Have you noticed how the pandemic has changed people’s connections and relationships? Do you think that people who now work remotely feel isolated and are concerned about their careers? My book, Focus on Now: Keys to a Wildly Successful Career (publication forthcoming), is a collection of stories that address these current issues through lessons learned over the course of my career. My goal is to help others become financially more successful in their jobs and careers—and live a happier and more meaningful life in a post-pandemic world.

I was a lawyer and then stopped practicing to become a national business leader who spent over thirty years successfully growing and improving many companies, ranging from some of the largest companies in the United States to small privately held companies. I share hundreds of practical lessons from my legal career and unique experiences from the years I spent leading and turning around companies so that readers can apply them to their own careers. Each chapter contains keys to career success and helpful, thought-provoking questions that everyone can easily relate to and use. These past lessons may provide insight into the issues people will face tomorrow. I wish someone would have taught me these lessons when I was younger.

I discuss many problems I encountered when working with different companies, including what I did to lead the successful bankruptcy reorganization of one of the world’s largest airlines, Continental Airlines (now United Airlines). I share the inside story of advising my company’s CEO and senior management about managing their second-largest customer’s bankruptcy, as well as the story of the defining moment in the bankruptcy—and the most challenging experience of my career!—when the Unsecured Creditors Committee, which I chaired, considered whether to shut down the airline, affecting tens of thousands of employees.

Interpersonal skills and connecting with others were critical keys to my success. I describe how virtues and character traits such as trust, dependability, patience, humility, and transparency have a positive effect regardless of the kind of work or employer—and how I believe that being likable, a skill that anyone can learn, may be more important than a person’s level of intelligence or experience in a career. “Soft skills,” genuinely caring, and being curious about others are the cornerstones for a successful career and becoming financially secure. I share many relatable lessons about the soft skills that I learned in my fourteen years as the assistant general counsel in a multibillion-dollar company, Ryder System, such as how I continuously developed my conversational skills and avoided being a “know-it-all” person. Career success is a team effort, and I discuss ways I tried to become a great team player. And I explore my actions as a member of the board of directors in various companies and how I dealt with difficult members of those boards. In terms of connecting with others, I describe how having a caring mentor was one of the best professional experiences in my life and how it is essential for everyone to have a champion or sponsor at work.

I share the thought process in which I engaged before changing jobs and choosing to stop practicing law. I went through a process of self-reflection and tried to identify what would make me happier and allow me to live a more meaningful life. If I continued practicing law, I reasoned, I would remain unhappy for at least the next year or two, regardless of the type of law or where I practiced. If I changed roles, there was an equal chance that I would be unhappy in any subsequent position, and there might be some truth to the famous saying that “the grass is not greener on the other side—it is just more grass.” But I reasoned that there was at least an opportunity or a better chance to be happy in the next job, which would not happen if I stayed in my current role. I set career goals with intermediate steps along the way as I needed a plan or direction to follow, including a plan for the role of money in my decisions. Developing specific expertise and being good at something I enjoyed doing was, I felt, vital to my career. The past, including any outstanding student loans, was a sunk cost—and I decided that the past should not define my future or what I could do. I was willing to take career risks, bet on myself, and develop a new plan (and a backup in case my plan failed). I describe the ways that I continuously invested in myself.

I left Ryder to become the national partner-in-charge of corporate restructuring in an international accounting and consulting firm, Coopers & Lybrand (now PricewaterhouseCoopers). I explain how I learned to bring in new clients and business and how I handled challenges and trade-offs similar to those people face today when working remotely, such as whether networking with co-workers and new people was a major reason to return to the office. I also share what I learned from being fired from a job and address the current trend of quiet quitting, or remaining in place while not trying your hardest. I describe how I tried to pick the right company that aligned with my values because my employer’s reputation and culture affected my success and happiness.

A critical component of my career success was staying in touch with former coworkers and colleagues. Staying connected built my future net worth and resulted in new opportunities, relationships, and connections, such as becoming the chief investment officer for the Minnesota Twins Major League Baseball team owner, who referred me to the Colorado Rockies Major League Baseball team owner, who became my client. I describe the compassion and charity I saw while serving as his adviser.

Through my experiences with a multitude of organizations, I honed successful leadership traits. One example is the ability to persevere through difficult times: I explain what I did as the chief restructuring officer for an international restaurant chain, COSI, trying to save over 2,500 jobs. And I explain how my tenure as president of a construction company highlighted the importance of taking responsibility and admitting mistakes. Another key to success is always being prepared, trying your best, and remembering that “good enough is not good enough.”

The backbone of my career, though, was the love and support from my family, and I share heartwarming personal stories and how I refused to change my ingrained moral compass.

Overall, Focus on Now: Keys to a Wildly Successful Career encapsulates two general principles that I believe are critical for a successful career. First, be laser-focused on achieving a goal or plan. Second, and equally important, have a sense of urgency for every task and believe that “there is no time like the present.” In other words, focus on now—a philosophy that I have always embraced and the reason for the title of my book.

Corporations continue to look to innovation to increase value and expand capabilities. Traditionally, corporations focused on internal research and development (“R&D”) and acquisitions of strategic targets. Yet, innovation through R&D can have its limitations as it is funded internally and can be restricted by internal policies and procedures that may hinder innovation. Innovation through acquisition also has its risks, as the purchaser may not identify all of the potential issues of the target when conducting its due diligence. A purchaser may also face issues when attempting to integrate the target into its existing business—particularly when the purchaser is a multinational corporation and the target is an emerging company. 

To address these concerns, corporations have increasingly looked to establish a corporate venture capital (“CVC”) program to support and complement their innovation strategies and outsource strategic alignments to stay competitive. Corporations that have established a CVC program can gain invaluable market intelligence, as well as invest in and understand future acquisition targets. For emerging companies and start-ups, CVC programs offer funding as with traditional venture capital funds but can also provide such companies with market and development support. CVC programs can also form alliances with emerging companies that may be potential customers or strategic partners.

Corporate Venture Capital Programs Defined

CVC, a subset of and different from traditional venture capital, is the investment of corporate funds directly into emerging companies. CVC programs allow companies to gain insight and access to new markets, trends, and technologies. 

The term CVC both broadly captures strategic investments made by large and established corporations in emerging companies and also more narrowly refers to investments that a corporation makes through a related CVC arm dedicated to sourcing and making investments in start-ups, rather than through direct strategic investments.

Objectives of a CVC Program

CVC programs are similar to traditional venture capital funds in that the goal is to invest in emerging high-growth companies that drive value back to the company. Both CVC programs and traditional venture capital funds are driven by financial returns. 

However, CVC programs, once known as strategic investments, also strive to advance the company’s strategic objectives. In addition to financial returns, the other goals of a CVC program could be to (i) identify and capitalize on synergies between the corporation and emerging company, (ii) develop the corporation’s technology, (iii) acquire the emerging company’s technology, and/or (iv) create commercial partnerships.

For the emerging company, and in addition to funding, a CVC program can offer (i) access to resources, (ii) access to customers, (iii) market knowledge, (iv) brand validation, and (v) wider networks. 

As such, CVC programs may look to invest in emerging companies that operate in the same or complementary industries.

Choosing a Legal Structure 

A CVC program’s strategic and financial objectives will inform how closely the program will coordinate with the corporation’s current operations—that is, its legal structure. There are three main types of legal structures for CVC programs: limited partnerships, investment via an affiliate, and fully integrated programs. Many factors should be considered when establishing the appropriate structure for a CVC program, including tax considerations. These considerations are beyond the scope of this article. 

1. Limited Partnerships

A CVC program can be structured as a limited partnership operating as a separate legal entity from the parent company. A limited partnership is made up of at least one general partner (“GP”) and one limited partner (“LP”). In any partnership, the GP or GPs manage the partnership. CVC programs may utilize this model of investment in two ways. First, they may look to form an independent limited partnership. Second, they may invest in a venture capital fund as a limited partner.

