On January 27, 2022, the Supreme Court of California issued a decision that changes the burden for employers that are defending against current or former employees’ whistleblower retaliation claims. In Lawson v. PPG Architectural Finishes, Inc., No. S266001,___ Cal.5th ___, the Court answered a question that the Ninth Circuit had certified in an effort to dispel “widespread confusion” over the evidentiary standard for retaliation claims bought under California Labor Code section 1102.5. Some courts had concluded the traditional burden-shifting framework set out in McDonnell Douglas Corp. v. Green (1972) 411 U.S. 792, should apply, with plaintiffs having to prove that they were retaliated against for a pretextual reason. Others had decided that the more employee-friendly California Labor Code section 1102.6 should apply, with employers having to prove by clear and convincing evidence that the plaintiffs would have suffered the challenged consequence (such as losing their jobs) even if they had not identified any wrongdoing. The California Supreme Court sided with the latter group, holding that section 1102.6’s framework applies both on summary judgment and at trial.
In Lawson, the plaintiff sued his former employer under section 1102.5 for firing him after he complained of allegedly fraudulent practices. The district court granted the employer’s motion for summary judgment on the ground that the plaintiff failed to demonstrate that the employer’s stated reasons for termination, including poor performance, were pretextual.
The issue on appeal was the appropriate framework for Lawson’s claim. The district court applied McDonnell Douglas’s three-part burden-shifting framework: (1) the employee establishes a prima facie case of retaliation; (2) the burden of production shifts to the employer to articulate a legitimate reason for its decision; and (3) the burden shifts back to the employee to show that that the employer’s reason is pretextual. Lawson argued the district court instead should have followed section 1102.6’s two-part framework, which mirrors the analysis required for retaliation claims brought under the Sarbanes-Oxley Act and related federal statutes: (1) the employee demonstrates (by a preponderance of the evidence) that retaliation was a “contributing factor” in the adverse employment action, and (2) the burden shifts to the employer to prove (by clear and convincing evidence) that the adverse action would have occurred even if the employee had not engaged in protected conduct. The Ninth Circuit certified the question to the California Supreme Court because, it observed, the “state’s appellate courts do not follow a consistent practice.”
In a unanimous decision written by Justice Leondra Kruger, the Court held that section 1102.6 governs section 1102.5 retaliation claims. The Court anchored its conclusion in the statutory text: The statute “[b]y its terms” specifies “the applicable substantive standards and burdens of proof.” The statute’s legislative history, by contrast, “yields no clear answers on the McDonnell Douglas question.” The Court also observed that the McDonnell Douglas framework is not “well suited” to employee-whistleblower claims because while McDonnell Douglas presumes an employer’s reason for adverse action “is either discriminatory or legitimate,” a section 1102.5 plaintiff can prove unlawful retaliation “even when other, legitimate factors also contributed to the adverse action.” Finally, the Court rejected the employer’s argument that the McDonnell Douglas framework should apply at least during the summary judgment stage, explaining that “the parties’ burdens of proof at summary judgment generally depend on their burdens of proof at trial.”
The Court’s decision changes the burden that employers must satisfy in attempting to prove that they took adverse employment actions for legitimate, nonretaliatory reasons. Under McDonnell Douglas, an employer has to show only a legitimate, nonretaliatory reason for its decision, at which point the burden shifts to the employee to prove that reason is pretextual. But under section 1102.6, an employer must instead prove, by “clear and convincing” evidence, that it would have taken the same action against the employee “even had the plaintiff not engaged in protected activity.” Section 1102.6 thus makes it easier for employees alleging retaliation to prove their case and avoid summary judgment. Yet the Court’s decision did not change plaintiffs’ burden to establish, by a preponderance of the evidence, that their protected activity “was a contributing factor in a contested employment action.” The Court also made clear that under the section 1102.6 framework, employers will “be able to raise a same-decision defense on summary judgment,” allowing courts to dismiss “meritless” retaliation claims before trial.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these matters or regarding developments at the California Supreme Court or in state or federal appellate courts in California. Please feel free to contact any member of the Appellate and Constitutional Law or Labor and Employment practice groups, or the following appellate lawyers in California:
Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)
Julian W. Poon – Los Angeles (+1 213-229-7758, jpoon@gibsondunn.com)
Theane Evangelis – Co-Chair, Litigation Group, Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Michael Holecek – Los Angeles (+1 213-229-7018, mholecek@gibsondunn.com)
Daniel R. Adler – Los Angeles (+1 213-229-7634, dadler@gibsondunn.com)
Ryan Azad – San Francisco (+1 415-393-8276, razad@gibsondunn.com)
Matt Aidan Getz – Los Angeles (+1 213-229-7754, mgetz@gibsondunn.com)
Matthew Ball – Denver (+1 303-298-5731, mnball@gibsondunn.com)
Please also feel free to contact the following Labor and Employment practice leaders and members:
Harris M. Mufson – Co-Head, Whistleblower Team of Labor & Employment Group, New York (+1 212-351-3805, hmufson@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
We are pleased to present Gibson Dunn’s ninth “Federal Circuit Year In Review,” providing a statistical overview and substantive summaries of the 76 precedential patent opinions issued by the Federal Circuit between August 1, 2020 and July 31, 2021. This term included significant panel decisions in patent law jurisprudence with regard to standing (ABS Global, Inc. v. Cytonome/ST, LLC, 984 F.3d 1017 (Fed. Cir. 2021) and Gen. Elec. Co. v. Raytheon Techs. Corp., 983 F.3d 1334 (Fed. Cir. 2020)); subject matter eligibility (cxLoyalty, Inc. v. Maritz Holdings Inc., 986 F.3d 1367 (Fed. Cir. 2021) and Illumina, Inc. v. Ariosa Diagnostics, Inc., 967 F.3d 1319 (Fed. Cir. 2020)); venue (In re Samsung Elecs. Co., 2 F.4th 1371 (Fed. Cir. 2021) and Valeant Pharms. N. Am. LLC v. Mylan Pharms. Inc., 978 F.3d 1374 (Fed. Cir. 2020)); IPR procedures (Facebook, Inc. v. Windy City Innovations, LLC, 973 F.3d 1321 (Fed. Cir. 2020)); and public accessibility of prior art (M & K Holdings, Inc. v. Samsung Elecs. Co., 985 F.3d 1376 (Fed. Cir. 2021) and VidStream LLC v. Twitter, Inc., 981 F.3d 1060 (Fed. Cir. 2020)). Each of these decisions, as well as all other precedential decisions issued by the Federal Circuit in the 2020‒2021 term, is summarized in the Federal Circuit Year In Review.
Use the Federal Circuit Year In Review to find out:
- The easy-to-use Table of Contents is organized by substantive issue, so that the reader can easily identify all of the relevant cases bearing on the issue of choice.
- Which issues may have a better chance (or risk) on appeal based on the Federal Circuit’s history of affirming or reversing on those issues in the past.
- The average length of time from issuance of a final decision in the district court and docketing at the Federal Circuit to issuance of a Federal Circuit opinion on appeal.
- What the success rate has been at the Federal Circuit if you are a patentee or the opponent based on the issue being appealed.
- The Federal Circuit’s history of affirming or reversing cases from a specific district court.
- How likely a particular panel may be to render a unanimous opinion or a fractured decision with a majority, concurrence, or dissent.
- The Federal Circuit’s affirmance/reversal rate in cases from the district court, ITC, and the PTO.
The Year In Review provides statistical analyses of how the Federal Circuit has been deciding precedential patent cases, such as affirmance and reversal rates (overall, by issue, and by District Court), average time from lower tribunal decision to key milestones (oral argument, decision), win rate for patentee versus opponent (overall, by issue, and by District Court), decision rate by Judge (number of unanimous, majority, plurality, concurring, or dissenting opinions), and other helpful metrics. The Year In Review is an ideal resource for participants in intellectual property litigation seeking an objective report on the Court’s decisions.
Gibson Dunn is nationally recognized for its premier practices in both Intellectual Property and Appellate litigation. Our lawyers work seamlessly together on all aspects of patent litigation, including appeals to the Federal Circuit from both district courts and the agencies.
Please click here to view the FEDERAL CIRCUIT YEAR IN REVIEW
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:
Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com)
Nathan R. Curtis – Dallas (+1 214-698-3423, ncurtis@gibsondunn.com)
Florina Yezril – New York (+1 212-351-2689, fyezril@gibsondunn.com)
Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:
Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com)
Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415-393-8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In February and March 2021, we published updates on global legislative developments in relation to mandatory human rights due diligence and supply chain reporting (see here and here).
At that time, it was expected that the European Commission (“EC”) would publish draft legislation at the pan-European level in the form of a Sustainable Corporate Governance proposal (“SCG”) in Summer 2021. The anticipated draft directive was hailed as a potential game-changer: directing how companies should manage matters in their own operations and value chains as regards human rights, climate change and the environment, and related governance.
By comparison, fewer material developments have arisen in the United States, with the most notable change to the law in this field in recent years being the California Transparency in Supply Chains Act 2010. But the landscape may be changing, both with the recently passed federal Uyghur Forced Labor Prevention Act and a new proposed law pending in New York State (the draft “Fashion Sustainability and Social Accountability Act”) that may impose significant reporting requirements on the fashion industry.
Pan-European Developments – EC draft legislation significantly delayed
As it stands, the EC draft directive has not yet been handed down and updates on its status have not been forthcoming from the EC. However, it is reported that the delay is a result of a (second) rejection by the EC’s internal Regulatory Scrutiny Board (an independent body charged with quality control and impact assessment of legislation). The latest indications by the EC are that the draft directive is now expected in February 2022.
Unsurprisingly, this delay has been met with widespread condemnation and concern from civil society. For example, on 8 December 2021, in an open letter signed by 47 civil society and trade union organizations to EC President Ursula von der Leyen (see here), complaints were made about delays to a “crucial new law that can help millions of people to demand justice against human rights violations…” and expressing “dee[p] concer[n]” about the “complete lack of transparency on the reasons for this new delay”. The letter called on the President to “publicly reiterate [the] commitment … to making supply chains of companies active on the EU market sustainable through ambitious, binding human rights and environmental due diligence legislation”.
US Developments – Groundbreaking draft legislation proposed
Meanwhile, in the US, human rights due diligence legislation has advanced with two meaningful developments.
On the federal level, on 23 December 2021, President Biden signed the Uyghur Forced Labor Prevention Act (the “UFLPA”) into law. The UFLPA creates a rebuttable presumption that all goods manufactured – even partially – in China’s Xinjiang Uyghur Autonomous Region are the product of forced labor and therefore not entitled to entry at US ports. The UFLPA also builds on prior legislation, such as the Uyghur Human Rights Policy Act of 2020, by expanding that Act’s authorization of sanctions to cover foreign individuals responsible for human rights abuses related to forced labor in the Xinjiang region. We explore the UFLPA in detail in our client alert, here.
On the state level, earlier this month, two New York State Senators introduced historic legislation to set broad sustainability mandates for the fashion industry – an industry which is (according to some estimates) responsible for approximately 4-8.6% of global greenhouse gas emissions. The Fashion Sustainability and Social Accountability Act (the “FSSAA”), sponsored by Senator Alessandra Biaggi and assembly member Dr. Anna Kelles, is a proposal that, if enacted, would require fashion retailers and manufacturers doing business in New York State with annual global gross revenues that exceed $100 million to publish extensive disclosures on their websites about their “environmental and social due diligence policies, processes and outcomes, including significant real or potential adverse environmental and social impacts” (see here). The FSSAA would therefore place obligations on many household fashion names and brands based around the world.
The disclosures under the draft FSSAA include, among other things: (i) supply chain mapping of at least 50% of suppliers by volume across all tiers of production; (ii) a “sustainability report” identifying each business’s risks, as informed by United Nations and International Labor Organization principles; (iii) independently verified greenhouse gas reporting; and (iv) quantitative measures, such as publishing the median wages of workers of suppliers compared with the local minimum wage. The FSSAA requires that all disclosures be made on the retail or manufacturer’s website within a year of the legislation’s enactment into law.
In terms of enforcement, the FSSAA, if passed, would require New York’s Attorney General (“AG”) to publish an annual report regarding companies’ compliance with the law. And, if enacted, failure to meet the legislation’s requirements would result in the AG having the power to fine sellers and manufacturers up to 2% of annual revenues of $450 million or more. Such money will then be deposited into a community benefit fund, which will be used for environmental projects that directly and verifiably benefit environmental justice communities.
While legislation can take years, advocates are hoping that the bill is passed by Spring 2022 and certainly no later than the end of the 2022 New York State legislative session in June. The legislation has four cosponsors and is currently pending before the New York House Consumer Affairs and Protection and Senate Consumer Protection Committees and, if it advances out of committee, it will be voted on by the full legislative body.
Conclusion
These initiatives in the US are a further indication of the general direction of evolving due diligence expectations. If enacted, the FSSAA would not only make waves in the fashion world, but could also foreshadow legislation requiring ESG disclosures for other industries in the US.
With this in mind, together with the anticipated EC legislation and individual country developments, companies should continue to reflect on their knowledge of their own supply chains, human rights and environmental risks within their business, and internal due diligence processes/compliance methodologies. The expectations of companies in terms of their substantive management of environmental and human rights risks, as well as their reporting obligations, looks set only to increase.
This alert has been prepared by Susy Bullock, Stephanie Collins, and Ryan Butcher* in London; and Roscoe Jones, Jr., Howard S. Hogan, Perlette Michèle Jura, and Jessica C. Benvenisty in the United States.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental, Social and Governance (ESG) practice, or the following authors in London and the US:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Stephanie Collins – London (+44 (0) 20 7071 4216, SCollins@gibsondunn.com)
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Jessica C. Benvenisty – New York (+1 212-351-2415, jbenvenisty@gibsondunn.com)
Please also feel free to contact the following ESG practice leaders:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, mmurphy@gibsondunn.com)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
* Ryan Butcher is a trainee solicitor working in the firm’s London office who is not yet admitted to practice law.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On the heels of a record-setting 2020, the year 2021 saw a more modest pace of Foreign Corrupt Practices Act (“FCPA”) enforcement, particularly as it relates to corporate actions. The inevitable slowdown from any changeover in presidential administrations, combined with the lingering impacts of the global pandemic, undoubtedly contributed to this phenomenon. But with the Biden Administration doubling down on the strategic importance of global anti-corruption enforcement, and with continuing robust FCPA-related enforcement against individuals, we fully anticipate a return to substantial corporate FCPA enforcement in the years to come.
This client update provides an overview of the FCPA and other domestic and international anti-corruption enforcement, litigation, and policy developments from 2021, as well as the trends we see from this activity. Gibson Dunn has the privilege of helping our clients navigate anti-corruption-related challenges every day, and we are honored to have been ranked again this year Number 1 in the Global Investigations Review “GIR 30” ranking of the world’s top investigations practices—Gibson Dunn’s fourth consecutive year and sixth in the last seven years to have been so honored. For more analysis on anti-corruption enforcement and related developments over the past year, we invite you to join us for our upcoming complimentary webcast presentations:
- “FCPA 2021 Year-End Update” on February 1, 2022 (to register, Click Here)
- “Corporate Compliance and U.S. Sentencing Guidelines” on March 30, 2022 (to register, Click Here)
FCPA OVERVIEW
The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business. These provisions apply to “issuers,” “domestic concerns,” and those acting on behalf of issuers and domestic concerns, as well as to “any person” who acts while in the territory of the United States. The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depositary Receipts (“ADRs”) or American Depositary Shares (“ADSs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA. The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States.
In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and those acting on their behalf. First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Second, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations. Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.
International corruption also may implicate other U.S. criminal laws. Increasingly, prosecutors from the FCPA Unit of the Department of Justice (“DOJ”) have been charging non-FCPA crimes such as money laundering, mail and wire fraud, Travel Act violations, tax violations, and even false statements, in addition to or instead of FCPA charges. Without question, the most prevalent amongst these “FCPA-related” charges is money laundering—a generic term used as shorthand for statutory provisions that generally criminalize conducting or attempting to conduct a transaction involving proceeds of “specified unlawful activity” or transferring funds to or from the United States, in either case to promote the carrying on of specified unlawful activity, to conceal or disguise the nature, location, source, ownership or control of the proceeds, or to avoid a transaction reporting requirement. “Specified unlawful activity” includes over 200 enumerated U.S. crimes and certain foreign crimes, including the FCPA, fraud, and corruption offenses under the laws of foreign nations. Although this has not always been the case, in recent years, DOJ has frequently deployed the money laundering statutes to charge “foreign officials” who are not themselves subject to the FCPA. It is now commonplace for DOJ to charge the alleged provider of a corrupt payment under the FCPA and the alleged recipient with money laundering violations.
FCPA AND FCPA-RELATED ENFORCEMENT STATISTICS
The below table and graph detail the number of FCPA enforcement actions initiated by DOJ and the Securities and Exchange Commission (“SEC”), the statute’s dual enforcers, during the past 10 years.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||
|
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
|
11 |
12 |
19 |
8 |
17 |
9 |
10 |
10 |
21 |
32 |
29 |
10 |
22 |
17 |
35 |
19 |
21 |
11 |
11 |
4 |
But as our readers know, the number of FCPA enforcement actions represents only a piece of the robust pipeline of international anti-corruption enforcement efforts by DOJ. Indeed, the increasing proportion of “FCPA-related” charges in the overall enforcement docket of FCPA prosecutors is a trend we have been remarking upon for years. In total, DOJ brought 17 such FCPA-related actions in 2021, bringing the overall anti-corruption figures for the past year to 28 cases filed or unsealed by DOJ. The past 10 years of FCPA plus FCPA-related enforcement activity is illustrated in the following table and graph.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||
|
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
DOJ |
SEC |
|
12 |
12 |
21 |
8 |
23 |
9 |
12 |
10 |
27 |
32 |
36 |
10 |
48 |
17 |
54 |
19 |
40 |
11 |
28 |
4 |
2021 FCPA-RELATED ENFORCEMENT TRENDS
In each of our year-end FCPA updates, we seek not merely to report on the year’s FCPA enforcement actions, but also to distill the thematic trends we see stemming from these individual events. For 2021, we have identified three key enforcement trends that we believe stand out from the rest:
- Sharp downturn in corporate FCPA enforcement actions and financial penalties;
- DOJ continues substantial FCPA and FCPA-related enforcement against individuals; and
- Biden Administration policies foreshadow a return to robust corporate anti-corruption enforcement in the coming years.
Sharp Downturn in Corporate FCPA Enforcement Actions and Financial Penalties
The modern era of FCPA enforcement (often described as beginning with the blockbuster Siemens resolution in 2008) may certainly be characterized by its penchant for setting enforcement records in one year, and then breaking them the next. But this overall trend has not always been linear, and indeed, frequently, there is a drop-off in cases in the years that presidential administrations change. So, it is accurate to say that corporate FCPA enforcement—after reaching new heights of penalties imposed in 2019 ($2.66 billion in corporate penalties on 21 enforcement actions) and 2020 ($2.79 billion in corporate penalties on 16 enforcement actions)—fell off the proverbial cliff in 2021 ($259.5 million on 6 enforcement actions). But we would not go nearly so far as to foretell the demise of corporate anti-corruption enforcement in the years to come. Indeed, based on what we are seeing at DOJ and the SEC, we counsel against such predictions.
The first corporate FCPA enforcement action of 2021 was with German financial institution and U.S.-issuer Deutsche Bank AG, which on January 8 reached a coordinated FCPA resolution with DOJ and the SEC to resolve allegations of internal control deficiencies and inaccurate record-keeping associated with the use of third-party business development consultants between 2009 and 2016. The DOJ allegations focused on consultants in Abu Dhabi and Saudi Arabia, each of which was allegedly known by Deutsche Bank employees to be relatives or close associates of government officials who would pass portions of their consulting payments on to the officials in exchange for business awarded to the bank. The SEC resolution additionally identified purportedly questionable consulting relationships in China and Italy.
To resolve the criminal charges, Deutsche Bank entered into a three-year deferred prosecution agreement with DOJ alleging conspiracy to violate each of the FCPA’s books-and-records and internal controls provisions, as well as a separate wire fraud conspiracy charge associated with an unrelated commodities trading scheme that was charged together with the FCPA matter. For the FCPA misconduct, the bank paid a criminal penalty of $79.6 million, which represented a 25% discount from the middle of the U.S. Sentencing Guidelines range—this was the maximum discount for cooperation (in a non-voluntary disclosure case), but the discount was taken from the middle rather than the bottom of the range because of a prior criminal antitrust resolution in 2016. To resolve the SEC charge, Deutsche Bank consented to the entry of an administrative cease-and-desist order charging FCPA accounting violations and agreed to pay $43.3 million in disgorgement and prejudgment interest. Gibson Dunn represented Deutsche Bank in these matters.
On June 25, 2021, global engineering firm Amec Foster Wheeler Ltd. (“AFW”), which during the relevant period was principally based in the UK but traded on a U.S. exchange, reached a $177 million coordinated resolution with anti-corruption authorities in Brazil, the United Kingdom, and the United States. The U.S. charging documents allege that between 2011 and 2014, an AFW subsidiary used several agents—including one that failed AFW’s due diligence process based on compliance concerns, but nonetheless continued working “unofficially” on the project—to make more than $1 million in improper payments to win a contract with state-owned oil company Petróleo Brasileiro S.A. (“Petrobras”).
On the U.S. front, to resolve the SEC’s investigation, AFW consented to the entry of an administrative cease-and-desist order charging FCPA bribery and accounting violations and ordering $22.76 million in disgorgement and prejudgment interest. To resolve a criminal FCPA bribery conspiracy charge, a UK subsidiary of AFW entered into a three-year deferred prosecution agreement with DOJ and agreed to a criminal penalty of $18.375 million. Both the SEC and DOJ applied offsetting credits for payments to authorities in Brazil and the UK in connection with the coordinated resolution, bringing the total due to the SEC to $10.13 million and $7.66 million to the United States. The Petrobras-related allegations were only a part of a larger anti-corruption resolution reached by the UK AFW subsidiary and the SFO, which as described in our UK section below imposed the USD-equivalent of $142.7 million in penalties and disgorgement for alleged improper payments in India, Malaysia, Nigeria, and Saudi Arabia, as well as Brazil, as part of its own, separate three-year deferred prosecution agreement. The U.S. resolutions, which were coordinated by Gibson Dunn, acknowledged AFW’s cooperation and remediation by applying the maximum available 25% discount from the bottom of the U.S. Sentencing Guidelines range and not requiring an independent compliance monitor.
The third corporate FCPA enforcement action of 2021, and the only one that was resolved solely with civil SEC charges, was with WPP Plc, the world’s largest advertising group and an ADS issuer. On September 24, 2021, the SEC announced that WPP consented to the entry of a cease-and-desist order charging FCPA bribery and accounting violations, and agreed to pay $10.1 million in disgorgement, $1.1 million in prejudgment interest, and an $8 million civil penalty, without admitting or denying the SEC’s allegations.
According to the SEC’s charging document, prior to 2018, WPP deployed a global growth strategy by which it entered markets through acquisitions of smaller advertising agencies, frequently with an “earn-out provision” that deferred a portion of the purchase price pending the accomplishment of future financial goals, which in many cases the acquired agency’s founder stayed on to achieve. These newly acquired agencies and their founders were the focus of this enforcement action, with the SEC alleging improper payments in Brazil, China, India, and Peru. A DOJ investigation reportedly is ongoing, and it is not clear whether additional charges are forthcoming.
