ERISA Fiduciary Duties: Compliance Remains Essential

ERISA Fiduciary Duties: Compliance Remains Essential

The Employee Retirement Income Security Act of 1974 (ERISA) establishes a comprehensive framework of fiduciary duties for many involved with employee benefit plans. Failure to comply with these strict fiduciary standards can expose fiduciaries to personal and professional liability and penalties. With ERISA litigation on the rise, a new administration, and recent news that the Department of Labor (DOL) is sharing data with ERISA-plaintiff firms, a refresher on fiduciary duty compliance is necessary.

What Plans Are Covered?

ERISA’s fiduciary requirements apply to all ERISA-covered employee benefit plans. This generally includes all employer-sponsored group benefit plans unless an exemption applies, such as governmental and church plans, as well as plans solely maintained to comply with workers’ compensation, unemployment compensation, or disability insurance laws.

Who Is A Fiduciary?

A fiduciary is any individual or entity that does any of the following:

  • Exercises authority over the management of a plan or the disposition of assets.
  • Provides investment advice regarding plan assets for a fee.
  • Has any discretionary authority in the administration of the plan.

Note that fiduciary status is determined by function, what duties an individual performs or has the right to perform, rather than an individual’s title or how they are described in a service agreement. Fiduciaries include named fiduciaries. Those specified in the plan documents are plan trustees, plan administrators, investment committee members, investment managers, and other persons or entities that fall under the functional definition. When determining whether a third-party administrator is a fiduciary, it is important to identify whether their administrative functions are solely ministerial or directed or whether the administrator has discretionary authority.

What Rules Must Fiduciaries Follow?

Fiduciaries must understand and follow the four main fiduciary duties:

  • Duty of Loyalty: Known as the exclusive benefit rule, fiduciaries are obligated to discharge their duties solely in the interest of plan participants and beneficiaries. Fiduciaries must act to provide benefits to participants and use plan assets only to pay for benefits and reasonable administrative costs.
  • Duty of Prudence: A fiduciary must act with the same care, skill, prudence, and diligence that a prudent fiduciary would use in similar circumstances. Even when considering experts’ advice, hiring an investment manager, or working with a service provider, a fiduciary must exercise prudence in their selection, evaluation, and monitoring of those functions and providers. This duty extends to procedural policies and plan investment and asset allocation, including evaluation of risk and return.
  • Duty of Diversification: Fiduciaries must diversify plan investments to minimize the risk of large losses, with limited exceptions for ESOPs.
  • Duty to Follow Plan Documents and Applicable Law: Fiduciaries must act in accordance with plan documents and ERISA. Plans must be in writing, and a summary plan description of the key plan terms must be provided to participants.

Fiduciaries also have a duty to avoid causing the plan to engage in any prohibited transactions. Prohibited transactions include most transactions between the plan and individuals and entities with a relationship to the plan. Several exceptions exist, including one that permits ongoing provision of reasonable and necessary services.

Liabilities and Penalties

An individual or entity that breaches fiduciary duties and causes a plan to incur losses may be personally liable for undoing the transaction or making the plan whole. Additional penalties, often at a rate of 20% of the amount involved in the violation, may also apply. While criminal penalties are rare, are possible when violations of ERISA are intentional. Causing the plan to engage in prohibited transactions may also result in excise taxes established by the Internal Revenue Code.

To limit potential liability, plan sponsors and fiduciaries should ensure the appropriate allocation of fiduciary responsibilities, develop adequate plan governance policies, and participate in regular training. Plan sponsors may purchase fiduciary liability insurance to cover liability or losses arising under ERISA. In addition, the DOL has established the Voluntary Fiduciary Correction Program (VFCP), which can provide relief from civil liability and excise taxes if ERISA fiduciaries voluntarily report and correct certain transactions that breach their fiduciary duties. The VFCP program was recently updated with expanded provisions for self-correction of errors, which are addressed in a previous advisory.

Understanding and adhering to the responsibilities outlined under ERISA allows fiduciaries to better serve and protect the financial well-being of participants and beneficiaries. If you have any questions regarding your responsibilities under ERISA or need assistance ensuring your plan policies are consistent with ERISA regulations, please contact a member of Varnum’s Employee Benefits Team.

