Emergency Benefits for Employees: Key Programs Employers Can Provide

Employers can provide valuable emergency benefits to help employees in some of their most trying times, whether illness, natural disaster, or anything in between. Having these benefits ready and available can help employers attract and retain employees and make hard times a little smoother. This advisory will explore some of the most common options to assist employees who have been affected by emergencies or disasters.

Leave Sharing Programs

Leave sharing allows employees to donate their personal leave or vacation time to a leave sharing pool. Employees who need leave for a medical emergency or major disaster (natural or otherwise) may use the leave that other employees have contributed to the leave sharing pool to extend the time they can take paid leave. Leave sharing programs are voluntary, and employees may not donate leave that is required by state or other applicable laws. Donors may not select the recipients of the leave they donated. Assuming the program is correctly established, employees who choose to donate do not pay tax on the leave they contribute, making this a good option for people who wish to help their fellow employees.

Qualified Disaster Payments

Employers may provide tax-free payments to employees who have experienced disasters for necessities such as residential repair, reasonable and necessary family and living expenses, funeral expenses, and replacement of key, non-luxury items including beds and kitchen appliances. Employers may not provide tax-free payments for items already covered by the employee’s insurance. Employers can select almost any payment amount, small or large, and can limit amounts by individual or for all employees, so long as the benefits are provided in a non-discriminatory manner.

Retirement Plan and Qualified Disaster Withdrawals

Recent changes to retirement plan rules have created new options for helping employees who experience a qualified federally-declared disaster. Employers sponsoring 401(k), 403(b), or governmental 457(b) plans may allow plan participants affected by a federally-declared disaster to take a distribution from their accounts. The distribution can be in an amount up to $22,000 (although not all participants will be permitted to take that amount). These qualified disaster recovery withdrawals are not subject to the 10% early withdrawal penalty that may otherwise apply to distributions before age 59½. Participants may repay qualified disaster recovery withdrawals to the plan over the three years following the withdrawal. This ability to repay a previous distribution can allow participants who recover from the disaster to restore retirement savings, a rare option with regard to plan distributions. To provide for qualified disaster withdrawals and repayments, the retirement plan must be amended to reflect the availability of this option.

Non-Employer Provided Benefits

Beyond what employers provide, employees who have experienced a federally declared emergency may be eligible for a variety of governmental (local, state, and federal) benefits. What is available depends on the specific circumstances. Employers interested in informing employees about these benefits should talk with their legal counsel or consultants to determine what is currently available and how to best communicate those options.

Before and during a disaster, employers have many options to help employees and maintain morale. If you have questions, want more information, or need help preparing the right documentation, please contact a member of Varnum’s employee benefits team.

5 Essential Documents for a Basic Estate Plan

Titlescreen 01

Prepare for your future by exploring the intricacies of estate planning. Creating a comprehensive estate plan focuses on the five key documents crucial for a secure legacy including:

1. Will

There are two types of wills to consider. The first is a simple will that outlines how you want your assets distributed after your passing, designates a personal representative, and if applicable names a guardian and conservator for minor children. This document is filed with the probate court, and probate is required for asset administration. The second type of will, which is more common for our clients to put into place, is a pour-over will. In a pour-over will, you still designate individuals for each of the previously described roles, but instead of asset distribution, you direct that the assets without listed beneficiaries solely in your name be moved into your trust.

2. Trust

A trust is a legal arrangement where you (the grantor) transfer assets into the trust, managed by a trustee (usually you during your lifetime) for the benefit of beneficiaries. While alive, you serve as the grantor, trustee, and beneficiary. Upon your passing or incapacitation, a successor trustee takes over, managing assets for and distributing assets to beneficiaries according to your outlined preferences.

3. Power of Attorney

By signing a power of attorney, you empower someone to make legal and financial decisions on your behalf during your lifetime. It can be drafted to take effect only upon your incapacitation, but more commonly, it becomes effective upon signing. In all cases, it becomes invalid upon your death.

