Delaware Chancery Court Dismisses Unripe Challenges to and Upholds Enforcement of Advance Notice Bylaws
Advance notice bylaws are commonplace among public companies. Nearly all S&P 500 companies have a version of advance notice bylaws. Generally speaking, advance notice bylaws require that stockholders provide written notice and certain information to a corporation prior to submitting a proposal, nominating directors, or raising other business at a stockholder meeting. Following the adoption of the “universal proxy rule” by the Securities and Exchange Commission, boards of many public companies reviewed their advance notice bylaws wholesale and decided to amend such provisions. Those amendments were met by a wave of litigation culminating in the Delaware Supreme Court’s decision in Kellner v. AIM ImmunoTech Inc., 320 A.3d 239 (Del. 2024). In Kellner, the Delaware Supreme Court clarified that the framework for analyzing the validity of advance notice bylaws depends on whether the challenge is facial (i.e., a challenge to adoption or amendment of a bylaw in the abstract, when there is no ongoing proxy contest or threat thereof, also referred to as a “clear day”) or as applied (i.e., a challenge to adoption, amendment, or enforcement of a bylaw during an actual or threatened proxy contest, also referred to as a “cloudy day”). In a facial challenge, Kellner instructs that advance notice bylaws are presumed valid unless a plaintiff can show “that the bylaw cannot be valid in any set of circumstances.” On the other hand, Kellner clarifies that challenges to the adoption, amendment, or enforcement of advance notice bylaws on a cloudy day (sometimes referred to as “equitable review”) are subject to heightened scrutiny under the two-prong test set forth in Coster v. UIP Companies, Inc., 300 A.3d 656 (Del. 2023).
Kellner significantly impacted several ongoing challenges to advance notice bylaws. Since Kellner, the Delaware Court of Chancery has dismissed at least two challenges to amendments of advance notice bylaws as unripe and confirmed a board’s right to enforce its advance notice bylaw. These cases, briefly summarized below, cement the analytical framework spelled out in Kellner and its underlying precedent as well as Delaware courts’ continued desire to uphold advance notice bylaws adopted on a clear day and skeptical view of defensive board actions undertaken during the threat of a potential proxy contest. Further, these cases make clear that Delaware courts will not permit an as-applied or enforceability challenge to advance notice bylaws when such challenge is based on hypothetical or theoretical applications of such provisions.
Delaware Court of Chancery Rejects Hypothetical Challenges to Advance Notice Bylaws
In two recent decisions, the Delaware Court of Chancery ruled that challenges to advance notice bylaws were not ripe for review.
In Siegel v. Morse, C.A. No. 2024-0628-NAC (Del. Ch. Apr. 14, 2025), the plaintiff challenged AES Corporation’s amendments to its advance notice bylaw based on the “acting in concert” definition[1] and the ownership disclosure requirements[2] within the advance notice bylaw, both of which require stockholders to make certain disclosures when nominating a director.
According to the plaintiff, these advance notice requirements make it “unreasonably difficult, if not impossible” for stockholders to nominate candidates to the corporation’s board. The original complaint (prior to Kellner) alleged that the corporation’s advance notice bylaw provisions were facially invalid. The amended complaint (after Kellner) disclaimed any facial validity challenge and instead claimed that such provisions were unenforceable. Notably, the plaintiff did not attempt or intend to nominate a director, nor did the plaintiff identify a stockholder who attempted or intended to nominate as a director. Because there was no facial validity challenge in front of the Chancery Court and no attempt or intent to use or comply with the advance notice bylaw provisions, the Chancery Court dismissed the challenge as unripe, noting that Delaware law permits equitable challenges to bylaws only when there exists a genuine and existing controversy and does not permit such challenges based on hypotheticals. In making the decision, the Chancery Court noted that in order for a claim to be ripe under these circumstances (i.e., in the absence of a live proxy contest), the stockholder bringing the claim at least must allege that one or more stockholders have been “chilled from making a nomination” for the corporation’s board. The Chancery Court’s decision in Siegel has been appealed to the Delaware Supreme Court.
As was the case in Siegel, in Assad v. Chambers, C.A. No. 2024-0688-NAC (Del. Ch. June 2, 2025), the plaintiff challenged Owens Corning’s amendments to its advance notice bylaw based on the same features of the bylaw at issue in Siegel (i.e., the acting in concert definition and ownership provision). As in Siegel, the Assad plaintiff also amended his complaint after Kellner to convert a facial validity challenge into an enforceability challenge (expressly disclaimed any facial validity challenge), did not attempt or intend to nominate a director, nor did the plaintiff identify a stockholder who attempted or intended to nominate a director (or who felt “chilled” from so doing). With nearly identical facts before it, the Chancery Court reached the same decision as in Siegel and dismissed the plaintiff’s complaint because it was not ripe. As in Siegel, the Chancery Court’s decision in Assad has been appealed to the Delaware Supreme Court.
While neither of these rulings stands for the proposition that there must be an active proxy contest to allow a stockholder to bring a facial challenge to advance notice requirements, they do set a threshold that the stockholder at least must allege having been “chilled” from putting forth a nomination for the board. Since the plaintiffs in these cases did not make this kind of allegation, it is unclear what will be adequate allegations of chilling, which the Chancery Court may expound on in future decisions.
