Data and analytics company LexisNexis, a division of RELX, has embraced the rule of law as central to its corporate mission. According to its website, its business “is driven by the mission to advance the rule of law around the world, which is vital for building peace and prosperity in society.” In 2019, the company established the LexisNexis Rule of Law Foundation to coordinate its rule of law work. Leading these efforts has been Ian McDougall, president of the LexisNexis Rule of Law Foundation and former LexisNexis general counsel, who is also a member of the World Justice Project (WJP) Rule of Law Leadership Council. WJP Executive Director Elizabeth Andersen caught up with Ian recently to learn more about LexisNexis’s commitment to the rule of law. An edited transcript of their conversation follows. 

Elizabeth Andersen: Tell me the origin story of the LexisNexis Rule of Law Foundation. How did LexisNexis come to prioritize the rule of law?

Ian McDougall: When LexisNexis Chief Executive Officer Mike Walsh appointed me as general counsel twelve years ago, he asked me to think about the company’s good work on various volunteer projects in over one hundred countries and consider how that work could be organized under a coherent theme that the company could unite behind. It seemed to me that all of these projects were related in one way or another to the rule of law, so that became our theme. 

As a first step, we, like WJP, had to decide what we mean by the rule of law. Our approach was to undertake historical research about how this idea had developed in different parts of the world. We wanted to get the world—through history—to tell us what the rule of law meant, rather than the other way around. The common themes that emerged make up the four pillars of the rule of law that we use: equality before the law, an independent judiciary, access to the law, and access to remedy.

We were careful to be as nonpolitical as possible and to avoid difficult language and topics, so we talk about access to remedy, rather than “justice,” because we are avoiding very interesting but sometimes philosophical debates that can sidetrack us. We don’t include, for example, “human rights” or “democracy” in our definition, because these are, as far as we are concerned, outcomes that depend on the rule of law as we define it. This approach means that I can go to meetings with Chinese officials and to meetings with U.S. senators and make exactly the same speech. This nonpolitical approach is also important to making this something that the business community can get behind. 

You’ve been a real advocate for businesses taking up the rule of law cause. How do you make the case? 

Well, you have to talk to business in the language of business. That means saying or proving things like: When the rule of law is stronger, per capita GDP is stronger. You have a bigger marketplace and more opportunity to sell your goods. When the rule of law is stronger, you can protect the investment that you’re making in that country. 

Using these as avenues to interest the business community—to be able to say quite openly, this is not only the right thing to do, but it’s in your naked self-interest to do it right. You want to operate in this country; how do you do that when there is no facility to protect your investment or protect your intellectual property or do any of these basic things that mean that you have half a chance of getting a return on your investment? The answer is you need to get involved with us in advancing the rule of law, because that gives you the foundation for business investment. 

How does LexisNexis advance the rule of law, and what do you recommend to other businesses interested in advancing this cause? 

We do it by a very simple strategy of two points. First, deploy your core skills. In other words, take what you’re already good at and deploy that capacity to advance one or more of the four pillars of the rule of law. Second, work with partners who can bring something to the table. That’s where the Foundation comes in. It has served as a focal point for us to organize our capacity to contribute to the rule of law and as a vehicle for building key partnerships. 

And how does that work in practice? Give us some concrete examples of assets that LexisNexis has deployed in this work. 

We are a legal publisher, so quite naturally, we have helped countries to create the consolidated laws of their country. Sometimes in post-conflict situations, a country’s been destroyed, and there is hardly any record of what laws were in place before. We’ve had editorial teams go to the country, do research, see what exists, see where the gaps are, and then help the country to draft laws that fill the gaps in what they have or don’t have. They produce a consolidated set of laws.

We have also done judge training, helping judges understand how to operate in a rule of law context, to be thinking about the underlying principles they ought to be advancing in their judgments.

An important thing for the legal community is not to think too narrowly about the skill sets you have. Whenever you talk to a group of lawyers, the first thing they talk about is pro bono legal advice. There is so much more that can be done by people with legal education than that, important though it is. I’ve mentioned editorial work and teaching, there’s also project management—these kinds of skills can be deployed. When I say core skills, I don’t want people to think too narrowly, that a lawyer’s only core skill is to give free legal advice. It’s much, much wider than that; a huge range of activity can be done. 

As an example, LexisNexis has produced a coloring book for young children, explaining the “ABCs” of the rule of law. Each page of the coloring book has a little statement about the importance of the rule of law that relates to the picture to be colored. We’ve just received a request for ten thousand of these coloring books to be distributed to schools in Uganda. It’s an example of someone at LexisNexis thinking in a legal frame of mind but deploying another skill that they had—in this case, artistic ability. 

I helped found the UN Committee on Business for the Rule of Law. One of the things we created was a toolkit with some examples of what companies have done. There was a motorbike company, for example. How can a motorbike company advance the rule of law? They found a project where pro bono legal advice was being given, but it was hard for their partners to reach difficult-to-get-to places. They donated their motorbikes to enable lawyers to get to remote villages to deliver legal advice. There are all kinds of ways that businesses can think about contributing. 

And is it only the lawyers at LexisNexis, or are others in the business active in this work? 

Everyone can get involved. We have something called a project board. When a rule of law idea comes up, they post to the project board what jobs they need and appeal for people to join the project and volunteer their time. It’s important to remember that when we’re talking about the core skills of an especially large organization, that involves a large range: accounting, project management, and management generally, to name just a few. 

What are the potential pitfalls that a business might contemplate if they were to follow your lead, and how would you recommend navigating them? 

If you want to advance the rule of law around the world, you may have to try to engage with places that most people are trying to avoid. You’re trying to do things that are basically nation building, and sometimes you are going to have to speak to people who are not nice. It sounds like a risky thing to do, until you get a reputation that helps people understand what you’re doing. That’s the advantage of working through an organization like the LexisNexis Rule of Law Foundation, because then the motivations behind what you’re doing become obvious.

What do you say to the business leader who is concerned that engaging on rule of law issues might harm their business relations, cause political risk, or otherwise disadvantage them? 

We have to remember that there are many places around the world where it is just impractical for an individual, whether that be an individual company or an individual person, to take action. That’s why you have to work in a collective way, through organizations or associations. By working through an organization, you can start to make this an issue. Once it becomes an issue, then people start talking about it. Once people start talking about it, then you’re starting to move opinion and you’re starting to create the environment for action. 

Is there a project of the foundation of which you are most proud? 

One that we often cite is the Eyewitness to Atrocities app, which is a collaboration with the International Bar Association (IBA). The International Criminal Court noted that there are many bits of video information around the world online that show bad things happening that they can’t use as evidence because they’re not verified. The app was created to location stamp, time stamp, and encrypt video information about war crimes and crimes against humanity so that it would be admissible to a court. When the user does that, it gets sent to a Lexis server like a secure vault, which is then held for review by an appointed panel of IBA human rights lawyers. If the user’s phone happened to be confiscated, there’s no data left on the phone that the eyewitness app was ever used. 

It became a flagship for us because very soon after it was launched, it was used in support of successful International Criminal Court prosecutions of two people from the Democratic Republic of the Congo for crimes against humanity and war crimes. We know it works. 

That is an example of us advancing one of the four pillars of the rule of law (access to remedy, in this particular case), deploying our core skills (in this case, technology), and working with a partner (the IBA), in order to deliver a successful rule of law project.

How has the rule of law work benefited your company? 

Recruitment, retention, and morale go through the roof when people are a part of these projects. People want to join the company because it has this mission at its core. We know of technologists who could join the other big technology companies and choose to join us because they want to be involved in things like this. Whenever we do employee surveys and test the temperature of employee morale, top of the list every time is the rule of law stuff.

When I was recruiting lawyers to my legal team fifteen years ago, the questions they would ask at the end of the interview were: Is there a bonus? How much holiday do I get, and does this come with a health scheme or pension? Now the question I get asked is how to get involved in rule of law projects. It’s totally transformed the conversation in recruitment. 

One last question: Is there anything about the way in which this work has played out that has surprised you? 

I think one surprise for me has been the degree of enthusiasm that this work generates. It’s tremendous to see the impact that it has had on the people involved in the projects. It really is wonderful to see, and also it’s given us as the company the opportunity to be involved in some amazing experiences.

“Tapping Core Business Skills to Advance the Rule of Law: A Conversation with LexisNexis Rule of Law Foundation President Ian McDougall” is part of a series on the rule of law and its importance for business lawyers created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

APPENDIX A

Issues for Lawyers to Consider in Legal Technology Agreements

Legal technology agreements are not always abundantly clear, but consider addressing the following issues:

1. Three types of data – original, derived and usage data
2. How this data can be used, other than for the benefit of the system
3. What “access rights” non-lawyers have
4. What can the software provider aggregate and extrapolate from the data, and specifically, in instances where a law firm is uploading data into an AI system, confirmation that either the data will only be used to train models for the law firm’s use or the data will not be used for training at all
5. How data is being delivered between the parties
6. Where it is being stored to inform compliance with sovereignty requirements and data residency requirements?
7. Specify how data can be stored for each of your different regions and then the global framework
8. How does the user access the data across different regions without pulling data inadvertently from one location to other privacy policies and other protocols?
9. How does the information get into the system?
10. Storage requirements
11. Data retention requirements
12. Removal requirements and controls
13. Control of data the lawyer inputs
14. Control of new data and right to remove (complicated by cloud technology from different providers), and as implicated by GDPR
15. Specific provisions regarding how data can be used, what derivative works can be created, what sort of aggregated de identified data can be leveraged in any sorts of contracts
16. If the agreement is silent, assume this information can be used in different way
17. “Derivative Works” provision, critical because part of the benefit of the solution is to provide the lawyer a derivative work, such as a fully compiled PDF version of the document with its appropriate signature pages; this is difficult because the vendor wants to make sure that the lawyer can do everything needed or promised by the technology
18. Clarify no other uses of the data
19. Add specific permissions around client confidential information
20. Data residency requirements that tell the lawyer exactly where the data will be and cannot be shifted between regions
21. Specify that all “Customer Data” (or “Company Content”) is owned by the customer and define customer data; any exceptions must be clearly spelled out.
22. Confirmation whether there are exceptions to the otherwise applicable rules around data storage and access for the purposes of abuse monitoring or similar (e.g. to guard against hate speech or terrorism).