4. Designation of Patient Advocate and Living Will

This document designates someone to make medical decisions on your behalf when you cannot communicate with your treatment team. It also outlines your medical treatment preferences.

5. Deed

If you own real estate, you may want to consider a deed. Various types exist, all aimed at facilitating the transfer of real estate to intended beneficiaries without probate.

In addition to these primary documents, Varnum’s Estate Planning Team also reviews clients’ beneficiary designations on retirement accounts and life insurance policies regularly to ensure alignment with their evolving needs and changes in the law.

Contact Varnum’s Estate Planning Team to start or update your estate plan today.

FTC Issues New HSR Premerger Notification Rules

10 28 Advisory Hsr 1200x628

On October 10, 2024, the Federal Trade Commission voted unanimously to issue its much-anticipated revisions to the Hart-Scott-Rodino (HSR) Act premerger notification form and related instructions (the “Final Rule”). Pending any legal challenges to the Final Rule, the Final Rule will go into effect 90 days following its publication in the Federal Register, which is anticipated in the coming days. For planning purposes, transacting parties should anticipate the Final Rule will take effect in mid- to late January 2025.

While there are fewer changes being implemented in the Final Rule than as initially proposed, the Final Rule still effects a large number of material changes from current HSR practices. Below is an abbreviated list of the more notable changes proposed in the Final Rule:

  • Item 4(c)/4(d) Documents: The Final Rule increases the amount and type of materials originally requested under Items 4(c) and 4(d) of the HSR Form, including a new requirement to produce any materials prepared by or for the “supervisory deal team lead.” The supervisory deal team lead is the individual with “primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.” Other materials now required to be produced under Items 4(c) and 4(d) of the HSR Form include ordinary-course materials that discuss market share, competition, or products or services, regardless of whether such materials were prepared in connection with the proposed transaction.
  • Deal Rationale and Competition Narratives: Parties must now provide a narrative regarding the acquisition rationale for such filer, including providing any documentation that discusses such rationale. Additionally, filers must provide narratives regarding any overlapping products or services and such party’s supply chain relationships (including whether purchases are made from the other filer or any of its or their competitors).
  • Prior Acquisitions: The Final Rule expands the requirement to disclose certain prior acquisitions during the 5 years prior to the filing to also apply to the acquired person. The Final Rule also contains commentary regarding serial acquisitions that fall outside of the scope of HSR filing requirements. This seems to indicate that serial acquirers or those pursuing a “roll-up” strategy may face increased scrutiny.
  • Organizational Structure: Filers must now provide increased visibility into its organizational structure, including minority interest holder information (which may include upstream minority interest holders who are invested in an entity above the filer).
  • Overlap Description: The Final Rule requires narratives regarding the “principal categories of products or services (current and planned) as well as information on whether [the filer] currently competes with the other filing person.”
  • Early Termination: After a multi-year hiatus, the Final Rule now resumes the practice of requesting early termination (i.e., approval in advance of the statutory 30-day waiting period). However, commentary suggests a grant of early termination may be more limited than historical practice.

The FTC anticipates an average of 68 additional hours will be required to prepare an HSR filing (“with an average low of 10 hours for [certain transactions] and an average high of 121 hours for filings from an acquiring person in a transaction with overlaps or supply relationships”).

In light of this, transacting parties should consider the following:

  • Be cognizant of the significant amount of additional work now involved in preparing for and making HSR filings. It is important for transacting parties to calibrate expectations for the impacts on cost and, maybe more importantly, timelines.
  • Engage HSR counsel as early as possible in the transaction process to (a) evaluate whether an HSR filing is required, (b) begin preparation of the HSR notification form, (c) coordinate gathering HSR transaction materials with the transacting parties, and (d) assess competitive overlaps.
  • Accelerate HSR-eligible transactions, if possible, to file under the current rules prior to mid-January 2025 (or consider filing on a letter of intent instead of an executed purchase agreement).
  • Know that the FTC is pressing to have “more” to scrutinize. Be aware of the expanded pool of employees, directors, officers, and others (including the supervisory deal team lead) with respect to whom the FTC is now seeking responsive documents and other materials. Also be aware of the increased scope of documents and other materials required to be disclosed in connection with the HSR filing, particularly materials regarding market share, competition, and other related topics, and discuss the need for careful review of such materials.
  • Know that the Final Rule includes specific prohibitions on exchanging certain information with the other filer, particularly regarding competition narratives.
  • Be cognizant regarding timelines to close and “gun-jumping.” Parties, including the FTC, are working through the new guidance, and the FTC will likely require new or clarifying information in connection with a filer’s materials, which may have the impact of delaying the start of the waiting period.

Contact Varnum’s Mergers and Acquisitions team with any questions or concerns regarding the Final Rule.

How to Develop an Effective Cybersecurity Incident Response Plan for Businesses

Featuring a high concentration of CIPP-certified privacy professionals, Varnum attorneys guide businesses through all aspects of data privacy and cybersecurity, from compliance and policy issues to breach preparedness and response.

Data breaches have become more frequent and costly than ever. In 2021, the average data breach cost companies more than $4 million. Threat actors are increasingly likely to be sophisticated. The emergence of ransomware-as-a-service (RaaS) has allowed even unsophisticated, inexperienced parties to execute harmful, disruptive, costly attacks. In this atmosphere, what can businesses do to best prepare for a cybersecurity incident?

One fundamental aspect of preparation is to develop a cyber incident response plan (IRP). The National Institute of Standards and Technology (NIST) identified five basic cybersecurity functions to manage cybersecurity risk:

  • Identify
  • Protect
  • Detect
  • Respond
  • Recover

In the NIST framework, anticipatory response planning is considered part of the “respond” function, indicating how integral proper planning is to an effective response. Indeed, NIST notes that “investments in planning and exercises support timely response and recovery actions, resulting in reduced impact to the delivery of services.”

But what makes an effective IRP? And what else goes into quality response planning?

A proper IRP requires several considerations. The primary elements include:

  • Assigning accountability: identify an incident response team
  • Securing assistance: identify key external vendors including forensic, legal and insurance
  • Introducing predictability: standardize crucial response, remediation and recovery steps
  • Creating readiness: identify legal obligations and information to facilitate the company’s fulfillment of those obligations
  • Mandating experience: develop periodic training, testing and review requirements

After developing an IRP, a business must ensure it remains current and effective through regular reviews at least annually or anytime the business undergoes a material change that could alter either the IRP’s operation or the cohesion of the incident response team leading those operations.

An effective IRP is one of several integrated tools that can strengthen your business’s data security prior to an attack, facilitate an effective response to any attack, speed your company’s recovery from an attack and help shield it from legal exposure in the event of follow-on litigation. 

Varnum’s Data Privacy and Cybersecurity Practice Team is experienced in preparing for and responding to various forms of cybersecurity incidents. Contact one of our attorneys to discuss IRPs and other proven approaches to incident readiness to keep your business prepared.

MPSC Issues Order with Instructions for Siting Large Renewable Energy Projects in Michigan

MPSC Issues Order with Instructions for Siting Large Renewable Energy Projects in Michigan

On Thursday, October 10, 2024, the Michigan Public Service Commission (Commission) approved final application instructions and procedures that will be used to implement the state’s new renewable energy siting law, Public Act 233 of 2023 (PA 233). PA 233 goes into effect on November 29, 2024, and gives the Commission siting authority over large-scale renewable energy and storage projects, except when a local municipality adopts a compatible renewable energy ordinance with requirements that are no more restrictive than those in PA 233, including setbacks and review timelines.

