Cross-Border Counselor

Over the last few years, many Canadian junior resource companies and startup companies have cut back on their legal spend, not necessarily undertaking a legal review of each new private placement of securities, or limiting their review to a Canadian one. Yet over this same time frame, the applicable U.S. rules and relevant interpretations have changed, and previously vetted forms may not be current. Indications that your U.S. law compliance practices in offering and selling securities could use a good scrub include the following: You don’t know the definition of a “foreign private issuer” or whether your company is one; You don’t know if your company has a “substantial U.S. market interest” in the class of securities you are offering; You don’t know what “bad boy disqualifications” are or who they apply to, or you can’t remember the last time the company’s insiders completed disqualification questionnaires; Your U.S. subscription agreements refer to Rule 506 and not Rule 506(b); Your U.S. subscription agreements treat an investor with a net worth of $1 million as an accredited investor, without subtracting certain items relating to the investor’s principal residence; Your warrant exercise forms don’t require all warrant holders to check an appropriate box to help you determine whether U.S. law applies to the exercise and confirm compliance with a U.S. exemption where required; Your offering includes warrants, but your subscription agreements don’t include U.S. provisions relating specifically to the warrants; or You aren’t checking the U.S. legal requirements when you draft your equity compensation plans or when you grant stock options, RSUs, PSUs, ESPP participation, or other types of compensatory equity to a U.S. resident. The risk of non-compliance includes rescission rights for investors, restatement of financial statements, and civil or criminal enforcement actions by regulators, so it’s important to regularly review your forms to ensure they are up to date.

A Canadian company (the employer) historically has not issued equity-based awards to employees of its U.S. subsidiaries, but it now is considering doing so. Past posts have addressed potential U.S. income tax pitfalls and the need for careful review of the plan and award agreements prior to the grant of restricted stock units (RSUs) and deferred share units (DSUs) to individuals who are subject to U.S. federal income tax on compensatory income. You can read the DSU blog entry here and the RSU blog entry here. Let’s assume careful review and drafting have addressed potential U.S. tax issues in terms of the written documents. What are common mistakes that can arise in administering the U.S. awards? A common error with respect to RSUs awarded to U.S. employees is to overlook the correct timing of U.S. employment tax obligations (as distinguished from federal income tax withholding obligations). Confusion can arise when, for U.S. tax purposes, the substantial risk of forfeiture lapses earlier than the year in which the RSUs will be settled/paid out. For purposes of this discussion, when we use the term “vesting” it means the lapse of a substantial risk of forfeiture. Below are examples of how confusion can arise. Many RSUs provide for immediate settlement upon satisfaction of service-based vesting conditions. In such a case (and absent any “retirement vesting” provision as discussed below) federal income tax and FICA are due essentially at the same time, i.e. when the RSUs vest and are paid out. Some RSUs by their terms delay the income tax event by deferring the payment until an event or date that will occur later than vesting. However, in contrast to income tax withholding, which occurs when shares or cash in settlement of RSUs are actually or constructively received, the FICA tax event cannot be delayed. FICA tax is due for RSUs upon vesting, even if payment/settlement is delayed. One common oversight is failing to take into consideration the impact that “retirement vesting” in an RSU award will have on FICA tax timing. In the absence of retirement vesting provisions, an RSU that has a service-based vesting period frequently will be settled (shares delivered or cash settlement) immediately upon vesting. In such a case, both federal income and FICA withholding will apply at the time of vesting/settlement. In contrast, if an RSU award provides that it will not be forfeited if the individual retires prior to the scheduled vesting date, the RSU will be vested when the participant becomes eligible to retire (because there will be a lapse of the service-based substantial risk of forfeiture), notwithstanding that settlement of the RSU may not occur until the original settlement date. Even if the RSU will be settled on the earlier of the scheduled vesting date and the date of retirement, this will not solve the problem. This is because the risk of forfeiture lapses when the participant is eligible to retire, whether or not he or she in fact retires at that time. Thus FICA taxes will be due at grant if the individual already has met the criteria for retirement, or at the time during the vesting period that an individual first meets the criteria for retirement. This obligation to withhold and pay employment taxes before the RSUs are settled/paid out may be an unpleasant surprise for the employer and the participant. There are some alternative timing rules for FICA withholding that can provide some (but not complete) relief. We’ll discuss them in a future post. As a reminder, U.S. taxpayers are taxed on worldwide income, regardless of where they reside. U.S. taxpayers are: (i) U.S. citizens regardless of residency; (ii) non-resident aliens (“green card” holders); and (iii) non-citizens, non-green card holders who have a “substantial presence” in the United States under the U.S. income tax laws (but exceptions to this category apply – careful analysis of the facts and applicable tax treaties required).

One of the most difficult and costly aspects of developing mining projects in the United States is the permitting requirements under the Clean Water Act (CWA). The Trump administration is currently undertaking a rulemaking process to examine and redefine the scope of the CWA. Companies with mining projects in the United States should consider participating in the rulemaking process to assure that their interests are represented. In 2015, the U.S. Environmental Protection Agency (EPA) and the U.S Army Corps of Engineers (Corps) (collectively the Agencies) adopted final regulations redefining the term “waters of the United States,” which defines the scope of federal regulatory jurisdiction under the CWA. States, industry groups, and environmental organizations immediately challenged the rule in the federal courts, and a nationwide stay issued by the 6th Circuit Court of Appeals has prevented the Agencies from implementing the 2015 regulations. In light of the circumstances, and pursuant to an Executive Order from President Trump, dated February 28, 2017, the Agencies are currently reviewing the definition of “waters of the United States” under the CWA. The Agencies have proposed a two-step process for this review. First, in July, the Agencies proposed a rule to repeal the 2015 regulations and re-codify the regulations that existed prior to 2015. The public comment period for this proposed rule runs through September 27, 2017. Second, the Agencies will propose new regulations substantively redefining “waters of the United States” and the scope of CWA Jurisdiction. This rulemaking is particularly important for natural resource companies because the breadth of topographic features to which the CWA applies has a major impact on project permitting. Natural resources projects are generally subject to two types of CWA permits. Under Section 402 of the CWA, parties are required to obtain a National Pollutant Discharge Elimination System (NPDES) permit from the EPA, or a delegated state agency, for any point sources where pollution may enter into waters of the United States. Under Section 404 of the CWA, parties are required to obtain a 404 permit from the Corps prior to the discharge of dredge or fill material into waters of the United States. The cost and timing for permitting and the feasibility of natural resources projects can largely depend on whether topographic features within or near a project are considered “waters of the United States” and subject to these CWA permitting requirements. Thus, the Agencies review of the scope of the definition for “waters of the United States” should be of particular interest to anyone operating, permitting, or investing in natural resource projects in the United States. As part of their review process pursuant to the February 28th Executive Order, the Agencies recently announced they would hold 11 sessions this Fall to give stakeholders an opportunity to provide recommendations on a revised definition of “waters of the United States.” Nine of the 11 sessions will be tailored for specific industries, with the stakeholder session for “Mining” scheduled for October 31, 2017, from 1pm to 3pm ET. Registration for each of the stakeholder sessions will close one week prior to the scheduled date of the session. The Agencies will also be accepting written recommendations and comments on the rulemaking process, which should be submitted on or before November 28, 2017. Over the past several years, Dorsey has represented mining companies in rulemaking processes under the CWA and similar environmental statutes, through participation in stakeholder meetings and the submission of comments that communicate to the regulatory agencies our mining clients’ concerns and objectives. The Federal Register notice announcing the schedule of public sessions is available at www.gpo.gov/fdsys/pkg/FR-2017-08-28/pdf/2017-18214.pdf. Information on registering for the sessions is available at www.epa.gov/wotus-rule/outreach-meetings.

