Philadelphia Business Lawyers: Rival Continuing to Sell Infringing Products

By ,

Last year, Texas Advanced Optoelectronic Solutions, Inc. (TAOS), a company that makes light sensors used in iPhones and other products, was awarded $88.7 million after a jury found that its competitor had infringed upon its patent and misappropriated trade secrets. The competitor, Intersil, continues to deny infringement, according to TAOS. TAOS is now seeking a permanent injunction against Intersil.

Back in November of 2008, TAOS first sued Intersil, alleging that it unlawfully used confidential information disclosed during merger or acquisition negotiations. According to allegations in the lawsuit, Intersil wanted to either secure a license from TAOS or acquire the company. When TAOS failed to accept their offer, Intersil attempted to destroy the company in order to take the full market share.

In March of 2015, a jury found that Intersil used TAOS’ patented technology for dual-diode ambient light sensors without consent and misappropriated trade secrets in order to gain a competitive advantage. TAOS was awarded $48.7 million in disgorgement, $12 million in royalties, $8 million in lost profits and $20 million in punitive damages. Only about $73,000 was awarded for patent infringement.

Now, TAOS is seeking to permanently enjoin Intersil from marketing and selling the dual-diode technology. Four products that TAOS holds patents for are the focus of the dispute. TAOS is also seeking to recover attorneys’ fees.

According to one of TAOS’s lawyers, Intersil continues to sell products that the jury determined were infringing upon their client’s patent and is now directly competing with TAOS by selling the stolen technology.

Intersil continues to deny these claims, and argues that the jury verdict should be set aside. Intersil insists that if a judgment is entered, the company should not be required to stop making the product, but rather, should be asked to pay a royalty to TAOS for use of the patented technology. Intersil’s position is that even though the jury found that it willfully misappropriated trade secrets, this behavior is somewhat common.

The judge has requested that the parties continue to mediate the dispute in order to attempt to negotiate a license and royalty agreement. If the parties choose not to participate in the mediation, the judge will issue a ruling.

Philadelphia Trademark Infringement Lawyers at Sidkoff, Pincus & Green Represent Businesses Victimized By Misappropriation of Trade Secrets

If you are the owner of a valid trademark or patent that is being used by another individual or business without your permission, Philadelphia business lawyers at Sidkoff, Pincus & Green can help. With offices conveniently located in Center City Philadelphia, we represent clients throughout Philadelphia and South Jersey. Call us at 215-574-0600 or fill out our online contact form today.

Philadelphia Employment Lawyers: EEOC Is Allowed to File a Single Lawsuit for Multiple Workers

By ,

The U.S. Equal Employment Opportunity Commission (“EEOC”) now has the ability to file a single suit on behalf of a group of workers, instead of individually filing separate suits for each worker who experienced discrimination from the same employer. In EEOC v. FedEx Ground Package System, the Western District of Pennsylvania ruled that the EEOC would be able to continue its lawsuit against FedEx.  The EEOC represents 17 individuals who claim FedEx did not make reasonable accommodations for them in their jobs as package handlers.

This decision came down to determining the purpose of the EEOC. First, the court explained the EEOC exists to protect individuals and bring suit on their behalf to remedy employment discrimination. Additionally, the Court stated the EEOC exists to litigate for public interest, not only for individual employees. Prior cases have not allowed the consolidation of claims because the facts in those cases were so specific, it would be too difficult to decide them as a whole. Here, the decision turned on the fact that the employees have multiple facts in common, such as their disabilities and position at the company, which would allow the Court to come to a determination for the group.

For more information, call Philadelphia employment lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Wrongful Termination Lawyer Philadelphia: Dauphin County Woman Alleges Former Employer Violated ADA

By ,

A woman in Dauphin County, Harrisburg is seeking compensation over claims she believes she is owed due to wrongful termination. She was terminated after asking for accommodations for her disabilities. On January 4th, 2016, Ebony Stephenson filed a complaint in the U. S. District Court for the Middle District of Pennsylvania against Healthcare Services Group Inc., alleging violation of the Americans with Disabilities Act and the Pennsylvania Human Relations Act.

Stephenson was hired by Healthcare Services Inc. in October 2013 and worked as a housekeeper at Defendant’s Spring Creek Nursing Home. Stephenson’s supervisor allegedly made a comment about her knapsack in 2013 which implied that Stephenson was a man. Following the incident she says she requested the number of her supervisor’s superior and accused him of being disrespectful. She was discharged from her position on the same day and claims that she began to suffer from anxiety. She was then rehired the next month by Healthcare Services Inc. but at a different facility. She requested accommodations for her disabilities which were refused. Stephenson was later terminated and alleges retaliation for her accommodation request, which occurred August 2014. This case is currently pending.