The Commission’s application instructions and procedures are intended to assist renewable energy developers applying for siting approval from the Commission by providing clarity on pre-application procedures, fees, required application documents and exhibits, and the submittal process. Some of the changes in the final draft include:

  • Narrowing the scope of what is considered a “compatible renewable energy ordinance” — a CREO may only contain the setback, fencing, height, sound, and other applicable requirements expressly outlined in PA 233 and may not contain additional requirements beyond those specifically identified in the law;
  • Clarifying what “affected local units” of government are eligible for a $2,000 per megawatt payment and a one-time grant payment;
  • Establishing a pre-application check-list for developers to satisfy before filing with the Commission; and
  • Confirming that the Commission will review entire projects spanning multiple jurisdictions (regardless of whether portions of the project were denied or approved at the local level). 

Varnum stands ready to assist developers in navigating Michigan’s State Siting process. We will continue to monitor the implementation of PA 233, including developments at the Commission, as the law takes effect later this year.

If you have any questions about the Commission’s recent Order, PA 233’s general requirements, or if you want to discuss obtaining a Certificate from the Commission, please contact Varnum’s Renewable Energy Team.

Hurricane Preparedness for Community Associations

Hurricane Preparedness for Community Associations

Southwest Florida has felt the impact of several hurricanes in the last six years, including the most recent storm surge from Hurricane Helene last month. This follows the devastation wrought by Hurricane Irma in 2017 and Hurricane Ian in 2022, both of which were deadly storms that caused billions of dollars in property damage. As Florida condominium and homeowners associations prepare for imminent and remote hurricane threats, it is essential to take intentional and proactive steps to facilitate effective and efficient recovery.

Operational Considerations

Operationally, community associations should prepare for an approaching storm. It is highly advisable to maintain a map and site plan of the property, noting the location of water valves, irrigation controls and critical electrical and sewage infrastructure. This map should be printed and included in a binder considering the high likelihood of a power outage. It is also recommended that community associations take pictures of the property for comparison purposes to demonstrate the extent and timing of damage. 

Hurricane Plans and Handbooks

In addition to operational preparations, many community associations will also adopt a detailed hurricane plan. While effective in theory, associations should be cautious when drafting these plans to avoid creating expectations and duties that may not be fulfilled. In general, when community associations undertake an obligation, it comes with a duty of care. If the hurricane plan creates an expectation that the Association will guarantee safety and security during tumultuous times, the reality is that most community associations will not be equipped or trained to meet this expectation. As a result, it is recommended that hurricane plans also include clear disclaimers that owners and residents should not rely on the association for their personal safety and security, and that the association’s staff and vendors may be completely unavailable or unable to access the property. 

For example, some hurricane plans claim that the purpose of the plan is to “keep residents safe” and “prevent damage” to the property. Although these are good goals, it is important to remember that community associations are governed by volunteers with families and properties to manage. Hurricane season is also a time when many residents, volunteers and Board members are residing in their northern homes. In other words, Florida community associations are not built or designed to serve as a first response organization, and it is highly likely that the association will not have sufficient personnel in the moments leading up to and after a devastating storm to guarantee everyone’s safety.

Hurricane Ian flooded many condominium garages, and many of the impacted condominium associations had a hurricane plan requiring staff to move cars to higher elevation. Unfortunately, many residents did not leave a key with the association, there were more cars than elevated parking spaces and the severity of the storm was not known until relatively late and there were many tasks to complete. The result was many expensive cars floating down the street, and owners demanding to know why the association did not move the cars as promised.   

Emergency Powers

Next, the Board of Directors should be aware of the Board’s emergency powers that become effective when the Governor declares a state of emergency and through the aftermath of a hurricane. Florida Statutes section 718.1265 provides emergency powers to condominiums and section 720.316 provides emergency powers to homeowners’ associations.

First, specific to condominiums only, the Board should consider Florida Statutes section 718.1265(1)(h) providing that, if emergency powers are available, the Board may require the evacuation of the condominium if the applicable county or city orders an evacuation. More importantly, the statute also provides that the condominium association is immune from liability “should any unit owner or other occupant of a condominium fail or refuse to evacuate the condominium property or association property where the board has required evacuation.” This effectively means that the Board can issue an evacuation order and the Association is immune from liability when a resident stays and is injured.   