Delaware Court of Chancery Upholds Enforcement of Advance Notice Bylaw but Gives Stockholders Another Bite at the Apple for Defensive Board Action Taken on a Cloudy Day
In contrast to Siegel and Assad, a third case, Vejseli v. Duffy, 2025 WL 1452842 (Del. Ch. May 21, 2025), involved a ripe dispute over the rejection of the plaintiffs’ notice to nominate directors to Ionic Digital Inc.’s board.
In Vejseli, the plaintiffs challenged (among other claims) the Ionic board’s rejection of their nomination notice for failing to disclose and provide copies of certain material agreements between the plaintiffs and nonstockholders that had proposed commercial arrangements with Ionic, which Ionic’s board felt were required by Ionic’s advance notice bylaw. The plaintiffs’ position was that the rejection was inequitable because the agreements in question were no longer operative at the time plaintiffs submitted the nomination notice. Noting that one of the agreements in question was terminated on the same date as the submission of the nomination notice, the Chancery Court highlighted the importance of informational and disclosure requirements in advance notice bylaws and noted that stockholders would undoubtedly want to know about recently terminated agreements when making a voting decision. Because the nomination notice failed to disclose a material provision in one of the agreements that survived termination, the Chancery Court found that the notice did not fully comply with the advance notice bylaw.
Next, the Chancery Court turned to the equitability of the rejection under the two-prong test set forth in Coster. Under Coster, the Chancery Court applied enhanced scrutiny to determine “(1) if the Board rejected the Nomination Notice for legitimate, rather than pretextual, selfish, or disloyal, reasons, and (2) if the rejection was reasonable and was not preclusive.” Under the first prong of the Coster test, the Chancery Court found that the Ionic board rejected the notice for legitimate, nonpretextual, selfish, or disloyal reasons, because the disclosure requirements served legitimate objectives and the lack of disclosure threatened an informed stockholder vote. The Chancery Court also found that the board’s failure to provide an opportunity to supplement the notice was not inequitable because the notice was submitted two days before the nomination window closed. Under the second prong, the Chancery Court found that the enforcement of the bylaw was reasonable and not preclusive because the plaintiffs were able to submit a notice and had the opportunity to comply with the disclosure requirements.
However, facing the threat of a proxy contest, Ionic’s board adopted resolutions setting the date of the stockholder meeting and reducing the board size, eliminating one of the open director seats. The Chancery Court applied enhanced scrutiny to its review of the Ionic board’s resolution reducing the size of the board because it was adopted on a cloudy day. The court found that the Ionic board did not prove a valid, nonpretextual corporate purpose for adopting the resolution, finding that the testimony suggested the board adopted the resolution so that the board (as opposed to the stockholders) could identify better candidates, which the court found is not a valid purpose. Additionally, the Chancery Court found that even if the board’s purpose was justified, the board resolution was neither reasonable nor necessary to achieve the purpose for the resolution provided by the board. Further, the court found that the resolution was preclusive because it rendered the proxy contest unattainable by eliminating one of the two open seats and imposed the board’s favored outcome on the stockholders. Because Ionic failed both prongs of the enhanced scrutiny test, the Chancery Court held that the Ionic board breached its fiduciary duties in adopting the resolution. Therefore, the court ultimately granted the plaintiffs’ request for an injunction, invalidating the board resolution to reduce the size of the Ionic board and reopened the 10-day director nomination period under Ionic’s advance notice bylaw to permit the board, the plaintiffs, and other stockholders to submit director nominations for the two open seats.
Vejseli underscores and highlights the importance for corporations to review and amend their bylaws on a clear day rather than a cloudy day. Defensive board actions undertaken on a cloudy day that disenfranchise stockholders or interfere with that franchise will place the corporation at risk of being locked into costly litigation where those actions will be viewed skeptically by Delaware courts. While not recommended, if for some reason a corporation determines it to be necessary and in the best interest of the corporation and its stockholders to amend its bylaws on a cloudy day, it is imperative that the corporation contact legal counsel to discuss in advance and, at a minimum, the board must document in the minutes of the meeting(s) the valid business reasons for adopting the amendment. As noted by the court, retrospective testimony asserting purported valid business reasons, without contemporaneous documentation citing those reasons at the time of adopting an amendment, will not survive enhanced scrutiny. Despite the ultimate “do over” granted to the plaintiffs in Vejseli, it is notable that the Chancery Court upheld the Ionic board’s rejection of the noncompliant notice and its enforcement of the requirements of the advance notice bylaw under enhanced scrutiny.
Advance notice bylaws continue to be a key driver of orderly and effective governance processes at stockholder meetings. Because the Delaware courts continue to uphold advance notice bylaws adopted on a clear day, we continue to recommend that companies review their advance notice bylaws if they have not done so recently to confirm that such bylaw provisions are modernized and in line with current market practice. Waiting to amend until there is a need for an advance notice bylaw may be too late.
[1] The acting in concert portion of the bylaw requires disclosure of any compensation or reimbursement in the past three years and disclosure of relationships between or among any person nominating a director for election or stockholder or beneficial owner on whose behalf such nomination is to be made and each proposed director nominee, and their respective affiliates and associates, or others acting in concert therewith, whether or not pursuant to an express agreement, arrangement, or understanding.