Video Privacy Protection Act: What’s Next After Sixth Circuit Creates Split

Sixth Circuit Creates Split on VPPA 'Consumer' Definition

The Video Privacy Protection Act (VPPA) is a federal law aimed at prohibiting the unauthorized disclosure of a person’s video viewing history. While the VPPA was originally enacted in 1988 to prevent disclosure of information regarding an individual’s video rental history from businesses like Blockbuster, the explosion of the internet in the decades since has greatly expanded its potential reach, giving rise to countless lawsuits targeting businesses’ websites. One such case, involving the alleged disclosure of the plaintiff’s video viewing history through use of Meta’s data-tracking Pixel, was recently decided by the United States Court of Appeals for the Sixth Circuit, in a decision that serves to narrow the reach of the VPPA.

In a published opinion, the Sixth Circuit addressed the issue of who can be considered a “consumer” – and thus able to bring a claim – under the VPPA. The VPPA defines the term “consumer” to mean “any renter, purchaser, or subscriber of goods or services from a video tape service provider.” Citing longstanding canons of statutory construction, the Sixth Circuit reasoned that, when read in context of its surrounding text, the phrase “goods and services” is limited to audiovisual goods and services. The plaintiff, a subscriber to 247Sports.com’s newsletter which contained links to videos that were accessible to anyone on the website, failed to allege that the newsletter itself was audiovisual material, and thus was not protected under the VPPA.

Notably, the Sixth Circuit’s decision was contrary to the conclusions previously reached by other Federal Courts of Appeals, specifically the Second and Seventh Circuits. Those courts had endorsed a broader interpretation of the term, considering a subscriber of any of the provider’s goods or services to be a “consumer” under the VPPA, regardless of whether the subscription was specifically for audiovisual materials. By defying this trend, the Sixth Circuit creates a circuit split that may be resolved by the Supreme Court of the United States. The defendant in the Second Circuit case on this issue has petitioned the Supreme Court to review the decision. Now, with a circuit split apparent, the Supreme Court may be more likely to intervene.

Against this uncertain backdrop, and with the wave of Meta Pixel and similar lawsuits continuing, businesses will need to carefully evaluate the operation of their websites and whether they may be subjected to a VPPA claim. The review should also include an analysis of the effectiveness of any consent provisions that the business may be relying on to avoid liability. Businesses should be aware of the risks presented by the entities they acquire or merge with whose data sharing practices may implicate the VPPA. To mitigate the risk of liability, due diligence in any such transaction should include a thorough review of the target company’s data practices, compliance with privacy regulations, and any ongoing or potential lawsuits tied to the use of tracking technology.

Varnum’s Data Privacy and Cybersecurity Team is closely monitoring new VPPA developments and is well-equipped to help companies navigate these challenges and ensure compliance with evolving privacy laws. Please contact your Varnum attorney if you have questions on the risks associated with data-tracking tools such as the Meta Pixel and how they may apply to your company’s practices.

Selling a Business: A Practical Guide for a Successful Transaction

Selling a Business: A Practical Guide for a Successful Transaction

Selling a business is a complex process that involves preparing financial information, choosing the right structure (asset vs. stock sale), navigating legal and tax implications, and negotiating terms with potential buyers. This practical guide from Varnum Law outlines the key steps and considerations for a successful transaction, including how to maximize value, minimize risk, and ensure a smooth closing.

This guide is designed to help business owners and executives navigate the process of selling a business. It provides an overview of the sale process and practical tips for achieving the best possible outcome and addresses common challenges encountered during deals.   

For many sellers, a transaction will involve unfamiliar procedures and terms where a lawyer can provide valuable guidance. The better the key concepts are understood, the better equipped one will be to make informed decisions and achieve a favorable result.

Sale Process

The timeline for the deal will likely include the following steps:

  • Selecting a business broker who is right for the business.
  • The buyer presents a proposal letter or letter of intent.
  • The buyer prepares an Asset Purchase Agreement (APA) for the parties to negotiate.
  • The seller’s board of directors and shareholders approve the APA.
  • Both the buyer and seller sign the APA at or before closing.
  • Additional steps, such as obtaining real estate title insurance, finishing due diligence, and preparing closing documents.
  • At closing, the buyer pays the purchase price, and the seller transfers the business.

Letter of Intent

The selected buyer will produce a written proposal letter or letter of intent naming the price, transaction structure, and key terms. It should be written to state that it is nonbinding, meaning that everything remains subject to negotiating and signing a more detailed, definitive purchase agreement. The letter of intent will often include a binding agreement to negotiate exclusively with the buyer for a period of time.

Tax Planning

The structure of the transaction will determine the tax implications and the net proceeds. A lawyer can help assess the business’ options and calculate the net cash anticipated after taxes.

Due Diligence

The buyer will often do a thorough business review including financial statements, contracts, employee compensation and benefits, real estate, and other key aspects. Though the process can be time-consuming, it is typically better to provide the requested information rather than contest its necessity.

