How enforceable is your Non-Compete clause?

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a final year student of NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you would like me to review your employment contract or existing non-compete so as to get legal advice that is specific to your business needs).

All employers like to protect their interests- there’s almost always a non-compete clause in their employment contracts and the moment an employee leaves their employment and starts to work with someone they met during the course of their employment, the employer may want to enforce the non-compete clause and stop the employee from working there. But how enforceable do you think your non-compete clause is?

A non-compete clause is a restrictive covenant tailored to restrict an employee from pursuing any similar kind of business activity that can cause detriment to his/her former employer. It is a specifically designed tool in modern commerce, aimed to protect the employer’s interest.

Enforceability of Non-Compete Clause in India- A case study

The Supreme Court of India, while dealing with this in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, examined whether a post-service restrictive covenant would fall within the mischief of section 27 of the Indian Contract Act. This section makes any agreement restraining someone’s trade or profession void and such agreement can’t be enforced. Thus, the court in the Superintendence case held that a contract, which had for its object a restraint of trade, was prima facie void.

In Wipro Limited v. Beckman Coulter International S.A the High Court of Delhi held that a non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.

A different and more liberal interpretation has been observed by the Supreme Court in Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Ltd., where the Court clarified that not all non-compete clauses are prima facie prohibited and held, “a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided“.

Some reasonable restrictions which can be placed to make a non-compete clause enforceable have been illustrated by the Madras High Court in the case of FL Smidth Pvt. Ltd. v. Secan Invescast (India) Pvt. Ltd.

• Geographical location- Often a non-compete is phrased in a way to restrict the employee from engaging with the third party which is a potential competitor in a particular location.
• Trade Secrets- A non-compete can be in place to protect trade secrets or such intellectual property in the commercial interest of the employer.
• Time Duration-If the non-compete is in place for a stipulated period of time then it is acceptable to place such restrictions
• Goodwill- Agreements providing sale of goodwill are valid and enforceable. This is an exception to Section 27 of Indian Contract Act, provided in the Section itself.

Therefore, in order for a Non-Compete clause to be enforceable by law, it is important to ensure that restriction imposed by the employer is reasonable and not unduly harsh on the employees.

Non-Competes in the US

On the same line of logic, in the United States, the scope of the restriction is a significant determinant of whether a court will enforce the restriction. In New York, for example, a non-compete clause (1) must be no greater than is required for the protection of the legitimate interest of the employer (i.e., it must be narrowly tailored); (2) must not impose undue hardship on the employee; and (3) must not be injurious to the public. To enforce a non-compete clause, the employer must satisfy each prong of the test.

Non-compete clauses that are geographically limited to a region, city, or neighborhood are more likely to be enforced. So are clauses that are temporally limited. In addition, a narrowly drafted non-compete clause will usually be limited to a specifically defined industry or role within that industry—for example, trading in a particular sector of the securities market.

Moreover, under the “employee choice” doctrine, a post-employment agreement that conditions the availability of a post-employment benefit (like health insurance or severance pay) on compliance with a non-compete covenant is presumptively reasonable.

A non-compete is therefore perfectly valid during employment but its enforceability gets tricky and must be crafted with caution so as to be considered a reasonable restriction on the employee thus making it enforceable.

We are well experienced in drafting employment contracts and customizing restrictive covenants. Please email me at chetana@legalcornerllp.com for tailored employment agreements or if you wish to set up a free consultation

Applying for a trademark registration in the US, you will need a US licensed attorney now

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a final year student of NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you are interested in applying for a US trademark registration or would like me to represent you in a Trademark related).

The United States Patent and Trademark Office (USPTO) amended the rules of practice in trademark cases. The following rules were changed and came in effect from 3^rd August, 2019:

1) Rules of Practice in filings pursuant concerning the International Registration of Trademarks, 2) Rules regarding Representation of Others before the United States Patent and Trademark Office 

The changed rule now states that – “it is now required by applicants, registrants, or parties to a trademark proceeding whose domicile is not located within the United States (U.S.) to be represented by an attorney who is an active member in good standing of the bar of the highest court of a state in the U.S.A”.

Why this rule? Will this rule affect me? 

