Client Alert
(by Blaine Lucas, Stephen Korbel and Max Junker)
Among the many challenges facing Pennsylvania municipalities during the Coronavirus pandemic is how to conduct business in compliance with applicable statutory requirements when the physical presence of their officials, constituents, development applicants and other interested parties is either highly discouraged by public health officials or prohibited altogether. This can be particularly problematic for applicants for a variety of local government land use approvals, consideration and action on which usually are statutorily mandated to take place at public meetings and hearings.
In an effort to address these issues, the Pennsylvania General Assembly is currently considering House Bill No. 1564 on an expedited basis. Among other things, HB 1564 would relax the requirements for physical attendance at public meetings during the Governor’s declaration of a disaster or emergency by substituting a variety of telecommunications alternatives. It also would provide for the suspension, or tolling, of statutory deadlines for municipal boards and agencies to hear and act upon a wide variety of land use and other development applications during the pendency of such a declaration. Notably, HB 1564 provides that an applicant can request, and a municipality at its discretion may proceed with, consideration and action on an application using telecommunication alternatives.
HB 1564 is on a fast track, with the House approving it on March 25, 2020, and the Senate expected to act upon it in the next several days. HB 1564 can be viewed here.
The following are the key provisions of HB 1564.
Use of Telecommunication Devices to Conduct Public Meetings
If the declaration is of a disaster or emergency which would render the conduct of public business dangerous to the health or safety of the members of the governing body, officials or members of the public, the governing body may exercise its executive, legislative, and judicial powers and functions, to the extent possible, by means of telecommunication devices without a quorum physically present at any one location, subject to the following requirements:
- The telecommunication device must permit audio communication between locations, and allow the members of the governing body to speak and hear any comments or votes;
- The governing body must, no later than 24 hours prior to the meeting, post notice on its website of the time and date of the meeting, along with instructions on how to obtain remote participation information, and notify the newspaper of general circulation which normally publishes such notices of the meeting;
- The governing body must (1) either live-stream the meeting, (2) record the meeting and make it available to the public within 24 hours after the meeting, including on the municipality’s website, if any, or (3) make draft meeting minutes available for public inspection within 48 hours after the meeting either on its website or at an accessible location within the municipality; and
- If the governing body has exercised any executive, legislative, or judicial powers or functions, at the next regularly scheduled public meeting once the declaration has been lifted the governing body must adopt a resolution stating both the actual emergency that occurred and the nature of the power or function exercised.
Extensions for Existing and Pending Approvals
If a municipality, its agency, or board has received an application, plat, plan or other submission for an “approval” as defined in Section 2 of the 2013 Permit Extension Act (which covers local government approvals pursuant to over 30 statutes, including the Municipalities Planning Code, the Flood Plain Management Act, the Stormwater Management Act, the Pennsylvania Construction Code, and the various city, borough and township codes) and the final day to approve or deny the application falls during a disaster declaration, the following would apply:
- As of the date of the declaration, all statutory time limits for review, hearing, and decision on the application will be suspended or tolled, and will resume on the date following the termination of the declaration;
- The municipality must notify the applicant of the declaration, the time extension, and of the right to request any meetings, hearings, or proceedings be conducted using telecommunication devices;
- The failure to receive the notice does not affect the tolling of days;
- The applicant may request any meetings, hearings, or proceedings as required by the law, charter or ordinance governing the application during the period of the disaster;
- The municipality may proceed with the request at its discretion;
- If the municipality agrees and holds the proceedings, the applicant, municipality, and any other parties receiving actual notice of the proceedings, waive any challenge to the proceedings under 42 Pa. C.S. §5571.1 (relating to appeals from ordinances, resolutions, maps) or any other provision of law; and
- The running period of any approval granted and in effect after the beginning of the declaration is automatically suspended during the declaration and resumes after the final termination of the disaster or emergency.
For additional information, please contact Blaine A. Lucas at blucas@babstcalland.com or 412-394-5657, Stephen L. Korbel at skorbel@babstcalland.com or 412-394-5627, or Robert Max Junker at rjunker@babstcalland.com or 412-773-8722.
Click here for PDF.
Employment & Labor Alert
(by Molly Meacham, Alexandra Farone and Chelsea Heinz)
This is a follow-up to Babst Calland’s client alert on the Families First Coronavirus Response Act provisions and related new leave requirements. The Department of Labor announced that the effective date will be April 1, 2020. The leave is not retroactive and begins April 1. Each company’s number of employees to determine whether it meets the 500-employee threshold will be calculated at the time the leave is to be taken. The Department of Labor released Question and Answer guidance available here, providing additional preliminary information on calculating the employee threshold, leave calculations, rate of pay calculations, and interactions with other types of leave. The full regulations have not yet been released, and are expected prior to the April 1 effective date.
The model notice issued by the Department of Labor is available here, and was issued along with a Frequently Asked Questions regarding the notice requirements available here. The notice does not need to be displayed until April 1, 2020 and most employers will want to wait to publish the notice until their FFCRA policy is ready to avoid employee confusion. The notice must be posted in a conspicuous place on the employer’s premises, which may include email, company intranet, or physically at the workplace depending upon current operations.
Please contact any of Babst Calland’s Employment and Labor attorneys if you need advice on the Families First Coronavirus Response Act and its requirements.
Click here for PDF.
Smart Business
(by Jayne Gest with Carl Ronald)
A trademark or service mark identifies a company as the source of a particular set of goods or services. It protects the association, in a consumer’s mind, between goods or services and the company that sells or produces them.
“We try to protect the goodwill a company has earned by registering and enforcing their trademarks to make sure no one obtains an unfair business advantage by trading off our clients’ goodwill in the marketplace,” says Carl Ronald, shareholder at Babst Calland.
Smart Business spoke with Ronald about adopting trademarks.
How long do trademarks last?
Theoretically, trademarks can last forever. Realistically, though, trademark protection lasts as long as you continue to use a name or logo in the marketplace. There are two types, registered and unregistered, and the latter is often called “common law” marks.
A registered trademark is a text or design mark that a company applies for with the United States Patent and Trademark Office. So long as the business continues to use the mark and appropriate maintenance procedures are complied with, the registration will be good for an unlimited number of renewable terms of 10 years each.
Common law marks, on the other hand, last as long as they continue to be used in commerce but convey less protection.
What’s the procedure for protecting a new product or business name?
First, identify the word or logo you wish to use with your product or service, and decide whether you’re likely to use it longer than a few years, in order to justify the cost. Is this a name for a core product, or a slogan that plays off a current event or product line that may change seasonally or annually?
