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Business & Corporate Law Contracts

The Importance of Morality Clauses in Contracts with Public Figures

The Importance of Morality Clauses in Contracts with Public Figures

Madison Shaner

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In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

The question then becomes how, and how quickly, can those contracts be terminated and what the consequences for termination are. A company’s failure to act swiftly when a public figure it works with can result in calls for boycott and damage both to the brand and its image. For instance, the calls to boycott Adidas in the weeks following Ye’s antisemitic comments on Twitter in October 2022 were rampant, with many wondering what was taking the brand so long to denounce the tweets and distance itself from Ye, and Adidas spending weeks with the relationship “under review.” The terms of the contract between the parties would have been a critical portion of that review, as was the potential economic consequence of the reported $246 million profit loss to Adidas per year in discontinuing the Yeezy line, which was contracted to last through 2026.  

As we’ve previously discussed in this Blog,  having a well-thought-out contract between a brand and the social media content creators is paramount to the success of that relationship – and whether your company is engaging with a content creator who has gained renown on social media, or a much more prominent partner, it is important to consider whether a morality clause is worth including in that contract. Ideally, a company would partner with a celebrity or creator whose conduct and values align with the brand, and where there is little concern about skeletons in the closet because the partner has been appropriately vetted, including a review of old tweets and other social media posts. It goes without saying that all parties to these contracts hope that a morality clause never comes into play, and that the end to any business relationship can be drama-free. The protection afforded by a carefully drafted morality clause can be useful in the worst-case scenario.

So, what is a morality clause? A morality clause, or a morals clause, is a provision in the contract that gives a company a unilateral right to terminate a contract or take other, defined, remedial action, if the other party to the contract causes a breach by engaging in conduct that is considered to be immoral, scandalous, or might otherwise injure or tarnish the reputation of the company. Essentially, it is a special provision that allows for swift action to terminate a contract to help the company avoid scandal and damage to a company’s public image. When a morality clause is triggered, it is typically considered a material and uncurable breach of the contract, which comes with a significantly reduced timeline on which the company can operate to quickly terminate the contract, to the company’s benefit.

How the parties define the actions that fall under the terms of a morality clause depends on the parties, how heavily negotiated the provision is, and what the parties believe the possible realm of actions might be. Historically, morality clauses were intended to address potential criminal conduct of employees and other contracting parties, but the scope of what is covered by these clauses has significantly broadened over the years, particularly following cultural phenomena like the #MeToo movement. A creator or public figure who is subject to a morality clause ideally prefers a more specific, narrowly defined universe of actions—with limited discretion from the partnering company—that would allow the company they’re under contract with to terminate the relationship. Companies, on the other hand, often prefer language that is broader and more ambiguous, with sole and unqualified discretion of what constitutes a violation by their counterparty. A creator or public figure may also seek to include intentional action on their part, rather than merely recklessness, while companies are often disinclined to consider the intentions in favor of focusing on the outcome. The question of provable offenses and allegations is another critical point of negotiation between the parties – is an allegation of misconduct enough to terminate the contract or is it required that the misconduct be proved? If so, who determines whether it has been sufficiently proved?

Ultimately, a well-drafted and carefully considered and negotiated morality clause is important to protect both parties in a contract between a company and any public figure it associates with. The corporate and business team at Milgrom & Daskam has significant experience drafting and negotiating these clauses and would be happy to discuss your options as you move forward in your contracts.

ABOUT THE AUTHOR

SENIOR ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Recent Crypto Enforcement Actions and the Brewing Battle Between Regulators for Jurisdiction Over Digital Assets

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Do Colorado Courts Still Enforce Liquidated Damages Provisions?

