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Overview of General Corporate Law Compliance INSIDE COUNSEL INSIDER: CORPORATE & REGULATORY COMPLIANCE 1.0

Premiere Date: January 24, 2017

This webinar is sponsored by: Eisner Amper

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MEET THE FACULTY

MODERATOR

Rafael Zahralddin- Elliott Greenleaf

Aravena

PANELISTS

John Arrastia Genovese Joblove & Battista

Chris Cahill Lowis & Gellen

Kyle Stone Illinois Department of Public Health

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SERIES SPONSOR

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ABOUT THIS WEBINAR

So, you have made a decision on the form of business entity, whether it is a corporation, LLC, or even a non-stock/non-profit. Like any well-oiled machine, it is not enough to set it up, now you have to keep it in working order. Corporate compliance is what you do after forming an entity to make sure the business remains in good standing with specific state law requirements. This webinar discusses how to maintain compliance with various state law requirements, including Delaware. Notice requirements and best practices on recording meetings will be reviewed, including which communications are protected by the attorney-client privilege and which ones are not. The importance of maintaining separate business and personal assets is analyzed. By-laws are analyzed, including how action is taken, whether by proxy, consents, resolutions, voter agreements, including the impact of technology on corporate action. Corporate compliance and ethics programs are discussed, including best practices; in particular, who should be a part of the reporting structure and who should not. Also discussed is whether the compliance program should be a stand-alone program or if it should be integrated into the normal business process of a company.

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ABOUT THIS SERIES

This webinar series covers internal investigations related to corporate and regulatory compliance,

corporate law compliance, securities law compliance (with a focus on the Sarbanes-Oxley Act) and

executive compensation as it relates to corporate and regulatory compliance. The various episodes

examine these topics from a company’s perspective with a focus on the impact to the company’s day-

to-day and long-term operations. Each episode is delivered in Plain English understandable to

business owners and executives without much background in these areas. Yet, each episode is proven

to be valuable to seasoned professionals. As with all Financial Poise Webinars, each episode in the

series brings you into engaging, sometimes humorous, conversations designed to entertain as it

teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed

independently of the other episodes, so that participants will enhance their knowledge of this area

whether they attend one, some, or all of the episodes.

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EPISODES IN THIS SERIES

EPISODE #1 Overview of General Corporate Law Compliance 1/24/2017

EPISODE #2 Internal Investigations- 101 2/28/2017

EPISODE #3 Securities Law Compliance 4/11/2017

EPISODE #4 Executive Compensation 5/16/2017

Dates shown are premiere dates; all webinars will be available on demand after premiere date

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STATE CORPORATE STATUTORY COMPLIANCE

Two aspects of state law corporate statutory compliance:

• Franchise tax and annual reporting.

• Regulation of operation and manner of action.

Federal Statutes like Sarbanes-Oxley directly fill in the gaps in some limited instances and indirectly fill in by influencing best practices where there are no state statutory provisions.

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STATE LAW REQUIREMENTS: DELAWARE

• Annual Franchise Tax

• Annual Report

• Deceptive Solicitations

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ANNUAL FRANCHISE TAX

• Corporations

• Alternative Entities

• Non-Stock Non-Profit

• Exempt Status

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ANNUAL FRANCHISE TAX: CORPORATIONS

Minimum Tax

• Authorized Shares Method

$75.00 for tax years before 2014

New minimum tax is $175 beginning 2014

• Assumed Par Value Capital Method

$350

Maximum Tax is $350,000 for both methods

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ANNUAL FRANCHISE TAX

Taxpayers owing $5,000 or more must make estimated tax payments in quarterly installments with:

• 40% due by June 1st; • 20% by September 1st; • 20% by December 1st; and• The remaining 20% by March 1st.

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ANNUAL FRANCHISE TAX ALTERNATIVE ENTITIES

• Limited Partnerships, Limited Liabilities Companies, and

General Partnerships formed in the State of Delaware are

required to pay an annual tax of $250 for tax years before

2014 and $300 effective July 1, 2014 and for tax year

2014;

• Taxes for alternative entities are due on or before June 1st

of each year;

• Penalties for non-payment or late payment is $200; and

• Interest is due at a rate of 1.5% per month.

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EXEMPT ENTITY

• Exempt entities that don't comply with the exempt corporation requirements owe a franchise tax of $175.

• Non-stock entities can qualify for exempt status.

