Category: Uncategorized

Suffolk County employers, take note: effective June 30, 2019, employers in the county will be barred from asking about a job applicant’s salary history during the hiring process or relying on any such information to determine compensation.

The change is the result of the recently passed Restricting Information on Salaries and Earnings (“RISE”) Act, which applies to employers with four or more employees. Under the new legislation, inquiring about a candidate’s salary history (including compensation and benefits), whether orally, in writing, on an application, or otherwise, or conducting research into the candidate’s salary history, is prohibited. The law also bars employers from relying on a candidate’s salary history in determining his or her compensation at the new company at any stage of the hiring process – including at the offer or contract stage.

Penalties for violating this law will include compensatory damages to the individual as well as payments to Suffolk County, up to $50,000. Fines could reach $100,000 if the violation is found to be willful, wanton, or malicious.

The intended purpose of the legislation is to help eliminate the gender wage gap, as well as wage inequity for employees from minority groups. In other words, the law is intended to give employees coming from lower paying jobs an opportunity to not be weighed down at their new positions.  The belief is that employers will focus more on the local job market to determine the appropriate wages.

While a salary history ban has not been implemented statewide, Suffolk County joins a number of areas in the state, including Westchester County, Albany, and New York City, that have already passed such legislation. (Please contact us for additional guidance if your business operates in any of these regions.) A statewide bill may go to the State Senate for a vote in 2019.

In advance of the June 2019 effective date, employers should take the opportunity to update their employment practices to comply with the new law. Removing any references to salary history on your application forms is a critical first step. All employees who conduct interviews and participate in the hiring process should also be trained in compliance with the new policy.

This law comes on the heels of the new sexual harassment laws passed in New York State. Passed in April, that legislation requires employers to have both a sexual harassment prevention policy as well as training for their employees.

If you have questions about the RISE Act, or about your sexual harassment policy, please contact us.

Amicus curiae briefs, also known as “friend of the court” briefs, are often filed in appellate cases heard by the United States Supreme Court (as well as state appellate courts and intermediate federal courts of appeal). Amicus briefs provide non-parties who have a strong interest in the subject matter of a case – sometimes referred to as amici – an opportunity to advise and educate the court on particular issues. Amicus briefs can play a critical role in appellate advocacy by bringing relevant information and arguments to the court’s attention that the parties have not addressed.

Once a case reaches the appellate level—especially the Supreme Court—it raises policy issues well beyond the concerns of the individual parties to the case. Consequently, courts tasked with deciding these cases want to know the broader implications of the case beyond the parties. As a result, amicus briefs have been filed on behalf of diverse amici—such as businesses, municipalities, non-profits, and business associations—each whom have specialized knowledge or expertise and advocate a unique perspective.
Amicus briefs can play a valuable role precisely because they provide different perspectives from the principal parties. They provide helpful guidance to the court about the real-world impact of its decisions.

Companies, organizations, individuals, or groups of individuals can submit arguments on behalf of themselves, encouraging courts to rule in favor of the party whose interest is most closely aligned with theirs. Considering different perspectives enriches the judicial decision-making process.

In recent years, the presence and role of amicus briefs in appellate practice has undergone a major transformation. Throughout the first century of the Supreme Court’s existence, amicus briefs were rare. Even during the initial decades of 20^th century, amicus briefs were filed in only about ten percent of the Supreme Court’s cases. But recently, amicus briefs have become nearly ubiquitous. During the Supreme Court’s 2014-2015 term, 98% of cases had amicus filings (all but one case). In that term, Obergefell v. Hodges, 135 S. Ct. 2584 (2015), the Supreme Court’s landmark marriage equality ruling, had a record 148 filed amicus briefs. Most recently, during the Supreme Court’s 2017-2018 term, 890 amicus briefs were filed with an average of 14 per case.

There is sound evidence that amicus briefs have an impact. During the Supreme Court’s 2017-2018 term, the justices cited amicus briefs in 59 percent of the cases with signed majority opinions. And as a general trend, amicus briefs are now commonplace in federal and state appellate courts where they are cited to with increasing regularity.