Next, evaluate the strength of the mark. The strongest are made-up word(s) that don’t describe what you sell, like Xerox or Apple. Suggestive marks convey a characteristic of the goods or services being sold but don’t exactly describe them. An example of this slightly weaker mark is Netflix. Descriptive marks describe product features, such as Cold and Creamy for ice cream. It’s natural to want to use descriptive words in the name of a new product or business. Unfortunately, this tendency can lead to the adoption of trademarks that are weak source indicators.
After you’ve selected a mark, a clearance search can ensure your use of the mark won’t create confusion in the marketplace due to another pre-existing mark for similar goods. Assuming there are no conflicting marks, you’re free to begin using it in association with your products and services, while, ideally, filing a trademark application.
What if you expand into a new geography and someone’s already in that market?
This classic conflict is another reason to do a nationwide search and obtain a federal registration. If you’re an unregistered user of a mark, you’re likely out of luck. If you’re a registered user, you’re in a much better position if you registered before the other company began use of its identical or confusingly similar mark. You can likely compel them to stop using the mark. If they started using it first, your federal registration still provides some leverage. While you probably can’t force them to stop using the mark, you would have the power to keep them from expanding.
Where do businesses misstep with this?
Some companies confuse a corporate name with a trademark. The two overlap but aren’t identical. When adopting a new name, the exact name may not be taken, but that doesn’t mean a particular mark won’t infringe on the rights of another.
The question isn’t whether the marks are identical. The issue is whether adopting a mark in association with those particular goods or services is likely to cause confusion in the marketplace. Will consumers not understand the true source of those goods or services? Will they think there’s an affiliation or sponsorship between the two entities? A confusingly similar trademark can create just as many problems as an identical one.
What’s your takeaway for business owners?
When introducing a new product or service name or founding a new company, have a clearance search performed prior to adopting the new name. If the goods or services are offered on the internet or in more than one state, file a federal trademark application to protect your rights.
For the full article, click here.
For the PDF, click here.
Client Advisory
(by Jim Corbelli and Molly Meacham)
In the late afternoon of March 19, 2020, and without advanced notice, Pennsylvania Governor Tom Wolf issued an Order for all “non-life-sustaining businesses” in the Commonwealth to close their physical locations. The Order was effective at 8 p.m. last evening with enforcement to begin at 12:01 a.m. on Saturday, March 21. A copy of the Order can be found here. There are many questions that arise from the Governor’s Order, and it can be expected that further clarifications will be forthcoming from the Governor’s office. The Governor’s office has also issued a press release with additional information.
In a press conference at 2 p.m. today, the Governor stated that the guidelines are being revised based upon feedback from businesses and other stakeholders, and that the forthcoming guidelines will be in line with the federal government’s Cyberspace and Critical Infrastructure Security Agency (CISA) guidance that has identified 16 “Critical Infrastructure Sectors,” as available here. In addition, the Governor encouraged businesses to seek a waiver if they believe that they have been incorrectly categorized as “non-life-sustaining.” The waiver process is meant to “cut through red tape” and the Governor stated that decisions will issue via email.
While further guidance remains pending, this Alert will summarize the current Order and suggest methods to address confusion regarding the Order or to seek relief from its provisions.
The Order provides that “No person or entity shall operate a place of business in the Commonwealth that is not a life sustaining business regardless of whether the business is open to the members of the public.” The Order does not prevent working from home. The Order further provides specific guidance on what the Governor has decided is a “life sustaining business.” A list of businesses and industries that “can remain open” and their classification can be found here. No doubt the list was designed to attempt to provide clarity on what is a “life sustaining business.” However, the list creates uncertainty regarding what businesses are covered by the Order and how to obtain relief from the Order.
There are options to seek clarity regarding the Order. Those options include pursuing an exemption or clarification through the Governor’s office or an entity such as the Pennsylvania Department of Community and Economic Development (“DCED”) or challenging the Order in Court. Waivers can be sought through an online form, available here.
Babst Calland is closely monitoring the developments regarding the Order and providing input to our clients to address the Order and other risks caused by the novel coronavirus. If there are questions about the Order, please contact Jim Corbelli at jcorbelli@babstcalland.com or Molly Meacham at mmeacham@babstcalland.com.
Click here for PDF.
Pennsylvania’s Best Lawyers
(by Joseph Reinhart)
Much state environmental law is based on federal statutes. How can environmental-law attorneys help?
Environmental lawyers can be instrumental in sustaining rural communities and protecting natural resources by helping landowners and businesses understand the complex and interrelated laws and regulations governing so many aspects of economic development. Many municipalities in Pennsylvania have passed ordinances designed to protect residents in rural areas from environmental harm associated with natural-resource development. In some cases, these ordinances are issued with the intention of implementing Pennsylvania’s Environmental Rights Amendment. These ordinances may require approval prior to conducting activities as common as earth disturbance and road usage. Sorting out the laws and ordinances applicable to these activities, and determining which governmental authority has jurisdiction over them, are tasks well-suited to attorneys trained in environmental law.
Many states have developed their own climate-change plans. Do you think Pennsylvania will do that?
In 2018, Governor Tom Wolf issued an executive order establishing a Climate Action Plan for the commonwealth. The plan seeks to achieve, by 2025, a 26 percent reduction in greenhouse-gas emissions from 2005 levels. It includes a wide variety of proposed actions, including improvements in energy efficiency, increased use of electric vehicles, maintenance of nuclear generating capacity, and investment in solar development. The plan also contemplates development of a cap-and-trade program to limit carbon-dioxide emissions.
Will the passage of certain laws be necessary?
Wolf’s executive order requiring the development of a cap-and-trade program has been met by stiff resistance from parties concerned about the costs and potential adverse economic consequences associated with a carbon tax. In December 2019, members of the Pennsylvania House and Senate referred bipartisan companion bills, known as the Pennsylvania Carbon Dioxide Cap and Trade Authorization Act, to their respective environmental and energy committees. The proposed legislation provides that there is currently no statutory or constitutional authority allowing a state agency to impose a tax on carbon emissions, and requires the General Assembly, in consultation with the DEP and other agencies, to determine whether and how to do so. Regardless of the outcome, any laws dealing with a cap-and-trade program in Pennsylvania are likely to receive considerable attention and require input from environmental lawyers representing all interested parties.
Click here for PDF.
Environmental Alert
(by Kevin Garber, Sean McGovern and Jean Mosites)
On March 6, 2020, Governor Tom Wolf issued a Proclamation of Disaster Emergency throughout the Commonwealth under the Pennsylvania Emergency Management Services Code in response to the expanding COVID-19 coronavirus pandemic. On March 13, President Donald Trump declared a state of national emergency. Many other states and local governments are following suit. These government actions may be a basis to invoke the force majeure clause of consent orders and consent decrees between regulated parties and the Pennsylvania Department of Environmental Protection, other state and local environmental regulatory agencies or the U.S. Environmental Protection Agency.
