The Dealmaking Slowdown: A Time for Startups to Prepare
As the slowdown in dealmaking continues, both buyers and sellers are left to consider their options moving forward during this period of extreme uncertainty and market volatility. To put the current slowdown in perspective, EY had previously forecasted M&A activity to rise by 10% this year.[1] However, they recently adjusted that outlook, saying the M&A market entered a “watchful phase” in February of this year. Their data shows a downturn in the number and total value of deals of more than $100 million. The volume of those deals dropped by 5.9 percent YoY and 19.5 percent from just January of this year, and combined deal value also fell 53 percent YoY and 34 percent from January.
Whenever we see this kind of significant pause in dealmaking, buyers typically have the advantage, but not always. There are certain dynamics that can vary based on industry, the nature of the assets, and, of course, macroeconomic factors. Below, we look at the balance of power between buyers and sellers during a slowdown and how each side can best position themselves for success when conditions improve.
Who Has the Upper Hand?
Most of the time, the buyer is going to have the upper hand in this kind of situation. When there are fewer people willing to buy, those who are can often negotiate much more favorable terms. Buyers can also be highly selective, taking their time to conduct thorough due diligence on their targets and consider all options available. When the economy is in turmoil, it can also present an opportunity for buyers to target distressed or capital-constrained businesses.
While sellers are not usually in the driver’s seat when dealmaking is lagging, there are some opportunities for them to still have leverage. This is particularly true if they have an especially unique proposition or a high-performing and proven concept. There are also some areas that tend to be recession-proof or continue to grow despite contributing economic factors. Those startups who might have the best leverage are those who are not under pressure to sell as they can either wait until deal activity picks back up or negotiate more aggressively for more favorable terms.
What Can Sellers Do Now?
When it’s slow out there, sellers should make sure their fundamentals are solid. Focusing on cash flow and operational efficiencies can help to demonstrate a strong foundation to potential buyers, as well as looking at growth strategies that can move the business forward. It is also important for sellers to look at ways they can extend their runway. When mergers and acquisitions slow down, VC funding often follows suit. This means it is critical that startups ensure they have ample capital reserves to wait out the dealmaking doldrums until more favorable market conditions emerge.
Most importantly, sellers must remain consistently deal ready. The global economic and geopolitical factors that are contributing to this downturn are shifting rapidly, and that means that there could be an uptick in deal activity at any time as trade deals are struck, the markets stabilize, or conflicts and tensions are eased. While this will not happen overnight, founders should be ready to make a move when the timing and the buyer are right. Buyers will no doubt be using this time to do their diligence, so they are ready to move fast when conditions improve and look at the kinds of strategic investments that best fit their long-term goals. Founders would be wise to establish the kinds of connections today that will allow them to execute their exit plans once deals start flowing again.
[1] https://sgbonline.com/ey-ma-outlook-signals-cautious-us-deal-market/
Updates on SB 54: CalRecycle to Take a Second Stab at Implementing Regulations
On 7 March 2025, Gov. Gavin Newsom sent the Department of Resources Recycling and Recovery (CalRecycle) back to the drawing board on proposed regulations to implement the state’s Plastic Pollution Prevention and Packaging Producer Responsibility Act (SB 54). Senate Bill (“SB”) 54 is one of many state extended producer responsibility laws that seek to make product manufacturers responsible for the environmental burden associated with single-use packaging and similar materials. Newsom signed SB 54 into law in 2022, and CalRecycle has been working to implement the law since 2023.
SB 54 targets single-use plastic packaging and food service ware (Covered Materials) and has the lofty goals of achieving by 2032 making 100% of Covered Materials recyclable or compostable, reducing the use of Covered Materials by 25%, and actually recycling Covered Materials at a minimum of 65%.
SB 54 mandated CalRecycle to propose permanent regulations for SB 54 by 8 March 2025. The recently rejected proposed regulations were originally released for public comment in February 2024 and underwent two rounds of public comment. After two public comment periods, CalRecycle arrived at the proposed permanent regulations that Newsom declined to accept. Newsom declined to adopt CalRecycle’s proposed regulations due to the unacceptable burdens and costs the proposed regulations would have imposed on businesses. CalRecycle will have to convene another series of stakeholder meetings and develop new regulations, but CalRecycle’s timeline for proposing these new regulations is not yet clear.
