How Alcohol Exporters Can Use FDII and IC-DISC to Maximize Tax Savings
For US alcohol exporters – whether crafting bourbon, brewing craft beer, or bottling fine wines – selling to international markets is a significant opportunity for growth. Two US federal income tax regimes, the foreign-derived intangible income (FDII) deduction and the interest charge-domestic international sales corporation (IC-DISC), offer valuable ways to reduce tax liability and boost profits. Each has unique benefits and trade-offs, making them suited to different business needs. This blog post compares FDII and IC-DISC, helping alcohol exporters decide which tool – or combination – best fits their global ambitions.
Note that all discussions of tax rates are limited to US federal income tax. Additional state and local taxes and excise taxes may also apply.
FDII for Export Income
Introduced under the 2017 Tax Cuts and Jobs Act (TCJA), FDII incentivizes US C corporations to earn income from foreign sales while keeping operations stateside by providing a reduced effective tax rate on eligible export income derived from US-based corporations. It targets “intangible” income – profits exceeding a routine return on tangible assets – and applies a deduction directly on the exporter’s tax return.
How FDII Works
Eligible income comes from selling alcohol (e.g., whiskey or wine) to foreign buyers for use outside the United States.
The FDII deduction is 37.5% of qualifying income (dropping to 21.875% after 2025), reducing the effective corporate tax rate from 21% to 13.125% on that portion of income.
No separate entity is required. Claims are made on the existing C corporation’s Form 1120.
Example: A winery exporting $2 million in Pinot noir with $400,000 in net profit might qualify $300,000 as FDII. A 37.5% deduction ($112,500) lowers the tax from $63,000 to $39,375, saving $23,625.
IC-DISC: A Classic Deferral and Rate Reduction Tool
The IC-DISC, a legacy export incentive from the 1970s, operates as a separate “paper corporation” that earns commissions on export sales. It is available to any US business structure (e.g., C corporations, S corporations, and LLCs) and shifts income to shareholders at a lower tax rate or defers it entirely.
How IC-DISC Works
The exporter forms an IC-DISC and pays the entity a commission (up to 4% of export gross receipts or 50% of net export income).
The commission is deductible for the operating company, reducing its taxable income.
The IC-DISC pays no federal tax; instead, its income is distributed to shareholders as qualified dividends (taxed at 20% capital gains rate) or retained for deferral.
Example: A distillery owned by a closely held pass-through entity with $2 million in export sales and $400,000 in net profit pays a $200,000 commission to its IC-DISC. The operating company saves $74,000 in income tax (37%), while shareholders pay $47,600 in capital gains tax (20% plus 3.8% net investment income tax) on the dividend, netting a $27,600 savings.
Comparing Tax Benefits: FDII vs. IC-DISC
Combining FDII and IC-DISC?
For alcohol manufacturers and distributors, using both FDII and IC-DISC is possible. FDII reduces the corporate tax rate on export income, while an IC-DISC could shift additional income to shareholders at the capital gains rate or defer it.
Conclusion
FDII and IC-DISC are potent tools for alcohol exporters, each with distinct strengths. FDII delivers a lower tax rate with minimal effort, ideal for C corporations riding the wave of global demand for American products. IC-DISC offers flexibility, deferral, and broader eligibility, suiting a wider range of businesses with an eye on cash flow. As the craft beer, spirits, and wine industries expand abroad, choosing the right regime – or blending them – can uncork significant savings. Consult a tax professional to tailor the choice to your operation.
The CFTC’s New Advisory on Self-Reporting, Cooperation and Remediation
In an advisory announced February 25, 2025, the Division of Enforcement of the Commodity Futures Trading Commission (CFTC or Commission) announced a new regime for assessing cooperation credit in determining fines in the settlement of enforcement cases. The advisory expressly revokes and replaces all six prior enforcement advisories on cooperation, as well as the advice in the Enforcement Manual on cooperation. The advisory now formally titles cooperation credit as “Mitigation Credit.” The advisory splits the scoring of Mitigation Credit between a score for a particular quality of self-reporting and a score for a particular level of cooperation during an investigation and remediation. A settling party can be eligible for Mitigation Credit based on either self-reporting or cooperation, or both.
The advisory provides a “Matrix” that assigns specific percentage penalty discounts for each combination of the credit scores. The scoring is structured to encourage both exemplary cooperation and exemplary self-reporting. For example, exemplary cooperation even with “satisfactory” self-reporting results in only a 35 percent reduction; exemplary self-reporting followed by no cooperation results in a 20 percent discount; and both an exemplary self-report and exemplary cooperation results in a 55 percent reduction in penalty.
The advisory might be a harbinger for better clarity and more predictable outcomes, but only time will tell what its future effectiveness will be. It can be hard to measure the extent to which credit is awarded in the current absence of quantified penalty levels for particular types of violations. If the CFTC Enforcement Division’s initial settlement demand seems excessive, it will be difficult to discern the dollar or percentage value of any credit. However, by delineating specific percentage credits for particular Mitigation Credit, the advisory signals a quantitative approach that over time might provide more predictable rewards for self-reporting and cooperation. There will undoubtedly be disagreements over the Division’s assessments but having the advisory’s specific framework could help focus the debates.
Self-Reporting Process Changes
Voluntariness: A self-report must be made voluntarily, meaning that it must be made prior to an imminent threat of exposure of the potential violation. Importantly, a self-report will be eligible for Mitigation Credit even if it may have been required to be disclosed by a futures commission merchant, swap dealer, major swap participant, swap execution facility or swap data repository in its annual chief compliance officer report, if the self-report was made in a timely manner “notwithstanding the timing of the annual report.”
Disclosure to the “Appropriate Division”: The advisory provides that an investigated party can be credited for self-reporting as long as it self-reported to the “Appropriate Division” of the CFTC. Previously, self-reporting would have been credited only if the report was made directly to the Division of Enforcement. The Appropriate Division is defined to be the primary division that is responsible for the interpretation and application of each regulation that is the subject of the potential violation. Disclosure to the Division of Enforcement, however, will be treated as disclosure to the Appropriate Division, so disclosure to the Division of Enforcement will always qualify.