A requirement that such foreign applicants, registrants, or parties be represented by a qualified U.S. attorney will instill greater confidence in the public that U.S. trademark registrations that issue to foreign applicants are not subject to invalidation for reasons such as improper signatures and use claims and enable the USPTO to more effectively use available mechanisms to enforce foreign applicant compliance with statutory and regulatory requirements in trademark matters. In the past few years, the USPTO has seen many instances of unauthorized practice of law (UPL) where foreign parties who are not authorized to represent trademark applicants are improperly representing foreign applicants before the USPTO. As a result, increasing numbers of foreign applicants are likely receiving inaccurate or no information about the legal requirements for trademark registration in the U.S., such as the standards for use of a mark in commerce, who can properly aver to matters and sign for the mark owner, or even who the true owner of a mark is under U.S. law. This practice raises legitimate concerns that affected applications and any resulting registrations are potentially invalid.

Foreign-domiciled trademark applicants, registrants, and parties to Trademark Trial and Appeal Board proceedings, including Canadian trademark filers, must appoint and be represented before the United States Patent and Trademark Office (USPTO) by an attorney who is licensed to practice law in the United States.

Changes Notified in Code of Federal Regulations and requirements for US based Attorneys
The USPTO revised the rules in parts 2, 7, and 11 of title 37 of the Code of Federal Regulations to require foreign applicants, registrants, or parties to a proceeding mandatorily be represented by an attorney, as defined in Section 11.1, of title 37 Code of Federal Regulations (CFR). In Section 11.1, that is, an attorney who is an active member in good standing of the bar of the highest court of a U.S. state (including the District of Columbia and any Commonwealth or territory of the U.S.) and who is qualified under Section 11.14 (a), 37 (CFR) 11.14 (a), to represent others before the Office in Trademark related matters.

U.S.-licensed attorneys representing any trademark filers must provide all of the following:
1) Name, postal address, and email address.
2) Statement confirming to their active membership in good standing of a bar of the highest court of a U.S. state, Commonwealth, or territory
3) Bar membership information (state, bar number if applicable, and year of admission).

(I am an attorney licensed to practice law in New York and District of Columbia.  Please email me at chetana@legalcornerllp.com for legal inquiries or if you wish to set up a free consultation)

Private Placement from the Issuer’s Perspective- Part 3 Steps to Making an Offer & a Lawyer’s Role

By Vivek Krisnaswamy, for Legal Corner LLP. Vivek is a final year student of NALSAR University of Law and will be graduating in 2021. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you need advice and assistance with private offerings in the US so as to get legal advice that is specific to your business needs. 

How to make a Private Offer

The timeline for completing a private placement will vary depending on several factors but generally takes about 6-8 weeks to complete the first transaction. A lawyer would be able to explain the different factors that go into determining how long the process will take.‍

1. Launching the Deal: this is when a clear period of time is demarcated to conclude the buying process.
2. Negotiations: This process will take place from the beginning to the end of the discussions with the investor. Here the specifics of the agreement, like price, legal terms, etc. ironed out.
3. Information Gathering: The investor will do his due diligence – reviewing financial statements, meeting the management team, assessing the company, and then taking a closer at the industry.
4. Investment Risk Analysis: This process is very similar to how rating agencies grade public offerings.
5. Pricing: It is during this step that the rate of interest compensating the risk is determined. As mentioned in the previous article of the series, this could be decided very arbitrarily based on the risk taken on by the investors.
6. Rate Lock: This is when the investor and the company agree to lock-in interest rates based on the agreed upon spread and US Treasury rates.
7. Closing: This is the formal exchange of the securities and the capital offered by the investor.

As you can see the process is similar to obtaining bank financing.

The Lawyer’s Role

Because lawyers actually study how to go about these procedures, they know what details to pay attention to, and have the power to make sure that companies don’t lose their investors, while simultaneously protecting them from being cheated. Here is a list of some of the things that lawyers do for companies trying to make a private offering.