Closing out the year in corporate FCPA enforcement, on October 19, 2021 Swiss financial institution and ADR issuer Credit Suisse Group AG agreed to an FCPA resolution with the SEC and a related non-FCPA, wire fraud resolution with DOJ. The DOJ and SEC allegations concern the same Mozambique loan bribery and kickback scheme that we first reported in our 2019 Year-End FCPA Update, wherein we described FCPA and FCPA-related charges against three Credit Suisse bankers, two former Mozambican government officials and a business consultant, as well as two Lebanese former executives of a UAE shipbuilding company. The allegations are that between 2013 and 2016, the defendants structured three syndicated loan and securities offerings worth $2 billion involving Mozambican state-owned entities, from which at least $200 million was allegedly misappropriated for bribes and kickbacks to the scheme participants.
To resolve the SEC’s charges, Credit Suisse consented to an administrative cease-and-desist proceeding alleging violations of the FCPA’s accounting provisions, as well as fraud-based securities violations, and agreed to pay combined disgorgement and prejudgment interest of $34 million plus a $65 million civil penalty. To resolve the criminal investigation, Credit Suisse entered into a three-year deferred prosecution agreement with DOJ concerning, and a UK subsidiary pleaded to, wire fraud charges, and agreed to pay a cumulative criminal fine of $247.5 million, plus $10.34 million in criminal forfeiture. After applying a variety of offsets, Credit Suisse ultimately agreed to pay $99 million to the SEC, $175 million to DOJ, and $200 million to the UK Financial Conduct Authority (“FCA”) in a related resolution. The bank also agreed to forgive $200 million in debt owed by the Government of Mozambique, which the prosecutors and regulators considered, together with Credit Suisse’s remediation and cooperation efforts, in setting the $475 million combined resolution amount.
DOJ Continues Substantial FCPA and FCPA-Related Enforcement Against Individuals
DOJ filed or unsealed FCPA or FCPA-related charges against 25 individual defendants in 2021, which may be grouped as follows.
Ecuadorian Police Pension Fund Defendants
On March 2, 2021, DOJ announced the arrest of Ecuadorian citizens John Luzuriaga Aguinaga and Jorge Cherrez Miño for their alleged roles in a long-running bribery scheme involving the Instituto de Seguridad Social de la Policia Nacional (“ISSPOL”), Ecuador’s public police pension fund. DOJ alleges that from 2014 to 2020, Cherrez, an investment advisor with operations in Florida and Panama, paid more than $2.6 million in bribes to ISSPOL officials, including now-former ISSPOL Risk Director Luzuriaga, in exchange for the right to manage ISSPOL funds. Two-and-a-half months later, on May 19, 2021, Ecuadorian investment company manager Luis Alvarez Villamar pleaded guilty to money laundering conspiracy for his role in accepting funds from Cherrez in connection with the ISSPOL corruption scheme. Luzuriaga is currently scheduled for trial on money laundering charges in the Southern District of Florida in February 2022, and Cherrez is considered a fugitive on his pending FCPA bribery and money laundering charges.
Additional PDVSA (Citgo) Charges
For years, we have been covering a multi-faceted corruption investigation by DOJ with the common nucleus being Venezuelan state-owned oil company Petróleos de Venezuela S.A. (“PDVSA”). One of the investigation strands has involved a pay-to-play corruption scheme at Citgo Petroleum Corporation, PDVSA’s U.S. subsidiary, as covered most recently in our 2020 Year-End FCPA Update. On March 12, 2021, DOJ unsealed money laundering conspiracy charges initially filed two years earlier against another defendant, former Citgo buyer Laymar Giosse Pena-Torrealba. According to the charging documents, Pena-Torrealba accepted bribes from Juan Manuel Gonzalez (who himself pleaded guilty in May 2019) in exchange for helping Gonzalez’s companies to secure contracts with Citgo. Pena-Torrealba pleaded guilty to one count of money laundering conspiracy and was sentenced in November 2021 to three years of probation.
Additional PetroEcuador Charges
We also have been reporting for several years now on a multi-agency investigation into alleged corruption at Ecuador’s state-owned oil company, Empresa Publica de Hidrocarburos del Ecuador (“PetroEcuador”). This has included coordinated charges brought by DOJ and the Commodity Futures Trading Commission (“CFTC”) against energy trading firm Vitol, Inc., as well as several of its traders, as covered in our 2020 Year-End FCPA Update. On April 6, 2021, DOJ unsealed an August 2020 criminal complaint against Canadian citizen Raymond Kohut, a now-former employee of a different Swiss energy trading firm. According to the charges, two Asian state-owned entities contracted to provide loans to PetroEcuador backed by periodic oil deliveries, and Kohut’s employer negotiated with the Asian entities to market and sell those oil products. Starting in 2012, Kohut and his co-conspirators allegedly made more than $22 million in corrupt payments to PetroEcuador officials to award contracts to the Asian entities under favorable terms so that Kohut’s company could then enter related, advantageous trading agreements with the Asian entities. Kohut and his co-conspirators allegedly met to discuss the conspiracy in Florida, and some of the payments flowed through New York correspondent bank accounts. Kohut pleaded guilty to a single count of money laundering on April 6, 2021, and awaits sentencing.
Additional Odebrecht-Related Charges
The blockbuster multinational anti-corruption resolution with Odebrecht S.A. in 2016, first covered in our 2016 Year-End FCPA Update, continues to be a recurring source of FCPA and FCPA-related charges against individual defendants. On May 20, 2021, DOJ unsealed money laundering charges against Austrian citizens and bank executives Peter Weinzierl and Alexander Waldstein. The indictment alleges that Weinzierl and Waldstein moved more than $170 million through a series of fraudulent transactions and sham agreements from Odebrecht’s New York bank accounts, through Weinzierl’s and Waldstein’s Austrian bank, into accounts at an Antiguan bank allegedly used by Odebrecht as a slush fund used to pay bribes to Brazilian, Mexican, and Panamanian officials. Weinzierl was arrested on May 25, 2021 in the United Kingdom, where he is currently undergoing extradition proceedings. Waldstein remains at large.
Chadian Oil Rights Defendants
On May 24, 2021, DOJ announced the indictment of two diplomats from Chad—Mahamoud Adam Bechir and Youssouf Hamid Takane—Bechir’s wife Nouracham Bechir Niam, and the founder of a Canadian energy company, Naeem Riaz Tyab, all on FCPA or FCPA-related charges stemming from an alleged bribery scheme relating to the award of oil rights in the Republic of Chad. According to the indictment, while serving in Washington, D.C. as Chad’s Ambassador to the United States and Canada and Deputy Chief of Mission, respectively, Bechir and Takane collectively solicited and accepted $2 million in bribes, plus corporate shares, in exchange for awarding Tyab’s company oil rights worth tens of millions of dollars. Bechir’s wife Niam was allegedly brought into the scheme when Tyab received legal advice not to enter a consulting contract with a company owned by Bechir, and so instead, entered into substantially the same consulting contract with a company owned by Niam, in addition to awarding Niam substantial shares in Tyab’s company. Tyab and Niam were both charged with conspiracy to violate the FCPA, and all four defendants were charged with conspiracy to commit money laundering.
The indictment was initially handed down in February 2019, shortly before Tyab was arrested in New York City. According to court documents, Tyab immediately began cooperating and pleaded guilty in April 2019. But the case remained sealed as DOJ sought to obtain custody of the other three defendants. More than two years later, in May 2021, DOJ acknowledged that its efforts to arrest the other defendants were unlikely to be successful in the near term and moved to unseal the indictment. Further illustrating the long tail of these corruption cases, Tyab’s company—Griffiths Energy International Inc.—pleaded guilty to violations of Canada’s Corruption of Foreign Public Officials Act in 2013 as covered in our 2013 Year-End FCPA Update. Bechir, Takane, and Niam all remain at large, and Tyab is currently scheduled to be sentenced in February 2022.
Bolivian Military Equipment Defendants
Also in May 2021, DOJ announced charges against five individuals in an alleged pay-to-play bribery scheme involving the sale of tactical defense equipment to the Bolivian Ministry of Defense. DOJ alleges that Bryan Berkman, the owner of Bravo Tactical Solutions LLC, his father Luis Berkman, and his business associate Philip Lichtenfeld, all conspired to make over $600,000 in corrupt payments to former Bolivian Minister of Government Arturo Carlos Murillo Prijic and his former Chief of Staff Sergio Rodrigo Mendez Mendizabal in exchange for a $5.6 million contract to supply tear gas and other non-lethal riot equipment to the Ministry of Defense. Four of the five defendants have pleaded guilty—Bryan Berkman and Lichtenfeld to FCPA conspiracy charges and Luis Berkman and Mendez to money laundering conspiracy charges. Murillo is currently set for a May 2022 trial date on a superseding eight-count money laundering indictment.
Nigeria Oil Contract Defendant
On July 26, 2021, DOJ filed a criminal information charging Anthony Stimler, a former West Africa-based oil trader for a Swiss commodity trading and mining firm, with one count each of conspiracy to violate the FCPA’s anti-bribery provisions and money laundering conspiracy. According to the charging document, between 2007 and 2018, Stimler participated in a scheme to bribe employees of the state-owned Nigerian National Petroleum Corporation to obtain contracts for more lucrative grades of oil on better delivery schedules for the commodity trading firm. Stimler has pleaded guilty and is cooperating with DOJ on the ongoing investigation of Stimler’s former employer.
CASA Corruption Defendant
On August 4, 2021, DOJ announced the arrest of Florida businessman Naman Wakil on charges that between 2010 and 2017 he allegedly bribed officials of both PDVSA and Venezuelan state-owned food company Corporación de Abastecimiento y Servicios Agrícola (“CASA”) to secure approximately $250 million in contracts for his companies. Wakil faces substantive and conspiracy FCPA and money laundering charges. He has pleaded not guilty and is currently set for a November 2022 trial date.
Ericsson Djibouti Defendant
On September 8, 2021, DOJ announced the unsealing of a June 2020 FCPA and money laundering conspiracy indictment of former Telefonaktiebolaget LM Ericsson Horn of Africa Account Manager Afework Bereket. According to the indictment, between 2010 and 2014, Bereket participated in a scheme to pay approximately $2.1 million to two high-ranking officials in Djibouti’s executive branch and one employee of a Djibouti state-owned telecommunications company to secure a €20.3 million contract with the state-owned entity. The indictment further alleges that Bereket concealed the bribes by entering a sham consulting contract with a company owned by the spouse of one of the officials, and concealing that ownership interest from others at Ericsson. As first reported in our 2019 Year-End FCPA Update, in 2019, Ericsson entered into an FCPA resolution with DOJ and the SEC that included the Djibouti scheme. Bereket remains at large.
CLAP Corruption Defendants
On October 21, 2021, DOJ announced a money laundering indictment returned against five defendants stemming from alleged corruption involving Comité Local de Abastecimiento y Producción (“CLAP”), a Venezuelan state-owned and state-controlled food and medicine distribution program. The indictment alleges a scheme involving a staggering $1.6 billion in food and medicine contracts obtained by Colombian businessmen Alvaro Pulido Vargas, Emmanuel Enrique Rubio Gonzalez, and Carlos Rolando Lizcano Manrique, and Venezuelan businesswoman Ana Guillermo Luis obtained through corrupt payments to the then-governor of Venezuelan State Táchira, Jose Gregorio Vielma-Mora. All five defendants are considered fugitives. Pulido—who additionally faces money laundering charges stemming from a separate pay-to-play scheme described in our 2019 Year-End FCPA Update—along with Rubio and Vielma-Mora also were sanctioned by the Office of Foreign Assets Control in 2019 for alleged CLAP-related corruption.
Egyptian Coal Sale Defendant
On November 3, 2021, DOJ charged Frederick Cushmore Jr., the now-former Head of International Sales for a Pennsylvania-based coal mining company, with one count of conspiracy to violate the FCPA’s anti-bribery provisions. According to the criminal information, between 2016 and 2020, Cushmore and others at his company engaged an Egyptian sales agent to secure $143 million in coal contracts with an Egyptian state-owned company, knowing that the agent would provide a portion of his $4.8 million in commissions to officials at the state-owned entity. The information further alleges that Cushmore and others used encrypted messaging applications and commercial email accounts in an effort to avoid detection of their corruption scheme. Cushmore is currently scheduled to be sentenced in the Western District of Pennsylvania in March 2022, but the limited information available publicly suggests additional charges may be forthcoming, which would likely impact that sentencing date.
Biden Administration Policies Foreshadow Return to Robust Corporate Anti-Corruption Enforcement in the Coming Years
As noted above, there may be a slowdown in government enforcement actions that takes place with any change in presidential administrations. Although most prosecutors and enforcement lawyers at DOJ and the SEC are career attorneys who holdover across administrations, the senior political leadership often changes, and that can cause a delay in necessary approvals or willingness to move more significant cases forward until new leadership is in place. This is particularly true for high-profile enforcement activities such as corporate FCPA actions. If there was any lingering doubt, further tempering overreliance on last year’s comparatively low corporate FCPA enforcement rate, the Biden Administration took several notable steps in 2021 that lead us to anticipate a return to robust corporate enforcement in the years to come.
Biden Administration Announces U.S. Strategy on Countering Corruption
On June 3, 2021, the White House published a National Security Study Memorandum that identifies “countering corruption as a core United States national security interest.” The memorandum emphasizes the significant costs of corruption, estimated at between two and five percent of global GDP, as well as its associated impacts on less tangible (but equally important) societal goods, such as rule of law, inequality, trust in government, and national security. The memorandum directed the National Security Advisor and Assistants to the President for Economic Policy and Domestic Policy to conduct a review across numerous government agencies to devise a comprehensive anti-corruption strategy report and recommendations within 200 days.
On December 6, 2021, the Biden Administration released its first-ever “United States Strategy on Countering Corruption.” This 38-page Strategy Memorandum is structured around five “pillars”: (1) “modernizing, coordinating, and resourcing U.S. Government efforts to fight corruption”;
(2) “curbing illicit finance”; (3) “holding corrupt actors accountable”; (4) “preserving and strengthening the multilateral anti-corruption architecture”; and (5) “improving diplomatic engagement and leveraging foreign assistance to advance policy goals.” The Strategy Memorandum further emphasizes that the Biden Administration will pursue “aggressive enforcement action” in support of its anti-corruption objectives through enforcement of the FCPA and other statutes by U.S. enforcers in coordination with foreign law enforcement partners. It also suggests that the Biden Administration will seek additional tools to broaden the reach of its anti-corruption enforcement powers, including through enhanced legislation to target the “demand side” of bribery. The Strategy Memorandum further recognizes the need for increased coordination and synergy between the U.S.’s anti-corruption and anti-money laundering efforts and to address “deficiencies in the U.S. anti-money laundering regime” through the extension of regulatory compliance and reporting requirements to non-financial institution “gatekeepers,” such as lawyers, accountants, and trust and company service providers.
For additional details regarding the Strategy Memorandum, please consult our recent Client Alert, “U.S. Strategy on Countering Corruption Signals Focus on Enforcement.” And for further details on the Biden Administration’s overall approach to anti-corruption enforcement, please consult our Client Alert “Big Changes Afoot for FCPA and Anti-Bribery Enforcement?“
Deputy Attorney General Announces Changes to DOJ Criminal Enforcement Policies
In a sign of an increasingly tough approach to corporate enforcement generally, on October 28, 2021, Deputy Attorney General Lisa O. Monaco announced that DOJ is modifying certain corporate criminal enforcement policies. Specifically, these policy changes: (1) restore prior guidance concerning the need for corporations to provide non-privileged information about all individuals involved in misconduct (not just those substantially involved) in order to receive cooperation credit; (2) require prosecutors to consider a corporation’s full criminal, civil, and regulatory record in making charging decisions (not just conduct related to the misconduct at issue in the present case); and (3) make clear that there is no general presumption against monitorships and prosecutors are free to require the imposition of a corporate monitor whenever they determine it appropriate. Further, Monaco highlighted DOJ’s increasing scrutiny of companies that have received pretrial diversion (such as deferred or non-prosecution agreements) in the past, including to determine whether they continue their criminal conduct during the period of those agreements. Close in time to Monaco’s speech, several companies announced that DOJ is investigating breach allegations, including in the FCPA context an announcement by Telefonaktiebolaget LM Ericsson that DOJ determined the company breached its obligations under its deferred prosecution agreement covered in our 2019 Year-End FCPA Update.
Although these policy changes concern general corporate criminal enforcement, they touch closely upon corporate FCPA matters. For further details on Deputy Attorney General Monaco’s speech, please see our recent Client Alert, “Deputy Attorney General Announces Important Changes to DOJ’s Corporate Criminal Enforcement Policies.”
2021 FCPA-RELATED ENFORCEMENT LITIGATION
Following the filing of FCPA or FCPA-related charges, criminal and civil enforcement proceedings can often take years to wind through the courts. A selection of prior-year matters that saw material enforcement litigation developments during 2021 follows.
Two Alleged Fugitives Challenge Their Indictments from Abroad
A recurring theme in FCPA investigations is indictments returned and sometimes unsealed while the defendant is abroad. A frequently litigated issue that arises in these circumstances is whether the defendant is able to challenge the charges—frequently on jurisdictional grounds—from abroad without submitting themselves physically to the Court’s jurisdiction. Courts have reached differing conclusions on whether these challenges are barred by the so-called “fugitive disentitlement” doctrine, including two district court decisions from different circuit courts of appeal going in opposite directions in 2021.
On March 18, 2021, the Honorable Robert N. Scola, Jr. of the U.S. District Court for the Southern District of Florida denied a motion to enter a special appearance and challenge the indictment filed by Alex Nain Saab Moran, a joint Colombian and Venezuelan national charged with money laundering offenses in connection with a $350 million construction-related bribery scheme in Venezuela as covered in our 2019 Year-End FCPA Update. In January 2021, 18 months after the indictment was returned, Saab moved to vacate his fugitive status with leave to challenge his indictment on the grounds that he is a Venezuelan diplomat entitled to absolute immunity under the Vienna Convention on Diplomatic Relations, as well as that the indictment does not state an offense given Saab’s lack of connection to the United States. Saab’s motion followed his arrest in the Republic of Cape Verde, where he was detained as his plane stopped for refueling en route from Venezuela to Iran based on an INTERPOL “red notice” request filed by the United States.
Saab argued that the fugitive disentitlement doctrine should not apply because he was not in the United States when the indictment was returned—indeed he asserted he had not been to the United States in nearly three decades, long before the alleged criminal activity—and therefore he could not be correctly described as a fugitive who fled the charges. But Judge Scola disagreed, holding that a defendant who is aware of an indictment and does not appear in court to answer the charges is a fugitive regardless of whether they affirmatively fled the United States to avoid the charges—this concept is known in the Eleventh Circuit as “constructive flight.” The Court denied the motion for a special appearance and declined to consider the substantive motion to dismiss.
Saab has appealed the district court’s ruling, and DOJ has moved to dismiss the appeal. Meanwhile, the Republic of Cabo Verde granted the extradition request and transferred Saab to the United States, where he is now being detained pending trial. To fulfill a condition of the extradition, DOJ dismissed seven of the eight counts against Saab to ensure that the maximum term of imprisonment is consistent with Cabo Verde law.
The case of Daisy Teresa Rafoi Bleuler—a Swiss citizen and wealth manager charged with FCPA and money laundering offenses arising from the transfer of allegedly corrupt proceeds associated with a PDVSA-related bribery scheme covered in our 2019 Year-End FCPA Update—turned out very differently under Fifth Circuit law. Rafoi was arrested by Italian authorities, again on a U.S.-initiated INTERPOL red notice request, as she vacationed with family in Lake Como. As she underwent extradition proceedings, first in Italy and then in Switzerland, Rafoi filed a motion to dismiss the indictment on jurisdictional grounds.
In an opinion dated November 10, 2021, the Honorable Kenneth M. Hoyt of the U.S. District Court for the Southern District of Texas made short work of the government’s argument that Rafoi’s motion should not be heard under the fugitive disentitlement doctrine. The Court held that fugitive disentitlement is a discretionary doctrine, and found that where a foreign national challenges the applicability of U.S. law to their actions, without having affirmatively fled the United States, they should be permitted to do so from abroad. Moving to the merits of the motion to dismiss, Judge Hoyt fond that as a matter of law the indictment was deficient in alleging any action by Rafoi in the territory of the United States such as to bring her within the scope of 15 U.S.C. § 78dd-3, that she acted as an agent of U.S. persons under 15 U.S.C. § 78dd-2, or that she engaged in any financial transactions subject to U.S. jurisdiction under the money laundering statutes. Fundamentally, the Court found that neither the FCPA nor the money laundering statutes should be read so broadly as to apply to foreign nationals acting completely outside the United States, and that any other interpretation would lead to serious constitutional due process concerns under the “void for vagueness” doctrine.
On December 7, 2021, DOJ noticed an appeal to the U.S. Court of Appeals for the Fifth Circuit. We expect this appeal could lead to an important appellate court ruling on the breadth of the FCPA and money laundering statutes as applied to foreign nationals in 2022, likely to be joined by the heavily-anticipated revisitation of the Hoskins case by the Second Circuit Court of Appeals, covered in our 2020 Mid-Year FCPA Update and still pending after an August 17, 2021 argument.
Roger Ng Motion to Dismiss Denied
We reported in our 2018 Year-End FCPA Update on the indictment of former Goldman Sachs banker “Roger” Ng Chong Hwa on FCPA bribery and money laundering conspiracy charges arising from the 1Malaysia Development Berhad (“1MDB”) scandal in Malaysia. In October 2020, after being extradited to the United States to face these charges, Ng filed a comprehensive motion to dismiss, arguing: (1) the superseding indictment returned after his extradition from Malaysia violated the “rule of specialty,” which prohibits material changes to charges post-extradition; (2) venue in the Eastern District of New York was insufficiently alleged in the indictment; (3) the indictment did not meet the requirement of alleging that he was an “agent of an issuer” because the “U.S. Financial Institution #1” described in the indictment—meant to refer to Goldman Sachs—was in fact an “artificial combination” between various Goldman Sachs entities; (4) he could not have circumvented Goldman Sachs’s internal accounting controls because the alleged bribes were paid with 1MDB funds, rather than money from Goldman Sachs; (5) the money laundering count was deficient because it did not specify the particular Malaysia bribery statute alleged to have been violated as the requisite specified unlawful activity; (6) the so-called “silence provision” in Goldman Sachs’s deferred prosecution agreement—a standard term that prohibits companies from contracting the admitted statement of facts—violated his constitutional right to call witnesses in his defense; and (7) he was entitled to Brady disclosures from Goldman Sachs because the bank’s cooperation with DOJ made it a part of the “prosecution team.”
In September 2021, the Honorable Margo Brodie of the U.S. District Court for the Eastern District of New York denied Ng’s motion to dismiss in its entirety in an equally comprehensive, 160-page memorandum opinion. Trial is currently scheduled to commence in February 2022.