The recent data breach at Equifax, a major credit rating agency, has provided an unexpected reminder of the importance of well-structured insider trading policies. Following last week’s announcement of the data breach, it was disclosed that certain Equifax executives, including its Chief Financial Officer, sold a portion of their holdings after the cyberattack was discovered, but before the news was publically announced. While Equifax has stated that the executives had “no knowledge of the intrusion at the time they sold their shares,” the developing story illustrates some of the risks attendant to sales of securities by insiders of public companies. Canadian issuers registered with the SEC or trading in the U.S. markets will find the recent article by Dorsey partners Cam Hoang and Gary Tygesson to be a helpful reminder of the key issues to consider in adopting or reviewing an insider trading policy: www.dorsey.com/newsresources/publications/client-alerts/2017/09/equifax-data-breach.

On September 5, 2017, the U.S. House of Representatives overwhelmingly passed (by a vote of 403-3) the Improving Access to Capital Act. The Act directs the SEC to amend Regulation A+ to allow SEC reporting issuers to use Regulation A+ when raising capital, and to deem their SEC periodic reports to satisfy the periodic and current reporting requirements of Tier 2 of Regulation A+. The Act is now being considered by the U.S. Senate. If the Act becomes law, it will increase the alternatives available to SEC reporting companies in seeking additional capital. Smaller public companies that are not listed on Nasdaq or the NYSE, and are therefore subject to state securities regulation in respect of their capital raising activities, may find Regulation A+ especially attractive, because an offering under Tier 2 of Regulation A+ is preempted from state securities regulation other than the potential requirement to make a notice filing, consent to service of process, and pay a filing fee.

In the United States, employers are required to pay employees overtime (1.5 times the employee’s hourly rate) for hours worked over 40 per week. In some states, such as California, employers are required to pay overtime if employees work more than 8 hours in a day. Like Canada, U.S. employees may be exempt from overtime requirements if they meet certain criteria. However, such exemptions under U.S. law are frequently more complicated than their Canadian counterparts, and even sophisticated U.S. employers frequently get them wrong. In 2016, U.S. employers spent nearly $700 million on class-action settlements of wage and hour claims. This does not include amounts U.S. employers spent paying judgments and attorneys’ fees. The three major categories of exempt employees under the U.S. Fair Labor Standards Act (which governs overtime pay) are the so-called “executive,” “administrative,” and “professional” exemptions: Similar to the Canadian exemption for managers, U.S. law exempts so-called “executive” employees from overtime. Employees must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent to qualify for the executive exemption. Such employees must also have the authority to hire or fire other employees, or the employee’s recommendations as to the hiring, firing, advancement, or promotion of other employees must be given particular weight. To qualify for the “administrative” exemption, an employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. The employee’s duties must be separate from the production of goods or rendition of services that the employer is in the business of providing. Accountants and human resources professionals can fall into this category. To qualify for the “professional” exemption, the employee must perform work requiring advanced knowledge that is intellectual in character and that usually requires some sort of prolonged course of study. Doctors, attorneys, and accountants with advanced degrees are good examples. For each of these exemptions, the employee’s job must require the exercise of discretion and judgment regarding matters of significance to the company. The authority to commit the company to large contracts or to spend significant amounts of the company’s money are good examples. Also, to qualify for any of these exemptions, employees must be paid a salary of at least $455 per week. There are additional exemptions for so-called “creative professionals,” “computer employees,” and “outside sales employees” as well. U.S. employers frequently misapply these exemptions. To qualify for the “creative professional” exemption, the employee’s primary duty must involve invention, imagination, and originality in a field of artists or creative endeavor. The key to this exemption is the distinction between creativity and technical skill. An employee that makes technical drawings or reproductions would not qualify, but an employee that creates original works of art would. The “computer employees” exemption is often a trap for employers. The mere fact that an employee uses a computer or is technically proficient with computer hardware or software is not enough. The employee must design, develop, analyze, or create computer software or hardware systems on behalf of the employer. Low-level tech support does not qualify, but computer programmers and systems designers do. Another frequently misapplied exemption is the “outside sales employees” exemption. Many U.S. employers mistakenly classify their in-house sales staff as exempt. However, to qualify for this exemption, a salesperson has to work primarily on the road, traveling to customers. Employees that primarily work a phone, either at home or at the employer’s office, do not qualify. All of these exemptions often sound clear on paper. The Vice President of Sales, the head of accounting, and the company’s in-house lawyer are all clearly exempt. But what about the assistant manager at a retail location? What about a mid-level accounting professional? Many employees fall into a gray area. The consequences of misclassifying employees can be severe. An employer that misclassifies its force of 50 salespeople could easily end up owing over a million dollars in overtime in a class action suit. These claims are also very expensive to research and litigate. If a company fails to record the hours worked of a misclassified employee, a U.S. Court will start with the presumption that the employee’s own testimony regarding his or her hours worked is accurate, and the employer will have the burden of proving otherwise. Canadian companies looking to operate or acquire businesses in the United States should carefully assess their own and their targets’ wage and hour practices and make sure they are consistent with U.S. law.

Canadian companies should carefully structure and document loans and advances to their U.S. subsidiaries. If loans to U.S. subsidiaries are not properly structured and documented, such loans may be recharacterized as equity investments for U.S. federal income tax purposes, and important U.S. tax benefits will be lost. Properly structured loans are treated as debt for U.S. federal income tax purposes with favorable tax treatment. The U.S. subsidiary may deduct interest paid in computing taxable income. Such interest payments to its Canadian parent corporation are generally not subject to U.S. withholding tax under the Canada – U.S. income tax treaty. Repayment of the principal amount is generally not subject to U.S. tax for both the U.S. subsidiary and Canadian parent corporation. Loans which are recharacterized as an equity investment do not qualify for favorable tax treatment. The U.S. subsidiary cannot deduct interest paid in computing taxable income. Interest and principal payments will be treated as dividends to the extent of current or accumulated earnings and profits of the U.S. subsidiary. Dividends are subject to U.S. withholding tax of 5% or 15% under the Canada – U.S. income tax treaty. Loans should be properly documented with promissory notes and, in some cases, loan agreements. This documentation should include, at a minimum: an unconditional obligation to pay a sum certain by the U.S. subsidiary, a stated interest rate, the applicable currency (Canadian or U.S. dollars), payment terms (demand or one or more fixed dates), a maturity date, and creditors’ rights provisions. Evidence showing that the U.S. subsidiary has a reasonable expectation of repaying the loan is very important. At a minimum, internal projections should be prepared showing the U.S. subsidiary has the capacity to repay the loan. For larger loans, consideration should be given to obtaining a debt capacity report from a financial advisory or accounting firm. Beginning in 2018, new regulations under Code Section 385 will require that certain loans meet detailed documentation rules to avoid automatic recharacterization as equity. U.S. and Canadian transfer pricing rules will require certain documentation supporting the interest rate charged on the loan. A discussion of the transfer pricing rules is beyond the scope of this summary.