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Categories
Real Estate Law

FinCEN and Real Estate: Additional Disclosure Requirements May Be On the Horizon for Real Estate Transactions

FinCEN and Real Estate: Additional Disclosure Requirements May Be On the Horizon for Real Estate Transactions

Madison Shaner

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As part of the anti-money laundering regime under the Bank Secrecy Act of 1970 (the “BSA”), in late 2021, the Financial Crimes Enforcement Network (“FinCEN”) division of the Department of the Treasury issued an advanced notice of proposed rule-making (“ANPRM”) seeking to address potential money laundering through real estate transactions. The comment period for the ANPRM closed on February 21, 2022. This ANPRM comes closely after the notice of proposed rule-making related to the implementation of the Corporate Transparency Act (the “CTA”), which you can read more about here. Both the CTA and the proposed regulations under the ANPRM would require significant levels of disclosure regarding the beneficial ownership of companies and real estate in non-financed real estate transactions.  These measures aim to reduce money laundering, and assets held by undisclosed foreign investors. It is estimated that between 2015 and 2020, at least $2.3 billion was laundered through U.S. real estate, though the actual figure is likely much higher. Accordingly, both FinCEN and Congress are trying to limit the number of real estate transactions used to launder money.

The existing disclosure framework under the BSA requires recordkeeping and disclosure of certain information by financial and other reporting entities in commercial and residential real estate transactions involving financing, and in all-cash residential transactions valued at over $300,000 in specific cities. The existing requirements are intended to assist in detecting and reporting suspicious transactions to aid in combatting money laundering and the financing of terrorist activity. According to FinCEN, the current reporting framework covers roughly 80% of real estate transactions. The proposed rules, however, would apply to non-financed real estate transactions and essentially target the remaining 20% by potentially expanding reporting requirements to include all real estate transactions “not financed via a loan, mortgage, or other similar instrument, issued by a bank or a non-bank residential mortgage lender or originator, and that is made, at least in part, using currency or value that substitutes for currency” which could include real estate transactions using cryptocurrency. Additionally, unlike the current regulations, the proposed reporting requirements are not geographically limited to certain metropolitan areas.

The proposed rules and questions in the ANPRM targeted the following topics through a series of over 80 questions: (i) to whom new requirements should apply; (ii) which transactions should be covered; (iii) the dollar-value reporting threshold; (iv)what information should be reported; (v) how information should be reported; and (vi) who should be responsible fore reporting that information.

Financial institutions, and in some instances title insurance companies, currently bear the burden of meeting reporting requirements in covered transactions. However, the ANPRM could expand the scope of service providers required to report transaction information as FinCEN sought input on which service providers should be required to collect information, maintain records, and report information on non-financed purchases, and whether it should employ a “hierarchical, cascading reporting obligations on different entities involved in the transactions to ensure there is always an entity required to report.

The proposed regulations are also coupled with the Kleptocrat Liability for Excessive Property Transactions and Ownership (the “KLEPTO Act”), the bi-partisan bill introduced by Senators Elizabeth Warren, Sheldon Whitehouse, Roger Wicker, and Bill Cassidy in April as a way to crack down on transactions by Russian President Vladimir Putin and his allies and to provide information as to who is purchasing assets, including real estate and aircrafts, as a way to launder funds.

Paired with the beneficial ownership reporting requirements under the CTA, any potential (additional) reporting requirements for real estate transactions will likely result in significant disclosure requirements for all real estate investors and owners in the future, even if real estate investment and ownership is accomplished using a third-party entity. While no final rule-making has been announced relating to real estate transactions, we can likely expect greater scrutiny and additional burdens to be imposed on real estate transactions in the future.

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Business & Corporate Law

The Importance of Morality Clauses in Contracts with Public Figures

In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

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U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

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Categories
Business & Corporate Law

The Corporate Transparency Act: What It Is and What It Means for Your Small Business

The Corporate Transparency Act: What It Is and What It Means for Your Small Business

Madison Shaner

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On January 1, 2021, as part of the federal Anti-Money Laundering Act (the “AMLA”), Congress enacted the Corporate Transparency Act (the “CTA”) in an effort to increase corporate transparency. The CTA requires certain companies to file information on their businesses, including “beneficial ownership” information, with the Financial Crimes Enforcement Network (“FinCEN”). The impact of the CTA on companies and those who would be required to report information has not been clear. However, on December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking to establish the regulations that would implement the CTA, and provide additional clarity on which businesses would be considered “reporting companies” under the CTA.

