Limited Liability Companies, or LLCs, are now the most popular legal entity for organizing businesses in the United States, according to a new report issued by Berkman Solutions.

“While it is tempting to conclude that S Corporations are substantially more popular than LLCs, this conclusion is based on the total number of legal entities. S Corporations have a more than 15 year head start on LLCs. Adjusting for that head start, the data reveals that LLCs are eclipsing S Corps,” according to Berkman’s analysis.

“Looking at the year-over-year net change in tax filings demonstrates that LLCs have a slight edge over S Corporations since 2004, except for 2006,” it continues. “The year-over-year net change captures the addition (or reduction) in tax returns from the prior year by legal entity type.”

Read the article.

Archer Norris published its second annual California Business Litigation Report, revealing that corporate lawyers continue to view many aspects of California’s business environment as perplexing, downright exasperating, and in many ways more challenging than other states.

In a release, the firm said employment laws and labor issues were found to be by far the most significant legal concern of companies doing business in California, reported by 62% of respondents. When it comes to areas in which litigating in California is more challenging than in other states, employment law and labor issues again landed in the top spot (69%), followed by environmental law and regulation (57%). The survey showed that the most-cited legal stumbling blocks also include commercial litigation, product liability, intellectual property, land use, and health care. Among out-of-state counsel specifically, regulatory compliance was repeatedly cited as a chief challenge across a wide spectrum of legal concerns.

Conducted in partnership with ALM Marketing Services, Archer Norris’s survey polled general and corporate counsel with business interests in California on their opinions of the California legal climate, how they evaluate litigation matters, and how they choose outside counsel for handling these matters.

This year, Archer Norris also examined current attitudes toward hot issues such as cybersecurity, finding that anxiety about exposure to cyber risks indeed runs deep among in-house counsel, with nearly two-thirds reporting they are “very concerned.” They are most worried about information loss and associated costs resulting from data leakage or systems attacks, damage to critical IT infrastructure, and risk arising from malware and computer viruses.

“The results of our 2016 survey make it clear the legal terrain in California continues to prove daunting not only to companies new to litigating in the state, but also to those who have been handling matters here for some time,” said Gene Blackard, Managing Partner of Archer Norris. “In order to overcome these challenges, it’s more critical than ever for companies doing business in California to have highly responsive and knowledgeable outside counsel. Archer Norris has guided hundreds of businesses through the complex litigation and transactional landscape here, with the goal of seeing our clients succeed in California long-term. With more than 100 attorneys practicing in five offices across the state, we’re exactly where our clients need us to be to best handle their diverse needs.”

The survey also yielded insights about how in-house counsel evaluate which outside California counsel is the right partner. While 55% of respondents noted the importance of a firm offering competitive rates and fees, a number of other factors were deemed more important than cost. Respondents first and foremost look for dependability and consistency (74%), followed by responsiveness, depth of experience, knowledge of the business and industry, and whether the law firm is one known for thoroughly exploring options for resolution other than going to trial.

Respondents reported spending about one-quarter of their overall legal budgets on outside counsel, and most said their budgets will stay the same or increase this year (37% and 29% respectively) compared to last. Many admit they would consider paying “premium” fees (up to 30% above the norm) to defend “bet the company” issues (23%) or legal matters where the client risks losing $1 million or more (32%).

The previous Business Litigation Playbook white paper, which also reveals corporate counsels’ greatest legal concerns within a variety of practice areas, can be downloaded.

Theranos Inc.’s Chief Executive Officer Elizabeth Holmes was banned for two years from owning or operating laboratories by U.S. regulators, a major blow against the controversial blood-testing startup that’s come under scrutiny for risking patient harm with unreliable tests, reports Doni Bloomfield for Bloomberg Technology.

“The once high-flying Silicon Valley company was also penalized for an undisclosed amount and lost its eligibility to get payments from federal health insurance programs for lab services, according to a statement late Thursday from Theranos, citing a notice it received from the Centers for Medicare and Medicaid Services,” the report says. “The closely-held firm is shutting down its Newark, California, lab and plans to rebuild it, Holmes said.”

