an amalgamation of bits and pieces from many different deals and deal teams. Over time, the mishmash of provisions has become an institutional precedent with people ceasing to question whether any specific provision is appropriate for a particular transaction. Instead, it becomes a "must-have" simply because it has appeared in enough prior instances. It is difficult for many institutions to update their deal execution processes and forms because many lack a perspective beyond that of the institution. HRO is using its experience with our clients, our leadership role in the American Bar Association's M&A Committee, and other legal and business committees to analyze our clients’ transaction forms and execution processes objectively. For example, we are in the process of creating an electronic template for a form letter of intent for some of our clients that will reduce the time and legal cost of drafting the letter. In addition, we have partnered with some of our clients to help them track specific deal metrics for their institutions so that they do not squander time and expense doing so on their own. Because HRO has the infrastructure and know-how for these types of projects, we are accomplishing them at a fraction of the cost it would take our clients.

For more information on Mergers and Acquisitions, please contact Steve Lee at 213-572-4365 or steve.lee@hro.com.

CleanTech/Environmental - Energy Stimulus Dollars

In the renewable energy world, we are still looking to the skies and waiting for the federal stimulus dollars to drop. While dollars have begun flowing through state weatherization programs and limited grant opportunities, several other Department of Energy (DOE) and state programs remain unfunded or have yet to issue guidelines or regulations. We expect mounting political pressure will cause a flurry of stimulus activity over Q3 and Q4 as DOE rushes to meet industry and Obama administration expectations. In particular, look for approval of your state's State Energy Program plans (California's $226 million and Arizona's $55 million plans have been approved in June). There may be grants or loan funds for which your company qualifies under your state programs. Also consider partnering with your local municipality. Several municipalities are slated to receive millions of dollars for energy efficiency and renewable energy projects. Denver, for example, will receive in excess of $9 million. Watch your state energy office website. Colorado's can be found at www.colorado.gov/energy/recovery.

Climate Change Legislation

The American Clean Energy and Security Act of 2009, H.R. 2454, also known as the Waxman-Markey bill, passed the House on June 29, 2009. Check out HRO's Alert on this important legislation (http://www.hro.com/files/file/publications/HRO_ALERT-WaxmanMarkey.pdf). Among many important changes, HR 2454 imposes a national renewable energy portfolio standard (RPS) of 6 percent by 2015 and 20 percent by 2020. While many of the Western states already meet or exceed these standards, the biggest impact will be felt in the Southern states that almost uniformly lack RPS. Given that the Southern states lack the West's resources in wind and solar, those states will look heavily to biomass and hydro power to meet their RPS requirements. Even if your business is not located in the Southern regions, you may consider locating a biomass production facility in the South, close to abundant feed stocks. We believe those companies prepared to act quickly in partnering with the Southern utilities will be at an advantage moving into 2010.

Solar Consolidation Strategies

Continuing a trend from the first half of the year, expect to see increased consolidation and vertical integration in the solar industry. As pressures mount on the industry from lower gas prices, falling panel prices and tighter credit markets, the industry as a whole will continue to feel some squeeze through the second half of 2009. While lending for operations and/or expansion remains tight, lenders are indicating that acquisition financing may be more available in the second half of 2009. If you are in the solar space, either as a manufacturer or integrator, consider improving your competitive advantage by analyzing your consolidation and vertical integration options. HRO's New Energy and M&A teams can help you with this analysis.

Greenhouse Gases

Greenhouse gases (“GHGs”) are in the news every day. Amid the swirl of pending laws and regulations on the horizon at the state and federal level, the most immediate and direct impact for many businesses appears set to begin on January 1, 2010, in the form of a proposed Environmental Protection Agency (“EPA”) rule entitled “Mandatory Reporting of Greenhouse Gases.” The proposed rule is lengthy and complex. It would not limit GHG emissions but it would require an estimated 13,000 facilities nationwide to monitor and report their GHG emissions. The final rule is not yet in place, but EPA believes there is an “urgent need” to start collecting data in 2010. This is an unusually short time frame to launch a significant regulatory program.

Who would be affected. Any facility that emits 25,000 metric tons of CO₂ equivalent (mtCO₂e) or more of GHG emissions per year from stationary fuel combustion may be subject to the rule. Certain categories of facilities would be covered regardless of their GHG emission levels. Some of the sources most likely to be affected are: petroleum refineries; producers of chemicals, metals, and minerals; electricity generation units; coal mines; food processing facilities; ethanol producers; electronics manufacturers; natural gas compression, processing, and transmission; and fossil fuel suppliers.

