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February 11, 2021 |
2020 Year-End ERISA Disputes Update

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With the emergence of COVID-19, 2020 was a year of significant and unprecedented change in daily life and the economy. In particular, 2020 was a busy year for Employee Retirement Income Security Act (“ERISA”) lawsuits—across industries—implicating employers’ retirement and healthcare plans. Not only were there significant decisions on a number of key issues impacting these lawsuits, but COVID-19 also triggered new and different legal exposure for plan sponsors and administrators. Recognizing the importance of this area of law to its clients, in 2020, Gibson Dunn launched an ERISA Disputes Practice Area, bringing together the Firm’s deep knowledge base and significant experience from across a variety of its award-winning practice groups, including: Executive Compensation & Employee Benefits, Class Actions, Labor & Employment, Securities Litigation, FDA & Health Care, and Appellate & Constitutional Law.

This 2020 year-end update summarizes key legal opinions and provides helpful analysis to assist plan sponsors and administrators navigating this unprecedented time.

Section I highlights four notable opinions from the United States Supreme Court addressing ERISA’s statute-of-limitations, Article III standing, and ERISA preemption. The Court also remanded a case to the Second Circuit concerning the pleading standard for alleging a breach of the duty of prudence under ERISA on the basis of a failure to act on insider information.

Section II provides a summary of hot topics in ERISA class-action litigation, including notable developments in fiduciary breach litigation and a growing trend of COBRA notice litigation.

Section III addresses evolving procedural issues, including the standard of review of benefits claim decisions, and an emerging circuit split on the arbitrability of claims brought on behalf of plans.

Section IV offers an overview of key issues in health plan litigation, including trends in behavioral health and residential treatment coverage disputes, and updates on assignments and anti-assignment clauses.

I.   Significant Activity in the Supreme Court

2020 saw a significant rise in ERISA cases reaching the United States Supreme Court. In fact, the Court decided four ERISA cases in 2020, which is more than the Court has decided in any other year of the statute’s 45-year existence. These decisions provide helpful guidance to litigants on important topics in ERISA litigation. In Intel Corp. Investment Policy Committee v. Sulyma, 140 S. Ct. 768 (2020), the Court resolved a circuit conflict regarding when employers and plan fiduciaries can invoke the three-year statute of limitations period under Section 413(2) for an alleged breach of fiduciary duty. In Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020), addressing fiduciary breach claims against a defined-benefit pension plan, the Court clarified when participants in an ERISA plan have Article III standing to sue for statutory violations. In Rutledge v. Pharmaceutical Care Management Ass’n, 141 S. Ct. 474 (2020), the Court again addressed the scope of ERISA preemption, particularly with respect to state regulations of health care and prescription drug costs, as well as state regulations of intermediaries. Finally, in Retirement Plans Committee of IBM v. Jander, 140 S. Ct. 592 (2020), the Supreme Court was expected to address whether the “more harm than good” pleading standard from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 430 (2014), can be satisfied by generalized allegations that the harm resulting from the inevitable disclosure of an alleged fraud generally increases over time, but instead, in a per curiam decision, declined to rule on the merits and remanded the case to the Second Circuit.

A.   Intel Corp. Investment Policy Committee, et al. v. Sulyma Addresses Statute of Limitations

In Intel Corp. Investment Policy Committee, et al. v. Sulyma, 140 S. Ct. 768 (2020), the Supreme Court addressed the circumstances in which employers and plan fiduciaries can invoke ERISA’s three-year statute of limitations for an alleged breach of fiduciary duty, unanimously holding that in order to trigger the three-year limitations period, an employee must have become “aware of” the plan information and that a fiduciary’s disclosure of plan information alone does not meet the “actual knowledge” requirement.

The plaintiff, a former employee of Intel, sued Intel’s investment committee, administrative committee and finance committee (collectively, “Intel”), alleging that his retirement plans improperly overinvested in alternative investments. Id. at 774. Under Section 413(1) of the Employment Retirement Income Security Act of 1974 (ERISA), breach of fiduciary duty claims may be brought within six years of the breach or violation. However, Section 413(2) of ERISA shortens the limitations period to “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” 29 U.S.C. § 1113(2). Plaintiff filed suit within six years of the alleged breaches but more than three years after petitioners had disclosed their investment decisions to him. Sulyma, 140 S. Ct. at 774. While Intel provided records showing that the plaintiff had received numerous disclosures explaining the extent to which his retirement plans were invested in alternative assets, the plaintiff testified in a deposition that he didn’t remember reviewing the disclosures and also stated in a declaration that he was unaware that his account was invested in alternative investments. Id. at 775.

The Court unanimously affirmed the Ninth Circuit’s decision holding that a plaintiff does not necessarily have “actual knowledge” based on receipt alone of information if he did not read it. Id. at 779. While the disclosure of information to plaintiff is “no doubt relevant in judging whether he gained knowledge of that information,” to meet § 1113(2)’s “actual knowledge” requirement, the plaintiff must have become aware of that information. Id. at 777. The Court emphasized that its decision does not foreclose any of the “usual ways” to prove actual knowledge at any stage in litigation—including through proof of willful blindness—and that the decision will not prevent defendants from using circumstantial evidence to show actual knowledge. Id. at 779.

Gibson Dunn submitted an amicus brief on behalf of the National Association of Manufacturers, the American Benefits Counsel, the ERISA Industry Committee, and the American Retirement Association in support of petitioner: Intel Corp. Investment Policy Committee.

As we discussed in our Appellate Update on the Sulyma decision, we expect the Court’s holding to lead to an uptick in lawsuits against employers and plan fiduciaries, based on allegations that the three-year limitations period is inapplicable because they did not read or cannot recall reading plan documents.

B.   Thole v. U.S. Bank N.A. Addresses Article III Standing

As we reported in our Appellate Update, in June of last year, the Supreme Court held that participants in a fully funded defined-benefit pension plan lacked Article III standing to sue under ERISA for breach of fiduciary duties because they had no “concrete stake in the lawsuit.” Thole v. U.S. Bank N.A., 140 S. Ct. 1615, 1619 (2020). The plaintiffs in Thole alleged that the plan fiduciaries “violated ERISA’s duties of loyalty and prudence by poorly investing the assets of the plan,” resulting in a loss of $750 million. Id. at 1618. Defendants moved to dismiss for lack of standing, which the district court granted. Id. at 1619. The Eighth Circuit “affirmed on the ground that the plaintiffs lack[ed] statutory standing [under ERISA].” Id.

The Supreme Court, in a 5-4 decision authored by Justice Kavanaugh, affirmed on the ground that plaintiffs lacked Article III standing. Id. The Court explained that “[t]here is no ERISA exception to Article III” and that the plaintiffs lacked standing “for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives.” Id. at 1622. Accordingly, the Court reasoned that the plaintiffs did not have a “concrete stake in the lawsuit” as “[w]inning or losing [the] suit would not change the plaintiffs’ monthly pension benefits.” Id.

In so ruling, the Court rejected each of the four theories plaintiffs raised to demonstrate their standing. Id. at 1619–21. First, the Court rejected plaintiffs’ argument, based on trust-law principles, that they have an equitable or property interest in the plan. Id. at 1619–20. The Court reasoned that “a defined-benefit plan is more in the nature of a contract” than a trust as “[t]he plan participants’ benefits are fixed and will not change, regardless of how well or poorly the plan is managed.” Id. at 1620. Second, the Court held that plaintiffs lacked standing to sue “as representatives of the plan itself” because they had not been “legally or contractually appointed to represent the plan.” Id. Third, the Court found that even though ERISA affords all participants “a general cause of action to sue” it does not “affect the Article III standing analysis.” Id. Fourth, and finally, the Court rejected plaintiffs’ argument that defined-benefit plans will not be “meaningfully regulate[d]” if plan participants lack standing to sue as employers have “strong incentives” to manage plans and the Department of Labor can “enforce ERISA’s fiduciary obligations.” Id. at 1621.

In a concurring opinion, Justice Thomas, joined by Justice Gorsuch, objected to the Court’s “practice of using the common law of trusts as the ‘starting point’ for interpreting ERISA” and recommended that the Court “reconsider our reliance on loose analogies in both our standing and ERISA jurisprudence.” Id. at 1623. The concurrence called for the Court to return to a “simpler framework” for standing, and one in which the party must show injury to private rights. Justice Thomas stated there was no such injury in Thole because the private rights the petitioners alleged were violated did not belong to them; they belonged to the plan, and petitioners had no legal or equitable ownership interest in the plan assets. Id.

The Supreme Court’s decision in Thole is welcome news to plan sponsors, fiduciaries, and administrators, all of whom can now rely on this decision to argue that participants of ERISA plans cannot sue for breach of fiduciary duty unless they have a “concrete stake in the lawsuit,” such as a failure by the plan to make required benefits payments. Id. at 1619. In addition, Thole—and in particular Justice Kavanaugh’s forceful statement that “[t]here is no ERISA exception to Article III”—provides strong support for application of Article III requirements and jurisprudence to cases brought under ERISA.

More litigation is ahead on these issues. For instance, a split among district courts has developed on the question of whether participants in defined-contribution plans have standing to bring claims challenging investments in which they did not personally invest. Compare Cryer v. Franklin Templeton Res., Inc., 2017 WL 4023149, at *4 (N.D. Cal. July 26, 2017) (holding plaintiff had standing to sue for funds “in which he did not invest” because “the lawsuit seeks to restore value to and is therefore brought on behalf of the [p]lan”); McDonald v. Edward D. Jones & Co., L.P., 2017 WL 372101, at *2 (E.D. Mo. Jan. 26, 2017) (finding that “a plan participant may seek recovery for the plan even where the participant did not personally invest in every one of the funds that caused an injury to the plan”), with Wilcox v. Georgetown Univ., 2019 WL 132281, at *9–10 (D.D.C. Jan. 8, 2019) (finding that plaintiffs did not have standing to challenge options in which they did not invest); Marshall v. Northrop Grumman Corp., 2017 WL 2930839, at *8 (C.D. Cal. Jan. 30, 2017) (holding that plan participants lacked standing because they failed to allege that they invested in the particular fund). Since the Supreme Court made clear that injuries to the plan do not necessarily confer standing to the plan participants, Thole may support the argument that plaintiffs lack standing to bring suit when they did not personally invest in a challenged plan investment option. It remains to be seen whether, going forward, the courts adopt this interpretation of Thole to set limits on Article III standing in defined-contribution plan suits.

C.   Rutledge v. Pharmaceutical Care Management Association Narrows ERISA Preemption

On December 10, 2020, the Supreme Court issued an 8-0 decision (Justice Barrett did not participate) in Rutledge v. Pharmaceutical Care Management Association holding that ERISA did not preempt an Arkansas statute regulating the rates at which pharmacy benefit managers reimburse pharmacies for prescription drug costs. Justice Sotomayor, who authored the opinion on behalf of the unanimous Court, relied on “[t]he logic of” the Court’s previous decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995), to conclude that the Arkansas law “is merely a form of cost regulation . . . [that] applies equally to all PBMs and pharmacies in Arkansas,” and therefore is not subject to ERISA preemption because it did not have an impermissible connection with or reference to ERISA. 141 S. Ct. 474, 481 (2020). Rutledge is likely to be viewed by regulators as supporting state authority to regulate health care costs without running afoul of ERISA preemption. (Gibson Dunn’s Appellate Update discussing this case can be found here). Gibson Dunn submitted an amicus brief on behalf of the U.S. Chamber of Commerce in support of the Pharmaceutical Care Management Association.

In Rutledge, the Court ruled that “ERISA is . . . primarily concerned with pre-empting laws that require providers to structure benefit plans in particular ways,” which include those that require “payment of specific benefits,” those that bind “plan administrators to specific rules for determining beneficiary status,” and those where “acute, albeit indirect, economic effects of the state law force an ERISA plan to adopt a certain scheme of substantive coverage.” Id. at 480. The Court found that the need for regulatory uniformity—in particular, cost uniformity—is not absolute, and that it does not alone justify application of ERISA preemption: “[N]ot every state law that affects an ERISA plan or causes some disuniformity in plan administration has an impermissible connection with an ERISA plan,” which the Court noted is “especially so if a law merely affects costs.” Id. The following sentence from the Court’s opinion encapsulates its holding: “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” Id.

The Rutledge decision will impact future litigation regarding the scope of ERISA preemption. In particular, state regulators likely will rely on this decision in seeking to insulate state laws concerning prescription drug prices and pharmacy benefit managers from preemption. The reach of Rutledge, however, likely will be tested even beyond this immediate context, because state regulators can be expected also to defend other state laws and regulations on the basis that they merely impact health care costs and lack the necessary connection with ERISA plans under Rutledge. States may also attempt to enact new statutes and issue regulations of those health care intermediaries and other service providers to covered plans.

ERISA preemption will continue to be a hot area this year with the Ninth Circuit Court of Appeals hearing argument in Howard Jarvis Taxpayers Association v. CA Secure Choice Retirement Savings Program later this month, for example. In that case, the Ninth Circuit will evaluate whether ERISA preempts California’s state-run auto-IRA program, which transfers portions of a person’s paycheck into a retirement account.

D.   Retirement Plans Committee of IBM v. Jander Remands Questions About Dudenhoeffer Pleading Standard to Second Circuit

As we discussed in a recent Securities Litigation Update, in Retirement Plans Committee of IBM v. Jander, 140 S. Ct. 592, 594 (2020), the Supreme Court was slated to address whether the “more harm than good” pleading standard from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 430 (2014), “can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” In Dudenhoeffer, the Court held that, in order to state a claim for breach of the duty of prudence under ERISA on the basis of a failure to act on insider information, a complaint must plausibly allege an alternative action that the fiduciaries could have taken that would not have violated securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. 573 U.S. at 428.

In Jander, plaintiffs, IBM employees who participated in an employee stock ownership plan (ESOP) sponsored by IBM, sued IBM’s retirement plan fiduciary committee for breach of fiduciary duty, alleged that IBM misrepresented the value of its microelectronics division, thereby artificially inflating the value of company stock, and caused a drop in the stock price upon selling the microelectronics division. Jander v. Ret. Plans Comm. of IBM, 272 F. Supp. 3d 444, 446–47 (S.D.N.Y. 2017). Plaintiffs’ claims were dismissed by the district court on the basis that the complaint lacked context-specific allegations as to why a prudent fiduciary couldn’t have concluded that plaintiff’s hypothetical alternatives were more likely to do more harm than good, failing to satisfy the Dudenhoeffer pleading standard. Id. at 449–54.

The Second Circuit reversed, holding that plaintiffs had pled a plausible claim for violation of ERISA’s duty of prudence based on (1) the fiduciaries’ knowledge that the stock was inflated through accounting violations; (2) their power to disclose these accounting violations; and (3) their failure to promptly disclose the true value of the microelectronics division. Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620, 628–31 (2d Cir. 2018). Ultimately, the Second Circuit held that if the fiduciaries knew that disclosure of the insider information was inevitable, then delaying this disclosure would cause more harm than good to the ESOP. Id. at 630.

In a per curiam decision issued on January 14, 2020, the Supreme Court declined to rule on the merits in Jander, and vacated and remanded the case for the Second Circuit to address two unresolved issues raised by the parties: (1) whether ERISA ever imposes a duty on a fiduciary for an ESOP to act on inside information, and (2) whether ERISA requires disclosures that are not otherwise required by the securities laws. 140 S. Ct. at 594–95. Justice Kagan (joined by Justice Ginsburg) and Justice Gorsuch issued concurring opinions, articulating differing views on how these questions should be resolved on remand. See id. at 595–96 (Kagan, J. concurring); id. at 596–97 (Gorsuch, J. concurring). On remand, the Second Circuit reinstated its original opinion, again reversing the district court’s decision. Jander v. Ret. Plans Comm. of IBM, 962 F.3d 85, 86 (2d Cir. 2020) (per curiam).

While not purporting to break new ground, the Court nevertheless noted two things. First, the Court explained that the Dudenhoeffer “more harm than good” standard is the correct standard to apply to ESOP fiduciaries. See 140 S. Ct. at 594. Second, the Court made clear that ERISA’s fiduciary duty of prudence does not require fiduciaries to act in a way that violates securities laws. See id. However, the opinion leaves unresolved whether there may be circumstances in which ESOP fiduciaries are required to act on the basis of inside information to benefit an ESOP, and whether the Dudenhoeffer standard requires ESOP fiduciaries to disclose information that is not required by federal securities laws. See id. at 594–95.

In recent cases following Jander, at least one district court has concluded that the Second Circuit’s decision should be classified as an outlier because “the overwhelming majority of circuit courts to consider an imprudence claim based on inside information post-Dudenhoeffer [have] rejected the argument that public disclosure of negative information is a plausible alternative.” Burke v. Boeing Co., No. 19-cv-2203, 2020 WL 6681338, at *5 (N.D. Ill. Nov. 12, 2020). Given this circuit split, plaintiffs may be more likely to target the Second Circuit for stock-drop and similar suits. However, in a recent decision from the Second Circuit, the court affirmed dismissal of an imprudence claim brought by a plaintiff who argued that two alternative actions—earlier disclosure and closure of the fund to additional investment—were “on par with those found sufficient in Jander.” Varga v. Gen Elec. Co., No. 20-1144, --- F. App’x ----, 2021 WL 391602, at *2 (Feb. 4, 2021). The court found plaintiff’s allegations insufficient, conclusory, and not consistent with those in Jander, concluding that she had “failed to adequately plead alternative actions that the fiduciaries could have taken.” Id. at *2–3. Thus, while Jander remains good law in the Second Circuit, the Varga decision suggests that courts will still look closely at plaintiffs’ allegations of plausible alternative actions in the context of motions to dismiss.

II.   Class Actions Continued To Be a Significant Focus of ERISA Litigation in 2020

The year 2020 was again a busy period in ERISA class-action litigation, particularly fiduciary-breach litigation. While large plans continue to be the primary targets of these lawsuits, plaintiffs are also targeting smaller plans—and some cases attempting to aggregate these claims by suing administrators or service providers to multiple plans. We discuss below two important circuit splits in the field of ERISA fiduciary-breach class actions, and also an emerging area of litigation concerning the required contents of COBRA notices.

A.   Hot Topics in ERISA Fiduciary Breach Litigation

We continued to see significant activity in ERISA fiduciary-breach litigation in 2020, including on issues concerning (1) whether plaintiffs can state a fiduciary-breach claim based on offering a particular mix of investment options in a plan, and (2) whether single-stock funds are per-se imprudent under ERISA. We also may see changes regarding the rules governing whether investing in environmental, social, and corporate governance (“ESG”) funds could constitute a fiduciary breach under ERISA.

As to the first issue, the Seventh, Third, and Eighth Circuits have all recently addressed whether plaintiffs can state a fiduciary-breach claim by alleging that a plan offered certain underperforming investment options, as well as other unobjectionable options. In Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020), the Seventh Circuit held that plaintiffs failed to allege a fiduciary breach by claiming that defendants provided investment options that were “too numerous, too expensive, or underperforming,” when the defendant also offered low-cost index funds, among other options that the plaintiffs found unobjectionable. Id. at 991–92. A few months after the Seventh Circuit’s decision in Divane, the Eighth Circuit appeared to adopt a more plaintiff-friendly interpretation by holding that plaintiffs could state a claim by alleging that “fees were too high” and that the defendants “should have negotiated a better deal.” Davis v. Wash. Univ. of St. Louis, 960 F.3d 478, 483 (8th Cir. 2020); see also Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 330 (3d Cir. 2019) (stating that “a meaningful mix and range of investment options” does not necessarily “insulate[] plan fiduciaries from liability for breach of fiduciary duty”). These holdings may suggest to plaintiffs that the Third and Eighth Circuits will be more receptive to these types of claims, prompting an increase in fee-suit litigation in those jurisdictions.