For more information, call a wrongful termination lawyer Philadelphia at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Employment Lawyers: Lyft Settles Labor Law Violation

By ,

Lyft Settles Labor Law Violation for $12M and Offers More Job Security

Lyft Inc. agreed to pay $12.25 million and give additional job security to a proposed class of current and former drivers suing the ride-hailing service in federal court, but will not classify drivers as employees. In the dispute, Lyft will also concede its right to terminate drivers at will, pay the costs to arbitrate drivers’ grievances and implement a pre-arbitration process, as well as provide drivers additional information on prospective riders such as their passenger ratings, according to the proposed settlement filed Tuesday.

Driver Patrick Cotter sued Lyft in September 2013 for allegedly classifying its drivers as independent contractors but treating them as full-time employees and taking 20 percent off their tips as an “administrative fee” in violation of multiple state labor laws.

Previously, Lyft’s terms of service stated that the company could deactivate a driver for any reason; now, the ride-hailing company will only be able to do so for one of a list of predetermined reasons, such as a low passenger rating, according to the settlement agreement. Drivers at risk of deactivation, meanwhile, will be given clear notice and an opportunity to present their side. If a driver is deactivated but would like to contest the decision, he or she he can challenge the ruling in arbitration at Lyft’s expense. Drivers will also be able to address pay-related issues in arbitration.

This settlement will have a direct impact on how Lyft’s competitor Uber will respond to similar claims against them. Uber refuses to acknowledge that their drivers are employees and entitled to employee benefits. Lyft’s settlement while not recognizing the drivers as employees extends more job security and benefits for Lyft drivers.

For more information, call Philadelphia employment lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Employment Lawyers: Injury Sustained After Quitting

By ,

A Workers’ Compensation Judge’s decision to grant a Claimant’s claim petition was reviewed and granted in the Commonwealth Court of Pennsylvania, despite the Claimant quitting before the incident occurred. Marazas v. W.C.A.B. (Vitas Healthcare Corp.). Claimant quit and his Manager informed him that he needed to remove his personal belongings from the truck he had been using. Id. at 857.  Manager escorted Claimant to do so pursuant to Employer’s policy and Claimant, while walking to the warehouse on Employer’s premises, fell and sustained injuries. Id.

Claimant made the case that he was both on Employer’s premises and furthering Employer’s interests when he sustained injuries. Although Claimant quit before he was injured, he was still within the scope of employment because he was acting at Employer’s direction, and thus furthering Employer’s interests.

For more information or to discuss an employment law-related matter, call Philadelphia employment lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Business Lawyers: Help Your Lawyer Win Your Case

By ,

How To Help Your Lawyer Win Your Case[1]

Summary:

The client is not just a passenger in a lawsuit. Instead, the client should be a combination of co-pilot and Air Traffic Control. Your lawyer needs your help.

  1. Write A Story About Your Case

You know what happened. Judges and juries will transform the evidence they hear at trial into a story. Therefore, you can get a head start by putting the facts together in the same way a novelist would write about the case. You can use chronological order and create a narrative that starts at the beginning. In some cases, the personalities and relationships of the parties and witnesses are more important. Whatever you select, write out everything you can think of. Eliminate all duplication to allow your lawyer to digest your story. Keep a copy and update your story as you learn or understand new things. Do not be afraid to throw out the story and start over if the mode you picked (e.g., chronological) turns out to be less effective than another (e.g., personal relationships). When you have your testimony taken, your story will help you keep the facts in perspective to the issues in the case. Also, your narrative will be a roadmap for your lawyer when he cross examines your adversaries and plans for the evidence needed for you to win.

  1. Do Not Be Afraid To Be Honest

Many people make the mistake of thinking that if their case does not have a perfect set of facts they cannot win. However, judges and juries know life is flawed like genuine leather and a case that looks perfect is treated like a cheap, plastic imitation of the truth. Your lawyer will be planning your case around what you tell him. If you do not tell him the truth, he will get stuck on a detour. Think of telling an ambulance driver directions on where it should pick up a sick loved one. You surely would be as accurate as possible; and your communications with your lawyer must be just as careful and accurate.

  1. Organize Your Emails And Papers

In modern trials, email and documents often dominate the case. Do not shirk the work of diligently searching all of your computers and phones for email and text messages; and similarly, locate every paper document. These things will be like bullets in your lawyer’s gun on the one hand, and will give him a plan of how to avoid traps.

Additional resources provided by the author

Gary Green

For more information, contact our Philadelphia business lawyers at 215-574-0600 or contact us online.

[1] Copyright 2016  by Gary Green Esquire, Managing Partner of Sidkoff, Pincus & Green P.C.,  Philadelphia Pa.

