Germany’s Supply Chain Law at a Crossroads: The Implications of the Proposed Shift to the CSDDD
In April 2025, CDU, CSU, and SPD – the coalition parties almost certainly forming Germany’s next federal government – announced their intention to repeal the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz (LkSG)) as part of a broader initiative to reduce administrative and economic burdens. According to the coalition agreement, the LkSG shall be replaced with legislation implementing the EU Corporate Sustainability Due Diligence Directive (CSDDD) in a bureaucracy-light and enforcement-friendly manner. The reporting obligations under the LkSG shall be abolished immediately, and enforcement of existing obligations shall be suspended, except in cases of grave human rights violations, until the new EU-aligned framework enters into force and is implemented in German law.
This legislative shift is causing widespread uncertainty among companies, many of which have already undertaken significant efforts to implement the LkSG since it came into force in January 2023. The law currently obliges large enterprises with more than 1,000 employees since 2024 onwards to establish comprehensive due diligence mechanisms, including annual risk assessments, grievance mechanisms, and supply chain monitoring, with potential fines reaching up to 2% of global turnover in the event of non-compliance.
While some industry associations have welcomed the repeal as a step toward deregulation, the announcement has also raised significant concerns within the business and legal communities. Numerous companies have already made considerable investments to comply with the LkSG, establishing compliance systems, internal governance structures, and supplier monitoring mechanisms. The prospect of a repeal, especially after only a short period of application, has introduced legal uncertainty and operational ambiguity, particularly with respect to future compliance expectations.
From a legal perspective, the formal abolition of the LkSG would require a new act adopted by the parliament. Earlier attempts to initiate such a legislative reversal failed due to insufficient parliamentary support. Nevertheless, the linkage of national legislation with the EU’s CSDDD offers a feasible path for reform by way of harmonized substitution rather than outright repeal. The CSDDD covers both human rights and environmental obligations and applies not only to direct suppliers but, under certain conditions, also to indirect supply chain actors. Notably, the CSDDD introduces civil liability provisions and imposes obligations on a broader spectrum of business activities, including downstream operations such as recycling and distribution.
The EU Commission’s Omnibus proposals aim to address some of the implementation challenges previously identified under the LkSG. Proposed key modifications include limiting the scope of due diligence to direct business partners unless specific risks are identified further down the supply chain, reducing the frequency of effectiveness monitoring from annually to once every five years, and restricting the information that can be demanded from SMEs. These reforms are intended to strike a balance between ensuring substantive sustainability commitments and preserving economic viability, particularly for companies operating within complex global value chains.
Despite these developments, civil society organizations have strongly opposed the dismantling of the LkSG. The “Initiative Lieferkettengesetz”, a coalition of over 140 NGOs, religious institutions, and trade unions, has described the planned repeal as a serious regression in the protection of human rights and environmental standards. They argue that the LkSG has already led to tangible structural improvements and that weakening it sends the wrong signal to companies that have acted in good faith.
Meanwhile, supervisory authorities such as the Federal Office for Economic Affairs and Export Control (BAFA) have begun to enforce the LkSG with targeted inquiries and audits, particularly in high-risk sectors. These enforcement activities prompted many companies to accelerate their compliance efforts, contributing to the establishment of internal processes that may now remain relevant under the forthcoming CSDDD regime.
Considering the transitional phase between the phasing out of the LkSG and the implementation of the CSDDD, companies are advised to avoid dismantling existing due diligence systems prematurely. While certain regulatory relief may be on the horizon, reputational and legal risks remain, particularly in the event of adverse public exposure or litigation. Moreover, the CSDDD will introduce new obligations concerning environmental risks, for which most businesses will need to gather additional information and develop appropriate compliance tools.
In conclusion, the repeal of the LkSG marks a turning point in Germany’s supply chain regulation. While the transition to EU-level harmonization promises simplification in some areas, it also brings new challenges and legal uncertainties. Companies are well advised to maintain a forward-looking compliance posture, preparing not only for reduced national reporting burdens but also for the broader and more integrated responsibilities under the CSDDD.
Fidelity National Financial, Inc. Takes Another Run On Nevada Move
Last year, I reported that the stockholders of Fidelity National Financial, Inc. had failed to approve a proposal to convert the corporation from a Delaware to a Nevada corporation. The company has not given up on the proposal. Yesterday, it filed preliminary proxy materials re-proposing reincorporation in Nevada. According to the company, this year’s proposal includes a few tweaks in response to stockholder concerns:
A similar proposal to reincorporate FNF in Nevada was submitted to our stockholders at our 2024 annual meeting (the 2024 Redomestication Proposal), but did not receive the vote required to approve the Redomestication. We engaged in discussions with certain of our stockholders regarding the 2024 Redomesticaton Proposal both prior to and after the 2024 annual meeting. From these discussions, we understand that there is a desire to preserve, after the Redomestication, certain stockholder rights that are currently in our current Fifth Amended and Restated Certificate of Incorporation (the Delaware Charter). Since the Board of Directors continues to believe there are many important reasons the Redomestication is advisable and in the best interests of the Company and its stockholders, we have updated the proposed Nevada Charter to preserve certain stockholder rights under our Delaware Charter within the statutory framework established by Nevada law. In particular, the updated Nevada Charter provides that:
The limitation on individual liability afforded to our directors and officers under the Nevada Revised Statutes (as amended from time to time, the NRS) does not apply to any breach of fiduciary duty that (i) constitutes a breach of the duty of loyalty, (ii) involves acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) results in a transaction from which a director or officer derived an improper personal benefit;
The Company is prohibited from effectuating any reverse split of our capital stock (that otherwise would not require stockholder approval pursuant to NRS 78.207) without stockholder approval; and
The exception to dissenter’s rights provided under NRS 92A.390(1) will not apply (if dissenter’s rights would otherwise be available) to any stockholders who are required in the relevant transaction to accept cash-only consideration for their shares.