(a) Formation of a Limited Partnership

A corporation may look to form an independent limited partnership in which the parent company is the sole LP and a separate entity is incorporated that is the GP. Under this approach, the corporation can set the investment criteria and strategic direction of the limited partnership. This means that the CVC program can be focused on investing in portfolio companies that directly benefit the corporation. This approach can offer tax advantages, but these are beyond the scope of this article. The disadvantage is that this approach requires substantial capital investment for the corporation, and conflicts may still exist between the parent company and the investment arm. 

(b) Investment as a Limited Partner

Alternatively, the corporation can invest as a limited partner in one or more independent venture capital funds. By joining as a limited partner, the corporation has quick and easy access to deal flow, invests in areas farther away from the corporation’s core business, and relies on the venture capital fund to make investment decisions. However, this structure also means limited influence and autonomy on the investments and fewer strategic incentives for the corporation. In addition, the CVC program will have limited access to information relating to the day-to-day operations of the portfolio companies. 

2. Investment via an Affiliate 

A CVC program may also be structured as an affiliated legal entity of the corporation or a separate business unit within the corporation. Under this approach, the day-to-day management of the CVC program can be separated from the other aspects of the corporation as the CVC program can be managed independently from the rest of the operations of the business. As such, the investment selection and decisions can be separated from the parent company. Typically, the parent company will have oversight over certain decisions by way of an executive committee.

3. Fully Integrated CVC Programs

A corporation can also form a CVC program internally, where the investment team consists of company employees. Under this structure, a specific investment department or business unit oversees and approves each investment. As this is an in-house CVC program, investments made are generally closely related to the business divisions of the parent company. 

Running a Successful CVC Program

For a CVC program to succeed strategically and financially, a company should clearly define its investment goals, develop a strong program infrastructure, and establish deal sources, among other business best practices.

1. Have a Defined Investment Thesis 

While strategic investments produce financial value in the long run, CVC programs often have to balance strategic and financial objectives. For instance, a CVC program’s decision to invest in a portfolio company may be driven by its interest in the portfolio company’s technology or business processes. As such, the CVC program may be willing to accept lower returns due to the potential synergies with the parent company’s operations or strategic direction. Having a clear understanding of the CVC program’s strategic direction and investment goals will inform which CVC structure would be most appropriate, though it is not critical for the CVC program to have a defined investment thesis that is aligned with the parent company’s strategy.

2. Develop a Strong Infrastructure 

Once an investment thesis is established, the CVC program must have the resources and structure required to reflect the investment thesis. This includes determining the level of autonomy that the CVC program will have with respect to the parent company. Greater autonomy may allow for the CVC program to take greater risks and make investments that may fall outside of the traditional scope of the parent company’s operations. Yet, the parent company should still look to maintain a level of oversight to ensure that no conflicts of interest exist and that no investment decisions are made that might cause reputational damage to the parent company. 

The parent company must also ensure that adequate resources are made available to the CVC program to support its success. This includes ensuring that individuals with expertise in venture capital financing are involved. When corporations initially consider investing in emerging companies, they may not have the internal expertise with negotiating minority investments. Without expertise in venture capital investing, corporations may treat these investments as if they were mergers and acquisitions investments. As such, the corporation may focus on ensuring that it has control of the operations and decision-making of the emerging company. In doing so, the corporation could limit the potential of an emerging company and stifle the future innovation that drove the corporation’s decision to invest in the first place.

Some additional infrastructure considerations include the following:

• Who will manage the day-to-day program operations?
• How will capital be allocated to the CVC portfolio and the targeted stages of investments? 
• What will be the compensation structure for the corporate venture team?
• What will be the key performance metrics for the CVC program?

3. Establish the Deal Pipeline

The volume and quality of investment deals are important factors to a CVC program’s success. Consequently, CVC programs should establish a robust communication framework to ensure that there is an efficient investment approval process. Internal communication includes frequent meetings with the investment team and consistent oral/written connections with the parent company. External communication includes outreach efforts to relevant start-up communities and engagement with portfolio companies. 

There are three main ways that CVC programs source deals:

• Institutional venture capital firms: Forming relationships with institutional firms, which have a wider network and greater deal flow, is an important way for CVC programs to grow their deal pipeline.
• Accelerators and incubators: Accelerators provide good sources for early-stage investments, because the participating start-ups have already undergone some sort of vetting process.
• Informal networks: CVC programs often have analysts who scout start-ups on research platforms, attend venture capital events, and gain referrals.

Conclusion

CVC programs have proven to be an effective way for companies to invest capital strategically to drive future growth and leverage disruptive innovation. The structures and points discussed herein are not an exhaustive list of considerations relating to the formation of a CVC program, but this article highlights some key issues that companies should contemplate. Companies that plan to engage in CVC should seek counsel with venture capital knowledge to guide their process. 

What are the ethical obligations of a transactional lawyer embroiled in litigation over the transaction when ordered by the court to turn over for a forensic analysis the hard drive of a computer containing not only information about the client before the court but also confidential information of various other clients? A lawyer facing a court order or a subpoena requiring the disclosure of client confidential information is faced with some complex and fact-intensive questions about how to respond, which are considered in a recent New York State Bar Association ethics opinion (“NYSBA Op. 1239”). Under the facts there, the client involved in the litigation had waived attorney-client privilege and consented to disclosure of confidential information, but the other clients had not.

There is some interesting rules-based history here. Nearly 30 years ago, ABA Formal Opinion 94-385 (“Formal Op. 385”) addressed issues confronted by a lawyer on the business end of such a subpoena or court order. That opinion, which was issued prior to the 2002 amendments to Model Rule 1.6, took the hard-line position that a lawyer was ethically required to seek to limit a subpoena or court order on any legitimate available grounds in order to protect documents deemed confidential under Rule 1.6.

The pre-2002 iteration of Rule 1.6(a) simply stated that a lawyer “shall not reveal information relating to representation of a client unless the client consents after consultation.” Only two exceptions were recognized by then–Rule 1.6(b), neither of which was applicable to the subpoena/court order situation.^[1] The Comment to that earlier version of Rule 1.6, but not the blackletter, did recognize that a court order might supersede the lawyer’s obligation of confidentiality; however, Formal Op. 385 proclaimed that a lawyer could not be a “passive bystander” in such circumstances but had to use all legitimate means available to avoid the disclosure:

Only if the lawyer’s efforts are unsuccessful, either in the trial court or in the appellate court (in those jurisdictions where an interlocutory appeal on this issue is permitted), and she is specifically ordered by the court to turn over to the governmental agency documents which, in the lawyer’s opinion, are privileged, may the lawyer do so.

The 2002 amendments to Model Rule 1.6 included a new provision in 1.6(b) providing that “[a] lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary . . . to comply with other law or a court order.” That principle is now enshrined in Model Rule 1.6(b)(6). Notwithstanding this authorization, there remain complex shoals for a lawyer in this situation to navigate.

In 2016, the ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 473 (“Formal Op. 473”), which revised the guidance given in 1994 and confronted the ethical responsibilities regarding confidential client information of a lawyer who is subject to a subpoena. There is no question, as Formal Op. 473 acknowledged, but that the lawyer must obey a court order. (That is true, incidentally, even where the court order is unlawful, as the Supreme Court held years ago in Walker v. City of Birmingham.^[2]) The obligation to comply, however, does not foreclose the possibility of taking certain protective actions where required by applicable rules of professional conduct.^[3]

As noted above, the proscription in Model Rule 1.6(a) against revealing confidential client information is subject to various exceptions. One of these permits, Rule 1.6(b)(6), allows turning over such information “to comply with . . . a court order” but, as limited by the introductory language of 1.6(b), only “to the extent the lawyer reasonably believes necessary” to so comply. In the situation described, Formal Op. 473 advised that the lawyer, when assessing what information needs to be disclosed and what protective measures may appropriately be undertaken, must consult with the client,^[4] as contemplated by Model Rule 1.4.