In addition to monitoring the updated rulemaking process for California’s SB 54, our firm is keeping up with several other proposed and enacted state regulations impacting food packaging and food-contact material producers, including the following:
Expected release of CalRecycle’s final “material characterization study” required under SB 343 by 4 April 2025; the report will determine what materials are considered “recyclable” for purposes of “chasing arrows” symbols and SB 54.
Introduced 16 January 2025, Minnesota’s Senate File 188/House File 44 would require food-packaging manufacturers and brand owners to test for and report ortho-phthalates. If enacted, the law would take effect 1 July 2026.
On 20 February 2025, California introduced the Safer Food Packing Act of 2025 to regulate antimony trioxide, bisphenols, and ortho-phthalates in food packaging.
Introduced 3 February 2025, Illinois House Bill 2516 will prohibit the sale or distribution of any cookware and food packaging that contains potentially added per- and polyfluoroalkyl substances (PFAS). If passed, this regulation will take effect 1 January 2026.
Introduced 13 February 2025, Hawaii SB 683 will prohibit the sale or distribution of any cookware and food packaging that contains potentially added PFAS. If passed, this regulation will take effect 1 January 2028.
Breaking News: SEC Withdraws Its Defense of Climate Disclosure Regulations
On March 27, the US Securities and Exchange Commission (SEC) announced that it will no longer defend Biden-era regulations requiring large corporations to disclose the impacts of climate change on their businesses. This announcement follows a vote by the SEC’s three-member governing body to end its defense of the rule and comes amid industry complaints that the rule was an overstep of the SEC’s authority.
Read the press release here.
This news follows significant shifts in the United States’ approach to climate change under the Trump Administration, including the deregulation of the US Environmental Protection Agency as discussed in our prior alert. The SEC’s acting chair described the climate disclosure mandates as “costly” and “unnecessarily intrusive.”
The Enhancement and Standardization of Climate-Related Disclosures for Investors (the Rule) was the first federal sustainability disclosure requirement in the United States and sought to inform investors by requiring registrants to provide information on greenhouse gas emissions, severe weather-related financial statement disclosures, and climate-related governance, targets, and risks disclosures. Among other mandates, the Rule required publicly traded companies to discuss climate-related risks that materially impacted, or were reasonably likely to materially impact, their companies when filing registration statements and annual reports.
However, the Rule never saw the light of day as it was quickly challenged and stayed following its adoption in March 2024, and has since been the subject of ongoing litigation consolidated in the Eighth Circuit.[1] In February, the SEC indicated its reluctance to defend the Rule before the Eighth Circuit, with the acting chairman calling it “deeply flawed.”
Though publicly traded companies will have less compliance burdens related to climate change as a result of the SEC’s decision, companies and investors alike should bear in mind the growing awareness of how climate impacts investment performance on a global level. In addition, the California climate disclosure laws (discussed here) and the European Union’s Corporate Sustainability Reporting Directive (though proposed to be pared back) will continue to drive disclosure of climate-related information for the time being.
Our team will continue to monitor developments and provide updates as they become available.
[1] Iowa v. Securities Exchange Commission, No. 24-1522 (8th Cir.)
Additional Authors: Jeffrey J. Kennedy and Maria Ortega Castro
25% Tariff on Automobiles and Automobile Parts Begins April 3; USMCA Vehicles May Qualify for Partial Relief
Go-To Guide:
New 25% tariff on imported cars starts April 3, 2025, citing national security concerns.
Automobile parts from USMCA countries temporarily exempt, but full implementation expected by May 3, 2025.
USMCA-qualifying vehicles may receive partial relief based on U.S. content value.
Importers that do not carefully document U.S. content may face retroactive, full tariffs on misstatements.
