Philadelphia Business Lawyers: SEC Rule 144

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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.

 

Philadelphia Business Lawyers: Minnesota Cities File Antitrust Lawsuit against Chemical Companies

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The city of St. Cloud has joined other Minnesota cities, including Minneapolis, St. Paul, Duluth and Rochester, in a class action lawsuit brought against manufacturers and distributors of liquid aluminum sulfate, a chemical used to purify drinking water. The defendants in the antitrust lawsuit are accused of price fixing which may have cost St. Cloud taxpayers more than $850,000.

A representative for the city of St. Cloud says that the city purchases between 350 and 585 tons of aluminum sulfate annually, and the price of the chemical has almost doubled over a period of six years. One of the chemical companies named in the class action lawsuit, General Chemical Corp., had previously plead guilty to price fixing in a case brought by the U.S. Department of Justice last fall.

Philadelphia business lawyers at the Law Offices of Sidkoff, Pincus & Green have been representing business clients in the Philadelphia area and worldwide since 1958. Our attorneys have amassed extensive knowledge and experience while successfully pursuing complex class action and antitrust lawsuits on behalf of our clients. Contact us online or call 215-574-0600 today to schedule a consultation with one of our business lawyers in Philadelphia.

Philadelphia Employment Lawyers: Jiffy Lube Cheats Employees out of Fair Pay

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A former Jiffy Lube assistant manager (“Plaintiff”) filed a class action suit against a franchise of the auto repair shop in Pennsylvania federal court claiming that policies such as requiring workers to clock out while at work violate state and federal wage and hour laws. The Complaint alleges that Jiffy Lube violated the Fair Labor Standards Act and Pennsylvania wage laws by cheating customer service technicians and assistant managers of proper minimum wage and overtime pay. The Complaint says, “the defendants’ policy and practice of forcing its employees to work off the clock is firmly embedded within its culture and specifically referenced in its written operating procedures.”

Customer service technicians and assistant managers are responsible for working on vehicles, including providing oil changes, brake, tire and cooling system services. Those duties aren’t exempt from minimum wage or overtime pay under the FLSA and the Pennsylvania Minimum Wage Age.  Despite this, Jiffy Lube allegedly routinely denied those employees pay through by editing workers’ time entries to reduce or remove hours. The auto repair shop also ordered employees to clock out when they weren’t helping customers during scheduled shifts, even though they had to remain at the store. Plaintiff alleges that Jiffy Lube told him that it wasn’t company policy to pay employees for all hours actually worked. He pointed to the company’s regional manager conference in winter 2015, where the Vice President allegedly stated that there was no reason to pay employees for all hours worked if there were no cars at the shop.

Plaintiff is bringing the suit as a collective action under the FLSA and as a class action under the Pennsylvania Wage Payment and Collection Law and the Pennsylvania Minimum Wage Act.

For more information or to discuss a wage and hour issue under the FLSA, call Philadelphia employment lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Employment Lawyers: Rest Breaks for Non-Exempt Employees Should be Paid

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The US Department of Labor filed suit against an employer in Perez v American Future Systems, INC. d/b/a Progressive Business Publications, claiming the employer unlawfully required non-exempt sales employees working in their call center to log off and not be paid for any break time taken by the employees during the work day. These include rests and bathroom breaks that only last a few minutes at the most. The employer’s policy permits employees to take “personal breaks at any time for any reason, but these breaks were unpaid. Any time by the employee not spent working, regardless of the length of the break was to be unpaid.

The court supported its decision finding a Department of Labor regulation on the issue to be persuasive. This regulation essentially stated that rest periods of short length are common in the industry and promote efficiency. The regulation further stated these types of breaks are normally paid for and considered as hours worked. This decision is important because it puts employers on notice that these short breaks should be considered hours worked and warns employers they can be liable in the event they try to discourage employees from taking such breaks.

For more information or to discuss a wage and hour issue, call Philadelphia employment lawyers at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.

Philadelphia Business Lawyers: Police and Fire CBA

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Interest Arbitration under Policeman and Fireman Collective Bargaining Act

“Policemen or firemen employed by a political subdivision of the Commonwealth or by the Commonwealth, through labor organizations or other representatives designated by fifty percent or more of such policemen or firemen, have the right to bargain collectively with their public employers concerning the terms and conditions of their employment, including compensation, hours, working conditions, retirement, pensions and other benefits, and have the right to an adjustment or settlement of their grievances or disputes in accordance to this Act.” 43 Pa. Stat. Ann. § 217.1 (West).