Readers listed on the NYSE will want to note a recent rule change. Effective immediately, notification of public announcements regarding dividends or stock distributions must be provided to the NYSE at least ten minutes prior to public release, even after market close. Read more in the post from our partner Jason Brenkert here: https://governancecomplianceinsider.com/nyse-rule-change-requires-ten-minutes-advance-notice-of-public-announcement-of-dividends-or-stock-distributions/

This week the SEC Division of Economic and Risk Analysis published a new report including a wealth of data regarding recent trends in public offerings and private placements of securities. The report includes a number of interesting facts about U.S. private placement practice, including: In the last few years, issuers have raised 2-3 times more capital through Regulation D than through Rule 144A. Rule 506(b) remains the most popular way to raise capital under Regulation D, with 97% of all funds raised under Rule 506 being raised under Rule 506(b), rather than the newer Rule 506(c), with issuers choosing not to take the additional steps required by Rule 506(c) to generally solicit investors. Only 6% of Rule 506(b) offerings in the most recent years have contemplated sales to non-accredited investors. Brokers are more likely to be used in Rule 506(c) generally solicited offerings, at 33% of new offerings compared with only 17% of new offerings under Rule 506(b). The issuer fails to file a Form D in as many of 10% of all unregistered offerings eligible for the Rule 506 exemption. The number of Regulation A offerings qualified by the SEC has taken off, from less than 10 per year before the “Regulation A+” amendments (which increased the maximum offering amount to $50 million) to more than 80 in 2016; however, Regulation A still represents a small fraction of the funds raised under Regulation D or Rule 144A. This is consistent with what we are seeing from our Canadian clients who conduct private placements in the United States. Most issuers that rely on a safe harbor are continuing to rely on Rule 506(b), limiting their offering to accredited investors with no general solicitation, or relying on Rule 144A, to allow for a quicker and more streamlined approach. However, Regulation A+ offerings are becoming more popular where the benefits warrant the extra time and expense. The complete SEC report is available at: www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.

Canadian companies and their outside counsel occasionally ask about the ability to grant early exercise incentive stock options (“ISOs”) to limit the impact of the U.S. alternative minimum tax (“AMT”) to their U.S. employees. However, due to fairly counterintuitive U.S. federal tax regulations, structuring options in this manner may expose optionees to negative tax consequences in the event of a disqualifying disposition (defined below). This post reviews the tax effects of early exercise ISOs and compares the tax results to alternative structures. Early Exercise ISO Tax Consequences With any early exercise option, the optionee is permitted to initially exercise their entire stock option by paying the full option exercise price, but will receive back restricted stock with the same vesting schedule as the original option. Employees will usually file a Section 83(b) election as permitted within 30 days following the transfer of the restricted stock. In 2004, final ISO regulations clarified that Section 83(b) elections filed on restricted shares acquired via early exercise ISOs are only effective for AMT purposes and not for ordinary compensation tax purposes. In the best case where both ISO holding periods are met (the shares acquired via ISO are held at least two years from the date of grant and at least one year from the date of exercise, prior to sale), the entire spread between the sale price and the exercise price paid will be taxed as long-term capital gain. However, if either holding period is not met, a “disqualifying disposition” occurs. Assuming that an 83(b) election was timely filed within 30 days following exercise, then upon a disqualifying disposition, the difference between the fair market value of the shares on the date the underlying restricted stock vests less the exercise price paid for the shares is compensation income that will be reported on the employee’s Form W-2 in the year of sale (or if less, the amount realized in the sale less the exercise price).[1] In addition, the capital gains holding period will only begin on the date the underlying restricted stock vests.[2] To the extent the stock price increased or decreased from the date of restricted stock vesting, such change will be short-term or long-term capital gain or loss, as applicable. This tax result means that early exercise ISOs become risky to an optionee in the event of a disqualifying disposition. While reducing AMT income is a positive result, a disqualifying disposition results in a potentially large amount of compensation income and/or short-term capital gain. The optionee often has little control over whether a disqualifying disposition will occur, such as if all shares are sold in connection with an acquisition of the issuer or if the optionee’s shares are repurchased following termination from employment. Early Exercise NSO Tax Consequences As compared to an ISO, the exercise of a non-qualified stock option (“NSO”) is not a preference item for AMT purposes. If an optionee early exercises a NSO, an 83(b) election will be respected for compensation purposes and the optionee will only recognize compensation income equal to the fair market value of the shares on the date of exercise less the option’s exercise price. This income will be subject to applicable withholding for federal and state payroll taxes, including FICA. However, if the option is early exercised shortly following the option grant date, as is often the case, there is typically minimal (or zero) spread to recognize as compensation up front. The 83(b) election also starts the capital gains holding period. Thereafter, the vesting of the underlying restricted stock received upon the early exercise will not result in any further compensation income to the optionee. Upon disposition of the stock, capital gain or loss will be recognized in the year of sale, which will be long-term if the stock is held at least one year from the date of early exercise. Therefore, in contrast to early exercise ISOs, early exercise NSOs can reduce the exposure to gain being characterized as short-term capital gain to the one year after the early exercise, provided the 83(b) election is timely filed. In addition, by exercising and filing an 83(b) election shortly following grant, recognition of compensation income may be limited or eliminated. Early exercise ISOs have an overhang for up to two years following the date of grant where a disqualifying disposition could result in both compensation income and short-term capital gain recognition. For these reasons, as illustrated in the examples below, we find early exercise NSOs to be preferable to early exercise ISOs in most cases. This is especially true with respect to companies where (i) there is a possibility of acquisition within two years following the date of grant, (ii) the optionees have sufficient capital to early exercise the awards, and (iii) the optionees see a meaningful upside for the company at the time of early exercise (or the amount needed to early exercise is relatively small). Example 1 A startup company grants early exercise ISOs for 1000 shares to an employee at $0.05 per share on June 1, 2017, subject to a vesting schedule where 50% vests on June 1, 2018, and the remaining 50% vests on June 1, 2019.  Participant early exercises on June 5, 2017 while shares are still worth $0.05 per share and files an 83(b) election recognizing $0 in income, which is effective only for AMT purposes. Upon exercise, the participant receives restricted shares with the same two-year vesting schedule. When 50% of the shares vest on June 1, 2018, the fair market value has risen to $5 per share. On March 1, 2019, the company is sold via a stock purchase agreement for $10 per share. All unvested equity awards are accelerated and the shares held by the participant are sold in the deal, resulting in a disqualifying disposition, as both ISO holding periods were not met. Participant recognizes compensation income equal to the spread between FMV on the date the restricted stock vested less the exercise price paid: For the 500 shares that vested on June 1, 2018, 500 x $(5.00 - .05) = $2,475. For the 500 shares that vested in connection with the March 1, 2019, transaction, 500 x $(10.00 - .05) = $4,975. Total compensation income recognized due to disqualifying disposition is $2,475 + $4,975, or $7,450. The capital gains holding period begins on the date of restricted stock vesting. Because both tranches of restricted stock vested less than a year prior to the March 1, 2019, transaction, the $10,000 received in the stock sale less (i) $7,450 previously recognized as compensation income and (ii) $50 in total exercise price paid, or $2,500, is short-term capital gain. Example 2 Assume the same facts as Example 1, but with an early exercise NSO instead: The 83(b) election on June 5, 2017, results in $0 in compensation recognition and also begins the capital gains holding period. No compensation income is recognized with the vesting of the underlying restricted shares, as there is no disqualifying disposition concept applicable, and the 83(b) election was effective for compensation tax purposes. Upon the sale of the company on March 1, 2019, the entire $10,000 received minus the $50 amount paid in exercise price, or $9,950, will be recognized as long-term capital gain. Example 3 Assume the same facts as Example 1, but with a regular ISO grant (without the early exercise feature) that is exercised immediately prior to the March 1, 2019, transaction: No compensation income recognized at the time of exercise under the ISO rules. The March 1, 2019, sale of the shares will be a disqualifying distribution, characterizing the full $10,000 received minus the $50 amount paid in exercise price, or $9,950, as compensation income.   [1] U.S. Treas. Reg. Sec. 1.422-1(b), Ex. 2. [2] Id.

