The legal landscape is constantly changing as new laws are passed or existing laws are interpreted or applied differently. Brooks Pierce’s attorneys identified some of the biggest potential legal issues companies need to be aware of in the coming months – from labor and employment to cybersecurity and federal investigations – and provided a high-level assessment of what business leaders need to know now to better prepare for the future.
Work and employment
Federal agencies have identified more employee-friendly priorities since President Joe Biden took office in January 2021. Many of these initiatives are expected to expand further in 2022. We are also seeing higher rates of collaboration among government agencies in investigating employee complaints. Several federal agencies have entered into a memorandum of understanding (MOU) to strengthen enforcement of federal employment laws. This makes it more likely that employers will defend agency investigations on multiple fronts. For example, an accusation of discrimination from the Equal Employment Opportunity Commission (EEOC) may be followed by a Notice of Investigation from the U.S. Department of Labor’s (DOL) Wage and Hour Division. based on information uncovered by the EEOC.
For employers, we expect this to mean two things. First, there will be more agency investigations into workplaces than we have seen in recent years. Second, these investigations will likely be more intense than previous administrations and may involve multiple government agencies.
Given these developments, employers should work with a lawyer to prepare their records, policies and procedures for a possible investigation. Employers who become aware of an internal complaint or government investigation should promptly seek legal counsel to avoid any inadvertent missteps. As always, employers should be aware of whistleblower laws and consult with an attorney before taking any real or perceived adverse action against an employee who has engaged in “protected activity” under whistleblower laws. state or federal government employment.
Data privacy and cybersecurity
2022 is about to be the year we will see real movement on a federal data privacy law. California’s passage of the California Consumer Privacy Act (CCPA) nearly two years ago put some pressure on Congress to enact a federal standard. However, slow adoption by other states slowed the initial push a bit. In 2021, however, Colorado and Virginia passed CCPA-inspired consumer privacy laws that are expected to go into effect in early 2023. As more states begin to pass CCPA-like consumer privacy laws, there is a real threat that compliance with various state laws and requirements would be untenable for businesses. A federal law would solve this problem.
We also expect cyber liability insurance costs to continue to rise rapidly throughout 2022. The proliferation of ransomware attacks, business email compromise scams, and more traditional data breaches continue to drive up cyber insurance costs. Cyberinsurers will increasingly tie the availability of reasonable coverage or premium discounts to a company’s use of a variety of security requirements and mitigation tools. Companies should expect to be subject to cybersecurity audits, inspections, and similar actions before a vendor drafts a policy. Also, the days of a one-stop-shop for cyber coverage are over. Today’s cyber policies and complementary plans are tailor-made for specific situations. More and more, we see policies with unexpected exclusions or limitations. For example, some vendors may exclude business email compromise from traditional cyber coverage, as many of these incidents are due to “human factor” errors. A policy excluding incidents resulting from employee error would result in a coverage gap for many companies.
White Collar Defense and Investigations
In October 2021, United States Department of Justice Assistant Attorney General Lisa Monaco announced that the DOJ was returning to a tougher stance on white-collar crime, particularly offenses involving professional misconduct. The DOJ issued a detailed set of policy changes aimed at eradicating repeat corporate misconduct and giving higher priority to prosecuting those involved. For example, companies under investigation for misconduct by the DOJ will again have to provide lists of everyone connected to the potential misconduct, regardless of their position within the company, not just those “substantially involved”.
Another notable change in this policy concerns the importance that a company’s history of misconduct can play in an investigation. In recent years, DOJ investigations focused only on related misconduct, such as problems with the IRS while investigating possible tax violations. The DOJ will now review the entire regulatory, criminal, and civil record to determine an appropriate resolution for a business that is the target or subject of a criminal investigation. For example, if a prosecutor is determining the resolution of a federal tax investigation for a target company, they must also consider any prior non-tax misconduct, including lawsuits filed by another state, country, or other branch of the federal government. the target company has been involved in the past.
The DOJ also said it will strengthen its use of independent corporate monitors to make sure companies are meeting their compliance standards. The DOJ will consider whether pretrial diversion (non-prosecution agreements and deferred prosecution agreements) is taken seriously enough by infringing companies and whether it is appropriate for repeat offenders.
These new policies mean that any company and its directors, officers and employees facing a DOJ investigation should prepare for tougher enforcement and a more invasive investigation by federal agents and prosecutors.
Impact of rising interest rates and inflation on M&A activity
Over the past few years, we have seen an increase in M&A activity despite the COVID-19 pandemic. Persistently low interest rates have made debt relatively cheap and traders have been resilient. With the Federal Reserve sending signals that it will start raising interest rates soon and inflationary pressures lingering, we may start to see M&A activity slowing down. However, despite growing headwinds, the cost of funding remains low at the moment, there is a strong deal pipeline and buyer demand is holding steady so far into 2022.
Representations and Warranties Insurance
In recent years, there has been an increase in demand for representations and warranties (RWI) assurance in mergers and acquisitions; in fact, there is a near-universal expectation that private equity-backed transactions above a certain threshold will require RWI. Due to the increased demand for RWI and the general increase in trading volume, the cost of these policies has increased. Additionally, RWI underwriters are more selective, insert more restrictions and require a higher quality of care in order to bind policies. In today’s market, middle and lower-middle market transactions may continue to experience difficulty obtaining an appropriate RWI policy and parties may have to waive RWI for traditional indemnification structures.
Impact of COVID-19 on contractual provisions
The contractual provisions of acquisition agreements continue to evolve as the COVID-19 pandemic evolves. During the pandemic, parties have focused on risk transfer provisions in acquisition agreements, such as exceptions in the definition of material adverse effect (MAE) and exceptions to interim operating covenants. Since 2020, many acquisition agreements have included COVID-19 pandemic-related impacts in the definition of MAE or have excluded pandemic-related actions or omissions from the covenant requiring a vendor to conduct business “only in the normal course of business in accordance with past practice. As the pandemic enters an endemic phase, parties to the agreement will need to reassess how the provisions regarding COVID-19 exceptions to the EAW or “ordinary course of business” are interpreted. For example, actions taken by a company to respond to the pandemic can now be considered part of the “normal course of business” of the company.