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.

This article is part of the Attorney Career Advancement series, monthly articles from attorney business development coach Lana Manganiello offering insights and advice on practical approaches to attorney growth and practice development.

Nearly everyone enjoys receiving acknowledgment of a job well done and excellence in their work, and certainly lawyers are no exception. The number of companies offering awards and recognitions to attorneys and law firms is growing every day, and they are often money-making endeavors. My lawyer clients are solicited regularly with suggestions they are a “Top,” “Best,” “Most,” “Leading,” or “Super” attorney in their area of practice—but greatness often comes with a price. To be listed, one is encouraged to take out congratulatory advertising, or purchase a plaque or badge that can be posted to the attorney’s website profile or included in one’s email signature. For most attorneys, it can be challenging to know which of these opportunities matter and are legitimate, and which are spam.

Do recognitions even matter?

If you can basically buy yourself endless awards, do they have any value? It really depends on your objective. If you are growing a practice, then you need to think about the professionals that matter to you and what matters to them. Some considerations for pursuing awards include:

Tipping the scales: When a client or prospect is considering hiring you versus a competitor who appears equal in all areas (pedigree, experience, education), and you have a long list of awards and recognitions from organizations the client or prospect has heard of, or think they have heard of, and your competition doesn’t, that could be the thing that pushes them to hire you. This is also relevant when you are being considered by future employers. Note that non-lawyers typically do not have as many opportunities for public recognition and awards as lawyers do, so when people outside of the legal profession see your accolades, they may be more likely to be impressed.

Building credibility: Having industry honors and awards can build your perceived credibility. Most audiences understand these types of recognitions as a form of social proof, especially when the award is specific in highlighting a nuance, niche, or differentiator about you and your practice (e.g., a securities litigator recognized for working in cryptocurrency and blockchain). The people referring your work and those responsible for hiring you could feel validated when seeing you receive consistent recognitions. Attorneys you want to work with (whether senior or junior to you) may see honors and recognitions as an affirmation of expertise in your field, which may help persuade them to work with you.

Staying top of mind: Regularly reminding your network of your expertise is key to growing your reputation and leads to new opportunities. For law firms, publicly acknowledging a recognition received by one of their attorneys is a nice way to improve their visibility as well as highlight practice areas and expertise within a firm. Lawyers can use the opportunity to share an award won with their network to highlight the type of work that led to the honor.

Which awards/lists should you submit to?

Certainly not all awards and honors are equal. There are plenty of recognitions for lawyers that do not require a fee, so I generally advise attorney clients to avoid those that are purely pay-to-play. To make the biggest impact on your practice, focus on awards and recognitions given by organizations that your target contacts might have heard of. Also look for awards that help you build the professional reputation you are interested in. It may sound obvious, but if you are pivoting your bankruptcy practice to focus on finance work with venture capital firms, do not pursue awards for bankruptcy attorneys.

How to improve your chances of selection?

The submission process for lawyer awards is often very similar from one recognition to the next, so though it may seem like a lot of work to prepare a nomination, you can usually use the information again and again.

List of Matters: Submissions typically ask for recent representative matters. To make submitting for awards easy, keep an up-to-date list of the matters you have handled and those you would like more of. It’s best to write about the matter in a way that highlights what your work meant for the client along with some of the more significant details. Legal organizations will sometimes require case numbers, client names, and a contact to verify the matter, so you may want to include that in your list as well. (This information is typically kept confidential.)

Biography: You will likely need to include a biography, so it is good practice to always keep your firm website bio updated, reviewing it at least every six months. Your bio should make clear exactly what you do and for whom, in the most specific terms. This is not the place to list everything you are capable of; an effective bio will only mention experience and activities that are relevant to your target audience and relate to the work you want more of.

Extracurriculars: Most organizations want to know about your activities outside of work. Your work in the community and in your profession (participation in associations, on charitable boards, volunteering, etc.) is often a key differentiator that will lead to your selection. I encourage professionals to get involved in organizations for a multitude of reasons, and increasing your chances of selection for awards and honors is certainly one benefit.

