It Is More Than Conceivable That The Court Of Chancery Would Correct Statutory Law
The most distinguishing feature of Delaware law is that it is interpreted and applied by a court of equity. A recent post by Professor Stephen Bainbridge illustrates this point:
The Delaware Supreme Court held in Schnell v. Chris-Craft Industries, Inc., that “inequitable action does not become permissible simply because it is legally possible.” This means that even if a corporate action complies with the literal terms of a statute, Delaware courts can intervene if the action is deemed unfair or inequitable. Schnell thus demonstrates that Delaware courts will not allow statutory formalism to justify unfair corporate behavior. Equity acts as a safeguard against directors exploiting statutory provisions to the detriment of shareholders. The decision remains a cornerstone of Delaware’s approach to corporate governance, ensuring that statutory compliance is always subject to equitable scrutiny. It’s at least conceivable that an activist judge could invoke Schnell to impose liability in a particular case even though the technical requirements of SB 21 were satisfied. (See, e.g., the discussion above of Fliegler [v. Lawrence. 361 A.2d 218 (Del.1976)].)
This understanding of equity versus law goes all the way back to none other than Aristotle. See Nicomachean Ethics Book V, Section 10. Thus, the risk that the Court of Chancery would “correct” statutory law is more than conceivable. It is entirely plausible given the Court’s role as a court of equity.
The Nuts and Bolts of a Chapter 11 Plan
Editors’ Note: Most business people, finance professionals, and even attorneys have no more than a passing familiarity with bankruptcy. If your company is (or you, personally are) having financial difficulties, then bankruptcy may be an option (although there are other options). A business and its owner/senior executives often have two types of bankruptcy available to them: Chapter 7 and Chapter 11. Chapter 13 is also available to individuals but there are limits that apply that commonly make the option unavailable to business owners.
The word ‘Chapter’ refers to how the US Bankruptcy Code is organized: Chapter 7 is titled “Liquidation” and Chapter 11 is titled “Reorganization.” The title of Chapter 11 is, however, misleading because one (a company or a person) who files Chapter 11 can use it to reorganize or liquidate. In either case, a ‘successful’ Chapter 11 usually — but not always — involves the confirmation of a Chapter 11 plan.
Chapter 11 bankruptcy serves as a vital mechanism for businesses aiming to restructure their debts and continue operations. This article delves into the intricacies of Chapter 11 plans, highlighting the process, key participants, and essential elements for successful reorganization.
What Is a Chapter 11 Plan?
A Chapter 11 plan is essentially a contract — a legally binding document that dictates how a company will distribute its assets and/or equity in itself to satisfy its financial obligations. Once approved by a bankruptcy court, the plan dictates how creditors are repaid and how the company will proceed financially.
Evan Hill, a partner at Skadden, Arps, Slate, Meagher & Flom, describes it as a roadmap that lays out how creditors will be treated and how the company will be structured post-bankruptcy. Once confirmed by the court, the plan becomes binding on all parties involved.
Initially, the debtor (the business filing for bankruptcy) has the exclusive right to propose a plan for the first 120 days after filing. This exclusivity period can be extended or challenged by creditors if they believe the debtor isn’t making sufficient progress.
Key Players in a Chapter 11 Case
There can be many parties involved in a Chapter 11 plan, often with different or competing motivations:
The Debtor: The company (or individual) filing for bankruptcy, aiming to restructure debt and continue operations or to sell its assets for the highest price possible to repay creditors as much as possible.
Secured Creditors: Lenders with collateral, such as banks holding a mortgage.
Unsecured Creditors: Suppliers, vendors, or litigation claimants without collateral. Their interests vary widely depending on their relationship with the debtor.
Equity Holders: Shareholders who are at the bottom of the distribution hierarchy.
The US Trustee: A branch of the US Department of Justice ensuring the process is fair and compliant.
The Bankruptcy Judge: The final authority who confirms or denies the Chapter 11 plan.
David Wood, a partner at Marshack Hays Wood, notes that secured creditors usually just want to get paid, while unsecured creditors may have business interests beyond just repayment.
Creating a Chapter 11 Plan
Some companies enter bankruptcy with a pre-negotiated plan in place, which can expedite the process. Others develop their plans during the bankruptcy case through negotiations with creditors.
Matt Christensen, a partner at Johnson May, explains that the more a debtor can pre-negotiate with major creditors, the smoother the process tends to be. Otherwise, the debtor may face competing plans from creditors who have their own ideas about how the company should be restructured. In smaller cases, debtors often draft a plan after filing, once they have a clearer picture of their financials and creditor positions.
Key Requirements for Plan Confirmation
To be confirmed by the court, a Chapter 11 plan must meet several legal requirements under Section 1129 of the Bankruptcy Code:
Feasibility: The plan must be realistic and demonstrate that the reorganized company can survive.
Good Faith: The plan must be proposed in a fair and honest manner.
Best Interests Test: Creditors must receive at least as much as they would if the company were liquidated under Chapter 7.
Impaired Class Acceptance: At least one class of impaired creditors must vote in favor of the plan.
Cramdown Provisions: If not all creditors agree, the plan can still be confirmed if it meets certain fairness criteria.
Christensen notes that Subchapter V of Chapter 11, which smaller businesses can opt into, have fewer hurdles and allow for debtor-friendly provisions like the elimination of the absolute priority rule.