Which companies are subject to reporting requirements?

Almost all types of domestic and foreign business entities are included in the CTA’s definition of “reporting companies”. This includes limited liability companies and corporations. That being said, the CTA allows for a number of exemptions for companies that will not be required to make CTA filings. However, these exemptions apply only to large entities and entities that are already subject to various reporting requirements due to size or industry regulations.

Companies that are considered “large operating companies” are not required to make filings under the CTA. The proposed rules clarify that “large operating companies” are those that: (1) employ more than 20 employees on a full-time basis in the United States; (2) filed Federal income tax returns in the prior year demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (including receipts or sales from entities owned by the entity and through which the entity operates); and (3) has an operating presence at a physical office within the United States. The CTA additionally does not require filings for subsidiaries of exempted entities, meaning entities whose ownership interests are entirely owned or controlled by an exempt entity. Subsidiary entities that are partially-owned by exempt entities, are, however, not exempted.

What does a reporting company have to report?

Reporting entities will be required to disclose basic information regarding the entity itself, including the company’s full name, any trade name (or D/B/A), business street address(es), the jurisdiction of formation, and taxpayer identification information (EIN). In addition to entity information, reporting entities are required to report information on their beneficial owners. Meaning that each reporting entity will be required to report the name, birthdate, address, and unique identifying number from an acceptable identification document (such as a passport or driver’s license) with an image of the document. The beneficial owner information must be provided for each company applicant and beneficial owner of the entity. Beneficial owners are defined by the CTA as “any individual who, directly or indirectly” exercises “substantial control” over the reporting company or “owns or controls” at least 25% of the “ownership interests” of the reporting company.” 

While the CTA doesn’t define “substantial control” or “ownership interests,” the proposed regulation clarifies that “substantial control” is viewed through the lens of three specific indicators: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any officer or dominant majority of the board of directors of a reporting company; (3) direction, determination or decision of, or substantial influence over important matters of a reporting company (e.g. sale, lease or transfer of principal assets of the company, entry into or termination of major contracts, major expenditures and investments, compensation of senior officers). The proposed regulations also take an expansive view of what constitutes an “ownership interest” to include both equity in the reporting company and other types of interests, such as capital or profits interests, convertible instruments, warrants or rights, or other options to acquire equity, capital, or other interests in a reporting company.

When do reporting companies have to report their information?

When reporting companies are required to comply with the CTA depends on the date of the company formation. After FinCEN’s regulations become final, new reporting companies will be required to report the information about their beneficial owners upon formation or within fourteen days thereof. Any existing company formed prior to the effectiveness of the FinCEN regulations will be required to report its information within two years of the promulgation of the new regulations. Reporting companies will also need to update their information within a year of any change of beneficial ownership.

Who will be able to see and access information regarding beneficial ownership?

The beneficial owners of consumer facing companies may be concerned about the accessibility of their personal information given the reporting requirements. This concern is largely unfounded, however. The reporting information will be kept in a secure, private, database maintained by FinCEN. The database of reporting information will not be publicly available, and ownership information will be available upon requests only from federal law enforcement agencies; state, local, or tribal law enforcement agencies authorized by court order; a federal agency on behalf of a foreign country if such request is pursuant to an international agreement; or a financial institution for customer due diligence purposes authorized by the reporting company.

The current proposed rulemaking is one of three to implement the CTA. Companies should begin evaluating whether they will fall within the reporting requirements and who within their entity structure may be considered a beneficial owner based on this initial proposed rulemaking.

