Publications Archives

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during September 2024. Please click on the links below for further details.

I. GLOBAL

International Financial Reporting Standards (“IFRS”) Foundation launches guide to help companies voluntarily apply International Sustainability Standards Board (“ISSB”) sustainability reporting standards

On September 25, 2024, the IFRS Foundation released a new guide to support companies that plan to voluntarily adopt the ISSB’s sustainability and climate disclosure standards, which have already been adopted by jurisdictions representing nearly 55% of global GDP and more than 40% of global market capitalization.

The new guide, titled Voluntarily Applying ISSB Standards—A Guide for Preparers, is designed to support companies that operate in jurisdictions that do not yet require application of the ISSB standards, but who nevertheless wish to voluntarily report under them, either in response to investor demand or in preparation for global requirements. The IFRS Foundation notes that the guide helps support implementation by highlighting the following: (i) transition relief that allows companies to use a phased-in approach to the ISSB standards, (ii) proportionality mechanisms to address “the range of capabilities and circumstances of companies,” and (iii) resources from the IFRS Foundation to help companies transition from other frameworks and standards (such as the Task Force on Climate-related Financial Disclosure and Sustainability Accounting Standards Board standards) to the ISSB standards.

International Energy Agency (“IEA”) publishes guidance on implementing COP28 energy goals

In connection with Climate Week NYC, the IEA published From Taking Stock to Taking Action on September 24, 2024. This report explores the actions needed to fully implement the global energy goals agreed on at the COP28 conference, as well as the risks of failing to do so. These goals include a 2050 net zero emissions pledge for the energy industry, a transition away from fossil fuels, and an intention to triple renewable energy capacity by 2030, among others.

24% of investors in Vanguard’s proxy choice program chose ESG-focused voting policy

On September 17, 2024, Vanguard released data from its 2024 Investor Choice voting pilot program, reporting that 24% of participating investors opted for an ESG-focused voting policy. Vanguard’s pilot program allows investors to select from a range of voting policy options and covers equity funds comprising more than $100 billion in assets. Of the 40,000 participants for the 2024 proxy season, 24.4% selected the Third Party ESG Policy (which will vote in accordance with Glass Lewis’s ESG Voting Policy recommendations), 43% selected the Vanguard-Advised Funds Policy (which will vote in accordance with the guidelines of each of Vanguard’s funds), 30.3% selected the Company Board-Aligned Policy (which will vote in accordance with the recommendations of each company’s board of directors), and 2.3% selected the “Not Voting” Policy (which will leave all shares unvoted). Vanguard stated that the Investor Choice pilot is meant to “enabl[e] interested individual investors to more fully align their investment portfolios with their personal preferences in order to advance their long-term financial goals” and that Vanguard is “committed to continuing to empower investors by expanding access to the proxy voting process.”

II. UNITED KINGDOM

Financial Conduct Authority (“FCA”) offers temporary flexibility for firms to comply with its “naming and marketing” sustainability rules

On September 9, 2024, the FCA published a statement setting out temporary measures for firms to comply with its naming and marketing sustainability rules. The FCA noted that in-scope firms “should now be taking all reasonable steps to ensure compliance with the ‘naming and marketing’ and disclosure rules,” which come into effect starting on December 2, 2024. The FCA also noted that it is taking longer than expected for some firms to make the necessary changes. As a result, the FCA is providing further support and flexibility to firms that may need additional time to make the required changes. Until 5 pm on April 2, 2025, firms have limited temporary flexibility to comply with the naming and marketing rules in relation to a sustainability product that is a UK-authorised investment fund. The flexibility only applies to firms that comply with certain criteria outlined in the FCA’s statement. Regarding the authorization of mergers, wind-ups or terminations before December 2, 2024, the FCA has announced that it intends to take a “supportive, proportionate and outcomes-based approach in these circumstances.” Firms are requested to contact their supervisor or usual supervisory contact at the FCA to discuss on a case-by-case basis.