The Board would not physically remove any resident, but this simple resolution would mitigate significant liability exposure to personal injury. Practically, it would be very difficult to contact the association’s management and legal teams to prepare this evacuation resolution when needed. Hurricane plans should include a pre-drafted resolution for the Board to “fill in the blanks” at an emergency Board meeting. This simple and pre-drafted resolution will immediately allow the Board take advantage of the statutory immunity.

Second, if a quick decision is required, also note that both condominiums and homeowners’ associations can conduct emergency board meetings with less than the normal notice requirements. Generally, Board meetings will require at least 48 hours posted notice; however, both statutes provide that emergency Board meetings can be conducted with “practicable” notice and without any in-person meeting requirement. This means that if a Board only has three hours to notice an emergency Board meeting via Zoom or other digital platform, the notice is proper even though less than 48 hours.

Pre-Existing Contractual Relationships

Finally, it can be very difficult, if not impossible, to get contractors and emergency service vendors to the property in the aftermath of a hurricane. Even if there is a vendor with capacity, the Association will have no leverage in negotiations for price or contract terms. After Hurricane Ian, for example, water restoration and debris removal firms were arriving from all over the country and charging high equipment and labor rates embedded in one-sided contracts that provided the association with no safeguards. 

If possible, community associations should work with local and licensed vendors to garner some priority status in the aftermath of a storm. This also opens an opportunity to know the rates and negotiate the contract terms before the storm when there is negotiating leverage, and not in the aftermath of the storm when the Association may be compelled to take any available contractor.

The best laid plans do not always work as intended. Hurricane Ian was an example of shifting currents and paths where community associations quickly went from being outside the cone of uncertainty to the eye of the storm at high tide. As hurricane season approaches, Florida community associations should work with their management team, attorneys, insurance agents and professionals to preemptively address some of these important concerns.

In the aftermath of a hurricane, it is essential to conduct a thorough review of contracts for remediation, repair, and adjuster agreements. We often see clients feeling pressured to sign quickly to demonstrate to their community that they are taking action. Unfortunately, this haste can lead to complications down the line, as our team frequently finds itself helping clients extricate themselves from unfavorable contracts that result in exorbitant fees and subpar work.

At Varnum, our Michigan offices ensure that we can provide uninterrupted service, no matter what happens in Florida. If you have any questions or need assistance with your contracts, please do not hesitate to reach out to your Varnum attorney.

This advisory was originally published in June 2022.

The Latest Changes and Updates to SECURE 2.0

SECURE 2.0: Key Changes for Retirement Plans & Deadlines

As we’ve previously advised you, the SECURE 2.0 Act of 2022 (“SECURE 2.0” or “the Act”) included many changes over a number of years that affect employer-sponsored defined contribution plans. Since the passage of the Act, guidance has been trickling out regarding some SECURE 2.0 provisions, and others have been modified or delayed.

Some recent changes include the following:

Extended deadline for amendments

The deadline for amending retirement plans to comply with the SECURE 2.0 changes was extended late last year. Most retirement plans now have until December 31, 2026, to amend (collectively-bargained plans have until December 31, 2028, and governmental plans have until December 31, 2029). This does not affect the deadline by which provisions must be administratively implemented, but does give plan sponsors additional time to amend their plan documents.

Additional catch-up contribution opportunities

Currently, the catch-up contribution limits for certain plans are indexed for inflation and apply to employees who have reached the age of 50. SECURE 2.0 increases catch-up contribution limits for individuals aged 60-63 to the greater of: (1) $10,000 (indexed for inflation), or (2) 50% more than the regular catch-up contribution limit in effect for 2024, effective for plan years beginning on or after January 1, 2025. Because the regular catch-up contribution limit for 2024 is $7,500, we anticipate that the 50% rule will apply, and the increased catch-up limit for individuals aged 60-63 will be at least $11,250 (150% of $7,500).