Additionally, a circuit split may have recently developed concerning whether single-stock funds are per se imprudent plan offerings under ERISA. In May 2020, the Fifth Circuit affirmed the dismissal of a putative fiduciary breach class action in Schweitzer v. Investment Committee of Phillips 66 Savings Plan, 960 F.3d 190 (5th Cir. 2020). The court held that defendants satisfied their fiduciary duties to diversify and to act prudently because they provided plan participants with an array of investment options that “enable[d] participants to create diversified portfolios.” Id. at 196–98. Accordingly, the Fifth Circuit in Schweitzer rejected plaintiffs’ claim that “a single-stock fund is imprudent per se.” Id. at 197–98. But only a few months later, the Fourth Circuit held the opposite, concluding that defendants breached their fiduciary duty when offering a single-stock fund. Stegemann v. Gannett Co., 970 F.3d 465, 468 (4th Cir. 2020). The Fourth Circuit rejected the argument that “diversification must be judged at the plan level rather than the fund level,” holding that “each available fund on a menu must be prudently diversified.” Id. at 476–77 (emphasis added). In dissent, Judge Niemeyer argued that “the majority merge[d] the duties of diversification and prudence,” and, in effect, made it impossible for an employer to “ever prudently offer a single-stock, non-employer fund.” Id. at 484, 488. No other court has yet adopted the Fourth Circuit’s standard. Defendants in Stegemann filed a petition for a writ of certiorari, and on January 4, 2021, the Supreme Court called for a response from plaintiffs, indicating that the Justices may be interested in hearing the case.

Last, in the final year of the Trump administration, the Department of Labor (“DOL”) proposed and adopted a new rule that ERISA fiduciaries must make investment decisions “based solely on pecuniary factors”; and an investment intended “to promote non-pecuniary objectives” at the expense of sacrificing returns or taking on additional risk would constitute a breach of the fiduciary’s duty. Financial Factors in Selecting Plan Investments, 85 Fed. Reg. 72,846, 72,851, 72,848 (Nov. 13, 2020). Though the final version of the rule does not explicitly reference ESG funds, the DOL’s press release announcing the rule expressly stated that the rule’s purpose was to provide further guidance “in light of recent trends involving [ESG] investing.” U.S. Dep’t of Labor, U.S. Department of Labor Announces Final Rule to Protect Americans’ Retirement Investments (Oct. 30, 2020), https://www.dol.gov/newsroom/releases/ebsa/ebsa20201030. The new rule took effect on January 12, 2021, 85 Fed. Reg. at 72,885, and there have not yet been any cases addressing when and whether investment in an ESG fund could constitute a fiduciary breach. Notably, the new rule appears to conflict with many of the Biden administration’s stated environmental goals, and the DOL rule may be a target for reversal by the new administration.[1]

B.   Growing Challenges Related to COBRA Notice

The year 2020 also saw a rise in COBRA notice litigation. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows employees and their dependents the opportunity to continue to participate in their employer’s group health plan when coverage would otherwise be lost due to a termination of employment or other “qualifying event[s].” 29 U.S.C. § 1163. And plan administrators are required to provide notice to employees informing them of their right to elect COBRA coverage. 29 C.F.R. § 2590.606-4. COBRA mandates that the notice include specific information and be “written in a manner calculated to be understood by the average plan participant.” Id. § 2590.606-4(b)(4). Plaintiffs have filed numerous class actions against employers alleging technical violations in the language of the notices, seeking statutory penalties up to $110 per day for each participant that received inadequate notice.

Many COBRA notice lawsuits have been filed in Florida, with others filed in venues that include New York and South Carolina. The number of such lawsuits has recently been spurred by COVID-19 layoffs. Plaintiffs’ allegations are substantially similar across cases, and generally allege that COBRA notices were deficient for one or more of the following reasons:

  1. Notice failed to identify the name, address, and telephone number of the plan administrator;
  2. Notice failed to identify the qualifying event;
  3. Notice failed to explain how to enroll in COBRA coverage;
  4. Notice failed to provide all the required explanatory language regarding the coverage;
  5. Notice was not written in a manner calculated to be understood by the average plan participant; and/or
  6. Notice failed to comply with the model notice created by the Department of Labor (“DOL”).

The influx of COBRA notice litigation highlights the importance for employers of reviewing their COBRA notices to assess whether any changes may be necessary to ensure compliance with statutory guidelines and regulations. To assist employers, the DOL has issued model notices on its website that employers can review against their own notices to ensure they are in compliance. Employers who have outsourced COBRA administration should also periodically check in with their third-party administrators to confirm compliance with all guidelines and regulations and may want to consider clearly assigning responsibility for compliance with notice requirements in their vendor agreements.

III.   Key Decisions on Important ERISA Procedural Issues

The courts also issued important guidance this year to ERISA practitioners, plan sponsors, and plan administrators concerning ERISA procedural issues. In particular, the courts issued rulings concerning the standard of review for benefits claims, and provided further guidance on the ability to compel arbitration of claims brought by participants on behalf of a plan. Both of these topics are discussed below.

A.   The Evolving Abuse of Discretion Standard of Review

In 2020, courts continued to wrestle with the degree of deference owed to benefit determinations made by plan administrators. The well-established rule is that a court reviews the plan administrator’s decision de novo unless the terms of the benefit plan give the administrator discretion to interpret the plan and award benefits. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). Where the plan terms grant this discretion to the administrator, courts review the administrator’s determinations under a deferential “abuse of discretion” standard (or arbitrary and capricious review, as some circuits call it). Id. Because it is common for benefit plans to give the administrator this discretion, the deferential standard often applies, and the Supreme Court has repeatedly parried attempts by plaintiffs to strip administrators of this deference. See Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 115 (2008) (abuse of discretion standard applies even when administrator has conflict of interest); Conkright v. Frommert, 559 U.S. 506, 522 (2010) (abuse of discretion standard applies even when court of appeals found previous related interpretation by administrator to be invalid).

Last year, plaintiffs persisted in their efforts to curtail the deferential abuse of discretion standard, and they found success in some instances. For example, in Lyn M. v. Premera Blue Cross, 966 F.3d 1061 (10th Cir. 2020), even though the plan gave the administrator discretion, the court nonetheless held that a de novo standard applied because plan members “lacked notice” of the discretion. Id. at 1065. The administrator failed to disclose the document granting discretion, and the plan summary it did disclose “said nothing about the existence” of that document. Id. at 1067. To preserve plan discretion under Lyn M., plan documents—including the summary plan description that plans are required to provide to their members—should disclose either the grant of discretion to the administrator or the precise document conferring that discretion.

Additionally, even when an abuse of discretion standard is found to apply, courts have developed ways to limit the degree of deference given to plan administrators. The Ninth Circuit, for example, continues to apply varying degrees of “skepticism” to the administrators’ determinations—as part of abuse of discretion review—when certain factors such as a conflict of interest are present. The precise degree of skepticism applied may provide a focal point for appellate review. In Gary v. Unum Life Insurance Co. of America, 831 F. App’x 812 (9th Cir. 2020), the circuit held that the district court “applied the incorrect level of skepticism to its abuse-of-discretion review.” Id. at 814. The district court had applied a “moderate degree” of skepticism because it found that the plan administrator had a structural conflict of interest (based on the district court’s belief that the administrator was responsible both for assessing and paying out claims) and had failed to afford the plaintiff a “full and fair review.” Id. at 813. But the Ninth Circuit held that, viewing the evidence in the light most favorable to the plaintiff, the circumstances in the case called for an even “higher degree of skepticism.” Id. This heightened skepticism was warranted, in the court’s view, because it found that the administrator’s consultants had “cherry-picked certain observations from medical records numerous times,” the administrator had not conducted an in-person examination of the plaintiff, and the administrator had reversed in part its initial decision denying benefits in full. Id. at 814. This decision suggests that, at least in the Ninth Circuit, courts may limit the degree of deference afforded to administrators—even under an abuse of discretion review—in particular circumstances.

However, not all circuits have been so receptive to plaintiffs’ efforts. The Eighth Circuit recently clarified its case law in this area, holding that, despite what an older circuit decision may have suggested and whatever other circuits may hold, a plan administrator’s delay in deciding an appeal of a benefits denial does not warrant de novo review. McIntyre v. Reliance Standard Life Ins. Co., 972 F.3d 955, 960, 964–65 (8th Cir. 2020). As with a conflict of interest, such delay is just a factor to be considered when applying abuse of discretion review. Id. at 965. The First Circuit also recently reaffirmed “the importance of giving deference” to plan administrators. Arruda v. Zurich Am. Ins. Co., 951 F.3d 12, 24 (1st Cir. 2020). The plaintiff in Arruda argued that courts can find an administrator’s decision arbitrary even when the administrator “relied on several independent experts” and a record consistent with its benefits determination. Id. at 21–22, 24. The First Circuit disagreed, finding this proposal to be “in considerable tension with” the abuse of discretion standard. Id. at 24.

Last year also saw circuit courts rebuff creative attempts by plaintiffs to avoid abuse of discretion review. For instance, in Ellis v. Liberty Life Assurance Co. of Boston, 958 F.3d 1271 (10th Cir. 2020), petition for cert. filed, (U.S. Jan. 8, 2021) (No. 20-953), all parties agreed that the plan conferred discretion on the administrator, and the plan provided that it was governed by the law of Pennsylvania, but the plaintiff sought de novo review on the ground that a Colorado statute prohibited grants of discretion in insurance policies. Id. at 1275. The court rejected the plaintiff’s argument that Colorado law should apply, holding that the law of the state selected by a plan’s choice-of-law provision normally applies, “to effectuate ERISA’s goals of uniformity and ease of administration.” Id. at 1280. Notably, the court observed that this choice-of-law question “could be avoided if ERISA preempts the Colorado statute,” but it declined to resolve this preemption issue, leaving it open for future litigation. Id. at 1279.

Finally, in Davis v. Hartford Life & Accident Insurance Co., 980 F.3d 541 (6th Cir. 2020), once again all parties agreed that the plan conferred discretion to the administrator, but the plaintiff contended that the administrator exercised no discretionary authority because a different company in the same corporate family had actually made the decision to terminate benefits. See id. at 545–46. But the Sixth Circuit found this argument “d[id] not add up as a factual matter.” Id. at 546. Even though the plan’s decisionmakers received their salaries from the other company, they were still adjudicating claims under the administrator’s policies, not the other company’s policies. Id. This precedent presents a potential obstacle for future plaintiffs who try to use the structure of a plan administrator’s corporate family as a backdoor means of securing de novo review.

B.   A Possible Split on Arbitrability of ERISA § 502(a)(2) Claims

Arbitrability of ERISA section 502(a)(2) fiduciary-breach claims brought on behalf of a plan continued to be a hot topic in 2020 as courts applied key appellate decisions in this space from 2018 and 2019. In 2018, the Ninth Circuit held that section 502(a)(2) claims belong to the Plan, not the individual employee(s), and thus individual arbitration agreements that bound plan participants to arbitrate could not be used to compel the arbitration of claims brought on behalf of the plan. Munro v. Univ. of S. Cal., 896 F.3d 1088, 1092 (9th Cir. 2018). One year later, the court accordingly held that § 502(a)(2) claims are, in fact, arbitrable when the Plan has agreed to arbitration. Dorman v. Charles Schwab Corp., 780 F. App’x 510, 513–14 (9th Cir. 2019). According to the Ninth Circuit, “[t]he relevant question is whether the Plan agreed to arbitrate the § 502(a)(2) claims,” and when a “Plan [does] consent in the Plan document to arbitrate all ERISA claims,” a mandatory arbitration agreement is enforceable. Id. (emphasis added). Hence, in the Ninth Circuit, even when an individual employee has “agreed to arbitrate their claims in their employment contracts,” a § 502(a)(2) claim belongs to the plan and “that claim is not subject to arbitration unless the plan itself has consented.” Ramos v. Natures Image, Inc., 2020 WL 2404902, at *6–7 (C.D. Cal. Feb. 19, 2020) (emphasis added). Meanwhile, as noted in one of our recent class action updates, the Supreme Court has continued to enforce arbitration provisions in various contexts, and these decisions can be brought to bear in ERISA cases as well.

A circuit split may now be emerging on this issue. In Smith v. Greatbanc Trust Co., the U.S. District Court for the Northern District of Illinois rejected the Ninth Circuit’s holding in Dorman, even though in Smith (like Dorman) the plan documents indicated that the plan agreed to arbitrate. 2020 WL 4926560, at *3–4 (N.D. Ill. Aug. 21, 2020), appeal docketed, No. 20-2708 (7th Cir. Sept. 9, 2020). The court in Smith concluded that failure to notify a former employee (who remained a participant in the plan) of changes to the plan that compelled arbitration was inconsistent with ERISA’s notice requirements, and that, to the extent the arbitration agreement served as a “waiver of a party’s right to pursue statutory remedies,” the agreement was unenforceable. Id. (quoting Am. Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235–36 (2013)). The case is now pending appeal.

These decisions provide important guidance for employers considering amending their plans (or other plan-related documents, such as administrative services contracts) to include arbitration provisions. Under the Ninth Circuit’s Dorman decision, arbitration provisions in the plan documents can be used to bind the plan and to compel arbitration of claims brought on behalf of the plan. The Smith decision, however, underscores the importance of providing plan participants notice of any changes to plans, such as the addition of arbitration provisions, that would potentially impact participants’ rights to pursue statutory remedies.

IV.   ERISA Health Plan Litigation

Finally, litigation concerning health plans remains a substantial part of the ERISA litigation landscape. In 2020, the federal courts of appeals addressed a significant number of disputes over behavioral-health coverage and issued a wide range of decisions addressing plan participants’ ability to assign their rights to providers.

A.   Behavioral Health and Residential Treatment

ERISA disputes over behavioral-health coverage and residential treatment remained a significant source of litigation and appeals in 2020. Appellate decisions in this area mainly involved individual claims by patients challenging coverage determinations. Last year the courts of appeals decided at least 9 cases involving the denial of coverage for behavioral-health treatment, each of which involved individual claims by patients.

In disputes over individual coverage, the appellate courts in 2020 tended to afford significant deference to plan administrators’ determinations that behavioral-health treatment—and in particular residential treatment—was not medically necessary or did not qualify as emergency care. For example:

  • In Doe v. Harvard Pilgrim Health Care, Inc., the First Circuit affirmed a district judge’s application of de novo review when she found that a patient’s residential treatment for psychological illness was medically unnecessary because medical experts had concluded that the patient did not require 24-hour supervision, her condition could be managed at a lower level of care, and medication had improved her condition before treatment. 974 F.3d 69, 72–74 (1st Cir. 2020).
  • In Tracy O. v. Anthem Blue Cross Life & Health Insurance, the Tenth Circuit concluded that Anthem did not act arbitrarily and capriciously in denying coverage for a residential stay at a psychiatric facility because Anthem reasonably relied on four doctors’ conclusions that the patient’s condition had not significantly deteriorated and that her behavior could be managed in an outpatient setting. 807 F. App’x 845, 853–55 (10th Cir. 2020).
  • In Brian H. v. Blue Shield of California, the Ninth Circuit affirmed a district judge’s determination that Blue Shield had not abused its discretion because it reasonably relied on expert opinions that a patient’s stay at a residential-treatment facility was not medically necessary because he would not have posed a danger to himself or others if treated in a less intensive setting. 830 F. App’x 536, 537 (9th Cir. 2020).
  • In Meyers v. Kaiser Foundation Health Plan, Inc., the Ninth Circuit affirmed a district judge’s conclusion that Kaiser (regardless of whether de novo or abuse-of-discretion review applied) properly denied coverage for a patient’s out-of-network residential treatment because it did not meet the plan’s requirements for out-of-network coverage: It did not qualify as emergency services and, even if the treatment was unavailable in-network, the patient did not obtain Kaiser’s permission prior to treatment. 807 F. App’x 651, 653–54 (9th Cir. 2020).
  • In Todd R. v. Premera Blue Cross Blue Shield of Alaska, 825 F. App’x 440, 441–42 (9th Cir. 2020), the Ninth Circuit, vacating the district court’s de novo judgment for the plaintiffs, held that a plan administrator correctly determined that a medical policy’s criteria for residential treatment were not met but remanded for the district court to consider in the first instance the plaintiff’s argument that those criteria were improper.

In each of these decisions, the court of appeals accorded deference to individual denials of coverage by administrators. By contrast, in Katherine P. v. Humana Health Plan, Inc., 959 F.3d 206, 209 (5th Cir. 2020), the Fifth Circuit determined that the district judge improperly granted summary judgment to the plan administrator. The Fifth Circuit reaffirmed prior precedent holding that when review of a coverage determination is de novo, the ordinary summary-judgment standard applies and a material dispute of fact should be decided by a bench trial. Id. The panel thus vacated the district judge’s grant of summary judgment to a plan administrator and remanded for the district judge to decide a dispute of material fact about whether treatment at a level of care less intense than partial hospitalization had been unsuccessful in controlling the plaintiff’s eating, purging, and compulsive exercise. Id. at 209–10; see also Lyn, 966 F.3d at 1064 (remanding for district court to apply de novo review to residential treatment claim rather than abuse of discretion standard).

Given the broad judicial deference ordinarily accorded to plan administrators’ medical determinations, plaintiffs have sought other grounds for challenging denials of coverage for behavioral healthcare. One common strategy is to invoke the federal Mental Health Parity and Addiction Equity Act, and related state parity acts, which require that health plans provide equal coverage for mental illnesses and physical illnesses. In Stone v. UnitedHealthcare Insurance Co., for instance, the plaintiff alleged that the health plan and its administrator violated the federal and California mental health parity acts when they refused to cover her daughter’s out-of-state residential-care treatment, but the Ninth Circuit affirmed the judgment for the defendants. 979 F.3d 770, 774–77 (9th Cir. 2020). Because the plan imposed the same limitations on out-of-state mental- and physical-health treatments, the plaintiff had not shown that the defendant treated mental health less favorably than physical health. Id. at 777.

More novel theories have met skepticism in the courts of appeals. In I.M. v. Kaiser Foundation Health Plan, Inc., for example, the plaintiff alleged that Kaiser breached its fiduciary duty to him by excluding coverage for residential treatment for eating disorders from its plans and inhibiting physicians from referring him to a residential-treatment facility. 2020 WL 7624925, at *2 (9th Cir. Dec. 22, 2020). The Ninth Circuit disagreed, finding no evidence in the record that Kaiser had erected barriers to residential treatment. Id.

B.   Assignments and Anti-Assignment Clauses

The assignment of benefits remains a critical issue in ERISA health plan litigation. Under ERISA § 502(a), only “a participant or beneficiary” may sue an insurer to recover benefits owed to her or to enforce her rights under her plan. 29 U.S.C. § 1132(a)(1)(B). Ordinarily, this would mean that a patient herself would have to sue an insurer under § 502(a). However, courts have deemed it permissible for participants to “assign” their benefits to healthcare providers. See, e.g., Plastic Surgery Ctr. v. Aetna Life Ins. Co., 967 F.3d 218, 228 (3d Cir. 2020). Once a participant has validly assigned her benefits to a healthcare provider, that provider can stand in the shoes of the participant and bring suit against an insurer for non-payment under § 502(a). Id. The appellate courts in 2020 addressed a variety of issues related to the assignment of benefits

1.   Scope of the Rights Conveyed

Appellate courts continue to grapple with the scope of the rights conveyed by an assignment. Decisions in 2020 reflect at least two distinct approaches. In American Colleges of Emergency Physicians v. Blue Cross & Blue Shield of Georgia, the Eleventh Circuit took a blanket approach, holding categorically that “the assignment of the right to payment includes the right to seek equitable relief.” 833 F. App’x 235, 240 (11th Cir. 2020). The Sixth and Ninth Circuits, in contrast, held that the scope of an assignment of benefits depends on the specific language used; where an assignment’s language appears to encompass only causes of actions for benefits, then additional potential causes of action under ERISA are not included. See DaVita Inc v. Amy’s Kitchen, Inc., 981 F.3d 664, 678–79 (9th Cir. 2020) (holding that assignment of “any cause of action . . . for purposes of creating an assignment of benefits” did not include the right to seek equitable relief); DaVita, Inc. v. Marietta Mem’l Hosp. Emp. Health Benefit Plan, 978 F.3d 326, 344 (6th Cir. 2020) (concluding that identical language did not include the right to bring breach-of-fiduciary-duty claims under § 1104(a)(1)(B)); see also McKennan v. Meadowvale Dairy Emp. Benefit Plan, 973 F.3d 805, 808–09 (8th Cir. 2020) (holding that an assignment of “any and all causes of action” did not include the right to challenge the rescission of the assignor’s coverage, at least where deceased assignor failed to comply with plan provisions as to third-party representatives). These decisions can be a mixed bag for plans, insurers, and administrators. The Eleventh Circuit’s approach allows providers to bundle benefits claims with equitable claims, while protecting insurers against having to litigate separate claims by patients and providers as to the same underlying treatment. The opposite is true for the Sixth and Ninth Circuit decisions: Where the assignment excludes equitable relief, providers have fewer arrows in their quiver to use against insurers, but insurers could face multiple lawsuits for the same treatment.