Financial Reporting Council (“FRC”) publishes 2024 Annual Review of Corporate Reporting

On September 24, 2024, the FRC published its Annual Review of Corporate Reporting with its findings from monitoring UK companies’ annual report and accounts and its expectations for the upcoming reporting season. With respect to sustainability reporting, the FRC noted that “there were comparatively few compliance issues in premium-listed companies’ reporting against the Taskforce for Climate-related Financial Disclosures (TCFD) framework.” The FRC also wrote to companies that did not report against TCFD despite being in scope of the relevant Listing Rules or provided inadequate disclosures, amongst other reasons. This winter (2024/2025), the FRC also plans to publish results of a thematic review of climate-related financial disclosures reporting under the Companies Act 2006, which will cover a selection of large private and AIM companies with a year-end between August and December 2023.

Competition and Markets Authority (“CMA”) publishes greenwashing guidance for the fashion industry and stakeholders

On September 18, 2024, the CMA published a compliance guide for fashion retail businesses explaining how they can follow the Green Claims Code when making environmental claims. According to the guidance, all businesses in the clothes, footwear, fashion accessories and related services (such as packaging, delivery and returns) supply chain are responsible for ensuring their environmental claims are accurate and substantiated. Given the guidance, the CMA expects there will be no excuse for using misleading claims, and that failure to ensure practices are aligned with consumer protection rules could carry a risk under the Digital Markets Competition and Consumers Act (of up to 10% of global turnover), once the Act’s enforcement provisions take effect in 2025. The publication follows a review in 2022 by the CMA into the fashion industry.

UK government transfers the National Grid Electricity System Operator (“ESO”) into public ownership in £630m acquisition

On September 13, 2024, the UK Government announced its decision to acquire the ESO from National Grid, transitioning it into public ownership. From October 1, 2024, the entity will be reestablished as the National Energy System Operator (the “NESO”) and will assume responsibility for the comprehensive planning of Britain’s gas and electricity networks. For the purposes of the Energy Act 2023, NESO will be designated independent from the Government as the licensed Independent System Operator and Planner for the UK, taking on all existing functions of the ESO, under the oversight of Ofgem. This follows the joint consultation (which closed on May 9, 2024) by Ofgem and the Department for Energy Security & Net Zero on the structure and licensing of NESO, which noted that NESO will take on key operational roles in electricity, as well as planning roles in gas and hydrogen. This aligns with the UK Government’s commitment to decarbonise the power grid by 2030.

Britain ends its dependence on coal for electricity

On September 30, 2024, the UK’s last remaining coal-fired power station at Ratcliffe-on-Soar closed, making Britain the first G7 nation to have ended its reliance on coal for electricity production. The closure follows the Government’s announcement in 2015 that all coal-fired power stations would close by 2025, a date which was later brought forward to 2024 in advance of the UK hosting COP26 in Glasgow. The phase-out of coal is a significant milestone in the UK’s transition plans.

New Water (Special Measures) Bill to give regulators enforcement powers against water companies damaging the environment

On September 4, 2024, the Water (Special Measures) Bill was introduced by the UK Government in the House of Lords, proposing changes to the regulation of private companies providing water and sewerage services in England and Wales, including by requiring water companies to publish annual pollution incident reduction plans, providing information on emergency sewage overflows, introducing new automatic penalties for offences committed by water companies and giving regulators new powers to recover costs for enforcement work. Alongside the bill, the government also published explanatory notes, a delegated powers memorandum and a policy statement supporting the bill.

III. EUROPE

Lawsuit against European Commission demands stricter emissions reductions by 2030

On August 27, 2024, Climate Action Network Europe and the Global Legal Action Network submitted their final written statements before the oral hearing in a lawsuit against the EU Commission. The NGOs challenge the legality of Europe’s emissions allowances for the period leading up to 2030, arguing that the EU Commission failed to adequately assess and establish suitable emission reduction targets and did not properly evaluate the impacts of climate change on fundamental rights. It is also alleged that the emission reductions in the EU’s Fit for 55 package are inadequate to meet the 1.5°C target of the Paris Agreement.

