The End of the COVID Public Health Emergency and Its Effect on Employee Benefit Plans

2023 05 Advisory Covid Employee Benefits

The COVID-19 public health emergency ends on May 11, 2023. The emergency resulted in two big changes to welfare plans: the relaxation of certain notification and timing requirements, and the requirement for plans to cover COVID testing and vaccination at no cost to plan participants. While the public health emergency ends May 11, 2023, plans have a grace period until July 11 to take certain actions and come into compliance with the normal rules.

Plan Sponsor Requirements

Before the grace period ends, plan sponsors will generally need to follow the rules that existed before COVID. Among the most important of these rules are the requirements for plan sponsors to:

  • Timely provide all notices, including those for HIPAA and COBRA.
  • Review COVID-related coverage under their employee assistance programs (EAPs) to determine if such coverage would be considered “significant medical care,” which can result in additional reporting and compliance obligations. 
  • Review telehealth options to ensure they are properly integrated and provided by an entity that can comply with the post-COVID requirements. Telehealth rules were substantially relaxed during COVID. With telehealth now expected and utilized by more participants, getting telehealth right is more crucial than before.

Plan Sponsor Decisions

With the end of the public health emergency, plan sponsors must also make several important decisions with respect to their employee benefit plans:
• Whether testing will continue free of charge or will be subject to cost sharing.
• Whether non-preventative care vaccines for COVID will continue to be free of charge.
• Whether costs for certain COVID-related services will continue to be posted.

As they are mostly based on what costs the plan sponsor or plan will cover going forward, these plan sponsor decisions are largely business-related. In the absence of a choice by the plan sponsor, the insurance provider will likely make a default choice. The important legal consideration is that the plan documents and employee communications should be consistent and accurately reflect the plan sponsor’s decisions.

Participant Requirements

In addition to the changes for plan sponsors, the end of the public health emergency will result in the reinstatement of a number of rules applicable to participants. Participants will need to:

• Follow the HIPAA Special Enrollment timing rules.
• Elect COBRA within the 60-day window for elections.
• Make all COBRA payments timely.
• Timely notify the plan of disabilities and qualifying events under COBRA.
• Follow the timing limitations of their plans and insurance policies regarding filing claims, appeals and external reviews.

Next Steps

First, plan sponsors should decide what COVID-related coverage will remain fully paid by the plan, if any. Some insurance companies are already starting to communicate with participants, and maintaining a consistent message will avoid unnecessary problems.

Second, plan sponsors should review their EAP and telehealth coverages for compliance with the rules that will soon be in effect. To the extent necessary, plan sponsors should update the documentation for their plans.

Finally, plan sponsors should consider a voluntary reminder communication to participants. Many rules have been relaxed over the last two years or so, and participants may be confused regarding the rules. A reminder may save stress for participants and those administering the plan, and will also serve to document the plan sponsor’s intention to properly follow the terms of the plan.

If you have questions, concerns, or want to discuss your circumstances, please contact a member of Varnum’s employee benefits team.

Preparing for Michigan Liquor License Renewal 2023-2024

2023 04 Advisory Liquor License

All liquor licenses issued by the State of Michigan Liquor Control Commission (MLCC), including all on premises, off premises, manufacturer, wholesaler and importer licenses, must be renewed by May 5, 2023. All liquor licenses issued by the MLCC are effective for periods of one year each and expire April 30 of each licensing year. Exceptions exist only for certain sales representative and vendor permits, which are valid for terms of three years. However, on May 1, 2023, the Michigan Liquor Control Commission extended the renewal period for liquor licenses until midnight on Friday, May 5, 2023.

For those with licenses currently in escrow, different rules for renewal apply, but these licenses must also be renewed, despite the non-active nature of the license. Finally, no exceptions to the renewal rules exist for recently issued licenses: liquor licenses issued in the 2022 – 2023 licensing year must be renewed on or prior to May 5 as well.

In order for restaurants, hotels, retail stores and other liquor licensed operators to retain their licensed status with the ability to furnish and/or sell alcoholic beverages, whether at retail or wholesale, each Michigan licensee must renew their existing licenses on or prior to the extended deadline. The failure of an active licensee to timely renew a license is a violation of the Michigan Liquor Control Code and will subject the license to termination.