2.   Waivability of Assignment Issues

Courts sometimes treat the existence and scope of an assignment as a jurisdictional question—going to the existence of Article III standing—that therefore cannot be waived. Cell Sci. Sys. Corp. v. La. Health Serv., 804 F. App’x 260, 264 (5th Cir. 2020) (stating that the existence “of valid and enforceable assignments of benefits” is necessary for Article III standing). In the Sixth Circuit’s DaVita decision, however, the court held that a defendant had waived the argument that one of the plaintiff’s claims fell outside of the scope of the assignment. 978 F.3d at 345. The panel explained that “[t]he question of whether [a patient] has transferred their interest to [a provider] . . . deals not with Article III standing” but with Federal Rule of Civil Procedure 17’s requirement that an action “‘must be prosecuted in the name of the real party in interest.’” Id. The court thus found Article III standing without deciding the dispute about the scope of the assignment. Id. at 341 n.8.

3.   Anti-Assignment Clauses

In recent years, ERISA health plans have increasingly elected to include “anti-assignment” clauses. See Plastic Surgery Ctr., 967 F.3d at 228. These clauses bar patients from assigning their benefits to providers, or place certain limits on the scope of what claims can be assigned (or in what circumstances), putting providers back in the position of having to bill patients directly. Id. Should the patient prove unable or unwilling to pay, providers must then either rely on the patient to bring an ERISA suit or sue the patient directly. Id.

Many circuits have addressed these clauses, and they have unanimously determined that the clauses are, in general, permissible and enforceable. See Am. Orthopedic & Sports Med. v. Indep. Blue Cross Blue Shield, 890 F.3d 445, 453 (3d Cir. 2018). Still, appellate decisions in 2020 reflect multiple strategies through which providers have attempted to avoid the effect of anti-assignment clauses, with varying degrees of success:

  • In Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross & Blue Shield of Illinois, the Ninth Circuit held that an insurer had waived its right to invoke an anti-assignment clause by failing to raise it during the administrative claim process. 983 F.3d 435, 440–42 (9th Cir. 2020). The court also held that the plaintiff had pleaded sufficient facts to adequately allege that insurer was “equitably estopped from raising” the anti-assignment clause because the insurer had promised the provider that it was eligible to receive payment under plan. Id. at 442–43.
  • In Cell Science, by contrast, the Fifth Circuit rejected an argument that an insurer was estopped from invoking anti-assignment clause. 804 F. App’x at 264–66. The court emphasized that there was “no indication from the record that [the insurer] either misrepresented or misled [the provider] with respect to its intention to enforce the anti-assignment clause in its plan.” Id. at 265.
  • In King v. Community Insurance Co., the Ninth Circuit held that an assignment fell outside of the scope of the plan’s anti-assignment clause. 829 F. App’x 156, 159–60 (9th Cir. 2020). The plan expressly allowed payments to “providers” and forbade beneficiaries from assigning benefits to “anyone else.” Id. at 159. The Ninth Circuit rejected the insurer’s argument that the phrase “anyone else” meant anyone other than the beneficiary. Id. at 160. The court also held that the anti-assignment clause was unenforceable because it was not properly included in any plan document. Id. at 160–62.

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[1] Congress may also attempt to take action against the rule. The Congressional Review Act provides a procedure for Congress to pass a Joint Resolution of Disapproval within 60 legislative working days that, if signed by the President, deems recent administrative rulemaking to not have had any effect. The DOL’s new rule is still within that 60-day timeframe.


The following Gibson Dunn lawyers assisted in the preparation of this alert: Karl Nelson, Geoffrey Sigler, Katherine Smith, Heather Richardson, Lucas Townsend, Jennafer Tryck, Matthew Rozen, Jennifer Roges, Luke Zaro, Daniel Weiss, Jialin Yang, Christopher Wang, Robert Batista, Zachary Copeland, and Brian McCarty.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Geoffrey Sigler – Washington, D.C. (+1 202-887-3752, gsigler@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Heather L. Richardson – Los Angeles (+1 213-229-7409,hrichardson@gibsondunn.com) Lucas C. Townsend – Washington, D.C. (+1 202-887-3731, ltownsend@gibsondunn.com) Jennafer M. Tryck – Orange County (+1 949-451-4089, jtryck@gibsondunn.com) Matthew S. Rozen – Washington, D.C. (+1 202-887-3596, mrozen@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 3, 2020 |
Proxy Advisory Firm Updates and Action Items for 2021 Annual Meetings

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The two most influential proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”)—recently released their updated proxy voting guidelines for 2021. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other developments. An executive summary of the ISS 2021 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here. The 2021 Glass Lewis Guidelines are available here and the 2021 Glass Lewis Guidelines on Environmental, Social & Governance Initiatives are available here.

ISS 2021 Voting Policy Updates On November 12, 2020, ISS released updates to its proxy voting guidelines for shareholder meetings held on or after February 1, 2021. This summary reviews the major policy updates that apply to U.S. companies, which are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies. ISS plans to issue a complete set of updated policies on its website in December 2020. ISS also indicated that it plans to issue updated Frequently Asked Questions (“FAQs”) on certain of its policies in December 2020, and it issued a set of preliminary FAQs on the U.S. Compensation Policies and the COVID-19 Pandemic in October 2020, which are available here. In January 2021, ISS will evaluate new U.S. shareholder proposals that are anticipated for 2021 and update its voting guidelines as necessary.
  1. Director Elections
Board Racial/Ethnic Diversity While ISS has not previously had a voting policy regarding board racial or ethnic diversity, ISS noted that many investors have shown interest in seeing this type of diversity on public company boards, especially in light of recent activism seeking racial justice. In its annual policy survey administered in the summer of 2020, ISS reported that almost 60% of investors indicated that boards should aim to reflect a company’s customer base and the broader societies in which companies operate by including directors drawn from racial and ethnic minority groups, and 57% of investors responded that they would also consider voting against members of the nominating committee (or other directors) where board racial and ethnic diversity is lacking. Under ISS’s updated policy, at companies in the Russell 3000 or S&P 1500 indices:
  • For the 2021 proxy season, the absence of racial/ethnic diversity on a company’s board will not be a factor in ISS’s voting recommendations, but will be highlighted by ISS in its research reports to “help investors identify companies with which they may wish to engage and foster dialogue between investors and companies on this topic.” ISS will only consider aggregate diversity statistics “if specific to racial and/or ethnic diversity.”
  • For the 2022 proxy season, ISS will generally recommend votes “against” the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members. Mitigating factors include the presence of racial and/or ethnic diversity on the board at the preceding annual meeting and a firm commitment to appoint at least one racially and/or ethnically diverse member within a year.
ISS highlighted several factors in support of its new policy, including obstacles to increasing racial and ethnic diversity on boards (citing studies conducted by Korn Ferry and the “Black Corporate Directors Time Capsule Project”), new California legislation, AB 979, to promote the inclusion of “underrepresented communities” on boards, recent comments by SEC Commissioner Allison Lee in support of strengthened additional guidance on board candidate diversity characteristics, diversity-related disclosure requirements and SEC guidance, and investor initiatives focused on racial/ethnic diversity on corporate boards. Board Gender Diversity ISS announced a policy related to board gender diversity in 2019, and provided a transitional year (2020) for companies that previously had no female directors to make a commitment to add at least one female director by the following year. In its recent policy updates, ISS removed the transition-related language, as the transition period will end soon. After February 1, 2021, ISS will recommend votes “against” the chair of the nominating committee (or other directors on a case-by-case basis) at any company that has no women on its board except in situations where there was at least one woman on the board at the previous annual meeting, and the board commits to “return to a gender-diverse status” by the next annual meeting. Material Environmental & Social Risk Oversight Failures Under extraordinary circumstances, ISS recommends votes “against” directors individually, committee members, or the entire board, in the event of, among other things, material failures of risk oversight. Current ISS policy cites bribery, large or serial fines or sanctions from regulatory bodies, significant adverse legal judgments or settlements, or hedging of company stock as examples of risk oversight failures. The policy updates add “demonstrably poor risk oversight of environmental and social issues, including climate change” as an example of a board’s material failure to oversee risk. ISS previously noted in its proposed policy updates that this policy is intended for directors of companies in “highly impactful sector[s]” that are “not taking steps to reduce environmental and social risks that are likely to have a large negative impact on future company operations” and is “expected to impact a small number of directors each year.” “Deadhand” or “Slowhand” Poison Pills ISS generally recommends votes case-by-case on director nominees who adopted a short-term poison pill with a term of one year or less, depending on the disclosed rationale for the adoption and other relevant factors. Noting that the unilateral adoption of a poison pill with a “deadhand” or “slowhand” feature is a “material governance failure,” ISS will now also generally recommend votes “against” directors at the next annual meeting if a board unilaterally adopts a poison pill with this feature, whether the pill is short-term or long-term and even if the pill itself has expired by the time of that meeting. ISS explains that a deadhand pill provision is “generally phrased as a ‘continuing director (or trustee)’ or ‘disinterested director’ clause and restricts the board’s ability to redeem or terminate the pill” and “can only be redeemed if the board consists of a majority of continuing directors, so even if the board is replaced by shareholders in a proxy fight, the pill cannot be redeemed,” and therefore, “the defunct board prevents [the redemption]” of the pill. Continuing directors are defined as “directors not associated with the acquiring person, and who were directors on the board prior to the adoption of the pill or were nominated by a majority of such directors.” A slowhand pill is “where this redemption restriction applies only for a period of time (generally 180 days).” Classification of Directors as Independent While there are several changes to ISS’s policy, the primary change is to limit the “Executive Director” classification to officers only, excluding other employees. According to ISS, this change will not result in any vote recommendation changes under its proxy voting policy, but may provide additional clarity for institutional holders whose overboarding policies apply to executive officers.
  1. Other Board-Related Proposals
Board Refreshment Previously, ISS generally recommended votes “against” proposals to impose director tenure and age limits. Under the updated policy, ISS will now take a case-by-case approach for tenure limit proposals while continuing to recommend votes “against” age-limit proposals. With respect to management proposals for tenure limits, ISS will consider the rationale and other factors such as the robustness of the company’s board evaluation process, whether the limit is of sufficient length to allow for a broad range of director tenures, whether the limit would disadvantage independent directors compared to non-independent directors, and whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner. With respect to shareholder proposals for tenure limits, ISS will consider the scope of the proposal and whether there is evidence of “problematic issues” at the company combined with, or exacerbated by, a lack of board refreshment. ISS noted that the board refreshment is “best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed,” but it cited the growing attention on board refreshment as a mechanism to achieve board diversity as an impetus for this policy change.
  1. Shareholder Rights and Defenses
Exclusive Forum Provisions Exclusive forum provisions in company governing documents historically have required shareholders to go to specified state courts if they want to make fiduciary duty or other intra-corporate claims against the company and its directors. In March 2020, a unanimous Delaware Supreme Court confirmed the validity of so-called “federal forum selection provisions”—provisions that Delaware corporations adopt in their governing documents requiring actions arising under the Securities Act of 1933 (related to securities offerings) to be filed exclusively in federal court. Noting that the benefits of eliminating duplicative litigation and having cases heard by courts that are “well-versed in the applicable law” outweigh the potential inconvenience to plaintiffs, ISS updated its policy to recommend votes “for” provisions in the charter or bylaws (and announced it would not criticize directors who unilaterally adopt similar provisions) that specify “the district courts of the United States” (instead of particular federal district court) as the exclusive forum for federal securities law claims. ISS will oppose federal exclusive forum provisions that designate a particular federal district court. ISS also updated its policy on state exclusive forum provisions. At Delaware companies, ISS will generally support provisions in the charter or bylaws (and will not criticize directors who unilaterally adopt similar provisions) that select Delaware or the Delaware Court of Chancery. For companies incorporated in other states, if the provision designates the state of incorporation, ISS will take a case-by-case approach, considering a series of factors, including disclosure about harm from duplicative shareholder litigation. Advance Notice Requirements ISS recommends votes case-by-case on advance notice proposals, supporting those that allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible. Previously, to be “reasonable,” the company’s deadline for shareholder notice of a proposal/nomination had to be not more than 60 days prior to the meeting, with a submittal window of at least 30 days prior to the deadline. In its updated policy, ISS now considers a “reasonable” deadline to be no more than 120 days prior to the anniversary of the previous year’s meeting with a submittal window no shorter than 30 days from the beginning of the notice period (also known as a 90-120 day window). ISS notes that this is in line with recent market practice. This policy applies only in limited situations where a company submits an advance notice provision for shareholder approval. Virtual Shareholder Meetings In light of the ongoing COVID-19 pandemic and other rule changes regarding shareholder meeting formats, ISS has added a new policy under which it will generally recommend votes “for” management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting. ISS will recommend votes case-by-case on shareholder proposals concerning virtual-only meetings, considering the scope and rationale of the proposal and concerns identified with the company’s prior meeting practices.
  1. Social and Environmental Issues
Mandatory Arbitration of Employment Claims The new policy on mandatory arbitration provides that ISS will recommend votes case-by-case on proposals requesting a report on the use of mandatory arbitration on employment-related claims, taking into account the following factors:
  • The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace claims;
  • Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and
  • The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers.
ISS added this policy because proposals on mandatory arbitration have received increased support from shareholders, and ISS clients have expressed interest in a specific policy on this topic. Sexual Harassment ISS’s new policy on sexual harassment provides that ISS will recommend votes case-by-case on proposals requesting a report on actions taken by a company to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment. ISS will take into account the following factors:
  • The company’s current policies, practices, and oversight mechanisms related to preventing workplace sexual harassment;
  • Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and
  • The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.
Similar to the new policy on mandatory arbitration discussed above, ISS cited increasing shareholder support for sexual harassment proposals and client demand as reasons for establishing this new policy. Gender, Race/Ethnicity Pay Gap ISS recommends votes case-by-case on proposals requesting reports on a company’s pay data by gender or race/ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps. In its updated policy, ISS adds to the list of factors to be considered in evaluating these proposals “disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers” and “local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.” ISS notes that this change is to “highlight that some legal jurisdictions do not allow companies to categorize employees by race and/or ethnicity and that definitions of ethnic and/or racial minorities differ from country to country, so a global racial and/or ethnicity statistic would not necessarily be meaningful or possible to provide.” Glass Lewis 2021 Proxy Voting Policy Updates On November 24, 2020, Glass Lewis released its updated proxy voting guidelines for 2021. This summary reviews the major updates to the U.S. guidelines, which provides a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on environmental, social and governance initiatives.
  1. Board of Directors
Board Diversity Glass Lewis expanded on its previous policy on board gender diversity, under which it generally recommends votes “against” the chair of the nominating committee of a board that has no female members. Under its expanded policy:
  • For the 2021 proxy season, Glass Lewis will note as a concern boards with fewer than two female directors.
  • For the 2022 proxy season, Glass Lewis will generally recommend votes “against” the nominating committee chair of a board with fewer than two female directors; however, for boards with six or fewer members, Glass Lewis’s previous policy requiring a minimum of one female director will remain in place. Glass Lewis indicated that, in making its voting recommendations, it will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.
In addition, Glass Lewis noted that several states have begun to address board diversity through legislation, including California’s legislation requiring female directors and directors from “underrepresented communities” on boards headquartered in the state. Under its updated policy, Glass Lewis will now recommend votes in accordance with board composition requirements set forth in applicable state laws when they come into effect. Disclosure of Director Diversity and Skills Beginning with the 2021 proxy season, Glass Lewis will begin tracking the quality of disclosure regarding a board’s mix of diverse attributes and skills of directors. Specifically, Glass Lewis will reflect how a company’s proxy statement presents: (i) the board’s current percentage of racial/ethnic diversity; (ii) whether the board’s definition of “diversity” explicitly includes gender and/or race/ethnicity; (iii) whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (also known as the “Rooney Rule”); and (iv) board skills disclosure. Glass Lewis reported that it will not be making voting recommendations solely on the basis of this assessment in 2021, but noted that the assessment will “help inform [its] assessment of a company’s overall governance and may be a contributing factor in [its] recommendations when additional board-related concerns have been identified.” Board Refreshment Previously, Glass Lewis articulated in its policy its strong support of mechanisms to promote board refreshment, acknowledging that a director’s experience can be a valuable asset to shareholders, while also noting that, in rare circumstances, a lack of refreshment can contribute to a lack of board responsiveness to poor company performance. In its updated policy, Glass Lewis reiterates its support of periodic board refreshment to foster the sharing of diverse perspectives and new ideas, and adds that, beginning in 2021, it will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new directors have joined the board in the past five years. Glass Lewis indicated that it will not be making voting recommendations strictly on this basis in 2021.
  1. Virtual-Only Shareholder Meetings
Glass Lewis has removed its temporary exception to its policy on virtual shareholder meeting disclosure that was in effect for meetings held between March 30, 2020 and June 30, 2020 due to the emergence of COVID-19. Glass Lewis’s standard policy will be in effect, under which Glass Lewis will generally hold the governance committee chair responsible at companies holding virtual-only meetings that do not include robust disclosure in the proxy statement addressing the ability of shareholders to participate, including disclosure regarding shareholders’ ability to ask questions at the meeting, procedures, if any, for posting questions received during the meeting and the company’s answers on its public website, as well as logistical details for meeting access and technical support.
  1. Executive Compensation
Short-Term Incentives Glass Lewis has codified additional factors it will consider in assessing a company’s short-term incentive plan, including clearly disclosed justifications to accompany any significant changes to a company’s short-term incentive plan structure, as well as any instances in which performance goals have been lowered from the previous year. Glass Lewis also expanded its description of the application of upward discretion, including lowering goals mid-year and increasing calculated payouts, to also include instances of retroactively prorated performance periods. Long-Term Incentives With respect to long-term incentive plans, under its updated policy Glass Lewis has defined inappropriate performance-based award allocation as a criterion that may, in the presence of other major concerns, contribute to a negative voting recommendation. Glass Lewis will also review as “a regression of best practices” any decision to significantly roll back performance-based award allocation, which may lead to a negative recommendation absent exceptional circumstances. Glass Lewis also clarified that clearly disclosed explanations are expected to accompany long-term incentive equity granting practices, as well as any significant structural program changes or any use of upward discretion.
  1. Environmental, Social & Governance Initiatives
Workforce Diversity Reporting Glass Lewis has updated its guidelines to provide that it will generally recommend votes “for” shareholder proposals requesting that companies provide EEO-1 reporting. It also noted that, because issues of human capital management and workforce diversity are material to companies in all industries, Glass Lewis will no longer consider a company’s industry or the nature of its operations when evaluating diversity reporting proposals. Management-Proposed E&S Resolutions Glass Lewis will take a case-by-case approach to management proposals that deal with environmental and social issues, and will consider a variety of factors, including: (i) the request of the management proposals and whether it would materially impact shareholders; (ii) whether there is a competing or corresponding shareholder proposal on the topic; (iii) the company’s general responsiveness to shareholders and to emerging environmental and social issues; (iv) whether the proposal is binding or advisory; and (v) management’s recommendation on how shareholders should vote on the proposal. Climate Change Glass Lewis will no longer consider a company’s industry when reviewing climate reporting proposals, noting that because of the extensive and wide-ranging impacts climate change can have, it is an issue that should be addressed and considered by companies regardless of industry. As a result, under its new policy, Glass Lewis will generally recommend votes “for” shareholder proposals requesting that companies provide enhanced disclosure on climate-related issues, such as requesting that the company undertake a scenario analysis or report that aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). Glass Lewis explained that that while it is generally supportive of these types of proposals, it will closely evaluate them in the context of a company’s unique circumstances and when making vote recommendations will continue to consider: (i) how the company’s operations could be impacted by climate-related issues; (ii) the company’s current policies and the level and evolution of its related disclosure; (iii) whether a company provides board-level oversight of climate-related risks; (iv) the disclosure and oversight afforded to climate change-related issues at peer companies; and (v) if companies in the company’s market and/or industry have provided any disclosure that is aligned with the TCFD recommendations. Glass Lewis’s updated policy also addresses its approach to proposals on climate-related lobbying. When reviewing proposals asking for disclosure on this issue, Glass Lewis will evaluate: (i) whether the requested disclosure would meaningfully benefit shareholders’ understanding of the company’s policies and positions on this issue; (ii) the industry in which the company operates; (iii) the company’s current level of disclosure regarding its direct and indirect lobbying on climate change-related issues; and (iv) any significant controversies related to the company’s management of climate change or its trade association memberships. Under its policy, while Glass Lewis will generally recommend that companies enhance their disclosure on these issues, it will generally recommend votes “against” any proposals that would require the company to suspend its memberships in or otherwise limit a company’s ability to participate fully in the trade associations of which it is a member. Environmental and Social Risk Oversight Glass Lewis has updated its guidelines with respect to board-level oversight of environmental and social issues. Under its existing policy, for large-cap companies and in instances where Glass Lewis identifies material oversight concerns, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. Under its updated policy:
  • For the 2021 proxy season, Glass Lewis will note as a concern when boards of companies in the S&P 500 do not provide clear disclosure (in either the company’s proxy statement or governing documents such as committee charters) on board-level oversight of environmental and social issues.
  • For the 2022 proxy season, Glass Lewis will generally recommend votes “against” the governance committee chair at S&P 500 companies without explicit disclosure concerning the board’s role in overseeing these issues.Glass Lewis clarified in its updated policy that, while it believes it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, it believes that companies should determine the best structure for this oversight (which it noted may be conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee).
  1. Other Changes
Glass Lewis’s 2021 voting policies also include the following updates:
  1. Special Purpose Acquisition Companies (“SPACs”): New to its policy this year is a section detailing Glass Lewis’s approach to common issues associated with SPACs. Under its new policy, Glass Lewis articulates a generally favorable view of proposals seeking to extend business combination deadlines. The new policy also details Glass Lewis’s approach to determining independence of board members at a post-combination entity who previously served as executives of the SPAC, whom Glass Lewis will generally consider to be independent, absent any evidence of an employment relationship or continuing material financial interest in the combined entity.
  2. Governance Following an IPO or Spin-Off. Glass Lewis clarified its approach to director recommendations on the basis of post-IPO corporate governance concerns. Glass Lewis generally targets the governance committee members for such concerns; however, if a portion of the governance committee members is not standing for election due to a classified board structure, Glass Lewis will expand its recommendations to additional director nominees, based on who is standing for election. Glass Lewis also clarified its approach to companies that adopt a multi-class share structure with disproportionate voting rights, or other anti-takeover mechanisms, preceding an IPO, noting it will generally recommend voting against all members of the board who served at the time of the IPO if the board: (i) did not also commit to submitting these provisions to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of these provisions.
  3. Board Responsiveness. Glass Lewis did not change its board responsiveness policy, but clarified its approach to assessing significant support for non-binding shareholder resolutions. Specifically, for management resolutions, Glass Lewis will note instances where a resolution received over 20% opposition at the prior year’s meeting and may opine on the board’s response to such opposition; however, in the case of majority-approved shareholder resolutions, Glass Lewis generally believes significant board action is warranted in response.
Recommended Actions for Public Companies
  • Submit your company’s peer group information to ISS for the next proxy statement: As part of ISS’s peer group construction process, on a semiannual basis in the U.S., companies may submit their self-selected peer groups for their next proxy disclosure. Although not determinative, companies’ self-selected peer groups are considered in ISS’s peer group construction, and therefore it is highly recommended that companies submit their self-selected peer groups. Certain companies with annual meetings to be held between February 1, 2021 and September 15, 2021 may submit their self-selected peer groups through the Governance Analytics page on the ISS website from November 16, 2020 to December 4, 2020. The peer group should include a complete peer list used for benchmarking CEO pay for the fiscal year ending prior to the next annual meeting. Companies that have made no changes to their previous proxy-disclosed executive compensation benchmarking peers, or companies that do not wish to provide this information in advance, do not need to participate. For companies that do not submit changes, the proxy-disclosed peers from the company’s last proxy filing will automatically be considered in ISS’s peer group construction process.
  • Evaluate your company’s practices in light of the updated ISS and Glass Lewis proxy voting guidelines: Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2021, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies. For example, companies should consider whether their exclusive forum provisions or poison pills in the charter or bylaws contain any specific feature that would lead to adverse voting recommendations for directors by ISS or Glass Lewis.
  • Assess racial/ethnic diversity on your board and consider enhancing related disclosures in the proxy statement: Companies should assess the composition of their board with respect to gender and racial/ethnic diversity, and consider whether any changes are needed to the board’s director recruitment policies and practices. Companies should also consider whether their diversity disclosures in the proxy statements or other public filings are adequate. To facilitate this assessment and support enhanced public disclosures, companies should consider asking their directors to self-identify their diverse traits in their upcoming director and officer questionnaires. As also noted by ISS, investors, too, are increasingly focused on racial/ethnic diversity. California recently passed the new board racial/ethnic diversity bill that expands upon the 2018 gender diversity bill, and the Illinois Treasurer launched a campaign representing a coalition of state treasurers and other investors in October 2020 asking Russell 3000 companies to disclose the race/ethnicity and gender of their directors in their 2021 proxy statements. In August 2020, State Street sent a letter to the board chairs of its U.S. portfolio companies, informing them that starting in 2021, State Street will ask companies to provide “specific communications” to shareholders regarding their diversity strategy and goals, measures of the diversity of the employee base and the board, goals for racial and ethnic representation at the board level and the board’s role in oversight of diversity and inclusion. In addition, earlier this week, Nasdaq filed a proposal with the SEC to adopt new listing rules related to board diversity and disclosure. The proposed rules would require most Nasdaq-listed companies to publicly disclose statistical information in a proposed uniform format on the company’s board of directors related to a director’s self-identified gender, race, and self-identification as LGBTQ+ and would also require such Nasdaq-listed companies “to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”
  • Consider enhancing board oversight and disclosures on environmental and social matters: Although ISS noted that its update related to material environmental and social risk oversight failures is expected to affect a small number of directors in certain high-risk sectors, it is notable that ISS explicitly adds environmental and social risk oversight as an area where it will hold directors accountable. Also, institutional investors continue to focus on these issues in their engagements with companies and voice their concerns at companies that lag behind on this front. For example, BlackRock recently reported that, during the 2020 proxy season, it took actions against 53 companies for their failure to make sufficient progress regarding climate risk disclosure or management, either by voting against director-related items (such as director elections and board discharge proposals) or supporting certain climate-related shareholder proposals. Regardless of sector or industry, companies should evaluate whether their board has a system that properly enables them to oversee how the company manages environmental and social risks and establishes policies aligned with recent developments.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com) Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com) Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com) Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com) Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com) Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, ctillinghast@gibsondunn.com) Executive Compensation and Employee Benefits Group: Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+ 214-698-3425, khanvey@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 30, 2020 |
New York State’s New Paid Sick Leave Law Takes Effect on September 30, 2020

