SCOTUS Restrains Wetland Regulation By Narrowing “Waters of the United States”

Advisory Wetlands Linkedin

The US Supreme Court has just handed down a highly anticipated decision in Sackett v. EPA, reining in the federal government’s ability to regulate wetlands under the Clean Water Act (CWA). Specifically, this ruling provides important clarity on whether CWA applies to wetlands not directly adjacent to “waters of the United States.”

The Sacketts, the Idaho property owners that have battled the federal government in this case for many years, sought clarification from the Court on whether the federal government could regulate wetlands on their property and prevent the couple from building on their land. Specifically, the Sacketts’ property contained wetlands near a ditch that fed into a non-navigable creek that in turn fed into Priest Lake more than 300 feet away from their property. The Court ruled unanimously that the Sacketts were not subject to federal CWA permitting, but split 5-4 on the CWA’s applicability to adjacent wetlands.

Justice Samuel Alito, the majority opinion’s author, held that, “the CWA extends to only those ‘wetlands with a continuous surface connection to bodies that are waters of the United States in their own right,’ so that they are ‘indistinguishable’ from those waters.” In sum, the Court established a two-part test to determine if an adjacent wetland falls within the definition of “waters of the United States” so as to be under the CWA’s jurisdiction: (1) a party must establish “that the adjacent [body of water constitutes] . . . ‘water[s] of the United States’ (i.e., a relatively permanent body of water connected to traditional interstate navigable waters); and (2) the wetland has a ‘continuous surface connection with that water, making it difficult to determine where the ‘water’ ends and the ‘wetland’ begins.” In essence, the Court found that the CWA applies to a particular wetland only if it blends or flows into a neighboring water that is a channel for interstate commerce.

In the case of the Sacketts, the Court ruled that the Sacketts’ wetlands were “distinguishable from any possibly covered waters.” Consequently, the CWA did not apply, and the federal government could not regulate the Sacketts’ building activities. This narrow reading of the CWA is a win for land developers, farmers and others in the energy sector who’ve recently experienced excessive enforcement of environmental regulations. 

Although this ruling has a large impact around the country, its significance is much smaller in Michigan, which has its own wetland statute (Part 303 of Michigan’s Natural Resources and Environmental Protection Act) that is more restrictive than the CWA’s rule.

For more information about this landmark case, or wetland regulation contact a member of Varnum’s Environmental Law Practice Team.

Five Frequently Asked Questions About Divorce Property Division in Michigan

2023 05 Advisory Divorce Property Division

For many couples, dividing assets and debts is one of the most difficult parts of a divorce. Although a stressful process, the valuation of assets is extremely important, particularly real estate, businesses and deferred compensation plans. For instance, if a couple speculates as to the value of a business, any agreement based upon the value may be impossible to fulfill. This may prevent the ability of both spouses to move forward financially and can even destroy a business which once provided the family with a great standard of living.

1. What Does Equitable Distribution Mean in a Divorce Case?

Equitable distribution is the process of dividing marital and divisible property in court. In a perfect world, spouses would negotiate the division of their marital property without a judge’s involvement. Of course, most spouses don’t divorce if they’re finding it easy to cooperate. If they can’t come to an agreement (which is not out of the ordinary), the court will schedule a hearing and divide marital property using a theory of equitable distribution. Marital property includes both assets and debts. Based on this theory, a judge will split the couple’s property 50-50 unless such a split would be inequitable or unfair. When a judge assesses the fairness of a split, they consider a series of factors, some of which are:

  • Each spouse’s income, debts and property
  • How long the marriage lasted and each spouse’s age
  • Ways in which a spouse directly or indirectly contributed to the other’s educational and professional opportunities
  • A custodial parent’s need to occupy or own the marital home or other household items
  • Both spouses’ physical and mental health
  • Tax consequences related to the property division
  • Any other factors that are “just and proper”

Note that the court will not consider child support and alimony payments when dividing marital property.

2. What Is Marital Property and How Much Is It Worth?

For the purposes of property division, courts classify property into three categories:

  • Marital Property: This category includes any income, assets, property and debts accumulated during the marriage. Marital property can include wages, pension and retirement funds, investment accounts, real estate, personal property, mortgages, car loans and credit card bills.
  • Separate Property: Spouses typically do not get a share of their partner’s separate property, which includes pre-marriage assets and debts as well as gifts or inheritances that someone specifically gave to one spouse and not the other. It’s important to note that separate property can transform into marital property if it is commingled, meaning mixed with marital assets. For example, if a spouse uses an inheritance to buy a jointly-titled asset, it might become marital property.
  • Divisible Property: There’s always some time that passes between when spouses separate and when the court gets around to handling property distribution, and this category exists to deal with assets that the spouses receive during that period as well as assets that change in value during that period. Note that an asset that was earned before the date of separation will still count as divisible property if it’s received after separation.

