SEC Whistleblower Reform Act Reintroduced in Congress
Last Wednesday, March 26, 2025, Senator Grassley (R-IA) and Senator Warren (D-MA) reintroduced the SEC Whistleblower Reform Act. First introduced in 2023, this bipartisan bill aims to restore anti-retaliation protections to whistleblowers who report their concerns within their companies. As upheavals at government agencies dominate the news cycle, whistleblowers might feel discouraged and hesitant about the risks of coming forward to report violations of federal law. This SEC Whistleblower Reform Act would expand protections for these individuals who speak up, and it would implement other changes to bolster the resoundingly successful SEC Whistleblower Program.
The SEC Whistleblower Incentive Program
The SEC Whistleblower Incentive Program (the “Program”) went into effect on July 21, 2010, with the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The Program has since become an essential tool in the enforcement of securities laws. The program benefits the government, which collects fines from the companies found in violation of federal securities laws; consumers, who benefit from the improvements companies must make to ensure they refrain from, and stop, violating federal law; and the whistleblowers themselves, who can receive awards for the information and assistance they provide. Since its inception, the SEC Whistleblower Program has recouped over $6.3 billion in sanctions, and it has awarded $2.2 billion to 444 individual whistleblowers. In FY 2024 alone, the Commission awarded over $255 million to forty-seven individual whistleblowers.
Under the Program, an individual who voluntarily provides information to the SEC regarding violations of any securities laws that leads to a successful civil enforcement action that results in over $1 million in monetary sanctions is eligible to receive an award of 10–30% of the fines collected. Since the SEC started accepting tips under its whistleblower incentive program in 2010, apart from a dip in 2019, the number of tips submitted to the SEC has steadily increased. In Fiscal Year 2024, the SEC received more than 24,000 whistleblower tips, the most ever received in one year.
Restoring Protections for Internal Whistleblowers
While the SEC Whistleblower Program has been successful by any measure, in 2018, the Supreme Court significantly weakened the Program’s whistleblower protections in Digital Realty Trust v. Somers, 583 U.S. 149 (2018). The Court ruled in Digital Realty that the Dodd-Frank Act’s anti-retaliation protections do not apply to whistleblowers who only report their concerns about securities violations internally, but not directly to the SEC. The decision nullified one of the rules the SEC had adopted in implementing the Program. Because many whistleblowers first report their concerns to supervisors or through internal compliance reporting programs, this has been immensely consequential. The decision has denied a large swath of whistleblowers the protections and remedies of the Dodd-Frank Act, including double backpay, a six-year statute of limitations, and the ability to proceed directly to court.
The bipartisan SEC Whistleblower Reform Act, reintroduced by Senators Grassley and Warren on March 26, 2025, restores the Dodd-Frank Act’s anti-retaliation protections for internal whistleblowers. In particular, the Act expands the definition of “whistleblower” to include:
[A]ny individual who takes, or 2 or more individuals acting jointly who take, an action described . . . , that the individual or 2 or more individuals reasonably believe relates to a violation of any law, rule, or regulation subject to the jurisdiction of the Commission . . . .
. . .
(iv) in providing information regarding any conduct that the whistleblower reasonably believes constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the Commission to—
(I) a person with supervisory authority over the whistleblower at the employer of the whistleblower, if that employer is an entity registered with, or required to be registered with, or otherwise subject to the jurisdiction of, the Commission . . . ; or
(II) another individual working for the employer described in subclause (I) who the whistleblower reasonably believes has the authority to—
(aa) investigate, discover, or terminate the misconduct; or
(bb) take any other action to address the misconduct.
With these changes to the definition of a “whistleblower,” the Act would codify the Program’s anti-retaliation protections for an employee who blows the whistle by reporting only to their employer, and not also to the SEC. Notably, the Act would apply not only to claims filed after the date of enactment, but also to all claims pending in any judicial or administrative forum as of the date of the enactment.
Ending Pre-Dispute Arbitration Agreements for Dodd-Frank Retaliation Claims
Additionally, the SEC Whistleblower Reform Act would render unenforceable any pre-dispute arbitration agreement or any other agreement or condition of employment that waives any rights or remedies provided by the Act and clarifies that claims under the Act are not arbitrable. In other words, retaliation claims under the Dodd-Frank Act must be brought before a court of law and may not be arbitrated, even if an employee signed an arbitration agreement. This would bring Dodd-Frank Act claims into alignment with the Sarbanes-Oxley Act of 2002 (“SOX”), another anti-retaliation protection often applicable to corporate whistleblowers. While the Dodd-Frank Act eliminated pre-dispute arbitration agreements for SOX claims, it included no such arbitration ban for Dodd-Frank claims. As a result, two claims arising from the same underlying conduct often need to be brought in separate forums—arbitration for Dodd-Frank and court for SOX—or an employee must choose between the two remedies.
Reducing Delays in the Program
The SEC Whistleblower Reform Act would also benefit whistleblowers by addressing the long delays that have plagued the Program, which firm partners Debra Katz and Michael Filoromo have urged the SEC to remedy and have written publicly on to raise awareness on this topic In particular, the Act sets deadlines by which the Commission must take certain steps in the whistleblowing process. The Act provides that:
(A)(i) . . . the Commission shall make an initial disposition with respect to a claim submitted by a whistleblower for an award under this section . . . not later than the later of—
(I) the date that is 1 year after the deadline established by the Commission, by rule, for the whistleblower to file the award claim; or
(II) the date that is 1 year after the final resolution of all litigation, including any appeals, concerning the covered action or related action.
These changes are important because SEC whistleblowers currently might expect to wait several years for an initial disposition by the SEC after submitting an award application, and years more for any appeals of the SEC’s decision to conclude. The Act’s amendments set clearer deadlines and expectations for the Commission and would speed up its disposition timeline—and the provision of awards to deserving whistleblowers.
While the Act does provide for exceptions to the new deadline requirements, including detailing the circumstances under which the Commission may extend the deadlines, the Act specifies that the initial extension may only be for 180 days. Any further extension beyond 180 days must meet specified requirements: the Director of the Division of Enforcement of the Commission must determine that “good cause exists” such that the Commission cannot reasonably meet the deadlines, and only then may the Director extend the deadline by one or more additional successive 180-day periods, “only after providing notice to and receiving approval from the Commission.” If such extensions are sought and received, the Act provides that the Director must provide the whistleblower written notification of such extensions.
Conclusion
The SEC Whistleblower Reform Act, which would reinstate anti-retaliation protections for whistleblowers and ensure that the Program runs more efficiently, would be a significant step forward for the enforcement of federal securities laws and for the whistleblowers who play a vital role in those efforts. The bipartisan introduction of the Act is a testament to the crucial nature of the Program.