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EXEMPT ENTITY QUALIFICATIONS

The Delaware code allows domestic corporations to file as an exempt corporation if:

• Organized under the corporation laws;

• Not authorized to issue capital;

• Exempt under section 501(c)(3) of the United States revenue code for other similar or successor IRS code provisions;

• Qualifies as a civic organization under § 8110(c)(1) of Title 9 or § 6840(4) of Title 16;

• Qualifies as a charitable/fraternal organization under § 2593(1) of Title 6;

• Is listed in § 8106(a) of Title 9;

• Is organized primarily or exclusively for religious or charitable purposes; or

• Is (i) organized not for profit and (ii) no part of its net earnings inures to the benefit of any member or individual.

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ANNUAL REPORT

• $50 plus taxes due;• Due no later than March 1st of each year;• Penalty for not filing the completed annual

report on or before March 1st is $125 plus interest at 1.5% per month and applied to any unpaid tax balance;

• Notice is sent in December of each year; and• Annual reports must be electronically filed.

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ANNUAL REPORT CONT’D

• LP/LLC/GP are all exempt from filing an annual report.

• Non-Stock Non-Profits that qualify as exempt from the franchise tax must still file an annual report.

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DECEPTIVE SOLICITATIONS

• The Delaware Secretary of State has issued warnings to Delaware entities that criminals are sending out deceptive solicitations which appear to alert Delaware entities of pending compliance deadlines;

• The deceptive requests for funds are disguised as compliance “fees” but are instead for dubious payments to the soliciting company for "domestic representation.”;

• In many instances, the solicitation used the seal of the state of Delaware without authorization, uses a fake business address, and recommends various expediting fees on top of various other fictitious fees; and

• One solicitation has requested not only should false fees be paid, but also that the annual report should include lists of shareholders and officers, a completely fictitious requirement under Delaware law.

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The Delaware Secretary of State warns that all

Delaware registered agents are required to have an

address in Delaware, that official forms are the only

ones recognized by Delaware, and the official forms are

easily verifiable as they are available at the Delaware

Secretary of State website.

DECEPTIVE SOLICITATIONS CONT’D

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ANNUAL MEETINGS OF SHAREHOLDERS

Annual meetings are required by:

• State law (where incorporated);

• Stock Exchange Listing standards (if listed);

• Corporate Charter or bylaws;

• Most important policy reasons for the meeting is election of Directors; and

• If there are no provisions for shareholder special meetings or acts by written consents the annual meeting is the primary means by shareholders to influence corporate governance.

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STATE LAW REQUIREMENTS

• All state statutes and the Model Corporation Law address annual meetings;

• Most states require an annual meeting;

• Election of directors is required by many states at the annual meeting;

• Date, place, and time are set in corporate bylaws; and

• Some states, including Delaware, provide that failure to hold a meeting will not cause the dissolution of the corporation or affect otherwise valid corporate actions.

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FAILURE TO HOLD A MEETING

• Failure to hold an annual meeting by the date or time frame required can be addressed by judicial intervention.

• 44 jurisdictions and the model act provide for court-ordered meetings. Model Bus. Corp. Act Ann. § 7.03 (2008).

• Delaware law requires that if a meeting is not held by 30 days of the designated date in a board resolution or the corporate bylaws, or 13 months since the last meeting, any shareholder or director may seek an order from the Delaware Court of Chancery for a meeting.

• The Chancery Court can designate the meeting place, time, place, record date and form of notice.

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STOCK EXCHANGE REQUIREMENTS

• NYSE requires listed corporations to hold an annual meeting each fiscal year;

• NASDAQ requires that the corporation hold an annual meeting of shareholders no later than once a year after the end of the corporation's prior fiscal year;

• Other compliance requirements by exchanges include the type of information required to be provided to shareholders in preparation for the meeting; and

• The federal securities laws also regulate the dissemination of information to shareholders through the federal proxy rules.

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MEETING MINUTES STATUTORY REQUIREMENTS (GENERAL)

• Outside of the context of the annual meeting, requirements are sparse;

DGCL "one of the officers shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose." 8 del. C. § 142(a).

• Corporate records, including minute books, must be convertible into paper form that are admissible into evidence; and

• There are no requirements on how to record proceedings or the level of detail required.

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CORPORATE CHARTER AND BYLAW

Charters and bylaws can dictate the frequency of regular board meetings, special

meetings, who can call these meetings, what qualifies as a meeting, and what actions can

be taken in lieu of a meeting. In an LLC, the operating agreement controls.