Renewal Process Modifications

The MLCC has recently modified the renewal process by adding a credit card option for liquor license renewal payments. The online renewal portal now accepts payments using Visa, Mastercard, American Express and Discover. Payment by electronic funds transfers (EFT) from bank accounts continues to be an available option too. If there are multiple transactions, you need to allow five (5) minutes in between transactions of the same amount with the same account information. Otherwise, the system thinks it is a duplicate payment.

Licensees can now print their own renewal license online. If licensees have no changes to their renewal license application, they may print their own license for the May 5, 2023, renewal date. If a renewal application has been mailed to the MLCC prior to April 1, 2023, it may also be printed online. Licensees can only print active licenses for the current renewal year. Escrow renewals do not contain licensing documents that require printing. Instructions for printing renewal licenses can be found here.  

Typically, the administrative staff of the MLCC will mail renewal packages in the middle of March. The members of Varnum’s Hospitality and Beverage Control Law Practice Group are currently responding to several license inquiries and are handling the renewal of the licenses for a number of our clients when so requested. If you would like to obtain our assistance in this regard or have any other questions, please contact us. We would be happy to review and submit the appropriate documentation to the State of Michigan to assure that your license is properly renewed and delivered to you on a timely basis to avoid any suspensions of your license.

Varnum Attorneys Support Letter to FTC on Proposed Ban of Non-Compete Agreements

2023 05 Non Competes (1)

On April 19, 2023, in response to the FTC’s request for comments, Varnum attorneys Ziyad Hermiz and Timothy Monsma joined several leading law firms across the country to sign a letter to the Federal Trade Commission (FTC) calling for a cautious approach to testing the potential impacts of the proposed ban on non-compete agreements.

The letter, which was submitted by more than 100 attorneys who advise on and litigate matters on behalf of employers involving trade secrets and restrictive covenants, raises concerns and practical considerations for businesses stemming from the FTC’s unprecedented attempt to limit the use of non-compete agreements in employment contracts.  The letter further provides a path to achieve the FTC’s objectives while minimizing risks to workers, companies and the economy.

Varnum attorneys are closely monitoring this situation and will be providing updates to our clients as the FTC’s initiative further develops.

Understanding Pre-Money vs. Post-Money Valuation

One of the key points of negotiation in any venture capital financing round is the valuation of the company. Valuation can be determined prior to the investment, called the pre-money valuation, or after the investment is made, called the post-money valuation. Whether a valuation is measured on a pre-money basis or post-money basis has a material effect on the capital effects of the financing round, including pricing for shares issued in the financing round and the scope of dilution borne by current investors.

What Is Pre-Money Valuation?

The pre-money valuation is the valuation used to calculate the per share price of the company’s stock, typically a series of preferred stock, sold in a financing round. As its name suggests, the pre-money valuation does not take into consideration any new money the company will receive in the pending preferred stock financing.

The purchase price for the preferred stock is calculated by dividing the pre-money valuation by the fully diluted capitalization of the company. For example, if the company has a pre-money valuation of $7.5 million and a fully diluted capitalization of five million shares, then it would sell shares of preferred stock in the financing for $1.50 per share. As an example of the post-money effect of this pre-money valuation, consider a scenario in which the investors purchase $2.5 million worth of preferred stock. Those investors will have purchased 1,666,667 shares of the company’s preferred stock, representing 25 percent of the company on a post-closing basis, and resulting in the company having a post-money valuation of $10 million.

How to Calculate a Company’s Fully Diluted Capitalization 

Once the pre-money valuation is set, the main factor affecting the per share price is the calculation of fully diluted capitalization. The fully diluted capitalization of the company typically includes the following:

  • All issued and outstanding shares of the company’s capital stock, including common and preferred stock (or common stock issued upon conversion of preferred stock, if the preferred stock converts to common stock at a ratio greater than 1:1);
  • All capital stock issued upon the conversion or exercise of all the company’s outstanding convertible or exercisable securities, including all outstanding vested or unvested options or warrants to purchase the company’s capital stock; and
  • All common stock reserved and available for future issuance under any of the company’s existing equity incentive plans, including, in some cases, any equity incentive plan created or expanded in connection with the proposed financing round.