The standard force majeure provision of most PADEP consent order and agreements allows deadlines in the order to be extended if circumstances beyond the reasonable control of the regulated party prevent compliance with the order. Similar provisions are often found in consent agreements with USEPA and in consent decrees approved by federal and state courts. These force majeure provisions typically require the affected party to notify the agency of the force majeure event when the party becomes aware or reasonably should have become aware of the event impeding performance. For example, the model PADEP Consent Order and Agreement requires telephone notice within five working days and written notice, in some circumstances by notarized affidavit, within 10 working days describing the reasons for the delay, the expected duration of the delay, and the efforts being taken to mitigate the effects of the event and length of the delay. This model provision states that failure to comply with the timing and notice requirements invalidates a force majeure extension.
There are compelling reasons why the coronavirus pandemic, which is unlike any event experienced in this country, is beyond the contemplated scope of agency force majeure clauses such that strict adherence to the timing and notice provisions should be excused and extensions should be granted as necessary. If the pandemic is interfering or threatening to interfere with your ability to comply with requirements or deadlines in a consent order or consent agreement, because of a limited availability of employees, vendors, supplies or otherwise, consider potential options within the force majeure clause of the agreement. Also consider an application of force majeure principles to pandemic-related difficulties complying with environmental permits.
Babst Calland’s Environmental attorneys are available to help you with your situation and recommend the best course of action for proceeding in these uncertain times. For more information, please contact Kevin J. Garber at (412) 394-5404 or kgarber@babstcalland.com Sean M. McGovern at (412) 394-5439 or smcgovern@babstcalland.com, or Jean M. Mosites at (412) 394-6468 or jmosites@babstcalland.com.
Click here for PDF.
Employment & Labor Alert
(by Molly Meacham, Alexandra Farone and Chelsea Heinz)
The Families First Coronavirus Response Act (the “Act”) was enacted on March 18, 2020 and adds two additional types of leave connected to the coronavirus (“COVID-19”) pandemic. Employers should immediately institute policies relating to these new leaves to ensure proper compliance and to avoid violating the Family and Medical Leave Act or the Fair Labor Standards Act.
Key Provisions Related to Coverage
- The new leave provisions apply to private sector employers with fewer than 500 employees and provide eligible workers with additional paid and unpaid time off over and above any existing leave already provided by their employer. Businesses that were too small to be previously subject to FMLA are now covered by these provisions.
- Under the Act, the Secretary of Labor is given the authority to issue regulations that would exclude health care workers and emergency responders from the Act, as well as businesses with less than 50 employees where the regulations would jeopardize the business as a going concern. Unless and until the Secretary of Labor issues such regulations, the provisions of the Act apply to all private sector employers with less than 500 employees.
- Any leave payments made pursuant to the Act are capped as described below at the amount of the tax credits created to reimburse employers (maximum aggregate over both leaves of $15,110 per employee).
- The Act is effective not later than April 2, 2020, and remains in effect until December 31, 2020. Under the Act the Department of Labor is to issue a mandatory workplace poster relating to the new leave provisions by March 25, 2020.
Emergency Paid Sick Leave
- Full-time employees regardless of tenure are immediately eligible for 80 hours of paid sick leave on the Act’s effective date.
- Part-time employees are eligible for additional paid sick leave proportional to their typical work hours over a two-week period.
- Employers are prohibited from requiring an employee to use other paid leave provided by the employer before using this emergency paid leave.
- The emergency paid sick leave may be used for the following circumstances:
-
- to comply with a federal, state, or local quarantine or isolation order related to COVID-19;
- on the advice of a health care provider to self-quarantine because of COVID-19;
- if an employee is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
- if an employee is caring for a son or daughter whose school or place of care is closed or the child care provider is unavailable due to COVID-19; or
- the employee is experiencing “any other substantially similar condition” specified by the Secretary of Health and Human Services.
- An employee must only provide “reasonable and practical” notice of the need for this leave.
- The leave is to be paid at the employee’s regular rate of pay, up to a maximum amount of $511 per day ($5,110 aggregate) for reasons (a) through (c), and a maximum amount of $200 per day ($2,000 in the aggregate) for reasons (d) and (e).
- Failure to provide this leave is a violation of the Fair Labor Standards Act.
Emergency Family and Medical Leave
- FMLA is amended to allow employees who have been employed for at least 30 days to take up to 12 weeks of FMLA leave for a “qualifying need related to a public health emergency.”
- This is limited to an employee being “unable to work (or telework) due to a need for leave to care for the son or daughter of such employee if the school or place of care has been closed or the child care provider of such son or daughter is unavailable due to a public health emergency.”
- The first 10 work days of leave may be unpaid, covered by an employer’s existing leave provisions, or covered by the Act’s emergency paid sick leave. This is at the election of the employee and cannot be dictated by the employer.
- After 10 work days, employers must provide up to 10 additional weeks of paid FMLA at no less than two-thirds of the employee’s regular rate of pay, up to a cap of $200 per day and $10,000 in the aggregate. The Act includes a calculation for employees with varying schedules.
- For small businesses with fewer than 25 employees, the Act includes reinstatement exceptions to the general FMLA requirements.
- As an extension of FMLA, employers must be prepared to strictly comply or risk a claim of FMLA interference or retaliation.
Along with the model poster that is required within seven days, it is likely that the Secretary of Labor will issue regulations within the next fifteen days as anticipated by the Act.
Babst Calland’s Employment and Labor attorneys can assist employers that are subject to the Act by helping them develop a COVID-19 policy for their organization that complies with the Act, answering questions about how these leaves will apply to their employees, and answering questions about the application of the Act to an employer’s changing operational circumstances. For more information about the Act’s requirements and how Babst Calland can assist you, please contact Molly E. Meacham at (412) 394-5614 or mmeacham@babstcalland.com.
Click here for PDF.
Client Advisory
(by Christian Farmakis)
Dear Clients and Friends:
Clearly, in light of the COVID-19 pandemic, this is a time for reflection and a time for staying on top of our personal and professional priorities.
With the Coronavirus pandemic having a widespread effect on business continuity, supply chains and revenues, Babst Calland and its alternative legal service provider, Solvaire, are currently advising C-suite executives and managers as they seek to quickly assess their contract provisions, evaluate their exposure and make effective operational and financial risk-based decisions. Of particular concern, key suppliers may desire to invoke “force majeure”, delay or termination provisions during this time of uncertainty. Similarly, our clients may desire to invoke these same provisions to delay or terminate unessential projects.
