Business Vantage Point Blog

The Angel Match Program (AMP) is an initiative launched by the New Jersey Economic Development Authority (NJEDA) to support early-stage businesses in New Jersey. This program is specifically designed to provide funding and support to startups and emerging companies in the state, with the goal of helping them grow and succeed. The AMP is a unique program that aims to provide funding to early-stage companies in the form of equity investments. This means that the NJEDA will invest in these companies in exchange for ownership shares. The program has been designed to help address a funding gap that many startups face in their early stages. Many entrepreneurs struggle to find funding to get their businesses off the ground, and the AMP aims to bridge that gap by providing much-needed capital to these businesses. This program also helps attract and retain angel investors, which are crucial to the success of early-stage companies. In order to be eligible for the AMP, a company must comply with the following: Company Type: The AMP is open to New Jersey-based startups that are formed as either C-corporations or limited liability companies. Companies must be early stage and not have received more than $2 million in outside funding.   Location: Eligible companies must have a physical commercial office, co-working or incubator space in New Jersey. The company must agree to remain located in New Jersey with at least 50% of full-time employees in the state for the duration of the loan.   Size and Employees: The company cannot have more than 100 total employees; at least 50% must be full-time employees working in New Jersey, and a minimum of two full-time founders or C-level executives must work in New Jersey.   Business Model: The company must have a primary business model in commercializing and marketing a product and have minimum revenues of $100,000 within the trailing 12 months. Service-based companies are not eligible.   Industry: The AMP is open to startups and early-stage companies operating in the following industries: advanced transportation and logistics, advanced manufacturing, aviation, autonomous vehicle and zero-emissions, clean energy, clean technology, life sciences, hemp processing, information and high technology, and finance and insurance. The program is designed to provide funding to companies that are working on innovative products or services that have the potential to disrupt their respective industries. Please be aware that because the AMP receives federal funding, any business that derives revenue from marijuana-related activities or that supports the end-use of marijuana is not eligible for participation in the AMP.   Investment Size: The AMP provides funding to companies through a matching program that matches investments made by accredited angel investors. The minimum investment size is $25,000, and the maximum investment size is $500,000. NJEDA investments are in the form of convertible promissory notes, which reach maturity in 10 years, with no payments for the first seven years. The NJEDA will match investments on a 1:1 basis, up to a maximum of $500,000 per company. The funding may be used for product development, marketing, research and development and other working capital needs.   Outside Investment: At least two investors must commit to an investment in the form of preferred equity with a defined price per share. Investor funds to be matched by the AMP note must be closed within 60 days from receipt of the NJEDA commitment letter.   Application Process: To apply for the AMP, companies must submit an application that includes a business plan, financial projections and a pitch deck. Potential applicants may schedule an initial consultation with an innovation officer by sending an email to AngelMatch@njeda.com. The NJEDA will review the application and notify the company if it has been accepted into the program. The application fee is $1,000.   Additional Requirements: Companies that receive funding through the AMP must agree to a number of additional requirements, including providing regular updates to the NJEDA on their progress and participating in NJEDA events.   For information on similar programs in other jurisdictions, please visit our previous article, New York State’s Pre-Seed and Seed Matching Fund Program.

When a dispute erupts into litigation between a corporation and one of its investors, the corporation will likely seek to invoke the attorney-client privilege to prevent the investor from accessing otherwise relevant communications between the corporation’s board of directors and its counsel. However, according to a recent decision by the Delaware Court of Chancery, the attorney-client privilege may not shield such materials from production to the investor in situations where the director wears two hats because of affiliation with the investor. Corporations governed by Delaware law should familiarize themselves with this decision to ensure that privileged information is properly protected from disclosure. In Hyde Park Venture Partners Fund III, L.P. et al. v. FairXchange, Inc., C.A. No. 2022-0344-JTL (March 9, 2023), the corporation in question, FairXchange, Inc. (FairXchange), sought to withhold communications between its board of directors and FairXchange’s counsel from production to two of its investors (the Funds). The Funds had been represented on FairXchange’s board of directors by a director who was also a manager of the Funds. When a third party offered to purchase FairXchange, the Board member affiliated with the Funds opposed the proposed sale (preferring a process where the company would seek other strategic alternatives), while the remaining directors favored pursuing the offer. The remaining directors then took steps to remove FairXchange’s representative from the board, and following such director’s removal by the requisite stockholder vote, the board unanimously approved the sale. After the sale closed, the Funds then brought an appraisal proceeding against FairXchange. When the Funds sought the production of pre-sale communications between the board and its attorneys during the discovery phase of the proceeding, the corporation objected on the grounds of attorney-client privilege. The Chancery Court rejected FairXchange’s privilege claim and ordered the corporation to produce the attorney-client communications to the Funds. The Court explained that Delaware had adopted the so-called “joint client rule,” whereby members of a corporation’s board of directors are each considered joint clients of the corporation’s attorneys. According to the Court, such joint clients are each “within the circle of confidentiality” and, therefore, cannot assert a privilege against one another concerning advice sought from counsel relevant to their service to the corporation. A corporation, therefore, cannot have a reasonable expectation of confidentiality that excludes a member of its board. If a director is removed from the board, that director is excluded from the “circle” from that point forward. But the former director remains within the circle as to advice received from counsel before the former director’s removal. Moreover, where an investor in the corporation is represented by a director on the board, the investor’s designee is presumed to share information with the investor because, according to the Court, humans “ha[ve] only one brain [and] cannot partition their brains so that they only use particular knowledge for particular purposes.” For this reason, the Court held, the corporation similarly cannot have a reasonable expectation of confidentiality that excludes an investor represented by a member of the board of directors. While the Court held that the corporation was required to produce the privileged material to the Funds, the material remains privileged as to the rest of the world. But it cannot be withheld from another party “within the circle of confidentiality” established by the joint representation. The Chancery Court clarified that corporations have options if they wish to exclude particular directors (or the investors they represent) from the “circle of confidentiality” concerning certain legal communications. Corporations can do so by contract, typically via a confidentiality agreement laying out limitations to a director’s or investor’s right to receive or access information. They can do so by appointing (openly and with the excluded director’s knowledge) a special committee not including the excluded director, which could then retain its own counsel and enjoy confidentiality only within its own ranks. Or they can do so by advising the excluded director that an adversity of interest exists between the director and the corporation, such that the director can no longer rely upon the advice of the corporation’s counsel with respect to the matters related to the adversity. Notably, the Chancery Court recognized that Federal courts generally apply a different rule to this circumstance: the so-called “entity rule.” Under this approach, directors are treated as agents of the corporation, and the corporation, not the directors, holds the privilege. When a director resigns or is removed from the board, the former director has no claim to privileged material that she may have previously accessed during her period serving as a director. Simply put, corporations governed by Delaware law (or potentially subject to Delaware law) should consider how the Chancery Court’s recent decision in Hyde Park could impact their ability to maintain the confidentiality of attorney-client communications if relations with a director or the investor she represents turn adverse. Taking some reasonable precautions in advance – such as through the execution of a fulsome confidentiality agreement – may avoid a negative outcome down the road.

After several years of record-breaking levels of merger and acquisition (M&A) activity, late 2022 into 2023 has seen market volatility, persistent inflation, rising interest rates, continuing supply chain issues, global conflicts and fears of a possible economic downturn that have resulted in a significant slowing in deal flow as well as decreased exit values. As the U.S. economy emerged from the COVID-19 pandemic, the Federal Reserve aggressively raised interest rates to combat inflation, raising rates by a historic 3.75 percentage points in 2022 alone. Although only one of many factors at play, interest rates play a critical role in shaping the decisions of both buyers and sellers in acquisition transactions in various ways. While deal volume and valuations have drastically fallen from the highs of recent years, the prevailing high-interest rate environment can provide both challenges and opportunities. Cost of Capital Financing Structure One of the most significant ways interest rates affect M&A transactions is financing structure. When interest rates are low, debt financing is cheaper. This lower cost allows buyers the option to use more debt to fund acquisitions as they can afford to borrow more money to finance a deal. On the other hand, when interest rates are higher, buyers may need to rely more on cash on hand and equity financing, which leads to lower leverage ratios and the need for higher equity contributions toward the purchase price. The adverse effect of rising interest rates on the cost of capital also increases the costs of servicing existing debt which impacts the target’s operating expenses and profitability as it is more expensive for companies to pay back such loans. These increased costs of financing acquisitions and servicing debt, as well as the need to contribute more equity financing to support the borrowing, put downward pressure on M&A activity as buyers become cautious about borrowing to finance deals they might otherwise be willing to pursue in a lower interest rate environment. Sellers, particularly those who are considering accepting rollover equity (selling less than 100%) or are subject to an earn-out as a portion of the purchase price, also are impacted by these higher debt service costs in terms of the value of their retained interest. Further, the increased costs of buyer debt generally may also impact the value of any stock portion of the purchase price if the equity of the buyer is offered as part of the consideration. Therefore, even if buyers are able to obtain debt financing on acceptable terms, sellers in this environment may push for lower leverage (more cash upfront) or all-cash deals. Increased interest rates may also impact a buyer’s “cash on hand” or “dry powder.” As interest rates rise, investors tend to favor fixed-income and credit securities. Higher interest rates increase the “risk-free rate,” which is the rate of return on virtually risk-free investments like government bonds. This, in turn, narrows the equity risk premium or the excess return earned by an investor above the risk-free rate in alternative investments and, therefore, indirectly puts pressure on important M&A activity by impacting new fundraising by PE funds, which restricts the amount of capital available on the buy-side of the M&A market. For example, “dry powder,” or the amount of available cash in private markets/private equity, has been estimated to have reached a record $3.7 trillion at the end of 2022, according to Bain & Company’s Global Private Equity Report 2023. However, the markets are seeing a slowdown in new fundraising, so existing funds are being more conservative with how they deploy the existing dry powder, in part preserving cash for supporting their existing portfolio companies. This same conservative approach applies to strategic buyers with cash on hand as borrowing for their own business needs becomes more expensive, so they tend to conserve cash and slow acquisition activity. As a result, with higher interest rates and volatility in the equity markets, including the market for private capital raises, buyers become conservative and look to preserve cash on hand except for very opportunistic deals. Nevertheless, with higher borrowing costs, buyers with cash on hand may be less constrained than others and find a competitive advantage under current market conditions. Discount Rate and Valuations Interest rates can also impact valuations when assessing targets or deciding to put a company up for sale. When interest rates are high, the cost of capital is higher, which means future cash flows are discounted at a higher rate. This can result in lower valuations, as future cash flows, and thus a company’s revenue projections, are worth less in terms of today’s dollars. A higher discount rate of future cash flows can be particularly biting for early-stage or high-growth companies that are not expected to become cash-flow positive for some time. Also, higher interest rates can diminish the value of company assets, further driving down valuations. Lower valuations may induce potential sellers to hold back on putting their companies up for sale, opting instead to wait for an improved economic landscape where valuations might be higher. At the same time, lower valuations can provide an opportunity to make certain targets more attractive (i.e., less expensive), but this would need to be weighed against higher capital costs and economic uncertainties. Another consideration is that significant declines in valuations of companies and their assets, particularly at a time with higher capital costs, can make private investment exits much less attractive for current owners who may have acquired or invested in these companies at a time when valuations were much higher. Deal Structure Interest rates can also impact the structure of acquisition transactions and the strategic decisions of dealmakers. As noted above, deals may involve more cash and equity rather than debt financing. However, in difficult financing environments, especially where valuations are trending downward (in this case, in part because of rising interest rates), we may see an increase in earn-outs and contingent payments, which are often used in M&A transactions to bridge gaps in valuation expectations between buyers and sellers. These structures allow for additional payments to be made to the seller if certain performance metrics are achieved post-closing. Higher interest rates can have an impact on the use and structure of earn-outs and contingent payments. Where increased interest rates may be driving buyers and sellers further apart in terms of valuations, these structural components can be useful but difficult to navigate. Earn-outs and contingent payments always add complexity and uncertainty to a deal and require careful negotiation between the parties. Sellers will want adequate controls in place to maximize their ability to achieve full payment, while buyers will want maximum flexibility to operate the business in their best interests. This is always the case, but the concerns are heightened in an unpredictable and potentially downward-trending economic environment. In such cases, it becomes much harder to set realistic milestones or for a buyer to commit to long-term obligations such as maintaining the seller’s key team members and continuing to fund certain initiatives. Also, the cost of capital in and of itself may impact financial results. Another potential deal tool that buyers may use is to propose seller financing (having the seller agree to be paid over time in the form of a promissory note, often subordinated to any outside debt financing for the deal). Sellers will be particularly wary of the likelihood of timely payment of such subordinated debt with high-interest rate senior debt that likely includes tighter covenants than in a more favorable deal environment, although the interest on such sub-debt may be attractive. Conclusion While rising interest rates increase the cost of capital, decrease valuations and lower deal volumes and activity, higher rates do not necessarily mean fewer opportunities. Companies with cash will have an advantage over those without, as cash can provide certainty, and with lessened demand for acquisitions in the market, those buyers may find less competition for potential deals. Lower valuations may also create more attractive acquisition targets, and some sellers may be interested in selling now rather than waiting indefinitely for the markets to calm. Staying vigilant and monitoring macroeconomic developments will allow M&A parties to make informed decisions – where and how the U.S. Federal Reserve steers monetary policy and interest rates will have a real impact on deal values, deal volumes and deal structures. Savvy M&A operators who understand the challenges and opportunities of a high-interest rate environment and how to effectively adapt therein will still be able to make successful deals happen.

