Corporate & Securities Blog

Our Authors

We draw on the resources and experiences of our professionals across a variety of disciplines to provide an integrated and diverse array of content. Our goal is to provide industry news and insights that help our readers stay informed and grow personally and professionally in their respective fields and areas of interest. 

Lori Smith, Editor

Lori Smith is chair of the emerging companies & venture capital practice and is an active participant in the firm’s health law and mergers and acquisitions groups. Lori has been a trusted adviser to foreign and domestic companies for over 30 years, ranging from startups to large corporations, including entrepreneurs and angel, venture capital, and private equity investors. She represents public and private companies in the negotiation of mergers and acquisitions, leveraged buyouts, equity and debt financings, private placements, strategic alliances, partnerships and joint ventures.

Lori combines her transactional experience with her traditional health care, technology and financial services industry knowledge, and a deep understanding of the nuances of the digital age. She has extensive experience representing companies from formation and growth stage through exit in a wide range of industries, including technology, media and communications, fashion and textiles, financial services, food and beverage, sports, gaming, specialty chemicals, insurance, healthcare and digital health.

Alycia Vivona
With two decades of experience in a broad-based corporate practice, Alycia Vivona has developed particular knowledge in the areas of mergers and acquisitions, cross-border representations and health care.
Andrew Barron
Andrew J. Barron is an experienced tax, trusts and estates lawyer representing executors, administrators, trustees and beneficiaries in all aspects of trust and estate administration. His clients depend on him to navigate complex family dynamics to efficiently and empathetically resolve conflict. Andrew routinely prepares and reviews income, estate, inheritance, and gift tax returns, as well as accountings, nonjudicial settlement agreements and receipt/release agreements. Andrew works closely with high-net-worth individuals to reach their personal and business planning goals. He drafts and reviews wills, trusts, power of attorney, healthcare directives and other estate and business planning documents. Andrew is proud to maintain an active pro bono caseload.
Christopher Connell
Christopher Connell is the co-chair of Stradley Ronon’s corporate and securities practice group. He focuses his practice on the representation of financial institutions, financial services businesses and other corporate clients in various industries in numerous transactional matters, including mergers and acquisitions, offerings of debt and equity securities (both public and private), initial public offerings and securities matters for public companies. Chris also regularly advises corporate clients of all sizes in an outside general counsel role, supporting the clients’ general corporate law, contracting and governance needs.
Daniel Pereira
Daniel Pereira concentrates his practice on bankruptcy, insolvency and related matters. Daniel advises clients on a wide array of issues, including both transactional and litigation matters. Although Daniel primarily focuses his practice on representing creditors, he also has experience representing debtors and other interested parties, particularly foreign debtors, in cross-border insolvency and restructuring proceedings.
David Fitzgibbon
David Fitzgibbon concentrates his practice on intellectual property matters, with a focus on chemical and mechanical arts. He is experienced in drafting and procuring patents, counseling clients regarding the scope and significance of their and others’ patent and IP rights, and negotiating technology-related agreements on behalf of clients.
David Winkowski
David Winkowski concentrates on taxation and estate planning for high-net-worth individuals, executives at publicly traded and privately held companies, and owners of closely held businesses and their families. David has extensive experience designing and implementing sophisticated estate plans, wills, inter vivos trusts, prenuptial agreements and family limited partnerships. In addition, he advises clients on a variety of asset-protection techniques.
Dean Krishna
Dean Krishna concentrates his practice on international and domestic tax matters. He advises on matters including mergers and acquisitions; private fund agreements, investments and structuring; commercial securities offerings; business restructurings; and general domestic and cross-border tax planning.
Deborah Hong
Deborah Hong is the co-chair of Stradley Ronon’s corporate and securities practice group. She focuses her practice on corporate transactions, including mergers and acquisitions, venture capital investments, joint ventures, and corporate restructurings. She advises a number of publicly held and privately-owned companies in the technology, financial services, manufacturing and consumer products sectors. Deborah also provides corporate and strategic business counseling for a variety of clients.
Deborah Reperowitz
Deborah Reperowitz is a nationally recognized bankruptcy and commercial litigation attorney, mediator and co-chair of the firm’s bankruptcy, workouts & creditors’ rights group. Debbie has been a partner at “Biglaw” firms and served as senior vice president, chief litigation counsel at CIT Group and general counsel to a financial advisor with an excess of $20 billion under management. 
Evan Poulgrain
Evan Poulgrain concentrates his practice on corporate law, advising public and private and private companies in various corporate transactions, including mergers and acquisitions, divestitures, entity formation and corporate governance issues. 
Eric Porter
Eric Porter is a highly respected commercial litigator with extensive experience representing clients through all stages of litigation in state and federal courts.
Jennifer Gniady
Jennifer Gniady co-chairs Stradley Ronon’s nonprofit and religious organizations practice group, bringing together more than two dozen lawyers across a broad range of legal disciplines to serve these unique clients. She has spent more than 15 years counseling nonprofit organizations on how to respond to threats, solve problems and plan for the future. Her clients include charities, religious organizations, associations, schools and organizations promoting the arts, media, science and technology.
Jason Jones
Jason Jones is engaged in the practice of business law, with particular emphasis on mergers and acquisitions of middle-market businesses; organizing and structuring corporations, limited liability companies and other business entities; and drafting and negotiating shareholders’ agreements and business contracts. 
Jeremy Gottlieb
Jeremy Gottlieb concentrates his practice on a wide variety of investment management-related matters, including counseling investment advisers and registered investment companies on legal, regulatory and transactional matters.
Jeremy Miller
Jeremy Miller is a member of the firm’s business department and counsels investors, entrepreneurs and public and private companies in all aspects of their business needs
John Baker
John Baker focuses his practice on complex securities law and banking issues for mutual funds and their boards of directors/trustees, investment advisers, broker-dealers, banks, hedge funds and other participants in the financial markets.
Josh Galante
Josh Galante is a member of the firm’s business department and focuses his practice on complex business combination and investment transactions.
Katherine Durr
Katherine Durr focuses her practice on structuring secured and unsecured financing, including syndicated credit facilities, acquisition financings, and asset-based and real estate loans for commercial banks, investment funds, and public and private companies.
Katherine Pfingsten