The details of this consultation can certainly vary with different facts. As is clear from Model Rule 1.6(a), a client (including a former client) may, provided there is informed consent, simply authorize the lawyer to provide the materials sought by the subpoena. The lawyer should, pursuant to the “informed” prong of “informed consent,” be sure to counsel the client on available privilege and work-product protections, as well as the tenor of Rule 1.6 itself. Thus, Formal Op. 473 says, the consultation “at a minimum” must include “(i) a description of the protections afforded by Rule 1.6(a) and (b), (ii) whether and to what extent the attorney-client privilege or work product doctrine or other protections or immunities apply, and (iii) any other relevant matter.”^[5] After such consultation, if so instructed by the client (or in the event the client is unavailable), the lawyer must assert all reasonable claims against disclosure and seek to limit the subpoena or other demand on any reasonable ground.

New York’s version of the confidentiality rule is substantially identical to Model Rule 1.6. There are, however, some differences in the relevant comments—in particular, Comment [15] to Model Rule 1.6 and Comment [13] to N.Y. Rule 1.6.

The New York version of the comment is more detailed. It provides:

A tribunal or governmental entity claiming authority pursuant to other law to compel disclosure may order a lawyer to reveal confidential information. Absent informed consent of the client to comply with the order, the lawyer should assert on behalf of the client nonfrivolous arguments that the order is not authorized by law, the information sought is protected against disclosure by an applicable privilege or other law, or the law is invalid or defective for some other reason. In the event of an adverse ruling, the lawyer must consult with the client to the extent required by Rule 1.4 about the possibility of an appeal or further challenge, unless such consultation would be prohibited by other law. If such review is not sought or is unsuccessful, paragraph (b)(6) permits the lawyer to comply with the order.

NYSBA Op. 1239 prescribes the following course of action:

1. Consult (to the extent required by New York’s version of Rule 1.4) with each other client whose confidential information is on the hard drive.^[6]
2. The consultation with each other client (from the preceding paragraph) should involve reasonable efforts the lawyer will take to preserve the confidentiality of that client’s information stored on the hard drive.^[7] If the information provided by the lawyer is adequate to meet the requirements for “informed consent” (as defined in New York’s Rule 1.0(j)^[8]), the client will be able to choose between making an effective waiver of confidentiality (in which case nothing further need be done as to that client) or insisting upon its preservation.^[9]
3. Absent waiver, the lawyer must take reasonable steps to preserve the confidentiality of each nonparty, nonwaiving client’s information. The reasonable steps identified in the opinion include
   1. seeking to establish agreed search terms or other protocols that a mutually acceptable ESI vendor could implement;
   2. in the event the waiving client’s electronic file has been stored in a fashion that allows for segregated duplication, securing an agreement to produce only that portion of the file that concerns the waiving client;
   3. negotiating a confidentiality order limiting production for “attorney eyes only”;
   4. seeking the appointment of a special master to review the privilege issues;
   5. seeking in camera review of the confidential information by the court (citing NYSBA Opinion 1057 (2015));
   6. in the absence of agreement, moving to reargue the motion leading to the court’s decision outlining less intrusive means by which the legitimate goals of the litigation may be advanced;
   7. in the absence of a court order revisiting the terms of the order, moving to stay enforcement pending appeal; and
   8. appealing.^[10]

What happens, however, if all of those steps prove unsuccessful? This is where “you have to know when to hold ’em and know when to fold ’em.”^[11] As NYSBA Op. 1239 forthrightly acknowledges, the lawyer “is not ethically required to be held in contempt of court to protect confidential information stored on his hard drive and may comply with the court directing the production of his hard drive for forensic analysis.”^[12]

1. The exceptions were (1) “to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm” and (2) “to establish a claim or defense on behalf of a lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer’s representation of the client.” At that time, Model Rule 1.6’s prohibition against disclosure was therefore considerably broader than that of its predecessor, DR 4-101, under the Model Code of Professional Responsibility, which had authorized revealing client confidences or secrets “when . . . required by law or court order.” MODEL CODE OF PROFESSIONAL RESPONSIBILITY DR 4-101(C)(2) (1980). ↑

2. 388 U.S. 307 (1967) (holding that an injunction issued by a court with jurisdiction and authority to issue it must be obeyed though it be erroneous; civil rights protestors who disobeyed an injunction they believed violated the First Amendment without seeking to have it modified could not attack its constitutionality at a contempt hearing for violating that order). ↑

3. See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS [hereinafter “RESTATEMENT”] § 63 (The Am. L. Inst. 2000) (“A lawyer may use or disclose confidential client information when required by law, after the lawyer takes reasonably appropriate steps to assert that the information is privileged or otherwise protected against disclosure.”). ↑

4. The opinion noted that the obligation is essentially the same for current and former clients. It went on to note:

   For former clients, the lawyer must make reasonable efforts to reach the client by, for example, internet search, phone call, fax, email or other electronic communications, and letter to the client’s last known address. The specific efforts required to reach particular clients will depend on the circumstances existing when the lawyer receives the demand. But these efforts must be reasonable within the meaning of Model Rule 1.0(h), and should be documented in the lawyer’s files.

   Formal Op. 473, at 3–4 (2016). ↑

5. Id. at 5. As an example of “other relevant matter,” Formal Op. 473 suggests the potential for criminal liability to the client arising out of disclosure of confidential information in a civil proceeding, including a possible assertion of the Fifth Amendment privilege against self-incrimination. Id. ↑

6. NYSBA Op. 1239, ¶ 7 (2022). ↑

7. Id. ¶ 9. ↑

8. New York’s definition of informed consent in Rule 1.0(j) is substantially similar to the Model Rules’ definition in Rule 1.0(e). ↑

9. NYSBA Op. 1239, ¶ 10. ↑

10. Id. ¶ 11. See also RESTATEMENT § 63, cmt. b (observing that “[w]hether a lawyer has a duty to appeal from an order requiring disclosure is determined under the general duties of competence”) (citation omitted). ↑

11. With apologies to Kenny Rogers’s “The Gambler.” ↑

12. NYSBA Op. 1239, ¶ 13. Cf. RESTATEMENT § 63, cmt. b (“If a lawyer may obtain precompliance appellate review of a trial-court order directing disclosure only by being held in contempt of court . . .,the lawyer may take that extraordinary step but is generally not required to do so by the duty of competent representation.”) (citation omitted). ↑

On its face, it appears to be counterintuitive: United States federal courts recognizing and enforcing workplace rights for employees working in an illegal industry. However, this is just the case when it comes to the marijuana industry. In fact, recent federal cases and administrative actions make it clear that, although participants in the marijuana industry may be engaging in conduct deemed illegal under federal law, cannabis companies must still comply with federal anti-discrimination laws.

Federal laws, such as Title VII of the Civil Rights Act of 1964 (Title VII), the Age Discrimination in Employment Act of 1967, and the Americans with Disabilities Act prohibit discrimination, harassment, and retaliation in the workplace. However, because the cannabis industry is still in its infancy, it should come as no surprise that there is a dearth of case law addressing how these laws will apply to the industry currently deemed illegal under federal law. One of the earliest cases to address this issue is Aichele v. Blue Elephant Holdings, LLC.^[1] In Aichele, the District Court of Oregon considered retaliation claims filed by an employee who worked at a marijuana dispensary as a part-time “budtender.” After the employee complained about sexual harassment and workplace safety, her employer’s subsequent conduct and treatment of her in the workplace, the District Court ruled, constituted adverse employment actions that were reasonably likely to deter her from complaining in the future, thereby establishing a case for retaliation. Instead of addressing the legality of the workplace in the first place, or the legality of plaintiff’s own conduct by working in Oregon’s (federally prohibited) marijuana industry, the Aichele court instead squarely focused on the factors a plaintiff must necessarily allege in order to set forth a case for retaliation under Title VII, and determined that the employee had successfully done so.

More recently, the Maryland District Court ruled in favor of an African American marijuana dispensary budtender who properly pled claims for race discrimination under Title VII and successfully defeated the defendant dispensary’s motion for summary judgment in Jones v. Blair Wellness Ctr., LLC.^[2] The Jones court, similar to the court’s analysis in Aichele, focused on the factual and legal elements necessary to state a claim for discrimination in violation of Title VII and ignored entirely the underlying fact that the conduct both parties were engaged with—participating in Maryland’s regulated marijuana industry—was in violation of federal law.