In a decision rendered on March 15, 2023, the Delaware Court of Chancery, in the case In Re Mindbody, Inc. Stockholder Litigation,¹ held Richard Stollmeyer (the CEO), the chief executive officer and a director of Mindbody, Inc. (the Company), a public company incorporated under the laws of Delaware, liable for breaches of the fiduciary duties of care and loyalty to the Company and its stockholders in a transaction involving the sale of the Company via merger to Vista Equity Partners Management, LLC (Vista). The Court also held Vista liable for aiding and abetting such breaches. The plaintiffs claimed that the CEO breached his fiduciary duties by tilting the sale process in favor of Vista and committed disclosure violations by failing to disclose facts about the sale process and that Vista aided and abetted such breaches. Sale Process Claims Under Delaware law, in the context of a sale of control of a Delaware corporation, directors are required to focus on one primary objective, securing the transaction which offers the best value reasonably available to the stockholders. This means that directors, in exercising their fiduciary duties, must seek a deal that offers the best price and other terms reasonably available under the circumstances. Directors must prioritize Revlon duties over other long-term corporate and financial objectives. Where a stockholder challenges a change-of-control transaction, enhanced scrutiny, as set forth in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.² is the presumptive standard of review. Under Revlon, the directors have the burden of demonstrating both (i) the reasonableness of the decision-making process employed by the directors, including the information on which the directors based their decision and (ii) the reasonableness of the directors’ action in light of the circumstances then existing. The business judgment rule, under which there otherwise would be a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the Company, does not apply except where the transaction is approved by a “cleansing vote” of a fully informed, uncoerced majority of the disinterested stockholders. In deciding whether the business judgment rule standard could be restored in the case at hand by such a cleansing vote, the Court found that the stockholder vote was flawed because the stockholders were not made aware of the CEO’s conflicts or the way in which the sale process favored Vista as described below, and therefore, the transaction was not approved by a fully informed, uncoerced majority of the disinterested stockholders. Accordingly, the Court found that enhanced scrutiny was the appropriate standard of review. In holding the CEO liable, the Court found that the conduct leading to the merger fell outside the range of reasonableness. The following summarizes certain findings of the Court as set forth in its opinion. The CEO was subjectively motivated in large part by his need for liquidity. He had substantial financial commitments; approximately 98% of his net worth was in stock of the Company and he was substantially limited in the amount of stock he could sell from time to time. This created a disabling conflict. The CEO set the sale process in motion largely without the involvement or knowledge of the Board of Directors. Without informing the board and prior to the commencement of a formal sale process by the board, the CEO met with a banker who introduced him to Vista, and the CEO had initial meetings with Vista. The CEO attended a Vista summit for chief executive officers of ex-public companies that Vista had acquired, at which Vista made presentations advertising the immense wealth that the chief executive officers had achieved by selling to and working for Vista. After the summit, the CEO believed that selling to Vista gave him the opportunity to both gain liquidity and remain as chief executive officer in pursuit of post-acquisition equity-based upside. The CEO became focused on a sale to Vista and wanted to sell to Vista. The CEO held shares of a super-voting class of stock, which provided control of approximately 19.8% of the Company’s voting power. The super-voting stock was set to automatically convert to common stock in approximately three years, which would carry less than 4% of the Company’s fully diluted voting power. Tactically, it was best for the CEO to take action quickly on a sale before the super-voting class of shares converted to common and his voting power was diluted. The CEO did not inform the full board of directors immediately upon receipt of an expression of interest from Vista to acquire the Company. Rather, the CEO had a lengthy discussion with the director, who was the director designee of the Company’s largest shareholder, whom the CEO knew also wanted a near-term exit from its investment in the Company. It was not until approximately a week later that the CEO informed the full board of Vista’s expression of interest. However, the full board was not made aware of the full extent of the discussions that the CEO had with Vista, and the board did not form a transaction committee to consider running a sale process until approximately two weeks thereafter. The CEO knew that Vista might attempt to move fast to gain a competitive advantage over other bidders. While the transaction committee formed by the board of directors established certain guidelines to cabin management’s communication with potential bidders, the CEO ignored them and, among other things, tipped Vista that a formal sale process was beginning. However, the CEO did not tip other potential bidders of the sale process. By causing a delay in providing information to the board and tipping Vista on the sale process, the CEO gave Vista a huge head start. When Vista was ready to make a firm offer, the other bidders (seven other parties signed non-disclosure agreements and were given access to the data room) were still in the early stages of their due diligence review of the Company and were largely unable to respond within the timeframe requested to make best and final offers. After Vista made a firm offer, the investment committee countered and Vista raised its final bid to $1 per share below where its deal team thought that the deal price would land. That offer was ultimately accepted by the Company. The evidence shows that Vista could and would have gone higher if it had been pressured to do so. The plaintiffs also argued and presented evidence that the CEO lowered earnings guidance to depress the Company’s stock price and make a deal seem more attractive. The Board of Directors was kept in the dark and did not know of the conflicts involving the CEO that infected the sale process. Among other things, the board did know about the CEO’s need for liquidity, the Company’s largest stockholder’s desire for a near-term exit, the details of certain meetings that the CEO had with Vista or information the CEO communicated to Vista regarding his desire to find a home for his Company or that he had tipped Vista about the start of the formal sale process giving Vista a huge head start. The CEO’s actions deprived the board of information needed to employ a reasonable decision-making process. Ultimately, the Court found that the CEO did not strive in good faith to pursue the best transaction reasonably available. He instead pursued a fast sale to Vista to further his personal interests. Because he tilted the sale process in Vista’s favor for personal reasons, the process did not achieve a result that fell within the range of reasonableness. Vista prevailed against the plaintiffs and was not held liable for the plaintiffs’ sale-process claims on procedural grounds because the plaintiffs failed to assert a claim against Vista for aiding and abetting in the sale-process breaches until trial. However, as noted below, the plaintiffs prevailed against Vista on aiding and abetting disclosure violations. Disclosure Violations With regard to the claims that the CEO committed disclosure violations by failing to disclose facts about the sale process, the Court held that the CEO breached his duty of disclosure and Vista aided and abetted such breach. The Court found that the CEO failed to disclose the full extent of his involvement with Vista in the proxy materials delivered to the stockholders, which was a material omission, and that Vista aided and abetted the CEO’s breach by failing to correct the proxy materials to include a full and fair description of its own interactions with him. Under the merger agreement between the Company and Vista, Vista was contractually obligated to review the proxy materials and inform the Company if there were material omissions from the proxy materials. The record shows that Vista personnel who interacted with the CEO reviewed the proxy materials; Vista knew about its own interactions; it was evident that they were not disclosed and Vista knowingly participated in the breach by not speaking up. Conclusion This case reinforces that in running any sale process, it is important for the board to be proactive in managing the sale process in a reasonable manner and to uncover any conflicts of interest or interference in the process by particular individuals. As is often the case, continuing management may be key to the sale and will have both an interest in the transaction terms and influence over the potential buyers and process. Beyond the issues in this case, boards need to be cognizant that in deals involving conflicts of interest (i.e., where a majority of the directors approving the transaction were interested or where a majority stockholder stands on both sides of the transaction), an even higher standard of entire fairness could be applicable. As a result, it is important to run a process that will withstand scrutiny not only under the Revlon standard but also as to overall fairness to all stockholders. The Board of Directors or a special committee formed to manage the process can weigh various factors, including the feasibility of closing the transaction (e.g., availability of financing), any regulatory approval hurdles, the identity of the bidder and the bidder’s plans for the Company and other reasonable factors but must ensure that the overall process is fair and free of conflicts of interest that impact obtaining the best result for the stockholders. The board must also ensure that in seeking any cleansing vote of the disinterested stockholders, all disclosures are complete, accurate and do not omit any material information that is necessary for stockholders to make a fully informed decision. ¹ 2023 WL 2518149 (Del. Ch. March 15. 2023) ² 606 A.2d 173 (Del. 1986)

The National Labor Relations Board (NLRB) is a federal agency with the power to safeguard union organizing rights and to remedy unfair labor practices. Its reach goes beyond just those employers with unionized workforces and impacts most private-sector employers. Recently, the NLRB issued a decision finding that overly broad confidentiality and non-disparagement clauses in severance agreements run afoul of the National Labor Relations Act. Following the NLRB decision, the General Counsel of the NLRB published a broader interpretative memorandum. While the memorandum does not have the same force of law as a formal decision by the NLRB, it provides a window into the NLRB’s enforcement position. Three practical steps for businesses seeking to navigate between the position of the NLRB and contractual protections against misuse of competitive information include: Update Existing Templates. Review and update existing confidentiality and non-disparagement clauses in template severance agreements, employment agreements and handbooks. While the NLRB decision focused on severance agreements, the General Counsel’s memorandum and another pending decision from the NLRB likely will expand the scrutiny beyond severance agreements. Examples of areas for more careful review include: Are covenants overly broad and generic, or are they appropriately tailored to the business in order to protect intellectual property, trade secrets and other proprietary information? Are the appropriate employees signing the right templates? For example, while an executive severance agreement may require a broader non-disparagement covenant, the same concern may not apply to the separation of an entry-level employee. Do different templates send mixed messages, or are they consistent? Are there exceptions included that the NLRB or other regulators would expect to see to avoid interfering with employee rights or the regulator’s oversight? Do contracts include severability clauses that seek to prevent voiding the entire agreement if only one provision is found unlawful?   Consider a Disclaimer. While the General Counsel of the NLRB continues to advocate for a universal model disclaimer for use by all employers, the NLRB has yet to adopt that position or a specific form of disclaimer. As advised by the NLRB’s General Counsel: While specific savings clause or disclaimer language may be useful to resolve ambiguity over vague terms, they would not necessarily cure overly broad provisions. The employer may still be liable for any mixed or inconsistent messages provided to employees that could impede the exercise of Section 7 rights. As noted in my Stericycle brief to the Board regarding employer rules, I asked it to formulate a model prophylactic statement of rights, which affirmatively and specifically sets out employee statutory rights and explains that no rule should be interpreted as restricting those rights, that employers may—at their option—include in handbooks in a predominant way to mitigate the potential coercive impact of workplace rules on the exercise of Section 7 rights and simplify compliance, which could also easily apply to severance agreements. I noted that the description of statutory rights should focus on Section 7 activities that are of primary importance toward the fulfillment of the Act’s purposes, commonly engaged in by employees (particularly in non-union workplaces, since they do not have union representatives available to bargain over rules and guide employees as to their rights), and likely to be chilled by overbroad rules, and provided suggested model language for inclusion to make it clear to employees that they had rights to engage in: (1) organizing a union to negotiate with their employer concerning their wages, hours, and other terms and conditions of employment; (2) forming, joining, or assisting a union, such as by sharing employee contact information; (3) talking about or soliciting for a union during non-work time, such as before or after work or during break times, or distributing union literature during non-work time, in non-work areas, such as parking lots or break rooms; (4) discussing wages and other working conditions with co-workers or a union; (5) taking action with one or more co-workers to improve working conditions by, among other means, raising work-related complaints directly with the employer or with a government agency, or seeking help from a union; (6) striking and picketing, depending on its purpose and means; (7) taking photographs or other recordings in the workplace, together with co-workers, to document or improve working conditions, except where an overriding employer interest is present; (8) wearing union hats, buttons, t-shirts, and pins in the workplace, except under special circumstances; and (9) choosing not to engage in any of these activities. While a disclaimer may not be a cure-all, employers should consider whether to adopt an interim disclaimer now or wait for further NLRB decisions and guidance. Set an Enforcement Strategy. Establish a process so that, prior to seeking to enforce a confidentiality or non-disparagement agreement (whether by legal action, demand letter or adverse employment action), appropriate review by human resources or legal advisors occurs. It is increasingly important that strategy aligns with the most up-to-date legal positions, which include not only decisions by the NLRB but also a network of other federal and state laws, regulatory opinions and court decisions.

Companies are increasingly moving toward performance-based compensation arrangements for their executives.¹ These pay-for-performance arrangements typically apply to equity-based compensation. More broadly, equity-based awards can be a significant component of a company’s compensation program. An equity incentive plan can serve as a powerful tool to attract and retain talent. Whether a startup or a public company, it is imperative that equity awards be properly granted. A few key considerations include: Adopt an Equity Plan. First, it is important for the company’s Board of Directors (Board) to adopt an equity plan. The company should determine what type of plan is appropriate for it, giving consideration to the short-term and long-term intentions of the company. For example, omnibus plans typically provide greater flexibility in the types of awards that can be granted, including incentive stock options (ISOs), non-qualified stock options (NSOs), stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), performance shares, performance share units, phantom stock and phantom stock units. On the other hand, a more limited plan, like a stock option-only plan, can be more narrowly tailored. Adopt Forms of Award Agreements. Just as a company’s Board should adopt an equity plan, the Board should also approve forms of award agreements. As a practical matter, the Board may want to authorize officers of the company to make grants or to modify or amend the forms to allow grants to be made quickly in connection with new hires or employee promotion, recognition or retention so that there is no need to wait until the next Board or compensation committee meeting for approval of individual grants. The plan (and applicable state law) must allow for such delegation.² In addition, it is prudent for the Board to limit the officers’ authority to modify grants such that any changes to the forms of agreements do not, individually or in the aggregate, have a material financial, legal, tax or accounting impact on the company or any of its affiliates. Grant Awards in Accordance with the Governing Documents. While it’s great to have a plan, it’s even better to follow its terms. The plan must be administered in accordance with its terms, and awards must be granted in accordance with the governing documents. For example, in order to grant a restricted stock award, the equity plan must allow for the grant of restricted stock. Similarly, to permit an optionee to exercise options that have not yet vested, the governing documents must allow for the early exercise of options. Failure to adhere to the governing documents can lead to complex and costly issues. Beware of Tax Implications and Considerations. Each type of equity-based compensation is subject to different tax considerations with respect to both the grantee and the company. It is important to understand the potential tax considerations in connection with each award. For example, the methodology for determining the fair market value of an ISO is subject to Internal Revenue Code (IRC) Sections 421 and 422, but the methodology for determining the fair market value for NSOs and SARs is set forth in IRC Section 409A (409A). The determination of fair market value of restricted stock is subject to IRC Section 83. Under 409A, the value of stock not readily tradable on an established securities market must be determined by the “reasonable application of a reasonable valuation method.”³ The IRS will presume a valuation is correct if an employer uses one of the “safe harbor” methods set forth in the final 409A regulations to determine the stock’s FMV. On the other hand, if an employer does not use a safe harbor method, then the employer will have the burden to prove to the IRS that the exercise price of the stock option is no less than FMV on the date of grant. In general, a reasonable valuation method is one that considers all available information that is material to the value of a company. It is important to note that a 409A valuation generally expires after 12 months if it has not expired earlier due to new information that has a material effect on the value of the company. There are three safe harbor methods for determining FMV under 409A: Qualified independent appraisal method. A valuation that is determined by a qualified independent appraiser as of a date no more than 12 months before the date of grant. Illiquid method for certain startups. The 409A regulations provide a safe harbor for internally-produced valuations of private startups that are younger than ten years old and are not reasonably expected to undergo a change in control within 90 days or a public offering within 180 days of the date the internal valuation report is used. The common stock may not be subject to any put, call or other right or obligation to purchase such stock (other than a right of first refusal upon an offer to purchase by an unrelated third party or obligation that constitutes a “lapse restriction”). The safe harbor requires that a valuation:Be performed by a person whom the corporation reasonably determines to be qualified based on the person’s “significant knowledge, experience, education and training” (generally meaning a person who has at least five years of relevant experience in business valuation or appraisal, financial accounting, investment banking, private equity, secured lending or other comparable business experience in the relevant industry); be evidenced by a written report; and take into account the value of the company’s tangible and intangible assets, the present value of future cash flows, the market value of similar entities engaged in a substantially similar business and other relevant factors such as control premiums or discounts for lack of marketability. Non-lapse restriction valuation method. Under this method, the use of a valuation formula that, if used as a non-lapse restriction under IRC Section 83, would be considered fair market value for purposes of Section 83 is presumed to be reasonable if the formula is applied consistently to other transfers of shares of the same or substantially similar classes of stock to the issuer or any person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the issuer. Failure to comply with 409A has hefty consequences. For individual taxpayers: income tax recognition is accelerated to the year of vesting (rather than on the date of exercise); an additional federal 20% excise tax applies; further increases in the intrinsic gain of the stock right continue to be taxed (and excise taxes continue to apply) in future years until the stock right is ultimately exercised or otherwise expires and premium interest and other potential penalties apply to the extent 409A taxes are not timely reported or withheld by the employer. Employers have an obligation to report a 409A violation on Form W-2 or Form 1099 and to withhold on accelerated income (but not FICA). In addition, there may be state tax law consequences. Given these potential consequences, it’s not hard to imagine a scenario where an employee loses all of the value of the equity-based award. Look out for Securities Law Implications. Because equity incentive plans involve issuing securities, companies need to consider applicable federal and state securities laws. There must be an exemption available for all grants. Most companies will rely on Rule 701 of the Securities Act of 1933 when making grants to individual employees pursuant to the company’s equity plan. However, this rule has certain limitations, including exclusions for certain consultants and does not cover non-service providers. Keep in mind that similar limitations are often built into a company’s equity plan (which is intended to incentivize service providers) both for business reasons as well as to ensure the plan is generally compliant with Rule 701. Therefore, certain types of equity grants may not be eligible for issuance pursuant to the plan or may require the applicability of a different exemption. Also, Rule 701 requires a company that issues more than $10 million in equity to employees over a 12-month period to supply Rule 701 disclosures to all employees who might exercise their stock options. Companies may face serious penalties for noncompliance with this requirement. For example, in 2018, the SEC brought an enforcement action against Credit Karma for failure to comply with Rule 701. Companies should also be aware of any state blue sky laws that may apply. ¹ Does performance-based compensation actually improve a CEO’s performance? (yahoo.com) ² For example, the Delaware General Corporation Law permits delegation of authority by the Board subject to certain limitations, including that the resolution authorizing the delegation must fix (a) the maximum number of options or RSUs that may be granted by the delegate, and (b) the maximum number of shares exercisable upon the exercises of the awards granted by the delegate. The Board must also set a time period during which the options or RSUs may be granted and fix the time period during which shares may be issued in respect of the exercise of awards granted by the delegate. See DGCL Section 157(c). ³ Note that the only method that provides protection in the event of a faulty valuation is the independent appraisal, which is discussed herein.