Click for PDF

Earlier this year, New York State enacted a comprehensive new law, N.Y. Labor Law § 196-B, requiring employers to provide sick leave to all employees. The law takes effect on September 30, 2020, and employees will begin accruing leave as of that date, but employees may not use any paid sick leave until January 1, 2021. As summarized below, the law mandates that all employers provide a minimum amount of sick leave to employees, with different requirements depending on employer size and income.

Summary of the New York State Sick Leave Law

Amount of Leave. The New York State Sick Leave law requires that all employers must provide sick leave to employees, but the amount of leave varies based on employee headcount and employer income level. The leave requirements are as follows:

  • Employers with at least 100 employees in a calendar year must provide 56 hours of paid sick leave;
  • Employers with between five and 100 employees in a calendar year must provide 40 hours of paid sick leave;
  • Employers with fewer than five employees and a net income in excess of $1 million in the previous tax year must provide 40 hours of paid sick leave; and
  • Employers with fewer than five employees and a net income of less than $1 million in the previous tax year must provide 40 hours of unpaid sick leave.

Importantly, an employer that already has a sick leave policy or time off policy in place that provides employees with an amount of leave which meets or exceeds all requirements of the New York State Sick Leave law is not required to provide employees with any additional sick leave in order to comply with the law. So, for example, if an employer already provides 2 weeks of paid vacation (80 hours), the employer does not need to provide any additional sick leave. However, even when an employer’s existing time off policy provides for a sufficient amount of leave, employers must also be sure their policy satisfies the accrual, carryover, and use requirements of the new law.

Employers who enter into collective bargaining agreements on or after September 30, 2020 must provide benefits comparable to those provided under the law.

Rate of Accrual. The law provides that leave must accrue at a rate of at least one hour per every 30 hours worked, but an employer can choose to provide the entire amount of leave at the beginning of the year. If an employer chooses to frontload leave time, it cannot later reduce the amount of leave if the employee does not work sufficient hours to accrue the amount provided.

Use of Sick Leave. While employees will start to accrue leave as of September 30, 2020, when the law takes effect, employees may not use leave until January 1, 2021. Upon the oral or written request of an employee after January 1, 2021, an employer must permit an employee to use accrued sick leave for the following reasons:

  • mental or physical illness, injury, or health condition of the employee or the employee’s family member (regardless of receiving a diagnosis);
  • the diagnosis, care, or treatment of a mental or physical illness, injury or health condition of, or need for medical diagnosis of, or preventive care for, the employee or the employee’s family member; or
  • an absence when the employee or employee’s family member has been the victim of domestic violence, a family offense, sexual offense, stalking, or human trafficking, including absences to seek services from shelters, crisis centers, social services, attorneys, or law enforcement, or “to take any other actions necessary to ensure the health or safety of the employee or the employee’s family member or to protect those who associate or work with the employee.”

A covered family member includes an employee’s child (including biological, adopted, or foster child, a legal ward, or “a child of an employee standing in loco parentis”); spouse; domestic partner; parent (including biological, foster, step-, adoptive, legal guardian, or a “person who stood in loco parentis when the employee was a minor child”); sibling; grandchild or grandparent; and the child or parent of an employee’s spouse or domestic partner. An employer may not require the disclosure of confidential information relating to the employee’s reason for using sick leave.

An employer may choose to set a reasonable minimum increment for the use of sick leave. This minimum increment, however, may not exceed four hours. An employee who uses paid sick leave is entitled to receive compensation at his or her regular rate of pay, or the applicable minimum wage, whichever is greater.

Carry Over. The law also provides that an employee’s unused sick leave must carry over to the following calendar year, with some limitations on the use of leave. An employer with fewer than 100 employees may limit the use of sick leave to 40 hours per calendar year; an employer with 100 or more employees may limit the use of sick leave to 56 hours per calendar year. Employers are not required to pay employees for unused sick leave upon separation from employment, whether voluntary or involuntary.

Prohibition on Discrimination or Retaliation. Pursuant to Section 196-B(7), an employer must not discriminate or retaliate against any employee for exercising the right to request or use sick leave. Under Section 196-B(10), any employee who returns from sick leave must be restored to the position of employment held by such employee prior to any sick leave taken, with the same pay and other terms and conditions of employment.

Interaction with Other Laws

The New York State Sick Leave law is the first permanent sick leave law in New York State, but similar sick leave laws are already in place in certain municipalities and counties in New York, and employers must continue to comply with all applicable laws. For example, New York City’s Earned Safe and Sick Time Act requires employers with five or more employees to provide up to 40 hours of paid sick and safe time, and employers with fewer than five employees to provide up to 40 hours of unpaid safe and sick time. Similarly, Westchester County’s Earned Sick Leave Law requires employers with five or more employees to provide up to 40 hours of paid sick time and employers with fewer than five employees to provide up to 40 hours of unpaid sick time, and the Safe Time Law requires up to 40 additional hours for safe leave. Both local laws only apply if the employee has worked more than 80 hours in a calendar year, and offer expanded reasons for use. Additionally, the New York State Sick Leave law is separate and distinct from the New York State Quarantine Leave law, which went into effect March 18, 2020 and provides sick leave, family leave, and disability benefits for individuals who are subject to a mandatory or precautionary order of quarantine or isolation due to COVID-19.

Takeaways for Employers

  • Employers with employees in New York State should review their employment handbooks and leave policies to ensure compliance with the new law. Critically, large employers (more than 100 employees) who are currently subject to the existing New York City or Westchester County sick leave laws will need to increase the amount of sick leave from 40 hours to 56 hours.
  • Employers should prepare to accrue and track accrual of sick time for employees beginning September 30, 2020.
  • Employers should put a process in place for employees to request and use sick leave, which employees can use starting January 1, 2021.
  • Internal processes and procedures for tracking accrual and leave used are critical, because the new law provides that employers must provide a summary of the amount of sick leave accrued and used by an employee within three business days of an employee’s request.
  • While the law does not require employers to pay out unused sick time upon termination of employment, employers should ensure their written policies are clear on this issue.
  • The new law does not contain any notice requirements, but the New York Department of Labor will conduct a public outreach campaign, and employers may receive questions from employees on their sick leave policies.
  • The New York Department of Labor has not yet adopted regulations or issued guidance to effectuate any provisions of the New York State Sick Leave law, but may do so in the future. Employers should continue to monitor for developments in order to ensure they are aware of, and comply with, any future regulations and guidance promulgated by the Department.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Labor and Employment practice group, or the following authors in New York:

Gabrielle Levin (+1 212-351-3901, glevin@gibsondunn.com) Stephanie L. Silvano (+1 212-351-2680, ssilvano@gibsondunn.com)

Please also feel free to contact any of the following practice leaders:

Labor and Employment Group: Catherine A. Conway - Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz - Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 18, 2020 |
Krista Hanvey Named Among Texas Lawyer’s 2020 On the Rise Honorees

Texas Lawyer named Dallas partner Krista Hanvey among 30 lawyers featured as the 2020 “On the Rise” honorees in its Texas Legal Awards, which honors “those attorneys and judges who have made a remarkable difference in the legal profession in Texas -- whether in shaping the law, achieving outsized results for their clients, being an outstanding jurist or assisting those in need of legal services.”  The list was published on September 17, 2020. Krista Hanvey counsels clients of all sizes across all industries, both public and private, using a multi-disciplinary approach to compensation and benefits matters that crosses tax, securities, labor, accounting and traditional employee benefits legal requirements.  She has significant experience with all aspects of executive compensation, health and welfare benefit plan, and retirement plan compliance, planning, and transactional support.

July 6, 2020 |
Law360 Names Five Gibson Dunn Lawyers as 2020 Rising Stars

Five Gibson Dunn lawyers were named among Law360’s Rising Stars for 2020, featuring “attorneys under 40 whose legal accomplishments transcend their age.”  The following lawyers were recognized: New York partner Brian Ascher in Media & Entertainment, Dallas partner Krista Hanvey in Benefits, New York partner Saee Muzumdar in Mergers & Acquisitions, New York associate Lindsey Schmidt in International Arbitration, and Washington, D.C. of counsel Molly Senger in Employment. The list of Rising Stars was published on July 5, 2020.

June 1, 2020 |
Supreme Court Holds That ERISA Defined-Benefit Pension Plan Participants Do Not Have Article III Standing To Sue For Fiduciary Breach

Click for PDF Decided June 1, 2020 Thole v. U.S. Bank, N.A., No. 17-1712

Today, the Supreme Court held 5-4 that participants in defined-benefit pension plans lack Article III standing to sue under ERISA for alleged breach of fiduciary duties because, whether or not they prevail in the action, they will receive the same payments for the rest of their lives. 

Background: Section 502(a)(2) and (a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(a)(2) and (a)(3), authorize civil actions for breach of fiduciary duty with respect to  employee pension benefit plans. Petitioners are participants in U.S. Bank’s defined-benefit pension plan, which guarantees lifetime fixed periodic payments. Although petitioners have received all payments to which they are entitled, they sued U.S. Bank for breach of fiduciary duty, alleging that plan fiduciaries did not appropriately manage the plan’s assets, causing the assets to fall below the minimum funding level that ERISA requires, and that investment of plan assets in mutual funds offered by a U.S. Bank subsidiary caused the plan to pay higher investment fees than it would have paid for other, similar mutual funds. U.S. Bank moved to dismiss, arguing that petitioners lacked Article III standing because they did not suffer an injury-in-fact. The district court granted the motion. The Eighth Circuit affirmed, but not on Article III grounds. The Court held that ERISA does not permit defined-benefit plan participants to sue for alleged breach of fiduciary duty when they have received all benefits to which they are entitled under the plan.

Issues: Whether an ERISA defined-benefit plan participant or beneficiary can demonstrate Article III standing to bring claims alleging breach of fiduciary duty under ERISA Section 502(a)(2) or (a)(3) when the participants and beneficiaries have received all benefits to which they are contractually entitled.

Court's Holding: No. A participant or beneficiary in a defined-benefit ERISA plan who has received all vested benefits—and who has not shown a “substantially increased risk that the plan and employer would both fail”—cannot show the requisite injury-in-fact for Article III standing to sue for alleged breach of fiduciary duty.

“If [petitioners] were to win this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny more. The [petitioners] therefore have no concrete stake in this lawsuit.

Justice Kavanaugh, writing for the majority

What It Means:
  • Explaining that “[t]here is no ERISA exception to Article III,” a majority of the Court—the Chief Justice and Justices Thomas, Alito, Gorsuch, and Kavanaugh—held that petitioners lacked Article III standing “for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives.” Petitioners also did not plausibly allege that “plan underfunding” created a “substantially increased risk” that the plan or employer “would both fail,” thereby jeopardizing future pension benefits.
  • The Court rejected petitioners’ argument, based on trust-law principles, that they have an equitable or property interest in the plan’s assets, or the “financial integrity” of the plan. The benefits of trust beneficiaries depend on how well the trust is managed. By contrast, “a defined-benefit plan is more in the nature of a contract,” and “[t]he plan participants’ benefits are fixed and will not change, regardless of how well or poorly the plan is managed.”
  • The Court also held that petitioners lacked standing to sue “as representatives of the plan itself” because they had not been “legally or contractually appointed to represent the plan.” Going forward, fiduciary breach claims concerning defined-benefit plans likely will need to be brought by the Department of Labor or co-fiduciaries.
  • The Court’s ruling means that beneficiaries of ERISA defined-benefit pension plans generally will not be able to sue for breach of fiduciary duty unless the plan has failed to make required benefits payments, or it is likely that the alleged misconduct will render the plan insolvent.
  • Although the Court was careful to distinguish defined-contribution plans, today’s opinion could impact other types of ERISA claims. For example, in cases challenging the administration of health benefits, the Court’s ruling may cast doubt on plaintiffs’ attempts to evade the limits on class certification by claiming class-wide breaches of fiduciary duty without tying those allegations to a class-wide deprivation of benefits.

The Court's opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com

Related Practice: Class Actions and Employee Benefits

Richard J. Doren +1 213.229.7038 rdoren@gibsondunn.com Heather L. Richardson +1 213.229.7409 hrichardson@gibsondunn.com
Geoffrey Sigler +1 202.887.3752 gsigler@gibsondunn.com Daniel J. Thomasch +1 212.351.3800 dthomasch@gibsondunn.com
© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 24, 2020 |
Gibson Dunn Earns 84 Top-Tier Rankings in Chambers USA 2020

In its 2020 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 84 first-tier rankings, of which 31 were firm practice group rankings and 53 were individual lawyer rankings. Overall, the firm earned 302 rankings – 84 firm practice group rankings and 218 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Product Liability: Consumer Class Actions National – Real Estate National – Retail: Corporate & Transactional National – Securities: Regulation CA – Antitrust CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Zoning/Land Use CA (Los Angeles & Surrounds) – Employee Benefits & Executive Compensation CA – Real Estate: Northern California CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Real Estate: Mainly Corporate & Finance NY – Technology & Outsourcing TX – Antitrust This year, 156 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Michael Bopp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael P. Darden, Patrick Dennis, Mark Director, Thomas Dupree, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Peter Hanlon, Hillary Holmes, Daniel Kolkey, Brian Lane, Jonathan Layne, Ray Ludwiszewski, Karen Manos, Randy Mastro, Cromwell Montgomery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin, Debra Wong Yang, and Meryl Young.