3. Can a Prenuptial Agreement Protect My Assets?

Nuptial agreements can occur either before (prenuptial) or during a marriage (postnuptial). In a nuptial agreement, you and your spouse define which property is marital and which is separate. This can streamline your property division process during a divorce.

Not every nuptial agreement is valid, however. Spouses can dispute the validity of a nuptial agreement if they didn’t enter it voluntarily, if it was based on fraud or misrepresentations, or if it wasn’t properly signed. Even if a couple doesn’t have a nuptial agreement, they can still negotiate a separation agreement, which is an out-of-court property settlement that divides marital and divisible property and identifies separate property. A separation agreement can also resolve child custody and support issues. However, it’s important to keep in mind that once a couple enters a separation agreement, it will become legally binding and won’t be easy to change. Couples should always get advice from a lawyer before entering a separation agreement.

4. Who Gets to Stay in Our House?

If a couple has minor or dependent children, the parent who has primary physical custody may get to stay in the marital home. However, that spouse will need to consider whether they can afford to pay the remaining mortgage and other costs before trying to stay in the house.

Sometimes, the best option for both parties is to sell the marital home and divide the proceeds.

5. How Are Businesses and Real Estate Divided?

In terms of real estate, the housing market can be a roller coaster, as the value can fluctuate based upon location and market forces. Rather than estimating the value, an appraisal is necessary to determine market value. Then, an agreement must be reached about who will be awarded specific properties.

When looking at businesses, each is truly unique. The value of a business consists of analyzing financial data for several years as well as looking at recent trends. A proper business valuation is important to ensuring a realistic and fair division of assets.

Other Factors to Consider

Frequently, executives enjoy deferred compensation based upon job performance and company loyalty. Accurately accounting for compensation benefits earned during the marriage, but not yet received, is critical to a fair division of assets. If a couple does not value such an asset, one spouse may end up with a windfall and the other shortchanged. As a result, couples facing divorce should consult with experienced legal counsel about asset valuation to ensure that the division of their assets is based in reality and not speculation.

If you have any questions, please contact a member of Varnum’s Family Law Practice Team.

Summary of IRC Section 1202 Qualified Small Business Stock

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Under IRC Section 1202, noncorporate taxpayers generally may exclude 100% of their gain (subject to a per-issuer limitation) from the sale or exchange of qualified small business (“QSB”) stock if the QSB stock is acquired after September 27, 2010 and has been held for more than five years.

Qualified Small Business Eligibility

Stock of a corporation is QSB stock if the following requirements are met:

  • “C” Corporation. The stock must be issued by a domestic “C” corporation after August 10, 1993.
  • Original Issuance. The taxpayer must have acquired the QSB stock at original issue (including through an underwriter) in exchange for money or property other than stock or for services.
  • Gross Assets Test. The corporation’s gross assets must be $50 million or less both before and immediately after the stock is issued.
  • Stock can continue to be QSB stock if the corporation’s assets exceed $50 million after the issuance of the stock; however, once the $50 million threshold has been exceeded, the corporation will not be permitted to again issue stock that will qualify as QSB stock.
  • The determination of gross assets is generally determined by reference to the amount of cash and the adjusted tax basis of other property (fair market value in the case of contributed property).
  • Active Business Requirement. At least 80% of the corporation’s assets (based on value) must be used in the active conduct of one or more “qualified trades or businesses.”
  • Qualified trades or business are any trades or businesses other than specified business engaged in providing services (e.g., health, law and those relying on the reputation or skill of employees), finance, farming, certain natural resource production or extraction or a lodging or restaurant business.
  • Five-Year Holding Period. In order to qualify for the exclusion, the taxpayer must hold the QSB stock for more than five years.
  • Stock Owned by Partnership or S Corporation. Stock owned by a pass-through entity qualifies as QSB stock to an individual owner of the pass-through if:
    • The amount is attributable to gain on the sale or exchange by the pass-through entity of stock that is QSB stock in the hands of the pass-thru entity (determined by treating the pass-through entity as an individual);
    • The pass-through entity held the stock for more than five years; and
    • The amount is includible in the taxpayer’s gross income by reason of the holding of an interest in the pass-through entity that was held by the taxpayer on the date on which the pass-through entity acquired the stock and at all times thereafter before the disposition of the stock by the pass-through entity.
  • Redemption Rules. Certain redemptions of a taxpayer’s stock by the corporation can cause the taxpayer’s stock to not qualify as QSB stock. The rules are more restrictive if there is a “significant redemption” of more than 5% of the QSB’s stock (by value) during a specified period.
  • Per-Issuer Limitation. Taxpayers can only exclude a specified amount of gain with respect to the QSB stock of a single issuer. The gain limitation is the greater of:
    • Ten times the taxpayer’s aggregate adjusted tax basis in the QSB stock of that issuer disposed by the taxpayer during the taxable year, or
    • Ten million dollars (reduced by the aggregate amount of the gain taken into account by the taxpayer under Section 1202 with respect to that issuer in any prior year).

