Delaware Supreme Court Holds Business Judgment Governs Decision to Reincorporate Outside of Delaware For Purpose of Reducing Litigation Exposure In the Absence of Existing or Threatened Litigation
In Maffei v. Palkon, No. 125, 2024, 2025 Del. LEXIS 51 (Del. Feb. 4, 2025) (Valihura, J.), the Delaware Supreme Court held that a corporation’s decision to reincorporate in another state purportedly to reduce exposure to potential future litigation risk is subject to the deferential business judgment rule, as long as the decision is not alleged to have been made to avoid any existing or threatened litigation or in contemplation of a specific transaction. Reversing the decision of the Delaware Court of Chancery [see blog article here], the Supreme Court concluded that reduced exposure to potential liabilities that a controlling stockholder may face in the future is not a material, non-ratable benefit triggering the exacting entire fairness standard of review.
In Maffei, minority stockholders in TripAdvisor, Inc. and its controlling stockholder Liberty TripAdvisor Holdings, Inc. (collectively, the “Companies”) challenged the Companies’ decision to convert from Delaware corporations to Nevada corporations. In deciding to reincorporate in Nevada, the Companies cited what they believed were greater protections against liability for directors and officers under Nevada law. The boards of both Companies approved the conversions without implementing any procedural protections in favor of the minority stockholders. The controlling stockholder of the Companies exercised his control to approve the Companies’ reincorporation in Nevada.
Plaintiffs contended that the conversions were self-interested transactions that were not entirely fair to minority stockholders, arguing that the conversions accorded the controlling stockholder and other insiders a “non-ratable benefit” by allegedly reducing their exposure to future liability to the company and non-controlling stockholders. Defendants moved to dismiss for failure to state a claim and argued that the decision to reincorporate in Nevada should instead be governed by the more deferential business judgment rule. The Court of Chancery agreed with plaintiffs, holding that the entire fairness standard of review applied and denied the motion to dismiss.
The Delaware Supreme Court granted interlocutory review to consider which standard of review — entire fairness or the business judgment rule — applies to the conversion decisions. Defendants argued the business judgment rule applies because there was no pending or contemplated lawsuit and, therefore, they are not receiving a material, non-ratable benefit. They further argued that subjecting the conversions to entire fairness review raises comity concerns by requiring the court to quantify the extent of the harm, if any, that moving from Delaware to Nevada imposes on minority stockholders. Plaintiffs, in contrast, reiterated their prior argument that the entire fairness standard of review applies because the conversions conferred a non-ratable benefit on the controlling stockholder and other corporate insiders. The State of Nevada itself filed an amicus brief generally supporting defendants’ arguments and arguing that applying the entire fairness standard would risk creating an “exit tax” regime for corporations leaving Delaware.
The Delaware Supreme Court agreed with defendants holding that the conversions did not provide non-ratable benefits sufficient to trigger entire fairness review. The Court began its analysis by considering what constitutes a “non-ratable benefit,” which, if conferred on a controlling stockholder in a transaction with the controlled corporation, triggers entire fairness review under Delaware law. The Court confirmed that a non-ratable benefit must be “material” to avoid the business judgment rule. The Court then held that temporality, or whether the corporate decision is tied to obtaining a specific benefit to avoid an existing problem, is a key factor in determining the materiality of a potential non-ratable benefit. In reaching this conclusion, the Court cited Delaware cases illustrating the importance of temporality. For example, the Court cited cases in the advancement context holding that entire fairness review does not apply to director decisions adopting provisions regarding the advancement of litigation expenses when those provisions are adopted without regard to any particular litigation or expenses. The Court also pointed to Delaware cases distinguishing between the adoption of provisions limiting directors’ liability for future conduct with actions to extinguish directors’ existing potential liability for past conduct. Finally, the Court cited Delaware’s ripeness and standing jurisprudence, which it concluded show that Delaware courts routinely apply temporal distinctions and require more than mere speculation about future litigation for a party to litigate a claim. With this background in mind, the Court held that that distinguishing between transactions that might limit potential future liability and transactions extinguishing existing potential liability is a workable solution in deciding whether a transaction confers a material, non-ratable benefit.
The Court then held that in this case, plaintiffs failed to allege facts showing the controlling stockholder and other corporate insiders received a material, non-ratable benefit sufficient to warrant entire fairness review. It emphasized the absence of any allegations that the conversion decisions were made “to avoid any existing or threatened litigation or that they were made in contemplation of any particular transaction.” Thus, the Court found that the business judgment rule applied.
Concerns regarding comity and Delaware policy also supported its holding. While Delaware serves as the domicile for many U.S. corporations and other business entities, other states, including Nevada, are eager to compete by promoting their own corporate governance regimes. Where stockholder litigation rights as just “one stick in the corporate governance bundle,” the Court observed that its holding furthers the goals of comity by declining to engage in “a cost-benefit analysis” of one state’s corporate governance regime over another’s, something it noted courts are “ill-equipped to quantify.” Additionally, the Court concluded that not to second guessing directors’ decisions to redomesticate aligns with Delaware policy, which has “long recognized the values of flexibility and private ordering.” The Delaware Supreme Court’s decision in Maffei reflects the evolving juridical and academic discussion regarding the competition between states as forums for corporate domicile and the effect that corporate domicile decisions can have on the outcome of governance disputes [see, e.g., Harvard Law School Forum on Corporate Governance blog articles here and here]. By applying the business judgment rule to director decisions to reincorporate in another jurisdiction where such decisions are not motivated by existing operational issues, the Delaware Supreme Court leans into this competition by enhancing management’s flexibility.
Does Chicago’s Municipal Code Make Everyone A Minority?
Recent posts have discussed a registration statement filed Bally’s Chicago, Inc. for an offering that would impose a stockholder qualification based on race, gender and ethnic status. This qualification requirement is intended to satisfy the requirements of a Host Community Agreement entered into with the City of Chicago. The agreement defines “minority” pursuant to Section 2-92-670(n) of the Municipal Code of Chicago which, among other things, defines “minority” as including African Americans, American Indians, Asian Americans, and Hispanics. The MCC then adds:
individual members of other groups, including but not limited to Arab-Americans, found by the City of Chicago to be socially disadvantaged by having suffered racial or ethnic prejudice or cultural bias within American society, without regard to individual qualities, resulting in decreased opportunities to compete in Chicago area markets or to do business with the City of Chicago
What the authors of the Host Community Agreement apparently missed is that the effect of the Host Community Agreement is to bring everyone else within the definition of a “minority” because the allocation share ownership opportunities to specific racial and ethnic groups disadvantages others “without regard to individual qualities”.
Even more invidiously, the explicit inclusion of Arab-Americans while omitting Jewish Americans is manifestly anti-Semitic in effect, if not intent.
Independent Manager Consent Requirement Upheld
Recently, the Bankruptcy Court for the Northern District of Illinois issued an opinion in In re 301 W N. Ave., LLC, dismissing a debtor’s bankruptcy filing for lack of proper authority to file and discussing the considerations for enforcing a requirement that an Independent Manager approve a bankruptcy filing for a Delaware limited liability company. 2025 WL 37897 (Bankr. N.D. Ill. 2025). The opinion is consistent with “Authority to File” opinions regularly provided in structured finance transactions involving Delaware LLCs that have Independent Managers whose consent is required to file bankruptcy. Practitioners should be aware of the Bankruptcy Court’s analysis concerning LLC agreements and may want to update future Authority to File opinions to reference this case.
Case Background
On January 6, 2025, the Bankruptcy Court dismissed a chapter 11 bankruptcy case, holding that the Debtor, which was organized as a Delaware LLC, lacked the requisite authority to file its bankruptcy petition under Delaware law. Prior to the bankruptcy filing, the Debtor entered into a $26 million secured Loan Agreement, which required the appointment of an Independent Manager. The Loan Agreement further required that the Debtor’s governing documents require the Independent Manager to consent to certain significant business decisions, including whether to authorize the Debtor to file bankruptcy. The Debtor’s LLC Agreement complied with the Loan Agreement’s requirements. The Debtor’s LLC Agreement also required the Independent Manager to consider the interests of the Debtor, including the Debtor’s creditors, when making any significant business decision, including any decision to file bankruptcy. Id. at *11. Nevertheless, the Debtor filed bankruptcy without the Independent Manager’s consent.
The Debtor’s lender filed a motion to dismiss the bankruptcy case, arguing that the Debtor lacked authority to file the bankruptcy petition because it failed to obtain the Independent Manager’s consent, as required by the LLC Agreement. The Bankruptcy Court agreed. The Bankruptcy Court first noted that under Delaware law, an LLC can act only through the authorization provided by its operating agreement, and that here, the LLC Agreement required the consent of the Independent Manager to file a bankruptcy petition. Id. at *7. As a result, the Bankruptcy Court concluded that the Debtor lacked the proper authority to file.
The Bankruptcy Court next considered whether the LLC Agreement impermissibly restricted the Debtor’s right to file bankruptcy. In this case, the LLC Agreement required the Independent Manager to consider only the interests of the Debtor, including the Debtor’s creditors, when deciding whether to file bankruptcy. Id. at *11. The LLC Agreement also expressly instructed the Independent Manager not to consider the interests of other third parties, including affiliates or groups of affiliates, when exercising its decision-making authority. Id. at *12. Although the Debtor argued that these provisions constituted an inappropriate restriction on the Debtor’s ability to file bankruptcy, the Bankruptcy Court concluded that restricting or eliminating the Independent Manager’s duties to the Debtor’s affiliates or groups of affiliates was “entirely consistent with Delaware law and cannot be construed to contravene public policy.” Id. at *12. After concluding that the LLC Agreement did not impermissibly restrict the Independent Manager’s obligation to consider the Debtor’s interests, and having already concluded that the Independent Manager did not consent to the bankruptcy, the Bankruptcy Court granted the motion to dismiss.