No matter your interests, amicus briefs provide a meaningful opportunity for practical benefits. Businesses or associations can file amicus briefs explaining how the disposition of a case will affect them. Non-profits can file amicus briefs to educate the court on issues that may advance their mission, values, or society at large. Amicus briefs can even be used as a marketing tool showing tangible action on important issues. Amicus briefs now play a pervasive and critical role in appellate practice, and when used correctly, they persuade courts to make decisions that favor amici.

Christine Malafi is a partner at Campolo, Middleton & McCormick, LLP. Malafi also chairs the firm’s corporate department, one of the most robust teams in the New York region. Malafi’s practice focuses on mergers and acquisitions, corporate governance, routine and complex transactions, labor and employment issues (including sexual harassment prevention policies and training), and other business matters, as well as municipal, insurance coverage, and fraud issues. She routinely represents buyers and sellers in multi-million dollar transactions and serves in a general counsel role for many of the firm’s internationally-based clients.

Employers establish a clear social media policy, Malafi said.

“Social media is ubiquitous, with everyone from your grandmother to your second-grade teacher logging on,” she said. “Therefore, it’s no surprise that social media has found its way into the workplace, posing unique challenges to employers.”

“Handling social media is a balancing act for employers,” she said. “Employee posts may impact an employer’s reputation and the employee’s performance and productivity; at the same time, however, employers must take care not to run afoul of state and federal laws that generally protect work-related conversations among employees on social media, protect employees’ right to privacy, prohibit termination based on recreational activities outside the office (such as blogging or posting), and prohibit discrimination against employees based on disabilities or other information they reveal online.”

Employers must take a necessary first step, Malafi noted. “Employers are advised to be proactive by establishing a social media policy clearly stating the employer’s stance on the use of social media on company systems, prohibiting employees from disclosing confidential information about the business on social media, and prohibiting the use of social media to harass colleagues, among other things. As with all workplace policies, training of employees is also critical.”

“In today’s political climate, the challenges that social media poses for employers will only increase,” Malafi said. “Employers who understand the landscape will be ahead of the game.”

Prior to joining the firm, Malafi served as Suffolk County Attorney, the first woman and youngest person ever to serve in that position. She served as the chief legal officer of the county for eight years, where she focused on obtaining jury verdicts in favor of the county, making fewer settlements, enforcing anti-discrimination laws, and protecting children from harm.

Malafi earned a juris doctor, magna cum laude, from Touro College, Jacob D. Fuchsberg Law Center and a bachelor’s degree from Dowling College.
She is admitted to practice in New York, Connecticut and before the United States Court of Appeals, Second Circuit; United States District Court, Southern District of New York; and United States District Court, Eastern District of New York.

Malafi earned a Martindale-Hubbell AV Preeminent Rating. Among her many recognitions, she was listed in Best Lawyers in America for Employment Law/Management in 2018 and 2017; and as a 2016 Top Outstanding Women in Law by Hofstra University School of Law’s Center for Children, Families and the Law.

Campolo, Middleton & McCormick, LLP (CMM) is a premier law firm with offices in Ronkonkoma and Bridgehampton. CMM does not seek to be the largest law firm as measured by number of lawyers or offices. Instead, the firm strives to be the firm of choice for clients with respect to their most challenging legal issues, most significant business transactions, and most critical disputes. CMM attorneys serve as their clients’ strategic partners, advising them on everything from day-to-day business decisions to their plans for worldwide expansion.

By Marc Alessi

Published in Innovate Long Island

It’s no secret that Long Island has problems with cellphone service.
More than 200 cellphone “dead zones” were identified in late 2016, as well as poor-quality network speed, reliability and performance. U.S. Senator Chuck Schumer (D-NY) has even urged carriers to improve coverage on the Island.

As a longtime resident of the North Shore, I have witnessed firsthand what it means to not have reliable wireless connectivity with our mobile-enabled electronics. And as someone who served for several years in public office, I know the typical community sensitivities that arise when we discuss the investments and improvements necessary to ensure a wireless infrastructure that enables our communities to participate in the information economy.

It is of paramount importance that we ensure the seamless wireless connectivity of our personal lives and for businesses.

My interest in improving the quality of mobile networks has grown stronger since I left public service and immersed myself into the innovation economy. As a startup entrepreneur here on Long Island and someone who helps to develop and grow startups throughout the state, I’ve witnessed firsthand the impact that quality cellphone service can have on the local entrepreneurial ecosystem, keeping businesses running smoothly and ensuring that local communities can attract high-growth tech startups.
I also know that if we don’t keep pace as smartphone usage and data demands increase, Long Island’s issues with cellphone service will be further magnified.