The Consumer Financial Protection Bureau (CFPB) recently finalized a rule that will subject the country’s most active digital wallets to ongoing supervision by the agency. Will the CFPB’s new supervisory authorities be a game changer, or is this action much ado about nothing?

Overview of the Digital Wallet Larger Participant Rule

The rule identifies “general-use digital consumer payment applications” subject to supervision as any nonbank that provides 50 million consumer payment transactions, in U.S. dollars, to multiple unaffiliated persons in a year, regardless of the payment method used to fund the payment.

Consumer payment transactions include any transfer of funds by a consumer to another person for personal, family, or household purposes, whether the funds belong to the consumer or are made by extending credit, e.g., from a deposit account or credit card, respectively.

Payment functionality includes both

• funds transfer functionality—receiving funds from a consumer in order to transmit them to a third party (e.g., a “staged wallet” where funds are obtained and then remitted), or accepting from a consumer and transmitting payment instructions; and
• payment wallet functionality—when payment account details or credentials are stored and transmitted to facilitate a consumer payment transaction, e.g., when a digital wallet stores tokenized payment credentials and passes them to a merchant in a tap-to-pay transaction.

Excluded payment transactions include

• payments solely to repay a debt
• international money transfers and securities and commodities transfers
• payments to purchase goods or services from the wallet provider, i.e., first-party payments, or when making donations to a fundraiser selected from a wallet provider
• certain prepaid accounts, e.g., health savings accounts and gift certificates

Consequences of the CFPB’s Supervision of Digital Wallets

In the end, this will leave roughly seven companies subject to ongoing supervision by the CFPB, covering 98 percent of the digital wallet market.

This could be a game changer for a few reasons:

Full visibility for digital wallets. In the short term, companies subject to supervision for offering digital wallets will be subject to exams that evaluate all their activities related to consumer financial products and services—e.g., data access and use activities subject to new Section 1033 personal financial data rights obligations, data security and sharing activities under the Gramm-Leach-Bliley Act, lending activities under the Truth in Lending Act, marketing, and other activities subject to the general prohibition on unfair, deceptive, or abusive acts and practices. While the CFPB will likely focus on payment activities, the broad scope of services provided in digital wallets today—think driver’s licenses, boarding passes, concert tickets, student IDs, and more—could directly or indirectly involve financial products or services, and the commingling of these data within a single wallet could be an area of focus.

Increased visibility of known problem areas. Over the longer term, the CFPB will gain a better understanding of the full range of digital wallet activities and other developing practices of digital wallet providers, including details of their relationships with third parties. Risks highlighted in the final rule relate to Regulation E error resolution obligations of digital wallets and the commingling of financial data with other data for marketing (e.g., email, calendar, health, fitness, and other data stored on a mobile device), among others. The supervision of larger participants could cause the CFPB to search for those risks throughout the industry, creating a trickle-down effect on the broader market. In fact, the CFPB stated in the final rule that supervisory highlights will be published periodically to share insights from examinations of these larger participants with the broader market.

Leaving open the potential for action on digital currency. In limiting the final rule to only cover U.S. dollar transactions, the CFPB sidestepped its potential exertion of supervisory jurisdiction over digital currency or digital asset wallets, leaving open the possibility that digital currency or digital asset transactions could be subject to the CFPB’s jurisdiction over the transmission or exchanging of “funds” under the Dodd-Frank Act.^[1]

On the other hand, this larger participant rule could be much ado about nothing for a few reasons:

Top wallets are already well known to the CFPB. The seven companies now subject to supervision have been on the CFPB’s radar and have likely been subject to requests for information in the past, both directly (see the CFPB’s 1022 order requesting information about digital wallet activities in 2021 and the resulting report released in 2023 highlighting the role of big tech firms in mobile payments) and indirectly (e.g., banks could already be required to share information about their digital wallet arrangements with their supervisors, including the CFPB and other federal regulators).

Supervisory activities are slow, isolated, and largely confidential. Supervisory activities are a long slog. Supervision will be limited to a handful of large digital wallet providers, conducted in a deliberately slow and carefully structured way. This supervision shouldn’t directly impact the many third parties that interact with those wallets, though some trickle-down effects are possible in the medium to long term.

The change in administration could slow-roll implementation. With the coming change in administration, the final larger participant rule could be subject to rejection by Congress under powers granted to it under the Congressional Review Act, though it’s unclear if there’s support for such a move in Congress at this time. Assuming the final rule survives such a challenge, the CFPB’s budget is likely to come under scrutiny, and its limited resources might not be directed towards newer areas such as this, where risks are less apparent or aren’t clearly defined.

1. See 88 Fed. Reg. 80197, 80202 (November 17, 2023). ↑

This is the first installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.

“As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication.  The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners.  You may contact me, Kathy Jaffari, at [email protected] to get involved.”

Board meeting minutes establish the record of matters considered and actions taken by the board. They are evidence of compliance with legal and regulatory requirements and of directors’ discharging their fiduciary duties. Minutes are often the first thing a plaintiff’s lawyer wants to see when challenging the company, and they can determine whether the challenge is limited to the company or whether the plaintiff can take action against board members personally. Draft them with this in mind.

1. Pre-draft the minutes.
   Use the board meeting agenda and presentation materials as a guide. Having a good starting point frees up the drafter to listen to the dialogue and capture questions and actions for follow-up. The pre-draft of the minutes should capture essential information such as where and when the meeting takes place, whether it is a regular or a special meeting, attendance, quorum, and what presentations were given and by whom. If an item is presented in response to a prior request from the board, the minutes should reflect that, particularly if the request was documented in prior meeting minutes.
2. Be consistent.
   If you note “unanimous” approval for some resolutions or “extensive” discussion for some topics, but don’t use those descriptors for others, this opens an avenue of inquiry that might otherwise be avoided. The same is true for being detailed in your notes about some topics but high-level for others. Think through whether you record time for each agenda item, ending time for the meeting, and whether and when various people enter and depart the meeting, including in executive session. Practices differ on these matters, but be consistent in your approach.
3. Be objective.
   Minutes should not reflect emotion, color commentary, or value judgments. They should simply and clearly identify topics discussed, actions taken, and follow-up requested. To this end, avoid jargon, make sure code names can be decoded, and keep the tone professional.
4. Be mindful in describing specific board action.
   The board should consider “approving” corporate actions but only “concurring” with significant actions taken by subsidiaries, to best protect corporate separateness. Use words like “agreement” and “support” if a formal approval is not required and you want to evidence alignment. Document a formal resolution if there might be a need for a certified copy of a board resolution later.
5. Avoid attributing questions or comments to particular directors.
   Doing so can provide a roadmap for plaintiffs’ lawyers seeking to drive a wedge between directors. The board acts as a body, and minutes themselves should align with this concept. Exceptions apply where directors must recuse themselves from a vote, and in the rare instance where a director wants their dissent recorded in the minutes.
6. Special situations require special attention.
   Privileged discussions between counsel and the board should be described as privileged. Consider not including privileged substance in the minutes, as minutes are generally not privileged. If a director has a conflict on a matter being discussed, the conflict should be disclosed and documented (further measures like recusal might also be appropriate).
7. Manage drafts.
   Ideally only the final approved minutes are retained, and all drafts are destroyed. This helps ensure there is only one record of the meeting—the right one. For this reason, it is risky to make an audio or video recording of meetings. If minutes are redacted for an intended purpose, ensure the unredacted version is saved appropriately.
8. Be timely in drafting and reviewing minutes.
   Memories fade. It is best to draft the minutes immediately so they can go through the review cycle while participants have a strong recollection of what happened. Draft minutes should be reviewed by the general counsel, the chairman/lead director, and perhaps presenters, then presented to the full board/board committee for approval at the next regular meeting of the board/board committee.
9. Manage access to minutes.
   Although minutes might not be protected by privilege, they should be treated as confidential. They should be accessible on a need-to-know basis by staff. Agree with auditors on terms by which auditors can review minutes, and redact anything protected by privilege. Auditors should not have access to drafts that have not yet been approved by the board.
10. Note only the essential in executive session.
    Generally, minutes are not taken in executive session, so as to encourage directors to speak freely. However, it is important to capture any formal action taken or resolutions passed in executive session, e.g., setting of CEO pay.

The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.

This article aims to highlight the key legal considerations and gating requirements to be assessed by global investors undertaking big-ticket mergers and acquisitions (M&A) deals arising out of the acquisition of a majority shareholding or control of an entity not incorporated in India that has a direct or indirect subsidiary in India (“India Co”), leading to an indirect change of control of such India Co (“Indirect Acquisition”).

Approvals Under Foreign Exchange Regulations

The extant foreign exchange regulations in India provide, inter alia, the permissible entry routes (i.e., approval route, where approval from the government of India (“GOI”) is required, including in certain sensitive sectors such as pharmaceuticals, defense, etc.; and automatic route, where no such prior approval is required); sectoral caps; and other conditionalities that are applicable to investments by nonresidents. If the India Co operates in a sector falling under the approval route or a sector that prescribes any sectoral caps or conditionalities, the respective approval requirement or sectoral caps or conditionalities would be triggered in the case of Indirect Acquisitions as well.

On April 17, 2020, the GOI issued Press Note 3 of 2020 (“PN-3”), which provides that prior GOI approval needs to be obtained in cases where the beneficial owner of any investment in India (direct or indirect) is situated in or is a citizen of any country that shares land borders with India. While PN-3 does not prescribe any thresholds for determination of beneficial ownership, the prevalent market view is that if beneficial ownership of investments, whether direct or indirect, from land-bordering countries is less than 10 percent of the share capital of the acquirer, then no approval would be required under PN-3. The process for seeking approval under PN-3 can typically take up to fourteen weeks, and the approvals can take between nine and twelve months, based on the sector in which the India Co operates.

Obligations Under (Indian) Companies Act, 2013

Reconstitution of Board of Directors

The (Indian) Companies Act, 2013 read with rules framed thereunder, as amended from time to time (“Companies Act”), prescribes the minimum number of directors for a private company (two directors) and a public company (three directors). An Indirect Acquisition typically necessitates a reconstitution of the board of directors, wherein nominees of the acquirer are appointed as directors of the India Co. Furthermore, the Companies Act also prescribes that at least one director on the board of directors must be an Indian resident (someone who must have resided in India for a minimum of 182 days during the past financial year). Lastly, if any director is a citizen of any country that shares land borders with India, prior GOI approval would be required for their appointment. Under the Companies Act, a person has to obtain certain registrations to be eligible for appointment as a director, which can take up to two weeks from the date of submission of requisite documents, among other requirements.