The Role of the Disclosure Statement
In traditional Chapter 11 cases (but not in Subchapter V cases), the court must approve a disclosure statement before a plan can move to a vote. In some cases, debtors seek conditional approval to streamline the process. A disclosure statement, which accompanies the Chapter 11 plan, provides detailed information for creditors. Creditors and other interested parties need to understand what they’re voting on. A disclosure statement lays out the financial situation, how debts will be treated, and why the plan is viable.
Voting and Confirmation Process
Once the disclosure statement is approved, creditors vote on the plan.
Acceptance: A class of creditors approves if two-thirds in amount and more than half in number vote in favor.
Cramdown: If certain classes object, the court can confirm the plan anyway, provided it is fair and equitable.
Wood emphasizes that this is where negotiation skills come into play. The process of building consensus can go more smoothly with more buy-in upfront.
Reorganization vs. Liquidation Plans
Not all Chapter 11 cases aim to keep a company operating. Sometimes, a debtor files a liquidation plan, which outlines how assets will be sold to maximize creditor recovery. Hill points out that liquidation plans don’t typically grant the debtor a discharge from debts, making them different from reorganization plans.
Understanding Key Legal and Financial Considerations in Chapter 11
1. Debtor-in-Possession (DIP)
In Chapter 11 cases, the debtor often continues to operate the business as a ‘debtor-in-possession’ (DIP). This means that the debtor retains control of assets and business operations during the bankruptcy process, without the appointment of a trustee. The DIP has fiduciary duties to creditors and must operate within the confines of the Bankruptcy Code.
2. Automatic Stay
Upon filing for Chapter 11, an automatic stay is enacted, which halts all collection activities, foreclosures, and lawsuits against the debtor. This provision provides the debtor with temporary relief from creditors, allowing time to propose a reorganization plan.
3. Priority Claims
Certain creditors have priority claims under the Bankruptcy Code, meaning they are entitled to be paid before general unsecured creditors. Priority claims include certain tax obligations, employee wages, and administrative expenses incurred during the bankruptcy process.
4. DIP Financing
Businesses in Chapter 11 may require financing to continue operations during the bankruptcy process. DIP financing allows debtors to secure new loans, often with court approval, giving these lenders priority repayment status.
Final Thoughts
Although the confirmation process commonly takes place long after the filing of the Chapter 11 case, it is typically critical to consider the strategy for confirmation before filing the case.
To learn more about this topic view The Nuts & Bolts of Chapter 11 (Series I) / The Nuts & Bolts of a Chapter 11 Plan. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about Chapter 11.
This article was originally published on here.
©2025. DailyDACTM, LLC. This article is subject to the disclaimers found here.
CTA UPDATE: US District Court Reinstates Reporting Requirement; FinCEN Grants 30-Day Filing Extension
Go-To Guide:
On Feb. 18, 2025, the U.S. District Court for the Eastern District of Texas granted the government’s motion to stay relief in Smith v. U.S. Department of the Treasury, thereby lifting the injunction against the Corporate Transparency Act (CTA) that had been in place in that case.
As a result, FinCEN confirmed that beneficial ownership information (BOI) reporting requirements under the CTA are once again back in effect, subject to a 30-day filing extension.
Most entities will have a reporting deadline of March 21, 2025 (except for reporting companies with later reporting deadlines under existing guidelines).
The CTA’s status has shifted multiple times1 since Dec. 3, 2024, when a Texas district court in Texas Top Cop Shop, Inc. v. McHenry (formerly Texas Top Cop Shop, Inc. v. Garland) preliminarily enjoined the CTA and its BOI reporting rule (Reporting Rule) on a nationwide basis.
On Jan. 7, 2025, a second federal judge of the U.S. District Court for the Eastern District of Texas (the District Court) ordered preliminary relief barring CTA enforcement in Smith v. U.S. Department of the Treasury.2 Then, notwithstanding the SCOTUS Order staying the injunction in Texas Top Cop Shop, on Jan. 24, 2025, FinCEN confirmed that reporting companies were not required to file BOI Reports with FinCEN due to the separate nationwide relief entered in Smith (and while the order in Smith remained in effect). On Feb. 5, 2025, the government appealed the ruling in Smith to the U.S. Court of Appeals for the Fifth Circuit (the Fifth Circuit) and asked the District Court to stay relief pending that appeal.
CTA Reporting Requirements Back in Effect
On Feb. 18, 2025, the District Court in Smith granted a stay of its preliminary injunction pending appeal, thereby reinstating BOI reporting requirements once again. On Feb. 19, 2025, FinCEN issued guidance on its website to reflect this update and to announce that companies have 30 days to submit BOI reports:
With the February 18, 2025, decision by the U.S. District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336 (E.D. Tex.), beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) are once again back in effect. However, because the Department of the Treasury recognizes that reporting companies may need additional time to comply with their BOI reporting obligations, FinCEN is generally extending the deadline 30 calendar days from February 19, 2025, for most companies.
New Filing Deadlines
Most reporting companies will be required to file BOI reports no later than March 21, 2025, as follows:
The new deadline to file an initial, updated, and/or corrected BOI report is generally now March 21, 2025.
Companies that were previously given a reporting deadline later than the March 21, 2025, deadline must file their initial BOI report by that later deadline (i.e., companies that qualify for certain disaster relief extensions and companies formed on or after Feb. 20, 2025).
Looking Ahead
In its guidance, FinCEN indicates that it will assess its options to further modify deadlines and initiate a process this year to revise the Reporting Rule to reduce burden for lower-risk entities, including many U.S. small businesses. How this will impact BOI reporting requirements remains to be seen.