SEC Ends Defense of Climate Disclosure Rules
In March of 2024, we reported on the US Securities and Exchange Commission’s adoption of a comprehensive set of rules governing climate-related disclosures. The rules would require public companies to disclose climate-related risks, including their impact on financial performance, operations, and strategies, along with greenhouse gas emissions data, governance structures and efforts to mitigate climate impacts. To no one’s surprise, the adopted rules were met with a flurry of court challenges from states and private parties, which led the SEC to issue a stay of the rules pending resolution of the litigation.
Also unsurprisingly, on March 27, 2025, the SEC, under the new administration, voted to end its defense of the climate-related disclosure rules in court. SEC Acting Chairman Mark T. Uyeda stated, “The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”
The SEC’s decision to end its defense of the rules very likely means that companies will never be required to comply with the rules. Despite this decision, however, the rules will remain in effect until a court rules them invalid or the SEC rescinds them through the rulemaking process (although the stay remains in effect for now). For that reason, there is currently some uncertainty regarding the rules’ future, and we will continue to follow developments. But, in any case, given the SEC’s recent statements, it seems unlikely that the SEC and its staff would seek to enforce compliance with the rules while they remain in effect.
Although it probably is safe for public companies to assume that they do not need to continue planning for compliance with the climate-related disclosure rules adopted in 2024, companies should remember that climate-related disclosures may be required under other SEC rules and guidance and, in certain cases, climate disclosure requirements of states or non-US jurisdictions. In particular, the SEC’s 2010 guidance on climate-related disclosures remains in effect, requiring public companies to report the impact of climate change on their financial performance, operations, and risks, particularly when such factors are material. While it remains unclear to what extent the SEC under the current administration will enforce, or perhaps even revise, this guidance, companies would be well-advised to be consistent with their climate-related disclosures from period to period.
Additionally, companies may still be required to disclose climate-related risks and greenhouse gas emissions in other jurisdictions, such as California or the European Union, where climate-related disclosure rules are already in place. Other states are also considering similar regulations, potentially expanding the scope of companies subject to such disclosure requirements. Notwithstanding the SEC’s recent action, climate-related disclosures appear to be here to stay.
Can An Employer Require Employees To Invest In The Business?
Employee stock bonus, stock purchase, and stock option plans are extremely common. Most employees and prospective employees are undoubtedly happy to receive these types of equity compensation awards, but can an employer require an employee to invest in the employer’s business. The California Labor Code provides:
Investments and the sale of stock or an interest in a business in connection with the securing of a position are illegal as against the public policy of the State and shall not be advertised or held out in any way as a part of the consideration for any employment.
Cal. Lab. Code § 407. This would seem to be a problem.
Fortunately, Section 408(c) of the Corporations Code provides:
Sections 406 and 407 of the Labor Code shall not apply to shares issued by any foreign or domestic corporation to the following persons:
(1) Any employee of the corporation or of any parent or subsidiary thereof, pursuant to a stock purchase plan or agreement or stock option plan or agreement provided for in subdivision (a).
(2) In any transaction in connection with securing employment, to a person who is or is about to become an officer of the corporation or of any parent or subsidiary thereof.
A similar provision was added in 2015 with respect to domestic and foreign limited liability companies. Cal. Corp. Code § 17704.01(e).
This does not mean that corporations and LLCs are out of the woods in every case in which it is alleged that the employee was forced to invest. In Hulse v. Neustar, Inc., 2019 WL 13102321 (S.D. Cal. Dec. 18, 2019), the court denied the defendant’s motion for judgment on the pleadings because the plaintiff alleged that the defendant required the plaintiff to participate in an equity rollover that was separate and apart from the terms of the initial stock option plans pursuant to which the plaintiff acquired his equity.
Disability Discrimination Charges Involving Neurodivergence Are Rising, According to EEOC Data
As diagnoses of neurodiversity become more common, employers are facing more disability discrimination complaints from neurodivergent workers, according to recent data from the U.S. Equal Employment Opportunity Commission (EEOC).
Quick Hits
EEOC data shows a rise in disability discrimination charges related to neurodiversity in recent years.
The federal Americans with Disabilities Act (ADA) covers certain conditions associated with neurodivergence.
It is unlawful to discriminate, harass, or retaliate against workers with disabilities related to neurodivergence.
Neurodiversity generally refers to medical conditions that cause the brain to function differently than the typical pattern. These conditions include autism, attention-deficit hyperactivity disorder (ADHD), dyslexia, sensory processing disorder, and Tourette’s syndrome. In many cases, people with those conditions meet the ADA definition of disability. The ADA covers physical and mental impairments that substantially impair a major life activity, such as sleeping, eating, speaking, and reading.
EEOC merit resolutions related to autism more than doubled from 0.4 percent of total merit resolutions in 2016 to 1.5 percent of total merit resolutions in 2023. Likewise, merit resolutions related to “other neurological impairments” accounted for 4.2 percent of total merit resolutions in 2023, up from 3.2 percent in 2016.
The increase in EEOC charges may reflect societal trends as Americans became more aware of neurodiversity, and more children and adults received diagnoses related to neurodiversity in recent years.
About 11 percent of U.S. children aged three to seventeen years had ever been diagnosed with ADHD in 2022, up from 8 percent in 2008, according to the U.S. Centers for Disease Control and Prevention (CDC). The percentage of children diagnosed with autism more than quadrupled from 0.006 percent in 2000 to 0.028 percent in 2020, according to the CDC.
A variety of reasonable accommodations could be helpful for a neurodivergent worker, depending on the symptoms, the severity of the condition, and the type of job. Employers can use the interactive process to identify accommodations that would be suitable for the individual without being an undue hardship for the employer.
If an employee has an ADA-qualified disability involving neurodivergence, it is illegal to discriminate or harass that employee because of the employee’s condition. It is also unlawful to retaliate against that employee for reporting an ADA violation.
10 Tips for Accommodating Employees With Autism
Employers may wish to review their written policies and practices to ensure that they are adequate to prevent discrimination, harassment, and retaliation against workers who have an ADA-qualified disability related to neurodivergence.
Regarding employees with autism, employers can consider a variety of reasonable accommodations, depending on the individual needs and the nature of the job. Here are ten possibilities to consider:
1. Flexible Work Schedules: Allowing adjustments to start/end times or offering part-time options can help reduce stress and accommodate sensory or routine preferences.
2. Quiet Workspaces: Providing a low-noise area, noise-canceling headphones, or a private office can minimize sensory overload.
3. Clear Communication: Offering written instructions, checklists, or visual aids alongside verbal directions can improve understanding and task completion.
4. Structured Environment: Maintaining consistent routines, predictable schedules, and advance notice of changes can help reduce anxiety.