Stay prepared: Most awards are given out annually and have a specific window of time in which they will accept nominations. Do some research on the organizations that matter to you and to your target professional contacts, and create a list of awards you are interested in being considered for, noting submission deadlines. If you work at a firm with a marketing department or outside resource, they likely have a “master calendar” of industry awards. You will want to make sure you share your business development goals with the marketing department and let them know of any specific awards you want to be considered for. Also, be sure they have your most recent information so that they can easily submit on your behalf. Note that your chances for selection improve every year you submit a nomination, so do not give up because you aren’t selected for an award on the first attempt.

How to maximize your recognitions

It takes years of hard work to be eligible for an industry award, plus additional effort and intentionality to be selected. Make sure you make the most out of your recognition. Below are some ways to leverage your honors.

• Update your website profile to include your all your accolades. You can do this in the biography narrative and can also include some variation of an “Honors” or “Awards & Recognitions” section where you list them in bulleted form.
• Post to social media with a note on how the recognition relates to your clients.
• Ask your firm to include mention of your recognition on the firm website, social media platforms, and newsletter.
• Put out a press release announcing the recognition. Include information (about the award, about recent cases, about your practice/firm) that your key contacts would be interested in. Note that alumni organizations will often post about alumni in their news bulletins, so it is a good idea to mention where you went to school in your press releases.

Remember, to effectively market and grow your ideal practice, you need to prioritize your client’s thinking and mindset. Some of the attorneys I work with felt like industry awards were a sham until they were awarded one and received unexpected favorable attention from clients, prospects, and referral partners as a result. If you have a clear vision of exactly who you want to work with and what ideal work looks like for you, you can create a successful marketing strategy that feels meaningful… even with the inclusion of awards and recognitions.

When it comes to legal marketing, content isn’t just king—it’s the whole kingdom. Articles, videos, social media posts, photography, and your website all have the power to engage people and motivate them to seek you out. But churning out content for content’s sake is a waste of time and energy. Sure, leads may pour in, but are they the kind of leads you want? A thoughtful and cohesive content strategy is a firm’s secret sustainable marketing weapon to build the credibility and visibility that ultimately supports sellability.

The key to pulling in qualified leads is to be intentional with your messaging. Analyze. Strategize. Think about what compelling content would look like for your target audience, and then deliver that content like no one else can. For example, a trial attorney who is feeling the pain of weeding through too many unqualified leads could start investing in educational content that helps prospective clients understand more about the severity of cases they take on and how laws work in their state specific to that type of case. When every piece you put out reflects your firm’s expertise, personality, professionalism, and commitment, you will draw in leads more aligned with your client profile.

Here’s where to start.

Audit Your Content

The first step in improving the performance of your content is to evaluate your current content. Look at your analytics to see what content is pulling in leads now. What’s the quality of those leads? Are they truly client material, or are you wasting precious time following up with people without real business potential? Read your content with fresh eyes, and objectively assess its quality, timeliness, and relevance to the audience you want to attract.

This exercise can help you gain perspective that enables you to narrow your focus. Let’s say you’re a divorce attorney, and you wrote a blog titled “Divorce in America” that generated a lot of leads. How many of those people were actually on the brink of hiring a divorce attorney? Probably not nearly as many as would have read the blog “5 Steps to Take Before Discussing Divorce with Your Spouse.” That is how you find better qualified leads with content.

Focus on “MarkEDing®”

As you contemplate what content you should be sharing, think about this: What do people usually ask you about? Maybe it’s What should I do if I’m in an accident? How can I protect my business in a divorce? or When does it make sense to file for bankruptcy? Think about what your clients want to know, and then give them the information they need. Teach, don’t preach!

When your marketing messages are based on educating your audience (I coined the term “markEDing” to describe this), you make a deeper connection that leaves them feeling empowered. It also leaves them with a positive impression of your firm. By sharing valuable insights, you have demonstrated that you respect your audience’s information needs and are a reliable, forthright resource.

Write for SEO

Search engine optimization can be an outstanding tool for connecting potential clients to your content. And no, this isn’t a pitch for you to hire a full-time SEO firm. The key to visibility is not just architecture and code; it’s about having content—frequent content with SEO practices that will take your marketing efforts to the next level. Knowing how to carefully craft your blog post titles, metadata, video titles, and descriptions, image file names, etc. can elevate your content’s appearance in searches.