Expedited oral arguments for the Fifth Circuit appeal in Texas Top Cop Shop are set for March 25, 2025. Unless the courts or Congress3 provide further relief, reporting companies should prepare to comply with the deadlines outlined above. Additionally, reporting companies should stay updated on FinCEN announcements, as further adjustments to reporting deadlines could be issued within the next 30 days.
1 On Dec. 3, 2024, the CTA and its BOI reporting rule were preliminary enjoined on a nationwide basis, approximately four weeks ahead of a key Jan. 1, 2025, deadline. FinCEN appealed that ruling, and on Dec. 23, 2024, a motions panel of the U.S. Court of Appeal for the Fifth Circuit stayed the injunction, allowing the CTA to go back into effect. Three days later, on Dec. 26, 2024, a merits panel of the Fifth Circuit vacated the motion panel’s stay, effectively reinstating the nationwide preliminary injunction against the CTA and the Reporting Rule. On Dec. 31, 2024, the government filed an emergency application with the U.S. Supreme Court to stay that preliminary injunction. On Jan. 23, 2025, the Supreme Court granted that application (the SCOTUS Order), staying the nationwide preliminary injunction in Texas Top Cop Shop, Inc. v. McHenry. McHenry v. Texas Top Cop Shop, Inc., No. 24A653, 2025 WL 272062 (U.S. Jan. 23, 2025).
2 See Smith v. United States Dep’t of the Treasury, No. 6:24-CV-336-JDK, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025).
3 On Feb. 10, 2025, the House of Representatives unanimously passed the Protect Small Businesses from Excessive Paperwork Act (H.R. 736, 119th Cong. (2025)). The bill has moved to the Senate for consideration. If enacted, the bill will extend the reporting deadline for entities that qualify as “a small business concern” to Jan. 1, 2026.
Corporate Risk Management Basics: What Every Business Should Know
Introduction
Risk management is a critical component of any successful business strategy. It involves identifying, assessing, and mitigating potential threats that could adversely affect an organization’s operations, assets, or reputation. These risks can be financial, operational, legal, or strategic in nature. By implementing effective risk management practices, businesses can safeguard their interests and ensure long-term stability.
What Is Risk Management?
Risk management is the systematic process of identifying potential risks, evaluating their likelihood and impact, and developing strategies to address them. This proactive approach enables businesses to minimize potential losses and capitalize on opportunities. As Brenda Wells, an expert in risk management emphasizes, risk management isn’t just about reacting to problems; it’s about planning ahead to prevent them.
Major Focus Areas in Risk Management
Risk management involves multiple dimensions, each critical to the overall success and resilience of an organization. Addressing these areas holistically can help businesses maintain operational efficiency and financial security. Effective risk management encompasses several key areas:
Operational Risks: These pertain to disruptions in day-to-day business activities, such as supply chain interruptions, equipment failures, or human errors. Managing operational risks involves implementing robust internal controls and contingency plans to maintain business continuity.
Financial Risks: These involve uncertainties related to financial markets, including interest rate fluctuations, credit risks, and liquidity challenges. Businesses must monitor their financial exposures and employ strategies like diversification and hedging to mitigate these risks.
Legal and Compliance Risks: Organizations must adhere to various laws and regulations pertinent to their industry. Non-compliance can lead to legal penalties and reputational damage. Regular compliance audits and staying updated with regulatory changes are essential practices.
Cybersecurity Risks: In today’s digital age, cyber threats such as data breaches and theft of intellectual property (IP) are prevalent. Alex Sharpe, a cybersecurity expert, warns that many businesses underestimate their exposure to cyber risks, but a single incident can cripple a company financially and erode customer trust. Implementing robust cybersecurity measures and employee training can mitigate these risks. In today’s hyper-connected world, we can no longer only look at ourselves. We also need to look at third parties we depend upon.
Reputational Risks: These arise from negative public perceptions due to poor customer service, product failures, or unethical practices. Maintaining transparency, ethical operations, and effective communication strategies are vital to protecting a company’s reputation.
Key Legal and Financial Terms in Risk Management
Understanding specific legal and financial terms is crucial for effective risk management. These terms often occur when discussing mitigating risks and ensuring regulatory compliance:
Derivatives: Financial instruments whose value is derived from underlying assets like stocks, bonds, or commodities. They are commonly used for hedging financial risks.
Directors and Officers (D&O) Liability Insurance: This insurance provides coverage to company leaders against claims arising from alleged wrongful acts in their managerial capacity.
Third-Party Risk Management (TPRM): Involves assessing and managing risks associated with external entities that a business engages with, such as suppliers or service providers.
Compliance Program: A structured set of internal policies and procedures implemented by a company to ensure adherence to laws, regulations, and ethical standards. A robust compliance program helps in identifying regulatory risks and implementing measures to mitigate them.
The Role of Insurance in Risk Management
Insurance is a fundamental tool in transferring risk. Sue Myers, a seasoned expert in risk and insurance, emphasizes the need for strategic planning in risk management. By obtaining appropriate insurance coverage, businesses can protect themselves against significant financial losses resulting from unforeseen events. However, as David Pooser points out, “insurance transfers risk, but it doesn’t eliminate it. A solid risk management plan includes prevention and mitigation strategies.” Therefore, while insurance provides a safety net, it should be complemented with proactive risk mitigation efforts.