Whether or not a new or expended equity incentive plan is included in the fully diluted capitalization is typically a point of negotiation between the company and the lead investor in the financing round (this negotiation is often referred to as the “Option Pool Shuffle”). If a new or expanded pool is included in the fully diluted capitalization, this means that only current stockholders will be diluted by such creation or increase. The inclusion of the new or expanded pool increases the number of shares in the fully diluted capitalization, which functionally decreases the price per share in the financing round. If the new or expanded pool is not included, both current stockholders and investors in the financing round are diluted by the creation or expansion of the pool on a post-closing basis.

What Is Post-Money Valuation?

The post-money valuation is also used to calculate the per share price of the preferred stock sold in a financing round but, as its name also suggests, the post-money valuation takes into consideration the new money the company will receive in the pending preferred stock financing, as well as any outstanding convertible securities, such as SAFEs and convertible notes, converting into shares of preferred stock as part of the financing round.

The post-money valuation then is equal to the company’s pre-money valuation plus the amount invested in the company in the financing round, either in new money or convertible securities. Using the example above, if the company has a post-money valuation of $10 million and the investors propose investing $2.5 million in new money, the functional pre-money valuation of the company is again $7.5 million. If the company has a fully diluted capitalization of five million shares, then it would again sell shares of preferred stock in the financing for $1.50 per share.

However, in this example, if the company also has $1 million in SAFEs and convertible notes converting into shares of preferred stock in the financing round, the functional pre-money valuation of the company is now $6.5 million. If the company has a fully diluted capitalization of five million shares, then it would now sell shares of preferred stock in the financing for $1.30 per share. In this example, notice that the investors investing $2.5 million in new money will still end up with 25 percent of the company on a post-closing basis.

Once the post-money valuation is set, negotiations concerning the calculation of fully diluted capitalization are still relevant, but the main factor now affecting the per share price is the amount of converting securities functionally lowering the valuation. In particular, the valuation caps, discounts and interest rates on such convertible securities can all effect the calculation of the per share price and functionally lower the pre-money valuation.

Seeking a lawyer for your startup? Varnum’s Venture Capital and Emerging Companies Team provides critical guidance and support to entrepreneurs and venture capital professionals throughout all stages of financing and growth. Let us add value to your team as you work to bring your new offering to market.

Navigating the Solar Energy Development Approval Process in Michigan

Michigan’s Renewable Energy Portfolio Standard law (MCL 460.1028) initially set the bar for 15% of the state’s electricity to come from renewable sources by 2021. Though only 11% of the in-state electricity came from renewable energy in 2021, Michigan’s renewable energy ambitions continue to soar. Governor Gretchen Whitmer introduced Michigan’s Healthy Climate Plan (MHCP) in April 2022, targeting 60% of the state’s power to come from renewables by 2030, including a 50% renewable energy standard for utilities. Bolstered by a Democrat-controlled governor and legislature, Michigan has become a hot spot for solar energy projects.

Michigan’s Unique Approval Process

Solar energy projects in Michigan face a unique approval process. In Michigan, local planning commissions and zoning boards, rather than state or county authorities, often regulate solar projects. Solar developers must, therefore, navigate the local master plan, zoning ordinances, politics and public opinion. Solar projects usually require a special land use permit and site plan approval from the local municipality – most typically a township. The general process—though it is township-specific—for obtaining such a permit includes:

  1. Pre-application Meeting: Engage with the township’s planning commission to discuss project details and requirements.
  2. Preliminary Site Plan Preparation: Create a detailed site plan, including project location, layout and relevant assessments.
  3. Permit Application: Submit the special land use permit application and site plan for review to the township.
  4. Planning Commission Review: The commission reviews the application, ensuring compliance with local ordinances and laws.
  5. Public Hearing: Engage in a public hearing to address community concerns.
  6. Approval or Denial: In some townships, the planning commission makes the final decision. In others, the planning commission makes the recommendation to approve or deny and the township board makes the final decision. If denied, developers may revise the project plan or seek legal appeals.

In some townships, solar projects are only permitted in certain zoned districts. In those townships, a rezoning may be required. That process is similar to the special land use approval process but has additional steps and different legal standards for approval. Significantly, a rezoning is subject to referendum if sufficient signatures are obtained in a short timeframe following the rezoning.