1. Independent Evaluation: Lawyers know how important it is for companies to get an objective un-biased valuation to determine the stock price before even launching the deal.
2. Business Plan/Marketing Document: They can help you create a plan that contains operational information, forward-looking statements, anticipated revenues, information about partners, directors, and any other details that an investor would ask for.
3. Investor Questionnaire: Once investors are identified (keeping in mind the solicitation restrictions), an investor questionnaire is prepared by the lawyer to confirm, self-certification by the investor, whether or not they are accredited, and other details.
4. Private Placement Memorandum (PPM): PPM is a full disclosure document (similar to a prospectus in an IPO) that contains amount to be raised, use of proceeds, risk factors, industry market analysis, description of management chain.
5. Subscription Agreements: These agreements are drawn up to confirm how many securities each investor is subscribing to.
6. Investment/Stock Purchase Agreement: This document is drafted after heavy negotiation and has many other miscellaneous agreements that go along with it depending on the jurisdiction that you are transacting in.
7. Revising Article of Incorporation: Most investors ask for certificates of designation of preferred stockholder rights, which can be issued only after the AoI are revised to reflect such changes.
8. Form D & other Forms: 15 days from the first sale, Ford D and all other necessary form in all states where the investors are located must be filed.

Other than these tasks, lawyers can also help you find investors, negotiate better terms, and actively safeguard your company before, during, and after the entire process of issuing private equity. For more information about how to make a private offering, feel free to contact us through out LinkedIn page.

If you have any questions regarding the incorporation process, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.

Private Placement from the Issuer’s Perspective- Part 2 Understanding the Regulatory System

By Vivek Krisnaswamy, for Legal Corner LLP. Vivek is a final year student of NALSAR University of Law and will be graduating in 2021. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you need advice and assistance with private offerings in the US so as to get legal advice that is specific to your business needs. 

Rules under Regulation D

As we saw in the previous part of this series, transactions not involving public offerings do not require registration. This would save a company from having to a file documents – a description of the company’s properties and business and of the security to be offered for sale; information about the management of the company; and financial statements certified by independent accountants – to the SEC.

To qualify as a non-public offering, and fall under the safe harbour of section 4(a)(2), the conditions laid out in Rule 506(b), 506(c), or Rule 504, of Regulation D must be met:

Rule 506(b)

• Must not involve any general solicitation or advertising to market the securities.
• The company may sell to as many “accredited investors” as it chooses to and up to 35 other purchasers. “Non-accredited investors”, must be sophisticated, and have a deep understanding of and experience in financial and business matters.
• Investors must self-verify whether or not they are accredited investors.
• Companies, though allowed to choose what information to provide to accredited investors, must ensure to not violate any federal securities laws – free from false or misleading statements. Non-accredited investors should be provided with documents based on the guidelines in Regulation A (guidelines for registered offerings). All information provided to accredited investors must be provided to non-accredited investors as well.
• Companies must be available to answer all questions by prospective investors.

Under rule 506(c) of Regulation D, a transaction may qualify as a non-public offering even if the issuer engages in “general solicitation” and “general advertising” if:

• The issuer takes reasonable steps to verify that ALL potential buyers are “accredited investors.”
• These reasonable steps could be defined as reviewing the accredited investors’ documentation – W-2s, tax returns, bank statements, etc.
• The company/issuer can decide what information to provide to the potential investors as long as it does not violate anti-fraud provisions.

Apart from these two rules, a private offer of securities can also be made under Rule 504, which brings State Blue-Sky laws into the fold. Under this rule:

• General solicitation and advertising are permitted depending on state blue-sky limitations.
• Number of investors and their accredited status depend on state blue-sky laws – you may be allowed to have an unlimited number of investors and their accreditation may not be required.
• Investors must self-verify whether or not they are accredited investors.
• The company is not required to disclose any documents to non-accredited investors to claim the exemption, however it is suggested to provide all material information.
• Offerings in which an issuer sells up to (not greater than) $5 Million in securities in any twelve-month period are exempted. The two other types of offerings do not limit the amount of money that can be raised.

Anti-Fraud Provisions

Regardless of whether or not your offerings fall under the safe harbor of section 4(a)(2), all securities transactions are subject to the antifraud provisions of the federal securities laws. Meaning that any company or issuer will be held accountable for “false or misleading statements” that were made regarding respective company, the securities offered, or the offering. The company and its board are responsible for any such statements, whether made by the company itself or on behalf of the company; whether they are made orally or in writing.

These laws are enforced through criminal, civil and administrative proceedings. An individual or other private party may bring actions under certain securities laws as well. Further, if it is found that all conditions of the exemptions have not been met, buyers might be able to return their securities and obtain a refund.