Katherine Pfingsten focuses her practice on corporate law, representing public and private companies in a range of matters, including mergers and acquisitions, entity formation and corporate governance issues.
Katrina Berishaj
Katrina Berishaj advises financial services clients, including banks, trust companies, broker-dealers, investment advisers, insurance companies and institutional investors, on issues arising under the fiduciary and prohibited transaction rules of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, with respect to financial products, services and transactions. 
Kevin Casey
Kevin Casey is co-chair of the intellectual property and chair of the IP litigation groups at Stradley Ronon and an active member of the alternative dispute resolution group. 
Kenneth Wang
Kenneth Wang uses his many years of experience in both private practice and in-house tax departments for Fortune 200 companies to counsel clients on all aspects of U.S. tax law, including mergers and acquisitions, partnerships and joint ventures, fund formation, financing transactions, real estate transactions, business restructurings and reorganizations and international tax.
Lisa Jacobs
Lisa Jacobs has extensive experience representing businesses and institutions on domestic and international transactional matters. For more than 30 years, Lisa has served as an advisor to both private and public companies in a wide variety of industries on matters related to mergers and acquisitions, corporate finance, institutional and private equity financings, securitization and structured finance and corporate governance issues.
Lori Smith
Lori Smith is chair of the emerging companies & venture capital practice and is an active participant in the firm’s health law and mergers and acquisitions groups. Lori has been a trusted adviser to foreign and domestic companies for over 30 years, ranging from startups to large corporations, including entrepreneurs and angel, venture capital, and private equity investors. She represents public and private companies in the negotiation of mergers and acquisitions, leveraged buyouts, equity and debt financings, private placements, strategic alliances, partnerships and joint ventures. Lori combines her transactional experience with her traditional health care, technology and financial services industry knowledge, and a deep understanding of the nuances of the digital age. She has extensive experience representing companies from formation and growth stage through exit in a wide range of industries, including technology, media and communications, fashion and textiles, financial services, food and beverage, sports, gaming, specialty chemicals, insurance, healthcare and digital health.
Matts Batryn
Matts Batryn is a member of the firm’s business department, representing commercial banks, investment funds, private equity sponsors, non-bank lenders and public and private corporations in structuring secured and unsecured credit facilities, including acquisition financings, syndicated loans, asset-based loans, real estate secured transactions and debtor-in-possession facilities.
Megan Stamm
Megan Stamm focuses her practice on corporate law, representing clients on a broad range of matters, including complex acquisitions, regulatory compliance, entity formations and governance issues.
Melissa Perry
Melissa Perry is an experienced litigator and strategic problem solver who represents corporate and institutional clients in all types of litigation, including employment and labor, complex commercial, government investigations, and appellate matters.
Peter Bogdasarian
Peter Bogdasarian serves as Chief Privacy Officer for the firm, and is responsible for protecting the firm’s data – including information received from our clients – from unauthorized access. He also counsels clients in connection with data privacy and cyber security-related issues. Peter also provides advice to clients in connection with inquiries, investigations, and enforcement actions initiated by government agencies and self-regulatory organizations as well as general litigation matters.
Peter Brockmeyer
Peter Brockmeyer represents commercial banks, investment funds, private equity sponsors, non-bank lenders and public and private corporations in structuring secured and unsecured credit facilities, including acquisition financings, syndicated loans, asset-based loans, real estate-secured transactions, and debtor-in-possession facilities.
Peter Hong
Peter Hong is co-chair of the firm’s derivatives & commodities practice group and uses his many years of service at the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to guide clients through the various regulatory requirements involved in the offer of financial services and products. 
Philip Foret
Philip Foret works closely with clients to develop strategies aligned with their business goals across the full range of intellectual property matters, including IP counseling and opinions, freedom-to-operate studies, due diligence, worldwide portfolio development, trademark clearance and dispute resolution and copyrights.
Randy Friedberg
Randy Friedberg is a member of the firm’s business department. A seasoned attorney, Randy has advised clients and businesses of all sizes for over 30 years on trademark and copyright law, unfair competition, trade secrets, advertising, internet and cyber issues, rights of privacy and publicity, entertainment law, and general corporate and litigation matters.
Rebecca Fallk
Rebecca Fallk is an associate in the firm’s white-collar defense practice group, representing various clients in high-profile internal investigations and matters that involve federal regulatory agencies. She has hands-on litigation experience conducting internal investigations in response to probes and subpoenas, handling witness interviews, drafting court pleadings and briefs and preparing for depositions, oral arguments and trials.
Samantha Krasker
Samantha Krasker represents clients in a variety of general commercial litigation matters. Her work includes researching and drafting legal memoranda and motions and assisting with case management.
Samuel Gray
Samuel Gray focuses his practice on corporate transactions, representing public and private companies in mergers and acquisitions, commercial loan transactions, securities law compliance and general corporate matters.
Steve Feldman
With more than 25 years of experience in high-stakes litigation, Steven concentrates his practice in the areas of securities litigation & enforcement, white-collar defense, investigations and compliance. He represents companies and individuals accused of securities and commodities law violations, public corruption, business crimes and fraudulent practices by U.S. Attorneys’ Offices, States Attorneys General, District Attorneys’ Offices, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Steven Scolari
Steve provides practical and strategic legal and business advice to executives and owners of both private and public businesses in connection with a variety of transactional matters, as well as business succession planning engagements, in a wide scope of industries. Those transactions include mergers and acquisitions, debt and equity financings, joint ventures and corporate restructurings.
Thomas Hanley
Thomas Hanley focuses his practice on advising public and private companies on corporate and securities law issues, including capital-raising transactions, mergers and acquisitions, corporate governance, SEC compliance and corporate litigation. Tom also counsels management, in-house counsel, boards of directors, board committees and investors on fiduciary duty issues, takeover defense, proxy contests/contested elections and related issues.
Thomas Ix
Thomas Ix focuses his practice on mergers and acquisitions, joint ventures, contract negotiations and general corporate matters. Tom has extensive experience in middle-market mergers, stock acquisitions, and asset transactions. He represents clients in a variety of industry sectors, including manufacturing, distribution, financial service, plastic packaging, recycling, outdoor advertising and specialty chemicals.