Review of Governing Documents

Early in the process, the selling corporation should review its articles of incorporation, bylaws, and any shareholder (buy-sell) agreements. The seller should identify anything that could affect the transaction, such as rights of first refusals or super-majority vote requirements. An attorney can help with this.

Structure – Sale of Assets

Many business sales are structured as asset purchases. In this structure, the selling corporation transfers its assets to a buyer-controlled entity. The buyer can form a new corporation to purchase the assets or use an existing entity. The seller keeps its corporate entity and dissolves it after the closing. Buyers do this to avoid any known or unknown liabilities the corporation may have.

Transferred assets include owned real estate, equipment, furniture, accounts receivable, prepaid assets, the goodwill of the business, the name of the paper, all website addresses, etc. In most cases, cash is retained by the selling corporation.

Some working capital liabilities may also be transferred to the buyer, such as accounts payable. Bank debt and other long-term liabilities are typically not assumed by the buyer. Liabilities not assumed by the buyer are paid off at closing and remain an obligation of the selling corporation.

The other transaction structure is for the buyer to purchase the corporation or LLC.

Purchase Price

Larger companies purchasing smaller companies typically pay all cash. Often 5 to 10 percent of the purchase price may be placed in an escrow account with a bank for an agreed-upon period of time.

The purchase price is for the enterprise value of the business without regard to bank debt and other long-term liabilities. This is frequently referred to as selling the business on a cash-free, debt-free basis. The seller will need to pay off any bank debt or other long-term liabilities out of the purchase price. Additional liabilities may include deferred compensation payments and any severance obligations.

The purchase price often includes a “net working capital adjustment” as well. Net working capital is current assets (excluding cash) minus current liabilities. Net working capital varies daily as revenues are received, expenses are paid, and liabilities and prepaid assets are accrued.

When a business is sold, the buyer and seller will usually agree on a “net working capital target.” The target is intended to be a normal amount of working capital that should be there as of the closing. If the actual net working capital at the time of closing exceeds or is less than the target amount, then the purchase price is increased or reduced dollar for dollar.

The seller will want to be careful about selecting the net working capital target because any shortfall at closing will reduce the purchase price. Different types of businesses have different working capital profiles. So, it is important to make sure the working capital definition and target fit for the business. 

Asset Purchase Agreement

The buyer will prepare a detailed APA listing of the assets being purchased and the purchase price.

The APA will include several representations and warranties from the seller such as:

  • The selling corporation will have all director and shareholder approvals needed to sell the business.
  • The assets being sold will be free and clear of all liens when the transaction closes.
  • The seller’s financial statements are accurate.
  • There are no material liabilities that have not been disclosed to the buyer.
  • The list of employees and their compensation is accurate.

If the representations are not true at the time of the closing, the buyer is not required to complete the transaction.

If the buyer discovers a representation is not true after closing, the buyer may have a claim against the seller. For example, if the seller represents that the equipment is free and clear of liens, and it turns out there is a lien, the seller would be responsible for paying off the lien. The purchase agreement will include limits and procedures related to how and when the buyer can make a claim against the seller.

The seller can protect themselves by including disclosure schedules within the APA documenting any problems or facts contrary to the representations. If disclosed before the closing, the buyer cannot make a claim after the closing. This is where the due diligence review benefits both the buyer and the seller.

The APA will include a list of covenants or promises. The seller will promise to operate its business in the ordinary course between signing and closing. The seller will also agree to negative covenants promising not to do certain major actions between signing and closing, such as entering into a new contract or making a large dividend.

Board of Directors and Shareholder Approval

The board of directors should review and approve the definitive APA before it is signed. If a board decides that a sale of the company is the best decision, the directors have fiduciary duties to make an informed decision in the best interests of the shareholders. Hiring a business broker and soliciting multiple bids for the business is considered the gold standard to get the best possible price from the sale. The directors should carefully review the deal terms and transaction documents. Directors should also include their lawyers in the board meeting and ask to walk through the key terms of the legal agreements. An attorney can help prepare board minutes that document the process followed and the reasons for the transaction.

The APA must also be approved by the corporation’s shareholders (by a majority of the outstanding shares unless there is a super-majority vote requirement). The shareholder meeting takes place either at or before the APA is signed or between the signing and the closing.   

In addition to approving the sale of all assets, the shareholders will often vote to dissolve the corporate entity after the closing. During the dissolution process, the corporate entity turns its assets into cash, pays its liabilities, and then distributes the net proceeds to shareholders.

