5/23/2017 ABA Business Law Section eNewsletter: Corporate Counsel Committee

http://apps.americanbar.org/buslaw/committees/CL240000pub/newsletter/201007/ 1/5

Leianne Crittenden,Co­Chair

Nicole Harris, Co­Chair

Newsletter of the ABA Business Law Section Committee on

  Corporate CounselAugust 2010

Message from the Co­Chairs

Annual Meeting Schedule

Featured Members  Amber Lee Williams & Kandace

Patton WatsonA Tale of Two 1L's 

Featured Articles  The Supreme Court's Bilski

Decision:Did Anything Change? 

  A New Front in Anti­BriberyEnforcement:US and UK Anti­Bribery 

  China's Anti­Monopoly Law:Experience and Lessons LearnedAfter Two Years 

  MoFo Tech+ :A Field Guide to IPOs 

  U.S. Supreme Court Rules inQuon:Employee Text Messages NotShielded from Employer Review 

Editorial Board:

Judith Kim    eNewsletter Editor    Direct Energy    404­759­6833

  Message from the Co­Chairs    Dear Corporate Counsel Committee Members,

Welcome to San Francisco! We are pleased to behosting the 2010 Annual Meeting in our hometown.As always, the meeting will be a busy one filled withgreat programs and catching up fellow members. 

The Committee Dinner on Friday evening at Yoshi'sJazz Club and Restaurant will be a special one.Yoshi's is known for great food (wine, non­alcoholicbeverages and transportation are also included in theticket price), amazing music (you can stay for the 10pm show) and wonderful ambiance. This will not bethe usual conference dining experience and we thinkyou will enjoy it. 

The location is also historic and reminds us of theimportance of the laws with which we all work.Yoshi's is located in the Fillmore District called the"Harlem of the West" where all the jazz happened inSF. Geographically, the Fillmore is currently adjacentto Japantown. The Fillmore developed as a jazzcenter because Japanese Americans were sent tointernment camps leaving the area open and AfricanAmericans who migrated West to work in the steelmills and other wartime jobs during World War IIneeded to move in somewhere. Now it is wonderful

that we can all celebrate, Yoshi's, jazz, the Fillmore and Japantown ­ together. 

There are several Committee Programs and Meetings. Please see the fullAnnual Meeting committee schedule below. 

The two CLE programs cover: (1) cloud computing­­software as a service and(2) the globalization of in­house counsel address present­day issues andchallenges for corporate counsel with any almost practice background. 

We will also have three Committee meetings : (1) In House Counsel EssentialToolkit publication update ­ open to all, you can get your name in print, (2) Allhands Committee meeting ­ open to all and (3) Committee leadership meeting ­open to the Committee's subcommittee chairs, vice chairs and co­chairs. 

In this issue, we have a variety of articles focusing on timely topics, including:recent U.S. Supreme Court case law, an introduction to initial public offerings(IPOs) and international developments on the anti­corruption front. 

As many of you are aware, the Committee has committed members who workyear round to update the In­House Counsel's Essential Toolkit (revised editionexpected in 2011). Our featured members article focuses on two long­timemembers, Kandace Watson and Amber Lee Williams, from Baker McKenzieand Walmart Stores, Inc., respectively. They make a great in house/outsidecounsel team. Perhaps you should team up, too. After reading the article,please be sure to check the link to the Tool Kit, if you have not had theopportunity to do so already. 

Please look for us at the meeting and say hello. We look forward to working withyou. 

Nicole Harris, Pacific Gas and Electric Company 

 

5/23/2017 ABA Business Law Section eNewsletter: Corporate Counsel Committee

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Leianne Crittenden, Oracle Corporation Co­Chairs, Corporate Counsel Committee Business Law Section of the American Bar Association 

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  Annual Meeting Schedule   The Committee on Corporate Counsel will sponsor or co­sponsor the followingprograms and events at the Annual Meeting in San Francisco:

Friday, August 6th8:00AM ­ 10:00AMProgram: SEC Disclosure Rules & Board of Director Diversity(co­sponsored with the Corporate Director Diversity Committee)Fairmont Hotel Venetian Room, Lobby Level 

Moderator: Nicole D. Harris, Corporate Counsel, Pacific Gas and Electric Company,San Francisco, CA Speakers:

Lissa L. Broome, Wachovia Professor of Banking Law and Director, Center forBanking and Finance, University of North Carolina School of Law, Chapel Hill,NCDonna Hamlin, Chief Executive Officer, Intrabond Capital, San Francisco, CAAnthony C. Jordan, Partner, StoneTurn Group LLP, Boston, MADavid Lee, Of Counsel, Gibson, Dunn & Crutcher LLP, Irvine, CA

At the end of 2009, the SEC approved rules effective 2010 that require enhanced proxystatement disclosures, including a requirement that public companies, for the first time,provide disclosure regarding board diversity. The panel will discuss what this rulemeans, how companies have addressed the issue, and provide insight on corporatedirector diversity. 

1:30PM ­ 2:30PMThe In­House Counsel's Essential Toolkit InterContinental Mark Hopkins HotelPine Room, California Street Level Domestic Dial­in: (866) 646­6488 International Dial­in: (707) 287­9583Conference Code: 8175975641 

2:30PM ­ 4:30PMProgram: If it's Tuesday it Must Be Belgium: Tips on the Basics to Havean Effective International Transaction Fairmont HotelPavilion, Lobby Level

Moderator: Judy Kim, FERC Attorney, Direct Energy, Houston, Texas

Speakers:

Beatrice Hamza Bassey, Partner, Hughes Hubbard & Reed, New York, NewYorkDavid Caron, William Maxeiner Distinguished Professor of Law, Berkeley,CaliforniaAnna Han, Professor of Law, University of Santa Clara, Santa Clara, CalifoniaTed Howes, Partner, McDermott Will & Emery, New York, New YorkJohn Yang, Director, Illinois Tool Works, Shanghai, China

This program will provide practical basic, starting with how to choose local counsel, towhat is different from our legal system (like how is litigation and dispute resolutionconducted?), to types of entities that can enter contracts under differing legal systems.What happens when an overseas deal needs to end or goes bad­­ what do you need toknow before you sign the documents? 

 

5/23/2017 ABA Business Law Section eNewsletter: Corporate Counsel Committee

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Saturday, August 7th10:00AM ­ 11:00AM Leadership Meeting ­ open to committee leadersInterContinental Mark Hopkins Hotel Pine Room, California Street Level Domestic Dial­in: (866) 646­6488 International Dial­in: (707) 287­9583 Conference Code: 8175975641 

11:00AM ­ 12:00PM General Meeting ­ open to all InterContinental Mark Hopkins HotelPine Room, California Street Level Domestic Dial­in: (866) 646­6488 International Dial­in: (707) 287­9583 Conference Code: 8175975641 

Monday, August 9th8:00AM ­ 10:00AMProgram: Head in the Clouds, Feet on the Ground: Cloud Computing,How In­house Counsel Can Get Ahead of the Clouds Fairmont HotelFrench Room, Lobby Level 

Moderator: Howie Wong, General Counsel, Toronto Housing Authority, Toronto, ON 

Speakers:

Robin J. Lee, Partner, Cooley, Palo Alto, CaliforniaJohn Moss, salesforce.com, San Francisco, CaliforniaJon A. Neiditz, Partner, Nelson Mullins Riley & Scarborough, Atlanta, GeorgiaSteven D. Young, Microsoft, Redmond, Washington

In­house counsel knows how to negotiate mainstream IT services (software licensing,operations & maintenance). To address the new challenge of remote online services,"cloud computing", learn from the experts on how to take advantage of the "clouds"without sacrificing your clients' privacy and security concerns. Also, hear howtraditional companies have taken a step­by­step approach to cloud computing.

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  Featured Members: Amber Lee Williams & Kandace Patton Watson

 

 

A Tale of Two 1L'sAmber and Kandace first met during their 1Lyear at the University of Texas at Austin Schoolof Law back in August 1995. Although Amberand Kandace started their legal careers in thevery same classroom, they took very differentcareer paths. Several years into their legalcareers, Amber and Kandace were able toreunite by working together on the ABACommittee on Corporate Counsel's first edition

of "The In­House Counsel's Essential Toolkit" published in 2007.They are currently working together on the second edition. 

More... 

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5/23/2017 ABA Business Law Section eNewsletter: Corporate Counsel Committee

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  Featured Articles   The Supreme Court's Bilski Decision: Did Anything Change?By: Mircea A. Tipescu and Michael P. Chu

General practice lawyers do not often focus on issues relating tothe long­established fundamentals of the patent law statute. Butover the past several months, the corporate world has beentransfixed on threshold issues relating to whether business­method types of inventions are truly patentable. Since the U.S.Court of Appeals for the Federal Circuit's State Street Bank casein 1998 confirmed the patentability of such inventions, many high­tech corporations, financial institutions, startups, and Web­basedcompanies have depended on these business­method patents toprotect their core businesses. 

More... 