 

Philadelphia Employment Lawyers Discuss New Jersey Opportunity to Compete Act

By ,

New Jersey employers may find it necessary to update employment and hiring policies to ensure compliance with the New Jersey Opportunity to Compete Act (OTCA), which went into effect on December 8, 2015. Similar so-called “ban-the-box” laws have also been enacted in a handful of other states including Hawaii, Illinois, Massachusetts, Minnesota and Rhode Island.

The OTCA is intended to create opportunities for people with criminal records by limiting the use of background checks in hiring practices. The OTCA bars employers from inquiring about an applicant’s criminal history until after a first interview has been completed. Once a first interview has concluded, employers have the right to inquire about criminal history.

For specific information regarding compliance with and exemptions to New Jersey’s “ban-the-box” law, call Philadelphia employment lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online. Our team of competent and well-regarded attorneys is well-qualified to handle any legal matters pertaining to employment law.

Philadelphia Business Lawyer: Gift to Minors under UTMA

By ,

The strategy of a making a gift to a minor under the UTMA in Pennsylvania to reduce the size of a marital asset just prior to the filing of a a divorce [1]

  1. The factual background and the challenge

We were consulted by a wealthy woman who was contemplating a divorce. At the time, there was no disharmony in the marriage, the parties were living together as a married couple, and neither had spoken to the other about a separation or divorce. However, our client was an accomplished interior designer and an architect who made her fortune by merging talent with hard work. By contrast, her husband, although only in his mid-forties, decided to retire and live off of his wife’s income. Moreover, the husband wanted nothing to do with the couple’s ten year old daughter. This caused our client to reach the conclusion that she wanted to end the marriage, but before taking any action, she wanted to drain her funds out of the joint bank account, and at the same time provide for her daughter’s wellbeing in the future if something happened to our client since it was obvious that the child could never rely on her father.

  1. Our research and proposed solution

We recognized that under Pennsylvania law, after a divorce is filed, all assets are frozen and are deemed marital assets that neither spouse can spend without court approval. On the other hand, before the divorce action is instituted there generally is no restraint on how a spouse spent money in joint accounts, unless the court finds there was a brewing or actual problem in the marriage, and that one spouse dissipated marital funds. Here there was not yet any brewing problem, but we needed to find law to determine whether a gift to the child would be deemed dissipation. We thus looked into whether our client could accomplish her goal by making a gift to her daughter under the Pennsylvania Uniform Transfers to Minors Act (“UTMA”) 20 Pa.C.S.A. § 5301, et seq., which is often referred to by lawyers and bankers who have been around for more than a few years by the well-known name of the law it replaced, the Uniform Gifts to Minors Act. “The purpose of PUTMA is to provide an inexpensive, easy way for giving property to minors. Sutliff v. Sutliff, 515 Pa. 393, 528 A.2d 1318, 1323 (1987). Section 5304 of PUTMA addresses the irrevocable nature of transfers to PUTMA accounts and provides:

A person may make a transfer by irrevocable gift to, or the irrevocable exercise of a power of appointment in favor of, a custodian for the benefit of a minor pursuant to section 5309 (relating to manner of creating custodial property and effecting transfer).” 20 Pa.C.S.A. § 5304. Whatever its source, custodial property that is held pursuant to Section 5304 is the property of the minor child. Sutliff, 528 A.2d at 1323.” Sternlicht v. Sternlicht, 2003 PA Super 95,  (2003) aff’d, 583 Pa. 149, 876 A.2d 904 (2005)

In the area of divorce, in Radakovich v. Radakovich, 2004 PA Super 82, ¶ 23, 846 A.2d 709, 717 (2004) The husband set up an account for the couple’s son under the UTMA to cover his future college education. The account, at the time of the divorce had grown to over $100,000. The trial judge held that the gift made the funds the property of the son. On appeal, the Wife’ contention was that the trial court erred in concluding the bank account was subject to the Pennsylvania Uniform Transfers to Minors Act (PUTMA), 20 Pa.C.S.A. § 5301–5310 and that it should have been considered for equitable distribution under the Pennsylvania Divorce Code  23 Pa.C.S.A. §§ 3501 and 3323. The wife lost on appeal, and the transfer of funds to the son was upheld. The court found that the deposit of funds from joint accounts during the marriage  under the Pennsylvania Uniform Transfers to Minors Act (PUTMA) to brokerage account  resulted in an irrevocable gift to son, which was not subject to equitable distribution between the husband and wife.

