Cheers!  New Jersey’s Agricultural and Natural Resources Committee voted 5-0 last week in favor of bill A2196.  The bill is designed, among other things, to eliminate the current “mandatory tour” obligation imposed upon New Jersey’s craft brewers.  Under the current state of the law, craft brewers are required to provide a tour of their facilities each and every time a patron enters the premises to purchase the breweries’ products for on-site consumption – whether it is the individuals first or one-hundredth time visiting the facility.  If passed, the pending legislation will alleviate craft breweries of this oft-criticized requirement in the hopes of placing New Jersey brewers on par with their competitors in neighboring states where such tours are not required.

As the bill continues to gain steam among craft brewers, many New Jersey bars and restaurants have expressed opposition.  These groups fear that the bill will provide breweries with an end-run around the steep costs of obtaining liquor licenses and thereby unfairly compete in the market.

At the present time, the bill is awaiting a second reading before the State Assembly.

As a result of the well-publicized scandals involving LIBOR rate manipulation, British regulators announced plans in July 2017 to phase-out LIBOR by 2021 and replace it with a more reliable benchmark.  In addition to other markets, the LIBOR phase-out will have a broad impact on the $4 trillion syndicated loan market, including currently existing loan documents that extend past 2021.  Specifically, in the case of loan documents that reference a LIBOR rate and automatically fall back to prime or base rate if LIBOR is unavailable, the permanent phase-out of LIBOR will likely lead to the imposition of a higher interest rate if this fallback language is not amended.  However, because LIBOR’s replacement has not yet been determined and the phase-out is at least three years away, it is probably premature at this time for borrowers to proactively seek amendments to their credit agreements.  That being said, there are a few steps that borrowers can take now to be prepared.

BACKGROUND

The London Interbank Offered Rate (LIBOR) has been the global borrowing interest rate benchmark for nearly 50 years.  Many borrowers pay interest under their credit agreements based upon a LIBOR interest rate, which is typically defined first by reference to the screen rate published by ICE Benchmark Administration Limited (IBA), and then to an alternative reference source if the screen rate is unavailable.  Although the LIBOR rate is intended to represent the rate of interest at which major banks in London actually loan funds to each other, the financial crisis liquidity in the LIBOR market has dropped significantly to the point where more than 70% of 3-month LIBOR submissions are based on the judgment of the submitting bank as opposed to actual transactions.  Due to this lack of liquidity and the negative publicity surrounding the LIBOR scandal, the United Kingdom Financial Conduct Authority (FCA), which has regulated LIBOR since April 2013, urged the phase-out of LIBOR by the end of 2021 and a transition to an alternative reference rate based on market transactions.

The uncertainty surrounding LIBOR’s fate is twofold.  First, although the FCA has encouraged the phase-out of LIBOR, it has stressed that the phase-out is not mandatory and, further, that the IBA may continue to produce LIBOR rates after 2021 if it chooses to do so.  Because of this, some commentators believe that LIBOR may continue to be quoted well beyond 2021 side-by-side with LIBOR’s replacement.  Second, the FCA has put the burden of finding LIBOR’s replacement primarily on market participants, who have not yet settled on an alternative rate.  The front runners at this point appear to be the Broad Treasury Financing Rate (BTFR) in the U.S., and the Sterling Overnight Index Average (SONIA) in the U.K., each of which is being considered as a replacement rate in the derivatives market.  However, neither of these rates are ready replacements for LIBOR in the lending market because (i) each is an overnight rate as opposed to LIBOR, which is quoted for seven borrowing periods ranging from overnight to one year, and (ii) each is based on past transactions (i.e., each is “backward looking”) as opposed to LIBOR, which is a stated rate for a forward-looking term.

WHAT BORROWERS CAN DO TO PREPARE

The first thing borrowers can do is review their existing credit agreements to see how the interest rate is determined if LIBOR no longer exists.  Although some credit agreements, such as the LSTA and LMA models, contain provisions that fall back to a waterfall of alternative reference rates if LIBOR is unavailable, such as a reference bank rate (i.e., an average of quotes of rates in the wholesale markets), the lenders’ cost of funds, or an alternative rate, many do not contain any fallback other than to simply default to base or prime rate loans.  As these rates are historically higher than the LIBOR rate, they can lead to the borrower incurring a significantly higher interest expense than it anticipated at the time the borrower entered into the loan.  However, even if a borrower is faced with a potential rate increase, given the uncertainty of both the timing of LIBOR’s phase-out and the replacement for the LIBOR rate, it is probably premature for it to approach its lender seeking an amendment.

