Post-Transition Compensation/Buyout for Founding Law Firm Partners
Set Reasonable Expectations
Founder-owned law firms face unique challenges when it comes to transition planning. Ensuring a seamless handover to successor partners while maintaining profitability and morale is critical. This guide outlines practical strategies for managing founder partner buyouts and succession planning.
Challenges in Compensation Systems
Most small—to mid-sized firms compensate based on originations and profits. If both the founder and successor lawyer simultaneously receive credit in the compensation system, this can create financial difficulties. Recognizing these challenges early can help mitigate potential conflicts.
Practicalities of Buyouts
Buyouts are more practical between the retiring senior partner (seller) and the successor partners (buyers). Non-successor partners may resist contributing to a buyout that does not directly benefit them. Furthermore, a buyout may not be feasible depending on the firm’s profitability.
Transitioning the Founder’s Business
The founder’s business might not transfer successfully, and other partners may believe that the founding partner was already compensated while working and is not entitled to post-retirement pay. Junior partners who have worked on the senior partner’s clients might feel they deserve to inherit the relationships.
Alignment of Partner Timelines
The timelines of the remaining partners may not align with the potential benefits of buying out a founding partner. Recognizing these concerns is crucial, and founders should avoid overreaching. Sensible buyouts can help ensure that the firm’s top attorneys are not motivated to start a new firm to avoid paying senior partners a disproportionate share of current profits.
Assessing Retirement as an Independent Transaction
We advise clients to assess each retirement as an independent transaction. To perform this evaluation, the following tools are necessary:
Client profitability of the transitioning partner’s book of business
Capacity Analysis post-transition
Worklife timeline for the retiring partner
Worklife timeline for the remaining partner(s)
Origination ceding schedule
Pro-forma profitability of the transitioning book for three years
Compensation pro forma for the retiring partner and the successor partners
Objective and Process-Oriented Approach
Adopting an objective, process-oriented approach when determining a buyout price and structure minimizes the emotional aspects of negotiation. Firms equipped with the requisite data to conduct these analyses can establish expectations early in the process and create a framework for future buyouts.
Transition Modeling
To manage expectations effectively, we recommend initiating transition modeling two years before the start of any transition. We prefer a three-year buyout period with a declining payment schedule based on profitability measures before buyout costs.
Transition Compensation Elements
The key elements in setting transition compensation include an objective, process-oriented approach, early expectation-setting, and a consistent model.
Conclusion
Effective transition planning is essential for founder-owned law firms to ensure smooth succession and maintain firm stability. By recognizing potential challenges, adopting an objective approach, and initiating early planning, firms can navigate transitions successfully and safeguard their legacy.
Australian Federal Budget 2025-2026–Key Tax Measures and Instant Insights
The Australian Federal Government has just released its budget for 2025-26. The K&L Gates tax team outlines the key announced tax measures and our instant insights into what they mean for you in practice.
In summary, with an upcoming Australian federal election, the budget is light on substantive tax changes (other than personal income tax cuts), and largely defers measures to raise further revenue or amend the tax system until after the election. Whilst there will be some relief that there have not been further targeted tax measures (e.g. on multinationals), there is also likely to be disappointment that there has been no attempt at tax reform or addressing the large number of outstanding matters requiring clarification.
Key Announced Tax Measure
K&L Gates Instant Insights
Personal Income Tax Cuts From 1 July 2026
The Government has announced reductions in the first tax rate from 16% to 15% from 1 July 2026 and from 15% to 14% from 1 July 2027.
The Government has also increased the income threshold for where the 2% Medicare levy applies.
These will no doubt be welcome for individuals, and will likely form a key part of the Government’s campaign for re-election.
These changes have been largely targeted at low to middle income earners, although the tax cuts will apply to all taxpayers. Given the higher rates of inflation and wage growth, this essentially returns some (but not all) of the higher income tax take from “bracket creep” to taxpayers.
There is no relief however for businesses, small or large.
Managed Investment Trust (MIT) “Clarifications”
The Government is proposing to legislate to allow foreign widely held pension funds and sovereign funds to get access to the reduced MIT withholding tax rates on eligible income for “captive” MITs (i.e. where they are the sole actual or beneficial member of the MIT).
This is intended to “complement” the Australian Taxation Office’s (ATO’s) Taxpayer Alert TA 2025 / 1 which focused on restructuring to access MIT benefits and using structures to implement captive MITs.
This is a pre-announced, welcome change that confirms existing industry practice, and addresses a difference between the rules to qualify as a MIT and the rules to apply reduced withholding tax.
However, it was only necessary due to the ripple of serious concerns started by TA 2025/1 and focusing on “captive MITs” without sufficient clarity on the ATO’s concerns.
It remains clear that the ATO has a focus on foreign collective investment vehicles (i.e. funds) accessing MIT withholding concessions where they are the sole ultimate owner (even though they may themselves by widely held).
No Changes to Address Taxation of “Digital” Assets–Handball to the ATO
The Government has confirmed it will not legislate any amendments to the taxation laws to deal with the array of digital assets, such as “decentralised finance” (DeFi), gaming finance (GameFi) and non-fungible tokens (NFTs).