Timing of Self-Reporting: Self-reporting must be “prompt” but promptness will be measured against the reporting person’s efforts to determine whether there was a potential violation and its materiality in a timely manner, including discovery of the potential violation and escalation, investigation, management review and governance requirements.
Qualifying for “Full Credit”: To receive “full credit” for a self-report, the report must be complete including all material information regarding the potential violation known to the person at the time of the self-report, including description of the issue, date and method of discovery, available root cause analysis and remediation, if any.
Rolling Disclosure can Still Qualify for Full Credit: To encourage voluntary disclosure at the earliest possible time, the Division will recommend full credit for the Person where the Person made best efforts to determine the relevant facts at the time of the self-report, fully disclosed the facts known at that time, continued to investigate and disclosed additional relevant facts as they were identified; and demonstrates adherence to the other requirements in this advisory.
Safe Harbor for Good Faith Mistakes in Self-Reporting: Importantly, the advisory makes the commitment that the Division will not recommend charges for fraud or false statements if errors and inaccuracies occur in self-reports if the self-report or voluntary disclosure was made in good faith and if any inaccurate information in the self-report or voluntary disclosure is supplemented and corrected promptly after discovery of the inaccurate information. This might seem to be simply fair government behavior, but it is welcome to have it in writing.
The Matrix for Mitigation Credit
The advisory’s Matrix assigns particular penalty percentage discounts based on the combination of separate scores for: (1) self-reporting; and (2) cooperation and remediation. The Division will evaluate self-reporting on a three-tier scale: No Self-Report; Satisfactory Self-Report; and Exemplary Self-Report. It will evaluate cooperation and remediation on a four-tier scale: No Cooperation; Satisfactory Cooperation; Excellent Cooperation; and Exemplary Cooperation. Mitigation Credit for self-reporting and cooperation are evaluated separately. This is the Matrix:
Tier 1: No Cooperation
Tier 2: Satisfactory Cooperation
Tier 3: Excellent Cooperation
Tier 4: Exemplary Cooperation
Tier 1: No Self-Report
0%
10%
20%
35%
Tier 2: Satisfactory Self-Report
10%
20%
30%
35%
Tier 3: Exemplary Self Report
20%
30%
40%
55%
Scoring Self-Reporting: The Division of Enforcement will evaluate self-reporting primarily on four factors: (1) the voluntariness of the self-report; (2) whether the self-report was made to the Commission; (3) whether the self-report was made in a timely manner; and (4) whether the self-report was complete.
Tier
Self-Reporting
Tier 1: No Self-Report
No timely self-report; or Self-report was information already known from other sources; or Self-report that was not reasonably related to the potential violation or not reasonably designed to notify the Commission of the potential violation.
Tier 2: Satisfactory Self-Report
Self-report to an Appropriate Division Notified the Commission of the potential violation Did not include all material information reasonably related to the potential violation that the reporting party knew at the time of the self-report
Tier 3: Exemplary Self-Report
Self-report to an Appropriate Division Notified the Commission of the potential violation Included all material information reasonably related to the potential violation that the reporting party knew at the time of the self-report Included additional information that assisted the Division with conserving resources in the Division’s investigation
Scoring Cooperation and Remediation: In evaluating a company’s or individual’s cooperation, the Division of Enforcement will study a wide variety of factors, including remediation measures.
Cooperation: The Division of Enforcement will consider such factors as whether the company or individual provided assistance beyond subpoenas and compulsory processes, voluntarily provided documents and information, made presentations, made witnesses available, performed internal investigations or reviews, provided an analysis and identified the root cause of the violation, took corrective action for remediation, significantly completed remediation and proactively engaged and used significant resources to provide material assistance.
Remediation: The Division of Enforcement will also evaluate remediation as part of cooperation and will primarily consider whether a company or individual engaged in substantial efforts to prevent a future violation. The relevant Operating Division will determine whether the remediation plan is appropriate.
Monitors and Consultants: The advisory introduces an important new role for Operating Divisions in fashioning remedial relief. The advisory states that the appropriate Operating Division will determine whether to recommend the use of a compliance monitor or consultant to ensure completion of remedial undertakings. This means that settlements can involve advocacy with Operating Divisions in addition to the Division of Enforcement. The Division of Enforcement will then have to approve the selection of a monitor, who will have to periodically submit progress reports to the Division of Enforcement. Additionally, the monitor, in conjunction with the individual or company’s senior management, must submit a certification of completion to the undertakings of the company or individual.
Tier
Cooperation
Tier 1: No Cooperation
No substantial assistance beyond required legal obligations
Tier 2: Satisfactory Cooperation
Provided substantial assistance Voluntary production of documents and information Arranging for voluntary witness interviews Basic presentations on legal and factual issues
Tier 3: Excellent Cooperation
Meet the expectations for Satisfactory Cooperation Consistently provided substantial assistance Internal investigations or reviews Thorough analysis of potential violation, root cause, and corrective action for remediation Use of internal or external expert resources and consultants as appropriate
Tier 4: Exemplary Cooperation
Meet the expectations for Excellent Cooperation Consistently provided material assistance Proactive engagement and use of significant resources Significant completion of remediation Use of accountability measures, as appropriate
The Division’s advisory opens the door to more predictable credit for self-reporting and cooperation going forward. Time will tell its contribution to fair outcomes.
Trump Media Claims Corporate Law Decisions Are Better When Made Locals
Trump Media & Technology Group Corp., a Delaware corporation, operates Truth Social and its securities trade on The Nasdaq Stock Market LLC. The company’s largest stockholder is Donald J. Trump, Jr. Given Trump pere’s affiliation with Elon Musk and Mr. Musk’s disdain for Delaware’s corporate law regime, it likely will come as no surprise that TMTG has filed preliminary proxy materials that include a proposal to reincorporate from Delaware to Florida. Also, it should forgotten that President Trump’s erstwhile rival for the presidency hails from Delaware.