The Debtor appealed the Bankruptcy Court’s decision (appeal pending).
Potentially Updating Authority to File Opinions
Authority to File opinions are legal opinions provided in many structured finance transactions that address whether, under the terms of the applicable LLC agreement, the requirement that an Independent Manager consent to a bankruptcy filing of the LLC would be governed by state law, and not federal law. In other words, Authority to File opinions address whether a provision requiring an Independent Manager to consent to a bankruptcy filing would be preempted by federal law as an impermissible restriction. Authority to File opinions are only provided for LLCs because the law regarding corporations and partnerships is well settled.
The language in the 301W N. Ave Debtor’s LLC Agreement concerning what the Independent Manager should, and should not, consider is similar to language used in many LLC agreements that are subject to Authority to File opinions. In particular, since the In re General Growth Properties, Inc. bankruptcy case in 2009, many LLC agreements provide that Independent Managers should consider only the interests of the LLC, including its creditors, in deciding whether to consent to a bankruptcy, and should not consider the interests of affiliates or groups of affiliates. As the Bankruptcy Court here expressly analyzed such a provision, practitioners may want to update their Authority to File opinions to specifically reference 301 W N. Ave.
Conclusion
301 W N. Ave re-affirms the validity of LLC agreement provisions requiring an Independent Manager’s consent to file bankruptcy when the Independent Manager is required to consider the interests of only the LLC, including its creditors, and not the interests of the LLC’s affiliates or groups of affiliates. Accordingly, 301 W N. Ave also re-affirms the analysis used in Authority to File opinions in structured finance transactions.
Summary of Tax Proposals in Leaked Document Detailing Policy Proposals
I. Introduction
On January 17, 2025, news sources reported that Republican members of Congress circulated a detailed list of legislative policy options, including tax proposals. This blog post summarizes some of the tax proposals and corresponding revenue estimates mentioned in the list.
II. Individuals
(a) SALT Reform Options
The $10,000 cap on the deductibility of state and local tax (“SALT”) from federal taxable income for most non-corporate taxpayers is set to expire at the end of the year. The list includes several alternative proposals for SALT deductibility going forward.
Repeal SALT Deduction: The SALT deduction would be repealed for individual and business tax filers. This would raise $1 trillion over ten years, as compared to extending the current TCJA deduction cap.
Make $10,000 SALT Cap Permanent but Double for Married Couples: The current TCJA deduction cap for individual and business tax filers would remain, but the cap would be raised for married couples to $20,000 at an estimated cost of $100-200 billion over 10 years, as compared to extending the current TCJA deduction cap.
$15,000/$30,000 SALT Cap: The current SALT deduction cap would be increased to $15,000 for individual taxpayers and $30,000 for married couples, with an estimated cost of $500 billion over 10 years, as compared to extending the current TCJA deduction cap.
Eliminate Income/Sales Tax Deduction Portion of SALT: Only property taxes would be eligible for the SALT deduction, and the deduction would not be capped. This proposal would cost $300 billion over 10 years, as compared to extending the current TCJA deduction cap.
Eliminate Business SALT Deduction: This policy option would eliminate the SALT deduction for business filers only, while maintaining the TCJA deduction cap for individuals. It would raise $310 billion over 10 years.
(b) Repeal or Reduce Mortgage Interest Deduction
The TCJA lowered the amount on which homeowners may deduct home mortgage interest to the first $750,000 ($375,000 if married filing separately) of indebtedness. One proposal would repeal the deduction on primary residences, which would raise $1.0 trillion over 10 years dollars, as compared to extending current TCJA deduction caps.A second proposal would lower the cap on the deduction to the first $500,000 of indebtedness. This proposal would raise $50 billion over 10 years, as compared to extending current TCJA deduction caps. Both savings estimates are Tax Foundation scores.
(c) Repeal Exclusion of Interest on State and Local Bonds
Under current law, interest earned on bonds issued by states and municipalities is excluded from federal taxable income.One proposal would repeal this exclusion, which would raise $250 billion over 10 years. Interest on certain “private activity bonds” is also exempt from federal income tax. A second proposal would repeal the exemption for private activity bonds, Build America bonds, and other non-municipal bonds. It would raise $114 billion over 10 years.
(d) Repeal the Estate Tax
Estates are generally subject to federal tax. The TCJA raised the estate tax exclusion to $13,990,000 in 2025. The list includes a complete repeal of the estate tax. The proposal would cost $370 billion over 10 years.
(e) Exempt Americans Abroad from Income Tax
The foreign earned income exclusion allows U.S. citizens who are residents of a foreign country or countries for an uninterrupted tax year to exclude up to $130,000 in foreign earnings from U.S. taxable income in 2025. The list suggests the limit could be raised, or that all foreign earned income could be exempted from U.S. tax. The Tax Foundation has estimated that the cost is $100 billion over 10 years, though it is not clear which proposal the estimate is related to. This is a Tax Foundation Score.
III. Businesses
(a) Corporate Income Tax
The current corporate income tax rate is 21%. The list posits reductions in the rate to either 15% (at a cost of $522 billion over 10 years) or 20% (at a cost of $73 billion over 10 years).
(b) Repeal the Corporate Alternative Minimum Tax
The Inflation Reduction Act of 2022 (“IRA”) imposed a 15% corporate alternative minimum tax (“CAMT”) on the adjusted financial statement of certain very large corporations. One proposal would repeal the CAMT, at a cost of $222 billion over 10 years.
(c) Repeal Green Energy Tax Credits
The IRA enacted various “green” tax credits, including for clean vehicles, clean energy, efficient building and home energy, carbon sequestration, sustainable aviation fuels, environmental justice and biofuel. These tax credits are proposed to be repealed. The repeal would save up to $796 billion over 10 years.
(d) End Employee Retention Tax Credit
The Employee Retention Tax Credit (“ERTC”) was established under the Coronavirus Aid, Relief, and Economic Security Act in 2020. The ERTC provided “Eligible Employers” with a refundable tax credit for wages paid between March 12, 2020 and January 1, 2021 for keeping employees on payroll despite economic hardship related to COVID-19.The proposal would extend the current moratorium on processing claims for credits, eliminate the credit for claims submitted after January 31, 2024 and impose stricter penalties for fraud related to the credit at an estimated savings of $70-75 billion over 10 years.
IV. Nonprofits
(a) Endowment Tax Expansion for Private Colleges and Universities
The TCJA imposed a 1.4% excise tax on total net investment income of private colleges and universities with endowment assets valued at $500,000 or more per student (other than assets used directly in carrying out the institution’s exempt purpose). One proposal would increase the excise tax to 14%, which would raise $10 billion over 10 years. A related but separate proposal would change the counting mechanism for the per student endowment calculation to include only students who are U.S. citizens, permanent residents or are able to provide evidence of being in the country with the intention of becoming a citizen or permanent resident. This proposal would raise $275 million over 10 years.
(b) Repeal Nonprofit Status for Hospitals
Generally, hospitals are eligible for federal tax-exempt status. The list proposes to eliminate tax-exempt status for hospitals. The Committee for a Responsible Federal Budget has estimated that the proposal would raise $260 billion over 10 years.
V. Enforcement
Repeal IRA’s IRS Enforcement Funding
The IRA resulted in supplemental funding to the IRS, for enforcement purposes. The list states that if this funding is repealed, outlays would be reduced by $20 billion and revenues by $66.6 billion, for a net cost of $46.6 billion over 10 years.
Mary McNicholas and Amanda H. Nussbaum also contributed to this article.
President Trump Orders FCPA Freeze; DOJ Announces Major Policy Realignment De-Emphasizing Corporate Investigations and Enforcement
The much-heralded end to prosecutions brought pursuant to the Foreign Corrupt Practices Act (FCPA)1 never materialized during the first Donald Trump administration, but the second Trump administration has the potential to bring major change to the US Department of Justice’s (DOJ) approach to FCPA enforcement.
On 10 February 2025, President Trump issued an executive order2 freezing the initiation of all new FCPA investigations and enforcement actions for 180 days. The executive order also instructs newly confirmed Attorney General (AG) Pam Bondi to promulgate guidelines on FCPA enforcement and conduct a comprehensive review of existing and historical FCPA investigations and resolutions.
President Trump’s directive comes on the heels of more than a dozen policy memoranda3 issued by AG Bondi on 5 February 2025, that will fundamentally realign DOJ’s operations and enforcement priorities during the second Trump administration. Two key DOJ directives—the memorandum on “Total Elimination of Cartels and Transnational Criminal Organizations” (TCO Memo) and DOJ’s new “General Policy Regarding Charging, Plea Negotiations, and Sentencing” (General Policy Memo)—when taken in concert with the new executive order, have the potential to bring about a seismic shift in DOJ’s approach to corporate investigations and enforcement.
What will the new FCPA guidelines look like? How will DOJ implement the FCPA guidelines and its other recent policy announcements? How will DOJ integrate them into forthcoming changes to the DOJ’s Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy? The answers to these questions will largely define the corporate enforcement landscape for the second Trump administration and beyond.