It also (in a fairly luke-warm way) endorsed the principles developed by the Board of Taxation (BoT) to guide taxation of digital assets, whilst also indicating that further ATO guidance will be available to address uncertainty.
Whilst the lack of a specific tax regime for digital assets is consistent with the BoT’s recommendations, the tepid endorsement of the BoT’s policy framework for digital assets provides little guidance on how the ATO is to develop further tax guidance to address the taxation of these novel assets, leaving the ATO to largely continue to act as policy formulator and implementor as well as revenue collector.
Based on the existing guidance, it is unlikely this will result in much relief for digital asset providers, platforms or investors.
No Further Guidance on Corporate Tax Residency
The Government has provided no update on the changes (promised back in Federal Budget 2020/21) on clarifying corporate residency laws, particularly following hardening of ATO guidance on corporate residency.
This means the ATO’s views in TR 2018/5 and PCG 2018/9 continue to be applied (notwithstanding the Government’s previously stated intent to address some of the challenges associated with those rules).
Foreign entities with Australian directors etc continue to face heightened risks of the ATO trying to allege Australian tax residency.
Announced but Unenacted Measures
The budget largely provides no clarity on a number of previously announced but unenacted measures, including:
Changes to increase scope of foreign resident CGT withholding tax – other than that this has been delayed until after legislation is enacted;
Clean building MIT rates for data centres and warehouses has been delayed until after legislation is enacted;
Small business instant asset write-off extension to 30 June 2025;
Part IVA amendments to deal with withholding tax;
CGT rollovers and response to the BoT’s review;
Additional taxation of superannuation balances over AU$3 million, including whether this incorporates unrealised gains; and
Changes to Division 7A (i.e. removal of distributable surplus requirement).
The list of announced but unenacted tax measures continues to grow and provides real uncertainty for the tax system and all taxpayers. Whilst there are some positive amendments, including deferring the commencement of the unreleased changes to foreign resident capital gains withholding, it largely leaves these matters unresolved.
Some of the measures, such as taxation of superannuation balances, are clearly baked into the budget revenue forecasts, and so although the Government has not succeeded in getting legislation passed, the intent remains to do so (pending its re-election).
The Government also appears to be in wait and see mode as to what the ultimate outcome is in the Bendel litigation to determine next steps on Division 7A.
However, there has been little or no clarity provided on most measures, and so taxpayers continue to face uncertainty. Whether we see some measures proceed will ultimately depend on the outcome of the election.
Continued Focus on Tax Integrity by the ATO
The Government has provided further funding to the ATO to address tax integrity and target tax avoidance arrangements, particularly focused on multinationals.
The Government has also provided additional funding to the ATO to address non-payment of superannuation contributions and amounts PAYG withheld on account of tax.
This will see the ATO continue to target key concerns – based on our experiences, in recent years this has involved multinationals, foreign investors (including private equity funds) and intellectual property arrangements.
The continued focus on entities using the PAYG withholding and superannuation contribution regimes as a source of funding is unsurprising, and we have seen dramatically increased ATO activity in this space. This has led to increased insolvencies in small to medium businesses.
Understanding Partial Redemptions for Startup Founders
Being a startup founder is hard. Among other things, startup founders face long hours, resource constraints, intense pressure, and the need for constant adaptation and resilience in the face of uncertainty. Founders face all these tasks while also being severely underpaid, adding to the list of trials one of the more challenging: personal financial pressure.
As a result of such financial pressure, and the frightening uncertainty of success, it is not unusual for founders to consider a partial redemption or liquidity event in which they sell a portion of their shares to the company or directly to an investor, typically as part of a proposed financing round. Such a redemption provides cash to the founder in exchange for a reduced level of ownership and risk in the company. A partial redemption may be accomplished through a cash purchase directly from the company or by using a portion of the proceeds from a financing round. A partial redemption can be a strategic move with both advantages and potential drawbacks. Understanding the nuances of this transaction is crucial for founders and investors alike.
Why Consider Partial Redemption?
Several factors might drive a company to pursue a partial redemption of the founder’s shares:
Liquidity: Founders may seek to cash out a portion of their equity for personal or financial reasons.
Tax Planning: Partial redemption can offer tax advantages, especially when structured carefully.
Corporate Governance: Reducing the concentration of ownership can improve corporate governance and decision-making.
Employee Incentive Plans: Repurchased shares can be used to fund employee stock option plans or other incentive programs.
Key Considerations:
Before embarking on a partial redemption, several factors must be carefully evaluated:
Valuation: Accurately valuing the company’s shares is essential for determining a fair redemption price. The company should review the current 409A valuation and consider the potential impact the partial redemption will have on future 409A valuations.
Tax Implications: The tax consequences for both the company and the founder can vary significantly based on factors such as the founder’s holding period, the redemption structure and the company’s tax status. In general, a shareholder may exclude 100% of gain from the redemption of Qualified Small Business Stock (QSBS) for federal income tax purposes if certain issuance date and holding period requirements are met. However, a founder’s redemption may be disqualified from QSBS tax treatment.