TMTG makes the interesting argument that is better to have corporate law decided by the locals:
Another advantage of home-state incorporation is that the legislators and judges making corporate law - and the juries deciding fact disputes - are drawn from the community in which the Company operates. Corporate law and litigation often overlap with and impact business, employment and operational matters. The Board believes that local decision-makers have a deeper understanding of our business, and therefore are best situated to make decisions about our corporate governance.
TMTG supports this position by citing other companies that have chosen to be incorporated in their home states:
Successful companies are incorporated in many U.S. states and other jurisdictions outside of the United States. Some of the most successful consumer-facing companies in the United States are headquartered and incorporated in the same state, demonstrating identification with their home state, including, among others, Apple and Southwest Airlines. For example, Microsoft reincorporated from Delaware to its home state in order to reunite the company’s legal and physical homes. One of the reasons given by Microsoft when it left Delaware was that Washington was “the location of the Company’s world headquarters and the location of its primary research and development efforts.” Similarly, the Board believes there is value in unifying TMTG’s legal and physical homes
Although the Silicon Valley has spawned a great many public companies, Apple Inc. is one of the very few publicly traded companies that has remained incorporated in California.
TMTG also takes aim at two recent Delaware court decisions, In re Match Group, Inc. Derivative Litigation, 315 A.3d 446 (Del. 2024) and Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024), concluding that reincorporation “will result in less unmeritorious litigation against the Company, our directors and officers and our controlling stockholder, which in turn would better allow our directors and officers to focus on our business and save the Company the costs of such litigation”.
Finally, TMTG discounts the recently proposed and highly controversial amendments to Delaware’s General Corporation Law:
Though there are proposed amendments to the DGCL to, among other things, increase protections for officers of a corporation, we believe Florida strikes a better balance between the benefits and costs of litigation to the Company and its stockholders than does Delaware because Florida has a statute-focused approach to corporate law whereas Delaware’s approach depends upon judicial interpretation that lends itself to greater uncertainty.
In a recent post, Professor Stephen Bainbridge asseverated:
“Assuming SB 21 passes the Delaware legislature, those decisions will be overturned and the incentive driving DExit will be significantly reduced”.
Evidently, TMTG does not agree.
SEC Staff Issues New Guidance on Shareholder Proposals With SLB 14M
On February 12, 2025, the Staff of the SEC Division of Corporation Finance released Staff Legal Bulletin No. 14M (SLB 14M), which addresses various aspects of the Rule 14a-8 shareholder proposal process. Going forward, public companies navigating proxy season will have more flexibility in excluding certain shareholder proposals, especially those related to environmental and social issues. Most notably, SLB 14M rescinds Staff Legal Bulletin No. 14L (SLB 14L), issued in 2021, which imposed a higher burden on public companies seeking to exclude shareholder proposals. SLB 14M also reinstates guidance that was previously rescinded by SLB 14L.
What SLB 14M Means for Companies
The new guidance highlights a significant shift in the SEC Staff’s approach to shareholder proposals under the Trump Administration. SLB 14M reasserts a more company-friendly approach and eliminates guidance that, in practice, led to an increase in shareholder proposals and fewer requests for no-action relief.
Looking back, under the now-rescinded SLB 14L, the SEC Staff imposed a series of restrictions on public companies attempting to disqualify shareholder proposals from going to a vote. The 2021 guidance tightened some exemptions and allowed the Staff to go beyond the enumerated exclusions to consider a proposal’s “broad societal impact” when deciding whether to grant an exemption request. Following its issuance, shareholder proposals, particularly those on environmental and social issues, surged, while the success rate for no-action letters declined.
Now, SLB 14M is expected to lower the threshold for excluding shareholder proposals, particularly under Rules 14a-8(i)(5) and (i)(7). Companies will now have more leeway in requesting no-action relief from the SEC Staff as the guidance for omitting certain proposals has broadened.
This new guidance comes at a time when many companies have already submitted no-action requests for 2025 annual meetings in which they set forth an argument under SLB 14L’s prior framework. However, companies that submitted no-action requests prior to the publication of SLB 14M do not need to resubmit. If a company wishes to raise new legal arguments in light of SLB 14M, it may still file a supplemental set of arguments. The SEC Staff will also consider the publication of SLB 14M to be “good cause” for companies making a late no-action request, as long as the legal arguments in the request relate to the new SEC Staff guidance.
A Brief Summary of the New Staff Guidance
As explained in more detail below, SLB 14M:
Reinstates a company-specific approach to evaluating whether the subject matter of a shareholder proposal transcends ordinary business. The Staff will assess whether a specific policy issue raised in a proposal is significant to a particular company, rather than evaluating whether the proposal addresses issues with broad societal impact or universal significance. This approach allows a company to more easily exclude broad social policy shareholder proposals if the proponent does not establish that the issues are significant in relation to the company.
Broadens the application of the micromanagement exemption by expanding the circumstances under which a proposal would be considered to micromanage a company. Therefore, companies will now have more flexibility in excluding certain proposals that require the company to adopt a specific method for implementing a complex policy.
Refocuses the Staff’s “economic relevance” analysis. As a result, shareholder proposals that raise social and ethical issues must tie those matters to a significant effect on the company’s business, and the mere possibility of reputational or economic harm alone will not suffice. This change affords companies a greater ability to exclude proposals related to social and ethical matters unless they are significantly related to the company.
Advises that companies submitting no-action requests under Rules 14a-8(i)(5) and 14a-8(i)(7) are not required to include an analysis from the board of directors regarding the significance of the policy issue raised in a shareholder proposal. However, a company may still provide a board analysis if it believes it would be beneficial.
Provides additional guidance stating:
companies may exclude graphics or images from shareholder proposals if they make the proposal materially false or misleading;
companies no longer have to send a second deficiency letter to specifically identify proof of ownership defects that were already addressed in an initial deficiency letter;
the Staff’s views on the use of email confirmation receipts for submission of proposals, delivery of deficiency notices and responses; and
companies should adopt a plain meaning approach, rather than being overly technical, when interpreting the language of the proof of ownership letters.