The venture capital and emerging company communities were rocked last week by the collapse of Silicon Valley Bank (SVB) and the subsequent collapse of Signature Bank. While the federal government stepped in on Sunday to assure depositors that all insured and uninsured deposits are safe and SVB is up and running through a newly formed bridge bank in an almost business-as-usual fashion in the US, the reality is that the future is unclear for the bank on which much of the community has depended for over 25 years. There is still much to learn about the situation beyond the obvious that has already been widely reported. The coming weeks will uncover more about the who, what and why of what happened; what can be done to shore up the US banking system further and avoid similar situations in the future; and whether SVB will be sold in whole, in parts, wound down or file for bankruptcy (among the many options). However, one thing that is certain at this point is that this changes the landscape in the near term for both debt and equity venture financing – the loss of SVB as a significant player, especially in the venture debt space, is a void that needs to be filled by viable alternatives beyond the current alternative of much more limited, costly, private debt sources. I sincerely hope the community pulls together to ensure minimal fallout, not just financially but to the lives of individuals who devoted themselves to supporting the emerging company community. Stradley Ronon will be monitoring this situation closely, and we are available to assist clients impacted by this situation. Sincerely, Lori Smith

NBA Top Shots, one of the most popular applications on the Flow Blockchain, a private blockchain created by Dapper Labs, allows consumers to purchase non-fungible tokens (NFTs) known as “Moments.” Moments are digital video clips of basketball highlights from NBA games. Consumers can acquire Moments on the NBA Top Shots application in two ways: they may purchase one or more “packs” of Moments, each of which is similar to a pack of basketball cards, or they may purchase one or more individual Moments on a secondary marketplace created and maintained by Dapper Labs. On the secondary marketplace, Moments owners may resell Moments they purchased in packs or from other Moment owners on the marketplace. Transactions involving Moments can occur only on Dapper Labs’ Flow Blockchain. On Feb. 22, 2023, in the case of Friel v. Dapper Labs, Inc., Judge Victor Marrero of the United States District Court for the Southern District of New York denied a motion to dismiss a class-action lawsuit that alleges that Dapper Labs violated federal securities laws by offering Moments for public sale without filing a registration statement with the Securities and Exchange Commission (SEC). The Dapper Labs court recognized that NFTs themselves are not necessarily securities but concluded that the plaintiffs had plausibly alleged that transactions in Moments are securities because they constitute “investment contracts” pursuant to SEC v. W.J. Howey Co., 328 US 293, 298-299 (1946) (Howey), and in view of precedent such as Gary Plastic Packaging v. Merrill Lynch, Pierce, Fenner, & Smith Inc., 756 F.2d 230 (2d Cir. 1985) (Gary Plastic). Under Howey, a financial interest is an “investment contract” if it involves (1) an investment of money (2) in a common enterprise (3) with the expectation of profits (4) based upon the entrepreneurial or managerial efforts of others. The Howey test was applied in Gary Plastic to Merrill Lynch’s marketing and sale of insured certificates of deposit (CDs) that it obtained from various banks. Among other representations, Merrill Lynch promised purchasers that it would maintain a secondary market to guarantee purchasers liquidity for their deposits. Due in part to Merrill Lynch’s creation and maintenance of a secondary market, which was a critical part of Merrill Lynch’s marketing efforts, the Gary Plastic court concluded that the expectation of profits by purchasers rested heavily on the efforts of Merrill Lynch and, therefore CDs sold by Merrill Lynch were investment contracts. As in Gary Plastic, the Dapper Labs court’s decision hinged on the “efforts of others” prong of Howey – whether the value of Moments depends on Dapper Labs’s expertise and managerial efforts. The Court concluded that it does because Moments can be purchased and traded only in the secondary marketplace in the NBA Top Shots application that runs atop Dapper Labs’ Flow Blockchain. Looking to Gary Plastic and other Howey precedent, the Dapper Labs court concluded that the value of Moments depends on Dapper Labs’ maintenance of the Flow Blockchain, maintenance of the secondary marketplace, and its ongoing promotion of Moments. Although the Dapper Labs court emphasized that its ruling was “narrow,” the decision is a reminder that even when an asset is not itself a security – for example, orange trees, whiskey, chinchillas, CDs, etc. – the manner in which the asset is marketed, sold, and maintained can cause the sale of the asset to constitute an investment contract.

In an effort to bolster the development of new businesses in high-growth industries, New York State launched the Pre-Seed and Seed Matching Fund Program (the Program), which offers early-startup companies assistance in obtaining investment funding. The Program is funded through the State Small Business Credit Initiative (SSBCI) with the goal to “support high growth start-up companies at the earliest stages of their growth and development.” On Jan. 5, 2023, New York Governor Kathy Hochul announced the Program’s launch, which gives early-stage companies the opportunity to receive equity investments ranging from $50,000 to $250,000 at the pre-seed or seed stage. The Program matches investments that start-up companies receive from the private sector on a dollar-for-dollar basis – companies must have $1 of qualified private sector investment for every $1 Program investment. Eligible private funding includes convertible debt, a Simple Agreement for Future Equity or equity securities. Interested companies must complete a competitive application process. Preference will be given to C-Corporations and diverse teams from underserved geographies and socially/economically disadvantaged individuals. To qualify for the Program, companies must meet the following criteria: Be in one of the following industries:Advanced Manufacturing Agricultural Tech Climate Tech Consumer Products Data/SaaS/AI Fintech Healthcare Life Sciences and BioTech Medical Devices   Raise $2,000,000 or less of dilutive funding (i.e., funding in exchange for ownership in the company); Have their headquarters and at least one C-suite employee in the state of New York for at least 12 months after investment; Be registered to do business in New York and in good standing; Raise matching funds from qualified private sector investors, including investors who are part of an investment entity (venture capital fund, angel fund, family office, investment partnership, or LLC), an individual member of an organized investment group who is an accredited investor and qualified purchaser, or an individual that can otherwise establish credibility as an accredited investor; and Complete the application. The application is rather extensive and requires applicants to disclose current funding sources, a business model, a problem the company is solving, key factors in achieving profitability, target customers, competitors, the status of intellectual property, finances and personal information on team members. Applications are currently being accepted on a rolling basis, and there is no deadline to apply. If the SSBCI believes a company is a potential fit for the Program, the SSBCI will conduct due diligence, including evaluating the business model, market size, team, product, financials, competitive advantage and potential impact for New York State. After the due diligence process, select applications will be asked to schedule a meeting. Although the application timeline will vary from company to company, the Program requires that its investments be made within 90 days of the closing of the company’s round. Because of this 90-day time requirement, companies interested in the Program should be cognizant of the application timeline and close of funding rounds. The SSBCI recommends that companies begin their fundraising process and secure private investment commitments before applying.

In 1736, Ben Franklin warned the fire-threatened city of Philadelphia that “an ounce of prevention is worth a pound of cure.” When it comes to data privacy and security, emerging companies and start-ups may struggle to follow this advice during the cost-sensitive early years. Many state privacy laws only become fully effective upon reaching certain thresholds for revenue or consumer data, and it may be tempting to push compliance off into a future product cycle.¹ However, as a practical matter, it may actually end up costing more, in the long run, to rebuild or rework your organization or products’ existing architecture when those laws are abruptly triggered. Moreover, although smaller companies may not find themselves in regulatory trouble, poor privacy practices can still trigger reputational harm and loss of customer confidence. Entities should therefore address data privacy concerns from day one. Making emerging consumer data rights a key consideration in the design of your product may prove to be the best approach. The following are some useful tips to follow that will help you incorporate privacy and security thinking into your product development cycle. Understand the Data You Have Keeping an accurate inventory of the data you are collecting is essential to understanding and managing the privacy and security concerns that will require your company’s attention. Effective internal communication is key, as multiple initiatives or product launches may inadvertently cause data to reside in more than one place or lead to inconsistent collection sets between applications or interfaces. Do More With Less One of the best strategies for avoiding data privacy and security issues is to only collect the data that is strictly necessary to accomplish the purposes for which it was collected in the first place. The more data you collect, the greater the privacy issues and the more attractive you are to potential threat actors. Committing to data minimization can be challenging in the early stages, as product function and internal processes may still be fluid. However, you should aim to maximize the utility of a limited data set and be thoughtful about collecting additional information from customers as business needs become clearer. It is always better to avoid potential liability and collect the right data at the appropriate time. A Regime of Good Trust and Privacy Hygiene Since the passing of the California Consumer Privacy Act in 2020, regulatory attitudes have shifted away from the “notice and consent” model of data collection and use. Instead, the growing expectations of consumers and regulators alike suggest that new products and services should foundationally recognize users’ data privacy rights. Regardless of your actual compliance obligations, building a product that defaults to protect a user’s privacy can provide a significant defense against future liability. In other words, your product should collect as little of your customers’ data as needed while requiring as little action from the customer as possible. Have a Public Privacy Statement Even if you effectively calibrate your platform to collect as little customer data as possible, the information that you do use should only be collected with informed and knowing consent. A clear, plain-language privacy statement is an effective and low-cost way to communicate with potential users about how your company collects and uses data and provides a signal to regulators that you understand you have obligations from operating in this space. It also protects your company from claims that it misused data or misled customers. It is imperative, however, that your privacy statement reflects your company’s actual practices. Telling customers one thing and then treating their data in a materially different way can lead to significant liability and could be the worst of all possible worlds. Security at Any Size No business is too small to go unnoticed by cybercriminals. Per Verizon’s 2022 Data breach Investigation Report, “very small businesses (10 employees or fewer)” remain targets of threat actors who have a “we’ll take anything we can get” attitude to data exfiltration or ransomware attacks. Unlike larger organizations, many new and emerging companies do not have the resources to hire dedicated security professionals or deploy the most cutting-edge technology. Luckily, there are many cost-effective security practices. First, consider using multi-factor authentication for key systems and make sure that employees do not reuse or share passwords. Second, manage your organization’s technology assets by timely installing software updates and changing default credentials. Finally, carefully scrutinize vendor agreements to make sure that their privacy and security practices provide at least as much protection as your own. Current Data Privacy Laws Are a Blueprint In addition to the five comprehensive state data privacy laws that have already passed, there are 14 additional states with privacy bills in the various stages of the legislative process. Though each new law requires careful consideration of the precise compliance requirements, almost all active and proposed privacy legislation provides for certain consumer rights. Specifically, the right to access their information, the right to request that their information be deleted and the right to opt out of the sale of their data.² As you are building your initial inventories and mapping your company’s data, consider how you customers are likely to exercise these rights and how you intend to respond. Even if you are under no legal obligation to provide your customers with these controls, building these processes from the beginning will streamline your eventual compliance. ¹ Also, firms operating in certain industries (i.e., finance, healthcare) or jurisdictions (such as the European Union) will incur privacy obligations regardless of their size and scale. ² For a more comprehensive review of active data privacy laws, see 2023 State Data Privacy Law: A Quick Reference Guide.

The Consolidated Appropriations Act, 2023 (the Act), signed into law by President Biden on Dec. 29, 2022, included a long-awaited federal exemption from registration with the Securities and Exchange Commission (SEC) for brokers engaged in merger and acquisition (M&A) transactions among certain privately held companies (the Exemption). There has long been an issue, particularly with smaller privately held companies, including venture capital and private equity-backed lower middle market companies, hiring unregistered brokers or finders to assist with M&A transactions in exchange for a success fee. The SEC has historically taken the position that the payment of success fees to anyone for assisting with finding a buyer or investor to consummate a transaction involving the sale of securities would require registration as a broker-dealer. The discussions throughout the past have been around the issue of whether an exemption should apply to someone that simply acts as a finder without further involvement in the transaction and why a registered broker-dealer would be required if a sale transaction involved the sale of securities but would not be required for a sale of assets. As to the latter point, basing the registration requirements on the form of the transaction rather than substance seemed to most practitioners to be an unnecessary distinction. These smaller companies, however, need assistance in sale transactions and can not afford the often prohibitively expensive fees of larger registered broker-dealers, nor are those larger firms generally interested in working on the smaller transactions. In 2014, the staff of the SEC provided limited relief in what has become known as the “M&A Brokers” no-action letter i (the M&A Brokers Letter).¹ The Exemption generally codifies the relief previously provided by the M&A Brokers Letter; however, there are significant differences that should be considered by an M&A broker and any company considering hiring an M&A Broker in considering whether the broker should rely on the new Exemption or the M&A Brokers Letter, which is explicitly contemplated within the Exemption. The Exemption, which was originally contemplated by Congress even before the SEC staff’s issuance of the M&A Brokers Letter, becomes effective March 29, 2023.² M&A Broker Definition Section 501 of Title V of Division AA of the Act amends Section 15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), by adding a new subsection (13), Registration Exemption for Mergers and Acquisition Brokers. Pursuant to Section 15(b)(13), “an M&A broker shall be exempt from registration under this section.” The term “M&A broker” is defined to mean a broker and any associated person of the broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of “an eligible privately held company,” regardless of whether the broker acts on behalf of a seller or buyer, through the “purchase, sale, exchange, issuance, repurchase or redemption of or a business combination” involving securities or assets of the eligible privately held company. In order to claim the Exemption, the M&A broker must “reasonably believe” that: Upon consummation of the transaction, any buyer of the eligible privately held company, acting alone or in concert, will control the eligible privately held company or the business conducted with its acquired assets and, directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the acquired assets, including without limitation, for example, by electing executive officers, approving the annual budget, serving as an executive or other executive manager or carrying out such other activities as the SEC may, by rule, determine to be in the public interest; and Any buyer will, prior to becoming legally bound to consummate the transaction, receive or has reasonable access to the most recent fiscal year-end financial statements of the issuer of the securities as customarily prepared by the management of the issuer in the normal course of its operations and if the issuer’s financial statements are audited, any related statement by the auditor, a balance sheet dated not more than 120 days before the date of the offer and information pertaining to the management, business, results of operations and material loss contingencies of the issuer. The term “eligible privately held company” means a privately held company that: (i) does not have any class of securities required to be registered with the SEC pursuant to Section 12 of the Exchange Act or with respect to which the company files or is required to file, periodic information, documents and reports under Section 15(d) and (ii) in the fiscal year immediately before the engagement of the M&A broker, has (a) earnings of less than $25 million before interest, taxes, depreciation and amortization and/or (b) gross revenues of less than $250 million. The SEC is permitted to modify the dollar figures if the SEC determines that such a modification is necessary or appropriate in the public interest or for the protection of investors. Excluded Activities Section 15(b)(13)(B) precludes an M&A broker from relying on the Exemption if the broker engages in any of the following: Directly or indirectly, in connection with the M&A transaction, receives, holds, transmits or has custody of the funds or securities to be exchanged by the parties to the transaction. Otherwise engages on behalf of an issuer in a public offering of securities registered, or required to be registered, with the SEC under Section 12 of the Exchange Act or with respect to which the issuer files, or is required to file, periodic information, documents and reports under Section 15(d) of the Exchange Act. Engages in a transaction involving a shell company, other than a business combination-related shell company formed solely for purposes of the transaction. Directly or indirectly through any of its affiliates, provides financing to a party to the transaction. Assists any party to obtain financing from an unaffiliated third party without (i) complying with all other applicable laws in connection with such assistance, including, if applicable, Regulation T, and (ii) disclosing any compensation in writing to the party. Represents both the buyer and the seller in the same transaction without providing clear written disclosure as to the parties represented and obtaining written consent from both parties to the joint representation. Facilitates a transaction with a group of buyers formed with the assistance of the M&A broker to acquire the eligible privately held company. Engages in a transaction involving the transfer of ownership of an eligible privately held company to a passive buyer or group of passive buyers. Binds a party to a transfer of ownership of an eligible privately held company. In addition, the Exemption is not available to a broker, including any officer, director, member, manager, partner or employee of such broker who (i) has been barred from association with a broker or dealer by the SEC, any state or any self-regulatory organization or (ii) is suspended from association with a broker or dealer. Reliance on the Exemption or the M&A Brokers Letter As noted above, while the Exemption generally codifies the M&A Brokers Letter, there are significant differences that should be considered by a broker and any company considering hiring a broker to facilitate an M&A transaction in determining whether the broker should rely on the Exemption or the M&A Brokers Letter. First, the Exemption is limited to transactions by eligible privately held companies, that are, companies with earnings of less than $25 million in the preceding fiscal year and/or companies with gross revenues of less than $250 million during the preceding fiscal year. The M&A Brokers Letter applies to transactions involving privately held companies regardless of earnings or revenue limits. Second, the Exemption requires that the M&A broker “reasonably believe” that the buyer of the eligible privately held company will control and be actively involved in its management, while the M&A Brokers Letter requires that the buyer must actually control and actively operate the privately held company. Finally, the M&A Brokers Letter conditions relief, in part, on the fact that any securities received by the buyer or M&A broker in an M&A transaction will be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act of 1933 (the Securities Act) because the securities would have been issued in a transaction not involving a public offering. Even though the Exemption does not expressly address the status of securities transferred in the M&A transaction covered by the Exemption, the buyer should nonetheless determine its compliance with the Securities Act and whether the securities received are restricted securities. What Next? Given the differences between the Exemption and the M&A Brokers Letter, it remains to be seen whether the SEC staff will withdraw the M&A Brokers Letter or otherwise modify the conditions of the no-action letter. In addition, as the Exemption does not preempt state blue sky laws regulating M&A brokers, such brokers must continue to adhere to applicable state laws and regulations. However, as some states previously amended their requirements for M&A brokers following the issuance of the M&A Brokers Letter, it also remains to be seen if those and other states will either amend their current requirements or enact new laws or regulations in response to the new Exemption. Companies using unregistered brokers in reliance on either the Exemption or the M&A Brokers letter need to continue to understand and carefully consider the limitations and scope of the relief provided. ¹ M&A Brokers, SEC No-Action Letter (Jan. 31, 2014). ² See H.R. 2774, 113th Cong. (2014); S. 1923, 113 Cong. (2014).

