Tag: Joseph Pastore

Big Changes in Unemployment Benefits: What Connecticut Employers Need to Know

Posted on by Kelly McElroy

The unemployment and severance law landscape is constantly evolving. Connecticut’s legislature recently passed Public Acts 21-200 and 22-67, aiming to enhance the financial stability of the Unemployment Insurance (UI) Trust Fund following the COVID-19 pandemic. Companies that operate in Connecticut should prioritize these changes, implemented on Jan. 1, 2024, as they profoundly impact employers and the labor force within the state.

This article will explore the modifications in unemployment benefits and severance pay, potential legal implications for noncompliance, and strategies to navigate the changes effectively.

 

Major Changes in Connecticut

Critical changes to Connecticut’s unemployment benefits include:

  • Disqualification of unemployment with severance – Previously, unemployment benefits and severance pay could be received concurrently as part of a separation agreement. Now, receiving severance pay for a specific period disqualifies the employee from unemployment benefits during that period.
  • Increased payment – The minimum weekly unemployment benefit payment has increased from $15 to $40. It will be subsequently indexed annually due to inflation. However, the minimum benefit will revert to $15, when the federal government provides a fully federally funded supplement to the individual’s weekly benefit amount.
  • Accrued vacation pay – An employee’s receipt of accrued vacation pay at the time of dismissal won’t disqualify them from unemployment benefits, assuming they meet other eligibility requirements. However, vacation pay issued during a shutdown period will still lead to disqualification or reduction in benefits.
  • Annual inflation adjustment – The minimum base period earnings requirement for unemployment benefits increased from $600 to $1,600 and will be subsequently indexed annually to inflation. However, the minimum base period earnings requirement will revert to $600 when the federal government provides a fully federally funded supplement to the individual’s weekly benefit amount.
  • Maximum unemployment benefit rate – This will be frozen from October 2024 through October 2028.

Connecticut employers must also note the tax changes, including the taxable wage base increase from $15,000 to $25,000, and ensure compliance.

 

Legal Ramifications for Noncompliance

Although the legal consequences may differ depending on the specific type of non-compliance, the most immediate outcome can be financial penalties. Falsifying or intentionally misstating employee hours or wages to reduce UI contributions can lead to significant fines and potential legal action. Failure to submit required UI reports or providing inaccurate information can also result in fines and potential audits from the Connecticut Department of Labor (DOL).

If an employer doesn’t submit the required paperwork or provides incorrect information, it can delay or deny UI benefits for laid-off employees. This can have severe financial repercussions for workers experiencing job loss. Failure to comply with UI regulations can negatively impact the employer’s rating, potentially leading to denials of future UI claims for affected employees.

Non-compliance with UI laws can result in a public record of violations, damaging the employer’s reputation and making it difficult to attract new customers and retain talent. In high-profile cases, non-compliance can lead to negative media attention and further damage to the employer’s brand and reputation.

There may also be other legal consequences, such as the DOL filing court orders requiring employers to comply with UI regulations. Employees or the DOL may bring civil lawsuits against employers for violating employee rights or the UI system.

 

Strategies to Navigate the New Laws

Although navigating the complexities of the new unemployment benefits changes requires careful consideration of your specific situation, here are some general strategies to consider:

  • Remain compliant – Familiarize yourself with the changes to unemployment insurance eligibility, employer tax rates and other relevant provisions to remain compliant. State agencies like the DOL offer information and resources to help employers and workers understand the new UI laws.
  • Stay informed – Since this recently came into effect and legal interpretations and penalties may still be evolving, it’s imperative that you stay informed about any updates and modifications to help you adjust your strategies as needed.
  • Review your internal policies – Update your company’s policies and procedures concerning layoffs, terminations and severance packages to align with the new laws. This includes documenting reasons for termination, eligibility for unemployment benefits and severance pay calculations.
  • Retain detailed records – All termination decisions, reasons for termination and communication with affected employees are critical and will be valuable in case of legal challenges.
  • Keep open employee communication – Be transparent with employees about the new laws and their potential impact on them. Consider holding informational sessions or providing written materials to explain the changes clearly. Open communication with employees can help avoid future disputes.
  • Seek legal counsel – Understanding the nuances of the new UI laws is necessary to ensure compliance and avoid potential legal issues. Likewise, legal counsel can assist you with appealing decisions, challenging tax assessments and negotiating agreements to protect your interests.

Remember, these are just general strategies. The approach you take will depend on your company’s specific circumstances. Consulting with a qualified employment lawyer who specializes in your jurisdiction is essential to developing a tailored plan for effectively navigating the legal complexities of these new UI laws. For legal inquiries, please contact us at Pastore LLC.

 

This article is intended for informational purposes and does not constitute legal advice.

 

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

7 Myths About Contesting Election Night Outcomes in Connecticut

Posted on by Kelly McElroy

    It’s rare, but it happens. And sure enough, it did recently in Bridgeport, Conn.: a court-ordered redo of a mayoral election after allegations of misconduct that led state legislators to consider changes to the voting system.

    Like all states, Connecticut has strict laws regarding elections—and even more stringent laws for contesting election night outcomes. Yet, misconceptions about these laws, fueled by high-profile court cases and media narratives, are widespread in political campaigns or those seeking legal representation in election matters.