In Light of SLB 14M, Companies Should Consider the Following
Companies should consider revisiting the shareholder proposals they previously determined were not excludable under the old guidance and re-evaluate them in light of the new guidance.
Companies should not feel the need to resubmit any no-action requests in light of SLB 14M unless they want to address new legal arguments. SLB 14M confirms that the Staff will apply SLB 14M when reviewing pending no-action requests.
For companies that have not yet submitted no-action requests, even if the deadline has passed, consideration should be given to whether exclusionary arguments can be made in light of SLB 14M guidance, especially for proposals related to environmental or social issues.
Companies should consider whether to re-engage with certain shareholder proposals. In light of SLB 14M, shareholder proponents may be more willing to engage and agree on a basis to withdraw their proposals, since the new guidance is more favorable to companies.
A Detailed Summary of SLB 14M
A Refresher on the Ordinary Business Exemption
Exchange Act Rule 14a-8(i)(7), often referred to as the ordinary business exemption, allows a company to exclude a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” The policy underlying the ordinary business exemption rests on two key considerations. One is that it allows a company to exclude a shareholder proposal from a company’s proxy materials if the proposal deals with a matter that is “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” However, shareholder proposals that pertain to ordinary business matters, but focus on a significant policy issue, cannot be excluded under this first consideration if they transcend the company’s day-to-day business matters. The other consideration is the micromanagement prong, which provides that a shareholder proposal should not seek to “micromanage” the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment. SLB 14M does not upend this approach, but rather changes the Staff’s analysis of these considerations as they relate to no-action requests.
The Ordinary Business Exemption Under SLB 14M: A Return of the Company-Specific Approach and Broadened Micromanagement Exclusions
As explained above, the SEC Staff rests the ordinary business exemption on two considerations: the proposal’s “subject matter” and whether the shareholder proposal “micromanages” the company.
Under the “subject matter” consideration, SLB 14M rescinds and replaces the SLB 14L guidance with a company-specific approach.
Again, under the ordinary business exemption, shareholder proposals that deal with a company’s ordinary business matters can be excluded. But, shareholder proposals that focus on “sufficiently significant” policy issues that transcend ordinary business typically do not fall under the exemption. Traditionally, the SEC would consider the nexus between the policy issue and the company when determining whether the issue transcends ordinary business.
SLB 14L had the effect of making it more difficult for companies to exclude certain social policy proposals by not requiring them to demonstrate their particular significance to the company’s business. Instead, the SEC Staff focused on whether the social policy proposal raised issues with broad societal impact, such that they transcended the ordinary business of the company, regardless of whether there was a direct connection between the policy issue and the particular company seeking to exclude the proposal.
The new SLB 14M guidance returns to a company-specific approach, where SEC Staff will evaluate significance based on the individual company, rather than focusing on whether a proposal raises an issue with broad societal impact. Essentially, companies will likely not have to include as many shareholder proposals in their proxy materials that raise issues of broad societal importance, such as environmental or ethical issues, unless there is a specific nexus between the issue and the company. The change broadens companies’ ability to exclude a wider range of shareholder proposals that address policy issues of societal significance only.
Under the “micromanagement” consideration, SLB 14M reinstates past guidance that is stricter on proposals that “micromanage” the company.
SLB 14M reinstates parts of several other SLBs, Staff Legal Bulletin Nos. 14I, 14J and 14K, that were overridden by SLB 14L. Under SLB 14L, the micromanagement exclusion had been interpreted more narrowly. SLB 14L took the approach that proposals seeking detail or seeking to promote timeframes or methods would not necessarily constitute micromanagement, so long as the proposals afforded discretion to management as to how to achieve such goals. For example, proposals that requested companies to adopt timeframes and targets for addressing climate change were not excludable if they allowed management the discretion to achieve these targets.
The reinstated guidance, under SLB 14M, takes a much stricter approach in favor of companies and will evaluate whether the shareholder proposal “involves intricate detail, or seeks to impose specific timeframes or methods for implementing complex policies,” such as a proposal that seeks an intricately detailed study or report. Therefore, a proposal may be excludable if it prescribes specific actions without providing the company enough flexibility or discretion to address the issue. SLB 14M also confirms that the micromanagement standard can apply to proposals addressing executive compensation or corporate governance topics.
Revitalizing the Economic Relevance Exemption Under Rule 14a-8(i)(5)
SLB 14M now requires a shareholder proposal that raises social and ethical issues to demonstrate its significance to the company, otherwise, it may be excluded. The analysis is now dependent on the specific circumstances of the company to which the proposal is submitted.
Economic relevance, under Rule 14a-8(i)(5), is another basis for the exclusion of shareholder proposals. It permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” Historically, the SEC Staff and courts have interpreted this rule as not allowing for the exclusion of a proposal related to social and ethical issues, regardless of its economic relevance to the company, and as a result, this rule has been infrequently used.
SLB 14M redirects the focus on Rule 14a-8(i)(5) and the shareholder proposal’s significance to the company’s business. Under SLB 14M, the analysis is now viewed as “dependent upon the particular circumstances of the company to which the proposal is submitted.” The SEC Staff explains that a matter significant to one company may not be significant to another. Thus, if a proposal’s significance to a company is not apparent on its face, the proposal may be excludable unless the proponent demonstrates that it is “otherwise significantly related to the company’s business.” However, the SEC Staff generally views substantive governance matters as significantly related to most companies.
Additionally, the mere possibility of reputational or economic harm alone will not demonstrate that a proposal is “otherwise significantly related to the company’s business.” In evaluating whether a proposal is “otherwise significantly related to the company’s business,” the SEC Staff will now consider the proposal in light of the “total mix” of information about the company.