April 3, 2020 |
Gibson Dunn Deal Receives Honorable Mention in Asian-Mena Counsel Magazine

Asian-mena Counsel recognized Murphy Oil’s $2.127 billion divestment of its entire Malaysian operations to PTT Exploration and Production Company Limited (PTTEP), the publicly listed subsidiary of Thailand’s national oil company, PTT, with an honorable mention in its Deals of the Year for 2019. Gibson Dunn represented Murphy Oil on this deal.  The transaction was the largest oil and gas M&A transaction in Southeast Asia in the past 5 years, and the largest oil and gas M&A transaction in Malaysia’s history. The feature was published on April 2, 2020. The Gibson Dunn team was led by Singapore partner Brad Roach, and the corporate transactional team included Singapore associate Alexandra Jones, London partner James Howe, London associates Amar Madhani and Mitasha Chandok, Denver associates Melissa Persons and Graham Valenta, Houston partner Gerry Spedale and Hong Kong associate Winson Chu. London partner Sandy Bhogal and London associate Panayiota Burquier provided assistance on tax matters.  Washington, D.C. partner Michael Collins provided assistance on employment matters.

March 25, 2020 |
Tax-Favored Financial and Other Assistance to Employees in the Face of COVID-19

Click for PDF The COVID-19 pandemic has been extremely challenging for everyone, changing day-to-day life in unprecedented ways. On March 13, 2020, President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Act”). Many employers have been providing assistance to employees whose working schedules have been reduced or who have been temporarily laid off by continuing some or all of their pay for a period of time. Payments in the form of salary or wage continuation, while certainly welcome, are treated as taxable income to the employee. However, the President’s national emergency declaration under the Act gives employers a means to provide tax-free financial assistance to employees who are affected, directly or indirectly, by COVID-19, while preserving the employer’s ability to deduct the payments of financial assistance. Section 139 (“Section 139”) of the United States Internal Revenue Code (the “Code”) provides, in relevant part, that “Gross income shall not include any amount received by an individual as a qualified disaster relief payment”. The term “qualified disaster relief payment” means “any amount paid to or for the benefit of an individual…to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster”. Section 139 applies to both federal income and employment taxes. With the President’s declaration of a national emergency, the COVID-19 pandemic is a “qualified disaster”. Given the likely significant financial burdens that many employees will bear as a result of quarantines and/or limited or ceased business operations in the coming days and weeks, employers who are able may want to consider providing tax-favored financial assistance to affected employees. As noted, this form of financial assistance will not be treated as taxable wages/income to the employee. Furthermore, it should be fully deductible to the employer as a business expense.

  • Employers May Provide Non-Taxable Financial Assistance Directly.

Under Section 139, employers may provide direct financial assistance to employees affected by COVID-19. The assistance provided will not be treated as income/wages to the employees, and the employer should be able to deduct those payments as business expenses. There is no ceiling on the amount of assistance that may be provided to an employee under Section 139 other than it must be “reasonable and necessary” and must not be for an expense reimbursable by the employee’s insurance. This means that employers cannot provide across-the-board assistance to all employees or group of employees under Section 139. Rather, the employer will need to set up a process for accepting and evaluating applications for financial assistance. The employer should also ensure that its payroll function treats any such payments as separate from wages so that the amounts paid are not inadvertently characterized as taxable to the recipients. There are no requirements to report qualified disaster relief payments to the Internal Revenue Service (“IRS”).

Other forms of assistance that may be provided to employees who incur a financial hardship as a result of COVID-19 include:
  • Employees Helping Employees: Employee Leave Transfer Programs.

An employer may establish an employee leave transfer program. An employee leave transfer program allows employees to help their co-workers by donating some of their available vacation, sick pay or PTO hours into a “leave bank” for the purpose of aiding affected colleagues who do not have enough paid time off to cover an extended break from their job. Employees affected by COVID-19 (or other medical emergencies) who have exhausted, or will exhaust, their paid leave due to the medical emergency may then withdraw additional leave from the leave bank. The paid time off used from the leave bank is taxable income to the employee who receives the additional leave. So long as the donated leave is used for another employee’s “medical emergency”, the employee donating the leave is not taxed on the value of the donated leave. A “medical emergency” is defined as “a medical condition of the employee or a family member that will require the prolonged absence of the employee from duty and will result in a substantial loss of income to the employee because the employee will have exhausted all paid leave available apart from the leave-sharing plan”.   Similar favorable tax treatment is also available for leave donation in the event of a “major disaster”, but as of the date of this Alert, the technical requirements of that definition have not been satisfied by the COVID-19 pandemic. Employees can also contribute funds to aid fellow employees, but unless those funds are contributed to a charitable organization, such as one of those described below, the employee donating the funds will be treated as making a gift with after-tax income and will not be able to claim an income tax deduction.

  • Employer-Sponsored Charitable Organizations Classified as Public Charities.

Some employers have established tax-exempt charitable organizations under Section 501(c)(3) of the Code, one of the purposes of which may be to provide financial assistance to employees who face unexpected emergencies that have resulted in financial hardship. The type of financial assistance that may be provided by an employer-sponsored charity depends on how the charity is classified under the federal tax law regulating tax-exempt organizations. If the employer’s charitable organization is classified by the IRS as a “public charity”--generally because it receives contributions from a sufficiently broad number of donors--then the organization may provide financial assistance to any employee who experiences a financial hardship on account of COVID-19. The employee with the financial need must apply for assistance, and the organization must determine the extent of its support based on the nature and size of the need. Proper procedures are important. If they are followed, any financial assistance provided by the organization should not be taxable to the recipient employee. And because the organization is itself exempt from federal income taxation, it can apply all funds received (without the drag of income taxation) to achieve its charitable goals.

  • Employer-Sponsored Charitable Organizations Classified as Private Foundations May Provide Assistance Following the Declaration of a National Emergency without the Risk of Incurring Certain Tax Liabilities.

If an employer-sponsored charitable organization is classified as a Section 501(c)(3) “private foundation” as opposed to a public charity--generally because most or all of the funding is provided by the employer—then providing financial assistance to employees presents a number of risks to the organization under the Code. First, and most importantly, providing support to employees could be treated as advancing the employer’s private interests and therefore risk the tax-qualified status of the organization. According to the IRS, a private foundation has to be “operated exclusively for exempt purposes”. Second, such financial support might be treated as “self-dealing” on the part of the employer and subject the employer and the foundation manager to substantial excise taxes. However, when financial assistance is provided in connection with a “qualified disaster” (which follows the same basic definition as Section 139, and, therefore, would cover the COVID-19 pandemic), payments by the private foundation, if properly made and documented in the same manner as described above in the section covering public charities, should not threaten the tax-qualified status of the organization or constitute proscribed acts of self-dealing under Section 4941 of the Code, among other benefits. Furthermore, the organization would not need to seek prior approval from the IRS to provide this form of assistance to individuals, although if not otherwise covered in the description of its purposes, the organization would need to disclose this program in its next annual filing with the IRS.

Note that if an employer is considering establishing a new private foundation to provide financial assistance to employees who suffer a financial hardship as a result of the COVID-19 pandemic, it will need to continue the foundation beyond the COVID-19 pandemic either to address other charitable purposes or to aid employees with future financial emergencies. The IRS requires that any tax-exempt charity serve a “charitable class” (which means that the covered group has to be “large or indefinite”), and, in the context of financial relief provided to employees by an employer-sponsored charitable organization, this requires at a minimum that the class of recipients be broadened to cover employees who incur financial hardships in the future. Furthermore, an independent person or group should be selected to make decisions regarding the delivery of aid to employees, as the IRS wants to see that “any benefit to the employer is incidental and tenuous”.

  • Charitable Donations to a Donor-Advised Fund Administered by an Independent Public Charity.

An employer may not have previously established a charitable organization and does not wish to do so now. Some community foundations and public charities maintain separate funds or accounts to receive contributions from individual donors. These donors then receive advisory privileges over investment or distribution of the donated funds. While donor-advised funds generally may not make grants to individuals, an exception is made for funds or accounts established specifically to benefit employees and their family members who are victims of a qualified disaster.

In order for the employer-sponsored donor-advised fund to be able to give directly to employees, the fund must meet the following criteria. First, the fund must serve the single identified purpose of providing relief from one or more qualified disasters. Second, it must serve a “broad and indefinite” charitable class. Third, the recipients of the donations must be selected based on an objective determination of need, and the selection must be made either by (i) using an independent person or group or (ii) establishing adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. Fourth, no payment may be made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or public charity, or any person who is selecting recipients. Fifth, the fund must maintain adequate records to demonstrate the recipients’ need for the disaster assistance provided.

  • Charitable Contributions to a Relief Fund Established by Another Organization.

An employer may make charitable contributions to a disaster relief fund established by an independent charitable or governmental organization under which the other organization makes the decisions regarding who will receive aid. While the employer would receive a charitable contribution for its contributions, it would have limited or no ability to influence the selection of recipients. Therefore this Alert focuses on those approaches that allow an employer to have greater levels of influence over the selection over who benefits from the employer’s generosity.

Gibson Dunn's lawyers are available to assist with any questions, as detailed below. In addition, the IRS has set up a page on its website to address matters relating to Coronavirus tax relief. See https://www.irs.gov/coronavirus.
Gibson Dunn's lawyers are available to assist with any questions you may have regarding the multitude of legal developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm's Coronavirus (COVID-19) Response Team. The following Gibson Dunn lawyers prepared this client update: Stephen Fackler and Allison Balick, with assistance from Dora Arash, Eric Sloan, Edward Wei, Jeffrey Trinklein and David Rubin. Gibson Dunn lawyers are working with many of our clients on their response to COVID-19 and are available to assist with questions about various types of employee assistance arrangements, including those that fall within the scope of Section 139. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Executive Compensation and Employee Benefits, Tax, or other practice groups, or the authors: Stephen W. Fackler - Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Allison Balick - Los Angeles (+1 213-229-7685, abalick@gibsondunn.com) Please also feel free to contact any of the following practice leaders and members:

Executive Compensation and Employee Benefits Group: Stephen W. Fackler - Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins - Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller - Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey - Dallas (+ 214-698-3425, khanvey@gibsondunn.com) Allison Balick - Los Angeles (+1 213-229-7685, abalick@gibsondunn.com)

Tax Group: Dora Arash - Los Angeles (+1 213-229-7134, darash@gibsondunn.com) Eric B. Sloan - New York (+1 212-351-2340, esloan@gibsondunn.com) Jeffrey M. Trinklein - London/New York (+44 (0)20 7071 4224 /+1 212-351-2344), jtrinklein@gibsondunn.com) Edward S. Wei - New York (+1 212-351-3925, ewei@gibsondunn.com) David W. Rubin - Los Angeles (+1 213-229-7647, dwrubin@gibsondunn.com)

© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 6, 2019 |
IRS Updates U.S. Retirement Plan COLAs for 2020

Click for PDF On November 6, 2019, the IRS released its cost-of-living adjustments applicable to tax-qualified retirement plans for 2020. Many of the key limitations, including the elective deferral and catch-up contribution limits for employees who participate in 401(k), 403(b) and 457 tax-qualified retirement plans, have increased from current levels. The key 2020 limits are as follows:

Limitation 2020 Limit
402(g) Limit on Employee Elective Deferrals (Note:  This is relevant for 401(k), 403(b) and 457 plans, and for certain limited purposes under Code Section 409A.) $19,500 ($19,000 for 2019)
414(v) Limit on “Catch-Up Contributions” for Employees Age 50 and Older (Note:  This is relevant for 401(k), 403(b) and 457 plans.) $6,500 ($6,000 for 2019)
401(a)(17) Limit on Includible Compensation (Note:  This applies to compensation taken into account in determining contributions or benefits under qualified plans.  It also impacts the “two times/two years” exclusion from Code Section 409A coverage of payments made solely in connection with involuntary terminations of employment.) $285,000 ($280,000 for 2019)
415(c) Limit on Annual Additions Under a Defined Contribution Plan $57,000 (or, if less, 100% of compensation) ($56,000 for 2019)
415(b) Limit on Annual Age 65 Annuity Benefits Payable Under a Defined Benefit Plan $230,000 (or, if less, 100% of average “high 3” compensation) ($225,000 for 2019)
414(q) Dollar Amount for Determining Highly Compensated Employee Status $130,000 ($125,000 for 2019)
416(i) Officer Compensation Amount for “Top-Heavy” Determination (Note:  Because Code Section 409A defines “specified employees” of public companies by reference to this provision, this amount also affects the specified employee determination, and thus, the group subject to the six-month delay under Code Section 409A.) $185,000 ($180,000 for 2019)
Social Security “Wage Base” for Plans Integrated with Social Security $137,700 ($132,900 for 2019)

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Stephen W. Fackler - Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins - Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller - Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+ 214-698-3425, khanvey@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 24, 2019 |
UK Employment Update – January 2019

Click for PDF In this, our 2018 end of year alert, we look back at key developments in UK employment law over the past twelve months and look forward to anticipated key developments in the year ahead. A brief overview of developments and key cases from 2018 which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links to the appendix. 1.    Employment Status (click on link) We consider recent developments in the law regarding 'worker status' in the UK and look at how the Government responded to recommendations on employment status made in the Taylor Review in its Good Work Plan. 2.    Good Work Plan (click on link) The Government's Good Work Plan sets out a number of proposed reforms to UK employment laws and policy changes to ensure that workers can access fair and decent work, that both employers and workers have the clarity they need to understand their employment relationships, and that the enforcement system is fair and fit for purpose. We consider these below. 3.    Vicarious Liability (click on link) We consider the impact of two recent decisions of the UK Court of Appeal which look at vicarious liability in both the legal spheres of Employment and Data Protection. In relation to Employment, it was held that there was a sufficient connection between a managing director's job and his drunken assault on an employee to render the company vicariously liable for his actions. With regards to Data Protection, it was held that an employer was vicariously liable for the criminal actions of an employee who leaked the personal data of almost 100,000 employees, notwithstanding that the employer was held to have taken appropriate steps to mitigate the risk of such criminal actions occurring, and that the employee's actions were undertaken with the express intention of causing damage to the employer. 4.    Sexual Harassment and #metoo (click on link) The #metoo movement has had a significant impact on the use of non-disclosure agreements ("NDAs") in situations involving allegations of sexual harassment. We consider the circumstances in which it remains appropriate to use NDAs in connection with the settlement of such claims and allegations. 5.    Data Protection (click on link) More than six months have now passed since the General Data Protection Regulation (the "GDPR") became effective in May 2018. Given the potentially significant fines for non-compliance, businesses subject to the GDPR have been investing heavily in GDPR compliance programmes. However, uncertainty still surrounds the GDPR and how it should operate in practice. We consider the enforcement action taken by the Information Commissioner's Office (the "ICO") during 2018 and the approach the ICO has said it intends to take with respect to enforcement in the future. We also consider recent guidance on the territorial scope of the GDPR as well as the implications of Brexit on the European and UK data protection regimes. 6.    Other News and Areas to Watch (click on link)


APPENDIX

1.   Employment Status

The question of employment status has vexed the UK courts in recent years. Employment law in the UK is unusual in that it recognises three different ways of working: (i) as an employee under a contract of employment; (ii) as an individual who may not be classed as an employee but who otherwise provides services personally in circumstances which may attract 'worker' status; and (iii) finally, as a self-employed independent contractor providing services to a client. The distinction between these three categories has been called into question in a spate of recent cases, some involving the gig economy. We previously considered the different employment rights afforded to individuals in these three categories of working relationship in a prior alert. This year, the eagerly awaited judgment from the UK Supreme Court in the case of Pimlico Plumbers Ltd and another v Smith [2018] UKSC 29 gave further guidance on the approach to be taken by the UK courts when determining whether an individual who performs services for a client but who is not an employee should nevertheless enjoy protection under UK law as a 'worker'. As we indicated in our previous alert, the obligation to perform services personally is a necessary requirement for 'worker' status. When considering this issue, the UK Supreme Court highlighted the need to consider the terms of the contract between the parties in full (such that a contractual right of substitution in the Pimlico Plumbers contract was overridden by other clauses of the contract which indicated that the services were to be performed personally). Other relevant factors which contributed to the finding of 'worker' status in this case were tight control over the plumber's attire and administrative aspects of his job, onerous terms as to amount and timing of payment, and a suite of covenants restricting the plumber's working activities following termination. As a consequence, care should be taken when engaging an independent contractor to ensure that the arrangements are documented clearly and that the terms of engagement (whether individually or taken as a whole) are not consistent with worker status.

2.   Good Work Plan

The Good Work Plan, published in December 2018, builds on the response given by the Government in relation to the Taylor Review in February 2018, and reports on the progress of the issues raised in various consultations. In it, the Government responds to recommendations on employment status made in the Taylor Review by promising to (i) "bring forward detailed proposals" on how the employment status framework for employment rights and tax should be aligned, and (ii) provide legislation to "improve the clarity" of the employment status tests, "reflecting the reality of modern working practices". Unfortunately, however, no further information has been given about what this will entail. The Government has also laid down three statutory instruments implementing the Good Work Plan that will become effective from 6 April 2020 and which: (i) provide that the written statement of employment particulars must be given from day one of employment; (ii) change the rules for calculating a week's pay for holiday pay purposes, increasing the reference period for variable pay from 12 weeks to 52 weeks; (iii) abolish a perceived loophole known as the Swedish Derogation, which allows agency workers to be paid less than if they were directly hired provided they have a contract of employment with the agency and are paid between assignments; (iv) extend the right to a written statement to workers (previously just employees); and (v) lower the percentage required for a valid employee request for the employer to negotiate an agreement on informing and consulting its employees from 10% to 2% (while keeping the minimum 15-employee threshold for initiating proceedings in place). From April 2019, the limit on financial penalties for breaches of employment law which have aggravating factors will be increased from £5,000 to £20,000.

3.   Vicarious Liability Update

As reported previously, the boundaries of the law on vicarious liability, which determines the circumstances in which an employer will be deemed liable for the acts of its officers and employees, continue to expand. We highlight below two recent decisions of the UK Court of Appeal in the field of vicarious liability: 3.1    Vicarious Liability and Employment: Overturning a decision by the UK High Court, the UK Court of Appeal held that a company was vicariously liable for an assault carried out by the managing director on another employee. In Bellman v Northampton Recruitment Ltd [2018] EWCA Civ 2214, the managing director punched an employee several times at an unscheduled drinking session after the office Christmas party. The UK Court of Appeal confirmed that, when considering the issue of vicarious liability, the UK courts should focus on the "field of activities" assigned to the perpetrator and ask whether the actions for which the employer is claimed to be vicariously liable fell within his or her "field of activities". In the present case, the managing director's seniority and the way in which he asserted that authority at the event at which the assault took place were both significant factors leading the court to conclude that the employer was responsible for the assault which he carried out at an unofficial out-of-office event. This decision restores the UK Supreme Court's broader application of the "close connection" test to incidents of assault by an employee in Mohamud v WM Morrison Supermarkets Plc [2016] UKSC which we reported on previously. 3.2   Vicarious Liability and Data Protection: In a decision that is likely to have far-reaching consequences for employers, the UK Court of Appeal upheld a controversial UK High Court judgment that an employer, Morrisons Plc, was vicariously liable for the criminal actions of an employee, notwithstanding that it had taken appropriate steps to mitigate the risk of such actions occurring. In the first group litigation after a data breach in the UK, Morrisons is liable in damages to over 5,000 individuals. A disgruntled employee of Morrisons leaked the personal details of almost 100,000 employees to the internet. The UK High Court found that Morrisons was not directly liable for the breaches of the Data Protection Act 1998 (the "DPA 1998"), which has since been superseded by the GDPR and the Data Protection Act 2018 (the "DPA 2018") (which sits alongside the GDPR in the UK and, amongst other things, confirms the UK's approach to certain flexibilities and exemptions permitted by the GDPR), misuse of private information, and/or breaches of confidence. However, it found that Morrisons was vicariously liable for the employee's actions. Morrisons appealed to the UK Court of Appeal, however, the appeal was dismissed. The UK Court of Appeal held that (i) it was not implicit that Parliament had intended to exclude vicarious liability from the scope of the DPA 1998 and (ii) the UK High Court had been correct to find that there had been a "seamless and continuous sequence" of events between the breach and the employment relationship. The misuse of the personal data by the employee in this case was found to be within his "field of activities" as there was an "unbroken chain" of events between his work activities and the data leak. Referring to the decision in Bellman, the UK Court of Appeal said it also made no difference that the tort took place away from the workplace. What this means for employers: The UK Court of Appeal's judgment, whilst concerned with the provisions of the DPA 1998, applies equally to the equivalent duties and responsibilities under  the GDPR. In particular, in order to mitigate vicarious liability risks it may not be sufficient for UK employers to simply comply with their obligation under the GDPR to implement "appropriate technical and organisational measures" to ensure that personal data in their possession is appropriately secured. Hence, employers should also consider appropriate insurance coverage, whether by public liability policy or a bespoke cyber insurance policy. It remains to be seen how effective these policies will be, and they are unlikely to cover the entire exposure.