For example, a person acquired 1,000 shares of QSB stock on July 15, 2015, at a total cost of $100,000. They then sell all their shares in 2023 for $20 million, and the per-issuer limitation is the greater of: (1) $1 million, i.e., 10 times X’s $100,000 total basis in the 100 shares, or (2) $10 million. Since they acquired the QSB stock after Sept. 28, 2010, the 100 percent exclusion applies. On their 2023 return, they can exclude $10 million of the $20 million gain realized on the disposition. Any gain in excess of the $10 million limitation would be taxed as capital gain.

Contact your Varnum attorney with any questions.

Planning a Giveaway: Promotional Methods and Privacy Considerations

Once a company has decided to launch a giveaway to generate excitement and buzz around their brand, there are several legal considerations that must be thoroughly reviewed and complied with before proceeding. These typically include rules and regulations around eligibility, entry requirements and prize fulfillment, among others.

In addition to complying with legal requirements surrounding rules and eligibility, there are other crucial factors that companies must consider when launching a giveaway campaign. First and foremost, it is essential to choose the right format for the giveaway based on target audience, the company’s objectives and the desired outcome. Additionally, partnering with the right organizations can help maximize the reach and impact of the giveaway; however, careful consideration should be given to selecting reputable and trustworthy partners. Finally, companies must prioritize protecting customers’ privacy throughout the giveaway process and comply with data privacy laws, especially when collecting personal data.

Choosing the Right Format

There are many ways to run a promotional giveaway – from prizes to entry periods to advertising tools, there are endless possibilities when organizing a contest or sweepstakes. The format and platform a company chooses will depend on its budget, goals and target audience.

Today, many companies use social media to host giveaways to increase their followers, boost engagement and improve brand awareness. However, Instagram, Facebook, Twitter and TikTok all have different and unique rules for running a giveaway. Failure to follow each platform’s rules could lead to a company’s content being deleted or banned. In fact, certain social media websites have promotion guidelines including specific language which must be used in the post to inform the entrant that the website is not affiliated nor a sponsor of the giveaway. For example, Instagram requires that promotions include “[a] complete release of Instagram by each entrant or participant” and “[a]cknowledgement that the promotion is in no way sponsored, endorsed or administered by, or associated with, Instagram.”[1]

Similar considerations should be made when broadcasting prize promotions on the television and radio. Specifically, the Federal Communications Commission (the “FCC”), states that the material terms of the promotion should be disclosed via “periodic disclosures broadcast on the station” or “[w]ritten disclosure on the station’s Internet Web site, the licensee’s Web site, or if neither . . . has its own Web site, any Internet Web site that is publicly accessible.”[2]

Choosing a Third-Party Administrator

If a company is not running the giveaway independently, it will need to hire a third-party administrator. It is important to choose third parties that have good reputations and are familiar with the laws and regulations governing promotional giveaways. If a third-party administrator is involved in the giveaway, a company must clearly identify the third-party by name, be clear in the official rules about what entrant information the third-party may receive to conduct the giveaway and ensure the third-party will delete the entrant information as soon as possible at the conclusion of the giveaway. Failure to properly identify the third-party administrator’s role and how information is retained could lead to serious privacy and data security liability.

Protecting Customers’ Privacy

When a company runs a promotional giveaway, it may need to collect personal information from entrants, such as their name, email address and mailing address. Companies should protect this information from unauthorized access by using a secure website and  having a privacy policy in place.

Generally, companies should avoid storing personal information or sharing said information with third parties beyond that necessary to conduct the giveaway. Ultimately, the giveaway must comply with data privacy laws, and its official rules must adequately outline how information will be collected, used, retained and disposed.

Companies should not use the entrant information to create a giveaway/sweepstakes mailing list without requesting consent and providing a method to opt-out. For example, as noted in the CAN-SPAM Act, if an entrant is given the option to consent to future e-mails, all future messages must include a clear and conspicuous method to opt-out.[3] Likewise, pursuant to the DMPA, the promoter of a mailed giveaway “must establish and maintain a notification system that provides for any individual . . . to notify the system of the individual’s election to have the name and address of the individual excluded from all lists of names and addresses used by that promoter to mail any skill contest or sweepstakes.”[4]

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] Promotion Guidelines | Instagram Help Center.

[2] 47 C.F.R. § 73.1216(b)

[3] 15 U.S.C. § 7704(a)(3)

[4] 39 U.S.C.A. § 3017(c)(2).

Remote Inspection of I-9 Documents to End July 31, 2023

Temporary U.S. Department of Homeland Security COVID-19 policy allowing for remote inspection of Form I-9 documents will end on July 31, 2023. Employers have until August 30, 2023 to complete physical inspection of any Form I-9 identity and employment eligibility documents. This is also an opportunity to conduct a Form I-9 self-audit to ensure compliance. Please contact your Varnum immigration attorney if you have any questions.

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

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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.

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

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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.