A New Front in Anti­Bribery Enforcement: US and UK Anti­BriberyBy: John Kocoras and Brigid Breslin

The global battle against commercial bribery has advanceddramatically with the passage of the UK Bribery Act 2010 (BriberyAct). Following recent criticism, authorities in the United Kingdomappear eager to demonstrate with the Bribery Act that they are asserious about compliance as the United States has shown it iswith the Foreign Corrupt Practices Act (FCPA). Any multinationalcompany with operations in the United Kingdom or United Statesshould examine closely its compliance policies and procedures inan effort to avoid being one of the Bribery Act's earliest examplesor the FCPA's next catch. 

More... 

China's Anti­Monopoly Law: Experience and Lessons Learned After Two YearsBy: Henry (Litong) Chen, Alex An and Brian Fu

On 1 August 2008, China's Anti­Monopoly Law (AML) came intoforce. After two years' experience of China's first comprehensiveantitrust law, some important lessons have been learned, butsome key issues still remain unresolved. 

The AML adds another regulatory layer to the body of existinglaws that apply to trade in China. One major issue is the emergingtension between the AML and some of these other laws, inparticular the Anti­Unfair Competition Law (AUCL) and the PriceLaw. 

More... 

MoFo Tech+ : A Field Guide to IPOsFrom: Morrison & Foerster LLP

Life Will Find a Way—John Hammond, Jurassic Park (1997) 

 

5/23/2017 ABA Business Law Section eNewsletter: Corporate Counsel Committee

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It's amazing how many important ideas can be gleaned from aHollywood blockbuster. "Life will find a way"–or stated differently,you have to do what you have to do in order to survive, grow, andprosper–is just one of them. For technology companies intent onfinding the most reliable source of attractively priced equity capitalto grow and prosper, an initial public offering has become thealternative of choice. 

Now that doesn't mean that the capital markets always havebeen–or always will be–receptive to tech IPOs. In fact, marketwindows of opportunity tend to open and close with little advancenotice and with considerable frequency. But the fact is that year inand year out, for several decades, IPOs have been the financinggold standard for tech companies that aspire to grow. 

» Full Article (without graphics)» Full Article (with graphics from mofo.com) 

U.S. Supreme Court Rules in Quon: Employee Text Messages Not Shielded fromEmployer ReviewFrom: Morgan, Lewis & Bockius LL

In a much­anticipated opinion in the Quon matter, on June 17 theU.S. Supreme Court declined to set precedent on broad issues ofemployee privacy expectations in workplace communications.Instead, the unanimous Court ruled narrowly, reversing thedecision of the Ninth Circuit by holding that the review of anemployee's text messages sent using employer­issued electronicdevices did not, under the circumstances in that case, violatetraditional Fourth Amendment reasonable search standards. 

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Business Law Section: 312­988­5588 | Section Staff | businesslaw@abanet.org | www.ababusinesslaw.orgCopyright © 2010

A Tale of Two 1L’s By Amber Lee Williams & Kandace Patton Watson Amber and Kandace first met during their 1L year at the University of Texas at Austin School of Law back in August 1995. Although Amber and Kandace started their legal careers in the very same classroom, they took very different career paths. Several years into their legal careers, Amber and Kandace were able to reunite by working together on the ABA Committee on Corporate Counsel’s first edition of “The In-House Counsel’s Essential Toolkit” published in 2007. They are currently working together on the second edition. Kandace’s path Since I was 12 years old, I knew that I wanted to be a lawyer. If you dig through the archives of Elliot Middle School in Altadena you may find a photo of me when I joined the Young Lawyers of America Club. Back then, I never dreamed there were attorneys who could spend their entire careers without going to court. It was during a summer internship after my 2nd year of law school that I realized I did not want to be a trial lawyer. I had accepted a pro bono case for an indigent client and plead his case before an administrative law judge. I handled the case from beginning to end - conducting expert interviews, gathering evidence, drafting briefs, arguing orally and cross-examining witnesses. The judge awarded my client everything we requested – even the long-shots. My client was ecstatic – but, I realized that I wanted to spend my career negotiating win-win outcomes instead of lose-lose litigation. Although I was relieved to win for my client, the realization came over me that it would be far better for clients and the courts, if the parties could reach mutually agreeable resolutions before ever spending the time and resources for trial. So, I became interested in transactional work. I still remember my first international deal. It was around 1999 and I was an associate at Brobeck. A California-based biomedical device company had secured European investors. I had primary responsibility for preparing the documents, ensuring compliance with U.S. federal and state securities laws pertaining to non-U.S. investors, and other key deal points. I was nervous because I was unsure whether there would be language, cultural or insurmountable legal challenges or other unanticipated factors that might delay or prevent the financing from closing. In addition, knowing that top executives of international financial institutions and corporations would travel trans-Atlantic to sign the documents I had a primary role in preparing was surreal. When the executives and signatories arrived, I had to answer and address all of the on-the-spot questions about the documents being executed. As cool and calm as I attempted to appear externally, I could

barely contain my enthusiasm. When all of the documents were signed and collected, the wire confirmations were received, and the last person left the board room, only then was I able to mentally unwind. I was emotionally and physically exhausted, but beaming with the pride of knowing that the deal was done, and the client was happy. I am now a partner at Baker & McKenzie LLP and have been working on international transactions for more than a decade. As a deal lawyer, I thrive on complex transactions. Complex transactions can involve multiple U.S. states, multiple countries, and multiple personalities; there may be anywhere from 10 to 50 agreements, certificates, instruments and other documents that various parties must sign to properly document the transaction. It takes keen organization and attention to detail to ensure that each required document works harmoniously together. For me, nothing is more exciting than multi-jurisdictional deals that bring diverse people, cultures and countries together to form a unified business or humanitarian purpose. Knowing that the legal structure I create will form the foundation to fulfill my client’s vision is exhilarating. Over the years, these deals have ranged from U.S. venture capital investments in emerging growth Brazilian bio-fuel companies and Canadian investments in U.S. alternative energy and clean tech companies to mergers, acquisitions and post-acquisition legal entity integrations for retail and pharmaceutical conglomerates that involve North America, Asia Pacific, Latin America, Europe, the Middle East and Africa. As a U.S. born and bred attorney who speaks only English (fluently), I considered shying away from practicing law in the international arena. However, fluency is more than just speaking the local language. I have found it much more important to be fluent in the way I think, work and behave when advising clients on international matters. Knowing the local language has its advantages – especially if you need to catch a cab back to your hotel after a meeting in another country, but English is the language primarily used in international business. In global transactions, there is usually at least one team member from each party who is fluent in the local language and able to translate when necessary. Companies and investors are increasingly international in their operations and investments. They must leverage the safest, most cost-efficient locations for their products and services. As a trusted international legal advisor, I enable them to compete more effectively, by helping them navigate legal systems globally. Being an active member of the ABA, in particular having served as an Ambassador to the Section of Business Law, has given me access to top tier attorneys in all different disciplines that are more than willing to take a phone call to answer key legal issues in their areas of substantive expertise. It has been a wondeful way to stay on top of legal

developments in my areas of expertise and to assist me in expanding to new arenas. In addition, I have made new friends, reunited with old friends, published, and presented, all as a member of the ABA. Amber’s path I am an associate general counsel for Wal-Mart Stores, Inc. and practice in the area of regulatory compliance for the Walmart US business. My day-to-day activities include providing advice and counsel related to a broad spectrum of compliance-related issues, including licensing, weights and measures and financial services matters. I also work with business professionals on merchandising and compliance issues related to the company’s sales of alcohol, tobacco and firearms. In my capacity in the Compliance Division, I also have the opportunity to work with the compliance strategy and risk management team on risk assessments and work with compliance subject matter experts on compliance policies, standard operating procedures and training. Back in 1995 when I started law school at the University of Texas, and even at graduation in the spring of 1998, I could not have foreseen where my journey would take me. I knew from a very early age that I wanted to be an attorney and never wavered from that aspiration. I started picking out law schools and mapping out my vision for the future when I was in high school, which I imagined would include practicing at a law firm. But the actual experience of law school was different than what I expected and I figured out pretty quickly after I got there that I wanted a different type of career than what I had envisioned. The loss of my older brother during the summer after my second year of law school cemented me in the conviction that I would have to choose carefully to find the type of legal work I wanted to do in an environment that would develop and harness my talents and abilities. In-house practice has turned out to be the perfect fit for me. My first in-house position was as the assistant general counsel for an application service provider that specialized in convergent messaging technology and business communications. I came into an organization with a small legal team (the general counsel and me) that was preparing for an IPO and building a corporate infrastructure. Being a “go to” lawyer in a small legal department meant that I was able to gain broad exposure early in my career, including having a significant role in the company’s IPO, negotiating and drafting a broad range of commercial contracts, working on the company’s IP issues, and participating in the development and implementation of corporate policies. Most importantly, I realized the expansive capacity I had to learn, adapt and apply my legal skills in a dynamic business environment. It has been more than 9 years since I left my first in-house position and the foundation I developed in those critical formative years after law school have served me well and helped me, not only to attain other opportunities, but also to have the confidence and competence to perform in diverse corporate environments. My career transitions have allowed me to move from being one of only two attorneys at a small company to ultimately joining the incredible legal team at Walmart. While the organizations are vastly different, the goal of providing first-class legal services to the corporate client is

unchanging. The best part of being an in-house counselor for me is getting the opportunity to work collaboratively with business professionals to help them achieve their business goals. I still strive every day to be a “go to” lawyer who is viewed as a partner in the business. Active participation in the ABA Committee on Corporate Counsel has enhanced my professional life and continues to be very rewarding. My skills and network have broadened as a result of working on the “The In-House Counsel’s Essential Toolkit.” Engagement with the Committee has presented me the opportunity to make new friends, connect with old friends, and work with attorneys from around the country who do fascinating work in a variety of practice areas. The ABA is an infinitely helpful resource for practical legal information and creates opportunities for attorneys to develop meaningful professional relationships. Amber Lee Williams and Kandace Watson are co-chapter editors of the General Business Contracts volume of The In-House Counsel's Essential Toolkit. Together, as in house counsel and outside counsel, they have ensured that their team of authors summarized the information on point and addressed the needs of in house counsel. Their volume covers topics from consulting agreements to real property leases and manufacturing supply agreements. http://www.abanet.org/abastore/index.cfm?section=main&fm=Product. AddToCart&pid=5070553 Look for the revised edition of this practical guide and ABA book bestseller in the next year.