Collective bargaining may only begin at least six months before the start of the fiscal year of the political subdivision or of the Commonwealth, and any request for arbitration may only be made at least one hundred ten days before the start of said fiscal year. § 217.3. In public sector labor law, there are primarily two types of alternative dispute resolution processes: 1) interest arbitration and 2) grievance arbitration. Interest arbitration is the process by which the parties, through a neutral arbitrator or panel, create a collective bargaining agreement after the parties fail to reach an agreement. Contrarily, grievance arbitration occurs when the parties dispute the proper interpretation or application of provisions contained in an existing collective bargaining agreement. Id.

An interest arbitration award under the Policemen and Firemen Collective Bargaining Act may embrace only those issues which the submitting party has specifically raised in the notice of arbitration, or which are reasonably considered as included within those issues and not serve as a means to reopen the underlying agreement. Id. (citing 43 P.S. § 217.4) (emphasis added).

Invocation of the interest arbitration process under the Policemen and Firemen Collective Bargaining Act requires an impasse. The issues must be submitted to interest arbitration for contract formulation by the interest arbitration panel and the issues not so preserved, unless reasonably included within properly preserved issues, are beyond the scope of the interest arbitration process and will not be enforceable. Michael G. Lutz Lodge No. 5, of Fraternal Order of Police v. City of Philadelphia, No. 42 EAP 2014, 2015 WL 9284242 (Pa. Dec. 21, 2015) (citing 43 P.S. § 217.4).

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

Philadelphia Employment Lawyers: Liability for Temp Employees

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A recent Third Circuit decision overhauled previous notions of non-liability for temporary employees.  Typically, a temporary employee is thought to be the liability problem of the staffing agency that places the employee. The Third Circuit’s decision in Faush v Tuesday Morning, Inc. suggests otherwise. In this case, Plaintiff Matthew Faush and two other employees were ordered to clean up trash in the back of the store. When Faust complained about the assignment he was told by the store manager that minorities were not allowed to work in the front due to risk of theft. Faust was then fired shortly after. The district court decided that Faust was not an employer and could not be liable under the discrimination statutes.

The Third Circuit Court examined the factors and ruled that the company was liable for its temporary workers because it: indirectly paid Faush’s wages, had the power to demand replacement workers, gave assignments, and directly supervised the temporary workers.  Individuals employed by third party staffing firms may have a relationship not only with the staffing agency, but with employers as well, and that relationship should be closely examined when dealing with incidents involving liability. Individuals employed by staffing agencies should carefully review their contracts to ensure that such agreements provide adequate protection against potential adverse actions taken by the employer.

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

Philadelphia Employment Lawyers: Philadelphia Uber Drivers Sue Uber for Wage Violations

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Ride-Sharing company Uber and its Philadelphia subsidiary Gegen LLC are named defendants in a class action lawsuit alleging violations of the Fair Labor Standards Act and Pennsylvania wage laws.  Plaintiffs include three Philadelphia UberBlack drivers filing on behalf of current and former Uber drivers. The drivers claim that Uber misclassified them as independent contractors instead of employees, thereby avoiding the need to pay Uber drivers hourly and overtime wages, as well as avoiding various state/city taxes.

UberBlack drivers are required to pay Uber 25% of their earnings as well as regulatory fees, vehicle payments and insurance premium payments. These payments that drivers need to make to Uber, Plaintiffs claim, endangers their ability to earn a living.  Plaintiffs also allege that since they are not classified as Uber employees, Uber is able to avoid providing any type of benefit to drivers as well as charging them for business expenses obtained by the company.

Plaintiffs are seeking injunctive relief requiring Uber to come into compliance with state, city and federal laws.

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

Philadelphia Cab Company Sues Uber for $1.5 Million in Damages

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On January 08, 2016, CoachTrans, Inc., a Philadelphia-based cab company sued Uber Technologies, Inc. for tortious interference with a prospective business advantage, prima facia tort, and false advertising under the Lanham Act. Plaintiff is seeking at least $1.5 million in damages.