What must be reported. Emissions of carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), sulfur hexafluoride (SF6), and other fluorinated gases.

When reports would be due. Facilities subject to this rule would begin collecting data on January 1, 2010. Most sources would submit annual reports, with the first reports due in 2011.

How sources calculate their emissions. Depending on the type of facility, sources would measure emissions directly, take periodic samples, or make estimates using emissions factors. The proposed rule also contains detailed recordkeeping requirements.

For more information on CleanTech/Environmental and Energy Stimulus Dollars, please contact Melody Harris at 303-866-0639 or melody.harris@hro.com, or Chris Colclasure at 303-866-0398 or chris.colclasure@hro.com.

Securities Law: Corporate Governance

Public company boards and management must stay abreast of the array of corporate governance reforms proposed or enacted over the last several months. Federal lawmakers and regulators have advanced numerous initiatives that, if implemented in full, could vastly change the nature of public companies, their governance practices and the role of directors in corporate decision-making.

Important areas to monitor include:

Executive Compensation. Front and center of the proposed reforms (and the headlines) is executive compensation. The reforms include not only enhanced disclosure requirements, but also specific prohibitions and required practices. Our Alert (http://www.hro.com/files/file/publications/ALERT-SEC2010Proposals.pdf) discusses the myriad of executive compensation proposals.

DO: Consider whether your compensation practices link pay to long term performance targets and avoid compensation arrangements that promote undue risk.
Elimination of Broker Discretionary Voting. The SEC approved a change to eliminate broker discretionary voting in uncontested director elections. This is widely expected to increase the time and expense of proxy solicitation as companies strive to achieve quorum, meet majority voting standards they may have, and in some cases, strengthen the power of institutional shareholders and activist groups.

DO: Review your company’s meeting and voting requirements to assess the impact of the new rule. More information about the change in the broker non vote rule can be found in our July 2009 Client Alert. http://www.hro.com/files/file/publications/ALERT-BrokerNonVotes.pdf
Shareholder Proxy Access. The SEC has proposed new rules that require companies to provide access to the company’s proxy for director nominations to stockholders who satisfy ownership and other conditions. Consideration of these proposed rules was recently postponed until 2010. In contrast, Delaware has adopted new legislation that would allow companies to adopt bylaw provisions granting shareholders access to the company proxy under certain conditions.

DO: Review your bylaw or other provisions regarding stockholder nominations and meeting procedures for potential changes. Expect more shareholder proposals and an increase in election contests.
Board Structure and Disclosure. Numerous proposals relate to the very composition and structure of boards of public companies. They cover not only enhanced disclosure requirements (e.g., longer look back for legal proceedings), but also mandate board structures (e.g., prohibit classified boards; require separation of board chair and chief executive officer; require majority voting).

DO: Evaluate your leadership and board structure as well as your voting standards for elections. Be ready to revise your D&O questionnaires to request potential additional disclosure.
Risk Management. Various proposals center around risk and determination of the company’s compensation scheme, disclosure of directors’ evaluation of risk and whether a separate risk committee should be established.

DO: Consider whether your company would benefit from a separate risk committee. Document the consideration of risk in compensation and other decisions.

HRO monitors and analyzes these developments in order to advise our clients on how to prepare for, address and comply with potential new rules that would fundamentally change past corporate governance practices.

For more information about Securities Law, please contact Martha Rehm at 303-866-0464 or martha.rehm@hro.com, or Dean Salter at 303-866-0245 or dean.salter@hro.com, or Garth Jensen at 303-866-0368 or garth.jensen@hro.com.

HRO will host a discussion of these topics and other current developments at our Public Company Update: 2010 Proxy Season on November 20, 2009.

International Law

The economic downturn and resulting business displacement knows no borders and both our large multinational clients as well as clients with smaller interests overseas are finding both challenges and opportunities outside the United States. They are responding to changes in legal and regulatory regimes as well as coping with changed financial conditions and customer demands in the many markets in which they operate throughout the world.

U.S. taxpayers with international activities will be watching with interest the progress of various international tax proposals announced by the Obama administration in May. These proposals include limitations on the ability of U.S. taxpayers to deduct certain expenses incurred in connection with foreign operations until the associated earnings are repatriated, and new restrictions on the use of foreign tax credits. In addition, the proposals would increase penalties for failure to report overseas investments or financial accounts, and tighten withholding rules applicable to “qualified intermediaries.” No specific legislation has yet been proposed, although it is expected that bills will be introduced later this year. Under the Obama administration’s proposals, the changes would be effective for 2011.