Today, if deployed efficiently, 4G LTE can meet most communities’ wireless-connectivity needs. But to enable future technologies like autonomous vehicles and smart cities, 5G (the fifth generation of wireless broadband technology that carriers are rolling out this year) will be required in pockets for cities and communities around the country.

We’re using our smartphones more than ever – to chat, stream content, read the news, shop and more. By 2020, mobile data traffic worldwide will be four times what internet traffic was in 2005. All that data is putting a strain on the cell towers built before our “phones” became more than phones.

This data demand isn’t just a fun part of our lifestyle. Wireless bandwidth is important for public safety, which brings me to FirstNet (First Responder Network Authority), which was created in 2012 by the Middle-Class Tax Relief and Job Creation Actto provide first responders with the first nationwide, broadband network dedicated to public safety.

The rollout is beginning this year across the country. Installing the appropriate network infrastructure will be critical in ensuring that the network runs smoothly and keeps communities safer in life-threatening situations.

It is estimated that about 70 percent of 911 calls are placed from wireless phones. In other words, wireless is not just for smartphones, but actually is a basic utility.

We all have a critical stake in assuring our communities have quality network coverage. You may have read recently that the villages of Kings Point, Lake Success, Flower Hill, Plandome, Plandome Manor and Williston Park are among the areas with more data demand than the current network infrastructure can accommodate. And you may have noticed a drop in coverage in your own local area or while driving on the LIE.

Our bandwidth is maxed out. Addressing network infrastructure challenges requires collaboration between the carriers, neutral host providers (the companies that build the network infrastructure and lease it to the carriers), residents and local leaders.

Those aforementioned areas are currently debating the path forward after reviewing a proposal from the carrier providing service to customers and ExteNet Systems, an Illinois-based neutral host provider, to improve network coverage and performance.

New network infrastructure doesn’t mean unsightly cell towers, which is a common concern. Neutral host providers like ExteNet install “small cell” antennas, which can be as small as a lunchbox and are placed near the top of utility poles, much like electrical transformers.

When citizens, community leaders and organizations can work together with the carriers and neutral host providers, the potential is there to install unobtrusive wireless sites that support today’s data demands, and the future.

Health concerns about radio emissions from small cells also are raised frequently. It is understandable, given how much we all use our smartphones. As a parent, I also want to ensure no health impact for my three children.

Fortunately, several U.S. government agencies and international organizations are working together to monitor research on the health effects of radio frequency exposure. To date, the FDA and the World Health Organization, among others, have concluded that scientific evidence doesn’t effectively link radio frequency exposure with any known health problems.
In addition, small cell networks with small antennas help limit radiated power. The deployment of faster 4G and 5G networks also will contribute to reducing the energy radiated by cell phones significantly.

I hope that Long Island, and the residents and businesses which stand to benefit from the improved cell phone service, can work together with the carriers and neutral host providers to ensure that our wireless network capabilities are the best they can be. If enhanced wireless service becomes a reality, our communities will be better off.

Read the full article here.

By Patrick McCormick and Richard DeMaio

The political drama surrounding Justice Kavanaugh’s confirmation captivated the public this fall. Across the country, people were glued to their screens watching the proceedings. But why? Fierce ideological debates and even allegations of sexual assault are not new to confirmation hearings. Throughout history, confirmation hearings have involved sexual assault allegations (Justice Thomas) and ideological disagreements (Robert Bork). However, they have never been mixed into a single cocktail featuring a former political operative such as Justice Kavanaugh.

Justice Kavanaugh’s confirmation serves as an example that any time politics threatens to seep into the Court, it will be met with resistance. Look no further than the two most recent nominees, Merrick Garland and Justice Gorsuch. Merrick Garland—who sat on the D.C. Circuit with Justice Kavanaugh where they voted the same in 93% of the cases—had full support of the Democrats. And although Justice Gorsuch found himself in the middle of a political battle after the Senate failed to consider Garland for a vote, he nonetheless emerged from his confirmation relatively unscathed with majority support. Justice Kavanaugh’s “X-factor,” that Merrick Garland and Justice Gorsuch lacked, was a position as a Republican operative.