On March 26, 2025, President Donald Trump announced a proclamation, “Adjusting Imports of Automobiles and Automobile Parts Into the United States,” directing the imposition of a 25% tariff on imports of passenger vehicles, light trucks, and certain automobile parts, citing national security concerns under section 232 of the Trade Expansion Act of 1962. The 25% duty will apply to designated Harmonized Tariff Schedule of the U.S. (HTSUS) codes listed in the proclamation’s annex, which will be published in the Federal Register at a later date.
U.S. Customs and Border Protection (CBP) will begin collecting duties on imports of covered automobiles at 12:01 a.m. EDT on April 3, 2025. Covered automobile parts will be subject to the same duty on a date to be determined, but no later than May 3, 2025.
Covered Products and Future Expansion
The proclamation applies the 25% tariff to passenger vehicles (sedans, SUVs, crossovers, minivans, cargo vans), light trucks, and selected automobile parts including engines and engine parts, transmissions and powertrain parts, and electrical components. The precise list of covered vehicles and parts (by HTSUS code) will be contained in the yet-to-be-published annex to the proclamation. Additional categories of automobile parts may be included over time. Domestic producers and industry associations may request the inclusion of other parts if they demonstrate that increased imports threaten to impair U.S. national security.
USMCA Automobiles: Partial Duty Based on US Content
The proclamation introduces a new content-based valuation system for qualifying automobiles under the United States-Mexico-Canada Agreement (USMCA). Importers of USMCA-qualifying automobiles may submit documentation supporting the value of U.S. content in a given model, defined as “the value of parts wholly obtained, produced entirely, or substantially transformed in the United States.” The 25% tariff will apply only to the automobile’s non-U.S. content, calculated as the vehicle’s total value minus the verified U.S. content.
Enforcement and Penalties for Misstatements
Importers should take note of deterrent measures built into the proclamation. If CBP determines that the declared non-U.S. content of a USMCA-qualifying automobile has been understated, the 25% tariff will apply retroactively and prospectively to the full value of the affected model. Specifically, duties will be retroactively assessed from April 3, 2025, and will continue to apply to all subsequent imports of the same model by the same importer until CBP verifies corrected values.
USMCA Automobile Parts: Temporary Exemption
USMCA-qualifying automobile parts are temporarily exempt from the 25% tariff. This exemption will remain in place until the secretary of Commerce establishes a process to calculate and apply the tariff only to the non-U.S. content of each part and publishes a notice in the Federal Register. In contrast, non-USMCA-qualifying parts will become subject to the full 25% tariff no later than May 3, 2025.
Other Implementation Measures: FTZs and Duty Drawback
Any automobile or automobile part subject to the 25% tariff and admitted into a U.S. foreign-trade zone (FTZ) on or after the effective date must be admitted in privileged foreign (PF) status—unless eligible for admission under domestic status (referring to goods that have been imported to the United States and for which all duties and taxes paid). Upon entry for consumption from the FTZ, the article will be subject to the duty rate applicable to its HTSUS subheading as of the admission date into the FTZ. Importers utilizing FTZs should review inventory and entry strategies, as this provision may reduce one of the traditional benefits of FTZ operations.
Additionally, duty drawback will not be available for the new 25% tariffs. Companies seeking to recover duties through export programs will not be able to claim refunds for these duties, even if the automobile or part is subsequently exported. This may affect cost planning for companies with international supply chains and re-export strategies.
Key Takeaways: Automobiles
1.
Effective at 12:01 a.m. EDT on April 3, 2025, covered imports of passenger vehicles and light trucks will be subject to a 25% duty on entry or withdrawal from warehouse for consumption.
2.
USMCA-qualifying automobiles may receive a partial exemption, with the 25% duty applied only to the non-U.S. content of each model.
3.
Understatement of non-U.S. content will trigger full-duty liability on the total value of all affected models, retroactive to April 3, 2025, and continuing until CBP verifies corrected values.
4.
Importers must maintain thorough documentation of U.S. content and be prepared for CBP audits and potential enforcement actions.
5.
Additional automobile parts may be added to the tariff schedule based on industry petitions and agency determinations.
Key Takeaways: Automobile Parts
1.
A 25% duty will apply to covered automobile parts—engines, transmissions, and electrical components—no later than May 3, 2025.