Freezing FCPA Enforcement
The 10 February 2025, executive order, entitled “Pausing Foreign Corrupt Practices Act Enforcement to Further American Economic and National Security,” rests on two fundamental claims: (1) “Current FCPA enforcement impedes the United States’ foreign policy objectives and therefore implicates the President’s Article II authority over foreign affairs;” and (2) “[O]verexpansive and unpredictable FCPA enforcement against American citizens and businesses…actively harms American economic competitiveness and, therefore, national security.” According to the fact sheet accompanying the executive order, aggressive FCPA enforcement has imposed “a growing cost on our Nation’s economy” and harmed the ability of US companies to obtain “[s]trategic advantages in critical minerals, deep-water ports, and other key infrastructure or assets around the world [that] are critical to American national security.” Given the weighty constitutional, economic, and national security implications at stake, the executive order directs DOJ to:
Immediately cease initiation of any new FCPA investigations or enforcement actions for the next 180 days, unless the Attorney General determines that an individual exception should be made;
Review in detail all existing FCPA investigations or enforcement actions and take appropriate action with respect to such matters to restore proper bounds on FCPA enforcement and preserve presidential foreign policy prerogatives; and
Within 180 days, adopt a “Policy of Enforcement Discretion” by issuing updated guidelines or policies, as appropriate, to adequately promote the president’s Article II authority to conduct foreign affairs and prioritize American interests, American economic competitiveness with respect to other nations, and the efficient use of federal law enforcement resources.
The executive order then prescribes that FCPA investigations and enforcement actions initiated or continued after issuance of the revised guidelines or policies “must be specifically authorized by the Attorney General.” The Attorney General also must comprehensively review DOJ’s FCPA enforcement actions from a historical perspective in order to “determine whether additional actions, including remedial measures with respect to inappropriate past FCPA investigations and enforcement actions, are warranted and shall take any such appropriate actions or, if Presidential action is required, recommend such actions to the President.”
Shifting Enforcement Priorities From Corporates to Cartels
A few days before issuance of the executive order on the FCPA, DOJ issued the TCO Memo and General Policy Memo, which aim to implement President Trump’s goal of attacking the operation of cartels and transnational criminal organizations (TCOs) in the United States and abroad by shifting DOJ’s priorities away from corporate enforcement to four new areas of focus: (1) illegal immigration; (2) transnational organized crime, cartels, and gangs; (3) human trafficking and smuggling; and (4) protecting law enforcement personnel.
Narrowing and Shifting FCPA Enforcement
The TCO Memo also orders a major redirection of resources and focus at DOJ’s FCPA Unit, perhaps the preeminent weapon in DOJ’s corporate enforcement arsenal.
The TCO Memo directs FCPA Unit prosecutors to “prioritize investigations related to foreign bribery that facilitates the criminal operations of Cartels and TCOs, and shift focus away from investigations and cases that do not involve such a connection.” For example, the TCO Memo describes hypothetical cases in which bribery of foreign officials occurs to facilitate human smuggling or narcotrafficking. Historically, such cases represent a tiny minority of DOJ’s overall anti-corruption enforcement activity. In instances where the underlying investigations and prosecutions are related to cartels and TCOs, the TCO Memo suspends the requirement that FCPA investigations and prosecutions, as well as those under the newly enacted Foreign Extortion Prevention Act (FEPA),4 be led by Fraud Section prosecutors.
Deprioritizing Antikleptocracy
The operational and policy shifts at another key DOJ corporate enforcement component, the Criminal Division’s Money Laundering and Asset Recovery Section, are even more drastic. The TCO Memo shutters various high-profile antikleptocracy initiatives, including the Kleptocracy Asset Recovery Initiative5 and Task Force KleptoCapture,6 DOJ’s marquee unit tasked with enforcing sanctions on Russian oligarchs in response to the 2022 Ukraine invasion. Federal prosecutors assigned to those initiatives are instructed to return to their prior posts, and resources formerly devoted to those initiatives will be redirected to the “total elimination of Cartels and TCOs.”
Expanding Corporate Enforcement Authority for US Attorney’s Offices Nationwide
The TCO Memo also authorizes US attorney’s offices nationwide to independently initiate FCPA/FEPA investigations and prosecutions in matters related to cartels and TCOs as part of an effort to remove “bureaucratic impediments” to implementation of DOJ’s new policy objectives. Other bureaucratic impediments removed by AG Bondi include the elimination of the preindictment review requirement for capital-eligible offenses for cases where the defendants are alleged to be members or associates of cartels or TCOs.7 Similarly, approval requirements from DOJ’s National Security Division (NSD) for terrorism and International Emergency Economic Powers Act (IEEPA) charges,8 search warrants, and material witness warrants are also suspended when the matter involves members or associates of any cartel or TCO designated as a foreign terrorist organization. Approval requirements for the filing of racketeering charges9 are likewise suspended for matters involving cartels and TCOs.
Analysis
The executive order and the Bondi policy memoranda are high-level directives that prescribe an unmistakable shift in DOJ’s programmatic focus away from anti-corruption and antikleptocracy enforcement—at least for now. If taken at face value, the actions mandated by the executive order are comprehensive: DOJ must not only promulgate new enforcement guidelines but must also systematically review all historical FCPA resolutions and determine whether any “remedial measures with respect to inappropriate past FCPA investigations and enforcement actions” are warranted.
How Will the Forthcoming DOJ Guidelines Define the “Proper Bounds” on FCPA Enforcement?
The executive order is predicated on the dual imperatives to “preserve Presidential foreign policy prerogatives” and return US companies to a globally competitive footing. Accordingly, the forthcoming guidelines will undoubtedly contain a requirement to consider and analyze the potential foreign policy implications of a proposed FCPA enforcement action—a constitutional “deconfliction” provision of sorts. Where the Bondi DOJ views a prior FCPA action brought forth by the prior administration’s DOJ to have significant geopolitical sensitivities, don’t be surprised if these matters are restructured or even dismissed under this executive order. The guidelines can also be expected to incorporate DOJ’s new enforcement priorities related to elimination of TCOs and cartels. Federal prosecutors will also likely be directed to consider any potentially adverse consequences to US national security like access to critical rare-earth minerals, deep-water ports, and the other key strategic and infrastructural considerations similar to those enumerated in the fact sheet.
The “Pipeline Effect”
Federal corporate investigations typically take many years from initiation to resolution, a timeline that can be significantly dilated by DOJ’s use of mutual legal assistance requests to its international partner agencies. Per the executive order, the dozens of FCPA investigations currently in the “pipeline” will be re-evaluated and are all potentially subject to discontinuation and declination. It is unclear what proportion of ongoing FCPA investigations and enforcement actions will be deemed incompatible with the forthcoming guidelines and discontinued after expiration of the 180-day freeze.
Whither the SEC?
Conspicuously absent from the executive order is any directive to the US Securities and Exchange Commission (SEC) related to its civil enforcement jurisdiction over the FCPA for issuers.10 The fact sheet accompanying the executive order mentions the SEC only once when citing statistics for investigations and enforcement actions initiated in 2024. As of this writing, it is unclear whether the SEC will receive an analogous directive to fundamentally re-evaluate its application of the statute and remediate any “inappropriate” FCPA resolutions from years past.
Who Will Exercise Enforcement Authority?
The executive order specifies that the Attorney General must authorize all FCPA investigations that are initiated or continued following promulgation of the new guidelines. This directive is seemingly at odds with the TCO Memo’s grant of authority to each of DOJ’s 94 US attorney’s offices to independently investigate and charge FCPA/FEPA cases related to TCOs and cartels. It is worth noting that similar requirements have been relaxed for preclearance of IEEPA and Racketeer Influenced and Corrupt Organizations Act (RICO) cases, too, a move that could expand the kinds of charges DOJ brings in corporate enforcement investigations with a cartel or TCO nexus. Time will tell how tight the nexus between the alleged foreign bribery and the cartel or TCO must be, but it is possible that unleashing hundreds of additional federal prosecutors on the FCPA and FEPA statutes will lead to a more robust—albeit significantly modified—enforcement landscape. Ironically, the TCO Memo’s loosening of approval requirements in FCPA and FEPA cases may have the effect of increasing the volume of FCPA enforcement across DOJ’s many subdivisions in this administration’s new priority areas of focus.
Global Enforcement Activity Remains Strong
DOJ routinely works its cross-border investigations with international partner agencies, some of whom have already signaled11 that they will continue their aggressive enforcement posture irrespective of DOJ’s policy realignment. Over the years, the United States has worked closely with partner nations and international organizations, like the Organization for Economic Co-operation and Development, to persuade countries around the world to enact and enforce domestic bribery laws. And even if US enforcers take their foot off the anti-corruption gas pedal, global enforcement of similar anti-corruption laws from authorities like the UK Serious Fraud Office, India’s Central Bureau of Investigation, Brazil’s Federal Prosecution Office, Singapore’s Corrupt Practices Investigation Bureau, and others will continue.
Key Takeaways
Prudent companies should not take the recent executive order and DOJ memoranda as an invitation to relax antibribery and other forms of corporate compliance. Despite the ostensible shift at DOJ, regulators and enforcement agencies across the federal government will continue work in related areas, like economic sanctions and export controls that present complex regulatory and enforcement risks. And even in the FCPA space, certain core prosecutions will likely continue following the review mandated by the executive order, especially in cases where significant violative conduct is directed from the United States.
