Copyright Infringement Litigation

Agencies Issue PPACA Implementation Guidance

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA).  Six months later, the PPACA's "first round" of coverage mandates are set to go into effect.  Group health plans must comply with the following coverage mandates beginning with their next plan year (Jan. 1, 2011, for calendar year plans):

• Extension of dependent coverage to age 26;
• Elimination of pre-existing condition exclusions for enrollees under age 19;
• Prohibition on lifetime and annual dollar limits;
• Prohibition on rescissions;
• Provision of first dollar coverage for preventive health services (non-grandfathered plans only);
• Internal claims and appeals procedures and external review process (non-grandfathered plans only);
• Mandated patient protections (non-grandfathered plans only);
• Non-discrimination rules extended to insured plans (non-grandfathered plans only); and
• No discrimination based on health status (non-grandfathered plans only).

Since the enactment of the PPACA, the Departments of Labor (DOL), Health and Human Services, and the Treasury have jointly published several phases of interim final regulations, issued sub-regulatory guidance, and invited comments concerning many of the changes that will impact employers and retirement systems that sponsor group health plans. 

Read the entire article.
 

         On Sept. 16, 2010, the United States Environmental Protection Agency (EPA) published a notice in the Federal Register soliciting stakeholder input regarding the agency’s role under the Pollution Prevention Act of 1990 in regulating or encouraging the "green" or sustainable products movement.  The EPA will consider and accept comments until Oct. 19, 2010, on the scope and nature of the agency’s proposed role in the identification, development, manufacturing of, designation and use of "green" or "sustainable" products, as well as views on the major challenges and opportunities in this area.

         Companies may be affected by the EPA’s action on this matter if they manufacture, distribute, label, certify, verify and purchase or use consumer, commercial or industrial products that may be considered as "green," "sustainable" or "environmentally preferable."  Potentially affected entities may include, but are not limited to those industries with the following North American Industrial Classification Codes (NAICS):  23, 31–33, 42, 44, 45, 54, 72, 81 and 92.

         The areas contemplated by EPA for regulation or other action include: 

1.      Assembling information and databases;
2.      Identifying sustainability "hotspots" and setting product sustainability priorities;
3.      Evaluating the multiple impacts of products across their entire life cycle;
4.      Defining criteria for more sustainable products;
5.      Generating eco-labels and/or standards;
6.      Establishing the scientific foundation for these eco-labels and/or standards;
7.      Verifying that products meet standards;
8.      Stimulating the market; and
9.      Developing end-of-life management systems (reuse, recycling, etc.).

         If you would like to discuss the EPA's request for stakeholder input or any of the potential changes to EPA’s role in the "green" movement, please contact Kristina Tridico, Susan Charles or Freedom Smith.  In addition, you can view the Federal Register notice prepared by the EPA to summarize its proposed actions.

In the wake of the recent financial crisis, on May 20, 2010, the U.S. Senate voted to adopt sweeping financial reform.  The proposed Restoring American Financial Stability Act of 2010 would:

• create a number of new governmental bodies designed to protect investors;
• severely limit government bail-outs;
• streamline bank regulation;
• regulate trading of derivatives;
• increase regulation of hedge funds and credit rating agencies;
• affect executive compensation;
• undertake some reform of the SEC;
• strengthen the Federal Reserve; and
• increase regulation of securitization and municipal securities transactions. 

But, could it also affect the availability of private equity funds?

The bill aims to end so-called "too big to fail" bail-outs.  The Volcker Rule is part of that effort.  The rule prohibits banks and their affiliates from investing in or sponsoring hedge funds and private equity funds and otherwise requires limited relationships with hedge funds and private equity funds.  Non-bank financial institutions supervised by the Federal Reserve will also have restrictions on their hedge fund and private equity investments. 

Banks and other regulated financial institutions provide a significant portion of the capital for private equity funds.  Without that capital, private equity funds will likely be smaller and less inclined to make investments.  In many instances, private equity dollars are available to companies seeking funding in circumstances under which traditional banks would not lend.  In those cases, the limited availability of private equity dollars could damage companies seeking funding.  Those companies may not be able to obtain funds for operations, strategic acquisitions or expansion if private equity money is not available.

While the financial reform bill has many legitimate purposes, it may have consequences that were not anticipated by the drafters.  Those consequences will affect not only private equity funds themselves but also companies that rely on private equity as a source of funding.

This morning we met with the chief managing director of Eli Lilly India, Sandeep Gupta.  The delegation was greeted with large bouquets of flowers, lit candles and the tilaka (the name for the Indian dot) was placed on our foreheads.  It was most definitely a warm and friendly greeting.

The Lilly Indian facility was started in 1993 as a joint venture with Ranbaxy Labs.  They currently have over 430 employees and became a Lilly subsidiary in 2001.  Sixty percent of their portfolio focuses on diabetes and another 20 percent on oncology.

India does not yet have a comprehensive patent system.  They did pass a law in 2005 indicating that patents could be obtained and protected in India, but it's been a very slow implementation process.  As a result, there are very few patents, which can prevent companies, like Lilly, from having an even larger presence.

The cost of health care was a topic in this meeting.  The Indian leaders believe health care costs in the U.S. are higher because the U.S. spends a large amount of money on research and development, where most countries do not invest as much in finding cures.  Ninety percent of new molecules discovered are discovered by the U.S.