Citing concerns over economic harm, President Trump has targeted his predecessor’s climate change agenda. He has sought reversal of a number of key Obama regulations, directives, and other actions, including the Clean Power Plan and the U.S. participation in the Paris accords. The overall blueprint for these actions is found in his March 2017 Executive Order on Promoting Energy Independence and Economic Growth. This order lays out for the Environmental Protection Agency and Department of Interior, as well as other agencies, specific actions to take to promote the development and use of domestically produced oil, gas, coal, and nuclear power. The agencies are only now beginning to undertake these actions, which could have dramatic impacts on the expansion of the mining, oil and gas, and power sectors in the United States, as well as on Canadian companies investing in these sectors or trading in these fuels with the United States. Of course, the path forward will be somewhat uncertain as any actions will be challenged in court by a revitalized environmental community. For more information, see our partner Jim Rubin's recent article featured in Trends, a newsletter published by the American Bar Association Section of Environment, Energy, and Resources: www.americanbar.org/publications/trends/2016-2017/july-august-2017/trump-seeks-to-uproot-the-obama-climate-change-agenda.html

Occasionally, we will see Canadians or Canadian companies assume that they can authorize as many shares for issuance as they want when forming a Delaware corporation, or that they can authorize shares without par value. That’s technically true, but Delaware will make you pay dearly for it, up to $180,000 per company per year. A Delaware corporation must pay the state an annual franchise tax. This tax is initially based on the number of authorized shares. Provided the authorized shares have a stated par value, the tax assessment can be re-calculated on an assumed par value basis using a formula that involves the number of shares authorized for issuance by the certificate of incorporation, the number of shares actually issued and outstanding, the par value of the shares, and the issuer’s total assets. For a properly formed Delaware subsidiary, the annual tax is usually $175. The tax is often more for an operating parent company, but by setting the authorized capital and par value appropriately, the tax can be managed. Unfortunately, we have seen situations where Delaware companies have been formed or acquired without adequate advice, resulting in a $180,000 annual tax. Among other situations, this can occur when no par value shares are authorized, or when the number of shares authorized is a large number compared to a small number of shares actually outstanding, and the franchise tax obligation may fluctuate annually based on the company’s total assets.

Harassment has been in the news a lot lately in the United States, with several high-profile terminations at well-known companies. Companies are losing millions of dollars, not just in settlements and verdicts, but in lost customers and bad publicity. The Equal Employment Opportunity Commission, or EEOC, is the administrative agency responsible for enforcing laws prohibiting workplace harassment in the United States. The EEOC has issued new guidance suggesting that conventional anti-harassment training isn’t enough. So what is an employer to do? Maintaining an effective harassment reporting procedure is simple, but not always easy. Often, it means a willingness by the company to put its money where its mouth is. This involves taking the time and spending the money to educate employees about harassment in the workplace, adopting procedures for employees to report harassment, and educating employees about those procedures. First, the company needs to demonstrate that it takes reports of harassment seriously. This means immediately investigating all complaints and taking swift remedial action where there is evidence of harassment. A track record of taking complaints seriously and dealing with wrongdoers promptly gives other employees confidence that their own concerns will be heard and acted upon. This means taking action against harassers, even if they are rock star performers. Second, the company needs to make its employees aware of its harassment reporting procedures. The best way to do this is during mandatory anti-harassment training and by having employees acknowledge in writing that they have received and reviewed a copy of the company’s anti-harassment policies, which should contain the reporting procedure. Training takes time and money, but it gets the word out and demonstrates the company’s commitment to its anti-harassment policies. In addition to the moral and morale benefits likely to result, an effective reporting procedure can also be part of a legal defense to a harassment claim. Employers can avoid liability if they have an effective reporting procedure that the accusing employee failed to utilize. Courts look at the same issues discussed above when assessing this defense. Does the company have a robust anti-harassment policy? How has the company handled prior complaints? What steps has the company taken to inform employees about its anti-harassment policy and reporting procedure? A hotline is meaningless if a company has a history of ignoring complaints or has failed to inform employees about it. A hotline is really just one tool in the anti-harassment toolbox. Employers should train employees to recognize and report harassment in the workplace, swiftly investigate and respond to complaints, and make sure that employees know how to report harassment. If these other components are not established, an anti-harassment hotline is just a dial-in circular file.

As a reminder to all foreign issuers that have a December 31 fiscal year end, the upcoming end of their second fiscal quarter, June 30, 2017, will be the calculation date for their status as a foreign private issuer (“FPI”) for purposes of both the United States Securities Act of 1933, as amended (the “Securities Act”) and the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). We recommend that issuers begin the analysis early to determine whether actions should be taken prior to the June 30th date to avoid an unintentional loss of FPI status. An early determination of the business nexus test (as described below) is also needed to know whether the issuer needs to request that their transfer agent and depositories provide U.S. resident beneficial shareholder information as of June 30, 2017. As detailed below, the definition of an FPI has two parts, one based on the percentage of the issuer’s U.S. resident shareholdings (the shareholder test), and the other based on its connections with the United States (the business nexus test). As an issuer must meet both of the two parts of the test to lose FPI status, it is often beneficial for an issuer to consider the business nexus test prior to considering the shareholder test. Because many issuers will not meet any of the three elements of the business nexus test (as discussed below), there would be no need to go through the time-consuming and often difficult process of determining the percentage of voting shares held by U.S. resident shareholders. The term “foreign private issuer" is defined by Rule 3b-4 under the Exchange Act and Rule 405 under the Securities Act as any non-U.S. issuer, other than a foreign government, except any issuer meeting the following conditions: (a)   more than 50% of the outstanding voting securities of such issuer are, directly or indirectly, held of record by residents of the United States; and (b)   any one of the following: (i)    the majority of the executive officers or directors are U.S. citizens or residents, or (ii)   more than 50% of the assets of the issuer are located in the United States, or (iii)  the business of the issuer is administered principally in the United States. While the FPI test is a seemingly straightforward calculation, the application of the test in certain circumstances can be challenging. The SEC staff has recently issued guidance that clarifies the application of the tests in certain circumstances and provides comfort for the application of reasonable methodologies that are consistently applied. Our prior blog post on the clarifications can be found here: crossbordercounselor.com/sec-provides-clarification-of-foreign-private-issuer-calculation/. In evaluating the citizenship and residency of executive officers and directors, each test must be separately applied to executive officers as a group and directors as a group. In determining the location from which a business is administered, an issuer must assess, on a consolidated basis, the location from which the issuer’s officers, partners, or managers direct, control, and coordinate the issuer’s business activities. Issuers may look to the geographical segment information determined in the preparation of financial statements for purposes of calculating the location of assets. Alternatively, an issuer may apply any other reasonable methodology on a consistent basis to determine location of assets. If an issuer fails one of more of the business nexus tests, a calculation of the issuer’s U.S. shareholdings is required. For purposes of the shareholder test, each holder identified on the record of security holders counts as a record holder. However, the issuer must look through the record ownership of institutional custodians, such as Cede & Co, CDS, and other commercial depositories, by obtaining the list of accounts for which the securities are held by the depository. In addition, under applicable SEC rules, an issuer must “look through” the record ownership of brokers, dealers, banks, or nominees to the beneficial holders who hold securities through such institutions. The “look through“ provisions of these rules are limited to three jurisdictions: (1) the United States; (2) the foreign company’s home jurisdiction; and (3) the primary trading market for the foreign company’s securities, if different from the foreign company’s home jurisdiction. Foreign private issuer status is of considerable benefit to foreign issuers that access the U.S. markets. Issuers that are in danger of a change in status may find that the recent SEC guidance gives them some additional flexibility in satisfying the FPI test. For those issuers, careful advance planning may make it possible to avoid the loss of the FPI benefits.