The company founded by Holmes at one time had a $9 billion private valuation, based on technology that it said would allow for cheap, less-painful blood tests processed with breakthrough analyzers. Regulators soon stepped in, citing violations that put patients’ health and safety at risk.

Read the article.

With U.S. crude almost doubling in price since February and natural gas gaining about 38 percent just since May 26, stakeholders in at least three bankrupt energy companies are contending that corporate assets have risen so much in value that they deserve a bigger payout, reports Bloomberg News.

The news service, citing a letter by its reporter, says that “Sabine Oil & Gas Corp.’s unsecured creditors and note holders of Forest Oil Co., which merged with Sabine in 2014, filed a report last week seeking a jump in recoveries. Shareholders of bankrupt driller Penn Virginia Corp. questioned current valuations, while Ultra Petroleum Corp. shareholders, who are the first to be wiped out in a bankruptcy, said earlier this month that they are “very likely ‘in the money.’”

Sabine creditors creditors are claiming the company is ignoring the recent increase in oil and gas prices to inflate the amount paid to the secured lenders at the expense of junior ones.

Read the article.

Bank of America’s top lawyer isn’t the only in-house attorney expressing displeasure with associate salary raises announced recently by BigLaw firms and boutiques, reports Sara Randazzo of The Wall Street Journal. She says other general counsel are sending letters to their outside law firms, warning them of the potential for relationship problems if they join in the pay hikes.

The report quotes a letter Allstate Corp.’s general counsel, Susan Lees, sent to some law firms, challenging the logic of paying first-year associates $180,000.

“[O]ne must question the merits of a business model that compensates fresh law school graduates, who are devoid of any meaningful lawyering experience, with a salary greater than that of a seasoned in-house corporate attorney with a decade or more of experience counseling senior leaders in our organization,” states Ms. Lees’s letter, which was reviewed by Law Blog.

Read the article.

On June 17 the Austin Court of Appeals unanimously ruled in favor of Beck Redden‘s clients Statoil ASA and Fargo Acquisition, Inc., vacating a class certification order, the law firm reported.

The case, Brigham Exploration Co. et al. v. Boytim et al., involves Statoil’s 2011 acquisition of Brigham Exploration Company, the firm said in a release. Immediately following the announcement of the acquisition, a group of Brigham shareholders filed a purported class action, alleging claims for breach of fiduciary duty against Brigham’s board of directors and aiding and abetting that breach against Statoil, Fargo, and Brigham.

Beck Redden represents Statoil and Fargo in the litigation, led by partner Fields Alexander and associate Chris Cowan, and handled the second appeal of the class certification order. Appellate briefs were filed by appellate partner Russell Post with the assistance of Cowan and associate Parth Gejji.

After hearing oral argument by Post and lawyers for the Brigham defendants, the appellate court vacated the class certification on the ground that the class was not sufficiently defined because it included numerous shareholders who lacked standing, according to the release.

The case has been remanded for further proceedings in the trial court.

Image by NY Photographic

Chief executives of the biggest U.S. corporations saw their pay rise in 2015 at the slowest rate in seven years, but it’s not because their boards were suddenly getting tough, according to a study by ISS Corporate Solutions and reported by Reuters.

Companies’ allocations for pensions fell substantially last year, a result of rising bond yields and anticipation of the U.S. Federal Reserve’s first interest-rate hike in nearly a decade.

“The smaller pension component – a theoretical amount, to be paid in the future – has eaten into the value of total compensation packages and muddied the closely scrutinized relationship between company performance and executive pay,” writes Sai Sachin R.

“At 0.1 percent, the median pay rise in 2015 for the CEOs of more than 300 of the S&P 500 companies was the smallest since the financial crisis and a sharp decline from the 12.9 percent hike of 2014, data from ICS shows.”

Read the report.

Kirkland & Ellis LLP announced that it advised TSSP, a leading special situations investment platform of TPG, on its agreement with Hunt Oil Co., a privately held oil and gas exploration and production company, to develop certain of Hunt Oil’s assets in the Midland Basin in Texas.