SEC Imposes $35,000 Civil Penalty—In a Case from 2016
We reported in our 2016 Year-End FCPA Update on the SEC’s enforcement action against former Och-Ziff CFO Joel M. Frank in which, without admitting or denying the SEC’s findings, Frank agreed to cease and desist from future violations of the FCPA’s books-and-records and internal controls provisions. The parties further agreed that Frank would pay a civil penalty, but in an unusual move left for another day the determination of the penalty amount. That other day came four-and-a-half years later, on March 16, 2021, when the SEC published a new cease-and-desist order imposing a $35,000 civil penalty. The new order also softened some of the allegations against Frank, acknowledging that he “expressed objections” regarding certain of the payments in question, while still taking the position that because Frank allegedly “had final signing authority” for all expenditures he was responsible for causing the company’s accounting violations.
Baptiste and Boncy FCPA Convictions Reversed for Ineffective Assistance of Counsel
We reported in our 2019 Year-End and then 2020 Mid-Year FCPA updates on the jury trial convictions of retired U.S. Army colonel Joseph Baptiste and businessperson Roger Richard Boncy on conspiracy to violate the FCPA and the Travel Act arising from an FBI sting simulating a bribery scheme involving Haitian port project investments, followed by the post-trial grant of a new trial to both defendants based on the ineffective assistance of Baptiste’s counsel infecting the fundamental fairness of the joint trial. DOJ appealed the new trial grants but, on August 9, 2021, the U.S. Court of Appeals for the First Circuit affirmed the district court’s ruling.
On appeal DOJ did not contest the lower court’s deficient-performance findings—which included that Baptiste’s counsel did not open discovery files or share them with his client, did not obtain independent translations of Haitian-Creole audio recordings even after learning of deficiencies in the government’s translations, and did not subpoena any defense witnesses, including experts who could have testified about Haitian law or business practices. Instead, DOJ argued that the “overwhelming” evidence against both defendants was so strong that there was no prejudice based on the deficient performance of Baptiste’s counsel, and even if there was that prejudice did not extend to Boncy, whose counsel was competent. Writing for the First Circuit panel, the Honorable O. Rogeriee Thompson disagreed and held that the focus of Fifth and Sixth Amendment rights to due process and counsel is on the fundamental fairness of the proceeding, which clearly was undermined for both defendants based on the deficient performance of one defendant’s counsel. Both cases have been remanded to the district court and a joint retrial is currently set for July 2022.
2021 FCPA-RELATED LEGISLATIVE AND POLICY DEVELOPMENTS
In addition to the enforcement developments covered above, 2021 saw numerous important developments in FCPA-related legislative and policy areas.
Congress Strengthens SEC Disgorgement Authority
On January 1, 2021, Congress passed the National Defense Authorization Act (“NDAA”) for the 60th consecutive year, overriding a presidential veto from then-President Trump. Included within the nearly 1,500 pages of omnibus legislation, at Section 6501, is an expansion of the SEC’s statutory authority to seek disgorgement. These revisions are clearly a response to recent Supreme Court decisions in Kokesh v. SEC and Liu v. SEC, both of which narrowed the scope of the SEC’s disgorgement power, which (as our readership knows) is a critical driver of the SEC’s ability to penalize corporate and individual misconduct, including in FCPA cases. The Section 6501 changes explicitly authorize the SEC to seek disgorgement in cases filed in federal court, eliminating any residual doubt after Liu. They also extend the statute of limitations from five years to ten years for SEC enforcement actions based on scienter-based claims, a change which applies to both pending cases and enforcement actions initiated after the passage of the NDAA. For further details regarding the impact of Section 6501, please consult our separate Client Alert “Congress Buries Expansion of SEC Disgorgement Authority in Annual Defense Budget.”
Congress Passes Comprehensive Anti-Money Laundering Legislation
The NDAA also included the Anti-Money Laundering Act of 2020 (“AMLA”), which enacted the most consequential set of anti-money laundering reforms since the passage of the USA PATRIOT Act in 2001. As our readership knows, U.S. enforcers increasingly use the money laundering laws to prosecute and pursue proceeds of corruption passed through the U.S. financial system. The AMLA strengthens the government’s ability to investigate and prosecute corruption-related money laundering. Specifically, to limit the practice of using shell companies to launder ill-gotten gains, the AMLA implemented beneficial ownership reporting requirements for certain U.S. entities and foreign entities registered to do business in the United States and tasked the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) with maintaining a beneficial ownership registry of such reported information, which will be available for use by law enforcement agencies. Other changes made by the AMLA include enhancing the government’s ability to investigate money laundering, including by expanding DOJ’s authority to subpoena foreign banks with U.S.-based correspondent banking accounts. For a detailed summary of the most significant changes enacted by the AMLA, please see our separate Client Alert, “The Top 10 Takeaways for Financial Institutions from the Anti-Money Laundering Act of 2020.”
FinCEN Identifies Corruption as a Key National Priority
On June 30, 2021, FinCEN announced its first set of government-wide anti-money laundering and countering the financing of terrorism priorities, which will be updated every four years pursuant to the AMLA. FinCEN developed these priorities in consultation with federal and state regulators, law enforcement, and national security agencies. In its announcement, FinCEN explained that these priorities were meant to identify and describe the most significant money laundering and terrorist financing threats currently facing the United States to both signal FinCEN’s upcoming regulatory priorities and to provide guidance to covered institutions in developing and updating their compliance programs. Although FinCEN’s announcement stated that the priorities were listed in no particular order, it bears noting that corruption was the first priority listed. Consistent with other statements by the U.S. government in 2021, as reported herein, FinCEN identified anti-corruption as “a core national security interest of the United States,” in which anti-money laundering regulation and enforcement plays a crucial role.
New IRS Treatment of FCPA Disgorgement Payments
The U.S. Internal Revenue Service (“IRS”) has long prohibited tax deductions for fines or penalties paid to the government for unlawful conduct, including violations of the FCPA. But a question has arisen over the years as to whether disgorgement and forfeiture constitute a fine or penalty such that it is non-deductible. As covered in our 2017 Year-End FCPA Update, the IRS answered that question in the affirmative, issuing an advice memorandum opining that consistent with the Supreme Court’s decision in Kokesh v. SEC, disgorgement is equivalent to a penalty. The December 2017 Tax Cuts and Jobs Act, however, revised the Internal Revenue Code to make an exception for amounts paid to the government for restitution, remediation, or to come into compliance with the law. In January 2021, the IRS issued a finalized rule in response to this law, which sets out a multi-factored inquiry to determine whether an amount paid in disgorgement or forfeiture is deductible as restitution or remediation. The requirements are quite stringent and generally inconsistent with DOJ / SEC practice in FCPA resolutions, including a requirement that the payments must be made directly to victims rather than to the U.S. Treasury, potentially continuing to limit the ability of companies to deduct amounts paid as disgorgement or forfeiture in an FCPA enforcement action.
2021 FCPA-RELATED PRIVATE CIVIL LITIGATION
Although the FCPA does not provide for a private right of action, civil litigants have pursued a variety of causes of action in connection with FCPA-related conduct, with varying degrees of success. A selection of matters with material developments in 2021 follows.
Shareholder Lawsuits / Class Actions
- MTS – As covered in our 2019 Year-End FCPA Update, Russian telecommunications company and U.S. issuer Mobile TeleSystems PJSC (“MTS”) reached an $850 million joint FCPA resolution with the SEC and DOJ to resolve allegations of corrupt payments to the daughter of the late Uzbek president, to facilitate access to the telecommunications market in Uzbekistan. Shortly after the announcement of this settlement, a class action suit was filed against MTS and several individual defendants in the U.S. District Court for the Eastern District of New York, alleging that MTS issued false and misleading statements about the company’s inability to predict the outcome of the U.S. government’s investigations into its Uzbekistan operations, the effectiveness of the company’s internal controls and compliance systems, and its level of cooperation with U.S. regulatory agencies. On March 1, 2021, the Honorable Ann M. Donnelly dismissed the lawsuit, finding that the plaintiffs did not demonstrate that the challenged statements were false or misleading, that MTS could not have predicted the outcome of the investigation, and that its disclosures about the existence of the investigation were not insufficient. Plaintiffs have appealed the dismissal to the Second Circuit Court of Appeals, and the case is currently set for argument in March 2022.
- VEON – We covered in our 2016 Mid-Year FCPA Update an FCPA resolution by then-VimpelCom Ltd. (now VEON Ltd.) in connection with the same Uzbek fact pattern described above for MTS. VEON also found itself faced with a putative class action arising from alleged material omissions in securities filings relating to the adequacy of its internal controls, which also was dismissed in 2021. Specifically, on March 11, the Honorable Andrew L. Carter of the U.S. District Court for the Southern District of New York granted VEON’s motion to dismiss finding that the plaintiffs failed to establish that the company omitted material facts that it had a duty to disclose. This mooted the case as to lead plaintiffs, but the Court reopened the lead plaintiff appointment process, which remains ongoing.
- IFF – In 2018, following an acquisition of Israel-based Frutarom Industries Ltd, International Flavors & Fragrances, Inc. (“IFF”) disclosed that during the integration process it learned that pre-acquisition Frutarom executives had made improper payments in Russia and Ukraine, and that IFF had disclosed the matter to DOJ. Shareholders brought suit against IFF, Frutarom, and certain executives, claiming they lost millions of dollars when the news became public and IFF’s share price dropped. On March 30, 2021, the Honorable Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York dismissed the lawsuit, explaining that the investors failed to show how they were misled by IFF, failed to allege improper conduct during the putative class period, and failed even to adequately allege how the payments by the Israeli company Frutarom violated U.S. law. The plaintiff shareholders have appealed aspects of the decision to the Second Circuit, with oral arguments scheduled for February 2022.
- 500.com – In 2020, shareholders brought suit against Chinese online gaming company and U.S. issuer 500.com Ltd., alleging that company executives made improper payments to Japanese government officials to secure a lucrative gaming license, and then made misrepresentations concerning the same in the company’s public filings, including filings containing the text of its code of conduct. On September 20, 2021, the Honorable Gary R. Brown of the U.S. District Court for the Eastern District of New York granted 500.com’s motion to dismiss, adopting the report and recommendation of Magistrate Judge A. Kathleen Tomlinson. The two decisions together note that only in rare circumstances have courts permitted statements in a code of conduct to survive motions to dismiss and in those rare cases, the statements were made in response to inquiries or challenges to the company’s conduct rather than general, aspirational statements about how the company expects its employees to act. Regarding the alleged misstatements or omissions unrelated to the code of conduct, Judge Tomlinson found that the plaintiff failed to allege scienter adequately and that 500.com was not obligated to disclose uncharged wrongdoing.
- OSI – As reported in our 2019 Year-End FCPA Update, OSI Systems, Inc. succeeded in dismissing a putative class action lawsuit that arose from a short-seller’s report relating to alleged corruption in connection with an Albanian scanning contract (the underlying conduct of which was declined for prosecution by DOJ and the SEC), but plaintiffs were given leave to amend. Amend they did, and on October 22, 2021, OSI agreed to a $12.5 million settlement to resolve the matter. The October 2021 settlement agreement has received preliminary approval from the Honorable Fernando M. Olguin of the U.S. District Court for the Central District of California, and a final fairness hearing is scheduled for May 2022.
- Cognizant – Another FCPA enforcement case we covered in our 2019 Year End FCPA Update that wound its way towards a private civil resolution in 2021 concerns Cognizant Technology Solutions Corporation. Following an SEC FCPA resolution and DOJ declination with disgorgement arising from an alleged bribery scheme in India, a putative class of investors sued Cognizant in the U.S. District Court for the District of New Jersey. On September 7, 2021, Cognizant reached an agreement-in-principle to a $95 million settlement of the matter, which was approved by the Honorable Esther Salas on December 20, 2021.
Civil Fraud / RICO Actions
- Samsung – We covered in our 2019 Year-End FCPA Update a DOJ FCPA resolution reached by Samsung Heavy Industries Co., Ltd. arising from alleged corruption of Petrobras officials in the “Operation Car Wash” investigation. Also in 2019, Petrobras’s U.S. subsidiary filed a RICO / common-law fraud complaint against Samsung in Texas state court, which Samsung removed to federal district court and moved to dismiss. In June 2020, the district court dismissed the complaint on statute-of-limitation grounds, but on August 11, 2021 the U.S. Court of Appeals for the Fifth Circuit revived the case, finding that when Petrobras learned (or should have learned) of the corruption allegations such as to begin the clock was a dispute of fact and that Samsung had not conclusively established that Petrobras’s claims accrued before Petrobras filed its complaint. Following the Fifth Circuit’s remand, the case is now back before the Honorable Lee H. Rosenthal of the U.S. District Court for the Southern District of Texas.
- Ericsson – In an unfiled (but still quite noteworthy) action, on May 12, 2021 Telefonaktiebolaget LM Ericsson announced that it had reach an agreement to pay competitor Nokia Corporation $97 million to settle potential damages claims arising from the events that were the subject of Ericsson’s FCPA 2019 resolution with DOJ and the SEC. That resolution, covered in our 2019 Year-End FCPA Update, resulted in more than $1 billion in fines for alleged FCPA violations in China, Djibouti, Indonesia, Kuwait, Saudi Arabia, and Vietnam. There are no public details about Nokia’s claims, but it would seem that the case was predicated on Nokia losing out on competitive bids due to Ericsson’s alleged corruption.
Whistleblower Actions
- Western Digital – On June 25, 2021, Chief Judge Richard Seeborg of the U.S. District Court for the Northern District of California granted Western Digital Corp.’s motion to dismiss a bribery-related whistleblower lawsuit for lack of jurisdiction and failure to state a claim. The lawsuit was brought by a Brazilian citizen formerly employed by Western Digital’s Brazilian subsidiary, who alleged that he was terminated in retaliation for raising bribery and tax fraud concerns in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). In dismissing the case, the Court held that Dodd-Frank’s anti-retaliation provision does not apply to overseas conduct. Moreover, the Court held that, even if the claim alleged domestic wrongdoing, the former employee “failed to allege sufficient facts to give rise to a plausible inference that he suffered adverse employment actions in retaliation for whistleblowing” given the length of time between his report and his termination and the fact that he caused the company to be victimized by a phishing scam close in time to his firing.
2021 INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS
Multilateral Development Banks
U.S. Federal Court Reinforces World Bank Sovereign Immunity
In our 2016 Year-End FCPA Update, we discussed the landmark Canadian Supreme Court decision in World Bank Group v. Wallace, which concluded that the Bank had not waived its privileges and immunities by providing evidence gathered in a Bank investigation to national law enforcement authorities. On April 5, 2021, Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia reached a similar conclusion in a lawsuit filed by businessmen Noah J. Rosenkrantz and Christopher Thibedeau against the Inter-American Development Bank (“IDB”) asserting that the internal sanctions proceedings against their company failed to comply with the sanctions procedures governing such procedures, in violation of its contractual obligations. In dismissing the lawsuit, the Court held that the IDB is immune from suit in U.S. federal court as a sovereign entity and emphasized, like the Canadian court in Wallace, that a contrary ruling would undermine the Bank’s ability to carry out its mission. The plaintiffs have appealed the dismissal to the U.S. Court of Appeals for the District of Columbia Circuit.
Europe
United Kingdom
WGPSN (Holdings)
On March 16, 2021, Scotland’s Crown Office and Procurator Fiscal Service announced that WGPSN, a subsidiary of John Wood Group PLC, agreed to pay £6.46 million to Scotland’s Civil Recovery Unit to resolve allegations that PSNA Limited, a company WGPSN had acquired, benefitted from improper payments to secure contracts in Kazakhstan. These payments were allegedly made between 2012 and 2015, all prior to WGPSN’s acquisition, and when discovered by WGPSN were voluntarily reported to Scottish authorities.
GPT Special Project Management Ltd.
On April 28, 2021, the UK Serious Fraud Office (“SFO”) announced that Airbus subsidiary GPT Special Project Management pleaded guilty to corruption in violation of section 1 of the Prevention of Corruption Act 1906 and was ordered to pay a confiscation order of £20,603,000, a fine of £7,521,920, and costs of £2,200,000. The charges arise from alleged improper payments involving the Saudi Arabian National Guard. In setting the penalty, Justice Bryan at Southwark Crown Court considered GPT’s guilty plea, the fact that it no longer is in operation, the company’s cooperation with the SFO’s investigation, and the UK government’s role in facilitating the conduct. Also relevant was the fact that parent company Airbus entered into a $3.9 billion deferred prosecution agreement in January 2020 (as covered in our 2020 Mid-Year FCPA Update).
Amec Foster Wheeler Energy Ltd.
As covered above, on June 25, 2021 Amec Foster Wheeler reached a coordinated anti-corruption resolution with UK, U.S., and Brazilian authorities. The U.S. and Brazilian cases related to only to Brazil, while the UK case brought by the SFO is broader and covers alleged corrupt payments between 1996 and 2014 in India, Nigeria, Saudi Arabia, and Malaysia, as well as Brazil. Pursuant to a three-year deferred prosecution agreement approved by Lord Justice Edis, sitting at the Royal Courts of Justice, Amec Foster Wheeler agreed to pay £103 million in connection with a 10-count indictment, including nine counts of violating Section 1 of the Criminal Law Act 1977 and Section 1 of the Prevention of Corruption Act 1906 and one count of failure to prevent bribery under Section 7 of the Bribery Act 2010.
Petrofac Ltd.
On October 1, 2021, the SFO secured the conviction of Petrofac for seven separate counts of failure to prevent bribery between 2011 and 2017. Petrofac admitted to failing to prevent former senior executives of the group’s subsidiaries from using agents to pay bribes of £32 million to win oil contracts in Iraq, Saudi Arabia, and the United Arab Emirates worth approximately £2.6 billion. Petrofac will pay a confiscation order of £22.8 million; a fine of approximately £47.2 million; and the SFO’s investigation costs of £7 million. On the same day, Petrofac’s former Global Head of Sales David Lufkin was sentenced to a two-year custodial sentence, suspended for 18 months, as a result of his January 14, 2021, guilty plea admitting to three individual counts of bribery related to corrupt offers and payments made between 2012 and 2018 to influence the award of contracts to Petrofac in the United Arab Emirates. Lufkin had previously pleaded guilty in February 2019 to 11 counts of bribery already brought by the SFO (as discussed in our 2019 Year-End FCPA Update).
Unaoil Individual Prosecutions
On February 24, 2021, the SFO secured the conviction of former SBM Offshore executive Paul Bond arising out of his role in allegedly conspiring to bribe public officials to secure oil contracts from Iraq’s South Oil Company in the years following the overthrow of Saddam Hussain in 2003. A jury found the former senior sales manager guilty on two counts of conspiracy to give corrupt payments following a retrial of his case. On March 1, 2021, Bond was sentenced to three-and-a-half years in prison, making him the fourth individual to be sentenced in the case involving Iraq’s South Oil Company, which forms part of the SFO’s broader investigation into bribery at Unaoil. As covered in our 2020 Year-End FCPA Update, Bond’s three co-defendants have been sentenced to a collective total of 11 years and four months in prison.
On June 17, 2021, the SFO secured an approximately £402,000 confiscation order by consent against former Unaoil executive Basil Al Jarah. And on November 3, 2021, Stephen Whiteley, former Vice President at SBM Offshore and Unaoil’s territory manager for Iraq, was ordered to repay criminal gains of £100,000.
In a judgement handed down on December 10, 2021, the UK Court of Appeal quashed the conviction of Ziad Akle, another Unaoil executive who was convicted in 2020 of conspiracy to give corrupt payments as covered in our 2020 Year-End FCPA Update. The Court criticized the SFO for its contact with a U.S.-based “fixer” who had offered to assist in obtaining the convictions of related parties. The Court also found that the SFO had failed to disclose material relating to that contact, which was necessary for the defense to properly bring its case. The Court refused an application for a retrial on the grounds of the SFO’s misconduct. The UK Attorney General has since announced an independent review into the matter. Bond has appealed his conviction on the same grounds as Akle.
SFO Deferred Prosecution Agreements with Two Unidentified Companies
On July 19, 2021, the SFO entered into separate deferred prosecution agreements with two UK-based companies for bribery offenses. The SFO did not identify the companies because the investigations are ongoing, but confirmed that the criminal conduct saw bribes paid in relation to multi-million pound UK contracts. The two companies will pay more than £2.5 million between them, representing disgorgement of profits along with a financial penalty, and the SFO acknowledged that both companies fully cooperated. We will report back on these agreements when the companies names are made public.
France
A bill to strengthen the fight against corruption in France was registered at the French National Assembly on October 19, 2021. The bill outlines several proposals concerning the French Anti-Corruption Agency (“AFA”), the extension of anti-corruption obligations of public and private actors, the regulation of lobbying, and negotiated justice. Among other things, the bill would extend anti-corruption obligations to subsidiaries of large foreign organizations. The text also would make companies and public entities (other than the French State) criminally liable if a lack of supervision led to the commission of one or more offenses by an employee.
Italy
After more than three years of proceedings, in March 2021 an Italian court acquitted oil companies Royal Dutch Shell and Eni SpA, as well as a number of individuals, including the Eni CEO, of charges that they paid more than $1 billion to acquire the license to an offshore block in Nigeria. Prosecutors alleged that the money was intended as bribes, while the companies successfully defended with evidence that the payment was legitimate and intended to resolve long-running disputes as to the block’s ownership.
Kyrgyzstan
On May 31, 2021, Kyrgyzstan’s State Committee for National Security announced the arrest of former Prime Minister Omurbek Babanov as part of an investigation into corruption involving a gold mine project in Kumtor. The project was operated by Canadian company Centerra Gold until the Kyrgyz government took it over, citing a new law allowing it to take control of a project for up to three months due to environmental or safety violations. The Kumtor mine accounts for more than 12% of the national economy, according to Centerra, which has denounced the Kyrgyz government’s seizure.
Norway
In our 2015 Year-End FCPA Update, we reported that several senior level officers of Norwegian fertilizer manufacturer Yara International ASA were sentenced to prison in Norway for their role in an alleged scheme to pay bribes to government officials in India, Libya, and Russia. The former chief legal officer in particular, U.S. citizen Kendrick Wallace, received a two-and-a-half year prison sentence for his role. In 2017 the Norwegian appeals court upheld Wallace’s conviction and revised his sentence to seven years, finding that his conduct had been “very central” to the alleged scheme.
Norway subsequently submitted a request for extradition of Wallace. On June 11, 2021, the Honorable Sean P. Flynn, Magistrate Judge of the U.S. District Court for the Middle District of Florida, denied the request. The Court found that “Wallace cannot be extradited because the prosecution for the offense of which extradition is sought has become barred by lapse of time according to the laws of the United States.” Specifically, the Court found that while Wallace’s crimes were committed in 2007, he was indicted in 2014, exceeding the applicable five-year statute of limitations in the United States. The DOJ provided evidence that Norway sought evidence pursuant to Mutual Legal Assistance Treaty requests—which would toll the statute of limitations in the United States pursuant to 18 U.S.C. § 3292—but the Court found the specific evidentiary showing lacking, and ordered Wallace’s release from custody.
Russia
The Russian Federation Prosecutor General’s office reported nearly 30,000 corruption-related crimes in the first nine months of 2021, a 12.7% increase as compared to the same period a year ago, with bribery accounting for more than half of all corruption-related offenses. The reported damage caused by corruption-related crimes also increased from 45 billion rubles (approximately $612 million) to 53 billion rubles (approximately $719 million). In 2020, the number of corruption-related convictions of Russian officials was at an eight-year low of just under 7,000, continuous decline from a high of approximately 11,500 in 2015, but the number of convictions stemming from large-scale bribes, defined as greater than one million rubles (approximately $13,700), has increased 12-fold since 2012.