Additionally, the statute of limitations for a violation of the FCPA is five years, which can be extended by up to three years in instances where DOJ is pursuing evidence from a foreign authority by way of a mutual legal assistance treaty request. In other words, a bribe paid today could ultimately be prosecuted under future administrations well after President Trump has left office. Moreover, the scope and nature of DOJ’s policy shift remains to be seen, and the nexus to cartels and TCOs that DOJ will regard as sufficient to warrant bringing FCPA, FEPA, and RICO charges against companies may be quite attenuated. Accordingly, companies doing business in jurisdictions with a higher presence of cartels and other forms of transnational organized crime should consider stepping up their compliance and due diligence efforts, especially with respect to third-party engagements to ensure no direct or indirect links to problematic entities.
More broadly, effective compliance programs can be an especially powerful prophylactic tool, even given the coming shift in DOJ’s priorities and resource allocation. In enforcement areas that are being deprioritized by DOJ, companies may now enjoy unprecedentedly favorable odds of avoiding prosecutions if they can demonstrate that allegedly problematic conduct was an isolated incident that the company promptly investigated and effectively remediated. As always, robust and proactive compliance policies that are regularly tested and improved can pay huge dividends over the long haul.
Footnotes
1 Renae Merle, Trump called global anti-bribery law ‘horrible.’ His administration is pursuing fewer new investigations, WASHINGTON POST (Jan. 31, 2020), https://www.washingtonpost.com/business/2020/01/31/trump-fcpa/.
2 Pausing Foreign Corrupt Practices Act Enforcement to Further American Economic and National Security, THE WHITE HOUSE (Feb. 10, 2025), https://www.whitehouse.gov/presidential-actions/2025/02/pausing-foreign-corrupt-practices-act-enforcement-to-further-american-economic-and-national-security/. The accompanying fact sheet issued by the White House in conjunction with the executive order, Fact Sheet: President Donald J. Trump Restores American Competitiveness and Security in FCPA Enforcement, THE WHITE HOUSE (Feb. 10, 2025), https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-restores-american-competitiveness-and-security-in-fcpa-enforcement/.
3 AG Bondi’s memoranda involve a wide range of topics, including: reviving the federal death penalty and supporting state prosecutions of death row inmates commuted by former President Biden; establishing an October 7th task force; establishing a “Weaponization Working Group” to review DOJ investigations into, and prosecutions of, President Trump and January 6th; implementing requirements for all DOJ personnel to “zealously” defend, advance, and protect the interests of the United States; returning all DOJ employees to in-person work; prohibiting DOJ from issuing “improper” guidance documents instead of conducting rulemaking; ending “illegal DEI and DEIA discrimination and preferences” and “internal discriminatory practices”; reinstating prohibitions on third-party settlements; rescinding DOJ’s environmental justice memorandum; and ending federal support for sanctuary jurisdictions. The complete list of the memoranda is available at https://www.justice.gov/ag/select-publications.
4 For more on FEPA, see our prior alert: Criminalizing the “Quo:” The New Foreign Extortion Prevention Act Targets the Demand Side of Bribery | HUB | K&L Gates.
5 The Kleptocracy Asset Recovery Initiative prioritized recovering assets misappropriated by corrupt foreign officials, particularly through bribery and embezzlement schemes. One of its most prominent enforcement actions includes the recovery of over US$1.5 billion in misappropriated funds tied to the Malaysian sovereign wealth fund 1Malaysia Development Berhad, including a recent additional recovery of US$20 million.
6 Task Force KleptoCapture, established in March 2022, was created to enforce sanctions, export restrictions, and economic countermeasures by prosecuting violators and seizing assets. Since its launch, the task force has pursued numerous high-profile cases, leading to asset seizures, criminal charges, and forfeiture proceedings against individuals and entities attempting to circumvent US sanctions and launder illicit proceeds.
7 U.S. Dep’t of Just., Just. Manual § 9-10.060 (2023).
8 The policy exempts NSD approval and concurrence requirements for cases involving 18 U.S.C. §§ 2332a, 2332b, 2339A, 2339B, 2339C, 2339D, 21 U.S.C. § 960A, and 50 U.S.C. § 1705.
9 18 U.S.C. §§ 1961–1968.
10 CRIMINAL DIV., U.S. DEP’T OF JUSTICE & ENF’T DIV., U.S. SEC. & EXCH. COMM’N, FCPA: A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT 20 (2d ed. 2020), https://www.justice.gov/criminal-fraud/file/1292051/download.
11 Mohamad Al As and Austin Camoens, MACC: 1MDB asset recovery to continue despite shake-up at US DoJ, NEW STRAITS TIMES (Feb. 9, 2025), https://www.nst.com.my/news/nation/2025/02/1172739/macc-1mdb-asset-recovery-continue-despite-shake-us-doj.
Are you Making Progress? The Scottish Court Provides Helpful Pointers to English Administrators Seeking to Extend on the Content of Progress Reports
Although the case of Anthony John Wright and Alastair Rex Massey vs. Scottish Court of Session [2024] CSOH 105 is (as the name suggests) a Scottish decision, there are several takeaways from the case relating to the content of progress reports, which could usefully be applied and followed by English practitioners when making their own application. Not least, because of the words of warning from the judge:
“It is important that administrators and their advisers bear in mind that an extension of an administration should never be applied for, or granted, as a matter of formality. It is not uncommon for the court to encounter cases where serial applications have been made, often on (literally) the same grounds from 1 year to the next, with no discernible sign of progress being made; and of course, if there is an expectation that extensions will be granted without difficulty, there is a danger that administrators will not be incentivised into completing the administration within the existing deadline, confident that another one will be along in the fullness of time“
This case concerned an application to extend an administration that had originally commenced on 19 November 2020 and had been extended on three previous occasions. The court was keen to understand what progress had been made, that creditors had been informed of the application and given a chance to object and that the extension period was the appropriate length.
Despite the warning above the judge acknowledged that this administration was complex and did not fall into that category and was prepared to take at face value the assertion that further time was required to conclude the administration, despite some misgivings about the information in the progress reports.
Progress Reports
Typically, when making an application to extend, an administrator will rely on the last progress report to evidence what work has been undertaken and what additional work is still to be done.
However as noted by the judge it is not uncommon to see applications to extend made on the same grounds from one year to the next – and this is something which we also see in applications made before the English courts. That is not to say that an extension will not be granted where the reasons for the extension are the same, but there are some helpful lessons from this judgment which could usefully be utilised by English practitioners.
Evidence of progress following previous extensions
In this case the judge said that at the very least, when a previous extension has been granted on essentially the same grounds, the administrators should explain why they have been unable to complete the outstanding steps in the time available.
The judge extracted a few examples from the progress reports where it was not obvious (without further explanation) why it had taken the administrators more than four year to complete the work:
reconcile issues with a small number of trade suppliers,
interrogate the company’s records,
continue investigations into the affairs and transactions of the company, as well as the conduct of directors,
continue liaising with the purchaser’s finance and property teams,
review and deal with any third-party assets.
Each time an extension had been requested the progress reports had listed much of the same work that needed to be completed and the same, or similar wording appeared in the reports.
That is not to say that an extension won’t be granted when the reasons for an extension are the same, but the court was critical of the fact that year on year the same statements were used in the progress report to explain what work was still to be done. For example, this statement was repeatedly given:
“The Administrators’ trading account is not yet complete due to unreconciled positions with several of the cash processing providers and trade suppliers alike. It is envisaged that all these matters will be finalised in the next reporting period“
The same or similar wording appeared in multiple reports and the judge said that repeating the expression that it was envisaged that “these matters” will be finalised in the following reporting period was starting to sound “somewhat hollow”.
The underlying message was that a progress report should evidence what progress had been made in the last period and simply tweaking a report without giving meaningful updates and explanations is unsatisfactory – becoming more so, the longer the administration continues.
Statutory Tasks
In this case multiple reasons were given to support the extension including finalising “all costs associated with the administration” and attending to and completing “all statutory and administrative matters necessary for completion of the administration”. The judge noted that those tasks are applicable in any administration, and to say that they are outstanding does not really go any way towards explaining why an extension is necessary.
Regardless of whether an application is made before an English or Scottish court it would be unusual to rely on these as the only reasons for an extension, but clearly as the judge’s comments indicate, more is required to justify an extension than statutory tasks that a practitioner can be expected to undertake as a matter of course.
Information to creditors
The process and expectations of the Scottish courts in dealing with an administration extension are different, compared to English practice and procedure – the Scottish courts expect unsecured creditors to be notified of the application and to be given an opportunity to object even where they are not expected to get a return. Actively inviting objections is not, as a rule of thumb, something that English courts expect practitioners to do.
However, English practitioners will, as standard, notify all creditors of their intention to seek an extension and their reasons for doing so in a progress report. The Insolvency Service has previously suggested (see Dear IP October 2010) that this should be done only where there is a realistic expectation that an application for an extension will be made within three or four months of the progress report. This is a much shorter period than that mentioned by the judge in this Scottish case who said that it was likely to be acceptable for administrators to rely on a report that was 6 months old, where creditors had been told that an extension was required.
There isn’t, in our view, a hard and fast rule about the age of a progress report, the key question must be whether at the time of the report the administrator knew and could give reasons why an extension was required. Where a creditor portal is being used, informing creditors is much easier and if circumstances have changed or the progress report is a bit older updating creditors with a letter via the portal seems a sensible thing to do – the court can then be satisfied that creditors are informed.