Corporate Structure: The company’s legal structure and governing documents may impose limitations or restrictions on share redemptions.
Financial Impact: Repurchasing shares can reduce the company’s cash reserves and potentially affect its financial performance.
Shareholder Agreement/Investment Documents: Existing shareholder agreements or investment documents may contain provisions related to share transfers, redemptions, rights of first refusal, right of co-sale or tag-along rights. The partial redemption may trigger rights for existing shareholders who may wish to participate in the sale.
Potential Drawbacks:
While partial redemption can offer benefits, it also carries potential risks:
Dilution of Ownership: If the redemption is not carefully structured, it can lead to dilution of ownership for existing shareholders.
Company’s QSBS: Impact on Qualified Small Business Stock (QSBS) for existing shares as well as future purchases.
Market Perception: A significant share repurchase can sometimes be interpreted negatively by the market.
Loss of Talent: Founders may feel less motivated or committed to the company after a partial redemption.
The decision to redeem a founder’s shares is complex. Early exits and partial redemptions can provide liquidity and diversification for founders while allowing them to maintain some ownership in the company. However, it is important to consider the potential risks, structuring options and tax implications before the company and founder engage in such a redemption.
FinCen Issues a Huge Reprieve Form Domestic Reporting Companies
O frabjous day! the Financial Crimes Enforcement Network (FinCEN) late last Friday issued an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA). Here is the FinCEN’s summary:
In that interim final rule, FinCEN revises the definition of “reporting company” in its implementing regulations to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office (formerly known as “foreign reporting companies”). FinCEN also exempts entities previously known as “domestic reporting companies” from BOI reporting requirements.
Thus, through this interim final rule, all entities created in the United States — including those previously known as “domestic reporting companies” — and their beneficial owners will be exempt from the requirement to report BOI to FinCEN. Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners, and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.
Upon the publication of the interim final rule, the following deadlines apply for foreign entities that are reporting companies:
Reporting companies registered to do business in the United States before the date of publication of the IFR must file BOI reports no later than 30 days from that date.
Reporting companies registered to do business in the United States on or after the date of publication of the IFR have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective.
The CTA has been proven to be a costly disaster that has imposed unnecessary costs on small businesses that are no doubt cheering Friday’s announcement.
Texas Legislature Proposes Amendments to Texas Business Organizations Code
On February 27, 2025, a significant bill affecting entities organized under Texas law was filed in the Texas Legislature as Senate Bill 29 by Senator Bryan Hughes and as House Bill 15 by Representative Morgan Meyer. The Senate and House bills are currently identical and are referred to herein as the “Bill.” The Bill proposes a series of amendments to the Texas Business Organizations Code (“TBOC”) that apply to domestic Texas entities. Most of the amendments are applicable to Texas corporations, including in particular Texas corporations having shares listed on a national securities exchange. The authors of the Bill believe the amendments would reinforce corporate governance protections in Texas and reduce the risk of opportunistic shareholder litigation.
These reforms follow the commencement of operation of specialized Business Courts in Texas last fall and coincide with ongoing efforts to develop a new Texas-based stock exchange in Dallas. Together, these initiatives signal an ongoing commitment in Texas to providing a business-friendly jurisdiction that offers a stable legal environment for corporate governance and investment.
Many of the provisions of the Bill are tailored for publicly traded companies listed on a national securities exchange. The Bill would expand the definition of “national securities exchange” to include exchanges registered with the Securities and Exchange Commission as well as any stock exchange with its principal office in Texas that has received approval to operate by the Texas Securities Commissioner. [Bill Section 1; Amending TBOC Section 1.002(55-a).]
We discuss other key provisions of the Bill below.
Other states’ laws governing internal affairs and governance
The Bill provides that although a Texas entity’s managerial officials, in exercising their powers, may consider the laws and judicial decisions of other states and the practices observed by entities formed in other states, the failure to do so does not constitute or imply a breach of the TBOC or of any duty arising under Texas law. In fact, the Bill is clear that the plain meaning of the text of the TBOC “may not be supplanted, contravened, or modified by the laws or judicial decisions of any other state.” [Bill Section 2; Adding TBOC Section 1.056.]
Choice of forum and waiver of jury trial
The Bill would amend the TBOC to clarify that a domestic entity’s governing documents may require that one or more courts in Texas having jurisdiction shall serve as the exclusive forum and venue for any internal entity claims. [Bill Section 3; Amending TBOC Section 2.115(b).] For purposes of the TBOC, an “internal entity claim” means a claim of any nature, including a derivative claim in the right of an entity, that is based on, arises from or relates to the internal affairs of the entity [TBOC Sec. 2.115(a)].