Of course, pharmaceuticals were also discussed.  Brand name pharmaceuticals are important in India.  The U.S. may have one brand name and several generic brands.  In India, they have multiple brand names and people pay a lot of money for the brand names.  Even with the focus on brand names, 650 million Indians have no access to any medicine – brand name or generic.  Likewise, 80 to 90 percent of Indians are without health care insurance.

We were able to learn about India during or visit to the Lilly facility.  India has approximately 1.2 billion people, four times the number of people in the U.S.  Sixty percent of the Indian population is less than 30 years old, so it's a very young country.  They feel like their current government is very progressive and they reward innovation and try to reduce bureaucracy.

I've mentioned the vast difference in the living standards in rural and urban areas.  Seventy-one percent of the population lives in rural areas and 29 percent live in urban areas.  Population growth is slowing, but the literacy rate is rising, particularly with women.

The impact of the global economy is much less significant on India than with other countries.  For instance, although the global economic downturn affected India, it did not impact it nearly as negatively as some other countries.  India does not have a heavy reliance on exports.   They rely on their own domestic consumption.  They are "domestically led," which means they are somewhat insulated from global downturns and are much less volatile.

India has the fourth largest economy in the world.  In 2014, they expect to pass Japan and become the third largest economy.  Fifty-five percent of their economy is service based.  Their economy used to be 25 percent agriculture, but that's down to 19 percent.  The percentage involved in manufacturing has also decreased, but the service industry has increased.  They compare and contrast themselves frequently to China.  They point out that a large part of China's economy is manufacturing.

While at Lilly, we had a “town hall” type of meeting with the employees and local leaders.

After we left Lilly, we met with Vilasrao Dagadojirao Deshmukh, the minister of heavy industries and public enterprises for the government of India..  He talked about the various industries the government is involved in.  They are running airlines, making watches, running utilities, and a lot of other industries started because of a void from the lack of interest in private companies.  The government is competing with the private sector.  They are in a position now of turning some of these government initiatives into joint ventures and public/private partnerships.

Later in the day, we met with a senior partner in the Indian law firm of Seth Dua and Associates.  The firm has 34 attorneys, which by India’s standards is mid-sized.  Comparatively, Ice Miller has over 250 attorneys.  In India, you must be an Indian lawyer to practice law.  Several of the large law firms recently got into trouble for practicing law when they were not licensed to do so.   U.S. attorneys cannot even advise Indian companies.

Next we met with the minister of urban development, Jaipal Reddy.   The government is taking the problem of housing for the poor very seriously, although this is an overwhelming issue.

This evening there was a reception for the delegation.  The food was fantastic.  It poured down rain, but within a few minutes the heat had dried up all the moisture.

On the very last day in India we were able to visit the tomb of Mahatma Gandhi.  It was a solemn place.  Gandhi derived most of his principles from Hinduism, but believed all religions to be equal.  He was an avid theologian and read extensively about all major religions.  As we left the tomb, I was surrounded by Indian families who wanted to take pictures with me and their children.  I assume it was unusual for them to see the western attire and blonde hair.  There was a high terrorist alert so we were unable to visit any other locations.  We were advised to stay in our hotel, especially me as a blonde female.  It made me realize how I can take for granted how safe we are in the U.S.

We are now on our way home!  I’m ready to be back in Indiana, but I look forward to applying the lessons from this trip to helping Indian companies have even more economic success.

With the passage of the Patient Protection and Affordable Care Act and related reconciliation bills (the Act), it is time to explore what is really in the law.  Colleges and universities might be surprised to learn the number of opportunities available to them.  Everyone knows the Act includes individual and employer mandates regarding health insurance and imposes a broad range of new requirements on the health care industry.  But, in addition to those types of provisions, the bill is a veritable Christmas tree in terms of the grants and opportunities it makes available to businesses both within and outside the traditional health care field, particularly colleges and universities.

Each grant or program generally requires that the prospective recipient submit an application to the federal government.  The applications are generally submitted online through a government-sponsored Web site.

Read a summary of many of the opportunities available to colleges and universities under the Act.

Blog written by Jacob Cox.

Opposition continues to grow against the U.S. Environment Protection Agency's (EPA) recent finding that greenhouse gases "endanger" public safety and welfare due to their effect on global warming.  Climate change issues are already a common source of controversy, but the EPA's finding has drawn attention due to the potentially wide-reaching effect of regulations proposed by the EPA:  More than six million facilities whose emissions are currently unregulated, including hospitals, restaurants, hotels and even small farms, could potentially be subject to new permitting requirements.

Driven by a concern for the effect of such new administrative and economic burdens on small businesses, Virginia and two other states filed suit in federal court against the EPA in late February 2010, in an attempt to force it to reexamine its "endangerment" finding.  Since that time, more than a dozen other states, including Indiana, Kentucky and Nebraska, have filed motions to join the Virginia lawsuit in opposition to the EPA's finding.  Outside the courtroom, numerous members of Congress have also begun to seek support for an amendment to the Clean Air Act that would specifically prevent the EPA from regulating greenhouse gas emissions. 

Despite these criticisms, the EPA has refused to compromise its position, and has indicated that it believes its "endangerment" finding will withstand even such direct legal attacks.  Further, the EPA is not without its supporters in this fight – a similar number of states have already expressed their agreement with the EPA's finding, and have even requested the right to intervene in lawsuits filed against the EPA in support of the EPA's position. 

Congratulations!  You're one of few.  The next step is to negotiate the commitment letter.  There was a great article about negotiating loan commitments in the January/February 2010 issue of Business Law Today.  The article was titled "Negotiating the Loan Commitment:  The Borrower's Perspective" and was authored by John N. Oest.  Below are some of the major points made in the article: 

• Negotiate your important points up front before signing the commitment letter.  You will probably not get another opportunity.
   