On the legislative front, on October 1, 2021, the Russian Duma approved the National Plan For Countering Corruption through 2024. This plan prioritizes prohibiting anyone who has been fined for corrupt activities from holding government positions, improving the procedures for the submission and auditing of government employees’ asset declarations, implementing technology to combat corruption, instituting anti-corruption regulations involving the purchase of goods and services for government/municipal use, monitoring international agreements for cooperation in fighting corruption, and employing Duma deputies to participate in an inter-parliamentary organization aimed at preventing corruption.
And on the judicial front, on June 9, 2021, a Moscow court issued a decision classifying activist Alexei Navalny’s political organization, the Anti-Corruption Foundation (“ACF”), as an “extremist” movement. Under the applicable “anti-extremism” law, authorities can jail ACF members and freeze their assets, and those associated with the group cannot run for public office. On August 10, 2021, Russia’s financial watchdog—the Federal Financial Monitoring Service—also added ACF to its blacklist of groups accused of extremist activities or terrorism, which freezes the organization’s bank account and prevents ACF from opening new accounts.
Sweden
In our 2019 Year-End FCPA Update, we covered the trial acquittal in Sweden of three former Telia executives—former CEO Lars Nyberg, former deputy CEO and head of Eurasia unit Tero Kivisaari, and former general counsel for the Eurasia unit Olli Tuohimaa—on charges of bribing Uzbek’s then-first daughter Gulnara Karimova in exchange for telecommunications contracts in Uzbekistan. In February 2021, a Swedish appeals court upheld the acquittals, agreeing that Karimova, the daughter of Uzbekistan’s former president, was not a government official under Swedish law.
Switzerland
In January 2021, a Swiss court convicted Beny Steinmetz of 2019 charges (discussed in our 2019 Year-End FCPA Update) of paying bribes to the wife of former-Guinean President Lansana Conté and of related forgery to obtain a mining concession. He was sentenced to five years in prison and ordered to pay a CHF 50 million fine (~ $56.5 million).
In November 2021, three Swiss subsidiaries of Netherlands-based SBM Offshore were ordered to pay more than CHF 7 million (~ $7.6 million) for failing to prevent the bribery of public officials in Angola, Equatorial Guinea, and Nigeria between 2006 and 2012. The Office of the Attorney General of Switzerland found that these companies had entered into sham contracts with shell companies to pay more than $22 million in bribes. The Office of the Attorney General alleged that in light of the “extent and duration of the acts of corruption,” the companies’ risk assessment measures and anti-corruption controls were allegedly “either non-existent, or wholly inadequate.” This order is in addition to the more than $800 million that SBM Offshore has already paid to resolve corruption probes dating back to its 2017 FCPA resolutions reported in our 2017 Year-End FCPA Update.
Ukraine
Ukrainian President Zelensky’s focus in the first half of 2021 was on securing the release of the remainder of a $5-billion IMF loan to bolster Ukraine’s economy. After a six-week virtual mission to Ukraine in the beginning of 2021, the IMF refused to release the funds in what some viewed as an indication that Ukraine had not met the IMF’s expectations for tackling corruption. Following this refusal, in June 2021, Ukraine’s parliament, the Verkhovna Rada, passed two bills: the first reestablished the High Judicial Council, a special commission on appointing judges that will be majority-comprised of international experts; and pursuant to the second bill, public officials who fail to submit or submit false income or asset declarations could face prison sentences. Additionally, on November 8, 2021, President Zelensky signed into law amendments to legislation that provide for the independence of the anti-corruption bureau (“NABU”). Subsequently, on November 22, 2021, following a review by its Executive Board, the IMF announced that Ukrainian authorities would be allowed to draw on an additional $699 million.
The Americas
Brazil
In February 2021, President Bolsonaro disbanded Operation Car Wash, one of the most prolific anti-corruption investigations of all time and a staple of these updates for years. Operation Car Wash led to dozens of convictions, many prominent enforcement actions, and hundreds of millions of dollars in penalties within Brazil and billions of dollars globally. Still, the ripples of Operation Car Wash continued throughout the year. For example, on February 22, 2021, Korean engineering company Samsung Heavy Industries Co., Ltd. entered into a leniency agreement in Brazil to resolve allegations concerning contracts with Petróleo Brasileiro S.A. (Petrobras). Samsung Heavy Industries, as covered in our 2019 Year-End FCPA Update, previously in November 2019 entered into a deferred prosecution agreement with DOJ and agreed to pay a $75.5 million criminal fine to resolve FCPA anti-bribery conspiracy charges arising from the company’s alleged provision of $20 million to an intermediary, while knowing that some or all of that amount would be paid to officials at Petrobras. Half of the U.S. criminal fine was to be credited to a parallel resolution with Brazilian authorities. In connection with the Brazilian leniency agreement, Samsung Heavy Industries agreed to pay approximately R$ 706 million in damages to Petrobras together with R$ 106 million in fines. And on April 15, 2021, Brazil’s Supreme Court upheld a ruling annulling one of the most notable convictions resulting from Operation Car Wash—that of former President Luiz Inácio Lula da Silva, on grounds that the lower court in which Lula was tried did not have jurisdiction. The case was transferred to a federal court for retrial and, should no conviction follow, Lula will be able to run for presidential office in the upcoming 2022 election.
In August 2021, Brazil’s Federal Prosecution Service (“MPF”) filed a criminal complaint against two executives at French engineering company Doris Group over allegedly corrupt activity concerning platform vessel contracts totaling more than $200 million. The MPF also charged a former treasurer of Brazil’s Workers’ Party and two associates for active and passive money laundering. The executives allegedly paid bribes via a financial operator to a former manager of Petrobras and the former treasurer. The financial operator and Petrobras manager both signed collaboration agreements with the MPF in which they confessed to their roles in the scheme and cooperated by providing relevant documents and information.
In September 2021, a review body within the São Paulo prosecutor’s office vacated a resolution prosecutors reached with EcoRodovias in 2020. The now-nullified agreement was the culmination of a two-year bribery investigation into EcoRodovias and its subsidiaries concerning allegations that the companies engaged in a cartel that bribed public officials to obtain road concessions contracts between 1998 and 2015. In signing the 2020 agreement, EcoRodovias admitted to paying bribes and agreed to pay a fine of $113.72 million. The review body threw out the agreement due to a lack of evidence of illegal conduct.
And on October 27, 2021, Rolls Royce signed an agreement with Brazil’s Office of the Comptroller and Attorney General’s Office to pay $27.8 million to settle allegations that it bribed Brazilian public officials in connection with its contracts with Petrobras. As covered in our 2017 Mid-Year FCPA Update, the company in 2017 previously agreed to pay more than $800 million through a global resolution with the SFO, DOJ, and MPF. Under the new agreement, Brazilian officials will credit the $25.6 million that Rolls Royce paid to the MPF, leaving the company to pay another $2.2 million.
Canada
As reported in our 2019 Year-End FCPA Update, in September 2018 Canada passed legislation allowing deferred prosecution agreements for corporate offenders. In 2019, following a long-running investigation into alleged bribery of Libyan officials, engineering and construction giant SNC-Lavalin became one of the first major companies to seek such an agreement. Canadian prosecutors, however, reportedly were unwilling to negotiate with the company, and in 2021, prosecutors charged the company with several offenses, including fraud against the government. The Royal Canadian Mounted Police also arrested two former executives and charged them with fraud and forgery offenses tied to the investigation. The company has publicly stated that it is cooperating with the investigation and that prosecutors have invited it to negotiate a settlement. According to SNC-Lavalin, it is the first company to receive such an offer.
In August 2021, the Court of Appeal for Ontario threw out the bribery convictions of two former employees of Cryptometrics. As discussed in our 2019 Year-End FCPA Update, following trial in 2018, U.S. citizen Robert Barra and UK citizen Shailesh Govindia were sentenced to two-and-a-half years in prison for agreeing to bribe Indian aviation officials, including employees of Air India. But the appellate court found a “reasonable possibility” that prosecutors delayed disclosing emails they exchanged with a principal witness—the former Cryptometrics COO—and that such delay unduly impacted the trial’s fairness. The appellate court further found that the prosecution’s slow production of potentially exculpatory information, only after repeated requests from the defense, deprived the defense of the opportunity to conduct further lines of inquiry or obtain additional evidence.
Costa Rica
Costa Rican officials have been investigating an alleged scheme known as “Cochinilla,” involving allegations that certain construction companies bribed government officials to secure contracts to build public roads, resulting in approximately $125 million in misappropriated funds. On June 14, 2021, the Costa Rican Judicial Investigation Police executed 57 search warrants and made 28 arrests in connection with the investigation, including at the Casa Presidencial, the National Highway Council, the Ministry of Public Works and Transport, and the Public Transport Council, as well as at private homes and at the offices of several construction companies. In August 2021, the Judicial Investigation Police unearthed a trove of invoices apparently related to the investigation buried in a municipal cemetery.
Additionally, on November 16, 2021, six mayors—including the current mayors of San José, Escazú, Alajuela, Osa, and San Carlos—were arrested in connection with the “Diamante” investigation into public works corruption. The Diamante investigators conducted more than 80 raids across the country in connection with the probe.
Ecuador
In April 2021, Ecuador’s Comptroller General Pablo Celi, former Oil Minister José Augusto Briones, and several others were arrested as part of the long-running investigation concerning Ecuador’s state-owned oil company Empresa Pública de Hidrocarburos del Ecuador (“PetroEcuador”). The alleged scheme, covered previously in these pages, allegedly allowed contracting companies to charge PetroEcuador artificially inflated prices to supply fuel, with a percentage of the profits then kicked back to PetroEcuador executives. Augusto died in his jail cell by apparent suicide while awaiting trial.
El Salvador
In July 2021, prosecutors in El Salvador issued an arrest warrant for former president Salvador Sánchez Cerén in connection to the “Public Looting” scam that allegedly occurred while Sánchez Cerén was serving as Vice President from 2009 to 2014. The scandal allegedly involved $351 million in government funds illegally used to pay bonuses to government employees and their associates. Two weeks after the warrant was issued, Sánchez Cerén and his family fled to Nicaragua.
Peru
In an offshoot of the Odebrecht investigation (covered in our 2019 Year-End FCPA Update), in May 2021 Peru’s Attorney General and National Public Prosecution Office announced a plea agreement with Peruvian real estate and construction company Aenza (formerly Graña y Montero), to resolve allegations that the company, two subsidiaries, and certain former employees were involved in corruption in connection with several public infrastructure projects in the country. Under the agreement, Aenza will pay approximately $126 million to the state over several years.
Earlier, in March 2021, prosecutors charged former presidential candidate Keiko Fujimori with money laundering following a multi-year investigation into allegations that she received more than $1 million in bribes from Odebrecht during a prior presidential run. Prosecutors are seeking a sentence of 30 years in prison, while Fujimori denies any wrongdoing. In June 2021, Fujimori’s opponent in the presidential race claimed victory, which Fujimori disputed before conceding in August 2021. The first hearing related to Fujimori’s trial began in late August 2021.
Finally, on September 28, 2021, Magistrate Judge Thomas Hixson of the U.S. District Court for the Northern District of California granted Peru’s request to extradite former Peruvian President Alejandro Toledo. Peru had been seeking Toledo’s extradition since May 2018, and Toledo was arrested in 2019, in connection with alleged corruption and money laundering in an Odebrecht project for the construction of the Peru-Brazil Southern Interoceanic Highway. In his ruling, Judge Hixson found that there was enough evidence to “establish probable cause to believe that Toledo committed collusion and money laundering.” The Court said that this included testimony from Odebrecht’s former executive director in Peru, and Mr. Toledo’s admission during the extradition proceeding that he had received approximately $500,000 in Odebrecht bribes.
Asia
China
In 2020, China’s Supreme People’s Procuratorate (“SPP”) launched the first phase of a pilot program focusing on corporate criminal compliance. Although China does not have a mechanism equivalent to a U.S.-style deferred prosecution agreement, the pilot program encourages local procuratorates to decline prosecutions or arrests for corporate criminal cases, or to propose lighter or suspended sentences, where companies are committed to making compliance enhancements and implementing remediation plans. In April 2021, the SPP published the Work Plan on Launching the Pilot Program for Corporate Compliance Reform, which signals the launch of the second phase of the pilot program and its expansion to 10 provinces and cities, including Beijing, Shanghai, and Guangdong. In June 2021, the SPP, along with eight other national authorities, issued the Guiding Opinions on Establishing a Third-Party Supervision and Evaluation Mechanism for the Compliance of Enterprises Involved in Criminal Cases (for Trial Implementation). Under these guiding opinions, the SPP can refer a company that qualifies for the pilot program to a yet-unspecified third-party organization to investigate, evaluate, supervise, and inspect compliance commitments made by the company. The SPP confirmed in a press release in June 2021 that bribery-related cases may qualify for leniency under the pilot program, citing an example concerning Shenzhen Y Technology Co., Ltd, an audio equipment supplier whose employee was suspected of bribing customers to secure advantages in the procurement process, but which the SPP decided not to prosecute in lieu of a compliance supervision agreement.
On September 20, 2021, the Supervision Law of the People’s Republic of China came into effect, with implementing regulations issued by the National Supervision Commission. The National Supervision Commission was established in 2018 and is primarily responsible for supervising China’s anti-corruption efforts. The Supervision Law seeks to standardize the National Supervision Commission’s work by setting forth the scope, jurisdiction, procedures, and oversight of China’s anti-corruption agencies. In the same month, the National Supervision Commission, the Central Commission for Discipline Inspection (“CCDI”), and the SPP, among other government agencies, jointly issued a document titled “Opinions on Further Promoting the Investigation of Bribery and Acceptance of Bribes.” These opinions emphasize the importance of investigating those offering bribes, which marks a turn for an enforcement regime that historically has focused predominately on those who accept improper payments. These opinions also suggest that enforcement authorities should explore the implementation of a “blacklist” that would impose market restrictions on those that make improper payments, although implementing guidance on this “blacklist” proposal has yet to be issued.
Last but not least, 2021 saw a seismic shift in China’s data and privacy protection laws, with the developments likely to have far-reaching implications for cross-border investigations and litigation. The Standing Committee of the National People’s Congress first passed the Data Security Law, which took effect on September 1, 2021. Among other things, Article 36 of the Data Security Law prohibits “provid[ing] data stored within the People’s Republic of China to foreign judicial or law enforcement bodies without the approval of the competent authority of the People’s Republic of China.” In August 2021, the Standing Committee of China’s National People’s Congress passed the Personal Information Protection Law (“PIPL”), which came into effect on November 1, 2021. The PIPL is China’s first comprehensive legislation regulating personal data processing activities, and it shares many similarities with the EU’s General Data Protection Regulation, including, among other things, its extraterritorial reach, restrictions on data transfer, compliance obligations, and sanctions for non-compliance. In October 2021, the Cyberspace Administration of China (“CAC”) published the “Draft Measures for Data Export Security Assessment” to regulate the export of data in accordance with the Cybersecurity Law, the Data Security Law, and the PIPL. Under the Draft Measures, data processors must apply to the CAC for a “security assessment” of the outbound data in certain circumstances. For a detailed analysis of these new legislative developments, please see our separate Client Alerts, “China Constricts Sharing of In-Country Corporate and Personal Data Through New Legislation“ and “China Passes the Personal Information Protection Law, to Take Effect on November 1.”
Hong Kong
In May 2019, the Independent Commission Against Corruption (“ICAC”) charged Catherine Leung Kar-cheung, a former senior banker at JPMorgan Chase & Co., in connection with the long-running “Sons and Daughters” investigation. The ICAC accused Leung of offering a job to the son of a logistics company chairperson in an effort to win a mandate for an initial public offering. In January 2021, the district court acquitted Leung of the charges, finding that there was insufficient evidence that she corruptly sought to secure the IPO mandate by making the job offer.
India
The Indian Government has issued standard operating procedures that must be followed by Indian police before commencing any investigation against Indian public officials for alleged violations of India’s Prevention of Corruption Act, 1988. One of these standards is to require additional approvals to open an investigation, which have been criticized as erecting barriers to bringing enforcement actions against public officials.
In November 2021, India’s Enforcement Directorate arrested a former cabinet minister of the State of Maharashtra, Anil Deshmukh, on allegations involving money laundering and extortion. Deshmukh, who stepped down from his post earlier this year, is accused of using police officials to extort various hotels, restaurants, and bars in Mumbai, and of using shell companies to siphon the funds received for personal use. He is accused of extorting up to INR 100 crore (~ $13.4 million) per month while in office.
Indonesia
In August 2021, former Indonesian social affairs minister Juliari Batubara was sentenced to 12 years in prison by the Jakarta Corruption Court over a multi-million dollar COVID-19 graft scandal. A judge found the former politician “convincingly guilty of corruption” for receiving IDR 32.4 billion (~ $2.25 million) in kickbacks related to procurement intended for COVID-19 social assistance packages. The Court also fined Batubara IDR 500 million (~ $350,000) and ordered him to return IDR 14.5 billion (~ $1 million) in funds. As a result of his sentence, Batubara also will be banned from public office for four years after serving his prison term.
In 2021, Indonesia’s Corruption Eradication Commission (Komisi Pemberantasan Korupsi Republik Indonesia) (“KPK”) removed 57 of its graft investigators and personnel, while subjecting two dozen more to re-training, after 75 of its personnel failed a tailor-made civil service exam implemented as part of an effort to fold the body into the civil service. Controversy has surrounded the composition of the test: the National Commission on Human Rights has said that the test was plagued with “baseless stigmatization” and “illegal conduct,” while the Indonesian Ombudsman found that the document that set forth the legal basis for organizing the test was signed by officials who did not attend the meeting to discuss it. The KPK has defended the exam, which was taken by 1,300 staff. Dozens of the employees plan to appeal their dismissals.
Japan
In May 2021, the Japanese Ministry of Economy, Trade and Industry (“METI”) revised the Guidelines for the Prevention of Bribery of Foreign Public Officials. These revised Guidelines include a new subsection on mergers and acquisitions and provide additional guidance on third-party due diligence, facilitation payments, and applicability of the “agreement system” under the Japanese Criminal Procedure Code to bribery offenses. The due diligence provisions closely track the recommendations made by DOJ and the SEC in the FCPA Resource Guide. In addition, the revised Guidelines urge Japanese companies to prohibit small facilitation payments, noting that such payments could be made “in order to obtain a wrongful gain in business” in violation of the Unfair Competition Prevention Act.
Malaysia
The Malaysian government reached two corporate resolutions in 2021 in connection with the 1Malaysia Development Berhad (“1MDB”) scandal. First, in February 2021, the Malaysian banking group AMMB Holdings Berhad agreed to pay MYR 2.83 billion (~ $682.3 million) to settle outstanding claims and actions related to AMMB’s involvement in the 1MDB scandal, although the specifics of that involvement were not reported. Second, in March 2021, Deloitte PLT agreed to pay $80 million to the Malaysian government to settle claims related to its auditing of reports issued by 1MDB and a former 1MDB subsidiary. Also related to 1MDB, on August 5, 2021, DOJ announced that it had repatriated to Malaysia an additional $452 million in funds in connection with the scandal, bringing the total repatriated to more than $1.2 billion.
In other enforcement developments, we reported in our 2020 Year-End FCPA Update on amendments to the Malaysia Anti-Corruption Commission Act 2009 that took effect in June 2020, allowing for corporate liability. Under Section 17A, a commercial organization commits a criminal offense if a person associated with the organization corruptly gives any gratification with intent to obtain or retain any business or advantage for the commercial organization. In March 2021, Pristine Offshore Sdn Bhd became the first organization charged by the Malaysia Anti-Corruption Commission (“MACC”) under Section 17A, for allegedly having paid MYR 321,350 (~ $78,000) to the chief operating officer of Deleum Primera Sdn Bhd to secure a subcontract for the supply of workboats Both Pristine Offshore and its former director have pleaded not guilty.
Singapore
In February 2021, Singapore’s Corrupt Practices Investigation Bureau charged three former employees of a Singaporean subsidiary of Royal Dutch Shell with bribing shipping inspectors in exchange for assistance in stealing millions of metric tons of fuel from the company. In May 2021, Daewoo Engineering and Construction executives Ro Sung-Young and Kim Young-Gyu pleaded guilty to conspiring to bribe a Singapore Land Transport Authority official in exchange for contracts with the authority. Prosecutors also charged the official, alleging that he received bribes totaling SGD 1.2 million (~ $893,300) between 2014 and 2019. Also in May, a Singapore court sentenced Chang Peng Hong Clarence, a former Regional Director for Marine Fuels at BP plc’s Singapore subsidiary, to 4.5 years in prison for receiving bribes of almost $4 million from Koh Seng Lee, the executive director of a Singaporean petroleum and petroleum products wholesaler, in exchange for promoting that company’s business within BP. The court also ordered Chang to pay a SGD 6.2 million (~ $4.7 million) penalty.
South Korea
In January 2021, the Korean government launched the Corruption Investigation Office for High-Ranking Officials (“CIO”), an independent investigative agency with jurisdiction to prosecute corruption cases involving high-ranking public officials. The creation of the CIO, which has exclusive prosecution authority over financial crimes involving certain categories of senior officials (as well as private parties involved in the investigations), fulfills a key campaign promise of President Moon Jae-In, who came to power in 2017 following a corruption scandal that resulted in the impeachment of his predecessor (as discussed in our 2020 Year-End FCPA Update). The CIO was active throughout 2021, conducting multiple investigations that even extended to searches of the Supreme Prosecutor’s Office and offices of National Assembly members. Perhaps predictably, these measures have led to claims that the CIO is acting too aggressively.
On the legislative front, in November and December 2021 the Korean National Assembly passed a series of amendments to the Improper Solicitation and Graft Act (“Anti-Graft Act”) and the Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission. These amendments expand the law and its proscriptions to include additional improper advantages such as employment and internship opportunities, selection of scholarship recipients, positive reviews of dissertations and granting of degrees, and activities of prison guards. The amendments also increase the threshold for permissible agricultural gifts given to public officials during public holidays, and allow for anonymous reporting of Anti-Graft Act violations through attorneys.
The Middle East and Africa
Israel
Months after the corruption trial of Benjamin Netanyahu restarted following delays due to COVID-19, Netanyahu’s election loss ended his 12 years as Israeli Prime Minister. As covered most recently in our 2020 Year-End FCPA Update, the Israeli Attorney General announced indictments in February 2019 stemming from three separate allegations of wrongdoing. On February 8, 2021, Netanyahu pleaded not guilty, and the trial then was postponed again due to a disagreement over certain documents. One former media adviser to Netanyahu and his family recently testified regarding regulatory favors Netanyahu allegedly awarded to media tycoons in return for positive press coverage and gifts. The witness, who previously was charged and signed a cooperation deal with the government, also provided investigators with recordings of conversations with Netanyahu and his family.
Namibia
In 2021, state-owned National Fishing Corporation of Namibia (“Fishcor”), and several executives including former CEO Mike Nghipunya, were charged with racketeering, conspiracy, fraud, money laundering, tax evasion, and obstruction of justice. The investigation began in 2019, after Wikileaks published more than 30,000 documents from a former managing director of Icelandic seafood company Samherji’s Namibian operations. According to prosecutors, Fishcor illegally sold quotas to Samherji for $11.1 million, with funds then being provided to others, including a former Namibian fisheries minister. Pretrial hearings are scheduled for January 2022.