5. Sensory Adjustments: Modifying lighting (e.g., reducing fluorescent lights), allowing comfortable clothing, or minimizing strong odors can address sensory sensitivities.
6. Job Coaching or Mentorship: Assigning a supportive supervisor or peer to provide guidance and feedback can help employees learn job tasks and workplace norms.
7. Breaks as Needed: Permitting short, scheduled breaks to recharge can help manage fatigue or prevent becoming overwhelmed.
8. Task Modification: Breaking tasks into smaller steps, focusing on strengths (e.g., detail-oriented work), or adjusting nonessential duties can enhance productivity.
9. Assistive Technology: Tools like speech-to-text software, organizational apps, or timers can support focus and communication.
10. Social Support: Offering training for coworkers on autism awareness or excusing noncritical social events can ease interpersonal pressures.
Momentum on Voting on the Omnibus Delay and Updating Corporate Sustainability Reporting Requirements
Vote to delay
On 1 April 2025, the European Parliament approved the “urgent procedure” with regards to the “Omnibus” package of proposals to streamline corporate sustainability requirements.
The next step to vote on the “stop-the-clock” proposal will take place on 3 April 2025.
The approval of the urgent procedure of the Omnibus passed with a comfortable majority, but the division among political groups remains evident. If the stop-the-clock proposal is approved on 3 April 2025, co-legislators, being the European Parliament and the Council of the European Union, will begin negotiations to finalize the legal text.
Movement on substantive requirements
On 28 March 2025, Maria Luís Albuquerque, the European Commissioner for Financial Services and the Savings and Investments Union, sent a letter to the EFRAG Sustainability Reporting Board (EFRAG SRB) outlining the European Commission’s mandate for simplifying the first set of European Sustainability Reporting Standards (ESRS), which are the standards followed for Corporate Sustainability Reporting (CSRD). Commissioner Albuquerque emphasized the urgency of implementing these simplifications, highlighting their significance in the current geopolitical and economic context.
In response to this mandate, EFRAG has committed to a fast-track process aimed at substantially reducing mandatory data points and easing the practical application of the ESRS. The key dates are:
15 April 2025: EFRAG will inform the European Commission of its internal timeline to simplify the ESRS; and
31 October 2025: EFRAG has been tasked by the European Commission to provide its technical advice by this date so that the European Commission has time to adopt legislation in time for “companies to apply the revised standards for reporting covering financial year 2027, potentially with an option to apply the revised standards for reporting covering financial year 2026 if companies wish so”.
On this basis, it appears that the European Commission plans to adopt the revised and streamlined ESRS before the end of 2026, and that companies in the first wave of reporting would have the option to utilise the new ESRS should they wish to do so.
Another Court Partly Blocks DEI-Related Executive Orders; U.S. Government Continues to Stay Its Course
On Thursday, March 26, 2025, a federal judge for the Northern District of Illinois issued a Temporary Restraining Order (TRO) prohibiting enforcement of portions of Executive Order 14151 (“the J20 EO”) and Executive Order 14173 (“the J21 EO”), two of President Trump’s first directives seeking to eliminate Diversity, Equity, and Inclusion (DEI), previously explained here.
This order has implications for federal contractors and grant recipients nationwide, at least for now.
The Case
The case, Chicago Women in Trades v. Trump et. al., was brought by a Chicago-based association, Chicago Women in Trades (CWIT), that advocates for women with careers in construction industry trades. Federal funding has constituted forty percent of CWIT’s budget. After the issuance of the J20 and J21 EOs, CWIT received an email from the U.S. Department of Labor’s (DOL) Women’s Bureau stating that recipients of financial assistance were “directed to cease all activities related to ‘diversity, equity and inclusion’ (DEI) or ‘diversity, equity, inclusion and accessibility’ (DEIA).” Similarly, one of its subcontractors emailed CWIT to immediately pause all activities directly tied to its federally funded work related to DEI or DEIA. CWIT brought the action against President Trump, the DOL, and other agencies alleging, among other things, that its Constitutional rights were violated by various provisions in both EOs. For example, CWIT argued that the J20 EO targeted “DEI,” “DEIA,” “environmental justice,” “equity,” and “equity action plans” without defining any such terms. This lack of definition, according to CWIT, makes it difficult to understand what conduct is permissible and what is not.
Contractor “No DEI” Certifications Blocked
The ruling enjoins the DOL and, by extension, its Office of Federal Contract Compliance Programs (OFCCP) from enforcing two discrete portions of the Executive Orders: (1) Section 2(b)(i) of the J20 EO (the “Termination Provision”), authorizing the agency to terminate a government contract or grant based on the awardee’s alleged DEI-related activities; and (2) Section 3(b)(iv) of the J21 EO (the “Certification Provision”), requiring federal contractors and grant recipients to certify that they do not operate any program promoting unlawful DEI. A Memorandum Opinion and Order accompanying the TRO emphasizes that its ruling constrains only one agency, at least for now.
The injunction against the Termination Provision is also narrow in that it applies only to the plaintiff, CWIT. Specifically, the TRO blocks the DOL from taking any adverse action related to any contracts with the plaintiff. The TRO further forbids the federal government from initiating any enforcement action under the False Claims Act against the plaintiff. Nevertheless, the TRO does carry nationwide implications, in that it prohibits the DOL from requiring any contractor or grantee to make any certification or other representation pursuant to the terms of the J21 EO’s Certification Provision.
Other Initiatives to Curb DEI Continue
Despite judicial opinions criticizing the EOs, most notably in a case currently under review by the U.S. Court of Appeals for the Fourth Circuit, governmental agencies continue to move forward with actions supportive of the EOs, and enforcement against public and private entities for DEI initiatives or other practices. For example:
On March 19th, the U.S. Equal Employment Opportunity Commission and the U.S. Department of Justice (DOJ) issued multiple documents explaining the administration’s view of DEI as a form of workplace discrimination.
On March 26th, the DOJ issued a Memorandum to all U.S. law schools regarding race-based preferences in admissions and employment decisions.
On March 27th, two agencies issued press releases announcing investigations: the U.S. Department of Health and Human Services announced action against an unnamed “major medical school in California,” and the DOJ issued a press release stating that it is looking into whether four major universities in California use “DEI discrimination” in their admissions practices. The DOJ announcement concludes that “compliance investigations into these universities are just the beginning of the Department’s work in eradicating illegal DEI and protecting equality under the law.”
On March 28th, the administration made headlines across Europe after two French newspapers published the template of a letter and accompanying form sent by the U.S. Department of State to companies in France, Belgium, Italy, and other European Union nations that do business with the federal government, demanding compliance with the J21 EO and requesting completion of a form to certify “compliance in all respects with all applicable federal anti-discrimination law…” and that the contractor does not “operate any programs promoting Diversity, Equity, and Inclusion that violate any applicable Federal anti-discrimination laws.”