However, some townships can be less-than-welcoming to solar projects, actively seeking to prevent solar development. They may adopt moratoria, putting extended pauses on solar project considerations or amend their ordinances with unreasonable setback, size, noise, landscaping, storm water management and location restrictions, rendering projects economically unfeasible. Developers should, therefore, seek legal counsel to help them navigate Michigan’s unique and complex legal landscape.

As lawyers specializing in solar energy projects in Michigan, we offer solar developers guidance through the complex legal terrain of land use, zoning regulations and permits. Please contact your Varnum attorney for more information.

Form 5500: Getting Easier for Some Employers

2023 04 Advisory Form 5500

Before filing in 2023 and 2024 Form 5500s for retirement plans, employers should know about some key changes. The changes summarized in this advisory apply to 2023 reports, unless otherwise noted.

One of the bigger changes is the revised method for determining the 100-participant threshold for when a plan is treated as being small enough to use simplified reporting alternatives (including waiver of the annual audit requirements and using the short form version of the Form 5500). This counting methodology for defined contribution plans will now be based on the number of participants with account balances. Previously, the number of individuals who were eligible to participate (even if they did not have an account) was used. This may increase the number of employers that are eligible to use the simplified reporting.

Also notable are several new schedules enabling consolidated returns for additional categories of retirement plans. The first new schedule (DCG) allows defined contribution groups (DCGs) to file a single Form 5500 if several requirements are met. DCGs are defined contribution pension plans that have all plan assets in a single trust; have the same named plan administrators, trustees and fiduciaries; offer the same investments to all participants; and do not hold employer securities. The new Schedule DCG should allow more simplified and more consolidated Form 5500s for plan sponsors. Form 5500 schedules were also changed to help simplify reporting for multiple employer plans (MEPs) and create Pooled Employer Plans (PEPs), by streamlining Schedule MEP with respect to questions on PEPs. PEPs are a type of multiple employer plan. Multiple employer plans exist when employers who are unrelated participate in a single plan. Normally each employer in a multiple employer plan is treated as having their own plan, especially for reporting purposes. Under the new PEP rules, for reporting purposes, the PEP is treated as a single plan.

Several other schedules have or will be changed, including Schedules H, MB, SB and R. Draft forms and instructions are already available or will be later this year. The DOL’s final rule will be applicable for plan years beginning on or after January 1, 2023. Based on this timing, use of the new forms will likely begin in 2024 or later. According to the DOL’s Fact Sheet, certain changes that were proposed in September 2021 are being deferred as part of a separate improvement project. Employers should watch for further updates to the Form 5500 requirements.

In addition to these new items, Varnum can help you avoid common Form 5500 errors and answer some of the more complex questions created by these changes (such as which schedules you can or should use) and the Form 5500 reporting process in general.

Varnum’s Employee Benefits team is monitoring these issues closely and available to provide counsel. Employers should also reach out to their tax advisors with questions. Please contact a member of the team if you have any questions.

Recent FTX Email Notices Raise Basic Questions for Customers

2023 04 Advisory Ftx

On November 11, 2022 FTX Trading Ltd. (“FTX”) and its affiliated debtors (together, the “FTX Debtors”) filed emergency Chapter 11 bankruptcy cases in Delaware. The filing came less than two weeks after documents were leaked showing that Alameda Research, a cryptocurrency hedge fund affiliated with FTX, secretly held a large amount of FTT (FTX’s own cryptocurrency token), sparking viral liquidity concerns about Alameda, and a Bahamian financial regulator froze the assets of FTX and appointed a provisional liquidator.

Four months later, on March 15, 2023 the FTX Debtors filed their schedules of assets and liabilities. In the weeks that followed, the FTX Debtors sent emails to potentially one million customers or more worldwide (one FTX Debtor, West Realm Shires Services Inc. (“WRSS”), listed over 400,000 customers as unsecured creditors who presumably all received an email) informing them that:

“You are receiving this email because you have been identified as a customer with a net positive account balance as of November 11, 2022 of one or more of the debtors in the Chapter 11 cases of FTX Trading Ltd. and certain of its affiliated debtors and debtors-in-possession pending in the United States Bankruptcy Court for the District of Delaware and jointly administered under the case number 22-11068. You have been listed in one or more of the debtors’ schedules and statements.”