One of the most important yet overlooked aspects of any commercial or corporate transaction involves confidentiality obligations. Often, parties gloss over the scope of the covenants, treat them as boilerplate using precedent without thinking through the details, such as what information needs to be protected in the particular transaction at hand, who should be subject to the restrictions, what limitations need to be imposed on the use of any disclosed information and sometimes, forget to include the covenant or enter into a separate confidentiality agreement altogether. This is especially true for venture capital, private equity and related fundraising transactions where companies may have numerous stockholders with varying or conflicting interests. For expediency and cost savings, early-stage venture capital deals typically involve the use of standardized forms, such as the Series A financing documents published by the National Venture Capital Association (NVCA). The NVCA forms include typical information and inspection rights which give at least significant investors broad-based access to confidential information regarding the company. Therefore, the NVCA forms do include a confidentiality provision protecting information received by investors in this context. Having said this, lawyers should still review these documents carefully and consider the specifics of the company and transaction, for example, the types of investors involved (e.g., funds vs. strategic investors), as there may be different sensitivities based on the nature of the investor. However, not all early-stage venture capital transactions use the NVCA forms, and many later-stage venture and private equity deals use bespoke sets of agreements prepared by individual law firms. And, even when precedential forms have been supposedly fine-tuned over time, they may not have adequate provisions for confidentiality in the context of the specific transaction. Further, there may be certain investors not covered by the provisions of the NVCA forms or other primary transaction documents (either because they don’t meet the threshold set forth in the documents to qualify for information rights in such documents or they are investing through another type of instrument, such as a convertible note). In such cases, it is customary for such investors to request information rights, rights to inspect company records and access to management in a side letter. It is important to make sure that side letter rights also are subject to adequate confidentiality and non-use restrictions. In addition to contractual rights, Delaware corporations need to keep in mind that under Section 220 of the Delaware General Corporation Law (the DGCL), stockholders of a Delaware corporation have the statutory right to access corporate books and records for a “proper purpose.” The term “proper purpose” is not expressly defined in the DGCL, but cases involving such demands generally arise in the context of allegations that a stockholder desires to value its interest in the company or has a credible basis to believe there is wrongdoing or mismanagement at the company or a breach of fiduciary duties by officers or directors. This was seen in a recent Delaware case1 (Rivest v. Hauppauge Digit., Inc.) in which the court permitted the disclosure of nonpublic information to a stockholder of a public corporation who exercised his Section 220 rights and did not afford confidential treatment to the corporation’s books and records. This case involved an individual plaintiff seeking to value his shares in a corporation that went “dark” for a number of years, did not make any public disclosures and ignored the requests of the plaintiff for financial and other information concerning his investment. The court stated that there is no presumption of confidentiality as it relates to a Section 220 demand, and the relevant facts and circumstances at hand would be weighed in determining whether or not to afford confidential treatment. The court went through a thorough and detailed analysis of the harm that could be imposed on the corporation for not affording confidential treatment of the corporation’s financial information, including that such information could be used by competitors of the corporation and could put the corporation out of business. On the contrary, the court also detailed the benefits of allowing the plaintiff to obtain such financial information without confidential treatment, including that the plaintiff was seeking basic financial information to value his shares, which falls within the criteria for a proper purpose for a Section 220 demand. In determining not to afford confidential treatment to the disclosed information and permitting the plaintiff to inspect the corporation’s financial records, the court stated that “Rivest has established a significant interest in obtaining financial statements for closed periods free of any confidentiality restriction [and] [t]he Company has not made a showing sufficient to outweigh Rivest’s interest and warrant a two-year confidentiality restriction.” While the company at issue in Rivest v. Hauppauge Digit., Inc. was a public company, in a recent transaction in which we were involved, a venture capital-backed company was pursuing a sale transaction and had a strategic investor who was potentially interested in acquiring the company. The company received a written request from such stockholder, purportedly in the context of wanting to monitor its investment. The request (which was not a formal Section 220 demand) was for various information pursuant to such stockholder’s information rights in an investor rights agreement. The information requested was highly sensitive because of the ongoing negotiations of the sale, certain prior communications with such stockholder indicating such stockholder was not necessarily supportive of the sale, and the fact that this stockholder had a commercial relationship with the company. In that matter, the investor was subject to adequate contractual confidentiality and non-use restrictions on the information, but in the absence of such limitations, this could have been highly problematic because disclosure could have violated agreements with the potential acquirers and could have led to leaks of information on a highly confidential transaction and potentially disrupted the closing of the sale. The absence of such restrictions could have allowed the recipient to share the information or use the information for a purpose other than monitoring its investment. If this stockholder had sought to make a Section 220 demand, the existence of the confidentiality provision in the agreement would likely have led a court to provide confidential treatment to any disclosed information – however, in future transactions, we have already made a note to make sure we explicitly extend these provisions to any demand, not just the information provided under the investment documents. Statutory information rights can be waived, and the investor rights agreement published by the NVCA does include an optional provision for the waiver of statutory information rights, though we don’t typically see investors agreeing to such a provision. Therefore, when statutory information rights are intact and not expressly waived, any contractual confidentiality obligation needs to take into account not only information provided pursuant to contractual information rights but also information provided in other contexts, such as statutory information rights. Further, it is critical, especially in private companies, to include strong confidentiality obligations in investment documents whether or not such documents provide stockholders with explicit rights to disclosure of, or access to, confidential and proprietary information, in order to protect such information from unwanted use and/or disclosure beyond the particular stockholder and for proper purposes. Such agreements should clearly define the types of information protected, the defined purposes for which such information may be used and the parties with whom such information may be shared (e.g., a venture capital or private equity fund may request the right to share certain limited information with its partners for valid reporting purposes). In the absence of such pre-existing agreement at the time of the demand (often made without court intervention), companies should also keep in mind that it is customary to ask for a confidentiality agreement before sharing such information. 1See Rivest v. Hauppauge Digit., Inc., 2022 WL 3973101, at * 1 (Del. Ch. Sept. 1, 2022).

A recent WSJ article highlighted that, given the tightened equity financing market for early and growth-stage companies and the corresponding decrease in valuations, more such companies might be turning to venture debt to bridge the gap in their financial needs. This shift appears to be driven, at least in part, by a desire to avoid selling equity in a down round at lower valuations than the previous round of financing. However, there can be several risks associated with such debt, as described in the article, including high and increasing floating interest rates, loans that may still involve the issuance of equity kickers such as dilutive warrants to purchase equity, and the potential for balloon payments that may come due when the company does not have sufficient readily available cash or an alternative source of funding. This is “real” debt as opposed to the traditional convertible note financing that is very customary and converts into equity on the next equity round. The risks highlighted in this article for companies taking on additional debt may be further amplified if these borrowers are unable to fully deduct interest payments on their debt. The Tax Jobs and Cuts Act (TJCA) included, among other things, a new restriction in Section 163(j) of the Internal Revenue Code of 1986, as amended, that limits certain borrowers’ ability to claim deductions for interest payments attributable to their business activities. A borrower that cannot fully deduct business interest payments would suffer adverse impacts to cash flow since it would not be able to effectively recover a portion of its interest payments via tax savings. In recent years, Section 163(j) has typically not been relevant due to historically low interest rates and, in many industries, strong economic performance. However, some borrowers could soon find themselves unable to fully deduct interest payments as a result of interest rates continuing to rise, coupled with declining revenue. In general, a borrower may be subject to Section 163(j) if its average annual gross receipts for the previous three years exceed $25 million. Such a borrower, as a practical matter, would only be able to deduct business interest payments up to 30% of their “adjusted taxable income” for the applicable tax year (subject to certain, more bespoke adjustments). For this purpose, “adjusted taxable income” is the borrower’s taxable income as calculated with certain exclusions, such as any non-business income, gain, deduction or loss and any net operating loss deductions. Importantly, for tax years beginning before Jan. 1, 2022, depreciation, amortization and depletion deductions were also excluded for calculating adjusted taxable income. Thus, for those tax years, the limit imposed by Section 163(j) would not be reduced even if a borrower had significant deductions of those types (which are often very useful for reducing a borrower’s actual taxable income and tax liability). However, for tax years beginning on or after Jan. 1, 2022, depreciation, amortization and depletion deductions are no longer excluded from, and thus will reduce, adjusted taxable income. Consequently, applicable borrowers are now at greater risk of adverse tax consequences under Section 163(j) – not only from a confluence of rising interest rates and depressed economic performance but also due to depreciation, amortization and depletion deductions now adversely impacting how much business interest can be deducted. It would be advisable for borrowers to consult their tax advisors when taking on debt to determine whether Section 163(j) might limit their business interest deductions and, if so, how that might impact their business projections or cash flow models.

It’s not news that owners of copyrights in music and images have been using AI tools to troll the web looking for infringements for a while. Once an infringement was located, more often than not, money was paid, and a quick settlement was reached. But now, suddenly, there is an entirely new set of issues for copyright owners to confront, which is not going to be so straightforward. Generative AI came into its own in 2022, with tools like ChatGPT and Stable Diffusion receiving mainstream headlines. Image generators, including OpenAI’s DALL-E and Stability AI’s Stable Diffusion, “create” images from text prompts (think: “a dancing monkey in the style of Picasso”). The issue is that those AI-art tools are “trained” on billions of images scraped from the web, some or even many of which are copyrighted by the artists who created them. Those artists might also have moral rights which protect the integrity of their original works. Recently a group of artists filed a class-action suit against AI art generators Stability AI, Midjourney and DeviantArt, arguing that the companies “violated the rights of millions of artists” and profited by using copyrighted images to train their AI models. A similar suit was recently filed against Microsoft, GitHub and OpenAI. Also this week, Getty Images (Getty) sued Stability AI, alleging it “unlawfully copied and processed millions of images protected by copyright” without a Getty license. A study conducted last year concluded that a sizable chunk of Stable Diffusion’s data was likely pulled from Getty’s site. Not that tough a call since the tool has a habit of including the Getty watermark in its “created” images. As is so often the case on cutting-edge legal issues, right now, it’s all a big gray area. There aren’t clear rules around the use of generative AI because it’s so new. But it’s growing rapidly and should be top of mind for companies and artists. In September, Getty banned the inclusion of AI-generated images in its database over copyright concerns. But Adobe announced that it would sell images generated by AI tools like DALL-E and Stable Diffusion (as did Shutterstock). Determining whether AI art tools actually do violate copyright law is going to be complicated, but the outcomes of these early lawsuits will likely set precedents for how to handle such cases in the future. Artists have already started sharing tools for determining whether their work was scraped by AI. Meanwhile, corporations are moving ahead with AI. Microsoft has already announced plans to integrate OpenAI’s generative AI tech into all its products.

