Delaware Is Scared of Texas– or rather its Corporate Law

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You have likely noted that Elon Musk, and many other CEOs, have been moving their corporate registration to Texas, which has shall we say more management-friendly laws than Delaware.  What you likely did not know is that 20% of Delaware’s state budget is covered by corporate fees.

The Delaware Senate has just passed and sent to the House  an amendment to the Delaware general corporate statute giving more power to management, tracking Texas law.  The thrust of the law, which passed the House unanimously, was two-fold: first, to permit control persons (directors, officers, majority shareholders) to enter into transactions wherein they have a personal interest if endorsed by either, not both, of the independent directors or stockholders; second, to limit the right of stockholders to access corporate records.

One part of the proposed changes did NOT pass: restricting legal fees for lawyers representing disgruntled shareholders upset by management or control stockholder safe-dealing.  So for those companies staying in Delaware, they still will be policed by the so-called “plaintiff’s bar.”

I will update if, as and when these new proposals become law.

Federal Guidance to Universities and Public Schools re DEI

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It is no secret that the current Administration is attempting to dismantle DEI initiatives.  It is also to be noted that the 2023 Supreme Court case involving Harvard made clear that Federal funding was at risk for DEI-adherent institutions, and that on January 21 of this year the President issued an executive order demanding “merit-based opportunity.”  The US Attorney General also has stated the the US Department of Justice was urging “the private sector to end discrimination and preferences.”  And indeed the business news has documented numerous private sector businesses retreating from DEI initiatives.

On February 14, the Department of Education issued a non -binding letter proposing guidance to all educational institutions receiving Federal money.  Such guidance is an indication of how the US Government is going to act in withholding funds, however. Those funds assist many Universities and Colleges, fund basic research and assist just about all public school systems down to kindergarten.

In what areas are DEI initiatives illegal today?  Admissions, hiring, promotion, compensation, financial aid, scholarship, discipline, housing, graduation–everything that happens on a campus or in a school.

What are the steps to be taken per the February 14 guidance–what should all affected schools do?

  1. Revise all relevant policies.
  2. Cease efforts to circumvent race reliance by indirect means (literally read, this would ban geographical models, models to diversify admissions for educational purposes, just about anything that has the effect of skewing treatment beyond pro rata treatment of identifiable groups).
  3. Stop using third party contractors to circumvent the ban on what a school cannot do directly.

What’s next?  In terms of government enforcement, the handwriting is on the wall.  There also is pending litigation concerning the constitutionality of the February 14 guidance, as to which I offer no prediction, particularly since the results in controversial litigation theses days seems so dependent on the disposition of the judges in the court in which a case is being heard (that of itself a very unsettling development leading to forum shopping and inconsistent rulings).

CTA Filings Re-re-Visited

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Since my most recent post on February 20 concerning CTA, the Feds have issued two more announcements, described below.  The chaos in this Administration, and the confusion it breeds both here at the law office end and without question among clients, is enormous.  And many of you have made your CTA filings, or incurred legal fees in starting the work.

On February 27 FinCEN (the Federal agency administering the CTA filings required for most US businesses which are not very large) announced that no fines would be levied even if filings were not made by the then-deadline of March 21; and there also was a promise of new regulations to prioritize filings only in cases of significant law enforcement or national security risks.  At that point, wise counsel was to be ready to file as there was no clear guidance as to what was covered and who would in fact be exempted or at least given a free pass.

Then on Sunday March 2 it was announced that even after the new rules take effect there will be no fines or penalties!  Sort of incredible, why would anyone file?  Further the intent is to limit the filings only to “foreign reporting companies.”  Putting aside why even these companies would file if there is no consequence to not filing, it is not clear at least to me  how to understand “foreign reporting company”– does that mean only foreign companies with a location in the US or does it include subsidiaries owned offshore?  English language literally would cover only the former, but I refuse to offer a view (nothing in these posts is legal advice, but I would not even offer a thought) as to what is meant.

The cost to American business by original CTA rules was in some cases significant.  To some of our clients with many US-based subsidiares owned or controlled directly or indirectly overseas, the cost has been greater.  What  overseas business people think of our government must be “interesting” although US businesses seeing the changing general landscape probably are immune to being surprised by anything.

More later if there is a later….

I REPEAT: ABOVE IS ACKNOWLEDGED AS UNCLEAR FROM MY END AND IS NOT LEGAL ADVICE IN SPADES!

CTA Filing Requirement Returns

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Yesterday the Federal Government reinstated the obligation for most US companies regardless of form (Corporation, LLC, certain Trusts) to file a detailed report of ownership, control and rights to benefit. For those who have not yet filed in hopes that the obligation would be voided by courts or the new Administration, it seems that the new deadline is in effect and for most companies in existence at the start of this year the filing deadline is now March 21.