Change in Nominee Shareholders

Under the Companies Act, a private company is required to have a minimum of two shareholders, and a public company is required to have a minimum of seven shareholders. Typically, in the case of an Indirect Acquisition, to meet the minimum shareholders requirement, group entities or individuals from the acquirer group hold at least one share of the India Co as nominee(s) and legal owner(s), with the acquirer holding beneficial ownership over such shares held by the nominee(s). The Companies Act also requires certain filings to be undertaken by the India Co to announce the change in nominee shareholders.

Change in Significant Beneficial Ownership

Under the Companies Act, an individual who holds a beneficial interest is required to make a declaration in connection with such beneficial interest. Individuals with a beneficial interest include those (a) who hold indirectly, or together with any direct holdings, not less than 10 percent of shares or voting rights in an Indian company; (b) who have the right to receive or participate in not less than 10 percent of the distributable dividend or any other distribution in a financial year through indirect holdings alone, or together with any direct holdings; or (c) who have the right to, or actually exercise, significant influence or control in any manner other than through direct holdings alone.

The Companies Act further clarifies that if the holding company of the India Co is a body corporate, the individual holding more than 50 percent of the share capital of the holding company will be the significant beneficial owner (“SBO”). However, if the holding company of India Co is a pooled investment fund (“PIF”) or an entity controlled by a PIF, the SBO could be either the general partner of the PIF or the investment manager of the PIF.

Since an Indirect Acquisition may trigger a change in the significant beneficial ownership of the India Co, the acquirer should take steps to identify such changes and, if applicable, cause the new SBO to make the necessary declarations. The India Co will also be required to maintain and update registers and make filings owing to the change in the SBO.

Obligations Under Charter Documents

All charter documents and material agreements affecting the structure and governance of the India Co should be reviewed to assess if any consent is required for undertaking the Indirect Acquisition or if the Indirect Acquisition triggers the exercise of any specific rights available to shareholders under such documents.

Dematerialization of Securities

Pursuant to a recent amendment to the Companies Act, all private companies (except small companies and government companies) in India (hereinafter “Covered Companies”) are now required to facilitate the dematerialization of their existing securities, and all fresh issuances are to be in dematerialized form. Earlier, this requirement only extended to public companies. This may have implications for Indirect Acquisitions if they involve either a pre-closing restructuring involving transfer of securities of a Covered Company or a change of the nominee shareholder, given that a security holder will be impeded from transferring the securities of a Covered Company that have not been dematerialized. Similarly, the person or entity that will become a security holder in the Covered Company will need to have a demat account in India. These requirements may have an impact on the timing of deal closing of such Indirect Acquisition.

Approval/Notification Under Antitrust Laws

The Competition Act, 2002 (“Competition Act”) sets out the thresholds for approval requirements for global M&A deals. The Competition Act exempts acquisitions, mergers, and amalgamations from the requirement of seeking approval from the Competition Commission of India (“CCI”) where the value of the assets of the target entity in India is less than INR 4.5 billion (approximately USD 53.80 million) or the turnover is less than INR 12.5 billion (approximately USD 149 million) (“De Minimis Exemption”). In the event that the De Minimis Exemption is not available to the parties, approval is required from the CCI based on the prescribed jurisdictional thresholds.

Recently, an additional threshold was introduced based on the global deal value (effective date September 10, 2024). An approval requirement is triggered when the global deal value exceeds INR 20 billion (approximately USD 242 million) and the target enterprise has substantial business operations in India (“Deal Value Threshold”). The parties/groups involved will no longer be able to avail themselves of the De Minimis Exemption if the Deal Value Threshold is breached. Accordingly, the parties will need to assess whether the Indirect Acquisition will exceed any of the thresholds above, triggering an approval/notification requirement from the CCI.

Tax Implications

Under the Indian income tax law (“IT Act”), an Indirect Acquisition may result in taxability of capital gains in the hands of the seller and corresponding liability of the acquirer for withholding taxes (subject to the provisions of any applicable double-taxation avoidance agreements). Indian tax laws deem the shares or interest of a nonresident entity to be capital assets situated in India if the shares of the nonresident target entity derive substantial value from assets located in India. Shares of a nonresident entity are considered to substantially derive their value from assets located in India if the value of such assets (a) exceeds INR 100 million (approximately USD 1.2 million) and (b) represents at least 50 percent of the value of all the assets owned by the acquirer.

If the capital gains are taxable in the hands of the seller, there will be a corresponding liability of the acquirer for deducting tax at source while remitting the sale consideration and for paying the same to the GOI within the prescribed timelines. For deducting tax at source, the acquirer would be required to obtain certain tax registrations. Obtaining such tax registrations can take up to four weeks from the date of application. Furthermore, if the nonresident seller does not have the requisite tax registrations in place, it could result in deduction at a higher rate. It is therefore important for the parties to examine at the outset the tax-related implications emanating from the Indirect Acquisition.

Other Points for Consideration

Sector-Specific Regulatory Approvals

Depending on the sector in which the India Co operates, the Indirect Acquisition may trigger a requirement to seek approval from the relevant regulatory body. For instance, any Indirect Acquisition involving a banking company in India would trigger the requirement to seek approval from the Reserve Bank of India (the central bank of India). It is important, therefore, for the parties to assess this requirement with respect to an Indirect Acquisition.

Treatment of Employee Stock Options

India’s foreign exchange laws allow a nonresident entity to issue employee stock options to employees of its Indian subsidiary if, inter alia, such stock options are offered globally on a uniform basis and the Indian subsidiary undertakes certain regulatory filings in connection with such issuance. Typically, the documents governing an Indirect Acquisition provide for cancellation, rollover, or swap of such global stock options. It is important for the parties to analyze the treatment of such global stock options pursuant to the Indirect Acquisition, as there could be implications under the foreign exchange laws.

Other Due Diligence Items

Other issues that emanate out of due diligence exercises, such as prior consents or notification requirements under material contracts, or lender consents getting triggered by an indirect change of control, will also have to be identified and addressed to ensure a seamless transition after the Indirect Acquisition.

Conclusion

While the issues discussed above are some of the common issues typically encountered in an Indirect Acquisition, the acquirer should undertake exhaustive legal due diligence from an Indian perspective to account for any other issue that may impact the Indirect Acquisition. Early identification of such issues is critical to ensure adherence to overall deal timelines.

Bid me run, and I will strive with things impossible.

—William Shakespeare, Julius Caesar, Act II, Scene 1

The Corporate Transparency Act (“CTA”)^[1] requires almost every small organization to promptly report information (including copies of certain identifying documents) to the Financial Crimes Enforcement Network (“FinCEN”) with respect to itself and its direct and indirect individual principal constituents, and it imposes civil and criminal penalties on the organization and some of its individual constituents for the organization’s willful failure to timely file the required information. While it is the organization charged with filing the reports, compliance with the CTA requires the cooperation of the individuals who are listed on the report. What happens if the organization—as a result of the recalcitrance, unavailability, or disagreement of the individuals from whom the information must be obtained^[2]—is unable to obtain the required information promptly enough to comply with the requirements of the CTA? While FinCEN is aware of the problem, it has nevertheless decided to resolve it by assuming that it does not exist. This very real problem subjects the organization, as well as the constituents responsible for compliance, to penalties for violations over which they may have no control.

An Entirely Complete BOIR

The CTA requires each organization that is a reporting company (“reporting company”)^[3] to file a beneficial ownership information report (“BOIR”)^[4] with FinCEN in accordance with regulations issued by FinCEN. The regulations promulgated by FinCEN (collectively, the “Reporting Rules”)^[5] mandate that the BOIR contain “true, correct, and complete” information and copies of identifying documents^[6] about the reporting company and each individual who is a beneficial owner (“beneficial owner”)^[7] or a company applicant (“company applicant”).^[8] The Reporting Rules require that a reporting company file a BOIR (“initial BOIR”)^[9] shortly after^[10] its creation or registration. Further, if and when any of the previously reported information with respect to the reporting company or its beneficial owners (but not company applicants) changes, the reporting company must file an update (“updated BOIR”).^[11]

Willful failure to comply with these requirements will subject the reporting company and individuals meeting the definition of senior officer^[12] to civil and criminal penalties.^[13] In addition, the CTA permits FinCEN to assess civil and criminal penalties on any individual who is a beneficial owner or company applicant who prevents the reporting company from filing a complete and accurate BOIR.^[14]

As discussed below, FinCEN has assured the public that these rules are not intended to provide a “gotcha” for the tens of millions of reporting companies and their senior officers, beneficial owners, and company applicants subject to these rules, but in its formal guidance, FinCEN has largely described its rules as absolute and intractable—guidance that is especially troubling when considering the penal nature of the CTA.

In a regulatory release dated September 29, 2023,^[15] FinCEN published a document titled “Agency Information Collection Activities; Submission for OMB Review; Comment Request; Beneficial Ownership Information Reports” (“2023 Notice”).^[16] Therein, FinCEN, based upon what it described as a “significant number of commenters” who were “uniformly critical” of any provision that would allow reporting companies to file reports indicating that information about a beneficial owner was “unknown,” declined to adopt “unknown checkboxes” that would allow organizations to file partially completed BOIRs and thereby give FinCEN notice of the organization’s inability to obtain the beneficial ownership information (“BOI”) required to complete the BOIR.^[17]

In the 2023 Notice, FinCEN acknowledged that reporting companies “could face difficulties in obtaining information promptly,” but having consulted with “behavioral scientists at the General Services Administration, technology experts at the Department of the Treasury, and various others throughout the U.S. Government (USG) who have expertise around these issues,” FinCEN stated:

The consultations highlighted potential, though not inevitable, pitfalls in not providing an explanatory mechanism in the BOIR Form when a filer is unable to obtain certain required information. This might inadvertently discourage reporting companies from filing in a timely manner (or filing at all) because they do not have sufficient information. It may also incentivize reporting companies to file meaningless or untruthful information in certain fields to make a deadline. These difficulties also have the potential to significantly increase the volume of inquiries to FinCEN’s Contact Center from reporting companies that seek clarification of the filing requirements when they are unable to obtain BOI.^[18]

In other words, FinCEN acknowledged that some reporting companies will not be able to comply with the system as it currently exists.