[2] The ownership disclosure requirement requires (i) nominating stockholders to disclose any equity interest in the corporation (including synthetic and derivative ownership interests, short interests, and hedging arrangements), along with their history of ownership of stock or derivative interest in the corporation, (ii) nominating stockholders and any person acting in concert with such stockholder to disclose any performance-related fees they would receive if the corporation’s stock appreciated or depreciated, and (iii) disclosure of any material relationship with, or any direct or indirect material interest in any material contract or agreement with, either the corporation or any principal competitor held by the nominating stockholder and anyone they are acting in concert with.
Washington State Scales Up Paid Family and Medical Leave Law
On May 20, 2025, Washington Governor Bob Ferguson took the final step toward implementing House Bill (HB) 1213’s expansion of the state’s paid family and medical leave program when he greenlit funding for the program as part of the state appropriations budget for the 2025-2027 biennium. With this funding, the new law will take effect on January 1, 2026.
Quick Hits
Washington State’s HB 1213 expands job protection rights under the state’s paid family and medical leave program.
The amended leave program reduces the minimum increment of time off from eight consecutive hours to four consecutive hours.
HB 1213 also broadens health insurance coverage requirements, along with a variety of other miscellaneous changes.
HB 1213 expands the Washington Paid Family and Medical Leave (WPFML) program, which is a state-administered program that provides Washington employees with paid time off from work for serious personal and family medical leave.
Here is an overview of the key changes to WPFML made by the new law.
Expanded Job Protection Rights
HB 1213 expands the job protection rights under the WPFML program in several ways. First, it gradually requires more employers to provide job protection. Currently, the law only requires employers with fifty or more employees in Washington to provide job protection. Under the new law, the size of employers required to provide job protection will be implemented over a three-year period, as shown in the table below.
IMPLEMENTATION DATE
EMPLOYER SIZES
January 1, 2026
25-49 Employees
January 1, 2027
15-24 Employees
January 1, 2028
8-14 Employees
Second, HB 1213 lowers the eligibility requirement for employees to qualify for job protection. Generally, employees do not qualify for job protection unless they have worked for their employer for at least twelve months and for 1,250 hours in the year before the start of their leave. The amendment will only require employees to have worked for their employer for at least 180 days before the start of their leave, regardless of how many hours they have worked.
Third, as explained in the final bill report, “[a] mechanism for addressing stacking of certain employment protection benefits is established.” This relates to the interplay of WPFML with the federal Family and Medical Leave Act (FMLA), which is complicated. FMLA and WPFML run concurrently only if the employee chooses to use them at the same time. Employees can opt to take WPFML leave after exhausting FMLA leave or to forego WPFML leave altogether. Also, in some cases, employees may not qualify for leave under the FMLA when they do qualify for leave under the WPFML.
HB 1213’s new “stacking mechanism” allows employers to count FMLA leave toward the total amount of leave entitled to job protection under the WPFML, if the employee was eligible for WPFML but did not apply for and receive it. To take advantage of this mechanism, employers must provide a written notice within five business days of the employee’s initial request for or use of FMLA leave, whichever comes first, and then monthly thereafter for the remainder of the employer’s FMLA twelve-month period.
The notice must be in a language understood by the employee and delivered in a method that is “reasonably certain to be received promptly by the employee.” The notice must include the following:
the employer is “designating and counting” the unpaid leave as FMLA leave, with the amount of FMLA time used and remaining, which the employer can estimate from information it receives from the state and the employee;
the employer’s twelve-month FMLA leave year;
because the employee is eligible for the WPFML program but has not applied for and received its benefits, the FMLA leave is counted against any permitted period of employment protection under the WPFML program;
the start and end date of the FMLA leave;
the total amount of FMLA leave counting toward the new job protection period under the WPFML; and
the employee’s WPFML benefits are not impacted by the stacking of the job protection rights of the FMLA and WPFML.
Fourth, employers must also provide a new notice of reinstatement rights to any employee taking more than two weeks of continuous leave or more than fourteen days of intermittent leave. The employer must provide the new written notice to the employee at least five business days before the return-to-work date. It must include the estimated expiration of the right of employment restoration and the date of the employee’s first scheduled workday after their leave.
Fifth, the amendment establishes maximum periods of employment protection. Unless there is a written agreement that says otherwise, the employees lose their right to employment restoration unless they exercise it on the earlier of the first scheduled workday following: (1) the actual leave period under the FMLA and/or WPFML or (2) sixteen weeks (or eighteen weeks for incapacity due to pregnancy) of continuous or combined intermittent leave during fifty-two consecutive calendar weeks.
Insurance Continuation Mirrors New Job Protection Period
Currently, employers must continue health insurance coverage during both FMLA and WPFML leaves only if there is at least one day of overlap between the two types of leave. Employees must continue paying whatever portion of their insurance premiums they normally pay.
The new law expands the employer’s requirement to maintain health insurance coverage to “any period of leave in the PFML Program in which the employee is also entitled to job protection.”
Other Changes
HB 1213 implements a slew of miscellaneous other changes, including allowing the state to periodically audit employer records to assess compliance, changing how an employer’s size is determined for premium calculations, and changing the grants available to small employers.
Next Steps
Employers may want to prepare for the changes coming to the WPFML program by reworking written policies and procedures and evaluating whether to change other forms of company-provided leave to address the expanded rights under WPFML. Washington State’s new mini-WARN Act takes effect on July 27, 2025, so employers may want to consider whether to implement reductions in force or closures before the amendments to WPFML begin on January 1, 2026.