In addition to courts throughout the country enforcing a private person’s right to be free from workplace discrimination and retaliation, even in the context of the federally illegal marijuana industry, agencies of the federal government, while maintaining that the sale and use of marijuana is illegal, have also demonstrated that they will hold cannabis industry employers accountable for discrimination in the workplace. In EEOC v. AMMA Investment Group, LLC,^[3] the U.S. Equal Employment Opportunity Commission (EEOC) filed a complaint in September 2020 against a marijuana dispensary and its parent corporation on behalf of several current and former employees. The employees claimed that a manager, who made inappropriate sexual comments and engaged in inappropriate touching, engaged in sex-based discrimination in violation of Title VII by creating a sexually hostile workplace. The parties settled the claims in the AMMA Investment Group case, with the defendant agreeing, among other things, to pay $175,000 in damages and to provide discrimination and harassment training to its employees.

What these cases demonstrate is that, although marijuana still remains illegal under federal law, both the federal government and the federal courts do not exempt cannabis industry participants from compliance with federal discrimination statutes. Discrimination in the workplace can result in significant monetary penalties, and it is therefore important that cannabis industry employers have both compliant and well-documented policies and procedures in place to address workplace discrimination issues. This is especially important because most states have passed their own workplace discrimination laws that mirror the federal laws, meaning claims could be brought against an employer at both the state and federal level for even a single instance of such misconduct.

The need for sound policies is further underscored by the fact that many states that have legalized the sale and use of marijuana (or are in the process of doing so) have also passed laws either recommending or requiring employers to provide sexual harassment and discrimination training for staff members. While these laws vary from state to state, they commonly require annual or bi-annual interactive training administered by an educator with expertise in preventing harassment, discrimination, and retaliation. Cannabis employers should be cognizant of these laws and ensure they comply with not only federal, but also additional state requirements.

Even if training is not legally required in a particular state, cannabis employers are well advised to take steps to ensure their employees are educated in this evolving area of law. Even mere allegations of workplace misconduct can be reputationally devastating for businesses in any sector. Further, not only does such proactive conduct mitigate the potential for a discrimination lawsuit in both state and federal courts, but cannabis industry participants are wary of whether courts will continue to take such a uniform approach to the application of federal workplace protections to the cannabis industry—that is, whether federal courts will continue to ignore the federal illegality of the defendant employer’s business conduct altogether. No reasonable operator in the space should knowingly provide the court an opportunity to hold their cannabis business to a less forgiving standard.

1. 292 F. Supp. 3d 1104 (D. Or. Nov. 13, 2017). ↑

2. 2022 U.S. Dist. LEXIS 66919 (D. Md. Apr. 11, 2022) ↑

3. Case No. 1:30cv2786 (D. Md. Sept. 24, 2020). ↑

This article is the second in a series reviewing recent regulatory developments related to cryptoasset-related issues in the banking sector. The previous article on a potential U.S. central bank digital currency is available here. The third article in the series will discuss the authority of banks to engage in cryptoasset-related activities.

Stablecoins are cryptoassets designed to have their value pegged to an external reference asset, such as a fiat currency. Many stablecoins are “minted” in exchange for fiat currency and are then backed by a variety of “reserve assets.” Some observers have questioned whether stablecoins are, in fact, stable. This question has led to a searching policy debate about how stablecoins should be regulated. This article briefly reviews that debate.

On November 1, 2021, the President’s Working Group (“PWG”), Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (“OCC”) issued a report on stablecoins (“PWG Report”), which focused specifically on fiat-pegged stablecoin arrangements with the potential to be used as a means of payment.^[1]

The PWG Report recommended that Congress “promptly” pass legislation regulating such payment stablecoins. In the absence of congressional action, the report recommended the Financial Stability Oversight Council (“FSOC”) take action. The report identified prudential risks associated with payment stablecoin arrangements such as “run” risks, payment system risks, and financial stability risks. Further, the report noted various investor protection and illicit finance risks that may be implicated from stablecoin activities.

The PWG Report recommended legislation that, among other things, limits stablecoin issuance, redemption, and maintenance of reserve assets to insured depository institutions (“IDIs”); subjects custodial wallet providers to federal oversight and regulation; requires risk management standards for entities performing activities critical to the functioning of stablecoin arrangements; and addresses concerns of concentration of economic power by considering limits on payment stablecoin issuers’ and custodial wallet providers’ affiliation with commercial entities. The PWG Report’s recommendation to the FSOC, meanwhile, focused on the FSOC’s authority to designate systemically important payment, clearing, and settlement (“PCS”) activities under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Designation would permit the establishment of risk-management standards for stablecoin activities, including requirements regarding reserve assets, the operation of the stablecoin arrangement, and “other prudential standards.” Financial institutions engaging in designated PCS activities would be subject to an examination and enforcement framework.^[2]

Since the issuance of the PWG Report, several pieces of legislation have been proposed to regulate payment stablecoins, including possible alternatives to the regulatory framework outlined in the PWG Report.^[3] Notably, limiting stablecoin issuers to be IDIs would require them to be subject to federal banking supervision and regulation at the issuing entity level by one of the OCC, Federal Reserve Board (“FRB”), or FDIC, and typically at the consolidated holding company level by the FRB. To date, most of the bills proposed would provide stablecoin issuers with additional licensing options. For example, in April 2022, Senator Pat Toomey (R-PA) released a discussion draft of the Stablecoin TRUST Act, which would allow institutions to be licensed as a money transmitting business, a national limited payment stablecoin issuer, or an IDI.^[4] The Stablecoin TRUST Act would provide the OCC with the authority to license, supervise, examine and regulate national limited payment stablecoin issuers under a more tailored regulatory regime, limiting the OCC’s authority to regulations that cover: (1) capital requirements, not to exceed six months of operating expenses; (2) liquidity requirements; and (3) governance and risk-management requirements tailored to the business model and risk profile of the issuers. IDIs would have the option to segregate payment stablecoin issuances and reserves from their other activities like lending. Any IDI that chooses to segregate its stablecoin activities would benefit from the same regulatory standards as national limited payment stablecoin issuers. The bill would require stablecoin issuers to maintain assets with a market value equal to at least 100% of the outstanding value of the stablecoins.

More recently, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Lummis-Gillibrand Responsible Financial Innovation Act. The bipartisan bill aims to empower various agencies with responsibility for regulating cryptoassets and also contains stablecoin provisions that hit on many of the same themes covered in the Stablecoin TRUST Act. Among other things, the Lummis-Gillibrand Responsible Financial Innovation Act would permit IDIs, limited purpose trust companies, and non-depository payment stablecoin issuers operating under a state or federal charter or license to issue, redeem, and conduct incidental activities related to stablecoins, provided they follow the requirements set forth in the bill, including maintaining liquid asset reserves valued at 100% or greater of the value of outstanding stablecoins and redeeming stablecoins at par in legal tender. Stablecoin issuers operating under a new national limited purpose trust charter would be restricted from engaging in activities like lending, but would benefit from a more tailored regulatory regime, including a simplified capital framework, appropriate standards for a community contribution plan, tailored recovery and resolution plan, and tailored holding company supervision.

Other key issues covered in the Stablecoin TRUST Act, the Lummis-Gillibrand Responsible Financial Innovation Act, and other stablecoin bills proposed to date include reporting, disclosure and audit, Bank Secrecy Act/anti-money laundering (“BSA/AML”), insolvency treatment, federal deposit or similar insurance, access to Federal Reserve accounts and services, and the scope of how “stablecoin” or “payment stablecoin” is defined. An overview of various legislative proposals is included in the Appendix.

Stablecoin issuers currently may operate under charters or licenses issued at the state level. For example, the New York Department of Financial Services (“NYDFS”) permits licensed virtual currency businesses (“BitLicensees”) and New York limited purpose trust companies to issue stablecoins with NYDFS approval. The NYDFS recently issued guidance on stablecoins emphasizing certain requirements, including that the market value of the assets backing the stablecoin must be equal to or greater than the nominal value of all outstanding units of the stablecoin at the end of each business day, the assets in the reserve backing the stablecoin must be separated from the proprietary assets of the issuer and held by FDIC -insured state or federally chartered institutions or by asset custodians approved by NYDFS, and issuers must have “timely” redemption policies in writing (approved in advance by the NYDFS).^[5] The NYDFS also requires monthly and annual examinations of management attestations by an independent Certified Public Accountant (CPA).