Since our client was earning in excess of $5000 per week as her take home pay, she decided to withdraw from the bank full $575,000 that had accumulated in the account, all of which had been deposited by her from her earnings. The client did not need to worry about current expenses or even a rainy day fund because she believed that her earnings were sufficiently robust. Of course a very attractive benefit from the withdrawal is that it would shrink the size of the marital estate, and potentially stop her husband from walking away with money she earned. A few months later she filed for divorce.

The key to the disposition of the case was the strictness of UTMA with regard to the use by the parents of money gifted to a child. Our client’s deposit of the funds into an account for her daughter was intended to be a gift, and all of the formalities were followed to comply with the UTMA. “To establish a valid inter vivos gift, the claimant must do so by clear, precise, direct and convincing evidence. To constitute a gift inter vivos there must be shown an intention to make an immediate gift and constructive delivery to the donee.” Sternlicht (Supra.), 822 A.2d at 739. The account was titled in our client’s name, but not as her property. Instead the account had a legend imprinted by the bank showing that our client was acting in the capacity as the custodian for her daughter. Pursuant to the UTMA, at 20 Pa. C.S.A. § 5311, the deposit of the funds into this account was irrevocable, because “the custodial property is indefeasibly vested in the minor.” Moreover, under the UTMA (id. at §§ 5313 and 5314), our client was listed on the account only nominally for her daughter, the real party in interest on the account. Furthermore, our client could not exercise any rights, powers or authority over the account, except in her fiduciary capacity under the UTMA; and expressly, not for herself.

This strategy was a good one. When the husband challenged the transfer and sought to have it reversed and the funds declared part of the marital estate, he did not find a friendly ear in the judge; nor did he win on appeal.

For more information, call our Philadelphia business lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

 

[1] Researched and written by Gary Green, Esquire, who is the Managing Partner of Sidkoff, Pincus & Green P.C.. This was copyrighted on January 26, 2016 by the author.

Philadelphia Business Lawyers: SEC Rule 144 – Part II

By ,

Where a founder of a publicly traded company bought shares of his company on the NASDAQ  stock exchange, and then pledged them to a bank to collateralize a personal loan, if the bank foreclosed on the control securities, would it be required to comply with  the Securities Exchange Commission’s Rule 144 (17 C.F.R. § 230.144)? [1]

  1. The facts of the proposed transaction

Sidkoff, Pincus & Green P.C., was asked by a client I will call “Mr. Founder,” to help him negotiate with his bank (“THE BANK”). He was the founder and CEO of his publicly traded company (“COMPANY”). Several years after COMPANY had completed its Initial Public Offering (“IPO”) he used his stock broker to buy $10 million dollars of the shares of COMPANY in a normal NASDAQ transaction. These were shares that had been registered with the SEC as part of the IPO, and the shares of COMPANY traded briskly every day since the IPO. Mr. Founder sought to borrow $6 million from a bank (“THE BANK”) and offered to pledge the shares as collateral for the loan. However, THE BANK refused to accept the shares because its lawyers stated they were “control securities” notwithstanding that Mr. Founder purchased them on the open market through his stock broker. In the view of the lawyers for THE BANK, if Mr. Founder defaulted, and THE BANK then foreclosed on the shares pledged as collateral for the loan, THE BANK could not sell them without first getting clearance from the SEC because in their view, the shares could only be sold under the rules and restrictions set forth in SEC Rule 144 (17 C.F.R. § 230.144).

We disagreed with that view, even though many authors of books on Securities Laws had stated that any shares an affiliate (i.e., a CEO or other top executive with control) of an issuer (i.e., COMPANY) obtained, automatically became control shares that were subject to Rule 144; and if THE BANK obtained the shares from Mr. Founder, it would stand in his shoes. Our view was that the lawyers for THE BANK and the authors had misread the law, and our legal position can be summarized as follows.

  1. Legal analysis why shares bought on a stock exchange by an affiliate of an issuer do not become control securities, and can be freely sold or pledged to a bank without the need for compliance with Rule 144

As described above, Mr. Founder had purchased the shares he proposed to pledge as collateral through a stockbroker on the open public market maintained by NASDAQ.  Therefore, this pledge was of “registered shares” that had been included in the float the SEC approved when it authorized COMPANY to proceed with its IPO. Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, states, “It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security…” Mr. Founder’s shares were in fact registered when the SEC approved COMPANY’s Form S-1 registration statement followed by its registration statement pursuant to Exchange Act Section 12(g); and indeed, that is how Mr. Founder was able to acquire the COMPANY’s Shares on the NASDAQ market, anonymously based on their then trading price.