The development area covers approximately 18,000 net acres across Martin, Glasscock, Midland and Upton counties. Under the agreement, TSSP has committed up to $400 million to fund the development which is expected to take approximately three years to deploy.  Additional terms were not disclosed.

The Kirkland team was led by corporate partners Anthony Speier and David Castro and associates Christopher Heasley, Nick Wenker, Ryan Martin and Lindsey Jaquillard; debt finance partners William Bos and Lucas Spivey; tax partner Chad McCormick and associate Joe Tobias; environmental transactions partner Paul Tanaka and associate Stefanie Gitler; restructuring partner Ryan Bennett; and litigation partner Anna Rotman.

Read more details.

A blog post on the Cooley M&A site discusses the “option to acquire” structure, which addresses both the needs of a target company to develop a product or business on the one hand and the desire by a buyer to identify growth opportunities on the other.

“In an option to acquire transaction, the buyer agrees to pay the target an option fee in exchange for the exclusive option to acquire the target for a fixed price during an option period subject to certain conditions and agreements that are set forth in a fully negotiated and executed acquisition agreement,” the post explains. “As part of the arrangement, the parties may also enter into a collaboration agreement covering certain development activities of the target during the option period, with the achievement of the developments functioning as milestones to the buyer’s ability to exercise its option to buy. The collaboration agreement is usually separate from the option and acquisition agreement. Sometimes, the specific terms of the option may also be set forth in a standalone option agreement that is separate from the acquisition agreement.”

While options to acquire are fairly common in the medical device and life sciences industries, the option also provides attractive opportunities for funds and companies in other industries as well, as a way to get an inside track on new technology, the firm writes.

Read the article.

The National Association of Corporate Directors’ 2016 edition of Governance Challenges combines guidance from five strategic content partners of the NACD with broad M&A expertise. The report addresses the importance of early board engagement in strategy, the need for proactive dialogue with all key stakeholders, and the imperative to balance short-term and long-term goals throughout the M&A process.

A complimentary copy of the report is available for download.

Boards can use this new resource to:

• identify “drive and drag” factors that can advance or delay transaction results;
• monitor key aspects of the due-diligence process before approving the deal;
• understand the tax implications of a prospective transaction;
• consider exposure to risk from antitrust liability, cybersecurity challenges, and environmental liability; and
• select and retain talent and adjust compensation arrangements during the leadership change.

Download the report.

The Center for Board Excellence is offering a free whitepaper that describes moving the directors and officers questionnaire process to a dynamic online system.

CBE says the paper explains how to save time and money by moving the D&O questionnaire online to:

• Reduce the number of questions
• Make them easier to follow and answer
• Turn definitions and schedules into dynamic flyovers or online links

“Focus particularly on the cost of your Directors’ and Officers’ time,” CBE suggests. “How much time did it take them to complete the process? How many irrelevant questions did they have to read and skip over? How many definitions did they have to look up in an appendix? Add to that the time it took you to compile the questionnaire and parse the results only to find that three forms came back incomplete.”

Download the paper or request a demo.

The key challenge for compensation committee members continues to be to approve compensation programs that directors believe are right for their companies, while maintaining an understanding of shareholder views and an ability to communicate the appropriateness of their compensation decisions sufficient to avoid criticism that could undermine directors’ abilities to act in their company’s best interest, according to a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

In the post Compensation Season 2016, the authors identified key considerations for compensation committees in the upcoming compensation season.

Read the article.

Gearing up for a battle for control of media company Viacom, board members took the unusual step of vowing to fight an expected campaign by Sumner Redstone and his family to shake up the board, the Los Angeles Times reports.

“Sumner Redstone this month added to his legal team a prominent Los Angeles litigator, Michael Tu, who specializes in securities law – raising the possibility of a legal campaign to dump Viacom Chairman and Chief Executive Philippe Dauman and other members of the board,” according to the newspaper.

Viacom’s stock value has dropped more than 45 percent in the last two years. Redstone and his family control 80 percent of the Class A voting shares of Viacom, but their economic stake in the company is about 10 percent.