The Bill would also add a new section to the TBOC to permit the governing documents of a Texas entity to contain an enforceable waiver of the right to jury trial if specified conditions are satisfied. Some commentators have questioned whether such a provision would be found to be constitutional because the Texas Constitution provides that the right to jury trial “shall remain inviolate.” In an attempt to satisfy the standards established in prior Texas case law for enforceable jury trial waivers, the Bill affirmatively states that a person’s waiver of jury trial is knowing and informed if the person (1) voted for or affirmatively ratified the governing document containing the waiver, (2) acquired an equity security in the entity when the waiver was included in the governing documents, or (3) is shown by evidence in a court proceeding to have knowingly and informedly consented or acquiesced to the waiver. [Bill Section 4; Adding TBOC Section 2.116.]
Codification of the business judgment rule
The Bill seeks to codify the business judgment rule in Texas by stating that, in the case of a Texas for-profit corporation having shares listed on a national securities exchange or affirmatively electing in its governing documents to be governed by this new provision, directors are presumed to act (1) in good faith, (2) on an informed basis, (3) in furtherance of the interests of the corporation, and (4) in a manner consistent with the law and the corporation’s governing documents. Neither the corporation nor its shareholders would have a cause of action against the corporation’s officers and directors unless one or more of the four preceding presumptions are rebutted by the claimant and the claimant proves both a breach of duty and that the breach involved fraud, intentional misconduct, an ultra vires act or a knowing violation of law. In any legal proceeding, the claimant must state with particularity the circumstances constituting the fraud, intentional misconduct, ultra vires act or knowing violation of law. The provision expressly states that it is not intended to affect any exculpation of monetary liability included in the corporation’s certificate of formation pursuant to TBOC Section 7.001. The Bill would also apply the same standards to any claims against directors or officers for breach of duty as a result of their authorization or performance of any conflict-of-interest contract or transaction with an interested director or officer under the TBOC’s interested person statute, if the corporation has shares listed on a national securities exchange or elects to be governed by the new business judgment rule provision. [Bill Sections 9 and 10; Adding TBOC Sections 21.418(f) and 21.419.]
Inspection of books and records
The Bill would amend the shareholder inspection rights provisions of the TBOC to clarify that a shareholder making a demand to inspect a Texas for-profit corporation’s books and records is not entitled to review emails, text messages or similar electronic communications, or information from social media accounts, unless the information affects an action by the corporation. Further, building on the existing statutory principle that a shareholder is not permitted to make a books and records demand for an improper purpose, the Bill would provide that, in the case of a corporation having shares listed on a national securities exchange or electing in its governing documents to be governed by the business judgment rule provisions, a written inspection demand will not be for a proper purpose if the corporation reasonably determines that the demand is in connection with a derivative proceeding that has been instituted or is expected to be instituted by the demanding holder or the holder’s affiliate, or if the demand is in connection with an active or pending civil lawsuit in which the demanding holder or the holder’s affiliate is or is expected to be an adversarial named party. [Bill Section 4, Amending TBOC Section 21.218.]
Advance determinations of independent and disinterested directors
The Bill would permit the board of directors of a Texas for-profit corporation having shares listed on a national securities exchange to adopt resolutions that authorize the formation of a committee of independent and disinterested directors to review and approve transactions, whether or not contemplated at the time of the committee’s formation, involving the corporation or any of its subsidiaries and a controlling shareholder, director or officer. In a novel new provision, the corporation adopting such a resolution would be able to petition a court of appropriate jurisdiction to hold an evidentiary hearing to validate the status of committee members as independent and disinterested.
There are various procedural provisions regarding this process that are beyond the scope of this alert. However, importantly, the new provision states that the court’s determination that the directors are independent and disinterested is dispositive in the absence of facts, not presented to the court, constituting evidence sufficient to prove that one or more of the directors is not independent and disinterested with respect to a particular transaction. Accordingly, the corporation may be able to avoid in subsequent litigation issues of whether directors are independent and disinterested. [Bill Sections 7 and 8; Adding TBOC Sections 21.416(g) and 21.4161.] The Bill also adds to the TBOC provisions governing shareholder derivative proceedings similar provisions that would authorize a court to make an advance dispositive determination as to whether the directors who are involved in making a decision whether to pursue a derivative action claim on behalf of the corporation are disinterested and independent. [Bill Section 13; Amending TBOC Section 21.554.]
Derivative litigation
The Bill would amend the TBOC to provide, for a Texas for-profit corporation having common shares listed on a national securities exchange or electing to be governed by the new business judgment rule provision, that a shareholder may not institute or maintain a derivative proceeding on behalf of the corporation unless the shareholder beneficially owns, at the time of instituting the derivative proceeding, a number of common shares to meet the required ownership threshold to institute a derivative proceeding in the right of the corporation as specified in the corporation’s certificate of formation or bylaws. However, that required ownership threshold may not exceed 3 percent of the corporation’s outstanding shares. [Bill Section 12; Adding TBOC Section 21.552(a)(3).] For these purposes, a “shareholder” can be a holder of record, a beneficial owner, or under a proposed amendment, two or more shareholders acting in concert. [Bill Section 11, Amending Section 21.551(2)(c).]
Disclosure-only settlements
Section 21.561 of the TBOC specifies certain circumstances in which a plaintiff’s attorneys may be awarded fees and expenses in a derivative proceeding, including the condition that the court finds the proceeding has resulted in a substantial benefit to the corporation. The Bill would amend this section of the TBOC to provide that a substantial benefit does not include “additional or amended disclosures made to shareholders, regardless of materiality.” [Bill Section 14; Adding TBOC Section 21.561(c).]