If the lawsuit is successful, this could lead to stricter emission targets, raising carbon allowance costs in the EU’s Emissions Trading System and impacting covered sectors and importers under the Carbon Border Adjustment Mechanism. Despite early challenges in court, a recent European Court of Human Rights ruling recognizing climate protection as a human right may bolster the NGOs’ case.

European Commission proposes carbon footprint labels for flights

On September 25, 2024, the European Commission published a statement announcing the launch of a consultation on a new EU Flight Emissions Label (“FEL”) initiative to provide passengers with standardized information about the carbon footprint of their flights. The initiative is part of the broader ReFuelEU Aviation regulations, adopted in 2023, which seek to decarbonize the aviation sector. The FEL aims to establish a standardized and regulated approach for calculating flight emissions by considering factors like aircraft type, average passenger count, cargo weight, and the type of fuel used. Beginning in 2025, airlines operating flights within or departing from the EU will be able to voluntarily participate in this initiative.

Italy launches greenwashing investigation into Shein, global fashion retailer, over environmental claims

On September 25, 2024, the Italian Competition Authority announced its investigation into Shein’s website operator, Infinite Styles Services CO. Limited, over potentially misleading advertising claims regarding the environmental sustainability of Shein-branded clothing. The inquiry focuses on claims made in various sections of the website. The Italian Authority alleges that Shein attempts to project an image of sustainable production and commercial practices through vague and potentially misleading statements, aiming to capitalize on increased consumer sensitivity to environmental issues. This investigation aligns with broader actions taken by EU regulators and lawmakers to combat greenwashing and protect consumers from misleading sustainability claims.

European Commission launches infringement procedures against 17 member states over Corporate Sustainability Reporting Directive (“CSRD”) transposition delays

On September 26, 2024, the European Commission initiated infringement procedures against 17 EU member states (Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia, and Finland) for failing to fully transpose the CSRD into their national laws. Although the CSRD took effect in early 2024, with the first reports due in 2025 for large public-interest companies, the mentioned countries missed the July 6, 2024 deadline for transposition.

In its published statement, the Commission emphasized that without full transposition, harmonized sustainability reporting across the EU would be impossible to achieve, which could potentially hinder informed investment decisions based on companies’ sustainability performance.

Under the EU’s infringement procedures, these 17 member states have two months to respond and complete transposition before the Commission may escalate the process (ultimately referring the matter to the European Court of Justice to impose penalties). Notably, on July 25, 2024, the Commission had already initiated an infringement procedure against Sweden, which delayed the implementation of the CSRD by six months, requiring Swedish companies to report only for fiscal years starting after July 1, 2024. In a related move, the Commission also launched infringement actions against 26 member states for failing to implement provisions under the Renewable Energy Directive, which aims for renewable energy to account for 42.5% of the EU’s total energy consumption by 2030.

IV. NORTH AMERICA

California Governor signs amendments to climate-related legislation

On September 27, 2024, Governor Gavin Newsom signed Senate Bill (“SB”) 219, enacting amendments to SB 253 (requiring reporting of greenhouse gas emissions) and SB 261 (requiring reporting of climate-related financial risks and the measures taken to reduce and adapt to them). The amendments provide the California Air Resources Board (“CARB”) an additional six months to publish regulations related to SB 253, extending the deadline to July 1, 2025 from January 1, 2025, but do not alter the deadline for companies to comply with these regulations. SB 219 also allows emissions reports under SB 253 to be consolidated at the parent company level (which was already allowed under SB 261) and makes other changes to CARB’s responsibilities described in our client alert. For further details on SB 253 and SB 261, please see our client alert and blog post.