Read the article.

By Jose Tabuena, JD, CFE, CHC

Effectiveness is a cornerstone of modern corporate compliance. The U.S. Sentencing Guidelines expect it, and compliance officers spend substantial time and resources trying to create an effective program. And as reflected in recent studies and surveys, assessing compliance program effectiveness continues to be top-of-mind for senior compliance officers. On its face, the regular monitoring and measuring of the program can prove beneficial to company success.

Yet in spite of the Sentencing Guidelines for Organizations being in existence for over 20 years, and the recent focus on developing metrics, it remains challenging to demonstrate the effectiveness of the compliance function.

In recent columns I’ve raised the limitations on government pronouncements and socalled metrics, with the current lack of rigor in measuring effectiveness. Enforcers and regulators (typically lawyers) are not scientists, and the field of compliance can benefit from more empirical research. Surveys of compliance professions reveal that many are not confident that the metrics they use to assess compliance program effectiveness give them a true picture of program success.

Still, a company will want to be able to demonstrate that it is creditworthy under the sentencing guidelines to benefit from penalty reductions, and more importantly to avoid indictment altogether. The company’s other constituents, including shareholders, the board, and management, will also seek some level of assurance that the compliance program is effective and worthy of investments that have been made. Program “efficiency” is another consideration for evaluating performance. Without an agreed-upon methodology, and needing more than a qualitative description of “I know effectiveness when I see it,” how can a company approach this measurement challenge?

Regular reporting and meeting with the board

One way companies can respond to this concern is to compile regular (at least annual) compliance program reports that detail all key aspects of their respective programs at a particular time. The report can be a compilation of quarterly reporting with a summary of highlights for the fiscal year. If sufficiently comprehensive and persuasive, such reports may help a company surmount the evidentiary challenge of proving the effectiveness of its program at a given point of time in the relatively distant past.

Of course this begs the question of what goes into a program report. At a minimum you want to make sure your board is up to speed with your compliance program by summarizing the key changes and developments. The compliance framework essentially boils down to three basic questions which form the basis of an effectiveness evaluation and program audit methodology: 1) Is the compliance program well-designed? 2) Is it being applied in good faith? and 3) Does it work?

The science and mostly art of effectiveness assessments is still evolving. You need to carefully identify types of data available, apply insight to the data, and design metrics to create the story around effectiveness.

Compliance programs, particularly in highly regulated industries, have matured to the point where data for the first two questions are periodically collected and reviewed. This is at least a good start with building the case for effectiveness. To evaluate effectiveness, compliance departments now analyze internal audit findings, track hotline calls, monitor training completion rates, review the disposition of internal investigations, perform self-assessments, survey employees, compare themselves against peer companies, retain outside professionals to review the compliance function, and track performance on regulatory reviews. When meeting with the board you can talk through progress, results, and challenges as they stand today, in relation to previous years, and benchmarked against other companies:

• Implementation Process – Status of important compliance initiatives, any major program operational updates, and what work remains.
• Risk Profile Changes – Any new, emerging risks or noteworthy changes to the likelihood or severity of your organizational profile, either due to business changes or environmental developments.
• Policy Attestation and Training Certification – What percentage of employees have successfully completed training and policy requirements, including the results of any post-training tests and policy attestation rates? Are there consequences for those who have not completed?
• Employee Feedback – Highlights of feedback received through employee focus groups, culture surveys, suggestion box, and how you are using this feedback to drive improvements.
• Compliance Audit Findings – Results of internal or external audits, and what these findings mean for the organization and the compliance program.
• Hotline/Internal Reporting Data – How many tips your hotline or other reporting channels have received, trends by type of incidents being reported, and any hotspots that have emerged in particular locations, departments, or business units.
• Incidents and Investigations – The number and type of investigations that took place, the disposition of cases, and what ongoing investigations the board should be aware of.

Risk focus

A feature of an effective program is the regular performance of a compliance risk assessment. Regulators and enforcement agencies will be looking for correlation between the risk assessment measures and performance indicators that are being used to monitor those risks and compliance performance. These measures should consider the high-risk areas and what has been put in place to address those special risks; internal audit will undertake an annualized range of audits as part to identify compliance issues that provides a good source of measures and also indicate to the regulator that the company is operating cohesively.