Selecting the Right Insurance Agent/Broker
An insurance agent or broker plays a pivotal role in a company’s risk management strategy. A knowledgeable agent can help identify potential coverage gaps and ensure that the business is adequately protected. Reid Peterson advises business owners to seek agents who possess a deep understanding of their specific industry and can offer tailored recommendations. He encourages businesses to think of their insurance agent as part of their advisory team, just like a lawyer or accountant.
Building a Comprehensive Business Advisory Team
A multidisciplinary advisory team enhances a company’s ability to manage risks effectively. Key members should include:
Attorney: Handles legal matters, ensures regulatory compliance, and manages potential litigation.
Accountant: Oversees financial health, conducts audits, and advises on tax-related issues.
Insurance Agent: Assesses risk exposures and recommends appropriate insurance solutions.
Cybersecurity Expert: Develops strategies to protect against digital threats and ensures data integrity.
This collaborative approach ensures that all potential risks are identified and managed comprehensively.
Common Risk Management Pitfalls
Businesses often encounter challenges in their risk management efforts. Common risk management pitfalls include:
Neglecting Regular Updates: As businesses evolve, so do their risk exposures. It’s crucial to regularly review and update risk management strategies and insurance coverages to align with current operations.
Overlooking Cybersecurity: With the increasing reliance on digital systems, neglecting cybersecurity can leave businesses vulnerable to costly data breaches.
Lack of Crisis Management Plans: Many companies fail to prepare for potential crises, which can lead to disorganized responses and increased financial losses.
Failure to Review Contracts: Poorly drafted contracts can expose businesses to unnecessary legal and financial risks. Having legal professionals review agreements can prevent future disputes.
Final Thoughts
Risk management is an essential part of running a successful business. By taking a proactive approach — identifying risks, developing mitigation strategies, and working with the right advisors — businesses can protect themselves from costly disruptions. As Brenda Wells emphasizes, risk management isn’t about avoiding all risks — it’s about being prepared for them.
To learn more about this topic view Corporate Risk Management / Corporate Risk Management Basics. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about managing business risks.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
The Return of the CTA: FinCEN Confirms that Beneficial Ownership Information Reporting Requirements are Back in Effect with a New Deadline of March 21, 2025
On February 19, 2025, the Financial Crimes Enforcement Network (“FinCEN”) announced that beneficial ownership information reporting requirements under the Corporate Transparency Act (“CTA”) are back in effect with a new deadline of March 21, 2025 for most reporting companies. This announcement came in response to the decision made on February 17, 2025 by the U.S. District for the Eastern District of Texas in Smith v. U.S. Department of the Treasury, No. 6:24-cv-336-JDK, 2025 WL 41924 (E.D. Tex.) to stay (lift) the preliminary injunction on enforcement of the CTA.
In addition to the deadline extension of 30 calendar days from February 19, 2025, FinCEN notably stated that “in keeping with Treasury’s commitment to reducing regulatory burden on businesses, during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.”
FinCEN did not provide any further details regarding how or when the BOI reporting rule would be revised. However, FinCEN did note that it would provide an update before the March 21, 2025 deadline “of any further modification of this deadline, recognizing that reporting companies may need additional time to comply with their BOI reporting obligations once this update is provided.” The full notice from FinCEN can be read here: FinCEN Notice, FIN-2025-CTA1, 2/18/2025.
Meanwhile, in Congress, several bills have been proposed that, if signed into law, would push the reporting deadline out still further. On February 10, 2025, the Protect Small Business from Excessive Paperwork Act of 2025, H.R. 736, co-lead by U.S. Representatives Zachary Nunn (R-IA), Sharice Davids (D-KS), Tom Emmer (R-MN) and Don Davis (D-NC), unanimously passed by the House. This bill, if passed into law, would modify the deadline for filing of initial BOI reports by reporting companies that existed before January 1, 2024 to not later than Jan. 1, 2026. On February 12, 2025, the Protect Small Business Excessive Paperwork Act of 2025 – companion legislation in the Senate that would likewise extend the filing deadline until January 1, 2026 – was introduced by U.S. Senators Katie Britt (R-AL) and Tim Scott (R-SC) and referred to the Committee on Banking, Housing and Urban Affairs.
Additionally, on January 15, 2025, another bill – the Repealing Big Brother Overreach Act – was introduced by U.S. Senator Tommy Tuberville (R-AL) in the Senate and re-introduced by U.S. Representative Warren Davidson (R-OH) in the House. This bill, if passed into law, would repeal the CTA entirely.
As noted above and in previous posts, the CTA landscape remains volatile. The Sheppard Mullin CTA Task Force will continue to monitor the various court cases, both in Texas and in other jurisdictions around the country, as well as the legislative bills that are making their way through the House and Senate, and will continue to provide updates as they become available. In the meantime, reporting companies are advised to comply with the law as it currently stands and, barring any further updates from FinCEN, should being filing BOI reports again if they have not already done so.
For background information about the CTA and its reporting requirements (including answers to several frequently asked questions), please refer to our previous blog post, dated November 5, 2024. For more information about the history of the CTA litigation mentioned above, please refer to our blog post, dated January 3, 2025.
Additional information about the CTA requirements can be found at the following FinCEN websites:
FinCEN’s website regarding beneficial ownership information
FinCEN’s Small Entity Compliance Guide
FinCEN’s BOIR Frequently Asked Questions (https://www.fincen.gov/boi-faqs)
California: Private Equity Management of Medical Practices Again Appears in Proposed Legislation
The California legislature recently introduced legislation, SB 351, that would impact private equity or hedge funds managing physician or dental practices in California. The bill is similar to a portion of California legislation from last year, AB 3129, which targeted private equity group and hedge fund management of medical practices. Last year, AB 3129 passed in the legislature but was vetoed by the Governor before becoming law. The introduction of SB 351 is part of a continuing trend in California and across the country in examining the influence of private equity investment in medical practices.
