Category: Business Law

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 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 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 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.

Philadelphia Business Lawyers Discuss Outcome of JP Morgan Shareholder Dispute

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The 2nd U.S. Court of Appeals recently ruled in favor of JPMorgan Chase & Chief Executive Officer, Jamie Dimon, clearing him and other bank officials of conducting a poorly run investigation into the 2012 trading scandal known as “London Whale.” The court said that the plaintiff, Ernesto Espinoza, did not show sufficient evidence to prove that JPMorgan acted negligently, or that bank officials publicly downplayed the company’s losses of $6.2 billion.

Bruno Iksil, the man responsible for JPMorgan’s losses in its chief investment office, made such enormous bets that he became known as the “London Whale” in financial circles.

According to Chief Judge Robert Katzman, JPMorgan conducted an extensive investigation into Iksil’s questionable wagers and took steps to make some of the changes requested by Espinoza, including pay cuts and improved controls. Katzman also said that it is not the court’s place to question board decisions, nor is JPMorgan under any obligation to provide Espinoza with any further details about their decisions surrounding the “London Whale” investigation.

The appeals court revisited the case after consulting the Delaware Supreme Court on how to evaluate cases like this in the future.

In an effort to settle U.S. and British probes into Iksil’s misconduct, JPMorgan admitted wrongdoing and has paid over one billion dollars. Two former traders from the company have been charged with covering up losses that were linked to Iksil. Iksil, a French national, is cooperating with officials.

Philadelphia Business Lawyers at Sidkoff, Pincus & Green Represent Clients in Shareholder Disputes

 If you are involved in a shareholder dispute, our Philadelphia business lawyers at Sidkoff, Pincus & Green have the experience and resources to provide you with top-notch legal representation. Call us today at 215-574-0600 or contact us online for a confidential consultation. Our offices are conveniently located in Philadelphia, Pennsylvania.

Philadelphia Business Lawyers: Pittsburgh Paid Sick Leave Act Ruled Invalid

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Less than six months after being signed into law, the Court of Common Pleas of Allegheny County has ruled that the Paid Sick Leave Act is invalid and unenforceable. The law required employers to provide employees a minimum of one hour of paid sick time per thirty-five hours worked, with the minimum accrual dependent upon the number of employees.

Plaintiffs claimed that the city does not have the authority to enact the ordinance under what is known as the “Home Rule Charter and Optional Plans Law”. This law states that a “home rule municipality, such as Pittsburgh, ‘shall not determine duties, responsibilities or requirements placed upon businesses, occupations and employers’ unless expressly provided by statutes”.  The Court determined that the Act did just that, in violation of the Home Rule Charter and Optional Plans Law. As a result of this case, companies with operations in Pittsburgh need not update their sick and paid leave policies.

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

Philadelphia Business Lawyers: “Cadillac Tax” Delayed until 2020

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On December 18, 2015, President Obama approved a spending and tax package that includes a two-year delay of the so-called “Cadillac Tax”. This tax will impose a forty percent excise tax group health plans to the extent their total annual premium costs exceed $10,200 for single coverage and $27,500 for family coverage. This tax is intended to motivate employers and carriers to find a way to reduce the costs of employee health coverage.

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

Philadelphia Business Lawyers: Elements of Defamation in Pennsylvania

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Defamation is a tort that holds individuals liable for false statements, spoken or written, which harm the reputation of another.  In general, a defamation complaint must be sufficient to identify the accused defamer and outline the circumstances of the publication of the false statements.  The tort protects public figures as well as private individuals and is interpreted under state law.  The statute of limitations is one year for bringing an action for defamation.

In Pennsylvania, the elements of the tort are outlined in the Uniform Single Publication Act (USPA).  The burden is initially on the Plaintiff to prove each element: 1. The defamatory character of the communication, 2. Its publication by the Defendant, 3. Its application to the Plaintiff, 4. The recipient’s understanding of its defamatory meaning, 5. The recipient’s understanding of it as intended to be applied to the Plaintiff, 6. Special harm resulting to the Plaintiff from the publication (actual damages that are economic or pecuniary). 7. Abuse of a conditionally privileged occasion (the publication was not reasonably necessary due to common interests).

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

Philadelphia Business Lawyers: Aetna Kickback Lawsuit

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EDPA Denies Defendant BlueWave Healthcare Consultants’ Motion to Dismiss, Allowing Aetna’s Doctor Kickback Suit to Continue

On December 29, 2015, U.S. District Judge Robert F. Kelly of the Eastern District of Pennsylvania denied BlueWave Healthcare Consultants, Inc.’s Motion to Dismiss a lawsuit brought by Plaintiff Aetna alleging Defendants paid doctors kickbacks to order unnecessary blood tests. Aetna alleges that BlueWave referred physicians in the Aetna network and told them they would be paid to refer blood samples to Defendant Health Diagnostics Laboratory, Inc. According to Aetna, BlueWave received approximately $200 million in commissions after entering into a sales agreement with Health Diagnostics Laboratory.

BlueWave argued in its Motion that Aetna failed to allege that BlueWave said anything false, one of the elements of fraud, as well as arguing that it was not liable for fraud because it was Health Diagnostics Laboratory that submitted the false bills to Aetna. However, Judge Kelly stated that under Pennsylvania common law, a person may be liable for fraud by merely participating in the scheme.  “Thus, the current Pennsylvania law places no requirement on plaintiff to prove that BlueWave defendants directly sent the false claims to Aetna,” Kelly said. “Rather, plaintiff has the burden to prove, amongst the other requirements required for fraud, that BlueWave defendants ‘participated in’ the perpetration of a fraudulent act.”

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