After studying the law, we concluded that if there was any filing requirement, it would not be found in Rule 144 because it is silent on shares that were purchased through the regular stock exchanges and NASDAQ. Moreover, even if Mr. Founder was required to disclose his share purchase under another SEC rule, as an insider or otherwise, it would not turn the shares into Rule 144 shares.   Additionally, we understood that one purpose of Rule 144 was to insure that the markets for securities have full disclosure in the “distribution” of shares where the receipt benefits the issuer (in Rule 144, the distributors of shares were called “underwriters”).  The thrust of Rule 144 therefore is not to demote shares that already were registered (such as the shares Mr. Founder bought through his stock broker) nor was the thrust convert shares that had previously been registered back to restricted shares that needed SEC approval before they could be sold back into the public market.

In forming our opinion, we relied on the many things the SEC has stated, and the language of the law and SEC Rules which demonstrated that shares purchased on NASDAQ by a control person (i.e., a CEO such as Mr. Founder) are not transformed merely by his purchase into shares that could be sold only under Rule 144. On the contrary, looking the law and the SEC statements, those shares, would not be restricted shares. For example, the SEC has stated in explaining Rule 144,

A third factor, which must be considered in determining what is deemed not to constitute a “distribution,” is the impact of the particular transaction or transactions on the trading markets. Section 4(1) was intended to exempt only routine trading transactions between individual investors with respect to securities already issued and not to exempt distributions by issuers or acts of other individuals who engage in steps necessary to such distributions. Therefore, a person reselling securities under Section 4(1) of the Act must sell the securities in such limited quantities and in such a manner as not to disrupt the trading markets. The larger the amount of securities involved, the more likely it is that such resales may involve methods of offering and amounts of compensation usually associated with a distribution rather than routine trading transactions. Thus, solicitation of buy orders or the payment of extra compensation are not permitted by the rule.  (Emphasis added)

The language of Rule 144 was limited to the steps one needed to take to sell unregistered share, and did not address shares bought on NASDAQ; and nothing in the purchase made by Mr. Founder through his stock broker fit within the language or the reasoning of Rule 144.  Furthermore, the Rule gave us additional support at 17 CFR 230.144 where the SEC discussed the  rational for Rule 144, and what the Rule attempts to accomplish:

The term “underwriter” is broadly defined in Section 2(a)(11) of the Securities Act to mean any person who has purchased from an issuer 1 with a view to, or offers or sells for an issuer 2  in connection with, the distribution of any security, 3  or participates, or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct         or indirect underwriting of any such undertaking. 4  The interpretation of this definition traditionally has focused on the words “with a view to” in the phrase “purchased from an issuer with a view to * * * distribution.” An investment banking firm which arranges with an issuer for the public sale of its securities is clearly an “underwriter” under that section. However, individual investors who are not professionals in the securities business also may be “underwriters” if they act as links in a chain of transactions 5 through which securities move from an issuer to the public.

I used the red numbers above to draw attention to all of the items that are not associated with Joseph’s purchase of the shares  from a stockbroker, and his gifting of the shares to the FLP under the UTMA.

#1        Mr. Founder bought shares of COMPANY from a stockbroker, and those shares had already been registered years ago at the time of the IPO (and obviously, had already been bought and sold many times by others via the NASDAQ exchange). Therefore, Mr. Founder expressly did not purchase the shares from the issuer, Inovio;

#2        Mr. Founder’s purchase and proposed pledge of the             shares were not for the benefit of COMPANY or at             the  behest of COMPANY- and in fact, COMPANY      was completely uninvolved when Mr. Founder           bought the shares on the  ASDAQ exchange.

#3      Mr. Founder’s NASDAQ purchase had nothing to do            the “distribution” of COMPANY’s shares to the            public; that distribution had long since been         completed.

#4        Mr. Founder’s NASDAQ purchase was not part of   the underwriting of the shares he bought.

In other words, Mr. Founder’s transaction,  buying shares that were traded in due course, on NASDAQ, through a retail stockbroker, did not even arguably satisfy the definition of shares involved in an underwriting or shares that could be deemed to be implicated as being bought or sold by an underwriter. The SEC further explained 17 CFR 230.144, why it promulgated Rule 144, and noting that the Rule was designed to apply only if Mr. Founder would otherwise have been deemed to be an underwriter:

The Commission adopted Rule 144 to establish specific criteria for determining whether a person is not engaged in a distribution.  Rule 144 creates a safe harbor from the Section 2(a)(11) definition of “underwriter.  (Emphasis added)

However, as demonstrated, Mr. Founder did not need a “safe harbor from the Section 2(a)(11) definition of “underwriter’”, and Rule 144 did not apply to him. Nonetheless, the lawyers for THE BANK argued that by implication, Rule 144 made any shares obtained Mr. Founder subject to Rule 144, even shares trading on the NASDAQ market; and they raised the language in Rule 144 (b) (2) that says:

(2) Affiliates or persons selling on behalf of affiliates. Any affiliate of the issuer, or any person who was an affiliate at any time during the 90 days immediately before the sale, who sells restricted securities, or any person who sells restricted or any other securities for the account of an affiliate of the issuer of such securities, or any person who sells restricted or any other securities for the account of a person who was an affiliate at any time during the 90 days immediately before the sale, shall be deemed not to be an underwriter of those securities within the meaning of section 2(a)(11) of the Act if all of the conditions of this section are met.