What’s Next?
The court will consider further injunctive relief in the coming weeks, and may convert the TRO into a preliminary injunction after a hearing scheduled for April 10, 2025. At present, at least a dozen lawsuits have been filed challenging the Executive Orders regarding DEI, while Executive Branch agencies continue to pursue enforcement activities aligned with the EOs and administration policy.
We Never Know How High We Are Until We Are Called to Rise: Protecting Alabama’s Medical Cannabis Program
There’s a great scene in the movie Wall Street when the up-and-coming Charlie Sheen (pre-Tiger Blood and now that I think about it maybe the precursor to the “winning!” mantra that seems to resonate today) is playing the role of Bud Fox, an eager trader looking to land a job with the biggest whale of them all, Gordon Gecko (played perhaps only as peak Michael Douglas could). Right before his one and only shot at impressing Gecko, Bud looks into the mirror, straightens his tie, fixes his hair, and says “life comes down to a few moments; this is one of them.”
At the risk of being slightly melodramatic, I’m reminded of that scene when I take stock of Alabama’s medical cannabis program as it sits at the intersection of a narrowing legislative window and a judicial proceeding on the brink of success (or failure).
A brief recap of where we stand at this moment. First, on the court side:
Earlier this month, the Alabama Court of Civil Appeals ruled that the Montgomery County Circuit Court lacked jurisdiction to hear the complaints of Alabama Always – an applicant for a medical cannabis license that has not been awarded a license during any of the three rounds of awards – because Alabama Always (and, presumably by extension, any other disappointed applicant for an integrated facility license) had not exhausted its administrative remedies before filing suit. As a result, the Alabama Court of Civil Appeals instructed the circuit court to lift the injunction prohibiting the AMCC from issuing integrated licenses.
And to the Legislature, we recently wrote:
As has become an annual tradition as the medical cannabis program has been in existence, there are a number of proposals currently pending in the Legislature that purport to fix what ails the program.
Sen. Tim Melson has introduced a substitute to Senate Bill 72. As a reminder, the original version of SB72 would have, in relevant part: (1) expanded the total number of integrated licenses from five to seven; (2) shifted the authority of issuing licenses from the AMCC to a consultant; and (3) shielded the decision from any judicial review. And, just as important, licenses wouldn’t be issued until well into 2026, assuming there was no litigation – an assumption I defy any serious person to tell me with a straight face is valid.
After unanimous public disapproval of the proposal, Sen. Melson introduced a substitute bill that would change the agencies tasked with appointing the consultant and would allow for the Alabama Court of Civil Appeals to review the award of licenses if the award was arbitrary or capricious or constituted a gross abuse of discretion. It would also move up the time to issue licenses, but it would still be in 2026, again assuming no lawsuits. While the substitute is a small step in the right direction and an acknowledgment of the flaws in the original bill, I still do not see it as the right path forward.
And here’s why: I reject that Alabama’s medical cannabis program requires a “legislative fix.” I believe that the original medical cannabis law, passed four years ago, isn’t broken.
In light of the Court of Civil Appeals’ decision, we may be mere months away from issuing licenses to dispensaries and integrated facilities.
Once a single dispensary license is issued, Alabama doctors can begin obtaining certifications to qualify patients for medical cannabis and Alabamians with qualifying conditions can begin to obtain medical cannabis cards. So, if you believe that the appellate court offers a path forward that may allow medical cannabis in 2025, why would you press for a bill that would ensure that it isn’t? Put simply, if it ain’t broke, don’t legislatively “fix” it.
Loyal readers of Budding Trends will recall that multiple proposals were voted out of the same committee last legislative session and did not become law. They will also recall that it took more than one legislative session to pass a medical cannabis law in the first place. Is past prologue or is this another example of reform taking time?
Sometimes the hardest course of correct action is inaction. I don’t blame anyone who looks around at Alabama’s medical cannabis landscape and thinks that something (anything) has to be done to fix what they see as a broken program. But I think they are wrong.
I believe that any efforts to engage in any sort of purported compromise legislation, no matter how well-intentioned those proposals may be, is doing a disservice to all applicants and the patients seeking access to medical cannabis in Alabama. The reasoning is simple: If both sides propose legislative changes, then both sides are at least implicitly agreeing that something needs to be done by the Legislature. I reject that premise. I think we are currently on the precipice of launching a medical cannabis program. The appellate courts appear unwilling to abide any further delays from the lower court, and investigative hearings should begin soon. That would allow for the possibility of all licenses being issued in 2025, when the so-called legislative fixes being proposed push us into 2026 at the earliest. Hold the line. Stay the course. And let’s get this program launched. Onward. Forward.
As always, thanks for stopping by.
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No Ultimatums: New York State Lawmakers Contemplate New Mandatory Provisions for Severance Agreements
On March 4, 2025, the New York Senate passed Senate Bill S372 (the “No Severance Ultimatums Act” or “S372”).
If enacted, S372 would add a new section to the New York Labor Law requiring New York employers to provide for a 21-business day review period and a seven-day revocation period in all severance agreements. Currently, similar protections are afforded to employees who are over the age of 40 pursuant to the Older Workers Benefit Protection Act (OWBPA), which amends the Age Discrimination in Employment Act (ADEA). Similar protections are also available to New York employees who enter into agreements settling claims of discrimination, harassment, or retaliation, but only if the agreement contains a non-disclosure provision relating to those claims.
Specific Requirements Under Consideration
Under the terms of S372, any severance agreement offered to an employee or former employee will need to:
contain a notice advising the employee of their right to consult an attorney regarding the agreement;
provide at least 21 business days for review of the agreement; and,
acknowledge a seven-day period within which the employee may revoke the agreement.
The intent of the proposed law, as stated in the bill’s Sponsor Memo, is to extend the protections afforded by the OWBPA to all employees in New York, regardless of their age. However, there are a few notable differences: the review period proposed by S372 (21 business days) exceeds the duration required under the OWBPA (21 calendar days). Further, S372 would apply to all employees in New York State, even those working for small employers. The ADEA applies only to employers with 20 or more employees.
If enacted, S372 would permit employees to sign a severance agreement prior to the conclusion of the “revocation period”, provided that the decision to do so is made knowingly and voluntarily, and not induced by the employer through fraud, misrepresentation, by threat, or by incentivizing earlier signature by offering different terms. (We believe that the reference to the “revocation period” here is a misnomer and is intended to mean the 21-day review period, since the true revocation period begins after an employee signs an agreement.) However, no signed agreement will be effective or enforceable until the mandatory seven-day revocation period has expired.
