Here is your October 2018 eNews from the Business Law Section (“BLS”):
Welcome to the first Business Law Section eNews for the 2018-2019 State Bar year! I am both privileged and excited to serve as the new Chair of the Business Law Section (BLS), as we also enter into this, our first full year as a part of the California Lawyers Association (CLA). The CLA is comprised of all 16 Sections and the California Young Lawyers Association (CYLA). Statutorily separated from the State Bar of California effective January 1, 2018, the CLA is approximately 100,000 lawyers strong, the new largest statewide voluntary bar association in the country.
At the CLA’s inaugural Annual Meeting held this September 14-15, 2018 at the Sheraton San Diego Hotel & Marina, ABA President Bob Carlson addressed the attendees to convey his organization’s strong support for the new CLA. In addition, California Chief Justice Tani G. Cantil-Sakauye conducted a joint swearing-in ceremony at the Annual Meeting for the new leaders of the California Judges Association and the CLA. The level of attendance and participation at the Annual Meeting by the California Chief Justice, the ABA, and several international legal delegations, all demonstrate that the CLA has emerged as THE bar association for ALL California attorneys.
As one of the 8,000+ members of the BLS, you may wonder what impact the Section may have on your career under the new CLA. Whether you are a new lawyer or a seasoned practitioner, the CLA offers substantial benefits, limited only by the depth of your involvement in the Section.
Under the CLA, the BLS has more autonomy to lend its voice to the initiatives and goals that are important to it:
Learning all of this, your next question may be, “How do I get more involved in the BLS?” There are myriad opportunities for involvement:
Each month, I will include a short(er) address in the eNews to keep you up to date on all your Section is doing, and all the ways you can become and stay involved. As our first year under the CLA progresses, I hope you will agree that your membership in the BLS continues to provide new and improved value to your practice. In sum, I look forward to our demonstrating to you all the BLS and the CLA can accomplish together.
Monique D. Jewett-Brewster, Hopkins & Carley, A Law Corporation (San Jose)
Chair, Business Law Section
Elisa D’Amico was the keynote speaker at the BLS Breakfast at the CLA Annual Meeting in San Diego on September 15, 2018. She addressed cyber-exploitation, a growing form of digital sexual abuse, and best practices for businesses and individuals in dealing with the nonconsensual sharing of sexually explicit images. Ms. D’Amico is a litigation partner at Miami office of K & L Gates where she focuses on privacy, technology, and internet law. She regularly counsels business clients concerning internet and technology law, including defamation, online harassment, internet-based fraud, and social media law. In 2014, D’Amico co-founded the Cyber Civil Rights Legal Project (CCRLP) to provide victims of cyber exploitation with pro bono legal help.
Larry Sonsini received the Business Law Section Lifetime Achievement Award on September 15, 2018 at the CLA Annual Conference from Paul Pascuzzi, the Chair of the Selection Committee. The award is given annually by the Business Law Section to a California business lawyer who over an extended period has made significant contributions to the Section or to business law generally in the State of California. “We have the perfect person this year in Larry Sonsini,” Mr. Pascuzzi declared. As one of the founding partners of Wilson Sonsini Goodrich & Rosati, the firm he envisioned could service a technology company from infancy to maturity and beyond, Mr. Sonsini is well known in Silicon Valley, and nationwide. BLS congratulates and thanks Larry Sonsini for all he has accomplished for the business and legal community in the State of California.
Monique D. Jewett-Brewster
Vice Chair of Programs
Reno F.R. Fernandez III
Vice Chair of Member Services
Cathryn S. Gawne
Vice Chair of Legislation
Vice Chair of Publications
Corey R. Weber
Business Law News Coordinator
Steven J. Williamson
eNews Editor in Chief
David Scott Levaton
Standing Committee Coordinator
Social Media Coordinator
Co-presented by the Business Law and Solo & Small Firm Sections
Thursday, October 18, 2018 in Los Angeles, California
More information here.
The BLS is comprised of 15 Standing Committees whose members review and propose legislation, draft eBulletins, BLN articles, and practice guides, and speak at live and webinar programs, all in order to provide value to their respective constituency lists. The Standing Committees meet between 5 and 10 times each year, usually by telephone. Committee members develop valuable personal and business relationships with other practitioners in their respective fields of practice.