Mindful of this, the 2023 Notice proposed a potential alternative option (“drop-down option”) that would allow reporting companies to temporarily supply the BOI that they have available and the reasons why they are temporarily unable to provide BOI with respect to some beneficial owners (this would not be available with respect to the provisions of the BOIR applicable to the reporting company itself or the company applicants), thereby providing current BOI that is available. The drop-down option would not excuse the reporting companies of their reporting obligations, and the BOIR would not be considered complete until the missing BOI has been submitted. The drop-down option is still unimplemented.

Thus, it is clear that, under the current regime, both FinCEN and the supporters of the BOIR form do not wish the BOIR to be filed unless it is entirely complete. This is reflected in the 2023 Notice and the current BOIR reporting form, which precludes indicating that any BOI is unavailable.^[19]

Notwithstanding this position, in response to another common situation in which a BOIR may not be timely filed as a result of circumstances beyond the control of the reporting company—that is, when the reporting company has not received its taxpayer identification number (“TIN”)—FinCEN in its Frequently Asked Questions (“FAQs”)^[20] expressly provides that the BOIR should not be filed until the TIN is obtained but that the reporting company would be advised to document its reasonable efforts to obtain the TIN.^[21]

The Horns of the Dilemma

It is impossible to comply with current BOIR reporting requirements if the reporting company is unable to obtain the necessary BOI from a beneficial owner or company applicant. The horns of this dilemma^[22] are to not file and in so doing breach the filing deadlines or, in the alternative, to file an incomplete report in opposition to the requirement to not only file a complete report but also to certify it to be true and complete.^[23] So, which (if either) of the following is a better alternative?

1. Filing a BOIR that is not entirely true, correct, and complete (perhaps attempting to provide additional notification as to the BOI that is not included)
2. Following the procedure established in FAQ G.3 with respect to TINs discussed above—that is, delaying the filing of the BOIR until the necessary BOI is provided while documenting the reasonable efforts to obtain the same from the beneficial owner at issue^[24]

As to the additional notification, we have heard suggestions about various ways in which reporting companies might use additional communications with FinCEN to address the missing BOI:

1. through use of a pdf filing with an additional explanation attached;
2. through a notice to FinCEN via its email or telephonic helpline^[25] or the chat function;^[26] or
3. by preparing a notice and uploading it at one of the “identifying document image” portals^[27] in lieu of an image of an identifying document.

The efficacy of any of these approaches in communicating with FinCEN is uncertain. On the one hand, the reporting company may profess that it has done all it can and has afforded FinCEN with not only all the available BOI but also (presumably) evidence of its efforts to collect the missing BOI. That assessment must, however, be balanced against FinCEN’s rejection of an option to file an incomplete report to the effect that the filing of a BOIR that is not true, correct, and complete is not acceptable. Perhaps rendering these additional notification options unavailable is that an incomplete filing would contradict the statement required to complete the filing: “I further certify, on behalf of the reporting company, that the BOI contained in this BOIR is true, correct, and complete.”^[28]

This is unfortunate because the alternative discussed in the 2023 Notice—allowing a filing with an opportunity to provide notification of the BOI not supplied—would be similar to the method used by the Internal Revenue Service in permitting notification of inconsistent positions (Form 8082) and would provide FinCEN with notification of the BOI not supplied in a manner that would clearly associate the absence of the BOI with the BOIR to which it applies.

It is worth noting in this context that in many business organizations, particularly those organized before the CTA was adopted, the organization may have no legal right to demand BOI from its beneficial owners and company applicants in general and especially those individuals who are indirect beneficial owners.^[29] As discussed below, the CTA as interpreted in the Reporting Rules imposes criminal and civil penalties on those beneficial owners and company applicants who fail to provide their BOI and documentation, but, in a catch-22 for the twenty-first century, it is FinCEN, not the reporting company, that can assess those penalties—and it is FinCEN that has explicitly denied the reporting companies any way for to communicate those individuals’ failures to it.

The CTA includes both civil and criminal penalties,^[30] and as a penal statute it should be strictly construed and construed with lenity.^[31] In its public pronouncements, FinCEN has indicated that it is mindful of the penalties and will not apply them arbitrarily.^[32] As noted above, while the CTA requires filing by the reporting company and imposes civil and criminal penalties on persons who willfully provide false information or fail to provide information to FinCEN, the Reporting Rules interpret the civil and criminal penalties as applying to beneficial owners and company applicants who fail to provide their BOI and documentation to the reporting company.^[33] Even in the absence of the rule of statutory construction, it is difficult to understand how failing to take an action that, as noted in the 2023 Notice, is impossible to accomplish could be categorized as a willful violation.^[34]

Less-Than-Perfect Choices

Of the two realistic options available to FinCEN discussed above—(i) providing a method, whether in the form of a drop-down option or otherwise, to inform FinCEN of unattainable BOI (as discussed in the 2023 Notice); or (ii) deferring the obligation to file the BOIR until the filer believes it has all of the BOI necessary (as provided for TINs in FAQ G.3), in either case including a requirement that the reporting company diligently pursue obtaining the missing BOI—it would appear that the most useful would be for FinCEN to adopt a program similar to that described in the 2023 Notice, with an orderly regimen for filing and notifying FinCEN of the problem (and potentially identifying recalcitrant owners for FinCEN to contact). Unless and until FinCEN provides a workable alternative that takes account of the real problems faced by real reporting companies, however, probably the better approach is for the reporting company to continue with well-documented efforts to collect the required BOI and to defer filing the BOIR until it is satisfied that the information in the BOIR is “true, correct, and complete,” rather than to file a BOIR known to be less than “true, correct, and complete.”^[35]

Robert Keatinge is of counsel to Holland & Hart LLP in Denver, Colorado. Thomas E. Rutledge is a member of Stoll Keenon Ogden PLLC in Louisville, Kentucky. They are both coauthors of Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies (Thomson Reuters, updated Nov. 2024), and Robert R. Keatinge, Ann Conaway & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies (Thomson Reuters, updated Nov. 2024). The opinions expressed in this article are solely those of the authors and not of any other person.

1. See 31 U.S.C. § 5336. For a review of the CTA generally, see Larry E. Ribstein, Robert R. Keatinge & Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies, at ch. 4A (Nov. 2024). ↑

2. It is important to recognize that it is the reporting company, and not the affected individual, that will make the determination that the affected individual is a beneficial owner and, if applicable, a company applicant. See Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg., infra note 5, at 59514 (“The fundamental premise of the CTA is that the reporting company is responsible for identifying and reporting its beneficial owners and applicants.”(citing 31 U.S.C.A. § 5336(b)(1)(A))); id. at 59515 (“Given that the CTA places the responsibility on reporting companies to identify their beneficial owners, . . .”); FinCEN FAQ K.4 (Dec. 12, 2023). This is a two-edged sword. Initially, an individual not advised that they are, as to a particular reporting company, a beneficial owner should have no exposure for not being included in that company’s BOIR. But then a reporting company’s determination that an individual is a beneficial owner is arguably final and conclusive (presuming that it was made in good faith) as to that person, and they are obligated to provide either their identifying information or FinCEN ID. There is no mechanism by which a person may object to FinCEN or another body that “I don’t care what they say—I’m not a beneficial owner.” ↑

3. See 31 U.S.C. § 5336(a). ↑

4. See id. § 5336(b)(1); see also 31 C.F.R. § 1010.380(b) (effective Jan. 1, 2024). ↑

5. See 31 C.F.R. § 1010.380 (effective Jan. 1, 2024). The reporting regulations appear at 31 C.F.R. §§ 1010.380(a)(1) et seq. The “final” beneficial ownership reporting regulations were released in Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022). The final rules followed from a notice of proposed rulemaking, Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69920 (Dec. 8, 2021), which itself followed from the advance notice of proposed rulemaking set forth in Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 17557 (Apr. 5, 2021). Those “final” regulations related to certain due dates amended by Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 66730 (Sept. 28, 2023), supplemented as to the use of FinCEN identifiers by the release of Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 88 Fed. Reg. 76995 (Nov. 8, 2023), and expanded as to the exemption for public utilities (31 C.F.R. § 1010.380(c)(2)(xvi)) in Update of the Public Utility Exemption Under the Beneficial Ownership Information Reporting Rules, 89 Fed. Reg. 83782 (Oct. 18, 2024) (collectively, “Reporting Rules”). ↑

6. See 31 C.F.R. § 1010.380(b) (“Each [BOIR] shall be filed with FinCEN in the form and manner that FinCEN shall prescribe in the forms and instructions for such report or application, and each person filing such report or application shall certify that the report or application is true, correct, and complete.” (emphasis added)). ↑

7. See 31 U.S.C. § 5336(b)(3); 31 C.F.R. § 1010.380(d). ↑

8. See 31 U.S.C. § 5336(b)(2) (describing this individual simply as “applicant”); 31 C.F.R. § 1010.380(e). ↑

9. See 31 U.S.C. §§ 5336(b)(1)(A), (B), (C); see also 31 C.F.R. § 1010.380(e). ↑

10. See 31 U.S.C. § 5336(b)(1)(A) (providing that each reporting company created after the effective date of FinCEN regulations shall file an initial BOIR). As originally adopted, 31 C.F.R. § 1010.380(a)(1) required entities formed or registered on or after January 1, 2024, to file their initial BOIRs within thirty calendar days of creation or registration; and any entity created or registered before January 1, 2024, to file its initial BOIR no later than January 1, 2025. This rule was amended by RIN 1506-AB62, Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. at 66732, to extend the BOIR filing deadline from thirty days to ninety days for entities created or registered on or after January 1, 2024, and before January 1, 2025. Effective for organizations created or registered on or after January 1, 2025, the initial BOIR is due within thirty days of formation. ↑

11. See 31 U.S.C. § 5336(b)(1)(D); 31 C.F.R. § 1010.380(a)(2). If, post-filing, it is determined that any submitted information was inaccurate, a corrected report may be filed. If the information concerning the company applicant changes, no updated BOIR need be filed. See 31 C.F.R. § 1010.380(a)(2). ↑

12. See 31 C.F.R. § 1010.380(f)(8). This term does not appear in the CTA. ↑

13. See 31 U.S.C. § 5336(h)(1); 31 C.F.R. § 1010.380(g) (discussed below). ↑

14. 31 U.S.C. § 5336(h)(1); 31 C.F.R. § 1010.380(g). ↑

15. This release postdated the release of the Reporting Rules by just more than a year and predated the initial effective date of the Reporting Rules by just more than three months. ↑

16. See Agency Information Collection Activities; Submission for OMB Review; Comment Request; Beneficial Ownership Information Reports, 88 Fed. Reg. 67443 (Sept. 29, 2023). ↑

17. See id. at 67444:

    Consistent with the requirements of the PRA, FinCEN carefully considered the comments received in response to the 60-day notice that proposed the BOIR Form for public comment. Notably, commenters were uniformly critical of the checkboxes that would allow a reporting company to indicate if certain information about a beneficial owner or company applicant is “unknown,” or if the reporting company is unable to identify information about a beneficial owner or company applicant. Commenters referred to these checkboxes as the “unknown checkboxes.” A significant number of these comments expressed concern that the checkboxes would incorrectly suggest to filers that it is optional to report required information, and that reporting companies need not conduct a diligent inquiry to comply with their reporting obligations. These commenters requested that FinCEN remove all such checkboxes.