Some entities in specific categories had been given a later filing date; if you had such a later date you would in fact be aware of that, and note that the later filing date still does apply to you.

In the future, a re-visitation of requirements for certain smaller US companies, to lighten filing burdens, is promised, BUT it seems that will not happen before your March 21 deadline.

There is detailed guidance on my firm’s website under Alerts: http://www.duanemorris.com/alerts

The Economy

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First, apologies for not posting for a while but have been traveling and also working on my publishing; most recent book of poetry, Unrequited Evils, is now available at Amazon books and as always I am appreciative for your support in purchasing and posting a review.  ‘nuf said.

The economy is one of the dominant themes in the news, both generally and perhaps more so today given governmental moves that will impact business (and law) significantly; there is much to touch upon while wholly avoiding politically partisan observations.

Uncertainty has not to this date restrained the stock market, but an early look at my practice indicates no significant uptick in M&A notwithstanding the alleged presence of lots of “dry powder” (I have three client businesses for sale sitting on my desk without clear traction at this very writing).  The legal press recently noted an increase in “down rounds” in VC investments.  It seems clear that turmoil in the medical marketplace is making medtech investment move more slowly.  It may be that the unclear impact, and US governmental view, of  AI also is creating confusion — see my firm’s February 12 “Alerts” post on US government guidance on US of AI in medtech at http://www.duanemorris.com

I also want to give a shout-out to two recent monthly posts by a consulting firm, Capital Restoration.  (Disclosure: a principal in that firm is a personal friend and former client)  Their micro-analyses of current statistics offer a somewhat cautionary look at where the economy is going (which of course impacts your and my business and personal interests). Their advice suggests the following:

*Inflation is back and not at this point do they cite tariffs.  January CPI up .5% (that’s 6% annualized).

*Purchasing is down: retail sales, including in January where typically consumers spend for clearance items; auto sales (down 3%!); e-commerce down almost 2%.  Some of this may be fire-related or weather-related, but one might expect e-commerce to thrive.

*Drastic reductions in Federal spending, triggering lay-offs which of course create unemployment  (citing government agencies, NGOs, hospitals, auditing firms, major tech firms (Meta, Microsoft), airlines, financial services firms)

*Federal budget deficit of $36 Trillion (annual interest cost of $1.4 Trillion) with personal income tax revenue of $2.4 Trillion (and I personally note Trump’s stated intent to extend his income tax cuts) is problematic (quoting Capital Restoration, “the numbers simply do not add up”).

Now this commentary does not address any possible good news arising from the new Administration’s policies (tariffs are protective of American business and the government is very pro-business, etc.).  But unbundling what is happening to arrive at a rational projection for the economy strikes me as not possible as of this moment, and I can offer no clues based on what I see coming across my personal desk.

CTA Injunction

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As just about everyone is aware, Federal law requires filing for many companies a report setting forth the ownership and control of these companies. This is a requirement generally referred to as “CTA.” For entities existing before 2024, the deadline is December 31.  For entities formed during 2024, the report is due within 90 days of formation.

Below is my current reaction relative to the efforts of a US District Court in Texas to create a nationwide ban on the requirement to comply with this law. [Note that many companies are subject to this requirement but also many are not– you must seek counsel from your legal advisers in this regard.]

A  Federal District Court in Texas has issued an injunction to prevent the CTA registration requirement from taking effect.   Since this injunction may be overturned, modified, or limited in geographical scope, for now all companies subject to the filing requirement (which is due as of this writing on December 31 for older companies and within 90 days of formation for 2024-formed companies) should seek legal guidance as to whether they should continue in ordinary course to prepare this filing (if not already completed).  I note in passing that the Federal Courts in the District encompassing Texas are notoriously conservative; that may explain the injunction but at this point the injunction is in effect at the National level.

It is possible that the filing deadline will be extended given this development; it is possible that the injunction will be over-turned and that the original deadline will be in effect; it is possible that a senior Federal court or the incoming administration will alter, defer or overturn the whole program.  What will happen is unclear.  As the deadline approaches all companies subject to this filing who have yet to file must determine how to respond until clarity is provided to all of us, hopefully in a matter of days.

As with all posts, nothing on this site constitutes legal advice to any recipient.  All recipients should consult with their own legal counsel or advisers with respect to next steps.  Posts to this site are informational only and readers cannot rely upon any posted matter as legal advice provided to you.  Readers are warned that the CTA requirements are complex and that consultation with your legal advisers is recommended.

Election/What Companies and Boards Should Do

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This seventh and final post addresses issues for corporate boards, in light of issues raised at the November 20 NACD–New England  program discussing the impact of the election on business. Fo

Are you a winner or a loser? The panel suggested that certain companies will do well, and others not so well, in the new economy.  Clearly AI is destined to be of intense interest and AI-related companies should be able to have an easier time raising capital (something I observe in my own practice).  Bitcoin’s hour has arrived, for good or ill.  Independent media has come into its own (outside press coverage separately have noted that during the election the non-mainstream digital press was the active venue for effective communication).    Tech and banks should do well absent intense regulation.  If interest rates do get lower, and if immigration does not create labor gaps, retail big box and companies which provide what is purchased in CapX expenditures should thrive.