To qualify for membership, a practitioner must be a member of the BLS and have practiced law at least five years. Each Committee is comprised of 16-30 members, selected for 3-4 year terms.
(Note: Existing members were automatically appointed to the same Committee for their remaining term under the CLA. Applications are only required for new members or for those whose terms expire in 2018.) Applications can be found here.
Please send the completed application to John Buelter, email@example.com.
Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the September 2018 update to Sales and Mergers of California Businesses. References are to the book’s section numbers. See CEB’s BLS Landing Page for special discounts for Business Law Section members. The most significant legal developments since the last update include developments in such important topic areas as the internal affairs doctrine, federal taxation, and mergers.
SALES AND MERGERS OF CALIFORNIA BUSINESSES
September 2018 Update
Internal Affairs Doctrine
In Central Laborers' Pension Fund v McAfee, Inc. (2017) 17 CA5th 292, 346, relying on State Farm Mutual Automobile Ins. Co. v Superior Court (2009) 114 CA 4th 434, 442, the California court of appeal held that although Delaware law supplied the relevant standard of care in the breach of fiduciary duty action, there was "no basis on which to extend the internal affairs doctrine to matters properly governed by local forum rules, including form of the action (equitable or legal) and mode of trial (jury or bench)." The court found that the action was equitable and the plaintiff was therefore not entitled to a jury trial. See §2.14.
On December 22, 2017, legislation commonly referred to as the Tax Cuts and Jobs Act (HR 1) (Pub L 115–97, 131 Stat 2054) was signed into law by the President. The official name of the new law is "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," but it is referred to in this title as either the Tax Cuts and Jobs Act or the TCJA. The TCJA made substantial changes to the federal tax laws, generally effective for tax years beginning on or after January 1, 2018. It represents the most significant revisions to United States tax law since the Internal Revenue Code of 1986. Certain changes sunset on December 31, 2025 (or other specified dates). Chapter 3 has been updated to reflect the TCJA, but practitioners should remain alert to the overall impact of the TCJA on any tax matters that may affect their clients. See §3.1.
None of the TCJA provisions directly addressed merger or acquisition transactions. Thus, the corporate reorganization provisions in IRC §368 (see §§3.5–3.18) remain unchanged. However, the TCJA modified many Internal Revenue Code provisions that indirectly affect mergers and acquisitions, including transaction structure and valuation. These provisions include the new reduced corporate tax rate (see §3.3), new limits on the deductibility of interest (see §3.47B), 100 percent expensing of costs for certain capital investments (see §§3.47D–3.47F), and changes to the rules concerning net operating losses (see §§3.47–3.47A). In general, the TCJA made asset acquisitions and sales more attractive because of the reduced corporate tax rate for sellers and buyers' ability to 100 percent expense the cost of capital assets acquired. In addition, the TCJA made debt-financed acquisitions less attractive because of the new limits on interest deductibility. Finally, the TCJA reduced the value of tax benefits such as the net operating loss deduction and tax-free reorganization structures because of the new reduced corporate tax rate. See §§3.1, 3.2, 3.5.
For tax years beginning January 1, 2018 and ending December 31, 2025, the Tax Cuts and Jobs Act (TCJA) has replaced the existing tax rates for individuals with seven new rates varying from a low bracket of 10 percent to a high bracket of 37 percent, with rates of 12, 22, 24, 32, and 35 percent in between. IRC §1. The TCJA generally retained the previous 0, 15, and 20 percent rates on long term capital gains and qualified dividends. However for tax years from 2018 through 2025, these rates are no longer tied to the ordinary income brackets but have their own brackets. See §3.3.
The TCJA eliminated the graduated corporate tax structure previously in force and replaced it with a single flat tax of 21 percent. IRC §11. In addition, corporations are no longer subject to the alternative minimum tax. IRC §55(a). See §3.3B. In general, corporations are taxed on capital gains at regular ordinary income tax rates. IRC §1201. See §3.3.
Because of the lower corporate tax rate, corporate sellers may be more willing to sell appreciated assets because the tax consequences to them are reduced. In effect, it is less expensive for a corporation to dispose of unwanted assets because the corporate tax on the sale will be less. In addition, the lower corporate tax rate means that the advantages of structuring a transaction as a tax-free reorganization under IRC §368 (see §§3.5–3.18) have been reduced. See §3.3.