However, there was no suggestion by the Insolvency Service in Dear IP October 2010 that English administrators should actively invite objections – this seems to be a long-standing practice confined to the Scottish Courts and we are sure that English administrators will hope it stays that way!
Key Takeaways
Although this decision is not binding on the English courts, the below takeaways are sensible and would undoubtedly assist English practitioners with an application to extend given that an English court will also want to understand why an extension is required and what progress has been made:
Simply saying that more time is required, for the same task without more detail is unlikely to be viewed favourably especially so where the task appears on the face of it to be something that can be completed within the extended period.
If a prior report says that the administrators expect/hope that a task will be completed in the next reporting period, but it hasn’t, explain why that hasn’t been possible.
Ensure reports contain ‘meaningful’ and sufficient information. Avoid simply repeating or regurgitating the same statements in successive progress reports as a matter of course. A progress report should evidence progress.
If using a previous version of a progress report to produce the next one, review the statements given previously and add an update.
If the circumstances have changed since a progress report was produced or it is becoming a bit old, consider updating creditors with a letter via the creditor portal (if there is one).
Requiring an extension to complete statutory tasks is unlikely on its own to be sufficient justification for an extension.
Separately, the court was required to consider the length of the extension having agreed to extend. The secured creditor had consented to an extension (but only for a 6-month period) the administrators wanted a 12-month extension. The judge confirmed that there isn’t a policy of granting year long extensions and that granting an extension for a year should not therefore be presumed. He also referenced instances of where administrators had asked for 12 months but when pressed they had accepted a shorter period.
As noted at the outset, administrators have to be incentivised to conclude an administration, and countless extensions are unlikely to do achieve that. But there is a balance between imposing a realistic deadline so that the tasks which need to be done, can be, and not giving enough time such that further cost will be incurred in having to come back to court to extend again. Each case will be considered on its own merits, and we have seen the English courts grant long extensions where administrators have been able to justify why a long period is required, but as with any application to extend practitioners should not assume that these will be rubber stamped without full explanation and justification for the extension as this case also demonstrates.
Race/Gender/Ethnicity Based Share Restrictions
Yesterday’s post took note of a proposed initial public offering by Bally’s Chicago, Inc. that would impose a stockholder qualification based on race, gender and ethnic status. This qualification requirement is intended to satisfy the requirements of a Host Community Agreement entered into with the City of Chicago.
I noted that Section 204(a)(3) of the California Corporations Code expressly allows a California corporation to include in its articles provisions that impose “special qualifications of persons who may be shareholders”. Section 102 of the Delaware General Corporation Law includes no similar authorization.
Stanley Keller kindly pointed me in the direction of Delaware Code Section 202 which authorizes restrictions on the transfer or registration of a Delaware corporation’s securities to be imposed by the certificate of incorporation, by the bylaws, or by agreement. Section 202(c)(5) permits a restriction on transfer or registration if it is not “manifestly unreasonable”. Section 205(d)(2) further provides that such a restriction shall be conclusively presumed to be for a reasonable purpose if it is for “complying with any statutory or regulatory requirements under applicable local, state, federal or foreign law”.
In the case of Bally’s, it might be argued that the restriction is for the purpose of complying with an agreement (the Host Community Agreement) rather than a statutory or regulatory requirement. However, the Host Community Agreement requirement was intended to meet the requirements of the Illinois Gambling Act, 230 ILCS 10/1, et seq. which requires that any applicant for a casino owners’ license demonstrate it “used its best efforts to reach a goal of 25% ownership representation by minority persons and 5% ownership representation by women.” 230 ILCS 10/6(a-5)(9).
If it is ultimately determined that the Host Community Agreement and/or the Illinois Gambling Act are unconstitutional, an interesting question will arise whether the conclusive presumption in Section 205(d)(2) should be applied to an unconstitutional requirement.
Chancery Imposes Penalties for Spoliation in Facebook Litigation
A recent Delaware Court of Chancery decision provides useful guidance regarding the requirements to preserve evidence in litigation and the potential penalties for spoliation. In the matter styled: In re Facebook, Inc. Derivative Litigation, C.A. Cons. No. 2018-0307-JTL (Del. Ch. Jan. 21, 2025), the court addressed spoliation in litigation involving allegations that Facebook sold personal information in violation of applicable obligations it had to its social media users.
I. Factual Background
Although several million documents were produced in the litigation, this decision involved a motion alleging that the COO of Facebook and one of the members of the board of directors failed to preserve their personal email accounts which were used at least occasionally for business communications relevant to the lawsuit.
II. Legal Analysis
The legal definition for spoliation is the destruction or significant alteration of evidence, or the failure to preserve evidence properly, or the improper concealment of evidence. Slip op. at 11 (citing Goldstein v. Denner, 310 A.3d 548, 567 (Del. Ch. 2024)).
Court of Chancery Rule 37(b) authorizes spoliation sanctions for failure to preserve ESI and requires that before sanctions can be imposed, it must be shown that: (1) The responding party had a duty to preserve the ESI; (2) The ESI is lost; (3) The loss is attributable to the responding party’s failure to take reasonable steps to preserve the ESI; and (4) The requesting party suffered prejudice. Moreover, in order for an adverse inference or case dispositive sanctions, the plaintiff must show that the responding party recklessly or intentionally failed to preserve ESI. Slip op. at 12.
III. When Court Should Decide Spoliation Motion
The court recited factors it will consider to determine whether to address a spoliation motion before trial or after trial. Slip op. at 13-14.
IV. When a Duty to Preserve Exists
The first question under Rule 37(e) is whether ESI should have been preserved.
The court emphasized that: “A party is not obligated to preserve every shred of a paper, every e-mail or electronic document.” Slip op. at 14-15 and footnote 51. But the party must preserve what it reasonably should know is relevant to the action. The duty applies to key people likely to have relevant data.
The second step in a Rule 37(e) analysis is whether the ESI is lost. For purposes of Rule 37(e), information is lost only if it is irretrievable from another source including other custodians. Slip op. at 17.
The third step in the Rule 37(e) analysis is whether ESI was lost because of the failure of a party to take reasonable steps to preserve it.
In order to understand preservation, we must understand the components of ESI discovery.
The court reviewed the five steps involved in ESI discovery: (i) Identification; (ii) Preservation; (iii) Collection; (iv) Review; and (v) Production. In this case the issues were identification and preservation.
(i) Identification: Taking reasonable steps to identify ESI is the first step in preserving evidence or information which should be collected and preserved. This involves locating the relevant people that have custody of the relevant ESI or the ability to obtain it, as well as the location of types of ESI. Slip op. at 18. This may involve interviewing individuals that might have information about the location of relevant ESI.
(ii) Whether there was a failure to take reasonable steps to preserve: The next step is to preserve ESI, but a party “need not preserve all documents in its possession; it must preserve what it knows and reasonably ought to know is relevant to possible litigation and is in its possession, custody, or control.” Slip op. at 19.
Importantly, the court explained that it should be “sensitive to the parties’ sophistication with regard to litigation in evaluating preservation efforts; some litigants, particularly individual litigants, may be less familiar with preservation obligations than others who have considerable experience in litigation.” Slip op. at 19.
(iii) Steps Necessary to Preserve
The court distinguished between the practical steps an organization must take to preserve compared to an individual, but both must suspend routine document destruction policies. Slip op. at 20. For example, individuals must disable auto-delete functions, and also backup data for personal devices. Failure to do so may suggest they acted unreasonably. An individual must self-educate in order to learn what is necessary to prevent automatic deletion or destruction.
Applying the standards to the Facebook case, the court found that the COO was highly sophisticated as the chief operating officer and she knew what was required. She should have consulted company counsel if she had any doubts. Her failure to take steps to avoid the auto-deletion of her email was not reasonable. Slip op. at 21-22.
The court also explained that the director of the company who failed to disable his auto-delete function for his personal emails acted unreasonably, but in his case there was no prejudice.
V. Prejudice Required
If there was no prejudice from the loss of ESI, no sanctions are imposed. Slip op. at 23. The court explained what prejudice means in this context.
The prejudice analysis requires that the requesting party provide an explanation as to why the lost ESI could have been relevant, but “the mere fact that evidence is lost is not sufficient to demonstrate prejudice; the requested party must provide a plausible explanation as to why evidence could have been relevant such that the failure to preserve is prejudicial.” Slip op. at 24.
Once the party seeking sanctions meets the initial burden, the party who failed to preserve must convince the court that the lost ESI did not result in prejudice, such as: because the material could not have been relevant, or would not have been admissible, or could not have been used by the requesting party to its advantage. Slip op. at 24.
The court explained why the loss of the COO’s emails was prejudicial—but why there was no prejudice from the emails of the board member that were lost. Slip op. at 25-27.
VI. Sanctions
The court rejected most of the requests for sanctions, and only imposed an elevated requirement for the burden of proof, as well as an award of fees for bringing the motion for sanctions. Slip op. at 29.
The AI Royal Flush: The Five Foundations of Artificial Intelligence, Part 2
This is Part 2 of a summary of Ward and Smith Certified AI Governance Professional and IP attorney Angela Doughty’s comprehensive overview of the potential impacts of the use of Artificial Intelligence (AI) for in-house counsel.