CoachTrans, which owns three cabs, has seen the value of its taxicab medallions, which are required by law for anyone who wants to operate a cab in Philadelphia, drop in net worth from $500,000 down to $80,000 following Uber’s rise in the city. The lawsuit alleges that by identifying itself as a “taxi” in commerce, Uber made a “false and misleading” statement to the public and such statement has caused and continues to cause “competitive or commercial injuries to Plaintiff.”

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

Philadelphia Employment Lawyers: OHSA- Tightening Policies and Increasing Penalties

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For the first time in 25 years, the Occupational Safety and Health Administration (OSHA) can significantly raise penalties. A small provision in the recently passed Bipartisan Budget Act will allow an increase in penalties of up to 82%. Today, the maximum penalty any employer can receive is $70,000. As these fine limits have been in place since 1990, many larger businesses could see these penalties as the cost of doing business, rather than as fines.

Recently, two local construction companies are facing tens of thousands of dollars in fines after OSHA issued citations when it was discovered that these companies where breaking strict safety polices. One violation included failure to report the hospitalization of a worker who fell 40 feet according to the US Department of Labor. The second company to violate the OSHA’s polices must pay $70,000 in penalties after a makeshift platform fell apart at the site of a residential development in West Chester according to the Occupational Safety and Health Administration. The worker who was injured suffered permanent damages included paralysis from the waist down.

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

Philadelphia Business Lawyers: Maker of “Fireball” Liquor Drops Trademark Infringement Lawsuit

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A federal lawsuit filed by the maker of the popular liquor Fireball Cinnamon Whisky (“Fireball”) against Jack Daniels for trademark infringement was dropped just before the New Year after an agreement was reportedly made between the two parties. Jack Daniel’s Tennessee Whiskey, which is owned by Brown-Forman, has seen large increases in sales since their cinnamon-flavored Tennessee Fire hit the shelves. In their November lawsuit, the owners of Fireball, Sazerac, accused Brown-Forman of violating their trademark by using the term “Fireball” in their Google advertisements.

According to Sazerac, when potential customers searched for their Fireball product on Google they were directed to advertisements for Brown-Forman’s Tennessee Fire product instead of Sazerac’s Fireball. The lawsuit accused Brown-Forman of using the term “Fireball” in their advertisements to create confusion amongst consumers in the market and to use the success of Sazerac’s product for their own financial gain.

The day before Brown-Forman was required to respond to the lawsuit, Sazerac filed a motion in a Kentucky federal court to drop their claims. Sazerac’s motion did not hint as to why the company was dropping the lawsuit, but a spokeswoman for the company said that the parties had come to an agreement regarding the dispute. Neither companies agreed to comment about the specific details of the reconciliation.

Sazerac’s lawsuit had asked the federal court to stop Brown-Forman from using their trademarked term “Fireball” as keywords in their online marketing campaigns and generally. Brown-Forman’s marketing campaign for Tennessee Fire, which the Louisville-based company expanded across the country in 2014 and 2015, has been largely successful. Brown-Forman’s second-quarter earnings report for 2015 indicated that a seven percent increase in sales for the Jack Daniel’s family of whiskey was made possible by the success of Tennessee Fire. The report also held Tennessee Fire responsible for a three percent expansion in total net sales for the first six months of 2015.

Since entering the whiskey market in the late 1990’s, Sazerac has caused concern and disruption to Brown-Forman. When it comes to cinnamon-flavored whiskey, Fireball dominates Jack Daniel’s Tennessee Fire and Jim Beam’s Kentucky Fire in sales. In 2014, Sazerac sold $130.7 million worth of Fireball while Jack Daniels and Jim Beam only sold $43.7 million and $22.5 million respectively of their cinnamon-flavored whiskey. Although Brown-Forman is still the market leader with 12 percent of all whiskey sales in the United States, Sazerac has caused the company to increase their marketing campaigns and compete for sales.

Philadelphia Business Lawyers at the Law Offices of Sidkoff, Pincus & Green Regularly Represent Companies Whose Trademark Has Been Infringed Upon

The experienced Philadelphia trademark infringement lawyers at Sidkoff, Pincus & Green serve clients in complex trademark infringement cases. Our seasoned Philadelphia business lawyers have served as counsel for thousands of companies in every kind of business matter. This broad range of experience in all types of business matters has given our team of lawyers the opportunity to fine-tune their knowledge of specific legal areas such as trademark infringement. Call us at 215-574-0600 for a consultation or contact us online.