USDA Approves SNAP Waivers in Additional States
U.S. Secretary of Agriculture Brooke Rollins is continuing to approve waivers that allow states to prohibit certain food items from qualifying under the Supplemental Nutrition Assistance Program (SNAP). In May 2025, we reported that Nebraska received the first-ever waiver that allows the state to restrict the purchase of certain “junk” foods and beverages, such as candy and soda. Five additional states have now received SNAP waiver approvals, including Arkansas, Idaho, Indiana, Iowa, and Utah.
Idaho and Indiana restrict the purchase of both soft drinks and candy, while Utah only restricts the purchase of soft drinks. Arkansas—in addition to restricting soft drinks and candy—also restricts the purchase of fruit and vegetable drinks with less than 50% natural juice and “unhealthy drinks.” With the exception of Arkansas whose implementation date is July 1, 2026, SNAP restrictions in other states begin on January 1, 2026.
The language of Iowa’s SNAP waiver is unique in that it “restricts all taxable food items as defined by the Iowa Department of Revenue except food producing plants and seeds for food producing plants.” Some of the taxable food items that will face restrictions include candy, chewing gum, carbonated and non-carbonated soft drinks, sweetened naturally or artificially sweetened water, and dried fruit leathers.
Several other states, including Colorado, Louisiana, Montana, Texas, and West Virginia, have submitted SNAP waivers to prohibit the purchase of certain food and beverage items and are pending approval. Arizona and Kansas had also introduced legislation to restrict SNAP funding for certain products, but both bills have been vetoed.
Keller and Heckman will continue to monitor developments related to SNAP.
Understanding the Federal Reconciliation Bill’s Implications for MCO Tax Structure
New York’s Medicaid financing strategy—particularly its use of a managed care organization (MCO) tax—has come under renewed federal scrutiny amid recent legislative proposals and regulatory developments. The federal reconciliation bill, known as the One Big Beautiful Bill Act (OBBBA), alongside newly proposed guidance from the Centers for Medicare & Medicaid Services (CMS), could significantly influence how New York and other states structure healthcare-related tax mechanisms used to draw down federal Medicaid matching funds.
Section 44132 of the OBBBA would establish a ten-year moratorium on the creation or expansion of provider and MCO taxes. Under this proposal, states would be prohibited from adopting new healthcare-related taxes or increasing existing ones unless they were enacted before the effective date of the legislation. Even if a tax complies with federal requirements—such as being broad-based, uniformly applied, and not directly redistributive—it would remain frozen at its current structure for the duration of the moratorium.[1]
This legislative action is reinforced by CMS’s proposed rule issued in April 2025, which would increase scrutiny of waiver requests for narrowly tailored provider taxes. The CMS fact sheet outlines how the rule aims to ensure that such taxes do not disproportionately benefit the providers who fund them and that they meaningfully redistribute costs across a provider class. CMS signaled that future approvals would be based not only on statistical compliance with redistribution formulas, but also on substantive evidence that the taxes are not structured to guarantee repayments through Medicaid.
New York’s FY 2025 budget projected approximately $3.7 billion in revenue from its MCO tax, intended to support Medicaid program enhancements, including base rate adjustments and targeted payments to providers. However, according to CMS correspondence and discussions shared at the May 2025 MACPAC meeting, the federal government is expected to approve only about $2.1 billion in matching funds under current policy standards.
This shortfall has triggered a review by New York State officials, with reports indicating that the state may need to restructure or replace components of the MCO tax mechanism. As of June 2025, the New York State Department of Health has not issued updated guidance or notifications to providers regarding potential changes to reimbursement or supplemental funding. However, news coverage and budget briefing materials confirm that the Governor’s Office is working with CMS and legislative leaders to evaluate options for FY 2026 and beyond.
New York is not alone. States such as California, Michigan, and Pennsylvania are also assessing their provider tax frameworks in response to tighter federal standards and the proposed legislative freeze. Many of these states have historically used targeted healthcare-related taxes as tools to secure additional federal funding for Medicaid. Under the OBBBA and new CMS rules, these strategies will require greater alignment with redistributive principles and transparency requirements.
For context, the foundational rules governing provider taxes appear in 42 U.S.C. § 1396b(w) and are implemented through 42 C.F.R. § 433.68. These rules require taxes to apply across a broad base of providers, to be uniformly imposed, and not to disproportionately benefit any one group of taxpayers. The reconciliation bill does not change those standards—it simply imposes a statutory moratorium on modifications that could otherwise have been evaluated under the existing waiver process.
For providers operating in New York, the practical effects of these developments are not yet fully known, but preparation is prudent. Providers may wish to monitor announcements from the New York Department of Health, reassess their current funding assumptions, and evaluate how federal match uncertainty could affect supplemental payments. While reimbursement changes have yet to be implemented, the alignment of federal legislation and administrative rulemaking indicates that states may soon face binding constraints on Medicaid financing flexibility.
As guidance evolves and legislative proposals move forward, healthcare providers, Medicaid plans, and other stakeholders should prepare to navigate these changes.
FOOTNOTES
[1] Proposed in legislative summaries; pending bill text.