• Understand that the commitment letter likely contains a number of conditions to the bank's commitment, and few for the borrower.  Some commitment letters contain an express agreement by the borrower to borrow the funds.
• Negotiate basic financial terms in the commitment letter, including amount of loan, interest rate, maturity date, fees, financial covenants and method of calculation of interest.
   
• Understand at the commitment letter stage how much money will actually be available to you.  For example, if your loan is based on "80 percent of Eligible Accounts Receivable" or some similar formulation, you'll need to understand up front what constitutes an Eligible Account Receivable.  If you do not, you could end up with less money available to you than you expect.
   
• Work through the prepayment rights and obligations at the commitment letter stage.  You may want to prepay the loan, but may find it triggers penalties or  yield protection payments .  Also, you need to understand when you will be required to repay the loan.  Often, an equity raise or a sale of substantial properties outside the ordinary course of business will trigger a prepayment requirement.
   
• Look for a due-on-sale clause.  Most mortgages contain these provisions that require repayment of the loan upon sale of the property.  These may be subject to limited enforceability in some states.
   
• Change of control provisions prohibit transfers of shares of a privately-owned company if the transfer would result in specified percentages of change of ownership.  The borrower should ask for some specific exceptions, including permitting transfers among owners and their affiliates, transfers for estate planning purposes and others.
   
• The commitment letter will generally limit other debt and other liens.  You should negotiate to obtain some standard exceptions such as unsecured trade debt, subordinated debt, intercompany debt, purchase money debt and capital leases.  You may also want to try to get a general basket for unsecured debt in a maximum amount.  With respect to liens, you should negotiate to allow existing liens, liens imposed by operation of law, liens security purchase money debt and other liens. Depending on your company's structure, the lender may require guarantees of the loan.  You and the guarantors will need to understand the scope of those guarantees.  

 
The basic point is, don't take the commitment letter lightly.  The early stage is when the key terms of the credit are mutually established, so pay attention to the details of the commitment letter and negotiate the issues most important to you at this stage.

During the financial crisis, private equity, mezzanine and venture capital firms have spent a lot of time "cleaning house."  The financial crisis has made cheap debt less available and thus private equity and other firms are not able to complete deals with the huge leverage ratios that existed prior to the crisis.  So, they have taken a close, hard look at existing investments in order to determine which could be saved and have allocated resources appropriately.  

This sort of review has included, from a legal perspective, review of debt covenants and commercial contracts.  The firms have wanted to determine which of their portfolio companies are in danger of violating a financial covenant or failing to perform under a critical contract. 

Recent reviews have also included analyses of potential exit strategies in a down economy.  The potential strategies include the traditional options of bankruptcy, sale and IPO.  IPO's have been down sharply until very recently, so this option has not been given much consideration.  Sales have continued, but with valuations low, this is often not a favored option.  Bankruptcy is, as always, fraught with difficulties as firms consider the opposition of creditors as well as the value of their secured positions, if any.

Throughout the financial crisis, distressed investing has continued.  With the credit markets tight, private equity and other firms have taken some opportunities to fund companies that have not been able to get credit in the traditional credit markets.  These efforts persist, and the firms continue to focus sharply on the fundamentals of these companies in order to protect their investments. 

If you haven't read the thousands of pages of the current Senate-proposed version of the Patient Protection and Affordable Care Act (that's the formal name of the proposed healthcare reform bill), you might be surprised by the kinds of opportunities that are available for businesses.  This commentary may be a bit premature given that a bill has not been passed, but because the Senate-proposed bill is currently forming the basis for congressional debates, it could become relevant to businesses very soon.

Everyone knows that the bill would require universal health insurance and impose a broad range of new requirements on the healthcare industry.  In addition, the bill has a variety of grants and opportunities it makes available to businesses both within and outside the traditional healthcare field. 

There are numerous grant opportunities for states, and in many cases, the state can allocate funds through a bidding process.  Traditional healthcare organizations such as hospitals are eligible for a large number of grants and funded study and training projects.  Nonprofits have a number of opportunities available, too.  And colleges and universities also can take advantage of a wide range of potential grant and award programs.  Funds are also available for other businesses, such as grants to implement comprehensive workplace wellness programs or contracts to establish Web sites.

It will be an interesting road to see what happens to healthcare reform in the next weeks and months.  We will keep you posted on the funding opportunities that might be available for your business.

Saying "[w]ith respect to climate pollution, we will act," and that "[t]he Clean Air Act does in fact allow us to do so" Administrator Jackson today announced that greenhouse gases threaten the public health and welfare of the American people.
 
Administrator Jackson indicated at the press briefing that the agency's intention with regards to the finding was to "release the science and reduce the questions." Stressing that "we'll continue to work under the Clean Air Act" Administrator Jackson also stated that the agency is "compelled" to address climate change pollution.
 
She fielded questions on the legislative timeline and agenda and stressed that EPA's and the legislative initiatives are independent.  Administrator Jackson did emphasize that the agency would move forward with work that the EPA had planned, and that there is no reason to delay.  A common question at the briefing was what EPA's timeline is on additional rules for stationery sources and additional rulemaking for reductions in light of the greenhouse gas reporting rule. Administrator Jackson said that there was no timeline for the next rules on emissions, including next steps on the tailoring rule, and stated that "I have no additional information on timelines." 
 