• Under Delaware law written consents in lieu of a meeting by shareholders are valid

unless the certificate of incorporation either expressly prohibits consents or effectively

prohibits it by requiring unanimous consent;

• In non-public companies written consents are seen as a means of convenience for

shareholders; and

• In public companies written consents have been pushed by shareholder activists as a

means to give more power to shareholders to hold special meetings or act outside of

annual meetings.

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• Shareholder consents in lieu of annual shareholder meetings have been made a focus by

shareholder activists and are permitted by Delaware law;

• According to the Harvard Law School forum on corporate governance and financial

regulation, in 2010, only about 28% of Fortune 500 and 31% of public companies permitted

shareholders to act by less than unanimous written consent;

• However, a board can't restrict consents with a bylaw provision, restrictions have to be to the

corporate charter and that requires shareholder approval; and

• Written consent proposals predominate the proxy shareholder proposals submitted by

activists according to Proxy Monitor, a website sponsored by the Manhattan Institute's center

for legal policy.

WRITTEN CONSENTS

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“ELECTRONIC MEETINGS"

State corporate law will need to be consulted to clear up whether meetings can be held "electronically" and the limits and definition of that method of holding a meeting.

• Delaware companies are allowed to broadcast their meetings to remote locations and hold their annual meetings entirely electronically without a physical location.

• Section 211(a)(1) of the DGCL allows boards of directors of Delaware companies to hold an annual meeting solely by means of remote communication.

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LIMITED LIABILITY COMPANIES

• The LLC act does not require annual meetings of members or managers;

• Best practices are that the LLC have an annual meeting and keep record of that meeting; and

• Even in a sole member LLC, minutes should be taken of all major decisions, i.e. admission of new members, disposition of assets, taking on new debt, or acquiring assets.

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MEETING MINUTES STATUTORY REQUIREMENTS (GENERAL FOR LISTED COMPANIES)

• The Securities Exchange Act of 1934, as amended (the "Exchange Act"), also adds record-keeping requirements for reporting companies: Issuers shall "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Exchange Act Section 13(b)(2)(A).

• Reasonable detail in this context means "such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs." Exchange Act Section 13(b)(7).

• "[N]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account" as described above. Exchange Act Section 13(b)(5).

• No further guidance on what needs to be in minutes.

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MEETING BEST PRACTICES

• There is no required order of business, but a well organized agenda facilitates a successful meeting;

• Clear and understandable conduct rules are also important;

• Robert's Rules are not required and most advisors do not recommend using them, but having clear rules of engagement prepared instead;

Flexibility for the chairperson to make changes as the situation requires during the meeting;

Limits on numbers of questions asked and the time periods for discussion by shareholders; and

Preparation of detailed scripts to address a variety of situations.

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MEETING BEST PRACTICES CONT’D

For a meeting to be legitimate:

• Determine a quorum is present;

• Determine vote required to approve matters at the meeting;

• Make corporate records and shareholder lists available; and

• Have procedures for tabulating votes both by proxy and in person at the meeting.

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WHO, WHAT, AND WHY OF MINUTES.

• The corporate secretary usually prepares the meeting minutes;

• Minutes are not required to make corporate action valid but help make the record complete;

• Clears up confusion over actions later;

• Depending on the meeting, the minutes should be accompanied by appropriate documents relevant to the meeting;

For example, annual meeting minutes should include:

Election inspector reports;

Voting results; and

List of shareholders and record date.

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MEETING MINUTE CONTENTS

• Time, place and date of meeting;

• Compliance with notice requirements (evidence of notice and waiver);

• Quorum compliance;

• Name of person presiding and person acting as secretary of the meeting; and

• Those in attendance (when participants enter and leave meeting).

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MEETING MINUTE CONTENTS

General description of agenda items:

• General discussions regarding agenda items, especially corporate actions

(motions and votes). Descriptions should note substance, but do not require

detail. Record of individual votes not required. Recusals should be noted and

abstentions. Parties can request dissent to be noted.

• Note any evidence of corporate decision makers exercising duty of care,

including reliance on the input of professionals and any recommendations and

reports from professionals or any standing or special committees.

• Privileged discussions can be noted, but the detail cannot be, as minutes are

discoverable.

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SARBANES-OXLEY INFLUENCE ON STATE LAW CORPORATE COMPLIANCE

• Except for provisions concerning document destruction and whistleblower protection, the governance provisions required by the Sarbanes-Oxley Act apply only to public companies.