Dissenters Rights

Most states have a corporations statute that includes dissenters’ rights. Early in the process, an attorney should review the corporations statute and advise whether the transaction is exempt from the dissenters’ rights provisions. In most states, dissenters’ rights do not apply when assets are sold for cash, and the proceeds are distributed to shareholders within one year. If dissenters’ rights apply and the transaction is not exempt, a dissenting shareholder has certain rights to go through a process designed to determine the fair value of their shares.

Real Estate

If the seller leases real estate, the lease must also be reviewed. Oftentimes it will be necessary to receive the landlord’s consent before transferring the lease to the buyer. If the seller owns the real estate, then the real estate will be transferred at the closing.

Title insurance will be obtained to confirm that the seller owns the real estate and to identify any mortgages, easements, or other liens or encumbrances on the property. The buyer will expect all mortgages to be paid at closing, so it gets a clean title to the property.

Often the buyer will obtain a survey of the property to show the precise boundaries and the building’s exact location.

The buyer will also typically hire an environmental consulting firm to examine the real estate for any contamination or asbestos. A Phase I assessment involves a tour of the property, a look at the history of the property, and a determination of whether there are any recognized environmental conditions that may require further investigation. If it looks like there may be serious issues, the buyer may proceed to a Phase II assessment which involves taking soil samples and testing them for contamination.

The buyer may also get a building inspection to inspect the structure, HVAC systems, roof, etc.

Net Proceeds to the Seller

The corporation selling the business closes the transaction and receives the cash purchase price. Out of the purchase price, the seller must pay off its bank loans and other long-term debt. It must also pay its transaction expenses, which include the business broker fee, attorney fees, accountant’s fees, real estate title insurance, etc. Any net working capital adjustment will also affect the net proceeds to the shareholders of the selling corporation.

Early in the process, the seller’s Chief Financial Officer and outside accountant should prepare an estimate of what the net proceeds will be after payment of expenses and taxes.

Escrow Account

The buyer will often withhold between 5 and 10 percent of the purchase price. That money will be put in an escrow account for a period of time. If the seller has misrepresented the business to the buyer, the buyer will take money from the escrow account to make itself whole. If the buyer does not have any legitimate claims, the money will be distributed to the seller at an agreed upon date, often 12 to 18 months after the closing.

For sellers, one tactic is to negotiate a staged release of the escrow funds. For example, 50 percent is to be released to the seller six months after the closing, with the remaining 50 percent to be distributed to the seller 12 months after the closing.

Employee Transition to Buyer

In an asset sale, the employees are the seller’s employees before the closing, and the buyer’s after the closing. The buyer will typically do the same new employee intake paperwork that it would do for any new employee. Employees may be required to fill out an employment application, a form I-9 to verify employment eligibility, etc. Employees will enroll in the buyer’s benefit plans. If the seller has a 401(k), then arrangements will be made to terminate that 401(k) or transfer balances to the buyer’s 401(k) or to individual employee IRAs.

A buyer in an asset purchase is not required to hire all the seller’s employees. Sellers should ask buyers about their intentions as part of the negotiation process and consider severance obligations and policies for any employees not hired by the buyer.

The Closing

At closing, the final documents are delivered, the buyer pays the purchase price, and the business is transferred. Often it is a virtual closing that does not require people to be physically present. The lawyers arrange for documents to be signed and delivered. After the documents are signed, the parties and/or their lawyers will join a conference call, agree that everything is completed, and direct the buyer to transfer the purchase price.

After the Sale

After the closing, the selling corporation then enters a wind-down period that may take 3 to 12 months. The corporation must pay all its creditors.

Bumps along the way 

Every deal comes with its frustrations, which can include:

  • The sale process is taking longer than expected.
  • The buyer’s due diligence review may seem intrusive. Responding to requests is time-consuming, and it may seem like the buyer is requesting the same information repeatedly.
  • The buyer may be slow to commit to the future role of key members of the seller’s management team.
  • The seller may become frustrated with the buyer’s focus on environmental or other risks that have never been an issue in the past.
  • The buyer may seem overly concerned about contracts and vendor relationships that have not caused issues before.
  • Some buyers have a smooth and well-thought-out transition process with good communication. Others may have poor communication and may seem haphazard and reactive. A buyer may also be distracted by other deals in the process.