Notably, although S372 would apply to the government workforce as well as private employers, it would not apply to severance agreements negotiated pursuant to a collective bargaining agreement.
When Would the No Severance Ultimatums Act Take Effect?
After the state Senate passed S372, it was delivered to the Assembly and referred to its Labor Committee. If approved by the lower house and signed by Governor Hochul, the bill’s provisions would take effect immediately. Thereafter, any severance agreement that does not comply with S372 will be deemed void and unenforceable. It is unclear whether the law would have any retroactive effect on existing agreements, particularly those executed in the weeks just prior to the law’s effective date.
For now, S372 is not yet law, and the legislation may be modified as it undergoes committee review in the Assembly. We will monitor the progress of this bill. If it is enacted, we’ll be prepared to revise your template severance agreements and advise on best practices to comply with the new requirements.
United States Court of Appeals Enforces Arbitration Agreement Against Third-Party Non-Signatories
Arbitration agreements often seem straightforward—until they unexpectedly bind parties who never signed them. The United States Court of Appeals for the Eleventh Circuit’s recent decision in Various Insurers v. General Electric International, Inc., ___ F.4th ___ (11th Cir. 2025), underscores the reach of arbitration clauses and the courts’ willingness to enforce them against third parties. This case highlights how third-party beneficiaries—and their insurers—can be required to arbitrate disputes, even though they were not signatories to the contract. The ruling is a good reminder for businesses, insurers, and legal practitioners to carefully consider the third-party implications of arbitration clauses when drafting, reviewing, and enforcing international commercial agreements.
Background: Arbitration Battle Following a Catastrophic Failure
The dispute arose from a catastrophic turbine failure at an Algerian power plant owned by Shariket Kahraba Hadjret En Nouss (SKH). SNC-Lavalin Constructeurs International Inc. (SNC) operated the plant on SKH’s behalf pursuant to an Operations and Management Agreement. In turn, SNC had entered a Services Contract with General Electric International (GE) to supply parts and services for the power plant. The Services Contract between SNC and GE International contained an arbitration clause.
Following the turbine failure, various insurers and reinsurers, acting as subrogees of SKH, sued GE International and other General Electric companies in the U.S. State of Georgia’s state-wide business court. GE International and the other General Electric companies removed the case to federal court and then sought to compel arbitration, arguing that SKH was a third-party beneficiary of the Services Contract and, as such, its insurers and reinsurers were also bound by the arbitration clause.
The Eleventh Circuit’s Analysis: Why the Insurers Were Bound to Arbitrate
The central issue was whether SKH, as the power plant’s owner, was a third-party beneficiary of the Services Contract between SNC and GE International. If so, SKH’s subrogated insurers and reinsurers would also be required to arbitrate.
The court applied federal common law to determine SKH’s third-party beneficiary status, to hold that SNC and GE International intended “to grant SKH the benefit of the performance promised” under the Services Contract, and therefore that SKH was indeed a third-party beneficiary.
The key facts about the Services Contract that led the court to that conclusion included the following:
The Services Contract explicitly referenced SKH’s ownership of the power plant and the Operations and Maintenance Agreement between SNC and SKH, including SNC’s obligations to operate and maintain the power plant for SKH’s benefit.
SKH had decision-making authority over certain changes to the power plant’s operations that would trigger GE International’s contractual obligations.
The Services Contract allowed SKH to act unilaterally in order to limit damages and losses during emergencies.
SKH had rights to access certain reports that the Services Contract required GE International to prepare, further evidencing SKH’s direct interest in the contract’s performance.
Because SKH was deemed a third-party beneficiary, the court ruled that its insurers—via subrogation—were also bound by the arbitration clause in the Services Contract. The court distinguished two other federal decisions declining to compel arbitration against third-party beneficiaries where the arbitration clause covered only disputes between the contracting parties.
Delegation of Arbitrability: The Role of ICC Rules
The court then addressed who should decide whether the insurers’ and reinsurers’ specific claims were subject to arbitration, the courts or the arbitrator. The Services Contract incorporated the International Chamber of Commerce (ICC) arbitration rules, which expressly delegate arbitrability decisions to the arbitrator. Citing its own precedent (Terminix Int’l Co., LP v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327 (11th Cir. 2005)), the court found that incorporating the ICC rules was clear evidence that the parties intended to delegate arbitrability decisions to the arbitrator.
This means that the arbitrator, not the court, has to decide which, if any, of the insurers’ and reinsurers’ claims were subject to arbitration.
Key Implications of the Ruling
Contracts should clearly define whether third parties—such as affiliates, subcontractors, and beneficiaries—are bound by arbitration clauses. Manufacturers, suppliers, and distributors should consider whether they are bound by arbitration clauses in vendor contracts they have not signed but for which they could be deemed third-party beneficiaries—or conversely, whether they wish to enforce an arbitration clause against a third party that has not signed it. The same holds true for parties to large-scale construction and engineering contracts involving agreements between multiple stakeholders. Insurers stepping into the shoes of an insured party will normally be bound by the insured’s arbitration obligations, potentially limiting litigation options. And because these issues may depend on which law applies to the arbitration clause, contracts should state that clearly as well.
You can read the court’s full opinion here.
FDA’s New Transparency Tool Addresses Chemical Contaminants
Recently, the Food and Drug Administration (FDA) introduced a new online resource called the Chemical Contaminants Transparency Tool (CCT Tool) which allows the public to search for information about different chemical contaminants that may be found in human food. This online, searchable database provides a consolidated list of contaminant levels such as tolerances, action levels, and guidance levels used to evaluate potential health risks in human foods. This tool is part of the FDA’s efforts to modernize food chemical safety and has been launched as part of the administration’s Make America Healthy Again initiative.
Key Features and Objectives of the Transparency Tool
Prior to launch of the CCT tool, tolerances, action levels, guidance levels, derived intervention levels, recommended maximum levels, and advisory levels were to be found (or defined) in 21 C.F.R. parts 109 and 509, and also in guidances for industry. The CCT Tool consolidates this information into one resource, with the goal of making it easier to find information about the contaminants by commodity type.
Here is a snapshot of some data available through the tool:
The levels above show the safety limits for contaminants in food, but do not imply that the presence of these chemical at the specified level is necessarily permissible. FDA’s prior guidances on these chemicals remains an important resource to understand the levels shown in the chart. As explained by acting FDA Commissioner Sara Brenner, M.D., M.P.H., “While it’s ideal to have no contaminants in our food, they can sometimes occur. Eating a variety of nutrient-rich foods from all major groups – vegetables, fruits, grains, dairy, and protein – can help minimize exposure.”
The introduction of the CCT Tool is a useful reminder of the importance of compliance for food manufacturers and distributors. It also highlights the new administration’s focus on transparency for and within the food system, and could be a harbinger of new tools that FDA may develop as part of the new administration’s goals.