This illustrates another point that I made long ago when I wrote my first book on Nevada’s corporate law – both Delaware and Nevada provide menus of charter provisions such that there is not just one Delaware charter or one Nevada charter.
Vexingly, Fidelity National continues to its proposal as a “redomestication”. As I have now pointed out several times, conversion and domestication are two entirely different statutory procedures. Failure to distinguish between these procedures has in my experience resulted in improper filings.
Fourth Circuit Rejects the Use of Short-Seller Report as a Basis for Satisfying Loss Causation Element in Securities Fraud Action
The United States Court of Appeals for the Fourth Circuit recently joined a growing consensus among federal appellate courts: short-seller reports, without more, rarely suffice to plead loss causation under the federal securities laws. In Defeo v. IonQ, Inc., 2025 U.S. App. LEXIS 8216, ___ F.4th ___ (4th Cir. Apr. 8, 2025), the Court held that a report by activist short-seller Scorpion Capital — which coincided with a significant stock price drop — did not constitute a corrective disclosure revealing previously concealed fraud to the market. The opinion aligns the Fourth Circuit with decisions from the Ninth Circuit, which have similarly found that loss causation cannot rest on short-seller publications that are speculative, anonymously sourced and heavily disclaimed.
IonQ is a publicly traded company operating in the quantum computing space. In Defeo, shareholder plaintiffs filed a complaint for violation of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 accusing IonQ and certain insiders of the Company of making misstatements concerning the prospects for IonQ’s technology and the Company’s financial performance. Plaintiffs’ loss causation theory was premised on a May 3, 2022 report by a pseudonymous short-seller, which allegedly revealed the purported misrepresentations and caused the Company’s share price to fall from $7.86 to $4.34.
Defendants moved to dismiss the complaint arguing, among other things, that plaintiffs failed to adequately plead loss causation because plaintiffs loss causation allegations relied almost entirely on a short-seller report that was speculative, anonymous, and heavily disclaimed. The district court granted defendants’ motion to dismiss with prejudice, concluding that the report did not plausibly reveal new facts to the market sufficient to satisfy the standards necessary for pleading loss causation. After unsuccessfully seeking reconsideration and leave to amend, plaintiffs appealed the district court’s dismissal of their complaint.
On appeal, the Fourth Circuit affirmed the district court’s order dismissing plaintiffs’ complaint. In short, the short-seller report did not plausibly disclose new facts to the market because the report’s authors, held a short position in IonQ stock, expressly disclaimed the accuracy of their information, admitted to paraphrasing anonymous sources and conceded they could not verify the truth of their claims. The Court reiterated that a shareholder plaintiff seeking to plead loss causation must allege new facts — not mere allegations — entered the market and caused the decline in stock price.
The Fourth Circuit found the Ninth Circuit’s decisions in In re BofI Holding, Inc. Securities Litigation, 977 F.3d 781 (9th Cir. 2020), and In re Nektar Therapeutics Securities Litigation, 34 F.4th 828 (9th Cir. 2022), persuasive. In BofI, the Ninth Circuit held that blog posts authored by anonymous short-sellers who expressly disclaimed the accuracy of their content could not plausibly be understood by the market as revealing the truth of a company’s alleged misstatements. In Nektar, the Ninth Circuit extended the reasoning in BofI and held that a short-seller report relying on anonymous sources and speculative inference and without presenting new, independently verifiable facts failed to qualify as a corrective disclosure sufficient to satisfy the standard for pleading loss causation. The Fourth Circuit concluded that Scorpion Capital’s report on IonQ shared the same deficiencies highlighted by the Ninth Circuit in BofI and Nektar.
The Fourth Circuit also held that IonQ’s own response to the Scorpion report — a press release issued the next day — did not salvage plaintiffs’ theory of loss causation. IonQ expressly denied the report’s accuracy, warned investors not to rely on the report and underscored the short-seller’s financial motivation for tarnishing the Company. The Court rejected plaintiffs’ contention that IonQ had a duty to specifically refute each allegation in the short-seller report. The Court further held that the handful of media articles cited by plaintiffs discussing the short-seller report did not affect the conclusion that plaintiffs failed to adequately plead loss causation. The articles merely noted the stock drop and the existence of the report, without confirming or endorsing the short-sellers’ claims.
Defeo confirms that courts will look past market reaction and instead focus on whether a disclosure plausibly revealed verifiable, new information to the market when evaluating whether a securities fraud action adequately pleads loss causation. The Fourth Circuit’s opinion does not impose a categorical bar on the use of short-seller reports to establish loss causation, but it makes clear that plaintiffs relying upon such reports must ensure that those reports meet a high standard of reliability. That standard is not met where the report disclaims its own accuracy, relies upon anonymous sources and offers only general accusations without offering independently verifiable facts. Allegations, even if market-moving, do not become revelations simply by appearing in a headline. For loss causation to be adequately pled, the law still requires facts, not just fallout.
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Ten Minute Interview: Bridging M&A Valuation Gaps with Earnouts and Rollovers [VIDEO]
Brian Lucareli, director of Foley Private Client Services (PCS) and co-chair of the Family Offices group, sits down with Arthur Vorbrodt, senior counsel and member of Foley’s Transactions group, for a 10-minute interview to discuss bridging M&A valuation gaps with earnouts and rollovers. During this session, Arthur explained the pros and cons of utilizing rollover equity, earnout payments, and/or a combination thereof, and discussed how a family office may utilize these contingent consideration mechanics, as tools to bridge M&A transaction valuation gaps with sellers.