This exclusion is also viewed as more favorable to companies because it allows shareholder proposals on social and ethical issues related to operating, which account for less than 5 percent of total assets, net earnings and gross sales, to be more easily excluded, unless the proponent can demonstrate its particular significance to the company’s business.
No Requirement for Board Analysis Simplifies No-Action Request Preparation
SLB 14M also confirms that the SEC Staff will not expect a company’s no-action request to include a discussion of the board’s analysis of whether a particular policy issue is significant to the company when arguing for exclusion of a shareholder proposal under Rule 14a-8(i)(5) and/or Rule 14a-8(i)(7).
The prior SLBs had encouraged companies seeking to exclude proposals under Rule 14a-8(i)(5) or Rule 14a-8(i)(7) to include a discussion in their no-action requests setting forth an analysis by the company’s board of directors as to whether or not the particular issue raised by a shareholder proposal was significant to the company’s business.
Under SLB 14M, preparing a no-action request will be simpler for companies, as the SEC Staff will no longer expect a no-action request to include a discussion reflecting the board’s analysis. While companies are still permitted to submit such an analysis, it is no longer required.
Additional Topics Addressed by SLB 14M
SLB 14M also provides further guidance on several other shareholder proposal topics, including the following:
Shareholder proposals may contain graphics or images, and their exclusion may be appropriate if: (1) images make the proposal materially false or misleading; (2) the images used in the proposal would make it inherently vague or indefinite; (3) images would impugn the character, integrity or personal reputation of someone without a factual basis; (4) the images are irrelevant to a consideration of the proposal’s subject matter; or (5) the total number of words in a proposal (plus the words in any graphics) exceed 500 words.
Companies are not required to send a second deficiency notice if the company previously sent an adequate deficiency notice and believes the proponent’s response to the initial deficiency notice contains a defect.
Proponents and companies should request acknowledgment from the recipient to confirm the receipt of emails for submitting shareholder proposals, sending deficiency notices and responding to deficiency notices. The SEC Staff encourages both parties to provide such confirmation replies.
Companies should avoid an overly technical interpretation of proof of ownership letters and instead adopt a plain meaning approach to understanding the language of the letters. However, proponents must still provide clear and adequate evidence of their eligibility to submit a shareholder proposal.
China Issues Measures on Data Protection Compliance Audits
The Cyberspace Administration of China (“CAC”) recently released requirements regarding data protection audits, titled “Administrative Measures on Compliance Auditing of Personal Information Protection” (the “Measures”). The Measures will go into effect on May 1, 2025.
The Measures were promulgated in accordance with the Personal Information Protection Law (“PIPL”) and Administrative Regulations on the Security of Network Data. The Measures set forth the: (1) conditions that would trigger an audit of a data handler’s compliance with relevant personal information protection legal requirements; (2) selection of third-party compliance auditors; (3) frequency of compliance audits; and (4) obligations of data handlers and third-party auditors in conducting compliance audits. An Appendix to the Measures, titled “Guidelines on Personal Information Protection Compliance Auditing” (the “Guidelines”), contains additional compliance audit requirements.
Voluntary and Mandatory Compliance Auditing
The Measures will require data handlers that process the personal information of more than 10 million individuals to conduct compliance auditing at least once every two years.
The Measures will permit cyberspace administration and other relevant authorities to request data handlers to conduct third-party audits where:
the data handler’s processing activities pose a great risk to the rights and interests of individuals;
the data handler lacks sufficient security measures;
the data handler’s processing activities may infringe on the rights and interests of a large number of individuals; or
the data handler experiences a data breach that results in the leakage, tampering, loss or destruction of the personal information of more than one million individuals or the sensitive personal information of more than 100,000 individuals.
For the above scenarios, the data handler will need to complete a compliance audit in accordance with the Measures’ requirements and submit an audit report to the data handler’s competent authority, with any requested corrections submitted within 15 business days to the authority.
Additionally, the Measures specify that data handlers may conduct compliance audits on a voluntary basis, either internally or through the use of a third-party auditor.
Specific Requirements for Certain Types of Data Handlers
Pursuant to the Measures, data handlers processing the personal information of more than one million individuals will need to designate a person in charge of the protection of personal information (referred to herein as the “Designated Data Protection Personnel”). Data handlers providing key online platform services with a significant number of users and a complex business model will need to establish an independent organization consisting mainly of external members to monitor compliance audits.
Requirements for Third-Party Auditors and Designated Data Protection Personnel
Third-party auditors will be required to be equipped with audit staff, premises, facilities and funds appropriate to the services provided, and to protect the confidentiality of data reviewed during compliance audits. Additionally, third-party auditors will be prohibited from using subcontractors.
The Measures will prohibit data handlers from using the same third-party auditor (or its affiliates) or the Designated Data Protection Personnel to conduct compliance audits on the same subject more than three times in a row.
Guidance on Compliance Audits
The Guidance will require data handlers to evaluate the following factors in compliance audits:
the legal basis for processing the personal information;
the relevant personal information processing rules;
whether the data handler has fulfilled its individual notification obligations;
the data handler’s joint processing activities;
the vendors processing personal information on the data handler’s behalf;
whether there has been a transfer of personal information due to a merger, reorganization, separation, dissolution, bankruptcy or other reason;
whether the data handler has shared personal information with other data handlers;
whether the data handler engages in automated decision-making activities;
whether the data handler publicly publishes personal information (including instances in which the data handler obtains individuals’ consent to do so);
whether the data handler has installed surveillance devices that may be used to identify individuals in public places;
whether the data handler processes sensitive personal information;
whether the data handler processes personal information of minors under 14 years old;
whether the data handler transfers personal information outside of China;
how the data handler complies with the right to erase personal information;
how the data handler protects the rights of individuals in its processing activities;
how the data handler responds to individuals’ data protection inquiries and explains its personal information processing activities;
the data handler’s internal management policies and operating procedures;
the technical security measures the data handler has implemented to protect personal information;
the data protection education and training programs provided by the data handler to its workforce;
the performance of the Designated Data Protection Personnel;
whether the data handler conducts personal information protection impact assessment where required;
the data handler’s incident response plan and its implementation of the plan; and
for data handlers providing key online platform service with a significant number of users and a complex business model, the data handler’s social responsibility report on personal information protection.
