United States: January 12, 2017 Corporate Law Developments:

January 12, 2017 Corporate Law Developments: New California Labor Code Provision Requiring California Choice of Law and Venue in California Employment Contracts; New Department of Labor Fiduciary Rules for ERISA Financial Advisers; and a Delaware Court Decision Favorable to Delaware Limited Partnerships' General Partners in the Merger Context

This week's corporate law news roundup includes discussions of new California Labor Code Section 925 which requires California employers to use California for their choice of law and venue in contracts with employees who primarily reside and work in California; new U.S. Department of Labor (DOL) fiduciary rules that expand the Employee Retirement Income Security Act of 1974 (ERISA) "investment advice fiduciary" definition, requiring financial advisors to investment retirement accounts (IRAs) and 401(k) plans with fewer than $50 million in assets to acknowledge their role as fiduciaries starting April 10, 2017 and comply with "Best Interest Contract

EMPLOYERS WITH CALIFORNIA EMPLOYEES MUST NOW COMPLY WITH NEW CALIFORNIA LABOR CODE SECTION 925 REQUIRING CALIFORNIA CHOICE OF LAW AND VENUE IN EMPLOYEE CONTRACTS

All employers with employees that primarily reside and work in California must now comply with the new Section 925 of the California Labor Code, which requires employee contracts signed, modified or extended on or after January 1, 2017 to use California for venue and choice of law provisions. Additionally, as to controversies arising in California, all new California employee contracts will be governed by the substantive law of California, so that employers may no longer include in a California employee contract a provision that the contract be governed by laws of another jurisdiction. The primary employee remedies are injunctive relief and attorneys' fees. The statute applies only to contracts that are required as a condition of employment, but it is unclear as to whether the rule applies to provisions in agreements executed as to optional benefits or compensation. While the law applies to employees who primarily reside and work in California, the term "primarily" is not defined and it is unclear whether an employee must both reside and work in California. The new law is unclear as to whether an employee may choose not to void a non-California venue or choice of law provision (and elect to have the non-California law govern or to have the dispute heard outside the state), since it is deemed voidable by the employee (but not automatically void). For more information, see https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201520160SB1241.

U.S. DEPARTMENT OF LABOR ADOPTS NEW FIDUCIARY RULE EFFECTIVE APRIL 2017 FOR ALL FINANCIAL ADVISORS

The U.S. Department of Labor (DOL) has adopted a new fiduciary rule effective April 10, 2017, with phase-in as to certain elements through January 2018. Starting April 10, 2017, service providers and advisors to investment retirement accounts (IRAs) and 401(k) plans with fewer than $50 million in assets will be required to acknowledge their roles as fiduciaries (i.e., to put investors' best interests before their own). By January 1, 2018, providers will be required to comply with the rule's "Best Interest Contract Exemption" (BICE) disclosure requirements including the grant to investors of the right to sue by class action if they receive conflicting advice outside their best interest. The new rule could result in the elimination of commission structures prevalent in the industry. Advisors compensated on a commission basis (e.g., brokers and insurance agents) will need to provide clients with the BICE disclosure agreement in circumstances in which a conflict of interest could exist (e.g., where the advisor receives a higher commission or special bonus for selling a certain product). The rule expands the Employee Retirement Income Security Act of 1974 (ERISA) "investment advice fiduciary" definition, elevating all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary (bound to meet the fiduciary standard, as opposed to the lower level of accountability provided by the previously required "suitability" standard). The new fiduciary rule is separate from the SEC's Dodd-Frank-based efforts toward developing a uniform fiduciary standard. Exemptions exist, including for computer-generated investment advice when several requirements are met. For more information, see https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/dol-final-rule-to-address-conflicts-of-interest.

DELAWARE COURT ISSUES DECISION FAVORABLE TO GENERAL PARTNERS OF DELAWARE LIMITED PARTNERSHIPS

In a recent decision favorable to limited partnerships' general partners, the Delaware Supreme Court held that a limited partner's claims challenging a Master Limited Partnership (MLP) dropdown transaction were derivative and extinguished by a merger. In El Paso Pipeline, a parent corporation entered into certain dropdown transactions by selling assets to a public limited partnership of which it was the general partner. A limited partner alleged unfair dealing and that the limited partnership had overpaid for the assets to the partnership's detriment. During the trial, a third party (Kinder Morgan) acquired El Paso and merged it with the limited partnership, ending the partnership's separate existence. The Delaware court held that the limited partner's claims were derivative only, involving monetary dilution of interests and not any adverse effect to the limited partners' voting power or control (or direct claims that would have survived the merger). The Court observed that to rule that the derivative claims survived the merger would raise transaction costs and barriers to mergers, with obvious costs to public investors, and gain insubstantial enough to compensate them. The court found that the plaintiff had recourse to challenge the merger's fairness by alleging that the claims' value was not reflected in the merger consideration. For more information, see http://courts.delaware.gov/Opinions/Download.aspx?id=250510

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