Mergers and Acquisitions in Australia in 2025
A Recap: Expectations for 2025 Versus Reality to Date
2025 began with optimism that mergers and acquisitions (M&A) activity would continue to increase this year. In Australia and globally, 2024 saw the value of M&A activity increase on the prior year, with many surveys recording cautious optimism for increased deal flow in the year ahead across sectors and regions.
The key drivers of the expected upturn in M&A were the following:
Record levels of dry powder in private capital and private equity (PE) hands.
An expectation of further interest rate reductions.
The benefits of reduced regulation—cutting red tape was a mainstay of the policy promises of many of the political parties elected in 2024’s election cycles around the globe.
Greater political certainty following the unusually high number of elections globally in 2024.
Hot sectors, including technology, especially digital transformation, and artificial intelligence starting to deliver (or not) on its transformative promise, energy transition and financial services.
However, Q1 did not deliver on these early promises in the manner expected. In the United States, the expectations of greater certainty that dealmakers looked forward to because of single-party control of the White House and both houses of Congress was tempered by a lack of clarity on implementation.
Whilst directionally it remained clear through Q1 that significantly higher tariffs will be imposed by the United States on imports from many countries in addition to China, the extent remained unpredictable and the real motivations for introducing them uncertain. Similarly, whilst the new administration’s efforts to remove red tape were eagerly anticipated by many, the pace and extent of executive orders has surprised and is leading to widespread challenge, again undermining certainty.
Citing productivity and wage growth concerns, the Reserve Bank of Australia indicated at the end of March that further target rate cuts were unlikely in the near term.
Then the US “Liberation Day” tariffs were announced on 2 April, and the hopes of a more stable economic and political environment for M&A in 2025 were confounded. The sharp declines in global market indices immediately following their announcement is testament to the significant underestimation of the scope and size of the tariffs initially announced. Pauses on implementation, retaliatory and further tariffs, as well as bi-lateral tariff reduction negotiations, are set to continue to bring surprises for some time. Market sentiment will continue to decline as recessionary fears abound.
Meanwhile, Australia is gearing up for its own federal elections in May 2025, and economists currently predict that interest rate cuts of around one percentage point (in aggregate) are likely over the next 12 months, with the first cut predicted in May.
So, what for M&A in the balance of 2025?
Predictions
Trade Instability
In terms of the political forces shaping Australian M&A, Australia’s federal elections have already been trumped by US tariff announcements.1 We are at the start of the biggest reworking of international trade relations in over a century. With only 5% of our goods exports going to the United States, and (so far) the lowest levels of reciprocal US tariffs applied to Australia, the direct impacts to Australia’s economy are likely to be far outweighed by the indirect effects of the tariffs applied to China and other trading partners. Capital flows, including direct investment, must shift in anticipation of and in response to these changes, but forecasting the impacts on different sectors and businesses (and their effect on valuations) will remain complex for some time, weighing heavily on M&A activity until winners and losers start to emerge.
Foreign Investment
With a weak dollar and a stable political and regulatory environment, Australia will continue to be an attractive destination for inbound investment, not least in the energy transition, technology and resources sectors. Rising defence expenditure around the globe, and AUKUS, remain tailwinds for Australian defence sector investment. We expect further increases in Japanese inbound investment driven by their own domestic pressures. However, a report prepared by KPMG and the University of Sydney2 pours cold water on a further strengthening of interest from Chinese investors, despite the 43% year-on-year increase in 2024, citing Foreign Investment Review Board (FIRB) restrictions on critical minerals and, more generally, a move toward greater investment in Southeast Asia and Belt and Road Initiative countries.
FIRB
Last year, FIRB made welcome headway in shortening its response times for straightforward decisions. The recent updates to FIRB’s tax guidance and the new submissions portal are likely to require front-loading of the provision of tax information by applicants, which should further support a shortening of average approval times. These changes are welcome, as is the introduction of a refund/credit scheme for filing fees in an unsuccessful competitive bid. Whilst these changes will not affect the volume of M&A, they may well facilitate an increase in the speed of execution of auction processes.
Regulatory Changes
Whilst we do not expect the outcome of federal elections to be a key driver of M&A activity in 2025 overall, the slowing of FIRB approvals during caretaker mode and the potential backlog post-election will lead some inbound deal timetables to lengthen in the short term, especially if there is a change in government. In Q2, we expect Australia’s move to a mandatory and suspensory merger clearance regime will have the opposite effect. Even as full details of the new merger regime continue to be revealed, we expect some activity will be brought forward to avoid falling under the new regime at the start of 2026.
Larger Deals
Although surveys report an increase in total transaction value in 2024, they also show there were fewer transactions overall. After the rush of transaction activity in 2021 and 2022, and the proximity to the end of post-pandemic stimulus, it is perhaps too easy to characterise the current environment as one of caution. However, market perception is still that deals are taking longer to execute, with early engagement turning frequently into protracted courtship and translating into longer and more thorough due diligence processes. This favours a concentration on deals with larger cheque sizes, a trend mirrored in Australian venture capital (VC) investing in 2024 and which we see set to continue in 2025.
PE
Globally, PE deal volumes surged in 2024, with Mergermarket reporting PE acquisitions and exits exceeding US$25.3 billion and US$18.9 billion, respectively. There remains an avalanche of committed capital to deploy and a maturity wall of capital tied up in older funds to return. It is these fundamentals that are expected to drive sponsor deal activity, in spite of the ongoing global sell-off in equities. PitchBook’s Q1 results for Oceania PE bear this out. Corporates looking to refocus away from noncore operations or requiring cashflow will continue to find healthy competition for carve outs among PE buyers, and an increase on the relatively low value of PE take-privates in Australia in 2024 is predicted. Family-owned companies with succession issues are also expected to provide opportunities for PE buyers. Nevertheless, we expect more secondary transactions, including continuation funds, will be required to grease the cogs in these circumstances.