A combination of Justice Kavanaugh’s uncanny timing and political baggage exacerbated the politics and emotions that naturally underlie the nomination process. Justice Kavanaugh filled the seat of retired Justice Kennedy, who was the swing vote on several controversial issues such as abortion, same-sex marriage, affirmation action, and campaign finance. This came weeks before the midterm elections where optimistic Democrats hoped to flip a few seats in the Senate to block his nomination. On top of it all, sexual assault allegations against Justice Kavanaugh surfaced in the midst of the #MeToo movement.

The well-known politics of Justice Kavanaugh’s previous stints as associate counsel during the Ken Starr investigation and White House Counsel for President Bush compounded the heightened political realities. Justice Kavanaugh, who urged he would “call balls and strikes,” was the same man that helped build a case to impeach President Clinton and peddled many Republican policies in the Bush White House. He was also touted by President Trump as the means to fulfill a campaign promise to nominate a conservative justice willing to overturn Roe v. Wade.

Against this political backdrop was the myth that Senate confirmation hearings are supposed to be apolitical, with the sole inquiry being the qualifications of the nominee. That Justice Kavanaugh’s confirmation hearings were politically charged should not be surprising. Half the process required to seat a justice is bestowed upon the Senate—the most deliberative and gridlock-prone political institution in our government. Article II of the Constitution vests the president with the power to nominate justices and checks that power by requiring the “advice and consent” of the Senate. Presidents may nominate justices based on their judicial philosophies and politics. It is likewise appropriate for the Senate to reject nominees based on ideological or political differences. The Constitution does not require deference to the President’s nominee or the majority party.
A fear permeating the Constitutional Convention in 1787 was vesting too much power in the President. With that fear in mind, in July 1787 Nathaniel Gorham of Massachusetts proposed that judges be appointed “with the advice and consent of the second [legislative] branch.”[1] Gorham believed the president would “trust to information from the members about possible judicial nominees.”[2] At this point, a proposal to allow judges to be “appointed by the National Executive” failed. On September 12, 1787, the final version of the Constitution vested the President with the ability to nominate federal judges “with the advice and consent of the Senate.” In Federalist 76, Hamilton, who favored a strong executive, wrote that “advice and consent” required “co-operation” and that “[i]t would be an excellent check upon a spirit of favoritism in the President, and would tend greatly to prevent the appointment of unfit characters from State prejudice, from family connection, from personal attachment, or from a view to popularity.”
The history of Supreme Court nominations reaffirms the political nature of the confirmation process. From the first nominations in 1789, the Senate has confirmed 125 of 163 nominations for the Court. Of the 37 unsuccessful nominations, twelve were rejected in Senate roll-call votes, while most of the rest were withdrawn in the face of opposition or postponed and never voted on by the Senate. Unsurprisingly, these nominations were unsuccessful because of ideological and political reasons.

From the earliest days of the Court in 1795, President Washington named John Rutledge to be the second Chief Justice. Rutledge was appointed during a congressional recess and briefly served as Chief Justice. Shortly after his appointment, Rutledge delivered a speech vehemently attacking the controversial Jay Treaty.[3] Disregarding the fact that President Washington supported the treaty and that the Senate approved it, many cited to Rutledge’s political blindness as evidence of mental incapacity. Because the Senate disagreed with Rutledge’s views on the Jay Treaty, the Senate rejected his confirmation by a 14-10 vote.

Over the course of the 19^th  century, the Senate rejected about 20 percent of presidential nominees for the Supreme Court. President Cleveland had particular difficulty filling a Supreme Court vacancy all because of political tension between himself and then powerful New York Senator, David Hill. Senator Hill successfully blocked two of President Cleveland’s nominees. First, Senator Hill managed to block the nomination of William Hornblower in 1893. As president of the New York City Bar Association, Hornblower convened an investigation into a prominent judge who happened to be good friends with Senator Hill. The investigation led to accusations that the judge engaged in improper conduct in a contested election while he was deputy attorney general. The investigation ultimately led to the judge’s defeat for a seat on the New York Court of Appeals. Retaliating against Hornblower for derailing his friend’s seat on New York’s highest Court, and as the political foe of President Cleveland, Senator Hill vigorously campaigned against Hornblower’s nomination. Hill’s efforts were successful: the Senate rejected Hornblower’s nomination by a vote of 30-24. Senator Hill’s forceful opposition continued in 1894 when he also successfully blocked the nomination of Wheeler Peckham. Stuck between the political feud of President Cleveland and Senator Hill, the Senate rejected Wheeler’s nomination by a vote of 42-31.