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Chapter 15: A More Efficient Path for Recognition of Foreign Judgments as Compared with Adjudicatory Comity
Chapter 15 of the United States Bankruptcy Code, which adopts the United Nations Commission on International Trade Law’s (“UNCITRAL”) Model Law on Cross-Border Insolvency, provides a streamlined process for recognition of a foreign insolvency proceeding and enforcement of related orders. In adopting the Model Law, the legislative history makes clear that Chapter 15 was intended to be the “exclusive door to ancillary assistance to foreign proceedings,” with the goal of controlling such cases in a single court. Despite this clear intention, U.S. courts continue to grant recognition to foreign bankruptcy court orders as a matter of comity, without the commencement of a Chapter 15 proceeding.
While it is tempting choice for a bankruptcy estate representative to seek a quick dismissal of U.S. litigation, without the commencement of a Chapter 15 case, it is not always the most efficient path.[1] First, because an ad hoc approach to comity requires a single judge to craft complex remedies from dated federal common law, there is a significant risk that such strategy will fail (and the estate representative will subsequently need Chapter 15 relief), increasing litigation/appellate risk and thus, the foreign debtor’s overall transaction costs in administering the case.[2] Second, the ad hoc informal comity approach is of little use to foreign debtors, who need to subject a large U.S. collective of claims and rights to a foreign collective remedy in the United States because it does not give the foreign representative the specific statutory tools available in Chapter 15—the ability to turn over foreign debtor assets to the debtor’s representative; to enforce foreign restructuring orders, schemes, plans, and arrangements; to generally stay U.S. litigation against a foreign debtor in an efficient, predictable manner; to sell assets in the United States free and clear of claims and liens and anti-assignment provisions in contracts; etc.[3]
Wayne Burt Pte. Ltd. (“Wayne Burt”), a Singaporean company, has battled to recognize a Singaporean liquidation proceeding (the “Singapore Liquidation Proceeding”) (and related judgments) in the United States, highlighting the inherent risks in seeking recognition outside of a Chapter 15 case. The unusually litigious and expensive pathway Wayne Burt followed to enforce certain judgments shows how Chapter 15 provides an effective streamlined process for seeking relief.
First, Wayne Burt sought dismissal, as a matter of comity, of a pending lawsuit in the U.S. District Court for New Jersey (the “District Court”). On appeal, after years of litigation, the Third Circuit concluded that the District Court did not fully apply the appropriate comity test and remanded the case for further analysis. Thereafter, the liquidator sought, and obtained, recognition of Wayne Burt’s insolvency proceeding under Chapter 15 in the U.S. Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”), including staying District Court litigation that had been in dispute for five years in the United States and ordering the enforcement of a Singaporean turnover order that had been the subject of complex litigation as well within two months of the commencement of the Chapter 15 case.
The Dispute Before the District Court
The Wayne Burt case originated, almost exactly five years ago, as a simple breach of contract claim and evolved into a complex legal battle between Vertiv, Inc., Vertiv Capital, Inc., and Gnaritis, Inc. (together “Vertiv”), Delaware corporations, and Wayne Burt. The litigation began in January 2020, when Vertiv sued Wayne Burt in District Court, seeking to enforce a $29 million consent judgment entered in its favor. At the time the consent judgment was entered, however, Wayne Burt was already in liquidation proceedings in Singapore. Thus, a year after the entry of judgment, the liquidator moved to vacate the judgment on the grounds of comity.
On November 30, 2022, the District Court granted Wayne Burt’s motion and dismissed the complaint with prejudice.[4] The District Court based its decision on a finding that Singapore shares the United States’ policy of equal distribution of assets and authorizes a stay or dismissal of Vertiv’s civil action against Wayne Burt. Vertiv appealed to the Third Circuit.
The Third Circuit Establishes a New Adjudicatory Comity Test
In February 2024, the Third Circuit, in its opinion, set forth in detail a complex multifactor test for determining when comity will allow a U.S. court to enjoin or dismiss a case, based on a pending foreign insolvency proceeding, without seeking Chapter 15 relief.[5] This form of comity is known as “adjudicatory comity.” “Adjudicatory comity” acts as a type of abstention and requires a determination as to whether a court should “decline to exercise jurisdiction over matters more appropriately adjudged elsewhere.”[6]
As a threshold matter, adjudicatory comity arises only when a matter before a United States court is pending in, or has resulted in a final judgment from, a foreign court—that is, when there is, or was, “parallel” foreign proceeding. In determining whether a proceeding is “parallel,” the Third Circuit found that simply looking to whether the same parties and claims are involved in the foreign proceeding is insufficient. That is because it does not address foreign bankruptcy matters that bear little resemblance to a standard civil action in the United States. Instead, drawing on precedent examining whether a non-core proceeding is related to a U.S. Bankruptcy proceeding, the Third Circuit created a flexible and context specific two-part test. A parallel proceeding exists when (1) a foreign proceeding is ongoing in a duly authorized tribunal while the civil action is before a U.S. Court, and (2) the outcome of the U.S. civil action could affect the debtor’s estate.
Once the court is satisfied that the foreign bankruptcy proceeding is parallel, the party seeking extension of comity must then make a prima facie case by showing that (1) the foreign bankruptcy law shares U.S. policy of equal distribution of assets, and (2) the foreign law mandates the issuance or at least authorizes the request for the stay.
Upon a finding of a prima facie case for comity, the court then must make additional inquiries into fairness to the parties and compatibility with U.S. public policy under the Third Circuit Philadelphia Gear[7] test. This test considers whether (1) the foreign bankruptcy proceeding is taking place in a duly authorized tribunal, (2) the foreign bankruptcy court provides for equal treatment of creditors, (3) extending comity would be in some manner inimical to the country’s policy of equality, and (4) the party opposing comity would be prejudiced.
The first requirement is already satisfied if the proceeding is parallel.[8] The second requirement of equal treatment of creditors is similar to the prima facie requirement regarding equal distribution but goes further into assessing whether any plan of reorganization is fair and equitable as between classes of creditors that hold claims of differing priority or secured status.[9] For the third and fourth part of the four-part inquiry—ensuring that the foreign proceedings’ actions are consistent with the U.S. policy of equality and would not prejudice an opposing party—the court provided eight factors used as indicia of procedural fairness, noting that certain factors were duplicative of considerations already discussed. The court emphasized that foreign bankruptcy proceedings need not function identically to similar proceedings in the United States to be consistent with the policy of equality.
In the Wayne Burt appeal, the Third Circuit vacated the District Court’s order finding that although there was a parallel proceeding, the District Court failed to apply the four-part test to consider the fairness of the parallel proceeding.