South Africa
The trial of former South African President Jacob Zuma for allegedly accepting bribes related to a 1994 arms purchase spent most of 2021 plagued with delays. The National Prosecuting Authority accuses Zuma of accepting bribes on hundreds of occasions. Zuma was first charged in 2005, but the charges have been dropped and reinstated many times over the years amid allegations of political interference, and recent delays have been caused by the unexplained simultaneous resignation of Zuma’s entire legal team and Zuma’s application to remove the chief prosecutor on alleged bias grounds. Zuma’s trial is currently set to begin in April 2022.
The following Gibson Dunn lawyers and alumnae participated in preparing this client update: F. Joseph Warin, John Chesley, Richard Grime, Patrick Stokes, Kelly Austin, Patrick Doris, Matthew Nunan, Oleh Vretsona, Oliver Welch, Christopher Sullivan, Anna Aguillard, Claire Aristide, Anthony Balzofiore, Junghyun Baek, Sean Brennan, Alexandra Buettner, Lizzy Brilliant, Ella Alves Capone, Josiah Clarke, Priya Datta, Bobby DeNault, Nathan Eagan, Amanda Kenner, Derek Kraft, Michael Kutz, Caroline Leahy, Nicole Lee, Allison Lewis, Jenny Lotova, Andrei Malikov, Megan Meagher, Katie Mills, Erin Morgan, Sandy Moss, Monica Murphy, Jaclyn Neely, Ning Ning, Kareen Ramadan, Hayley Smith, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Katie Tomsett, Dillon Westfall, Sophie White, Terry Wong, and Caroline Ziser Smith.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
Washington, D.C.
F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com)
Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com)
Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com)
Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com)
David P. Burns (+1 202-887-3786, dburns@gibsondunn.com)
David Debold (+1 202-955-8551, ddebold@gibsondunn.com)
Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com)
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Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com)
Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com)
Robert K. Hur (+1 202-887-3674, rhur@gibsondunn.com)
Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com)
Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com)
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New York
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Denver
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Los Angeles
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San Francisco
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Palo Alto
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London
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© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On January 24, 2022, the Federal Trade Commission announced its annual update of thresholds for pre-merger notifications of certain M&A transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”). Pursuant to the statute, the HSR Act’s jurisdictional thresholds are updated annually to account for changes in the gross national product. The new thresholds will take effect on February 23, 2022, applying to transactions that close on or after that date.
The size of transaction threshold for reporting proposed mergers and acquisitions under Section 7A of the Clayton Act will increase by $9.0 million, from $92 million in 2021 to $101 million for 2022.
|
Original Threshold |
2021 Threshold |
2022 Threshold |
|
$10 million |
$18.4 million |
$20.2 million |
|
$50 million |
$92.0 million |
$101 million |
|
$100 million |
$184.0 million |
$202 million |
|
$110 million |
$202.4 million |
$222.2 million |
|
$200 million |
$368.0 million |
$403.9 million |
|
$500 million |
$919.9 million |
$1.0098 billion |
|
$1 billion |
$1,839.8 million |
$2.0196 billion |
The maximum fine for violations of the HSR Act has increased from $43,792 per day to $46,517.
The amounts of the filing fees have not changed, but the thresholds that trigger each fee have increased:
|
Fee |
Size of Transaction |
|
$45,000 |
Valued at more than $101 million but less than $202 million |
|
$125,000 |
Valued at $202 million or more but less than $1.0098 billion |
|
$280,000 |
Valued at $1.0098 billion or more |
The 2022 thresholds triggering prohibitions on certain interlocking directorates on corporate boards of directors are $41,034,000 for Section 8(a)(l) (size of corporation) and $4,103,400 for Section 8(a)(2)(A) (competitive sales). The Section 8 thresholds took effect on January 21, 2022.
If you have any questions about the new HSR size of transaction thresholds, or HSR and antitrust/competition regulations and rulemaking more generally, please contact any of the partners or counsel listed below.
The following Gibson Dunn lawyers prepared this client alert: Adam Di Vincenzo, Andrew Cline, and Chris Wilson.
Gibson Dunn’s lawyers are available to assist clients in addressing any questions they may have regarding the HSR Act or antitrust issues raised by business transactions. Please feel free to contact the Gibson Dunn attorney with whom you usually work in the firm’s Antitrust and Competition Practice Group, or the following:
Adam Di Vincenzo – Washington, D.C. (+1 202-887-3704, adivincenzo@gibsondunn.com)
Andrew Cline – Washington, D.C. (+1 202-887-3698, acline@gibsondunn.com)
Chris Wilson – Washington, D.C. (+1 202-955-8520, cwilson@gibsondunn.com)
Rachel S. Brass – Co-Chair, Antitrust & Competition Group, San Francisco
(+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Antitrust & Competition Group, Washington, D.C.
(+1 202-955-8678, sweissman@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
BlackRock, Vanguard and State Street Global Advisors (“State Street”) recently issued their voting policy updates for 2022, as well as guidance about their 2022 priorities for their portfolio companies. On January 18, 2022, BlackRock’s CEO issued his annual “Letter to CEOs” (available here), following closely on the heels of State Street’s CEO, who issued his annual letter to public company directors (available here) on January 12.
These pronouncements from the “Big Three” asset managers reflect a number of common themes, including an emphasis on climate and the transition to a Net Zero economy, diversity at the board level and throughout the workforce, and effective human capital management. Links to the BlackRock and Vanguard voting policies for 2022 are below. State Street’s voting policy updates span several documents that provide guidance on areas that State Street views as focal points for the coming year. Links to these documents are also below.
BlackRock Proxy Voting Guidelines for U.S. Securities (effective as of January 2022)
Vanguard Proxy Voting Policy for U.S. Companies (effective as of March 1, 2022)
State Street
1. BlackRock
2022 Letter to CEOs
In his 2022 letter titled “The Power of Capitalism,” BlackRock CEO Larry Fink encourages companies to focus on their purpose and put that purpose at the foundation of their relationships with stakeholders, in order to be valued by their stakeholders and deliver long-term value for their shareholders. The letter urges companies to think about whether they are creating an environment that helps their employee-stakeholders navigate the new world of work that has emerged from the pandemic. The letter observes that most stakeholders now expect companies to play a role in moving toward a Net Zero global economy and discusses BlackRock’s approach to climate and sustainability. This is a priority area for BlackRock because of its need, as a capitalist and fiduciary to its clients, to understand how companies are adjusting their business to massive changes in the economy. Mr. Fink also emphasizes that divesting from entire sectors, or simply passing carbon-intensive assets from public to private markets, will not move the world to Net Zero. BlackRock does not pursue divestment from oil and gas companies as a policy, but believes that action by “foresighted companies” in a variety of carbon-intensive industries is a critical part of the transition to a greener economy. Government participation on the policy, regulatory and disclosure fronts is also critical because, Mr. Fink notes, “businesses can’t do this alone, and they cannot be the climate police.”
The letter concludes with a reminder that BlackRock has built a stewardship team so it can understand companies’ progress throughout the year, and not just during proxy season. BlackRock previously announced an initiative to give more of its clients the option to vote their own holdings, rather than BlackRock casting votes on their behalf. The letter notes that this option is now available to certain institutional clients, including pension funds that support 60 million people. The letter also commits to expanding that universe as BlackRock is committed to a future where every investor, including individual investors, have the option to participate in the proxy voting process.
2022 BlackRock Voting Policy Updates
30% Target on Board Diversity
BlackRock believes boards should aspire to 30% diversity, and encourages companies to have at least two directors who identify as female and at least one who identifies as being from an “underrepresented group.” The definition of “underrepresented group” is broad and includes individuals who identify as racial or ethnic minorities, LGBTQ+, underrepresented based on national, Indigenous, religious or cultural identity, individuals with disabilities and veterans. Although the wording of the policy is aspirational, insufficient board diversity was a top reason BlackRock opposed the election of directors in 2021.
Board Diversity Disclosure
BlackRock updated its expectations for disclosure about board diversity. It asks that companies disclose how the diversity characteristics of the board, in aggregate, are aligned with a company’s long-term strategy and business model, and whether a diverse slate of nominees is considered for all available board seats.
Votes on Compensation Committee Members
BlackRock appears to be strengthening its position on votes for compensation committee members where there is a lack of alignment between pay and performance. In that situation, BlackRock will vote “against” the say-on-pay proposal and relevant compensation committee members (rather than simply “considering” negative votes for committee members).
Sustainability Reporting
BlackRock will continue to ask that companies report in accordance with the Task Force on Climate-related Financial Disclosure (“TCFD”) framework. In recognition of continuing advances in sustainability reporting standards, the 2022 voting guidelines recognize that in addition to TCFD, many companies report using industry-specific metrics other than those developed by the Sustainability Accounting Standards Board (“SASB”). For those companies, BlackRock asks that they highlight metrics that are industry- or company- specific. It also recommends that companies disclose any multinational standards they have adopted, any industry initiatives in which they participate, any peer group benchmarking undertaken, and any assurance processes to help investors understand their approach to sustainable and responsible business conduct.
Climate Risk
BlackRock continues to ask companies to disclose Net Zero-aligned business plans that are consistent with their business model and sector. For 2022, it is encouraging companies to: (1) demonstrate that their plans are resilient under likely decarbonization pathways and the global aspiration to limit warming to 1.5°C; and (2) disclose how considerations related to having a reliable energy supply and a “just transition” (that protects the most vulnerable from energy price shocks and economic dislocation) affect their plans. BlackRock also updated its voting policies to reflect its existing approach of signaling concerns about a company’s plans or disclosures in its votes on directors, particularly at companies facing material climate risks. In determining how to vote, it will continue to assess whether a company’s disclosures are aligned with the TCFD and provide short-, medium-, and long-term reduction targets for Scope 1 and 2 emissions.
ESG Performance Metrics
BlackRock does not have a position on the use of ESG performance metrics, but it believes that where companies choose to use them, they should be relevant to the company’s business and strategy, clearly articulated, and appropriately rigorous, like other financial and non-financial performance metrics.
Votes on Committee Members at Controlled Companies
BlackRock may vote “against,” or “withhold” votes from, directors serving on “key” committees (audit, compensation, nominating/governance), that it does not consider to be independent, including at controlled companies. Previously, this policy was limited to votes on insiders or affiliates serving on the audit committee, and did not extend to other committees.
2. Vanguard
Vanguard’s voting policy updates address several of the same areas as BlackRock’s, including oversight of climate risk, and board diversity and related disclosures. The introduction to the voting policies also contains more explicit language emphasizing that proposals often require fact-intensive analyses based on an expansive set of factors, and that proposals are voted case-by-case at the direction of the boards of individual Vanguard funds.
Climate Risk Oversight “Failures”
Vanguard’s voting policies outline certain situations in which funds will oppose the re-election of directors on “accountability” grounds—that is, “because of governance failings or as a means to escalate other issues that remain unaddressed by a company.” Under Vanguard’s current policies, funds will consider votes “against,” or “withhold” votes from, directors or a committee for governance or material risk oversight failures.
For 2022, Vanguard has updated this policy to clarify that in cases where there is a risk oversight “failure,” funds will generally vote “against,” or “withhold” votes from, the chair of the committee responsible for overseeing a particular material risk (or the lead independent director and board chair, if a risk does not fall under the purview of a specific committee). The policy has also been updated to reflect that it covers material social and environmental risks, including climate change. On the subject of climate change, the updated policy lists factors that funds will consider in evaluating whether board oversight of climate risk is appropriate, including: (1) the materiality of the risk; (2) the effectiveness of disclosures to enable the market to understand and price the risk; (3) whether a company has disclosed business strategies, including reasonable risk mitigation plans in the context of anticipated regulatory requirements and changes in market activity, in line with the Paris Agreement or subsequent agreements; and (4) company specific-context, regulations and expectations. Funds will also consider the board’s overall governance of climate risk and the effectiveness of its independent oversight of this area.
Board Diversity and Qualifications
For 2022, Vanguard has clarified its expectations on disclosure about board diversity and qualifications. The policy states that boards can inform shareholders about the board’s current composition and related strategy by disclosing at least: (1) statements about the board’s intended composition strategy, including expectations for year-over-year progress, from the nominating/governance committee or other relevant directors; (2) policies for promoting progress toward greater board diversity; and (3) current attributes of the board’s composition. The policy states that board diversity disclosure should cover, at a minimum, the genders, races, ethnicities, tenures, skills and experience that are represented on the board. While disclosure about self-identified personal characteristics such as race and ethnicity can be presented at the aggregate or individual level, Vanguard expects to see disclosure about tenure, skills and experience at the individual level.
Under its policy on board “accountability” votes, a lack of progress on board diversity and/or disclosures about board diversity may lead to votes “against,” or “withhold” votes from, the chair of the nominating/governance committee. Vanguard has updated this policy for 2022 to reflect its expectations about the various dimensions of diversity (gender, race, etc.) that should be represented on boards and about companies’ disclosures. The policy includes a reminder that “many boards still have an opportunity to increase diversity across different dimensions,” and that these boards “should demonstrate how they intend to continue making progress.”
Director Overboarding
Vanguard has clarified how its overboarding policy applies to directors who are named executive officers (NEOs). Although Vanguard’s limit of two public company boards remains in place, the policy updates clarify that the two boards could consist of either the NEO’s own board and one outside board, or two outside boards if an NEO does not sit on the board at their own company. Vanguard funds will generally oppose the election of directors who exceed this limit at their outside board(s), but not at the company where they are an NEO.
For other directors, Vanguard’s existing limit of four public company boards is unchanged.
Vanguard funds will also look for companies to have good governance practices on director commitments, including adopting a policy on outside board service and disclosure about how the board oversees the policy.
Unilateral Board Adoption of Exclusive Forum Provisions
Vanguard has updated its voting policy on board “accountability” votes where a company adopts policies limiting shareholder rights. Under this policy, Vanguard funds will generally oppose the election of the independent board chair or lead director, and the members of the nominating/governance committee, in response to unilateral board actions that “meaningfully limit” shareholder rights. For 2022, this policy has been updated to specify that these board actions may include the adoption of an exclusive forum provision without shareholder approval.
Proposals on Virtual and Hybrid Shareholder Meetings
According to Vanguard, data show that virtual meetings can increase shareholder participation and reduce costs. Vanguard funds will consider supporting proposals on virtual meetings if meeting procedures and requirements are disclosed ahead of time, there is a formal process for shareholders to submit questions, real-time video footage is available, shareholders can call into the meeting or send recorded messages, and shareholder rights are not unreasonably curtailed.
3. State Street
In his letter, State Street CEO Cyrus Taraporevala announces that in 2022, State Street’s main focus “will be to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.” To that end, the letter attaches three guidance documents outlining State Street’s expectations and voting policies for the 2022 proxy season in the areas of climate change and diversity, equity and inclusion. State Street has also published other guidance documents on director overboarding/time commitments and human capital for the 2022 proxy season.
The guidance documents are worth reading in their entirety because they provide detailed information about the practices and disclosures State Street expects to see from its portfolio companies in both 2022 and 2023, and about State Street’s related voting policies. A summary of the key highlights is below.
Corporate Climate Disclosures
General
State Street expects all companies in its portfolio to provide disclosures in accordance with the four pillars of the TCFD framework: governance, strategy, risk management, and metrics and targets. In approaching its disclosure expectations, State Street will begin by engaging with companies. The guidance document includes a list of questions (organized by the four TCFD pillars) that State Street may ask companies as part of its engagement efforts.
For companies that it believes are not making sufficient progress after engagement, State Street will consider taking action through its votes on directors and/or shareholder proposals. Starting in 2022, at S&P 500 companies, State Street may vote against the independent board leader if a company fails to provide sufficient disclosure in accordance with the TCFD framework, including about board oversight of climate-related risks and opportunities, total Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions, and targets for reducing GHG emissions.
Companies in “Carbon-Intensive Sectors”
For several years, State Street has had specific disclosure expectations for companies in “carbon-intensive sectors” (oil and gas, utilities and mining), and the guidance document outlines what State Street expects to see beginning in 2022. Disclosures are expected to address: (1) interim GHG emissions reductions targets to accompany long-term climate ambitions; (2) discussion of the impacts of scenario-planning on strategy and financial planning; (3) use of carbon pricing in capital allocation decisions; and (4) Scope 1, Scope 2 and material categories of Scope 3 emissions.
Climate Change Shareholder Proposals
State Street will evaluate climate-related shareholder proposals on a case-by-case basis, taking into account factors that include the reasonableness of a proposal, alignment with the TCFD framework and SASB standards where relevant, emergent market and industry trends, peer performance, and dialogue with the board, management and other stakeholders. For companies in carbon-intensive sectors, State Street will consider alignment with its disclosure expectations specific to these companies. The guidance also addresses specific factors State Street will consider in assessing climate-related lobbying proposals.
Climate Transition Plan Disclosures
Related to the broader subject of climate disclosures, State Street has also issued guidance specific to disclosures about companies’ climate transition plans. In the guidance, State Street notes that there is no one-size-fits-all approach to reaching Net Zero, and that climate-related risks and opportunities are highly nuanced across and within industries. It plans to continue developing its disclosure expectations over time, including taking into account any disclosures mandated by regulators. In his letter, State Street CEO Cyrus Taraporevala emphasizes that what State Street is seeking from climate transition plans, as a long-term investor, “is not purity but pragmatic clarity around how and why a particular transition plan helps a company make meaningful progress.” Mr. Taraporevala also emphasizes the need to take a big-picture look at whether the climate commitments individual companies make have the effect of reducing climate impacts at the aggregate level. In this regard, he observes that so-called “brown-spinning” (public companies selling off their highest-emitting assets to private equity or other market participants), “reduces disclosure, shields polluters, and allows the publicly-traded company to appear more ‘green,’ without any overall reduction in the level of emissions on the planet.” State Street recognizes that in the near term, additional investments in light fossil fuels may be necessary to propel the transition to Net Zero.
In light of these considerations, State Street intends its guidance document on climate transition plans as a “first step” to provide transparency about the core criteria State Street expects companies to address in developing their plans. These criteria are organized into ten categories that generally align with those found in two external frameworks: the Institutional Investors Group on Climate Change (IIGCC) Net Zero Investment Framework and Climate Action 100+ Net-Zero Company Benchmark. The criteria include decarbonization strategy, capital allocation, climate governance, climate policy and stakeholder engagement.
As a companion to its 2022 policy on holding independent board leaders accountable for climate disclosures (discussed above), this year, State Street plans to launch an engagement campaign on climate transition plan disclosure targeted at “significant emitters in carbon-intensive sectors.” Starting in 2023, it will hold directors at these companies accountable if their company fails to show adequate progress in meeting its climate transition disclosure expectations.
Diversity Disclosures
State Street’s guidance document lists five topics it expects all of its portfolio companies to address in their diversity disclosures:
- Board oversight—How the board oversees the company’s diversity, equity and inclusion efforts, including the potential impacts of products and services on diverse communities;
- Strategy—The company’s timebound and specific diversity goals (related to gender, race and ethnicity at a minimum), the policies and programs in place to meet these goals, and how they are measured, managed and progressing;
- Goals—Same as Strategy.
- Metrics—Measures of the diversity of the company’s global workforce and board. For employees, this should include diversity by gender, race and ethnicity (at a minimum) where permitted by law, broken down by industry-relevant employment categories or seniority levels, for all full-time employees. In the U.S., companies are expected to use the disclosure framework from the EEO-1 at a minimum. For the board, disclosures should be provided by gender, race and ethnicity (at a minimum), and can be on an aggregate or individual level; and
- Board diversity—Efforts to achieve diversity at the board level, including how the nominating/governance committee ensures diverse candidates are considered as part of the recruitment process.
State Street also encourages companies to consider providing disclosures about other dimensions of diversity (LGBTQ+, disabilities, etc.), as it views these attributes as furthering the overarching goal of contributing to the diversity of thought on boards and in the workforce.
Diversity and Proxy Voting
State Street will consider disclosures about board diversity in deciding how to vote on directors, as follows:
Racial/Ethnic Diversity – S&P 500 Companies
In 2022, State Street will vote “against,” or “withhold” votes from:
- The chair of the nominating/ governance committee if the company does not disclose the racial and ethnic composition of its board, either at the aggregate or individual level;
- The chair of the nominating/ governance committee if the company does not have at least one director from “an underrepresented racial or ethnic community”; and
- The chair of the compensation committee, if the company does not disclose its EEO-1 report, with acceptable disclosure including the original report, or the exact content of the report translated into custom graphics.
Gender Diversity
State Street may vote “against,” or “withhold” votes from, the chair of the nominating/governance committee:
- Beginning in 2022, for companies in all markets, if there is not at least one female director on the board; and
- Beginning in 2023, at Russell 3000 companies, if the board does not have at least 30% female directors. State Street may waive this policy if a company engages with it and provides a specific, timebound plan for reaching 30%.
If a company fails to meet the gender diversity expectations for three consecutive years, State Street may vote against all incumbent nominating/governance committee members.
The guidance also outlines State Street’s approach to voting on diversity-related shareholder proposals, including specific criteria relating to proposals seeking reporting on diversity, “pay gap” proposals, and proposals seeking racial equity audits.
State Street notes that its voting policies currently focus on increasing board diversity, but that in coming years it intends to shift its focus to the workforce and executive levels. Related to the subject of workforce diversity, the guidance previews ten recommended areas of focus for boards in overseeing racial and ethnic diversity. These are addressed in more detail in a publication issued by State Street in partnership with Russell Reynolds and the Ford Foundation.
Director Overboarding
For 2022, State Street is moving toward an approach that relies more heavily on nominating/governance committee oversight (and enhanced disclosures) about whether directors have enough time to fulfill their commitments. The updated approach is designed to ensure that nominating/governance committees are evaluating directors’ time commitments, regularly assessing director effectiveness, and providing disclosure about their policies and efforts. State Street cites two factors as the key drivers of these updates: its own research showing that boards with overcommitted directors have been slower to adopt leading governance practices and provide robust shareholder rights, and concerns about “tokenism” (nominating already-overcommitted diverse directors) and the need to broaden the candidate pools of diverse directors. The policy updates also address service on SPAC boards.
As a result of the policy updates, beginning in March 2022, State Street will apply the following overboarding limits to directors:
- For board chairs or lead directors, three public company boards; and
- Other director nominees who are not public company NEOs, four public company boards.
State Street may consider waiving these limits and support a director’s election if the company discloses its policy on outside board seats. This policy (or the related disclosure) must include:
- A numerical limit on public company board seats that does not exceed State Street policies by more than one;
- Consideration of public company board leadership positions;
- An affirmation that all directors are currently in compliance with the policy; and
- A description of the nominating/governance committee’s annual process for review outside board commitments.
This waiver policy will not apply to public company NEOs, who remain subject to State Street’s existing limit of two public company boards.
In calculating outside boards, State Street will not count mutual fund boards or SPAC boards, but it expects the nominating/governance committee to consider these boards in evaluating directors’ time commitments.
Human Capital Management (HCM) Disclosures and Practices
State Street’s guidance document lists the five topics it expects companies to address in their HCM disclosures: (1) board oversight; (2) strategy (specifically, how a company’s approach to HCM advances its overall long-term business strategy); (3) compensation, and how it helps to attract and retain employees and incentivize contributions to an effective HCM strategy; (4) “voice” (how companies solicit and act on employee feedback, and how the workforce is engaged in the organization); and (5) how the company advances diversity, equity and inclusion.