After the Tax Cuts and Jobs Act, the alternative minimum tax (AMT) is still in effect for noncorporate taxpayers, but the exemption amount has been increased to $109,400 (up from $84,500) for joint returns and surviving spouses; $70,300 for single taxpayers (up from $54,300); and $54,700 for taxpayers married filing separately (up from $42,250). The TCJA repealed the corporate alternative minimum tax, effective for taxable years beginning after December 31, 2017. IRC §38(c)(6)(E). See §3.4.
Before the Tax Cuts and Jobs Act, it was possible to exchange certain assets (including real property, and tangible and intangible personal property) in similar businesses tax free in a like-kind exchange transaction under IRC §1031. The TCJA amended IRC §1031 to limit its application to real estate not primarily held for sale, generally effective for exchanges engaged in after December 31, 2017. Personal property is no longer eligible for §1031 treatment. As a consequence, any personal property related to a real property exchange, such as laundry and kitchen equipment, office furniture and equipment, or landscaping equipment, is treated as taxable "boot" in the exchange. An exception is provided for exchanges in which either the relinquished property was sold or the replacement property was acquired on or before December 31, 2017. See §3.20.
The tax elections under IRC §§336(e) and 338, which enable taxpayers to treat a stock sale as if it were an asset sale for tax purposes, may become more attractive given the provisions in the Tax Cuts and Jobs Act that allow for immediate expensing of equipment and other depreciable assets purchased. See §3.24.
After the TCJA, the dividends-received deduction is now generally 50 percent, but it is 65 percent for any dividend received from any corporation if 20 percent or more of the stock of that corporation (by vote and value) is owned by the taxpayer, and 100 percent for a small business investment company or affiliated group recipient. IRC §243. See §3.26.
Before the TCJA, net operating losses (NOLs) could be carried back 2 years and carried forward 20 years to offset taxable income in such years. The TCJA amended IRC §172 to eliminate the 2-year carryback (except as noted in §3.47), but allows NOLs to be carried forward indefinitely until the NOL is used up. IRC §172(b). In addition, the limit (discussed in §3.47) on carryovers of losses arising in years beginning after December 31, 2017 is increased annually to take into account the time value of money. See §3.47.
Before the TCJA, business taxpayers were generally entitled to deduct interest expenses, subject to several limitations. For noncorporate taxpayers, the deductibility of interest related to investments was limited to investment income. Under the earnings-stripping provisions, interest deductions were disallowed if the payor's debt-to-equity ratio exceeded 1.5 to 1, the net interest expenses exceeded 50 percent of the taxpayer's adjusted gross income, and the interest was payable to certain described payees. The TCJA limits the amount of interest expense that can be deducted by large businesses (including corporations and pass-through entities) to the sum of (1) business interest income; (2) 30 percent of the business's "adjusted taxable income" for the year at issue; and (3) floor plan financing interest (which is fully deductible). Investment interest expense and investment interest income is not taken into account when applying this limitation. IRC §163(j). Note that interest on existing debt is not grandfathered; this limitation applies to all interest expense, regardless of when the debt was incurred. Clients are therefore well advised to review their existing capital structures. See §3.47B.
The new limitations on interest deductibility do not apply to expenses that are not "interest," even if those expenses are akin to interest, such as licensing, leasing, or rental expenses. Thus, alternative financing structures—such as sale-leasebacks, issuance of preferred stock, or borrowing short term or via convertible debt—should be considered. See §3.47B.
Under IRC §279(a), a corporation's annual deduction for interest on "corporate acquisition indebtedness" as defined is generally limited to $5 million. The TCJA made no changes to IRC §279. See §3.47C.
A bonus first-year depreciation allowance applies to certain "qualified property" as described in IRC §168(k). The allowance is claimed in the first year that the property is placed in service by the taxpayer for use in its trade or business or for the production of income. Before the TCJA, IRC §168(k) permitted "bonus depreciation" in the year placed in service for (1) 20-year property; (2) computer software; (3) water utility property; and (4) qualified improvement property, as long as the property was new and placed in service before January 1, 2020 (January 1, 2021, for longer production assets and certain aircraft). The bonus depreciation permitted was 50 percent in 2017, 40 percent in 2018, 30 percent in 2019, and no bonus depreciation in later years. The TCJA increased the 50 percent allowance to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for certain longer-production property and qualified aircraft). The allowance phases down after those dates. The allowances under prior law (as noted above) remain in effect for property acquired before September 28, 2017. See §3.47E.