Supreme Court Sides with IRS in Stock Redemption Agreement Case

By: David J. Winkowski and Andrew J. Barron The U.S. Supreme Court issued a decision on June 6 with significant repercussions for business owners who use life insurance as part of their business succession planning. In an uncommon 9-0 ruling, the justices in Connelly v. United States held that for federal estate tax purposes, the value of life insurance proceeds payable to a company upon a shareholder’s death was included in the corporation’s federal estate tax value, and this value was not offset by the company’s obligation to redeem the deceased shareholder’s stock under a buy-sell agreement. The Stock Redemption Agreement at Issue Brothers Michael and Thomas Connelly were the sole shareholders of a building supply business. The brothers and the company entered into a stock redemption agreement that allowed the surviving brother to purchase the shares of the first brother to pass away. If the surviving brother declined to purchase the shares, the company would be obligated to purchase them. The company obtained $3.5 million of life insurance on each brother to finance the redemption. After Michael Connelly died, Thomas Connelly declined to purchase his shares, and pursuant to the stock redemption agreement, the company became obligated to redeem them. The agreement laid out a number of methods for setting the redemption value of the shares (e.g., periodically executing a certificate of agreed value or having multiple independent appraisers provide valuation reports). However, the brothers never performed any of the valuation mechanisms. Instead, Thomas Connelly (as executor of his brother’s estate) and Michael Connelly’s son (an estate beneficiary) privately agreed to value Michael Connelly’s shares at $3 million. The company paid $3 million to the estate, and the estate valued Michael Connelly’s shares at $3 million on the estate tax return. The Internal Revenue Service (IRS) audited the return and assessed additional federal estate tax on the basis that the value of Michael Connelly’s shares included a proportional share of the life insurance proceeds. Michael Connelly’s estate paid the tax and sued the IRS for a refund. The estate claimed that the company’s obligation to redeem Michael Connelly’s shares was a liability on the company’s balance sheet, which offset the life insurance proceeds dollar for dollar. In contrast, the government argued that a redemption obligation is not a liability in the traditional sense and that a hypothetical buyer of Connelly’s shares would not have treated this obligation as a factor in reducing the purchase price. Supreme Court Affirms Lower Court Decisions The U.S. District Court for the Eastern District of Missouri and the U.S. Court of Appeals for the Eighth Circuit both ruled in favor of the government and the Supreme Court agreed, affirming the lower court decisions. The Supreme Court considered what a willing arm’s-length buyer would reasonably pay for Michael Connelly’s shares as of the date of his death. In the court’s view, the stock redemption at fair market value had no economic impact on either shareholder. Therefore, a willing buyer would not consider the redemption obligation as a liability. The court was careful to limit its holding to the specific facts of the case. In a footnote, the court mentioned that it does “not hold that a redemption obligation can never decrease a corporation’s value” if the underlying facts differ. For instance, a redemption obligation could “require a corporation to liquidate operating assets to pay for the shares, thereby decreasing its future earning capacity.” However, the company’s obligation to purchase the shares from the deceased shareholder’s estate did not, on its own, offset the life insurance proceeds used to finance the purchase. The Supreme Court did not address Internal Revenue Code Section 2703(b) and its regulations, which allow shareholders to set the value of company shares for federal estate tax purposes by agreement if certain criteria are met. However, the lower court opinions made it clear that the Connelly brothers’ failure to follow the terms of their agreement caused Section 2703(b) to not apply and instead allowed the IRS to determine the fair market value of the shares without reference to the agreement. The value of a decedent’s property at death should reflect its fair market value, which is the price at which the property could change hands between a willing buyer and a willing seller. In Connelly, the court determined that the fair market value of the corporation was increased by the life insurance proceeds payable to the corporation. Going Forward While Connelly held that a stock redemption obligation is not a liability that offsets life insurance proceeds in an estate tax analysis, careful planning and the use of alternative buy-sell arrangements (e.g., cross-purchase agreements or life insurance LLCs) may significantly reduce estate tax exposure. Business owners with buy-sell agreements in place should consider meeting with their advisers to review current valuation and funding provisions to ensure that their business documents will meet their intended planning objectives.   Meet the Authors David J. Winkowski David Winkowski concentrates on taxation and estate planning for high-net-worth individuals, executives at publicly traded and privately held companies, and owners of closely held businesses and their families. David has extensive experience designing and implementing sophisticated estate plans, wills, inter vivos trusts, prenuptial agreements and family limited partnerships. In addition, he advises clients on a variety of asset-protection techniques. dwinkowski@stradley.com | 484.323.1347 Andrew J. Barron Andrew J. Barron is an experienced tax, trusts and estates lawyer representing executors, administrators, trustees and beneficiaries in all aspects of trust and estate administration. His clients depend on him to navigate complex family dynamics to efficiently and empathetically resolve conflict. Andrew routinely prepares and reviews income, estate, inheritance, and gift tax returns, as well as accountings, nonjudicial settlement agreements and receipt/release agreements. Andrew works closely with high-net-worth individuals to reach their personal and business planning goals. He drafts and reviews wills, trusts, power of attorney, healthcare directives and other estate and business planning documents. Andrew is proud to maintain an active pro bono caseload. abarron@stradley.com | 215.564.8519

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Proposed Amendments to the Delaware General Corporation Law: A Response to Moelis and Activision

By: Lori S. Smith, Jeremy M. Miller and Katherine M. Pfingsten A series of recent decisions from the Delaware Court of Chancery has muddied the waters for dealmakers and lawyers, raising questions about the legality of certain longstanding market practices relating to stockholders’ agreements and the approval process for mergers. In deciding these recent cases, the court made clear that in construing the language of the Delaware General Corporation Law (DGCL), the court will apply a strict reading of the express language of the statute. In response to the uncertainties caused by the court’s recent decisions in Moelis and Activision, on March 28, the Council of the Corporation Law Section of the Delaware State Bar Association proposed certain amendments to the DGCL. These proposals are intended to conform the statute with customary market practice. Implications to Stockholder Agreements In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.,1 the court cast a shadow over the enforceability of provisions in agreements between a corporation and its stockholders that provide such stockholders with veto powers or protective voting rights that could be viewed as impinging on the authority and discretion of the board to manage the corporation. These types of agreements are widely used, especially in private equity and venture capital deal structures. At issue in Moelis were certain “Pre-Approval Requirements” in the stockholders’ agreement requiring the board to obtain the prior written consent of a founder stockholder (the founder) prior to taking virtually any meaningful corporate action, including, among others: (1) the issuance of common and preferred stock; (2) the appointment or removal of certain officers, such as the CEO, which was an office held by the founder; (3) entering into or amending any material contract; (4) adoption of a stockholder rights plan; and (5) any equity or debt commitment in an amount greater than $20 million. Read the full article here. ¹ West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., No. 2023-0309-JTL (Del. Ch. February 23, 2024).   Meet the Authors Lori S. Smith Lori Smith is chair of the emerging companies & venture capital practice and is an active participant in the firm’s health law and mergers and acquisitions groups. Lori has been a trusted adviser to foreign and domestic companies for over 30 years, ranging from startups to large corporations, including entrepreneurs and angel, venture capital, and private equity investors. She represents public and private companies in the negotiation of mergers and acquisitions, leveraged buyouts, equity and debt financings, private placements, strategic alliances, partnerships and joint ventures. lsmith@stradley.com | 212.404.0637 Jeremy M. Miller Jeremy M. Miller is a member of the firm’s business department and counsels investors, entrepreneurs and public and private companies in all aspects of their business needs. He represents established and emerging businesses on general corporate, transactional and securities law matters. Jeremy advises clients on transactions related to mergers and acquisitions, sales, financings, restructurings and franchises. He has experience representing companies in a variety of industries, including financial services, health care, technology and gaming. jmiller@stradley.com | 212.404.0642 Katherine M. Pfingsten Katherine Pfingsten focuses her practice on corporate law, representing public and private companies in a range of matters, including mergers and acquisitions, entity formation and corporate governance issues. kpfingsten@stradley.com |  215.564.8793

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FTC’s Noncompete Ban and the Impact on Trade Secret Protection