As stablecoins have become more popular, they have faced increasing scrutiny from policymakers. This scrutiny is illustrated by the PWG Report, proposed legislation, and state regulatory actions. It seems almost certain that the focus on and policy activity regarding stablecoins will continue.

1. Report On Stablecoins, President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (November 2021). ↑

2. See, Federal Regulators Recommend Bank Regulation for Stablecoins, Cravath, Swaine & Moore client memo (November 2, 2021). ↑

3. See, e.g., Stablecoin TRUST Act of 2022 (Apr. 6, 2022); Lummis-Gillibrand Responsible Financial Innovation Act, S. 4356, 117th Cong. (2d Sess. 2021); Stablecoin Innovation and Protection Act of 2022 (draft of Feb. 14, 2022); Stablecoin Transparency Act, S. 3970, 117th Cong. (2nd Sess. 2022); Digital Asset Market Structure and Investor Protection Act, H.R. 4741, 117th Cong. (1st Sess. 2021); and Stablecoin Classification and Regulation Act, H.R. 8827, 116th Cong. (2nd Sess. 2020). ↑

4. See, Summary of the Stablecoin TRUST Act of 2022, Cravath, Swaine & Moore client memo (April 18, 2022). ↑

5. New York Department of Financial Services, Virtual Currency Guidance (June 8, 2022). ↑

Appendix

Summary Chart re: Proposed/Pending Stablecoin Legislation and Recommendations

This summary chart shows how key policy choices are addressed in various proposals to regulate stablecoins. As the policy debate continues, these issues likely will be among the key points that are addressed and negotiated. As a result, this summary chart demonstrates possible alternatives for stablecoin regulation, including how “stablecoin” is defined. The proposals in some cases may include internal inconsistencies or ambiguities that may be resolved as the drafts are further developed.

Heroes and heroines have origin stories. Goddesses and gods have origin stories. These stories give context, offer explanations, answer some questions, and may raise others.

Lawyers who do pro bono work have origin stories, too—and not only because these lawyers are the unsung heroines and heroes of the legal profession. Their motivation and opportunity came from somewhere. Maybe it was planned, maybe it was pure serendipity—maybe it was a bit of both.

My own pro bono origin story dates back to my first assignment as a brand-new litigation associate at a leading New York law firm, fresh from a one-year clerkship with US District Judge A. David Mazzone. As a very junior litigator with a year of district court law clerk experience under my belt, I was assigned to the trial team in a big, “impact litigation” pro bono case in which we represented New York City in a civil action against the US Commerce Department and the Census Bureau. Our claim was that the decennial census undercounted New Yorkers. It just wasn’t designed to get that count right. But with proven methods of statistical adjustment, the census counts could be—demonstrably—made more accurate, or closer to the true figures. And after several years of litigation, the case was just weeks away from trial.

So, I dove in. There was a lot to do, and a lot to learn. It was clear from my first day on the case that every professional on the team, from the partner—a brilliant, intense, even legendary litigator—to the trio of associates, whom I admire to this day, to the two utterly dedicated paralegals, was passionate about the case, and the cause. Undercounting New Yorkers hurt the city. It reduced the amounts of federal funds and benefit programs that were allocated to New York and New Yorkers, sometimes significantly.

Many litigation associates at large firms never see a trial. Within two months of starting practice, I was back in court—as part of the team on a pro bono trial. I learned about the importance of preparation, and I saw the results of excellent preparation every day. I also saw how a sense of humor can come in handy when the judge was having an off day. And I saw firsthand how the kind of teamwork that is part of every client representation is enhanced when the firm is representing a client not to be paid, but because it is the right thing to do.

I learned a lot about the different roles that lawyers can have in the legal profession as well. Our co-counsel and our adversaries alike were brilliant and dedicated public servants. We shared our side of the counsel table with senior lawyers representing New York City from the Corporation Counsel’s office, or “Corp Counsel.” The defendants in the case, including the Commerce Department and the Census Bureau, were represented by the United States Attorney’s Office for the Southern District of New York. In a way, they were just as committed to the integrity of the census process as we were. Notably, the lead counsel on the government’s team later became a federal judge.

I learned something else from this pro bono experience, and this was quite unexpected. Sometimes even when you lose, you win. Our claim was that the 1980 decennial census figures should be adjusted. And we lost. But remember, the lawyers for Census Bureau—and the Bureau’s own senior staff and experts—shared the goal that the decennial census should be as good as it could be. The undercount hurts exactly the same people who may well be most likely to be missed—or undercounted. These are people without regular addresses, people who may not speak English as a first language (or at all), undocumented people and other people who may be fearful of authority, and people in the shadows and at the margins of urban life. Perhaps the lawyers representing the Census Bureau were as troubled by this as we were.

I’d like to think that this team of pro bono lawyers and experts made a pretty compelling case that statistical tools could be used prospectively to improve the accuracy of the census counts, and to bring the undercounted out of the shadows. And for the 1990 decennial census, the Census Bureau made the determination that these kinds of lessons and tools would be part of the process from the outset. Sometimes even when you lose, you win. Sometimes, eventually, everybody wins.

From that point on, a pro bono matter was pretty much always part of my practice. As an associate, these matters included representing an African American woman in her Title VII discrimination claim against her former employer, and representing an inmate on his Second Circuit appeal of the dismissal of his claim that the state prison disciplinary system was racially biased.

As a partner, my role shifted to encouraging and promoting and supervising countless pro bono matters, from political asylum cases to housing court matters to uncontested divorces. The lessons from my pro bono origin story stayed with me and guided me in those matters. Maybe they helped others find their own pro bono origin story as well.

And now, as a judge in a court with many unrepresented parties, I’m still thinking about pro bono—and I still love pro bono origin stories, especially when they are unlikely. One of my pro bono heroes is a bankruptcy and litigation partner at a national firm—and over the years, alongside his litigation and restructuring practice and managing his firm, he has represented death row inmates in challenging their capital sentences. It’s one thing to help your client. It’s another to save his life.

Another of my pro bono heroes is actually a firm that is known for its cutting-edge work representing the tech industry. Big clients, big issues, industry-leading work. And this firm gives back by fostering opportunities for its lawyers to advise small startups—enterprises that would never, not ever, find their way into a leading law firm’s lobby, never mind the firm’s conference rooms. As they explain it, their attorneys are as excited about this work as they are about the largest deal or financing.

Yet another of my pro bono heroes is a program—and here, I’ll name names. The program is ABA Free Legal Answers, and it partners with state bars to connect lawyers around the country who have the capacity to respond to the occasional question about the law and legal rights with people who just need a little help. Recently, ABA FLA volunteers answered their two hundred thousandth question—that’s two hundred thousand people who got information they needed, for free, from a lawyer. Just as important, that’s two hundred thousand times that a lawyer got to make a difference, and perhaps, begin to write their own pro bono origin story.

So, what’s your pro bono origin story? Is it like mine, the revelation of being part of a team on major pro bono impact litigation? Or are you that rare and extraordinary attorney who takes on the capital appeal alongside their commercial practice? Is your narrative like that of the associate who bills time to a major tech deal in the morning and sits down with a fledgling entrepreneur in the afternoon? Are you, or could you be, the lawyer who stepped up and offered a Free Legal Answer to some of those two hundred thousand people with a question? Once you do pro bono, in whatever way works for you, I predict that you’ll be back. I don’t think many people do pro bono just once. They are hopeless—actually, hopeful—recidivists. And then you can write your own pro bono origin story. You’ll be glad you did.

Hon. Elizabeth S. Stong is a U.S. Bankruptcy Judge for the Eastern District of New York, sitting in Brooklyn.

Introduction

Globally, we saw record levels of investment in 2021. In 2021, emerging companies, particularly in the technology sector, enjoyed increased valuations driven by greater competition among investors and greater access to capital.