What Does SB 351 Do?
SB 351 is intended to ensure health care providers maintain control of clinical decision-making and treatment choices and to limit the influence of private equity or hedge fund influence or control over care delivery in the state.
SB 351 would codify and reinforce existing guidance relating to the prohibition on the corporate practice of medicine and dentistry. Specifically, SB 351 would prohibit a private equity group or hedge fund involved in any manner with a California physician or dental practice from interfering with professional judgment in making health care decisions or exercising control of certain practice operations.
Under the proposed legislation, prohibited activities include: determining the diagnostic tests appropriate for a particular condition; determining the need for referrals to other providers; being responsible for the ultimate care or treatment options for the patient; and determining the number of patient visits in a time period or how many hours a physician or dentist may work. Exercising control over a practice would include the following types of activities: owning or determining the content of patient medical record; selecting, hiring, or firing physicians, dentists, allied health staff, and medical assistants based on clinical competency; setting the parameters of contracts with third-party payors; setting the parameters for contracts with other physicians or dentists for care delivery; making coding and billing decisions; and approving the selection of medical equipment and supplies.
In addition, SB 351 would limit the ability of a private equity or hedge fund to restrict a provider or practice from engaging in competitive activities. SB 351 would prohibit a private equity group or hedge fund from explicitly or implicitly barring any practice provider from competing with the practice in the event of a termination or resignation of that provider from that practice. The bill would also prohibit a private equity group or hedge fund from barring a provider from disparaging, opining, or commenting on issues relating to quality of care, utilization, ethical or professional changes in the practice of medicine or dentistry, or revenue-increasing strategies employed by the private equity group or hedge fund. The California Attorney General would be entitled to injunctive relief and other equitable remedies for enforcement of the provisions of SB 351.
SB 351 contains some of the provisions that were included in AB 3129 relating to management of physician and dental practices but does not include the same breadth of limitations that were in AB 3129. Notably, SB 351 does not require the notice to and consent of the California Attorney General for certain private equity health care transactions. SB 351 also does not extend to hedge fund or private equity involvement with psychiatric practices. The scope is limited to private equity or hedge fund involvement with a physician or dental practice.
What Happens Next?
SB 351 will continue to make its way through the California legislature this year and may undergo further amendments throughout the process. Similar to AB 3129, SB 351 may garnish sufficient support to be passed by the California legislature.
The reintroduction of this legislation in California demonstrates the continuing national focus on private investment in medical practices across the country and the limitation on restrictive covenants. Management organizations and professional entities in California should review their existing arrangements to ensure compliance with applicable laws and existing corporate practice restrictions. Given the continued interest in the California legislature in addressing these issues, it may be prudent to proactively align those arrangements with the limitations in SB 351. We will continue tracking SB 351’s progress.
Recent Developments: Nationwide CTA Injunction Lifted, New March 21, 2025, Reporting Deadline Set, and Reporting Rule May Be Modified
Key Takeaways:
The Corporate Transparency Act (CTA) reporting requirements are back in effect following a Texas district court decision entered on February 18.
According to the Financial Crime Enforcement Network (FinCEN), the new general deadline for most reporting companies filing initial, updated, and corrected BOI reports is March 21and the deadline for a reporting company with a previously given later deadline is the later deadline.
In the interim, FinCEN “will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks.”
FinCEN also “intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.”
Background:
On January 23, 2025, the United States Supreme Court (SCOTUS) reversed the U.S. district court’s preliminary injunction staying the Corporate Transparency Act (CTA) and the implementing Reporting Rule in Texas Top Cop Shop v McHenry (f/k/a Texas Top Cop Shop v Garland), Case No. 4:24-cv-00478 (E.D. Tex. 2024). For background, see our previous alerts describing the Texas Top Cop Shop district court’s December 3, 2024, opinion and order, and the Fifth Circuit’s decisions lifting and later reinstating the district court’s nationwide stay.[1]
A separate nationwide stay of the CTA Reporting Rule issued on January 7, 2025, by another Texas district court in Smith v U.S. Department of Treasury, Case No. 6:24-cv-00336 (E.D. Tex. Jan 7, 2025) was not affected by the SCOTUS order in Texas Top Cop Shop and remained in effect.[2]
On January 24, 2025, FinCEN published an updated alert acknowledging that, in light of the continuing effect of the nationwide stay in Smith, reporting companies were at that time not required to report beneficial ownership information but could do so voluntarily.[3]
On February 5, 2025, the Department of Justice (DOJ) appealed the Smith nationwide stay to the Fifth Circuit and filed a motion with the Smith district court asking it to lift that stay in view of the SCOTUS order in Texas Top Cop Shop. DOJ stated that, if lifted, FinCEN intended to extend reporting deadlines for 30 days and, during that period, evaluate whether to revise reporting requirements on “low-risk” entities and prioritize enforcement on the “most significant national security risks.”
On February 6, 2025, FinCEN published a new alert acknowledging the DOJ’s pending appeal in Smith and motion requesting the district court to lift the stay in Smith. FinCEN also confirmed its intention, if the stay was lifted, to extend the reporting deadline by 30 days and to assess options to modify further reporting deadlines for “lower-risk” entities during the 30-day period.