GeTtin’ SALTy Episode 55 | California Property Tax Update: The Supreme Court Tackles the Local Tax Subsidy Case [Podcast]
In this episode of GeTtin’ SALTy, host Nikki Dobay is joined by fellow Greenberg Traurig Shareholders Brad Marsh and Colin Fraser for a comprehensive catch-up on California property tax developments as Q2 2025 draws to a close.
The discussion covers key legislative updates, including the impending expiration of the state’s solar energy facility exclusion and ongoing reforms to the parent-child exclusion under Proposition 19.
The main event is a deep dive into the high-profile Olympic and Georgia Partners v. County of Los Angeles case, recently argued by Colin before the California Supreme Court.
The team unpacks the complex questions at stake: whether transient occupancy tax subsidies and hotel “key money” are taxable as real property, and whether the widely used Rushmore valuation approach holds up under legal scrutiny.
The conversation highlights the broader implications for taxpayers and local governments and offers a behind-the-scenes look at oral arguments and legal strategy.
The episode wraps with a superpower debate and a look ahead to the court’s forthcoming decision.
Compliance Deadlines for Chicago Employers Coming July 1, 2025
July 1 has become a key date for labor law changes in recent years — and 2025 is no exception. This year two important provisions delayed under the Chicago Paid Leave and Paid Sick and Safe Leave Ordinance and the One Fair Wage Ordinance will take effect. Here’s what you need to know to stay compliant.
Chicago minimum wage increase
Effective July 1, 2025, there will be an increase in the Chicago minimum wage for all employees. The minimum wage will increase to $12.62 for employees engaged in occupations that primarily receive gratuities and to $16.60 for all other employees.
Expanded salary covered under One Fair Workweek
Similarly, the salary threshold for employees who are covered under the One Fair Workweek Ordinance will increase to cover employees who earn equal to or less than $32.60 per hour or $62,561.90 per year. Employers whose industries involve building services, healthcare, hotels, manufacturing, restaurants, retail and warehouse services should review their employee classifications to determine which roles now fall under the coverage of the ordinance coverage.
New paid leave payout requirements for medium-sized employers
Lastly, the temporary exemption for medium-sized employers (those with 51 to 100 covered employees) under the Chicago Paid Leave Ordinance will end on July 1, 2025. Under the Chicago Paid Leave Ordinance, medium-sized employers were previously only required to pay out two days of any accrued and unused paid leave upon termination of employment. On July 1, 2025, all medium-sized employers will be required to pay out all accrued and unused vacation time upon termination of employment.
Preparation for upcoming changes
Staying ahead of regulatory changes is essential for protecting your business and supporting your workforce. To proactively address these changes, employers should meet with their human resources departments in the coming weeks to update company policies and ensure compliance.
Maine Enacts Ban on Reporting Medical Debt to Credit Bureaus
On June 9, Maine Governor Janet Mills signed into law LD558, which prohibits the reporting of medical debt to consumer reporting agencies. The law bars medical creditors, debt collectors, and debt buyers from furnishing information about medical debt to credit bureaus, regardless of payment status or consumer repayment activity.
The new statute amends the Maine Fair Credit Reporting Act by replacing the term “medical expenses” with “medical debt” and eliminating carveouts that had previously allowed reporting in limited situations.
Putting It Into Practice: Maine’s statute comes just weeks after the CFPB formally withdrew its proposed rule that would have barred medical debt reporting nationwide (previously discussed here), and follows Vermont’s law that banned medical debt in consumer reporting statewide (previously discussed here). Companies operating in other jurisdictions should expect the trend to continue and plan accordingly.
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NYC Comptroller Report Calls for Overhaul of State Consumer Financial Protections
On June 9, 2025, New York City Comptroller Brad Lander released a report urging City and State leaders to modernize consumer financial protections. The report outlines a series of legislative and regulatory recommendations aimed at closing gaps in existing protections and addressing emerging risks in the consumer financial marketplace.
The report comes amid a major regulatory pullback in the federal sector, highlighted by the CFPB’s layoffs and stalled enforcement posture (previously discussed here and here). The Comptroller identified five priority areas where local and state lawmakers could intervene to strengthen consumer safeguards. These include:
Addressing enforcement and regulatory gaps. The report criticizes New York’s current consumer protection law, General Business Law § 349, as one of the weakest in the country and calls for enactment of the FAIR Business Practices Act. The Act, which is currently in the New York legislature and is championed by New York Attorney General Letitia James, would broaden the scope of prohibited business practices beyond “deceptive” acts and practices and also include those acts that are “unfair” or “abusive.”
Expanding access to affordable banking. Among other steps, the report supports adoption of NYDFS’s proposed overdraft fee limits and broader access to IDNYC-validated accounts (which are New York City ID cards) at state-chartered banks.
Regulating emerging financial products. The Comptroller supports passage of the End Loansharking Act, which would bring earned wage access products, rent-to-own contracts, and merchant cash advances under state lending laws and prohibit predatory practices.
Enhancing privacy rights. The report calls for consumer data rights similar to those in California and Oregon, including the right to access, correct, and delete personal information.
Improving transparency and consumer outreach. The report recommends a statewide or city-level public complaint database to enhance oversight, especially if the CFPB’s complaint database is weakened or disabled.