So why issue this rule now, and not concurrent with the transportation rule?  She stressed again that this is a unique situation and responded that this finding itself was the subject of a U.S. Supreme Court Case and that they wanted to project the image that the "EPA is on the job and is about doing the job."  She said that they intend to "keep the ball moving."
 
The overall message from the press conference was, "with respect to climate pollution, we will act."

To view a full transcript of Administrator Jackson's remarks, click here.

Japan is the world's second-largest economy.  Their gross domestic product was over $4.8 trillion in 2008.  As I mentioned in a previous post, Japan is expanding ties with other countries in Asia to help diversify their economic relations with the U.S. and Europe, although those ties are still strong.  Because the Japanese-American relationship has such a large technological and economic impact on the world, they cooperate on a broad range of global issues, including development assistance, combating communicable diseases and protecting the environment and natural resources.  Both countries also have strong collaboration in science and technology.

Japan is slightly smaller than the state of California and about 73 percent of the country is mountainous.  Because there isn't much flat land, many hills and mountainsides are cultivated all the way to the summits.  Their agriculture consists of rice, vegetables, fruit, milk, meat, silk and fish.  Japan is an urban society with only about 4 percent of the labor force engaged in agriculture.

The agricultural economy is highly subsidized and protected.  Japan has few natural resources, fish being their primary natural resource, and trade helps it earn the foreign exchange needed to purchase raw materials for its economy.  Japan is the largest foreign market for U.S. agricultural products, with total agricultural exports valued at over $10 billion in 2007.

Japan's population, over 127 million, has slowed due to falling birth rates.  In 2005, Japan's population declined for the first time.

Japan is a major market for many U.S. products, including chemicals, pharmaceuticals, films and music, commercial aircraft, nonferrous metals, plastics and medical and scientific supplies.

Day 8 - Monday, September 14
We attended the opening ceremony of the Midwest U.S.–Japan Association Conference.  Mitch Daniels is one of three U.S. governors who is attending this conference.  Governor Jennifer Granholm of Michigan and Governor Jim Doyle of Wisconsin are in attendance as well.  There are four Japanese governors participating.

Several members of the delegation were able to meet privately with a representative from Sony.  He discussed that Sony's top issues right now are quality and the environment.  He also discussed the increased need for universities and businesses to collaborate more; specifically pointing out excellent programs at Purdue and Rose-Hulman that would be of importance to Sony.  This representative is happy with their Indiana connections and feels that Indiana strives to keep the costs of conducting business in the state low.

Overall, Japanese business leaders are looking to expand relationships throughout Asia and not rely so heavily on the U.S. and Europe  The current economic conditions that the U.S. and Europe are facing have impacted Japan because of their market presence.

Over the weekend Governor Daniels announced that beginning in 2010 the Indiana State Fair will feature a different country each year.  Japan will be the first country featured.  Japanese exhibits will include performing arts, cuisine, interactive displays and educational opportunities.

Day 7 – Sunday, September 13
Today was the first opportunity the delegates had to do some sightseeing on their own.  Some of the delegates visited Japanese shrines but I decided to do a bit of shopping in the "fashion capital of the world!" 

The Ginza District of Japan features many of the world's best designer shops as well as smaller shops featuring hand painted stationery, paper, umbrellas and fans.  The Japanese culture emphasizes order and cleanliness.  For example, you must take your shoes off when entering a dressing room and put a cloth over your face to protect the clothes.  On escalators, you hear instructions on which side to stand and reminders to hold small toddlers.

This emphasis on order and cleanliness even translates to their public restrooms.  The toilet seats in public restrooms are heated and all the restrooms have bidets.  Restrooms are easy to find and are on located on every floor.  There is a special deodorizing spray and you hear a continuous flushing sound to protect your privacy. 

In Japan you'll find that many stores have a lot of customer service representatives to assist you. In one small section of a department store I found 3-4 representatives designated to help customers in just that one section.

The Japanese stores tend to only carry three sizes: small, medium and large.  In America, I usually wear an extra small but in Japan I'm a medium. Most of the Japanese women are very slender and all are about the same height.  You'll find very little obesity among the Japanese.

Today's weather, beautiful, clear and in the mid-70s (similar to our Fall), gave me an opportunity to observe interesting aspects of the Japanese culture.  Even in the summer many Japanese wear boots.  As in China, pale skin is preferred and many of the women carry umbrellas.  Japanese society is very disciplined.  The city streets are clean and people don’t dress as casually as they do in the U.S.  For example, you don't find many people wearing flip-flops.

Sunday Evening
In the evening we attended the gala reception for the Midwest U.S.-Japan Association Conference in Tokyo.   For nearly three decades, business leaders from the Midwest region of the U.S. and Japan have met on an annual basis to discuss the growth and progress of economic relations of the American Midwest and Japan.  The Midwest U.S.-Japan Association is comprised of ten member states including Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio and Wisconsin.   Membership in the Japan-Midwest U.S. Association is comprised of corporations that have direct economic ties to Japan or are interested in developing them.  The association has some 100 corporate members including Toyota Motors, Mitsui & Co., Saison Group, Sumitomo Chemical, Kajima Corporation, and Sony.  The associations reinforce the economic, political and cultural ties that link the national economy of Japan with the regional economy of the Midwest.