Tips for a Successful Transaction

Here are some tips that can help achieve a better result for the company, employees, and shareholders:

  • Keep the sale process moving. The longer things drag on, the more likely a bad event will happen. Whether external like market trouble, or internal, like losing key employees.
  • Stay focused on operating the business. A deal can be a huge distraction that negatively impacts operations and earnings. Employees may lose focus, and deteriorating earnings during a sale process can be problematic.
  • Plan ahead for third-party tasks and lead times – for example, environmental assessments, real estate surveys, obtaining consent from landlords, getting shareholder approval, and paying off bank debt or bonds.
  • Review employment agreements, deferred compensation arrangements, or bonus or profit-sharing plans with a lawyer.
  • Be careful with capital expenditures. Using working capital to buy equipment could negatively affect net working capital at closing, and consequently the purchase price.
  • Create complete, detailed, and accurate Disclosure Schedules. Good Disclosure Schedules reduce the risk of post-closing claims from the buyer, helping preserve the net purchase price.
  • Have a good strategy and process for announcing the deal to employees and customers.   
  • Manage shareholder expectations. Net proceeds will be reduced by debts, taxes, and transaction expenses. Even after the closing, there will be a wind-down period before final distributions are made.
  • Consider severance pay for employees who are not hired by the buyer. Some companies pay special bonuses to employees in connection with the deal.
  • Acknowledge that key members of the management team may be conflicted, disappointed, or even outright hostile to the deal. It could mean changes to their title, responsibility, autonomy, compensation, or even their job.
  • Work with a bank early on regarding payoff arrangements for bank debt. If more complex financing, such as bonds, are in place, a lawyer can help navigate the complexities of this process.
  • Be mindful of vacation and travel schedules for key individuals involved in the process to plan ahead and avoid delays.  
  • Speak up and ask questions. Contact a Varnum attorney to assist in the sale of a business.

Frequently Asked Questions About Selling a Business

What costs and fees are involved in the sale process?

Selling a business comes with expenses that reduce your final net proceeds. These may include:

  • Business broker fees
  • Attorney and accountant fees
  • Title insurance and real estate-related costs
  • Due diligence expenses (such as environmental assessments or surveys)
  • Taxes on the sale proceeds
  • Escrow holdbacks (typically 5–10% of the purchase price, released later if no claims are made)
  • Your financial team can prepare an estimate of your net proceeds, taking into account these costs.

What is the best way to structure the sale of my business?

Most deals are structured as asset purchases, where the buyer acquires specific assets (such as equipment, real estate, accounts receivable, and goodwill) but does not assume long-term or unknown liabilities. This structure helps protect the buyer from unknown obligations.

Another option is a stock or membership interest sale, where the buyer acquires the company itself as an entity. The proper structure depends on your tax situation, liability considerations, and goals—your attorney and accountant can help determine the best fit.

How long will it take to sell my business?

The process typically takes several months to a year or more, depending on the transaction’s complexity. The typical timeline includes finding a buyer, negotiating a letter of intent, preparing the purchase agreement, and completing due diligence. After closing, many companies undergo a wind-down period of 3–12 months to settle creditors and distribute proceeds.

What happens to cash when selling a business?

In most sales, the seller keeps the company’s cash. Buyers usually purchase the business on a “cash-free, debt-free” basis, meaning the seller pays off any loans or long-term debt at closing. After assets are sold, the remaining net proceeds are distributed to shareholders.

Involved With a Delaware Corporation? Three Major Changes to Know

What Senate Bill 21 Means for Delaware Corporations

On March 25, 2025, Delaware Governor Matt Meyer signed Senate Bill 21 into law, effecting significant changes to the General Corporation Law of the State of Delaware (DGCL), the statutory law governing Delaware corporations. With over two-thirds of Fortune 500 companies domiciled in Delaware, it continues to be the preferred state of incorporation for businesses drawn to its modern statutory law, renowned Court of Chancery, and developed case law.

Consequently, below are three major takeaways for businesses incorporated in Delaware or individuals involved with a Delaware corporation—as a director, officer, or stockholder—here are three major takeaways:

1. Procedural Safe Harbor Cleansing Related Party Transactions

Under Delaware corporate law, related party transactions involving a fiduciary, such as where a director of a corporation stands on both sides of a transaction, are potentially subject to the entire fairness standard of review. This onerous standard of reviewing a fiduciary’s actions in certain conflicted transactions places the burden on the fiduciary to prove that the self-dealing transaction was fair—both in terms of the process (fair dealing) and substantive (fair price)—given corporate law theory that the fiduciary’s interests may not be aligned with maximizing stockholder value.