State Blue-Sky Laws

In 1956 the Uniform Securities Act was passed, a model law providing a framework that guides states in the crafting of their own securities legislation. It forms the foundation for 40 out of 50 state laws today, and itself is often nicknamed the Blue-Sky Law. Subsequent legislation, such as the National Securities Markets Improvement Act of 1996, pre-empts blue sky laws where they duplicate federal law.

These laws are essentially state anti-fraud regulations (almost like an extra layer of protection) that require issuers to be registered and to disclose details of their offerings. Typically, Reg. D offerings are exempt from (full) registration requirements, but the issuer will still have to file a notice, pay a filing fee and assent to service of process in that state. Issuers generally have to complete these procedures within 15 days of their first sale in the state.

These laws require issuers to register in their home state as well as any other state in which they wish to transact.

If you have any questions regarding the incorporation process, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.

Private Placement from the Issuer’s Perspective- Part 1 The Basics

By Vivek Krisnaswamy, for Legal Corner LLP. Vivek is a final year student of NALSAR University of Law and will be graduating in 2021. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you need advice and assistance with private offerings in the US so as to get legal advice that is specific to your business needs. 

What is Private Placement?

Private placement refers to the offering and selling of stock and bonds to a small group of pre-selected, “accredited investors”, rather than in the public market. It is an alternative to an initial public offering for a company seeking to raise capital for expansion. These investors could be banks, pension funds, mutual funds, insurance companies, or extremely wealthy individuals. As expert investors, “sophisticated investors” usually have more bargaining power and can easily acquire financial information from issuing companies before making a deal. Seeing as these investors can conduct due diligence themselves, the Securities & Exchange Commission does not provide them with the same level of protection awarded to the average investor, giving companies more freedom to choose what to disclose to potential investors.

How is it Regulated?

Investors receive sufficient disclosures and other protections from the rules and regulations laid out in the Securities Act of 1933, “the Act.” All securities in the United States have to register with the SEC or qualify for an exemption. Section 4(a)(2) of the Act exempts registration of transactions that do not involve a public offering. To be eligible for this exemption, the purchaser of the security must (1) have the required expertise in finance and business to be able to evaluate and bear the investment’s economic risk, (2) have the ability to acquire the information that is usually presented in a prospectus for a registered securities offering, (3) not resell securities to the public. If a company offers securities to even one person who does not satisfy these conditions, then said company would be in violation of the Act. For a better understanding of the requirements of all exemptions, one can refer to Rule 504, 506(b), 506(c), of Regulation D; Regulation S; or Rule 144A. It’s imperative to look through the act and decide under which category you would like to offer private securities with the help of a lawyer, to ensure that your company doesn’t accidentally violate the Act or any anti-fraud provisions.

Who is an Accredited Investor?

The definition of an Accredited Investor (AI) can be found under Rule 501 – any natural person with a net worth of at least $1 Million (excluding primary residence); OR has an income of at least $200,000 each year for the last two years ($300,000 combined income if married) and have the expectation to make the same amount this year. AIs are expected to be well informed, able to fend for themselves in the world of finance and business, and protect their interests. The definition did not consider the actual financial sophistication of the investor, and tests were based on the income of the potential investor.

On August 26, 2020, the SEC made several changes to this definition, that make it more inclusive by broadening its scope and including a new principle for determining who is worthy of the AI title. While there are many technical additions to the definition, the one that could be the most important change would be – “Add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.” – because it shows that the SEC has accepted the general principle that “sophistication” can and should be one of the methods of determining who can become an AI.

When & Why is Private Placement Preferred?

Stock is usually offered privately by Companies looking for smaller amounts of capital from a limited number of investors. Start-ups, particularly those that are in the risky internet and fin-tech sectors, benefit from this set-up. Suppose a company chose to issue shares under Reg. D, then it would be exempt from many reporting requirements – saving the company time and money. By keeping the investor pool small and sophisticated, the company can afford to sell more complex securities, maintain private ownership, and control its annual disclosures with the SEC.

Considering the high risk, lower liquidity, and higher complexity of the securities being offered, it may not be easy to market private stock. These factors would also result in more demanding buyers. Higher rates of interest, collateral, or even for a higher percentage of ownership in the company are just a few things companies that offer private stock are willing to trade for a quicker issuing process, that allows them to remain private entities, and helps avoid the full glare of the public’s and SEC’s scrutiny.

If you have any questions regarding the incorporation process, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.