By employing a series of AI/machine learning and other legal technologies, we can conduct accelerated and thorough searches across huge document sets revealing key information about each contract before our professional staff even begins reviewing the documents.
During this time, we understand the unprecedented challenges your organization and internal teams may be facing. Our team is here to help. Solvaire has 20 years of project management and quality control experience to organize and manage contract review projects from start to finish.
We employ flexible staffing models and can quickly ramp up staffing based on deadlines and need. Our reviewers and staff are fully capable of working remotely, allowing us to comply with the latest CDC Guidelines regarding social distancing.
Projects can be customized to fit your timeline and needs. Representative contract clause extraction provisions include force majeure, material adverse effect, termination, insurance, delay, term, governing law, payments and notice information, among others. Our legal technologies can also be quickly “trained” to find critical contract provisions unique to your business or industry.
Our entire team stands ready to assist in your business continuity. Please take care of yourself, your families, your customers and your business. Let us know how we can help. For immediate assistance, please call me at (412) 337-9269, or my colleague Charles G. Rile at (412) 654-6528.
Thank you.
Christian A. Farmakis
Chairman of the Board, Babst Calland
President, Solvaire
Click here for PDF.
The PIOGA Press
(by Kevin Garber and Jean Mosites)
On February 13, the Department of Environmental Protection presented its preliminary draft proposed rulemaking to establish a carbon dioxide budget trading program to the Air Quality Technical Advisory Committee (AQTAC). The proposed trading program would apply to fossil fuel fired electricity generators of greater than 25 MW in Pennsylvania. The draft proposal reflects a first look at DEP’s vision for a cap-and-trade program as directed by Governor Tom Wolf’s October 3, 2019, Executive Order 2019-07.
The draft proposed rule, although still in development, parallels the model rule prescribed by the Regional Greenhouse Gas Initiative (RGGI). RGGI is a coalition of 10 states in the Northeast and Mid-Atlantic that participate in a regional CO2 cap-andtrade program for fossil fuel-fired electricity generating units that have a nameplate capacity of over 25 MWe.
Under the program, each member state has a budget of CO2 allowances, which it then allocates through setaside programs, offsets or periodic auctions. The number of allowances in each state’s CO2 budget that are allocated through auction varies widely among members. Each affected source (CO2 budget source) is required to hold sufficient CO2 allowances based on its CO2 emissions as determined from continuous monitoring. Each allowance is equal to one ton of CO2 emissions.
States’ CO2 budgets, and in turn available allowances, periodically reduce over time. This requires each CO2 budget source to either reduce CO2 emissions as measured by continuous monitoring, or obtain extra CO2 allowances to cover its emissions in excess of its allowance account. Under RGGI, auctions to obtain allowances generally occur quarterly, and may be open to qualified participants other than CO2 budget sources. The draft proposed rule explicitly mentions financial institutions and environmental groups as potential auction participants. The proposal specifies an annual rather than quarterly auction process.
Unlike the majority of RGGI state members, Pennsylvania DEP has indicated it does not intend to seek legislative authority to implement a CO2 trading program, but rather believes it has sufficient authority under the Pennsylvania Air Pollution Control Act. This position has been controversial, as some stakeholders contend that approval by the Pennsylvania General Assembly is necessary for such a trading program, including one that would involve other states. In November 2019, bills were introduced into the House (HB 2025) and Senate (SB 950) that would require General Assembly approval for any Pennsylvania carbon cap-and-trade program. This legal dispute is likely to give rise to significant ongoing challenges to the trading program rule.
DEP’s draft proposed rule contains a number of differences from the RGGI model rule, most notably including:
- The proposed rule states that it is designed to reduce CO2 emissions “in a manner that is protective of public health, welfare and the environment and is economically efficient,” while the RGGI model rule mentions only economic efficiency in its statement of purpose. Numerous concerns were raised at the AQTAC meeting regarding the overall cost-effectiveness of the trading program, an analysis of which will be required under Pennsylvania’s Regulatory Review Act, Commonwealth Attorneys Act and the Climate Change Act. DEP indicated it is still assessing costs and benefits of the trading program. The overall economic impact of the regulation will be a critical issue to a variety of stakeholders as the rulemaking progresses.
- The draft proposed rule does not require the establishment of multi-state allowance auctions, as performed within RGGI. Rather, the draft proposal gives DEP discretion to hold auctions only within Pennsylvania if it determines, among other things, that its participation in a multi-state auction process would not provide more benefits than costs to Pennsylvania versus a statewide auction. There is no established timeframe in the draft proposed rule for Pennsylvania DEP to determine which approach it will take.
DEP is operating on an accelerated timeframe to initiate and ultimately finalize the CO2 budget trading program rulemaking. It intends to present a proposed version of the regulation to AQTAC in April, at which point the committee will vote on whether to advance the proposal to the Environmental Quality Board (EQB). DEP anticipates submitting the proposal to the EQB by July as required by Executive Order 2019-07. Assuming the EQB votes to adopt the regulation as a proposed rulemaking, public comments will be solicited in fall of 2020, and the final rulemaking could be promulgated by fall 2021. DEP expects the regulation to be effective in the first quarter of 2022.
Owners and operators of fossil fuel-fired electricity generating units greater than 25MW will be directly affected by the CO2 budget trading program rulemaking if the rule is adopted in its currently proposed form. In addition, the energy industry, manufacturers and consumers in general are likely to be affected by the rulemaking based on the potentially far-reaching impacts to the nature of energy generation within Pennsylvania and regionally.
Babst Calland’s climate change attorneys are closely following this rulemaking. If you have questions about the proposed CO2 budget trading program, please contact Kevin Garber at 412-394-5404 or kgarber@babstcalland.com or Jean Mosites at 412-394-6468 or jmosites@babstcalland.com.
Click here for PDF.
Developing Pittsburgh
(by Matthew Moses, Mary Binker, Ben Clapp and Casey Snyder)
Proposed changes to regulations implementing the National Environmental Policy Act of 1969 (NEPA) have the potential to affect real estate development within the greater Pittsburgh region and nationwide. The proposed regulations, issued by the Council on Environmental Quality (the “CEQ”) in January 2020, would revise NEPA procedures by narrowing both the scope of actions that must be reviewed under NEPA as well as the extent of such review. With these changes, the time, cost and environmental analysis required to comply with NEPA could be significantly reduced, and development projects that previously faced delays could proceed more quickly through the review process, or potentially avoid it altogether.