Angel investors, venture capital and private equity funds often seek to secure some presence, formal or informal, within the board meetings of the corporations in which they invest. Such representation and participation in corporate governance provide potential benefits to both the investor and the portfolio corporation. The corporation can benefit from having experienced investors participate and provide guidance in board meetings and beyond. While some corporations may be wary of offering such investors a formal seat on the board of directors, one option commonly employed is to grant investors or their representatives rights as “board observers.” Such persons may observe and even participate, usually in some limited fashion, in meetings of the board of directors. They generally get rights to attend meetings and obtain all materials provided to formal members of the board, but in a non-voting capacity. Granting such rights, however, introduces a number of unique issues and subtle potential pitfalls that both the corporation1 and the investor should carefully assess. Little caselaw or statutory guidance exists on the rights and obligations of board observers. Corporations and investors, each seeking to protect themselves, should therefore ensure that they expressly delineate those rights and obligations in advance via a detailed board observer agreement executed by both the corporation and the observer. Some of the key considerations to address in such an agreement, and related issues, are discussed below. Fiduciary Duties Corporate law generally does not impose fiduciary duties on board observers. Such fiduciary duties typically arise where one party manages an asset or group of assets for another, as a result of which the law will accordingly impose on the manager certain duties of loyalty and care with respect to the beneficiary. Directors, officers and managers of the corporation, having been charged with the duty to manage the assets of the corporation, are deemed fiduciaries with respect to the stockholders. But since board observers, by contrast, will typically have no formal responsibility for managing the corporation’s assets, they will typically not be deemed to owe the corporation any fiduciary duty. From the corporation’s perspective, the lack of fiduciary duties can lead to conflicts of interest, especially with strategic investors who may be in the same industry or business as the corporation. Such conflicts would not be addressed by an overriding duty of loyalty or duty not to act in a self-interested manner. Where an investor designates a representative to sit on the board, either formally or informally, that director could be said to be wearing two hats, one as a representative of the investor and one as a fiduciary to the corporation. In fact, that representative may even owe fiduciary duties to the investor who designated such person to sit on the board. As a formal board member, the duty of loyalty would protect the corporation from such conflicts. Therefore, on the one hand, companies often attempt to include language in board observer agreements that requires the board observer to act as if it were subject to fiduciary duties. On the other hand, investors often want the opposite, to expressly state that the board observer is not a fiduciary of the corporation. In fact, often, an investor will prefer an observer seat specifically because they are concerned about conflicts of interest created by such fiduciary obligations. The investor is interested in access to information and a window into its investment but doesn’t necessarily feel the need for a formal board seat that would give it the power to direct the affairs of the corporation through a vote on the board. Regardless of whether the board observer agreement expressly addresses fiduciary obligations, the agreement should both define the scope of the board observer’s rights to participation and access to information as well as seek to protect the corporation by imposing express limitations on such rights. For instance, the agreement should make clear that the observer is not entitled to vote at board meetings, may not veto any decision or action taken or being considered by management and may be excluded from receiving certain information or attending portions of meetings, as more fully discussed below. It may even subject the observer to additional restrictions on the use and disclosure of information that are not necessary for voting members of the board. The agreement may also specify the conditions upon which the board observer’s rights may sunset, for instance, if the investor who has the right to designate the observer does not continue to hold a specified amount of stock or by or before an identified end date. Confidentiality and Privilege As a non-member of the board and a representative of a third party, the board observer’s mere presence in the board meeting may compromise the confidentiality of information shared or discussed in the meeting. The observer’s presence may also destroy the privilege that attaches to a meeting between the corporation’s board and the corporation’s attorneys. Special care should accordingly be taken to address these issues in the board observer agreement. Courts considering the issue have reached varying conclusions on whether the provision of confidential or privileged information to a board observer waives the attorney/client privilege with respect to such information. In Finjan, Inc. v. SonicWall, Inc., a decision issued by the United States District Court for the Northern District of California in 2020, the Court found that a corporation’s disclosure to a board observer of information otherwise protected by the attorney/client privilege constituted a waiver of the privilege with respect to that information. By contrast, the United States District Court for the Eastern District of North Carolina held the exact opposite in a 2005 case, PharmaNetics, Inc. v. Aventis Pharmaceuticals, Inc. Corporations and investors should attempt to address this uncertainty upfront through their board observer agreement. The agreement should expressly define “Confidential Information” and impose unambiguous obligations on the observer to protect and maintain the confidentiality of such information and to not use the information for any purpose other than for monitoring the relevant investor’s investment in the corporation. In many situations, it should also contain appropriate limitations upon the sharing of competitively sensitive information. The agreement should also make clear that all such information is proprietary to the corporation and may contain trade secrets, the disclosure of which would harm the corporation. The restrictions imposed should apply broadly to all those parties with whom the observer is authorized to share information obtained from the corporation. The board observer agreement may also expressly provide the corporation the right to withhold certain proprietary information, especially if it could jeopardize trade secret protection for such information. The board observer agreement should also give the corporation the tools necessary to protect the corporation’s attorney/client privilege by expressly stating the corporation’s right to exclude the observer from any meetings or discussions with counsel where the observer’s presence might constitute a waiver of privilege. The corporation’s right to exclude the observer should also extend to situations in which matters being discussed may give rise to a potential conflict of interest. Of course, even when an agreement allows the corporation to exclude the observer for privilege reasons, the corporation must remain vigilant and actually exercise such right at appropriate times, or the privilege could be inadvertently waived. Conclusion Though the presence of board observers is fairly common in privately held corporations, corporations should think twice before liberally agreeing to allow any investor to appoint an observer, as their access to information and participation in a corporation’s board meetings raises a number of potentially significant issues for both the corporation and the investor. Given the relative lack of statutory guidance or caselaw governing the rights and obligations of these observers, both sides should ensure that they protect themselves in advance through the careful drafting and execution of a comprehensive board observer agreement. Stradley Ronon has a deep bench of experienced attorneys who regularly draft board observer agreements for a variety of corporate and investor clients. We are well-prepared to assist you with any legal needs you may have in this area or any related area, including those involving startup investments, compliance and governance. 1 Though this article focuses on observer rights with respect to corporations, observer rights can also be granted in entities that use other forms if they have boards or functionally similar governing bodies.

Stradley Ronon represented Petabyte Technology Inc., a provider of cloud-based technology solutions to the veterinary sector, in a $43.4 million acquisition by Chewy, Inc., an online provider of pet food and treats, pet supplies, pet medications and other pet-health products and services. The acquisition is expected to further strengthen Chewy’s pet healthcare product and service offerings.

Despite recent efforts on Capitol Hill over the summer, Congress has yet to bring a workable model for a national data privacy framework to a vote. Individual states continue to fill the void by responding to growing consumer expectations for greater privacy and control over their personal information. In 2023, four additional states (Colorado, Connecticut, Utah and Virginia) will join California in bringing comprehensive consumer privacy laws into effect. As state legislatures continue to define general data privacy rights, nationwide compliance has become increasingly complicated as many businesses are required to track diverging requirements across all states. The accompanying table is a quick reference guide that compares some of the key provisions of these emerging data privacy statutes. California’s data privacy law – which first came online in 2018 – set out many of the operational, disclosure and consumer rights obligations that are found throughout all jurisdictions. California’s law is also the broadest in the application, as it is the only law that does not require an entity to control or process the personal data of at least 100,000 consumers to apply. Though additional compliance efforts are likely inevitable, overlapping provisions across all five jurisdictions will hopefully minimize the impact of these additional obligations for those entities that are already in compliance with California’s Consumer Privacy Act (CCPA). However, businesses should be mindful of the areas where emerging privacy law diverges from California. For example, Virginia, Colorado and Connecticut require data controllers to provide consumers with the right to appeal a controller’s refusal to comply with a consumer’s request. Additionally, California law does not provide the right to opt out of targeted advertising or profiling like the other four jurisdictions. Finally, businesses should confirm they are prepared for the additional obligations brought on by the California Privacy Rights Act, which among other updates, removes CCPA’s exemption for employee data and the statute’s 30-day cure period.1 As California, Virginia, Colorado, Connecticut and Utah pass additional regulations or rules, Stradley Ronon will continue to monitor those developments. To download a current PDF of the reference table below, please click here. * The attorneys thank Alexandra Romano for her assistance with this article. Stradley Ronon hosted Alexandra Romano as a 2022 summer associate in the firm’s Philadelphia, PA, office. 1  In addition, these states are continuing to refine the regulations by which they will implement their data privacy laws, and these efforts may lead to further points of divergence with existing California precedents.

Throughout the pandemic, we all got accustomed to holding virtual meetings as a necessity, but recently I have received a number of questions from clients about continuing to hold virtual or hybrid board meetings or whether they should be encouraging more fully in-person meetings to the extent practicable. This is definitely a discussion that a number of companies are having as we try to move back to more in-person activities. There are, of course, pluses and minuses to the ability to use Zoom, Teams and other similar technology to meet with colleagues, but I believe the conversation should focus on the most effective way to hold a meeting of the Board of Directors, such that the Board properly engages with management and is diligent in exercising its fiduciary duties. Having attended a number of virtual meetings recently, there are certainly positives. The meetings can be easier to schedule and attend on shorter notice with reduced travel and consequently reduced time commitments by attendees. This is extremely important for companies operating globally or with directors that are located in geographic regions different from the company’s management. This also usually means reduced costs as companies generally reimburse non-employee directors for their airfare, hotel and other related travel expenses. In-person meetings also generally are longer, often running for a full day or more and involving dinners or lunches. Shorter meeting times and time commitments mean the Board can meet more frequently if necessary and have shorter sessions on specific issues or topics rather than needing to devote days to quarterly or semi-annual meetings. It also makes it easier to bring in outside advisors without the expense of such advisors committing to travel and attend a whole meeting when only needed for a segment of the meeting. However, there are a couple of big negatives that I see from virtual board meetings (which are not necessarily unique to a Board of Directors, but the concerns are heightened as a result of a Board’s duty of care in exercising oversight over the corporation.). The Board’s duty of care requires that it engage in reasonable diligence in evaluating actions to be taken by the corporation and make careful, informed decisions. To do so, the Board needs to be actively engaged in the process of evaluation and decision-making. While the directors are attending a meeting virtually, are they all actively participating? Are cameras on and everyone focused on the meeting, or are Board members multi-tasking or being distracted by other matters in their environment (the ones we all have working from home like children, dogs and ringing doorbells)? Is the meeting structured to allow directors to question management and ask for more information, or is the virtual setting making it more of a PowerPoint presentation followed by a rubber stamp by the Board? What materials did the Board review and consider, and when are they being provided? Was there sufficient time for the Board to gather the requisite information and deliberate? Are the Board members meeting before and/or after the “official” meeting in executive session or informally? An important part of a functioning Board is that the Board members have good interpersonal relations and trust one another. This is much harder to do when meeting virtually. Without the time before and after the meeting and during breakout sessions, there is less time to get to know one another or to have sidebars or other important discussions between and among specific members of the Board or between a Board member and management. You also lose the dynamics of being around one table together where eye contact, body language and even where people are seated in relation to each other can impact discussions. This could be a positive or a negative – maybe some Board members feel more comfortable speaking up in a virtual setting, but you lose the ability to really control the dynamics when, for example, a particular Board member might be monopolizing the conversation or time allotted for a meeting or topic or being disruptive to the flow of the meeting. The bottom line is that virtual or hybrid board meetings are probably here to stay, so it is important to set some guidelines. Meeting materials should be sent out far enough in advance that directors have a chance to review, digest and ask for additional information. The Board should consider a pre-meeting, even if it isn’t an in-person dinner, the night before the board meeting. This allows the Board to not only become more familiar with each other but also for Board members to raise issues in advance of the meeting and provide focus and direction for the discussions at the actual meeting – it is a time for the Board as a group to formulate important questions or issues they want to highlight for management. Given that virtual meetings tend to have a shorter time span, it is important to make sure the time is used wisely. At the meeting, there should be a clear agenda, and Board members should be instructed to keep cameras on if possible, as this will help with engagement. Board members should be strongly encouraged to ask questions and actively participate in discussions. The meeting should be structured to be just as interactive as an in-person meeting, and there should be time afterward in executive session or otherwise for board members to debrief on the meeting and plan and prepare for what issues need further discussion and evaluation between one meeting and the next. Companies might also consider alternating between virtual and in-person meetings or at least holding one or more regularly scheduled quarterly or semi-annual meetings in-person to the extent practicable and reserving the virtual meeting setting for special meetings on specific topics. The most important thing is that a company makes sure its Board is functioning in a cohesive and productive matter that has everyone rowing in the same direction in the best interest of the company and its stockholders.

The legal landscape around the enforceability of restrictive covenants, such as non-compete and non-solicitation provisions, is clearly changing. Businesses and their attorneys would do well to pay attention to these changes and learn the lessons being handed down at the state and federal levels. Recent Developments In the context of employment-based restrictions, the trend over the last several years has clearly been to disfavor restraints on an employee’s ability to earn a living utilizing their training and skills. California has long prohibited non-competition restrictions in the employment setting. Massachusetts enacted legislation in 2018 curtailing the permitted scope of non-competition agreements, requiring advance notice to employees and providing an opportunity to consult with counsel. States such as Colorado, Illinois, Oregon and Washington DC have all made recent changes limiting the enforceability of post-employment non-compete agreements, and a growing number of states, including New York, New Jersey, Connecticut, Maryland, Maine, New Hampshire, Rhode Island and Oklahoma are considering changes or have pending legislation. And though the regulation and enforcement of non-competition agreements have traditionally been by the individual states, President Biden issued an executive order in July 2021 calling upon the Federal Trade Commission (FTC) to undertake greater scrutiny of non-compete clauses indicating the growing disfavor of restrictive covenants has also reached the federal level. Restrictive covenants imposed on sellers in conjunction with the sale of a business have traditionally been afforded greater leeway than those in employment agreements, and courts throughout the U.S. have long found that buyers have a legitimate business interest to protect the assets and goodwill acquired in a sale/purchase. This is especially true in situations where sophisticated parties represented by counsel have knowingly negotiated such restrictions as part of the overall transaction. M&A attorneys have historically believed that courts would generally uphold restrictive covenants in acquisitions or at least apply the “blue pencil” rule to reform overly broad covenants to make them enforceable in order to allow a business to protect its bargained-for-interests. There are, of course, overriding antitrust considerations that must be part of this analysis, but most states have not taken a proactive approach to restrict contractually agreed upon restrictive covenants on sellers of businesses so long as they are reasonable in scope. As an example, California, where all non-competes have been generally disfavored, allows an exception to this in the sale of a business context to protect the goodwill/assets acquired, but such restrictive covenants are only enforceable to the extent they are reasonable and necessary to protect the buyer’s specific and immediate interests resulting from a particular transaction. While most of the focus on reining in non-competes and other restrictive covenants has been in the employer/employee context, there is a clear and increasing trend for all restrictive covenants to be disfavored, including those found in the M&A context, as a recent opinion from the Delaware Chancery Court and an FTC, settlement demonstrate. Delaware – Kodiak Building Partners, LLC v. Adams Delaware law with respect to non-competition and non-solicitation covenants calls for courts to carefully review such restrictive covenants to ensure they are (i) reasonable in geographic scope and duration, (ii) advance a legitimate economic interest of the party seeking enforcement and (iii) survive a balancing of the equities. On Oct. 6, 2022, in the case Kodiak Building Partners, LLC v. Adams (Kodiak), the Delaware Chancery Court ruled that a restrictive covenant imposed on a stockholder in an acquisition was overbroad and unenforceable. Moreover, and perhaps both surprising and reflective of recent trends, the Court declined to revise the covenants to such reasonable limitations as would make them enforceable. In this case, Kodiak Building Partners, LLC, a serial acquirer of businesses in the building materials, sales and distribution industries, entered into a stock purchase agreement to acquire all of the assets of two companies (which operated from a single location), including goodwill, and the 8.33% equity interest of the target company’s general manager, Phillip Adams. As part of the deal, Adams agreed to non-competition and non-solicitation restrictions for 30 months after closing that included a geographic scope of 100 miles within any one of Kodiak’s 81 locations (including those of what was defined as the Company Group so as to pick up Kodiak affiliates) across 16 states, not just the single location acquired in the immediate transaction. The Court found that Kodiak went beyond what was reasonable to include (i) a geographic scope far wider than pertaining to the single location involved in the transaction and (ii) an overly broad definition of “Business” and the Company Group covered by the restrictive covenants to cover all lines of business of Kodiak and its affiliated companies, not just the single line of business (roof trusses) engaged in by the acquired companies. The Court reasoned that protectable goodwill should be limited to the immediate transaction and the competitive space in which the target company operates. Interestingly, the Court in Kodiak repeatedly referred to Adams as an employee throughout the opinion focusing on the impact of the restrictions on him as an employee even though they discuss the result in the context of an acquisition. Although Kodiak alleged Adams was a senior executive of the acquired company and that he had expressly agreed to the reasonableness of the scope, he was a minority owner, and it was not alleged that he separately negotiated his restrictive covenants nor that he was separately represented by counsel in the negotiations (which might have made a difference in the analysis of the allocation of risk as noted in another case cited in a footnote in the decision). It is at least worthy of questioning whether the Court would have looked at this differently or at least given more weight to Kodiak’s arguments as to contractually getting the benefit of its bargain if Adams had been (i) a majority or more significant owner represented by experienced legal counsel, (ii) more actively involved in the sale negotiations or (iii) a recipient of more substantial consideration. Kodiak did argue that the proceeds he received from the sale were more than token consideration at seven times Adam’s annual compensation, but again the Court appeared to look at this in the context of Adam’s as an employee and not primarily with the lens of Adams as a sophisticated selling stockholder. Perhaps further worth noting is that the Court made this determination in the context of a request for a preliminary injunction which is a very high standard – they ultimately determined the restrictive covenants were not enforceable in such context, which focuses on whether it was more likely than not that Kodiak would succeed on the merits in the ultimate case. FTC Settlement – ARKO/Corrigan Earlier this year, the FTC issued an administrative complaint in response to an acquisition of ARKO Corp. of 60 gas stations from Corrigan Oil Company in Michigan and Ohio, taking issue with certain non-compete provisions that were alleged to be unreasonably overbroad in geographic scope and beyond what was reasonably necessary to protect a legitimate business interest. The terms of the non-competition agreement restricted Corrigan’s ability to compete not only in the local markets around those locations acquired as part of the deal but also in any other markets in which ARKO operates. The final Decision and Order effectively rewrote the ARKO/Corrigan Asset Purchase Agreement limiting the scope of non-compete covenants to only apply to locations acquired in the transaction, limiting the terms to be no broader than three years in duration and no more than three miles from the acquired locations, along with a number of other requirements signaling the FTC’s willingness to be proactive in protecting sellers where a buyer might overreach. As Lina Khan, Chair of the FTC, shared in her statement on the matter, “[F]irms may not use a merger as an excuse to impose overbroad restrictions on competition or competitors” and that “[a] general desire to be free from competition following a transaction is not a legitimate business interest.” Takeaways for Businesses and Practitioners The Kodiak opinion and ARKO settlement should be taken as cautionary tales for M&A attorneys and acquirers to carefully construct restrictive covenants so that they are narrowly tailored to protect the legitimate business interest of the acquirer in protecting the value and goodwill associated with the business being acquired, tethered to the specific geographic locations and operations of the acquired company. Courts may be more and more unlikely to rewrite overbroad restrictive covenants where taking the “blue pencil’ to reform such covenants could be seen as inequitable. In negotiating a deal, buyers should ensure that any restrictive covenants, such as non-competes or non-solicitation provisions, are appropriately limited with respect to the time, geographic scope and industry/business such that the focus is on the target, not the overall business of a buyer and its affiliated companies prior to the acquisition. It would also be wise to avoid catchall definitions that are overly broad.