Align Your Content with Your Personality

Authenticity is essential to making an impact with your content. This means that every communication you share should feel consistent with your firm’s personality or with the individual personalities of the lawyers on your team. Your marketing support team should understand the nature of not only your firm’s business but also its personality, and the team should have the ability to bring that to life in the most relevant way.

For example, one law firm partner we worked with was so warm and genuine that clients have stayed in touch with him for decades because of the relationships he built. We knew we had to get him on video and film testimonials from some of the clients who adored him. As people look to see who they will be working with, hearing that person and getting a feel of who they are can make a huge difference. On the flip side, if someone hates being on camera, you should find a different way to communicate their personality and professionalism—something that is authentic to the person and the firm.

Assign Content Creation to the Right Partner

Just because we all can write doesn’t mean we all should. For most, it’s best to focus on what you do best and have others do the rest. Any message that comes out of your organization should be well-crafted, grammatically sound, and reflective of your underlying communications strategy. It’s great for partners and associates to share their expertise and insights, but that doesn’t mean they need to be the ones putting pen to paper.

Delegate the writing and creative direction to someone with the right skill set and a deep understanding of your communications strategy. If you don’t have an internal creative team, a digital marketing agency can lift this burden. They can recommend topics with high readership potential, interview the appropriate subject matter experts, and create compelling content for your targeted marketing channels.

Turn One Message into Many

If creating content seems like a daunting task, remember that you don’t have to reinvent the wheel with every message. One substantial piece can be edited or repurposed into multiple messages. For example:

• One video can be chopped up into several short clips for social media.
• A blog can be excerpted to form many social media posts.
• One media hit—a podcast interview, TV appearance, magazine article, etc.—can be repurposed for your website and social media, your quarterly newsletter, a sales sheet, and other communication channels.

Lead the Way

Taking a strategic approach with these pointers in mind can support your objective of generating more high-quality leads. It can also help you solidify your leadership stance among the crowded field of legal professionals.

The Governor of Delaware has signed into law amendments to the General Corporation Law of the State of Delaware (the “DGCL”) proposed by the Delaware State Bar Association and subsequently approved by the Delaware legislature. A number of provisions of the DGCL are affected, and the legislation addresses several significant topics, including the personal liability of senior corporate officers under Section 102(b)(7) of the DGCL, the authority to issue stock and options, the expansion of appraisal rights to beneficial owners, and new provisions intended to streamline the process for non-U.S. entities to domesticate into Delaware. The 2022 amendments to the DGCL took effect on August 1, 2022, and apply to corporate actions taken on or after that date.

Personal Liability of Senior Corporate Officers (Section 102(b)(7))

Section 102(b)(7) of the DGCL has been amended to extend exculpation rights for breaches of the fiduciary duty of care to senior officers of a Delaware corporation. The amendments address a long-standing discrepancy between exculpation rights granted to directors but not to corporate officers, an issue magnified in cases where a corporate officer also serves as a director and could therefore be protected from liability in his or her capacity as a director, but not with respect to any actions taken as an officer. The dichotomy has been troublesome since the Delaware Supreme Court held in Gantler v. Stephens, 2009 WL 188828 (Del. 2009) that both officers and directors owe fiduciary duties of care and loyalty to a corporation and its stockholders but that personal liability for breaches of the fiduciary duty of care differ for officers and directors given the statutory language contained in Section 102(b)(7).

The amendments to Section 102(b)(7) permit a corporation to adopt exculpatory language in its certificate of incorporation limiting the personal liability of both directors and officers, including the president, CEO, COO, CFO, chief legal officer, controller, treasurer, chief accounting officers, and others “identified in the corporation’s public filings with the SEC” or who have consented through a written agreement to accept service of process on the corporation’s behalf.

Consistent with the protections previously afforded to directors under Section 102(b)(7), to be valid, language exculpating directors and officers must be included in the corporation’s certificate of incorporation, and a corporation may only limit officer liability for breaches of the fiduciary duty of care. The amendments further provide that officers may only be exculpated for claims brought directly by stockholders and not for fiduciary duty claims brought by the corporation or derivatively by stockholders. Finally, the amendments prohibit the exculpation of officers for (1) breaches of the fiduciary duty of loyalty; (2) a failure to act in good faith; and (3) any transaction where an officer derives an improper personal benefit.