Canadian companies exporting products across the border into U.S. markets face significant risks of litigation or regulatory action arising from products sold and distributed in the United States. In a recent article, our colleague Kent Schmidt outlines ideas for managing these risks and creating a litigation risk profile around the four key areas of vulnerability: product liability claims, breach of warranty claims, false advertising and consumer protection claims, and claims related to collection, use, or compromise of consumer data and personal information. The full text of Kent’s article is available at www.dorsey.com/newsresources/publications/articles/2017/05/avoiding-unnecessary-us-litigation. For a more thorough discussion on how Canadian companies can avoid product-related claims in the United States, we invite you to attend one of Kent’s upcoming in-person Cross-Border Product Liability Seminars being held in Vancouver, BC (May 31), or Calgary, AB (June 1). For more information on the seminar and to register, please visit the event page: www.dorsey.com/newsresources/events/event/2017/05/cross-border-product-liability-seminar.

After months of public pronouncements on the future, including threatened withdrawal from, the North American Free Trade Agreement (NAFTA), the Trump Administration announced on May 18, 2017, its intention to begin negotiations with Canada and Mexico. Signed by Robert Lighthizer, the newly confirmed U.S. Trade Representative, the notification letters to Congressional leaders do not contain any details on specific targets for negotiations. The letters describe instead broad aims for discussions with U.S. Congressional leaders and industry constituents, and the administration’s intention to begin negotiations with Canadian and Mexican counterparts in mid-August or later. President Trump previously railed against NAFTA and its alleged impact on the U.S. manufacturing sector. However, the agreement’s impact has not been uniformly negative, as evidenced by the strong growth of U.S. agricultural exports to Canada,[1] among other indicators. It is perhaps with this complex situation in mind that Mr. Lighthizer does not threaten to dismantle NAFTA outright,[2] but rather to “update U.S. approaches” regarding issues in “intellectual property rights, regulatory practices, state-owned enterprises, services, customs procedures, sanitary and phytosanitary measures, labor, environment, and small and medium enterprises,” which have developed since NAFTA entered into force in 1994. The notification specifically references “digital trade” as an issue that is not addressed in the agreement. In an interesting twist, Mr. Lighthizer explicitly cites the same priorities that Congress previously established for trade negotiations prior to President Trump’s election – the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, which granted Trade Promotion Authority (TPA) to the President to negotiate trade deals. At that time, Congress authorized TPA to facilitate final negotiations for the Trans-Pacific Partnership – a 12-nation trade pact that was formalized in February 2016, but which President Trump denounced as harmful to U.S. industries during his election campaign, and from which he announced the United States’ withdrawal soon after taking office. By referencing these Congressional priorities (which include trade in goods, agriculture, digital trade, and other U.S. industry concerns), and “initial consultations” with various Congressional committees and advisory groups, the Trump Administration is signaling its intention to engage with Congressional leaders and industry constituents. President Trump and Mr. Lighthizer will need to garner broad support for its trade agenda (among other issues) at this critical juncture for the current administration. In view of this evolving situation, and the Trump Administration’s outreach to U.S. legislators and industry leaders for the NAFTA negotiation process, Dorsey attorneys will continue to monitor developments.   [1] See our previous eUpdate, “Trump Administration’s First Major Statement on Foreign Trade Affects Agriculture” [2] NAFTA Article 2205 provides for U.S. withdrawal with six months’ notice. Opinion is divided as to whether the President can give such notice to withdraw without Congressional approval. See 19 U.S.C. § 3451.

If a non-U.S. corporation (the “Company”) is a “passive foreign investment company” or “PFIC” for any tax year during which a U.S. shareholder owns shares in the Company, certain adverse U.S. federal income tax consequences of the acquisition, ownership, and disposition of shares will generally apply to such U.S. shareholder. A U.S. shareholder will be subject to the rules of Section 1291 of the Internal Revenue Code (described below) with respect to (a) any gain recognized on the sale or other taxable disposition of shares and (b) any “excess distribution” received on the shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. shareholder’s holding period for the shares, if shorter). Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of shares, and any “excess distribution” received on shares, must be ratably allocated to each day in a U.S. shareholder’s holding period for the respective shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income (and not eligible for certain preferred rates applicable to capital gains). The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A U.S. shareholder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible. For a U.S. shareholder who is an individual that invests in stock of a corporation and holds such stock for more than 12 months, any gain on the sale of such stock is generally subject to a 20% tax rate applicable to long-term capital gains. However, if the stock held is stock in a PFIC, any gain on the sale or other disposition of such PFIC stock is generally taxed at the highest ordinary income tax rate of 39.6%, plus the applicable interest charge, which is not deductible. In addition, in most cases, a Medicare tax of 3.8% on investment income will apply to certain individuals, estates and trusts. Certain elections may be available to U.S. shareholders in certain situations to mitigate such adverse tax consequences.

A Canadian company that proposes to grant stock options or other types of equity compensation to persons in the United States must comply with the securities laws of the state in which the recipient is located, unless the type of equity being issued (e.g., the underlying common shares, in the case of options to purchase common shares) is listed on a “national securities exchange” such as the NYSE, Nasdaq, and NYSE MKT. This means that private companies, Canadian public companies that are not listed in the United States, and Canadian companies that are listed in the United States only in over-the-counter markets such as the OTCQX, OTCQB, or Pink Sheets, are required to comply with state securities laws. Canadian companies should not assume that because they have taken the requisite steps under U.S. federal laws, such as registering the underlying securities by filing a Form S-8 with the SEC or complying with an exemption from registration under SEC Rule 701, that no further actions are required. While some states’ laws do not require additional actions to be taken, many states impose requirements that differ from federal laws. For example, Some states require that an application for exemption be filed and accepted by the state, or another type of notice be filed, and a fee be paid, prior to making the first equity award in that state. Some states’ exemptions from registration requirements restrict the types of awards that can be made, the types of persons that can receive awards, and the types of companies that can rely on the exemption. For example, some states’ exemptions are unavailable for awards to consultants and non-employee directors, are subject to bad boy disqualifications, are available only for certain types of equity plans, or are unavailable for awards made on an SEC-registered basis. Some states have no specific exemption for equity-based compensation, and a company seeking to make equity-based awards in those states must either register the plan or comply with another type of exemption, such as an exemption that might be available for a private placement to a limited number of persons satisfying certain investment criteria. The State of California imposes substantive requirements on the plan itself, including terms related to the number of securities to be issued, minimum vesting criteria, minimum post-termination exercise periods, information delivery requirements, and shareholder approval requirements, in addition to the requirement to file a notice and pay a fee.