4.   Sexual Harassment and the #metoo Movement

The #metoo movement has increased the social and political pressure upon UK employers to tackle issues of sexual harassment head on, particularly where perpetrated by those in authority. While settlement agreements and associated non-disclosure provisions remain both useful and appropriate when resolving employment disputes, care must be taken in situations involving allegations of sexual harassment, especially where those allegations have been upheld against the perpetrator or continue to be maintained by the alleged victim. In particular, the use of NDAs or settlement agreements to prevent an employee from repeating, publishing or reporting allegations of sexual harassment has been called into question over the last year. The Women and Equalities Committee of the UK Parliament ("WEC") conducted an Inquiry into Sexual Harassment in the Workplace (the "Inquiry") in 2018, highlighting five points in respect of which they called upon the Government to take action: (i) putting sexual harassment at the top of the agenda; (ii) requiring regulators to take a more active role; (iii) making enforcement processes work better for employees; (iv) cleaning up the use of NDAs, and (v) collecting more robust data. The Solicitors Regulation Authority (the "SRA") subsequently issued a Warning Notice reminding lawyers that NDAs must not: (i) prevent anyone from notifying regulators or law enforcement agencies, of conduct which might otherwise be reportable; (ii) improperly threaten litigation, or (iii) prevent someone who has entered into an NDA from keeping or receiving a copy of the NDA. Further, in December, the UK Government responded to the Inquiry and said that a statutory code of practice on sexual harassment should be introduced, and acknowledged that NDAs require better regulation. The Government committed to consult on how best to achieve this and enforce any new provisions, but noted the lack of data and research on this issue. As a result, in November 2018, the WEC launched a new inquiry into the wider use of NDAs in cases where any form of harassment or discrimination is alleged. The findings of this are expected in Spring 2019. In the circumstances, and while settlement agreements containing non-disclosure provisions remain a lawful and appropriate means by which UK employers can resolve disputes in which allegations of sexual harassment have been made, care should be taken to ensure that: (i) NDAs are not used in circumstances in which the subject of the NDA may feel unable to notify regulators or law enforcement agencies of conduct which might otherwise be reportable; (ii) lawyers do not fail to notify the SRA of misconduct, or a serious breach of regulatory requirements, and (iii) lawyers do not use NDAs as a means of improperly threatening litigation or other adverse consequences.

5.   Data Protection

5.1   Enforcement: In a recent speech, the UK's Information Commissioner revealed that the number of complaints the ICO has received from the public regarding their personal data has increased from 19,000 since the GDPR came into effect, compared to 9,000 in a comparable period predating the GDPR. There have also been more breach reports – more than 8,000 since the GDPR came into effect and reports became mandatory in certain circumstances. The ICO's headcount has also increased to almost 700, which is 60% higher than in 2016. These increases in complaints and resources have yet to result in increased enforcement action. The ICO has issued one enforcement notice, requiring the deletion of data subjects' personal data by the entity in default. This enforcement action is notable because it was taken against a Canadian entity and so demonstrates that the ICO will take action against foreign entities which are subject to the GDPR. More recently, the ICO has issued monetary penalties to organisations across the finance, manufacturing and business services sectors for non-payment of the data protection fees all data controllers are required to pay unless certain exemptions apply. The ICO has not yet issued an administrative fine for a breach of the GDPR or DPA 2018. It has however recently imposed the maximum possible fine on an organisation under the DPA 1998, and in doing so indicated that the fine would have been significantly higher had the GDPR been in force when the breach occurred. The ICO has produced a draft Regulatory Action Policy, which sets out the approach the ICO intends to take with respect to enforcement. Although this policy remains subject to Parliamentary approval, organisations regulated by the ICO will be relieved to hear that although the ICO will consider each case on its merits, as a general principle it is the more serious, high-impact, intentional, wilful, neglectful or repeated breaches that can expect to attract stronger regulatory action, and so they are unlikely to attract the highest administrative fines if they have taken sensible and appropriate measures to comply with the GDPR and the DPA 2018. 5.2   Territorial Scope: The GDPR has extraterritorial effect, and may apply both to organisations established in the EU and to organisations not established in the EU. Where an organisation is established in the EU, the GDPR applies to the processing of personal data in the context of the EU establishment's activities, regardless of where the processing takes place. Where an organisation is not established in the EU, the GDPR applies to processing activities relating to the offering of goods or services to or the monitoring of the behaviour of individuals located in the EU. The European Data Protection Board (the "EDPB"), an EU body which is made up of the head of each European data protection authority and the European Data Protection Supervisor (the EU's independent data protection authority) (and which is tasked, amongst other things, with ensuring consistent application of the GDPR across the EU) has recently issued guidelines (currently subject to public consultation) on the territorial application of the GDPR, which are intended to provide clarity as to how the GDPR applies in practice. We have set out below some items of particular interest: 5.2.1   The meaning of "Establishment": An establishment implies the real and effective exercise of an activity through stable arrangements. The EDPB has confirmed that in some circumstances the presence of a single employee or agent in the EU may be sufficient to constitute a stable arrangement. However, the notion of establishment has its limits, and it is not possible to conclude that an organisation is established in the EU merely because its website is accessible in the EU. In addition, the EDPB does not deem a data processor in the EU to be an establishment of a data controller merely by virtue of its status as a data processor. 5.2.2   Data controller-data processor arrangements: Where an organisation subject to the GDPR uses a data processor which is not subject to the GDPR (for example, because that processor is not established in the EU), it will need to ensure that it puts in place a contract with the data processor which complies with the requirements of Article 28 of the GDPR. The processor will thereby become indirectly subject to some obligations under the GDPR. Where an organisation subject to the GDPR acts as a data processor, processing personal data on behalf of a data controller not subject to the GDPR, it will similarly need to ensure that it puts in place a contract with the data controller which complies with the requirements of Article 28 of the GDPR (save insofar as they relate to the provision of assistance to the controller in complying with the controller's obligations under the GDPR). 5.2.3   "Targeting" data subjects in the EU: An organisation which is not otherwise established in the EU will not become subject to the GDPR merely because it processes the personal data of individuals in the EU; an element of "targeting" those individuals must also be present, such that it is apparent that the organisation envisages offering goods or services to data subjects in the EU. Factors to be considered in this regard include (amongst others) whether the EU or an EU member state is mentioned in connection with the goods or services, whether the organisation uses a language or currency which is not used in its home country but which is used in the EU, and whether the organisation offers the delivery of goods in the EU. This concept of "intention to target" is not relevant to the application of the GDPR with regard to the monitoring of data subjects' behaviour in the EU – such monitoring may be subject to the GDPR irrespective of any intention (or absence thereof) to do so. 5.3   GDPR and Brexit: On the day the UK leaves the EU, the GDPR will be transposed into UK law as domestic legislation. This means that data protection standards in the UK will not change dramatically after Brexit, at least initially. However, Brexit may affect the way in which the GDPR applies to businesses, and certain businesses may find themselves subject to both the "UK GDPR" and the GDPR proper, depending on the nature and structure of their European operations. Separately, Brexit will have ramifications for personal data transfers, and particularly transfers from the EU to the UK. Currently, there are no restrictions on such data transfers. However, if the UK leaves the EU without the European Commission ("EC") having formally recognised its data protection laws as adequate, whether as a result of a no-deal Brexit or simply the failure to make an adequacy decision by the end of any transition period, and in the absence of any applicable derogation, adequate safeguards would need to be put in place in respect of any personal data transfers from the EU to the UK. This would typically involve the transferor and recipient entities entering into model clauses approved by the EC, although other options are available.

6.   Other news and areas to watch

6.1   Brexit: Whilst it is impossible to predict, at the date of writing, how Brexit will unfold, we can say that Brexit is not expected to have a substantial impact upon employment rights in the UK for the moment, irrespective of the form it takes. A white paper issued in July 2018 by the UK Government indicated that there is no intention to repeal or amend employment or equality laws in the UK, including those which derive from or implement European employment laws. The paper states: "existing workers' rights enjoyed under EU law will continue to be available in UK law at the day of the withdrawal" and proposed that the UK will commit to a "non-regression of labour standards" in order to maintain a strong trading relationship with the EU. Possible areas for reform post-Brexit could include compensation limits in discrimination claims (which are currently uncapped), as well as provisions for the accrual of statutory vacation and calculation of statutory vacation pay. We are happy to answer any questions which clients may have relating to Brexit and employment law. 6.2   Simplification of tax on termination payments: Since 6 April 2018, any payment in lieu of notice (including a non-contractual payment) has been treated as earnings and subject to tax and class 1 National Insurance Contributions ("NICs"). However, from 6 April 2020, all termination payments above the £30,000 threshold will be subject to class 1A NICs (employer liability only). 6.3   Large and medium sized companies engaging workers through PSCs are to become responsible for PAYE and NICs: In a move that will significantly impact those large and medium-sized companies engaging workers via personal services companies ("PSCs") from April 2020, the responsibility for operating off-payroll working rules, and deducting any tax and NICs due, will move from individuals to the organisation, agency or other third party paying an individual's PSC. Organisations will have to reconsider whether there is any material benefit in using PSC structures for their indirectly engaged workforce as opposed to directly engaged self-employed contractors. 6.4   Pay reporting: A new set of regulations that came into force on 1 January 2019 bring in mandatory reporting of the ratio between CEO pay, including all elements of remuneration, and average staff pay for UK incorporated companies that are listed on the London Stock Exchange, an exchange in an EEA member state, the New York Stock Exchange or NASDAQ, and have an average number of UK employees above 250 in their group, all of which will be effective for accounting periods beginning on or after 1 January 2019. Further, the Government launched a consultation on ethnicity pay reporting, looking in particular at the sort of information that employers should be required to publish.
Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these and other developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm's London office: James A. Cox (+44 (0)20 7071 4250, jacox@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) Sarika Rabheru (+44 (0)20 7071 4267, srabheru@gibsondunn.com) Thomas Weatherill (+44 (0)20 7071 4164, tweatherill@gibsondunn.com)

November 1, 2018 |
Glass Lewis Issues 2019 Proxy Voting Policy Updates

Click for PDF On October 24, 2018, Glass Lewis released its updated U.S. proxy voting policy guidelines for 2019, including guidelines for shareholder proposals.  The updated U.S. guidelines are available here, and the guidelines on shareholder proposals are available here.  The most significant updates to the guidelines are summarized below. The updated U.S. proxy voting guidelines include discussion of two previously announced policy changes that will take effect for meetings held after January 1, 2019, relating to board gender diversity and virtual-only annual meetings. Board Gender Diversity As previously announced, for a company that has no female directors, Glass Lewis generally will begin recommending votes "against" the nominating/governance committee chair, and may also recommend votes "against" other committee members depending on factors such as the company's size, industry, state of headquarters, and governance profile. Glass Lewis will "carefully review a company's disclosure of its diversity considerations" and may not recommend votes "against" directors when the board has provided a "sufficient rationale" for the absence of any female board members.  Such rationale may include any notable restrictions on the board's composition (e.g., the existence of director nomination agreements with significant investors) or disclosure of a timetable for addressing the board's lack of diversity. In light of California's recently enacted legislation requiring a minimum number of women on public company boards (discussed here), which includes having at least one woman by the end of 2019, Glass Lewis will recommend votes "against" the nominating/governance committee chair at companies headquartered in California that do not have at least one woman on the board and do not disclose a "clear plan" for addressing this issue before the end of 2019. Conflicting Shareholder Proposals Glass Lewis updated its policy on conflicting shareholder proposals to address special meeting proposals specifically.  These updates respond to developments during the 2018 proxy season, when the Securities and Exchange Commission (the "SEC") staff permitted companies to exclude "conflicting" special meeting shareholder proposals when seeking shareholder ratification of an existing special meeting right with a higher ownership threshold. The updated policy states that Glass Lewis generally favors a 10%-15% special meeting right and will generally recommend votes "for" shareholder and company proposals within this range.  When companies exclude a special meeting shareholder proposal by seeking ratification of an existing special meeting right, Glass Lewis will recommend votes "against" both the company's ratification proposal and the members of the nominating/governance committee. When the proxy statement includes both shareholder and company proposals on special meetings:

  • Where the proposals have different thresholds for requesting a special meeting, Glass Lewis will generally recommend voting "for" the lower threshold (typically the shareholder proposal); and
  • Where the company does not currently have a special meeting right, Glass Lewis may recommend that shareholders vote "for" the shareholder proposal and abstain from the company proposal seeking to establish a special meeting right.  Glass Lewis views the practice of abstaining as a means for shareholders to signal their preference for an appropriate special meeting threshold while not directly opposing establishment of a special meeting right.
While it appears that the special meeting threshold will be the primary focus of Glass Lewis's analysis, Glass Lewis also will consider the company's overall governance profile, including its responsiveness to and engagement with shareholders. Director Voting Recommendations Based on Excluded Shareholder Proposals With respect to the exclusion of shareholder proposals more generally, Glass Lewis states in the updated policy that "it generally believe[s] that companies should not limit investors' ability to vote on shareholder proposals that advance certain rights or promote beneficial disclosure."  In light of this, Glass Lewis will make note of instances where a company has successfully petitioned the SEC to exclude shareholder proposals and, "in certain very limited circumstances," may recommend votes "against" the members of the nominating/governance committee if it believes exclusion of a shareholder proposal was "detrimental to shareholders." Environmental and Social Risk Oversight Glass Lewis believes that companies should have "appropriate board-level oversight of material risks" to their operations, including those that are environmental and social in nature.  For large cap companies or companies where Glass Lewis identifies "material oversight issues," Glass Lewis will seek to identify the directors or committees charged with oversight of environmental and social issues, and will note instances where companies have not clearly defined this oversight in their governance documents. Where Glass Lewis believes that a company has not properly managed or mitigated environmental or social risks "to the detriment of shareholder value," Glass Lewis may recommend votes "against" directors who are responsible for oversight of environmental and social risks.  If there is no explicit board oversight of environmental and social issues, Glass Lewis may recommend votes "against" members of the audit committee.  Ratification of Auditor: Additional Considerations Glass Lewis's policies list situations in which it may recommend votes "against" ratification of the outside auditor.  Under the 2019 policy updates, Glass Lewis will consider factors that may call into question an auditor's effectiveness, including auditor tenure, any pattern of inaccurate audits, and any ongoing litigation or controversies.  In "limited cases," these factors may lead to a recommendation "against" auditor ratification. Virtual-Only Shareholder Meetings As previously announced, Glass Lewis's new policy on virtual-only shareholder meetings will take effect January 1, 2019.  Under this policy, for a company that chooses to hold a virtual-only meeting, Glass Lewis will analyze the company's disclosure of its virtual meeting procedures and may recommend votes "against" the members of the nominating/governance committee if the company does not provide "effective" disclosure assuring that shareholders will have the same opportunities to participate at the virtual meeting as they would at in-person meetings. Examples of effective disclosure include descriptions of how shareholders can ask questions during the meeting, the company's guidelines on how questions and comments will be recognized and disclosed to meeting participants, procedures for posting questions and answers on the company's website as soon as practical after the meeting, and how the company will deal with any potential technical issues regarding accessing the virtual meeting including providing technical support. Director Recommendations Based on Company Performance Glass Lewis typically recommends that shareholders vote against directors who have served on boards or as executives at companies with "indicators of mismanagement or actions against the interests of shareholders."  One instance where Glass Lewis may issue an "against" recommendation is where a company's performance for the past three years has been in the bottom quartile of the sector and the board has not taken reasonable steps to address the poor performance.  For 2019, Glass Lewis has clarified that rather than looking solely at stock price performance, it will also consider the company's overall corporate governance, pay-for-performance alignment, and board responsiveness to shareholders, in order to assess whether "the company performed significantly worse than its peers." Directors Who Provide Consulting Services Under its voting policies on conflicts of interest, Glass Lewis recommends that shareholders vote "against" directors who provide, or whose immediate family members provide, material professional services to the company, including legal, consulting or financial services.  Beginning in 2019, Glass Lewis will generally refrain from voting against directors who provide consulting services if they do not serve on the audit, compensation or nominating/governance committees and Glass Lewis has not identified "significant governance concerns" at the company. Executive Compensation Glass Lewis clarified or amended several executive compensation policies:
  • Say-on-pay voting recommendations.  Glass Lewis has provided additional guidance on how it evaluates executive compensation programs in making recommendations on say-on-pay proposals.  In particular, Glass Lewis evaluates both the structure of a company's program and the company's disclosures, in each case using a rating scale of "Good," "Fair" and "Poor."  According to Glass Lewis, most companies receive a "Fair" rating for both structure and disclosure, and the other two ratings primarily highlight companies that are outliers.
  • Peer group and other practices.  Glass Lewis's say-on-pay policy identifies practices that may lead to an "against" recommendation for say-on-pay proposals.  The 2019 updates clarify that these practices may also influence Glass Lewis's evaluation of the structure of a company's compensation program.  The updates also provide more detail on the peer group practices that Glass Lewis views as problematic.  These practices now will include the use of outsized peer groups and compensation targets set well above peers.
  • Pay-for-performance assessment.  Glass Lewis uses a grading system of "A" through "F" to benchmark executive pay and company performance against a peer group.  The updated voting policies clarify that the grades represent the relationship between a company's percentile rank for pay and its percentile rank for performance.  In other words, a grade of "A" reflects that a company's percentile rank for pay is significantly less than its percentile rank for performance, while a grade of "F" reflects that the pay ranking is significantly higher than the performance ranking.  Separately, the analysis in Glass Lewis's proxy papers reflects a comparison between a company and its peer group, with respect to both pay levels and performance.
  • Added excise tax gross-ups.  Glass Lewis may recommend votes "against" all members of the compensation committee if executive employment agreements contain new excise tax gross-up provisions, particularly if the company had previously committed not to provide gross-ups.  New gross-up provisions related to excise taxes on excess parachute payments also may lead to votes "against" a company's say-on-pay proposal.
  • Sign-on and severance arrangements.  Glass Lewis has clarified the terms of sign-on and severance arrangements that may contribute to negative voting recommendations on say-on-pay proposals.  Glass Lewis will consider the size and design of any contractual payments, as well as U.S. market practice.  Excessive sign-on awards may support or drive a negative voting recommendation, and multi-year guaranteed bonuses may drive "against" recommendations on their own.  In addition to the size of contractual payments, Glass Lewis will consider their terms.  Key man clauses, board continuity conditions, or excessively broad change in control triggers may help drive a negative voting recommendation.  In general, Glass Lewis will be wary of terms that are "excessively restrictive" in favor of an executive or could incentive behaviors that are not in a company's best interests.  Glass Lewis believes companies should abide by pre-determined severance amounts in most circumstances, and will consider severance amounts actually paid and in "special cases," their appropriateness given the circumstances of the executive's departure.
  • Grants of front-loaded awards.  Glass Lewis has added a new discussion of "front-loading," or providing large grants intended to serve as compensation for multiple years.  In making recommendations on say-on-pay proposals, Glass Lewis will apply particular scrutiny to front-loaded awards.  It will consider a company's rationale for front-loaded awards and expects companies to include a firm commitment not to grant additional awards for a defined period.  If a company breaks this commitment, Glass Lewis may recommend "against" the company's say-on-pay proposal unless the company provides a "convincing" rationale.
  • Clawbacks.  Glass Lewis will begin looking beyond the minimum legal requirements for clawbacks and considering the specific terms of companies' clawback policies.  According to the updated voting policies, Glass Lewis believes that clawbacks "should be triggered, at a minimum, in the event of a restatement of financial results or similar revision of performance indicators upon which bonuses were based."  Clawback policies that simply track minimum legal requirements "may inform" Glass Lewis's overall view of a company's compensation program.
  • Discretionary short-term incentives.  Glass Lewis will not recommend votes "against" a say-on-pay proposal solely based on a company's use of discretionary short-term bonuses if there is meaningful disclosure of the rationale behind the use of a discretionary mechanism and the bonus amount determinations.  However, other "significant" issues, such as a disconnect between pay and performance, may help drive a negative voting recommendation.
  • Equity plans that cover directorsGlass Lewis continues to believe that equity grants to directors should not be performance-based.  Where an equity plan covers non-management directors exclusively or primarily, the updated voting policies state that the plan should not provide for any performance-based awards.  Where non-management director grants are made under a broad-based equity plan, Glass Lewis will continue to use its proprietary model to guide its voting recommendations.  However, beginning in 2019, if a broad-based plan allows or explicitly provides for performance-based awards to directors, Glass Lewis may recommend "against" the plan on this basis, particularly if the company has granted performance-based awards to directors in the past.
  • Reduced executive compensation disclosure for smaller reporting companies.  Glass Lewis may recommend votes "against" all compensation committee members when the board has "materially decreased" proxy disclosure about executive compensation practices in a manner that "substantially impacts" shareholders' ability to make an informed assessment of a company's executive compensation practices.  In its summary of the 2019 policy updates, Glass Lewis indicates that this new policy applies to smaller reporting companies, in light of recent SEC rule changes to the definition of "smaller reporting company" that expand the number of registrants qualifying for scaled disclosure accommodations in their SEC filings, including in the area of executive compensation.
Shareholder Proposals In addition to special meeting shareholder proposals (discussed above), Glass Lewis has also updated its policies on other shareholder proposals in several respects:
  • Environmental and social proposals.  Glass Lewis has formalized the role that financial materiality will play in its consideration of environmental and social proposals.  In the discussion of its "Overall Approach" to these proposals, Glass Lewis states that it will evaluate shareholder proposals on environmental and social issues "in the context of the financial materiality of the issue to the company's operations" and will "place a significant emphasis on the financial implications of a company adopting, or not adopting" a proposal.  Glass Lewis believes that all companies face risks associated with environmental and social issues, but that these risks manifest themselves differently at different companies, based on factors including a company's operations, workforce, structure and geography.  Glass Lewis plans to use the standards developed by the Sustainability Accounting Standards Board ("SASB") to assist it in determining financial materiality.
  • Written consent proposals.  If a company has adopted a special meeting right of 15% or lower and reasonable proxy access provisions, Glass Lewis will generally recommend that shareholders vote "against" a shareholder proposal seeking the right for shareholders to act by written consent.
  • Workforce diversity.  Glass Lewis has adopted a formal policy on shareholder proposals asking companies to provide disclosure about workforce diversity or efforts to promote diversity within the workforce.  In making voting recommendations, Glass Lewis will consider a company's industry and the nature of its operations, the company's current disclosures on issues involving workforce diversity, the level of disclosure at peer companies, and any lawsuits or accusations of discrimination within the company.