Status of Bill
The full text of SB 29 is available here. HB 15 is an identical companion bill. During the week of March 10, 2025, the Bill was heard in the Senate State Affairs Committee, which is chaired by Senator Hughes, and in the House Judiciary & Civil Jurisprudence Committee. The Bill was left pending in both Committees, and there was no significant testimony at the hearings in opposition to the Bill. Accordingly, the prospects for passage of the Bill by the Texas Legislature appear to be positive. However, the Bill has attracted a negative fiscal note from the Office of Texas Secretary of State, which estimates that the cost of implementing the amendments to TBOC Section 4.051 would be $1,752,965 for fiscal year 2026 and $513,040 annually for each fiscal year thereafter. If passed, the Bill would take effect on September 1, 2025, unless adopted by a two-thirds vote in both the Senate and House, in which case it would become immediately effective. In any case, any existing derivative proceedings would be grandfathered under pre-existing laws after the Bill’s amendments take effect.
FinCEN Removes Beneficial Ownership Reporting Requirements for U.S. Companies and U.S. Persons, Sets New Deadlines for Foreign Companies
On March 21, 2025 the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA).
Going forward, only foreign companies (not U.S. companies owned by non-U.S. persons) that have registered to do business in the U.S. will be required to comply with the CTA.
Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners, and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.
The following deadlines apply for foreign entities that are reporting companies:
Reporting companies registered to do business in the United States before March 21, 2025, must file BOI reports no later than 30 days from that date.
Reporting companies registered to do business in the United States on or after March 21, 2025, have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective.
EU CSDDD Under US Pressure: Some Insights on the PROTECT USA Act
The European Commission’s (EC) recent announcement of the Omnibus Simplification Proposals signals that it has heard the challenges and objections raised by companies affected by the new requirements of the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). But in the US, Senator Bill Hagerty (R-TN), a member of the Senate Banking Committee, has introduced legislation that could impose substantial challenges to CSDDD compliance for US companies.
As a reminder, the EC proposed amendments for the implementation and transposition deadlines of the CSRD and CSDDD, as well as amending the scope and requirements of the CSRD and CSDDD. But the Prevent Regulatory Overreach from Turning Essential Companies into Targets Act of 2025 (PROTECT USA Act)[1] proposed by Senator Hagerty targets “foreign sustainability due diligence regulation” such as the CSDDD, and would prohibit US companies from being forced to comply with the CSDDD. If enacted as currently drafted, US companies will be faced with a significant conflict in complying with the PROTECT USA Act and the CSDDD.
Further, the PROTECT USA Act intends to protect US companies from any enforcement action by the EU or its member states for non-compliance with the CSDDD. Section 5(a) of the PROTECT USA Act states: “No person may take any adverse action towards an entity integral to the national interests of the United States for action or inaction related to a foreign sustainability due diligence regulation.”[2] And § 5(b) prevents U.S. federal or state courts from enforcing any judgment by a foreign court relating to any foreign sustainability due diligence regulation “unless otherwise provided by an Act of Congress.”[3]
The PROTECT USA Act could apply to a significant number of US companies, defining “an entity integral to the national interest of the United States” as “any partnership, corporation, limited liability company, or other business entity that does business with any part of the Federal Government, including Federal contract awards or leases.”[4] It also includes entities:
[O]rganized under the laws of any State or territory within the United States, or of the District of Columbia, or under any Act of Congress or a foreign subsidiary of any such entity that—
(i) derives not less than 25 percent of its revenue from activities related to the extraction or production of raw materials from the earth, including—
(I) cultivating biomass (whether or not for human consumption);
(II) exploring or producing fossil fuels;
(III) mining; and
(IV) processing any material de-rived from an activity described in subclause (I), (II), or (III) for human use or benefit;
(ii) has a primary North American Industry Classification System code or foreign equivalent associated with the manufacturing sector; or
(iii) derives not less than 25 percent of its revenue from activities related to the mechanical, physical, or chemical transformation of materials, substances, or components into new products;
(iv) is engaged in—
(I) the production of arms or other products integral to the national defense of the United States; or
(II) the production, mining, or processing of any critical mineral.[4]
And the PROTECT USA Act has a catch-all that will apply to any entity “the President otherwise identifies as integral to the national interests of the United States.”[5]
The PROTECT USA Act builds on opposition to the CSDDD raised during the Biden Administration and, given the Republican majorities in both the US House and Senate, advances the argument that the CSDDD challenges US sovereignty. In a February 26, 2025 bicameral letter to Scott Bessent, the Secretary of the US Department of the Treasury and Kevin Hassett, the Director of the White House National Economic Council, legislators described the CSDDD as “a serious and unwarranted regulatory overreach, imposing significant economic and legal burdens on U.S. companies.”[6] Thus, the PROTECT USA Act may serve as an incentive to further limit the scope of the CSDDD.