The U.S. government is continuing its increased enforcement activity prosecuting companies and their officers for violations of the Foreign Corrupt Practices Act (“FCPA”). Companies should review their internal controls on payments that could be deemed bribes to government officials or otherwise illegal under the FCPA. We recommend that companies regularly provide training to employees on how to comply with this law as well as periodically review sales agent and distribution agreements for FCPA compliance issues.

Many clients are reducing their workforce in various markets to better match the current economic climate. The employment laws in the jurisdiction in which the employees work will control the termination or furlough procedures and compensatory payments. The process is typically longer and often more expensive in many foreign countries than it is in the United States. Employers should check with counsel in those countries to ensure that these often very technical laws are complied with to avoid increased liability. In addition, employers should keep in mind the data privacy laws in many countries, primarily in Europe, which prohibit the sharing of certain personal information of personnel, even within the same company.

For more information about International Law, please contact Garth Jensen at 303-866-0368 or garth.jensen@hro.com, or Paul Thompson at 303-866-0676 or paul.thompson@hro.com.

Intellectual Property

We have recently observed that an increasing number of clients are considering taking advantage of the current difficult economic times by purchasing an interest in one or more distressed companies or companies with highly sought after products or services, such as green energy or green technology companies. While the most important aspect of such deals is often the financial component, due diligence should not be overlooked. For example, many target companies are touting the value of their intellectual property, such as their patent portfolio. However, an evaluation of the target companies' intellectual property should often be undertaken to gain a better understanding of what is actually being purchased. This is particularly true when a representation and warranty in a definitive agreement may be substantially worthless if no assets remain with the seller to provide a remedy to the disappointed buyer. Accordingly, we encourage our clients to contact us about performing due diligence on any target company. Times change, but whether you are buying Blackacre or Green IP, the principle of caveat emptor still holds true.

For more information about intellectual property, please contact Paul Cha at 303-866-0631 or paul.cha@hro.com, or Mark Yaskanin at 303-866-0269 or mark.yaskanin@hro.com.

Patent Law

The United States Supreme Court recently granted certiorari for review of the U.S. Court of Appeals for the Federal Circuit's holding in In re Bilski. In 2007 the Federal Circuit ruled that a process for anticipating hedge risk in commodities did not rise to the level of patentable subject matter under 35 U.S.C. Sect. 101. As a result, Bilski has created continued concern among companies that seek to patent software, biotechnology processes, and business methods. The U.S. Supreme Court is expected to review the Federal Circuit's holding that in order for an invention (based primarily on steps, methods, and the like) to achieve the status of patentable subject matter, the claimed invention needs to include a machine or transformation of physical matter.

For more information about Patent Law, please contact Paul Cha at 303-866-0631 or paul.cha@hro.com.

Personal Tax and Estate Planning

The end of the year is a good time to think about ways to minimize your taxes. Here are a few things to remember:

Review Your Estate Plan. Periodically reviewing your estate plan with legal counsel is essential, and the end of the year is a good time to do this. Changes in your family (marriage, divorce, births, adoptions, etc.) and changes in your wealth may need to be accounted for in your estate plan. In addition, changes in tax and other laws may affect your estate plan in ways you have not anticipated. It will be particularly important to keep track of changes in the tax laws over the next several months as Congress considers legislation to prevent the expiration of the estate tax in 2010 and the reappearance of the estate tax in 2011. Finally, the titling of your assets needs to be coordinated with your legal documents to make sure that the passing of assets through the use of joint tenancy and payable on death designations does not unintentionally defeat your estate plan and cause unnecessary estate taxes.
Make Gifts Using Annual Gift Tax Exclusion. The annual gift tax exclusion amount increased from $12,000 to $13,000 for 2009. This means that you may now give up to $13,000 per person per year (or $26,000 per person per year if the gift is made jointly with your spouse) free of gift tax. The annual gift tax exclusion is a “use it or lose it” benefit. Failure to make annual exclusion gifts to an individual this year does not entitle you to make double the amount of annual exclusion gifts next year.
Make Gifts for Tuition or Medical Expenses. Amounts paid on behalf of an individual for tuition at a qualified school or university or for medical care are excluded from gift tax if such gifts are made directly to the school or university or directly to the medical care provider, regardless of the relationship of the donor and the donee. For purposes of this gift tax exclusion, tuition means only direct tuition expenses and does not include related expenses, such as room and board, books, fees, etc. Medical care includes the payment of insurance policy premiums but does not include amounts reimbursed by an insurance company for medical care.
Make Gifts to Take Advantage of Low Asset Values. The economic downturn has brought about a significant drop in assets values. A gift made now while asset values are low will mean future appreciation in the value of the gifted assets will grow free of estate or gift tax in the hands of the donee. Now may be a particularly good time to make such a gift, even if it means using part or all of your $1 million lifetime gift tax credit. Please consult your tax advisor before making such a gift.
Make Gifts to Take Advantage of Low Interest Rates. The economic downturn has also seen a significant drop in interest rates, which makes tax planning strategies involving low interest rates particularly attractive. These strategies include low interest loans to family members, low interest installment sales (either directly or to an intentionally defective grantor trust), grantor retained annuity trusts, and charitable lead annuity trusts.
Make Charitable Contributions. The end of the year generally is also a good time to make charitable contributions. You may make charitable contributions of cash up to 50 percent of your adjusted gross income to public charities and 30 percent of your adjusted gross income to private foundations per year, and take a current charitable contribution income tax deduction. Typically, making contributions at year-end accelerates the benefit of the tax deduction for the contribution, providing a current-year benefit for a contribution that otherwise would not provide a benefit until the following year. This year, you should consider two possible legislative changes before making a decision concerning year-end contributions. On the one hand, if Congress takes action later this year to increase income tax rates for 2010, there may be an advantage to postponing charitable contributions until next year, increasing the tax benefit from the contribution due to the higher tax rates applicable in 2010. On the other hand, the administration has proposed capping the tax deduction for charitable contributions based upon a 28% marginal tax rate. While Congress has shown little interest in this proposal, if it were adopted, contributions made in 2009 would likely provide a larger benefit than those made in 2010.
Note that you might want to postpone a decision about the timing of your charitable contributions until later in the year. If Congress takes action later this year to increase tax rates for 2010, there may be an advantage to postponing charitable contributions until next year, increasing the tax benefit from the contribution due to the higher tax rates applicable in 2010.

Charitable contributions may also be used to avoid long-term capital gains. The simplest approach is to donate the highly appreciated asset to a public charity. Gifts of long-term capital gain property to a public charity are deductible at fair market value, although such donations may only be recognized in an amount up to 30 percent of the donor’s adjusted gross income. Gifts of long-term capital gain property to a private foundation generally are deductible only at the donor’s basis, and such donations are limited to 20 percent of the donor’s adjusted gross income. However, contributions to a private foundation of qualified appreciated stock (generally stock trading on a public exchange the sale of which would give rise to long-term capital gain) are deductible at fair market value.

Contributions in excess of these percentage limitations generally may be deducted over the five years following the year the charitable contribution is made.
Review Ancillary Estate Planning Documents. The end of the year is also a good time to review your ancillary estate planning documents, including your powers of attorney. Colorado recently adopted the Uniform Power of Attorney Act. This new law specifically permits co-agents to serve under a general power of attorney, and a general power of attorney subject to the new law is presumed durable unless it specifies otherwise. You may want to review your general power of attorney with legal counsel to determine whether executing a new general power of attorney governed by the Uniform Power of Attorney Act would be advisable.
Debt Work-Outs and Restructuring. If you anticipate restructuring existing debt, including both general unsecured debt and debt secured by real estate or other assets, remember that the restructuring may trigger federal and state income tax consequences. First, any “material modification” of the terms of existing debt is treated as an exchange of the “old” debt for “new” debt, and the exchange could result in debt forgiveness income to the borrower, and other tax consequences to the borrower and / or lender. In addition, any reduction in the amount owed will generally result in debt forgiveness income to the borrower. In some circumstances, it may be possible to avoid, or postpone, the debt forgiveness income. The American Recovery and Reinvestment Act created new alternatives for borrowers to consider in planning for debt forgiveness income.

For more information on Debt Work-Outs and Restructuring, please contact David Strong at 303-866-0263 or david.strong@hro.com.

For information on personal tax and estate planning, please contact Michael Bland at 303-866-0247 or michael.bland@hro.com, or Norv Brasch at 303-866-0364 or norv.brasch@hro.com.

This letter has not been prepared as a formal tax opinion. We are required by U. S. Treasury Regulations to inform you that this letter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed by U. S. federal tax laws upon you or any other person. We do not impose any limitation upon the disclosure by you of any information set forth in this letter.

This article is a periodic publication of Holme Roberts & Owen LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances, nor is it intended to address specific disclosure or compliance issues that may arise in particular circumstances or provide an exhaustive discussion of the topics discussed herein. The contents are intended for general informational purposes only, and you are urged to consult counsel concerning your particular situation and any specific legal questions you may have.