VC Exits
The rising prevalence of partial exits via secondary sales is shown neatly in the State of Australian Startup Funding 2024 report.3 Whilst those surveyed still rate a trade sale as their most likely exit, secondaries were next and IPOs were considered the least likely. The report notes 59% of surveyed Series B or later founders said they had sold shares to secondary buyers, and 23% of investors said they sold secondaries in 2024. Following the success of secondaries like that of Canva and Employment Hero, secondaries will continue to provide much-needed liquidity to founders and fund investors alike. There is also a recognition of the value of such transactions in advance of an IPO, because they bring in new investors who may be expected to stay invested longer post-float. With valuations settling following their retreat from pandemic highs, PE acquisitions of Australian venture-backed companies rose in 2024 especially from overseas buyers. With the launch of more local growth funds targeting these assets, we expect that trend to increase.
Footnotes
1. President Trump Announces “Reciprocal” Tariffs Beginning 5 April 2025 | HUB | K&L Gates2. Chinese investment in Australia shifts from acquisitions to greenfield – KPMG Australia3. State of Australian Startup Funding 2024 | Insights
DOJ Announces 90-Day Grace Period for Companies to Comply with New Data Security Rules on Foreign Adversary Access to U.S. Sensitive Data
The U.S. Department of Justice (DOJ)’s new data security rule went into effect April 8, 2025. The rule creates what are effectively export controls and requires companies to take measures to prevent U.S. sensitive personal and government-related data from falling into the hands of foreign adversaries. The rule targets transactions (including data brokerage, vendor agreements, employment agreements, and investment agreements) involving access to bulk sensitive personal data or government-related data when those transactions involve identified covered persons or countries of concern (China, Russia, Iran, North Korea, Cuba, and Venezuela).
On April 11, 2025, the DOJ’s National Security Division (NSD) issued a Compliance Guide, a Frequently Asked Questions (FAQs) document, and its Implementation and Enforcement Policy, offering critical clarity on how it will assess compliance and approach enforcement of the rule. One of the most significant elements of the policy is the DOJ’s announcement of a 90-day grace period (between April 8, 2025 and July 8, 2025) for companies making good faith efforts to comply (willful violations may still be pursued).This grace period is intended to encourage early cooperation and foster a compliance-first mindset across industries.
Companies should take action now, if they have not done so already, to engage in compliance efforts (many of which are identified by DOJ as evidence of “good faith”) such as:
Assessing datasets and datatypes that might be covered by the rule
Reviewing data flows and data transactions, particularly those that might constitute data brokerage as defined in the rule
Analyzing vendor agreements to determine the need for new contractual terms; renegotiation of agreements; and potential transfer of products and services to new vendors
Instituting vendor due diligence practices aligned with the rule
Evaluating employee access and potentially modifying roles, responsibilities, or work locations
Assessing investments and investment agreements relating to countries of concern or covered persons
Revising or creating internal policies and procedures
Implementing security controls as set forth in the requirements established by the Cybersecurity and Infrastructure Agency (CISA)
The DOJ guidance confirms the effective dates in the rule and expectation for full compliance with initial requirements after the 90-day grace period. While the core rule took effect April 8, 2025, additional compliance obligations (e.g., audits, reporting, due diligence) must be in place by October 6, 2025.
Organizations that collect, store, or transmit sensitive personal data—especially with cross-border implications—should begin engaging in the activities listed above. The rule is effectively a form of national security data control and applies to a broad array of actors, from data brokers and cloud infrastructure providers to businesses with international partnerships or data transfers.
When Do Blue Sky Laws Apply?
In my experience, many securities lawyers are well versed in the federal securities laws, but have little experience with state securities laws. This is understandable because federal law in many cases preempts state qualification/registration requirements, even with respect to offerings that are exempt from registration under the Securities Act of 1933. For those looking for a quick and easy summary of which exempt offerings are potentially subject, I recently came across the following table on the SEC’s website:
Securities Act Exemption
Under the Securities Act, is the offering potentially subject to state registration or qualification?
Section 4(a)(2)
Yes
Rule 506(b)
No
Rule 506(c)
No
Rule 504
Yes
Regulation Crowdfunding
No
Regulation A – Tier 1
Yes
Regulation A – Tier 2
No
Rules 147 and 147A
Yes
Rule 701
Yes
Note that the table uses the terminology “potentially subject”. It is possible that these offerings are also exempt under state law. For example, it is common for issuers to rely on the exemption from qualification in California Corporations Code Section 25102(o) in Rule 701 offerings. However, compliance with Rule 701 does not automatically meet the conditions of the Section 25102(o) exemption.
It is also important to understand that an offering that is not subject to state registration or qualification requirements is not subject to other state securities law requirements. For example, California and other states require a notice filing in respect of offerings made in reliance upon Rule 506. See Cal. Corp. Code § 25102.1. These offerings may also be subject to state securities fraud prohibitions.
Final Approval for Simplification – Council of the European Union Formally Approves to “Stop-the-Clock” on Sustainability Reporting and Diligence Requirements
On 14 April 2025, the Council of the European Union (the “Council”) has given the greenlight for the “Stop-the-clock” proposal, which will postpone the application of sustainability reporting and diligence requirements. This marks the final approval for delaying the application of the Corporate Sustainability Reporting Directive (“CSRD”) and Corporate Sustainability Due Diligence Directive (“CSDDD”). For further details on the key aspects of this delay please see our alert here.