    Misinterpretations of election law in Connecticut lead to false impressions and distorted views of the election process and how to best challenge election results. Several already abound. Below are seven myths and the reality of each:

     

    Myth: Uniform Election Processes Across Connecticut

    The notion that election processes, from voting by mail to voter registration, are uniform across Connecticut is a common misconception.

    Connecticut’s 169 cities and towns function independently, leading to varied interpretations and executions of state election laws. The Secretary of the State’s office is responsible for interpreting election law and who’s eligible to vote. Still, local practices can differ significantly, sometimes leading to issues like refusing secure drop box delivery or mismanagement at polling places​​.

     

    Myth: Legal Disputes Always End in Court

    The need for court involvement in election disputes is only sometimes necessary. The American Arbitration Association emphasizes the benefits of alternative dispute resolution (ADR) methods in resolving election-related disagreements, including vote counting and post-election audits. These approaches offer quicker and more cost-effective solutions compared to litigation.

    Campaigns need to explore these alternative avenues of resolution for more minor or technical conflicts.

     

    Myth: Any Voter Can Challenge Results for Any Reason

    In Connecticut, the law does not allow just any voter to challenge election results on any ground. The legal framework specifies that only certain parties—typically candidates, political parties or a group of qualified voters—have standing to contest election results. This limitation is in place to ensure that challenges are severe and have a basis in substantial issues affecting the election’s outcome.

    Restricting who can challenge election results prevents the electoral process from being overwhelmed with frivolous or unsubstantiated claims. Those who challenge results must present legitimate reasons, usually grounded in evidence of irregularities or legal violations. Examples include allegations of fraud, procedural errors or other issues that could have materially affected the election outcome. These challenges are subject to judicial scrutiny, and the burden of proof lies with the person or party making the challenge.

     

    Myth: Recounts Happen Automatically in Close Races

    While Connecticut law provides automatic recounts in certain circumstances, they are triggered only when the results fall within precise and narrow margins. For instance, a recount may be mandated if the vote difference between candidates is less than a certain percentage of the total votes cast. This small number margin is defined by state law and does not apply to every close race.

    This law ensures accuracy in very close elections where minor errors could alter results. Suppose the victory margin is above the threshold. In that case, no automatic recount occurs. Still, candidates or parties can request one through a different process with specific criteria. It’s important to understand these thresholds and the recount process. Misunderstandings can cause unrealistic expectations of a recount, leading to needless disputes and eroding trust in the electoral process.

     

    Myth: Challenges Can Delay Swearing-in Indefinitely

    Legal challenges to election results can delay the certification and swearing-in of elected officials, but they cannot do so indefinitely. Connecticut has legal and procedural frameworks that set timelines and processes for resolving election disputes. These frameworks ensure that protracted legal battles do not unreasonably disrupt governance.

    Election dispute resolution timelines are short to ensure power transitions and term commencements, with courts prioritizing these cases for speedy resolution. Frivolous or unsubstantiated challenges are unlikely to lead to lengthy delays, as courts can quickly dismiss cases that lack merit. This system balances the need to address legitimate concerns with the broader public interest in stable and effective governance.

    Myth: Voter Suppression Claims are Always Valid Grounds for Contesting Elections

    Voter suppression claims can prompt election contests, yet not all claims warrant legal action. In Connecticut, such claims need clear evidence showing a significant effect on election outcomes. Allegations may include restrictive ID laws, few polling places, voter roll purges and misinformation.

    Proving their decisive impact involves showing that suppression of eligible voters happened and that it changed enough votes to alter the election. Courts require detailed, credible evidence to consider these claims.

     

    Myth: All Election Challenges are Politically Motivated

    The view that election challenges are solely based on partisan politics is incorrect. They can result from various issues, like procedural errors, and not just partisan motives. Recognizing varied reasons for election challenges is critical to understanding election integrity complexities and advocating a non-partisan approach. Some challenges highlight the need for fair, transparent electoral processes beyond political lines.

    Additionally, these challenges follow strict timelines and rules to resolve disputes quickly to avoid governance disruption. This emphasizes the need for substantial evidence and legal justification in challenging election results.

    A thorough grasp of election law is essential for political campaigns and legal representatives to contest an election outcome. Legal guidance helps maneuver the electoral process and maintain compliance for devising a winning victory. The Bridgeport fallout shows that the waters of electoral disputes are far from still, with more contested outcomes sure to come on the political horizon.

     

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

    Preparing for the Impending AI Regulations: A Legal View

    Posted on by Kelly McElroy

    Due to artificial intelligence’s (AI) significant impact on business operations, companies must stay informed on evolving data privacy and transparency regulations. Recent research shows a steady increase in global AI adoption, with 35% of companies incorporating AI into their operations and another 42% considering it. Furthermore, 44% of organizations strive to integrate AI into their existing applications and processes.

    Discover how to start preparing for forthcoming AI regulations that will govern the ethical use of this technology. This will help avoid problems like legal issues, fines, damaged reputation and loss of customer trust.

    On Oct. 30, 2023, the White House issued an executive order to manage AI risks and expanded on the voluntary AI Risk Management Framework released in January 2023. The directive aims to ensure the safe, responsible and fair development and use of AI. Federal authorities will evaluate AI-related threats and provide guidelines for businesses in specific industries according to the following timeline:

    • Within 150 days of the date of the order: A public report will be issued on best practices for financial institutions to manage AI-specific cybersecurity risks.
    • Within 180 days of the date of the order: The AI Risk Management Framework, NIST AI 100-1, along with other appropriate security guidance, will be integrated into pertinent safety and security guidelines for use by critical infrastructure owners and operators.
    • Within 240 days of the completion of the guidelines: The Federal Government will develop and take steps to mandate such guidelines, or appropriate portions, through regulatory or other appropriate action. Also, consider whether to mandate guidance through regulatory action in authority and responsibility.