Putting It Into Practice: States are increasingly stepping in to expand consumer financial protections as federal oversight recedes (previously discussed here). Financial services companies operating in New York and other progressive jurisdictions should anticipate additional legislative and regulatory activity and reassess their compliance obligations accordingly.
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California AI Policy Report Outlines Proposed Comprehensive Regulatory Framework
On June 17, 2025, the Joint California Policy Working Group on AI Frontier Models released a final version of its report, “The California Report on Frontier AI Policy,” outlining a policymaking framework for frontier artificial intelligence (AI). Commissioned by Governor Gavin Newsom and authored by leading AI researchers and academics, the report advocates a ‘trust but verify’ approach.
Its recommendations emphasize evidence-based policymaking, transparency, adverse event reporting and adaptive regulatory thresholds. Given California’s role as a global AI innovation hub and its history of setting regulatory precedents, these recommendations are highly likely to influence its overall AI governance strategy.
Key Proposed Reccomendations
The California report provides recommendations that are likely to inform future legislative or regulatory action (although no legal obligations currently arise from its findings):
Enhanced Transparency Requirements: The report proposes public disclosure of AI training data acquisition methods, safety practices, pre-deployment testing results, and downstream impact reporting. This represents a fundamental shift from current practices where companies maintain proprietary control over development processes. If implemented, organizations could face reduced competitive advantages based on data acquisition methods while experiencing increased compliance costs for documentation and reporting requirements. This concern isn’t just about the method of acquisition, but whether certain methods (like exclusive licensing) create anti-competitive advantages.
Adverse Event Reporting System: The report recommends mandatory reporting of AI-related incidents by developers, voluntary reporting mechanisms for users, and a government-administered system similar to existing frameworks in aviation and healthcare. The report highlights that this system “does not necessarily require AI-specific regulatory authority or tools.”
Third-Party Risk Assessment Framework: The report states that companies “disincentivize safety research by implicitly threatening to ban independent researchers” and implicitly calls for a “safe harbor for independent AI evaluation.” This approach could reduce companies’ ability to prevent external security research while requiring formal vulnerability disclosure programs and potentially exposing system weaknesses through independent testing.
Proportionate Regulatory Thresholds: Moving beyond simple computation-based thresholds, the report proposes a multi-factor approach considering model capabilities (e.g., performance on benchmarks), downstream impact (e.g., number of commercial users), and risk levels, with adaptive thresholds that can be updated as technology evolves.
Regulatory Philosophy and Implementation
The report draws from past technology governance experiences, particularly emphasizing the importance of early policy intervention. The authors analyze cases from internet development, consumer products regulation, and energy policy to support their regulatory approach.
While the report doesn’t specify implementation timelines, California’s regulatory history suggests potential legislative action in the 2025–2026 session through a phased approach: initial transparency and reporting requirements, followed by third-party evaluation frameworks and, ultimately, comprehensive risk-based regulation.
Potential Concerns
The California Report on Frontier AI Policy’s acknowledgment of an “evidence dilemma” (the challenge of governing systems without a large body of scientific evidence), however, captures inherent limitations in regulating technology still characterized by significant opacity.
For example, the report notes that “[m]any AI companies in the United States have noted the need for transparency for this world-changing technology. Many have published safety frameworks articulating thresholds that, if passed, will trigger concrete, safety-focused actions.” But it also notes that much of the transparency is performative and limited by “systemic opacity in key areas.”
And while the report proposes governance frameworks based on “trust but verify,” it also documents AI systems that have exhibited “strategic deception” and “alignment scheming,” including attempts to deactivate oversight mechanisms. This raises profound questions about the feasibility of verifying the true safety and control of these rapidly evolving systems, even with proposed transparency and third-party evaluation mechanisms.
Looking Ahead
The California Report on Frontier AI Policy represents the most sophisticated attempt at evidence-based AI governance to date. While these recommendations are not yet law, California’s influence on technology regulation suggests these principles are likely to be implemented in some form.
Organizations should monitor legislative developments, consider engaging in public comment and proactively implementing recommended practices, and develop internal capabilities for ongoing AI governance.
The intersection of comprehensive state-level regulation and rapidly evolving AI capabilities requires flexible compliance frameworks that can adapt to changing requirements while maintaining operational effectiveness.
Supreme Court Upholds Tennessee Law Prohibiting Gender-Affirming Care for Children
On June 18, 2025, the Supreme Court of the United States ruled that a Tennessee law banning gender-affirming care for minors does not classify on the basis of sex in ways that would require heightened scrutiny under the Equal Protection Clause of the Fourteenth Amendment of the U.S. Constitution. In United States v. Skrmetti, a 6-3 opinion written by Chief Justice John Roberts, the Court ruled that Tennessee Senate Bill 1 does not require a higher level of constitutional scrutiny because its prohibitions rely on age and medical diagnosis, but not sex. Instead, the Court found that the Tennessee law met the lower requirements of “rational basis” review, finding that age and medical treatment limitations were permissible uses of state authority.
Quick Hits
The Supreme Court held that “Tennessee’s law prohibiting certain medical treatments for transgender minors is not subject to heightened scrutiny under the Equal Protection Clause of the Fourteenth Amendment and satisfies rational basis review.”
The Court reasoned that the state law classifies on the basis of age and medical use—both of which are subject to rational basis review—and not on the basis of transgender status.