Day 6 – Saturday, September 12
We traveled by bullet train to Tochigi Prefecture, Indiana's sister-state in Japan.  The bullet train was very comfortable and is an extremely efficient mode of transportation for the Japanese.  The train is low energy, low noise, seats a very high capacity of passengers and is easy to maintain.  The Japanese culture emphasizes order and you see that in their transit system.  Their average delay is less than one minute.  Everything is on time and there are no last minute changes.  Seventy-two percent of transportation is done on these bullet trains in Tokyo central and 56 percent in metro Japan.

When we arrived we attended a ceremony to celebrate the 10th anniversary of the sister-state agreement by planting a tulip tree, the official state tree of Indiana, in the central park of Tochigi.  This park is beautiful with many fountains and tulip trees.  The Japanese mentioned that the relationship between Tochigi and Indiana was fate.  Tulip trees were planted in this park 15 years before we became sister states and they feel there is strong significance in the fact that the tulip tree is Indiana's state tree.  These goodwill gestures were further endorsed by the fact that it was a rainy afternoon, but the clouds broke just as the planting ceremony began.

After the tree planning ceremony, we attended the 10th Anniversary Commemorative Symposium at the Tobu Hotel.  Over 100 Japanese government and business leaders attended this event.  Governor Fukuda, the governor of the Tochigi Prefecture, expressed his appreciation and his view of the importance of the delegation coming to Japan.  Personal connections are very important to the Japanese and these face-to-face visits are crucial to successful relationships.

After thy symposium, we attended a reception for the Indiana delegation which was hosted by Fukuda.  We were able to witness the tradition of the "breaking of the barrel."  Six Japanese officials broke a barrel, filled with Saki, with wooden hammers.

An interesting observation that I've made is that many of the roofs in Japan are "green."  The tops of the buildings have grass, trees and bushes.  Not only is this great for their environment, but it is a way for the Japanese to have yards in an area that is highly populated.

Day 3 - September 9, 2009 – Traveling to Hangzhou

I was really looking forward to traveling by train to Hangzhou and I was not disappointed.  It was a great opportunity for me to learn more about the Chinese culture and see more of China's beautiful landscape.

Hangzhou is in the Zhejiang Province located about 112 miles southwest of Shanghai.    Hangzhou has a population of over 6 million people, which is small by Chinese standards, and has a beautiful fresh water lake called West Lake.  West Lake is surrounded by mountains on three sides and is very well known in China.

Many Chinese homes, especially in farm villages, have temples on top of them to pay homage to their ancestors.  Ancestry and history play a large part of the Chinese culture and the temples are another example of these influences.

I also thought it was interesting, that unlike the U.S., Chinese grooms and their families pay for about 80 percent of the cost of their weddings.

It is early in the day of September 9, 2009 – 9/9/09 – and 9 is a very lucky number in the Chinese culture.  If fact, the Chinese celebrate the ninth second, of the ninth minute, of the ninth hour, of the ninth day, of the ninth month of the ninth year.  The luck of nine did not rub off on the number four in this culture.  Four is considered very unlucky, similar to the U.S. perception of the number 13.

I look forward to reporting more about this day's events in tomorrow's blog.

September 8, 2009 - Day 2

We spent the first part of our day with the American Chamber of Commerce for a discussion on "green collar" jobs.  Chinese carbon emissions are escalating and China has seven of the 10 most polluted cities in the world.  As a result, environmental protection has become more important to the Chinese.

Later in the day we traveled to Eli Lilly's facility at the Pudong Science Park.  Lilly has over 2,000 employees in China, which means China has the second largest Lilly operation in the world.  Pudong is one of Shanghai's newest districts with a focus on three main industries: life sciences, software and integrated circuits.

Some of us were also able to visit ShangPharma.  ShangPharma provides research services to pharmaceutical and biotech companies.  They currently have over 1,600 scientists.  An interesting question was raised about how intellectual property is protected for the company and its clients.  The uncertainty of intellectual property protection is not isolated to just ShangPharma.  It is an issue that China is addressing as a country.

Following these visits we had a traditional Chinese lunch that was again served on a lazy Susan.  There were six different courses that included duck, shrimp, squid, scallops, fresh vegetables, jellyfish and fried rice.  Beer and wine were again offered.  Chinese meals are traditionally very  large.  I was curious how the society remains so thin.  Meal preparation seems to hold the answer.  They use vegetable oils and other "waist friendly" and heart healthy preparation methods.

The day concluded with a Friends of Indiana reception.  Guests included companies that have a business connection to Indiana or have an interest in doing business in Indiana.  Eli Lilly, Cummins and Alison Transmission all attended.

I'm really looking forward to traveling by train to Hangzhou tomorrow.  It will be a great opportunity for me to see some of the rural parts of China and its landscape.

We've arrived in Shanghai China!  China is the world's most populous country with a population of 1.3 billion (with over 700,000 million living in rural farm villages) and one of the largest producers and consumers of agricultural products.  Over 40 percent of China's labor force is engaged in agriculture, even though only 10 percent of the land is suitable for cultivation and crops.  China is among the world's largest producers of rice, corn, wheat, soybeans, vegetables, tea and port. Industry and construction account for about 46 percent of China's gross domestic product (GDP). 

China is the second largest producer of oil after the U.S.  Coal makes up the bulk of China's energy consumption and is the largest producer and consumer of coal in the world.  China is home to 7 of the world's top 10 most polluted cities. 

China is now one of the most important markets for U.S. exports and in 2007, U.S. exports to China totaled $65.2 billion. 