Michigan Federal Court Holds CTA Reporting Rule Unconstitutional, Enjoins Enforcement Against Named Plaintiffs
On March 3, 2025, a Michigan federal district court in Small Business Association of Michigan v Yellen, Case No. 1:24-cv-413 (W.D Mich 2025) (SBAM), held that the CTA’s reporting rule is unconstitutional under the Fourth Amendment (unreasonable search) and entered a judgment permanently enjoining the enforcement of the CTA reporting requirements against the named plaintiffs and their members only. The district court did not find it necessary to, and did not, rule on the plaintiffs’ separate Article 1 and Fifth Amendment constitutional claims, instead leaving them “to another day, if necessary.”
The SBAM plaintiffs include (a) the Small Business Association of Michigan and its more than 30,000 members, (b) the Chaldean American Chamber of Commerce and its more than 3,000 members, (c) two individual reporting company plaintiffs, and (d) two individual beneficial owner plaintiffs owning membership interests in reporting companies.
We are not aware as of the date of this Alert whether the defendants have, or intend to, appeal the SBAM judgment to the Sixth Circuit Court of Appeals.
President Trump’s 4 March Tariffs Against Canada, Mexico, and China
Today, President Trump announced the implementation of new tariffs targeting imports from Canada, Mexico, and China, making good on his promise last month in the event measures were not taken by these countries to stem the tide of fentanyl and illegal migration into the United States.
Details of the Tariffs
The newly enacted tariffs are as follows:
CanadaA tariff of 25% will be imposed on all imports from Canada. This includes a broad range of goods, notably steel, aluminum, and various manufactured products, significantly impacting industries that rely on Canadian materials and components.
Mexico Similar to Canada, imports from Mexico will face a 25% tariff. This measure affects key sectors, including automotive parts, electronics, and agricultural products, posing challenges for businesses that have integrated supply chains spanning both countries.
ChinaAll imports from China will now be subject to a 20% tariff which will be in addition to the Section 301 and Section 232 tariffs. This figure reflects an increase of an additional 10% on top of the 10% duty that was already imposed on Chinese goods last month. This elevated rate applies to various goods, including electronics, machinery, and consumer products, signaling the administration’s intensified focus on addressing unfair trade practices and protecting American manufacturing.
Key Implications for Businesses
Supply Chain Disruptions: The tariffs may cause disruptions to existing supply chains. Companies should assess their current sourcing strategies to identify alternative suppliers and mitigate risks associated with higher costs and import delays.
Compliance and Regulatory Challenges: Importers must navigate new compliance requirements associated with the tariffs. Businesses should ensure they have the correct documentation for customs and be prepared for increased scrutiny regarding product classifications and valuations.
Potential for Retaliation: These tariff measures will likely lead to retaliatory actions from Canada, Mexico, and China, potentially impacting US exports to these markets. Companies should anticipate possible trade barriers that could disrupt their international operations.
Recommendations
Assess Impact on Cost Structures and Explore Supply Chain Alternatives: Consider diversifying your supplier base to include domestic sources or suppliers from other countries, reducing reliance on imports from Canada, Mexico, and China and minimizing exposure to tariffs.
Monitor Trade Developments: Stay informed about future regulatory changes and potential retaliatory measures from Canada, Mexico, and China that could further impact your business landscape and operations.
Conclusion
The implementation of tariffs against Canada, Mexico, and China represents the core tenants imbedded in the America First US Trade Policy with broad implications for businesses engaged in imports. Companies must quickly adapt to these changes to mitigate risks and seize potential opportunities.
Treasury May Be Shifting CTA Reporting Rule Away from Domestic and Toward Foreign Reporting Companies
On March 2, 2025, the United States Department of Treasury announced that it will not enforce fines or penalties based on the existing deadlines for reporting beneficial ownership information under the CTA beneficial ownership reporting rule.[1] This follows earlier guidance issued by FinCEN.[2]
Treasury further announced that it will be engaging in proposed rule-making to limit the CTA reporting rule to foreign reporting companies, noting that even after the new rules are in effect, it will not enforce any fines or penalties on any U.S. citizens, domestic reporting companies or their beneficial owners. No other details of the proposed rule-making or its timing were announced, including whether any changes might be proposed as to the definitions of domestic[3] or foreign[4] reporting companies under the reporting rule or any exemptions.
Treasury noted that this action is “in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.”
[1] See Treasury Department Announces Suspension of Enforcement of Corporate Transparency Act Against U.S. Citizens and Domestic Reporting Companies | U.S. Department of the Treasury.
[2] On February 18, 2025, the Financial Crimes Enforcement Network of the Department of Treasury (FinCEN) issued a notice extending beneficial ownership reporting deadlines for most reporting companies to March 21, 2025. See FinCEN Notice, FIN-2025-CTA1, FinCEN Extends Beneficial Ownership Information Reporting Deadline by 30 Days; Announces Intention to Revise Reporting Rule (February 18, 2025) and an updated FinCEN Alert (February 19, 2025) Beneficial Ownership Information Reporting | FinCEN.gov. Subsequently, on February 27, 2025, FinCEN announced that it was suspending enforcement of the CTA reporting rule, including any fines or penalties, pending its further extension of reporting deadlines in an interim reporting rule to be issued not later than December 21, 2025. See FinCEN Not Issuing Fines or Penalties in Connection with Beneficial Ownership Information Reporting Deadlines | FinCEN.gov.
[3] A “domestic reporting company” is currently defined under the CTA and the reporting rule as any entity that is formed by filing a document with a secretary of state or similar office under the laws of a State or Indian tribe (including, for example, most LPs, LLPs and statutory, business and other trusts if the laws of a state or tribal jurisdiction require such filing to create the entity), subject to exemptions from the definition included in the CTA and the reporting rule. See 31 U.S.C. § 5336(a)(11)(A)(i) and 31 CFR 1010.380(c)1(i)).