U.S. Senate bill would prevent retirement plan managers from using ESG factors in investment decisions

On September 26, 2024, U.S. Senator Bill Cassidy (R-LA) introduced the Restoring Integrity in Fiduciary Act, legislation that would prevent fiduciaries from considering ESG factors in investment decisions. In a press release, Senator Cassidy stated, “[a]sset managers should prioritize helping Americans achieve the best return for their retirement, not funneling their clients’ money to fund a left-wing political agenda.” The bill would amend the Employee Retirement Income Security Act (“ERISA”) to require fiduciaries to make investment decisions based only on “pecuniary factors.”

Senator Cassidy’s bill responds to the U.S. Department of Labor’s November 2022 rules that permit fiduciaries of ERISA-governed retirement plans to consider ESG in the selection process for investments. In March 2024, Congressman Greg Murphy introduced a similar bill to prevent retirement plan trustees from considering ESG factors when making investment decisions (described in our client alert).

California sues Exxon Mobil Corporation (“Exxon”) over claims about plastic recycling

On September 23, 2024, the State of California brought a lawsuit against Exxon alleging the company made false and deceptive claims that recycling could solve the problem of plastic waste pollution. The lawsuit alleges Exxon knew the technology for recycling plastic was inadequate to process the amount of plastic waste the company produced, yet it continued to promote recycling as the solution to the plastic pollution crisis. Among other relief, California is seeking to compel Exxon to establish and contribute to an abatement fund to address plastic pollution in the state. In the press release announcing the lawsuit, the California Attorney General notes that this lawsuit follows a two-year investigation into the fossil fuel and petrochemical industries’ role in the plastic pollution crisis and is aimed to “protect California’s natural resources from further pollution, impairment, and destruction, as well as to prevent [Exxon] from making any further false or misleading statements about plastics recycling and its plastics operations.”

Toyota entities accused of misrepresenting machinery emissions compliance

A complaint was filed in a California federal district court against Toyota Industries Corporation (“Toyota”) and related entities on September 22, 2024 for allegedly misrepresenting the true emissions levels of its engines used in forklifts and other construction machinery. According to the class action lawsuit, Toyota represented these vehicles were “clean-burning, low-emissions, high-performance, and sustainable,” and plaintiffs purchased the vehicles assuming they met regulatory emissions standards. However, the complaint alleges that the vehicles emitted more emissions than were reasonably expected and did not comply with emissions standards.

Microsoft Corporation (“Microsoft”) and Constellation announce renewable energy agreement and restart of Three Mile Island

On September 20, 2024, Constellation announced it had signed a 20-year power purchase agreement with Microsoft. Constellation intends to restart Three Mile Island Unit 1 (under the new name “Crane Clean Energy Center”) by 2028, and Microsoft will purchase the resulting energy to help match the power used for Microsoft’s data centers. The project is expected to require significant financial investment in addition to U.S. Nuclear Regulatory Commission approval and state and local permitting.

U.S. Commodity Futures Trading Commission (“CFTC”) issues final guidance regarding the listing of voluntary carbon credit derivative contracts

As summarized in our alert, on September 20, 2024, the CFTC issued final guidance regarding the listing of voluntary carbon credit derivative contracts on CFTC-regulated exchanges.

U.S. Securities and Exchange Commission (“SEC”) finds investment advisory firm misled investors with its data-driven “biblically responsible investing” strategy

On September 19, 2024, the SEC charged investment advisory firm Inspire Investing with making misleading statements about using data-driven methodology to avoid investing in companies whose business practices did not align with biblical values. The firm represented that its methodology would score companies based on their business practices and not invest in companies that participate in certain enumerated activities or products. But according to the SEC order, as a result of a failure to adopt written policies and procedures governing its investment process, Inspire Investing inconsistently applied its investment criteria and had invested in companies that engaged in business practices that did not align with its investment criteria, failing to comply with its representations about its investment strategy.