Gibson Dunn's lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm's Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups: Securities Regulation and Corporate Governance Group Elizabeth Ising - Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski - New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Ronald O. Mueller - Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Gillian McPhee - Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Aaron Briggs - San Francisco (+1 415-393-8297, abriggs@gibsondunn.com) Maia Gez - New York (+1 212-351-2612, mgez@gibsondunn.com) Julia Lapitskaya - New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera - Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Executive Compensation and Employee Benefits Group Sean C. Feller - Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Michael J. Collins - Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Krista Hanvey - Dallas (+1 214-698-3425; khanvey@gibsondunn.com)  © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 30, 2018 |
Webcast: Spinning Out and Splitting Off – Navigating Complex Challenges in Corporate Separations

In the current strong market environment, spin-off deals have become a regular feature of the M&A landscape as strategic companies look for ways to maximize the value of various assets. Although the announcements have become routine, planning for and completing these transactions is a significant and multi-disciplinary undertaking. By its nature, a spin-off is at least a 3-in-1 transaction starting with the reorganization and carveout of the assets to be separated, followed by the negotiation of separation-related documents and finally the offering of the securities—and that does not even account for the significant tax, corporate governance, finance, IP and employee benefits aspects of the transaction. In this program, a panel of lawyers from a number of these key practice areas provided insights based on their recent experience structuring and executing spin-off transactions. They walked through the hot topics, common issues and potential work-arounds.

View Slides (PDF)


[embed]https://player.vimeo.com/video/298472380[/embed]

PANELISTS:

Daniel Angel is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Technology Transactions Practice Group and a member of its Strategic Sourcing and Commercial Transactions Practice Group. He is a transactional attorney who has represented clients on technology-related transactions since 2003. Mr. Angel has worked with a broad variety of clients ranging from market leaders to start-ups in a wide range of industries including financial services, private equity funds, life sciences, specialty chemicals, insurance, energy and telecommunications. Michael J. Collins is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects of employee benefits and executive compensation. He represents buyers and sellers in corporate transactions and companies in drafting and negotiating employment and equity compensation arrangements. Andrew L. Fabens is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Capital Markets Practice Group and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. Stephen I. Glover is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, including spin-offs and related transactions, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others. Elizabeth A. Ising is a partner in Gibson Dunn’s Washington, D.C. office, Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group and a member of the firm’s Hostile M&A and Shareholder Activism team and Financial Institutions Practice Group. She advises clients, including public companies and their boards of directors, on corporate governance, securities law and regulatory matters and executive compensation best practices and disclosures. Saee Muzumdar is a partner in Gibson Dunn’s New York office and a member of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border M&A activities and general corporate counseling. Daniel A. Zygielbaum is an associate in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Tax and Real Estate Investment Trust (REIT) Practice Groups. Mr. Zygielbaum’s practice focuses on international and domestic taxation of corporations, partnerships (including private equity funds), limited liability companies, REITs and their debt and equity investors. He advises clients on tax planning for fund formations and corporate and real estate acquisitions, dispositions, reorganizations and joint ventures.
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

October 22, 2018 |
IRS Provides Much Needed Guidance on Opportunity Zones through Issuance of Proposed Regulations

Click for PDF On October 19, 2018, the Internal Revenue Service (the "IRS") and the Treasury Department issued proposed regulations (the "Proposed Regulations") providing rules regarding the establishment and operation of "qualified opportunity funds" and their investment in "opportunity zones."[1]  The Proposed Regulations address many open questions with respect to qualified opportunity funds, while expressly providing in the preamble that additional guidance will be forthcoming to address issues not resolved by the Proposed Regulations.  The Proposed Regulations should provide investors, sponsors and developers with the answers needed to move forward with projects in opportunity zones.

Opportunity Zones

Qualified opportunity funds were created as part of the tax law signed into law in December 2017 (commonly known as the Tax Cuts and Jobs Act ("TCJA")) to incentivize private investment in economically underperforming areas by providing tax benefits for investments through qualified opportunity funds in opportunity zones.  Opportunity zones are low-income communities that were designated by each of the States as qualified opportunity zones – as of this writing, all opportunity zones have been designated, and each designation remains in effect from the date of designation until the end of the tenth year after such designation. Investments in qualified opportunity funds can qualify for three principal tax benefits: (i) a temporary deferral of capital gains that are reinvested in a qualified opportunity fund, (ii) a partial exclusion of those reinvested capital gains on a sliding scale and (iii) a permanent exclusion of all gains realized on an investment in a qualified opportunity fund that is held for a ten-year period.
  • In general, all capital gains realized by a person that are reinvested within 180 days of the recognition of such gain in a qualified opportunity fund for which an election is made are deferred for U.S. federal income tax purposes until the earlier of (i) the date on which such investment is sold or exchanged and (ii) December 31, 2026.
  • In addition, an investor's tax basis in a qualified opportunity fund for purposes of determining gain or loss, is increased by 10 percent of the amount of gain deferred if the investment is held for five years prior to December 31, 2026 and is increased by an additional 5 percent (for a total increase of 15 percent) of the amount of gain deferred if the investment is held for seven years prior to December 31, 2026.
  • Finally, for investments in a qualified opportunity fund that are attributable to reinvested capital gains and held for at least 10 years, the basis of such investment is increased to the fair market value of the investment on the date of the sale or exchange of such investment, effectively eliminating any gain (other than the deferred gain that was reinvested in the qualified opportunity fund and taxable or excluded as described above) in the investment for U.S. federal income tax purposes (such benefit, the "Ten Year Benefit").
A qualified opportunity fund, in general terms, is a corporation or partnership that invests at least 90 percent of its assets in "qualified opportunity zone property," which is defined under the TCJA as "qualified opportunity zone business property," "qualified opportunity zone stock" and "qualified opportunity zone partnership interests."  Qualified opportunity zone business property is tangible property used in a trade or business within an opportunity zone if, among other requirements, (i) the property is acquired by the qualified opportunity fund by purchase, after December 31, 2017, from an unrelated person, (ii) either the original use of the property in the opportunity zone commences with the qualified opportunity fund or the qualified opportunity fund "substantially improves" the property by doubling the basis of the property over any 30 month period after the property is acquired and (iii) substantially all of the use of the property is within an opportunity zone.  Essentially, qualified opportunity zone stock and qualified opportunity zone partnership interests are stock or interests in a corporation or partnership acquired in a primary issuance for cash after December 31, 2017 and where "substantially all" of the tangible property, whether leased or owned, of the corporation or partnership is qualified opportunity zone business property.

The Proposed Regulations – Summary and Observations

The powerful tax incentives provided by opportunity zones attracted substantial interest from investors and the real estate community, but many unresolved questions have prevented some taxpayers from availing themselves of the benefits of the law.  A few highlights from the Proposed Regulations, as well as certain issues that were not resolved, are outlined below. Capital Gains The language of the TCJA left open the possibility that both capital gains and ordinary gains (e.g., dealer income) could qualify for deferral if invested in a qualified opportunity fund.  The Proposed Regulations provide that only capital gains, whether short-term or long-term, qualify for deferral if invested in a qualified opportunity fund and further provide that when recognized, any deferred gain will retain its original character as short-term or long-term. Taxpayer Entitled to Deferral The Proposed Regulations make clear that if a partnership recognizes capital gains, then the partnership, and if the partnership does not so elect, the partners, may elect to defer such capital gains.  In addition, the Proposed Regulations provide that in measuring the 180-day period by which capital gains need to be invested in a qualified opportunity fund, the 180-day period for a partner begins on the last day of the partnership's taxable year in which the gain is recognized, or if a partner elects, the date the partnership recognized the gain.  The Proposed Regulations also state that rules analogous to the partnership rules apply to other pass-through entities, such as S corporations. Ten Year Benefit The Ten Year Benefit attributable to investments in qualified opportunity funds will be realized only if the investment is held for 10 years.  Because all designations of qualified opportunity zones under the TCJA automatically expire no later than December 31, 2028, there was some uncertainly as to whether the Ten Year Benefit applied to investments disposed of after that date.  The Proposed Regulations expressly provide that the Ten Year Benefit rule applies to investments disposed of prior to January 1, 2048. Qualified Opportunity Funds The Proposed Regulations generally provide that a qualified opportunity fund is required to be classified as a corporation or partnership for U.S. federal income tax purposes, must be created or organized in one of the 50 States, the District of Columbia, or, in certain cases a U.S. possession, and will be entitled to self-certify its qualification to be a qualified opportunity fund on an IRS Form 8996, a draft form of which was issued contemporaneously with the issuance of the Proposed Regulations. Substantial Improvements Existing buildings in qualified opportunity zones generally will qualify as qualified opportunity zone business property only if the building is substantially improved, which requires the tax basis of the building to be doubled in any 30-month period after the property is acquired.  In very helpful rule for the real estate community, the Proposed Regulations provide that, in determining whether a building has been substantially improved, any basis attributable to land will not be taken into account.  This rule will allow major renovation projects to qualify for qualified opportunity zone tax benefits, rather than just ground up development.  This rule will also place a premium on taxpayers' ability to sustain a challenge to an allocation of purchase price to land versus improvements. Ownership of Qualified Opportunity Zone Business Property In order for a fund to qualify as a qualified opportunity fund, at least 90 percent of the fund's assets must be invested in qualified opportunity zone property, which includes qualified opportunity zone business property.  For shares or interests in a corporation or partnership to qualify as qualified opportunity zone stock or a qualified opportunity zone partnership interest, "substantially all" of the corporation's or partnership's assets must be comprised of qualified opportunity zone business property. In a very helpful rule, the Proposed Regulations provide that cash and other working capital assets held for up to 31 months will count as qualified opportunity zone business property, so long as (i) the cash and other working capital assets are held for the acquisition, construction and/or or substantial improvement of tangible property in an opportunity zone, (ii) there is a written plan that identifies the cash and other working capital as held for such purposes, and (iii) the cash and other working capital assets are expended in a manner substantially consistent with that plan. In addition, the Proposed Regulations provide that for purposes of determining whether "substantially all" of a corporation's or partnership's tangible property is qualified opportunity zone business property, only 70 percent of the tangible property owned or leased by the corporation or partnership in its trade or business must be qualified opportunity zone business property. Qualified Opportunity Funds Organized as Tax Partnerships Under general partnership tax principles, when a partnership borrows money, the partners are treated as contributing money to the partnership for purposes of determining their tax basis in their partnership interest.  As a result of this rule, there was uncertainty regarding whether investments by a qualified opportunity fund that were funded with debt would result in a partner being treated, in respect of the deemed contribution of money attributable to such debt, as making a contribution to the partnership that was not in respect of reinvested capital gains and, thus, resulting in a portion of such partner's investment in the qualified opportunity fund failing to qualify for the Ten Year Benefit.  The Proposed Regulations expressly provide that debt incurred by a qualified opportunity fund will not impact the portion of a partner's investment in the qualified opportunity fund that qualifies for the Ten Year Benefit. The Proposed Regulations did not address many of the other open issues with respect to qualified opportunity funds organized as partnerships, including whether investors are treated as having sold a portion of their interest in a qualified opportunity fund and thus can enjoy the Ten Year Benefit if a qualified opportunity fund treated as a partnership and holding multiple investments disposes of one or more (but not all) of its investments.  Accordingly, until further guidance is issued, we expect to see most qualified opportunity funds organized as single asset corporations or partnerships. Effective Date In general, taxpayers are permitted to rely upon the Proposed Regulations so long as they apply the Proposed Regulations in their entirety and in a consistent manner.

   [1]   Prop. Treas. Reg. §1.1400Z-2 (REG-115420-18).

Gibson Dunn's lawyers are available to assist with any questions you may have regarding these developments.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax Practice Group, or the following authors: Brian W. Kniesly - New York (+1 212-351-2379, bkniesly@gibsondunn.com) Paul S. Issler - Los Angeles (+1 213-229-7763, pissler@gibsondunn.com) Daniel A. Zygielbaum - New York (+1 202-887-3768, dzygielbaum@gibsondunn.com) Please also feel free to contact any of the following leaders and members of the Tax practice group: Jeffrey M. Trinklein - Co-Chair, London/New York (+44 (0)20 7071 4224 / +1 212-351-2344), jtrinklein@gibsondunn.com) David Sinak - Co-Chair, Dallas (+1 214-698-3107, dsinak@gibsondunn.com) David B. Rosenauer - New York (+1 212-351-3853, drosenauer@gibsondunn.com) Eric B. Sloan - New York (+1 212-351-2340, esloan@gibsondunn.com) Romina Weiss - New York (+1 212-351-3929, rweiss@gibsondunn.com) Benjamin Rippeon - Washington, D.C. (+1 202-955-8265, brippeon@gibsondunn.com) Hatef Behnia - Los Angeles (+1 213-229-7534, hbehnia@gibsondunn.com) Dora Arash - Los Angeles (+1 213-229-7134, darash@gibsondunn.com) Scott Knutson - Orange County (+1 949-451-3961, sknutson@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 6, 2018 |
Webcast: IPO and Public Company Readiness: Focus on Executive Compensation

As far as compensation is concerned, everything changes once a company goes public. Stock price values increase, sometimes dramatically, from when the company was private. There is now a public market on which employees can monetize their vested stock awards. A multitude of new laws require significant compliance efforts. Companies now have to consider a much broader group of stockholder and influencer interests. As a company prepares for its initial public offering, it needs to give special consideration to its compensation philosophy, structure, process and elements. A number of steps can be taken before an IPO which cannot be taken, or won’t be as effective, afterwards. This webinar provides an overview of:

  • common differences between private and public company compensation programs and how newly public companies can best plan for those differences;
  • equity compensation plan design for public companies, including both broad based equity plans and employee stock purchase plans;
  • governance and regulatory considerations, including the need to maintain an independent compensation committee;
  • executive compensation disclosures, including the Compensation Discussion and Analysis (CD&A) and executive compensation tables;
  • shareholder advisory firm guidelines in the executive compensation area, such as those issued by Institutional Shareholder Services (ISS) and Glass Lewis; and
  • ongoing public company compensation consideration, including annual say-on-pay and say-on-frequency votes and CEO pay ratio disclosures.
View Slides [PDF] https://player.vimeo.com/video/288785027
PANELISTS: Stephen W. Fackler is a partner in the Firm’s Palo Alto and New York offices and Co-Chair of Gibson Dunn’s Executive Compensation and Employee Benefits Practice Group. Over the years, Mr. Fackler has advised scores of companies planning to go public and assisted them with the implementation of the changes to their equity and cash compensation plans and programs in advance of their IPOs. Mr. Fackler has been selected by Chambers and Partners as a Leading Employee Benefits Lawyer each year since 2006 (the first year in which the category was included) in its publication and for the last few years has been ranked in the highest Tier 1 band. He has been named among the Top 20 Most Powerful Lawyers for Employee Benefits and ERISA in the United States in Human Resource Executive magazine and Lawdragon every year from 2012 through 2018. Just recently he was named 2019 “Lawyer of the Year” in the area of Employee Benefits in the Silicon Valley/San Jose region. Sean C. Feller is a partner in the Firm’s Century City office and member of the Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects executive compensation and employee benefits. His practice encompasses tax, ERISA, accounting, corporate, and securities law aspects of equity and other incentive compensation plans; qualified and nonqualified retirement and deferred compensation plans and executive employment and severance arrangements. Mr. Feller has been recognized by his peers as one of The Best Lawyers in America in the area of Employee Benefits (ERISA) Law. BTI Consulting named Mr. Feller as a 2018 BTI Client Service Super All-Star, one of six “standout attorneys who received recognition from multiple influential General Counsel and legal decision makers.” In 2017, he was ranked by Chambers USA as a Leading Lawyer in California in the area of Employee Benefits and Executive Compensation. Stewart L. McDowell is a partner in the Firm’s San Francisco office, a member of the Corporate Transactions Practice Group and Co-Chair of the Capital Markets Practice Group. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments. The Recorder has named Ms. McDowell as a “Women Leader in Tech Law” for the last four years. She is ranked by Chambers USA for Capital Markets: Debt & Equity (California), and was named a “Top Woman Lawyer” by the Daily Journal in 2017. Krista P. Hanvey is an associate in the Firm's Dallas office and member of the Executive Compensation and Employee Benefits Practice Group. Her practice focuses on all aspects of equity compensation and employee stock purchase plans; 401(k), ESOP and 403(b) tax-qualified retirement and nonqualified deferred compensation plans; executive employment, severance, change in control and non-compete agreements; performance bonus, sales commission and other incentive pay plans; and retiree medical, cafeteria and other welfare benefit plans. She regularly advises clients on the requirements of and compliance with tax laws, ERISA, HIPPA, COBRA, the Affordable Care Act and securities laws. Ms. Hanvey also has significant experience with all aspects of health and welfare benefit plan, retirement plan, and executive compensation compliance, planning, and transactional matters. She has also advised clients with respect to general corporate governance matters and regularly handles non-profit governance and pro bono adoption cases.