Background and Purpose of NEPA
NEPA was enacted in 1970 with the goal of promoting accountability and transparency in federal decision-making by ensuring that the environmental impacts associated with federal actions were considered by the agencies undertaking those actions. Under NEPA, each federal agency is responsible for conducting a NEPA analysis on all agency actions that are deemed “major Federal actions” to determine if such actions impact the environment. “Major Federal actions” are currently defined in CEQ NEPA regulations as “actions with effects that may be major and which are potentially subject to federal control and responsibility” (emphases added). That may include both federal projects and projects undertaken by non-federal entities that receive federal funding or require federal permitting. Examples of major Federal actions include oil and natural gas pipeline construction projects, highway construction, and bridge replacement. The federal agency that takes a major Federal action (e.g., the issuance of a permit) is required to prepare an analysis of the project’s effects on the environment, which can take three forms: (i) a categorical exclusion (CE) for an action that has been previously determined to involve no significant environmental impacts; (ii) the preparation of an environmental assessment (EA) for an action for which environmental impacts are not expected to be significant, which identifies the anticipated effects of the action and assesses their significance; or (iii) a more extensive environmental impact statement (EIS) for an action with known significant environmental impacts, involving the analysis of adverse environmental effects from, and alternatives to, the proposed action. While NEPA itself does not provide a mechanism for the public to challenge an agency’s NEPA analysis, the public has the right to conduct such a challenge through the citizen suit provisions of Administrative Procedure Act.
Proposed Changes to NEPA
The revisions to the NEPA regulations that were proposed by the CEQ in January seek to create a more efficient and timely review process by changing the application and scope of NEPA reviews, the analysis of alternatives to the proposed action, and timing requirements. The most significant change would be a revision of the term “effects.” Under the current regulations, “effects” include:
a. Direct effects, which are caused by the action and occur at the same time and place.
b. Indirect effects, which are caused by the action and are later in time or farther removed in distance, but are still reasonably foreseeable. Indirect effects may include growth inducing effects and other effects related to induced changes in the pattern of land use, population density or growth rate, and related effects on air and water and other natural systems, including ecosystems.
c. Cumulative effects, which are effects that result from the incremental impact of the action when added to other past, present or reasonably foreseeable actions
The proposed revised definition of “effects” would be:
[E]ffects of the proposed action or alternatives that are reasonably foreseeable and have a reasonably close causal relationship to the proposed action or alternatives. Effects include reasonably foreseeable effects that occur at the same time and place and may include reasonably foreseeable effects that are later in time or farther removed in distance. (1) Effects include ecological (such as the effects on natural resources and on the components, structures, and functioning of affected ecosystems), aesthetic, historic, cultural, economic (such as the effects on employment), social, or health effects. Effects may also include those resulting from actions that may have both beneficial and detrimental effects, even if on balance the agency believes that the effect will be beneficial. (2) A “but for” causal relationship is insufficient to make an agency responsible for a particular effect under NEPA. Effects should not be considered significant if they are remote in time, geographically remote, or the product of a lengthy causal chain. Effects do not include effects that the agency has no ability to prevent due to its limited statutory authority or would occur regardless of the proposed action. Analysis of cumulative effects is not required.
This definition would thus remove the references to direct and indirect effects, and would include only those effects that are “reasonably foreseeable and have a reasonably close causal relationship to the proposed action or alternative.” The requirement for analysis of cumulative effects would be explicitly eliminated. The proposed definition further clarifies that a “but for”causal relationship would be insufficient to trigger an analysis of a particular effect. Rather, the phrase “reasonably close causal relationship” is intended to eliminate effects that are remote in time or in geography, an agency has no authority to prevent, or would happen regardless of the agency action.
Notably, the proposed regulation does not specifically address the extent to which an agency would be required to analyze effects from greenhouse gas emissions and potential climate change impacts, other than to note that any such analysis must be consistent with the proposed definition of “effects.”
However, the CEQ’s proposed draft guidance on consideration of greenhouse gas emissions, released last June, would give agencies latitude in determining when quantification and analysis of greenhouse gas emissions and their effects are warranted. In the its proposal, the CEQ has requested input on whether the proposed regulation should incorporate any aspects of that draft guidance.
The proposed regulation also aims to clarify the determination process for whether or not a particular federal action triggers a requirement for NEPA review. Under its proposed rule, the CEQ seeks to modify the definition of “major Federal action” to remove the word “potentially” as well as the portion of the definition that relates to a failure to act. That would result in a narrowing of the definition of major Federal action to only affirmative actions that are clearly subject to federal control and responsibility. Additionally, the proposed definition would clarify that loans, loan guarantees or other forms of financial assistance in cases where the agency does not have sufficient control and responsibility over the effects of the action, are not within the scope of a major Federal action and thus not subject to NEPA analysis. With respect to EIS analysis of alternative options to the proposed major Federal action, under the current regulations, an agency must analyze all reasonable alternatives, including those that are not within the jurisdiction of the agency. The CEQ proposes to strike the term “all” from this requirement, allowing an agency to provide a reasonable number of examples that are technically and economically feasible. In addition, the CEQ proposes to remove the requirement that an agency analyze alternatives outside of its jurisdiction.
The CEQ’s proposal contains various other revisions aimed at streamlining the NEPA process, such as clarifying the process by which an agency can create a CE and allowing agencies to establish procedures for applying CEs created by other agencies. These changes also include more practical components, such as establishing presumptive time limits for NEPA reviews – two years for an EIS and one year for an EA. The proposed revisions, if adopted as a final regulation, would supersede all previous CEQ NEPA guidance, which would be withdrawn.
Potential Impacts to Real Estate Development
The proposed revisions to NEPA could have a significant impact on real estate developments that involve federal funding and/or permits, including both large infrastructure and energy projects. Since the inception of NEPA, projects meeting the “major Federal action” criteria have had to undergo time-consuming review, and have been subject to legal challenges by project opponents. Developers have faced substantial costs in preparing the necessary documentation of anticipated environmental effects, the costs of delays while projects remain under extended review, and the uncertainty of ultimate approval. For example, a Montana federal district court temporarily enjoined construction of the Keystone XL pipeline in 2018 on the basis that the lead agency – the U.S. Department of State – violated NEPA by failing to evaluate the cumulative environmental pacts of the project. If the CEQ’s proposed regulatory revisions are adopted, its changes to the definition of effects can be expected to result in more flexibility for agencies performing review of environmental effects and may make it more difficult for opponents to challenge an agency’s NEPA review. Additionally, the proposed time limits for NEPA review could also significantly reduce the current average timeframes for NEPA review by more than 75 percent, which in practice could ultimately allow projects to proceed to construction more quickly.