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The Supreme Court’s Bilski Decision: Did Anything Change?

By Mircea A. Tipescu and Michael P. Chu BRINKS HOFER GILSON & LIONE, Chicago

General practice lawyers do not often focus on issues relating to the long-established fundamentals of the patent law statute. But over the past several months, the corporate world has been transfixed on threshold issues relating to whether business-method types of inventions are truly patentable. Since the U.S. Court of Appeals for the Federal Circuit’s State Street Bank case in 1998 confirmed the patentability of such inventions, many high-tech corporations, financial institutions, startups, and Web-based companies have depended on these business-method patents to protect their core businesses. This year, the Supreme Court took another look at the issue. On June 28, 2010, the Court handed down its highly anticipated Bilski decision. See Bilski v. Kapos (2010). In its first Section 101 decision in 29 years, the Court reaffirmed the vitality of its precedents on what constitutes a patentable “process” and rejected categorical limitations for patent eligibility of a process. More specifically, the Court unanimously held that the machine-or-transformation test is not the sole test for determining patent eligibility of a process and, in 5-4 split, upheld the patentability of business method patents. Section 101 of the Patent Act defines the term “process” as “process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.” In Bilski, although it rejected a categorical exclusion for business methods patents, the Federal Circuit pronounced the machine-or-transformation test as the definitive test for patent-eligibility of a process. See In re Bilski (Fed. Cir. 2008). Under this test, a claimed process or method is patent-eligible if either: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. Bilski’s patent application claimed a method of hedging risks in commodities trading. The claimed method admittedly was not tied to any specific machine or apparatus, and included steps of (a) initiating transactions between a commodity provider and consumers of a commodity at a fixed rate corresponding to a risk position of said consumer, (b) identifying market participants for the commodity having a counter-risk position to those consumers, and (c) initiating transactions between the commodity provider and the market participants to balance the risk position of the consumer transactions. The Federal Circuit found that the claimed method covers the exchange of only options. Because options are merely “legal rights to purchase some commodity,” according to the court, the claimed method does not transform any physical object or substance (or an electronic signal representative of any physical object or substance). Therefore, the court ruled that Bilski’s

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claimed method of hedging risks in commodities trading failed the machine-or-transformation test and was not a patent-eligible “process.” In the wake of the Federal Circuit’s decision in Bilski, many observers expected that the machine-or-transformation test would restrict the scope of patentable subject matter, especially for software patents, business method patents, and pharmaceutical patents. The Supreme Court, however, unanimously disagreed with the Federal Circuit that the machine-or-transformation test is the sole test for determining whether an invention is a patent-eligible “process” under Section 101. The Court, led by Justice Kennedy, noted that requiring a patent-eligible “process” under §101to be tied to a machine or to transform an article violated statutory interpretation principles. The Court also explained that it never intended for the machine-or-transformation test to be an exhaustive or exclusive test. See Gottschalk v. Benson, 409 U.S. 63, 70 (1972); Parker v. Flook, 437 U.S. 504, 588-89 (1978). Nonetheless, the Court acknowledged that the “machine or transformation” test provides “a useful and important clue, an investigative tool for determining whether some claimed inventions are processes under §101.” Justice Kennedy’s opinion, which was joined in full by Chief Justice Roberts and Justices Thomas and Alito, further recognized the concerns of many in the patent community that the machine-or-transformation test “would create uncertainty as to the patentability of [other technologies in the Information Age beyond business methods, including] software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.” Since innovation may advance in unexpected ways, the patent laws leave room for new inquiries in response to new technologies, wrote Justice Kennedy. He was clear, however, that nothing in the opinion should be read as taking a position on the patentability of any of these technologies. A majority of the Court also declined invitations to exclude specific categories of technology - i.e., business methods - from patent protection. Instead, the majority held that the plain meaning of the term “method” in the definition for “process” in the patent statute precludes an interpretation of "process" that categorically excludes business methods. Citing other portions of the statute, the majority noted that a business method is simply one kind of “method,” which is patent-eligible under Section 101. The majority reasoned that holding business methods categorically not patentable-eligible would render other sections of the patent statute meaningless. This is not to say that the Court embraced business methods wholeheartedly. Justice Kennedy’s opinion conceded that some sort of limiting criteria for business methods patents may be acceptable because “some business method patents raise special problems in terms of vagueness and suspect validity.” The Court even seemed to encourage the Federal Circuit to develop other limiting criteria for business methods patents beyond the machine-or-transformation test:

It may be that the Court of Appeals thought it needed to make the machine or transformation test exclusive precisely because its case law had not adequately identified less extreme means of restricting business method patents, including (but not limited to) application of our opinions in Benson, Flook, and Diehr. In disapproving an exclusive machine or transformation test, we by no means foreclose the Federal Circuit’s

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development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text. Op. at 16.

And in a 47-page concurring opinion, Justice Stevens, joined by Justices Ginsburg, Breyer and Sotomayor, took great pains to argue that business methods are not patent-eligible subject matter. Justice Stevens based his argument on the historical development of patentable subject matter in the patent laws. He also viewed business methods patents as a monopoly on “the basic tools of commercial work … [and] business innovation,” which is likely to stifle rather than motivate both innovation and competition. In the end, the Court held that there was no need to define what constitutes a patent-eligible “process” beyond pointing to the definition of the term provided in Section 100(b) and looking to other Supreme Court precedent such as Gottschalk v. Benson (1972), Parker v. Flook (1978) and Diamond v. Diehr (1981) for the traditional exceptions to patent-eligibility: “laws of nature, physical phenomena, and abstract ideas.” Following this precedent, the Court held that the specific claims at issue were not patent-eligible because they claimed an abstract idea. The Court stated, however, that the Federal Circuit was free to develop of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its opinion. Justice Breyer’s short 4-page concurring opinion, joined by Justice Scalia, emphasized that the entire Court agreed that the claims at issue were “unpatentable abstract ideas.” He further noted four points of agreement between all nine justices: (1) that Section 101 is not unlimited; (2) that the machine-or-transformation test remains a helpful "clue" to patent eligibility; (3) that machine-or-transformation is not the sole test for determining patentability; and (4) that the Court's holding should not be read as an endorsement of the Federal Circuit's “useful, concrete and tangible result” test as set out in State Street. Undoubtedly, corporate observers breathed a collective sigh of relief as the Court recognized the importance of new and developing technologies, refusing to limit patent-eligibility to the narrow machine-or-transformation test. The Court’s opinion reaffirmed its precedent relating to Section 101 and ensured that a flexible analysis of patentable subject matter could be applied. Indeed, given the fact that the Court did not specify any further guidelines on how and when processes are patentable, the door remains open for the Federal Circuit to define additional tests relating to Section 101 in the future. For the time being, however, the machine-or-transformation test is certainly not dead. At the end of the day, it remains to be seen whether or not the decision will have any real effect on the scope or validity of business method patents. Mircea A. Tipescu is a senior associate and Michael P. Chu is a partner with the Chicago office of Brinks Hofer Gilson & Lione, a firm that specializes in intellectual property law.

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A New Front in Anti-Bribery Enforcement: US and UK Anti-Bribery

By John Kocoras and Brigid Breslin

The global battle against commercial bribery has advanced dramatically with the passage of the UK Bribery Act 2010 (Bribery Act). Following recent criticism, authorities in the United Kingdom appear eager to demonstrate with the Bribery Act that they are as serious about compliance as the United States has shown it is with the Foreign Corrupt Practices Act (FCPA). Any multinational company with operations in the United Kingdom or United States should examine closely its compliance policies and procedures in an effort to avoid being one of the Bribery Act’s earliest examples or the FCPA’s next catch.

US FCPA

The FCPA, enacted in the United States in 1977, generally prohibits “corrupt” payments to foreign officials for the purpose of obtaining or keeping business, including payments made by a company’s third-party agents in foreign countries. While such payments are generally exchanged outside the United States, US lawmakers have attempted to extend the FCPA’s reach as far as they can. The FCPA applies to US citizens, nationals and residents, as well as corporations that have securities registered in the United States or which make certain securities disclosures in the United States, and corporations and associations organised under a US state’s law or whose principal place of business is in the United States. It also encompasses the conduct of foreign subsidiaries or foreign agents of US companies where the US companies authorise, direct or control the activity.