2.
USMCA-qualifying parts are temporarily exempt until Commerce and CBP establish a U.S. content-based valuation system.
3.
Additional automobile parts may be included under the tariff regime upon petition by domestic producers or industry groups.
4.
Importers should prepare for heightened CBP scrutiny on valuation and content origin, especially for complex supply chains involving USMCA-qualifying parts.
Stephanie Vélez contributed to this article
A Final Rule Bites the Dust: Federal Court Rules FDA Lacks Authority to Regulate LDTs
The order is in, and the LDT Final Rule is out.
In May 2024, the U.S. Food & Drug Administration (“FDA” or the “Agency”) published its Final Rule establishing its regulatory framework over laboratory developed tests (“LDTs”) as medical devices and, in effect, announced the end to decades of enforcement discretion by the Agency. The deadline to comply with the first phase of the Final Rule was set for May 6, 2025. On Monday, March 31, however, a federal judge in the U.S. Eastern District of Texas ordered that “FDA’s final rule exceeds its authority and is unlawful” and that “[t]herefore, consistent with controlling circuit precedent, the proper remedy is vacatur of the final rule and remand to FDA for further consideration in light of this opinion.”
Epstein Becker & Green’s Life Sciences Team is continuing to review and digest this order and its impact on the clinical lab industry, and we plan to release a more fulsome analysis in the coming days.
In the meantime, we draw stakeholders’ attention to a few key takeaways from the order—namely, the judge’s statement that (1) “the [federal Food, Drug, & Cosmetic Act]’s relevant text is unambiguous and cannot support FDA’s interpretation” and (2) “FDA’s asserted jurisdiction over laboratory-developed test services as ‘devices’ under the FDCA defies bedrock principles of statutory interpretation, common sense, and longstanding industry practice.”
These findings—along with other elements of the district court’s legal analysis—arguably leave little to no room for FDA to salvage its effort to regulate LDTs, absent either a successful appeal of the court’s order or congressional action.
Georgia Regulates Third Party Litigation Financing in Senate Bill 69
On February 27, 2025, by a vote of 52 to 0, the Georgia Senate passed Senate Bill 69, titled “Georgia Courts Access and Consumer Protection Act.”
If signed into law, the bill would regulate third-party litigation financing (“TPLF”) practices in Georgia where an individual or entity provides financing to a party to a lawsuit in exchange for a right to receive payment contingent on the lawsuit’s outcome. This bill represents another effort by states to restrain the influence of third-party litigation financiers and increase transparency in litigations.
Senate Bill 69 sets forth several key requirements. First, a person or entity engaging in litigation funding in Georgia must register as a litigation financier with the Department of Banking and Finance and provide specified information, including any affiliation with foreign persons or principals. Such filings are public records subject to disclosure.
Second, the bill restricts the influence of a litigation financier in actions or proceedings where the financier provided funding. For example, a litigation financier cannot direct or make decisions regarding legal representation, expert witnesses, litigation strategy, or settlement, which are reserved only for the parties and their counsel. A litigation financier also cannot pay commissions or referral fees in exchange for a referral of a consumer to the financier, or otherwise accept payment for providing goods or services to a consumer.
Third, the bill renders discoverable the existence, terms, and conditions of a litigation financing agreement in the underlying lawsuit. Although mere disclosure of information about a litigation financing agreement does not make such information automatically admissible as evidence at trial, it opens the door to that possibility.
Fourth, the bill delineates specific requirements for the form of a litigation financing agreement and mandates certain disclosures about the consumer’s rights and the financier’s obligations. A financier’s violation of the bill’s provisions voids and renders unenforceable the litigation financing agreement. Willful violations of the bill’s provisions may even lead to a felony conviction, imprisonment, and a fine of up to $10,000.
Fifth, the bill holds a litigation financier “jointly and severally liable for any award or order imposing or assessing costs or monetary sanctions against a consumer arising from or relating to” an action or proceeding funded by the financier.