Recipients of these notices undoubtedly have many questions, possibly including: what does having a “net positive account balance” mean? Does this mean that these customers are one step closer to getting their cryptocurrency back from FTX, as many may think when they receive these notices? What further action is required, e.g., will they have to file a proof of claim down the road?

“Net Positive Account Balance”

The amount of the “Net Positive Account Balance” that customers might get back depends heavily on whether the cryptocurrency in the accounts belongs to the customer or FTX. If it belongs to the customer, FTX would be holding their property as a custodian and the customer would be entitled to its full return (assuming it is still there) before any creditors of the estate are paid. If it belongs to FTX, the customer would be reduced to a general unsecured creditor, and would only be entitled to a pro rata payment from whatever pool of net assets are available after payment to higher priority creditors. While FTX customers may have thought of their cryptocurrency deposits at FTX as “their cryptocurrency,” the actual nature of the deposits is an open question at this point. In their schedules, the FTX Debtors take the position that some cryptocurrency they are holding is their property, and some remains the customers’ property:

“The Debtors take the position that, consistent with the applicable terms of use between the Debtors and their account holders, certain cryptocurrency held on the Debtors’ platform is property of the Debtors’ estate pursuant to section 541 of the Bankruptcy Code. Conversely, the Debtors take the position that, consistent with the applicable terms of use, certain other cryptocurrency held on the Debtors’ platform is not property of the Debtors’ estate pursuant to section 541 of the Bankruptcy Code.”

In the case of WRSS, that FTX Debtor takes the position in its schedules that the cryptocurrency it is holding is property of WRSS, not the customer. This position is consistent with a recent ruling in another cryptocurrency-related case, that of cryptocurrency lender Celsius Network, LLC, applying the terms and conditions of the contracts used by Celsius (“Account Holders granted Celsius ‘all right and title to such Eligible Digital Assets, including ownership rights’”). However, at least one challenge has been filed in the FTX case on behalf of a class of customers seeking, among other things, a declaration that the cryptocurrency held by WRSS belongs to the customers, not WRSS. So, for the many customers of WRSS as well as other FTX Debtors, whether they own the cryptocurrency in their accounts is very much an open question at this point.

If the cryptocurrency in the FTX accounts is deemed to be property of FTX and not the customer, customers that withdrew cryptocurrency or other funds from FTX on or after August 13, 2022 (i.e. within the 90 day period prior to the bankruptcy filing date of November 11) could have yet another wrinkle to deal with regarding their claims. That is because they could be the target of a “preference action” down the road, with their claims subject to “disallowance” to the extent of any “preference liability.” Preference actions are a bankruptcy tool that allows the bankruptcy estate to take back payments shortly before the bankruptcy filing, subject to a variety of affirmative defenses that any preference target will surely raise in their defense. While the FTX Debtors are starting with the low-hanging fruit, i.e a more limited subset of parties that received large contributions or other payments, in the future the preference net could expand to include all “90 day transferees” of assets of the FTX Debtors, including customer cryptocurrency withdrawals, to the extent the cryptocurrency is deemed to be property of FTX.

Requirement to File Proof of Claim

In a Chapter 11 bankruptcy case, if a creditor disagrees with the debtor’s scheduling of its claim, or the claim is designated as contested, unliquidated or disputed, it must file its own proof of claim by a court-established deadline. If the creditor agrees with how its claim is listed,  it does not have to file a proof of claim. The court in FTX has not established a claim filing deadline yet. When a deadline is set, scheduled creditors will receive a notice about it. However, if the question of ownership is still an open issue as of the bar date for filing claims, customers may face a dilemma as to whether to file a proof of claim in the first place, out of concern for making an inadvertent admission that their interest in the cryptocurrency is that of a creditor, not an owner. Ultimately, a customer may want to file a proof of claim in an abundance of caution, attaching a reservation of rights in the event that they are deemed to be owners, not creditors. 

Possible Outcome For Customers

Unfortunately, like many bankruptcy cases at an early stage, the honest answer to this is, “who knows?” The FTX Debtors have not put forth any plan or timeframe about providing customers with access to their accounts, or any projections about what, if anything, owners or creditors might receive in the form of digital assets or a money equivalent. One good resource for customers who want to stay generally up to date is the Unsecured Creditor Committee’s Twitter account.