By Kevin R. Casey and Samantha Krasker The recent rulemaking by the Federal Trade Commission (FTC) on worker noncompetes has garnered an avalanche of publicity, mostly for its impact on employment agreements and employees’ ability to work for competitors. However, the rule’s effect on previously protected trade secrets is equally important. Read on as we highlight the rule’s restrictions and provide practical solutions for businesses looking to continue to protect valuable intellectual property. First, it should be noted that the ban does not take effect for 120 days after its May publication in the Federal Register. Second, leaving the 120-day period aside, the rule already has been the subject of litigation, which may ultimately modify or overturn it. The U.S. Chamber of Commerce filed one of the first actions in the U.S. District Court for the Eastern District of Texas seeking injunctive relief, declaring that the ban is invalid and preventing the ban from taking effect. The Chamber’s lawsuit asserts, among other things, that the FTC’s ban is overbroad and violates the basic legal principle against the FTC’s lawful authority. Other similar litigation has also been filed against the FTC. The new ban on noncompetes seeks to prohibit employers from requiring workers — including employees, independent contractors and unpaid workers — to execute noncompete clauses. The FTC’s ban also requires employers to notify most workers by the effective date that any current noncompete agreements will not, and cannot, be enforced against them. The FTC identifies only two exceptions to the ban: noncompete clauses executed by senior executives (employees who make more than $151,164 and are in policymaking positions) and certain types of noncompete clauses executed pursuant to the sale of a business. To date, noncompetes effectively protected trade secrets, which can be a critical component of a company’s intellectual property portfolio. Trade secrets can be defined as information used in a business (trade) that gives the owner a competitive advantage over others who do not know the information (secret), and the owner takes reasonable measures to protect the information from disclosure. Common examples of trade secrets include technical know-how, customer lists, product development plans, recipes or formulas, processes, data, software code, customer lists and business plans. Internally, companies limit access to trade secrets to those who “need to know” and provide strict guidelines for employees and contractors on how they can use and protect the trade secrets. Externally, businesses protect their intellectual property through confidentiality agreements, nondisclosure agreements and licenses. Both federal and state laws protect trade secrets. On the federal level, sources include the Economic Espionage Act of 1996 and the Defend Trade Secrets Act of 2016 (DTSA). For state law, sources include the Uniform Trade Secrets Act, the Restatement of Unfair Competition and the Restatement of Torts Section 757. However, these laws are not uniform. While most states allow confidentiality and nondisclosure agreements, some states strongly disfavor noncompete agreements. The FTC’s new rule sides with those states, noting, “Trade secret laws and nondisclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information” independent of noncompete clauses. With the current uncertainty surrounding noncompete agreements, many companies are exploring different ways to protect their valuable trade secrets. Among the alternatives to noncompete agreements that can be used to protect trade secrets are: NDAs: Require employees or contractors to keep specific information confidential and not disclose that information to others. When NDAs are carefully tailored and seek to protect proprietary information rather than prevent competition, they are more likely to be found enforceable. Limited use agreements: Allow employees or contractors to use trade secrets for a specific purpose but prohibit them from either using the trade secrets for any other purpose or disclosing the trade secrets to others. Use of existing trade secret laws: The aforementioned federal and state laws allow owners of trade secret information to sue in court and seek remedies for misappropriation of their trade secrets. The DTSA specifically allows for the recovery of attorney fees if the misappropriation has been in “bad faith.” Efforts to protect trade secret information will also help demonstrate that the owner has taken reasonable measures to maintain confidentiality. Encryption and security measures: Companies can implement secure methods for storing and transmitting trade secret information, which can help prevent unauthorized access or theft by third parties. Timely response to disclosures: If a trade secret is disclosed, companies should move swiftly to investigate the disclosure and, if necessary, take legal action. It is important for companies to have a comprehensive strategy in place to protect their trade secrets, including both legal and practical measures. This strategy can help prevent the loss of valuable assets and maintain a competitive advantage in the marketplace. With respect to the FTC’s ban on worker noncompetes, Stradley Ronon will continue to monitor these developments. We are available to assist clients with their obligations in navigating these new requirements while maintaining trade secret protections.   Meet the Authors Kevin R. Casey Kevin Casey is chair of the intellectual property litigation group at Stradley Ronon and an active member of the alternative dispute resolution group. Kevin considers ADR to be an integral part of his practice, participating in various ADR procedures as a party representative and as a neutral. In addition to being consistently listed by The Best Lawyers in America in several substantive intellectual property fields, Best Lawyers has named Kevin multiple times as its “Lawyer of the Year” in Philadelphia for intellectual property, patent and trademark law. Chambers USA: America’s Leading Lawyers for Business has identified Kevin as a leader in intellectual property in Pennsylvania. kcasey@stradley.com | 610.640.5813 Samantha Krasker Samantha Krasker represents clients in a variety of general commercial litigation matters. Her work includes researching and drafting legal memoranda and motions and assisting with case management. skrasker@stradley.com | 215.564.8797

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Corporate Transparency Act Under Fire: Two New Lawsuits Filed in Maine and Michigan