According to a Senate press release, Senate President Pro Tempore John F. Kennedy, who sponsored the legislation, lauded the Senate’s passage of the bill as enhancing transparency and protection for consumers. He commented that “[Georgia’s] civil justice system should not be treated as a lottery where litigation financiers can bet on the outcome of a case to get a piece of a plaintiff’s award” and that “SB 69 establishes critical safeguards for an industry that continues to expand each year.” He further stressed the need to “level the playing field and ensure that [Georgia’s] legal system serves the people—not powerful financial interests.” Since passing the Senate, the bill has also proceeded through the House First and Second Readers.
Georgia’s proposed legislation is largely in line with recent proposed or enacted TPLF legislation in other states. In October 2024, the New Jersey Senate Commerce Committee advanced Senate Bill 1475, which similarly requires registration by a consumer legal funding company, restricts the actions and influence of a consumer legal funding company, and mandates certain disclosures in a consumer legal funding contract, among other things. Indiana and Louisiana also enacted TPLF legislation codified respectively at Ind. Code §§ 24-12-11-1 to -5 (2024), and La. Stat. Ann. §§ 9:3580.1 to -.7 and 9.3580.11 to .13 (2024). West Virginia expanded its TPLF laws by enacting legislation codified at W. Va. Code §§ 46A-6N-1, -4, -6, -7, and -9 (2024). But different from these legislations, Georgia’s proposed legislation explicitly provides for the possibility of felony consequences for willful violations of its provisions.
TPLF has also reverberated at the federal level. In October 2024, the United States Supreme Court’s Advisory Committee on Civil Rules reportedly proposed to create a subcommittee to examine TPLF. H.R. 9922, the Litigation Transparency Act of 2024, was also introduced in the United States House of Representatives that same month and would require disclosure of TPLF in civil actions.
But while some argue that TPLF regulation would bring greater transparency and reduce frivolous litigation, others protest that such regulation would harm litigants with less resources. Either way, litigants would be well-served to monitor important developments regarding TPLF at both the state and federal levels.
The Inspector General: A Primer on What Inspectors General Are, What They Do, and Why You Should Care [Podcast]
This first episode provides an overview of the role of federal Inspectors General and answers key questions, including:
Who appoints Inspectors General, and who can remove them?
What authorities do Inspectors General have, and what work do they do?
What are the differences between and among Inspector General investigations, audits and inspections?
What can prompt an Inspector General inquiry, and what happens following an inquiry?
Virginia Governor Vetoes AI Bill As States Struggle to Approve Regulations
Virginia Governor Glenn Youngkin vetoed an artificial intelligence (“AI”) bill on March 24 that would have regulated how employers used automation in the hiring process. While the veto relieves employers of a new layer of regulation, the bill represented one of several state-level efforts to prevent potential harmful uses of AI in the employment context.
The Virginia General Assembly passed the “High-Risk Artificial Intelligence Developer and Deployer Act” during the 2025 legislative session. The bill would have regulated both creators and users of AI technology across multiple use cases, including employment. It defined “high-risk artificial intelligence” to cover any AI systems intended to make autonomous consequential decisions, or serve as a substantial factor in making consequential decisions. As relevant to the employment context, “consequential decisions,” included decisions about “access to employment.”
The law would have required Virginia employers to implement safeguards to prevent potential harm from “high-risk” AI, including adopting a risk management policy and conducting an impact assessment for the use of the technology. It also would have required users of covered AI systems to disclose their use to affected consumers, including employment applicants. The bill called for enforcement by the Virginia Attorney General only, with designated civil penalties for violations and no private right of action. But it also specified that each violation would be treated separately, so it created the potential for significant penalties if, for example, an employer failed to disclose its use of AI to a large group of applicants, resulting in a $1,000 penalty for every applicant impacted.
Youngkin said he vetoed the bill because he feared it would undermine Virginia’s progress in attracting AI innovators to the Commonwealth, including thousands of new tech startups. He also said existing laws related to discrimination, privacy and data use already provided necessary consumer protections related to AI. Had the bill avoided the governor’s veto pen, Virginia would have joined Colorado as the first two states to approve comprehensive statutes specifically governing the use of AI in the employment context. The Colorado law, passed in 2024, will become effective on February 1, 2026 and has many similarities to the bill Youngkin vetoed, including requirements that users of high-risk AI technology exercise reasonable care to prevent algorithmic discrimination.