We recently reviewed how companies should address CSRD requirements while the EC works through the Omnibus Simplification Proposals.[7] The PROTECT USA Act adds an additional layer of complexity for US companies in navigating the uncertainty of the EC’s legislative process along with the significant limits the PROTECT USA Act might present. SPB’s policy experts in the US and EU can support companies in making prudent business decisions in a rapidly changing legislative environment.
[1] https://www.hagerty.senate.gov/wp-content/uploads/2025/03/HLA25119.pdf
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] https://www.banking.senate.gov/imo/media/doc/csddd_letter_to_treasury-nec_draft_22525_zg.pdf.pdf
[7] https://natlawreview.com/article/what-should-companies-do-csrd-while-they-wait-eu-make-its-mind
Corporate Transparency Act 2.0 – Narrowing Reporting Requirements
On March 21, 2025, the Financial Crimes Enforcement Network (“FinCEN”) issued an interim final rule that significantly changes the reporting requirements under the Corporate Transparency Act (“CTA”). This alert summarizes the key changes to the reporting requirements and what they mean for your business.
Key Takeaways
Domestic companies1 are now exempt from all reporting requirements.
Foreign companies and foreign pooled investment vehicles no longer need to report U.S. person beneficial owners2 (but will need to report any non-U.S. person beneficial owners).
Compliance is still effectively voluntary as FinCEN has announced it will not be enforcing penalties and this rule is not yet effective.
Exemption for Domestic Companies
All domestic reporting companies are now completely exempt from the requirement to:
File initial beneficial ownership information (“BOI”) reports.
Update previously filed BOI reports.
Correct previously filed BOI reports.
FinCEN states that this reduction of requirements will eliminate the substantial compliance burdens for millions of U.S. businesses whose information would not be “highly useful” in the efforts to “detect, prevent, or prosecute money laundering, the financing of terrorism of terrorism, proliferation finance, serious tax fraud, or other crimes.”3
Changes for Foreign Companies
Foreign companies still must report beneficial ownership information, but with two important exemptions:
Foreign companies are exempt from reporting beneficial ownership information for any U.S. persons who are beneficial owners.
U.S. persons are exempt from providing their beneficial ownership information to foreign companies.
Foreign companies with only U.S. beneficial owners will not need to report any beneficial owners.
Changes for Foreign Pooled Investment Vehicles
Foreign pooled investment vehicles now only need to report:
Non-U.S. individuals who exercise substantial control over the entity (not an individual who has the greatest authority over the strategic management of the entity).
If multiple non-U.S. individuals exercise control, only the non-U.S. person with the greatest authority must be reported.
Foreign pooled investment vehicles with only U.S. beneficial owners will not need to report any beneficial owners.
Extended Deadline
Foreign reporting companies and pooled investment vehicles will have until the later of 30 days after this rule is published in the federal register, or 30 days after their registration to do business in the United States.
Next Steps
FinCEN is accepting comments on this interim final rule. The agency will assess these exemptions based on public comments and plans on issuing a final rule later this year.
1 See our prior advisories on the general application of the CTA and its specific application for those with entities for estate planning purposes for information on what is a domestic reporting company, a foreign reporting company, and beneficial owner information.
2 As a reminder, generally a beneficial owner is any individual who (directly or indirectly) (a) exercises substantial control over the company or (b) owns or controls at least 25% of the company’s ownership interests.
3 Please see full rule and explanation from FinCEN here.
How the Trump Administration’s War on Cartels Will Reshape the Financial Sector
On March 11, 2025, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a Geographic Targeting Order (GTO) aimed at disrupting drug trafficking and money laundering along the southwestern border. The GTO significantly lowers the Currency Transaction Reports (CTR) threshold from $10,000 to $200 for money service businesses (MSBs) operating in 30 zip codes across California and Texas. Treasury Secretary Scott Bessent emphasized the move as part of a broader effort to curb cartel influence, underscoring “deep concern with the significant risk to the U.S. financial system [from] the cartels, drug traffickers, and other criminal actors along the Southwest border.”
Despite its broader deregulatory agenda, the Trump administration has made clear that financial crime regulations — particularly those targeting money laundering, sanctions compliance, and illicit financing — are exceptions to its broader policy shift. The administration’s intensified crackdown on drug cartels underscores the financial sector’s growing role in national security and foreign policy enforcement. Banks and regulated institutions operating along the U.S.-Mexico border, or with substantial exposure to Mexico and Central America, must prepare for heightened compliance and due diligence expectations.
The Southwest Border GTO: A Glimpse into FinCEN’s Enforcement Priorities
GTOs compel financial institutions to implement heightened monitoring and reporting measures within specific high-risk regions. These orders, typically in effect for 180 days with the possibility of renewal, serve as a key intelligence-gathering and enforcement tool to disrupt illicit financial flows.
The March 11 GTO affects MSBs — including foreign exchange dealers, check cashers, issuers of traveler’s checks, and money transmitters — rather than banks. However, its implications extend far beyond these institutions. The drastic reduction of the CTR threshold to $200 reflects the cartels’ ability to efficiently launder drug proceeds through small, frequent transactions that evade traditional detection mechanisms.