U.S. House of Representatives passes anti-ESG bills

On September 19, 2024, the House passed the Prioritizing Economic Growth Over Woke Policies Act, H.R. 4790, by a vote of 215-203. The Act contains a series of anti-ESG bills aimed at curbing corporate ESG initiatives, signaling Republicans’ 2025 legislative priorities. Among other things, the package includes measures to (i) limit the SEC’s authority to impose new ESG disclosure requirements, including by requiring that rulemakings with disclosure obligations be grounded in materiality, (ii) require the SEC to report on the effects of the E.U.’s directives on corporate sustainability on companies, consumers, and investors, (iii) allow companies to exclude shareholder proposals with subject matters that are “environmental, social, or political (or a similar subject matter)” without regard to whether the proposal relates to a significant social policy issue, and (iv) require the SEC to study the financial and other incentives of shareholder proposals, proxy advisory firms, and the proxy process.

Ten U.S. State Governors Form Coalition for Energy Choice

On September 17, 2024, Louisiana Governor Jeff Landry and New Hampshire Governor Chris Sununu announced the formation of The Governors’ Coalition for Energy Choice with eight other senators. The Coalition is intended to help address high energy costs and inflation and to support the formulation of smart energy policies. Its goals are to “ensure continued energy choice, minimize permitting and other regulatory barriers, limit expensive energy mandates, focus on affordability and reliability of energy infrastructure, and coordinate to positively manage energy resources and the environment.”

SEC disbands Climate and ESG Task Force

The SEC recently disclosed that in the past few months, it disbanded the Climate and ESG Task Force in the Division of Enforcement. Formed in 2021 and reportedly composed of 21 lawyers, it pursued companies and investment advisors for three years for ESG-related fraud. The Task Force was involved in cases against numerous companies related to ESG matters, including publicly listed companies, financial institutions, and investment advisors. The expertise from the Task Force is now said to reside more generally within the Division of Enforcement.

V. APAC

Australian court fines Vanguard over misleading sustainable investing claims

On September 25, 2024, an Australian federal court imposed a record A$12.9 million (USD$8.9 million) penalty on Vanguard Investments Australia for misleading claims about its ESG fund, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund. The fund, launched in 2018, claimed to exclude companies with operations in fossil fuels and other controversial sectors. However, the Australian Securities & Investments Commission found that ESG research was not conducted on a significant portion of bond issuers, leading to the finding that the fund had investments in fossil fuel-related companies. Vanguard self-reported the issue in 2021 and admitted to making false claims. The court ruled that Vanguard’s misrepresentations were serious, affecting the fund’s main distinguishing feature and benefiting the company.

Singapore Exchange to start incorporating IFRS Sustainability Disclosure Standards

On September 24, 2024, Singapore Exchange’s market regulator, SGX RegCo, updated its sustainability reporting rules for listed companies. The update follows the announcement earlier this year by the government of Singapore that it will implement mandatory climate-related reporting requirements for listed and large non-listed companies. The changes include delaying mandatory Scope 3 emissions reporting for smaller issuers, following concerns about evolving measurement and reporting methodologies. Larger issuers are expected to begin Scope 3 reporting for fiscal year 2026. Scope 1 and 2 emissions reporting will be required for fiscal year 2025. The new rules also mandate other sustainability report disclosures beginning for fiscal year 2026, covering ESG factors, policies, practices, and governance.

Malaysia launches National Sustainability Reporting Framework

On September 24, 2024, Malaysia introduced a National Sustainability Reporting Framework (“NSRF”) to support its goal of reducing carbon intensity by 45% by 2030 and achieving net-zero emissions by 2050. Developed by the Advisory Committee on Sustainability Reporting, the NSRF employs ISSB Standards, specifically IFRS S1 and IFRS S2, as its baseline for sustainability disclosures. The NSRF aims to enable companies to provide reliable and comparable sustainability information, enhancing transparency regarding climate-related risks and sustainability practices. Implementation will be on a phased basis, allowing companies to adopt the standards based on their readiness, though they can also use other complementary frameworks.