The approved delay forms part of the Omnibus package to simplify the European legislation in the field of sustainability. The focus will now shift to the second stage of the Omnibus package: simplifying the substantive reporting obligations under the CSRD. To support this, the European Commission has mandated the EFRAG Sustainability Reporting Board (“EFRAG SRB“) to provide technical advice. EFRAG SRB is expected to inform the European Commission of its internal timeline for simplifying the European Sustainability Reporting Standards (“ESRS“) on 15 April 2025.
Next Steps
The legislation underlying the “Stop-the-clock” proposal is a European directive. It will be published in the EU’s Official Journal and will enter into force the day following the publication. EU Member States must transpose this directive into their national legislation by 31 December 2025.
An Ounce of Prevention: Policies, Procedures, and Proactivity in Employment
In the realm of employment, an intentional approach to crafting policies and procedures serves as a cornerstone for fostering a fair, compliant, and productive workplace.
Implementing clear policies, structured procedures, and proactive management strategies not only cultivates a positive work environment, but also mitigates potential legal and financial risks. An employee handbook is one important element of this strategy and a vital document that delineates company policies, procedures, and expectations.
The Importance of a Comprehensive Employee Handbook
A well-crafted, up-to-date employee handbook helps establish workplace culture, promote consistency, and reduce legal risk, while also serving as a day-to-day reference point for employees and management. Legally, a handbook can assist employers in defending against claims by demonstrating the existence of clear policies.
Amit Bindra of The Prinz Law Firm emphasizes that companies like Netflix have utilized their handbooks to define corporate culture and values, making them instrumental tools for recruitment and retention.
A Tailored Approach
Employers must ensure that every policy aligns with applicable local, state, and federal laws. Max Barack, partner with the Garfinkel Group, emphasizes that businesses operating in multiple jurisdictions need to account for differences in laws at the city, county, state, and federal levels. For example, wage and leave policies can vary significantly between the City of Chicago, Cook County, and the rest of the state of Illinois.
Helen Bloch, who specializes in business and employment law, points out that a poorly written handbook can do more harm than good. For example, including policies that don’t apply to a business, such as Family and Medical Leave Act (FMLA) provisions for a company with fewer than 50 employees, can create unintended legal obligations.
Getting Started
Key Legal and Financial Terms Explained
Understanding key legal and financial terms in employment is essential prior to drafting any policies or procedures to be included in an employee handbook. A few important terms are explained below:
At-Will Employment: In the United States, most employment relationships are ‘at-will,’ meaning either the employer or the employee can terminate the relationship at any time, for any reason, as long as it’s not illegal (e.g., based on discrimination). However, some states have exceptions to this doctrine.
Family and Medical Leave Act (FMLA): A federal law that provides eligible employees with up to 12 weeks of unpaid leave per year for certain family and medical reasons, with continuation of group health insurance coverage. Employers with 50 or more employees are generally subject to FMLA.
Non-Compete Agreements: A contractual clause that restricts an employee from working with competitors or starting a similar business within a specified time frame and geographic area after leaving a company. Some states, such as California, have strict limitations on non-compete agreements.
Essential Policies To Address
The following policy areas should be top of mind for employers as they begin to draft policies and procedures to be included in an employee handbook:
Leave Policies: Specify how employees request time off, who they report to, and any legally required sick leave provisions.
Expense Reimbursement: Outline procedures for submitting and approving business-related expenses.
Progressive Discipline: Establish disciplinary guidelines while maintaining flexibility to address individual situations appropriately.
Anti-Harassment and Discrimination Policies: Clearly define protected classes and establish reporting procedures.
Providing employees with a structured way to report concerns — especially serious ones like discrimination or harassment — is critical. A well-documented complaint process can also help protect businesses in the event of a legal claim. An anti-retaliation policy should accompany any open-door policy. Employees should feel safe bringing up legitimate concerns without fear of repercussions.
Max Barack notes that some employers worry an open-door policy could invite frivolous complaints but stresses that the absence of a clear reporting process often exacerbates legal exposure. A structured process ensures that employees know where to turn and that complaints are handled consistently.
Including independent contractors in an employment handbook requires caution. Misclassifying workers as contractors when they should be employees can lead to significant legal trouble. Instead of attempting to define classification on their own, employers should work with an attorney to ensure proper classification based on federal and state guidelines.
Charles Krugel warns that many businesses inadvertently misclassify workers, exposing themselves to costly litigation. An employee handbook that is not explicit about who and what it applies to could risk inadvertently subjecting independent contractors to employee policies.
Clarity Over Legalese
Clear and concise policies are the most effective. Employees need to understand the rules, and excessive legalese only creates confusion. Policies should be drafted in plain English so that everyone in the company can easily understand them.
Amit Bindra recounts a case where a corporate client questioned the validity of a contract simply because it was too easy to understand. The reality, he said, is that clear and concise language is more enforceable and practical in real-world applications.
For businesses with non-English-speaking employees, translating the handbook into several languages can be an essential part of this process. Some jurisdictions even require certain policies to be provided in multiple languages.
The Role of Training in Reinforcing Policies
A handbook is only effective if employees know what’s in it. Regular training sessions to reinforce policies are crucial. Ideally, training should be in person, but if that’s not possible, interactive online training can be a good alternative.
Max Barack emphasizes that companies should actively educate their employees, and not rely solely on written policies, to ensure they follow all policies and procedures. Training helps ensure compliance and demonstrates that the company takes its policies seriously.
Given that employment laws are dynamic, employers should provide refresher courses annually, especially when laws or policies change, and the handbook has been updated accordingly.
Final Thoughts
Keeping policies clear, compliant, and accessible will help businesses stay ahead of the curve in an ever-changing employment landscape. Having a well-structured employee handbook is an essential part of running a successful business.