If a borrower sees a potential issue with its LIBOR fallback language, it should closely monitor the marketplace to determine when and if it needs to take action.  Given the magnitude that LIBOR’s phase-out will have on the loan market, it is highly unlikely that the market will not do all that it can well in advance of the phase-out to effectuate a smooth transition to an alternative standard.  In particular, it is likely that LIBOR’s replacement will be determined well in advance of 2021 so borrowers can assess the impact on their credit agreements and be prepared to take appropriate action (e.g., seeking an amendment or prepaying the loan).  Further, it is also likely that the FCA will have signaled whether it will continue to quote LIBOR after the phase-out and, if so, for how long.  Depending on the length of time FCA continues to do so, borrowers with loans that mature past 2021 may be able to avoid amending their agreements entirely.  Finally, by the time the phase-out is implemented, the market will have likely settled on a standard for appropriate LIBOR fallback language, which should then be much easier to incorporate into existing loan documents than starting from scratch.  In short, although the temptation as a borrower may be to get ahead of the potential problem by proactively seeking an amendment, the best course of action is to monitor the situation and take a wait-and-see approach. One caveat to this is the situation where a borrower is already in the process of amending its credit agreement for other reasons, in which case it may as well amend the LIBOR fallback provision since the marginal cost of doing so is minimal.

 

Not too long ago, technology was considered a “vertical” market filled with companies that met the needs of the “technology” industry (think Microsoft, Dell, Cisco, Intel, and IBM).  However, technological products and services have evolved to the point of serving a “horizontal” market, having become an important aspect of many different types of businesses across a wide variety of industries and sectors (think fintech, healthtech, cleantech, autotech, edtech, etc.) and, by extension, M&A transactions.

For example, deals in the media industry increasingly are focused on the digital media aspects, particularly given the decline in demand for print media.  Likewise, parties to acquisitions in the financial services industry often pay close attention to the protection of proprietary investment strategies, data protection, trade names, and customized software.  Even manufacturers and other traditionally “non-tech” companies are leaning on technology more and more in order to streamline their business processes, manage and analyze data better, and to protect themselves from cyber-attacks.

This trend towards a “horizontal” market only looks to accelerate as technology becomes more and more embedded in businesses of all stripes, as presaged by the $13.7 billion purchase of Whole Foods by Amazon.com Inc. this year.  Similarly, private equity interest in tech and tech-enabled businesses has grown in recent years, particularly for more “stable” businesses such as software companies that generate recurring revenue or that serve other businesses.

Given the growing proportion of M&A deals that are considered to be “tech” deals (even where non-technology companies are involved), middle market businesses of all kinds that are evaluating the possibility of a sale or, conversely, looking for potential targets to acquire cannot afford to overlook the importance of technology as a key asset.

High-level legal concerns often revolve around the target’s ownership or right to use key technological assets, as well as the level of protection and ability to transfer the same.  This includes making sure that all owned intellectual property of the business is properly registered with the USPTO or copyright office in the name of the appropriate entity, and that all renewals and maintenance fees have been paid.  Additionally, acquirers should check that employees and, particularly, key independent contractors of the target have assigned their rights in and to all key intellectual properties to the target.  Inbound licenses that are material to the business, as well as revenue generating outbound licenses, should be reviewed to determine assignability.  It goes without saying that it is critical to ascertain whether the target has any existing or suspected infringement claims, as well as any security interests or encumbrances affecting its key technology assets.

Further, to the extent key technologies are held within a joint venture between the target and a third party, an acquirer should consider whether its business model would allow it to “step into the shoes” of the target vis a vis the joint venture versus the extent to which the acquirer could readily extract the technological assets and/or wind-down the joint venture.

The takeaway here is when engaging in M&A transactions – whether in the middle market or otherwise – ignore technology at your peril.  Those companies (even “non-tech” ones) that can demonstrate a strong command of their technological assets should increase their attractiveness as targets as we move into the future.  Conversely, acquirers that understand their own technology “gaps,” can quickly assess the target’s key technological assets and grasp how such assets will improve the integrated business post-closing will be better positioned to focus their due diligence efforts, minimize indemnification risks, and ultimately achieve the intended synergies.

New York City finally got its groove back.  After 91 years, the Cabaret Law (New York City Administrative Code § 20-359), a Prohibition-era law that has forbidden dancing at some New York City bars and clubs has been repealed.

As it currently stands, the Cabaret Law requires any New York City business where dancing occurs to obtain a cabaret license prior to operating, and if that business is desirous of selling alcohol on premise, it is required to provide a copy of its cabaret license to the New York State Liquor Authority to be licensed to sell or serve alcohol on premises.  Artistic performances, singing, and other forms of entertainment at New York City businesses also require a cabaret license.  In the past, the Cabaret Law stopped singers Billie Holiday, Ray Charles and others from performing in New York City, and caused Frank Sinatra to boycott some of his New York City performances.