In the 20th century, high-profile rejections followed. Considered part of the “southern strategy,” President Nixon nominated Clement Haynsworth and Harold Carswell. Both nominees supported segregation and were cynically viewed as Nixon’s way of rewarding southerners after winning the election. The rejection of both nominees was an indictment of President Nixon’s allegiance to his political strategy rather than the qualifications and merits of his nominees. But the rejection train did not stop there. A decade later stark ideological differences fomented the rejection of Robert Bork.
Following Bork’s rejection, the Senate considered two nominees whose pasts caught up to them with now-familiar allegations. Shortly after the Bork debacle, President Reagan nominated Douglas Ginsburg. Before his name was even officially submitted to the Senate, he was forced to withdraw his nomination because of his admission that he used marijuana.

A couple of years after that, allegations of sexual harassment followed Justice Thomas through his confirmation.

History adds up to this point: politics will—for better or for worse—always be part of the of the confirmation process. The reality is that justices will always carry baggage with them onto the Court. But the justices that leave lasting impacts are those that carry principled records of advocacy and judicial opinions. Justices like Thurgood Marshall, Antonin Scalia, and Ruth Bader Ginsburg will always be revered because their judicial philosophies were formed on principles, not politics. Nominating partisan people to fulfill partisan campaign promises will always make the nomination process political. Fears of partisanship will undermine the credibility of the nominee as well as the legitimacy of the Court. The stakes surrounding Kavanaugh’s confirmation were undeniably high. A single justice may tip the scales of justice in favor of a conservative majority for a generation. More than anything, Justice Kavanaugh’s confirmation is a reminder of the one place where politics does not belong—on the Supreme Court of the United States.

[1] Records of the Federal Convention of 1787, Max Farrand ed., New Haven: Yale University Press, 1911, Vol. II.
[2] Id.
[3] The Jay Treaty was a controversial treaty entered between the United States and Great Britain to relieve post-revolutionary war tension. The treaty was unpopular among the public, but it managed to garner enough support to squeak through the Senate. President Washington implemented the treaty in the face of disapproval, realizing it was the price of peace with Great Britain.

Meet Your SCBA Colleague with Patrick McCormick

By Laura Lane

Early on in your career, from 1988- 1992, you were an Assistant District Attorney in the Bronx, prosecuting felony cases.
There was a significant amount of work then and there were many trials by fire.

Sounds like a real learning experience.
I learned right away about selfreliance and reaching out. In March 1990 I tried my first felony case and in the same week argued a case before the Court of Appeals. You really did have to learn on the job and build relationships with other prosecutors. I was only 26 then.

Do you remember the details of the felony case?
It was a B felony, an undercover buy and bust. A middle school class came to watch the trial and during a break I spoke to them. One of the kids said that he knew who the defendant was and what corner he sold crack on. Unfortunately, I lost. I learned the importance of jury selection and how to try a case.

Was it difficult going to homicide crime scenes?
It was surreal seeing someone dead. When you were on homicide duty you were on 24-hour call and two times a month you went to the crime scene. My first was off the Throgs Neck Bridge.

But you weren’t alone at the crime scene.
No. There were detectives, onlookers, the medical examiner’s office. My job was always to get a visual of what was going on there. I learned to ask the right questions, so we could eliminate the possible defenses later, which I had to do on the fly. And no one was ever killed during the day. The standard time to show up was 2 or 3 a.m. It was great, great training. We did 10,000 indictments a year.

What was the degree of professionalism of the other people that were involved?
We had some of the best lawyers and prosecutors in the city. Relationships were made. Some of those people are floating around in Suffolk County now and some are judges. We have a similar background and there was, and is a mutual respect.

What was your next job?
I went to a small commercial litigation firm for four years in Garden City, which was a natural progression. Then I went to Certilman, Balin, Adler in East Meadow, the second largest firm on Long Island. That was from 1996 to 2010. I was a partner there for 10 years.