Canadian manufacturers who sell products through U.S. distributors should ensure that they take appropriate action to establish their U.S. intellectual property rights, and to deal clearly with those rights in their cross-border distribution agreements. In a recent post on Dorsey’s IP blog, The TMCA, Sandra Edelman discusses the difficulties encountered by Covertech Fabricating, a Canadian manufacturer of protective packaging and reflective insulation, in establishing that it was the rightful owner of the trademarks in its branded products, not its U.S. distributor. Read her analysis of the recent court decision here: thetmca.com/who-owns-that-trademark-the-manufacturer-or-the-exclusive-distributor/

On April 10, 2017, the SEC’s Division of Enforcement brought enforcement actions against 27 individuals and entities behind various alleged stock promotion schemes. These actions arose when public companies, through promoters or communications firms, hired newsletter writers to generate publicity for their securities without publicly disclosing that the writers were being paid. While it is not illegal to hire newsletter writers, Section 17(b) of the Securities Act of 1933 (Securities Act) requires that newsletter writers fully disclose both the amount and the nature of the compensation received, including the dollar amount of a cash payment, the number of shares issued, or any other compensation. Additionally, newsletter writers and persons who adopt, approve or authorize the content of a publication may be liable for untrue statements of material facts or omissions for misleading investors. The Internet provides a ready means for fraudulent promotion of securities though social media, newsletters, chat rooms, emails, online blogs, press releases, and other media. The SEC’s Division of Enforcement is focusing attention on companies using stock promotion schemes that lead investors to believe that they were reading independent, unbiased analyses in newsletters, social media, stock forums, or other media when writers are secretly compensated for promoting a company’s securities. The SEC can bring charges against companies and promoters for these types of violations under various provisions of the Securities Act and Securities Exchange Act of 1934 (Exchange Act), including: Securities Act Section 17(a)/ Exchange Act Section 10(b) and Rule 10b-5: For, directly or indirectly, using interstate commerce to offer or sale any securities by: - employing any device, scheme or artifice to defraud; or - obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or - engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Section 17(b) of the Securities Act: For, directly or indirectly, using interstate commerce to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof. Exchange Act Section 20(b):  For aiding and abetting violations of Section 17(a) and Section 17(b) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. In addition, violations of securities laws may result in criminal prosecution. Allegations of securities law violations or association with firms that are charged with securities law violations may cause liability and embarrassment to a company and its officers, directors and employees. These violations may result in penalties, fines, imprisonment, or sanctions, including barring persons from serving as an officer or director of a public company or participating in certain securities offerings. Companies may be ultimately responsible for the investor relations work performed by investor relations, communication, social media, marketing, and other firms. Companies can take steps to avoid securities law violations by: Completing due diligence and selecting only reputable investor relations, communication, social media, marketing, and other firms to engage in investor relations activities. Limiting the use of paid newsletter writers and making sure that any compensation paid is properly disclosed. Adopting public communications policies that require authorization of company communications prior to dissemination. Carefully reviewing all materials for accuracy to ensure that the disclosure does not contain untrue statements of a material fact or omissions. Making sure that all content is consistent with the company’s public disclosures filed with regulatory agencies. Including forward looking statement and other disclaimers in all materials that are promotional in nature. Involving legal counsel, auditors and other professionals in the review of investor relations materials. Note: This post was originally published on Dorsey’s Governance & Compliance Insider blog here. 

Recently we blogged about pitfalls and potential adverse tax consequences for U.S. taxpayers with respect to deferred share unit awards that pay out following the participant’s termination of services. Read that blog entry here. But what about restricted share units (RSUs) that are subject to vesting based on continued service and that are settled/paid out immediately after the scheduled vesting date(s)? If you only have a handful of employees in the U.S. who would receive RSUs under your existing RSU Plan, you may wonder whether review by U.S. tax counsel really is necessary. Common sense would suggest that there is no way such RSUs could run afoul of the U.S. tax rules related to deferred compensation (otherwise known as “Section 409A” of the U.S. Internal Revenue Code) because the intent is to pay out as soon as the RSUs vest and hence there is no “deferral” of compensation. Forget common sense. Given the significant adverse tax consequences (20% penalty tax) for the recipient if the RSU is neither exempt from, nor compliant with, Section 409A, the answer is yes, have the terms of the RSU Plan and RSU agreement reviewed by U.S. tax counsel before granting RSUs to U.S. taxpayers. A common problem with respect to RSUs awarded to U.S. taxpayers has to do with the “retirement” provisions in the RSU award. A company may believe that the RSUs will not be deferred compensation that is subject to Section 409A because the RSUs are subject to vesting based on continued service through stated “vesting” dates and they are paid out shortly after the scheduled vesting dates. The company believes the RSUs are exempt under the “short term deferral” exemption, and thus there is no risk of Section 409A penalties for noncompliance. However, many RSU awards have “retirement” provisions which state that upon a participant’s Retirement (as defined in the RSU Plan or RSU agreement), the RSUs will “continue to vest” as though the participant had continued employment or services with the company through the scheduled vesting dates. For U.S. tax purposes the substantial risk of forfeiture lapses once an individual becomes eligible to retire, even if the individual does not in fact retire. Thus, such an RSU awarded to an individual who is retirement eligible, or who will become retirement eligible during the vesting period, will not be subject to a substantial risk of forfeiture as soon as the individual is retirement eligible because the settlement/payout which will occur immediately following the scheduled vesting dates will be outside of the short term deferral period (i.e., the RSUs won’t be settled/paid out in all cases by March 15 of the year following the year in which the RSUs no longer are subject to a substantial risk of forfeiture). Since such RSUs will not be exempt from Section 409A, they must instead meet all of the 409A rules for documentary and operational compliance; hence the need to review the documents before grant in order to structure them to comply with Section 409A. Fortunately, through careful drafting and plan administration, RSU awards can be designed and administered to avoid these and other potential problems. We work regularly with Canadian tax counsel to ensure compliance. Tip: In thinking about whether any recipients of RSUs are U.S. taxpayers, remember that U.S. taxpayers are taxed on worldwide income, regardless of where they reside. U.S. taxpayers are: (i) U.S. citizens regardless of residency; (ii) non-resident aliens (“green card” holders); and (iii) non-citizens, non-green card holders who have a “substantial presence” in the U.S. under the U.S. income tax laws (but exceptions to this category apply – careful analysis of the facts and applicable tax treaties required).

The Trump administration recently issued a presidential permit to TransCanada to operate and construct the Keystone XL pipeline. The presidential permit grants permission to construct, connect, operate, and maintain the pipeline facilities at the international border between the United States and Canada, covering approximately 1.2 miles of pipeline. The remaining 1,200 miles of Keystone XL must be approved by various regulatory bodies in the United States and Canada. The granting of the presidential permit is a big step forward for the pipeline, but many significant regulatory and legal steps remain before TransCanada can start construction of Keystone XL. Read more about the issuance of the presidential permit and the hurdles ahead for Keystone XL in our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/03/despite-trump-approval-keystone-pipeline