Smith District Court Lifts Stay of CTA Reporting Rule:
On February 18, 2025, the Smith district court stayed the preliminary relief granted in its January 5, 2025, order, including the nationwide stay of the CTA Reporting Rule, pending disposition of the Smith appeal to the Fifth Circuit.[4]
CTA Reporting Requirements Back in Effect:
On February 19, 2025, FinCEN published an updated alert stating that, in view of the Smith district court’s decision, “beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) are once again back in effect.” FinCEN generally extended the deadline for most reporting companies filing initial, updated and corrected BOI reports to March 21, 2025 (30 calendar days from February 19, 2025). FinCEN also stated that “during this 30-day period, FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks” and that “FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.” At the same time, FinCEN also updated two other alerts with respect to Texas Top Cop Shop and National Small Business United v Yellen.[5]
FinCEN Updated CTA Reporting Deadlines:
The updated deadlines, as set forth in the FinCEN updated alert, follow:
For the “vast majority” of reporting companies, the new deadline to file an initial, updated, and/or corrected BOI report is March 21, 2025. FinCEN also stated that it will provide an update before that deadline of any further deadline modifications, recognizing that more time may be needed to meet BOI reporting obligations.
For reporting companies that were previously given a reporting deadline later than the March 21, 2025, the applicable deadline is that later deadline. FinCEN included as an example, “if a company’s reporting deadline is in April 2025 because it qualifies for certain disaster relief extensions, it should follow the April deadline, not the March deadline.”
FinCEN also noted that the plaintiffs in National Small Business United v. Yellen are not currently required to report their beneficial ownership information to FinCEN. See FinCEN alert “Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)”.
For additional information, see the FinCEN February 19, 2025, updated Alert, Beneficial Ownership Information Reporting | FinCEN.gov], and FinCEN Notice, FIN-2025-CTA1, FinCEN Extends Beneficial Ownership Information Reporting Deadline by 30 Days; Announces Intention to Revise Reporting Rule (February 18, 2025).
If you have questions about your CTA-related engagement with the firm, please contact your Miller Canfield lawyer for further guidance.
[1] Corporate Transparency Act: Miller Canfield
[2] See the Smith district court’s opinion and order here: [Smith et al v. United States Department of The Treasury et al, No. 6:2024cv00336 – Document 30 (E.D. Tex. 2025).]
[3] The current FinCEN Alerts can be found here [Beneficial Ownership Information Reporting | FinCEN.gov.]
[4] gov.uscourts.txed.232897.39.0.pdf
[5] [Beneficial Ownership Information Reporting | FinCEN.gov]
The CTA Strikes Back
Following a cascade of developments, the Corporate Transparency Act (CTA) is back, but with some potential changes on the horizon. Most reporting companies that have not yet filed all required reports under the CTA should prepare to file their initial, updated, or corrected reports by March 21, 2025.
In our recent alert on the CTA, we noted that the US Court of Appeals for the Fifth Circuit on December 26 reinstated a nationwide injunction prohibiting the government from enforcing the CTA. That injunction was stayed by the US Supreme Court on January 23, but a district court order in another case, Smith v. US Department of the Treasury, kept the CTA offline.
Court Orders the CTA Back into Effect
By an order dated February 17, however, the final district court order in the Smith case that was preventing the CTA’s enforcement was lifted by the US District Court for the Eastern District of Texas. As a result, beneficial ownership information (BOI) reporting requirements under the CTA are now back in effect.
FinCEN’s Response
In response, the Financial Crimes Enforcement Network (FinCEN) issued a notice stating that the new deadline for most reporting companies to file an initial, updated, or corrected BOI report is now March 21, 2025. Reporting companies that were previously given a reporting deadline later than March 21 (such as those qualifying for certain disaster relief extensions or those that were formed in late December 2024) have until that later deadline to file their initial BOI reports.
FinCEN’s notice further states that the government, recognizing that reporting companies may need additional time to comply with their BOI reporting obligations, will provide an update before March 21 of any further modifications to this deadline. FinCEN also observes that it will initiate a process this year to revise the BOI reporting rule to reduce burdens for “lower-risk entities,” including many US small businesses, although the notice does not go into detail on what companies might fall within that category or what changes may be contemplated.
Potential Future Court Action?
While it is possible that a court may find the CTA to be unconstitutional or otherwise stay its enforcement once again, there are no guarantees that this will occur (if at all) before the new March 21 deadline.
Potential Legislative Action?
There also remains the possibility of legislative action. On February 10, the US House of Representatives unanimously passed a bill, H.R. 736 (the Protect Small Businesses from Excessive Paperwork Act of 2025), to extend the filing deadline to January 1, 2026, for reporting companies formed before January 1, 2024. That bill is now under consideration in the US Senate, although, as of the publication of this alert, there is no indication of whether or when there may be further action on the bill in the Senate.
What Now?
In light of these developments, reporting companies should resume their CTA compliance efforts to file the requisite BOI reports by March 21 (or, as applicable, a later reporting deadline for those reporting companies that were previously given a reporting deadline later than March 21).
Client Alert- Corporate Transparency Act Is Back in Effect – Another Major Update
As has now been well reported, in 2021 Congress enacted the Corporate Transparency Act (the “CTA”), which empowers the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to collect information about “Beneficial Owners” of certain privately held entities for the purpose of deterring illicit activities through the operation of shell corporations and LLCs.