In addition to its anti-bribery provisions, the FCPA contains accounting provisions that generally require companies with securities listed in the United States to keep books and records that reflect transactions accurately, and to maintain an adequate system of internal accounting controls. The accounting provisions are sometimes invoked where authorities face significant challenges in proving that someone actually paid a bribe, but where they have proof that the books are purposefully inaccurate.

The Anti-Bribery Convention

In an effort to enhance global cooperation in combating bribery, the Organisation for Economic Co-operation and Development’s (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention) came into force in 1997. The Anti-Bribery Convention requires its 38 signatory nations, including the United States and United Kingdom, to enact and enforce laws prohibiting international commercial bribery.

In October 2008, the OECD’s Working Group on Bribery issued a report stating it was “disappointed and seriously concerned” with the United Kingdom’s compliance with the Anti-Bribery Convention. While the report noted that the United Kingdom had made some progress in combating bribery, the Working Group emphasised that it “strongly regrets the

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uncertainty about the UK’s commitment to establish an effective corporate liability regime” and urged the United Kingdom “to adopt appropriate legislation as a matter of high priority.”

UK Bribery Act 2010

The United Kingdom responded with aggressive legislation that in many significant respects reaches further than the FCPA.

The Bribery Act provides criminal penalties against individuals and corporations for offering, making, or requesting or receiving a financial or other advantage in return for the improper performance of a public or private business activity. It also imposes criminal liability on corporations for failing to prevent such bribes, where the bribes are made or received by a person performing services for the corporation, including third-party agents. Notably, however, the Bribery Act provides that a company can avoid liability if it had in place “adequate procedures” designed to prevent individuals associated with the company from paying bribes.

While the UK Bribery Act does not contain separate accounting provisions, in many respects it imposes greater anti-bribery restrictions than the FCPA. It applies to any corporation doing business in the United Kingdom that pays a bribe overseas, even if the bribe does not otherwise involve activity in the United Kingdom. Additionally, the Bribery Act reaches bribes that are intended only to influence private actors as well as bribes to influence public officials. Moreover, the Bribery Act makes it a crime for a corporation to fail to prevent a bribe by a person performing services for the corporation, unless the company had in place adequate procedures designed to prevent bribes. Any adequate procedures defence is certainly going to be delicate however; a company relying on this defence to escape liability will have to explain why the adequate procedures failed to prevent a bribe.

The OECD has heaped praise on the United Kingdom for the Bribery Act, stating that the United Kingdom has sent “a strong message of its commitment to fight against bribery…The UK is now well placed to help lead this fight.”

If enforcement efforts are as strong as the Bribery Act’s terms, the United Kingdom will be playing a powerful role in fighting bribery and we will likely see significant activity affecting a broad range of companies soon after it comes into force in April 2011. Similar to FCPA enforcement, those efforts are likely to focus on industries where contact with public officials, including officials of state-owned enterprises, is common. Key industries will likely include energy, defence, health care, pharmaceuticals and medical devices, telecommunications and real estate.

Any multinational company operating in the United States or United Kingdom would be wise to focus on anti-bribery policies, procedures, and training and deliver pointed communications from management condemning bribery.

[box out]:

US Foreign Corrupt Practices Act and UK Bribery Act

Key Similarities Key Differences

The FCPA and Bribery Act provide criminal The FCPA requires companies listed in the

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penalties for individuals and companies involved in corrupt payments overseas to obtain or maintain business.

United States to maintain accurate books and records. The Bribery Act does not contain accounting provisions.

The FCPA and Bribery Act are designed to reach conduct by companies that are based outside the United States or United Kingdom, respectively, but are linked to the United States or United Kingdom.

The Bribery Act reaches foreign payments by any company doing any business in the United Kingdom. The FCPA reaches foreign payments by companies only with securities registered in the United States or making certain disclosures there, companies organised under a US state law, or companies with a principal place of business in the United States.

An unlawful bribe under the FCPA or Bribery Act need not necessarily be a monetary payment.

The Bribery Act reaches bribes exclusively within the private sector that are not designed to affect public officials; the FCPA does not.

Corporate liability for violations of the FCPA and Bribery Act can be based on payments made by third-parties for the benefit of the corporation.

The Bribery Act makes it a crime for a company merely to fail to prevent a person associated with it from paying an illegal bribe; the FCPA does not.

Essential components for avoiding or reducing liability for violations include appropriate policies, procedures and training.

The Bribery Act provides expressly an “adequate procedures” defence for an organisation accused of failing to prevent a bribe. The FCPA does not include similar corporate defences.

[Bios]:

John Kocoras is a partner based in the Firm’s Chicago office. John, a former managing director of a global investigations company and US prosecutor, focuses his practice on internal investigations, white-collar criminal defence issues including FCPA matters and complex litigation. He can be contacted on jkocoras@mwe.com or at +1 312 984 7688.

Brigid Breslin is a partner in the Firm's London office, where her practice focuses on M&A and private equity. She also advises on a wide range of corporate and finance transactions. She can be contacted on bbreslin@mwe.com or at +44 20 7577 3487.

China’s Anti-Monopoly Law: Experience and Lessons Learned After Two Years

By Henry (Litong) Chen, Alex An and Brian Fu

On 1 August 2008, China’s Anti-Monopoly Law (AML) came into force. After two years’ experience of China’s first comprehensive antitrust law, some important lessons have been learned, but some key issues still remain unresolved.

The AML adds another regulatory layer to the body of existing laws that apply to trade in China. One major issue is the emerging tension between the AML and some of these other laws, in particular the Anti-Unfair Competition Law (AUCL) and the Price Law.

In China, an “exclusive sales arrangement”—an arrangement where a seller provides a certain economic benefit in exchange for the counterparty’s promise not to sell a competitor’s product—may trigger the application of both the AML and the AUCL. If the seller is a business operator with a dominant market position (DMP operator), an exclusive sales arrangement may be considered an abusive action under Article 17.4 of the AML because it restricts the counterparty to conducting transactions only with the DMP operator or businesses designated by the DMP operator. Similar compliance concerns may be triggered under the AUCL and provincial anti-unfair competition regulations, which view an exclusive sales arrangement as commercial bribery.

The AML prohibits a DMP operator from unjustifiably restricting a counterparty from conducting a transaction only with the DMP operator or with other designated business operators. The word “unjustifiably” indicates that a “rule of reason” standard should be used to evaluate the DMP operator’s conduct before issuing a decision. Under the AUCL and related provincial level regulations, however, there is no such balancing test and an exclusive sales arrangement is often construed to be a per se violation. Also, defences that might be available under the AML would not be applicable to the cases investigated under the AUCL. The enforcement authorities (such as the Administrations for Industry and Commerce) would thus assess the legality of such arrangements according to their own views of whether the arrangements fall under the AML or AUCL.

Criminal Liability

Article 52 of the AML provides for criminal liability for certain serious instances of obstruction of justice of a governmental investigation, such as refusing to provide related materials and information; providing fraudulent materials or information; concealing, destroying or removing evidence; and refusing or obstructing the investigation in other ways. The AML does not, however, provide for criminal liability for price fixing. As a result, the governmental authorities must “borrow” other criminal law provisions to impose criminal liability in incidences of price fixing.

In January 2010, companies in Liuzhou and Nanning colluded to fix prices for rice powder. Although the AML does not impose criminal sanctions for this conduct, the companies were fined and individuals arrested under the criminal provisions of Article 226 of the Criminal

Law (1997), which prohibits anyone from forcing others to buy or sell goods or services. Companies and individuals that engage in serious antitrust violations may therefore be subject to criminal prosecution in China, albeit not under the AML.

Protecting Competition

The question still remains whether the AML protects “competition” or individual competitors. The AML purports to protect “fair market competition” and uphold “the interests of consumers and social public interests.” During the legislative process, whether or not the AML should protect the competitors specifically (i.e., business operators) was hotly debated. In the end, no clause was included to this effect but, in practice, some of the enforcement authorities have nonetheless taken the view that protecting competitors is part of their enforcement mission under the AML.

For example, in 2008, the Coca-Cola Company moved to expand its operations in the fast-growing Chinese beverage market with a US$2.5 billion bid for the major Chinese juice maker, China Huiyuan Juice Group Ltd. The Ministry of Commerce (MOFCOM) blocked the acquisition. In its decision, MOFCOM stated that Coca-Cola’s acquisition of Huiyuan would allow Coca-Cola to leverage its dominant position in the carbonated soft drinks market into the fruit juice market and bring two leading Chinese fruit juice brands under common control, thereby threatening to impede the future growth of smaller Chinese fruit juice companies. MOFCOM’s decision was widely criticised as anticompetitive because it protected small and medium-sized enterprises, which is not mandated by the AML.