However, simply having a handbook isn’t enough — it must be kept up to date, written in plain English, and properly communicated to employees. By taking an intentional approach to crafting their policies and procedures and formalizing them in an employee handbook, businesses can avoid costly legal pitfalls and create a more positive and productive workplace.
To learn more about this topic, view the webinar An Ounce of Prevention: Policies, Procedures and Proactivity. Any 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 in reading other articles about crucial employment considerations.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
What’s It Worth? Valuing a Business for Sale
If you’re thinking of buying or selling something (anything), it’s important to know the value of that thing. Whether a piece of art, a shirt, a house, or a business.
Perhaps the best definition of the value of a thing is that the thing is worth what a buyer is willing to pay and what a seller is willing to receive for that thing. That’s a tautology, however.
Valuing a business is useful, if not necessary, in a variety of circumstances. Some examples include when a business is seeking a bank loan, when a business’s owners are divorcing (either figuratively or literally), and when a business is getting ready to be acquired (or, from the perspective of the would-be acquirer, when it is a potential target).
This article is intended as a brief introduction to the subject.
It’s important to note that valuation is not a one-size-fits-all process; different methods provide different insights, and the choice of method depends on the specific circumstances and purpose of the valuation. As Megan Becwar, principal at Dispute Economics, puts it, failing to match the intended purpose of the valuation with the correct valuation method for that purpose will likely result in an incorrect (or irrelevant) conclusion of value.
Importance of Accurate Business Valuation
An accurate valuation of a business in the context of a potential M&A transaction is important to a seller because overpricing can lead to a business lingering on the market while underpricing means the owner leaving money on the table. Moreover, a well-substantiated valuation can withstand scrutiny during negotiations, audits, and legal proceedings.
Methods of Business Valuation
There are several approaches to business valuation, each with its own set of methodologies and assumptions. The three primary methods are:
Income Approach: This method is based on the principle that the value of an asset is the present value of its expected future economic benefits. Discounted Cash Flow (DCF) Analysis is a common technique under the Income Approach. It estimates the present value of expected future earnings. This approach is particularly useful for businesses with stable and predictable cash flows.
Market Approach: The Market Approach compares the business to similar companies that have been sold, using industry multiples such as the Price-to-Earnings (P/E) ratio or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) multiples. It relies on the principle of substitution, suggesting that a prudent buyer would not pay more for a business than the cost of acquiring a similar one. This approach is most effective in active markets with ample comparable transactions.
Asset-Based Approach: This method values the business based on its tangible and intangible assets, subtracting liabilities. It considers the net asset value, essentially calculating the difference between total assets and total liabilities. This approach is often used for companies with substantial tangible assets or those facing liquidation, as intangible assets must be separately valued.
Understanding the nuances between intrinsic and relative valuations is important.
Intrinsic valuation is based on widely accepted academic methods, but assumptions can be manipulated.
Relative valuation, on the other hand, depends on actual market dynamics.
John Levitske of HKA Global notes that these distinctions underscore the importance of both selecting the appropriate valuation method and being mindful of the assumptions underpinning each approach.
Legal Considerations in Business Valuation
Legal factors play a pivotal role in business valuation, influencing both the valuation process and the final assessed value. Key legal considerations include:
Fair Market Value vs. Fair Value: Understanding the distinction between these terms is crucial. Fair Market Value (FMV) represents the price at which a property would change hands between a willing buyer and a willing seller, with neither under compulsion and both having reasonable knowledge of relevant facts. Fair Value, however, is a legal standard often used in shareholder disputes and may not consider discounts for lack of control or marketability. Richard Claywell, Certified Public Accountant, explains that fair market value assumes a hypothetical buyer and seller, while an actual transaction involves real-world negotiations, synergies, and motivations.
Minority Discounts and Control Premiums: A minority interest in a company may be less valuable due to the lack of control over business decisions, leading to a minority discount. Conversely, a controlling interest may command a premium. The application of these adjustments depends on the specific circumstances and the standard of value being used.
Buy-Sell Agreements: Buy-Sell Agreements outline the terms under which a business owner’s interest can be sold or transferred, often specifying the valuation method to be used. Properly drafted buy-sell agreements can prevent disputes and provide clarity during ownership transitions.
Legal Structure and Compliance: The legal structure of a business (i.e., sole proprietorship, partnership, corporation) affects its valuation due to differing tax implications, liability issues, and regulatory requirements. Ensuring compliance with all applicable laws and regulations is vital, as legal issues can significantly diminish a company’s value.
Editors’ Note: Legal structure is also significant for estate planning purposes. See Estate Planning for the Business Owner Series, Part 3: Examples of Business Transfers and Valuations by Andrew Haas of Blank Rome LLP to read more about this.
Financial Considerations in Business Valuation
Financial factors are at the core of business valuation, providing quantitative measures of a company’s performance and potential. Tom Walsh of Brody Wilkinson PC emphasizes the role of due diligence, noting that a buyer will scrutinize everything, from vendor contracts to customer concentration risks.
Key financial considerations include:
Financial Performance: Strong revenue, profitability, and growth prospects enhance value. Analyzing historical financial statements provides insights into the company’s earnings stability and operational efficiency. Potential buyers often scrutinize metrics such as gross margin, operating margin, and net profit margin to assess financial health.
Cash Flow Management: Cash flow is the lifeblood of any business, and its management directly impacts valuation. Buyers focus on free cash flow (FCF) as an indicator of a company’s ability to generate profits and sustain operations. Effective cash flow management can significantly enhance a company’s attractiveness to buyers.