Based on the likely impacts to a wide variety of industries and projects that require approvals, funding or other actions by federal agencies, developers of projects that are potentially subject to NEPA review and other stakeholders are encouraged to comment on the CEQ’s proposed regulation. The deadline to submit comments is March 10, 2020. There will also be two public hearings on the proposed regulations – on Feb. 11 in Denver, Colorado, and on Feb. 25 in Washington, D.C.
Click here for PDF.
Jean M. Mosites was recently appointed by Rep. Mike Turzai, the Speaker of the Pennsylvania House of Representatives to the Pennsylvania Environmental Hearing Board Rules Committee. Committee members serve two-year terms and may be reappointed for additional terms.
The Rules Committee reviews and makes recommendations regarding procedural rules for matters brought before the EHB. The Committee consists of nine attorneys who are in good standing before the Bar of the Supreme Court of Pennsylvania and who have practiced before the Board for a minimum of three years or who have comparable experience.
As a shareholder in Babst Calland’s Environmental and Energy and Natural Resources practice groups, Ms. Mosites has extensive experience representing clients in administrative appeals and environmental litigation in state and federal courts and before the Environmental Hearing Board in Pennsylvania, as well as counseling on environmental compliance and resolving liabilities under federal and state law.
Emerging Technologies Profile
Is there one thing you recall that influenced your career path? Yes, I started thinking about hands-free vehicles when I was just a kid. On a vacation back to the U.S., as my father accelerated the family station wagon onto the highway, I imagined something like a subway’s third-rail. Vehicles would connect to it and travel forward in a safe and graceful caravan. Drivers would be able to use their time how they pleased—maybe playing a game of cards with their daughters. When it was time to return to active driving, the vehicle would disconnect, and the driver would resume the controls. Even back then, the idea made so much sense to me.
What may surprise people about your background? As an attorney at the EPA, I was involved in rulemaking and enforcement for the first part of my career. In private practice, I represent companies that have been the focus of EPA’s regulations. Some of my friends tell me that my best skill is as an intermediary who can play on both sides of the regulatory fence.
What brought you to the nation’s capital? As the daughter of an American working abroad, I was raised all over Latin America. While growing up in countries still squarely under the thumb of charismatic caudillos, the idea of a country governed by law instead of one man’s whims seemed like a paradise. I’ve always been impressed by the predictability that stare decisis and precedent lend to our system. My law degree is from Georgetown, and from there I joined the EPA where the focus was on implementing the 1990 amendments to the Clean Air Act.
How do you ease your daily commute into/out of the District? Currently, while en route, I’m listening to the audiobook Go, Went, Gone by German novelist Jenny Erpenbeck. It’s a story about a widowed, retired professor in Berlin who experiences a transformation after he witnesses African refugees during a hunger strike and subsequently becomes involved in their immigrant community first as an academic pursuit and then as a friend.
Do you think AI will ever advance far enough to take over your complex job anytime soon? AI is already making our legal work more efficient. But, not yet to the point where it can replicate the high value logic and judgment that we aspire to every day. Nevertheless, when the time comes for technology to replace legal counsel, I’ve got a plan for what to do next.
So, what does that future plan include? If and when that happens, my plan is to travel extensively across Latin America where I grew up to see how it’s changed. When that’s done, it’ll be off to Australia for a couple of months.
Click here for PDF.
Smart Business
(by Jayne Gest with Chris Farmakis)
Vivak Gupta has hands-on experience with M&A — including his share of battle scars — after 36 years in the IT industry. Most recently, he was the president and CEO behind Mastech Digital’s $55 million deal for InfoTrellis in 2017.
No two acquisitions are the same, but he says he tries not to make the same mistakes twice.
“It’s a pretty complex process, and there is no shortcut but to actually learn from experience,” Gupta says. “It’s baptism by fire — you have to burn your fingers and then you really get to know what works and what doesn’t work.”
But even when Gupta isn’t actively looking to buy or sell a business, he keeps an eye on the dealmaking market — who is buying and selling companies and raising capital — because it’s a good indicator of what’s happening in the industry.
“Why is my competitor acquiring a company in, just as an example, the cloud space?” he says. “How is it connecting with their current strategy? Then, you watch how they complete the acquisition and how the market rewards them or penalizes them for that acquisition.”
Gupta isn’t alone in his feelings about the value of M&A. Many executives, investors and advisers see how mergers, acquisitions and dealmaking play a critical role in business today — both directly and indirectly. And those who ignore it run the risk of falling behind as their competitors scoop up a new technology, diversify into new geographies, raise growth capital and implement long-term exit plans that help them operate better.
You owe it to yourself to build your M&A knowledge and network, but don’t take our word for it. Here’s what some of Pittsburgh’s dealmakers had to say.
Take the initiative
M&A is done by different companies for different reasons, Gupta says, adding that you can get ideas from watching others, including honing your own strategy, because it’s important to agonize, from the beginning, about why you’re doing deals.
Many times, organizations are approached by someone looking to sell, such as founders looking to exit.
“That’s not a bad thing, but that’s more reactive,” he says.
It’s better to start at the drawing board and figure out your purpose for buying a company, Gupta says. Is it to bulk up or add new capabilities? Are you trying to diversify? Are you trying to realign the organization?
Gupta stays in touch with what’s going on in his industry by subscribing to numerous M&A reports and scrutinizing them to try to determine what his competitors’ objectives are and if they’re working out — and sometimes gets good ideas from his research.
Watching the dealmaking market isn’t just a way to gather ideas. It’s also a way to be ready for changing market conditions.
Chris Farmakis, shareholder and chairman of the board at Babst Calland, sees a lot of private equity capital in the marketplace chasing down middle-market deals. These firms are good at spotting regional or family-owned businesses, investing in one and then doing roll-up acquisitions to consolidate the industry.
“Business owners need to pay attention to this activity because what could happen is, you might be in an industry that consolidates and you’re the last standalone business,” he says. “You wait too long — you have no one to sell to or, at best, your purchase price is lower.”
Even if you’ve been successfully operating your business for 30 years, consolidation can add pricing or competitive pressures because your competitors now have scale.
“Business owners focus more on customer relationships and operations, as opposed to changing market conditions outside of their industry,” Farmakis says. “Sometimes, it’s important for them to lift their heads up and take a broader look at the market.”
Farmakis recommends utilizing trade associations as a resource, but doing so requires a different kind of networking than what business owners would normally be doing — which is mining customers, looking at new operations and other things that relate to operations.
For example, business owners can get a sense of market-based pricing for their industry, and people share things like, “The multiples are landing here,” or “This is what I heard they sold their company for.”
“Trade associations and industry associations can be a very good heartbeat or pulse as to what’s going on in the industry, and it’s a way to get direct and indirect information about people who have sold,” Farmakis says. “You can get a sense of, if you’re buying, what companies might cost and how they’re funded.”