    The Office of Management and Budget (OMB) released a new draft policy on Nov. 3, 2023. The policy is seeking feedback on the use of AI in government agencies. This guidance establishes rules for AI in government agencies. It also promotes responsible AI development and improves transparency. Additionally, it safeguards federal employees and manages the risks associated with AI use by the government.

    Here are some approaches to consider when planning for the impending AI regulations:

    Stay Well Informed  

    Constantly monitor the development of AI regulations at the local, national and international levels. Examine which regulations directly impact your company’s use of AI. Consult with legal counsel specializing in AI and technology law to thoroughly understand how it will affect your company. Also, become acquainted with core legal principles rooted in AI regulations.

    Conduct a Risk Assessment

    A risk assessment is crucial for compliance and reducing legal liability, especially with emerging AI regulations. Begin by analyzing your AI systems for possible violations of existing laws and regulations, including consumer protection, anti-discrimination and data privacy.

    Since AI systems gather and process large quantities of personal data, data protection and privacy are concerns. Companies should assess whether their AI systems comply with applicable data protection laws, such as the California Consumer Privacy Act (CCPA).

    Regarding anti-discrimination, companies should assess whether their AI systems are unbiased and initiate measures to mitigate any probable biases. Finally, create plans for any uncovered legal risks.

    Create a Powerful Infrastructure

    Determine whether existing procedures and policies sufficiently tackle AI development, deployment and usage. Make certain the right contractual agreements are in place with technology vendors, data providers and other stakeholders.

    In compliance with pertinent data privacy regulations, create strong data governance procedures for collecting, storing and using personal data. Regularly monitor and audit AI systems to detect legal compliance issues. Lastly, develop a thorough plan for responding to potential legal events such as data breaches.

    Partner with Legal Experts

    A team of legal experts specializing in AI can help ensure that legal considerations are incorporated throughout the development and deployment process. Companies can lower their legal risk by partnering with an external legal counsel specializing in corporate AI and other technology areas, including cybersecurity.

    In conclusion, addressing the legal aspects of AI improves compliance, and builds trust and confidence with stakeholders. Is your company legally protected in the AI-driven arena? For legal inquiries, please contact us at Pastore LLC.

    This article is intended for informational purposes and does not constitute legal advice.

    (Joseph M. Pastore III is chairman of Pastore, and focuses his practice on the financial services and technology industries, representing major multinational companies in state and federal courts, as well as before self-regulatory organizations such as FINRA, and government agencies such as the SEC.)

    (Julie D. Blake, JD, LLM, CIPP, CIPM, is an experienced commercial litigator and data privacy expert with expertise in cybersecurity, data privacy breaches, risk assessment and data privacy policy review.)

    12 Questions to Ask Potential Business Partners About Themselves

    Posted on by Kelly McElroy

    Business is another word for relationship.

    And that is where things get interesting.

    Like marriages, many business partnerships fail. To compound matters, there is also a greater likelihood that it will end in a legal proceeding.

    As an executive, how can you sidestep both negative outcomes? Well, you can start by selecting better business partners. The next time you find yourself looking for a business partner, spend more time upfront asking probing questions that can reveal possible red flags for you in the long run.

    Remember, the secret to better answers are better questions. Feel free to pull from the following to increase the chance of a successful partnership:

    What can you tell me about yourself?

    This question seems quite innocuous, but it is extremely strategic. The response will tell you how well the prospective business partner can communicate, which is an important factor in any successful partnership. The answer should be tailored to the opportunity, not a recap of the person’s life. In addition to communication skills, this question will reveal if the person conducted due diligence before the interview.

    What is your “why?”

    You never really know someone until you know what they want. Motivation is key, so ask about it early in the process.

    What does success look like?

    We all want to be successful, but what does that really mean? For some, it may mean growth or money. For others, it may mean more control over their time. These are different looks at success. Get clarity sooner rather than later.

    A breach of the partnership agreement, for example, is a common cause of a failed business partnership. During the interview process, you must ascertain whether the prospective business partner has a vision of success that jibes with the partnership agreement, which typically includes insight into business operations.

    What is your competitive advantage?

    Learning about a prospective business partner’s strengths could help you determine the business structure. In the partnership agreement, you could spell out how each partner would be responsible for their respective areas of expertise.

    What are your areas for development?

    Identifying weaknesses is just as important as learning about strengths. This information will give you a more complete picture of where this person would fit in the organization—if at all.

    Gross negligence occurs when a partner harms another by failing to provide a certain standard of care. Make sure areas of development for each partner are addressed from the onset.

    How would you describe your management style?

    Are you a visionary leader or a transformative one? Do you take charge yourself or delegate? Knowing the management style of all your business partners speaks to expectations, teamwork and, ultimately, business operations. Before profit and losses, it is about intangibles.

    How would you describe your communication style?

    You can’t be a leader without followers, and you can’t have followers without communication. Communicating tends to be the make-or-break variable in any equation involving a relationship. So, does the prospective business partner have a passive or aggressive communication style? Or is it more assertive? Assess the words, tone and actions during the interview. Now, ask yourself: How would this person fit in with other partners?