Senate Bill 21 establishes a safe harbor pursuant to Section 144 of DGCL for these conflicted transactions (other than take-private transactions) if the transaction is approved by either:

  • A majority of the disinterested members of the board or
  • A majority of the votes are cast by the disinterested stockholders—in each case, subject to certain additional requirements. Consequently, if transactional planners and corporations follow the new procedural safe harbor when entering certain related party transactions, they greatly minimize the likelihood of a successful challenge of any breach of fiduciary duty claim against the corporation’s board.

2. Limiting Who Qualifies as a Controlling Stockholder

Prior to the enactment of Senate Bill 21, whether a stockholder was a “controlling stockholder” and was therefore subject to certain rules under Delaware corporate law, was not set forth in DGCL. Rather, Delaware case law helped transactional planners to determine if a stockholder would be treated as such.

Senate Bill 21 codifies the definition of this term in Section 144 of DGCL. Under the revised Section 144, a “controlling stockholder” is a stockholder who:

  • Controls a majority in voting power of the outstanding stock entitled to vote generally in the election of directors;
  • Has the right to control the election of directors who control the board; or
  • Has the functional equivalent of majority control by possessing at least one-third in stockholder voting power and power to exercise managerial authority over the business of the corporation. This update provides transactional planners and corporations with clear guidelines over who qualifies as a controlling stockholder.

3. Narrowing Stockholder Information Rights

Over the past years, many Delaware corporations have been subject to an increasing number of “Section 220 demands” and related litigation that is often expensive for corporations to handle. Section 220 of DGCL provides stockholders with a statutory right to inspect a corporation’s books and records if the stockholder satisfies certain requirements.

Senate Bill 21 amends Section 220 of DGCL by narrowing what books and records of a corporation the stockholder is generally entitled to review after satisfying certain requirements. Specifically, the term “books and records,” as defined in Section 220 of DGCL, is now limited to certain organizational and financial documents of the corporation, including its annual financial statements for the preceding three years, board minutes, stockholder communication, and other formal corporate documents. Additionally, a stockholder’s demand must describe with “reasonable particularity” its purpose and requested books and records, and such books and records must be “specifically related” to the proper purpose.

In summary, Senate Bill 21’s amendments to DGCL give transactional planners and corporations additional clarity over cleansing conflicted transactions, who qualifies as a controlling stockholder, and the books and records a stockholder may access under Section 220. If you have questions about how the amendments to DGCL impact your Delaware corporation’s actions, reach out to a member of Varnum’s Securities and Capital Markets Practice Team.

 

Understanding Partial Redemptions for Startup Founders

Understanding Partial Redemptions for Startup Founders

Being a startup founder is hard. Among other things, startup founders face long hours, resource constraints, intense pressure, and the need for constant adaptation and resilience in the face of uncertainty. Founders face all these tasks while also being severely underpaid, adding to the list of trials one of the more challenging: personal financial pressure.

As a result of such financial pressure, and the frightening uncertainty of success, it is not unusual for founders to consider a partial redemption or liquidity event in which they sell a portion of their shares to the company or directly to an investor, typically as part of a proposed financing round. Such a redemption provides cash to the founder in exchange for a reduced level of ownership and risk in the company. A partial redemption may be accomplished through a cash purchase directly from the company or by using a portion of the proceeds from a financing round. A partial redemption can be a strategic move with both advantages and potential drawbacks. Understanding the nuances of this transaction is crucial for founders and investors alike.

Why Consider Partial Redemption?

Several factors might drive a company to pursue a partial redemption of the founder’s shares:

  • Liquidity: Founders may seek to cash out a portion of their equity for personal or financial reasons.
  • Tax Planning: Partial redemption can offer tax advantages, especially when structured carefully.
  • Corporate Governance: Reducing the concentration of ownership can improve corporate governance and decision-making.
  • Employee Incentive Plans: Repurchased shares can be used to fund employee stock option plans or other incentive programs.

Key Considerations

Before embarking on a partial redemption, several factors must be carefully evaluated:

  • Valuation: Accurately valuing the company’s shares is essential for determining a fair redemption price. The company should review the current 409A valuation and consider the potential impact the partial redemption will have on future 409A valuations.
  • Tax Implications: The tax consequences for both the company and the founder can vary significantly based on factors such as the founder’s holding period, the redemption structure and the company’s tax status. In general, a shareholder may exclude 100% of gain from the redemption of Qualified Small Business Stock (QSBS) for federal income tax purposes if certain issuance date and holding period requirements are met. However, a founder’s redemption may be disqualified from QSBS tax treatment.
  • Corporate Structure: The company’s legal structure and governing documents may impose limitations or restrictions on share redemptions.
  • Financial Impact: Repurchasing shares can reduce the company’s cash reserves and potentially affect its financial performance.
  • Shareholder Agreement/Investment Documents: Existing shareholder agreements or investment documents may contain provisions related to share transfers, redemptions, rights of first refusal, right of co-sale or tag-along rights. The partial redemption may trigger rights for existing shareholders who may wish to participate in the sale.