In disputing this point, we started by observing the important fact that there is not a single mention of “control securities” in Rule 144. Moreover, there is not a single description of in the Rule that is expressly aimed at registered shares bought by a CEO or other control person after an IPO on a national stock exchange – even though such trades are very common.  We reiterated that the shares Mr. Founder bought on the NASDAQ exchange had already been registered, and were, by definition, not therefore “restricted securities”.  We demonstrated that under the express definitions set forth in  to Rule 144, the term “restricted securities” are only those that were not registered and fit into one of the following categories:

  1. The term restricted securities means:
  • Securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering;
  • Securities acquired from the issuer that are subject to the resale limitations of Rule 502(d)under Regulation D or Rule 701(c);
  • Securities acquired in a transaction or chain of transactions meeting the requirements of Rule 144A;
  • Securities acquired from the issuer in a transaction subject to the conditions of Regulation CE;
  • Equity securities of domestic issuers acquired in a transaction or chain of transactions subject to the conditions of Rule 901or Rule 903under Regulation S;
  • Securities acquired in a transaction made under Rule 801to the same extent and proportion that the securities held by the security holder of the class with respect to which the rights offering was made were as of the record date for the rights offering “restricted securities” within the meaning of this paragraph (a)(3); and
  • Securities acquired in a transaction made under Rule 802to the same extent and proportion that the securities that were tendered or exchanged in the exchange offer or business combination were “restricted securities” within the meaning of this paragraph (a)(3).

Therefore, under the plain meaning of the text of  Rule 144, the shares Mr. Founder bought on NASDAQ fit no category that the Rule lists, and the shares were thus not “restricted”.  While Rule 144 also speaks of “any other securities,” but that language does not pertain if “the person is not offering or selling for an issuer in connection with the distribution of the securities, does not participate or have a direct or indirect participation in any such undertaking, and does not participate or have a participation in the direct or indirect underwriting of such an undertaking.” (See, Rule 144)

We concluded our negotiation successfully, and convinced the lawyers for THE BANK that the language of Rule 144 is not directed at shares bought on the NASDAQ exchange that were already registered; and the confusion grew out of sloppy draftsmanship by the SEC when it made the Rule.

 For more information, call our business lawyers in Philadelphia at 215-574-0600 or contact us online.

 

[1] Researched and written by Gary Green, Esquire, who is the Managing Partner of Sidkoff, Pincus & Green P.C.. This was copyrighted on January 26, 2016 by the author.

 

Philadelphia Business Lawyers: SEC Rule 144

By ,

Where a founder of a publicly traded company pledged unregistered, “control securities” to a bank to collateralize a personal loan, if the bank foreclosed on the control securities, would it be required to comply with  the Securities Exchange Commission’s Rule 144 (17 C.F.R. § 230.144)? [1]

  1. The facts of the transaction

In one of the cases handled by Sidkoff, Pincus & Green P.C.,  a client I will call “Mr. Founder,” retained forty percent of the shares of his company (“COMPANY”) when it had its initial public offering (“IPO”). As is customary, his shares were not registered with the SEC and were not part of the IPO, thus making them untradeable on the NASDAQ where the COMPANY was listed.  Mr. Founder then borrowed $50 million from a bank (“THE BANK”) and pledges his unregistered shares in the COMPANY as collateral for the loan. The loan documents stated that if the share price dropped below $5, the bank could seize the pledged shares. Due to a computerized trading glitch, the stock market crashed, and the shares of the COMPANY, which had always traded at over $10, had a brief few minutes where they (along with almost all other shares being traded the stock market that day) reached a new low when it’s shares traded at $4.25. Later in the day, the shares recovered somewhat, and closed at $7.12. When THE BANK sought to exercise its rights to foreclose on the collateral, Mr. Founder asked us to help. We began to negotiate a new loan with the loan specialist at THE BANK to replace the loan where it  had called in the collateral. One thing was evident: a new loan would need to avoid an automatic call of the collateral if there was a temporary drop in the price. In discussions, we learned that the THE BANK’s lawyers had convinced  it that a trigger price to call the collateral was needed because the shares were not tradeable because the lawyers were convinced the shares were restricted, and after THE BANK seized them, it would be required to comply with SEC Rule 144  (17 C.F.R. § 230.144).. We disagreed and presented the following argument in an effort to persuade the bank that once it obtained the shares, they would not be subject to Rule 144, and could be traded freely. Therefore, we argued, the trigger price was not necessary to protect THE BANK.