The Court found that the Tennessee law does not classify on the basis of transgender status, “although only transgender individuals seek treatment for gender dysphoria, gender identity disorder, and gender incongruence.”
The Tennessee Law
The Tennessee statute, Senate Bill 1, prohibits all medical treatments intended to allow “a minor to identify with, or live as, a purported identity inconsistent with the minor’s sex” or to treat “purported discomfort or distress from a discordance between the minor’s sex and asserted identity.” Such medical treatments may include surgery, puberty blockers, and hormone therapy. Those treatments are permitted for other medical purposes besides treating gender dysphoria, gender identity disorder, or gender incongruence.
About half the states have similar bans on puberty blockers, hormone therapy and surgeries when used to treat gender dysphoria or similar conditions in minors.
The Supreme Court’s Ruling
“While SB1’s prohibitions reference sex, the Court has never suggested that mere reference to sex is sufficient to trigger heightened scrutiny. And such an approach would be especially inappropriate in the medical context, where some treatments and procedures are uniquely bound up in sex,” Chief Justice Roberts wrote. “Where a law’s classifications are neither covertly nor overtly based on sex, the law does not trigger heightened review unless it was motivated by an invidious discriminatory purpose.”
The Court distinguished this ruling from Bostock v. Clayton County, Georgia, its landmark 2020 ruling finding that Title VII of the Civil Rights Act of 1964 prohibits an employer from firing workers for being gay or transgender. Bostock held that firing an employee for either of those two reasons is discrimination because of sex, because the individual’s sex is a “but-for” cause of differing outcomes. In Skrmetti, the Court found that sex is not a “but-for” cause, arguing that neither a transgender boy nor a transgender girl would have access to the prohibited treatment for gender dysphoria or certain conditions under the law.
In a dissenting opinion, Justice Elena Kagan wrote, “The majority refuses to call a spade a spade. Instead, it obfuscates a sex classification that is plain on the face of this statute, all to avoid the mere possibility that a different court could strike down SB1, or categorical healthcare bans like it. The Court’s willingness to do so here does irrevocable damage to the Equal Protection Clause and invites legislatures to engage in discrimination by hiding blatant sex classifications in plain sight. It also authorizes, without second thought, untold harm to transgender children and the parents and families who love them.”
Vermont Enacts New Telehealth Legislation Impacting Health Insurers
Vermont’s governor recently signed S 30 into law. The legislation, which goes into effect on September 1, 2025, requires that health insurance plans provide coverage for healthcare and dental services delivered through telemedicine to the same extent as if the services were provided through in-person consultations. Health insurance plans must also provide the same reimbursement rate for services billed using equivalent procedure codes and modifiers, subject to the terms of the health insurance plan and provider contract, regardless of whether the service was provided in person or through telemedicine.
For more updates on state legislative and regulatory developments related to telehealth, check out the latest Trending in Telehealth published by the Health & Life Sciences Group.
Senate Updates Code Section 899
On Monday, 16 June 2025, the Senate Finance Committee released its version (the Senate Proposal) of the Section 899 retaliatory tax provisions that also are included in the “One Big Beautiful Bill Act” (the Act) that was passed by the House of Representatives on 22 May 2025.1 The Senate Proposal contains significant changes (in both form and substance) from the House-passed provision (House Proposal). For a discussion of the House Proposal and the impact it would have on certain cross-border transactions, see our previous alert.
Significant Changes in US Senate Proposal
Below is a summary of certain significant changes to Code Section 8992 in the Senate Proposal.
Delayed Start Date
Under the House Proposal, Code Section 899 would apply to calendar year taxpayers starting in 2026. Under the Senate Proposal, Code Section 899 would apply to calendar year taxpayers starting in 2027.
Lower Increased Rates of Tax
Under the House Proposal, the US tax rates to which an “applicable person” is subject would increase by five percentage points per year, up to a maximum of 20 percentage points above the applicable statutory rate (determined without regard to a reduced rate). Under the Senate Proposal, the US tax rates to which an “applicable person” is subject would increase by five percentage points per year, up to a maximum of 15 percentage points above the rate to which the applicable person would otherwise be subject (which may be a reduced rate). For example, an applicable person that is eligible for a 0% tax rate under a US tax treaty would (assuming Section 899 overrides the 0% treaty rate) be subject to a maximum US withholding tax rate of 50% under the House Proposal, which is reduced to a maximum US withholding tax rate of 15% under the Senate Proposal.
Fewer Exclusions Survive Code Section 899
Under the House Proposal, certain statutory tax exemptions and exclusions, such as the portfolio interest exemption, would not be impacted by Code Section 899. Under the Senate Proposal, while certain enumerated exemptions and exclusions, notably including the portfolio interest exemption, are not impacted by Code Section 899, any exemptions or exclusions not enumerated may be impacted. This calls into question the viability of numerous existing tax exclusions and exemptions for which applicable persons may be eligible, such as (1) exclusions under income tax treaties (such as a prohibition on the taxation of interest income by the United States and exclusions appliable to certain categories of foreign treaty residents) and (2) the exclusion for FIRPTA gains afforded to qualified foreign pension plans (QFPFs).