    In response to the comments, FinCEN is pursuing a revised approach to the BOIR Form that will not contain unknown checkboxes. This approach will consist of a first implementation [that] will be used starting January 1, 2024, and a potential alternative implementation, which may be adopted [at] a later date following feedback from filers, law enforcement agencies, and other key stakeholders. In the first implementation, it will require every field to be completed (i.e., have responses entered in text boxes), and the BOIR Form can only be submitted once each required field has been filled out. Any field left blank, whether intentionally or accidentally, will prevent the filer from submitting their BOIR Form. It is our hope that filers will find the filing process to be seamless, users of the database will determine that the information collected is accurate, and all stakeholders, including law enforcement, will find this implementation to be sufficiently straightforward, transparent, and efficient. Throughout the months after this approach is implemented, FinCEN will seek continual feedback from filers and database users.

    See also Letter from the Independent Community Bankers of America to FinCEN (Oct. 30, 2023) (approving FinCEN’s removal of all “unknown checkboxes” from its BOIR form and stating, “ICBA appreciates FinCEN’s careful consideration to remove all 29 ‘unknown’ checkboxes. In its new approach, FinCEN will require every field to be completed (i.e., have responses entered in text boxes), and the BOIR form can only be submitted once each required field has been filled out. Any field left blank, whether intentionally or accidentally, will prevent the filer from submitting their BOIR form. ICBA fully supports this new approach and believes the spirit of the CTA would be fulfilled under this process.”); ICBA: Additional Beneficial Ownership Reporting Changes Needed, Indep. Cmty. Bankers of Am. (last visited Dec. 11, 2024). ↑

18. 88 Fed. Reg. 67443. “BOI” refers to the personal identifying information that a reporting company must include in its BOIR to identify each company applicant or beneficial owner. See also 31 C.F.R. § 1010.380(b)(1)(ii). ↑

19. See Fin. Crimes Enf’t Network, Beneficial Ownership Information Report: Filing Instructions (Jan. 2024) (stating, at page 3, that the information on the BOIR must be “true, correct, and complete”; at page 6, that “BOIRs must be complete before they can be filed with FinCEN. FinCEN will not accept a BOIR if any items marked with a red asterisk (*) are blank”; and, at page 9, that the terms none, not applicable, and unknown may not be used on the BOIR form). ↑

20. Beneficial Ownership Information: Frequently Asked Questions, Fin. Crimes Enf’t Network (last visited Dec. 11, 2024). ↑

21. See FinCEN FAQ G.3 (July 24, 2024):

    A reporting company must report its tax identification number when reporting beneficial ownership information to FinCEN and, indeed, will be unable to submit its BOI report without including a tax identification number. In such circumstances, in addition to making all reasonable efforts to file its BOI report in a timely manner (including requesting all necessary information as early as practicable), the reporting company should file its report as soon as it receives its EIN. As a best practice, the reporting company may consider retaining documentation associated with its efforts to comply with the BOI reporting requirements in a timely manner. ↑

22. See Be on the Horns of a Dilemma, Cambridge Dictionary (last visited Dec. 12, 2024) (“to be unable to decide which of two things to do because either could have bad results”). ↑

23. See 31 C.F.R. § 1010.380(b) (effective Jan. 1, 2024). ↑

24. What would be those reasonable efforts is a topic beyond the scope of this discussion, and will necessarily depend upon the nature of the beneficial owner. The communications to a corporation or an LLC that is an owner of the reporting company will be different from the communications to a distant relative who by inheritance is an owner. ↑

25. Need Help? Contact Us, Fin. Crimes Enf’t Network (last visited Dec. 12, 2024). ↑

26. BOI: Beneficial Ownership Information, Fin. Crimes Enf’t Network (last visited Dec. 12, 2024). ↑

27. Fin. Crimes Enf’t Network, OMB No. 1506-0076, Beneficial Ownership Information Report (May 29, 2024), Questions 33 and 51. ↑

28. Although an individual may submit the certification on behalf of a reporting company as its agent, that may be little comfort in a future FinCEN enforcement action. See also Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59514 (Sept. 30, 2022):

    While an individual may file a report on behalf of a reporting company, the reporting company is ultimately responsible for the filing. The same is true of the certification. The reporting company will be required to make the certification, and any individual who files the report as an agent of the reporting company will certify on the reporting company’s behalf. ↑

29. It bears noting that neither the CTA nor the Reporting Rules provide for a cause of action by the reporting company against a beneficial owner or company applicant who refuses to provide BOI or who otherwise interferes with the efforts of a reporting company to comply with the law. ↑

30. See 31 U.S.C. § 5336(h)(1) (making it unlawful to “(A) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with subsection (b); or (B) willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with subsection (b)”); id. § 5336(3)(A) (imposing civil and criminal penalties of $500 per day plus fines of not more than $10,000 and imprisonment of not more than two years or both for violating the reporting requirements); see also 31 U.S.C. § 5336(h)(6) (“In this subsection, the term ‘willfully’ means the voluntary, intentional violation of a known legal duty.”) The $500 per diem is adjusted for inflation. See Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, Pub. L. No. 101-410 (as revised by section 701 of the Bipartisan Budget Act of 2015, Pub. L. No. 114-74 (Nov. 2, 2015)). As of this writing, the per diem rate has increased to $591. See also FinCEN FAQ K.2 (Apr. 18, 2024). ↑

31. See Ladner v. United States, 358 U.S. 169, 79 S. Ct. 209, 3 L. Ed. 2d 199 (1958). ↑

32. See, e.g., Andrea Gacki, Dir., Prepared Remarks of FinCEN Director Andrea Gacki During Beneficial Ownership Information Reporting Event in Media, Pennsylvania (Sept. 16, 2024) (“But let me be clear. Small business owners doing their best to comply with the law should not lose sleep over these new reporting requirements. The CTA penalizes willful violations of the law, and this is where we plan to focus our enforcement actions. It’s not a ‘gotcha’ exercise, and we’re not looking to needlessly burden America’s thriving small business community.”). ↑

33. 31 C.F.R. § 1010.380(g) (effective Jan. 1, 2024):

    Reporting violations. It shall be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with this section, or to willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with this section. For purposes of this paragraph (g):

    1. 1. 1. The term “person” includes any individual, reporting company, or other entity.
          2. The term “beneficial ownership information” includes any information provided to FinCEN under this section.
          3. A person provides or attempts to provide beneficial ownership information to FinCEN if such person does so directly or indirectly, including by providing such information to another person for purposes of a report or application under this section.
          4. A person fails to report complete or updated beneficial ownership information to FinCEN if, with respect to an entity:
             1. such entity is required, pursuant to title 31, United States Code, section 5336, or its implementing regulations, to report information to FinCEN;
             2. the reporting company fails to report such information to FinCEN; and
             3. such person either causes the failure, or is a senior officer of the entity at the time of the failure. ↑

34. See supra note 30. ↑

35. On December 3, 2024, in a case styled Texas Top Cop Shop, Inc. v. Garland, a nationwide preliminary injunction was issued against the enforcement of both the CTA and the Reporting Rules. No. 4:24-cv-478, 2024 WL 4953814, 2024 U.S. Dist. LEXIS 218924 (E.D. Tex. Dec. 3, 2024, amended Dec. 5, 2024). That decision is currently on appeal to the U.S. Court of Appeals for the Fifth Circuit as Case No. 24-40792. Whether the preliminary injunction will be affirmed, restricted in its scope, or reversed is as of this date unknown. ↑

“Dear Alex,” a column created by the ABA Business Law Section’s Diversity, Equity, and Inclusion (DE&I) Committee, is the reader’s chance to ask all about DE&I anonymously. Think of it like the old “Dear Abby” columns, but for DE&I. In each column, the Dear Alex team answers a question related to DE&I. These questions can be interpersonal or even professional, like how to convince senior partners at your firm that investing in DE&I can be a competitive advantage. If you’ve ever had a DE&I question that you have been afraid or otherwise unable to ask, now is your chance to ask “Alex.” Questions can be submitted at the form linked here.

Dear Alex,

One of the lawyers I work with accidentally mentioned that another colleague has started their gender transition even though they had requested that be kept confidential. I want to ensure our colleague feels supported at work, especially since our firm is not very accepting. Should I approach them?

Sincerely,

Confidentiality Conundrum

Dear Confidentiality Conundrum,

This is a delicate situation. First, I commend you for wanting to be a supportive ally—simply asking this question indicates you’re already on the right path. Here’s the key point: if your colleague has requested confidentiality, the first rule of Ally Club would be not to discuss this without their permission. Respecting their privacy is essential.

Instead of directly approaching them, focus on creating a more inclusive work environment. Show your support in subtle but meaningful ways. For instance, use inclusive language in emails or meetings, advocate for policies promoting diversity, or participate in events celebrating LGBTQ+ identity and rights. These actions will signal to your colleague (and others) that you are a safe person to talk to if they wish to confide in you, and they’ll contribute to shifting the environment in your office for the better.

If the opportunity arises naturally, such as when your colleague chooses to mention their transition within the firm more broadly, then be there to listen and offer support. Just remember not to create unnecessary drama in the office by saying you already know about them being trans. In the meantime, make your less accepting workplace more open, one step at a time.

* * *

Dear Alex,

I want to understand more about microaggressions so I don’t unintentionally make anyone uncomfortable. What are some examples, and how can I avoid them?