That’s where you met Joe Campolo.
Yes. He was an associate there who started when I became a partner. He left and eventually became general counsel at a technology company. Joe hired me as outside litigation counsel. After that company was sold he opened a solo practice. It grew, and during that time he kept asking me to join him. I always joke with him and say he wore me down. In 2010 I joined as a partner. Relationships really are critical.

You are on the Board of Directors for CAPS and DDI. Is volunteerism important to you?
Yes, as it is to the firm. We all worked really hard to get where we are. There was no silver spoon. I worked at Woodbury Country Club doing maintenance when I was in college. We all believe in giving back. Volunteering is part of the firm’s culture.

What do you like about being an attorney?
I like that every day is different. I like to help people who have problems. And I enjoy the intellectual fight with another attorney.

When did you join the SCBA and why?
I joined in 2010 because I knew the value of being involved with a local bar and the relationships that would come from membership. I immediately went to the Academy to attend the CLE’s.

Would you recommend that young attorneys join?
Yes. I tell young associates all the time that it is important to join and become active. You never know who you will meet. A lot of the work I get is referred to me from other members. There are a lot of really, really good attorneys in the SCBA and they have a lot to offer. The bar association is a very welcoming place.

By Christine Malafi

With major data and security breaches consistently making headlines, a thorough investigation of a target company’s security practices is critical to a buyer’s decision to purchase a company. Areas of examination include operational assets, financial data, legal matters, strategic planning, and employee information. Such assessments help potential buyers manage and alleviate risk, liability, and exposure before pursuing a precarious deal. Unfortunately, cybersecurity is often overlooked in the frenetic pace of M&A transactions.

Failure to exercise proper due diligence in M&A transactions can result in costly mistakes. Just consider recent headlines: FedEx had customer data, including scanned passports and driver’s licenses, stolen from a publicly accessible server. FedEx obtained the server when it purchased Bongo International to help customers with shipping calculations. This breach highlights the importance of auditing digital assets to ensure data is secure before, during, and after an acquisition. Cybersecurity concerns may decrease the purchase price or result in a holdback of payments until claims are resolved.

This is precisely the scenario that played out in Verizon’s renegotiation of the Yahoo acquisition after details emerged that three billion Yahoo accounts were hacked. The news prompted a reported reduction of $350 million in the purchase price.  In 2017, Neiman Marcus agreed to pay $1.6 million as part of a proposed settlement of a consumer class action lawsuit, originating from a 2013 data breach which allegedly exposed the credit card data of more than 350,000 customers. And in August 2017, Women’s Health Care Group of PA, LLC experienced the third largest data breach of the year after completing a merger. These examples are only the tip of the iceberg, as nearly 182 million records have been exposed in the first half of 2018 alone.

To minimize the risks, target companies must have written data security policies – and enforce them – to maintain the highest company value. Potential acquirers must conduct targeted cybersecurity due diligence to determine whether a transaction should proceed by assessing all past and present versions of the target’s information security policies. Acquirers should also evaluate how to seamlessly migrate data and technology from the target company without exposing the information. The due diligence process can provide the acquirer with an estimate as to the costs needed to remediate.

A preliminary inquiry should also address data losses the target company has sustained. The acquiring company should uncover any systemic security failings, determine how the target company has responded to cybersecurity incidents, and assess whether the target company remains vulnerable.

The next area of inquiry is whether the company is a high-risk target. The due diligence team will need to determine the scope of client/customer data on the target company’s servers. This inquiry is especially pertinent to high profile mergers. A prospective buyer will also want to assess a target company’s governance. Questions to ask should include: what is the current state of the target company’s cybersecurity program, policy, procedures, compliance, and enforcement? How does the target company manage its IT security?  Are employees trained to recognize cybersecurity threats?  Is the target proactive in preventing breaches, detecting malware, updating security certificates, storing information, and protecting its assets?

The acquiring company must also research the target company’s regulatory and compliance obligations. The type of business is important: banking, financial, and healthcare institutions are highly regulated with respect to safeguarding information. These types of businesses often store information widely sought after by hackers. Additionally, companies regulated by the New York Department of Financial Services are subject to the agency’s new cybersecurity regulations and reporting obligations, which can be both time-consuming and costly. It may also be valuable to investigate industry standards to determine if a target company’s safeguards fall within commercially reasonable requirements. It is best practice for an acquirer to gain a complete picture of any additional compliance and regulatory burdens assumed in a deal.