Generative AI Best Practices for In-House Counsel
Considering all of the risks and responsibilities outlined in Part 1 of this series, Doughty advises in-house counsel to mandate training, discuss with the management team control of approved tools, and organize a review of what data can be used with AI at each company level.
TRAINING
Training has the potential to bridge generational gaps and create a working environment where people are more comfortable sharing new ideas. “I am very proud of our firm for the way that we have adapted to the modern business landscape,” noted Doughty. “We have some folks who have been practicing for 30 to 40 years, and we have some right out of law school. With everyone evolving and learning at the same rate, we’re using training to build a more inclusive culture.”
HUMAN REVIEW
Having an actual human review key decisions is another best practice. In a case where an experienced person would not have required an additional layer of review, but AI is being used to streamline the process, prudent companies should conduct a secondary review of the AI-generated work.
MONITOR REGULATIONS
Similar to the technology, the regulatory environment is constantly in flux. Most of the potential regulations are currently just proposals that are not legally binding. For example:
The EU AI Act is a comprehensive legislative framework that aims to regulate AI technologies based on their level of risk. It’s designed to ensure that AI systems used in the EU are safe and respect fundamental rights and EU values.
The U.S. Blueprint for an AI Bill of Rights outlines principles to protect the public from the potential harms of AI and automated systems, focusing on civil rights and democratic values in the U.S.
The FTC enforces consumer protection laws relevant to AI, focusing on issues like fairness, transparency, bias, and data privacy, but it currently operates within a more reactive and general deceptive trade practices legal framework.
Like the future, the final rules are impossible to predict. Doughty expects that transparency, fairness, and explainability will be common themes.
Regulators will want to know how decisions were made, whether AI was involved, how data is processed, and how data is protected. “They will not hesitate to hold senior-level people accountable. This is partially why clear policies are an effective strategy for minimizing risk,” commented Doughty.
Different regions have different ideas regarding ethics and bias. This increases the challenge of navigating the evolving regulatory framework.
COMPLIANCE
“Compliance with all of the standards is practically impossible, which makes this very similar to data protection and privacy. One of my worst nightmares is when a client asks me to make them compliant,” added Doughty, “because, in most cases, it’s simply not feasible.”
Penalties are likely to vary in proportion to the risk to society. Companies should consider whether using AI is worth the reputational damage and harm it could cause to individuals.
Businesses operating in high-risk sectors may see additional regulations compared to other businesses. It is a patchwork of inconsistent, overlapping laws, and that is unlikely to change. “If there is a positive to this, it is that it will keep us in business for a long time,” joked Doughty.
Legal knowledge will continue to be vital for helping clients make decisions. Critical thinking skills and an understanding of jurisprudence will also continue to support job security for attorneys.
Remember, AI is a Tool, not a Replacement.
“As attorneys, we have empathy skills. People don’t want to sit in front of a computer and talk about really difficult, hard things. They want to look you in the eyes,” Doughty explained.
AI is just a tool, and fears over being replaced may be overblown. Doughty is using the technology on a daily basis. Along with using it to edit her presentation into bullet points for experienced in-house attorneys, she uses it to draft legal scenarios.
Doughty advises not to use a person’s real name because of privacy. “I also use it when I am frustrated with someone, so I draft how I really feel, then ask the AI to make it more professional,” noted Doughty.
AI can quickly write an article if provided with a topic, a target audience, and a few links. The speed and accuracy are astonishing, but many believe it is difficult, if not impossible, to determine whether the copy was plagiarized. This is likely to be the subject of ongoing litigation.
Audience Questions Answered
In the Q&A portion of the presentation, the audience questions came in quickly. Doughty attempted to address all she could in the time allotted and offered to take calls regarding questions after the program.
In response to a question centered on navigating ongoing regulations, Doughty advised following the National Institute of Standards and Technology Cybersecurity Framework.
Another audience member wondered, “Can AI be trusted?”
“No, it cannot be trusted at all,” said Doughty. “There is not a single tool that I would recommend using as the basis for legal decisions without substantial human oversight – same as you would with any other technology tool.”
“What technology or change, if any, compares to the effect generative AI is having on the legal system and profession?”
“I don’t think we’ve seen anything like this since Word, Excel, and Outlook came out in terms of changing the way that we practice law and prepare legal work products. I remember having to go from the book stacks to Westlaw; it was just a different way to do research, but I still had to do all of those things. This is even more revolutionary than what we saw at that point.”
“How do you mitigate the risk of harmful bias in a vendor agreement?”
“The short answer is to fully vet your vendors. Many vendors understand the risks and will include representations and warranties within their contracts, but this one is difficult. Understanding the training model and data used for training can be key, as it was with the earlier examples of AI hiring tools trained in male-dominated industries that preferred male applicants.”
“Any tips to bring up the topic of AI to organizational leadership?”
“Quantify the risk and discuss all of the penalties that could occur, along with the opportunity costs associated with ruining a deal.”
“Are there any legal-specific AI tools that you see as a good value?”
“In terms of legal research, writing, or counsel, I would not advise using AI for any of that right now – outside of the (very) expensive, but known, traditional legal vendors, such as Westlaw and Thompson Reuters. This is partially because most of the AI tools people are using are open AI tools. This means every question and answer – right or wrong – is being used to train the technology. This is also partially because to ethically use these tools, we must understand their strengths and weaknesses enough to provide sufficient oversight, and many attorneys are not there yet.”
“What about IP infringement?”
“If AI has been predominantly trained on existing content and you use it to create an article, does the writer have an infringement claim? This is to be determined, and it’s one of the biggest issues being litigated right now. There are a slew of artists that are suing Gen AI companies for this purpose.”
“What about the environmental impact of AI processing?”
“Generative AI significantly impacts the environment due to its high energy consumption, especially during the training and operation of large models, leading to substantial carbon emissions. The use of resource-intensive hardware and the cooling needs of data centers further exacerbate this impact.”
“Any suggestions for when the IT department believes their understanding of the risks supersede the opinions of the legal department?”
“This is when the C-suite needs to come in because the legal risk and responsibility are already out there, and implementation is under a completely different department. It’s a business decision. I look at the IT department no different than the marketing or sales departments in determining the legal risk and making a recommendation.”
“Any recommendations for AI-based tools to stay on top of the regulatory tsunami?”
“Not yet, but I spend a lot of time listening to demos and participating in vendor training sessions. Signing up for trade association newsletters is another way to stay current. These are free resources for training and help with staying current on industry trends and proposed regulations.”
Conclusion
Doughty concluded the session by reminding the group of In-House Counsel that their ethical duties and responsibilities extend to governance, compliance, risk management, and an ongoing understanding of the ever-evolving landscape of Generative AI.
Executive Order 14173: How Public Companies’ DEI Initiatives May Be Targeted and Key Actions to Take Now
On January 21, 2025, President Trump signed Executive Order 14173, titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (the “Order”), which, among other actions,[1] directs all executive departments and agencies “to combat illegal private-sector [diversity, equity, and inclusion (DEI)] preferences, mandates, policies, programs and activities.”
The Order requires the heads of all agencies, assisted by the U.S. Attorney General (USAG), to “take all appropriate action with respect to the operations of their agencies, to advance in the private sector the policy of individual initiative, excellence and hard work.” The Order also directs the USAG, in consultation with the heads of relevant agencies and in coordination with the Director of the Office of Management and Budget, to submit a report within 120 days of the Order, including a proposed strategic enforcement plan identifying “(i) key sectors of concern” within the jurisdiction of each agency, (ii) the “most egregious and discriminatory DEI practitioners” in each sector, (iii) a plan to deter DEI programs or principles that “constitute illegal discrimination or preferences,” (iv) strategies to encourage the private sector to end such discrimination or preferences, (v) potential litigation, and (vi) potential regulatory action and guidance.
Of particular importance to public companies is the directive that, as part of the deterrence plan (described in clause (iii) above), and so as to “further inform and advise [the President] so that [his] Administration may formulate appropriate and effective civil-rights policy,” each agency “shall identify to up to nine potential civil compliance investigations of publicly traded corporations,” as well as large nonprofit organizations and foundations, state and local bar and medical associations, and higher-education institutions with endowments in excess of $1 billion.
As of the date of this publication, the Order remains in effect but is subject to a lawsuit brought by the City of Baltimore and other plaintiffs seeking a declaratory judgment that the Order is unlawful and unconstitutional and a preliminary and permanent injunction against its enforcement.[2]
Aligned with the Order: The New USAG Memorandum on DEI
In a February 5, 2025, memorandum issued to all employees of the Department of Justice (DOJ) (the “Memorandum”), the USAG warned that public companies could face criminal investigations relating to DEI programs or policies. The Memorandum, consistent with the Order, directs the Civil Rights Division and the Office of Legal Policy to jointly submit a report by March 1, 2025, to the Associate Attorney General with recommendations for enforcing federal civil rights laws and taking other “appropriate measures to encourage the private sector to end illegal discrimination and preferences,” including policies relating to DEI and diversity, equity, inclusion, and accessibility (DEIA). The Memorandum states that the report should identify:
“key sectors of concern” within DOJ’s jurisdiction;
the most “egregious and discriminatory” DEI and DEIA practitioners in each such sector;
a plan with specific steps or measures to “deter the use of DEI and DEIA programs or principles that constitute illegal discrimination or preferences, including proposals for criminal investigations and for up to nine potential civil compliance investigations” of the entities meeting the criteria enumerated in section 4(b)((iii) of the Order (which includes publicly traded corporations);
additional potential litigation activities, regulatory actions, and sub-regulatory guidance; and
“other strategies to end illegal DEI and DEIA discrimination and preferences and to comply with all federal civil-rights laws.”