Sincerely,

Looking to Learn

Dear Looking,

Microaggressions are sneaky little gremlins of everyday interactions—those subtle comments or actions that might seem harmless on the surface but can pack a punch to someone else’s identity or experiences. Think of it like accidentally stepping on someone’s toes. Sure, you didn’t mean to, but it still hurts!

Here are some examples: Saying “Wow, you’re so articulate” to someone from a marginalized group can imply surprise at their competence (which is not great). Asking “Where are you really from?” might seem like innocent curiosity, but it can feel invalidating to the person being asked, as it may come across as making assumptions about their background and treating them as an outsider. Microaggressions can also be nonverbal or involve things you don’t say, such as clutching your bag when someone walks by or ignoring someone’s ideas in a meeting but celebrating the same idea when someone else presents it.

To avoid microaggressions, start by listening and reflecting. Challenge your assumptions and biases (everyone has them; the key is managing them). A suggestion would be to refrain from complimenting or questioning someone if you are unsure how it might be received.

If you catch yourself committing microaggressions, be mindful of people’s feelings: If they say they are hurt, do not question them or try to explain what you “actually meant.” Just apologize and learn from the experience. If you witness others making microaggressive comments, use your voice to educate them or gently redirect the conversation. The secret is to be mindful, open to feedback, and willing to grow.

Dear Alex contributors from the BLS Diversity, Equity, and Inclusion Committee rotate and include David Burick, Daniel Roman, and Michael Sabella, among others.

The increasingly unstable political situation in Venezuela, exacerbated by the exile of opposition candidate Edmundo González following disputed presidential election results, compels U.S. financial services companies, including insurers, to more closely monitor evolving legislation impacting cross-border operations and in-country activities in Venezuela. In this context, U.S. anti-corruption and sanctions laws, coupled with Venezuelan law regulating the sale of insurance in the context of cross-border/international life and health insurance, become particularly relevant.

U.S. Sanctions and Anti-Corruption Laws

U.S. economic sanctions laws impact doing business in Venezuela and complicate foreign transactions and investments there, including with respect to sale of insurance. The U.S. legal framework for sanctions is designed to further specific foreign policy or national security goals. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces sanctions programs and maintains a list of sanctioned countries, individuals, and entities. Sanctions can be imposed to prohibit U.S. persons from engaging in transactions involving a specific country, as would be the case with North Korea, for example. Targeted sanctions also serve to block the property of sanctioned individuals within a certain country, as is the case with individual Russian oligarchs, and to freeze the assets of sanctioned individuals. Additionally, OFAC maintains a Specially Designated Nationals List (“SDN List”) of individuals and companies of targeted countries whose assets are blocked and/or frozen in the U.S.

Almost twenty years ago, the U.S. began imposing sanctions on Venezuelan individuals and entities that engaged in criminal, antidemocratic, or corrupt actions. Beginning in 2013, imposition of sanctions was expanded in response to President Nicolás Maduro’s rise to power and his increasing human rights violations. Persons under U.S. jurisdiction—both U.S. citizens and U.S.-incorporated businesses—are subject to this sanctions regime. In addition, non-U.S. persons who engage in transactions involving U.S. dollars are subject to the same sanctions.

In response to developments in Venezuela in the past several years, including this year’s election, sanctions were imposed on certain Venezuelan individuals—including government officials—and entities (i.e., where a sanctioned party has 50 percent or greater ownership interest in the Venezuelan company.)^[1] For example, OFAC designated the Venezuelan government-run oil company Petróleos de Venezuela, S.A. (“PdVSA”) as a sanctioned entity on its SDN List, and entities in which PdVSA owns 50 percent or greater interest may also be sanctioned by OFAC.

Most recently, in November 2024, the U.S. government officially recognized Venezuela’s opposition leader, Edmundo González, as the country’s legitimate president-elect after the July 2024 elections in which President Nicolás Maduro declared victory, further magnifying political uncertainty.^[2] In light of these developments, OFAC designated additional Venezuelan officials as SDNs.^[3] Consequently, any transaction, including the sale of life insurance, or any attempt to do business with Venezuelan nationals or entities needs to be thoroughly vetted to ensure compliance with U.S. sanctions laws. As noted below, the attempted sale of a life insurance policy to a Venezuelan national who is listed on an SDN list at the time of sale, or who subsequently becomes listed, could contravene these sanctions laws.

In addition to sanctions laws, U.S. companies transacting insurance business in Venezuela need to consider the implications of the Foreign Corrupt Practices Act (“FCPA”).^[4] The FCPA prohibits U.S. persons or businesses from offering, paying, or promising to pay money or anything of value to any foreign official for the purpose of obtaining or retaining business. This prohibition could be applicable to the payment of money to a Venezuelan official to secure a contract to sell insurance. Enforcement of the FCPA by the U.S. Department of Justice (“DOJ”) in recent years has resulted in prosecution of numerous Venezuelan nationals for engaging in schemes that involved bribing foreign officials and defrauding foreign financial institutions. The U.S. Securities and Exchange Commission (“SEC”) is tasked with the civil enforcement of the FCPA with respect to public companies and their officers, directors, employees, agents, or stockholders acting on behalf of the companies. A public company’s violation of the FCPA can be detected by the SEC when the company shields its accounting records or financial information, or otherwise maintains inaccurate bookkeeping, potentially concealing bribes—in which case, the SEC may bring a civil enforcement action against the company.

Besides complying with the FCPA in the foreign bribery context, U.S. individuals and businesses seeking to engage in business in Venezuela or with Venezuelan nationals also need to comply with a recently adopted U.S. anti-corruption law, the Foreign Extortion Prevention Act (“FEPA”),^[5] which is enforced by the DOJ. FEPA focuses on foreign government officials who demand or accept bribes from any U.S. persons or companies. Although FEPA may prove more challenging for the DOJ to enforce, an investigation under the FCPA of a foreign official might also yield evidence of FEPA violations.

In connection with transacting insurance business with Venezuelan nationals, U.S. companies need to take both the FCPA and FEPA into consideration, recognizing that these laws could be implicated in cross-border life insurance activities to the extent that the activity involves a Venezuelan state-run business seeking to insure its employees or affiliates. For example, a U.S. life insurance company potentially triggers application of the FCPA if it seeks to obtain or retain insurance business with a Venezuelan state-run company. Therefore, in a cross-border life insurance transaction where foreign officials may be involved, it is critical to conduct due diligence to accommodate FCPA and FEPA compliance.

Venezuela’s Amended Insurance Law

In addition to the foregoing regulatory compliance considerations, U.S. life and health insurers need to accommodate Venezuela’s recently amended insurance law regulating the sale of insurance. The new law, entitled Reform Law of the Decree with Rank, Value and Force of Law of the Insurance Activity, or Ley de Reforma del Decreto con Rango, Valor y Fuerza de Ley de la Actividad Aseguradora^[6] (herein referred to as the “New Insurance Law”) took effect on March 29, 2024. As was the case with the previous law, the New Insurance Law provides that the Superintendent of Insurance Activity (Superintendencia de la Actividad Aseguradora, or “SUDEASEG”) must preapprove and authorize entities that seek to carry out insurance activity in Venezuela, including insurance and reinsurance companies, intermediaries, and representative offices or branches of foreign reinsurance companies. Thus, insurers are required to be authorized to engage in insurance business in Venezuela.

As related to life and health insurance contracts in particular, Article 17 of the New Insurance Law (excerpted below with a courtesy translation), similar to the Venezuela insurance law it amended, could be interpreted as regulating the purchase by Venezuelan residents of life and health insurance in transactions undertaken and entered into outside Venezuela:

No serán válidos los contratos de seguros o de medicina prepagada celebrados con empresas extranjeras cuando el riesgo esté ubicado en el territorio nacional, ni las operaciones de reaseguro realizadas con empresas del exterior no inscritas en el registro correspondiente, salvo las previstas en los acuerdos internacionales válidamente suscritos y ratificados por la República.

El Ministro o Ministra con competencia en materia de finanzas, previa opinión de la Superintendencia de la Actividad Aseguradora, por razones de oportunidad y de interés del Estado, fijará los casos y las condiciones en los cuales se podrá autorizar el aseguramiento en el exterior de riesgos ubicados en el territorio nacional, que no sea posible asegurar con empresas establecidas en el país, siempre que esa imposibilidad haya sido demostrada fehacientemente.

Insurance contracts or prepaid medical plans entered into with foreign entities shall not be valid in cases where the risk is located within the national territory, nor shall reinsurance activity with foreign companies that are not authorized in Venezuela be valid, with the exception of contracts sanctioned by international agreements signed and ratified by Venezuela.

SUDEASEG will be responsible for determining the cases and conditions under which it will authorize the foreign insurance of risks in the national territory for which there is no similar insurance available in Venezuela, as long as it is sufficiently proven that there is no national alternative available.

New Insurance Law, Article 17 (courtesy translation)

Because Article 17 of the New Insurance Law treats as “invalid” insurance contracts entered into with foreign insurers (i.e., not authorized in Venezuela) when the risk (i.e., person insured) is located in Venezuela, the offer and sale of life insurance to persons resident in Venezuela by U.S. companies needs to be analyzed on a case-by-case basis.

This conclusion is arguably reinforced under Article 17 of the New Insurance Law, given that foreign insurers not authorized to transact insurance business in Venezuela can nonetheless obtain permission from SUDEASEG to sell insurance in Venezuela if the type of insurance to be sold is not available from authorized insurers in Venezuela.

Conclusion

The political and business landscape in Venezuela is ever changing. Companies must be mindful of the applicable regulatory environment when engaging in the cross-border sale of insurance with Venezuelan residents. This is especially true at present given the New Insurance Law’s effect on the sale of life and health insurance on a cross-border basis, and also given the current impact of U.S. sanctions and anti-corruption laws on transaction of insurance business in Venezuela.