Authority to Issue Stocks and Options (Sections 152, 153, 157, 154, and 141(c))

These amendments continue the ongoing expansion and modernization of a board’s ability to delegate authority to an individual or entity for purposes of issuing stock or options in the corporation. Pursuant to the amendments, a board is permitted to delegate authority to an individual or entity to issue stock, sell treasury shares, or issue rights or options to acquire stock. Each delegation of authority made by the board must still satisfy the requirements of Sections 152, 153, and 157 of the DGCL, respectively. Further, the amendment requires that before delegating these responsibilities, the board must adopt a resolution establishing: (1) the maximum number of shares of stock, rights, or options that may be sold or issued; (2) a time period for selling shares or issuing stock; and (3) the minimum amount of consideration for these transactions, so long as the consideration aligns with the requirements laid out in Section 154 of the DGCL. The resolutions adopted by the board may be dependent upon facts ascertainable outside of the resolution, such as by reference to a formula such as the stock’s trading price on a particular date or a trading price average over a specified period of time, so long as the resolution clarifies how such facts operate on the resolution.

While the amendments further expand the authority of a board of directors to delegate the issuance of stock and options, it is important to note that the amendment does not affect the board’s process for delegating authority to board committees under Section 141(c). Additionally, the amendments prohibit the individual or entity delegated authority by the board to issue or sell to themselves stock, options, or any related rights falling within his, her, or its delegated authority.

No Requirement that Stockholder List be Available During a Meeting (Section 219)

The amendments to Section 219 of the DGCL eliminate the requirement that a corporation make a stockholder list available for inspection during a meeting of stockholders. The amendments also clarify how the ten-day period for purposes of requesting a stockholder list in advance of a stockholder meeting is calculated in order to determine when the corporation is required to make the stockholder list available for inspection. The amendments to Section 219 of the DGCL are intended to address the increasing frequency with which stockholder meetings are held virtually on an electronic platform, as well as privacy concerns relating to the broadcast of stockholder information via the virtual meeting format.

Meeting Notice and the Adjournment of Virtual Meetings (Section 222)

The amendments to Section 222 of the DGCL explicitly provide that a notice of meeting of stockholders may be given in any manner permitted by Section 232 of the DGCL. Section 222(c) was further amended to address potential technical issues that may arise during a virtual meeting of stockholders, providing that (unless the corporation’s bylaws state otherwise) if a virtual meeting of stockholders is adjourned, including due to a technical failure to convene or continue a virtual meeting, notice need not be given if the time, date, and place of the adjourned meeting are announced at the meeting, displayed during the time scheduled for the meeting on the virtual platform utilized for the meeting, or set forth in the notice of meeting. As a practical matter, a corporation using a virtual meeting format may wish to include an advance adjournment notice in the meeting notice to address potential technical issues that may arise while convening or holding the stockholder meeting.

Stockholder Consents (Section 228)

Section 228(c) of the DGCL has been amended to clarify that a stockholder executing a written consent that is effective at a future time, including a time determined by the happening of a future event, need not be a stockholder at the time such consent is executed if the person is a stockholder of record as of the record date set for determining stockholders entitled to consent to the action.

Appraisal Rights (Section 262)

The amendments to Section 262 of the DGCL expand the rights of beneficial owners of stock, specifically by extending statutory appraisal rights to beneficial owners. Prior to the amendments, a beneficial owner of stock could only seek appraisal rights if the record holder of such stock demanded appraisal on the beneficial owner’s behalf. As a result of the amendments, beneficial owners of stock are now permitted to make appraisal demands in their own name.

The amendments include a new subsection 262(d)(3) providing that a beneficial owner may submit a written demand for appraisal if the owner satisfies the following three requirements: (1) maintaining beneficial ownership of the stock of the corporation from the date of the demand through the date of the merger, consolidation, or conversion; (2) satisfying the stockholder ownership threshold established under 262(a); and (3) submitting evidence of beneficial ownership in addition to other identifying information such as the beneficial owner’s address and the identity of the record holder.

In addition, the amendments specifically define who may be classified as a beneficial owner, including any “person (either an individual or entity) who is the beneficial owner of stock held either in voting trust or by a nominee on behalf of the person.” The amendments also provide that stockholders may have appraisal rights in connection with a conversion of the corporation unless the 262(b) market-out exception applies. The amendments further extend the market-out exception to “transactions approved by a stockholder consent.”