[4] A “foreign reporting company” is currently defined under the CTA and the reporting rule as any entity that is formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian tribe subject to exemptions from the definition included in the CTA and the reporting rule. See 31 U.S.C. § 5336(a)(11)(A)(ii) and 31 CFR 1010.380(c)(1)(ii).
Pest Practices: EPA Uses FIFRA EPA to Adopt Additional Operational and Workplace Controls on Ethylene Oxide
Having adopted stringent air emission controls on commercial sterilizers that use ethylene oxide (EtO), the Environmental Protection Agency (EPA) has now adopted further controls on workplace exposure to EtO, including adopting new employee exposure limits, limiting the use of EtO in sterilizing food products and cosmetics, establishing requirements for operating commercial sterilizers that use EtO and new recordkeeping and training requirements. These controls represent the next step in EPA’s campaign to control exposure to what it considers a toxic chemical.
Unlike its prior emission regulations, EPA issued these controls as an Interim Registration Review Decision (ID) under its Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) authority to regulate pesticides. Since its primary purpose is anti-bacterial, EtO has been regulated as a pesticide since 1966 and was registered under FIFRA in 1984. FIFRA gives EPA the authority to review and reregister pesticides and to confirm the allowed uses and warning on their required labels. It also allows EPA to issue interim findings and requirements even though it has not completed its registration process.
EPA began the reregistration process for EtO in 2013 but has yet to complete it. In 2021, however, as EPA began its focus on control of EtO, it began considering an ID to limit exposure. In 2023, it issued a draft ID, inviting comments from the regulated and environmental communities. On January 5 2025, EPA issued its final ID, which is not published in the Federal Register but is on EPA’s website.
In the ID, EPA imposes stringent limits on commercial sterilizers. It limits the applicable uses for EtO by stating that EtO can no longer be used for museum, library and archival materials, cosmetics, or musical instruments. The ID also limits EtO uses for food sterilization stating that it can no longer be used generally on whole or ground spices or seasoning materials, although it can be used for a specified list of such materials and used to treat another list of such materials only if additional treatment is necessary. The ID further imposes concentration limits to be applied by 2035, limiting concentration for medical device sterilization to 600 mg/L unless the device design requires greater concentration levels or has U.S. Food and Drug Administration (“FDA”) approvals for greater levels. Finally, commercial sterilization facilities are required to have separate heating, ventilating and air conditioning systems for offices and control rooms and for EtO processing areas.
The ID adds significant rules regarding employee exposure. It goes beyond the Occupational Safety and Health Administration’s (“OSHA”) Permissible Exposure Limits and applies an eight-hour time weighted average exposure limit that ratchets down over time. Through December 31, 2027, facilities are required to assure that the eight-hour time weighted limit is no greater than 1.0 ppm, but by January 1, 2035, the exposure limit must be reduced to 0.1 ppm. EPA adopts similar reductions for the short term exposure limit and the EPA action levels. Similarly, EPA imposes requirements to workers to use either air/airline respirators or self-contained breather apparatus when engaged in tasks involving direct exposure to EtO such as connecting and disconnecting EtO containers or unloading product from the sterilization chamber or aeration area. Finally, the ID requires continuous monitoring devices in both process and non-processing areas.
The ID also imposes enhanced training and recordkeeping requirements. Training must include a discussion of the health effects of EtO exposure and specific language that EtO is a carcinogen and describe symptoms of acute and chronic exposure. Recordkeeping includes monitoring sterilizer EtO concentrations, worker exposure data, indoor monitoring results, and worker training.
The ID imposes similarly stringent rules for sterilizers in healthcare facilities, including hospitals, veterinary facilities, and dental offices. Such facilities may only use EtO in single chamber sterilization devices that utilize emission capturing systems that limit worker and public exposure. The ID also imposes similar worker exposure requirements and similar rules on respirators. The rule on training and recordkeeping are similar as well.
The ID establishes numerous new requirements for EtO use for both commercial sterilizers and healthcare facility sterilizers and each of these requirements have different start and compliance dates. Since the ID is not subject to publication in the Federal Register, these requirements may not have been subject to the broad attention applied to EPA regulations but are just as dramatic and far reaching. EPA issued the ID in the last days of the Biden administration, and it is not clear if the Trump administration is reviewing the ID, along with other late adopted EPA regulations. What is clear is that users of EtO face significant additional requirements as a result of the ID and need to review and understand them.
Connecticut Establishes Emergency Certificate of Need Process for Hospitals in Bankruptcy
On March 3, 2025, Connecticut Governor Ned Lamont signed a law establishing a new process for hospitals in bankruptcy to apply for an “emergency certificate of need” (CON) to approve a transfer of ownership. The law, titled “An Act Concerning An Emergency Certificate Of Need Application Process For Transfers Of Ownership Of Hospitals That Have Filed For Bankruptcy Protection, The Assessment Of Motor Vehicles For Property Taxation, A Property Tax Exemption For Veterans Who Are Permanently And Totally Disabled And Funding Of The Special Education Excess Cost Grant” (the “Act”), was passed by the Connecticut Legislature though its emergency certification process in order to expedite its approval, presumably to allow the law and new process to be available for CON review of the potential sale(s) of Prospect Medical hospitals in Connecticut expected this year.
Emergency CON Process
Under the Act, the emergency CON process is to be available when “(1) the hospital subject to the transfer of ownership has filed for bankruptcy protection in any court of competent jurisdiction, and (2) a potential purchaser for such hospital has been or is required to be approved by a bankruptcy court.”
The Act requires the Office of Health Strategy (OHS) to:
Develop an emergency CON application for parties to utilize, and in doing so OHS must “identify any data necessary to analyze the effects of a hospital’s transfer of ownership on health care costs, quality and access in the affected market.”
Notably, if the buyer is a for-profit entity, OHS is permitted to require additional information to ensure that the continuing operation of the hospital is in the public interest.