Should the data gathered from this GTO indicate widespread illicit activity, regulators may extend its reach to regional and community banks, imposing even greater compliance burdens. More critically, the order signals heightened regulatory scrutiny on financial institutions’ roles in detecting and preventing cartel-related transactions. Banks with exposure to high-risk sectors must proactively enhance monitoring systems, train staff on emerging threats, and prepare to demonstrate robust compliance measures during regulatory examinations.
Drug Cartels as Terrorist Organizations: A Paradigm Shift for Financial Institutions
On his first day in office, President Trump signed an executive order initiating the designation of certain drug cartels as Foreign Terrorist Organizations (FTOs). On February 20, the State Department formally classified eight cartels under this designation, triggering sweeping legal and financial consequences.
Under U.S. law, FTO designation prohibits financial institutions from conducting transactions with these organizations and mandates the immediate blocking or freezing of assets linked to them. The move significantly expands the enforcement scope of the Treasury’s Office of Foreign Assets Control (OFAC), which oversees sanctions on terrorist organizations and other prohibited entities.
For financial institutions, this shift requires a fundamental reassessment of compliance strategies. Banks must refine sanctions screening processes, update risk management frameworks, and bolster due diligence measures to ensure they do not inadvertently facilitate transactions tied to these entities. Even transactions that do not explicitly list cartel-affiliated individuals or businesses may pose risks, necessitating enhanced scrutiny of financial flows originating from cartel-controlled regions.
In addition to shifting compliance strategies, the new FTO designation carries with it a risk for increased civil litigation against banks under the Anti-Terrorism Act (ATA). From approximately 2014 to present, federal courts throughout the country have seen an increase in civil matters against banks for providing financial services to FTOs and/or their affiliates, and therefore aiding and abetting acts of terrorism. While these claims ordinarily involve foreign banks predominantly located in the Middle East, Russia, China, and Europe, this new designation and the accompanying GTO could result in similar lawsuits against U.S. depository institutions.
Cartels have embedded themselves in diverse sectors — including agriculture, mining, transportation, and even financial services — complicating compliance efforts. Institutions that fail to adapt face increased criminal and civil liabilities, underscoring the urgent need for proactive risk mitigation measures.
The Road Ahead: Navigating an Intensified Regulatory Landscape
As the Trump administration intensifies efforts to dismantle cartel financial networks, financial institutions must brace for a rapidly evolving regulatory environment. Enhanced reporting obligations, stricter compliance requirements, and expanded due diligence mandates are set to redefine risk management strategies across the sector.
Institutions operating along the U.S.-Mexico border will be particularly affected, navigating the dual pressures of FinCEN’s GTO mandates and broader cartel-related sanctions. Strengthening internal controls, refining anti-money laundering frameworks, and integrating advanced transaction monitoring tools will be critical in maintaining compliance and mitigating legal risks.
While these regulatory shifts may impose short-term costs, they ultimately safeguard financial institutions from unwitting involvement in illicit activities. More importantly, they reinforce the industry’s pivotal role in national security efforts, ensuring that the financial system remains a bulwark against transnational crime.
By staying ahead of regulatory developments and embracing a proactive compliance posture, banks and financial institutions can not only protect themselves but also contribute meaningfully to the broader fight against cartel-driven financial crime.
FinCEN Eliminates Corporate Transparency Act’s Reporting Obligations for U.S. Persons
On March 21, 2025, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released an interim final rule (Interim Rule) that broadly eliminates Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act (CTA) for all U.S. reporting companies and all U.S. beneficial owners of foreign reporting companies. Under the Interim Rule, which FinCEN is implementing immediately, only companies created under foreign law and registered to do business in the U.S. will be required to submit BOI reports (unless otherwise exempt), and only foreign beneficial owners of such nonexempt foreign entities will be reportable.
Based on FinCEN’s estimates supporting the original BOI Rule (Original Rule), exempting all U.S. reporting companies shrinks the compliance universe by 99.8 percent.
How Did We Get Here?
The CTA whiplash, playing out in courts since early December, took a sharp turn by the government over the last month. On February 18, FinCEN restored the reporting obligations under the Original Rule after the last nationwide injunction against the CTA had been lifted at the government’s request. FinCEN gave reporting companies a grace period for compliance that would have ended, for most companies, on March 21.
Then, on February 27, FinCEN announced that it was suspending CTA enforcement pending a formal extension of the compliance deadlines beyond March 21. On March 2, the U.S. Treasury took this a step further, announcing the total suspension of CTA enforcement against U.S. persons and a rulemaking process “that will narrow the scope of the [BOI] rule to foreign reporting companies only.”
The Interim Rule puts this policy change into effect. The primary legal basis for this “narrowing” is a provision of the CTA that provides a regulatory process by which the U.S. Treasury may, subject to several statutory requirements, create additional exemptions from the BOI reporting obligations. In a court filing made after the March 2 announcement, the government elaborated on the policy change by noting the U.S. Treasury “intends to focus on foreign entities that could engage in illicit transactions from abroad.”