Over the years, the Cabaret Law survived several attempts at repeal, but not this time.   On October 31, 2017, the New York City Council voted overwhelmingly to pass legislation (Int. 1652) that repeals the Cabaret Law, finally allowing the city that never sleeps to dance the night away.   Proponents of the new legislation say the process to obtain a cabaret license is time-consuming, difficult, and costly.   This sentiment is reflected through the numbers – currently, only 97 out of approximately 25,000 New York City food and beverage establishments have a cabaret license, according to the New York Times.  Under the current laws, applicants are required to get electrical inspections and fill out several applications through the New York City Department of Consumer Affairs, who submits the applications to the Community Board where the premises are to be located, and to the Fire Department of New York for approval.  The license fee is determined by room capacity and could costs hundreds of dollars to up to $1,000 (for a two-year license term), and additional money for each additional room or floor.

Despite repealing the Cabaret Law in its entirety, the new legislation is expected to retain certain security requirements at large entertainment venues from the old law. Owners and operators of some large entertainment spaces (as defined by the New York City zoning laws), will be required to maintain security cameras and certified security guards.  These rules will be codified under new section 10-177 § 2, Title 10 of the Administrative Code of the City of New York.  Once the new legislation goes into effect, owners and operators of New York City venues where dancing occurs will not have to apply for a cabaret license at all.

The lead sponsor of the new legislation is Rafael L. Espinal (D-Brooklyn), a City Council Member and Chairman of the Council’s Committee on Consumer Affairs.  Councilman Espinal comes from a district where bars and unique venues have advocated repealing the Cabaret Law for decades.  Also on board is Mayor Bill de Blasio, who is expected to sign Int. 1652 into law soon.

“It’s over,” Councilman Espinal told the New York Times.  So, in the words of the late David Bowie, “Let’s Dance!”

As New Yorkers enjoy their pumpkin spice lattes, the fact that a Grande (16oz) serving will cost them about 380 calories (including 2% milk and whipped cream, because why not?) is becoming common knowledge.  Calorie information has been conspicuously posted on menus at “covered establishments” in New York City for nearly a decade, but on August 28, 2017, New York City agreed to postpone enforcement of its rule requiring restaurants, convenience stores and other establishments to post calorie counts for prepared food in response to a law suit brought by the food industry and supported by the Federal government.

In 2008, New York City became the first jurisdiction in the United States to require chain restaurants to post calorie information on menus and menu boards.   Shortly thereafter in 2010, the Federal government adopted similar laws by way of the Affordable Care Act.  The Federal government’s implementation of such laws has continually been delayed over the years, but now the Food and Drug Administration (“FDA”) plans to provide additional guidance on menu labeling requirements in May 2018.  New York City did not want to wait for the Federal guidance to begin enforcement of its Rule 81.50, New York City’s nearly identical version of its federal counterpart.

New York City’s most recent version of Rule 81.50 tracks its federal counterpart and applies to “covered establishments”, which means “a food service establishment or similar retail food establishment that is part of a chain with 15 or more locations nationally doing business under the same name and offering for sale substantially the same menu items, or a food service establishment that is not party of such a chain that voluntarily registers with the United States Food and Drug Administration to be subject to the federal requirements for nutrition labeling of standard menu items pursuant to 21 CFR 101.11(d), or successor regulation”.   For any such covered establishment, “[m]enus and menu boards must provide the number of calories contained in each standard item.”

While the FDA plans to provide guidance in May 2018, New York City nonetheless wanted to move forward with its enforcement of Regulation 81.50 beginning on August 21, 2017, but on July 7, 2017, the Food Marketing Institute and the National Restaurant Association teamed with several other food-service industry groups to file suit against the City of New York for what it said was premature enforcement of nutritional disclosure guidelines for food-service establishments. The National Association of Convenience Stores and the New York Association of Convenience Stores also joined in the suit, which was filed in the U.S. District Court for the Southern District of New York.

Court documents claim that that the local New York City rules are not identical to the impending FDA rules because they are effective immediately which would clash with the Federal government’s plan to delay compliance for one more year.  The plaintiffs asked the court to stop New York City from enforcing the regulations on the local level prior to the nation-wide rollout in May 2018 and argued that New York City’s Rule 81.50 was preempted by Federal law. The FDA filed court papers in support of the lawsuit.

New York City has now agreed to honor May 2018 as the start date due to the preemption of Regulation 81.50 by the similar provisions contained in the Affordable Care Act. As such, “covered establishments” will have more time to comply and the FDA will be able to set forth guidance as it planned in May 2018.

As the nation awaits the FDA’s guidance, food establishments in New York City should begin to think about whether or not they are a “covered establishment” and the steps they will need to take in order to avoid eventual enforcement action.