Losers: mainstream media, with a special vulnerability for META. Perhaps some climate-related enterprises although look to see if they are active in Red States; and note that during Trump-1 there was a spurt of interest in clean energy tech.; if China and its big lead in solar and that impact on AI gets in the Trump cross-hairs, it is possible that solar will become a hot area in spite of the benefit no doubt to be enjoyed for the fossil fuel sectors.

Boards will be faced with volatility risk due to what is likely to be a different and much less regulated economy; how that falls out is unclear in general, and if the new economy gets too far afield that may bespeak a need for caution.

As for ESG, the phrase itself is past its shelf life.  The environmental part has been previously covered, and the progress  made in corporate governance responsibility is likely to be untouched. The “social” part covers very many topics and social trends in business are not likely to be altered, although stripped of elements of “woke-ness.”  My observation is that young workforces in corporate America are not going to change their focus on social justice factors.

The panel had consensus on one thing: it will be very difficult to manage a “global” company, based on the economic and political uncertainty that the new administration will bring.  And even wholly on-shore companies will need to look at supply chains given tariff and geopolitical  risks (in this regard, the panel characterized future relationships with Mexico as complex but not likely to incur major alteration). Planning also is compounded by our prior discussion of China, its real agenda and its approach to Taiwan. “America first will be tested from day one” as to China, the Middle East and Ukraine; businesses touching those areas, as so many are,  will need to keep close watch.  My personal takeaway: big bold bets may not be the wisest business move. Finally, it was noted that Apple would be at greatest risk given the international lack of clarity–perhaps due to its present significant presence in China.

The panel also addressed the practice of companies to take public positions on social, political and international issues. Given the new administration the obvious comment was made that boards are best advised to look closely before a company or its CEO takes a public position on any matter; it was suggested that saying nothing about any issue is wisest, although pressure from younger staff in certain types of companies will likely remain constant.  This entire part of the program reminded me of a line from the movie Casablanca about the fact that now “the winds are blowing from Vichy.”

And to carry the movie reference forward as I conclude:  “Th–th–that’s all, folks!”

Election /International/Business

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This is the sixth post discussing content from a program mounted by NACD New England, exploring the business ramifications of the recent Presidential election.  International business is affected by Federal policy and of course by war and international tensions, and the United States also is engaged in a world-wide high-stakes sparring match with China that affects both business and peace.

The immediately prior post concerning the US-China battle over AI supremacy addressed part of this issue, the need for AI supremacy to maintain business supremacy.  But there is more to the Chinese story.

China’s diplomatic efforts to achieve traction in the Mediterranean,  South America, Asia generally and India in particular, is a direct challenge to US interests.  But an important unknown is whether China will move against Taiwan and its premier chip manufacturing facility, a move that seems to be more likely.  What underlies this likelihood?

China today is suffering under numerous internal pressures.  Local governments and banks are in deep trouble due to debt from the housing crisis.  We were told that 64,000,000 housing units were unoccupied, a number that seems almost impossible to understand.  The government admits that 18% of younger Chinese are unemployed, and the panel thinks the real percentage is at or above 25%.  Families are not having children. Women are not even marrying.  Riots and killings have broken out, reportage is not permitted to reach the press, but,theseare signs of social unrest.  The panel believes that Xi is under very great pressure and some risk, internally. This alone may make a war with Taiwan more possible, diverting attention and creating a rallying nexus.  In this context, recent activity in the Straits and the South China Sea takes on more ominous context.  The impact of a Chinese take-over of Taiwan on US business and AI prospects would be significant.

The prior post also noted that AI demands for power should affect US policy towards energy-rich Canada.

There was passing mention of relations with Mexico, without substantive analysis except to say that no major changes were anticipated. [SH note: what if deportees are dumped into Mexico?]

The panel noted that the war in Ukraine very likely would be brought to an end with surrender of land to Putin under the new administration, Trump having the geopolitical views he has expressed and his aversion to being involved with wars abroad or financing them.  The same may well be applied to the Middle East, more pressure to settle.  It was thought that Trump might well have leverage to apply in favor of the Abraham Accords, ability to pressure Saudi Arabia to recognize Israeli existence as part of a peace deal, and greater leverage with the Israeli government.

The panel seemed to treat political alliances and initiatives as integral to ultimate business dealings, and pointed out the major efforts of China to court the third world and particularly India which could in the long run prove to be a major market and substantive player.  The Belt and Road economic initiative also had opened up Chinese business and influence in new markets that the US business fails to reach. In this sense, the panel seemed to assume that political progress made by China was synergistic with business initiatives and that in some sense markets were getting closed to US business in the long run, markets that would be greatly expanding.