• Despite the limited application of SOX, it has significantly affected corporate compliance beyond public companies, as many are voluntarily incorporating Sarbanes-Oxley principles into their own governance structures.

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SOX COMPLIANCE AND PRIVATE COMPANIES

Best practices:• Establishes better defenses against litigation;• Facilitates raising capital;• Makes the company a better acquisition target; and• Helps make a company attractive for an IPO.

External auditors have applied certain SOX controls to private companies.

• Example: requiring a CEO/CFO to attest to accuracy of financial statements.

• Presence of an audit committee.

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SOX COMPLIANCE AND PRIVATE COMPANIES CONT’D

• Independent directors

• Audit committees

• Internal accounting controls

• Financial transparency and the MD&A

• Higher accountability for independence of auditors

• Code of business conduct and ethics

• Insider transactions

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COMPLIANCE, LEGAL DEPARTMENT OR STANDALONE FUNCTION?

The traditional discussion has been whether the General Counsel

should address all compliance or whether compliance should be a

stand-alone function, the job of a chief ethics and compliance

officer or CECO.

Studies by the association of corporate counsel in 2009 reported

that a majority of the companies surveyed either assigned the

compliance duties to the GC or to a CECO.

Recent studies report that compliance is spread throughout the

organization in different functions of the entity.

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CONFLICTS INHERENT IN LEGAL VS COMPLIANCE

TENET/WELLCARE/PFIZER

Two high profile cases, (Tenet/Wellcare) in which the dual role General Counsel and Chief Compliance Officer created a conflict identified by regulators:

• Both involved health care fraud;

• Both involved the irreconcilable conflict of the GC's duty to defend the company and the CECO's duty to ensure compliance; and

• Both resulted in the segregation of both functions after regulators highlighted that combining the roles into one party allowed the fraud to occur.

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CONFLICTS INHERENT IN COMBINING LEGAL AND COMPLIANCE FUNCTIONS

TENET/WELLCARE/PFIZER

Pfizer in 2009 as part of a $2.3B settlement with the Department of Justice and the Office of Inspector General of the Department of Health and Human Services signed a corporate integrity agreement that separated the functions in order to:

"Eliminate conflicts of interest, and prevent Pfizer's in-house lawyers from reviewing or editing reports required by the [ethics and compliance] agreement." -Chief Counsel for OIG, Lewis Morris

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COMPLIANCE, LEGAL DEPARTMENT OR STAND ALONE FUNCTION?

Federal Sentencing Guidelines state that:

"High-level personnel of the organization shall ensure that the organization has an

effective compliance and ethics program, as described in this guideline. Specific

individual(s) within high-level personnel shall be assigned overall responsibility for

the compliance and ethics program.“

United States Sentencing Guidelines Manual §8B2.1.

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COMPLIANCE, LEGAL DEPARTMENT OR STAND ALONE FUNCTION? CONT’D

Federal Sentencing Guidelines further state that:

Specific individual(s) within the organization shall be delegated day-to-day

operational responsibility for the compliance and ethics program. Individual(s) with

operational responsibility shall report periodically to high-level personnel and, as

appropriate, to the governing authority, or an appropriate subgroup of the governing

authority, on the effectiveness of the compliance and ethics program. To carry out

such operational responsibility, such individual(s) shall be given adequate resources,

appropriate authority, and direct access to the governing authority or an appropriate

subgroup of the governing authority.

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CRITICAL FEATURES OF CECO SUCCESS

Independence

Empowerment

Seat at the Table

Line of Sight

Resources

Donna Boehme, Five Essential Features of the Chief Ethics and Compliance Officer Position, Compliance and the Ethics Professionals (Nov./Dec. 2012).

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COMPLIANCE, LEGAL DEPARTMENT OR STANDALONE FUNCTION?

The PWC State of Compliance Study 2016 surveyed 800 executives across the globe.

The study found that:• 20% of Directors had formed their own stand

alone compliance/ethics committee; and• 72% had dedicated business units or business

area compliance officers.

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COMPLIANCE, LEGAL DEPARTMENT OR STANDALONE FUNCTION? CONT’D

The PWC State of Compliance Study 2016 also found that there were key owners of compliance and ethics related risk that were spread across several functions.