In a recent M&A transaction, a nuanced issue regarding the exculpation of directors under the Delaware General Corporation Law (DGCL) arose in the context of a potentially conflicted director serving on the board of a company considering a sale transaction. The company was an early-stage Delaware corporation that had completed multiple rounds of equity financing, the most recent of which was led by a strategic investor in the same industry as the company. At the time of its investment, the strategic investor negotiated for the right to designate one director to the company’s board. Due to the strategic investor’s potential interest in acquiring the company, when the company began considering acquisition offers, the strategic investor’s designated director had at least the appearance of a conflict of interest. In considering the potentially conflicted director’s obligations in the context of the board’s deliberations, counsel for the strategic investor incorrectly assumed that the exculpation language in the company’s certificate of incorporation, which is explicitly permitted (and limited) by Section 102(b)(7) of the DGCL1, amounted to a waiver of all fiduciary duties by the company.2 As Section 102(b)(7) makes clear, however, no such provision may exculpate a director for any breach of the duty of loyalty. Under the counsel’s mistaken interpretation, the director would have been free to share information he received in his capacity as a director with the strategic investor for whom he worked, potentially to the detriment of the company. As noted in prior Delaware case law, while it is possible to cleanse an interested party transaction under Delaware law, a director cannot disclose information to the appointing stockholder when such director is wearing two hats, i.e., if the disclosure could cause harm to the company to which such director owes a duty of loyalty.3 This is definitely a conundrum for directors appointed by private equity firms or other purely financial investors in many situations, but can be even more of a challenge for directors designated by strategic investors, who often have interests that are not solely focused on maximizing the economic value of their investment in a manner that is aligned with other stockholders. While the duty of loyalty issue was ultimately resolved between counsel, the scenario highlighted an interesting secondary issue: whether Delaware law would have required the same outcome if the target company had been a Delaware LLC. As practitioners know, while a corporation is a creature of statute, LLCs are generally creatures of contract. There are also important differences between the DGCL and the Delaware Limited Liability Company Act, particularly with respect to fiduciary duties. As the Delaware Court of Chancery noted in the recent Manti case4, and as is well established in Delaware law: “Waiver of fiduciary duty is a permitted feature of the LLC form.” The DGCL allows corporations to eliminate director liability for breaches of the duty of care, as described in Section 102(b)(7), and to renounce corporate opportunities, but the DGCL does not expressly authorize a contractual waiver of fiduciary duties or of claims to enforce such duties. By contrast, the Delaware Limited Liability Company Act has broad enabling provisions that allow for private ordering, including the modification or elimination of all fiduciary duties. The Manti case hinged on a purported contractual waiver of corporate directors’ fiduciary duties, but due to the court’s rejection of the waiver interpretation, the court did not ultimately rule on whether such a contractual waiver would be permissible in the corporate context. Exculpation from financial liability under Delaware corporate law has express limits and does not amount to the type of broad waiver that can be contracted for in LLCs. While there are many reasons that venture capital investors, in particular, prefer the use of Delaware corporations for their investments, when structuring investments generally, in addition to tax and other factors, consideration should be given to whether a corporation or LLC is the best vehicle in light of potential conflicts of interest that may arise in connection with exits and future financing arrangements. From the company’s perspective, these types of conflicts should be given serious consideration when deciding upon the composition of the board of directors, especially as it relates to strategic investors’ access to all of the information that would normally be shared with a board. Relatedly, as previously noted in Business Vantage Point, recently enacted amendments to the DGCL will likewise extend the right of a corporation to exculpate officers in certain situations, but it is clear that this expansion relates solely to the duty of care, as the prior version of the statute was also so limited with respect to directors. The expanded exculpation right does not apply to the duty of loyalty implicated in most conflict of interest cases involving a director appointed by, and in many cases employed as an officer or manager of, a stockholder who may be interested in a sale or other significant transaction. 1 DGCL Section 102(b)(7): Section 102: Contents of certificate of incorporation. … (b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters: … (7) A provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer, provided that such provision shall not eliminate or limit the liability of: (i) A director or officer for any breach of the director’s or officer’s duty of loyalty to the corporation or its stockholders; (ii) A director or officer for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) A director under § 174 of this title; (iv) A director or officer for any transaction from which the director or officer derived an improper personal benefit; or (v) An officer in any action by or in the right of the corporation. No such provision shall eliminate or limit the liability of a director or officer for any act or omission occurring prior to the date when such provision becomes effective. An amendment, repeal or elimination of such a provision shall not affect its application with respect to an act or omission by a director or officer occurring before such amendment, repeal or elimination unless the provision provides otherwise at the time of such act or omission. All references in this paragraph (b)(7) to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title. All references in this paragraph (b)(7) to an officer shall mean only a person who at the time of an act or omission as to which liability is asserted is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to § 3114(b) of Title 10 (for purposes of this sentence only, treating residents of this State as if they were nonresidents to apply § 3114(b) of Title 10 to this sentence). 2 The language in question originated from the National Venture Capital Association’s model Certificate of Incorporation, Article Ninth, which is available here. 3 Also worth noting is that the strategic investor had contractual information rights, as is typical for major investors in venture capital equity rounds. Information provided by the company to the investor pursuant to these contractual rights would not be subject to the same limitations based on fiduciary duties, although it would remain subject to applicable contractual confidentiality obligations. Further, all stockholders of Delaware corporations have the right to demand certain books and records pursuant to Section 220 of the DGCL, and other recent Delaware caselaw suggests that nonpublic company information furnished pursuant to a Section 220 request may not always be protected by confidentiality obligations. 4 Manti Holdings, LLC v. The Carlyle Group Inc., C.A. No. 2020-0657-SG (Del. Ch. Feb. 14, 2022).

In August of this year, Section 102(b)(7) of the Delaware General Corporation Law (DGCL) was amended to permit Delaware corporations to amend their Certificates of Incorporation to include a provision providing for the exculpation of officers from monetary damages for breach of certain duties owed to the corporation.1 These amendments represented a significant step in providing greater protection for a corporation’s officers with respect to actions taken on behalf of the corporation. Historically, the exculpatory language permitted by the DGCL in a corporation’s Certificate of Incorporation would have shielded only a corporation’s directors rather than its officers. Perhaps unsurprisingly, at least two suits concerning the new law have already been filed in the Delaware Court of Chancery. On Nov. 4, the Electrical Workers Pension Fund, Local 103, I.B.E.W. filed a class action complaint against Fox Corporation, who recently took advantage of the changes in the law to amend its Certificate of Incorporation to include a provision providing for the exculpation of its officers.2 Rather than challenging the amendment to the DGCL, the case hinges upon the procedure Fox Corporation used to amend its Certificate of Incorporation. Fox Corporation has a dual-class share structure – shares are either voting or non-voting. The amendment to the Certificate of Incorporation was approved by the voting class of shares but not by the non-voting class. Plaintiffs allege that the amendment was inconsistent with Section 242(b)(2) of the DGCL, which provides that holders of a class of stock are “entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation if the amendment would alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely.” The complaint alleges that the amendment to the Certificate of Incorporation required the vote of the non-voting stock because “[t]he right to seek judicial relief to hold officers accountable for reckless or grossly negligent behavior is a component of the ‘bundle of rights’ appurtenant to ownership of Fox Class A Common Stock.”3 Electrical Workers appears to be just the first of perhaps several cases that may challenge the expansion of the DGCL to allow for the exculpation of officers. In another case recently filed, a stockholder of Snap Inc. (the company behind Snapchat) sued the company, alleging that when the company amended its Articles of Incorporation, it implemented a measure that stripped the rights of non-voting stockholders. Similar to the argument presented in Electrical Workers, here plaintiff stockholder alleged that Section 242(b)(2) of the DGCL guaranteed the holders of any class of stock (including non-voting stock) the right to vote on any amendment that adversely affects any of the powers or rights appurtenant to that stock, regardless of whether the stock itself is considered voting or non-voting. Plaintiff argued that the “only reasonable reading [of Section 242(b)(2)] is that even if a class of stock is typically not entitled to vote on other matters, a charter amendment adversely affecting the ‘powers, preferences or special rights’ appurtenant to that class of stock still requires an approving vote.”4 This raises the question – is there such a power, preference or right attributable to non-voting shareholders that would allow them to challenge such an amendment? The complainants in Electrical Workers ground the basis of their argument in favor of such a right upon language the Delaware Chancery itself relied upon in the 2015 case of In re Activision Blizzard, Inc., S’holder Litig.5 Here, the court held that such “peculiar rights” held by stockholders included the right to assert direct claims for breach of fiduciary duty against a company officer.6 The court in Activision recognized that the right to sue for breach of fiduciary duty might – in limited circumstances – adhere to the stock itself and vest in the stockholder. Regardless of when and whether the Delaware Chancery renders a decision in either the Electrical Workers case, or the Snap, Inc. case, as we discussed in our earlier article, should carefully weigh the pros and cons of amending their respective Certificates of Incorporation to include such protections for corporate officers. While such an amendment may provide protection from certain stockholder litigation, ultimately, both officers and directors owe a duty of care to stockholders to exercise business judgment in good faith and in a reasonably prudent manner when acting on behalf of the corporation, in a manner that the officers and directors believe is in the best interests of the corporation and its stockholders. While the statute now permits exculpation in certain cases, a board of directors should carefully consider the implications of proposing such an amendment and its impact on stockholder rights. 1 See 8 Del. C. § 102(b)(7). 2 Electrical Workers Pension Fund, Local 103, I.B.E.W. v Fox Corporation, Case No. 2022-1007-MTZ (filed Nov. 4, 2022). 3 Id. at ¶ 7. 4 Karen Sbroglio v Snap Inc., Case No. 2022-1032 (filed Nov. 16, 2022), at ¶ 2. 5 In re Activision Blizzard, Inc., S’holder Litig., 124 A.3d 1025, 1049 (Del. Ch. May 20, 2015). 6 Id. at 1049. See, e.g., In re Baker Hughes Incorporated Merger Litig., 2020 WL 6281427, at *15-16 (Del. Ch. Oct. 27, 2020) (declining to dismiss a direct claim for breach of the duty of care against an officer).