Although record-breaking investments continued into the first quarter of 2022, it was clear this trend was beginning to slow as venture capital funds and investors altered their investment strategies in anticipation of changes in market conditions. Higher interest rates and a tightening of the credit markets, among other reasons, have driven these changes in market conditions.

In light of the changes, emerging companies may find raising capital difficult due to a reduction in the availability of both equity and debt financing. Securing financing may also take longer than expected, so emerging companies must consider scaling back spending to reduce their “burn rate.”

With a softening in valuations, startups and emerging companies may also need to consider raising funds at the same valuation, known as a “flat round,” or a lower valuation than their previous round, known as “down round” financing.

What Is a “Down Round”?

Down rounds are often the result of numerous factors, which include the slowing of economic trends as we are currently seeing, the need for a company to reset or pivot, the emergence of a new competitor in the market, or simply a shift in the market.

For founders of start-ups, down rounds can be a matter of survival whereby an immediate need for funding outweighs the possible negative connotations that a down round carries for the company. Down rounds are often seen as a last resort for growth companies. For venture capital investors, down rounds can reflect lower confidence in the company and a riskier investment.

Key Terms in a Down Round

While down rounds can also be an opportunity for companies to reset and refocus, it is important to understand that the contractual terms of the financing will also likely shift, giving investors additional leverage to negotiate more favorable and protective terms. As such, founders and emerging companies must understand the types of deal protection measures that investors will likely be requesting. Negotiating unfavorable terms may not only negatively impact existing investors, but may also limit the company’s ability to secure future financings.

Below is a summary of key issues startups and emerging companies should be aware of in down-round financings. For a more thorough analysis of these implications, it is important to consult your legal advisor.

Liquidation Preference

Generally, preferred shares have priority over common shares upon the liquidation, dissolution, or winding up of a company (each of these events is referred to as a “Deemed Liquidation Event”). Before any distribution or payment can be made by the corporation to the holders of common shares or any other junior preferred shares, the holders of the class (or series) of preferred shares are entitled to be paid first.

In the event of a Deemed Liquidation Event, holders of preferred shares will receive the liquidation preference for each preferred share along with the payment of any accrued and unpaid dividends before any amounts are paid to the common shareholders, who are typically the founders. The liquidation preference of each preferred share is typically the original purchase price the investor has paid for each preferred share. In riskier rounds, such as a down round, the liquidation preference may be set as a multiple of the original purchase price. In addition to the liquidation preference, preferred shareholders may be entitled to an additional payment depending on if their preferred shares are participating or non-participating:

• Non-participating – Once the liquidation preference is paid, the investor would not be entitled to any additional payments from the company. As such, any remaining assets of the company would then be distributed among the common shareholders and any junior preferred shareholders based on liquidation priority. Non-participating is the approach seen in the bulk of financings.
• Participating – In addition to the liquidation preference, the investor also has the right to share in any remaining proceeds of the company with the common shareholders pro rata on an as-converted basis.

Participating is also referred to as the “double-dip” preference and could be considered a windfall gain depending on how the company is liquidated. Founders should be cautious when negotiating terms surrounding liquidation preference as the consideration they receive is typically sweat equity, and they may receive salaries at below market.

In the event that the investor has negotiated a liquidation preference in which it would receive a multiple of the original purchase price, the investor may walk away with more than they have invested, whereas the founders, and other common shareholders, may end up with little or no payments. The risk is further compounded where the preferred shares are also participating because the investor would be entitled to share in any remaining proceeds of the company with the common shareholders pro rata on an as-converted basis. Emerging companies should look to limit an investor’s liquidation preference where possible. To balance the investor’s desire to protect its investment with the emerging company’s desire for a fair distribution of assets in the event of a Deemed Liquidation Event, the parties may also consider including a cap on the total amount the investor can receive in the event of a Deemed Liquidation Event. This may be a compromise that meets both parties’ interests.

Anti-Dilution Protection

Investors in venture capital financings are typically issued preferred shares that are, at the option of the investor, convertible into common shares based on a predetermined formula. If certain events occur, such as a down round or a dilutive share issuance, the conversion ratio or price may be adjusted so that the number of common shares the investor will receive on the conversion of preferred shares would increase. There are two main types of calculation for this down-round protection: full-ratchet adjustment and weighted-average adjustment.

• Full-Ratchet Adjustment – A full-ratchet anti-dilution provision leads to the greatest amount of adjustment and is not typically seen in venture capital financings. For a full ratchet, the conversion price of the preferred shares will be set at the lowest price for the company issued common shares (or shares convertible into common shares) following the investment no matter how many shares are sold at the lower price. For example, if the price per share in a future round goes down 50 percent, then the conversion price at which the investor could convert all their preferred shares into common shares would be reduced 50 percent. Full-ratchet anti-dilution provisions are seen as punitive as they can be triggered by an insignificant issuance of shares.
• Weighted-Average Adjustment – Weighted-average adjustments may be calculated on a broad or narrow basis: Weighted-average anti-dilution provisions take into consideration the number of common shares (or shares convertible to common shares) that are subsequently issued at a lower price. Weighted-average adjustments lead to significantly smaller adjustments, as they take into account the size and price of the down round in relation to the capitalization of the company immediately before the down round. Broad-based weighted-average adjustments are more commonly seen in venture capital financings.

Anti-dilution provisions can lead to unintended consequences and can be triggered by certain issuances that are unrelated to the economic condition of the company. Fortunately, certain types of issuances, such as shares issued upon the conversion of options issued under a stock option plan, are typically excluded from anti-dilution protections. However, emerging companies should carefully review what types of issuances are excluded to ensure that there are no unexpected consequences.

When considering conducting a financing at a lower valuation, emerging companies must consider the anti-dilution protection of existing investors to understand how these will impact the company’s capitalization table. Companies can look to renegotiate anti-dilution provisions and other key terms with investors before conducting the financing so as to limit this dilution.

Cumulative Dividends

Investors may also have a right to a distribution of the company’s earnings by way of a dividend. Dividends may be either cumulative or non-cumulative. In most instances, dividends will be non-cumulative, i.e., paid only as declared by the company’s board of directors. That said, in instances where the investor may deem the investment to be risky, the investor may insist on cumulative dividends. In contrast to non-cumulative dividends, cumulative dividends will accrue at a specified rate, regardless of whether or not the company actually declares dividends on those shares and generally carry a right to receive those accrued dividends in priority over any other shares ranked junior to such preferred shares. Emerging companies must carefully consider the impact of any cumulative dividends on future cash flows of the company along with their impact on distributions in the event of a Deemed Liquidation Event of the company.

Tranche Financing

Where there are concerns about the company’s performance, investors may agree to advance funds only when certain milestones are met. For example, investors may agree to advance a certain portion of their investment only after the successful accomplishment of a milestone, such as securing a key client. Where there are concerns about the future success of the emerging company, an investor may look to tranche financing to limit their exposure. Although this may seem like a balanced option, emerging companies must carefully consider the attainability of any milestones they set. Milestones should be specific and attainable. If the company fails to meet a milestone, then it will be in a weak bargaining position with the investor should it require any additional investment before meeting any specific milestone.

Conclusion

With rising interest rates and the possibility of a looming recession, emerging companies may need to make tough decisions when raising capital. Emerging companies must take steps to limit their cash burn to what is necessary to maximize their runway. Ensuring that emerging companies also understand the terms of any financing documents they agree to will help protect the interests of all stakeholders going forward. Before conducting a down-round financing, companies should consider if there are any alternatives available, such as convertible debt or bridge financing. Venture debt may also be an option that could provide a much-needed injection of cash that could allow the company to meet its short-term objectives.

ERISA breach of fiduciary duty litigation against employers and executives remains high. These suits continue to allege, among other things, that employers and executives breached their fiduciary duties to plans and participants by allowing service providers to charge excessive fees and that plan investment lineups contain imprudent investment options, including high-fee “retail” share class mutual funds and annuities.