Hong Kong proposes IFRS-aligned sustainability reporting standards

On September 16, 2024, the Hong Kong Institute of Certified Public Accountants (“HKICPA”) released new Exposure Drafts for its HKFRS Sustainability Disclosure Standards (the HKFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and HKFRS S2 Climate-related Disclosures), ( proposing full convergence with the ISSB standards. The convergence aims to enhance global comparability and meet investors’ needs for reliable sustainability information and is expected to take effect on August 1, 2025. The HKICPA is seeking public comments on the Exposure Drafts until October 27.

Hong Kong and Dubai strengthen collaboration on sustainable finance

On September 16, 2024, the Hong Kong Monetary Authority (“HKMA”) and Dubai Financial Services Authority (“DFSA”) concluded their first Joint Climate Finance Conference in Hong Kong. The event, themed “Building a Net-Zero Asia – Middle East Corridor,” attracted over 240 participants from various financial sectors across Asia and the Middle East. The conference addressed transition finance demands and explored investment opportunities for the global net-zero transition. Notably, the HKMA and DFSA signed a Memorandum of Understanding to enhance their partnership in sustainable finance, promoting cross-border dialogue, knowledge sharing, and joint research.

New Japan low carbon hydrogen development fund launched

On September 12, 2024, the Japan Hydrogen Fund, a new initiative dedicated to developing a low-carbon hydrogen value chain, was launched by a consortium of Japanese financial and industrial companies along with French energy giant, TotalEnergies. The fund has secured USD$400 million in initial commitments from investors including Toyota Motor Corporation, Iwatani Corporation, major Japanese banks, and other corporations. This launch aligns with Japan’s 2050 carbon neutrality goal and its 2030 interim targets for emissions reduction and energy mix transformation. The fund aims to support the development of a hydrogen supply chain both in Japan and globally by providing funding to hydrogen-related companies and projects.

Australia passes mandatory climate reporting law

On September 9, 2024, Australia’s House of Representatives passed the Treasury Laws Amendment bill, introducing mandatory climate-related reporting requirements for large and medium-sized companies. The bill, which follows Senate approval in August, requires disclosures on climate-related risks and opportunities and greenhouse gas emissions across the value chain. Reporting will begin in January 2025 for the largest companies, with a phased approach for smaller entities, with reporting requirements varying depending on size. The legislation aligns with ISSB standards and includes a one-year grace period for Scope 3 reporting. Additionally, the House passed a law establishing the Net Zero Economy Authority, tasked with guiding Australia’s transition to net zero emissions. This includes reskilling workers and coordinating with industry and investors on transformation opportunities.

Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update.

Warmest regards,
Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michelle M. Kirschner
Michael K. Murphy

Chairs, Environmental, Social and Governance Practice Group, Gibson Dunn & Crutcher LLP

For further information about any of the topics discussed herein, please contact the ESG Practice Group Chairs or contributors, or the Gibson Dunn attorney with whom you regularly work.

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Spencer Bankhead, Mitasha Chandok, Becky Chung, Martin Coombes, Ferdinand Fromholzer, William Hallatt, Kriti Hannon*, Elizabeth Ising, Vanessa Ludwig, Cynthia Mabry, Babette Milz*, Johannes Reul, Emily Rumble, Meghan Sherley, Helena Silewicz*, and Katherine Tomsett.

*Kriti Hannon, an associate in Orange County; Babette Milz, a research assistant in Munich; and Helena Silewicz, a trainee solicitor in London, are not admitted to practice law.