Policy Change or a New CTA?
Congress enacted the CTA to combat money laundering, the financing of terrorism, and other serious financial crimes by requiring tens of millions of private companies operating in the U.S. to identify their beneficial owners and disclose to FinCEN personal information about such companies and beneficial owners. FinCEN stores this information in a secure, nonpublic electronic warehouse for law enforcement purposes. Yet, FinCEN pegs the estimated number of reporting companies subject to the Interim Rule at less than 12,000 annually. Supporters of the CTA point to this fact, and findings made by Congress that bad actors conceal their ownership of entities in the U.S. to facilitate illicit transactions, in their criticism of the policy change. We could see judicial scrutiny of the Interim Rule if a plaintiff with legal standing decides to bring a case.
FinCEN is soliciting comments from the public on the Interim Rule, noting it “will assess the exemptions [in the Interim Rule], as appropriate, in light of those comments and intends to issue a final rule this year.” Among other unanswered questions, the Interim Rule does not address how BOI received by FinCEN from U.S. companies and their beneficial owners will be handled – nearly 16 million reports under the Original Rule were submitted to FinCEN prior to March 21.
Expect the CTA Saga to Continue
In addition to potential legal challenges to the Interim Rule, numerous cases challenging the CTA remain on court dockets and will continue to work their way through the legal process. Separately, some state legislatures have shown interest in developing their own versions of the CTA (which could be impacted by the ultimate resolution of the pending cases against the CTA), with New York having adopted the New York LLC Transparency Act (applicable to limited liability companies formed or registered to do business in New York and set to take effect January 1, 2026).
What Vice Chancellor Strine Got Wrong In Massey Energy Co.
Vice Chancellor Leo Strine famously wrote that “Delaware law does not charter law breakers”. In re Massey Energy Co., 2011 WL 2176479, at *20 (Del. Ch. May 31, 2011). Professor William J. Moon picks up on this theme in a forthcoming essay, Havens for Corporate Lawbreaking:
Yet even the fiercest defenders of the firm’s profit motive concede that the corporation’s profit-seeking function cannot justify breaking the law. As a matter of American corporate law, directors and officers are in breach of their fiduciary duties if they facilitate or engage in profit-maximizing illegal activities. Or so we thought.
Professor Moon’s essay calls out Nevada and the Cayman Islands as “corporate lawbreaking havens”. But are Vice Chancellor Strine and Professor Moon correct that Delaware does not charter corporate lawbreakers? I think not.
In JCCrandall, LLC v. Cnty. of Santa Barbara, 328 Cal. Rptr. 3d 828, 831 (Ct. App. 2025), review denied and ordered not to be officially published (Mar. 19, 2025), a California Court of Appeal pointed out the cannabis is illegal:
It is often said that cannabis is legal in California. The statement is not true. Under federal law, cannabis is illegal in every state and territory of the United States. (See Controlled Substances Act, 21 U.S.C. § 801 et seq.; 21 U.S.C. § 812 (c)(10); City of Garden Grove v. Superior Court (2007) 157 Cal.App.4th 355, 377, 68 Cal.Rptr.3d 656.) Article VI, paragraph 2 of the United States Constitution, known as the Supremacy Clause, provides in part, “The Constitution, and the Laws of the United States . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”
Therefore, any Delaware corporation engaged in the cannabis trade is potentially violating the law. Are the directors and officers of these corporation breaching their fiduciary duties when they allow the corporation to engage in the business for which it was formed?
It might be argued that Vice Chancellor Strine was referring only to Delaware law, but the Massey case involved violations of federal law. Thus, it cannot be said that he was referring only to state laws. Does this mean that Delaware charters the breakers of some laws? If so, how do directors and officers know which violations will support a breach of fiduciary duty claim and which will not?
More fundamentally, the immensity and complexity of state and federal laws and regulations mean that it impossible for most corporations to comply fully with all laws and regulations. Therefore, Delaware does indeed charter law breakers. This is most certainly true.
What California Employers Should Consider When Buying or Selling a Business
The purchase or sale of a business in California involves intricate legal considerations, particularly regarding the rights of and responsibilities to employees. Both the buyer and seller need to consider employment ramifications.
For Buyers:
As the new employer, the buyer will need to comply with a host of California requirements and disclosures. Employers new to California should pay special attention to regulatory requirements and may wish to consider arbitration agreements, employee handbooks, meal and rest break policies, timekeeping requirements, and other California-specific obligations. If the acquisition involves a reduction in force, additional considerations will be necessary. Finally, the acquirer may inherit existing policies and practices that could subject them to liability.
For Sellers:
Sellers also need to consider their obligations. Sellers of a business with employees should carefully manage the transition to ensure compliance with state requirements. This involves:
Providing written notices to employees about the sale and its implications.
Ensuring clear communication regarding any termination of employment.
Securing express written consent from employees if there is any intention to transfer obligations to the new business owner.
It is essential, whether buying or selling a business with employees, for business owners to consult with experienced employment lawyers. This ensures compliance with employment laws and helps mitigate potential risks.