Under Delaware General Corporation Law (DCGL) 8 Del. C. §271, a corporation’s board of directors may sell, lease or exchange all or substantially all of the corporation’s property and assets as the board deems expedient and in the best interests of the corporation so long the sale, lease or exchange is authorized by a majority of the outstanding stockholders of the corporation entitled to vote thereon. The Supreme Court of the State of Delaware recently was called upon to decide whether Section 271 is subject to a “common law insolvency exception” that would allow the board to sell, lease or exchange all or substantially all of the corporation’s assets without stockholder approval if the corporation is insolvent and failing. The Supreme Court of Delaware determined that Section 271 is not subject to a “common law insolvency exception,” reversing a decision of the Delaware Court of Chancery. Facts Stream TV Network, Inc.(Stream) is a Delaware corporation essentially controlled and owned by Mathu Rajan, his brother Raja Rajan and their parents, who hold a majority of Stream’s Class B common stock and a majority of Stream’s outstanding voting power. Stream’s charter contains the following Class B voting provision: For so long as shares of Class B Voting Stock remain outstanding, in addition to any other vote or consent required herein or by law, the affirmative or written consent of the holders of a majority of the then-outstanding shares of Class B Voting Stock, voting as a separate class, shall be necessary for the Corporation to consummation [sic] an Acquisition or Asset Transfer. (the Charter Voting Provision). Stream’s senior secured lender held a senior security interest in all of Stream’s assets, and Stream’s junior secured creditor held a subordinated security interest in all of Stream’s assets. Each of the senior and junior secured creditors was authorized to take control of Stream’s assets in the event Stream defaulted on its obligations to the respective lender. By February 2020, Stream had defaulted on its obligations to its senior and junior secured lenders, missed payroll, furloughed workers and defaulted on its trade debt, and in March 2020, its senior secured lender filed a complaint against Stream seeking foreclosure and other relief. Stream’s board was comprised of the Rajan brothers and four independent outside directors. At a board meeting on May 4, 2020, a Resolution Committee was formed to resolve Stream debt defaults and claims, as well as actual and threatened litigation “without further action being required from the Board of Directors or any executive of the Corporation.” Following negotiations, Stream, the senior and junior secured lenders and 52 of Stream’s stockholders entered into an agreement pursuant to which, in full satisfaction of the obligations to the secured lenders, all rights, title and interest in and to all of Stream’s assets would be transferred to SeeCubic, a newly formed holding corporation established by the lenders (the Omnibus Agreement). Additionally, Stream and its Class A common stockholders, except the Rajan brothers, were to receive certain rights under the Omnibus Agreement. The Court of Chancery On Sept. 8, 2020, Stream commenced an action in the Court of Chancery of the State of Delaware, seeking a declaration that the Omnibus Agreement was invalid. Stream moved for a temporary restraining order to bar SeeCubic from enforcing the Omnibus Agreement. SeeCubic filed counterclaims and third-party claims against the Rajan brothers, requesting expedition and a temporary restraining order that would prevent Stream from interfering with its rights under the Omnibus Agreement. In December 2020, the Court of Chancery held that it was reasonably probable that the Omnibus Agreement was a valid, binding, enforceable agreement and entered a preliminary injunction barring Stream and anyone acting in concert with it from taking any action to interfere with SeeCubic’s rights under the Omnibus Agreement. In September 2021, the Court granted in part, SeeCubic’s motion for summary judgment, holding that the Omnibus Agreement is valid and enforceable and converting the preliminary injunction into a permanent injunction. The Court subsequently granted a motion filed by Stream and the Rajan brothers to have the decision on SeeCubic’s summary judgment motion entered as a partial final judgment. On Nov. 12, 2021, Stream and the Rajan brothers appealed the decision, and on the same day, they moved before the Court of Chancery for an order modifying or staying the permanent injunction. On Dec. 2, 2021, the Court of Chancery issued a 34-page opinion in which it denied the motion seeking to modify or stay the permanent injunction. The Court reasoned that the Omnibus Agreement was valid and binding and that a common law insolvency exception operated to eliminate any requirement that the Omnibus Agreement was subject to a shareholder vote. The Court began its analysis with an exhaustive review of Section 271, including a comprehensive review of Section 64a, Section 271’s predecessor. Section 271 provides in relevant part: Every corporation may at any meeting of its board of directors or governing body sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or other property, including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors or governing body deems expedient and for the best interests of the corporation, when and as authorized by a resolution adopted by the holders of a majority of the outstanding stock of the corporation entitled to vote thereon. The Court concluded that a “common law insolvency exception” to the shareholder vote requirement contained in Section 271 was applicable to allow directors of an insolvent and failing corporation to sell Stream’s assets without shareholder vote or approval. In its December 2020 decision granting SeeCubic’s request for a preliminary injunction, the Court of Chancery considered the interplay between Sections 271 and Section 272 of the DGCL. Section 272 provides: The authorization or consent of stockholders to the mortgage or pledge of a corporation’s property and assets shall not be necessary, except to the extent that the certificate of incorporation otherwise provides. The Court determined that interpreting Section 271 to require a shareholder vote for the transfer of an insolvent corporation’s assets to its secured creditors would create a conflict with Section 272. The Court reasoned that since Section 272 makes clear that, absent a provision in a certificate of incorporation to the contrary, shareholder approval is not necessary to mortgage or pledge assets of a corporation to secure a debt, it would be illogical to require shareholder approval to transfer collateral to a secured creditor in satisfaction of an insolvent corporation’s obligations. Moreover, if shareholder approval is required to transfer collateral to a secured creditor, the value of a security interest in collateral would be undermined. Finally, the Court observed that given the prevalence of security interests and the fact that Section 271 and its predecessor have been in effect since 1917, the issue of whether Section 271 applies to the transfer of an insolvent corporation’s assets to its secured creditor in satisfaction of its obligations would have arisen, but it has not. Finally, the Court of Chancery summarily addressed the Charter Voting Provision, stating that the provision “tracks the text of Section 271 and warrants the same interpretation” — namely, that the Omnibus Agreement does not implicate the Charter Voting Provision. Appeal On appeal, the following four issues were presented to the Supreme Court of Delaware: Whether the Charter Voting Provision unambiguously requires Class B stockholder approval and renders Section 271’s shareholder voting rule irrelevant. Whether, in determining whether the Charter Voting Provision requires stockholder approval of the Omnibus Agreement, the Court of Chancery erred in its analysis by examining Section 271 prior to considering the applicability of the Charter Voting Provision. Whether Section 271 superseded any common law insolvency exception and whether such an exception ever existed under Delaware law. Whether the Court of Chancery’s decision would upset Delaware’s contractarian focus and the predictable application of Section 271. The Supreme Court considered the first and second issues simultaneously. First, the Court determined that the Court of Chancery erred by commencing its analysis with an examination of Section 271, concluding that instead, the analysis should commence with a determination of whether the Charter Voting Provision renders Section 271’s shareholder voting rule irrelevant. Accordingly, the Supreme Court began by noting that corporate charters are “broadly enabling” and may depart from the rules of common law so long as a charter provision does not conflict with the DGCL. The Court went on to note that corporate charters are contracts subject to the general rules of contract construction. Under Delaware law, contracts are to be read as a whole, and terms are to be given their commonly accepted meanings. The Supreme Court concluded that the terms of the Charter Voting Provision are clear and unambiguous, and therefore, extrinsic evidence may not be considered in construing the provision. Reading the Charter Voting Provision and the Omnibus Agreement together, the Supreme Court determined that the transaction embodied in the Omnibus Agreement falls within the Charter Voting Provision, and an affirmative vote of the holders of a majority of the then-outstanding shares of Class B stock is necessary to consummate the Omnibus Agreement. While the Supreme Court acknowledged that it need not engage in any additional review, it undertook an exhaustive analysis of the third issue before it and determined that any common law insolvency exception to the shareholder voting requirement contained in Section 271 that may have existed under Delaware law had been superseded by Section 271’s predecessor. In reviewing the Court of Chancery’s application of the insolvency exception, the Supreme Court noted that the Court of Chancery relied on authorities and cases that either predated Section 271 or were decided in jurisdictions other than Delaware. The Supreme Court reasoned that the Court of Chancery’s reliance on the cited authorities and cases was misplaced and embarked on its own exhaustive survey of the law relating to the common law insolvency exception. First, the Supreme Court examined the case law throughout the United States addressing the insolvency exception and found that no Delaware case has ever expressly addressed or adopted the insolvency exception. Then, the Supreme Court examined Section 271 and its predecessor, DGCL Section 64a. Section 64a made it easier for a board to sell, lease or exchange all or substantially all of the corporation’s assets by imposing a majority stockholder vote in favor of the sale of all assets of a corporation. Section 64a was enacted to supersede the common law rule that required a unanimous shareholder vote in favor of such sales. The Supreme Court left open the question of whether a common law insolvency exception existed under Delaware law prior to the enactment of Section 64a, concluding that when the common law unanimity rule was superseded by Section 64a, so too was any insolvency exception to that rule. The Court noted that this conclusion is reinforced by the plain language of Section 271, which is not ambiguous and does not contain any exceptions. Finally, the Supreme Court considered the fourth issue placed before it. The Court recognized Delaware’s contractarian philosophy and focused on the importance of stability and predictability in the application of DGCL, finding that allowing a common law insolvency exception to Section 271 that was never applied by a Delaware court would not advance these fundamental goals. Analysis The Delaware Supreme Court has foreclosed the possibility that a common law insolvency exception exists with respect to the shareholder voting requirement contained in Section 271. Therefore, absent a provision in a corporation’s certificate of incorporation that clearly and unambiguously provides otherwise, the consent of a majority of shareholders entitled to vote on the issue will be required in order for a board of directors to sell, lease or exchange all or substantially all of the assets of a corporation. This is the case regardless of whether the corporation is failing and insolvent or thriving and profitable. The Supreme Court’s elimination of the possibility of a common law insolvency exception to Section 271 may not be dire. It simply defers to corporations, the decision of whether to include an insolvency exception to the voting requirement contained in Section 271 in their governance scheme. As a corporation is insolvent and failing, fast action often is required to preserve value and “stop the bleeding.” Requiring shareholder approval in addition to a board resolution to enter into an assignment for the benefit of creditors or other agreement for the sale, lease or exchange of all or substantially all of an insolvent and failing corporation’s assets may frustrate the corporation’s ability to avail itself of opportunities to maximize the value of its assets for the benefit of its creditors. Moreover, absent an insolvency exception, shareholders whose individual interests may not be aligned with the interests of the corporation and its creditors may withhold votes for self-serving reasons, potentially pushing the corporation into bankruptcy or an alternative restructure that is costly in terms of time and money and potentially risky in terms of achieving success. Since the Supreme Court merely determined that a common law insolvency exception to Section 271 does not exist and because Section 271 is a default provision, a corporation can include a carefully drafted insolvency exception into its certificate of incorporation, and it will have the advantage of a contractual insolvency exception despite the Supreme Court’s ruling. Incorporation of an insolvency exception to the voting requirement contained in Section 271 will eliminate the roadblocks that could arise from requiring majority shareholder approval of a transaction at a time when shareholders’ individual interests may diverge from the interests of the corporation and its creditors. Eliminating these roadblocks may afford a corporation the agility to take advantage of opportunities to maximize the value of its assets for the benefit of its creditors should it become insolvent and failing. However, corporations must be cautious when delegating such power to their board since the board may lack the skill set to unilaterally make such decisions, or directors may be hesitant to act without a shareholder vote, given their duties and the scrutiny they are under. Accordingly, if such power is delegated to a corporate board, the corporation must periodically scrutinize the composition of its board with this delegation in mind to ensure that board members are capable of understanding the corporation’s financial condition, evaluating the corporation’s options and making and acting upon independent, well-reasoned decisions that are in the best interest of the corporation in the event the corporation becomes insolvent and is failing. This should be done regularly before the corporation becomes insolvent and is failing and should be equally important to directors so that they can dutifully discharge their fiduciary obligations and shareholders so that the remaining value, if any, of their investment can be preserved. Finally, the Supreme Court’s decision may impact secured creditors. The Supreme Court noted the Court of Chancery’s analysis regarding the interplay between Sections 271 and 272 with seeming approval, and in its discussion of the historical development of Section 271, the Supreme Court stated: “Section 272 clarified that Section 271 does not apply to mortgages or pledges of corporate assets.” From this statement, it appears indisputable that Section 271 does not apply to the delivery by an insolvent corporation of collateral to a secured creditor. The Supreme Court, however, did not expressly rule upon this issue. Instead, it relied upon the Charter Voting Provision to conclude that the Omnibus Agreement, which operated to deliver collateral to the designee of Stream’s secured creditors, required a shareholder vote. Accordingly, it is possible there could be further litigation on this issue absent a clear and unambiguous provision in a corporation’s charter that the delivery of mortgaged or pledged corporate assets to a secured creditor does not require a shareholder vote. In summary, the Delaware Supreme Court’s ruling unequivocally establishes that under Delaware law, there is no common law insolvency exception to Section 271. This decision does not prevent corporations from including an insolvency exception to Section 271 in their certificate of incorporation, thus creating a contractual insolvency exception. Before including such a provision in its certificate of incorporation, a corporation should carefully consider whether it wishes to confer upon its board the right to dispose of all or substantially all of its assets without a shareholder vote. If it chooses to confer such a right on its board, it should regularly assess the composition of its board to be sure that the board is capable of properly exercising this right in the event the corporation becomes insolvent and failing. Additionally, at least until it is definitely settled that the voting requirement of Section 271 is inapplicable to the transfer of assets to a secured creditor, secured creditors would be wise to consider requesting an express provision in a corporate borrower’s certificate of incorporation that permits the board to sell, lease or exchange to the secured creditor its collateral without the necessity of a shareholder vote.

Neal Stephenson coined the term “metaverse” in his 1992 science fiction novel Snow Crash as a portmanteau of “meta” and “universe.” The term is generally understood to mean beyond the universe. Having started with online video games, the metaverse has become a virtual-reality space in which users can interact with a computer-generated environment and other users to socialize, play, entertain and work. It is an immersive network of multiple 3D virtual worlds facilitated by the use of virtual reality (VR), augmented reality (AR) and artificial intelligence (AI). Introduction The metaverse is the next big thing in business and technology. According to Bloomberg, the global metaverse market is projected to reach US$800 billion by 2024. Proposed applications for metaverse technology include improving work productivity, interactive learning environments, e-commerce, real estate and fashion. The economy of the metaverse operates using contracts based on blockchain, payments made through cryptocurrencies and digital assets like virtual products and non-fungible tokens (NFTs). Users create such assets (user-generated content or UGC), which can be bought, sold and traded. These assets include the intellectual property of their owners. Commercialization of IP has already started in the metaverse, and IP owners are presented with both opportunities and challenges. Patents The metaverse is enabled by many technological innovations that can be and are being patented. Among the innovations are optical devices such as VR goggles, wearable devices and image and video processing and generation technologies. The fragmented nature of the metaverse has generated interoperability requirements, protocols and standards and provided the opportunity to create and patent connectivity and networking technologies. There is not one single metaverse; rather, multiple interoperable metaverses exist. A user’s avatar can switch from one virtual world to another, visiting, for example, Roblox, where users can socialize and play games created by other users; The Sandbox, where users can interact, play, build and own 3D virtual worlds; Omniverse, where individuals and teams can build custom 3D pipelines and simulate large-scale virtual worlds; Decentraland where users can buy plots of land, customize and monetize them, and interact with other users; and HoloFair where users attend events, network, explore 3D environments and play. Patent offices around the world have seen an increase in metaverse-related patent applications. Consideration should be given both to protecting patentable developments and to ensuring that no third-party patents are infringed in the process of commercializing technologies. Another interesting development at the intersection of the metaverse and patents is the use of NFTs to represent patents in the metaverse. An NFT can capture and certify the ownership of the patent. Thus, the NFT could reduce or even eliminate the costs when recording assignments of patents at various patent offices around the world. The NFT could also be used to notify a potential infringer of the existence of a patent which is important for patent owners when establishing damages for patent infringement. IBM and IPwe have already collaborated to create the infrastructure for an NFT-based patent marketplace. One challenge for metaverse-related utility patents is that courts and patent offices have become less receptive to software patents. They sometimes hold that software as an implementation of an abstract idea is ineligible for patent protection. Design patents, which protect the ornamental features of utilitarian objects, have limited scope. Policing patent infringement in the metaverse also has practical difficulties. Software typically runs behind the scenes and proving infringement hinges upon a source code comparison. Thus, proof likely requires filing proceedings, obtaining disclosure and instructing experts. This process is expensive and time-consuming and risks the infringer simply rewriting the source code to avoid liability. Trade Secrets In light of the challenges faced by metaverse-related patents, businesses may prefer to protect their metaverse technology via trade secrets. Trade secrets protect information that is maintained as confidential through the implementation of reasonable measures, and that gives the owner a competitive advantage. The success of the metaverse hinges upon an understanding of both the physical world (a place, shop or product) and its users (their location, habits and interests). The metaverse can apply real-world features to a virtual environment, for example, enabling an avatar to visit digital versions of real-life places. Clearly, the operation of the metaverse will generate significant data. And AR/VR/AI technology will generate data of unparalleled granularity – not just measuring where a person clicks, but how they move. The data are extraordinarily valuable, and trade secrets may protect the data. Among the challenges of metaverse-related trade secrets are that trade secret protection is relatively narrow and that trade secret misappropriation is often difficult to prove. The good news is that if the requirements are met, trade secrets can last indefinitely (the Coca-Cola formula has been protected as a trade secret for well over a century). The bad news is that because technology shifts so rapidly, one questions whether any particular trade secret will have long-term relevance. Trademarks Digital items comprised more than a $10 billion market in 2021. According to TurnTo Networks, 9 out of 10 consumers report that UGC influences their purchasing decisions. The best way to protect a brand in the metaverse is to register as a trademark the name, logo, trade dress (both packaging and product design) and any phrase or slogan used to promote virtual products and services. Therefore, not surprisingly, companies are already creating branded digital items, such as virtual Gucci bags for Roblox avatars. Nike has delved into the metaverse by building “Nikeland” on Roblox, and users can purchase Nike outfits for their avatars. McDonald’s has filed applications to register trademarks for virtual restaurants offering home delivery, and Walmart has applied to register trademarks for financial services “for use by members on an online community via a global computer network.” Leveraging the metaverse has potentially significant advantages for brands, but reaching a wider audience comes with increased potential to infringe third-party rights as brands expand into new territories and new promotional services. Licensing terms should be reviewed to determine whether they cover metaverse plans and activities or whether an extension of coverage must be negotiated. Further, trademark owners have not been universally successful in preventing the infringing use of their trademarks in virtual worlds. The owner of the trademark HUMVEE was unable to prevent the use of its mark in Call of Duty games, for example, because the court determined that such use had “artistic relevance” and evoked “a sense of realism and lifelikeness” protected by the First Amendment. Still further, companies risk negative publicity and consumer backlash as trademark “bullies” if they are too aggressive in enforcing their trademarks. One alternative is to embed symbols of authenticity into digital goods to discourage counterfeits. Another alternative is to grant limited permissions for fan art and other UGC, such as allowing users to create works using brand IP but not for commercial use or financial benefit. Copyrights Copyright law protects original works of authorship, such as literary (books), dramatic (movies), musical (songs) and artistic (paintings) works. In the metaverse, copyright law usually applies to UGC, such as avatars, virtual buildings and digital artwork. Computer programs (source and object code) running the metaverse also may be copyright-protectable works. If a user creates something in the metaverse that is substantially similar to a copyrighted work in the real world, however, the user might infringe on the copyright. For example, if a user creates an avatar that is based on a copyrighted character, the owner of the copyright might file an infringement action. Copyrighted works are already being minted into NFTs, sometimes without the permission of the copyright owner. Broadly speaking, infringement of copyright in the metaverse should mirror infringement of copyright on the Internet. In most cases, virtual works can infringe on physical works, and vice versa, but complications arise in the metaverse. If a copyrighted work is created by a large number of metaverse users in different parts of the world and is constantly being developed, determining authorship and ownership of the copyright in that work at any given point in time is likely to be challenging. It also may be difficult to search metaverse platforms such as Decentraland and The Sandbox for copyright infringements. And, once found, infringing content cannot be deleted from the blockchain, so it is questionable how certain findings of infringement by a court can be enforced. Metaverse platforms may have takedown procedures that can assist enforcement efforts. Metaverse terms of use pose another challenge to the commercialization of any form of IP in the metaverse. Before using the metaverse platform operated by a provider, the user may be required to register an account and accept the terms of use offered by the platform provider on a non-negotiable basis. It is important to carefully review the terms before accepting them. Under Roblox’s terms of use, for example, a user who has generated new content on Roblox’s platform grants Roblox a worldwide, perpetual, royalty-free and irrevocable right and exclusive license to exploit that content without charges. This IP license may be broad enough to deprive the user of any right to exploit the content inside and outside of Roblox. Conclusion Although we remain a long way from the full potential of the metaverse, the time to consider IP in the metaverse is now. There is little doubt that the metaverse will present new challenges for IP law. IP law has historically shown itself to be adaptable to new technologies, however, even if it has often taken time to catch up and has not always been well-received by all stakeholders. IP law will no doubt adapt again to the evolving challenges of the metaverse. One thing is for certain: businesses that ignore IP in the metaverse risk being left behind.