Finally, due diligence should look at the security of the computing infrastructure, vendor or third-party relationships, employee training, and the social media presence and policies of the target. These areas can help determine whether the target company is at a greater cybersecurity risk. A company’s network is only as secure as its weakest link, and any outsourcing of security or IT services can open a back-door into systems.

The more efficient a company’s cybersecurity response protocol, the less risk will be assumed by the acquirer.

In a world where cybersecurity incidents are ubiquitous, cybersecurity due diligence must be part of any good M&A checklist. Companies should integrate specialized cybersecurity teams, including counsel, into their due diligence process to ensure they are asking the correct questions. Carefully reviewing a target company’s cybersecurity posture not only identifies potential risks, but can also justify specialized representations and warranties to be included into purchase agreements to protect the value of an investment.

In the world of M&A, each party to a purchase agreement makes certain representations and warranties that serve to allocate risk between the parties and provide a basis for post-closing indemnification obligations. Although often used interchangeably, there are functional differences between a representation and a warranty. A representation is an assertion of past or existing fact given by one party to induce another party to enter into an agreement. A warranty is a promise that the assertion of existing fact or future facts are or will be true, along with an implied promise of indemnity if the assertion is false.

Representations and warranties are often heavily negotiated areas of an agreement. The number and nature of representations and warranties are specific to each party, the nature of the contract itself, and the subject matter of the contract or dealings.

A seller’s representations and warranties serve several related purposes. They serve as a disclosure about the seller and the seller’s business as of a specific date, give important information about the stock or assets being sold, provide a basis for the buyer’s right to terminate before or at closing, and affect the buyer’s right to indemnification by the seller and/or its principals. Representations and warranties could favor either a buyer or a seller depending on several factors including each party’s negotiating power, the nature of the transaction, and the trade in which the parties operate.

Standard representations relate to due organization, valid existence and good standing, power and authority to operate the business and to enter into the agreement, and compliance with laws. Other representations and warranties relate to the subject matter of the agreement, such as title to assets, liens and encumbrances, intellectual property rights, taxes, and litigation. Rather than omitting representations and warranties in their entirety (which will likely raise red flags to the other side), a seller should attempt to qualify its representations and warranties. This can be accomplished in a number of ways.

For instance, because it is not always possible to account for every single item that should be listed in an agreement, a seller may attempt to limit representations and warranties to apply only to things and matters that are “material” and to add “knowledge” standards to limit the statement of fact to things that the seller actually knows of or should have known of. Another option is to limit representations and warranties to apply only to certain time periods (e.g., “within the past three years”). Most importantly, a seller should disclose as many exceptions to facts or conditions that are inconsistent with the general statement of fact made in any corresponding representation or warranty. This reduces the potential for future claims of breach of representations and warranties based on non-disclosure of material conditions. A combination of the concepts above can be proposed by the seller as well. For example, “[e]xcept as set out on Schedule X.XX, there are no pending, and to seller’s knowledge, threatened lawsuits, actions or other proceedings or governmental investigations relating to the [s]eller’s properties or business” could be added to a representation and warranty involving litigation and other actions to avoid making an absolute statement of fact.

On the other hand, a buyer wants the seller’s representations and warranties to be unqualified and as broad as possible. Broader representations and warranties often requires a seller to disclose more information during contract negotiations and due diligence and can provide a greater foundation for buyer’s termination and indemnification rights in the event of a post-closing breach. Disclosure schedules are also utilized by the buyer as they can require a seller to list out certain important business items, such as required permits, third-party consents, and employee benefit and compensation information. By requiring the seller to list out these types of items, the buyer can utilize the disclosure schedules as a checklist of items to be tracked and completed leading up until closing. When signing and closing are not on the same day, a buyer will look to insert a “bring down” condition of the representations and warranties to ensure that the seller’s representations and warranties made as of the signing date are true and accurate as of closing date.
Representations and warranties can be as complex or as simple as agreed upon by the parties but, more often than not, they are the legal basis for the parties’ willingness to complete an M&A transaction.

Our legal team has a depth of experience in structuring M&A transactions on both the buy-side and sell-side across a variety of industries, including healthcare, technology, real estate, and retail. Learn more on our Mergers and Acquisitions page.