Abuse of Administrative Powers

Although Chapter 5 of the AML prohibits the abuse of administrative powers to eliminate or restrict competition, it seems that the Chinese Government lacks the will to enforce this important provision. On 5 June 2009, the State Administration for Industry & Commerce (SAIC) issued procedural regulations (the Regulations) to address this Chapter. Notwithstanding the clear mandate under Chapter 5, the Regulations provide that the SAIC does not have the power to enforce the AML against a governmental agency or public affairs organisation that abuses administrative power. Rather, the SAIC and its local branches can only make “suggestions” to government agencies about government conduct that may appear to be abusive practices as defined by the AML, leaving it to the government agency itself to take corrective action. This regulatory landscape means that government agencies and administrative organisations will become de facto AML enforcers, interpreting and applying the relevant provisions of the AML. It also produces a situation where government agencies are responsible for policing their own conduct, which gives rise inevitably to potential conflicts of interest. It therefore remains to be seen whether this pluralistic regulatory regime will result in an effective application of the AML to curb the abuse of administrative power.

In some areas, however, the enforcement authorities have exhibited an activist enforcement agenda under the AML. This is illustrated by MOFCOM’s October 2009 conditional approval of the merger between Panasonic Corp. and SANYO Electronic Co., Ltd. This is the first time the Chinese competition authorities have required divestitures outside of China in a transaction involving two non-Chinese businesses. The closing of this transaction was subject to clearance by regulatory authorities around the world, but the conditions imposed on the merging parties by MOFCOM under the AML were more severe than those of other international regulatory bodies and included extra-territorial divestiture requirements.

Comment

When the AML came into effect, there was considerable uncertainty as to how it would be applied in practice by the Chinese enforcement authorities. After two years, the basic contours of Chinese enforcement policy under the AML are beginning to emerge and perhaps the most important lesson to date is that, at least as applied in the private sector, the Chinese authorities are committed to aggressive enforcement of the new law. Companies with operations in China need to take this important new reality into account in managing their business.

[Bios]:

Henry (Litong) Chen, the Commissioner of the Economic Committee of All China Lawyers' Association, is a partner of MWE China Law Offices based in Shanghai. His broad range of experience for both Chinese and international clients includes arbitration, domestic litigation, compliance with the Chinese Anti-Monopoly Law, and antitrust filings. Henry can be contacted on + 86 21 6105 0586 or at henrychen@mwechinalaw.com.

Alex An is an associate of MWE China Law Offices based in Shanghai. Alex advises on aspects of antitrust, foreign direct investment, M&A and general corporate affairs in China. Alex can be contacted on + 86 21 6105 0595 or at aan@mwechinalaw.com.

Brian Fu is an associate of MWE China Law Offices based in Shanghai. Brian focuses his practice on various matters in the following areas of law: corporate, compliance, antitrust, banking & finance, real estate and litigation. Brian can be contacted on + 86 21 6105 0560 or at bfu@mwechinalaw.com.

 

MoFo Tech+ A Field Guide to IPOs

Life Will Find a Way —John Hammond, Jurassic Park (1997) It’s amazing how many important ideas can be gleaned from a Hollywood blockbuster. “Life will find a way”—or stated differently, you have to do what you have to do in order to survive, grow, and prosper—is just one of them. For technology companies intent on finding the most reliable source of attractively priced equity capital to grow and prosper, an initial public offering has become the alternative of choice. Now that doesn’t mean that the capital markets always have been—or always will be—receptive to tech IPOs. In fact, market windows of opportunity tend to open and close with little advance notice and with considerable frequency. But the fact is that year in and year out, for several decades, IPOs have been the financing gold standard for tech companies that aspire to grow. Over time, alternatives to IPOs have arisen and many tech companies have elected to stay private longer, often with the assistance of venture capital and private equity firms. M&A opportunities also can look very attractive to tech companies that cannot go public and either have outgrown—or worn out their welcome with—their existing financing sources. Despite the existence of alternatives, most tech companies will, when opportunity knocks, elect to go public. So, even if the knock is occasionally inaudible, it’s worth thinking about how best to prepare for an IPO. THE OFFERING PROCESS The public offering process is divided into three periods: The pre-filing period between determining to proceed with a public offering and the actual SEC filing of the registration statement; the company is in the “quiet period” and subject to potential limits on public disclosure relating to the offering. The waiting or pre-effective period between the SEC filing date and the effective date of the registration statement; during this period, the company may make oral offers, but may not enter into binding agreements to sell the offered security. And the post-effective period between effectiveness and completion of the offering. The Registration Statement A registration statement contains the prospectus, which is the primary selling document, as well as other required information, written undertakings of the issuer and the

signatures of the issuer and the majority of the issuer’s directors. It also contains exhibits, including basic corporate documents and material contracts. U.S. companies generally file a registration statement on Form S-1. Most non-Canadian foreign private issuers use a registration statement on Form F-1, although other forms may be available. There are special forms available to certain Canadian companies. The Prospectus The prospectus describes the offering terms, the anticipated use of proceeds, the company, its industry, business, management and ownership, and its results of operations and financial condition. Although it is principally a disclosure document, the prospectus also is crucial to the selling process. A good prospectus sets forth the investment proposition. As a disclosure document, the prospectus functions as an “insurance policy” of sorts in that it is intended to limit the issuer’s and underwriters’ potential liability to IPO purchasers. If the prospectus contains all SEC-required information, includes robust risk factors that explain the risks that the company faces, and has no material misstatements or omissions, investors will not be able to recover their losses in a lawsuit if the price of the stock drops following the IPO. A prospectus should not include “puffery” or overly optimistic or unsupported statements about the company’s future performance. Rather, it should contain a balanced discussion of the company’s business, along with a detailed discussion of risks and operating and financial trends that may affect its results of operations and prospects. SEC rules set forth a substantial number of specific disclosures required to be made in the prospectus. In addition, federal securities laws, particularly Rule 10b-5 under the Securities Exchange Act of 1934, require that documents used to sell a security contain all the information material to an investment decision and do not omit any information necessary to avoid misleading potential investors. Federal securities laws do not define materiality; the basic standard for determining whether information is material is whether a reasonable investor would consider the particular information important in making an investment decision. That simple statement is often difficult to apply in practice. An issuer should be prepared for the time-consuming drafting process, during which the issuer, investment bankers, and their respective counsel work together to craft the prospectus disclosure. The Pre-Filing Period The pre-filing period begins when the company and the underwriters agree to proceed with a public offering. During this period, key management personnel will generally make a series of presentations covering the company’s business and industry, market opportunities, and financial matters. The underwriters will use these presentations as an opportunity to ask questions and establish a basis for their “due diligence” defense.

From the first all-hands meeting forward, all statements concerning the company should be reviewed by the company’s counsel to ensure compliance with applicable rules. Communications by an issuer more than 30 days prior to filing a registration statement are permitted as long as they do not reference the securities offering. Statements made within 30 days of filing a registration statement that could be considered an attempt to pre-sell the public offering may be considered an illegal prospectus, creating a “gun-jumping” violation. This might result in the SEC’s delaying the public offering or requiring prospectus disclosures of these potential securities law violations. Press interviews, participation in investment banker-sponsored conferences, and new advertising campaigns are generally discouraged during this period. In general, at least four to six weeks will pass between the distribution of a first draft of the registration statement and its filing with the SEC. To a large extent, the length of the pre-filing period will be determined by the amount of time required to obtain the required financial statements. The Waiting Period Responding to SEC Comments on the Registration Statement The SEC targets 30 calendar days from the registration statement filing date to respond with comments. It is not unusual for the first SEC comment letter to contain a significant number of comments that the issuer must respond to both in a letter and by amending the registration statement. After the SEC has provided its initial set of comments, it is much easier to determine when the registration process is likely to be completed and the offering can be made. In most cases, the underwriters prefer to delay the offering process and to avoid distributing a preliminary prospectus until the SEC has reviewed at least the first filing and all material changes suggested by the SEC staff have been addressed. Preparing the Underwriting Agreement, the Comfort Letter, and Other Documents During the waiting period, the company, the underwriters and their counsel, and the company’s independent auditor will negotiate a number of agreements and other documents, particularly the underwriting agreement and the auditor’s “comfort letter.” The underwriting agreement is the agreement pursuant to which the company agrees to sell, and the underwriters agree to buy, the shares and then sell them to the public; until this agreement is signed, the underwriters do not have an enforceable obligation to acquire the offered shares. The underwriting agreement is not signed until the offering is priced. In the typical IPO, the underwriters will have a “firm commitment” to buy the shares once they sign the underwriting agreement. Underwriters’ counsel will submit the underwriting agreement, the registration statement, and other offering documents for review to the Financial Industry Regulatory Authority

(FINRA), which is responsible for reviewing the terms of the offering to ensure that they comply with FINRA requirements. An IPO cannot proceed until the underwriting arrangement terms have been approved by FINRA. In the “comfort letter,” the auditor affirms (1) its independence from the issuer, and (2) the compliance of the financial statements with applicable accounting requirements and SEC regulations. The auditor also will note period-to-period changes in certain financial items. These statements follow prescribed forms and are usually not the subject of significant negotiation. The underwriters will also usually require that the auditor undertake certain “agreed-upon” procedures in which it compares financial information in the prospectus (outside of the financial statements) to the issuer’s accounting records to confirm its accuracy. Marketing the Offering During the waiting period, marketing begins. The only written sales materials that may be distributed during this period are the preliminary prospectus and additional materials known as “free writing prospectuses,” which must satisfy specified SEC requirements. While binding commitments cannot be made during this period, the underwriters will receive indications of interest from potential purchasers, indicating the price they would be willing to pay and the number of shares they would purchase. Once SEC comments are resolved, or it is clear that there are no material open issues, the issuer and underwriters will undertake a two- to three-week “road show,” during which company management will meet with prospective investors. Once SEC comments are cleared and the underwriters have assembled indications of interest for the offered securities, the company and its counsel will request that the SEC declare the registration statement “effective” at a certain date and time, usually after the close of business of the U.S. securities markets on the date scheduled for pricing the offering. The Post-Effective Period Once the registration statement has been declared effective and the offering has been priced, the issuer and the managing underwriters execute the underwriting agreement and the auditor delivers the final comfort letter. This occurs after pricing and before the opening of trading on the following day. The company then files a final prospectus with the SEC that contains the final offering information. On the third or fourth business day following pricing, the closing occurs, the shares are issued, and the issuer receives the proceeds. The closing completes the offering process. Then, for the following 25 days, aftermarket sales of shares by dealers must be accompanied by the final prospectus or a notice with respect to its availability. If during this period there is a material change that would make the prospectus misleading, the company must file an amended prospectus.