Shanghai is beautiful with many high-rise buildings and lovely architecture.  It's approximately 200-300 years old, relatively new by Chinese standards.  It's very cosmopolitan and has one of the world's largest buildings.  The highways are elevated and the transportation system is very efficient with subways and lots of taxis, but traffic jams are not uncommon. 

The average age of marriage is 25 and it's not uncommon for many generations to reside in the same household.   This makes defining China's "middle class" difficult.  A young adult will have low expenses because they live with their elders, but they have a large impact on spending.

We concluded the evening with a wonderful 7 course dinner.  Keeping with tradition, we changed chopsticks with each course.  Dinner consisted of many "firsts" for me including sautéed prawns in chile sauce, shredded chicken soup, steamed garoupa, pan-fired beef and mushrooms, and a sweetened almond crème with pastries for dessert. 

During dinner many toasts were given, as is tradition in China.   When a person receives a toast they must participate by taking a drink.  Many high ranking officials and business leaders have people who help "protect" them from toasts so the leader isn't required to drink a large amount of alcohol.  When receiving a toasting you should hold your wine glass below the glass of the person who is making the toast as a sign of respect.

Monday, Sept. 7, 2009
We had a briefing at the hotel by the U.S. Commercial Service and we talked a lot about China.  We started off breakfast before the presentation with a combined traditional Chinese/American breakfast.  On the Chinese side we had soups, dumplings, fresh seafood, salad and loose leaf tea.

China's GDP is about one-third of the U.S. and they have the third largest global economy.  China has had 5 years of rapid double-digit GDP growth.

Shanghai is not representative of China as a whole.  The standard of living between large metropolitan cities and farm villages is vast with marked differences in health care and education.  It is very cosmopolitan and an important economic center.  Like most countries, China has been impacted by the worldwide recession.  Exports are down 7.8 percent as of last year and they have had over 100,000 factory closings.  There are 26 million unemployed Chinese migrant workers.

China was the first major country to enact a stimulus package.  They injected $582 billion in their economy with a majority of the stimulus funds targeted toward infrastructure (air, railways, highways and power grids) and earthquake reconstruction. They have had a 2009 economic revival with a growth rate of 7.9 percent, mostly due to the stimulus package and an increase in lending.  Auto sales are up 25 percent and for the first time China has surpassed the United States.  Home sales have also improved recently.

Daniels was the featured speaker at a conference hosted by Cummins, Inc. for representatives of some of Cummins’ top Chinese suppler companies and members of the Indiana delegation.  Steve Chapman, Cummins’ group vice president for China and Russia, who lives in Beijing, introduced Daniels. The governor discussed Indiana’s business climate and encouraged conference attendees to visit the Hoosier state as they consider setting up operations in the U.S.  The governor was the guest of honor at a luncheon hosted by Cummins at the conclusion of the conference.

There has been quick growth in U.S. exports to China since China joined a common trade union in 2002.  There are many U.S. companies in China and a significant U.S. presence in human capital.  China has surpassed Japan as the U.S.'s largest export market behind Canada and Mexico.  U.S. companies with a presence in China tend to be profitable in their operations and include companies such as General Electric, 3M, GM, Boeing, Cargill, IBM  and Caterpillar.  The Chinese are less likely to have large corporate centers in the U.S. because they don't experience managing a worldwide work force and because labor is much more expensive in the U.S. compared to China.   The average labor cost in the U.S. is $25/hour compared to $1/hour in China.

Shanghai has a population of 20 million and is the commercial capital and one of the wealthiest areas of China, similar to Manhattan.  Shanghai is the economic powerhouse so an important area for Governor Daniels an our delegation to visit.

In the evening we met with the Shanghai Foreign Commerce Commission to discuss why Chinese companies should do business in Indiana.  Governor Daniels discussed how businesses would benefit from working with Indiana including the fact that Indiana has higher capital and foreign investments than any other U.S. state and Indiana does not raise taxes to pay for unbalanced budgets.  After we left the commerce commission, we immediately  went to the Hoosier Club of Shanghai reception at the yacht club.  Members of the Hoosier club are comprised of alumni from Indiana universities.  The governor spoke and commented on the importance of student exchange programs.
 
To end the evening we went to an authentic Chinese restaurant featuring several courses including shrimp, soft shell crab, beef and avocado.  The food here is incredible and made from many natural ingredients.

The state in which you form your business may not seem important now, but it could have consequences in the future.  Administrative expenses, tax issues, attraction of future investors and simply the ease of governing your entity can all be affected by the state in which your entity is organized.

That being said, it is relatively easy to change the state of your company's formation.  As your business develops, the important thing is to periodically evaluate whether it continues to make sense to be organized in the state you originally chose.

There are three main issues to consider when determining where to form your business:

• Location of your business
• Tax issues
• Attracting investors

When you are choosing an entity there are a number factors you should consider.  For instance, you should think of how you would like to manage the business, protection against liability and your preferred tax treatment.  Below are brief descriptions of several business entities that may suit your needs and some of the advantages and disadvantages of choosing those entities.

Sole Proprietorship
The sole proprietorship is the simplest form of business.  A sole proprietorship is not an entity separate from you.  Though the sole proprietorship is a simple and convenient way to operate your business, you should beware, you will be exposed to unlimited personal liability if you operate your business as a sole proprietorship.  The owner of a sole proprietorship is directly and personally liable to creditors and other claimants. 

Corporate Entities

Corporation
A corporation is a business entity created under state law and is as an independent legal "person" apart from its shareholders and directors. A corporation's shareholders are generally not liable for the obligations of the corporation and are thus generally shielded from the corporation's creditors even if the corporation cannot pay its obligations.  Corporations must comply with statutory rules which are typically more restrictive and require considerably more formality than limited liability companies.