The Potential Impact of the Order
While the Order may be enjoined temporarily or permanently, it has—in the three weeks since its signing—had a significant impact on the DEI initiatives and programs of well-known public companies. Meta Platforms, Inc. (Facebook’s parent) and Alphabet Inc.’s Google have reportedly ended their goals of hiring employees from historically underrepresented groups, and Target Corporation has stated that it would end its DEI initiatives this year.[3] Bloomberg reported that a number of other public companies, including Sirius XM Holdings Inc. and Paypal, have revised or removed references to DEI initiatives in their annual reports filed with the Securities and Exchange Commission since the Order was signed.[4]
Even if the Order is enjoined or struck down, public companies may nevertheless continue to be targets of a wide array of investigations, enforcement actions, and litigation relating to their DEI initiatives or programs, such as:
civil compliance investigations regarding alleged violations of existing anti-discrimination laws launched by DOJ or other federal agencies, which may include issuing Civil Investigative Demands that require the production of documents and responses to written interrogatories and/or oral testimony;
investigations and lawsuits instituted by state attorneys general alleging violations of state anti-discrimination laws;
shareholder litigation, including class actions, alleging violations of securities laws, including alleged false or misleading statements in public companies’ annual and quarterly reports or proxy statements relating to risks associated with DEI initiatives;
EEOC Commissioner Charges for alleged violations of Title VII of the Civil Rights Act of 1964 (“Title VII”); and
individual lawsuits, class actions, and whistleblower complaints filed by current or former employees for alleged violations of federal or state laws prohibiting unlawful discrimination and retaliation.
Challenges to Public Companies’ DEI Initiatives
Two recent examples show that public companies may continue to be targeted for their DEI initiatives even if the Order is struck down. On January 27, 2025, a group of 19 state attorneys general, led by Kansas Attorney General Kris Kobach and Iowa Attorney General Brenna Bird, issued a letter to Costco Wholesale Corporation urging it to “end all unlawful discrimination imposed by the company” through its DEI policies and giving Costco 30 days to respond. Although these state attorneys general mention the Order in their letter, they cite recent U.S. Supreme Court decisions as authority for their efforts to stop unlawful discriminatory practices.[5] Only a few days later, on January 31, 2025, a proposed shareholder class action was filed against Target Corporation and its directors, alleging that the company violated securities laws, including by failing to disclose material risks of consumer boycotts in response to the company’s environmental, social, and governance (ESG) and DEI mandates and its 2023 Pride Campaign.[6]
On the same day that the complaint against Target was brought, U.S. Steel Corporation filed its 2024 annual report on Form 10-K with an expanded ESG risk factor referring to the Order and acknowledging the current negative perception of, and increased focus on, DEI initiatives:
In addition, in recent years, “anti-ESG” sentiment has gained momentum across the U.S., with several states and Congress having proposed or enacted “anti-ESG” policies, legislation, or initiatives or issued related legal opinions, and the President having recently issued an executive order opposing diversity equity and inclusion (“DEI”) initiatives in the private sector. Such anti-ESG and anti-DEI-related policies, legislation, initiatives, litigation, legal opinions, and scrutiny could result in U.S. Steel facing additional compliance obligations, becoming the subject of investigations and enforcement actions, or sustaining reputational harm.
What Public Companies Should Do Now
Public Disclosures
With the beginning of the 2025 proxy season, public companies should:
carefully review disclosures in their annual reports on Form 10-K that address, directly or indirectly, DEI initiatives, programs, policies, or objectives and:
refine required disclosures regarding human capital management, which may refer to employee recruitment, engagement, retention, training, and turnover, and
consider adding a new (or updating an existing) risk factor addressing DEI, including the risk of potential enforcement or litigation resulting from the Order and the Memorandum;
review and refine disclosures in their proxy statements that may touch upon DEI, including:
ESG initiatives and objectives;
diversity of directors and director nominees, including reference to any policy of the Board or the nominating committee with regard to the consideration of diversity in identifying director nominees;
executive compensation with performance metrics linked to DEI or ESG metrics; and
shareholder proposals relating to DEI or ESG matters;
monitor proxy voting guidelines from proxy advisory firms and mutual fund managers for changes with respect to guidance addressing the diversity of board members and other relevant topics;[7]
review other disclosures regarding DEI on their websites, in social media, and in communications with employees and candidates; and
monitor developments in the litigation to set the Order aside, as well as enforcement actions and litigation targeting DEI initiatives, and revise risk factors relating to DEI to reflect “material changes” in upcoming quarterly reports on Form 10-Q.
Compliance Review and Risk Assessment
Like other private-sector employers, public companies should undertake a thorough review and risk assessment of their DEI plans, programs, policies, and initiatives. During this process, public companies should:
promptly review any DEI plans, programs, and policies to determine whether they contain any aspect that could be deemed unlawful under Title VII[8] or any other federal, state, or local civil rights laws, and consider whether to take any action to modify such plans, programs, or policies, including the names of such plans, programs, or policies, in consultation with employment counsel;
extend such review to include:
programs for employee inclusion;
programs for talent management and leadership training, including initiatives to increase representation of particular groups in management;
hiring and recruitment practices that include DEI considerations;
compensation programs and policies utilizing metrics based on DEI factors;
codes of business conduct;
supplier diversity policies; and
federal contracting affirmative action programs (for further guidance on reviewing and winding down affirmative action programs for federal government contractors, please refer to our prior Insight titled “DEI and Affirmative Action Programs Blitzed, While Executive Order 11246 Is Revoked”);
evaluate the risks and impact of changes in DEI-related initiatives and activities going forward on various stakeholders (including employees and customers), as well as business and financial objectives and strategies;
consider the Board’s role in overseeing the compliance review and risk assessment of DEI plans, programs, policies, and initiatives and whether the Board (or a committee of the Board) should receive a report on the status of the review and risk assessment at the next meeting;
ensure that Human Resources (HR) and Compliance teams are familiar with procedures for handling and investigating whistleblower complaints and closely monitor hotlines and emails for DEI-related complaints or reports; and
ensure that Legal, HR, Compliance, and Investor Relations teams are prepared to handle inquiries, complaints, and potential investigations involving DEI-related matters.
As noted above, developments relating to the Order and reactions to it are evolving quickly, and the guidance in this Insight is provided with the caveat that events may occur soon after publication that may impact it. We will update you as related litigation moves forward and further developments unfold.
ENDNOTES
[1] For information regarding other actions under the Order, see the Epstein Becker Green Insight titled “DEI and Affirmative Action Programs Blitzed, While Executive Order 11246 Is Revoked” (Jan. 28, 2025).
[2] See National Association of Diversity Officers in Higher Education v. Donald J. Trump, Civil Action No. Case1:25-cv-00333-ABA (D. Md. filed Feb. 3, 2025).
[3] See Miles Kruppa, Google Kills Diversity Hiring Targets, Wall Street Journal (Feb. 5, 2025, 3:48 p.m. ET), https://www.wsj.com/tech/google-kills-diversity-hiring-targets-04433d7c; Jonathan Stempel and Marguerita Choy, Target is sued for defrauding shareholders about DEI, Reuters Legal (Feb. 3, 2025).
[4] See Clara Hudson, David Hood and Andrew Ramonas, Netflix, McCormick Uphold DEI to Investors After Trump Directive, Bloomberg Law (Jan. 30, 2025, 1:39 p.m. EST); Clara Hudson, Paypal Cuts Diversity Language in New Report to Shareholders, Bloomberg Law (Feb. 5, 2025, 3:18 p.m. EST).
[5] See Letter from B. Bird, Att’y General of Iowa, and K. Kobach, Att’y General of Kansas, et al. to R. Vachris, President and Chief Executive Officer of Costco Wholesale Corporation.
[6] See City of Riviera Beach Police Pension Fund v. Target Corporation, Civil Action No. 2:25-cv-00085 (M.D. Fla. filed Jan. 31, 2025).
[7] See, e.g., The Vanguard Group, Inc.’s Proxy voting policy for U.S. portfolio companies effective February 2024, which has revised some of its prior guidance for U.S. companies relating to women and minority directors.
[8] Title VII remains the law of the land. Under Title VII, all employment decisions should continue to be made without consideration of race, color, religion, sex, or national origin, as well as other factors protected by federal, state, and local law. (42 U.S.C. § 2000e).
The Risks of 50-50 Owned Business Partnerships: This Marriage of Equals Does Not Guarantee Success
During Valentine’s Day month, we are taking a look at 50-50 owned private businesses. Forming a co-owned company may sound like a good idea on paper because the two partners are close friends or family members who are making the same investment, sharing equal control, and receiving the same financial returns. But, as in marriages, the co-owners may run into conflicts they cannot resolve, which could require a costly business divorce. This is the chief problem with these co-owned businesses: When conflicts arise the partners cannot work out, they will be in a position of deadlock that distracts or ultimately derails their business.
The Deadlock Dilemma Is the Real Deal
The risk of a co-owned business capsizing over unresolved conflicts between the owners is substantial and many of these companies come apart because the partners failed to create any type of dispute resolution process. Here are two examples: first, the ubiquitous Buffalo, New York, law firm of Cellino & Barnes, broke up in 2020 after 25 years, but only after the partners engaged in a highly publicized, three-year-long legal battle resulting in a court-ordered buyout. The litigation between the two law partners was so contentious it led to an off-Broadway play produced about the case. The second example is the lengthy legal battle between the co-CEOs of TransPerfect Global, Inc., the translation services company, which the parties finally settled in 2020 after six years of litigation.