The Chapter 15 Case
On remand to the District Court, Wayne Burt’s liquidator renewed his motion to dismiss. Following his renewed motion, protracted discovery ensued, delaying a District Court ruling on comity.
Additionally, during the pendency of the appeal, Wayne Burt’s liquidator commenced an action in Singapore seeking that Vertiv turn over certain stock in Cetex Petrochemicals Ltd. that Wayne Burt pledged as security for a loan from Vertiv (the “Singapore Turnover Litigation”). Wayne Burt’s liquidator contended that the pledge was void against the liquidator. Vertiv did not appear in the Singapore proceedings and the High Court of Singapore entered an order requiring the turnover of the shares (the “Singapore Turnover Order”).
As a result, Wayne Burt’s liquidator shifted his strategy to obtain broader relief than what adjudicatory comity could afford in the pending U.S. litigation—recognition and enforcement of the Singapore Turnover Order. The only way to accomplish both the goal of dismissal of the U.S. litigation and enforcement of the Singapore Turnover Order is through a Chapter 15 proceeding.
On October 8, 2024, Wayne Burt’s liquidator commenced the Chapter 15 case (the “Chapter 15 Case”) by filing a petition along with the Motion for Recognition of Foreign Proceedings and Motion to Compel Turnover of Cetex Shares (the “Motion”). Vertiv opposed the Motion, contending that, under the new test laid out by the Third Circuit, the Singapore Liquidation Proceeding should not be considered the main proceeding because it may harm Vertiv.[10] Vertiv further contended that even if the Singapore Liquidation Proceeding was considered the main proceeding, the Bankruptcy Court should not “blindly” enforce the Singapore Turnover Order and should itself review the transaction to the extent it impacts assets in the United States.[11]
Less than two months after the Chapter 15 Case was commenced, the Bankruptcy Court overruled Vertiv’s objection, finding that recognition and enforcement of a turnover action was appropriate.[12] In so ruling, the Bankruptcy Court applied the new adjudicatory comity requirements set forth by the Third Circuit, in addition to Chapter 15 requirements.
The Bankruptcy Court began its analysis with finding that recognition and enforcement of the Singapore Turnover Order is appropriate under 11 U.S.C. §§ 1521 and 1507. Under Section 1521, upon recognition of a foreign proceeding, a bankruptcy court may grant any additional relief that may be available to a U.S. trustee (with limited exceptions) where necessary to effectuate the purposes of Chapter 15 and to protect the assets of the debtor or the interests of creditors. Courts have exceedingly broad discretion in determining what additional relief may be granted. Here, the Bankruptcy Court found that the Singapore insolvency system was sufficiently similar to the United States bankruptcy process.
Under Section 1507, a court may provide additional assistance in aid of a foreign proceeding as along as the court considers whether such assistance is consistent with principles of comity and will reasonably assure the fair treatment of creditors, protect claim holders in the United States from prejudice in the foreign proceeding, prevent preferential or fraudulent disposition of estate property, and distribution of proceeds occurs substantially in accordance with the order under U.S. bankruptcy law. Here, the Bankruptcy Court found that the Singapore Turnover Litigation was an effort to marshal an asset of the Wayne Burt insolvency estate for the benefit of all of Wayne Burt’s creditors and that enforcement of the Singapore Turnover Order specifically would allow for the equal treatment of all of Wayne Burt’s creditors.
Finally, the Bankruptcy Court found that recognition and enforcement of the Singapore Turnover Order was appropriate under the Third Circuit’s comity analysis. Specifically, the Bankruptcy Court found that the Singapore Turnover Litigation is parallel to the Motion, relying on the facts that: (1) Wayne Burt is a debtor in a foreign insolvency proceeding before a duly authorized tribunal, the Singapore High Court, (2) Vertiv has not challenged the Singapore High Court’s jurisdiction over the Singapore Liquidation Proceeding, and (3) the outcome of the Bankruptcy Court’s ruling would have a direct impact on the estate within the Singapore Liquidation Proceeding as it relates to ownership of the Cetex shares. The Bankruptcy Court concluded that the Singapore Liquidation Proceeding and the Chapter 15 Case are parallel.
The Bankruptcy Court’s analysis primarily focused on the third and fourth factors of the Philadelphia Gear test, determining that it was clear that the first factor was met because the Singapore Liquidation Proceeding is parallel to the Chapter 15 Case and that the second factor did not apply as there was no pending plan. The third inquiry was also satisfied for the same reasons detailed above for the Singapore insolvency laws being substantially similar to U.S. insolvency laws. The fourth inquiry—whether the party opposing comity is prejudiced by being required to participate in the foreign proceeding—was satisfied for the same reasons stated for Section 1507.
In recognizing and enforcing the Singapore Turnover Order, the Bankruptcy Court overruled Vertiv’s opposition finding it rests on an “unacceptable premise” that the Bankruptcy Court should stand in appellate review of a foreign court. Such an act would directly conflict with principles of comity and the objectives of Chapter 15. The Bankruptcy Court noted that this is especially true where the party maintains the capacity to pursue appeals and other necessary relief from the foreign court.
Vertiv appealed the Bankruptcy Court’s decision to the District Court, and the appeal is still pending.
Implications
Adjudicatory comity and Chapter 15 both aim to facilitate cooperation and coordination in cross-border insolvency cases. Indeed, Chapter 15 specifically incorporates comity and international cooperation into a court’s analysis, as Chapter 15 requires that a “court shall cooperate to the maximum extent possible with a foreign court.” In deciding whether to use adjudicatory comity and/or Chapter 15 it is important to consider the ultimate objective and the cost-benefit analysis of each approach. While seeking comity defensively in a U.S. litigation, without Chapter 15 relief, is possible, it can lead to inconsistent and unpredictable outcomes. Additionally, the multiple factors involved in applying adjudicatory comity can led to protracted discovery and, concomitantly, delaying recognition. By contrast, the Bankruptcy Court’s recent analysis demonstrates that the existing Chapter 15 framework, along with the well-established case law interpreting Chapter 15, provides an effective, reliable, and efficient tool for recognition and enforcement of foreign orders. That is particularly true, whereas here, a party seeks multiple forms of relief.
[1] Michael B. Schaedle & Evan J. Zucker, District Court Enforces German Stay, Ignoring Bankruptcy Code’s Chapter 15, 138 The Banking Law Journal 483 (LexisNexis A.S. Pratt 2021).
[2]Id.
[3]Id.
[4]Vertiv, Inc. v. Wayne Burt Pte, Ltd., No. 3:20-CV-00363, 2022 WL 17352457 (D.N.J. Nov. 30, 2022), vacated and remanded, 92 F.4th 169 (3d Cir. 2024).