Other states have laws that touch on AI-related topics, but lack the level of detail and specificity contained in the Colorado law. In several more states, attempts to regulate the use of AI in the employment context are meeting similar fates to Virginia’s law. For example, Texas legislators recently abandoned efforts to pass an AI bill modelled after the Colorado legislation. Similar bills have failed or appear likely to fail in Georgia, Hawaii, Maryland, New Mexico and Vermont. And even in states with more employment-related regulations like Connecticut, Democratic Governor Ned Lamont has resisted efforts by lawmakers to push through AI regulations. The exception to the trend may be California, where legislators are continuing to pursue legislation – A.B. 1018 – that closely resembles both the Colorado and Virginia bills with even steeper penalties.
In all, states remain interested in regulation of emerging AI tools, but have yet to align on the best way to handle such regulation in the employment context. Still, employers should use caution when using automated tools or outsourcing decision-making to third parties that use such technology. Existing laws, including the Fair Credit Reporting Act and Title VII of the Civil Rights Act, still apply to these new technologies. And while momentum for new state-level AI regulation seems stalled, employers should monitor state level developments as similar proposed laws proceed through state legislatures.
The Legal Ramifications of Dog Bites: Understanding Dog Owner Liability
Dog bites can lead to severe physical and emotional consequences for victims. Understanding the legal implications surrounding dog bites is essential for pet owners and the community. This blog will discuss the basics of dog owner liability and break down the factors that influence legal responsibility.
Understanding Dog Owner Liability
When a dog bites someone, the owner may be held legally responsible for the injuries caused. This liability generally falls under two primary legal frameworks: negligence and strict liability. Each has criteria and implications for both dog owners and victims.
1. Negligence
A dog owner can be held liable if it can be proven that they failed to exercise reasonable care in controlling or supervising their dog. Key factors to consider are:
Knowledge of Aggression: If the owner was aware (or should have been aware) of their dog’s aggressive tendencies but failed to take proper safety precautions, they may be held negligent. For instance, if a dog has previously bitten someone or shown aggressive behavior, the owner should take extra measures to prevent future incidents.
Proper Containment: Owners are expected to secure their dogs within appropriate boundaries, such as fenced yards or leashed walks. Failure to do so can result in liability if the dog escapes and bites someone.
Training and Socialization: Owners have a responsibility to train their dogs and make sure they are well-socialized. An untrained dog that attacks a person tends to reflect negligent ownership.
2. Strict Liability
In some jurisdictions, dog owners can be held liable for bites under the principle of strict liability, regardless of whether the owner was negligent. This means that if a dog bites someone, the owner is automatically responsible for the resulting injuries. Strict liability typically applies if:
The Bite Occurred in a Public Place: If a dog attacks a person who is legally in a public space, the owner may be held liable.
The Victim Was Not Trespassing: If the victim was on private property with permission or in a public area, the owner may face strict liability, even if they took reasonable precautions.
3. Breed-Specific Laws
Certain states have breed-specific laws that impose stricter liability on owners of certain dog breeds known for aggression. These laws can influence how liability is assessed and may result in increased legal consequences for owners of those breeds.
Defenses Against Liability
Dog owners may have several defenses against liability claims, including:
Provocation: If the dog was provoked or threatened by the victim, the owner can argue that the bite was a response.
Trespassing: If the victim was unlawfully on the owner’s property, this could also be a valid defense in some jurisdictions.
Assumption of Risk: If the victim knew of the dog’s aggressive nature and chose to approach or interact with the dog anyway, the owner may use this defense.
Conclusion
Understanding dog owner liability is essential for anyone who owns or interacts with dogs. The consequences of a dog bite can be significant, not only for the victim but also for the owner. By being informed and taking responsible measures, like proper training and following local laws, dog owners can help prevent incidents.
If you or someone you know has been involved in a dog bite incident, it’s important to reach out to a legal professional as soon as possible.