Know your value
President and CEO Michael Wagner started Target Freight Management more than a decade ago. He did his first two deals in 2019 when he bought out his business partner and acquired his first company. However, he paid attention to M&A prior to that, as it helped him understand the market and how his company’s value was changing.
Wagner knew what multiples logistics businesses were selling for — and he even had larger corporations pitching to him and asking him to sell.
“I wasn’t looking to exit, but there were big numbers thrown around in my business in the last three or four years,” he says. “I think it’s slowed down a little bit, but it’s just good to understand and know what’s going on in your business from that standpoint.”
Wagner also already had a foundation of knowledge when his partner wanted to sell. Wagner, who has never worked in another industry, wasn’t ready to retire at age 40, and he didn’t want to work for somebody else or wait until a noncompete ran out.
“It was important for me to understand the value of the business, and what it was going to cost me to buy him out,” he says.
John Roppo believes that knowing your value is just the start. Preparing for a sale takes time — especially if you want to get the best price you can. The long-time CFO started his own firm, Roppotunity LLC, to help companies prep for sale, among other things.
“You can’t bring somebody in three to six months out and say, get the company ready for sale,” he says. “You can do it, but you’re not going to get the best value, or you’re going to have a higher risk of the deal falling apart.”
Dawn Fuchs Coleman and her family’s business, Weavertown Environment Group, is a good example of why it’s important to be prepared. They had been approached numerous times by venture capital groups and angel investors but were never really interested.
When Univar, however, came to the environmental services company in 2015, she decided to listen to its offer, and nine months later, the sale went through.
Her reasons were many, but the timing was right. Fuchs Coleman wasn’t sure if the next generation, which was still young, was interested in running the company. She also knew the company couldn’t continue to self-finance, so a large strategic buyer was appealing.
“I had an uncle that had a very successful family business in the second mortgage lending space,” she says. “He had an offer to sell his business. He turned it down, and years later, I think he always regretted it. So, I had that in the back of my mind, too.
“You can’t be naïve, and you can’t be ignorant. You’ve got to be willing to hear it. If it feels right, listen; don’t just stop and say, ‘I’m not interested.’ You have to be open-minded.”
Use all available growth tools
Sreekar Gadde, executive director at BlueTree Capital Group, has noticed that staying updated on the M&A market allows business leaders to better plan for the future.
“This allows leaders to make informed decisions about their business — basically making sure that they are moving with the market and not stagnating,” he says. “In addition, this allows leaders to keep an eye open for M&A opportunities.”
They may discover a strategically advantageous chance to merge or acquire companies at a low value that will improve the business’s future opportunities, Gadde says.
BlueTree Capital Group also tends to view all major decisions in the context of M&A, he says. What is the ROI? Can the venture capital firm see a way to get a 3x to 5x on the capital or resources spent?
“In view of that, most, if not all, parts of a growth strategy need to be considered within the context of the M&A market,” Gadde says.
Business owners may want to use a similar lens on their decisions, especially if there’s a possibility that they want their company to be acquired in the future.
“Business owners need to constantly be informed about the M&A ecosystem — both the current status and where the ecosystem is headed,” he says. “This informs every decision they make, from product roadmap, to hiring, to financing and, eventually, when to start the acquisition process and how to position their company to get the most favorable terms.”
The most effective business leaders use all available tactical and strategic tools to grow shareholder value, says Louis Testoni, a retired market managing partner with PricewaterhouseCoopers who serves on a number of corporate boards.
Buying companies or divesting assets is one of those tools.
“Divestitures can be a valuable tool to monetize underperforming assets and/or assets no longer aligned with the core business strategy,” he says.
They can also unlock intrinsic value sitting on the balance sheet to reinvest in alternative ways, or reduce debt or increase working capital to support other parts of the business’s growth strategy.
For the full article, click here.
Smart Business
(by Jayne Gest with Kevin Wills)
Representations and warranties insurance, which has become more affordable for merger and acquisition transactions, is growing much more prevalent in recent years as the market for such insurance has grown more competitive.
“If you haven’t paid attention or you’re not a regular acquirer of businesses or assets, your opinion of reps and warranties insurance might be dated,” says Kevin T. Wills, shareholder and chair of the corporate and commercial group at Babst Calland.
Smart Business spoke with Wills about how representations and warranties insurance works and what to consider with this risk mitigator.
What are the benefits of utilizing reps and warranties coverage?
These policies can be advantageous for both buyers and sellers.
For a seller, it can reduce or eliminate any need to holdback or escrow a portion of the purchase price with respect to post-closing indemnification claims for breaches of representations and warranties. This provides a seller with a cleaner exit with less contingent liabilities and more certainty as to the sale proceeds. Additionally, if a seller is going to have an ongoing relationship with the buyer, it also avoids the potential awkwardness a lawsuit may cause.
On the buyer side, it can make your bid more attractive if the seller knows that it will not be responsible for post-closing claims for breaches of representations and warranties. It helps with the negotiation of the purchase agreement because a seller is less concerned with their post-closing exposure for breaches of representations and warranties, which saves time and reduces legal fees. Also, in some instances, the coverage limit and duration that the buyer acquires — the amount of the insurance policy and the term thereof— may exceed what the seller would be willing to give in a negotiated indemnification context. Further, liability baskets and caps do not need to be negotiated with an insurance company.
What are some limitations to be aware of?
A representations and warranties policy is not a cure all; an insurance policy is not a guarantee of recovery.
Further, this insurance only covers breaches of representations and warranties. It does not cover, for example, items such as breaches of covenants of a seller; breaches for which the buyer had knowledge at closing; retained liabilities of the seller, unless they can be tied to a breach of a representation; purchase price and working capital adjustments that might be negotiated in a purchase agreement; and extraordinary losses (those exceeding the policy amount). The policy will contain certain exclusions based on the insurance company’s underwriting that won’t be covered as well.
That is why it is critical for buyers to truly understand the policy binder before obtaining the coverage. Just because a buyer has expended $50,000 in underwriting fees, does not mean the buyer should proceed to pay the premium of 2 to 3 percent of the purchase price if the coverage does not look right once the buyer reviews the policy.
Where wouldn’t reps and warranties coverage make sense?
A strategic buyer who conducts robust due diligence and is familiar with the subject matter of the transaction may not want to spend additional money to acquire a policy. Further, the lower the deal value, the higher the sticker shock and impact on the deal may be. Percentages are universal, but 2 to 3 percent of $20 million, which is a typical minimum deal value for an insurance carrier, can have a greater impact to the bottom line than 2 to 3 percent of $1 billion.