  1. Analysis of whether pledged shares are considered control shares after foreclosure

As adopted and interpreted by the Securities Exchange Commission, Rule 144 is concerned with the distribution of restricted securities, both in private companies and companies that have stock that is publicly traded. While the issue here is the application of Rule 144 to the COMPANY shares pledged to THE BANK, Rule 144 was actually designed to provide a method for a CEO of a public company who obtained his shares from a source other than buying them on a stock exchange or through a stockbroker (such as in an IPO) to sell their shares.[2]  The scheme of Rule 144 allows the CEO to sell his shares without being considered an “underwriter”, a term broadly defined by the Securities Act of 1933 (15 U.S.C. § 77a et seq. Section 2(11)) to include one who “has purchased from an issuer [or from one who controls an issuer] with a view to … the distribution of any security” as well as one who “sells for an issuer [or for one who controls an issuer].” Id. at § 77b (11) (which generally means a person or entity involved in the market for a security and its distribution). Under § 5 of the Securities Act of 1933 (15 U.S.C., at § 77), an underwriter must comply with the requirement of registering the stock under the Securities Act of 1933, and essentially pursue an IPO or secondary offering. While Rule 144 generally treats an “issuer” (i.e., COMPANY) as if it were an underwriter, it provides a path for the issuer’s CEO to dribble out a small amount of the stock in the first six months (the “holding period” established under Rule 144(b) for listed companies). However, Rule 144 establishes hurdles and limitations on when, and how many shares can be sold; and also what kind of notice of the sale must be filed with the SEC to inform the public of the intended sale. Rule 144 focuses on the words “restricted security” and its definition is broad. For purposes of Rule 144, and as is pertinent here, an “affiliate” of an issuer is defined as “a person that directly, or indirectly controls the issuer.”

In the hypothetical sale (not the actual pledge situation), because the CEO is the founder and president of COMPANY, he would be deemed by Rule 144 to be an affiliate of COMPANY, and subject to Rule 144. (See, 17 C.F.R. § 230.144). Further, the shares that the CEO were deemed “control securities” (See the definition of “person” at § 230.144 (3) (a) (2).)[3]  In other words, using a hypothetical sale scenario for purposes of analyzing what the typical and anticipated Rule 144 case looks like, the CEO’s shares would be viewed as control securities.  If there had been no pledge of these shares to THE BANK, and if the CEO proposed to sell the shares, Rule 144 would oblige the CEO to file papers with the SEC, at a minimum, to comply with the public information and notice of sale requirements of Rule 144(c). That notice would state that the shares satisfied the holding period of Rule 144(b), and otherwise meet all of the other requirements of Rule 144 (i.e., COMPANY has filed its reports with the SEC, and trades robustly on NASDAQ). The shares could then be sold in accordance with volume requirements of Rule 144.

  1. Under the better legal authority, Rule 144 does not apply to the COMPANY shares pledged to THE BANK once they are seized

With these definitions and interpretations of the various SEC rules in mind, we now turn to the unique circumstances here that distinguish this case. The most critical fact in this case is that the shares have been pledged as collateral, not sold to THE BANK; and if THE BANK should have the need to foreclose on them and then resell them, THE BANK would not be an “affiliate” of COMPANY, and would not be subject to the SEC Rules. Furthermore, it would be almost impossible for THE BANK to attempt to obtain approval under Rule 144 for the sale of the COMPANY shares when it took the collateral, before there was a default, and to also satisfy Rule 144(i) since it would require that THE BANK have a bona fide intention to sell within a reasonable time. The awkwardness demonstrates why THE BANK would not be deemed reasonably to be subject to Rule 144.

Hence, on its face, THE BANK, by accepting as collateral, shares in COMPANY, does not fit the definition of “underwriter” as set forth in the Securities Act of 1933, 15 U.S.C. § 77a et seq. which defines “underwriter” broadly to include one who “has purchased from an issuer [or from one who controls an issuer] with a view to … the distribution of any security” as well as one who “sells for an issuer [or for one who controls an issuer].” Id. at § 77b(11) (Emphasis added). Section 4 of the Act creates a number of exemptions from this general rule. Id. § 77d. The exemption in Section 4(1) exempts “transactions by any person other than an issuer, underwriter, or dealer.” Id. § 77d(1).  As noted, an underwriter is defined in relevant part in Section 2(a)(11) as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.” Id. § 77b(a)(11). For purposes of the underwriter definition only, an issuer includes any person controlling, controlled by, or under common control with the issuer of the securities. Id. In light of the purpose of the Act, exemptions generally are to be interpreted to promote full disclosure of information necessary to protect the investing public. SEC v. Ralston Purina Co., 346 U.S. 119, 124-25 (1953). None of these factors or the reasoning, applies to THE BANK, which had no interest in purchasing COMPANY shares from COMPANY to help sell the shares in connection with the distribution of the shares.