State Street emphasizes that it expects companies to provide specificity on these subjects. For example, rather than disclosing that employees are surveyed regularly, State Street suggests that companies disclose survey frequency, examples of questions asked, and relevant examples of actions taken in response to employee feedback. State Street also encourages companies to consider emerging disclosure frameworks, such as the framework outlined by the Human Capital Management Coalition, which includes 35 institutional investors representing over $6.6 trillion in assets.
State Street will approach HCM issues by starting with engagement, focusing on the companies and industries with the greatest HCM risks and opportunities. For companies that it believes are not making sufficient progress after engagement, State Street will consider taking action through its votes on directors and/or shareholder proposals. It will consider supporting shareholder proposals at companies whose HCM disclosures are not sufficiently aligned with State Street’s disclosure expectations.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising and Lori Zyskowski.
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)
Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Mike Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@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)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
As we do each year, we offer our observations on new developments and recommended practices for calendar-year filers to consider in preparing their Form 10-K. This alert reviews the recent amendments to Regulation S-K adopted by the U.S. Securities and Exchange Commission (“SEC”) and discusses how public companies are reacting to these new requirements. In addition, it discusses other disclosure topics, including Environmental, Social, and Governance (“ESG”) issues such as human capital management, climate change, and cybersecurity, that, in light of increasing investor focus and forthcoming rulemaking, continue to be a top priority for public companies.
The following Gibson Dunn attorneys assisted in preparing this client update: Mike Titera, Justine Robinson, Andrew Fabens, Hillary Holmes, Elizabeth Ising, Thomas Kim, David Korvin, Ron Mueller, Jim Moloney, and Victor Twu.
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 Capital Markets 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)
James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Mike Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com)
Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com)
Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Adding to the growing list of jurisdictions that have passed pay transparency laws, effective May 15, 2022, employers in New York City will be required to include salary ranges in job postings.
Brief Summary
The new pay transparency law makes it an “unlawful discriminatory practice” under the New York City Human Rights Law (“NYCHRL”) for an employer to advertise a job, promotion, or transfer opportunity without stating the position’s minimum and maximum salary in the advertisement.
The salary range may include the lowest and highest salaries that the employer believes in “good faith” that it would pay for the job, promotion, or transfer at the time of the posting.
Notably, the law does not define “advertise” and it does not differentiate between jobs that are posted externally versus internally. The law also does not define a “salary,” nor does it clarify the requirements for non-salaried positions.
Covered Employers
The law applies to all employers with at least four employees in New York City, and independent contractors are counted towards that threshold. Significantly, however, the law does not apply to temporary positions advertised by temporary staffing agencies.
Enforcement and Penalties
The New York City Commission on Human Rights is authorized to take action to implement the law, including, among other things, through the promulgation of rules and/or imposition of civil penalties under the NYCHRL.
Growing Trend of Pay Transparency Laws
New York City’s pay transparency law is part of a growing trend in the United States.
In 2021, Colorado enacted a law that requires employers to disclose, among other things, the compensation or range of possible compensation in job postings. Of note, Colorado’s law is more expansive than New York City’s in that it requires employers with even one employee based in Colorado to post such salary information in any job postings for remote work (i.e., work that is performable anywhere, including Colorado).
Last year, Connecticut and Nevada enacted similar pay transparency laws, and Rhode Island passed a law (effective January 1, 2023) which will require employers to provide wage or salary range information to applicants and employees under certain conditions.
California, Maryland, and Washington also have laws requiring salary disclosure, but only upon the request of an applicant or employee, and each law’s disclosure requirements vary slightly. Maryland, for example, requires disclosure of a position’s wage range upon request of any applicant. In comparison, California requires disclosure upon request from applicants who have completed an initial interview and Washington requires disclosure upon request from applicants who have received an offer.
This trend appears poised to continue as other state legislatures, including Massachusetts and South Carolina, are considering pay transparency bills.
Similar to laws banning questions related to an applicant’s salary history during the hiring process, these pay transparency laws are aimed at promoting equal pay. Where state or local law provide for a private right of action, employers may face “tag-along” claims alleging pay disclosure non-compliance in addition to claims of workplace discrimination and/or retaliation.
Takeaway
All covered employers in New York City should take steps to ensure compliance with these new pay transparency requirements effective May 2022. And, employers operating in multiple jurisdictions should carefully monitor the ever-growing patchwork of pay transparency laws in order to ensure compliance wherever located.
The following Gibson Dunn attorneys assisted in preparing this client update: Danielle Moss, Harris Mufson, Gabby Levin, and Meika Freeman.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following:
Danielle J. Moss – New York (+1 212-351-6338, dmoss@gibsondunn.com)
Harris M. Mufson – New York (+1 212-351-3805, hmufson@gibsondunn.com)
Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
California has seen a flurry of legislative activity over the last couple of years focused on protecting the rights of employees entering separation or settlement agreements with employers. Employers who have not updated their separation or severance agreement templates in the last few years should consider whether updates to their agreements are needed. This is especially true in light of SB 331 which Governor Gavin Newsom signed into law on October 7, 2021. SB 331, or the “Silenced No More Act,” introduces additional restrictions on settlement agreements, non-disparagement agreements and separation agreements executed with employees in California after January 1, 2022.
Background – Recent Legal Developments
California has made a number of changes to requirements for separation and settlement agreements over the past few years, including but not limited to:
- SB 1431, effective January 1, 2019, which amended the language of Section 1542 of the California Civil Code, often cited in settlement agreements, to read as follows: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.”
- SB 820 which prohibits provisions in settlement agreements entered into after January 1, 2019 that prevent the disclosure of facts related to sexual assault, harassment, and discrimination claims “filed in a civil action” or in “a complaint filed in an administrative action.” SB 820 did not prohibit provisions requiring confidentiality of a settlement payment amount, and the law included an exception for provisions protecting the identity of the claimant where requested by the claimant.
- SB 1300, effective January 1, 2019, amended California’s Fair Employment and Housing Act to prohibit employers from requiring employees to agree to a non-disparagement agreement or other document limiting the disclosure of information about unlawful workplace acts in exchange for a raise or bonus, or as a condition of employment or continued employment. SB 1300 further prohibited employers from requiring, in exchange for a raise or bonus or as a condition of employment or continued employment, that an individual “execute a statement that he or she does not possess any claim or injury against the employer” or release “a right to file and pursue a civil action or complaint with, or otherwise notify, a state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity.” Under the law, any such agreement is contrary to public policy and unenforceable. That said, negotiated settlement agreements of civil claims supported by valuable consideration were exempted from these prohibitions.
- AB 749 went into effect on January 1, 2020 and further impacted settlement agreements by limiting the inclusion of “no-rehire” provisions in agreements that settle employment disputes. AB 749 created Code of Civil Procedure Section 1002.5, which prohibits an agreement to settle an employment dispute from containing “a provision prohibiting, preventing, or otherwise restricting a settling party that is an aggrieved person from obtaining future employment with the employer against which the aggrieved person has filed a claim, or any parent company, subsidiary, division, affiliate, or contractor of the employer.” AB 749 defined an “aggrieved person” as “a person who has filed a claim against the person’s employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process.” Notably, AB 749 continued to allow a “no-rehire” provision in a settlement agreement with an employee whom the employer, in good faith, determined engaged in sexual harassment or sexual assault. AB 749 did not restrict the execution of a severance agreement that is unrelated to a claim filed by the employee against the employer.
- AB 2143, which took effect January 1, 2021, modified the provisions enacted by AB 749 to further clarify and expand when employers can include a “no-rehire” provision in separation or settlement agreements. Specifically, AB 2143 amended Code of Civil Procedure Section 1002.5 to also allow a “no-rehire” provision if the aggrieved party has engaged in “any criminal conduct.” AB 2143 also clarified that in order to include a “no-rehire” provision in a separation or settlement agreement, an employer must have made and documented a good-faith determination that such individual engaged in sexual harassment, sexual assault, or any criminal conduct before the aggrieved employee raised his or her claim. Finally, AB 2143 also made clear that the restriction on “no-rehire” provisions set forth in Code of Civil Procedure Section 1002.5 applies only to employees whose claims were filed in “good faith.”
SB 331 – Key Changes
Against this legal backdrop, SB 331 has introduced additional restrictions that employers should keep in mind when entering into settlement or separation agreements with employees in California.
Settlement Agreements
Building on the protections included in SB 820, SB 331 expanded SB 820’s prohibition on provisions that prevent the disclosure of facts to include all facts related to all forms of harassment, discrimination, and retaliation—not just those related to sexual assault, sexual harassment, or sex discrimination. Just as with SB 820, parties can agree to prevent the disclosure of the settlement payment amount, and the identity of the claimant can be protected where requested by the claimant.
Non-Disparagement Covenants and Separation Agreements
Consistent with SB 1300, SB 331 prohibits an employer from requiring an employee to agree to a non-disparagement agreement or other document limiting the disclosure of “information about unlawful acts in the workplace” in exchange for a raise or bonus, or as a condition of employment or continued employment. SB 331 also prohibits an employer from including in any separation agreement with an employee or former employee any provision that prevents the disclosure of “information about unlawful acts in the workplace” which includes, but is not limited to, information pertaining to harassment or discrimination or any other conduct that the employee has reasonable cause to believe is unlawful.
Effective January 1, 2022, any non-disparagement or other contractual provision that restricts an employee’s ability to disclose information related to conditions in the workplace must include, in substantial form, the following language: “Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.”
Finally, SB 331 also provides that any separation agreement with an employee or former employee related to an employee’s separation from employment that includes a release of claims must provide: (i) notice that the employee has the right to consult an attorney regarding the agreement and (ii) a reasonable time period of at least five (5) business days in which to consult with an attorney. An employee may sign the agreement before the end of such reasonable time period so long as such employee’s decision is “knowing and voluntary” and is not induced by the employer through fraud, misrepresentation or a threat to withdraw or alter the offer prior to the expiration of such reasonable period of time or by providing different terms to the employees who sign such an agreement before the expiration of such time period. The SB 331 requirements do not apply to a negotiated agreement to resolve an underlying claim filed by an employee in court, before an administrative agency, in arbitration, or through an employer’s internal complaint process.
Conclusion and Next Steps
SB 331 represents the latest step taken by California intended to protect employees’ rights by restraining employers from preventing the disclosure of information regarding certain workplace conditions.
When evaluating separation or severance agreement templates, employers should consider whether the agreements:
- Include language requiring that a settlement or severance amount be held in the strictest confidence by the employee or former employee.
- Have the latest amended Section 1542 language.
- Have the appropriate disclosures for any non-disparagement provisions.
- Provide employees with sufficient disclosures and time to consider the separation agreement.
- Include limitations on individuals which are now prohibited.
Employers should navigate these requirements with care. Compliance with California’s multifaceted legal protections for employees and former employees will require careful drafting. Employers should consider seeking the assistance of legal counsel to refresh templates prior to entering into settlement or separation agreements in California.
The following Gibson Dunn attorneys assisted in preparing this client update: Tiffany Phan, Florentino Salazar, Sean Feller, Jason Schwartz, and Katherine V.A. Smith.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following:
Tiffany Phan – Los Angeles (+1 213-229-7522, tphan@gibsondunn.com)
Sean C. Feller – Co-Chair, Executive Compensation & Employee Benefits Group, Los Angeles
(+1 310-551-8746, sfeller@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Introduction
On 12 January 2022, the Hong Kong Monetary Authority (HKMA) released a Discussion Paper on the expansion of the Hong Kong regulatory framework to stablecoins (e.g. crypto-assets pegged to fiat currencies). The Paper considers the adequacy of the existing regulatory framework in light of the growing use of stablecoins and other types of crypto-assets in financial markets, and the challenges posed by this increase in their prevalence. It further poses eight questions for consideration by the industry, including the scope of a proposed new regulatory regime to cover what the HKMA describes as “payment-related stablecoins”.
This client alert provides an overview of the HKMA’s views on crypto-assets and stablecoins as outlined in the Paper, discusses the implications for players in the stablecoin ecosystem if the proposed changes are implemented, and suggested next steps for interested parties.
The HKMA has requested responses to the Paper by 31 March 2022, and has indicated that it intends to introduce this new stablecoin regulatory regime by 2023-2024.
HKMA’s views on crypto-assets and financial stability
The Paper provides a valuable insight into the HKMA’s views on crypto-assets in general, and stablecoins in particular, including their linkages to the traditional financial system and ramifications on financial stability.
In introducing its proposal to regulate payment related stablecoins, the HKMA has made it clear that while the current size and trading activity of crypto-assets globally may not pose an immediate threat to the stability of the global financial system from a systemic point of view, it does consider the increasing prevalence of crypto-assets to have the potential to impact financial stability. In particular, the HKMA has flagged that it considers the growing exposure of institutional investors, as well as certain segments of the retail public, to such assets as an alternative to, or to complement traditional asset classes, indicates growing interconnectedness with the mainstream financial system.
Further, as noted by the HKMA, it understands that while Hong Kong authorised banks (Authorised Institutions or AIs) currently undertake only limited activities in relation to crypto-assets, AIs are interested in pursuing these activities further, given that they face increasing demand from customers for crypto-related products and services. This is consistent with what we understand is a steady increase in high net wealth investors hungry for yield demanding access to crypto-assets through their private wealth managers, as well as an uptick in demand from retail investors in Hong Kong eager for the same exposure to upside. To this end, the HKMA has flagged that it will soon provide AIs with more detailed regulatory guidance in relation to their interface with and provision of services to customers in relation to crypto-assets.
Finally, the HKMA has also noted its concerns that the ease of anonymous transfer of crypto-assets may make them susceptible to the risk of illicit and money laundering / terrorist financing activities.
The HKMA’s views on stablecoins
The Paper also flags the HKMA’s view that stablecoins are increasingly viewed as a ‘widely acceptable means of payment’ and that this, alongside the actual increase in their use, has increased the potential for their incorporation into the mainstream financial system. In the HKMA’s opinion, this in turn raises broader monetary and financial stability implications and has resulted in the regulation of stablecoins becoming a key priority for the HKMA, which has stated in the Paper that it wishes to ensure that such coins “are appropriately regulated before they operate in Hong Kong or are marketed to the public of Hong Kong”.
The Paper goes on to identify a number of potential risks that may arise in relation to the use of stablecoins, including, in summary:
- Payment integrity risks where stablecoins are commonly accepted as a means of payment and operational disruptions or failures occur in relation to the stablecoins;
- Banking stability risks if banks were to increase their exposure to stablecoins, particularly if stablecoins were viewed as a substitute for bank deposits;
- Monetary policy risks in relation to the issue and redemption of HKD-backed stablecoins, which could affect interbank HKD demand and supply; and
- User protection risks where a user may have no or limited recourse in relation to operational disruptions or failures of a stablecoin.
Given these potential risks, the HKMA has stated in the Paper that it considers it appropriate to expand the regulatory perimeter to cover payment-related stablecoins in the first instance, although it has not ruled out the possibility of regulating other forms of stablecoins as well.
The HKMA’s discussion questions for industry consideration
The HKMA has noted in the Paper that it considers ‘the need to regulate [stablecoins] is well justified and the tool to regulate…[can] be decided at a later stage’. However, it has indicated that it wishes for feedback from the industry and the public on the scope of the regulatory regime applicable to stablecoins, and to this end has set out eight discussion questions for industry consideration. A summary of the key questions posed by the HKMA, as well as the HKMA’s views on those questions, is set out below.
| Question 1: Should we regulate activities relating to all types of stablecoins or give priority to those payment-related stablecoins that pose higher risks to the monetary and financial systems while providing flexibility in the regime to make adjustments to the scope of stablecoins that may be subject to regulation as needed in the future? |
In posing this question, the HKMA has noted that it intends to take a risk-based approach focused initially on payment-related stablecoins at this stage given their predominance in the market and higher potential to be incorporated into the mainstream financial market (as discussed above). However, the HKMA has noted that it intends to ensure that whatever regime is introduced is sufficiently flexible that it could extend to other types of stablecoins in the future. As such, issuers and traders of other types of stablecoins should not expect to avoid regulatory scrutiny forever.
| Question 2: What types of stablecoin-related activities should fall under the regulatory ambit, e.g. issuance and redemption, custody and administration, reserves management? |
The HKMA has proposed regulating a broad range of stablecoin-related activities, including:
- Issuing, creating or destroying stablecoins;
- Managing reserve assets to ensure stabilisation of stablecoin value;
- Validating transactions and records;
- Storing private keys used to provide access to stablecoins;
- Facilitating the redemption of stablecoins;
- Transmission of funds to settle transactions; and
- Executing transactions in stablecoins.
This broad list is based on a list of activities in relation to stablecoins published by the Financial Stability Board[1] and as such may be viewed as in keeping with international standards. However, as discussed below in relation to Question 5, the breadth of this regime may raise concerns regarding the degree of overlap between this regime and others proposed by Hong Kong regulators, including the proposed VASP regime to be administered by the Securities and Futures Commission (SFC) (see our alert here).
| Question 3: What kind of authorisation and regulatory requirements would be envisaged for those entities subject to the new licensing regime? |
The HMKA has suggested that it considers that entities subject to the new stablecoin licensing regime would be subject to the following requirements:
- authorisation and prudential requirements, including adequate financial resources and liquidity requirements;
- fit and proper requirements in relation to both management and ownership;
- requirements relating to the maintenance and management of reserves of backing assets; and systems; and
- controls, governance and risk management requirements.
Further, given that it is common for multiple entities to be involved in different parts of a stablecoin arrangement, the HKMA has noted that such entities could be subject to part or all of the requirements, depending on the services they offer.
If requirements in relation to these matters are ultimately implemented by the HKMA, the stablecoin regime would cover some of the requirements of the proposed VASP regime, with the exception of requirements of reserves of backing assets, which will presumably only be applied to stablecoins given their nature.
| Question 4: What is the intended coverage as to who needs a licence under the intended regulatory regime? |
The HKMA has signalled that it believes that only entities incorporated in Hong Kong and holding a relevant licence granted by HKMA should carry out regulated activities, to enable the HKMA to exercise effective regulation on the relevant entities. As such, it has stated in the Paper that it expects that foreign companies / groups which intend to provide regulated activities in Hong Kong or actively market those activities in Hong Kong to incorporate a company in Hong Kong and apply for a licence to the HKMA under this regime.
If implemented, this would have significant ramifications for those global crypto-exchanges currently offering trading in stablecoins to Hong Kong users from offshore. These businesses would be faced with a choice between either incorporating in Hong Kong and seeking a licence, or discontinuing their trading for Hong Kong users.
| Question 5: When will this new, risk-based regime on stablecoins be established, and would there be regulatory overlap with other financial regulatory regimes in Hong Kong, including but not limited to the SFC’s VASP regime, and the SVF licensing regime of the PSSVFO? |
The HKMA has stated that it will collaborate and coordinate with other financial regulators when defining the scope of its oversight and will seek to avoid regulatory arbitrage, including in relation to areas which ‘may be subject to regulation by more than one local financial authority’.
However, an HKMA-administered regime of the breadth proposed above would create a situation in which an exchange undertaking transactions in non-stablecoin crypto-assets would be regulated by the SFC under its proposed new VASP regime while being regulated by both the SFC and the HKMA under its stablecoin regime. In this respect, we note that the proposed definition of ‘virtual asset’ under the proposed new VASP regime ‘applies equally to virtual coins that are stable (i.e. the so-called “stablecoins”)’.[2] While the HKMA and SFC share regulatory responsibility for Registered Institutions (i.e. Authorised Institutions which are separately licensed by the SFC to undertake securities and futures business), that shared regulatory responsibility concerns distinctly different types of activities. In contrast, we consider that from an exchange’s perspective, the act of executing transactions in stablecoins is substantially similar to executing transactions in non-stablecoin crypto-assets. As such, this approach may lead to unnecessary and undesirable regulatory inefficiencies if exchanges are required to be licensed under both the SFC and HKMA regimes to undertake transactions in crypto-assets.
| Question 6: Stablecoins could be subject to run and become potential substitutes of bank deposits. Should the HKMA require stablecoin issuers to be AIs under the Banking Ordinance, similar to the recommendations in the Report on Stablecoins issued by the US President’s Working Group on Financial Markets? |
While not expressly stating that it will not require stablecoin issuers to be regulated as AIs under the Banking Ordinance, the HKMA has indicated that it expects that the requirements applicable to stablecoin issuers will instead borrow from Hong Kong’s current regulatory framework for stored value facilities (SVF). However, the HKMA has signalled that certain stablecoin issuers may be subject to higher prudential requirements than SVF issuers where they issue stablecoins of systemic importance.
| Question 7: [Does] the HKMA also have plan[s] to regulate unbacked crypto-assets given their growing linkage with the mainstream financial system and risk to financial stability? |
The HKMA has not expressly ruled out regulating unbacked crypto-assets, and has stated that it is necessary to continue monitoring the risks posed by this asset class. In stating this, the HKMA has also pointed to the VASP regime, suggesting that the HKMA’s approach to this area is likely to depend on the success of that regime once implemented.
| Question 8: For current or prospective parties and entities in the stablecoins ecosystem, what should they do before the HKMA’s regulatory regime is introduced? |
The HKMA has advised current and prospective players in the stablecoin ecosystem to provide feedback on the proposals set out in the Discussion Paper, and has noted that in the interim, it will continue to supervise AIs’ activities in relation to crypto-assets and implement the SVF licensing regime pending implementation of this new regime.
Conclusion
The Discussion Paper provides a valuable insight into the HKMA’s plans for the future of stablecoin regulation in Hong Kong. While some concerns exist as to the potential overlap between the HKMA’s new proposed regime and the SFC’s VASP regime, it is clear that the HKMA intends to ensure that it is regarded as the primary regulator of stablecoins going forward, and that it sees the regulation of this asset class as closely linked to its key objective of ensuring financial stability.
____________________________
[1] See Financial Stability Board, Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Final Report and High-Level Recommendations, https://www.fsb.org/wp-content/uploads/P131020-3.pdf, page 10.
[2] See Financial Services and the Treasury Bureau, Public Consultation on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (Consultation Conclusions), https://www.fstb.gov.hk/fsb/en/publication/consult/doc/consult_conclu_amlo_e.pdf, paragraph 2.8.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Crypto Taskforce (cryptotaskforce@gibsondunn.com) or the Global Financial Regulatory team, including the following authors in Hong Kong:
William R. Hallatt (+852 2214 3836, whallatt@gibsondunn.com)
Emily Rumble (+852 2214 3839, erumble@gibsondunn.com)
Arnold Pun (+852 2214 3838, apun@gibsondunn.com)
Becky Chung (+852 2214 3837, bchung@gibsondunn.com)
© 2022 Gibson, Dunn & Crutcher LLP
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Decided January 13, 2022
National Federation of Independent Business v. Occupational Safety and Health Administration, No. 21A244; and
Ohio v. Occupational Safety and Health Administration, No. 21A247
On Thursday, January 13, 2022, by a 6–3 vote, the Supreme Court prevented the implementation of an OSHA rule that would have imposed a vaccine-or-testing regime on employers with 100 or more employees.