ESG Update: Corporate Directors May Be Obligated to Assess Political Risk
Right now, much about the world is uncertain. Risks posed by political changes dominate the headlines and also weigh heavily on many decisions made by corporations, their advisors, and their stakeholders.
Businesses, of course, want to succeed even in chaotic environments. Success requires appropriate planning, and planning can help lead to predictability. Good corporate governance — making sure directors have appropriate information to timely assess compliance with legal obligations and fulfill duties they owe to the business, its employees, and stakeholders — can help mitigate downside impacts to businesses.
Delaware law obligates corporate directors to, among other things, take steps sufficient to assess corporate legal compliance. What has come to be known as “Caremark liability” attaches when directors fail to adequately oversee the company’s operations and compliance with the law. Below we frame out what Caremark liability is, how it applies to evaluating a politically uncertain environment, and outline six steps companies can take to appropriately manage risk.
Caremark Liability Defined
Caremark liability takes its name from the 1996 decision In re Caremark International Inc. Derivative Litigation, which established that directors of a Delaware corporation have a duty to ensure that appropriate information and reporting systems are in place within the corporation.
Caremark stems from an action where shareholders of Caremark International alleged that they were injured when Caremark employees violated various federal and state laws applicable to health care providers, resulting in a federal mail fraud charge against the company. In a subsequent plea agreement, Caremark agreed to reimburse various parties approximately $250 million. Caremark shareholders filed a derivative action against the company’s directors alleging that the directors breached their duty of care to shareholders by failing to actively monitor corporate performance.
Key points of Caremark liability under Delaware law include:
Duty of Oversight: Directors must make a good faith effort to oversee the company’s operations and ensure compliance with applicable laws and regulations.
Establishing Systems: Directors are expected to implement and monitor systems that provide timely and accurate information about the corporation’s compliance with legal obligations.
Breach of Duty: To establish a breach of Caremark duties, plaintiffs must show that directors either utterly failed to implement any reporting or information system or controls, or, having implemented such a system, consciously failed to monitor or oversee its operations.
High Threshold for Liability: Proving a breach of Caremark duties requires evidence of bad faith or a conscious disregard by directors of their duties.
Good Faith Effort: Directors are generally protected if they can demonstrate that they made a good faith effort to fulfill their oversight responsibilities, even if the systems in place were not perfect.
Caremark liability emphasizes the importance of proactive and diligent oversight by directors to prevent corporate misconduct and to demonstrate that directors are acting in good faith. Cases following Caremark emphasize that liability only attaches when directors disregard their obligations to companies, not when their business decisions result in “unexceptional financial struggles.”
Caremark claims remain difficult to plead but remain viable and, therefore, may lead to significant defense costs.
Is Caremark “ESG litigation”?
Yes. Since the November 2024 election, discussions of environmental, social, and governance (ESG) activities have been commonplace, with discussions of whether corporations should walk back prior commitments dominating the headlines. Caremark claims are distinct from claims frequently lumped together as “ESG litigation.” These “ESG litigation” claims typically involve either “greenwashing”-style product marketing claims (for examples, see here and here) or claims that investment managers, by factoring in ESG investment criteria, deprived investors of appropriate returns (two recent decisions are here and here). Caremark focuses on the “G” in ESG; it speaks directly to corporate governance and directors’ duties to monitor and oversee in good faith a corporation’s compliance with laws.
While the nomenclature of corporate governance may be shifting away from “ESG,” corporate officers remain obligated to oversee corporate operations and ensure compliance with the law. Caremark claims can be used to assess their efforts.
Corporate Governance and Political Risk
Political uncertainty in the United States is affecting regulated entities ranging from Fortune 100 corporations to law firms and from mom-and-pop importers to universities. Recent US Supreme Court decisions including Trump v. United States and Loper Bright v. Raimondo have fundamentally reshaped relations both between the branches of government and between the government and the regulated community.
Over time, members of the regulated community have increasingly faced pressure not just to comply with the law but also to take positions on political issues outside their immediate economic environment. While corporations may have systems in place to monitor risk incident to product liability or supply chain issues, they may not be monitoring risks related to the whipsawing of political positions on issues such as diversity, equity, and inclusion (DEI), the challenges posed by a dramatically slimmed (and thus less responsive) bureaucracy, or recissions of expected government funding.