[5]Vertiv, Inc. v. Wayne Burt PTE, Ltd., 92 F.4th 169 (3d Cir. 2024).
[6]Id. at 176.
[7]Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187, 194 (3d Cir. 1994)).
[8]Wayne Burt PTE, Ltd., 92 F.4th at 180.
[9]Id.
[10]See Vertiv’s Brief in Opposition to Motion for Recognition of Foreign Proceedings and Motion to Compel Turnover of Cetex Shares, Case No.: 24-196-MBK, Doc. No. 29, at 10-14 (D.N.J October 29, 2024).
[11]Id. at 13.
[12]In Re: Wayne Burt Pte. Ltd. (In Liquidation), Debtor., No. 24-19956 (MBK), 2024 WL 5003229 (Bankr. D.N.J. Dec. 6, 2024).
Recent NYSE and Nasdaq Regulatory Updates Regarding Reverse Stock Splits
Reverse stock split is a common corporate action taken by public companies to improve market perception, maintain compliance with certain stock exchange listing requirements or help keep stock prices at levels where certain investors can buy shares. Indeed, Hunton has recently assisted a number of clients with reverse stock splits in light of the market turmoil. Companies that are contemplating reverse stock splits should be reminded of the recent regulatory updates involving the use of reverse stock splits by companies listed on NYSE or Nasdaq.
Limitations on the Use of Reverse Stock Splits
Nasdaq
In October 2024, the US Securities and Exchange Commission (“SEC”) approved the proposed amendment to Nasdaq Rule 5810(c)(3)(A), submitted by Nasdaq in July 2024, which modifies the compliance periods for companies seeking to regain compliance with Nasdaq listing requirements in connection with reverse stock splits. Nasdaq rules generally require that a listed security maintain a minimum bid price of $1.00 (the “Minimum Price Requirement”). Under the prior rules, if a Nasdaq-listed company’s stock price fails to meet the Minimum Price Requirement for 30 consecutive business days, the company would typically be granted an initial 180-day period to regain compliance (the “Initial Compliance Period”), often by doing a reverse stock split. However, a reverse stock split may cause the company to fall below the numeric threshold for another listing requirement (such as minimum number of publicly held shares) (a “Secondary Deficiency”). In the event of a Secondary Deficiency, under the prior rules, Nasdaq would notify the company about the new deficiency and the company could be granted an additional period of up to another 180 days to cure the deficiency and regain compliance (the “Additional Compliance Period”) if it satisfies certain conditions. Under the amended rules, however, companies will no longer be afforded the Additional Compliance Period. If a company effects a reverse stock split to regain compliance with the Minimum Price Requirement but the reverse stock split results in a Secondary Deficiency, the company will not be considered to have regained compliance with the Minimum Price Requirement. To avoid delisting, the company must, within the Initial Compliance Period, (i) cure the Secondary Deficiency and (ii) thereafter meet the Minimum Price Requirement for 10 consecutive business days.
In addition, the amended Nasdaq Rule 5810(3)(A) imposes limitations on how many times a company can effect reverse stock splits within a certain period of time. If a company’s stock fails to meet the Minimum Price Requirement but such company has (i) effected a reverse stock split over the prior one-year period or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to 1, then the company will not be eligible for any compliance period (including the Initial Compliance Period) to cure the price deficiency, but will be issued a listing determination instead.
NYSE
In January 2025, the SEC approved the proposed amendment to Section 802.01C of the NYSE Listed Company Manual, submitted by the NYSE in September 2024 with subsequent amendments, which, similar to the amended Nasdaq rules, limits the circumstances under which NYSE-listed companies could use reverse stock splits to regain compliance with the price requirements for continued listings. The NYSE requires listed companies to maintain an average closing price of at least $1.00 over any consecutive 30-trading-day period (the “Price Criteria”). Under the prior rules, if a company’s stock fails to meet the Price Criteria, the NYSE will notify the company of its noncompliance; the company must, within 10 business days of receipt of the notification, notify the NYSE of its intent to cure the deficiency or be subject to suspension and delisting procedures. The company will then have a six-month period (the “Cure Period”) to regain compliance with the Price Criteria, typically by effecting a reverse stock split; the company will be deemed to have regained compliance if on the last trading day of any calendar month during the Cure Period, the company has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30-trading-day period ending on the last trading day of that month. Under the amended rules, however, if a company’s stock has failed to meet the Price Criteria and the company has (i) effected a reverse stock split over the prior one-year period or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to 1, then the company will not be eligible for the Cure Period; instead, the NYSE will immediately commence suspension and delisting procedures.
In addition, under the amended Section 802.01C, an NYSE-listed company who fails to comply with the Price Criteria will be prohibited from effecting any reverse stock split if doing so would result in the company falling below the continued listing requirements set forth under Section 802.01A, such as the number of publicly-held shares. If a company effects a reverse stock split notwithstanding the prohibition, the NYSE could immediately commence suspension and delisting procedures.
Halt of Trading in Stock Undergoing Reverse Stock Splits
In November 2023 and May 2024, the SEC approved the proposed amendments to Nasdaq and NYSE rules, respectively, which set forth specific requirements for halting and resuming trading in a security that is subject to a reverse stock split. The amended NYSE Rule 123D provides that the NYSE will halt trading in a security before the end of post-market trading on other markets (generally at 7:50 pm) on the day immediately before the market effective date of a reverse stock split. Trading in the security will resume with a Trading Halt Auction (as defined in NYSE Rule 7.35(a)(1)(B)) starting at 9:30 am, on the effective date of the reverse stock split. The NYSE believes that this halt and delayed opening “would give sufficient time for investors to review their orders and the quotes for the security and allow market participants to ensure that their systems have properly adjusted for the reverse stock split.”[1] Similarly, under the amended Nasdaq Rule 4120(a), Nasdaq generally expects to initiate the halt of trading at 7:50 pm,[2] prior to the close of post-market trading at 8 pm on the day immediately before the split in the security becomes effective, and resume trading at 9 am on the day the split is effective.
Other Considerations
Companies contemplating reverse stock splits should also note the advance notice requirements of NYSE and Nasdaq, currently requiring notification at least 10 calendar days in advance of the reverse stock split effectiveness date. The NYSE or Nasdaq may also request to review other documents (press release, amendment to the articles of incorporation, etc.) and companies should keep the representatives at the NYSE or Nasdaq engaged throughout the process so that their requests and questions will be addressed in a timely manner. We encourage companies to work closely with legal counsel to coordinate each step of a reverse stock split and ensure compliance with all applicable rules and regulations, which may be constantly changing.
[1] SEC Release No. 34-99974, April 17, 2024.
[2] SEC Release No. 34-98878, November 14, 2023.