    Unfortunately, failure to delineate authority is a common reason for business partnership breakups. To ensure the partners aren’t shirking their responsibilities or overstepping into another partner’s area, communicate in terms that all parties understand and reinforce in the partnership agreement.

    What will you need from the other business partners to be successful?

    From day one, it is important that your team members are put in the position to succeed—because when they win, you win. Learning about which resources they will need in advance will help you to determine the true cost of bringing this person on board. Do the requests logically align with the roadmap that was presented? Is it realistic?

    Can you describe your current workday at your most recent firm?

    Past behavior may not be a guarantee of things to come, but people tend to be creatures of habit. You should know in advance if the prospective business partner believes in working around the clock or four hours a day. This expectation could have a positive or negative impact on the rest of the partners.

    Partnership abandonment happens, which can result in a breach of fiduciary duty. The partnership agreement should define partnership work and business operations to make expectations clear and concise.

    What is your exit strategy?

    This question is another way to ask about the person’s “why” in an inconspicuous manner. When you want an honest answer to an important question, make sure you ask for it several times in different ways. The composite will tend to be the real answer.

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

    How to Break Impasse With 50/50 Business Partnership

    Posted on by Kelly McElroy

    Most business partnerships don’t last.

    Harvard Business Review says the fail rate for corporate alliances ranges in the 60% to 70% neighborhood.

    So, would a 50/50 business partnership improve your odds? Maybe. Fewer “voices” could make things easier or more challenging.

    The reasons for the breakup, regardless of the number of partners, have remained consistent over the years:

    • Lack of communication
    • Different goals and expectations
    • Lack of participation/inclusion

    Knowing the five ways to break an impasse in a 50/50 business partnership could help resolve the issue in question as well as the outcome.

     

    1. Mediation

    Mediation is an effective way to solve disputes in business partnerships. Unlike litigation, which tends to pit one partner against the other, mediation is a collaborative process without winners and losers.

    The mediator serves in the role as a facilitator who helps each partner contribute to the solution—not like a judge who passes a verdict.

    Choosing mediation also keeps the matter private, protecting the company’s brand and reputation by not undermining public confidence in your operations.

     

    1. Arbitration

    Arbitration is a procedure both parties approve that delivers a binding decision on disputes. A private dispute resolution can be advantageous because it comes with a timetable that can be controlled by the parties involved. In addition, there are no appeals.

    Besides finality and speed, arbitration also offers other benefits. The proceedings are confidential matters, and the financial cost can be set beforehand, which turns an otherwise expensive unknown into a number that is predictable.

     

    1. Divide Company

    One way to maximize a business relationship is to divide tasks and responsibilities among each partner based on their strengths and expertise. If one partner is stronger at marketing and sales, for example, then have that person concentrate on that area. This simple strategy allows the business partnership to create better results and efficiencies.

    Well, the same can be said for breaking up the business partnership. If an impasse remains, dividing the company along the lines of each business partner’s existing responsibilities might make the most sense. It could allow each partner to start another venture with their “piece” or add their portion of operations to another business partnership so they retain a certain level of value.

    Ideally, each partner should lay out this outcome in the business partnership agreement from the onset with guidance from their lawyer.

     

    1. Buy-Sell Options

    The business partnership agreement should spell out several exit options, especially for 50/50 ventures. A buy-sell provision could be a preferred choice among the two partners. Essentially, it means one partner would buy out the other partner at fair market value. To accomplish this option, a third-party appraisal would be required from a professional who was agreed upon by both partners.

    A challenge could occur if both partners want to buy out each other. This type of contingency would need to be documented in the business partnership agreement.

     

    1. Dissolve Business Partnership

    If certain contingencies are not addressed at the onset of a business partnership agreement, such as what happens if both partners—or neither partner—want to buy out the other, then dissolving the partnership could be the last remaining option to end a 50/50 business relationship impasse.

    Working with an attorney at the beginning of your business partnership would ensure that the agreement would be comprehensive so it would address—and therefore eliminate—many possible deadlocks and headaches before they happen.

     

    What is a Partnership Business

     

    Alliances are often created in the first place to capitalize on the skills, talents and relationships of others. A business partnership, for example, is an agreement between two partners or more with assets and liabilities on an ongoing venture.

    Being part of a business partnership can create several advantages that an entrepreneur couldn’t do alone. For example, a partner can pool their time, talent and resources, fostering new thoughts and problem-solving approaches. In addition, partners can share the workload that matches their individual expertise to improve outcomes and efficiency.

    These important details would need to be spelled out in a business partnership agreement to ensure everyone’s expectations are aligned. In fact, the business partnership agreement often turns out to be a make-or-break document, so don’t skimp. More substance upfront will only help support unity in the business partnership.

     

    Partnership Business Examples

     

    A general partnership is one of three common categories of business partnerships. Essentially, a general partnership means all the partners share financial and legal aspects equally, including debt for which each partner is personally accountable.

    A limited liability partnership protects the partners from legal action. This type of business partnership, which is common among professional service providers such as doctors and accountants, limits legal exposure from one partner to another. So, if one partner is involved in a legal proceeding, the other partners are shielded from the outcome.

    A limited partnership has one general partner personally liable for the business partnership’s debts and at least one silent partner with limited financial and legal liability based on the amount invested. Silent partners are not involved in the day-to-day management of operations.