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LEGAL

• intellectual property risks -- IT (69%)

• social media risk -- Corporate Communications (41%)

• employment and labor -- HR (71%)

• safety or environmental -- Operations (26%)

• ethical sourcing (40%) and supplier compliance -- Procurement (40%, 42%)

(Percentages are of respondents that selected that department as the "owner"of the risk).

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ETHICS AND COMPLIANCE

• Bribery or corruption 47%

• Fraud 33%

• Money laundering 38%

• Conflicts of interest 51%

• Privacy and confidentiality 38%

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OTHER FUNCTIONS

I. ProcurementEthical sourcing 40%Supplier compliance 42%

II. HREmployment and labor compliance 42%

III. IT Data security 79%

IV. OperationsSafety or environmental 26%

V. Corporate CommunicationsSocial media 42%

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ABOUT THE FACULTY

RAFAEL X. ZAHRALDDIN-ARAVENArxza@elliottgreenleaf.com

Rafael X. Zahralddin-Aravena is a Shareholder, Director, and Chair of his firm’s Commercial Bankruptcy and Restructuring Practice. He founded the Elliott Greenleaf Delaware office in 2007, which specializes in business law, as its first Managing Shareholder. He works as a litigator and advises businesses on issues of compliance, corporate formation, corporate governance, insolvency, distressed mergers and acquisition, commercial transactions, cyber law, and international and cross border issues.

He has been lead counsel in several significant matters including serving as special litigation counsel in Washington Mutual, the largest bank insolvency in U.S. history. In the Nortel bankruptcies he successfully secured a settlement of more than $50 million for the permanently disabled former employees of the company. The firm and Mr. Zahralddin were named among the firms that received multiple awards in 2014, culminating in the Large Company Transaction of the Year Award from the Turnaround Management Association for their work in the AgFeed USA, Inc. bankruptcy, which involved the sale of the U.S. and China assets of a publicly traded company.

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ABOUT THE FACULTY

JOHN ARRASTIAjarrastia@gjb-law.com

John Arrastia is a partner at Genovese Joblove & Battista in Miami. He focuses his practice on domestic and international litigation, arbitrations, and appeals, with a focus on business, commercial, and insurance disputes.

Prior to joining Genovese, Arrastia established Arrastia Capote Partners, LLP and was also an attorney and partner with largenational and regional law firms. He has represented various Fortune 500 companies and insurers, as well as smaller publicly-traded companies, privately-held businesses, and individuals in a variety of disputes at all stages of litigation, pre-litigation, and appeals. Arrastia has been the lead attorney in jury and bench trials, appeals, arbitrations, and dispositive motions in state and federal jurisdictions.

Arrastia is also an experienced arbitrator, representing clients before arbitration panels and tribunals. He is a member of the Panel of Arbitrators of the American Arbitration Association and as an associate of the Chartered Institute of Arbitrators. As an arbitrator, he has presided over cases involving a wide variety of issues including contracts, fraud, banking, real estate, personal services contracts, consulting agreements, and other business relationships. As an advocate, he has represented clients before arbitration panels on claims arising from diverse issues including real estate transactions, business dissolutions, fraud, and contracts.Additionally, Arrastia has also served as a court-appointed fiduciary as a receiver in both state and federal courts.

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ABOUT THE FACULTY

CHRIS CAHILLccahill@lowis-gellen.com

Mr. Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience representing very large debtors, and counsels and litigates on behalf of manufacturers and secured lenders in large and middle-market cases.

Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2017) and is the host of Financial Poise Radio, a periodic broadcast for investors and other curious persons, on www.financialpoise.com.

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ABOUT THE FACULTY

KYLE STONEkyle.stone@illinois.gov

Kyle Stone has served as General Counsel of the Illinois Department of Public Health (IDPH) since March 2015. As its chief legal officer, Kyle manages the IDPH Division of Legal Services, which provides legal counsel to the IDPH Director and programs. He previously worked at Lowis & Gellen, LLP, where his practice concentrated on civil litigation, with an emphasis on counseling and defending health care providers. Kyle presently serves as chairman of the Chicago Young Leadership Council for the American Israeli Public Affairs Committee (AIPAC), co-chairman of Maverick PAC Chicago, and as a member of the Deerfield Village Caucus Nominating Committee. He previously served as a member of the Auxiliary Board for Northwestern Memorial Hospital. Kyle received his J.D. from Loyola Chicago School of Law, and earned a B.A. with High Honors in History from the University of Michigan. He resides in Deerfield, IL with his wife and two young sons.

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