1. 31 C.F.R. § 591.406 (2024). ↑

2. Regina Garcia & Jorge Rueda, US Recognizes Venezuela’s Opposition Candidate as President-Elect Months After the Disputed Election, Associated Press (Nov. 19, 2024). ↑

3. Notice of OFAC Sanctions Actions, 89 Fed. Reg. 76915 (Sep. 19, 2024). ↑

4. 15 U.S.C. §§ 78dd-1, et seq. ↑

5. 18 U.S.C. § 201. ↑

6. Ley de Reforma del Decreto con Rango, Valor y Fuerza de Ley de la Actividad Aseguradora [Reform Law of the Decree with Rank, Value and Force of Law of the Insurance Activity], Gaceta Oficial No. 6,770, Nov. 29, 2023 (Venez.). ↑

To the uninitiated, the combination of patent and US Food and Drug Administration (FDA) law applicable to life sciences deals may seem needlessly technical and perhaps a subject best glazed over. What could go wrong? A lot. Consider the saga of the heart drug Angiomax. After the product was approved, the owner sought to extend the term of its patent by four years. Two months later, its lawyer prepared and filed the papers—seemingly within the statutory deadline of sixty days from drug approval. A year later, the US Patent and Trademark Office (USPTO) denied the four-year extension on the grounds that the filing was just one day late according to its rules for calculating time. The owner of Angiomax now stood to lose rights worth hundreds of millions of dollars based on a seemingly trivial one-day miscalculation.

Would a corporate lawyer conducting due diligence on a deal concerning a drug like Angiomax have flagged this issue? Would they know that the highly technical patent and FDA rules can require counting calendar days in a certain manner, and that not following these rules could lead to a very costly mistake? That is probably unlikely.

Corporate transactional lawyers and other life sciences dealmakers know how to get a deal done. They know corporate law and understand the importance of conducting diligence investigations to identify and manage business risks.

Yet corporate lawyers for life sciences transactions might benefit from consulting with an IP specialist when it comes to intellectual property (IP) diligence. IP diligence will identify and manage IP risks before the deal closes, especially patent and FDA risks that directly implicate the period of market exclusivity the product may enjoy and hence the value of the deal.

Patent lawyers can contribute a better understanding of important, but opaque, patent and IP concepts and thus improve the deal. Here are some of the most important IP concepts that may not be fully appreciated by corporate practitioners.

1. Groundbreaking Compound Patents Are Not the Key to Extending Market Exclusivity

If you develop a new therapy to cure cancer, you might win a Nobel Prize and earn a patent, too. But surprisingly, that patent may not be valuable to protect your product in the marketplace.

Developing a drug or biologic and obtaining regulatory approval is expensive and takes a long time—often ten years or longer. A drug developer will almost always patent its new therapeutic molecule during the preclinical stage, prior to starting clinical trials to obtain FDA approval. By the time the product is approved, the patent claiming the therapeutic molecule may only have a few useful years left before it expires—hardly enough exclusivity to justify the massive costs of drug development.

To protect future markets, developers invest in later-filed and later-expiring “secondary” patents that are narrower in scope. For example, drug developers will seek patents directed to methods of treating particular medical diseases or specific groups of patients for which the drug or biologic is used, as well as delivery devices and formulations for the drug. Drug developers may also seek to patent new and useful physical forms of the drug, such as salts and polymorphs (crystallized chemical forms of a drug that can be important for drug stability), and effective combination therapies in which the drug is used. In the realm of biologics, companies often patent the highly complex scientific processes required for making the drug.

These secondary patents often get far less attention than patents for pioneering chemical compounds, yet they are the workhorses that deliver the economic value necessary to make the therapeutic development process viable. Make sure that these secondary patents receive prime attention when performing diligence and are adequately addressed in your deal documents.

2. Sure, Patents Protect Your Market, but FDA Rights Can Block the Competition

Patents block competitors from making a direct or close copy of the patent owner’s invention and provide market exclusivity for a product. However, because patents can be avoided in many ways, innovators seek additional forms of market protection. The FDA offers a number of statutory exclusivities specifically for drugs, biologics, and medical devices that effectively block competitors from joining the market for critical periods of time. Likewise, the USPTO also offers drug, biologic, and device makers ways to extend the useful life of their patents to compensate for lost patent enforcement time from FDA delays in granting approvals.

The FDA provides exclusivity rights that grant drug developers the right to block competitors from obtaining competing approvals for effectively seven and a half years if the original drug is considered an orphan drug, or five years if the drug is considered to be a new chemical entity (as opposed to a new molecular entity). Some drugs may also qualify for pediatric exclusivity, which extends a product’s market exclusivity for six months in exchange for the drug developer conducting studies of its drug on pediatric patient populations. Even prospective exclusivity rights expected to be awarded to a generic first filer can stall market entry by other generic makers for years and benefit the developer of the original drug. There are several other kinds of exclusivity rights available for pharmaceuticals, biologics, medical devices, and diagnostics equipment.

Aspects of the FDA’s review processes also can result in unofficial “soft” exclusivities that protect against competition, such as stringent bioequivalent, biosimilar, and other approval standards required to obtain approval of closely similar versions of a drug, biologic, or medical device. For drugs and biologics in the form of liquids, nasal sprays, and topical ointments, the FDA often tightens the approval standards for competing generic products, making it harder to get a generic competitor’s product approved.

There are similar hurdles for medical products that operate using AI. For example, a buyer seeking to purchase a company that makes a medical device employing AI to guide surgery would need to make sure that the training dataset and other data used by the AI device’s software are owned by or licensed to the developer. Without exclusive rights to use the key data or exclusive AI software, the AI device will not have market exclusivity.

These exclusivity rights and stringent approval standards for similar products are intellectual property rights that can be just as important as patent rights in protecting the product market. The product developer must be careful in seeking and using these forms of market exclusivity.

It is important for deal documents to fully identify all the rights that protect the investment and add value to the deal. These would include traditional market exclusivity rights such as patents but should also include other lesser-known rights such as FDA exclusivity and approval standards. Ownership of these critical rights must be investigated and verified. Representations and warranties in the deal should confirm the key features of the exclusivity rights, including statements that the party owns these rights, the rights were obtained correctly, and the rights are being used properly to protect the market of interest. These non-patent rights are not vague theoretical rights but instead property rights that must be fully documented in the deal documents like other property rights.

3. Muddled IP Reps and Warranties Don’t Work

Clarity and candor are the keys to successfully completing a deal involving patents and exclusivity rights. During the diligence process, there will be many issues that cannot be immediately resolved, such as inventorship and prior art issues. Representations and warranties are the tools deal lawyers use to manage risks arising from murky patent and exclusivity issues, and they need to be as clear as possible.

Representations and warranties about patents in deal documents must reflect the issues at hand correctly and must be written with precision. For example, a representation should not comingle technical (and often confusing) concepts about patent validity with issues concerning patent inventorship, maintenance fees, ownership, or patent infringement. To make useful and effective representations, it is necessary to understand the patent processes that are the subject of the representations—which is where the assistance and advice of a patent lawyer may be useful.

4. USPTO Rules Can Void Your Security Interest in Patent Collateral

Patents are a common form of collateral in a corporate transaction and are secured by the grant of a security interest, such as interests evidenced by a UCC-1 filing. The granting of a security interest in a patent can only be validly made by the patent owner, and not a closely related company such as a parent corporation.

Verifying valid ownership can be tricky and may involve reviewing years of transfer records to establish a chain of title. To be the owner, the company must be the recipient of a written assignment of full ownership in its favor signed by the prior owner, and every link in the chain of title from the inventor to the present owner must be in place. If one of the links in the chain fails, so does the claim of ownership.

Unlike most forms of personal property, the transfer and ownership of patents is governed by federal law. US patent law requires that the transfer be in writing and then (to achieve full rights) recorded with the USPTO’s assignment division. The assignment must be made by the current owner and not a closely related party. For example, a parent corporation that fully owns a subsidiary cannot transfer ownership of patent rights owned by the subsidiary. Such a transaction would be a nullity and would create a break in the chain of ownership. Missing or defective links in the chain of title may seem like a minor issue, but they are not. If the ownership chain cannot be fully documented, ownership issues will remain unsettled and uncertain.

Thus, in a complex corporate transaction, the bona fides of every assignment in the chain of title must be examined to make sure title has properly passed to the present owner before a new transfer is made.

5. Although You Earned a Patent, You May Not Be Able to Use Your Own Invention

A common misconception about patents is the belief that a patent gives the patent owner, or patentee, the right to freely make and use the patented invention. After all, since the USPTO granted a patent that provides a right to exclude others from using the invention, why shouldn’t the patentee be able to use the invention claimed in the patent? A patent does not actually give the patent owner the right to use the patented invention. Restated in lawyerly terms, obtaining a patent does not give the patent owner freedom to operate (“FTO”). It only gives the patent owner the right to block others from making, selling, using, and importing the patented invention.

Often, a product developer will be confronted with a broader patent owned by another party that precludes the developer from practicing its own closely related invention. For example, suppose a pharmaceutical company patented a new groundbreaking therapeutic compound intended to treat a particular disease, but the compound was not approved by the FDA for lack of a suitable pharmaceutical formulation for the drug. A competitor overcomes this problem by developing an innovative new way to formulate that compound so that it is safe and effective and meets FDA standards. Even if the competitor obtains its own patent covering its formulation, it cannot make or use the formulation because doing so will infringe claims in the other company’s broader compound patent. Likewise, the original pharmaceutical company would too be precluded from practicing the competitor’s patented formulation.

Thus, it is important to understand that a patent does not give the owner the right to practice the invention. To answer that question, the diligence investigator must consider the more complex and different question of FTO.

Conclusion

Patent law presents difficult and, at times, unpredictable issues. In the worst case, the haze created by the interplay of patent and FDA statutes and regulations can cause practitioners to make simple, but devastating errors like miscounting calendar dates. Corporate practitioners should consider seeking complementary patent expertise for deals that involve patents, other IP, and related market exclusivity rights.

In the past year, following the U.S. Supreme Court’s decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College (“Harvard/UNC”),^[1] a number of trends have emerged in the diversity, equity, and inclusion (“DEI”) legal landscape, including an increase in Section 1981 claims, suits against corporate DEI initiatives, challenges related to DEI programs based on the First Amendment, and actions involving scholarships in higher education. Although many of the DEI-related lawsuits and developments have not involved employers or the workplace directly, the cases and developments hold lessons for employers regarding best practices for their own DEI initiatives and programs. The proverbial dust has not yet settled, so employers should expect even more legal developments in the DEI arena in the years to come.