We get asked from time-to-time whether it is advisable for issuers to pay fees to unregistered “finders” for introducing potential investors in the United States to the issuer in connection with securities offerings. The short answer is “no.” Most finders are engaged by issuers under finder’s, advisory, or other arrangements, which typically require payment of “success fees” upon completion of a financing transaction. While these arrangements are sometimes structured to try to hide or disguise the true intent of the arrangement, payment of transaction-based compensation is treated by U.S. securities regulators as a nearly-conclusive indication that a person is engaged in the securities business and should be registered as a broker-dealer. The relevant U.S. federal broker-dealer laws that should be of concern to an issuer using an unregistered finder include: Section 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act), which makes it unlawful for a person to “effect a transaction in securities” or “attempt to induce the purchase or sale of, any security” unless they are registered as a broker or dealer under the rules and regulations of the Financial Industry Regulatory Authority, Inc. (FINRA). FINRA is the regulatory organization designated by the Securities and Exchange Commission (SEC) to license and regulate broker-dealers. Section 29(b) of the Exchange Act, which provides that every contract made in violation of any provision of the broker-dealer registration requirements “shall be void” as to rights of persons who made or engaged in the performance of such contract. It results in the underlying purchase of securities becoming a voidable transaction that gives the investor a right of rescission, effectively granting a put right to the investor or purchaser. Section 20(e) of the Exchange Act, under which the SEC may impose aiding-and-abetting liability on any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act. The theory behind broker-dealer registration is to provide a gatekeeper to protect investors in the marketplace. FINRA members are required to “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of its business, including determining if an investment is "suitable" for its customer. Finders assisting in transactions rarely make such determinations and view themselves simply as middlemen in making introductions to potential investors. Because unregistered broker-dealers may not adhere to these high commercial standards, the SEC broadly construes the broker-dealer laws and narrowly construes the few permitted exceptions. Under SEC guidance derived from no-action letters, the SEC requires all intermediaries effecting transactions in securities to be licensed, subject to a few limited exceptions. Effecting a securities transaction may include, among other factors, receiving transaction-based compensation, recommending a company or the purchase of its securities, negotiating terms of a securities offering or purchase, attending meetings or presentations where the merits of the investment are discussed, performing or accommodating due diligence efforts, providing valuations or estimates of value, and other activities that facilitate a securities transaction. The consequences of engaging an unlicensed finder can be troublesome: Finder Risks:  Any unlicensed person engaging in activities designed to effect a transaction in securities may violate broker-dealer laws. The SEC or state securities regulators may seek to enjoin the unlawful activities or seek monetary penalties or criminal sanctions. Issuer Risks:  Retaining and permitting an unlicensed intermediary to effect a securities transaction may be a violation of federal and many state laws, and may subject the issuer to possible civil and criminal penalties. Any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act may be subject to aiding-and-abetting liability. Rescission Risks:  A violation of broker-dealer laws creates a right of rescission under federal and/or state securities law. The SEC or state securities regulators may require the issuer to offer investors rescission rights, and the issuer may be required to return the investment. State Securities Violations:  Many states have begun reviewing state notice filings on Form D (which report transactions exempt from registration under Regulation D) and actively monitoring finder’s fees paid in connection with securities transactions. Some states have required issuers to provide additional information related to unlicensed broker-dealers and, in some cases, to certify that finder’s fees or commissions have only been paid in compliance with broker-dealer laws. Accounting Liability Risk:  Auditors may raise accounting issues resulting from paying finder’s fees to unregistered broker-dealers and may require an issuer to account for potential liability arising from rescission rights. Bad Actor Consequences:  An issuer or finder that is convicted of any felony or misdemeanor, is subject to any order, judgment, or decree of any court, or is subject to any order of certain regulators may be ineligible to participate in certain types of securities offerings, including Rule 506 of Regulation D offerings and Regulation A offerings. Using an unlicensed finder can result in broker-dealer law violations. Many times the issue arises in the context of state notice filings and direct inquiries from state securities regulators where finder’s fees or commissions are paid in connection with an offering. Other times, they arise from a failed investment where the investor may assert claims related to broker-dealer law violations to establish a right of rescission. Issuers should use caution in determining whether to engage a finder to assist in financing transactions.   Note: This post was originally published on Dorsey's Governance & Compliance Insider blog here. 

Canadian employment law is, in many ways, far more employee favorable than U.S. employment law. With the exception of a few states, employment in the United States is “at-will.” This generally means that either the employer or the employee may terminate the employment relationship without cause and without notice, so long as the reason for the termination is not discriminatory (e.g., based on age, race or gender) or retaliatory (e.g., in retaliation for the employee engaging in whistleblowing activity). U.S. employees also have far fewer privacy rights in the workplace. Employees generally have no expectation of privacy in any computers or other electronic devices provided by the employer. However, there is one aspect of employment law that is far more treacherous and unpredictable in the United States—that is, the monetary damages available to employees who successfully sue their employers. Under U.S. law, an employee alleging that he or she was terminated for a discriminatory reason may seek lost wages including both “back pay” and “front pay.” Back pay consists of all of the wages the employee would have earned, from the date of termination through the date when the court issues an award, had the employee not been terminated. If the employee has not found a new job by that time, this can amount can be well over a year’s pay and includes not just base salary, but any bonus, overtime, and fringe benefits the employee would have earned. Front pay consists of all the wages the employee would have earned going forward from the award. Juries can award lost wages all the way through the employee’s expected date of retirement. A 40-year-old employee could be awarded 25 years of lost wages (through the typical retirement age of 65) where the jury believes that the employee is unlikely to find another job. Even where the employee finds a new job, the former employer can be on the hook for the difference between what the employee is making at the new job and what the employee expected to make at the old job. For example, a 35-year-old employee who is making $20,000 a year less could seek an award of $600,000 in lost wages (through age 65). In addition to lost wages, employees may seek emotional distress and punitive damages. Juries have broad discretion to award employees emotional distress damages resulting from an improper termination. These emotional distress awards can rise well into the six-figures. In 2009, a federal appellate court upheld a $1 million emotional distress award. Employees may be entitled to punitive damages where a jury finds that the employer discriminated against the employee “with malice or reckless indifference.” While punitive damages are limited by statute in certain cases, they are not capped in others. Where punitive damages are uncapped, they can easily reach six figures and can sometimes exceed $1 million where the employer’s conduct is found to be particularly heinous. Finally, employees are usually entitled to recover their attorney fees, even if they recover only a fraction of the damages they are seeking at trial. What is more, employees are rarely required to pay their former employer’s attorney fees if they lose. While employees may appear to have fewer rights under U.S. employment law, the consequences for the employer if those rights are violated can be extreme. Canadian companies who are taking on employees in the United States should take care to consult with experienced employment counsel to assess their employment practices and avoid the substantial liability that can result under U.S. law.

This week, the SEC approved a rule that would require broker-dealers to settle most securities transactions on a T+2 basis (shortening the current regime from T+3), effective September 5, 2017. See additional information in the post from our partner Jason Brenkert here. Will Canadian regulators follow suit?