There is considerable legal support holding that a pledgee such as THE BANK, that took a pledge of restricted shares as collateral for a loan, and might have to sell that collateral at a foreclosure sale, would not be an underwriter. A.D.M. Corp. v. Thompson, 707 F.2d 25, 26-27 (1st Cir. 1983).  In A.D.M., the Court held that the bank had a direct and separate economic interest in the restricted, control shares from the interest of the borrowers; and that it was not an underwriter since it did not directly or indirectly participate in the distribution of the asset. See, Rule 144(d)(3)(iv) and (e)(3)(ii); SEC Release No. 33–6099 (August 2, 1979), Q.49 (SEC treated estate as separate from its beneficiaries for purposes of determining the volume limitation).  While recognizing a contrary view in the dicta of SEC v. Guild Films Co., 279 F.2d 485, 489-90 (2d Cir. 1950), the Court was persuaded by the criticism of the position taken there, citing Fox v. Glickman Corp., 253 F. Supp. 1005, 1011-12 (S.D.N.Y. 1966) as well as the leading experts whose treatises on securities law was then, and still is, found by courts to be persuasive: 1 L. Loss, Securities Regulation 645-51 (2d ed. 1961); 11 H. Sowards, Business Organizations, § 4.01[3][b] & [c]. See, also, Getz v. Cent. Bank of Greencastle, 147 Ind. App. 356 (1970).

It likewise has been the position of the SEC for many years that a bank in the shoes of THE BANK is not obliged to comply with the requirements of filing a prospectus or obtaining an exemption under Rule 144 when accepting unregistered or controlled shares as collateral for a loan; and there are numerous SEC staff, “no-action letters” declining to bring enforcement actions in scenarios where banks and creditors took as collateral unregistered securities, and then sought to seize and sell the shares but were not considered to be underwriters. See, Russell Ranch, SEC No-Action Letter, 1995 WL 476256 (Aug. 11, 1995); Angelo K. Tsakopoulos, SEC No-Action Letter, 1993 WL 31695 (Feb. 5, 1993); Sec. Pac. Bank Ariz., SEC No-Action Letter, 1992 WL 159159 (June 26, 1992); Albuquerque Fed. Sav. & Loan Ass’n., SEC No-Action Letter, 1987 WL 108519 (Oct. 26, 1987); Harbor Properties Inc., SEC No-Action Letter, 1983 WL 28691 (Sept. 22, 1983); In the Matter of Otc Live, Inc. & Mark A. Suleymanov, SEC No-Action Letter, Release No. 261 (Sept. 30, 2004).

In each of these cases, a bank or other creditor sought to seize unregistered or otherwise restricted shares and to then resell the shares to satisfy the debt for which the shares provided security. In each case the Court or the SEC found that a creditor does not fit the definition of an “underwriter” on the one hand, and on the other, there was no policy gain to distort the language of the SEC Rules to transform the creditor into an underwriter. The gist of these holdings and SEC-No Action Letters was that the banks, accepted the unregistered, restricted stock as collateral for loans. If a bank foreclosed on the collateral, it seeks to mitigate its loss on the loan through sale of the collateral.  The bank never intended to participate in a public distribution of unregistered securities, thus differentiating a bank from an underwriter.

Accordingly, when we presented the weight of the authority and our view that it compelled the conclusion that the COMPANY shares pledged by the FLP would not be Rule 144 shares (as that term is commonly used) if they were seized, loan was renegotiated with terms that were favorable to our client.

For more information, call our Philadelphia business lawyers at 215-574-0600 or contact us online.

 

[1] Researched and written by Gary Green, Esquire, who is the Managing Partner of Sidkoff, Pincus & Green P.C.. This was copyrighted on January 26, 2016 by the author.

[2] Obviously, Rule 144 applies to owners of shares in addition to those who are the CEO of an issuer; but because the CEO’s issue was what we dealt with, we will use his status in this discussion for the sake of clarity.

[3] Although it is not a term defined in Rule 144, “control securities” is used commonly to refer to securities held by an affiliate of the issue regardless of how the affiliate acquired the securities. See, REVISIONS TO RULES 144 AND 145 Release No. 8869 FILE S7-11-07 December 6, 2007.