By: Lori S. Smith, Lisa R. Jacobs, Evan Poulgrain and John M. Baker Following an Alabama federal court’s decision in March declaring the Corporate Transparency Act (the CTA) unconstitutional, two similar lawsuits have been filed in different states challenging the constitutionality of the CTA. On March 1, 2024, Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama, in National Small Business United v. Yellen (NSBU), ruled that the CTA exceeded constitutional limitations on congressional powers (see our previous article for more in-depth analysis on this case). The government appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit, where it is being reviewed on an expedited basis. It is anticipated that the case may go on further to the U.S. Supreme Court, based on constitutional arguments raised in the matter. Status of the NSBU Appeal (in the context of the Corporate Transparency Act). On March 11, the government appealed the ruling in NSBU to the Eleventh Circuit. The court has granted expedited appeal, and briefing is set to be concluded by June 3, with arguments to be held on the first available argument calendar vacancy after that date.1 The appellant’s brief addresses the reasoning used by the District Court, which, as we have discussed previously, did not address the strongest constitutional arguments against the CTA. It could be anticipated that appellees will raise additional arguments in the alternative, which were ignored in the District Court’s decision. Ultimately, the Eleventh Circuit has four potential choices as to how to proceed with the NSBU appeal: Affirm the District Court’s opinion; Affirm the ruling based on alternative grounds raised in the appeal process; Reverse the decision, after taking alternative grounds into account; or Vacate the ruling, and remand for consideration of the alternative grounds raised on appeal. A crucial unknown factor remains: the identities of the judges who will be assigned to the appellate panel. Knowing their backgrounds will be vital in assessing the likely outcome of the case. While the order granting expedited status was signed by Judge Robin Rosenbaum, an Obama appointee, Judge Rosenbaum served only as a motions judge with respect to this matter. The composition of the hearing panel will presumably be determined by availability. Other Legal Challenges to the Corporate Transparency Act. While the ruling in the NSBU decision was limited to the plaintiffs in that case, two new key suits have been filed in other states that similarly challenge the constitutionality of the CTA: (1) Boyle v. Yellen in Maine; and (2) Small Business Association of Michigan v. Yellen in Michigan. These post-NSBU cases are in addition to Robert J. Gargasz Co. v. Yellen, which was filed in the U.S. District Court for the Northern District of Ohio on December 29, 2023. Maine — Boyle v. Yellen On March 15, 2024, William Boyle, a beneficial owner with reporting obligations triggered by the CTA, brought an action in the U.S. District Court for the District of Maine, challenging the constitutionality of the CTA as an “encroachment on the sovereignty of the State of Maine to regulate entity formation.”2 Boyle’s argument centers on the concept that the U.S. Constitution does not grant the federal government, including Congress and the Treasury Department, the authority to dictate the terms under which companies are chartered. Similar to the NSBU decision in Alabama, plaintiff Boyle puts forward the argument that the CTA’s broad language captures entities that are primarily holding companies that may not be engaged in foreign, interstate, or Indian commerce. Additionally, Boyle argues that the penalties imposed by the CTA were outside of Congress’s authority, as they did not constitute a tax. The Alabama court in NSBU rejected the idea that the CTA’s penalties constituted a tax, so it remains to be seen if we can expect similar treatment from the District of Maine. Michigan — Small Business Association of Michigan v. Yellen On March 26, 2024, the Small Business Association of Michigan, along with the Chaldean American Chamber of Commerce and several other plaintiffs, filed suit in the U.S. District Court for the Western District of Michigan challenging the CTA on three constitutional grounds: Commerce Clause. Plaintiffs argue that merely because an entity has been formed under state or tribal law, this does not necessarily mean that such entity has been engaged in any sort of commerce — interstate or otherwise. Plaintiffs argue that the Commerce Clause does not permit Congress to regulate entities solely by reason of their existence. Fourth Amendment privacy rights. Plaintiffs argue that the CTA is predominantly a tool to be utilized by law enforcement against crime (white collar or otherwise), and the reporting requirements oblige beneficial owners to provide sensitive information to federal law enforcement agencies that may be shared with domestic or foreign law enforcement. Plaintiffs note that no court oversight is required for any of the processes required under the CTA, and argue that the Fourth Amendment does not allow warrantless, suspicionless searches of American citizens or companies. Constitutional vagueness. Plaintiffs argue that the CTA’s definition of “beneficial owner” is unconstitutionally vague, and too indefinite for ordinary people to know precisely when they are required to report an interest or not.3 The plaintiffs sought a preliminary injunction against enforcement of the CTA against them while the case is pending. The court has denied the motion for a preliminary injunction and has ordered briefing to be concluded by July 26, as proposed by the parties.4 Ohio — Robert J. Gargasz Co. v. Secretary of the Treasury In this case, which was pending prior to the decision in NSBU, the court has granted the defendants’ motion to hold the case in abeyance pending the outcome of the appeal to the Eleventh Circuit.5 Proceedings in the Maine and Michigan cases are ongoing. Regardless of the outcome of these two cases, however, ultimately the Supreme Court is likely to have the final say on the CTA’s fate. This is especially true if lower courts disagree and Congress

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In FY25 Budget, New York Becomes First State to Require Paid Prenatal Leave

As part of a significant investment to support New York state’s health care system, the $237 billion executive budget for fiscal year 2025 includes two key employment law changes relevant to maternal health. Effective January 1, 2025, New York will mandate a separate sick leave bank for prenatal care for private-sector employers, making it the first state in the nation to create paid prenatal leave. Employees will receive an additional 20 hours of paid sick leave for prenatal care during a 52-week calendar period in addition to their existing sick leave. Paid prenatal leave includes health care services received by employees during pregnancy or related to such pregnancy, including physical examinations, medical procedures, monitoring and testing, and discussions with a health care provider. A second employment-related update to the budget takes effect 60 days following enactment on June 19, 2024. New York private and public employers must provide paid 30-minute breaks for breast milk expression “each time such employee has [a] reasonable need to express breast milk.” Currently, New York law provides for reasonable unpaid break time for this purpose, at least every three hours or as otherwise reasonably requested by the employee. What Steps Should Employers Take Now? Update Existing Policies and Posters. Review and update existing leave policies to incorporate the prenatal sick-leave mandate and requirement of paid lactation breaks. Keep an eye out for updated requirements on the New York State Department of Labor website regarding required posters and notices. Educate Managers. As managers are often the first to receive a sick leave request from a pregnant employee or an accommodation request for lactation, remind them of internal procedures for responding to or escalating such requests. Determine whether additional educational resources are needed. Consider Creative Accommodations. A variety of accommodations may be available to meet both employee and employer needs. Listen to the employee’s request and ask appropriate questions about possible accommodations. Remember Existing Legal Protections. Obligations under the New York mandate for prenatal sick leave are only one piece of existing legal protections for pregnant employees and employees post-childbirth. For example, the federal Pregnant Workers Fairness Act, which took effect on June 27, 2023, requires a covered employer to provide a “reasonable accommodation” to a qualified employee’s or applicant’s known limitations related to pregnancy, childbirth or related medical conditions, unless the accommodation will cause the employer an “undue hardship.” Seek Appropriate Human Resources or Legal Guidance. A network of federal, state and local laws may be implicated beyond these New York amendments. Employers are advised to consult with appropriate human resources or legal professionals before denying an accommodation request.   Meet the Author Melissa L. Perry Melissa Perry is an experienced litigator and strategic problem solver who represents corporate and institutional clients in all types of litigation, including employment and labor, educational issues, complex commercial, government investigations and appellate matters. Melissa specializes in employment and labor matters, representing clients in active litigation brought under Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Equal Pay Act, and other federal and state employment and labor laws. She regularly advises local, regional, and national entities regarding hiring, compliance, internal investigations, harassment and discrimination prevention, employee departures, and theft of trade secrets and proprietary material. mperry@stradley.com | 215.564.8049  

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Gig Work Laws Aim to Catch Up with Industry Innovations