Background:
On November 5, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an emergency temporary standard (“ETS”) governing employers with 100 or more employees. The ETS mandated covered employers to “develop, implement, and enforce a mandatory COVID-19 vaccination policy, with an exception for employers” that require unvaccinated employees to undergo weekly COVID-19 testing and to wear a mask during the workday.
Business groups and States filed petitions for review of the ETS in each regional Court of Appeals, contending that OSHA exceeded its statutory authority under the Occupational Safety and Health Act. The Fifth Circuit stayed the ETS and later held that the OSHA mandate was overly broad, not justified by a “grave” danger from COVID-19, and constitutionally dubious. After all petitions for review were consolidated in the Sixth Circuit, that court dissolved the Fifth Circuit’s stay. The panel majority held that COVID-19 was an emergency warranting an ETS and that OSHA had likely acted within its statutory authority.
Issue:
Whether to stay implementation of the vaccine-or-testing mandate pending the outcome of litigation challenging OSHA’s statutory authority to require employers with 100 or more employees to develop, adopt, and enforce a vaccine-and-testing regime for their employees.
Court’s Holding:
The vaccine-or-testing mandate should be stayed because OSHA likely lacks the statutory authority to adopt the vaccine-or-test mandate in the absence of an unmistakable delegation from Congress.
“It is telling that OSHA, in its half century of existence, has never before adopted a broad public health regulation of this kind—addressing a threat that is untethered, in any causal sense, from the workplace.”
Per Curiam Opinion of the Court
What It Means:
- The Court’s decision prevents the implementation of the OSHA mandate, which applies to 84 million Americans. Echoing its recent decision in Alabama Ass’n of Realtors v. Dep’t of Health & Human Services, the Court emphasized that agency action with such “vast economic and political significance” requires a clear delegation from Congress. It is doubtful that the stay will be lifted to allow OSHA to enforce the mandate before the ETS expires in May, meaning that it is unlikely employers will ever actually be subject to the ETS’s vaccine-or-testing mandate.
- The challengers had argued that covered employers would incur unrecoverable compliance costs and that employees would quit rather than comply. The federal government, for its part, had argued that the OSHA mandate would save over 6,500 lives and prevent hundreds of thousands of hospitalizations. The Court stayed the mandate without resolving this dispute on the ground that only Congress could properly weigh such tradeoffs.
- The Court’s decision to hear oral argument on the stay applications may signal the beginning of a trend, as this is the second time this Term that the Court moved an application to vacate a stay from the emergency docket to the argument calendar.
- Other Mandates: The Court stayed lower court injunctions against the vaccine mandate issued by the Centers for Medicare & Medicaid Services (“CMS”). See Biden v. Missouri, 21A240; Becerra v. Louisiana, 21A241. By a 5–4 vote, the Court ruled that the Secretary of Health and Human Services likely has the statutory authority to require vaccination for healthcare workers at facilities that participate in Medicare and Medicaid. Today’s decisions do not address the federal contractor vaccine mandate that is presently enjoined on a nationwide basis by a federal district court in Georgia. Four other federal district courts also have enjoined the government from enforcing that mandate. So far, the Sixth and Eleventh Circuits have refused to stay the injunctions against the federal contractor mandate pending appeal.
The Court’s opinions are available here and 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 |
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com |
| Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com |
Related Practice: Labor and Employment:
| Eugene Scalia +1 202.955.8543 escalia@gibsondunn.com |
Jessica Brown +1 303.298.5944 jbrown@gibsondunn.com |
Jason C. Schwartz +1 202.955.8242 jschwartz@gibsondunn.com |
| Katherine V.A. Smith +1 213.229.7107 ksmith@gibsondunn.com |
The tense political battles between former President Donald J. Trump and the United States House of Representatives under Democratic leadership renewed debates over the nature and extent of Congress’s authority to investigate and conduct oversight and have wide-ranging implications for congressional investigation of not just the Executive Branch but also of private parties.
In furtherance of the House of Representatives’ vigorous efforts to investigate President Trump, three House committees issued a series of subpoenas to banks and an accounting firm seeking the personal financial records of the President relating to periods both before and after he took office. The President and his business entities resisted, challenging the congressional subpoenas in court, thus drawing the judiciary into the fray. The President’s challenges culminated in the issuance of the Supreme Court’s historic decision in Trump v. Mazars and Trump v. Deutsche Bank AG, which announced groundbreaking new principles of law that will have profound implications for congressional oversight and investigations. In addition, the D.C. Circuit recently encountered related questions of congressional authority over the Executive Branch in connection with separate information requests to former White House Counsel Donald McGahn, leading to a series of hotly debated rulings (and an eventual settlement) in Committee on the Judiciary v. McGahn.
These cases arose against a seemingly well-established backdrop. It has long been understood that Congress possesses inherent constitutional authority to inquire into matters that could become the subject of legislation, such as through the use of compulsory process directed to both government officials and private citizens. As the Supreme Court recognized nearly a century ago, Congress “cannot legislate wisely or effectively in the absence of information respecting the conditions which the legislation is intended to affect or change.” Thus, “the power of inquiry—with process to enforce it—is an essential and appropriate auxiliary to the legislative function.” The Executive and Legislative Branches often resolve disputes about congressional requests for information through the “hurly-burly, the give-and-take of the political process between the legislative and the executive.” Only recently has Congress resorted repeatedly to the courts in an effort to enforce subpoenas against Executive Branch officials.
Washington, D.C. partners Michael Bopp and Thomas Hungar, with Chantalle Carles Schropp, prepared this article, originally published by the University of Virginia’s Journal of Law & Politics, Vol. 37, No. 1, in 2021.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On December 15, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) held a virtual open meeting where it considered four rule proposals, including two that are particularly pertinent to all public companies: (i) amendments regarding Rule 10b5-1 insider trading plans and related disclosures and (ii) new share repurchase disclosures rules.
Both proposals passed, though only the proposed amendments regarding Rule 10b5-1 insider trading plans and related disclosures passed unanimously; the proposed new share repurchase disclosures rules passed on party lines. Notably, these proposals only have a 45-day comment period, which is shorter than the more customary 60- or 90-day comment periods. Commissioner Roisman, in particular, raised concerns about the 45-day comment periods being too short, noting that the comment periods run “not only over several holidays,” but “also concurrent with five other rule proposals that have open comment periods.”
Below, please find summary descriptions of the these two rule proposals, as well as certain Commissioners’ concerns related to these proposals.
The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Andrew Fabens, James Moloney, Lori Zyskowski, Thomas Kim, Brian Lane, and Elizabeth Ising.
The current Supreme Court term promises to be one of the most eventful and impactful in recent memory. In this episode of “The Two Teds,” Ted Boutrous and Ted Olson discuss some of the key cases that will be heard during this session, covering topics that include abortion rights and the First Amendment.
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HOSTS:
Ted Boutrous – Theodore J. Boutrous, Jr., a partner in the Los Angeles office of Gibson, Dunn & Crutcher LLP, is global Co-Chair of the firm’s Litigation Group and previously led the firm’s Appellate, Crisis Management, Transnational Litigation and Media groups. He also is a member of the firm’s Executive and Management Committees. Recognized for a decade of excellence in the legal profession, the Daily Journal in 2021 named Mr. Boutrous as a Top Lawyer of the Decade for his victories. As a tireless advocate and leader for high-stakes and high-profile cases, Mr. Boutrous was also named the 2019 “Litigator of the Year, Grand Prize Winner” by The American Lawyer.
Ted Olson – Theodore B. Olson is a Partner in Gibson, Dunn & Crutcher’s Washington, D.C. office; a founder of the Firm’s Crisis Management, Sports Law, and Appellate and Constitutional Law Practice Groups. Mr. Olson was Solicitor General of the United States during the period 2001-2004. From 1981-1984, he was Assistant Attorney General in charge of the Office of Legal Counsel in the U.S. Department of Justice. Except for those two intervals, he has been a lawyer with Gibson, Dunn & Crutcher in Los Angeles and Washington, D.C. since 1965.
This year marks an important turning point for the seven-member Court, as new judges will soon comprise nearly half its bench. In June, the New York Senate confirmed the appointment of Anthony Cannataro and Madeline Singas. Judge Cannataro, who was formerly the Administrative Judge of the Civil Court of the City of New York, filled the vacancy left by Judge Paul Feinman, who passed away. Judge Singas, who was formerly the Nassau County District Attorney, filled the vacancy left by the retired Judge Leslie Stein. As Judges Feinman and Stein often voted with Chief Judge DiFiore and Judge Garcia to form a majority in the Court’s decisions, it remains to be seen if that pattern continues.
The Court will also change in 2022 because Judge Eugene Fahey, a swing vote, reaches his mandatory retirement age at the end of this year. To fill his seat, Governor Kathy Hochul nominated Shirley Troutman, a justice in the Appellate Division, Third Department. If confirmed, she would be the second African American woman to sit on the Court. Justice Troutman has extensive experience as a prosecutor and a judge. She also has spent her career upstate, providing geographic balance. On the other hand, analysts have expressed concern that the Court lacks “professional diversity,” as it would include four former prosecutors and only one judge (Fahey, or Troutman) with judicial experience in the Appellate Division.
Despite this turnover, the Court continued previous trends, with the pace of decisions reduced and a high number of fractured opinions. After Judge Feinman’s passing, the Court ordered several cases to be reargued in a “future court session,” which may suggest that his was a potential swing vote in those cases. Nevertheless, the Court continued to resolve significant issues in a wide array of areas, from territorial jurisdiction and agency deference to consumer protection and insurance contracts.
The New York Court of Appeals Round-Up & Preview summarizes key opinions primarily in civil cases issued by the Court over the past year and highlights a number of cases of potentially broad significance that the Court will hear during the coming year. The cases are organized by subject.
To view the Round-Up, click here.
Gibson Dunn’s New York office is home to a team of top appellate specialists and litigators who regularly represent clients in appellate matters involving an array of constitutional, statutory, regulatory, and common-law issues, including securities, antitrust, commercial, intellectual property, insurance, First Amendment, class action, and complex contract disputes. In addition to our expertise in New York’s appellate courts, we regularly brief and argue some of the firm’s most important appeals, file amicus briefs, participate in motion practice, develop policy arguments, and preserve critical arguments for appeal. That is nowhere more critical than in New York—the epicenter of domestic and global commerce—where appellate procedure is complex, the state political system is arcane, and interlocutory appeals are permitted from the vast majority of trial-court rulings.
Our lawyers are available to assist in addressing any questions you may have regarding developments at the New York Court of Appeals, or any other state or federal appellate courts in New York. Please feel free to contact any member of the firm’s Appellate and Constitutional Law practice group, or the following lawyers in New York:
Mylan L. Denerstein (+1 212-351-3850, mdenerstein@gibsondunn.com)
Akiva Shapiro (+1 212-351-3830, ashapiro@gibsondunn.com)
Seth M. Rokosky (+1 212-351-6389, srokosky@gibsondunn.com)
Please also feel free to contact the following practice group leaders:
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202.887.3667, mperry@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.
Virginia and Colorado, which earlier this year enacted comprehensive state privacy laws following California’s 2018 lead, are now poised to follow California in another way in 2022: writing implementing regulations and weighing changes to the laws themselves. Companies should account for these regulations and changes as they develop programs to comply with the laws, which take effect in 2023.
In Virginia, lawmakers are exploring possible updates to the Virginia Consumer Data Protection Act (“VCDPA”), which passed in March 2021, such as giving a state agency rulemaking authority. Unlike the California and Colorado laws, the VCDPA itself does not give a state agency the power to issue regulations to implement the new law. But a recent report mandated by the VCDPA recommended that the legislature give the Virginia Attorney General’s Office (“Virginia AG”) or another agency such rulemaking authority.
The report was issued in response to a provision in the VCDPA, which required the creation of a working group made up of government, business, and community representatives to study potential changes to the VCDPA before it goes into effect. The group met six times before issuing its final report in November. In addition to rulemaking authority, the report also suggested other significant changes, including increasing the Virginia AG’s enforcement budget, allowing the Virginia AG to collect actual damages from violations that cause consumer harm, giving companies a right to cure violations that would sunset in the future, requiring companies to honor an automated global opt-out signal, changing the “right to delete” to a “right to opt out of sale,” and considering amending statutory definitions such as “sale,” “personal data,” “publicly available information,” and “sensitive data,” among others. The final report is available here.
In Colorado, meanwhile, the Colorado Attorney General’s Office (“Colorado AG”), which already has rulemaking authority, has begun the rulemaking process for the Colorado Privacy Act (“CPA”), which passed in July 2021. In its regulatory agenda for 2022, the Colorado AG stated that it expects to propose and finalize rules for universal opt-out tools, which are mechanisms that allow users to automatically inform websites that they want to opt out of the processing of their personal data.
As we have reported in prior updates, California is tackling these issues in its own privacy laws, particularly as California is transitioning from the California Consumer Privacy Act (“CCPA”) to the California Privacy Rights Act (“CPRA”), which will take effect in 2023. In the meantime, the California Attorney General’s Office (“California AG”) promulgation of CCPA regulations that were last revised in March 2021, remain in force. Now, the new CPRA-created California Privacy Protection Agency has embarked in earnest on its own rulemaking to consider amending the California AG’s CCPA rules and to enact its own rules for the CPRA. In response to a request for comments on its proposed rulemaking, the agency received scores of comments from individuals, organizations, and government officials, which are available here.
There is no sign of a slowdown in the development of state privacy laws. In fact, more than two dozen other states have floated their own proposals for comprehensive privacy laws.
Although the precise contours of these laws remain in flux, the laws will almost certainly usher in notable regulatory changes affecting how companies collect and manage data while imposing a host of new obligations and potential liability. Companies would be well-served to focus their compliance programs accordingly.
We will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
This alert was prepared by Ryan T. Bergsieker, Cassandra L. Gaedt-Sheckter, and Eric M. Hornbeck.
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, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.
Privacy, Cybersecurity and Data Innovation Group:
United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)
Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@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.
Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2022 proxy season. The ISS U.S. policy updates are available here. The ISS updates will apply for shareholder meetings on or after February 1, 2022, except for those policies subject to a transition period. ISS plans to release an updated Frequently Asked Questions document that will include more information about its policy changes in the coming weeks.[1]
The Glass Lewis updates are included in its 2022 U.S. Policy Guidelines and the 2022 ESG Initiatives Policy Guidelines, which cover shareholder proposals. Both documents are available here. The Glass Lewis 2022 voting guidelines will apply for shareholder meetings held on or after January 1, 2022.
This alert reviews the ISS and Glass Lewis updates. Both firms have announced policy updates on the topics of board diversity, multi-class stock structures, and climate-related management and shareholder proposals. Glass Lewis also issued several policy updates that focus on nominating/governance committee chairs, as well new policies specific to special purpose acquisition companies (“SPACs”).
A. Board Diversity
- ISS – Racial/Ethnic Diversity. At S&P 1500 and Russell 3000 companies, beginning in 2022, ISS will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) if the board “has no apparent racially or ethnically diverse members.” This policy was announced last year, with a one-year transition. There is an exception for companies where there was at least one racially or ethnically diverse director at the prior annual meeting and the board makes a firm commitment to appoint at least one such director within a year.
- ISS – Gender Diversity. ISS announced that, beginning in 2023, it will expand its policy on gender diversity, which since 2020 has applied to S&P 1500 and Russell 3000 companies, to all other companies. Under this policy, ISS generally recommends “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) where there are no women on the board. The policy includes an exception analogous to the one in the voting policy on racial/ethnic diversity.
- Glass Lewis – Gender Diversity. Beginning in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee at Russell 3000 companies that do not have at least two gender diverse directors (as announced in connection with its 2021 policy updates), or the entire committee if there is no gender diversity on the board. In 2023, Glass Lewis will move to a percentage-based approach and issue negative voting recommendations for the nominating/governance committee chair if the board is not at least 30% gender diverse. Glass Lewis is using the term “gender diverse” in order to include individuals who identify as non-binary. Glass Lewis also updated its policies to reflect that it will recommend in accordance with mandatory board composition requirements in applicable state laws, whether they relate to gender or other forms of diversity. It will not issue negative voting recommendations for directors where applicable state laws do not mandate board composition requirements, are non-binding, or only impose reporting requirements.
- Glass Lewis – Diversity Disclosures. With respect to disclosure about director diversity and skills, for 2021, Glass Lewis had announced that it would begin tracking companies’ diversity disclosures in four categories: (1) the percentage of racial/ethnic diversity represented on the board; (2) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (3) whether the board has a policy requiring women and other diverse individuals to be part of the director candidate pool; and (4) board skills disclosure. For S&P 500 companies, beginning in 2022, Glass Lewis may recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company fails to provide any disclosure in each of these four categories. Beginning in 2023, it will generally oppose election of the committee chair at S&P 500 companies that have not provided any aggregate or individual disclosure about the racial/ethnic demographics of the board.
B. Companies with Multi-Class Stock or Other Unequal Voting Rights
- ISS. ISS announced that, after a one-year transition period, in 2023, it will begin issuing adverse voting recommendations with respect to directors at all U.S. companies with unequal voting rights. Stock with “unequal voting rights” includes multi-class stock structures, as well as less common practices such as maintaining classes of stock that are not entitled to vote on the same ballot items or nominees, and loyalty shares (stock with time-phased voting rights). ISS’s policy since 2015 has been to recommend “against” or “withhold” votes for directors of newly-public companies that have multiple classes of stock with unequal voting rights or certain other “poor” governance provisions that are not subject to a reasonable sunset, including classified boards and supermajority voting requirements to amend the governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so were not subject to this policy. ISS had sought public comment about whether, in connection with the potential expansion of this policy to all U.S. companies, the policy should apply to all or only some nominees. The final policy does not specify, saying that the adverse voting recommendations may apply to “directors individually, committee members, or the entire board” (except new nominees, who will be evaluated case-by-case). For 2022, the current policy would continue to apply to newly-public companies. ISS tweaked the policy language to reflect that a “newly added reasonable sunset” would prevent negative voting recommendations in subsequent years. ISS considers a sunset period reasonable if it is no more than seven years.
- Glass Lewis. Beginning in 2022, Glass Lewis will recommend “against” or “withhold” votes for the chair of the nominating/governance committee at companies that have multi-class share structures with unequal voting rights if they are not subject to a “reasonable” sunset (generally seven years or less).
C. Climate-Related Proposals and Board Accountability at “High-Impact” Companies
- ISS – Say on Climate. In 2021, both shareholders and management submitted Say on Climate proposals. For 2022, ISS is adopting voting policies that document the frameworks it has developed for analyzing these proposals, as supplemented by feedback from ISS’s 2021 policy development process. Under the new policies, ISS will recommend votes case-by-case on both management and shareholder proposals, taking into consideration a list of factors set forth in each policy. For management proposals asking shareholders to approve a company’s climate transition action plan, ISS will focus on “the completeness and rigor of the plan,” including the extent to which a company’s climate-related disclosures align with Task Force on Climate-related Financial Disclosure (“TCFD”) recommendations and other market standards, disclosure of the company’s operational and supply chain greenhouse gas (“GHG”) emissions (Scopes 1, 2 and 3), and whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2 and 3) by 2050. For shareholder proposals requesting Say on Climate votes or other climate-related actions (such as a report outlining a company’s GHG emissions levels and reduction targets), ISS will recommend votes case-by-case taking into account information such as the completeness and rigor of a company’s climate-related disclosures and the company’s actual GHG emissions performance.
- ISS – Board Accountability on Climate at High-Impact Companies. ISS also adopted a new policy applicable to companies that are “significant GHG emitters” through their operations or value chain. For 2022, these are companies that Climate Action 100+ has identified as disproportionately responsible for GHG emissions. During 2022, ISS will generally recommend “against” or “withhold” votes for the responsible committee chair in cases where ISS determines a company is not taking minimum steps needed to understand, assess and mitigate climate change risks to the company and the larger economy. Expectations about the minimum steps that are sufficient “will increase over time.” For 2022, minimum steps are detailed disclosure of climate-related risks (such as according to the TCFD framework”) and “appropriate GHG emissions reduction targets,” which ISS considers “any well-defined GHG reduction targets.” Targets for Scope 3 emissions are not required for 2022, but targets should cover at least a significant portion of the company’s direct emissions. For 2022, ISS plans to provide additional data in its voting analyses on all Climate Action 100+ companies to assist its clients in making voting decisions and in their engagement efforts. As a result of this new policy, companies on the Climate Action 100 + list should be aware that the policy requires both disclosure in accordance with a recognized framework, and quantitative GHG reduction targets, and that ISS plans to address its new climate policies in its updated FAQs, so there may be more specifics about this policy when the FAQs are released.
- Glass Lewis – Say on Climate. Glass Lewis also added a policy on Say on Climate proposals for 2022, but takes a different approach from ISS. Glass Lewis supports robust disclosure about companies’ climate change strategies. However, it has concerns with Say on Climate votes because it views the setting of long-term strategy (which it believes includes climate strategy) as the province of the board and believes shareholders may not have the information necessary to make fully informed voting decisions in this area. In evaluating management proposals asking shareholders to approve a company’s climate transition plans, Glass Lewis will evaluate the “governance of the Say on Climate vote” (the board’s role in setting strategy in light of the Say on Climate vote, how the board intends to interpret the results of the vote, and the company’s engagement efforts with shareholders) and the quality of the plan on a case-by-case basis. Glass Lewis expects companies to clearly identify their climate plans “in a distinct and easily understandable document,” which it believes should align with the TCFD framework. Glass Lewis will generally oppose shareholder proposals seeking to approve climate transition plans or to adopt a Say on Climate vote, but will take into account the request in the proposal and company-specific factors.
D. Additional ISS Updates
ISS adopted the following additional updates of note:
- Shareholder Proposals Seeking Racial Equity Audits. ISS adopted a formal policy reflecting its approach to shareholder proposals asking companies to oversee an independent racial equity or civil rights audit. These proposals, which were new for 2021, are expected to return again in 2022 given the continued public focus on issues related to race and equality. ISS will recommend votes case-by-case on these proposals, taking into account several factors listed in its new policy. These factors focus on a company’s processes or framework for addressing racial inequity and discrimination internally, its public statements and track record on racial justice, and whether the company’s actions are aligned with market norms on civil rights and racial/ethnic diversity.
- Capital Authorizations. ISS adopted what it characterizes as “minor” and “clarifying” changes to its voting policies on common and preferred stock authorizations. For both policies, ISS will apply the same dilution limits to underperforming companies, and will no longer treat companies with total shareholder returns in the bottom 10% of the U.S. market differently. ISS also clarified that problematic uses of capital that would lead to a vote “against” a proposed share increase include long-term poison pills that are not shareholder-approved, rather than just poison pills adopted in the last three years. ISS reorganized the policy on common stock authorizations to distinguish between general and specific uses of capital and to clarify the hierarchy of factors it considers in applying the policy.
- Three-Year Burn Rate Calculation for Equity Plans. Beginning in 2023, ISS will move to a “Value-Adjusted Burn Rate” in analyzing equity plans. ISS believes this will more accurately measure the value of recently granted equity awards, using a methodology that more precisely measures the value of option grants and calculations that are more readily understood by the market (actual stock price for full-value awards, and the Black-Scholes value for stock options). According to ISS, when the current methodology was adopted, resource limitations prevented it from doing the more extensive calculations needed for the Value-Adjusted Burn Rate.