As one example, the Supreme Court’s highly anticipated ruling in Hughes v. Northwestern University, issued earlier this year, found that ERISA imposed a fiduciary duty to monitor all plan investments and to remove any individual investment that is imprudent in terms of performance or cost. The case made it clear that retirement plan fiduciaries cannot satisfy their duties under ERISA by simply including a large number of investment options and assuming the large number of investment options insulates the fiduciaries from their duties to both monitor all investments and remove any investment options that are no longer prudent. Moreover, plan fiduciaries must remember that the duty to select prudent investment options is independent of the diversification requirement.

Due to the continuous stream of ERISA fiduciary litigation, some fiduciary liability insurers have reportedly revamped their processes for evaluating applications for fiduciary liability coverage. These changes may impact an employer’s ability to obtain adequate fiduciary liability coverage, thereby increasing the exposure to plan sponsors and their executives.  

Periodic fiduciary check-ups are always a good idea, but in light of these developments, it is perhaps more important than ever that plan sponsors conduct periodic internal reviews to ensure they continue to meet their fiduciary duties to their plans and participants. Among other things, responsible plan fiduciaries should: 

• Determine whether the committee (or committees) responsible for administering the plan and overseeing plan investments meets regularly and properly documents its meetings, including information not just on what decisions were made, but also showing that a prudent process was followed in making them.
• Review any plan committee charter to ensure the plan committee is operating in accordance with the charter. Consider whether any changes or updates are needed to the committee charter. If there is not a committee charter in place, consider adopting a committee charter outlining the plan committee’s roles and responsibilities.
• Review the plan’s investment options. Determine whether any investments options need to be removed from the plan because they are no longer considered prudent. Determine whether the plan offers the least expensive share class available for each fund, and if not, why. Determine whether the plan uses any proprietary funds of an affiliate of the recordkeeper or investment consultant, and if so, document the process undertaken for ensuring such investment options were independently evaluated. Determine whether the investment options in the plan, including any brokerage window, comply with the recent guidance from the U.S. Department of Labor (“DOL”) regarding plan investments in cryptocurrencies.
• Review the plan’s fees and expenses. Determine when the plan administrator last conducted an independent fee benchmarking analysis to determine the reasonableness and competitiveness of service provider fees (including fees for plan recordkeepers and investment consultants). If the benchmarking analysis shows a deviation from market rates for a service provider, consider conducting a new request for proposal (“RFP”). All RFPs and benchmarking studies should be documented. 
• Review the plan’s investment policy statement (“IPS”) and consider whether updates are needed. If there have been any deviations from the standards set forth in the IPS, ensure they are properly documented.
• Conduct fiduciary training for all plan fiduciaries. It is recommended that this be conducted at least annually.
• Review the plan document and determine whether it is up to date for any legal and plan-design changes. If the plan has recently been amended, review other relevant documents, such as the summary plan description, any plan administration manual, participant notices, and election forms, as applicable, to ensure they have been updated to reflect the changes made by the amendment.
• Review service provider agreements to ensure they comply with the DOL’s recent guidance regarding cybersecurity best practices.
• Maintain a plan compliance calendar. 

Fiduciary litigation is always a risk, but conducting periodic fiduciary check-ups should help limit the exposure of plan sponsors and their executives.

This year (2022) has seen the end of many high-profile joint ventures. Early in the year a flurry of global companies, including BP, Ford, and Worldwide Wrestling Entertainment (WWE), announced they were shutting down Russian joint ventures or partnerships.^[1] In July, Stellantis announced it was pulling out of its loss-making Jeep production joint venture in China.^[2] And Pfizer announced its intent to exit its 32% stake in Haleon, its consumer health venture with GSK that IPO’d in July in London’s biggest listing in more than a decade.^[3]

Such terminations should not be surprising. The median duration of a joint venture is ten years—a figure that has remained largely unchanged for decades.^[4] While JVs in relationship-driven geographies such as Asia and the Middle East—as well as asset-style JVs in slow-twitch industries such as oil and gas, mining, and chemicals—often last twice as long,^[5] the fact remains that all joint ventures come to an end, often earlier than partners anticipate.

Despite knowing this, drafting exit terms in joint venture agreements can be challenging for counsel, given that clients and their partners often do not know who will exit and when, or how successful the venture will be. Divergent views among partners commonly lead to clashes, as one partner may wish to be able to leave the venture while others desire that partner to be locked in for life, particularly when the partner is critical to the JV’s success.

Below are four tips that can help legal practitioners navigate these and other challenges of drafting and negotiating JV exit terms:

1. Negotiate Exit Terms Outside the JV Agreement.

In a JV Agreement, Shareholders Agreement, or other similar agreement, exit-related terms are scattered throughout various sections of the agreement, including sections about share transfers, termination, events of default, covenants, and/or definitions. This makes it challenging for clients to see a coherent picture of if or when they or their partners can leave the venture. It’s best to negotiate exit terms in a chart outside the JV Agreement, at least preliminarily. A simple and handy format for this chart includes four columns:

1. Exit Trigger – Exit triggers are circumstances that enable one or more partners to exit the venture. Exit triggers include, among other things: partner default, partner bankruptcy, partner change of control, Board or shareholder deadlock on material matters, force majeure, partners owning less than a certain percent of the venture, expiration of the JV term, and no trigger at all (i.e., the right to exit at will).
2. Exit Mechanism – Exit mechanisms are the means through which a partner exits once it has the right to do so. Exit mechanisms can include the right to put (i.e., sell) a partner’s shares to remaining partners, to call (i.e., buy) its partners’ shares, to trigger a buy/sell provision, to terminate the venture, or to sell to a third party at a negotiated price. Beyond these exit mechanisms, the non-triggering party may have rights, such as a right of first refusal, right of first offer, or tag-along right.
3. Valuation Approach – If the exit mechanism requires shares to be valued (e.g., if the exiting partner has a right to put its shares to the remaining partners), then the partners should agree in advance on an approach to establish the value of the shares to be transferred. Options include having a formula that determines the price of shares or having the shares appraised by one or more external appraisers.
4. Post-Exit Considerations – Many joint ventures will depend on the exiting partner for items like intellectual property or services. In such cases, partners should decide up front, at least at some level of detail, how these interdependencies between the JV and the exiting partner will be handled post-exit. For example, will there be a transition services agreement for a period of time? Will the JV retain a license to use IP from the exiting partner? The details of these arrangements (e.g., the price of an ongoing license between the exiting parent and the JV) are often best left to be negotiated in the future, but having the overall construct in place can eliminate uncertainty and streamline exit when it happens.

Addressing these points outside the JV Agreement can help counsel identify and close gaps in JV exit terms and help clients digest and develop a preferred approach to JV exit.

2. Plan for Partner Buyouts.

Two-thirds of terminations of joint ventures between strategic partners (as opposed to ventures with a financial investor) result in one partner buying out the others, while one-third of these JVs end in other ways, such as dissolution, sale to a third party, or public offering.^[6] The implication: the hotly negotiated provisions about transfers to third parties may be less important than your client thinks, while provisions about transfers among shareholders—like those related to puts, calls, or buy/sell provisions—may become critically important. Thus, anticipating partner-to-partner sales in JV Agreements can be useful.

3. Include a Lockup Period.

Less than 25% of JV agreements contain a lockup period—that is, a period where no partner is allowed to transfer its shares to a third party. Where lockups exist, the median period is five years.^[7] Many JVs would benefit from a lockup period during which partners commit to provide early stability to the venture. Thus, dealmakers should consider—and push to include—a lockup in their clients’ JV agreements, particularly where the partners are starting a new business that requires people, know-how, and other contributions from multiple partners.

4. Use Performance-Based Triggers and Other Creative Terms to Bridge Gaps.

Interestingly, some 12% of agreements include performance-based exit triggers—both negative and positive.^[8] For instance, in a JV between Goodyear and Sumitomo, the original agreement governing the JV established that if the venture did not achieve a 6% share of the tire market in Japan, such underperformance would provide either partner with the right to initiate exit.^[9] Performance-based exit triggers can help partners with different views on exit—say because one wants the right to exit anytime, and the other wants the partner locked in for life—to find a middle ground. Performance-based triggers can be particularly helpful when a JV is a client’s exclusive vehicle in a given market, as such triggers can allow the client to exit and pursue other opportunities in the market if the venture flounders.