August 30, 2018 |
IRS Issues Initial Selective Guidance on New Section 162(m) Provisions, including Transition Rules

Click for PDF On August 21, 2018, the IRS released Notice 2018-68, which provides initial guidance regarding changes made to Section 162(m) of the Internal Revenue Code ("Section 162(m)") by last year's Tax Cuts and Jobs Act (the "Act"). Since 1993, Section 162(m) has imposed a limit on federal income tax deductibility by publicly traded corporations for compensation paid to certain senior executives—generally the same executives whose compensation is disclosed in the corporation's proxy statement, who are referred to under Section 162(m) as "covered employees".  Section 162(m) has not imposed material increased tax costs on most publicly traded corporations since its enactment, probably mostly due to the exception for "performance-based compensation"—which includes cash bonuses, stock options, performance stock and similar awards— and the exclusion for amounts paid after termination of employment (such as deferred compensation and severance), at the same time that executive pay has increased significantly because of grants of cash and stock awards based on performance. The Act amends Section 162(m) in a number of substantial ways to expand the scope of coverage and limit the exceptions for compensation subject to its deduction limit.  The general view is that these amendments were part of a much broader effort to find ways to limit the federal government's revenue loss resulting from the Act's dramatic decrease in overall corporate income tax rates, with the maximum rate dropping from 35 to 21 percent.  The Act, among other things, (1) includes a public corporation's Chief Financial Officer as a "covered employee" (which was the case prior to changes in the proxy reporting rules in 2009), (2) provides that once an executive becomes a "covered employee", that executive remains a "covered employee" in perpetuity, (3) eliminates the current exception from the $1 million deductibility limit for "performance-based compensation", and (4) applies the limit even for amounts paid after termination of employment. The Act generally becomes effective for a public corporation's tax year beginning in 2018.  As part of the transition to the new law, the Act contains an exemption from the new law for "written binding contracts" in effect on November 2, 2017 (the date that the bill was introduced in the House of Representatives).  Specifically, the Act states that the changes to Section 162(m) "shall not apply to remuneration which is provided pursuant to a written binding contract which was in effect on November 2, 2017, and which was not modified in any material respect on or after such date."  In other words, the pre-Act Section 162(m) rules generally continue to apply to these arrangements.  Notice 2018-68 is intended to answer some of the many questions raised by taxpayers, particularly with respect to the changes in the definition of "covered employee" and the application of the transition rule (also referred to as the "grandfather rules").

Who is considered a "covered employee?"

Under the Act, a "covered employee" means any employee who is a principal executive officer (PEO) or principal financial officer (PFO) of a publicly held corporation or was an individual acting in that capacity at any time during the tax year . It also includes any additional employees whose total compensation for the applicable tax year places that employee among the three-highest compensated officers of the taxable year. At first glance, the definition looks like it covers the same group of executives whose compensation is subject to disclosure under federal securities laws in a publicly traded corporation's proxy statement.  However, the Notice clarifies that there is no "end of year" requirement for determining the three highest compensated executives who did not serve during the year as PEO or PFO, which means that an executive officer can be a "covered employee" under Section 162(m) even if his or her compensation is not required to be disclosed in the corporation's Summary Compensation Table under the rules of the Securities and Exchange Commission ("SEC"). The Notice provides an example where a corporation's three most highly-compensated executives other than the PFO and PEO all terminated employment during the applicable taxable year.  In that instance, even though one of those individuals would not be considered a "named executive officer" under SEC rules, all three are considered "covered employees" under the new rules. Additionally, since the IRS will disregard the limited disclosure rules under the securities laws for smaller reporting companies and emerging growth companies for Section 162(m) purposes, those companies will find that they will need to calculate total compensation for more executives for purposes of Section 162(m) than is needed to satisfy the reporting requirements under the SEC's rules. The Act also expands the definition of "covered employee" such that once an executive is a covered employee in any taxable year beginning after December 31, 2016, that status is retained forever and therefore covers all compensation paid to the executive for the remainder of his or her life, including compensation paid after the executive's termination of employment (and even if it is paid to a beneficiary or heir after the executive's death).  Prior law provided that an executive would cease to be a "covered employee" after his or her departure from the corporation, and therefore compensation paid after the executive was no longer a "covered employee" was not subject to Section 162(m). The IRS has provided a few examples to illustrate these changes. While the IRS has requested comments on how the rules should be applied to a corporation whose taxable year ends on a different date than its last completed fiscal year, the working principle that it has adopted in one of the examples is that if the corporation has a short tax year of less than 12 calendar months, the calculations to determine who is a "covered employee" will need to be completed independently for the short year.

What constitutes compensation paid under a written binding contract?

In general, compensation is considered as paid, or payable, under a written binding contract only to the extent that the corporation is obligated to pay the compensation under applicable law. Unless an agreement is renewed or modified, any compensatory payments made pursuant to such a written binding contract that was in effect on November 2, 2017, and that would have not been subject to the deduction limitation under Section 162(m) as it existed before the Act, are not subject to the deductibility limitation under the new rules.  The Notice emphasizes that in the case of executive employment agreements, even those with automatic renewal provisions, payments made under the agreement will generally be subject to the new law at the time that the contract is renewed or extended. Under prior law, "performance-based compensation" did not lose its exemption if the compensation committee of the board of directors of the corporation decided to unilaterally reduce the amount, which was called "negative discretion".  The Notice provides an example clarifying that to the extent an agreement or plan allows for a corporation to exercise this negative discretion with respect to performance-based compensation under a pre-November 3, 2017 written binding contract, the corporation may only deduct the amount that is not subject to such discretion.  This example implies that where a corporation had a right to reduce performance-based compensation to zero regardless of actual performance, no portion of the compensation would be considered grandfathered for purposes of the Act.  However, this example, and the underlying reasoning, should not apply to plans or agreements by which negative discretion is exercised by establishing the actual performance goals to be achieved, which have been referred to as "umbrella plans" or a "plan within a plan", so long as the actual goals were established on or before November 2, 2017.  Of course, this arrangement will only be grandfathered for as long as those pre-established goals remain in effect.  In addition, whether there was a right to reduce compensation payable presumably would have to be determined under applicable state law.  For example, if a plan includes a negative discretion right that the company has never exercised, this practice may mean that there is no actual negative discretion for state contract law purposes. The Notice also provides some examples clarifying that payments made pursuant to non-qualified deferred compensation programs in effect on November 2, 2017 will be grandfathered to the extent the corporation cannot unilaterally freeze or reduce future contributions.  Since in our experience most non-qualified deferred compensation plans contain provisions that allow the plan sponsor to amend or terminate those plans with few restrictions, these examples send a signal that those public corporations with non-qualified deferred compensation arrangements may need to reach out to the plan administrators to make sure that benefits as of November 2, 2017 are being calculated for future use, since for those sorts of plans, that may well be the only eligible benefit not subject to the new rules.

What is considered a material modification?

An agreement will be considered materially modified (and thus no longer eligible for grandfather treatment under the Act) if the agreement is amended to (1) increase the amount of compensation paid (other than in an amount equal to or less than a cost-of-living increase), (2) accelerate the payment of compensation without a time-value discount, (3) defer the payment of compensation, except to the extent any increase in the value of the deferred amount is based on either a reasonable rate of interest or a predetermined actual investment, or (4) make payments on the basis of substantially the same elements or conditions as the compensation payable pursuant to such agreement. The Notice contains an example in which a covered employee who has a grandfathered employment agreement providing for the payment of a fixed salary receives a restricted stock grant after November 2, 2017.  The example states that the grant of restricted stock is not a material modification because the stock grant is not paid on "substantially the same elements or conditions" as the salary.  (However, any payments under the stock grant itself will be subject to the new law.) To the extent an agreement is considered materially modified, all amounts received under the agreement after the effective date of such modification will be subject to the new rules, while the amounts received prior to the modification will remain protected under the grandfather rules.

Does the Act impact renewable agreements?

An agreement that is renewed after November 2, 2017 will be no longer be protected by the grandfather rules. An agreement is considered renewed on the date the agreement can be terminated by the corporation. An agreement is not considered renewable if it can only be terminated either (1) by the employee or (2) by having to terminate not only the agreement, but also the employee's employment with the corporation.

How should public corporations proceed?

The changes to Section 162(m) made by the Act will result in large losses of tax deductions for compensation paid to executives classified as "covered employees".  Based on the guidance issued in the Notice, the IRS has indicated that it intends to interpret the statute and the transition rule in ways that are intended to maximize the amount of compensation that will be subject to the new rules.  In particular, the Notice and its examples indicate that the IRS plans to interpret the "written binding contract" transition rule narrowly. When determining if an agreement is a "written binding contract," we recommend consulting with counsel since the assessment of whether an agreement is required to be paid under applicable law will require analysis of applicable state law. We recommend that public corporations subject to Section 162(m) take careful inventory of all outstanding plans, agreements and arrangements that were in place on or before November 2, 2017 with one or more executives who are "covered employees".  These arrangements should be reviewed to determine if and to what extent the grandfather rules can be relied upon.  In the case of deferred compensation, corporations should determine the amounts attributable to each participant who is or may become a "covered employee" that were accrued on or before November 2, 2017.  Such amounts will remain deductible when paid to the extent that they would have been deductible under the prior rules.  In some cases, coordination with plan administrators will be necessary.  Additionally, corporations should consider the potential tax impact of the new law and the IRS's interpretive guidance prior to making any changes to plans or agreements in effect as of November 2, 2017.

This Client Alert necessarily only scratches the surface of this complex topic.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following authors:

Stephen W. Fackler - Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins - Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller - Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Arsineh Ananian - Los Angeles (+1 213-229-7764, aananian@gibsondunn.com)

© 2018 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
Shareholder Proposal Developments During the 2018 Proxy Season

Click for PDF This client alert provides an overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

Top Shareholder Proposal Takeaways From the 2018 Proxy Season

As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year:
  • Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention.  Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors.  In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%.  However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds).
  • It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas.  Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015.  This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents.  However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request.  In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments. 
  • Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward.  The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases.  Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business.  In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful).  Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance.  It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis.
  • Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted.  Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support.  We expect these proposals will continue to be popular going into next year.  Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals.  In addition, large asset managers are increasingly articulating their support for greater board diversity.
  • Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings.  Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016.  With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year.  At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny.
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Gibson Dunn's lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm's Securities Regulation and Corporate Governance practice group:

Ronald O. Mueller - Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising - Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski - New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee - Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez - New York (+1 212-351-2612, mgez@gibsondunn.com) Aaron Briggs - San Francisco (415-393-8297, abriggs@gibsondunn.com) Julia Lapitskaya - New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera - Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)

© 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 18, 2018 |
Fifth Circuit Vacates Labor Department’s “Fiduciary Rule” “In Toto” in Chamber of Commerce of U.S.A., et al. v. U.S. Dep’t of Labor

Click for PDF On March 15, 2018, in a 2-1 opinion, the U.S. Court of Appeals for the Fifth Circuit struck down the U.S. Department of Labor's controversial "Fiduciary Rule."[1]  The Rule would have expanded who is a "fiduciary" under ERISA and the Internal Revenue Code, imposing significant new obligations and liabilities on broker-dealers and insurance agents who sell annuities to IRAs.  As the Fifth Circuit's opinion explained, the Department had "made no secret of its intent to transform the trillion-dollar market for IRA investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market."[2] The Fifth Circuit ruled for plaintiffs—the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association ("SIFMA"), the Financial Services Institute ("FSI"), the Financial Services Roundtable ("FSR"), the Insured Retirement Institute ("IRI"), and other leading trade associations—on each of their principal arguments.  Specifically, the Court reasoned that the Labor Department's new definition of "fiduciary" was inconsistent with the plain text of ERISA and the Internal Revenue Code, as well as with the common-law meaning of "fiduciary," which depends upon a special relationship of trust and confidence; that the Department impermissibly abused its authority to grant exemptions from regulatory burdens as a tool to impose expansive new duties that were beyond its power to impose; and that the rule impermissibly created private rights of action against brokers and insurance agents when Congress had not authorized those claims.  The Court therefore held that the Fiduciary Rule and the exemptions adopted alongside it were arbitrary, capricious, and unlawful under the Administrative Procedure Act ("APA"), and vacated them "in toto."[3] Under the APA, "vacatur" is a remedy by which courts "set aside agency action" that is arbitrary and capricious or otherwise outside of the agency's statutory authority.[4]  Its effect is to "nullify or cancel; make void; invalidate."[5]  Because the effect of vacatur is, in essence, to remove a regulation from the books, its effect is nationwide.  As the U.S. Court of Appeals for the D.C. Circuit has explained, "When a reviewing court determines that agency regulations are unlawful, the ordinary result is that the rules are vacated—not that their application to the individual petitioners is proscribed."[6]  The Fifth Circuit's judgment, which is scheduled to take effect on May 7, thus will effectively erase the "fiduciary" rule from the books without geographical limitation. The Fifth Circuit's decision was the second ruling last week to address the Fiduciary Rule.  On March 13, the Tenth Circuit addressed a more limited challenge to one aspect of the Rule, specifically, the procedures and reasoning followed by the Department in regulating products known as "fixed indexed annuities."[7]  Although the Tenth Circuit rejected that challenge, it made clear it was not addressing two threshold issues that had not been presented:  whether the Labor Department had authority to promulgate the Rule and whether the Rule permissibly defined the term "fiduciary."  The March 15 decision of the Fifth Circuit now conclusively resolves those questions in the negative.  And because the Fifth Circuit vacated the Rule on grounds the Tenth Circuit did not address, no "circuit conflict" is presented by the two decisions.[8] Gibson Dunn represented the U.S. Chamber of Commerce, SIFMA, the FSI, FSR, and IRI, among other associations, in their successful challenge to the Fiduciary Rule.  The American Council of Life Insurers and the Indexed Annuity Leadership Council filed parallel actions through separate counsel at WilmerHale and Sidley Austin, and Gibson Dunn presented oral argument before the Fifth Circuit for all three cases.


   [1]   Chamber of Commerce of the U.S.A., et al. v. U.S. Dep't of Labor, et al., No. 17-10238, slip op. 46 (5th Cir. Mar. 15, 2018).
   [2]   Id. at 45.
   [3]   Id. at 46.
   [4]   5 U.S.C. § 706(2).
   [5]   Black's Law Dictionary (online 10th ed. 2014).  See, e.g., Kelso v. U.S. Dep't of State, 13 F. Supp. 2d 12, 17 (D.D.C. 1998) (quoting United States v. Munsingwear, Inc., 340 U.S. 36, 41 (1950)) (explaining that "basic understandings of vacatur dramatize that, by definition, that which is vacated loses the ability to 'spawn[ ] any legal consequences'").
   [6]   Nat'l Mining Ass'n v. U.S. Army Corps of Engineers, 145 F.3d 1399, 1409 (D.C. Cir. 1998) (quoting Harmon v. Thornburgh, 878 F.2d 484, 495 n.21 (D.C. Cir. 1989)).
   [7]   See Mkt. Synergy Grp. v. U.S. Dep't of Labor, et al., No. 17-3038 (10th Cir. Mar. 13, 2018)
   [8]   A third challenge to the Fiduciary Rule is currently being held in abeyance.  See Nat'l Ass'n for Fixed Annuities v. U.S. Dep't of Labor, et al., No. 16-5345 (D.C. Cir. Feb. 22, 2018) (holding case in abeyance pending joint status report within 10 days of the decision of the Fifth Circuit).

The following Gibson Dunn lawyers assisted in preparing this client update: Eugene Scalia, Jason Mendro, Andrew Kilberg and Brian Lipshutz. Gibson Dunn's lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Eugene Scalia - Washington, D.C. (+1 202-955-8206, escalia@gibsondunn.com) Jason J. Mendro - Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Please also feel free to contact the following practice group leaders: Administrative Law and Regulatory Practice: Eugene Scalia - Washington, D.C. (+1 202-955-8206, escalia@gibsondunn.com) Helgi C. Walker - Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com) Labor and Employment Practice: Catherine A. Conway - Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz - Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Executive Compensation and Employee Benefits Practice: Michael J. Collins - Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Stephen W. Fackler - Palo Alto/New York (+1 650-849-5385/212-351-2392, sfackler@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 31, 2018 |
IRS Issues First “Required Amendments List” for Tax-Qualified Retirement Plans Under New Program

Click for PDF In Revenue Procedure 2016-37 (issued in June 2016), the Internal Revenue Service substantially modified its determination letter program for tax-qualified retirement plans, such as pension plans and 401(k) plans.  (See the Gibson Dunn client alert:  http://www.gibsondunn.com/publications/Pages/IRS--Additional-Guidance--Changes-to-Determination-Letter-Program-for-Qualified-Retirement-Plans.aspx).  In the past, retirement plans would be eligible to submit an application for a determination letter every five years, and adopt "interim amendments" each year based on an IRS-provided list.  A favorable IRS determination letter states that the IRS has concluded that the terms of the retirement plan comply with the tax laws in effect at the time that the letter is issued.  It has the practical effect of preventing the IRS from asserting that the form of the plan does not comply with the extremely complicated tax laws regulating retirement plans, and arguing that as a result, the plan should be disqualified from enjoying the favorable tax treatment for tax-qualified retirement plans under the Internal Revenue Code.  Since one of the consequences of disqualification is the immediate taxation of all vested benefits of every participant in the plan as well as current taxation of all earnings on plan investments, retirement plans have routinely applied to obtain a favorable determination letter every five years.  The IRS letter has been widely viewed as a form of inexpensive insurance against the risk of plan disqualification. The new determination letter program dramatically reduces the number of retirement plans that are eligible to request an individual determination letter from the IRS.  As a general rule, only newly adopted plans and terminating plans may apply for determination letters.  Ongoing retirement plans are basically excluded from requesting this letter.  Thus, many plan sponsors will not have the comfort of an IRS "seal of approval" that a plan continues to be tax-qualified in form. Under the new program, it becomes much more important to follow the IRS's publication of updated amendments and incorporate them into an ongoing plan in a timely manner.  Under Rev. Proc. 2016-37, the so-called "remedial amendment period" (the period during which legally-required plan amendments must be adopted) runs through the end of the second plan year beginning after the IRS issues its "required amendment list" (the "RA List").  The IRS recently issued its first RA List under the new program in Notice 2017-72.  Since most tax-qualified retirement plans use the calendar year as their plan year, the amendments set forth in Notice 2017-72 will need to be adopted by a calendar year retirement plan no later than December 31, 2019. This first RA List addresses only three items.  First, and, most broadly applicable, cash balance and other "hybrid" pension plans must be amended to reflect final regulations that were issued in 2014 and 2015 and generally became effective in 2017.  Second, "eligible cooperative plans" and "eligible charity plans" must include provisions restricting benefit distributions in certain circumstances that are applicable pursuant to the Pension Protection Act of 2006.  Third, for defined benefit plans that offer partial annuity options, regulations issued in 2016 must be incorporated to the extent necessary.  Thus, this first RA List has limited applicability.  Among other things, there are no provisions affecting 401(k) and other defined contribution plans. The most important takeaway from Notice 2017-72 is the reminder that the determination letter program has effectively ended for most retirement plans.  This will put more pressure on plan sponsors to ensure plans are timely updated and periodically reviewed by knowledgeable experts.  It can also be expected that plan auditors and acquirors in corporate transactions may seek legal opinions or other comfort that plans are tax-qualified in form since with the passage of time, the last IRS determination letter issued to a plan will become increasingly dated.  Employers who last received a favorable determination letter several years ago also should carefully review whether all prior IRS-required amendments have been adopted, because adopting "interim amendments" and then waiting until the next 5-year determination letter cycle to update plan documents is no longer an option.


Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following:

Stephen W. Fackler - Palo Alto and New York (+1 650-849-5385 and 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins - Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller - Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey - Dallas (+1 214-698-3425; khanvey@gibsondunn.com) 
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