Make a “completeness” determination on a submitted application within 3 business days.
Once an emergency CON application is deemed complete, OHS may – but is not required to – hold a public hearing within 30 days thereafter, and if a hearing is held OHS must notify the applicant(s) at least 5 days in advance of the hearing date. The Act provides that a public hearing or other proceeding related to review of an emergency CON is not a “contested case” under the state’s Uniform Administrative Procedure Act, which limits the procedural and appeal rights of the applicant(s). The Act also allows OHS to contract with third-party consultants to analyze the effects of the transfer on cost, access, and quality in the community, with the cost borne by the applicant(s) and not to exceed $200,000.
Emergency CON Decisions and Conditions
The Act requires final decisions on emergency CONs to be issued within 60 days of the application being deemed complete. Importantly, OHS is required to “consider the effect of the hospital’s bankruptcy on the patients and communities served by the hospital and the applicant’s plans to restore financial viability” when issuing the final decision. The Act also permits OHS to “impose any condition on an approval of an emergency” CON, as long as OHS includes its rationale (legal and factual) for imposing the condition and the specific CON criterion that the condition relates to, and that such condition is reasonably tailored in time and scope. The Act also expressly provides that any condition imposed by OHS on the approval of an emergency CON will apply to the applicant(s), including any hospital subject to the transfer of ownership “and any subsidiary or group practice that would otherwise require” a CON under state law that is part of the bankruptcy sale. However, the Act does allow the applicant(s) to request a modification of conditions for good cause, including due to changed circumstances or hardship.
Finally, the Act provides that the final decision on an emergency CON, including any conditions imposed by OHS as part of the decision, is not subject to appeal.
Takeaways
The Act seeks to establish a clear expedited pathway for CON review of hospital (and health system) sales as part of the bankruptcy process. The specific process, including the form of application, is likely to be rolled out quickly by OHS to be available as part of the resolution of the Prospect Medical bankruptcy process anticipated to occur during 2025. The ultimate efficacy of the process will depend upon the specific data sought as part of the emergency CON process, and on the scope of any conditions imposed by OHS on the sales (which could introduce uncertainty into the bankruptcy sale and approval process), but the establishment of this avenue for review is likely to be welcomed by parties to hospital system bankruptcy actions.
Treasury Department Announces Suspension of Enforcement of Corporate Transparency Act Against U.S. Citizens and Domestic Reporting Companies
The Treasury Department announced plans to significantly narrow beneficial ownership information (BOI) reporting obligations under the Corporate Transparency Act (CTA).
In a press release issued on March 2, 2025, the Treasury Department stated the following:
The Treasury Department is announcing today that, with respect to the Corporate Transparency Act, not only will it not enforce any penalties or fines associated with the beneficial ownership information reporting rule under the existing regulatory deadlines, but it will further not enforce any penalties or fines against U.S. citizens or domestic reporting companies or their beneficial owners after the forthcoming rule changes take effect either. The Treasury Department will further be issuing a proposed rulemaking that will narrow the scope of the rule to foreign reporting companies only. Treasury takes this step in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.
The Department’s announcement would appear to end the CTA regulatory regime for all entities other than foreign companies that have registered to do business in the U.S.
Client Alert: The Uncertainty Continues – Another Major Update to The Corporate Transparency Act
As reported in our Client Alert dated Feb. 20, 2025, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued guidance on Feb. 19, 2025, stating that the requirement to file beneficial ownership interest reports (“BOIR”) under the Corporate Transparency Act (“CTA”) is once again in effect. This guidance impacted deadlines to file BOIRs as follows:
Entities in existence as of Dec. 31, 2023, had until March 21, 2025, to file their BOIRs.
Entities that were created or registered between Jan. 1, 2024, and Dec. 31, 2024, originally had 90 days from the date of creation or registration to file their BOIRs. They had until March 21, 2025, to file BOIRs.
Reporting companies that were previously given a reporting deadline later than the March 21, 2025, deadline had to file their initial BOIR by that later deadline. For example, if an entity’s reporting deadline was in April 2025 because it qualified for certain disaster relief extensions, it was to follow the April deadline, not the March deadline.
Entities that were created or registered on or after Jan. 1, 2025, had until the later of March 21, 2025, or 30 days after their creation or formation, to file their BOIRs.
The past tense is intentionally used with respect to the deadlines specified above because on Feb. 27, 2025, FinCEN announced that it will not issue any fines or penalties or take any other enforcement actions against any companies based on failure to file or update BOIRs by the current deadlines. No fines or penalties will be issued, and no enforcement actions will be taken, until a forthcoming interim final rule becomes effective and the new relevant due dates in the interim final rule have passed. FinCEN stated that no later than March 21, 2025, FinCEN intends to issue an interim final rule extending BOIR deadlines. Recognizing the need to provide new guidance and clarity as quickly as possible, the rule must ensure that beneficial ownership interest information that is highly useful to important national security, intelligence, and law enforcement activities is reported.
Then, on March 2, 2025, the U.S. Treasury Department issued the following announcement:
“The Treasury Department is announcing today that, with respect to the Corporate Transparency Act, not only will it not enforce any penalties or fines associated with the beneficial ownership information reporting rule under the existing regulatory deadlines, but it will further not enforce any penalties or fines against U.S. citizens or domestic reporting companies or their beneficial owners after the forthcoming rule changes take effect either. The Treasury Department will further be issuing a proposed rulemaking that will narrow the scope of the rule to foreign reporting companies only. Treasury takes this step in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.”
During the past several months, with respect to filing BOIRs, entities were vacillating between taking take a “wait and see approach” and incurring the risk of having to make a filing quickly. Other entities were more proactive and made a voluntary filing. Now, with FinCEN’s March 2, 2025 announcement, and presuming that the Treasury Department does not change course again, domestic entities will not need to file BOIRs; only foreign entities will need to file BOIRs in accordance with a rule to be promulgated at some point by the Treasury Department.