The Securities and Exchange Commission (SEC or Commission) has brought its first crypto1 insider trading enforcement action2 involving nine digital coins available for trading on the Coinbase Global, Inc. (Coinbase) trading platform.3 Integral to the SEC’s insider trading allegation are its assertions that the nine digital coins trading on Coinbase are investment contracts that are securities. Below we provide a brief review of the case and discuss potential industry responses. Case Overview The SEC filed its civil action against Ishan Wahi (Ishan), a Coinbase employee, his brother, Nikhil Wahi (Nikhil) and a close friend, Sameer Ramani (Ramani), in the United States District Court for the Western District of Washington and charged the defendants with violating Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act). The complaint charges Ishan with misappropriating material, non-public information concerning the future listing of nine digital coins on the exchange in violation of his duty of trust and confidence to Coinbase and Nikhil and Ramani with purchasing those coins while in possession of information obtained in breach of Ishan’s duty to Coinbase. Simultaneously, the United States Department of Justice criminally indicted all three defendants in the United States District Court for the Southern District of New York for insider trading in violation of the federal wire fraud statute, but not the Exchange Act. The SEC’s Charges Can Only be Sustained if the Digital Coins are Securities The SEC alleges that Nikhil and Ramani traded in 25 digital coins listed on the Coinbase trading platform and that at least nine of them are investment contracts pursuant to SEC v. W.J. Howey Co., 328 US 293, 298-299 (1946) and, therefore, securities subject to the insider trading prohibitions of the federal securities laws. None of the nine coins are registered as securities with the SEC. The SEC alleges that these nine coins are securities because they are investments in a common enterprise in which the promotor promised to use the proceeds generated from the purchase of the coins to develop and maintain the networks that would give the coins value. According to the SEC’s theory, the initial coin value of each of the nine coins was the result of the managerial efforts of the coin issuers in developing and maintaining each individual network. Further, the coin issuers represented to investors that the coins would ultimately be available to trade on the secondary market, which would increase their liquidity and allow the value to appreciate. Potential Industry Responses As is often the case with “first in kind” enforcement actions, industry participants often find themselves asking, how does this action affect my business and should I be doing anything different? Industry participants who are concerned about the merits of the SEC’s enforcement efforts could seek to structure and disclose their way around existing Commission and SEC Staff statements and actions. However, such efforts in the area of digital assets have left most industry participants frustrated, given the perceived overreaching and lack of clarity by the Commission and its Staff in applying that guidance. For example, the SEC’s Coinbase complaint does not clarify how the nine coins the SEC deems securities differ from the remaining 16 coins that the defendants traded on Coinbase, much less how they differ from the 150 coins in total that are traded on Coinbase. Alternatively, industry participants can view the SEC’s enforcement efforts as incorrect readings of the law and follow the statutes and the Supreme Court’s case law interpreting those statutes as written. A recent example of this type of response is the response to the SEC’s enforcement action against Ripple Labs and two of its principals, alleging a violation of the registration provisions of the Securities Act of 1933 in connection with its digital coin XRP. That matter has neither resulted in a rush to the Commission to register digital coins as securities nor has it halted the trading of XRP or other digital assets. Industry participants can also continue with their current efforts to push for better guidance – not necessarily with the SEC – but with Congress and the courts. If, for example, the Coinbase civil action goes forward, there is an opportunity for court guidance on when a digital asset is a security. Will the Coinbase Civil Action Result in Useful Guidance? With respect to the SEC’s pending case, as a result of the parallel criminal proceeding, it is possible that the SEC’s case will be stayed pending the outcome of the criminal case. However, there are factors present here that mitigate against a stay: 1) the criminal case does not charge violations of the securities laws; 2) the matters are filed in different courts on opposite coasts and 3) the legal issue as to whether the nine coins are securities is significant, but does not impact the criminal case. These factors could cause a motivated trial judge to force the SEC’s case forward, potentially leading to case law on the security status of the nine coins at issue, with implications for the security status of digital assets in general. 1 We refer to digital assets in this alert as crypto, digital assets, digital coins or coins. 2 SEC v. Ishan Wahi, Nikhil Wahi and Sameer Ramani, Case 2:22-cv-01009 (Filed July 21, 2022). 3 Coinbase, headquartered in San Francisco, CA, is one of the largest crypto trading platforms in the United States. Its stock is registered with the Commission, and its shares are publicly traded on the NASDAQ. Coinbase’s trading platform is not registered with the SEC as a securities exchange, and neither Coinbase nor the trading platform are otherwise registered with the SEC.

ESG has graduated from a reference in the financial statements of major corporations to a barometer for the health and long-term prospects of any business valued by investors Understanding the growing importance of environmental, social and corporate governance (ESG) in the world of mergers and acquisitions requires looking no further than social media. Countless posts on these social platforms demonstrate society’s rising concerns around sustain- ability standards and corporate accountability. In fact, Elon Musk’s recent attempt to acquire Twitter is the perfect example of the reach that ESG has in today’s M&A market and the broader business world. Twitter is the most high-profile acquisition on the rocks right now. While the primary reason Musk has cited for backing away from the deal is his allegation that the social media platform is infected with bots that impact fake news and, ultimately, the company’s valuation, he has pointed to diversity concerns. “Musk has tweeted frequently about Twitter employing workers who are insufficiently diverse in embracing a wide variety of viewpoints and perspectives,” says Dr. Michael Kraten, an ESG expert and professor of accounting at Houston Baptist University. “Ironically, the lack of diversity that he mentions involves a lack of conservative and libertarian representation.” He suggests Musk’s concerns represent issues around the G in ESG. The components of ESG that are most in vogue are constantly shifting, but investors and companies alike have moved beyond viewing the standards as just another item to check off in the deal process to something that adds intrinsic value. Politics, ever-changing regulations and even the economic environment may color the way deals are evaluated at any given time. Still, the importance of ESG continues to grow, with the European Union leading the direction for where standards are heading. While countless metrics and organizations specializing in ESG due diligence have sprung up to meet rising demand, a major gap remains in the criteria used to rate ESG for major organizations and middle-market companies. As general partners and limited partners struggle to sift through the myriad components that comprise today’s ESG, one thing is clear: It isn’t going away and social pressures are proving to be the greatest driver of ESG adoption.

Effective Aug. 1, 2022, the Delaware General Corporation Law (DGCL) has been amended to include exculpation protections for corporate officers, as well as expanded flexibility in connection with the delegation of authority to corporate officers and others with respect to the granting of stock options and other rights to acquire stock. The amendments are part of a growing trend within the DGCL to empower corporate officers with more flexibility and control with respect to employee equity award programs and provide additional protection for corporate officers against certain types of stockholder litigation. Expanded Exculpation Protections for Corporate Officers Historically, directors have benefited from protections in the DGCL, which provide that a corporation’s charter can eliminate or limit such directors’ personal liability for monetary damages arising from breaches of the fiduciary duty of care.1 However, the DGCL did not authorize similar exculpation of corporate officers. As a result, corporate officers have increasingly become the target of stockholder litigation based upon breach of fiduciary duties. As of Aug. 1, 2022, it will be possible for Delaware corporations to adopt charter provisions that provide for similar exculpation protection for certain corporate officers subject to various limitations as described below. Newly formed corporations will be able to include exculpatory provisions for covered corporate officers in their original certificate of incorporation, similar to the current practice of including such provisions with respect to directors. For an existing corporation to benefit from the exculpation protections, it will require board and generally stockholder approval to amend the company’s certificate of incorporation. The protections provided under the adopted amendments are limited and only protect corporate officers from direct claims by stockholders. Unlike the provision for directors, the amendments do not permit exculpation from derivative claims brought by, or in the right of, the corporation. This means corporate officers are still subject to personal liability for monetary damages arising out of breach of fiduciary duty claims brought by the corporation or a derivative suit brought by stockholders. Similar to the exculpation provisions applicable to corporate directors, corporate officers also remain subject to personal liability for breaches of the fiduciary duty of loyalty, as well as for acts or omissions not in good faith, which involve intentional misconduct or knowing violation of law or involving receipt of an improper personal benefit. The exculpation protections provided under the newly amended DGCL are only applicable to certain corporate officers. The amendments limit applicability to only those officers who have consented to service of process under Delaware’s long-arm statute (as described in 10 Del. C. § 3114(b)), as well as a corporation’s president, CEO, CFO, COO, chief legal officer, controller, treasurer, chief accounting officer and other named executives in SEC filings. Despite the availability of this expanded protection, boards and stockholders will need to carefully consider the implications of exculpating corporate officers from monetary damages arising out of the duty of care before adopting a charter amendment. While such provisions may provide protection from certain stockholder litigation, the duty of care is a very important protection for stockholders requiring that officers and directors exercise business judgment in good faith and in a reasonably prudent manner when acting on behalf of the corporation in a manner that they believe is in the best interests of the corporation and its stockholders. When Sec. 102(b)(7) was originally added to the DGCL, it was in response to a 1985 Delaware Supreme Court decision that held directors of a Delaware corporation liable for a multi-million dollar damage award for violating the duty of care in connection with the approval of a merger hastily without considering all of the relevant material information. As a result, there was concern that qualified individuals would be unwilling to serve as directors of Delaware corporations, making it impossible to find independent directors and that D&O premiums would skyrocket. The same considerations do not necessarily apply to officers, although corporations routinely extend indemnification protection to the extent permitted by law to the most senior officers. Of course, the same D&O implications apply in the case of officers as stockholder litigation proliferates. Delegation of Authority to Grant Stock Options and other Rights to Acquire Stock The Aug. 1, 2022, amendments to the DGCL provide for the delegation to corporate officers of expanded rights with respect to the grant and modification of stock options and other grants of rights to acquire stock. The amendments permit a board of directors to delegate authority to an officer to issue stock2, sell treasury shares3 and issue rights or options to acquire stock.4The changes are part of a trend within recent amendments to the DGCL which have increasingly permitted boards and board committees to delegate authority to officers with respect to the issuance of stock outright, subject to certain limiting parameters set by the board. Previously, boards had broad rights to delegate authority to officers to issue stock in the company, but this broad delegation authority did not extend to stock options and other rights to acquire stock which were limited. In particular, a board could delegate authority to officers to select the other officers or employees who would receive grants of stock options and the size of their awards so long as the board or board committee set a numerical “ceiling” within which such grants could be made and approved the terms of the awards. These recent changes now enhance the delegated authority by expanding the group of potential recipients of such grants to others besides corporate officers and employees and providing the ability to vary the terms of the grants. However, the amendments prohibit any delegated person or entity from issuance of stock, options or rights to themselves. The amendments also permit the issuance of rights or options in book entry or electronic form. These changes should provide corporations with increased flexibility in designing or amending equity award programs. Importantly, any corporate instrument authorizing such a delegation to a corporate officer must contain language which sets parameters for the limit of an officer’s authority. Specifically, the instrument delegating such authority to the officer must specify: (1) the maximum number of shares, rights or options that can be granted; (2) the time period during which the issuance of shares, rights or options may take place and (3) the minimum amount of consideration to be received for the issuance of shares, rights or options. Any provision in a corporate resolution delegating authority with respect to the grant of stock options or other rights to acquire equity may be made dependent on facts ascertainable outside the resolution, provided the manner in which such facts shall operate is clearly and expressly set forth in such resolution.5 Other Amendments While the above are the most noteworthy of the recent amendments, the amendments also lowered the stockholder approval threshold required to convert a Delaware corporation to a foreign corporation or any other entity from unanimous approval to majority approval. Because stockholder approval of conversion no longer must be unanimous, non-consenting stockholders will now have appraisal rights in connection with a conversion.6 This amendment aligns the authorization requirements for conversion of a Delaware corporation with that for other fundamental transactions such as mergers. It is worth noting that the amendments also state that for existing corporations formed before Aug. 1, 2022, and in any applicable voting agreement relating to mergers and other similar transactions in effect before Aug. 1, 2022, those provisions will automatically be deemed to apply to conversions unless expressly provided otherwise. Therefore, corporations should consider reviewing and amending their existing governing documents (and stockholder agreements) if they do not want these provisions to apply automatically to conversions. Somewhat inconsistently, for newly formed corporations after Aug. 1, 2022, conversions will not automatically be deemed to be included in provisions relating to mergers and similar significant transactions, and conversions must be separately addressed in the certificate of incorporation and other documents impacting stockholder voting.7 Further, certain changes were made to the appraisal statute, including an amendment8 that allows a beneficial owner of stock to demand appraisal directly instead of relying on the record holder and eliminating appraisal rights in a merger, consolidation or conversion authorized by a plan of domestication under Section 388. There were also several other administrative amendments to the statute, including changes to the requirements regarding the availability of stockholder lists for examination at meetings and notices of adjournments of meetings which may require review and amendment of a corporation’s bylaws in order to implement. Conclusion All of the above changes should be considered by both those newly forming Delaware corporations as well as existing corporations who may want to review their certificates of incorporation and bylaws in light of the changes. If a public corporation is considering any such changes based on the recent amendments, it should also consider whether any changes need to be made to any SEC filings that may describe matters such as exculpation or indemnification of officers. The changes relating to delegation of authority should also prompt a review of existing equity plans and practices, keeping in mind that equity compensation is also subject to other statutory limitations, including tax considerations. ___________ 1 See 8 Del. C. § 102(b)(7) (expanding exculpation protections to senior officers). 2 See 8 Del. C. § 152. 3 See 8 Del. C. § 153. 4 See 8 Del. C. § 157. 5 See 8 Del. C. § 157(d). 6 See 8 Del. C. § 262. 7 See 8 Del. C. § 266. 8 See 8 Del. C. § 262.