The COSO Enterprise Risk Management and Risk Framework identifies the core elements of well-designed KRIs (Key Risk Indicators) to link business objectives to strategies to risk. The KRIs, if robust, should give you visibility into your riskiest areas. Periodic risk assessment results should be used to determine whether compliance risks are increasing or decreasing.

The data and results from a compliance risk assessment provide an opportunity to support program effectiveness. An approach to consider is to incorporate risk ratings that are generated from the risk assessment into routine monitoring reports. The status of mitigation efforts can be tracked and the impact on the risk rating reported as part of regular compliance program updates to senior management and the board. Such reports can be trended to (hopefully) depict the impact of mitigation activities with risk ratings adjusting over time.

Dashboards

Some organizations use dashboards (or scorecards) as a shortcut to giving executives and board members information about what is being accomplished by the compliance program and where the organization is at risk. The challenge is figuring out what metrics will go on the dashboard. Your metrics need to be specific and unique to your company and what business it conducts along with what goals you’re trying to achieve as a whole and as a compliance program—there is no one-size list of these metrics. Best practice and regulatory standards call for risk-based program reviews to specifically account for an organization’s unique risk profile.

Given the lack of standard measurement techniques, how else can dashboard metrics be identified? A rigorous audit to evaluate a compliance program will analyze specific program elements. The auditor can start with tools utilized when conducting a review of the compliance environment under COSO. This includes techniques for evaluating entitylevel controls, the control environment, and fraud-control activities. There are metrics around surveillance and testing but, in the end, do we know if we have an effective program? It’s still difficult to say. For purposes of the sentencing guidelines a company can stand-up a program that ticks all the boxes. One can engage independent consultants to come in and validate the existence and good faith effort being made. From benchmarking we know how our company compares to others. While metrics do not yet fully answer the crucial question of program efficacy, it can help build the case for effectiveness.

The science and mostly art of effectiveness assessments is still evolving. You need to carefully identify types of data available, apply insight to the data, and design metrics to create the story around effectiveness. Ultimately you want to create a report that tells the story of the compliance program to leadership, and if ever needed—to enforcement authorities and industry regulators.

Originally published in Compliance Week

Photo by Kārlis Dambrāns

Huawei Technologies sued Samsung Electronics on claims of infringement of smartphone patents, the Chinese firm’s first intellectual property challenge against the world’s top mobile maker, reports Reuters.

“Huawei has filed lawsuits in the United States and China seeking compensation for what it said was unlicensed use of fourth-generation (4G) cellular communications technology, operating systems and user interface software in Samsung phones,” according to the report.”

“The lawsuit marks a reversal of roles in China where firms have often been on the receiving end of patent infringement disputes. In smartphones, makers have grown rapidly in recent years but different intellectual property laws outside of China have slowed overseas expansion,” writes Yimou Lee and Anne Marie Roantree.

Read the article.

The Rock Center for Corporate Governance at Stanford University recently conducted a nationwide survey of 1,202 individuals — representative by gender, race, age, political affiliation, household income, and state residence — to understand public perception of CEO pay levels among the 500 largest publicly traded corporations.

“74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker,” the survey found. “Only 16 percent believe that they are. While responses vary across demographic groups (e.g., political affiliation and household income), overall sentiment regarding CEO pay remains highly negative.

Key takeaways are:

• CEOs are vastly overpaid, according to most Americans
• Most support drastic reductions
• The public is divided on government intervention

Download the survey.

Masimo Corp. founder and CEO Joe Kiani

The top 500 chief executive officers in American companies earned 340 times the average worker’s wage last year, taking home $12.4m on average, according to an analysis by the AFL-CIO, reports The Guardian.

The union’s analysis found that the pay of executives leading the S&P 500 index of top companies actually dipped last year. The figure in 2014 for the same group was 373 times more than their workers, earning on average $13.5m.