C Corporation
The distinction between a C Corporation and an S Corporation relates to the corporation's tax treatment.  Some of the advantages of a C Corporation are that ordinarily you may deduct the entire value of the fringe benefits offered to shareholders who also serve as employees, the number of shareholders the entity may have is unlimited and they may be either individuals, entities, U.S. residents or foreign.  C Corporations also have significant flexibility to carry corporate losses forward to future tax years.  But, operating as a C Corporation usually subjects you to double taxation, i.e., tax at two levels.  First, the net earnings of the corporation are taxed, and then, the shareholders will be taxed on the earnings of the corporation distributed to the shareholders.  For example, if a corporation issues dividends to its shareholders, it has already paid income tax on that money, but the dividends remain taxable as income to each shareholder. 

S Corporation
An S corporation is a regular corporation that has elected "S corporation" tax status. An S Corporation provides the limited liability of a corporation and the tax treatment of a partnership or a limited liability company.  With respect to non-tax considerations, the S corporation is essentially identical to a C Corporation.  The significant tax advantage with the S Corporation is that the corporation does not pay any income tax on its earnings.  Some disadvantages to an S Corporation are that only once class of stock is permitted and you must limit the shareholders to 100 individuals, none of which may be an entity (with the exception of estates and certain types of trusts) and none of which may be non-resident aliens.

Unincorporated Entities - Limited Liability Company
The limited liability company (LLC) has characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of "pass-through" income taxation.  Unlike a corporation, few of the LLC statutory rules are mandatory and most of its governance is dictated by an operating agreement executed by its members  The management powers in the LLC can be retained by the members of the LLC or centralized within a board of managers (who may or may not be members).  Another advantage of the LLC is that its flexibility allows for much less administrative paperwork and record keeping than a corporate structure.  Some disadvantages of an LLC are that some investors are more comfortable with a corporate structure (although this may only be an issue once the company is ready to take on significant investors and not in the early stages of your business) and some creditors may require that you, and other members, personally guarantee a loan to your LLC. 

Partnerships

General Partnership
In a general partnership, each partner has full and equal control over the partnership.  The partnership is a "pass through" entity for tax purposes.  While partners have considerable flexibility in structuring their relationship, partners run a great risk of loss because there is no limitation to a partner's liability.  Partners have joint and several liability for the acts of each partner within the scope of partnership business. 

Limited Partnership
Under a limited partnership (LP), unlike a general partnership, the limited partners are not responsible for partnership debts, obligations and liabilities.  An LP may have an unlimited number of limited partners, but must have at least one general partner who is responsible for the management of the partnership.  The general partner remains personally liable for partnership debts, obligations and liabilities, but the general partner can be a limited liability entity to add a layer of protection to the individuals managing it.  Like the general partnership, the LP is treated as a "pass-through" entity.  A disadvantage of the LP is that the limited partners must be careful not to become engaged in the decision making of the business or they will run the risk of losing limited liability protection. 

Limited Liability Partnership
A limited liability partnership (LLP) is a variation of the LP which allows a limitation of liability without the restriction on active participation required with an LP.  Under an LLP, partners remain liable for their own acts and are generally not liable for the acts of others, unless the partner has acted negligently or committed misconduct.  As with the general partnership and the LP, an LLP is treated as a "pass-through" entity for tax purposes.

Bottom Line:  There is no "one size fits all" answer to the choice of entity question.  You should give careful consideration to your needs and the needs of your business before settling on an entity.  Since the factors in consideration may be significant and the tax analysis complex, it may be wise to consult your tax advisor or an attorney to assist you in the decision process. 

Incentives are on the rise for businesses to provide "green" products and services.  Many consumers are willing to pay a premium for products that are environmentally friendly, and businesses have taken notice.  Buzzwords such as "organic," "recyclable" and "hybrid" are used to distinguish a product from its competitors.  Even the government has increased its focus on encouraging companies to provide environmentally friendly products and services by offering a wide array of tax incentives available to companies and consumers.  It is not surprising that many companies have responded to these incentives by embarking on green marketing campaigns.

However, companies engaged in green marketing are not only increasing their profits, but also their risk.  Lawsuits and class actions accusing companies of "greenwashing" - marketing the environmental friendliness of a company's product in a false or misleading way - have sprung up across the nation.  These lawsuits have been filed against companies in a variety of industries and trades, including construction companies, retailers, automakers, candy makers and manufacturers of cleaning supplies.

In addition to these consumer actions, the Federal Trade Commission (FTC) has also increased its scrutiny of green marketing.  In June 2009, the FTC filed suit against Kmart, Tender Corporation and Dyna-E International for making false and unsubstantiated claims that their products were biodegradable.  The FTC alleged that these claims did not conform with environmental marketing guidelines contained in the "Green Guides," a set of regulations used by the FTC to determine whether a company's environmental marketing constitutes consumer fraud.  A revised version of these guides will be released later this year and will address the changes and growth in green marketing over the past ten years.

Although green marketing is a potentially invaluable tool, companies should ensure that they understand and minimize the risks that are associated with its use.  For further information regarding green marketing and ways to manage its risk, please contact Michael McNally or Jacob Cox in Ice Miller LLP's Competitive Business Practices Litigation Practice Group and members of the Firm's Green Industries Initiative.