Entities formed on or after Jan. 1, 2024, that are subject to the CTA were to disclose to FinCEN information about their Beneficial Owners within 90 days of formation or any change for entities (Beneficial Ownership Interest Reports or “BOIR”). Entities formed prior to Jan. 1, 2024, were to have until Dec. 31, 2024, to file BOIRs. However, in the latter part of 2024, a series of lawsuits were brought challenging the constitutionality of the CTA; they have served to delay the reporting requirements of the CTA and have created confusion and uncertainty regarding the CTA for more than 30 million entities.
The most recent event occurred on Feb. 17, 2025, when the U.S. District Court for the Eastern District of Texas, Tyler Division issued a decision in Smith, et al. v. U.S. Department of the Treasury, et al., lifting the stay the Court had ordered on Jan. 7, 2025, that prevented FinCEN from enforcing the BOIR requirements on a nationwide basis.
In view of this decision, FinCEN issued guidance on Feb. 18, 2025, stating that the requirement to file BOIRs under the CTA is once again back in effect. For the vast majority of reporting companies, the new deadline to file an initial, updated, and/ or corrected BOIR is now March 21, 2025. FinCEN indicated that it will provide an update before then of any further modification of this deadline, recognizing that reporting companies may need additional time to comply with their reporting obligations once this update is provided.
The following chronology of events leading up to Feb. 18 underscores the confusion surrounding the CTA:
On Dec. 3, 2024, in the case of Texas Top Cop Shop, Inc., et al. Garland, et al., the U.S. District for the Eastern District of Texas, Sherman Division, issued an order prohibiting the federal government from enforcing the CTA anywhere in the country. The Court determined that the CTA was likely unconstitutional, and that its implementation would irreparably harm companies if they were forced to comply.
On Jan. 7, 2025, in the case of Smith case, the U.S. District Court for the Eastern District of Texas, Tyler Division, issued an order enjoining the government from enforcing the CTA against the plaintiffs and staying FinCEN’s regulations relating to the implementation of the CTA’s reporting requirements.
On Jan. 20, 2025, President Trump signed an Executive Order titled “Regulatory Freeze Pending Review,” which provides in part:
“I hereby order all executive departments and agencies to take the following steps:
(1) Do not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register (the “OFR”), until a department or agency head appointed or designated by the President after noon on January 20, 2025, reviews and approves the rule.”
The impact of this Order on FinCEN’s ability to issue new filing deadlines is uncertain.
On Jan. 23, 2025, the U.S. Supreme Court stayed (i.e., halted) the injunction issued in the Texas Top Cop Shop decision but did not address the injunction in
On Jan. 24, FinCEN issued the following:
“In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force… However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”
On Feb. 5, 2025, the federal government filed an appeal in the Eastern District of Texas challenging the injunction in Smith based on the Supreme Court’s ruling in Texas Top Cop Shop. FinCEN has indicated that if the remaining nationwide injunction in Smith is stayed, it intends to resume enforcement of the CTA and extend the reporting deadline by at least 30 days from the issuance of the stay.
On Feb. 10, 2025, the House of Representatives unanimously passed R. 736 — 119th Congress (2025-2026), the Protect Small Business from Excessive Paperwork Act of 2025. This bill would require reporting companies formed or registered before Jan. 1, 2024, to submit reports to FinCEN by Jan. 1, 2026, instead of by Jan. 1, 2025.
Prior to the above- mentioned Court decision on Feb. 17, some entities were taking take a “wait and see approach,” taking the risk of having to make a filing quickly. Other entities were more proactive and made a voluntary filing. With the February Court decision and FinCEN’s resulting position, a “wait and see approach” is no longer an option, at least not for now. But uncertainty regarding the ultimate fate of the CTA remains in view if the Executive Order described above and the possibility that the U.S. Supreme Court may rule on its constitutionality.
Stay tuned!
NewsBank Hit with Class Action over Employee Data Breach
Last week, a class action was filed against NewsBank, Inc., a Florida-based news database company, related to a 2024 breach of employee personal information.
NewsBank provides a database of archived news publications utilized by libraries, higher education institutions, and other organizations. NewsBank suffered a security incident affecting its employees’ personal information between June and July 2024.
The lead plaintiff claims that, as an employee of NewsBank from January 2023 to November 2024, they were required to provide their personal information (i.e., name, date of birth, Social Security number, and financial account information) as part of their employment.
The lead plaintiff alleges they now face a heightened risk of identity theft due to the breach. The complaint states, “Plaintiff and class members must now and for years into the future closely monitor their medical and financial accounts to guard against identity theft. The risk of identity theft is not speculative or hypothetical but is impending and has materialized as there is evidence that the plaintiff’s and class members’ private information was targeted, accessed, has been misused, and disseminated on the dark web.” The lawsuit alleges claims of negligence, breach of implied contract, and breach of fiduciary duty.
Additionally, the lawsuit alleges that NewsBank failed to follow its policies, including those outlined in its website Privacy Policy, stating that NewsBank had implemented security procedures to protect personal information from unauthorized access, use, and disclosure.
The class seeks over $5 million in damages and injunctive relief, requiring NewsBank to implement enhanced security measures and provide affected individuals with lifetime identity theft protection services. The complaint alleges that “[o]nce private information is exposed, there is virtually no way to ensure that the exposed information has been fully recovered or contained against future misuse [. . . ] For this reason, plaintiff and class members will need to maintain these heightened measures for years, and possibly their entire lives, as a result of defendant’s conduct.”