ADVANCE PLANNING Most companies must make legal and operational changes before proceeding with an IPO. A company cannot wait to see if its IPO is likely to be successful prior to implementing most of these changes. Many corporate governance matters, federal securities law requirements (including Sarbanes-Oxley) as well as applicable securities exchange requirements must be met when the IPO registration statement is filed, or the issuer must commit to satisfy them within a set time period. A company proposing to list securities on an exchange should review differing governance requirements of each exchange, as well as their respective financial listing requirements before determining which exchange to choose. An issuer must also address other corporate governance matters, including board structure, committees and member criteria, related party transactions, and director and officer liability insurance. The company should undertake a thorough review of its compensation scheme for its directors and officers, as well, particularly its use of equity compensation. Primary and Secondary Offerings An IPO may consist of the sale of newly issued shares by the company (a “primary” offering), or a sale of already issued shares owned by shareholders (a “secondary” offering), or a combination of these. Underwriters may prefer a primary offering because the company will retain all of the proceeds to advance its business. However, many IPOs include secondary shares, either in the initial part of the offering or as part of the 15% over-allotment option granted to underwriters. Venture capital and private equity shareholders view a secondary offering as their principal realization event. An issuer must consider whether any of its shareholders have registration rights that could require the issuer to register shareholder shares for sale in the IPO. Cheap Stock “Cheap stock” describes options granted to employees of a pre-IPO company during the 18-24 months prior to the IPO where the exercise price is deemed (in hindsight) to be considerably lower than the fair market value of the shares at grant date. If the SEC determines (during the comment process) that the company has issued cheap stock, the company must incur a compensation expense that will have a negative impact on earnings. The earnings impact may result in a significant one-time charge at the time of the IPO as well as going-forward expenses incurred over the option vesting period. In addition, absent certain limitations on exercisability, an option granted with an exercise price that is less than 100% of the fair market value of the underlying stock on the grant date will subject the option holder to an additional 20% tax pursuant to Section 409A of the Code. The dilemma that a private company faces is that it is unable to predict with certainty the eventual IPO price. A good-faith pre-IPO fair market value analysis can yield different

conclusions when compared to a fair market value analysis conducted by the SEC in hindsight based on a known IPO price. There is some industry confusion as to the acceptable method for calculating the fair market value of non-publicly traded shares and how much deviation from this value is permitted by the SEC. Companies often address this “cheap stock” concern by retaining an independent appraiser to value their stock options. However, it now appears that most companies are using one of the safe-harbor methods for valuing shares prescribed in the Section 409A regulations. Governance and Board Members A company must comply with significant corporate governance requirements imposed by the federal securities laws and regulations and the regulations of the applicable exchanges, including with regard to the oversight responsibilities of the board of directors and its committees. A critical matter is the composition of the board itself. All exchanges require that, except under limited circumstances, a majority of the directors be “independent” as defined by both the federal securities laws and regulations and exchange regulations. In addition, boards should include individuals with appropriate financial expertise and industry experience, as well as an understanding of risk management issues and public company experience. A company should begin its search for suitable directors early in the IPO process even if it will not appoint the directors until after the IPO is completed. The company can turn to its large investors as well as its counsel and underwriters for references regarding potential directors. THE UNDERWRITER’S ROLE A company will identify one or more lead underwriters that will be responsible for the IPO. A company chooses an underwriter based on its industry expertise, including the knowledge and following of its research analysts, the breadth of its distribution capacity, and its overall reputation. A company should consider the underwriter’s commitment to the sector and its distribution strengths. For example, does the investment bank have a particularly strong research distribution network, or is it focused on institutional distribution? Is its strength domestic, or does it have foreign distribution capacity? The company may want to include a number of co-managers in order to balance the underwriters’ respective strengths and weaknesses. A company should keep in mind that underwriters have at least two conflicting responsibilities—to sell the IPO shares on behalf of the company and to recommend to potential investors that the purchase of the IPO shares is a suitable and a worthy investment. In order to better understand the company—and to provide a defense in case the underwriters are sued in connection with the IPO—the underwriters and their counsel are likely to spend a substantial amount of time performing business, financial, and legal due diligence in connection with the IPO, and making sure that the prospectus and any other offering materials are consistent with the information provided. The underwriters will market the IPO shares, set the price (in consultation with the company) at which the shares will be offered to the public and, in a “firm commitment” underwriting, purchase the shares from the company and then re-sell them to investors. In order to ensure an

orderly market for the IPO shares, after the shares are priced and sold, the underwriters are permitted in many circumstances to engage in certain stabilizing transactions to support the stock. FINANCIAL REPORTING AND ACCOUNTING The IPO registration statement must include audited financial statements for the last three fiscal years; financial statements for the most recent fiscal interim period, comparative with interim financial information for the corresponding prior fiscal period (may or may not be audited depending on the circumstances); and income statement and condensed balance sheet information for the last five years (the earliest two years may be derived from unaudited financial statements) and interim periods presented. Early on, the issuer should identify any problems associated with providing the required financial statements in order to seek necessary accommodation from the SEC. These statements must be prepared in accordance with U.S. GAAP, as they will be the source of information for “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A). The SEC will review and comment on the financial statements and the MD&A. The SEC’s areas of particular concern are: • revenue recognition • business combinations • segment reporting • financial instruments • impairments of all kinds • deferred tax valuation allowances • compliance with debt covenants, fair value, and loan losses. An issuer will not be required to include either a management’s report on its internal control over financial reporting or an auditor’s report on such internal control until the second annual report following its IPO. SEC COMMENTS An integral part of the IPO process is the SEC’s review of the registration statement. Once the registration statement is filed, a team of SEC staff members is assigned to review the filing. The team consists of accountants and lawyers, including examiners and supervisors. The SEC’s objective is to assess the company’s compliance with its registration and disclosure rules. The SEC review process should not be viewed as a “black box” where filings go in and comments come out—rather, as with much of the IPO process, the relationship with the SEC is a collaborative process. The Process

The SEC’s principal focus during the review process is on disclosure. In addition to assessing compliance with applicable requirements, the SEC considers the disclosures through the eyes of an investor in order to determine the type of information that would be considered material. The SEC’s review is not limited to just the registration statement. The staff will closely review websites, databases, and magazine and newspaper articles, looking in particular for information that the staff thinks should be in the prospectus or that contradicts information included in the prospectus. The review process is time-consuming. While there was a time when the review process could be completed in roughly a couple of months, now, given the length of the prospectus and the complexity of the disclosure, it can take three to five months. This depends on the complexity of the company’s business and the nature of the issues raised in the review process. Initial comments on Form S-1 are provided in about 30 days—depending on the SEC’s workload and the complexity of the filing, the receipt of first-round comments may be sooner or later. The initial letter typically runs about 50 to 75 comments, with a majority of the comments addressing accounting issues. The company and counsel will prepare a complete and thorough response. In some instances, the company may not agree with the SEC staff’s comment, and may choose to schedule calls to discuss the matter with the staff. The company will file an amendment revising the prospectus, and provide the response letter along with any additional information. The SEC staff generally tries to address response letters and amendments within 10 days, but timing varies considerably. Frequent Areas of Comment It is easy to anticipate many of the matters that the SEC will raise in the comment process. The SEC makes the comment letters and responses from prior reviews available on its website, so it is possible to determine the most typical comments raised during the IPO process. Overall, the SEC staff looks for a balanced, clear presentation of the information required in the registration statement. Some of the most frequent comments raised by the SEC staff on disclosure, other than the financial statements, include: • Front cover and gatefold: On the theory that “a picture is worth a thousand words,” does the artwork present a balanced presentation of the company’s business, products, or customers? • Prospectus summary: Is the presentation balanced? • Risk factors: Are the risks specific to the company and devoid of mitigating language? • Use of proceeds: Is there a specific allocation of the proceeds among identified uses, and if funding acquisitions is a designated use, are acquisition plans identified? • Selected financial data: Does the presentation of non-GAAP financial measures comply with SEC rules?