Gig work rapidly evolved into a fixture of the job market, with constant innovation from the businesses operating in the space. Popular gig work roles expanded beyond ride-share and delivery drivers to graphic designers, freelance writers, mobile shoppers, fitness trainers, online tutors, virtual assistants and social media content creators. As the world of gig work continues to evolve, so does the legal landscape. The gig economy offers flexibility, but it also lacks many of the basic worker legal protections afforded to more traditional occupations. The classification of gig workers as independent contractors continues to be a key financial driver for the gig economy, as contractor status comes with lower business costs and flexibility. California’s Assembly Bill 5 (AB 5), which effectively presumes most workers are employees entitled to enhanced legal rights unless they meet specific criteria, remains controversial, with one recent study finding that AB 5 adversely impacted the California job market overall while other economists disagreed. The U.S. Department of Labor recently implemented its own independent contractor status rule, which does not go as far as AB 5 but renders contractor classification more challenging; court cases and efforts by lawmakers to overturn the rule remain pending. New York City adopted its own Freelance Isn’t Free Act applicable to most gig workers, while also requiring minimum pay standards for some delivery workers. Ride-share companies recently reached a settlement that includes enhanced protections and benefits for drivers across the entire state. Many other states and some cities, such as Chicago and Seattle, also have current or pending regulations aimed at providing more legal rights to gig workers. What does this evolving legal landscape mean for business? Compliance Uncertainty. Whether operating in the gig economy or simply using a gig worker occasionally, businesses face challenges when navigating changing regulatory requirements and varying federal, state and city regulations. Collective Bargaining. Current labor laws allow unionization by employees, not independent contractors. The movement to expand those legal rights to gig workers continues to gain momentum. Business Model Changes. As the law continues to evolve, companies should anticipate the potential need to reclassify certain gig workers as employees or change their pay practices.   Meet the Author A. Nicole Stover Nicole Stover is a strategic business partner to corporate and non-profit clients in all areas of employment law, including mergers and acquisitions, discrimination and harassment, competition and trade secrets, and compensation and benefits. nstover@stradley.com | 856.321.2418

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DOJ’s Pilot Whistleblower Program: What Does It Mean for Businesses?

By: Steven D. Feldman and Rebecca Fallk Deputy Attorney General Lisa Monaco announced on March 7 that the U.S. Department of Justice (DOJ) will launch a pilot whistleblower program that will offer financial incentives for individuals to report allegations of criminal wrongdoing to the DOJ. The program will be launched later this year following a 90-day process to develop and implement the pilot. The new initiative will expand upon the DOJ’s recent efforts to incentivize voluntary self-disclosure and will create a counterpart program to those already underway at the U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission, Internal Revenue Service and Financial Crimes Enforcement Network. The program will also serve as an alternative to qui tam actions, which offer their own whistleblowing incentives but are limited to cases of fraud against the government. In Monaco’s announcement, she stated that the DOJ’s whistleblower program rests on the premise that “if an individual helps DOJ discover significant corporate or financial misconduct — otherwise unknown to [DOJ] — then the individual could qualify to receive a portion of the resulting forfeiture.” An individual will be entitled to a whistleblower payment at the conclusion of a criminal proceeding resulting in a conviction where: (1) all victims have already been properly compensated; (2) the information the individual provides to the DOJ is not already known to the government; (3) the individual is not involved in the criminal activity itself; and (4) there is not an existing financial disclosure incentive, such as through the qui tam program. Monaco emphasized certain categories of cases that would be most lucrative to whistleblowers and should be most concerning to businesses. She explained that the DOJ is “especially interested in information about” the following: “criminal abuses of the U.S. financial system; foreign corruption cases outside the jurisdiction of the SEC, including [Foreign Corrupt Practices Act] violations by non-issuers and violations of the recently enacted Foreign Extortion Prevention Act; and domestic corruption cases, especially involving illegal corporate payments to government officials.” This new DOJ whistleblower program is designed to parallel and supplement the SEC’s existing whistleblower program and assist in cases outside the SEC’s jurisdiction. Like the SEC’s whistleblower program, the DOJ’s program will allow whistleblower awards only in cases involving penalties above a certain, yet to be determined, monetary threshold. Because of the high monetary threshold, the program will target only the most significant criminal conduct and motivate individuals to report large-dollar cases. The SEC’s whistleblower program has paid over $1.9 billion since its creation in 2011, including nearly $600 million in the last year alone. Unlike the SEC program, which focuses on public companies, U.S. listed entities and regulated entities under the SEC’s purview, this new DOJ program is notable because it will incentivize individuals to report on misconduct at companies and organizations not otherwise covered by the SEC’s program, including purely private corporations, partnerships and even nonprofits. What Actions Should Companies Take Now? In an effort to anticipate the impact of the new DOJ program on businesses, the SEC’s whistleblower program provides guidance in predicting the potential key implications of the DOJ program and how businesses can best prepare for these new policies: We expect the DOJ pilot program will add to the existing complexity surrounding the decision on whether and when an entity should self-report misconduct to the DOJ. The program’s incentives may increase the likelihood that employees will report misconduct directly to the DOJ instead of internally reporting to their employers. Companies will face a greater dilemma in deciding whether and when to self-report to the DOJ, knowing that benefits to companies for self-disclosure only exist if the government is unaware of the misconduct. Any disclosure and its timing will need to be even more carefully considered. Given the potential financial reward for reporting misconduct directly to the DOJ, companies will likely face more challenges in encouraging employees to report misconduct internally. A key takeaway is that companies should act now to create or optimize a framework that further encourages employees to report potential misconduct internally. Therefore, it is imperative that companies use the time before the pilot program is implemented to evaluate and review their existing compliance policies and procedures, including internal hotlines and other reporting mechanisms, to ensure that they are straightforward and may be thoughtfully utilized by employees. The goal is to create an environment where employees know that their disclosures will be promptly and appropriately handled so employees do not need to turn to the government for assistance. Entities covered by the SEC’s regulations are prohibited from taking actions that can be seen as restricting employees from reporting misconduct to the SEC, such as including provisions in employment policies, nondisclosure agreements or severance agreements that prohibit such voluntary disclosure. Companies should utilize the time before the DOJ pilot program is implemented to review employment policies, settlement agreements, severance agreements and the like to remove any language prohibiting voluntary government disclosure. Ultimately, it is important to ensure that employees do not feel motivated to go outside of their companies to make reports to the DOJ despite the new incentives being put in place. While more about the DOJ program will be released in the upcoming weeks and months, companies can take steps now to ensure they are prepared for the impact of these new policies. Meet the Authors Steven D. Feldman With more than 25 years of experience in high-stakes litigation, Steven concentrates his practice in the areas of securities litigation & enforcement, white-collar defense, investigations and compliance. He represents companies and individuals accused of securities and commodities law violations, public corruption, business crimes and fraudulent practices by U.S. Attorneys’ Offices, States Attorneys General, District Attorneys’ Offices, the Securities and Exchange Commission and the Commodity Futures Trading Commission. sfeldman@stradley.com | 212.404.0659 Rebecca Fallk Rebecca Fallk is an associate in the firm’s white-collar defense practice group, representing various clients in high-profile internal investigations and matters that involve federal regulatory agencies. She has hands-on litigation experience conducting internal investigations in response to

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The 83(b) Election: How Founders, Employees and Service Providers Can Lower Their Tax Burden