DOJ Gun-Jumping Complaint Highlights Importance of Careful Preparation of Interim Operating Covenants to Avoid HSR Act Violations
A recent civil complaint from the U.S. Department of Justice (DOJ) highlights the importance of carefully planning interim operating covenants in M&A deals and structuring the process to prevent buyers from gaining control of targets too soon—before the mandatory waiting period under the Hart-Scott-Rodino Act (HSR Act) is up. This is commonly referred to as “gun-jumping.”
On January 7, 2025, the DOJ filed a complaint for civil penalties and equitable relief for violations of the HSR Act against Verdun Oil Company II LLC (Verdun), XCL Resources Holdings, LLC (XCL), and EP Energy LLC (EP Energy) for gun-jumping in Verdun’s and XCL’s $1.4 billion acquisition of EP Energy, a crude oil production company operating in Utah and Texas. The DOJ alleges that between the execution of the transaction’s purchase agreement in July 2021 and October 2021, when the purchase agreement was amended to restore EP Energy’s operational independence, EP Energy allowed Verdun and XCL, Verdun’s sister company, (i) to exert premature operational and decision-making control over significant aspects of EP Energy’s day-to-day business, (ii) to assume financial risks within EP Energy’s business, (iii) to obtain competitively sensitive information, (iv) to engage directly with customers and vendors in contract negotiations, and (v) to coordinate anti-competitive pricing and supply chain disruptions, all prior to the expiration of the waiting period obligations under the HSR Act.
Even though EP Energy, Verdun, and XCL filed the required pre-merger HSR filings with the Federal Trade Commission and the DOJ, the complaint alleges that the purchase agreement granted the buyers too much control during the waiting period because of consent rights that placed key aspects of EP Energy’s business under their control. The purchase agreement also allegedly required buyers’ express approval to conduct development operations, which prevented EP Energy from continuing its oil well-development activities and production plans, and to hire field-level employees and contractors necessary for drilling and production in its ordinary-course operations. The purchase agreement also allegedly made the buyers responsible for any financial risk and liabilities tied to the restrictions, further suggesting they were gaining effective control over the company.
In addition, XCL and Verdun allegedly took an active “boots on the ground” approach to taking over EP Energy’s operations prior to the closing of the transaction and the expiration of the HSR waiting period, allegedly coordinating with EP Energy on customer contracts, relationships, and deliveries, in addition to coordinating on pricing terms offered to customers. In assuming the operational control of EP Energy, the buyers were allegedly granted access to confidential and competitively sensitive information to include details on customer contracts, pricing, production volumes, and vendor contracts.
As a result of these allegations, XCL, Verdun, and EP Energy are facing civil fines in excess of $5.6 million.
When structuring a deal, it’s important to account for the HSR clearance timeline and closely monitor the activities between the buyer and the target. All parties involved need to know what’s okay to do before the deal closes, especially when it comes to making decisions and taking control of operations. For example, deal teams should avoid having buyers negotiate on behalf of the target with customers or vendors, and be very careful with handling sensitive competitive information to prevent anti-competitive concerns. That info should be shared carefully, using “clean team” safeguards or data rooms to keep it under control.
While these tips are general best practices for any transaction, deal teams should address and tailor HSR, anti-competition, and purchase agreement interim operating covenant considerations on a deal-by-deal and client-by-client basis.
Resources:
U.S. Department of Justice, Press Release, Oil Companies to Pay Record Civil Penalty for Violating Antitrust Pre-Transaction Notification Requirements (Jan. 7, 2025), https://www.justice.gov/archives/opa/pr/oil-companies-pay-record-civil-penalty-violating-antitrust-pre-transaction-notification.
United States v. XCL Resources Holdings, LLC, No. 25-cv-00041 (D.D.C. Jan. 7, 2025).
Corporate Transparency Act Back in Effect and Extended Deadline
On February 18, 2025, the U.S. District Court for the Eastern District of Texas lifted the nationwide injunction it had previously issued against the enforcement of the Corporate Transparency Act (CTA).1 As a result, the CTA reporting requirements are effective again.
In response, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has extended the deadline for most reporting companies by 30 days, moving the new deadline to March 21, 2025. Reporting companies that were granted later deadlines—such as those with disaster relief extensions to April 2025—should continue to follow their original deadlines. Unlike prior deadlines, there is no distinction between companies formed before or after January 1, 2024 in terms of the deadline.
During this 30-day period, FinCEN will assess the possibility of further deadline changes and focus on prioritizing reporting from entities that pose higher national security risks. Additionally, FinCEN plans to revise the BOI reporting rule later this year to reduce the administrative burden on lower-risk businesses, including many small U.S. businesses.
However, it is unclear whether any changes will occur before the March 21, 2025 deadline.
What This Means for Your Reporting Company:
The CTA reporting requirements are back in effect.
If you do not have significant business or privacy concerns, you should submit your filings now.
If you have concerns, prepare your materials to file closer to the deadline if no updated guidelines or deadlines are issued.
New deadline for companies: March 21, 2025 (unless your reporting company has a later deadline).2
1 Background on Court Cases:
On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, et al. On January 23, 2025, the Supreme Court ordered that the injunction be lifted.
On January 7, 2025, the same U.S. District Court issued another nationwide injunction in Smith v. U.S. Department of the Treasury. On February 18, 2025, the court lifted its injunction. With no more nationwide injunctions in place, the CTA came back into effect. The Department of Justice has filed an appeal, and the injunction will remain lifted until the appeal is completed.
2 The CTA is still not being enforced against the plaintiffs in National Small Business United v. Yellen.