Many cross-border loan transactions involve subsidiaries that are organized in the United States and/or U.S. based collateral. To the extent that the underlying loan is made to a Canadian borrower by a Canadian lender, these transactions are typically documented with loan agreements governed by Canadian law (often under the law of the Province where the primary Canadian borrower is organized, but sometimes based on the law of a Province selected by the Canadian lender). In many of these transactions, in addition to the Canadian law governed documents, the Canadian lenders will also require the use of U.S. law governed documents for guarantees provided by U.S. organized subsidiaries and Security Agreements for collateral owned by U.S. subsidiaries or otherwise located in the United States. Whether or not the requirement to add these additional U.S. law governed documents is prudent and cost effective often depends on several factors, including: 1) the total amount of the loan, 2) the importance of the U.S. subsidiary guarantor to the consolidated balance sheet of the Canadian borrower, 3) the value of any U.S. based collateral, and 4) the nature of the U.S. based collateral. It is also important to understand the reason a Canadian lender would request the additional documentation when the Canadian law governed documents already cover any U.S. based subsidiaries and any U.S. based collateral. Primarily, the additional U.S. law governed documents aid a Canadian lender if and when the lender needs to realize on the U.S. based collateral or otherwise collect against the U.S. organized subsidiary in U.S. courts. As a general matter, U.S. courts should typically give effect to and recognize Canadian law as a valid choice of law, absent fraud or some other public policy concern. Therefore, Canadian law loan documents should be sufficient regardless of the jurisdiction of the subsidiary or the location of the collateral. Canadian borrowers can therefore argue that adding U.S. law governed documents in addition to the Canadian law documents is unnecessary. While there is merit to this argument, the reality is that while U.S. courts should give effect to and recognize Canadian law and they should be able to interpret and impose Canadian law in any proceeding brought in a U.S. court, many lenders simply don’t want to take the risk that a U.S. court would look for an opportunity to negate or invalidate a guaranty or security agreement simply because of the choice of Canadian law when a viable alternative is available. The other argument that is sometimes proffered is that it is better to have a U.S. law governed document if a filing under the Uniform Commercial Code (“UCC”) will be made in the United States for U.S. based collateral or for a U.S. organized subsidiary. Fundamentally, the reasonableness of the request hinges on the cost to draft and negotiate the additional documents vs. the likelihood that they would ever be used and if so the value of any U.S. based subsidiaries as guarantors or the value of any U.S. based collateral. Assuming the borrower is willing to agree to use additional U.S. law governed guarantees and security agreements, lenders will often request that the U.S. law governed documents be “typical” or “market” for similar transactions governed under U.S. law. While this request may be reasonable, in an effort to make the documentation and negotiation as efficient as possible, Canadian borrowers may counter that any U.S. law governed documents simply mirror all of the provisions of their Canadian law counterparts – other than the choice of law provisions and other truly jurisdiction-specific provisions (e.g., referencing the UCC instead of the Personal Property Security Act (“PPSA”)). In addition, because most lenders require legal opinions as to the enforceability of loan documents, most borrowers will need to engage separate U.S. counsel to negotiate the documents and provide the necessary legal opinions. Ultimately, the best approach to the form of the documentation and the scope of any opinions will again depend on the cost to draft and negotiate the additional documents vs. the likelihood that they would ever be used and if so the value of any U.S. based subsidiaries as guarantors or the value of any U.S. based collateral. As with any loan transaction, the costs associated with additional U.S. law governed documents needs to be balanced with the reality that there are some advantages to a lender in having different options in the event they need to enter U.S. courts to enforce their loan documents, while at the same time keeping in mind the value of the guarantees and the U.S. based collateral relative to the total value of the loans.

On March 1, 2017, the United States Securities and Exchange Commission (SEC) published the taxonomy for the eXtensible Business Reporting Language (XBRL) for financial statements prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (IFRS). Accordingly, foreign private issuers that prepare their financial statements in accordance with IFRS may immediately begin submitting their financial statements in SEC filings in the XBRL format. While Rule 405 of Regulation S-T would require foreign private issuers that prepare their financial statements in accordance with IFRS to submit financial data in XBRL upon publication of the taxonomy, the SEC has stated that such foreign private issuers are only required to submit financial data in XBRL with their first annual report on Form 20-F or 40-F for a fiscal period ending on or after December 15, 2017. Therefore, foreign private issuers who prepare their financial statements in accordance with IFRS are not required to submit XBRL data for the fiscal year ended December 31, 2016. The full text of the SEC’s release can be found at the following link: https://www.sec.gov/rules/other/2017/33-10320.pdf See our previous postings on the topic here: SEC delays XBRL compliance for foreign private issuers that prepare their financial statements in accordance with IFRS SEC Mandates Use of XBRL for Financial Statements

A Canadian corporation will generally be a passive foreign investment company or “PFIC” if, for a tax year, (a) 75% or more of its gross income is passive income (the “PFIC income test”) or (b) 50% or more of the value of its assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “PFIC asset test”). Gross income generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and passive income generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Cash and cash equivalents are generally treated as assets held for the production of passive income. For purposes of the PFIC income test and PFIC asset test described above, if the Canadian corporation owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, such Canadian corporation will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and PFIC asset test described above, and assuming certain other requirements are met, passive income does not include certain interest, dividends, rents, or royalties that are received or accrued from certain related persons (as defined in Internal Revenue Code Section 954(d)(3)), to the extent such items are properly allocable to the income of such related person that is not passive income. Canadian corporations that are in the development or exploration stage commonly constitute PFICs under the PFIC income test because their only source of gross income is interest income and other investment income earned on their cash balances. The same rules apply for other non-U.S. corporations.

Canadian miners and oil & gas companies should be aware that on February 14, 2017, President Trump approved a joint resolution of Congress that disapproved a recent SEC rule requiring specific disclosure by resource extraction issues. The obligation to report was imposed by Rule 13q-1 under the Exchange Act. The rules would have required resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. See the full discussion from our partner Kimberley Anderson here.

Anyone who has owned or operated a project involving public lands in the United States knows of the complex jigsaw puzzle of land ownership that defines the landscape of the United States. Jurisdictional governance is divided among Federal, state, Indian, and private ownership, resulting in regulatory tides to which natural resources, energy, and mining projects are subject. The collection of applicable laws, rules, orders, guidance documents, environmental reviews, permits, approvals, and administrative processes create a challenge for parties looking to develop mineral resources. With the election of President Donald Trump and Republican majorities in both the U.S. House and Senate, the tide is changing, and natural resources development—including the mining and energy industries—will be affected by the policies of the new administration. Here are a handful of areas where changes are anticipated. Permitting. U.S. energy and mining projects face a host of challenges from U.S. permitting processes—especially those impacting Federal lands—which are widely identified as some of the more lengthy and cumbersome in the world. Regulatory reform has been a signature pledge of President Trump and a host of Federal agencies, including the Environmental Protection Agency, the Bureau of Land Management, the Office of Surface Mining Reclamation and Enforcement, and the Army Corp of Engineers, are likely to be targets of such reform. Land Withdrawals. President Obama designated a record 34 national monuments during his two terms in the White House resulting in a withdrawal of those lands from traditional natural resource development. During the same period, both the Forest Service and the Bureau of Land Management adopted significant land use designations and moratoriums resulting in restrictions on natural resource development for thousands of additional acres of Federal lands. Many of these withdrawals and re-designations will be targets of the new administration and Congress. Republicans are expected to introduce legislation that would curb presidential authority to designate monuments under the Antiquities Act. Other members of Congress are seeking to have the President reverse certain monument designations, such as the Bears Ears National Monument and the Grand Staircase-Escalante National Monument. Revocation of Regulations. Congress intends to introduce legislation and pass resolutions that would reverse dozens of Obama Administration public land initiatives and regulations believed to seriously hinder the development of energy and mining projects on Federal lands, including blocking programs to protect endangered species, prohibiting EPA from implementing rules expanding the definition of wetlands, and halting adoption of methane emissions standards. Energy Policy. President Trump has released a draft energy plan that promises to expand energy development on the public lands. While it is unlikely that the new administration will successfully recraft years of public land law, there is little doubt that new policies will recast available uses of public lands for energy and resource development. We frequently assist Canadian companies looking to acquire, finance, permit, and develop mining and energy projects on public lands in the United States.