How often are claims paid out?
Claims are typically subject to arbitration, so claims payment is not usually public. However, a payment history is being established and there is a growing track record of honoring claims. For example, insurance carrier AIG reported that in 2018 it had a 19.4 percent claims frequency and the average claim payout was $19 million.
What’s your takeaway for business owners?
Representations and warranties coverage appears to be here to stay and is something to seriously consider for your next deal. Further, it may be something that buyers are obligated to do, especially in a bid process. Some sellers with a desirable business or assets are requiring buyers to buy representations and warranties insurance.
For the full article, click here.
For the PDF, click here.
Emerging Technologies Alert
(by Justine Kasznica and Boyd Stephenson)
Technology companies seeking foreign investment should be aware of recently effective changes to the Committee on Foreign Investment in the United States (CFIUS) notification process for investments by foreign entities. While these changes generally mirror CFIUS’ recently terminated pilot project, differences between the programs could determine whether a US business needs to file with CFIUS for pre-foreign investment review. The following client alert explains the program changes in greater depth.
On January 17, 2020, the Treasury Department’s Office of Investment Security (Treasury) released two final rules requiring some foreign entities acquiring an interest in a US business with a national security nexus (Transaction Rule)[1] or real estate near air or sea ports or near US military installations (Real Estate Rule or, collectively, Rules)[2] to be approved by the Committee on Foreign Investment in the United States (CFIUS) before the transaction can be completed. The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) required Treasury to expand the Transaction Rule—which previously required CFIUS review over only foreign investments that could result in foreign control of a US business—to include non-passive but non-controlling investments and to adopt the Real Estate Rule.[3]
The Treasury implemented a version of the Transaction Rule under a 2018 interim final rule and through a pilot program requiring mandatory declarations of certain transactions involving investments by foreign entities in US businesses beginning November 10, 2018.[4] On September 24, 2019, the Treasury issued notices of proposed rulemaking for the Transaction Rule[5] and the Real Estate Rule.[6] The Transaction Rule replaced the pilot program beginning February 13, 2020. The Real Estate Rule also took effect that day.
What’s in the Rule?
- The Transaction Rule largely continues the processes adopted for the pilot
project, which expands CFIUS’ review jurisdiction over foreign acquisitions of substantial interests in businesses with critical technology, critical infrastructure, or with access to sensitive personal data (TID Business). Like in the pilot program, CFIUS filings are now mandatory for both any transaction where a foreign government of a single state holds a substantial interest (49% or more) in any foreign entity acquiring a substantial interest (25% or more) in a TID Business and any transaction where a foreign entity gains control or access to information in a TID Business deploying technology in areas of concern to CFIUS, known as covered transactions.
- The Real Estate Rule adopts an analogous process for real estate sales, leases, and concessions with foreign entities acquiring real property within one mile of an airport or seaport and real property within various distances of military installations, increasing from one mile to any real property within the same
county, based on the type of military installation.
- Both Rules adopt the pilot program’s declaration process, which allows entities engaging in simpler covered transactions or those with a more distant nexus to national security to fill out a five-page Treasury-supplied form for CFIUS review, submitted at least 30 days before the transaction will be complete. Under the processes in both Rules, within 30 days CFIUS may approve a declaration, formally request the parties to the covered transaction to file a notice, reject the transaction, or clear the transaction while inviting the parties to file a notice, often referred to as a “no action letter.”
- A notice requires significantly more information about the covered transaction, either as a follow-up to a declaration or an initial filing for a more complex or more sensitive covered transaction. Under a notice, within 45 days CFIUS will clear the transaction, clear it subject to mitigation measures, extend the review period by 45 days, or recommend that the president blocks the covered transaction.
- Both Rules define the governments of Australia, Canada, and the United Kingdom as excepted states and individuals who are nationals of only those countries as excepted investors who are not subject to the mandatory CFIUS filing requirement for covered transactions. However, they remain subject to filing requirements for covered control transactions. Future governments and their nationals may be excepted if the CFIUS determines that they utilize robust process to analyze foreign investments for national security risks and that they coordinate with the US on matters related to investment security. The three excepted governments and their nationals retain this status until February 13, 2022 unless CFIUS grants them an exception determination, which will extend their status unless and until CFIUS then finds they no longer utilize a robust process to analyze foreign investments for national security risks or that they no longer coordinate with the US on matters related to investment security.
- Both Rules adopt a definition of “principal place of business” as an interim final rule designed to treat several off-shore investment funds as US entities. Both Rules consider the principal place of business to be the primary location from which a business’ management exercises control or, for an investment fund, where the investments are directed, controlled, or coordinated.
What Changed from the Pilot and the Proposed Rule?
- The Transaction Rule clarifies that covered transactions completed on or after November 10, 2018 through February 12, 2020 are subject to the terms of the pilot program and covered transactions completed on or after February 13, 2020 are subject its terms.
- Both Rules provide that transactions that require a CFIUS filing as a covered transaction under the Transaction Rule and also require a CFIUS filing as a covered real estate transaction under the Real Estate Rule should be made under the Transaction Rule.
- Both Rules clarify that, because FIRRMA does not apply to foreign air carriers certified by the Transportation Security Administration, business investments and real estate transactions related to their air carrier operations are not subject to CFIUS review.
- Both Rules provide extensive examples to illustrate whether a transaction is subject to CFIUS review. Although Treasury incorporates these in the regulations, both Rules note that example text is for information purposes only and each potentially covered transaction will be considered on the facts unique to its situation.
What’s Next?
- In FIRRMA, Congress granted Treasury authority to implement a fee for reviewing CFIUS declarations and notices. In the Rules, the Treasury notes that it plans on issuing a future fee rule.
- Today, mandatory filings are required for covered transactions investing in TID Businesses identified by their North American Industry Classification System (NAICS) Code. In the Transaction Rule, Treasury expressed its intention to initiate a future rulemaking replacing the use of NAICS Codes to identify businesses subject to mandatory filing with requiring CFIUS filings if the company produces or uses a technology subject to export control licensing requirements.
- In their comments, several investors requested that Treasury adopt a waiver or certificate of good standing system that, after being approved as an investor in a business subject to CFIUS review, would allow the investor or business to remain presumptively acceptable for future covered transactions. In both Rules, Treasury states its willingness to consider issuing such waivers in a future rulemaking after the two programs have been fully implemented.
If you have questions about the Transaction Rule or the Real Estate Rule or related matters in general, please contact Justine Kasznica at (412) 394-6466 or jkasznica@babstcalland.com or Boyd Stephenson at (202) 853-3452 or bstephenson@babstcalland.com.
Click here for PDF.