Under prior law, a taxpayer's use of qualified property was required to be the original use of the property. In other words, the property placed in service had to be new; a deduction was not allowed for used property. Now, the TCJA allows this deduction to be taken for both new and used property, as long as the property was not used by the taxpayer before the taxpayer's acquisition of the property and the taxpayer did not acquire the property from a related person. As a consequence, asset acquisitions should become more desirable, because purchasers will now be allowed to deduct immediately that portion of the purchase price allocable to qualified property. See §3.47E.
Before the TCJA, the maximum amount that a taxpayer could expense under §179 was $500,000 for qualifying property placed in service in a taxable year. The $500,000 was reduced by the amount that the cost of qualifying property placed in service that year exceeded $2 million. The TCJA increased the maximum amount a taxpayer can expense under IRC §179 to $1 million and increased the phase-out threshold amount to $2.5 million. The TCJA allows this deduction to be taken for both new and used property, as long as the property was not used by the taxpayer before the taxpayer's acquisition of the property and the taxpayer did not acquire the property from a related person. As a consequence, asset acquisitions should become more desirable, because purchasers will now be allowed to deduct immediately that portion of the purchase price allocable to qualified property. See §3.47F.
After the TCJA, the tax benefits of immediate expensing under IRC §179 (discussed in §3.47F) and bonus depreciation under IRC §168(k) (discussed in §3.47E) for purchases of qualified equipment at a cost under the §179 ceiling appear substantially the same. Bonus depreciation under IRC §168(k) is useful to large businesses that spend more than the §179 ceiling on capital equipment. In addition, businesses operating at a loss are still allowed to deduct some of the cost of equipment under §168(k) and carry the loss forward. Compare IRC §168(k) with IRC §179(a)(3). In applying these provisions, taxpayers generally apply the §179 deduction first, followed by the bonus depreciation deduction, unless the business had no taxable income. See §3.47F.
In FTC v Penn State Hershey Med. Ctr. (3rd Cir 2016) 838 F3d 327, the Federal Trade Commission (FTC) had filed suit seeking a preliminary injunction to prevent a merger of the two largest hospitals in the Harrisburg, Pennsylvania area. The federal district court denied the FTC's request on the basis that the FTC had not met its burden to define the relevant geographic market. In reversing the district court's finding and granting the injunction, the Third Circuit applied the hypothetical monopolist test to determine whether payors and patients would look outside of the four-county Harrisburg area for general acute care services sold to commercial payors. See §5.5.
Race, Policy, and Law (RPL) Academy at Oakland Technical High School. The mentoring program seeks lawyers, among other community leaders, who can help expose the academy’s 50-60 11th graders to the law. To learn more, click here: RPL Mentoring Program Sign Up
The United States Department of Justice maintains a List of Pro Bono Legal Service Providers in immigration court and legal aid centers in California. It is located here.
Information about other Pro Bono Opportunities can be found on The State Bar of California’s website.
If you know of other opportunities for pro bono help from BLS members, please contact Dennis Wickham, firstname.lastname@example.org.
The 15 BLS Standing Committees publish eBulletins announcing developments in their area of law and upcoming events open to BLS members. Click HERE to sign up to receive these eBulletins from any BLS Standing Committee completely free of charge.
Did you know that the BLS maintains a presence on LinkedIn, Twitter, and Facebook where BLS posts regular updates about new cases, new regulations, key legislative developments, and news and events from the BLS’s Standing Committees? What you may not know is that you can not only send items to the BLS to post or tweet, but also suggest items from your own social media pages for the BLS to re-post, re-tweet, or like. Doing so expands the reach of what you have to say to everyone who likes or follows the BLS on its various social media platforms, and may result in the BLS following you! Please submit your suggested items for consideration or direct any questions to BLS Social Media Coordinator, Dennis Wickham (email@example.com) and join the ever-expanding discussion!
Everett L. Green, Editor-in-Chief
Dennis Wickham, Contributing Editor
Corey R. Weber, Vice Chair of Publications and Contributing Editor
Monique D. Jewett-Brewster, BLS Chair and Contributing Editor