• Management’s Discussion & Analysis: Does the discussion address known trends, events, commitments, demands, or uncertainties, including the impact of the economy, trends with respect to liquidity, and critical accounting estimates and policies? • Business: Does the company provide support for statements about market position and other industry or comparative data? Is the disclosure free of, or does it explain, business jargon? Are the relationships with customers and suppliers, including concentration risk, clearly described? • Management: Is the executive compensation disclosure, particularly the compensation discussion and analysis, clear? Does it include discussion of performance targets, benchmarking, and individual performance? • Underwriting: Is there sufficient disclosure about stabilization activities (including naked short selling), as well as factors considered in early termination of lock-ups and any material relationships with the underwriters? • Exhibits: Do any other contracts need to be filed based on disclosure in the prospectus? A FINAL THOUGHT While windows open and close, and tech companies may have different views concerning the right moment to commence active and intense preparation for an IPO, it is rarely too early to undertake the advance planning described above. Much of this preparatory work is neither time-consuming nor expensive. Yet it will enhance greatly the opportunity to get into the market quickly, when the market is there. And even if an IPO does not turn out to be the option of choice, this preparatory work should prove valuable in facilitating other funding opportunities, or even acquisition by an existing public company. [Sidebar] Taxing Thoughts Companies organized as S corporations, partnerships, or LLCs taxed as partnerships, which do not pay federal income tax at the entity level, should consider the potential tax implications of an IPO. For S corporations, an IPO generally terminates S status for federal income tax purposes. The former S corporation is generally taxed as a C corporation and, as a result, will now be subject to a corporate level tax. Going public will also result in the S corporation having two short tax years—one, the S short year, which ends the day before the IPO, and the other, the C short year, which begins on the IPO date. In general, income and loss of the S corporation for the entire year in which the IPO occurs must be allocated between the S and C short years on a daily pro-rata basis. This could produce inequities. If the S corporation is a cash method taxpayer, conversion to a C corporation generally requires it to use the accrual method of accounting. This could lead to adjustments under Section 481 of the Internal Revenue Code to avoid duplication or omission of income items or deductions. These adjustments may be taxable income to the former S

corporation shareholders. To avoid these potential problems, the S shareholders may elect a “closing of the books” allocation under certain circumstances. Shareholders of the former S corporation may want to receive distributions from the S corporation to cover tax obligations attributable to flow-through items for the S short year. If such tax distributions are made after the IPO, it may be taxable to the former S corporation shareholders. Partnerships will generally lose their pass-through tax status on conversion to a C corporation in connection with an IPO. Revenue Ruling 84-111, 1984-2 C.B. 88, sets forth the tax consequences of converting from a partnership to a C corporation, and describes several alternatives wherein each alternative assumes no consideration other than that stock is received by the partnership or its partners. If the transaction meets the applicable requirements of Code Section 351, then it will be tax-free to the partnership so long as the corporation does not assume partnership liabilities (or receive property of the partnership subject to liabilities) in excess of the basis of the contributed assets. Careful tax planning is recommended to address these concerns. [Sidebar] Dress Rehearsal Well before its IPO, an issuer should begin to approach executive compensation as would a public company. The IPO registration statement requires the same enhanced executive compensation disclosures that public companies provide in their annual proxy statements, including a discussion of compensation philosophy, an analysis of how compensation programs implement that philosophy and a discussion of the effects of risk-taking on compensation decisions. Issuers contemplating an IPO should consider: Systematizing compensation practices. Compensation decisions should be made more systematically—doing so may require: • establishing an independent compensation committee of the board of directors. • using formal market information to set compensation. • establishing a regular compensation grant cycle.

Confirming accounting and tax treatment. The issuer should be sure that the Internal Revenue Code Section 409A valuation used to establish stock value for stock option purposes is consistent with that used for financial accounting purposes. The issuer also should consider whether to limit option grants as the IPO effective date approaches. Option grants close to an IPO may raise “cheap stock” issues. Securities law compliance. The issuer should confirm that equity grants were made in compliance with federal and state securities rules, including Rule 701 limits, to avoid rescission or other compliance concerns. Adopting plans. An issuer will have greater flexibility to adopt compensation plans prior to its IPO. Accordingly, planning ahead is essential. An issuer should adopt the plans it thinks it may need during its first few years of life as a public company (including an equity plan, employee stock purchase plans, and Code Section 162(m) “grandfathered” bonus plans), and reserve sufficient shares for future grants. Public companies are required to obtain shareholder approval for new compensation plans and material amendments. [Sidebar] Foreigners Welcome Foreign private issuers benefit from less onerous securities law requirements. A “foreign private issuer” (FPI) is a foreign issuer, other than a foreign government, that meets these conditions: • No more than 50% of its outstanding voting securities are directly/indirectly owned of record by U.S. residents. • Less than a majority of its executive officers or directors are U.S. citizens or residents. • No more than 50% of its assets are located in the U.S. • Its business is administered principally outside the U.S. FPIs receive certain accommodations, including: • Interim (rather than quarterly) reporting based on home country and stock exchange practice. • Exemption from proxy rules and from Section 16 insider reporting and short swing profit recovery provisions. • Aggregate (rather than individual) executive compensation disclosure, if permitted by home country. • Offering document financial statements updated semi-annually (not quarterly). • No obligation to apply U.S. GAAP—although reconciliation of significant variations may be required. • Form 6-K filings furnished not filed; no Forms 8-K. • No CEO/CFO certifications of interim financial information. • Certain corporate governance requirements are satisfied by home country requirements. • Pre-marketing IPO SEC filings may be made confidentially.

However, like U.S. companies, FPIs are subject to the Sarbanes-Oxley Act requirements governing internal control over financial reporting. [Sidebar] An Ounce of Prevention Underwriters and their counsel will focus on your company’s intellectual property portfolio. Prepare in advance for the IPO IP diligence process. Speak with your IP counsel. Underwriters generally have a few areas of potential concern: Strength of Patent Position Do your patents cover your commercial products? Are your patent claims easy to design around? Are your patents invalid or otherwise defective? And do you have a sufficient period of exclusivity? Third-Party Infringement Risks Are there any third-party patents or other IP that pose potential infringement risks, and if so, what is your strategy for mitigating those risks? Ownership Issues Does your company own or have all rights to license and use its patents, software, and other IP? Do any inventors have an obligation to assign to another entity or company? And is IP ownership generally clean? Advance preparation will not only demonstrate a level of sophistication and commitment to the IPO process, but will also help you avoid potential pitfalls along the way. Ask at the outset about the type of IP opinion that will be requested at closing. [Sidebar] D&O Insurance Directors and officers (D&O) insurance protects directors and officers from losses resulting from their service to a company. Typically, a D&O insurance policy maintained by a private company will not provide coverage for securities offerings, such as an IPO, and will not contain the coverage or provisions applicable to public companies. A company that is going public should review its existing D&O coverage and seek additional coverage. A public company’s D&O insurance program generally contains three types of coverage in one policy:

Side A covers D&Os’ costs and expenses for defense and due to payouts under settlements and judgments, where indemnification may not otherwise be available, such as due to state law limitations. Side B provides reimbursement to the company if it has indemnified D&Os in connection with a claim. Side B coverage is the most commonly invoked portion of a D&O policy. Side C known as “entity coverage,” covers the company itself. For public companies, coverage usually includes only claims resulting from alleged securities law violations. Most D&O insurance policies have complicated applications and impose compliance obligations upon the company. False statements in the application or failure to comply with these obligations can result in the loss of coverage if any substantial liabilities arise. As a result, a company will want to be certain that it has one or more employees who have appropriate experience preparing the application, and who will assume compliance responsibilities once the policy is effective. [Sidebar] Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 requires publicly traded companies to implement corporate governance policies and procedures that are intended to provide minimum structural safeguards to investors. Certain of these requirements are phased in after the IPO. Key provisions include: • Requirements related to the company’s internal control over financial reporting, including (1) management’s assessment and report on the effectiveness of the company’s internal controls on an annual basis, with additional quarterly review obligations, and (2) audit of the company’s internal controls by its independent registered public accounting firm. • Prohibition of most loans to directors and executive officers (and equivalents thereof). • The CEO and CFO of a public company must certify each SEC periodic report containing financial statements. • Adoption of a code of business conduct and ethics for directors and senior executive officers. • Required “real time” reporting of certain material events relating to the company’s financial condition or operations.