Potential Drawbacks

While partial redemption can offer benefits, it also carries potential risks:

  • Dilution of Ownership: If the redemption is not carefully structured, it can lead to dilution of ownership for existing shareholders.
  • Company’s QSBS: Impact on Qualified Small Business Stock (QSBS) for existing shares as well as future purchases.
  • Market Perception: A significant share repurchase can sometimes be interpreted negatively by the market.
  • Loss of Talent: Founders may feel less motivated or committed to the company after a partial redemption.

The decision to redeem a founder’s shares is complex. Early exits and partial redemptions can provide liquidity and diversification for founders while allowing them to maintain some ownership in the company. However, it is important to consider the potential risks, structuring options and tax implications before the company and founder engage in such a redemption. It is advisable to reach out to your Varnum attorney to review any proposed partial redemption documentation.

FinCEN Eliminates Corporate Transparency Act’s Reporting Obligations for U.S. Persons

FinCEN Eliminates Corporate Transparency Act's Reporting Obligations for U.S. Persons

On March 21, 2025, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released an interim final rule (Interim Rule) that broadly eliminates Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act (CTA) for all U.S. reporting companies and all U.S. beneficial owners of foreign reporting companies. Under the Interim Rule, which FinCEN is implementing immediately, only companies created under foreign law and registered to do business in the U.S. will be required to submit BOI reports (unless otherwise exempt), and only foreign beneficial owners of such nonexempt foreign entities will be reportable.

Based on FinCEN’s estimates supporting the original BOI Rule (Original Rule), exempting all U.S. reporting companies shrinks the compliance universe by 99.8 percent.

How Did We Get Here?

The CTA whiplash, playing out in courts since early December, took a sharp turn by the government over the last month. On February 18, FinCEN restored the reporting obligations under the Original Rule after the last nationwide injunction against the CTA had been lifted at the government’s request. FinCEN gave reporting companies a grace period for compliance that would have ended, for most companies, on March 21.

Then, on February 27, FinCEN announced that it was suspending CTA enforcement pending a formal extension of the compliance deadlines beyond March 21. On March 2, the U.S. Treasury took this a step further, announcing the total suspension of CTA enforcement against U.S. persons and a rulemaking process “that will narrow the scope of the [BOI] rule to foreign reporting companies only.”

The Interim Rule puts this policy change into effect. The primary legal basis for this “narrowing” is a provision of the CTA that provides a regulatory process by which the U.S. Treasury may, subject to several statutory requirements, create additional exemptions from the BOI reporting obligations. In a court filing made after the March 2 announcement, the government elaborated on the policy change by noting the U.S. Treasury “intends to focus on foreign entities that could engage in illicit transactions from abroad.”

Policy Change or a New CTA?

Congress enacted the CTA to combat money laundering, the financing of terrorism, and other serious financial crimes by requiring tens of millions of private companies operating in the U.S. to identify their beneficial owners and disclose to FinCEN personal information about such companies and beneficial owners. FinCEN stores this information in a secure, nonpublic electronic warehouse for law enforcement purposes. Yet, FinCEN pegs the estimated number of reporting companies subject to the Interim Rule at less than 12,000 annually. Supporters of the CTA point to this fact, and findings made by Congress that bad actors conceal their ownership of entities in the U.S. to facilitate illicit transactions, in their criticism of the policy change. We could see judicial scrutiny of the Interim Rule if a plaintiff with legal standing decides to bring a case.

FinCEN is soliciting comments from the public on the Interim Rule, noting it “will assess the exemptions [in the Interim Rule], as appropriate, in light of those comments and intends to issue a final rule this year.” Among other unanswered questions, the Interim Rule does not address how BOI received by FinCEN from U.S. companies and their beneficial owners will be handled – nearly 16 million reports under the Original Rule were submitted to FinCEN prior to March 21.

Expect the CTA Saga to Continue

In addition to potential legal challenges to the Interim Rule, numerous cases challenging the CTA remain on court dockets and will continue to work their way through the legal process. Separately, some state legislatures have shown interest in developing their own versions of the CTA (which could be impacted by the ultimate resolution of the pending cases against the CTA), with New York having adopted the New York LLC Transparency Act (applicable to limited liability companies formed or registered to do business in New York and set to take effect January 1, 2026).