Debt and Liabilities: The level of debt and financial obligations influence business valuation. A company with high debt levels may be considered riskier, potentially leading to a lower valuation. Conversely, a well-managed capital structure with manageable liabilities can enhance valuation by demonstrating financial stability.
Industry and Market Conditions: The external economic environment, industry trends, and market demand play crucial roles in determining business value. A company operating in a high-growth sector may command a higher valuation than one in a declining industry. Investors often look at comparable market transactions to gauge valuation expectations.
Conclusion
By understanding different valuation methods, preparing in advance, and seeking expert guidance, business owners can maximize their company’s worth and ensure a successful transaction. Whether you’re planning to sell now or years down the road, starting the valuation process early is one of the smartest business moves you can make.
To learn more about this topic, view What’s it Worth? Valuing a Business for Sale. 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 valuation.
This article was originally published on here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
April Welcomes More Flexible Co-Investment Exemptive Relief Under the Investment Company Act of 1940
On April 3, the US Securities and Exchange Commission (SEC) approved an exemptive application1 that allows for a more flexible co-investment transaction approval process. This new relief simplifies the process followed by investment managers under prior co-investment exemptive orders to approve the participation of business development companies (BDCs) and/or registered closed-end funds (together with BDCs, Regulated Funds) when making negotiated2 co-investments together with affiliated funds, where such joint transactions would otherwise be prohibited by the Investment Company Act of 1940, as amended (the 1940 Act), and the rules and regulations thereunder. Although the new exemptive relief is still subject to certain conditions, compared to previous co-investment exemptive orders, the new exemptive relief provides the following benefits.
Subject to the implementation of certain policies and procedures, the board of directors (the Board) of a Regulated Fund does not need to approve co-investment transactions in advance except for the transactions described in the bullet below.
A majority vote of the independent directors of the Regulated Fund (a Required Majority) will only be necessary to approve a negotiated co-investment transaction if (i) the Regulated Fund is investing into an issuer where an Affiliated Entity3 has an existing interest in such issuer, or (ii) the transaction is a non-pro rata follow-on investment or a non-pro rata disposition of an investment.
Previously, Regulated Funds were prohibited from participating in a co-investment transaction if certain Affiliated Entities had an existing investment in the subject issuer.
Moreover, the previous form of relief did not permit a Regulated Fund to participate in a follow-on investment, unless (i) the Regulated Fund participated in the initial co-investment and continues to hold an investment in the subject issuer or (ii) Affiliated Entities had no existing investment in the subject issuer. With this restriction now removed, Regulated Funds may participate in follow-on investments with their Affiliated Entities even if the Regulated Fund has no existing investment in the subject issuer.
Joint Ventures,4 funds that are sub-advised by a sponsor without requiring the adviser and sub-adviser to be affiliated, and entities relying on any provision of Section 3(c) under the 1940 Act, are now able to participate in negotiated co-investment transactions on the same terms as Regulated Funds and Affiliated Entities. Previous co-investment relief generally did not allow these types of entities (other than entities relying on the exemptions in Sections 3(c)(1), 3(c)(5)(C), and 3(c)(7) of the 1940 Act) to participate in negotiated co-investments in reliance on the exemptive relief.
Investment managers now have more discretion with respect to their investment allocation process under this new relief, so long as investment managers adopt and implement co-investment policies and procedures that are reasonably designed to prevent the Regulated Fund from being disadvantaged in the co-investment program. Prior to participation in co-investment transactions, the Regulated Fund’s Board needs to approve the policies and procedures and then must oversee the Regulated Fund’s participation in the co-investment program in the exercise of the Boards’ reasonable judgment.
Relief Conditions
In addition to the benefits described above, set forth below is a summary of the conditions of the new co-investment exemptive relief.
Regulated Funds and Affiliated Entities will still be required to acquire or dispose of investments generally on the same terms.5 If the transaction is a non-pro rata follow-on investment or non-pro rata disposition, then Required Majority approval will be necessary.
As indicated above, for a Regulated Fund to invest in an issuer in which such Regulated Fund is not an existing investor, but an Affiliated Entity is an existing investor, a Required Majority must approve such Regulated Fund’s participation in the transaction.
Any expenses associated with acquiring, holding or disposing of securities acquired in a co-investment transaction must be shared among the participants in proportion to the relative amounts of securities being acquired, held or disposed.
Affiliated Entities must continue to share transaction fees (including break-up, structuring, monitoring or commitment fees but excluding broker’s fees contemplated by Sections 17(e) or 57(k) of the 1940 Act, as applicable) with Regulated Funds and other Affiliated Entities participating in a co-investment transaction pro rata based on the amount invested or committed. No Affiliated Entity can accept any other compensation in connection with a co-investment transaction.
As discussed above, investment managers must adopt co-investment policies designed to prevent the Regulated Fund from being disadvantaged in the co-investment program. The Regulated Fund’s Board then must approve the policies and oversee the Regulated Fund’s participation in the co-investment program.
Prior to any disposition by an Affiliated Entity of an investment acquired in a co-investment transaction, the adviser to a Regulated Fund that participated in the co-investment transaction will be notified, and the Regulated Fund will be given the opportunity to participate pro rata based on the proportion of its holdings relative to the other Affiliated Entities participating. In a co-investment transaction, prior to any non-pro rata disposition of an investment by a Regulated Fund or if a disposition is not a sale of a Tradable Security,6 the Required Majority must approve the disposition.
At least quarterly, the Regulated Fund’s adviser and chief compliance officer (“CCO”) will be required to provide reports to the Regulated Fund’s Board regarding the Regulated Fund’s participation and activity in co-investment transactions and a summary of deemed significant matters that arose during the period related to the implementation of the adviser’s co-investment policies and procedures and the Regulated Fund’s policies and procedures.