Further, to the extent global thinking contemplated the US courting India as a counter-weight to China, the combination of Chinese inroads and proximity might be taking that thought off the table.

Finally, Europe by history has been and remains important to US business and trade. How will Trump deal with new leadership emerging in Italy, France and Germany?  What attention will he pay to Britain, which itself is on a downward path?  If the new administration turns on NATO, or walks away again from the Paris Accords, will American trade with Europe deteriorate?  All of the EU is in a slow growth mode, not gaining population, reliant on Russian fossil fuels.  The panel seemed concern about US relationships in Europe, but expressed the view that things might stabilize if NATO was “stable enough,” an undefined metric.

The last post will discuss the posture that American boards of directors, and thus the companies they lead, might adopt in light of the change of administration.

Election/AI/Business Impact

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AI permeated many aspects of the panel presentation at NACD, and this fifth post pulls together numerous different strands.

First there was the assertion that AI would so drive innovation that in the next decade almost all diseases could be cured, including a serum for cancer.

Second, AI was framed as essential to the US position in world business and in world politics, as it was viewed by all as the most important overall business driver in the future.  In this context, there was almost no discussion of AI risk or the need to control its development or use; it seemed to this observer that the panel just assumed that in fact it was going to be full speed ahead.

Third, the panel viewed the world’s brightest business future as being shared between the only two superpowers and thus the only two countries that entered into this discussion: the United States and China.  And the US was perceived as ahead but in a great trouble for the future.  China is allegedly each your graduating twice as many PhDs in AI than the US, and that if China surpasses the US in AI it will become ascendant in both business and in world power politics.  This risk is compounded by the fact that Taiwan is the key source of chips and China is seen as quite likely invading Taiwan (SH note: press reports that Trump has said the US cannot support a military response in that event).  See the next (sixth) post in this series, discussing international issues, with the panel’s view of what the internal drivers of China have become.

Fourth, at one point the panel agreed that to drive US business there is a need to provide essentials to the international community of emerging and/or growing nations.  Essentials are food, medicine, energy and computational power.  If one accepts the shopping list  and accepts that providing that list to growing Asia, Africa, South America, the Caribbean and India will be key to economic success, then ascendency in AI becomes a major factor in being able to serve these markets.

Last point is about data centers, which took long discussion.  AI is developed and run on data centers which must run 24-7 and burn huge amounts of power.  China has a lead in power given particularly its growth in solar power tech and its physical location stretching across a sunny band of Earth, and its current alleged lead in clean-tech generally. If the US is to compete, it needs power.  We do not have enough, but Canada has almost limitless power.  It was stated that, notwithstanding current tensions with Trudeau, the new administration and its cadre of tech advisers need to woo  Canada to ship the power South to the US, and both countries need to be in the business of building more power transmission lines and capacity.

Election/Medical/Bio/Health/Business Impact

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This is fourth post of a series concerning impact of the elections on US business, based on a program presented by the NACD’s New England Chapter.

Discussion started with the proposed Cabinet appointment of Kennedy, which was observed as obviously controversial and that confirmation was not assured but seemed likely; mention that, like Trump and Musk, Kennedy is a potential major disrupter (SH notes: as of the drafting of this post, word just came across the internet that the Gaetz appointment was withdrawn; and today’s press noted growing pressure against Kennedy confirmation; the panel was prescient about the power of the stock market as it was noted that the market was climbing steadily but as soon as Gaetz was proposed “the market fluttered” and the day after the panel program he has withdrawn).

Concern was expressed as to level of government financing for bio, pharma and all med-tech at the company and research hospital levels.  This fear seemed contrary to the general consensus that: this administration would be very pro-tech and pro science; the new administration is pro-business and will create an environment for VC/private capital which in turn often ends up in health care deals; profits must be kept high in med-tech because you need very expensive long-term research approved by the FDA and some projects will fail, so it is important to assure sources of finance to this sector.  This latter point feeds into the optimistic and startling prediction made by one panelist that: humankind now is entering the apex period of scientific progress which will in fact reconstruct all society by 2035 including the development thru AI of cures for all diseases including serums for cancer.

This led to a discussion of the appointment of Dr. Oz to run Medicare/Medicaid. He was evaluated as follows (without express reference to press concerns as to his prior therapeutic endorsements): he is a surgeon, he knows the issues, but there are “no guarantees.”

There was much discussion of a crisis in the support of the ailing and elderly.  At present longevity models the social security system is in danger, and if the prophesy is true that AI will drive great progress in longevity by curing everything up to and including cancer, then the costs of Medicare/Medicaid are going to grow due to new expensive treatments and enhanced longevity itself.