Varnum’s CTA Taskforce continues to monitor these developments and will provide updates as they become available. For further background on the CTA, please refer to Varnum’s CTA Resource Center.

DOL Expands Fiduciary Breach Correction Options

DOL Expands Fiduciary Breach Correction Options

The United States Department of Labor (DOL) has updated its procedures for correcting certain fiduciary violations. This expansion allows employers to self-correct a broader range of errors, aligning the program more closely with the IRS’s recently updated correction procedures. If certain conditions are met, the new guidance allows for self-correcting some of the most common fiduciary violations, such as late contributions, late loan repayments, and inadvertent loan failures.

The DOL has long provided plan fiduciaries the option to use its Voluntary Fiduciary Correction Program (VFCP) to address various fiduciary violations. The program requires plan sponsors to both correct the fiduciary violation and submit an application to the DOL for approval. The core elements of the VFCP program remain unchanged. However, the DOL has expanded the program to include a self-correction component (SCC), which will allow plan sponsors to correct fiduciary violations without submitting an application to the DOL. Employers can begin using the new SCC provisions on March 17, 2025.

When Can SCC Be Used?

SCC is available for three fiduciary violations: failure to transmit contributions timely, failure to transmit loan repayments timely, and some inadvertent loan failures. Covered inadvertent loan failures include errors that could be self-corrected with the IRS under its Employee Plan Compliance Resolution System (EPCRS), which includes the most common loan failures.

What Are The Requirements?

To use the SCC program, several requirements must be satisfied:

  • If the violation caused lost earnings, those lost earnings must be calculated using the DOL’s lost earnings calculator and be less than $100.
  • Late contributions or loan payments must be made to the plan within 180 days following when the employer withheld the amounts.
  • Employers must complete and maintain a copy of the SCC Record Retention Checklist. Given the importance of complete and proper documentation, employers should seek assistance from legal counsel and other plan service providers.
  • Employers must file electronically with the DOL as part of the correction process. Under the traditional VFCP process, the DOL would issue a no-action letter. Under the SCC program, a no-action letter will not be issued, but an acknowledgment will be provided after the electronic filing is made.

Any correction amounts and costs related to the SCC process must be paid from the employer’s general assets, not from plan assets.

If you need to correct your retirement plan or believe there may be an issue, please contact a member of Varnum’s Employee Benefits Practice Team for further information and assistance with the correction process.

New Michigan Law Strengthens Legal Protections for Assisted Reproduction

New Michigan Law Strengthens Legal Protections for Assisted Reproduction

The Assisted Reproduction and Surrogacy Parentage Act (ARSPA), also known as the Michigan Family Protection Act, enhances legal protections for families using assisted reproductive technology. Effective April 2, 2025, this legislation updates parentage laws to account for the use of assisted reproductive technology, providing greater clarity and legal security.

Legal Parentage for Children Conceived Through Assisted Reproduction

One of the law’s most impactful components is Part 2, which addresses the parentage of children conceived through assisted reproduction without surrogacy. The impact of the law on surrogacy is covered in a previous advisory. The law defines assisted reproduction as “a method of causing pregnancy through means other than by sexual intercourse” and includes in vitro fertilization (IVF), gamete donation (i.e., sperm, egg, and embryo), artificial insemination, and other assisted reproductive technologies.

Before the new law, non-biological parents in Michigan had to undergo a lengthy and costly stepparent adoption process to establish legal parental rights. Now, intended parents who conceive a child through assisted reproduction can petition the court for a judgment of parentage, legally establishing them as a child’s parent and granting them all rights and responsibilities associated with being a legal parent.

This change removes unnecessary barriers for many families, including non-biological mothers in same-sex couples who conceive using sperm donors and heterosexual couples using sperm, egg, or embryo donors due to infertility.

Estate Planning Considerations

With ARSPA in effect, individuals who have children or grandchildren through assisted reproduction should review their estate planning documents to ensure their children and grandchildren are included. Many estate plans define “child” to include adopted children but may not explicitly cover non-biological children conceived through assisted reproduction. Updating these documents can help avoid potential legal complications and ensure all children and grandchildren are treated as intended.  

How We Can Help

If you are considering or have already conceived a child through assisted reproduction, securing your parental rights is essential. Varnum’s Family Law Practice Team can help you navigate this new legal process and obtain a judgment of parentage if necessary. Our Estate Planning Practice Team can also review and update your estate documents to ensure they accurately reflect your family.