In light of the high risk of conflicts arising in the future between the co-owners of these businesses, the two partners should consider whether this ownership structure is truly their best option. If they do decide to go down this road, however, the good news is that they have some options to consider. This post reviews specific, practical steps the co-owners can take to head off problems that might otherwise cause their partnership to end in a bitter feud.
Another Approach: Shared Financial Returns, But Not Equal Co-Ownership
One approach for the partners to consider that will avoid future conflicts is to adopt an ownership structure that provides financial equality, but with a modified ownership percentage. Under this approach, the partners would agree to an ownership percentage of 51% to 49%, but also agree in the company’s governing documents to share equally in the company’s profits and losses, as well as in the amount of their compensation. This structure provides for both partners to share the same financial results from the company’s performance, but it establishes a process for decision-making by the company that will not result in gridlock.
Further, the majority owner will have the right to make operating decisions on a day-to-day basis for business, but the minority partner will also have veto rights over some of the most important decisions, and these will be subject to negotiation. By way of example, the partners may decide that a unanimous vote of both of the partners will be required to admit new partners, to approve the sale of the business, and/or to permit the company to take on debt above a certain amount. This structure thus avoids conflicts over most of the decisions that need to be made to keep the business moving forward.
Create a Set of Clear Tie Breakers
For partners who are insistent on having equal ownership in the company, it is critical for them to adopt a tie-breaking mechanism that will prevent them from reaching the point of deadlock over future business decisions. Some of the tie-breaking options available to the partners are reviewed below.
Zones of Authority
For certain companies, the roles of the two partners will be distinct, and in those businesses, the partners may be able to agree that each partner will have the authority to make decisions in their own domain. For example, a partner in charge of marketing and business development may be given authority to decide on what the website will look like, who to hire/fire in the marketing/sales department, and what marketing strategy to adopt. Similarly, a partner running the company’s back office may have the authority to select the accounting software and the CPA firm the company uses, to set pricing on products or services, and to hire a CFO or comptroller.
The problem with this approach is that the partners will have to agree on some decisions that do not fall into these clear categories and they may have conflicts deciding other issues, such as the amount of the company’s expenses, profits distributions, acceptable debt level and growth rate. The bottom line here is that there will still be many common areas in which a potential deadlock may arise between the partners.
Create a Neutral, Tie-Breaking Authority
The obvious tiebreaker is for the partners to agree to appoint either one person or a small committee or board (usually three people) who have some industry or other experience and who will make decisions to resolve all conflicts between the partners. While this approach sounds reasonable, it may be difficult for the partners to agree on the selection of one person or of a board of three people to serve in this capacity for the company.
In addition, even if the partners can agree on the specific person or people they wish to appoint, these individuals may not be willing to take on this role knowing that, at some future point, they will disappoint one of the partners by making a final decision that rejects the other partner’s position. To persuade anyone to serve in the capacity of a tiebreaker, the partners will also, at a minimum, have to agree to fully indemnify the people who agree to serve in this role. The partners will also have to agree to pay the legal fees for any and all disputes incurred by the tiebreakers in which they become involved because they agreed to serve in this role.
Adopt an Arbitration Procedure
For more complex disputes, the partners could agree to arbitrate these conflicts on a fast-track basis that resolves the dispute in 60-90 days. This is a much more formal approach to conflict resolution as it would involve using a private arbitration service, but the process will result in a clear, final and non-appealable result.
Further, before the parties agree to participate in arbitration, they could require that a mandatory, in-person mediation be held before any arbitration is filed. This would requires the parties to engage in one last mediated settlement conference in efforts to reach a resolution before they start any sort of legal process.
Enter Into a Negotiated Buy-Sell Agreement
Even when the partners do appoint an individual or board to resolve any conflicts that arise between them in the future, that may not end their discord. The partner whose position was rejected by the individual or board may be frustrated by the outcome, have hard feelings toward the other partner, and/or be concerned the company is now going off track. In this situation, the partners need to have a buy-sell agreement in place that provides a clear process for the exit of a partner to take place. If there is no off ramp for a disgruntled partner, things may go downhill rapidly in the business, because this unhappy partner may decide to create disruption (or worse) in the business in order to pressure the other partner to buy out that partner’s interest. These types of legal disputes between co-owners involving claims for breach of fiduciary duties can create significant distractions and substantial expense for the partners and the business.
The buy-sell agreement between the partners needs to address all of the following issues: (1) what are the circumstances under which the buy-out can be triggered (who can trigger it and how is it triggered); (2) what is the process for determining the value that will be paid for the departing partner’s ownership interest in the business at the time of exit; (3) what specific terms apply to the buyout payment (how many years, what interest rate and what collateral will be provided in the event of a default); and (4) what is the dispute resolution process for resolving any conflicts that arise regarding the application of the buy-sell agreement.
A critical part of this buy-sell agreement will be the process for deciding who is the buyer and who is the seller. This is often termed a “shotgun” provision, and it operates by allowing one person to make an offer to purchase the interest of the other partner, then the recipient will have the option to accept the purchase offer or to reject it and then become the buyer.
How this provision will work in practice therefore needs careful consideration to ensure that the business goals of the parties will be achieved if the clause is triggered in the future.
Conclusion
Starting a 50-50 owned business is exciting, but it is also inherently risky because it almost certainly requires the close collaboration of both of the partners on a long-term basis for the business to be successful. When the partners have serious disagreements, that can lead to a deadlock that cripples the business because key decisions will be postponed, investments will not be made, and opportunities will be missed. Also, the lack of clear direction when the two partners are locked in an impasse is likely to have a negative impact on both the company’s employees and customers.
If the two partners remain willing to accept these risks of entering into a co-owned business, they will want to do so with vigilance to head off future conflicts as much as possible. This planning process will require them to implement a tie-breaking process designed to resolve future disputes, as well as to negotiate and enter into a buy-sell agreement that enables them to achieve a business divorce if they reach a point where irreconcilable differences exist between them.
For both partners to keep smiling on Valentine’s Day and beyond, these planning measures will give them and the business the best chance to prosper on a long-term basis, and it will also provide a plan for a partner exit to help avoid a bitter, protracted business divorce down the road.
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Seventh Circuit Decision Highlights Distinction Between Traditional Non-Compete and Forfeiture-for-Competition
A recent decision by the U.S. Court of Appeals for the Seventh Circuit allowed an employer to enforce a “forfeiture-for-competition” against a former plant manager. The Court explained that, under Delaware law, forfeiture-for competition is not subject to the same reasonableness standard as a traditional non-compete clause. The case is LKQ Corporation v. Robert Rutledge, No. 23-2330 (7th Cir. Jan. 22, 2025).
Background
A former plant manager received restricted stock unit (RSU) awards as part of his compensation over several years. Each RSU award was governed by Delaware law and stated that the employee would forfeit his RSUs if he went to work for a competitor within 9 months after leaving the company. The company sought to enforce the forfeiture after the employee resigned and joined a competitor.
In June 2023, a federal District Court in Illinois held that the forfeiture provision was unenforceable because it failed a standard reasonableness test based on geographic and temporal scope, protecting a legitimate business interest, and a balancing of the equities. On appeal, the Seventh Circuit noted that the Delaware Supreme Court had distinguished between forfeiture-for-competition and a traditional non-compete, holding that a forfeiture-for-competition provision was not subject to the reasonableness test; but the forfeiture provision in that case was contained in a limited partnership agreement that had been negotiated by sophisticated parties. The Delaware Supreme Court had not addressed whether reasonableness would be required for a forfeiture clause in an agreement between employer and employee that had been subject to little or no negotiation.
The Seventh Circuit certified the open question to the Delaware Supreme Court and the Delaware Supreme Court responded that its prior decision was not limited to the limited partnership context. The Delaware Supreme Court explained that, unlike a traditional non-compete clause, a forfeiture-for competition provision “does not restrict competition or a former employee’s ability to work.” The Delaware Supreme Court cautioned, however, that there could be circumstances where the forfeiture is “so extreme in duration and financial hardship that it precludes employee choice by an unsophisticated party and should be reviewed for reasonableness.”
Applying the Delaware Supreme Court’s explanation, the Seventh Circuit held that the circumstances of the case were not so “extreme in duration and financial hardship” as to require a reasonableness review. Although the plant manager’s annual salary was only $109,000, he was not unsophisticated and had voluntarily accepted RSU awards that were available only to “key persons”—a designation reserved for less than 2% of the company’s workforce. The Seventh Circuit also determined that, though substantial, forfeiting RSUs valued between $130,000 and $340,000 did not reach the level of “extraordinary hardship” that might require a reasonableness review. Accordingly, the Seventh Circuit reversed the District Court and remanded for further proceedings.
Implications
Although non-compete provisions are almost always subject to some version of a reasonableness test (and prohibited altogether in some states), many states apply a looser standard to forfeiture-for competition provisions. The principle is that, while it might be unreasonable to restrict competition or to prevent someone from taking another job, it is fair to condition incentive compensation on honoring a non-compete. Employers should remain mindful, however, that there is some limit on the cost that can be imposed for breaching a non-compete. The details will vary by jurisdiction and the court’s assessment of the equities.