Drafting and negotiating JV exit terms is no easy feat, especially when exit terms are often some of the last terms negotiated when clients (and their attorneys) have deal fatigue and want to sign a deal. But addressing JV exit prior to the deal is critical to ensuring the partnership will work for your clients in the long term. After all, all joint ventures end—so plan for it.

The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.

1. Press Release, BP, “BP to exit Rosneft shareholding” (Feb. 27, 2022) (available at https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bp-to-exit-rosneft-shareholding.html); Press Release, Ford, “Ford Issues Statement on Suspension of Russian Joint Venture and Assistance for Ukrainian Refugees,” (Mar. 1, 2022) (available at https://media.ford.com/content/fordmedia/fna/us/en/news/2022/03/01/ford-russia-ukraine-statement.html);

   Press Release, WWE, “WWE Terminates Broadcast Partnership and Shuts Down WWE Network in Russia,” (Mar. 3, 2022) (available at https://corporate.wwe.com/news/company-news/2022/03-03-2022). ↑

2. “Stellantis, China’s GAC to terminate loss-making joint venture,” Reuters (July 18, 2022). ↑

3. Press Release, Pfizer, “Pfizer Provides Update on Ownership Interest in Haleon,” (June 1, 2022) (available at https://www.pfizer.com/news/press-release/press-release-detail/pfizer-provides-update-ownership-interest-haleon). ↑

4. James Bamford, Tracy Branding Pyle, and Edgar Elliot, “At-Will Exit in JV Agreements: Eject Buttons Often Come with Strings Attached,” The Joint Venture Alchemist, March 2022. ↑

5. Tracy Branding Pyle and Kira Medish, “How Long do Joint Ventures Last,” The Joint Venture Alchemist, March 2022. ↑

6. James Bamford, Tracy Branding Pyle, and Edgar Elliott, “JV Exits: Five Steps to Structuring Robust JV Exit Terms,” The Joint Venture Alchemist, February 2022. ↑

7. Ibid. ↑

8. Gerard Baynham, Ben Bollero, David Ernst, and Jason Reid, “Running for the Exits: Getting Joint Venture Exit Right,” The Joint Venture Exchange, August 2020. ↑

9. The Goodyear Tire & Rubber Company, Umbrella Agreement by and between The Goodyear Tire & Rubber Company and Sumitomo Rubber Industries, Ltd. (Exhibit 10.1 to Form 10-Q) (Aug. 10, 1999). ↑

On July 26, 2022, the Office of the Comptroller of the Currency (OCC) issued an update to its 2013 policy statement on minority depository institutions (MDIs). Changes to the policy statement include: (i) clarifying the definition of an MDI, (ii) describing how an MDI may be formed de novo or by designating an existing bank as an MDI, and (iii) providing examples of support to MDIs. The updated policy statement streamlines descriptions of the OCC’s policies, procedures, and programs relative to MDIs.

What Prompted the Update?

In 2013, the OCC issued a policy statement on MDIs (2013 Policy Statement), reaffirming its commitment to their creation and preservation. The 2013 Policy Statement set out the agency’s MDI designation process, explained how the agency supports MDIs, and provided other useful information to stakeholders and interested parties. Nine years after the release of the 2013 Policy Statement, the OCC saw fit to review and revise its statement for a few reasons. Acting Comptroller Michael J. Hsu released a statement noting that “MDIs are on the frontlines serving low-income, minority, rural and other underserved communities. They are a critical source of credit to support the financial needs and economic vitality of their communities. The OCC has a long history of recognizing the value of these institutions, and we will continue our efforts to ensure they remain a bedrock of financial access and inclusion.”

In addition to recognizing the vital role of MDIs in supporting the economic viability of the communities they serve, the OCC witnessed an increased interest from banks and other stakeholders in working with MDIs following the 2020 formation of the Roundtable for Economic Access and Change (Project REACh) and establishment of the Emergency Capital Investment Program (ECIP) by Congress for COVID relief.

Project REACh convenes leaders from banking, business, technology, and national civil rights organizations to “reduce specific barriers that prevent full, equal, and fair participation in the nation’s economy.” Among other things, Project REACh provides MDIs with targeted technical assistance and help developing executive exchange programs, improving access to cost-effective and shared services, and establishing revenue-generating partnerships and collaborations. The Project REACh MDI Workstream addresses the challenges for minority-owned banks to access capital, expand technology capabilities, and modernize infrastructure. Surely, revising the OCC’s policy statement on MDIs to fit the current economic needs of underserved communities furthers the mission of Project REACh.

Also in 2020, Congress created the ECIP, which directed $9 billion to MDIs and certified Community Development Financial Institutions to, among other things, provide financial assistance to businesses and consumers in disadvantaged and underserved communities disproportionately impacted by the economic effects of the COVID-19 pandemic.

Meaning of MDI

The OCC defines an MDI to include a national bank or federal stock savings association that is at least 51% owned by one or more minority individuals, women, or other socially and economically disadvantaged individuals. An MDI also includes a federal mutual savings association (1) where minority individuals comprise a majority of the Board of Directors and its account holders and (2) that serves the credit and other economic needs of a community predominantly of minority individuals. A federal mutual savings association is also considered to be an MDI if (1) a majority of its Board of Directors is comprised of minority individuals, women, or other socially and economically disadvantaged individuals, and (2) minority individuals, women, or other socially and economically disadvantaged individuals hold a significant percentage of its senior management positions.

The revised policy statement clarifies the use of the term “minority individual” to mean African Americans, Asian Americans, Hispanic Americans, and Native Americans; and clarifies the use of the term “minority” to mean minority individuals, women, and other socially and economically disadvantaged individuals. In addition, the revision adds a minority account holder element to the description of federal mutual savings association. The revised policy statement streamlines and clarifies the meaning of an MDI, but the OCC does not intend for the definitional revisions to have a substantive effect.

Formation, Designation, and Ongoing Review

The process of forming a de novo bank that is designated as an MDI or, on the other hand, receiving an MDI designation as an existing bank, is rather simple. For individuals interested in forming a de novo bank, the applicant must (1) file an application and receive approval to form a bank, and (2) request that the bank be designated as an MDI. If the OCC determines that all the applicable requirements are met, the OCC will provide (1) a letter approving the formation of a bank and (2) a separate MDI designation letter. An existing bank that believes it satisfies the meaning of MDI, as set forth above, may request that the OCC designate it as an MDI. If the OCC determines the bank satisfies the meaning of MDI, the agency will provide the bank with an MDI designation letter.

At its discretion, the OCC may continue to designate as an MDI a bank that no longer satisfies the meaning of MDI if the bank supports the economic viability of a community comprised predominantly of minority individuals, women, or other socially and economically disadvantaged individuals. A bank that no longer satisfies the meaning of MDI is one that falls below the 51% ownership threshold. On an annual basis, the OCC reviews whether banks continue to satisfy the meaning of MDI or if continued designation is appropriate.

Support for MDIs

The OCC develops an annual strategy to support the financial vitality and safe and sound operations of MDIs and to address unique risks MDIs face. Specifically, the OCC supports MDIs by providing training, technical assistance, and educational programs in such areas as compliance, risk management, and operations.

Further, the OCC recognizes that depository institutions that are not MDIs (a.k.a. non-minority depository institutions or NMDIs) can be key partners with MDIs, and it supports these relationships, which can be valuable tools for assisting MDIs. The OCC also provides resources to help identify relevant partnership opportunities. In assessing the record of an NMDI under the Community Reinvestment Act (CRA) and its implementing regulations, the OCC considers capital investments, loan participations, and other ventures undertaken in cooperation with minority- and women-owned financial institutions and low-income credit unions if such activities help meet the credit needs of the local communities served by the MDI or low-income credit union. NMDIs that invest in MDIs may receive positive consideration under the CRA if those investments are consistent with the requirements of the CRA and its implementing regulations.