- Updated FAQs on ISS Compensation Policies and COVID-19. ISS also issued an updated set of FAQs (available here) with guidance on how it intends to approach COVID-related pay decisions in conducting its pay-for-performance qualitative evaluation. According to the FAQs, many investors believe that boards are now positioned to return to annual incentive program structures as they existed prior to the pandemic. Accordingly, the FAQs reflect that ISS plans to return to its pre-pandemic approach on mid-year changes to metrics, targets and measurement periods, and on company responsiveness where a say-on-pay proposal gets less than 70% support.
E. Additional Glass Lewis Updates
Glass Lewis adopted several additional updates, as outlined below. Where relevant, for purposes of comparison, the discussion also addresses how ISS approaches the issue.
- Waiver of Retirement or Tenure Policies. Glass Lewis appears to be taking a stronger stance on boards that waive their retirement or tenure policies. Beginning in 2022, if the board waives a retirement age or term limit for two or more years in a row, Glass Lewis will generally recommend “against” or “withhold” votes for the nominating/governance committee chair, unless a company provides a “compelling rationale” for the waiver. By way of comparison, ISS does not have an analogous policy.
- Adoption of Exclusive Forum Clauses Without Shareholder Approval. Under its existing policies, Glass Lewis generally recommends “against” or “withhold” votes for the nominating/governance committee chair at companies that adopted an exclusive forum clause during the past year without shareholder approval. With a growing number of companies adopting exclusive forum clauses that apply to claims under the Securities Act of 1933, Glass Lewis updated its policy to reflect that the policy applies to the adoption of state and/or federal exclusive forum clauses. The existing exception will remain in place for clauses that are “narrowly crafted to suit the particular circumstances” facing a company and/or include a reasonable sunset provision. By way of comparison, ISS does not have an analogous policy.
- Board Oversight of E&S Issues. For S&P 500 companies, starting in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company does not provide “explicit disclosure” about the board’s role in overseeing environmental and social issues. This policy is taking effect after a transition year in which Glass Lewis noted concerns about disclosures it did not view as adequate. For 2022, Glass Lewis also will take the same approach for Russell 1000 companies that it took last year with S&P 500 companies, noting a concern where there is a lack of “clear disclosure” about which committees or directors are charged with oversight of E&S issues. Glass Lewis does not express a preference for a particular oversight structure, stating that boards should select the structure they believe is best for them.
- Independence Standard on Direct Payments for Directors. In evaluating director independence, Glass Lewis treats a director as not independent if the director is paid to perform services for the company (other than serving on the board) and the payments exceed $50,000 or no amount is disclosed. Glass Lewis clarified that this standard also captures payments to firms where a director is the principal or majority owner. By way of comparison, ISS’s independence standards likewise cover situations where a director is a partner or controlling shareholder in an entity that has business relationships with the company in excess of numerical thresholds used by ISS.
- Approach to Committee Chairs at Companies with Classified Boards. A number of Glass Lewis’ voting policies focus on committee chairs because it believes the chair has “primary responsibility” for a committee’s actions. Currently, if Glass Lewis policies would lead to a negative voting recommendation for a committee chair, but the chair is not up for election because the board is classified, Glass Lewis notes a concern with respect to the chair in its proxy voting analysis. Beginning in 2022, this policy will change and if Glass Lewis has identified “multiple concerns,” it will generally issue (on a case-by-case basis) negative voting recommendations for other committee members who are up for election.
- Written Consent Shareholder Proposals. Glass Lewis documented its approach to shareholder proposals asking companies to lower the ownership threshold required for shareholders to act by written consent. It will generally recommend in favor of these proposals if a company has no special meeting right or the special meeting ownership threshold is over 15%. Glass Lewis will continue its existing policy of opposing proposals to adopt written consent if a company has a special meeting threshold of 15% or lower and “reasonable” proxy access provisions. By way of comparison, ISS generally supports proposals to adopt written consent, taking into account a variety of factors including the ownership threshold. It will recommend votes case-by-case only if a company has an “unfettered” special meeting right with a 10% ownership threshold and other “good” governance practices, including majority voting in uncontested director elections and an annually elected board.
- SPAC Governance. Glass Lewis added voting guidelines that are specific to the SPAC context. When evaluating companies that have gone public through a de-SPAC transaction during the past year, it will review their governance practices to assess “whether shareholder rights are being severely restricted indefinitely” and whether restrictive provisions were submitted to an advisory vote at the meeting where shareholders voted on the de-SPAC transaction. If the board adopted certain practices prior to the transaction (such as a multi-class stock structure or a poison pill, classified board or other anti-takeover device), Glass Lewis will generally recommend “against” or “withhold” votes for all directors who served at the time the de-SPAC entity became publicly traded if the board: (a) did not also submit these provisions for a shareholder advisory vote at the meeting where the shareholders voted on the de-SPAC transaction; or (b) did not also commit to submitting the provisions for shareholder approval at the company’s first annual meeting after the de-SPAC transaction; or (c) did not also provide for a reasonable sunset (three to five years for a poison pill or classified board and seven years or less for multi-class stock structures). By way of comparison, as discussed above, for several years, ISS has had voting policies that address “poor” governance provisions at newly-public companies, including multiple classes of stock with unequal voting rights, classified boards and supermajority voting requirements to amend the governing documents. For 2022, ISS has clarified that the definition of “newly-public companies” includes SPACs.
- “Overboarding” and SPAC Board Seats. Under its “overboarding” policies, Glass Lewis generally recommends “against” or “withhold” votes for directors who are public company executives if they serve on a total of more than two public company boards. It applies a higher limit of five public company boards for other directors. The 2022 policy updates clarify that where a director’s only executive role is at a SPAC, the higher limit will apply. By way of comparison, ISS treats SPAC CEOs the same as other public company CEOs, on the grounds that a SPAC CEO “has a time-consuming job: to find a suitable target and consummate a transaction within a limited time period.” Accordingly, SPAC CEOs are subject to the same overboarding limit ISS applies to other public company CEOs (two public company boards besides their own).
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[1] ISS also issued an updated set of FAQs on COVID-related compensation decisions.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Ronald Mueller, and Lori Zyskowski.
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:
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Gibson Dunn’s Supreme Court Round-Up provides the questions presented in cases that the Court will hear in the upcoming Term, summaries of the Court’s opinions when released, and other key developments on the Court’s docket. To date, the Court has granted certiorari in 35 cases and set 1 original-jurisdiction case for argument for the 2021 Term.
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As we head into a new year, and the California Privacy Rights Act (“CPRA”) inches closer to its effective date of January 1, 2023 (with enforcement scheduled to begin six months later), the new California Privacy Protection Agency (“CPPA”) has begun holding regular public meetings. The CPPA’s chair and board members were appointed in March, and the tasks ahead are substantial: the board is charged with writing and revising a slew of new regulations to implement the sweeping privacy law under the pioneering agency’s purview, before it turns to enforcing them. At the CPPA’s recent meetings, board members have discussed the agency’s goals and the steps they have taken to launch the new agency.
By way of background, the California Attorney General (“AG”) already drafted rules under the CPRA’s predecessor, the California Consumer Privacy Act (“CCPA”), and both the CCPA and its implementing regulations remain enforceable until July 1, 2023, when enforcement of the CPRA begins.[1] The CPRA will amend the CCPA when it takes effect, and the CPPA has the authority to update the current CCPA regulations, in addition to writing new regulations that will implement the CPRA.
The CPPA’s first meeting took place in June 2021, and the board has met several times since then, including as recently as Monday, November 15. These initial meetings have given some clues about what to expect from its rulemaking—and when to expect it:
- Impact of Hiring Delays: The CPPA’s five-member board noted that the pace of hiring has slowed the CPPA’s ability to structure the organization, hold informational hearings, and conduct research to determine the focus of its rulemaking. That said, the pace may pick up soon—in October, the CPPA hired an executive director, Ashkan Soltani, a former FTC chief technologist who is now running the agency’s day-to-day operations. Those operations include hiring much of the staff, with the board’s input. The CPPA’s board has also been tackling the minutiae of creating a new agency, from finding office space in Sacramento, to adopting a required conflict-of-interest code. In the meantime, the AG’s Office has been providing the CPPA with administrative support as the agency gets off the ground.
- Current Clues on Timing of the Draft Regulations: The CPPA will soon replace the AG’s Office in drafting implementing regulations, and could begin promulgating those rules as soon as April, though timing is still unclear. Under the CPRA, the CPPA will supersede the AG’s authority to promulgate rules the later of July 1, 2021, or six months after the CPPA formally notifies the AG that it is prepared to issue rules. (Note that although the language in the CPRA initially stated that this deadline would be the earlier of the two, AB 694 clarified that it would be the later of the two, including in light of the delays noted above.) In its October meeting, the CPPA approved providing that notice to the AG’s Office. Depending on when the notice was actually sent, and whether the CPPA will issue rules at the time the authority is transitioned, the CPPA could issue rules around April 19, 2022. Interestingly, however, the final regulations must be adopted by July 1, 2022. As some may remember from CCPA’s regulatory rulemaking process, there were various required comment periods, which would make meeting that deadline difficult even with promulgation of a draft on that day.
- Considerations of Expedited Rulemaking or Delayed Enforcement: In the November meeting, the board considered potential solutions for the challenges it is facing in connection with its rulemaking responsibilities, including the complexity of the issues and its limited staff. These potential solutions include (i) engaging in emergency rulemaking to write rules faster than the standard timeline, (ii) delaying enforcement of the CPRA, (iii) hiring temporary staff, and (iv) staggering rulemaking, many of which could have significant effects on companies’ compliance programs and timing.
- Public Comment Period: In September 2021, the board called for public comment on its preliminary rulemaking activities, asking the public for feedback on “any area on which the [CPPA] has authority to adopt rules.” Some of the specific areas it sought comments on included: when a business’s processing of personal information creates a “significant risk” for consumers, triggering additional compliance steps for businesses; how to regulate automated decision making; what information should be provided to respond to a consumer’s request for their information; how to define various terms; and specifics regarding effectuating consumers’ rights to opt out of the sale of their information, to delete their information, and others. According to the board, it received “dozens” of comments to this initial open-ended call for comments by the November 8, 2021 deadline.
- Rulemaking Priorities: While the CPPA reviews its initial public comments, board members are also studying a number of areas for potential rulemaking and considering topics for informational hearings—presumably similar to what we saw in the CCPA rulemaking process—which are used to gather information on certain key issues. To tackle its many tasks, the CPPA board has divided itself into several subcommittees, including ones focused on updates to existing CCPA rules, new CPRA rules, and on the rulemaking process itself. Those subcommittees are considering for rulemaking areas such as defining the terms “business purposes” and “law enforcement agency approved investigation;” recordkeeping requirements for cybersecurity audits, risk assessments, automated decision making, and other areas; clarifying how the CPRA will apply to insurance companies; and prescribing how to conduct the rulemaking process itself. For informational hearings, the board highlighted areas such as automated decision-making technologies, profiling, and harmonization with global frameworks; and how the current rules governing consumer opt outs are operating “in the wild” for consumers and businesses.
- Additional Goals: Board members also noted they want to make sure they are educating Californians about their privacy rights and ensure that outreach is available to speakers of languages other than English.
Further Legislative Privacy Measures
The CPPA is not alone in crafting new data privacy requirements. In October, California Governor Gavin Newsom signed legislation that made technical changes in the CPRA through AB 694 (mentioned above), clarifying when the CPPA would assume its rulemaking authority.
Also in October, Governor Newsom signed the Genetic Information Privacy Act to impose new requirements on direct-to-consumer genetic testing companies and other companies that use the genetic data they collect. The new law requires those companies to, among other things, make additional disclosures to consumers, obtain express consumer consent for different uses of consumers’ genetic information, and timely destroy consumers’ genetic samples if requested. The law allows the AG to collect civil penalties of up to $10,000 for each willful violation. Separately, the governor also signed a bill that adds “genetic information” to the definition of personal information in California’s data-breach law.
Next Steps
Despite Governor Newsom’s initiatives and all of the CPPA’s efforts so far, we can expect months of uncertainty before companies have a clear sense of what rules may supplement the CPRA’s language. But companies cannot wait until the CPPA completes its rulemaking to start thinking about their compliance programs, particularly in those areas not covered under existing regulations, such as automated decision making and profiling. Given the complexity of the CPRA and its new requirements—and important sunsetting provisions on employment and B2B data that may have left companies with opportunities to avoid compliance with CCPA on large swaths of data—companies should begin planning now for how they will comply with the enacted amendments to the CCPA. In particular, companies should, sooner than later:
- (Re)consider collection and storage of personal information: Even though the CPRA does not come into effect until January 2023, the CPRA will give consumers the right to request access to personal information collected on or after January 1, 2022, and for any personal information collected from January 1, 2023 forward, the CPRA may give consumers the right to request their historical information beyond the CCPA’s 12-month look back. Companies should start thinking about how to collect and store personal information in a way that will allow them to respond to such a request (if such information is indeed subject to the right), and begin analyzing how new rights such as the right to limit the use of sensitive personal information, right to opt out of sharing, and right of employees to the same protections, may apply to your business. In particular, the distinction between personal information and sensitive personal information may affect how information should be collected and stored.
- Design a plan to revise privacy-related documents: In light of changes to service provider and contractor requirements, transparency and disclosure requirements (including relating to data subject rights), retention limitation requirements, and additional changes in the CPRA, it is a good time to start reviewing vendor contracts, privacy statements, data retention practices and policies, and other privacy-related documents.
- Prepare for compliance with respect to employment and B2B data: The CPRA extended until January 1, 2023, exemptions in the CCPA for business-to-business and employment-related data. To the extent companies have avoided bringing those categories of data into compliance so far, they may want to revisit those decisions as the exemptions near their end.
- Don’t neglect CCPA compliance: Given that CCPA will continue to be enforceable until July 1, 2023, and the roll-out of regulations over the course of 2020 may have left some with outdated compliance programs that should be updated, it is a good time to revisit that compliance as well.
- Remain nimble: Rulemaking will clarify certain requirements. Companies should therefore be prepared to modify certain aspects of their compliance programs as those rules take shape.
Of course, businesses should also take heed that it’s not just California they should be paying attention to: Colorado and Virginia have also implemented comprehensive privacy laws that will take effect in 2023, as our prior updates have detailed, and consideration of a national privacy program from the ground up may be most efficient.
We will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
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[1] Cal Civ. Code § 1798.185(d).
This alert was prepared by Ashlie Beringer, Alexander H. Southwell, Cassandra L. Gaedt-Sheckter, Abbey A. Barrera, Eric M. Hornbeck, and Tony Bedel.
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, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.
Privacy, Cybersecurity and Data Innovation Group:
United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
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Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
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Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
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On November 12, 2021, the Delaware Court of Chancery issued a post-trial decision finding that the general partner of a Master Limited Partnership (“MLP”) breached the partnership agreement of the MLP that it controlled and engaged in willful misconduct that left the general partner unprotected from the exculpatory provisions in the partnership agreement. It is rare for a court to find such a breach on the part of the general partner of an MLP, and this decision is based on the particular facts of the case, not a change in established law. The decision offers useful reminders to participants in MLP transactions about the limits of acceptable conduct under standard partnership agreement provisions.
Background
In 2005, Loews Corporation (“Loews”) formed and took Boardwalk Pipeline Partners, LP (the “Partnership” or “Boardwalk”) public as an MLP after the Federal Energy Regulatory Commission (“FERC”) implemented a regulatory policy that made MLPs an attractive investment vehicle for pipeline companies. Boardwalk served as a holding company for its subsidiaries that operate interstate pipeline systems for transportation and storage of natural gas. Loews, through its control of the general partner of the Partnership (the “General Partner”), controlled Boardwalk.
The General Partner itself was a general partnership controlled by its general partner, Boardwalk GP, LLP (“GPGP”). GPGP had a sole member, Boardwalk Pipelines Holding Corp., a wholly owned subsidiary of Loews (“Holdings”). Holdings had exclusive authority over the business and affairs of GPGP not relating to the management and control of Boardwalk. Holdings’ board of directors consisted entirely of directors affiliated with Loews. GPGP had its own eight-person board (the “GPGP Board”), consisting of four directors affiliated with Loews and four directors unaffiliated with Loews. The GPGP Board had authority over the business and affairs of GPGP related to the management and control of Boardwalk. The different composition of the GPGP Board and the Holdings Board meant that if Holdings made a decision for GPGP as its sole member, then Loews controlled the decision. If the GPGP Board made the decision for GPGP, however, then the four directors unaffiliated with Loews could potentially prevent GPGP from taking the action that Loews wanted.
Boardwalk’s Agreement of Limited Partnership (“Partnership Agreement”) included a provision that would allow the General Partner to acquire all of the common equity of Boardwalk not owned by Loews through the exercise of a Call Right, so long as three conditions were met. First, the General Partner had to own “more than 50% of the total Limited Partnership Interests of all classes then Outstanding.” Second, the General Partner had to receive “an Opinion of Counsel (the “Opinion”) that Boardwalk’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers” (the “Opinion Condition”). Third, the General Partner had to determine that the Opinion was acceptable (the “Acceptability Condition”). The Partnership Agreement did not specify whether the GPGP Board, as the board that managed the publicly traded partnership, or Holdings, as the General Partner’s sole member, should determine whether the Opinion was acceptable on behalf of the General Partner.
If the three conditions above were met, then, under the terms of the Partnership Agreement, the General Partner could exercise the Call Right in its individual capacity “free of any fiduciary duty or obligation whatsoever to the Partnership, any [l]imited [p]artner or [a]ssignee” and not subject to any contractual obligations. The Call Right would be exercised based on a trailing market price average.
On March 15, 2018, the FERC proposed a package of regulatory policies that potentially made MLPs an unattractive investment vehicle for pipeline companies. The trading price of Boardwalk’s common units declined following the FERC announcement. In response to the March 15th FERC action, several MLPs issued press releases stating that they did not anticipate the proposed FERC policies would have a material impact on their rates, primarily because customers were locked into negotiated rate agreements. Boardwalk issued a press release stating that it did not expect FERC’s proposed change to have a material impact on revenues (rather than rates). A few weeks after the press release, Boardwalk publicly disclosed the General Partner’s intention to potentially exercise the Call Right (the “Potential-Exercise Disclosure”). The common unit price of Boardwalk further declined.
Loews retained outside counsel to prepare the Opinion required under the Partnership Agreement. The Court found that counsel, after discussion with Loews, created a “contrived” opinion in order to find an adverse impact on rates when the FERC proposals were not final. Loews also sought advice from additional outside counsel to advise on whether the Opinion was sufficient for purposes of the Opinion Condition requirements under the Partnership Agreement and whether Holdings had the authority to make the acceptability determination, or whether the GPGP should make such determination. Ultimately, following the legal advice it received, Loews had the Holdings board, comprised entirely of Loews insiders, find the Opinion acceptable.
On May 24, 2018, Boardwalk’s unitholders filed suit in the Court of Chancery seeking to prevent the General Partner from exercising the Call Right using a 180-day measurement period that included trading days affected by the Potential-Exercise Disclosure, claiming that the disclosure artificially lowered the unit trading price and undermined the contractual call price methodology. The parties soon reached a settlement on the 180-day measurement period. On July 18, 2018, Loews exercised the Call Right and closed the transaction just one day before FERC announced a final package of regulatory measures that made MLPs an even more attractive investment vehicle. After the Court of Chancery rejected the settlement Loews reached with the original plaintiffs, the current plaintiffs took over the litigation.
The Court’s Findings
In its post-trial opinion, the Court held that the General Partner breached the Partnership Agreement by exercising the Call Right without first satisfying the Opinion Condition or the Acceptability Condition. The Court found that the General Partner acted manipulatively and opportunistically and engaged in willful misconduct when it exercised the Call Right. Further, the Court held that the exculpatory provisions in the Partnership Agreement do not protect the General Partner from liability.
The Court held the Opinion failed to satisfy the Opinion Condition, because the Opinion did not reflect a good faith effort on the part of the outside counsel to discern the facts and apply professional judgment. In making the determination, the Court reviewed in detail factual events submitted at trial and took into account the professional and personal incentives the outside counsel faced in rendering the Opinion.
In holding the General Partner failed to satisfy the Acceptability Condition, the Court noted that a partnership agreement for an MLP is not the product of bilateral negotiations and the limited partners do not negotiate the agreement’s terms, and, as a result, Delaware courts would construe ambiguous provisions of the partnership agreement against the general partner. The Court found that, “because the question of who could make the acceptability determination was ambiguous, well-settled interpretive principles require that the court construe the agreement in favor of the limited partners.” As such, the Court determined that the GPGP Board, which included directors who were independent of Loews, was the body that had the authority to make the acceptability determination. Because the GPGP Board did not make the determination regarding the Acceptability Condition, the General Partner breached the Partnership Agreement by exercising the Call Right.
The Court further held that the provision in the Partnership Agreement stating the General Partner would be “conclusively presumed” to have acted in good faith if it relied on opinions, reports or other statements provided by someone that the General Partner reasonably believes to be an expert did not apply to protect the General Partner from liability, because the General Partner participated knowingly in the efforts to create the “contrived” Opinion and provided the propulsive force that led the outside counsel to reach the conclusions that Loews wanted.
In addition, the Court held the exculpation provision in the Partnership Agreement, which would generally protect the General Partner from liability except in case of bad faith, fraud or willful misconduct, did not apply because the General Partner engaged in willful misconduct when it exercised the Call Right.
The Court found the General Partner liable for damages of approximately $690 million, plus pre- and post-judgment interest.
Key Takeaways
While this case does not reflect a departure from established law, it provides helpful lessons for participants in MLP transactions to consider, including:
- Outside counsel and advisors should be independent. The Boardwalk decision highlights the importance of retaining independent outside counsel and advisors in transactions involving conflicts of interest. Outside counsel and advisors should independently discern the facts, conduct analysis, and apply professional judgment.
- Ambiguity in the partnership agreement may be resolved in favor of the public limited partners. MLPs and their sponsors should carefully consider their approach when making determinations with respect to any ambiguous provisions of the partnership agreement. Although the partnership agreement may provide for a presumption that they have acted in good faith, the general partner and sponsor should conduct their activities with respect to a conflict transaction as if there were no such presumptive provision.
- Focus on precise compliance with the partnership agreement. Consistent with previously issued case law, to obtain the benefits provided in the partnership agreement, MLPs and their sponsors must strictly comply with the terms of the partnership agreement. Equally as important, they should be prepared to establish a clear and consistent record of satisfaction of such conditions.
- Always be mindful of written communications and that actions will be judged with benefit of hindsight. The Court cited multiple emails, handwritten notes and other written communications (including from lawyers and within law firms) introduced as evidence at the trial. The Court also cited drafts of minutes of committee meetings in reviewing the written record. Participants in MLP transactions should be mindful that any written communications, including those thought to be privileged, could be evidence in litigation. Participants should also recognize that communications and actions taken will be reviewed with the benefit of 20/20 hindsight.
For the full opinion, please reference: Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Mergers and Acquisitions, Oil and Gas or Securities Litigation practice groups, or the following authors:
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Gerry Spedale – Houston (+1 346-718-6888, gspedale@gibsondunn.com)
Tull Florey – Houston (+1 346-718-6767, tflorey@gibsondunn.com)
Brian M. Lutz – San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com)
Special appreciation to Stella Tang and Matthew Ross, associates in the Houston office, for their work on this client alert.
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