 

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients

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The Lasting Impact of Covid-19 on Commercial Lease Negotiations

The Lasting Impact of Covid-19 on Commercial Lease Negotiations

Madison Shaner

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When COVID-19 struck businesses in March of 2020, many assumed the impact would be short-lived, that after a few weeks of shutdowns and lock-ins, business and life would return to normal. Now, well over a year later, and with new variants and surges emerging despite vaccines, the question is: when, how, or even if, a return to offices will occur. Employees are increasingly likely to seek other opportunities if their employers press a return to full-time, in-person work. Job seekers have also begun prioritizing remote work options when looking for new jobs. 

Facing this rising desire to stay remote or move to a hybrid work model, employers must now determine what their physical workspace needs are in the post-pandemic world. A recent McKinsey study forecasts that roughly 38% of businesses will implement some sort of hybrid work arrangement in industries where remote work is feasible. This will likely result in a dramatic shift in the commercial real estate space, particularly where office spaces are concerned, as employers find they don’t want to be locked into a long-term lease, want more flexibility in their leased spaces, or that they need significantly less space than they previously required for their workforce. In a post-COVID world, many lease provisions will play a key role in future lease negotiations, and this shift may see tenants wielding more negotiating power than ever before.

1. Term

While negotiating the term of a lease is nothing new, we may see a trend toward shorter lease terms in the future. Previously, landlords were reluctant to grant leases for commercial spaces in less than five-year terms, particularly where there was build-out performed as part of a landlord’s lease obligations. However, given the shift in the real estate market, and the increases in vacant commercial space, landlords may have to accept shorter-term leasing arrangements from potential tenants who don’t want to get locked into leases given the uncertainty of the world and the shift toward hybrid work models.

2. Expansion/Contraction

Tenants may be seeking options that will allow them to adjust their space needs as they change in post-pandemic leases. Tenants may seek to expand their space as more employees come in for workdays, or to accommodate necessary physical distancing requirements. Conversely, as many employees continue to work remotely, tenants may only need a fraction of the space previously required because there are simply fewer bodies in the building at any given time. Landlords may have limited flexibility here but may also want to leave the door open depending on what their vacant space looks like, and whether trades can be made between tenants who are seeking more space with tenants who are seeking less space. Landlords may even elect to keep certain spaces open as short-term (e.g., daily, or weekly) rental options for tenants who only need more space for brief stretches of time.

3. Force Majeure.

Force majeure provisions were often the first contract provision everyone looked to when COVID hit to determine their liability and ability to avoid consequences for a lack of performance under the terms of the lease or contract. Pre-pandemic, force majeure clauses typically did not offer tenants relief from their obligation to pay rent, even if they may have offered protection from breaching their leases for failure to continuously operate their businesses out of the leased premises. Moving forward, landlords and tenants should expect force majeure provisions to be a more heavily negotiated lease provision, including specific language relating to government shutdowns, public health orders, and crises.

4. Subleasing and assignment.

When lessees become unable to meet their obligations under their leases due to either reduced business or shutdowns and government mandates, they may try to either sublease their spaces or transfer their leases to a third party by assigning the lease. Prior to the pandemic, many landlords, particularly in commercial leases, were reluctant to allow tenants to sublease or assign their leases. Lessees who could sublet or assign their spaces under the terms of their leases were able to defray their overhead costs by finding sublessees or assignees for spaces they either no longer needed or were no longer able to use during the pandemic. As such, assignment and sublease provisions became valuable focal points in existing leases and will likely be heavily negotiated in new leases.

Beyond the shift in lease provisions, it is likely that more and more tenants will seek flexible working spaces that allow people to work in person when desired or necessary. To capitalize on the new hybrid work models, landlords and owners must consider how to best transition their spaces and lease agreements to give tenants flexibility, or risk being stuck with empty commercial spaces.

The real estate team at Milgrom & Daskam is skilled at drafting and negotiating commercial leases, and whether you’re a landlord or a tenant, we would love to help craft the solutions that work best for you. Reach out to our team for a consultation if you’re looking for assistance in your upcoming commercial real estate transactions.