Many recordkeepers and payroll providers are preparing for this change now and may be contacting plans to determine if the plan is adopting this change or opting out. Many plan documents (including the Varnum pre-approved plan documents) incorporate the catch-up contribution limits by reference to Code §414(v), which will automatically include the increased limits for participants aged 60- 63 when they become effective. We anticipate that most, if not all, clients will want to include the increased catch-up limits to allow employees closer to retirement age to save more for retirement. Plan sponsors may want to check with their payroll providers to confirm that they are on track to implement this change by January 1, 2025.

Increase in involuntary cash-out threshold

Prior to SECURE 2.0, if a terminated participant had a vested benefit between $1,000 and $5,000, plans could roll this amount over to an IRA without the participant’s consent. SECURE 2.0 allows plans to increase the $5,000 involuntary cash-out limit amount to $7,000, effective for distributions made after December 31, 2023. Your recordkeeper has likely already contacted you about this change. This is also a change that we believe most clients will or have already made and can ease plan administration. Note that a plan administrator is not required to cash-out terminated participants. An increase in the cash-out limit from $5,000 to $7,000 should be reflected in your plan documents and distribution policies.

Other changes to catch-up contributions delayed

If a defined contribution plan permits participants who have attained age 50 to make catch-up contributions, those must be made on a Roth basis for participants who earn at least $145,000 (indexed after 2024) or more in the prior year. This change could significantly complicate plan administration, and professionals have been asking for additional guidance with respect to its implementation. Perhaps with an eye toward allowing time for such guidance, this provision has been delayed to 2026.

We encourage clients to call their Varnum contacts to review and update their plan documents to incorporate these changes, or to discuss these or other SECURE 2.0 changes.

Due Diligence for Acquisitions of Mobility Targets

Legal Due Diligence for Investors in the Mobility Sector

As the mobility sector continues to evolve at an unprecedented pace, driven by innovations in technology and a global shift towards sustainability, businesses looking to invest or acquire companies or technology within this dynamic landscape are confronted with a vast array of challenges and opportunities. Whether a seasoned investor, an established business seeking a strategic acquisition or a startup navigating partnerships, a potential investor must conduct thorough due diligence in order to mitigate a wide range of risks, some of which are inherent to early-stage investing and others that are specific to the mobility sector. 

A fulsome due diligence process is likely to include an assessment of a target’s commercial potential, financial performance and projections, and its legal structure and status. While this article will touch upon elements of all of these forms of diligence, it will focus on the most important topics covered in legal due diligence for those considering investments in mobility targets.

Corporate Structure, Governance and Capitalization

Choice of Entity and Tax Elections

Early-stage companies come in all shapes and sizes and may be formed as corporations (either C-chapter or S-chapter), limited liability companies, partnerships or incorporated associations. More mature companies seeking large-scale investment often choose to incorporate as a Delaware corporation, as the Delaware General Corporation Law and Delaware state courts provide a business-friendly, stable and predictable body of law for the adjudication of disputes. Although a corporation may elect to be taxed in a number of different ways, most select to be taxed at the corporate level (i.e., taxation as a C chapter corporation) in order to maximize the company’s flexibility when seeking investors. If the target company is organized in another form or under a different body of law, the investor may wish to inquire about the reasons behind that decision.

Board of Directors and Management

Investors may also wish to review the composition and activities of the company’s board of directors (or similar governing body). As a company matures, investors will customarily require it to have a board of directors that reflects the interests of all of the major parties on the capitalization table. A board of directors made up solely of founders and their friends and family or a board that rarely meets to discuss business may signal an aggressive founder or an underdeveloped governance function. Conversely, if the board is active but dominated by a strategic partner or a major existing investor, then a new potential investor may wish to consider whether it has the leverage to demand its own seat at the table or “veto” rights over certain key decisions.