Certain Unfair Foreign Taxes No Longer Trigger Increased US Tax Rates
Under the House Proposal, applicable persons with respect to any country that enacted an “unfair foreign tax” (referred to as a discriminatory foreign country) would be subject to increased US tax rates. An unfair foreign tax included an undertaxed profits rule (UTPR) tax, a diverted profits tax (DPT), a digital services tax (DST), and certain other taxes identified by the Secretary of the Treasury. Under the Senate Proposal, countries whose applicable persons are subject to increased US tax rates would include only those countries that have enacted an “extraterritorial tax” (which generally includes a UTPR tax but does not include a DPT or a DST). However, the Super BEAT provisions discussed below would apply to any “offending foreign country,” that is, any country that has enacted any unfair foreign tax, including a UTPR tax or a DST (a DPT is not a per se unfair foreign tax under the Senate Proposal). See our previous alert for a list of countries imposing one or more of these taxes.
Changes to Super BEAT
Under the House Proposal, the 3% BEAT base erosion payments threshold would have been eliminated entirely for US corporations majority-owned by applicable persons. Under the Senate Proposal, the BEAT base erosion payments threshold is retained, but (1) is reduced to 0.5% for US corporations that are majority-owned by applicable persons, and (2) is reduced to 2% for all other US corporations. In addition, whereas the House Proposal would have established a higher Super BEAT tax rate under Code Section 899, the Senate Proposal increases the BEAT tax rate under Code Section 59A to 14% for all taxpayers (regardless of ownership by applicable persons). The Senate Proposal also adds a “high-tax” exception to base erosion payments under the regular BEAT that is not applicable to taxpayers subject to the Super-BEAT.3
In summary
The Senate Proposal is less disruptive than the House Proposal in certain respects, including the deferral of its effective date of Code Section 899 by one year and the lower cap on US tax rate increases (15 percentage points above the US tax rates that would otherwise be applicable, compared with 20 percentage points above US statutory tax rates without regard to any reduction in rate in the House Proposal). Notwithstanding the foregoing, the Senate Proposal (like the House Proposal) would have a significant impact on investment and operations in the United States by applicable persons. It would also override significant exemptions and exclusions under the Code that were thought to have been unaffected by the House Proposal, such as the exemption for QFPFs from FIRPTA gains.
Next Steps
There are several procedural and political hurdles for Congress to clear before Section 899 becomes law.
As has become the norm for recent landmark tax legislation when one Party controls the White House and both chambers of Congress, the Act is being considered under the reconciliation process. Reconciliation provides a statutory relief from the normal filibuster and cloture process for Senate debate, effectively overriding a requirement of a sixty-vote majority to pass legislation through the Senate.4 Instead, a simple majority vote in the Senate is sufficient to pass budget reconciliation legislation. In exchange for this “privileged” status, such legislation is limited to provisions with a budgetary impact and is subject to restrictions called the Byrd Rule.
The Senate Proposal currently is undergoing the “Byrd Bath,” where the minority Party challenges certain provisions as “extraneous” and in violation the Byrd Rule, with the Senate Parliamentarian ruling on these challenges. The Section 899 proposal is expected to be challenged under this procedure.
There are several ways that a provision may be considered extraneous, including (i) if it addresses an item outside the jurisdiction of the committee that is responsible for the provision or (ii) if it produces changes in revenue or spending which are merely incidental to the non-budgetary components of the provision (i.e., its budgetary impact does not substantially outweigh its policy implications).5
Section 899 has already survived one Byrd Rule challenge, with the Parliamentarian ruling that it rightly falls under the jurisdiction of the Senate Finance Committee and not the Foreign Relations Committee, the body generally tasked with issues impacting US treaty obligations. An additional challenge is expected on the grounds that Section 899 is primarily a policy proposal intended to backstop President Trump’s tariff policy rather than a budgetary measure. A ruling is expected later this week.
For the Act to become law, the House and the Senate must agree on the same bill. If the proposal survives the Byrd Rule challenge and passes the Senate in its current form as part of the complete Act, the House must either pass an identical version of the Act or revise the bill and return it to the Senate to reconsideration. Section 899 may be revised as part of this process, but it is expected to be included in final legislation. Both chambers hope to pass the Act in time for a 4 July 2025 signing ceremony by President Trump. Although discussions are ongoing among the White House, House, and Senate, given the significant differences between the House and Senate versions as they currently exist, reaching consensus that quickly may not be viable. A more realistic timeline may be to approve the legislation before the August recess.
Footnotes
1 Chairman Crapo Releases Finance Committee Reconciliation Text, June 16, 2025, available at https://www.finance.senate.gov/chairmans-news/chairman-crapo-releases-finance-committee-reconciliation-text.
2 Section 899 is not currently a section of the Internal Revenue Code of 1986, as amended (the Code). References to Code Section 899 herein are to such section as set forth in the House Proposal and Senate Proposal.
3 The US Senate Proposal contains other noteworthy revisions to US international tax provisions that are outside the scope of this alert.
4 See Standing Rules Of The Senate, R. XXII, S. Doc. No. 113–18 (2013).
5 2 U.S.C. § 644(b)(1), Extraneous matter in reconciliation legislation. Other limitations include (i) where the provision does not produce a change in government spending or revenues; (ii) if the net effect of provisions reported by the committee overseeing the provision fails to achieve its reconciliation instructions; (iii) the provision increases the deficit beyond the 10-year reconciliation window; or (iv) if the provision makes changes to Social Security.