    Whether you are involved in a 50/50 business relationship or not, an impasse is bad for business. Move forward with invaluable counsel from your attorney.

     

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net

    Business Partnerships: How to Improve Odds of Survival?

    Posted on by Kelly McElroy

    Whether it involves two parties or more, a business partnership has followed a certain convention of thought for decades.

    Start with a comprehensive business plan and a business partnership agreement with clear, understandable metrics that capture the sense of accomplishment for your alliance. Systems and procedures should be part of the overall structure built for success.

    That’s the winning recipe, right? Well, not necessarily. Researchers Jonathan Hughes and Jeff Weiss, who authored “Simple Rules for Making Alliances Work” in the Harvard Business Review, believe more rules are needed to improve the long-standing fail rate for business partnerships, which hovers around 70%. Although the research focuses on corporate alliances, it has implications for the intricacies of business partnerships.

    Based on their findings, the researchers propose several complementary rules to elevate conventional wisdom.

     

    Business Partnership Insight: Place more value on working together

    A solid business plan and contract are crucial, but those two instruments alone are not enough. When it comes to business partnerships that fail, the paperwork is rarely called into question while communication and trust grind to a halt.

    Diversity of ideas is one of the benefits of starting a business partnership. Aren’t two heads still better than one? More ideas often lead to more opportunities and improved efficiency.

    The notion of working together implies two-way communications that can counter many possible negatives associated with business partnerships, such as confusion. Of course, the business partnership agreement would spell out areas of responsibility. But once you drill down to day-to-day activities, it can quickly become gray areas that fester. Is your partner really working as hard as you? Is he moving into my area of expertise, which could create further internal conflict?

    Hughes and Weiss recommend that alliances, such as business partnerships, put less emphasis on the business partnership arrangement and more energy behind the working relationship.

     

    Business Partnership Insight: Highlight Progress, Goals

    Building a successful business partnership is a process. The wins don’t happen overnight, especially when the relationship is a new one.

    Achieving desirable outcomes takes an investment of time, money and third-party resources that come in the form of more relationships, which most likely will be time-consuming and inconvenient—although worth it. In a practical sense, this effort, which could take 12 months or multiple years, could lead to barren monthly reports for the foreseeable future.

    Blank reports can lead to lower morale and lost confidence. It would also feed a popular negative about business partnerships, which centers on personalities. When interacting with another person, you will have to navigate their quirks and emotional levels on a daily basis. In sports, it has been said that winning is the best deodorant because everything smells bad when you are losing. A slew of negative reporting, especially at the beginning of a project or relationship, could tip the scales in the wrong way.

    Researchers urge business partnerships to place emphasis on “means” metrics as opposed to “ends” numbers. For psychological reasons, highlighting the road to success will go a long way to sustaining the effort so all partners feel the initiative is moving forward—although not complete yet.

     

    Business Partnership Insight: Transform Differences Into Opportunities

    Matching strengths and differences are often driving forces why two parties should partner together.

    However, the difference in backgrounds and experiences can quickly turn into a negative for the business partnership. Assuming one way to solve a problem at another company would work in the current partnership may be naïve. Resenting the other partner without working toward finding common ground would be unproductive.

    The researchers reference a real-work example of two companies partnering in an alliance when good faith and communications started to break down. Company executives created working sessions with team members from each company to address differences between the companies. Individual competencies and culture were issues that topped the list, which is why so few were initially open to joining the conversation. When the negatives were highlighted, the reluctance stopped and team members began to provide frank feedback, which ultimately turned the tide and allowed the two entities to work more closely together.

    Eliminating differences and embracing collaboration serve as the third complementary rule from the researchers.

     

    Business Partnership Insight: Find Collaboration Beyond Structures

    In most situations, corporate structure is a framework that leads to positive outcomes. Sometimes, however, it can feed the blame game when surprises become negative.

    There is nothing more draining to productivity than team members spending their energy pointing fingers and assigning fault to others. Instead, researchers recommend that the partners discuss how each contributed to the problem and what they can do to address it today and prevent it tomorrow. Refusing to tear down the other partner preserves the relationship, avoiding a situation where information could be withheld out of self-preservation—something that wouldn’t be positive for a company.

    Reaching a stage of collaboration underscores the chief competitive advantage of any business partnership.

     

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

    3 Keys to Launching Legal Cryptocurrency ICO

    Posted on by Kelly McElroy

    Money is going digital.

    In 2013, you could count the number of active cryptocurrency coins on both hands.

    Today, there are 8,832 active coins and tokens, according to CoinMarketCap.

    Launching a successful Initial Coin Offering (ICO) continues to be the main mechanism for bringing these digital assets to the marketplace. In cryptocurrency, an ICO is a crowdsourcing way to raise money for a new coin or application. Investors purchase tokens related to a product or service that are expected to increase in value based on demand. However, in many cases, several types of cryptocurrency may offer some form of utility, but they don’t always offer an ownership share in the organization or a portion of revenue, which is a key difference between ICOs and initial public offerings (IPOs) for stock equities.

    The timing of the offerings is another important difference. For ICOs, they occur in the beginning when a coin is publicly launched. For IPOs, they tend to happen once the company is established and looking to expand by diluting ownership.