These political issues can generate corporate risk. Good corporate governance practices can help cabin new corporate risks, thereby minimizing the potential for financial impacts on the corporation. Practices which could be evaluated include:
Ensure appropriate data-gathering and compilation. Political policies do not arise in a vacuum. Internal and external policy advisors, trade associations, and business contacts can help track potential political risks.
Review and assess policy positions and evaluate whether they continue to be appropriate on a regular basis. At the federal level, we have seen DEI-related activities move from being universally lauded to potential reasons for imposition of federal civil or criminal liability. Executive Order 14173, issued on January 21, directed the US Attorney General to develop an enforcement plan to target private sector DEI programs believed to be unlawful. Actions like designating corporate personnel tasked with understanding points of emphasis in government enforcement and mapping them across a corporate footprint may be appropriate.
Evaluate what corporate efforts are appropriate to use in marketing efforts in the current political environment. Recent years have seen sustainability reports become key tools to influence stakeholders ranging from consumers to employees. Businesses which previously leaned into social issues or community involvement in the ESG-era may want to deemphasize aspirational goals and/or provide additional data on their factual conclusions, practices, and achievements.
Review and assess places where rollbacks in federal, state, or local government spending could impact the viability of business operations. Investments reliant on federal grants or subsidies need to be reviewed.
Review corporate compliance programs in light of federal priorities. The US Department of Justice has listed initial federal compliance priorities including terrorism financing, money laundering, and international restraints on trade. As above, taking a systematic approach to understanding and evaluating points where corporate activities could be impacted by enforcement priorities may be appropriate.
Finally, the regulated community should conduct a thorough census of regulations or statutory laws that have the potential to negatively impact corporate operations. They should assess whether any impediments can be addressed through a forward-looking government relations strategy, especially given current efforts to streamline regulations and government operations, particularly related to environmental and energy issues. (For more, see here and here.)
When directors fail to consider and weigh political factors and shifts in governmental initiatives and program enforcement such as those listed above, stakeholders may ask why the board made no effort to make sure it was informed about an issue so intrinsically critical to the company’s business operation.
Maine Board of Environmental Protection Will Consider Proposed PFAS Rule at Its April 7, 2025, Meeting
The Maine Board of Environmental Protection (MBEP) will consider the Maine Department of Environmental Protection’s (MDEP) December 2024 proposed rule regarding products containing per- and polyfluoroalkyl substances (PFAS) during its April 7, 2025, meeting. As reported in our December 31, 2024, memorandum, on December 20, 2024, MDEP published a proposed rule that would establish criteria for currently unavoidable uses (CUU) of intentionally added PFAS in products and implement sales prohibitions and notification requirements for products containing intentionally added PFAS but determined to be a CUU. MBEP’s meeting agenda includes links to the following new documents:
Staff memo: According to the staff memo, MDEP received and reviewed 57 comments on its December 2024 proposed rule, totaling 419 pages. Based on comments received, MDEP amended the draft rule to correct typos, eliminate superfluous language, and add clarifying language. MDEP notes that “[n]one of these changes are significant”;
Chapter 90 proposed rule mark-up;
Chapter 90 proposed rule clean;
Chapter 90 written comments received; and
Chapter 90 draft basis statement and response to comments.
According to the meeting agenda, MBEP will accept and consider additional oral public comment on the proposed rule at its April 7, 2025, meeting, “only if the additional public comment is directly related to comments received during the formal rulemaking comment period or is in response to changes to the proposed rule.”
FDA Can’t Stop, Won’t Stop – Navigating the New Administration [Podcast]
In this episode of Food & Chemicals Unpacked, we dive into the current adjustments experienced at the U.S. Food and Drug Administration (FDA) so far under the Trump administration. Keller and Heckman Partner George Misko joins us to discuss the future of food safety regulations, including the downsizing of HHS under Secretary Robert F. Kennedy Jr., potential changes to the GRAS process, and FDA’s ongoing post-market review program.