Advisory Boards

As they develop, mobility companies may also have advisory boards that meet from time to time or simply provide advice on an as-needed basis to founders and management. Reviewing the makeup and function of these boards can help a potential investor get a sense of the types of relationships that the company has in the mobility space and the quality of advice that management solicits in making key decisions.

Capitalization Table and Governance Documents

Finally, potential investors will review the capitalization table and governance documents of the target company to understand their economic and governance rights, the preferences and priorities associated with their investment and distributions, and their ability to influence decisions and prevent dilution in future rounds of investment. The capitalization table should demonstrate that the founders have an appropriate equity stake in the business to align their incentives with those of investors, that key employees are invested in the success of the company through grants of derivatives or other financial considerations, and that major investors have not purchased equity on terms that place them at odds with other investors.

Financial Information

Financial Statements and Projections

A potential investor should expect to review at least basic financial information about the operations of the company to date and its future projections over the next few years. Early-stage companies without a track record of performance may be able to provide only projections, in which case the investor should review the assumptions that underlie those projections and consider whether those assumptions are reasonable. Some companies may provide financial statements, but the quality of those financial statements and related assurances will likely depend on the stage of development and maturity of the operation. 

Debt

If the company has material debt to commercial lenders, suppliers, or third parties, the investor should be reasonably comfortable with the terms upon which it has been extended. If the company is a party to any convertible notes, the investor should review them in connection with its evaluation of the capitalization table.

Personnel and Reporting

Potential investors must also consider the qualifications and track record of the company’s chief financial officer and the quality of financial reporting that is due to investors. Investors providing a significant capital investment should negotiate financial information rights into their purchase documentation so that they may track the company’s progress and evaluate their investment.

Technology and Intellectual Property

The success of companies in the mobility sector is likely to hinge upon the effectiveness of its intellectual property and the company’s ability to exploit its value. A potential investor will wish to confirm that all intellectual property developed by founders for use by the company or by employees in the scope of their work has been properly assigned to the company. An investor may also wish to conduct basic intellectual property searches to see if the company’s material intellectual property is infringing on the rights of third parties or is likely being infringed upon by others.

If the company is relying upon trade secret protection for its intellectual property, then it is important to confirm that the company’s employees, independent contractors and others who come into contact with its intellectual property have signed appropriate confidentiality agreements and restrictive covenants that will prevent them from publicizing or otherwise misusing important intellectual property.

Commercial Contracts and Relationships

Strategic Partners

Mobility companies are often able to fund startup costs and development as a result of contracts with strategic partners that provide funding, access to licensed intellectual property and commitments to order products and services in exchange for a sizeable equity stake and preferred pricing or other considerations. If possible, investors should review material contracts with strategic partners to determine if they include exclusivity provisions, restrictive covenants or other provisions that are likely to limit the company’s options for competitive procurement, sale or other exit.

Supply Contracts

Material supply contracts are also likely to be an area of interest in due diligence. Investors should be comfortable that these agreements are on reasonable terms with reliable and stable partners and contain sound terms with respect to indemnification and dispute resolution.

Customer Contracts

If the target company has any material customer contracts, the investor may wish to review these to determine if they are on reasonable, arms-length terms, if they can be easily terminated, and if the agreements include any warranty provisions or KPIs that may be costly for the company to support. If the company has fixed terms and conditions for its customer contracts, these should be reviewed according to similar criteria.

User Agreements

If the company relies upon access by customers, suppliers or third parties to software (including websites, portals or other similar access points, there should be a suitable end-user license agreement in place that establishes the terms upon which the user is able to access these items. Terms should include adequate limitations of liability and limitations on use. The license agreement should also reference the company’s privacy policy and should include, if applicable, consent for the collection of data and the terms upon which user and customer data will be used by the company.

Employment Matters

Basic Staffing Needs

Investors should determine whether the target company is properly staffed. Although companies’ needs change over time, a maturing company will require capable support in financial matters, technology and product development, sales and marketing, team management, legal and regulatory compliance. If the target company does not have individuals in these roles or adequate outside support, there should be a plan to address these needs.