Varnum’s Bankruptcy, Restructuring and Creditors’ Rights Group is monitoring the FTX and other cryptocurrency-related cases and available to provide counsel to customers, creditors and other parties in interest. Please contact one of Varnum’s Restructuring Group attorneys if you have any questions.

Planning a Giveaway: Legal Considerations for Contests and Sweepstakes

2023 03 Advisory Giveaway

Giveaways are an effective avenue for promoting a product or business—from the early days of mail-in contests to today’s online entries, sweepstakes have been a powerful marketing tool for decades. What started as small incentives such as free products or discounts has now evolved into sizable prizes like cars and vacations, and as giveaways have grown in popularity, so have the legal stakes associated with this promotional strategy.

When planning a giveaway, companies should exercise caution and thoughtfulness regarding what the giveaway will entail, how customers will be expected to participate, the value of the prize and where the giveaway will be applicable. If done carelessly, an innocent giveaway can subject a company to a wide range of civil and criminal liability, all in the name of a product or service promotion.

Contests, Sweepstakes and Official Rule Content*

First, a company should know whether it intends to run the giveaway as a sweepstake or a contest.[1] This distinction is important, as each requires its own considerations to avoid liability related to lotteries and gambling. Generally speaking, the difference between sweepstakes and contests are how the winner is selected. Sweepstakes involve prizes that are awarded based on chance, while contests award prizes based on skill.  

While every state is different regarding the exact information that should be included in the official giveaway rules,[2] the consensus is that the official rules should include the following:

  • a statement that no purchase is necessary and that a purchase will not enhance the chances of winning;
  • information on how a party will enter the giveaway and how many entries will be permitted;
  • a clear statement regarding the number of prizes available and the number of entries permitted;
  • information regarding entry eligibility (i.e., age and states of residence);
  • information regarding the verified retail value of the prize (i.e., if the prize is a grill, the rules should identify the verified valued of the same in dollars);
  • a statement regarding the odds of winning the prize based on the number of estimated and completed entries received;
  • information concerning the free method of entry if there is a method of entry which requires a purchase (i.e., alternative forms of entry that do not require the entrant to make a purchase or incur a cost for entry);
  • information regarding the name of the giveaway sponsor, including the name and address; and
  • information about where the official rules can be accessed.

Most importantly, free options must give entrants an equal opportunity to submit an entry and win. In some situations, even a call and/or text message requirement may act as an entry for purchase, as the cost to call and/or text may be viewed as a fee to enter.[3] To avoid potential liability, a company should disclose a free method that does not result in a standard-carrier fee.[4]

Age and Location Considerations for Giveaways

In addition to rules considerations, companies should consider the age and location of the potential entrants. Issues of enforceability arise with those below the age of majority; therefore, it is recommended that eligibility be limited to those that are 18 years or older.[5] Similarly, enforceability issues arise when considering the locations of the applicant where some states impose stricter requirements than others and require additional filings. For example, if the states of giveaway eligibility include Florida, New York and/or Rhode Island, a company should be aware of the bond filing, registration requirements, and prize level thresholds imposed by these states. Ultimately, while giveaways covering the 50 states are often drafted more generally, if a company plans to limit the number of states in which it will conduct the giveaways (2-5 states), it is important to consult a lawyer about the specific requirements of said states to ensure strict compliance.

Giveaways are an excellent vehicle to promote brand awareness and to engage with a company’s audience. If you have any questions or would like to review your giveaway rules to ensure compliance with state and federal laws, please contact your Varnum attorney.

*Please note, the information in this advisory should not be construed as an exhaustive list of everything that should be included in the official rules of a giveaway nor a list of all laws that should be reviewed and factors considered when drafting and promoting a giveaway.

[1] States use various terms for sweepstakes, giveaways, contests, raffles, and lotteries, but remain consistent when distinguishing games of skill from games of chance.

[2] See, e.g., MCL § 750.372a; N.Y. Gen. Bus. Law § 369-e (McKinney); Fla. Stat. Ann. § 849.094 (West); 11 R.I. Gen. Laws Ann. § 11-50-1 (West); 16 C.F.R. § 310.3(a)(1)(iv).

[3] See, e.g., 16 C.F.R. § 308.3.

[4] Id.

[5] See, e.g., ¶ 60,632 Digital Demographics Inc.—recommend-it Online Service., Advert. L. Guide P.