By: Katrina Berishaj and Jeremy Gottlieb Restricted stock awards are generally taxed when they vest, which can often occur months or years after such awards are granted. Stock options are generally taxed at exercise after they have vested (for incentive stock options, the spread between strike price and fair market value at exercise is a tax adjustment item for purposes of alternative minimum tax) and at a subsequent disposition. However, in certain instances, an option holder may purchase stock that is not vested. These awards are sometimes referred to as early exercise options. Section 83(b) of the U.S. Internal Revenue Code (IRC) provides taxpayers the ability to elect to pay taxes on the fair market value (FMV) of restricted property at the time the property is granted as opposed to when the property is vested, effectively accelerating the recognition of ordinary income tax. The 83(b) election can be a powerful tax-savings tool, particularly for startup companies, where the value of the stock may be de minimis at the time of grant but is expected to increase over time. Benefits of an 83(b) Election Tax Savings at the Time of Issuance: An 83(b) election allows a taxpayer who is granted an equity award to pay income tax on the award at the time it is granted instead of waiting for the award to vest. Because the FMV of the shares is typically de minimis in a startup’s earliest stages, the taxpayer generally can pay the small amount of applicable taxes (if any) associated with the grant rather than paying taxes on the value of the stock at the time of vesting, when the FMV of the stock is potentially higher. Thus, where the value of stock increases over time, an 83(b) election can result in significant tax savings. Capital Gains Treatment: Filing an 83(b) election starts the taxpayer’s capital gains holding period clock earlier. A taxpayer who makes the 83(b) election will receive the long-term capital gains rate if the sale of the shares occurs more than one year after the date of grant (or exercise date for early exercise options) rather than one year after vesting. Potential Drawbacks of an 83(b) Election One potential drawback of making an 83(b) election is that if the taxpayer later forfeits the shares before the shares vest, the taxpayer is not entitled to a refund for the taxes paid. Thus, there is the potential for a taxpayer to be out of pocket for the amount of taxes paid on stock that the taxpayer never owns. Additionally, if the shares depreciate between the date of grant and the date they vest, a taxpayer who makes an 83(b) election will pay a higher tax by making the election. How to File an 83(b) Election To make a valid 83(b) election, the taxpayer must sign and complete the required election forms and return the forms to the IRS no later than 30 days after the date that the stock award is granted. For restricted stock, the grant date is typically the effective date of the agreement. In the case of early exercise options, it is the date on which the option holder exercises his or her options early (before the options vest). Failure to file within the timeframe will render the election void, and a taxpayer may recognize ordinary taxable income as vesting restrictions lapse. In general, the taxpayer will need to provide the following information on the 83(b) election form: Taxpayer’s general information. A description of the property, including the quantity of shares of the issuer/company. The date of grant. The taxable year for which the election is being made. The nature of restriction or restrictions to which the property is subject. The FMV of the shares of the company on the date granted. The amount, if any, paid for the property. The amount to include in gross income. The taxpayer must file the form with the IRS office that the taxpayer files his or her annual income tax return. A copy of the form should also be provided to the issuer/company. The taxpayer should retain a copy of the completed election form for his or her personal records. Meet the Authors Katrina Berishaj Katrina Berishaj advises financial services clients, including banks, trust companies, broker-dealers, investment advisers, insurance companies and institutional investors, on issues arising under the fiduciary and prohibited transaction rules of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, with respect to financial products, services and transactions. She assists corporate and governmental retirement plan sponsors on a broad range of issues concerning their fiduciary and non-fiduciary responsibilities. Katrina also advises on qualified and nonqualified retirement plans and executive and equity compensation arrangements. kberishaj@stradley.com | 202.507.5179 Jeremy Gottlieb Jeremy Gottlieb concentrates his practice on a wide variety of investment management-related matters, including counseling investment advisers and registered investment companies on legal, regulatory and transactional matters. jgottlieb@stradley.com | 215.564.8123

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Alabama Federal Court Decision Throws Corporate Transparency Act into Disarray

By: Lori S. Smith, Lisa R. Jacobs, Evan Poulgrain and John M. Baker A federal district court in Alabama issued a significant decision in National Small Business United v. Yellen on March 1, declaring the Corporate Transparency Act (CTA) unconstitutional as it exceeds the Constitution’s limits on the power of Congress.[1] Background of the Corporate Transparency Act The CTA, enacted as part of the National Defense Authorization Act for Fiscal Year 2021, aims to combat money laundering and terrorist financing by requiring certain businesses to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This information includes beneficial owners’ full legal names, dates of birth, residential street addresses, and the identifying number and an image of a government-issued identification document. Although the CTA passed with bipartisan support, it was criticized by some business groups that argued the act imposed a heavy reporting burden on legitimate businesses. The plaintiffs in this case included one such group: National Small Business United, a nonprofit trade group also known as the National Small Business Association (NSBA) that represents more than 65,000 member companies. Plaintiff Isaac Winkles owns an Alabama corporation that is an NSBA member. The plaintiffs filed suit in the U.S. District Court for the Northern District of Alabama challenging the constitutionality of the CTA. The named defendants were the U.S. Department of the Treasury, Treasury Secretary Janet Yellen and FinCEN Acting Director Himamauli Das in their official capacities. Ultimately, the court sided with the plaintiffs and held that the CTA was unconstitutional. Key Points of the Alabama Court’s Decision Exceeding Enumerated Powers: The court held that the CTA exceeds Congress’s enumerated powers under the Constitution. U.S. District Judge Liles Burke focused on (1) the powers over foreign affairs and national security, (2) the Commerce Clause and (3) the taxing power. Foreign Affairs and National Security: The court rejected the defendants’ argument that the CTA fell within the defendants’ powers over foreign affairs and national security because it aids in preventing money laundering and terrorism financing. The court reasoned that even if these are legitimate goals, the CTA’s means to achieve them are not necessary and proper. The act’s broad scope and intrusion into areas traditionally regulated by states were deemed excessive. Commerce Clause: The court considered whether the CTA could be considered under one of three broad categories of Commerce Clause jurisprudence: (1) channels of interstate and foreign commerce; (2) the instrumentalities of, and things and persons in, interstate and foreign commerce; and (3) activities that have a substantial effect on interstate and foreign commerce. The court acknowledged that the CTA targets entities that may utilize interstate commerce channels. However, it found that the CTA lacks a sufficient nexus to the Commerce Clause because it does not regulate interstate commerce. Judge Burke distinguished the CTA from other cases in which Congress regulated activities with a substantial effect on interstate commerce. Here, the focus on the non-commercial, intrastate activity of incorporating entities was not sufficient to justify the federal intrusion. The court noted that the CTA does not regulate activities that, although purely intrastate, substantially affect interstate commerce. Further, the court reasoned that many entities are established for purposes that may or may not be commercial. The court also suggested that FinCEN already has the means of obtaining ownership information through its Customer Due Diligence (CDD) rule, which requires financial institutions to obtain certain beneficial ownership information from their customers. “FinCEN’s CDD rule and the CTA provide FinCEN with nearly identical information, but the CDD rule does so in a constitutionally acceptable manner,” the court said.[2] Taxing Authority: The court rejected the Treasury’s argument that the CTA is justified by the taxing power. “The CTA’s civil penalties are not a tax: they are not paid into the Treasury and have no income thresholds; the penalty amounts are fixed rather than variable; the penalties are not ‘found in the Internal Revenue Code and enforced by the IRS’; and the penalties are imposed only on those who ‘knowingly’ or ‘willfully’ violate the law,” Judge Burke noted.[3] Plaintiffs’ Claimed Violations of Multiple Constitutional Amendments: The court declined to address the plaintiffs’ arguments that the CTA’s expansive reporting requirements violate several amendments to the Constitution, including the following: First Amendment: The plaintiffs raised concerns regarding the potential chilling effect on the formation of new entities due to the disclosure of personal information. Fourth Amendment: The plaintiffs questioned whether broad data collection authorized by the CTA constitutes an unreasonable search and seizure. Fifth Amendment: The plaintiffs argued that the potential for self-incrimination due to the reporting requirements was a point of concern. Ninth and Tenth Amendments: The plaintiffs noted the potential infringement on unenumerated rights and the power reserved to the states, particularly regarding corporate formation and regulation.   Outcome and Impact on the Future of the Corporate Transparency Act Ultimately, the court declared the CTA to be unconstitutional and enjoined the defendants, along with any other agency or employee acting on behalf of the United States, from enforcing the statute against the plaintiffs.[4] The decision represents a setback in the government’s efforts to combat financial crime through enhanced beneficial ownership transparency and creates some confusion for those covered by the CTA. However, it is important to note that this is a single district court ruling, and the injunction imposed by the judge applies only to the specific plaintiffs. FinCEN’s published response to the decision states FinCEN would comply strictly with the court’s order: “As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.” [5] Accordingly, the decision has no binding impact on any other reporting company or beneficial owner thereof. The government will likely appeal, potentially