Each year, the adviser and CCO must provide information requested by the Regulated Fund’s Board related to the Regulated Fund’s participation in the co-investment program and any material changes in the Affiliated Entities’ participation in the co-investment program, including changes to the Affiliated Entities’ co-investment policies.
The adviser and the CCO must also notify the Regulated Fund’s Board of any compliance matters related to the Regulated Fund’s participation in the co-investment program that the CCO considers to be material.
All information presented to the Regulated Fund’s Board must be safeguarded for the life of the Regulated Fund and two years after, which will be subject to SEC examination.
Similar to the applications and orders for the new multi-share class exemptive relief, as highlighted in Katten’s advisory published last week, investment managers will need to individually apply for and obtain the new co-investment exemptive relief.
1 FS Credit Opportunities Corp., et al, SEC Rel. No. IC-35520 (April 3, 2025). Unless there is a request for a hearing, the approval will become effective after a 25-day notice period.
2 The applications did not seek relief for transactions effected consistent with staff no action positions (See, e.g., Massachusetts Mutual Life Insurance Co. (pub. avail. June 7, 2000), Massachusetts Mutual Life Insurance Co. (pub. avail. July 28, 2000) and SMC Capital, Inc. (pub. avail. Sept. 5, 1995)). In general, these positions allow co-investing with an affiliate if the only term of the investment that is negotiated is price.
3 “Affiliated Entity” means an entity not controlled by a Regulated Fund that intends to engage in co-investment transactions and that is (a) with respect to a Regulated Fund, another Regulated Fund; (b) an adviser to the Regulated Fund or its affiliates (other than an open-end investment company registered under the 1940 Act), and any direct or indirect, wholly- or majority-owned subsidiary of an adviser to the Regulated Fund or its affiliates (other than of an open-end investment company registered under the 1940 Act), that is participating in a co-investment transaction in a principal capacity; or (c) any entity that would be an investment company but for Section 3(c) of the 1940 Act or Rule 3a-7 thereunder and whose investment adviser is an adviser to the Regulated Fund.
4 “Joint Venture” means an unconsolidated joint venture subsidiary of a Regulated Fund, in which all portfolio decisions, and generally all other decisions in respect of such joint venture, must be approved by an investment committee consisting of representatives of the Regulated Fund and the unaffiliated joint venture partner (with approval from a representative of each required).
5 “Same terms” means the same class of securities, at the same time, for the same price and with the same conversion, financial reporting and registration rights, and with substantially the same other terms.
6 “Tradable Security” means a security which trades: (i) on a national securities exchange (or designated offshore securities market as defined in Rule 902(b) under the Securities Act of 1933, as amended) and (ii) with sufficient volume and liquidity (findings which are to be made in good faith and documented by the advisers to any Regulated Fund) to allow each Regulated Fund to dispose of its entire remaining position within 30 days at approximately the price at which the Regulated Fund has valued the investment.
Are Many Nasdaq Global Select Corporations Subject To The California General Corporation Law?
Only a few publicly traded corporations are incorporated in California. Most either started life in Delaware or later decamped to that state (and more recently other states). Nonetheless, many of these corporations have their principal offices in California and/or significant operations and shareholders located in California. The Golden State has long been sensitive to the phenomenon of pseudo-foreign, or “tramp”, corporations. In response, it has peppered its General Corporation Law with provisions that expressly apply to foreign corporations, provided they have certain specified nexus to the state. The most far-reaching of these provisions is Section 2115 which imposes numerous provisions of the GCL to foreign corporations “to the exclusion of the law of the jurisdiction in which it is incorporated”. In general, a foreign corporation will be subject to 2115 if more than one-half of its business and one-half of its shares are held of record by persons with addresses in California (there is, of course, much more detail in the statute, but hanc marginis exiguitas non caparet.
Corporations listed on major stock exchanges for the most part do not perseverate excessively over Section 2115 because the statute expressly exempts “with outstanding securities listed on the New York Stock Exchange, the NYSE American, the NASDAQ Global Market, or the NASDAQ Capital Market”. On closer inspection, however, there appears to be a noticeable omission in this list of exchanges. Nasdaq has three listing tiers, the Nasdaq Global Select Market, the Nasdaq Global Market, and the Nasdaq Capital Market, and the statute only lists the last two tiers. The omission of the Nasdaq Global Select Market is unlikely to have been intentional because that market has the highest listing criteria. Apparently, the omission arises from California’s view that the Nasdaq Global Market itself is comprised of two tiers. Apparently, this was the view of the Commissioner of Corporations when he certified the Nasdaq Global Market for purposes of an exemption under the Corporate Securities Law of 1968: “Moreover, effective July 1, 2006, the Nasdaq National Market was renamed the NASDAQ Global Market. The NASDAQ Global Market now contains two tiers (NASDAQ Global Market and NASDAQ Global Select Market) . . .”. The Commissioner, however, has no authority to administer or enforce Section 2115.
Some readers will likely protest that Section 2115 is unconstitutional. Indeed, that was the conclusion of the Delaware Supreme Court in Vantage Point Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005). However, a California Court of Appeal has arrived at the opposite conclusion in Wilson v. Louisiana-Pacific Resources, Inc., 138 Cal. App. 3d 216, 187 Cal. Rptr. 852 (1983). Therefore, the status of Section 2115 may depend upon where the case is brought.
DExit And The Concomitant Malapropisms Continue
On Friday, the global entertainment company, AMC Networks Inc., filed preliminary proxy materials that include a proposal to approve the company’s “redomestication to the State of Nevada by conversion”. Readers will recognize that this statement makes no sense because it conflates two different processes, domestication and conversion. See Converting A Corporation Is Not Domestication.