    Since 2019, $19 billion has been raised through ICOs, while only $969 million has been raised through equity crowdfunding, according to research from CB Insights. The inclusive nature of the offerings has made them popular worldwide. For example, anyone with a digital wallet can participate in an ICO and the market is open around the clock in every time zone, which has made it easier to build large investor followings.

    To increase the odds of launching a successful ICO, your coin will need to be set up for success. Here is a checklist of essential items:

    Cryptocurrency Attorney Insight #1: Legal Assistance

    The first must-have is legal advice from a trusted lawyer with crypto and blockchain experience.

    As a member of the Connecticut Crypto Forum, which Pastore LLC has sponsored since last May, we have helped cryptocurrency and blockchain startups succeed, while others have struggled because they were not savvy about regulation.

    Your attorney will need to assess whether your ICO is promoting coins that are deemed securities by the SEC. Market professionals may be promoting the sale of coins without determining if securities law is applicable to the digital assets, which could result in a violation of the Securities Exchange of 1934.

    The Howey test will help you understand the legal nature of crypto at your ICO.

    In 1946, the U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. created the basis for specific factors that separate a security from a commodity. In the decision, which involved citrus grove buyers, the investors only needed to supply capital to the arrangement, while all the other details were managed by others. This point underscores the basic tenets of an investment contract. The four factors include 1) an investment, 2) a common enterprise, 3) a profit expectation and 4) generated from the work of third-party participants.

    Cryptocurrency Attorney Insight #2: Marketing Expertise

    A whitepaper is a crucial document that spells out a looming problem and positions the coin as the solution. Biographies are also important. In the beginning, startups are only ideas, while the team members are the product that investors want to support.

    The blockchain architecture should be disclosed and key topics, including energy consumption, interoperability and scalability, should be addressed for investors. The tokenomics of the coin, which includes supply and demand issues, should also be included in the document. What is the total supply? The current supply? Will coins be “burned” or permanently removed from circulation? These questions should be addressed.

    The whitepaper should include a roadmap, which includes important dates and milestones, in addition to the amount of money raised and its intended use.

    Web company Dev Technosys estimates that cryptocurrency companies should budget 10% to 20% of their funding target to support its marketing program.

    As part of the outreach program, a website is an important part of the puzzle. It’s the center of your brand’s online universe. Cryptocurrency organizations tend to opt for a clean, simple one-page site that scrolls down to company news, industry awards and affiliations, as well as the roadmap and background of team members.

    Cryptocurrency Attorney Insight #3: Technical Experience

    There are several technical aspects a cryptocurrency team must consider to improve its chances of a successful ICO.

    First, a security audit for your soon-to-be launched crypto coins leverages code analysis that discovers problems in the applications. This exercise needs to be part of your pre-launch process and stated in the marketing materials to build confidence among investors.

    An emphasis on blockchain development, however, cannot be understated. Development is about maintaining the platform by managing various usages such as distributed applications, smart contracts and digital currencies. As a reference point, Ethereum may have the highest number of developers with 5,758. Since Bitcoin was established in 2009, it is estimated that there are more than 23,000 developers in the field today.

    And the most crucial, make-or-break, technical endeavor? Getting your coin on an exchange. The exchange listing creates many “abilities” for cryptocurrency coins, ranging from credibility, visibility and accessibility for investors. Of course, price stability is one of the biggest benefits.

    Bottom line, considering any potential legal ramifications of your cryptocurrency coins first and foremost will create an environment for a successful ICO—and productive venture.

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

    The Howey Test: Would Your Crypto Offering Pass or Fail?

    Posted on by Kelly McElroy

    Before you launch your next crypto token, you should see if you can pass the test.

    It is not the smell test with investment bankers.

    The Howey test will help you understand if your crypto is one of many digital securities which would present more legal responsibilities, such as disclosure and registration requirements.

    The U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. was a 1946 Supreme Court decision about citrus grove buyers in Florida. The Howey Company sold citrus groves to investors who leased the land back to Howey. The company’s employees managed the groves and sold the fruit on behalf of the investors. Both the company and the investors profited from the venture.

    The investors only needed to supply capital to the arrangement, while others took care of all the other details. An investment contract is what you get when your transaction passes the Howey test.

    Of course, this concept impacts things beyond citrus fruit. It is also applicable to the cryptocurrency market. In fact, there are four factors to consider which separate a security from a commodity:

    • An investment
    • A common enterprise
    • A profit expectation
    • Generated from the work of third-parties

    In the U.S., the SEC has deemed bitcoin not to be a security. The issuer, an anonymous Satoshi Nakamoto, released all 21 million tokens at once as part of a contract. None of the tokens went to him or a company treasury. When the tokens were released, they had no value, and when they gained value, Nakamoto did not receive any benefit.

    In effect, he removed any possible connection between “common enterprise” from the other factors, which disqualifies the venture as a security under the Howey test.

    SEC Chair Gary Gensler said, “at the core, these (altcoin) tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group,” during an interview with New York Magazine.

    However, Rostin Behnam, the chairman of the Commodity Futures Trading Commission (CFTC), said Bitcoin is not the only commodity. He called another crypto coin—Ethereum—a commodity during a hearing before the Senate Agriculture Committee. In fact, Ethereum has been listed on CFTC exchanges for some time.

    An interagency council comprised of state and federal banking officials, as well as commodity, securities and consumer protection groups, agreed in a report that there is not a comprehensive regulatory framework for digital assets. Hence, the reason for differing stances within the industry.