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Delaware Chancery Court Examines ‘Reasonable Efforts’ in Chordia Decision

Most contracts will straightforwardly require the parties to take or refrain from taking specified actions. However, some contracts require that a party attempt to bring about a result that may or may not be within the party’s control. Such provisions are commonly qualified so that the party will not have breached the provision, even if the goal is not achieved, so long as the party has used its “reasonable efforts” to bring about the desired result. Because the steps that a party must take to satisfy a reasonable-efforts requirement will depend on the facts and circumstances surrounding the obligation, lawyers may struggle to advise their clients on what is required to satisfy such an “efforts clause.” In the recent case of Chordia v. Lee, the Delaware Court of Chancery reviewed the factors to be considered in analyzing an efforts clause while holding that a majority stockholder had failed to use its reasonable efforts to carry out the terms of a stockholders’ agreement. What Happened in Chordia? Zenith Electronics LLC, an indirect, wholly owned subsidiary of major appliance and consumer electronics company LG Electronics Inc., purchased a controlling interest in ad tech company Alphonso Inc. in 2020. Although Alphonso’s founders wanted to retain control of the company so that they could drive it toward an initial public offering, the founders and other Alphonso stockholders (the key holders) ultimately settled for significant upfront cash together with some heavily negotiated minority protections. The key holders’ minority protections were intended principally to preserve liquidity for their minority interests in Alphonso. Specifically, the parties entered into a stockholders’ agreement that gave the key holders a demand registration right exercisable after December 2025 and a right to annual tender offers in 2024, 2025 and 2026. These liquidity rights were protected, in turn, by the combination of (1) a right of the key holders to appoint up to three of the seven directors on Alphonso’s board and (2) a prohibition on any change to the registration right or the scheduled tender offers absent the consent of at least one director appointed by the key holders. The key holders’ right to appoint directors to the Alphonso board was subject to two conditions. First, they had to retain collective ownership of at least 10 percent of Alphonso’s outstanding shares. Second, at least one of the key holders had to remain as an officer or employee of Alphonso. LG Electronics had the right to terminate the stockholders’ agreement in its entirety if all key holders ceased to serve as officers and employees of Alphonso. The stockholders’ agreement further provided that Alphonso’s board — controlled by four LG Electronics-appointed directors — retained the exclusive right to terminate the employment of Alphonso’s officers and any of its employees with annual compensation of $500,000 or more, which applied to five of the key holders (the executive key holders). As the court noted, “Given these mechanics, it might seem that [the key holders’ right to appoint Alphonso directors] requires protection of its own.” That protection, according to the key holders, was to be found in the stockholders’ agreement’s efforts clause, which read: Alphonso “agrees to use its reasonable efforts, within the requirements of applicable law, to ensure that the rights granted under this Agreement are effective and that the Parties enjoy the benefits of this Agreement. Such actions include, without limitation, the use of [Alphonso’s] reasonable efforts to cause the nomination and election of the directors as provided in this Agreement.” Not long after the closing, friction developed between LG Electronics and the executive key holders, including LG Electronics’ realization that a sale of Alphonso pursuant to the key holders’ liquidity rights would be inconsistent with LG Electronics’ long-term objective of incorporating Alphonso’s technology into LG Electronics’ products. By mid-2022, LG Electronics sought ways to terminate the stockholders’ agreement and eliminate its obligations to the key holders. At the end of the year, Alphonso’s board held a special meeting at which the board (1) terminated the employment of the five executive key holders and (2) elected a new interim CEO, who immediately fired the two remaining key holders who were neither officers nor employees with annual compensation of $500,000 (the non-executive key holders). Later that day, Zenith signed a written consent (the December consent) removing all Alphonso directors who had been appointed by the key holders. On March 30, 2023, the key holders filed a complaint seeking an order pursuant to Section 225 of the Delaware General Corporation Law that Zenith’s removal of the directors appointed by the key holders pursuant to the December consent was invalid and, therefore, those directors remain members of Alphonso’s board. The court agreed with the key holders. Chancery Court Examines Efforts Clause with Four-Factor Analysis After determining that a court hearing a case under Section 225 of the Delaware General Corporation Law could decide an appropriately tailored breach of contract claim, the court conducted an analysis that “begins and ends with the ‘reasonable efforts’ provision in the Stockholders’ Agreement.” Specifically, the court focused its analysis on four questions: “(1) which parties are required to use reasonable efforts, (2) toward whom reasonable efforts must be used, (3) the scope of the obligation imposed by the words “reasonable efforts,” and (4) whether the party that must use reasonable efforts acted in the manner required by the obligation toward those to whom reasonable efforts must be used.” Which Parties Must Use Reasonable Efforts? Turning to the first of these questions, the court, while noting the “truism that a corporation acts through individuals,” nonetheless also noted that “the Stockholders’ Agreement itself distinguishes in various instances between Alphonso and the Board,” treating the board and Alphonso as distinct parties with differing rights and obligations. This distinction was so prevalent that “in some instances the Stockholders’ Agreement refer[red] separately to the Board and Alphonso in the same provision.” Under these circumstances, the court adopted the defendants’ approach and interpreted the rights and obligations under the stockholders’ agreement as applying separately to Alphonso and to its

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