Finally, the amendments remove the requirement that a Section 262 stockholder notice of appraisal rights include a copy of Section 262 of the DGCL; rather, the notice may reference a publicly available electronic resource providing information regarding stockholder appraisal rights.

Conversions (Sections 265, 266, and 262(k))

Section 265 of the DGCL, governing the conversion of other entities to a Delaware corporation, was amended to modify the time frame by which a conversion must be approved. While the statute previously required the approval of the converting entity and the approval of the certificate of incorporation by the same authorization required to approve the conversion to occur prior to the filing of the certificate of conversion, the amendments provide that the approvals must occur by the time the certificate of conversion filed with the Delaware Secretary of State becomes effective.

Section 266 of the DGCL, governing the conversion of a Delaware corporation to another entity, was also amended to require the vote of holders of a majority in voting power of the outstanding shares entitled to vote on the conversion, versus the prior requirement for unanimous approval of the conversion by all of the outstanding stock of the entity regardless of voting rights. While the prior formulation was intended to protect stockholders from converting into a different form of entity with substantially different governance and ownership rights, as a practical matter the unanimity requirement made the statute unworkable in many instances.

In recognition of the prior policy concerns, however, Section 266 contains two important protections for the stockholders of a Delaware corporation contemplating a conversion: (1) the amendments require the consent of any stockholder who would become a general partner due to a conversion, given potential personal liability for a general partner under Delaware law; and (2) the amendments state that any provision of a certificate of incorporation of a corporation incorporated before August 1, 2022, or a voting or other written agreement between the corporation and a stockholder entered into prior to that date, that restricts or prohibits the consummation of a merger or consolidation, shall be deemed to apply to a conversion unless the certificate of incorporation or agreement otherwise provides. Thus, for example, holders of preferred stock who are entitled to a separate class vote to approve a merger or consolidation transaction under the terms of a corporation’s certificate of incorporation effective prior to August 1, 2022, would be deemed to have the same class vote on a proposed conversion.

Finally, Section 262 of the DGCL, which sets forth statutory appraisal rights for stockholders, has been amended to apply to the conversion of a Delaware corporation in addition to a merger or consolidation.

Dissolution (Sections 275 and 276)

The amendments to Sections 275 and 276 of the DGCL are intended to clarify dissolution procedures for corporations specifying the duration of the corporation’s existence in their certificate of incorporation. The revisions to Section 275 provide that any corporation whose certificate of incorporation specifies the duration of the company’s existence must file dissolution documents with the Delaware Secretary of State within ninety days of the date set in the company’s incorporation documents. The certificate of dissolution must also contain the name of the corporation, the date listed in the certificate of incorporation on which the corporation would dissolve, the names and contact information for the corporation’s directors and officers, and the date on which the original certificate of incorporation was filed. Further, the amendments specify that the corporation will be dissolved as a legal matter on either the date listed in the certificate of incorporation or the date on which the certificate of dissolution goes into effect, whichever is earlier. In addition, the amendments modify Section 276 to contain conforming dissolution provisions for nonstock corporations.

Domestication of Non-US Entities (Section 388)

Section 388 of the DGCL was substantively amended to permit a non-United States entity domesticating into Delaware to adopt a plan of domestication setting forth the terms and conditions of the domestication, including the manner of exchanging or converting the equity interests of the non-United States entity to be domesticated and any details or provisions deemed desirable. The revised statutory language providing for a plan of domestication significantly streamlines the mechanics and technical approvals required in connection with the formation of a new Delaware corporation upon domestication and offers greater flexibility to transaction planners in structuring deals that contemplate one or more non-United States entities domesticating into Delaware.

A plan of domestication may set forth corporate action to be taken by the domesticated corporation in connection with the domestication, each of which must be approved in accordance with the requirements of applicable foreign laws prior to the effectiveness of the domestication into Delaware. Once approved, any such corporate action that is within the power of the Delaware corporation under the DGCL that is set forth in the plan of domestication will be deemed to be authorized, adopted, and approved, as applicable, by the domesticated corporation and its board of directors and stockholders, and no further action of the board of directors or stockholders is required. Importantly, if any corporate action set forth in the plan requires the filing of a certificate with the Delaware Secretary of State, the certificate must state that no action by the board of directors or stockholders of the Delaware corporation otherwise required by any other provision of the DGCL is required in accordance with Section 388 of the DGCL.