    Right now, asset classification dictates how digital assets are regulated. If it is a payment, then it falls under the purview of Money Services Business and the Office of the Comptroller of the Currency. Likewise, CFTC oversees commodities, and the SEC has jurisdiction over securities.

    Recently, the SEC has filed a complaint against Binance and Coinbase, alleging that they are selling unregistered securities. The complaint mentioned several coins that could be viewed as securities: Polygon, Cardano and Solana. Soon after the announcement, Robinhood—another crypto exchange—delisted the three mentioned coins.

    Binance.US has decided to become a crypto-only exchange, ending US dollar deposits and withdrawals. The SEC wants a federal judge to freeze the exchange’s assets, including $2.2 billion in crypto and $377 million held in dollars.

    Either the Coinbase case or the Binance case could make its way to the U.S. Supreme Court, which could in effect create the path for industry regulation with its ruling. As part of a possible outcome, the High Court could also rewrite the Howey test or revise it in relation to digital assets.

    At the 2023 Global Exchange and Fintech Conference, Gensler said congressional action is not needed because the laws are already on the books. “Not liking the law, not liking the rules is different than not hearing it or not getting it,” he said. However, this view fails to recognize that the current regulatory framework is not black and white for investors and institutional players.

    Under federal securities laws, a company must register with the SEC before offering or selling securities. As part of the registration process, an issuer must disclose financial statements that have been audited by a public accounting firm. These documents provide important information that helps investors make informed decisions about their investments.

    As the digital financial assets space grows, more large corporations can be found with crypto on their balance sheets. A 2022 Deloitte Global Corporate Treasury Survey found that 40% of interviewed finance executives said they have already implemented blockchain or they are considering it.

    In the short term, issuers will need to work with a law firm with expertise in crypto and digital currencies to navigate the impact of the courtroom rulings and the subsequent new era of regulation on their business.

    Make sure your company will be able to pass the test in the evolving legal landscape.

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

    7 Ways to Align Executive Pay with Dodd-Frank

    Posted on by Kelly McElroy

    Connecting executive compensation with financial performance took a while to implement—and it wasn’t easy.

    Toward the end of last year, the U.S. Securities and Exchange Commission voted 3-2 to accept the “clawback” rules, which are intended to discourage senior leadership from making risky corporate decisions for short-term gain, resulting in restated financial statements.

    In short, the SEC called out two types of triggering events involving material and non-material changes to financial statements. And the last part, referred to as “Little Rs,” is why the SEC vote was not unanimous.

    Two SEC Commissioners, Hester Peirce and Mark Uyeda, voted no because the new rule included non-material changes.

    SEC Chair Gary Gensler, however, supported the rule, citing the fact that corporate restatements have increased to nearly 75% from 35% in recent years. “If the financials are inaccurate, why should executives be getting paid incentive comp on financials that were inaccurate,” he said in an interview with Thomson Reuters.

    Here are seven insights to ensure your executive compensation is aligned with the Dodd-Frank Act:

     

    Require Shareholder Advisory Vote

    Public companies are required to hold a non-binding advisory vote for their shareholders on the topic of executive compensation at least once every three years.

    Although the frequency vote gives shareholders four options, including “abstain,” making the vote an annual tradition is the best practice.

    At the end of May, Russell 3000 companies have only failed 1.5% on Say on Pay, according to Harvard Law School Forum on Corporate Governance. The current failure rate is 130 basis points lower than last year. In addition, the percentage of Russell 3000 companies receiving more than 90% support (i.e., 78% vs. 75%) is also higher than last year.

    Investors are now able to vote on the compensation of the top executives in a public company, which includes the CEO, CFO and at least another three highly paid executives.

     

    Bolster Independence for Compensation Committee

    The compensation committee balances investor expectations along with a company’s financials to form employee retention strategies. In recent years, however, the role has evolved. Two-thirds of surveyed companies have expanded the role of their committee by expanding the charter or the name as well as the charter, according to the Center On Executive Compensation.

    Institutional investors are driving change with more focus on the environment, talent and diversity and inclusion. New topics like human capital metrics, safety and wellbeing, culture and employee engagement are now falling under the compensation committee’s purview.

    Strengthening independence requirements for committee members is more important than ever.

     

    Added Disclosure on Conflicts for Consultants

    Compensation consultants can serve as an invaluable resource for up-to-date pay rates, ongoing compensation trends and incentives to foster employee performance.

    The Dodd-Frank Act requires more disclosure about the portion of compensation consultants and any potential conflicts. Stock exchanges must have listing standards that create greater independence for all compensation committee members, including consultants.

    For example, exchanges must consider the source of all compensation to the director and whether the director is affiliated with the issuer via a subsidiary or affiliate.

     

    Oversight of CEO/Rank Employee Ratio

    The Dodd-Frank Act requires public companies to disclose the CEO pay ratio, which compares a CEO’s compensation to pay for median employees.

    In 2021, CEOs were paid 399 times as much as a typical worker—a 1,460% increase since 1978. The shift in executive compensation to stock-related investments, which represents roughly 80% of the gains over the decades, is cited as one of the driving forces by the Economic Policy Institute.

    Even though the SEC strongly encourages companies to follow generally accepted accounting principles (GAAP) metrics to ensure integrity, companies are only required to provide the CEO pay ratio without context or a long discussion, which can be found, however, in the compensation and analysis parts of a proxy statement.