“The marginal drop in pay comes despite some eye-watering payouts for the three highest-paid CEOs – Masimo Corporation’s Joe Kiani, Timothy Walbert of Horizon Pharma and Gamco Investors’ Mario Gabelli – who took home nearly $3bn between them, according to the AFL-CIO,” the Guardian story says.

The average production worker who does not hold a supervisory role,earned about $36,900 a year in 2015.

Read the article.

A Delaware judge has dismissed a lawsuit by Wal-Mart Stores Inc. shareholders who accused the board of the world’s largest retailer of trying to cover up bribes paid by company executives in Mexico, according to a report by Reuters.

The Delaware judge ruled that an earlier dismissal by an Arkansas judge of a nearly identical lawsuit by another group of shareholders precluded the Delaware case from going forward.

“He said that while the Arkansas plaintiffs may have chosen to rush their case rather than fully investigate alleged wrongdoing, their haste did not disqualify them from representing Wal-Mart shareholders,” Reuters reported.

In 2012, The New York Times reported that found Wal-Mart had engaged in a multi-year bribery campaign to build its Wal-Mart de Mexico business.

Read the article.

Foley & Lardner LLP announced that Lou Cohen and Elgie Sims Jr. have joined the firm’s Business Law Department as of counsel in the Chicago office.

“We are thrilled to welcome Lou and Elgie. Together, they add unique transactional and public policy experience combined with a deep understanding of the Chicago market that will significantly enhance our offerings to clients,” said Myles Berman, managing partner of Foley’s Chicago office.

In a release, the firm said Cohen has led and handled high-profile real estate transactions for international and domestic lenders, developers, real estate investment trusts, public pension funds, pension fund advisors, insurance companies and governmental entities. He served as lead counsel for the owner and redeveloper of the Chicago Soho House Club, and represented the City of Atlanta in negotiations surrounding the development of the $1.4 billion stadium for the Atlanta Falcons. His practice is focused on commercial real estate development, including acquisitions and dispositions, venture structuring and formation, leasing, lending, restructuring and workouts.

“Lou is an accomplished and well-known real estate attorney in Chicago and the Midwest. His ability to manage complex real estate transactions will be a great service to our institutional and other major real estate clients,” said Fred Ridley, chair of Foley’s Real Estate Practice.

Sims, who is currently the Illinois state representative for the 34th District, will focus on government affairs and municipal finance as a member of the firm’s Government & Public Policy and Public Finance Practices. Sims has an extensive background representing clients and spearheading complex legislative initiatives before various branches of federal, state and local governments. Several of his legislative accomplishments include passage of Illinois’ film tax credit, which helped the film industry generate over $330 million in spending in 2015, and changes to Illinois’ nursing home reimbursement model. As state representative, he was the chief House sponsor of Senate Bill 1304, which established a clear policy and guidelines for police body-worn cameras and police reform initiatives. He currently serves as chairman of the Illinois House Judiciary Criminal Committee and a member of the Business and Occupational Licenses, Elementary & Secondary Education; Curriculum and Policies, Higher Education, Transportation, Regulation and Roads and Revenue and Finance Committees.

“As a lawyer and legislator, Elgie’s knowledge of the intricacies behind local and state government policies will benefit a broad range of our clients, from Fortune 500 businesses to health care companies to non-profit organizations. We look forward to adding his Midwest expertise to our established national bench,” said David Ralston, chair of Foley’s Government & Public Policy Practice.

Prior to joining Foley, Cohen was a partner at Locke Lord.

Some U.S. companies are now paying a top hourly rate of $2,000 to partners at the country’s biggest law firms, according to a report on a survey released by BTI Consulting Group.

The report says the top rate of $2,000 an hour in 2015, up from $1,600 last year, represents a 25 percent one-year increase.

BTI conducted more than 300 independent, individual interviews with CLOs and general counsel at Fortune 1000 companies and large organizations.

The company said GCs pay the highest rates for:

• Bet-the-company IP work
• Enterprise level M&A related litigation
• Large-scale government investigation
• Defense against high-profile activist hedge funds

Read the article.