In addition, the amendments provide that the terms of the plan of domestication may be made dependent upon facts ascertainable outside of the plan if the way such facts operate is clearly set forth in the plan. The amendments further require that a certificate of domestication certify that, prior to the time the certificate of domestication becomes effective, the domestication was approved in accordance with the governing documents of the non-United States entity or by applicable non-United States law.

Other Amendments

Other minor amendments to the DGCL were also enacted, including amending: (1) Section 103 to clarify that the execution of an instrument by a person constitutes an oath or affirmation, under penalties of perjury, that the facts stated in the instrument will be true at the time such instrument is effective, and to remove outdated language; (2) Section 502 to clarify that, unless a corporation maintains its principal place of business in the State of Delaware and serves as its own registered agent, the principal place of business of the corporation shall not be the address of its registered office in Delaware; and (3) Section 503 to provide that a corporation holding the status of a large corporate filer with the Delaware Secretary of State will maintain that status unless it notifies the Secretary of State’s office that the corporation no longer meets the criteria applicable to large corporate filers.

The SPAC IPO market and the de-SPAC market have slowed dramatically during 2022.

By all measures, 2022 has not been a banner year for SPACs. With the SEC proposing new rules that threaten to upend the SPAC business, SPAC IPOs have declined from 2021, when more than 600 IPOs raised over $162 billion, to just 74 in 2022, raising only $12.4 billion.^[1] July 2022 was, per the Wall Street Journal, “the first month in five years that no new SPACs raised money.”^[2] The pace of de-SPAC business combinations has also slowed considerably, with around 290 de-SPACs announced in 2021, compared to only around 90 so far this year.^[3] Almost 580 active SPACs are still searching for targets, with approximately 120 SPACs having an investment horizon through the end of 2022. So far in 2022, at least 15 SPACs have already announced that they will withdraw their registration statements or liquidate.^[4]

However, M&A activity involving de-SPACed companies is picking up significantly, driven both by de-SPACed sellers in search of a buyer, as well as strategic buyers aiming to acquire desirable companies at attractive values.

Many de-SPACed companies are trading below their acquisition levels of $10 per share, in some cases significantly below that level. Of the more than 400 de-SPACed companies that remain publicly traded, around 330 (almost 85%) are trading at or below $10, while almost 95 are trading under $1.^[5] Average de-SPAC redemption rates in the latter part of 2021 and in 2022 have been in excess of 80%.^[6] As such, many de-SPAC business combinations did not result in sufficient primary proceeds to the companies that went public via a de-SPAC to support projected growth plans.

Given the low valuations at which many de-SPACed companies are trading, raising additional equity financing in the public markets is difficult and may not be an attractive option (if it is even possible at all). PIPE investors, who historically invested in SPACs at $10 per share, currently have little appetite to direct more funds into de-SPACed companies. Many de-SPACed companies are also in “sectors of the future” (like energy transition) and often do not have the steady cash flows and positive EBITDA needed in order to access the traditional bank loan or bond market.

In light of the limited financing options, M&A may be the natural step for de-SPACed companies looking to develop sustainable businesses and generate investor interest. Battery maker Romeo Power, for instance—which de-SPACed in a $1.33 billion deal that closed in late 2020—was recently acquired by electric truck manufacturer Nikola Corporation in an all-stock transaction, implying a consideration of $0.74 per Romeo share. Even de-SPACed companies that are doing well and are generating robust revenues often operate in industries with significant capital needs and may benefit from being part of a company with a larger platform and stronger balance sheet.

M&A transactions involving de-SPACed companies present many unique issues. Below we highlight key considerations in advising a client pursuing a merger involving a de-SPACed company.