Increase in Section 1981 Litigation

Over the past year, there has been an increase in so-called reverse discrimination suits filed under Section 1981 of the Civil Rights Act of 1866. Section 1981 provides “all persons within the jurisdiction of the United States” the “same right in every State and Territory to make and enforce contracts.”^[2] The Civil Rights Act of 1866 was discussed and analyzed at length in Harvard/UNC. The majority noted that “the Act did not single out a group of citizens for special treatment—rather, all citizens were meant to be treated the same as those who, at the time, had the full rights of citizenship.”^[3]

Case precedent unique to Section 1981 further demonstrates that Section 1981 protects racial-ethnic nonminority groups and minority groups alike. For example, in McDonald v. Santa Fe Trail Transportation Company,^[4] the U.S. Supreme Court was asked to decide whether Section 1981 applied to racial discrimination against members of all races. The Court considered the plain language of the statute, examined the legislative history surrounding the Civil Rights Act of 1866, and considered other evidence regarding congressional intent. Ultimately, the Supreme Court held that the statute was clearly designed to protect citizens of every race.^[5]

The recent increase in suits filed under Section 1981 is most likely connected to the differences in how Section 1981 claims proceed as compared to claims under Title VII of the Civil Rights Act of 1964. First, a plaintiff can bring a Section 1981 claim more quickly than a Title VII claim because, unlike a Title VII claim, a Section 1981 claim does not require that the plaintiff first file a charge with the U.S. Equal Employment Opportunity Commission (“EEOC”) and exhaust its administrative remedies.^[6] Second, unlike Title VII, a Section 1981 claim is not subject to a damages cap. These two key differences make a Section 1981 claim more attractive to a plaintiff looking to challenge DEI-related policies and practices.

Increase in Organizations Filing Suits Against Corporate DEI Programs

Following the Harvard/UNC decision, there has been an increase in suits filed by organizations challenging corporate DEI programs. Similar to how Students for Fair Admissions sought action on behalf of its members in Harvard/UNC, other organizations have initiated lawsuits challenging DEI programs on behalf of their members. Two of the most active organizations engaged in this litigation in the past year include American Alliance for Equal Rights (“AAER”) and America First Legal Foundation.

However, thus far, many of these suits have been dismissed due to a lack of standing. For example, earlier this year, the organization Do No Harm filed suit against Pfizer, Inc., alleging that its collegiate summer internship program violated Section 1981 because it allegedly excluded applicants on the basis of race.^[7] Pfizer challenged Do No Harm’s standing to bring the suit. Though Do No Harm claimed that it had identifiable candidates who wished to apply and met all of the requirements for the fellowship except for the racial requirement, the organization did not provide specific names of the individuals allegedly harmed.^[8] As a result, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s dismissal of the lawsuit and held that “an association that relies on injuries to individual members to establish its standing must name at least one injured member.”^[9]

First Amendment Concerns Related to DEI Initiatives

Recent DEI-related cases have also discussed First Amendment issues related to DEI programs, initiatives, and legislation. For example, AAER filed suit against a venture capital firm, Fearless Fund Management LLC, alleging that the firm’s grant contest violated Section 1981.^[10] The contest provided grants to small businesses that were at least 51 percent owned by Black women.^[11] AAER alleged that the contest discriminated against other small business owners.^[12] Fearless, in turn, argued that the First Amendment “protect[ed] [its] contest as a form of expressive conduct” and further argued that its contest was designed to demonstrate “its ‘commitment’ to the ‘[b]lack women-owned’ business community.”^[13] The U.S. Court of Appeals for the Eleventh Circuit, however, disagreed and found that “if that refusal were deemed sufficiently ‘expressive’ to warrant protection under the Free Speech Clause, then so would be every act of race discrimination.”^[14]

In Honeyfund.com Inc. v. Governor of Florida, the Eleventh Circuit addressed a slightly different free speech concern in connection with a legal challenge to Florida’s Individual Freedom Act.^[15] This law, also known as the “Stop WOKE Act,” banned certain mandatory workplace trainings.^[16] Florida argued that the act lawfully prevented employers from mandating that their employees listen to “dangerous and offensive speech.”^[17] On the other hand, plaintiffs Honeyfund and Primo Tampa argued that “the Act prohibits them from sharing their viewpoints.”^[18] Ultimately, the Eleventh Circuit held that the statute unlawfully regulated speech because it was the content of the speech at the meetings that the state was attempting to regulate.^[19]

Impact on Scholarships and Fellowships

Another area that has been impacted by the Harvard/UNC decision is educational scholarships and fellowships.

Following the decision, some states instructed their educational institutions to make changes to their scholarship programs. For example, Missouri’s attorney general, Andrew Bailey, instructed all educational institutions in Missouri subject to Title VI of the Civil Rights Act of 1964 to “identify all policies that give preference to individuals on the basis of race and immediately halt the implementation of such policies.”^[20] He also specifically instructed that scholarships “must immediately adopt race-blind standards.”^[21] As a result, the University of Missouri informed its donors that scholarships from the university would be awarded on a race-neutral basis. Some donors were upset that their scholarships could no longer be given to individuals of a specified race, which was their intent when making the donation. As a result, litigation may be looming with respect to how universities use charitable gifts with specific intentions.^[22]

Additionally, educational institutions offering scholarships with race-specific application criteria could face investigation by the Department of Education’s Office for Civil Rights (“OCR”). For example, the Equal Protection Project filed a complaint with the OCR alleging that five scholarships offered by Minnesota State University Moorhead were discriminatory because the scholarship conditioned eligibility on a student’s race.^[23] The same organization filed a complaint with the OCR regarding Western Kentucky University scholarships that restricted eligibility based on race.^[24] The OCR opened an investigation into the scholarships, and Western Kentucky University has since removed the scholarship offerings from its website.^[25]

In the Harvard/UNC decision, the Supreme Court focused on the constitutionality of affirmative action with respect to race, but it did not extend its analysis to gender. It’s possible that this is because Title IX has historically regulated gender equality in educational settings. Thus, while Section 1981 claims have become increasingly popular for challenging racial inequalities in educational settings, Title IX likely remains the only avenue for gender inequality claims in educational settings.

Changes to DEI Departments

In response to the Harvard/UNC decision, many educational institutions have made adjustments to their DEI departments and programs in the past year. In February 2024, the University of Florida closed its diversity department and terminated all DEI staff.^[26] In May 2024, the board of trustees of the University of North Carolina at Chapel Hill voted to redirect funding from diversity initiatives to campus safety and policing.^[27] Similarly, in response to state legislative actions, the University of Wyoming closed its DEI office.^[28] The University of Iowa restructured its DEI office and renamed it the “Division of Access, Opportunity, and Diversity.”^[29] The Massachusetts Institute of Technology eliminated diversity statements from its faculty hiring process,^[30] and Harvard has eliminated DEI statements as a requirement for tenure-track job applications.^[31]

Takeaways for Employers

In this new era of increased DEI-related litigation, the importance of lawful and thoughtful DEI programs remains for employers. One key to a successful program is effectively training employees and communicating the intention of the program to them. In other words, it is important for employers to know the why behind their DEI initiatives and programs. And effectively communicating the rationale behind DEI policies and initiatives is also key to demonstrating a lack of discriminatory intent. Employers cannot make employment-related decisions based on race, sex, or any other protected trait. Moreover, employers should not financially incentivize managers or leaders to meet related diversity goals because EEOC representatives have publicly stated that such incentives can be evidence of discriminatory intent.

At the end of the day, employers should remember that they should always hire or promote the most qualified candidate and treat employees and candidates as individuals and not as representatives of their respective demographic groups. By focusing their efforts on removing barriers to inclusion (as opposed to creating quotas or targets for racial or gender balancing), employers can manage workplace policies and standards universally across all employees while still capturing the essence of DEI.

1. Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll. (Harvard/UNC), 600 U.S. 181 (2023). ↑

2. 42 U.S.C. § 1981. ↑

3. Harvard/UNC, 600 U.S. at 250. ↑

4. McDonald v. Santa Fe Trail Transp. Co., 427 U.S. 273 (1976). ↑

5. Id. at 295. ↑

6. Riddhi Setty & Tatyana Monnay, Conservative Duo Fights Against DEI One Bias Claim at a Time (1), Bloomberg L. (June 5, 2024). ↑

7. Do No Harm v. Pfizer Inc., 96 F.4th 106 (2d Cir. 2024). ↑

8. Id. at 108–09. ↑

9. Id. at 109, 120–21. ↑

10. Am. All. for Equal Rts. v. Fearless Fund Mgmt., LLC, 103 F.4th 765 (11th Cir. 2024). ↑

11. Id. at 769–70. ↑

12. Id. ↑

13. Id. at 777, 779. ↑

14. Id. at 779. ↑

15. Honeyfund.com Inc. v. Governor of Fla., 94 F.4th 1272 (11th Cir. 2024). ↑

16. Id. at 1275–76. ↑

17. Id. at 1276. ↑

18. Id. ↑

19. Id. at 1283. ↑

20. Letter from Andrew Bailey, Att’y Gen. of Missouri (June 29, 2023). ↑

21. Id. ↑

22. Liam Knox, Affirmative Action Fallout Sours Donor Relations, Inside Higher Ed (June 13, 2024). ↑

23. Stephen Montemayor, Race-Based Scholarships at Minnesota State University Moorhead Subject of New Civil Rights Complaint, Minn. Star Trib. (June 11, 2024). ↑

24. Equal Protection Project v. Western Kentucky University (Two Scholarships Restricting Eligibility Based on Race Challenged), Equal Protection Project (last visited Nov. 22, 2024). ↑

25. Id. ↑

26. Caroline Downey, University of Florida Closes Diversity Department, Fires All DEI Staff, Nat’l Rev. (Mar. 1, 2024). ↑

27. Caroline Downey, University of North Carolina Board Slashes DEI Funding, Diverts Money to Campus Police, Nat’l Rev. (May 13, 2024). ↑

28. UW Makes Changes in Response to Legislative Actions on DEI, Univ. of Wyo. (May 10, 2024). ↑

29. Univ. of Iowa Off. of Strategic Commc’n, UI Makes Progress Implementing Iowa Board of Regents DEI Directives, Iowa Now (May 30, 2024). ↑

30. James Lynch, MIT Scraps Diversity Statements in Faculty-Hiring Process After Discovering “They Don’t Work,” Nat’l Rev. (May 10, 2024). ↑

31. Josh Moody, Harvard’s Largest Division Drops DEI Hiring Statements, Inside Higher Ed (June 5, 2024). ↑