     

    Disclose Pay Versus Performance

    Last summer, the SEC adopted amendments to require companies to disclose information that links executive compensation and financial performance.

    For the five more recent fiscal years, the amendments require companies to provide a table of executive compensation and financial performance measures, including total shareholder return, as well as the total shareholder return of companies in the registrant’s peer group, its net income and a financial performance metric of the company’s own selection. Companies are also required to provide a list of three to seven financial performance measures that they deem important for connecting executive compensation and company performance.

     

    Mandate Recovery Policies for Restatements

    The SEC requires companies to implement policies to recover awarded, incentive-based compensation resulting from an accounting restatement from past and existing executive officers, no matter the level of involvement. As a result, stock exchanges must have listing standards that require companies to adopt a written “clawback” policy, which they will disclose as an exhibit in Form 10-K and on the cover of annual reports.

    All types and sizes of restatements can trigger a clawback, including ones that materially impact the financial statements in the current year and ones that don’t from prior fiscal periods.

    Companies must recover the compensation that is erroneously awarded and received by an executive in the three years preceding the date of the restatement.

     

    Disclose Hedging

    A company must disclose the ability of employees, officers and directors who can use equity securities granted as compensation to hedge. The company must comply by disclosing the practices in full or providing an accurate summary. If the company doesn’t have any hedging policies, then it must disclose that hedging is permitted.

    Companies should review their current hedging policies with an attorney and consider updating or streamlining the document. Does your current policy cover the correct category of employees or enough detail about transactions?

    Review these items carefully with an attorney to make sure pay is aligned with the Dodd-Frank Act.

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or jpastore@pastore.net.)

     

    6 Ways to End Partnership Disputes

    Posted on by Kelly McElroy

    Business partnerships are not always meant to last.

    And that includes the successful ones.

    Countless reports pin the fail rate at around 70% in the first year. A lack of a detailed partnership agreement upfront usually plays a role. Some partners want to work on the business, while others may want to work in the business. For a couple of months, that arrangement may work. But once it’s clear the other partners are working 25 hours a week, and you’re grinding more than 60 hours, things will change.

    Communications may become strained or end.

    Regarding the “successful” business partnerships, life tends to get in the way, and some partners may want to retire at some point.

    Like any business transaction, always begin at the end. Before you spend so much energy on the entry point, invest the time in your exit strategy.

    The odds make it clear that your business partnership will end in some type of dispute.

    But what are your options?

    Here are six possibilities to consider:

    Business Attorney Insight: Mediation

    Discussing the disputed matter(s) with your partner should yield results, but it may take a trained mediator to get the job done. Mediators help open the lines of communication and characterize each stance in less provocative ways.

    Bringing each partner back to the overall mission—the good of the company—should help create a path forward since it’s the reason each partner signed on in the first place. Focusing on the project as opposed to personalities will increase your odds of resolution.

    Business Attorney Insight: Buy Out

    You should have included a buyout provision in your partnership agreement. However, if that is not the case, then leverage your buy-sell agreement, which generally is included in partnership agreements.

    A buyout agreement should be drawn up by your attorney and given to the exiting partner. You should also work with a financial advisor who can help put dollar amounts on assets. Please do not use a boilerplate template that you found online. Every partnership, not to mention the situation, is unique, and this type of transaction typically involves too much value to leave to a form letter.

    Business Attorney Insight: Sell

    Like many of the other options, selling can be relatively easy or difficult.

    If your partnership agreement addresses what happens when partners sell their interests, this matter should be over quickly. Some agreements provide the existing partners with first dibs on the exiting partner’s equity.

    However, if the partners are only given the right of first refusal, then this adventure could take time if it’s shopped around. And then, the question becomes about how the daily operations of your company will be impacted with a potentially disgruntled partner looming around the office and representing the company with A-list clients.

    Business Attorney Insight: Freeze-Out

    A freeze-out merger happens with a majority stakeholder in a company with another company that they own and control. Then, the majority shareholder submits a tender offer to the original company to force out the minority shareholders. If it’s successful, all the assets from the original company may be moved over to the newly created company.

    The courts prefer a merger to another case, so they tend to rule in favor of these mergers, especially if the majority stakeholder makes a strong connection to a corporate purpose backed by sound business judgment.

    This is another reason you have an attorney on your team.

    Business Attorney Insight: Dissolution

    Refer to your partnership agreement for this one. Most agreements include how the assets will be divided and distributed when the relationship is dissolved.

    If your partnership agreement doesn’t include this provision, then you may be subject to the Uniform Partnership Act of 1997, which was proposed by the National Conference of Commissioners on Uniform State Laws to govern business partnerships in the United States. To date, 37 states, including Connecticut, have ratified the agreement (check with your lawyer for details).

    Dissolution may end a partnership, but not the operations of a company, which shifts its activities to closing accounts, as well as selling and disposing of assets. This part could take many months, depending on the size and complexity of your company.

    Business Attorney Insight: Litigation

    Business partnerships include more than one agreement.

    There’s one for the partnership and another for operations. There are agreements for employment and non-compete terms. Typically, there are also non-disclosure agreements to protect company investments.

    If any of these contracts are breached, then that could trigger litigation for resolution.

    Examples could include misuse of company assets, failure to disclose potential conflicts of interests and sharing copyrights or trade secrets.

    One day, your business partnership will end. Consult with your business attorney for a favorable outcome to your hard work.

    (Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or jpastore@pastore.net.)