The de-SPACed company’s board of directors will need to make important fiduciary decisions. If a de-SPACed company that is trading (significantly) below its IPO price is considering an M&A transaction, especially one where the consideration will be all or mostly cash, the de-SPACed target’s board will need to engage in important fiduciary deliberations. The target’s board may consider, where relevant, questions such as: Is this the right time for the company to sell? What constitutes fair value for the target’s shares? How important is the $10 per share SPAC IPO price as a benchmark? In the current environment, even a bid at a high premium to current trading levels may still be at a steep discount to the de-SPAC acquisition value of the target. It is important for the de-SPAC target board to undertake an informed, thorough, and well-documented (via minutes and presentations by financial and legal advisors) decision-making process when considering a potential transaction. A buyer of a de-SPACed target has an equally strong interest in ensuring that the target conducts a proper process; if a deal is completed, the buyer will inherit any resulting litigation and obligations to indemnify the de-SPACed target’s directors and officers.

Different shareholder groups may have different views as to whether a transaction is desirable. Different shareholder groups may have acquired their shares in the de-SPACed target at different prices. They may thus stand to benefit differently from a potential transaction—especially one at a loss relative to the de-SPAC acquisition value—even if they receive the same consideration. As is well known, SPAC sponsors usually acquire their shares in the SPAC for nominal consideration (typically $25,000 for shares representing 20% of the SPAC’s outstanding shares post-IPO and prior to the de-SPAC), while public investors who purchased on the open market and PIPE investors typically bought their shares at $10 each. It may be useful to study the de-SPACed target’s shareholder base to determine at what price points investors acquired their shares and whether they would likely support a transaction, including at what price, and what mix of consideration may be appropriate in light of the particular facts and circumstances of the de-SPACed company.

Voting power may be concentrated with a few shareholders who may determine whether shareholder approval for a transaction can be obtained. Often, the SPAC sponsor (and its affiliated entities), the anchor PIPE investors, and the legacy target shareholders hold a significant percentage of the de-SPACed target’s shares. In some cases, the legacy target shareholders may also hold high vote stock, which increases their voting power above their economic ownership of the company. Because of this, it is important to determine which shareholders can sway, and potentially decide, the outcome of the shareholder vote and the extent to which they will be supportive not only of a transaction, but also willing to sign up voting agreements in favor of a deal.

De-SPAC directors may be nominated by certain shareholders and may face actual or perceived conflicts. Many de-SPACed companies are parties to shareholder agreements that may give certain significant shareholders director designation rights. As a result, directors of de-SPACed companies may be affiliated with certain shareholders, and it may be important to evaluate whether in the context of a particular transaction any directors may have actual or perceived conflicts of interest given their relationships with certain shareholders. This highlights the need for some de-SPACed targets to assess process issues, potentially including, given the facts and circumstances of the proposed transaction, the need for, or benefits of, creating a special committee or seeking a “majority of the minority” vote. As noted above, a buyer of a de-SPACed target has a shared interest in ensuring that the target conducts a proper process. If a transaction is evaluated by the courts under the “entire fairness” standard of review, for example, any shareholder litigation challenging the deal will be difficult to dismiss on the pleadings. Therefore, if there are procedural measures that can be employed to lend a transaction “business judgment rule” review, a buyer may want to consider those measures.

De-SPACed companies may have very complex capitalization structures. De-SPACed companies often have multiple classes of stock (including potentially high vote and low vote stock). In addition, it is not uncommon for founders and other legacy target shareholders to be entitled to “earnout shares,” which are issued if and when the de-SPACed target’s stock price reaches or exceeds certain levels. In 2021, over 40% of the closed de-SPAC deals contained an earnout provision. On the flip side, a portion of the SPAC sponsor’s shares may be subject to “vesting” or “forfeiture back” provisions, under which the sponsor will lose some of its shares unless the de-SPACed company’s stock price trades above specified levels by specified deadlines. Sponsor equity was subject to such vesting and/or forfeiture in over half of the de-SPAC deals that closed in 2021.^[7]

As such, determining the fully diluted capitalization of a de-SPACed company may be particularly challenging, and the treatment of earnout, vesting, and forfeiture provisions needs to be carefully reviewed in light of the contemplated amount and mix of deal consideration. This task may be time-consuming especially where the relevant provisions have drafting ambiguities and do not lend themselves to straightforward answers.