• Disclosure of whether the company has an “audit committee financial expert” serving on its audit committee. • Disclosure of material off-balance sheet arrangements and contractual obligations. • Audit committee approval of any services provided to the company by its audit firm, with certain exceptions for de minimis services. • Whistleblower protections for employees who come forward with information relating to federal securities law violations. • Compensation disgorgement provisions applicable to the CEO and CFO upon a restatement of financial results attributable to misconduct. The exchanges’ listing requirements contain related substantive corporate governance requirements regarding independent directors; audit, nomination, and compensation committees; and other matters. [Sidebar] Controlling Your Shares In connection with an IPO, the issuer may want the option to “direct” shares to directors, officers, employees and their relatives, or specific other designated people, such as vendors or strategic partners. Directed share (or “family and friends”) programs, or DSPs, set aside stock for this purpose, usually 5-10% of the total shares offered in the IPO. Participants pay the initial public offering price. Shares not sold pursuant to the DSP are sold by the underwriters. Generally, directed shares are freely tradable securities and are not subject to the underwriter’s lock-up agreement, although the shares may be locked up for some shorter period. Each underwriter has its own program format. There are, however, guidelines that must be followed. The DSP is not a separate offering by the company but is part of the plan of distribution of the IPO shares and must be sold pursuant to the IPO prospectus. To provide for an orderly market and to prevent existing shareholders from dumping their shares into the market immediately after the IPO, underwriters will require the issuer as well as directors, executive officers, and large shareholders (and sometimes all pre-IPO shareholders) to agree not to sell their shares of common stock, except under limited circumstances, for a period of up to 180 days following the IPO, effectively “locking up” such shares. Exceptions to the lock-up include issuances of shares in acquisitions and in compensation-based grants. Shareholders may be permitted to exercise existing options (but not sell the underlying shares), transfer shares to family trusts, and sometimes to

make specified private sales, provided that the acquiror also agrees to be bound by the lock-up restrictions. These lock-up exceptions will be highly negotiated. [Sidebar] How Much Does An IPO Cost? IPO expenses can add up quickly, as company personnel and professionals scramble to meet substantial demands in short timeframes. The table presents approximate costs for a $200 million IPO. $200,000,000 Gross proceeds

from the IPO 14,000,000 Underwriting discount (7% of gross proceeds) 34,760 Regulatory filing fees (SEC and FINRA) 155,000 Nasdaq listing fee 800,000 Legal fees and expenses 1,000,000 Accounting fees and expenses 15,000 Transfer Agent fees and expenses 200,000 Road show expenses 400,000 Printing expenses $183,395,240 Net proceeds

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U.S. Supreme Court Rules in Quon: Employee Text Messages Not Shielded from Employer Review

June 18, 2010

In a much-anticipated opinion in the Quon1 matter, on June 17 the U.S. Supreme Court declined to set precedent on broad issues of employee privacy expectations in workplace communications. Instead, the unanimous Court ruled narrowly, reversing the decision of the Ninth Circuit by holding that the review of an employee’s text messages sent using employer-issued electronic devices did not, under the circumstances in that case, violate traditional Fourth Amendment reasonable search standards.2 Acknowledging that it was in sensitive and uncharted territory and, therefore, should “proceed with care,” the Court noted that it “risked error by elaborating too fully on the Fourth Amendment implications of emerging technology before its role in society has become clear.” “Prudence counsels caution before the facts of the instant case are used to establish far-reaching premises that define the existence, and extent, of privacy expectations enjoyed by employees when using employer-provided communications devices.” Nevertheless, the Court’s analysis and dicta suggest factors that may be weighed by future courts in addressing these issues. Quon Facts In Quon, the City of Ontario (the City) acquired two-way pagers for use by Ontario Police Department (OPD) SWAT team members, including Sergeant Quon, to assist with responding to emergencies. Under the City’s contract with service provider Arch Wireless, each pager was allotted 25,000 characters per month, after which overage fees would accrue. When it issued the pagers, the City did not have in place a formal pager-use policy. It did, however, have a computer usage, Internet, and email policy which warned that all network activity might be monitored and that users had no expectation of privacy or confidentiality when emailing or when using network resources. Quon signed an acknowledgment of this policy.

1 City of Ontario, Cal. v. Quon, No. 08-1332 (2010), issued June 17, 2010. 2 For a fuller exploration of the underlying facts and lower court rulings, see the eData LawFlash, “Ninth Circuit Ruling:

Employee Text Messages Shielded from Employer Review,” June 26 2008, available at: http://www.morganlewis.com/pubs/eData_LF_TextMessagesShielded_26jun08.pdf.

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Once the pagers were in use, the City made clear to employees, including Quon, that it would treat text messages in the same way as email messages. Some City employees also developed an informal policy concerning fees for exceeding the monthly character limit, allowing individual users to pay overage charges with the understanding that if they paid, their usage would not be audited. The OPD later opened an internal investigation to establish the adequacy of the character limit. As part of this investigation, the department obtained transcripts of Quon’s text messages from service provider Arch Wireless for two of the several months in which Quon exceeded the character limit. Messages sent outside of work hours were redacted. Review of the transcripts revealed that most of Quon’s work-hours communications were personal and included sexually explicit messages, some of which he sent to coworkers within the department. Procedural Issues and Legal Analysis Quon and others implicated by the transcripts, including coworkers and Quon’s then-wife, sued Arch Wireless and the City, claiming that Arch had violated the Stored Communications Act (SCA)3 and that the City had violated their Fourth Amendment rights. On a motion for summary judgment, the district court held that Arch had not violated the SCA and that, although Quon had a reasonable expectation of privacy, neither the City nor the OPD had violated the Fourth Amendment. On appeal the Ninth Circuit reversed. While agreeing that Quon had a reasonable expectation of privacy in his text messages, the court found that the search was unreasonable and listed less intrusive means that could have been used to determine the reason for the overages, including warning Quon or allowing him to redact the transcripts. The court also held that Arch violated the SCA. Having granted certiorari only on the Fourth Amendment issues, the Supreme Court reversed the Ninth Circuit. Previously in O’Connor4 the Supreme Court majority held that “special needs, beyond the normal need for law enforcement,” can make warrant and probable cause requirements impracticable for government employers, and developed a two-part test for determining whether a Fourth Amendment right has been violated. First, a court must decide if the employee has a reasonable expectation of privacy, considering the “operational realties of the workplace,” to determine if privacy rights are implicated. If a legitimate privacy expectation is found, the court proceeds to the second part of the test to determine if, under all of the circumstances, the intrusion into that right is reasonable. Rather than deciding whether Quon had a legitimate privacy expectation, the Court focused on the reasonableness of the City’s text message review. Assuming, arguendo, that Quon did have a reasonable expectation of privacy in the text messages, that the City’s review constituted a search under the Fourth Amendment, and that the principles applicable to a government employer’s search of an employee’s physical office also apply to the search of an employee’s electronic communications, the Court still found that the City’s actions were reasonable. In O’Connor, the plurality reasoned that when conducted for a “non-investigatory, work-related purpose” or for the “investigation of work-related misconduct,” a government employer’s warrantless

3 18 U.S.C. §§ 2701-2711. 4 O’Connor v. Ortega, 480 U.S. 709, 711 (1987).

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search is reasonable if it is “justified at its inception” and “the measures adopted are reasonably related to the objectives of the search and not excessively intrusive in life of the” the circumstances giving rise to the search. Here, the City sampled Quon’s messages, redacting those which occurred while not on duty. Moreover, the Court held that the review was the most efficient way for the City to assess whether the messages were professional or personal. The City was furthering a legitimate work-related purpose by ensuring that employees were not being required to pay work-related expenses out of their own pockets, and that the City was not paying for employee personal communications. Finally, the Court reasoned that as a law enforcement officer, Quon should have known that his communications could be subject to legal scrutiny and audit. Because they were predicated solely on the search’s unreasonableness, the privacy violation claims of those with whom Quon communicated also failed. Lessons from Quon The Court decided Quon under the Fourth Amendment of the U.S. Constitution, which only regulates the conduct of governmental actors. Consequently, the decision technically applies only to public employers. Nonetheless, the decision ultimately could have broader implications for private employers as well. Private employees have privacy protection under some state constitutions, statutes, and the common law. In defining the scope of this protection in the future, lower courts may be influenced by some of the Supreme Court’s observations about the reasonableness of the City’s conduct in Quon. The Court’s overall approach suggests that the practices listed below will help reduce the potential exposure to any employer facing similar issues. Though the opinion does not address head-on the issue of employee privacy expectations in workplace communications, there is still much in the Court’s analysis and overall approach that may serve to curb a proliferation of privacy claims in the private sector.

Organizations should develop policies and procedures that take advantage of the Supreme Court’s guidance, and try to establish the following practices:

Establish and clearly disseminate formal, written electronic communications and systems usage policies, broad and flexible enough to cover emerging technologies, and update them regularly as the practical implications of new technologies become clear

Establish and disseminate explicit statements that employees have no privacy, confidentiality or ownership expectations in data stored on company systems or in any communications generated using employer provided devices

Formally disseminate, and require an acknowledgement for, all policies and modifications Provide clear notice that communications and systems usage may be monitored and

audited Put in place monitoring practices, including taking measures to detect and eradicate

informal policies and workarounds that may contradict or undercut company policies About Morgan, Lewis & Bockius LLP With 23 offices in the United States, Europe, and Asia, Morgan Lewis provides comprehensive transactional, litigation, labor and employment, regulatory, and intellectual property legal services to clients of all sizes—from global Fortune 100 companies to just-conceived startups—across all major industries. Our international team of attorneys, patent agents, employee benefits advisors, regulatory

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scientists, and other specialists—nearly 3,000 professionals total—serves clients from locations in Beijing, Boston, Brussels, Chicago, Dallas, Frankfurt, Harrisburg, Houston, Irvine, London, Los Angeles, Miami, Minneapolis, New York, Palo Alto, Paris, Philadelphia, Pittsburgh, Princeton, San Francisco, Tokyo, Washington, D.C., and Wilmington. For more information about Morgan Lewis or its practices, please visit us online at www.morganlewis.com.

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