Key Employees

Most companies in the technology sector also have one or more founders or key employees whose vision, experience and background are crucial to the success of the enterprise. Ideally, founders’ incentives are properly aligned with investors’ interests because of their equity position in the company. However, investors may wish to confirm that certain key employees are locked into employment agreements with proper restrictive covenants and financial incentives. In select circumstances, it may be appropriate for the company to obtain key man life insurance policies for important employees. For more mature operations, it may be appropriate to inquire about whether the company has an adequate succession plan in place to prepare for the potential departure of key employees. 

Employees and Independent Contractors

For other employees and independent contractors, investors will wish to ensure that the company has filled positions that are important for operational purposes and that it has the ability to attract and retain talent. Companies in the mobility sector may have an acute need for engineers and other skilled workers, and investors should be comfortable that the company will be able to meet its hiring goals. If the company is employing key talent on immigration visas or expects that it will need to solicit international talent in order to meet its needs, an investor may wish to confirm compliance with applicable law and consider the likelihood that the company will be able to offer the necessary visa support to the individuals it wishes to target.

All employees with access to confidential information or trade secrets or who are involved in the development of intellectual property should have signed confidentiality agreements and documents evidencing the assignment of intellectual property developed in the course of their work.

Litigation

Businesses that operate in the mobility sector frequently require testing in real-world environments and, ultimately, will bring their products and services into direct contact with drivers and existing infrastructure. Accidents are likely to occur from time to time and, given the novelty of new mobility technology, these accidents may receive greater press coverage and attention than ordinary motor vehicle crashes. Litigation is an expensive prospect for established companies, but it can threaten the viability of start-ups with limited runway. Potential investors should inquire about or conduct independent searches for litigation in jurisdictions where the company is conducting operations and seek to understand the company’s strategy for managing its legal risk.

Government Approvals and Regulatory Matters

The success or failure of many companies in the mobility sector is likely to hinge on their ability to work with governmental and regulatory agencies approvals for their products and services promptly and to avoid costly or damaging investigations that may affect their ability to conduct business. Companies seeking to provide products or services relating to autonomous vehicles operating beyond certain threshold speeds will need to work with the National Highway Traffic and Safety Administration (NHTSA) and state regulators in which vehicles are to be operated. A company that needs to build or access infrastructure such as charging stations or bike-sharing stations may need local approvals regarding where its infrastructure may be positioned and how its assets may be stored when not in use. Mobility companies that rely on government contracts and integration with public transportation systems will require well-established relationships with those entities in order to succeed. Potential investors should ask a target company to outline how the business interacts with and depends upon government approvals and contracts and what the anticipated cost of establishing, maintaining or extending those approvals and relationships is likely to be as the business moves toward profitability.

Data Privacy

Companies in the mobility sector are likely to collect a significant amount of data in the course of their operations. This data may be a crucial part of the company’s business and revenue model or it may present an important opportunity as a future secondary source of revenue or pivot. However, any company that collects personally identifiable information (PII) or other material data about its customers, users, suppliers and partners must dedicate serious attention to the legal obligations associated with these activities. 

Except where truly necessary, the company may wish to limit the collection of PII (including any combination of information that can be used to identify users). If PII is or may be collected, the company needs to have procedures in place to obtain proper consent for the collection and maintenance of this data, it must take reasonable steps to protect this data, and it must have privacy and other policies in place that govern how the data is used and stored. These obligations are of particular importance if the company operates in or collects data from users in highly regulated markets such as the European Union, the United Kingdom or the State of California.

Varnum’s Corporate and Mobility Practices have client relationships with some of the biggest names in the mobility sector and support investors as they navigate investment opportunities in the next generation of mobility disruptors. Want to venture confidently into your next mobility investment? Schedule a meeting with Greg Wright of our mobility and corporate practice groups.