De-SPACed companies may have multiple types of warrants that need to be accounted for. As part of a de-SPAC transaction, de-SPACed companies typically inherit “public warrants,” which were issued to the public investors in the SPAC IPO, and “private placement warrants,” which were issued to the SPAC sponsor, as well as potentially PIPE investors, in putting together the financing for the deal. The terms of the public warrants and private placement warrants are usually identical, except that the de-SPACed company may redeem the public warrants if its stock price reaches or exceeds certain levels, whereas the private placement warrants are not redeemable.

Both public and private placement warrants may contain provisions that provide that in the case of a merger or other business combination transaction, the warrants become exercisable for the merger consideration. This means that the buyer cannot unilaterally take them out (subject to the redemption provisions of the public warrants based on the deal price) and—if some warrant holders do not exercise their warrants right away—may have ongoing obligations to pay the merger consideration for the life of the warrants.

As a separate matter, in a deal that involves less than a specified percentage (usually 70%) of listed stock as the deal consideration, the warrants often provide that the exercise price will be adjusted if the warrant is exercised within a specified period of time after the closing of the deal (usually 30 days) such that the warrant holder will be entitled to receive upon exercise, on a net basis, the Black-Scholes value of the warrant (calculated as of immediately prior to closing, based on certain assumptions specified in the warrant agreement). This creates an added complication in that a buyer may not know the exact amount of consideration to be paid for the de-SPACed warrants at the time of signing. Buyers should, therefore, consider whether the warrant agreement terms may be amended and whether it would be feasible or desirable for the buyer to enter into agreements with the warrant holders that lock in the treatment of their warrants at the time of signing.

Finally, de-SPACed companies may have inherited legacy target warrants (for example, if the target had issued warrants to VC funds or debt or service providers pre-SPAC IPO), which may have bespoke provisions and may further complicate cleaning up the company’s capital structure post-acquisition.

Some de-SPACed companies are organized as “Up-Cs” for tax purposes. Some de-SPACed companies are structured as umbrella partnership C corporations (“Up-Cs”), where the target business is organized as a flowthrough for tax purposes, either as an LLC or a limited partnership (“opco”), and the publicly listed de-SPACed company’s sole asset is its equity in opco. In such a structure, the public shareholders hold one class of shares in the public company (which carry both economic and voting rights) while other shareholders, typically the legacy target founders and initial investors, hold both a different class of shares in the public company (which carry voting but no economic rights) and units in opco (which carry their economic interests). As such, acquiring a de-SPACed company that is organized as an Up-C is even more challenging from a corporate perspective; the transaction needs to account for both the treatment of shares and opco units. Further, many Up-Cs often have a tax receivable agreement (“TRA”) in place. TRAs may, among other things, require a payout to TRA beneficiaries upon a change of control of the de-SPACed company, and these payments can be significant. Therefore, having a TRA in place raises additional structuring considerations, including whether certain shareholders are potentially receiving differential consideration.

De-SPACed companies may be subject to, or at risk of, litigation or investigation. Finally, it is not uncommon for de-SPACed companies to be subject to fiduciary duty litigation in connection with the de-SPAC process, and/or securities litigation or investigations regarding issues with the de-SPAC merger or subsequent SEC disclosures. (This is especially common when the de-SPACed company misses earnings targets shortly after going public with the de-SPAC). Any potential buyer of a de-SPACed company should carefully conduct diligence regarding these potential exposures and the extent to which they may be extinguished by virtue of the acquisition.

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Mergers involving de-SPACed companies present several unique features. It is important—even more so than in other contexts—to engage and consult with counsel early, as several threshold matters will need to be addressed to ensure that the transaction is structured in the appropriate manner, that the valuation accounts for the fully diluted capital of the de-SPACed target, and that the board process is appropriately structured to meet applicable fiduciary standards.

1. Source: SPACInsider, SPAC Statistics as of August 15, 2022. ↑

2. Source: Wall Street Journal, SPAC Activity in July Reached the Lowest Levels in Five Years, August 17, 2022. ↑

3. Source: DealPoint Data as of August 17, 2022. ↑

4. Source: The Deal, List of SPACs to Liquidate after Failed DeSPACs Grows, August 15, 2022. ↑

5. Source: SPACInsider as of August 15, 2022. ↑

6. Source: SPACInsider as of August 15, 2022; Freshfields, 2021 De-SPAC Debrief, January 2022. ↑

7. Source: Freshfields, 2021 De-SPAC Debrief, January 2022. ↑