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Contracts

Legal Fundamentals of Contracts for Influencers and Brands

Legal Fundamentals of Contracts for Influencers and Brands

Madison Shaner

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Whether you call them influencers, brand advocates, or goodwill ambassadors, social media content creators represent a rapidly growing marketing segment, with companies set to spend up to $15 billion on influencer marketing by 2022.

As more and more businesses move toward using content creators and influencers in their marketing campaigns, and as the percentage of marketing budgets spent on content creators grows, the question becomes how to effectively paper these transactions to protect both content creators and the businesses that hire them. 

The use of content creators for marketing allows businesses access to targeted demographics in an easy, relatively inexpensive manner, and the quality of traffic driven to businesses from content creators is often seen as better than traffic coming from other sources. Influencer marketing, especially ads in stories, has a significant impact on click-through rates because the content feels less like an advertisement to viewers. Consequently, viewers may be more inclined to trust the ads and to purchase products featured. With changes to how apps can track user activity and therefore how brands can use that information to target ads to their desired audiences, even larger portions of marketing budgets may move toward the use of content creators as time goes on.

If your business hires content creators for marketing campaigns or has ongoing relationships with content creators, having effective and efficient contracts with your influencers is critical to protecting your business. Alternatively, if you are a content creator, the contracts you sign as you work with companies are critical to building your brand and maintaining your own business. The contracts between brands and content creators should cover everything from employment status, to the payment and posting terms, to the ownership of intellectual property, to the requirements set forth by the Federal Trade Commission (FTC) and truth in advertising, and even what happens if either the brand or the content creator does something that results in being “canceled,” or how the parties can part ways.

If a business and a content creator don’t anticipate an ongoing contractual relationship, the parties should, at a minimum, document the brand’s permission to use the content and the duration and parameters of that grant. For instance, if a content creator posts images unsolicited by the brand that features the brand’s product, the brand should make an inquiry to the content creator and obtain their permission before reposting the images. Failure to obtain the content creator’s consent to re-posting the images may result in claims of copyright infringement or misappropriation of the creator’s right of publicity and may lead to Digital Millennium Copyright Act (DMCA) takedown requests through social media platforms. This could negatively impact both the brand’s image as well as its ability to market itself on the content creator’s social media channel in the future.

Critical to the conversation around using content creators in marketing is the FTC’s increased interest in influencer advertising. FTC rules provide that content creators must disclose their relationships with brands within their posts so that followers can understand whether the content that they are seeing is organic or whether it’s an ad that the content creator is being paid to post. Failing to appropriately disclose the relationships between brands and content creators can result in penalties, fines, and legal fees. In November 2019, the FTC released a “Disclosures 101 for Social Media Influencers” brochure to teach content creators how to correctly disclose when the content they post constitutes a paid endorsement. In 2020, the FTC requested public comments on whether the guidelines for influencers should be revised. The guidelines from the FTC indicate that even products received for free in exchange for an endorsement trigger the disclosure requirement, and the disclosures must be easy to understand and placed in such a way that an average viewer would be able to see that the content is sponsored.

While the FTC guidelines place adherence to the disclosure requirements on the shoulders of content creators, it is incumbent on companies to ensure content creators they work with are following these requirements because brands may also be held liable when the content creators they work with aren’t diligent about their disclosures. For instance, in March of 2020, the FTC entered into a settlement with Teami, LLC, for $1 million after alleging that Teami promoted its products using deceptive health claims and endorsements by well-known influencers and celebrities who failed to adequately disclose that they were being paid to promote the products. The FTC imposed a $1 million fine on Teami after determining that Teami would be unable to pay the full $15.2 million judgment against it.

The corporate attorneys at Milgrom & Daskam have extensive experience drafting and negotiating contracts between businesses and content creators. If you are entering into such an agreement and would like counsel to help you protect your interests, feel free to reach out to the corporate practice group at Milgrom & Daskam for a free consultation

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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