Many terms of art are used in venture capital transactions that can be difficult to understand. Most of them relate to key issues that may be points of negotiation in your venture capital transaction. Below are a few of the common terms of art used in venture capital transactions and their common meanings:

• Conversion: Conversion refers to the conversion of shares of preferred stock into shares of common stock. Conversion provisions can be optional or mandatory. An optional conversion is when a shareholder has the option to convert its shares of preferred stock to shares of common stock at any time or when certain events happen. A mandatory conversion requires that all shares of preferred stock be converted into shares of common stock upon the occurrence of a certain event, such as consent of the majority of the holders of the preferred stock or a public offering. In a venture capital transaction, the typical negotiation points regarding conversion provisions, in addition to those mentioned under "Anti-dilution", are the events that trigger mandatory conversion, such as a public offering, and the dollar threshold that the event must reach before the conversion is mandatory.
• Anti-dilution: Anti-dilution provisions allow a preferred shareholder to keep the same or a similar ownership percentage in the company when the company sells more stock. This may be accomplished by giving the shareholder preemptive rights (see the definition below). Other terms that you may hear in conjunction with anti-dilution are weighted average and full ratchet. These are two methods for adjusting downward the conversion price per share of stock issued to the preferred shareholder when additional shares of stock are issued to new investors at a price lower than the price the preferred shareholder paid. In other words, if a preferred shareholder purchased its shares for $1.00 per share, and is able to convert its preferred shares into common shares at a deemed $1.00 per common share, the anti-dilution provisions may operate to make that conversion price lower, allowing the preferred shareholder to convert its preferred shares into a larger number of common shares. In a venture capital transaction, a typical negotiation point regarding anti-dilution provisions is whether a weighted average or full ratchet formula is used. A weighted average formula is currently the most common, but there are a number of ways a weighted average formula can be calculated.
• Preemptive rights: Preemptive rights are the rights of a shareholder to purchase its pro rata portion of any new shares of stock issued by the company at the same price and on the same terms as the new shares are being offered to new investors. A preemptive right, if exercised by the shareholder, allows the shareholder to retain its ownership percentage in the company. In a venture capital transaction, the typical negotiation points regarding preemptive rights are (i) who will receive the preemptive rights, such as the venture capital investors, major shareholders or all shareholders and (ii) what issuances are exempt from the preemptive rights.
• Right of first refusal: A right of first refusal gives each shareholder or certain specified shareholders the right to purchase its pro rata portion of shares offered by another shareholder to a third party, on the same terms. The company may have the first right of refusal and the shareholders may have a secondary right of refusal if the company elects not to purchase the shares. In a venture capital transaction, the typical negotiation points regarding rights of first refusal are (i) who is subject to the right of first refusal (i.e., who must offer their shares to the company and/or other shareholders prior to selling to a third party), (ii) who will receive the benefit of the right of first refusal, such as the venture capital investors, major shareholders or all shareholders and (iii) what transfers are exempt from the right of first refusal.
• Tag-along rights/Co-sale rights: Generally, a tag-along right is a protective provision for a minority shareholder. It allows a minority shareholder to sell its pro rata portion of shares of stock along with a selling significant shareholder. This right is often combined with the right of first refusal to allow a shareholder who does not exercise its right of first refusal to sell its pro rata portion with the selling shareholder, on the same terms and conditions. In a venture capital transaction, the typical negotiation points regarding tag-along rights are the same as those for rights of first refusal.
• Drag-along rights: Drag-along rights allows a defined group of shareholders (usually a single shareholder or group of shareholders who own a majority of the company) to require the remaining shareholders to sell their shares of stock in, and/or consent to, a transaction approved by the defined group, such as a sale of the assets of the company or a sale of all of the shares of stock of the company. In a venture capital transaction, the typical negotiation points regarding drag-along rights are (i) who are the shareholders that can initiate the transaction, and (ii) the percentage threshold of such shareholders that must approve (i.e. a majority, two-thirds, etc.).
• Redemption: Redemption happens when the company buys shares back from the investor. Redemption can be mandatory or optional on the part of the company or the shareholders. Generally, the redemption cannot occur before a certain date, such as five years after the first sale of the series of preferred stock, and must be approved by a certain percentage of the shareholders (i.e. a majority, two-thirds, etc.). This is designed the protect the venture capital investors' return on the transaction but also provides the company with some comfort that, absent special circumstances, it will not be required to come up with the cash to redeem prior to the agreed-upon date. There may be more specific negotiated redemption provisions that relate to the occurrence or non-occurrence of certain events by agreed upon dates. For example, if the venture capital is being used primarily to finance a construction project, there may be deadlines that have to be met in order to avoid mandatory redemption. In addition, the company may negotiate provisions that allow the company to redeem at its option after certain time periods have passed or certain events have occurred. In a venture capital transaction, the typical negotiation points regarding redemption provisions are (i) whether and under what circumstances redemption is required or allowed , (ii) the price for which each share is redeemable (e.g., the original purchase price plus accrued dividends or the greater of the original purchase price plus accrued dividends and the fair market value), (iii) the first date on which a redemption may be requested and (iv) the percentage of shareholders that is required to effect a redemption.
• PIK preferred: "PIK" stands for "paid-in-kind". This means that the dividends on PIK preferred are paid in the form of additional shares of preferred stock. In other words, rather than accruing dividends that must be paid in cash now or in the future, the preferred shareholder is deemed to own additional shares. The calculation of the number of PIK preferred shares issued in connection with any particular dividend is a point of negotiation between the parties.