Gibson Dunn 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, the authors, or any leader or member of the firm’s Environmental, Social and Governance practice group:

Environmental, Social and Governance (ESG):

Susy Bullock – London (+44 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213.229.7121, [email protected])
Ronald Kirk – Dallas (+1 214.698.3295, [email protected])
Michelle Kirschner – London (+44 20 7071 4212, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

This update summarizes key takeaways and considerations from this year’s developments, including the trends from our review of nearly 100 companies’ public AB 1305 reports.

Last year, California adopted a trio of laws requiring certain public and private companies to provide climate-related disclosures. As a quick refresher:

Climate Corporate Data Accountability Act (Senate Bill 253). For U.S. companies doing business in California with annual revenues over $1 billion, Senate Bill (“SB”) 253 requires them to report their greenhouse gas (“GHG”) emissions annually beginning in 2026 (for Scope 1 and 2 GHG emissions) and 2027 (for Scope 3 emissions).
Greenhouse Gases: Climate-related Financial Risk (Senate Bill 261). For U.S. companies doing business in California with annual revenues over $500 million, SB 261 effectively requires them to begin biennial reporting in 2025 regarding their “climate-related financial risks” and adopted measures to reduce or adapt to them.
Voluntary Carbon Market Disclosures (Assembly Bill 1305). For companies that make certain environmental claims, adopt particular environmental goals, or purchase, use, market, or sell voluntary carbon offsets in California, Assembly Bill (“AB”) 1305 requires annual website disclosure providing support for those claims, goals, or offsets.

More background SB 253 and 261 is detailed here, and AB 1305 is further discussed here.

The California Legislature and Governor Gavin Newsom proposed varied amendments to these laws in 2024, and certain largely administrative amendments have now been signed into law. Litigation challenging SB 253 and 261 is also ongoing (as described here), though the laws have not been stayed while the litigation proceeds. As a result, companies are now facing a mostly unchanged—though uncertain—reporting landscape in the state.

To help companies prepare for reporting under these laws (including SB 253 and SB 261, if they ultimately go into effect), we have summarized below our key takeaways and considerations from this year’s developments, including the trends from our review of nearly 100 companies’ public AB 1305 reports.

SB 253 & 261: Amendments Adopted (But Little Changed For Reporting Companies).

In June 2024, Governor Newsom proposed a trailer bill that would have delayed the initial reporting deadlines for SB 253 and 261 by two years, from 2026 to 2028, and provided the California Air Resources Board (“CARB”) more time to adopt implementing regulations (delaying the deadline from January 1, 2025 to January 1, 2027), among other changes. These proposals echoed the Governor’s previously expressed concerns over the bills’ financial impacts on covered companies and timing of the original reporting deadlines.

The California Legislature did not adopt the trailer bill and, rejecting any reporting delay for companies, instead proposed its own amendments (SB 219), which the Governor signed into law on September 27. SB 219 did not remove the SB 253 or 261 filing fee payments, but did remove the requirement that the payments be made at the time the reports are disclosed or submitted. It also makes clear that companies can report at the parent level on a consolidated basis for both reports (this was previously clear only for SB 261 reporting).

The remainder of SB 219’s changes impact CARB, including:

For SB 253:
- extending CARB’s deadline to adopt implementing regulations by six months from January 1, 2025 to July 1, 2025;
- removing the requirement that CARB engage an “emissions reporting organization” to receive companies’ GHG emission reports and to develop a digital platform for receiving and disclosing emissions reports, among other responsibilities. Instead, CARB could opt to receive the disclosure directly and develop such a platform;
- granting CARB greater discretion to set a schedule for Scope 3 GHG emissions reporting, rather than requiring that the deadline be no later than 180 days after Scope 1 and 2 GHG emissions are disclosed;
- removing the requirement that CARB review and assess GHG accounting and reporting standards every five years after 2033; and
- extending CARB’s deadline to publish the emissions reports it receives from 30 days to 90 days.
For SB 261:
- removing the requirement that CARB contract with a climate reporting organization for certain activities or publications on the climate-related risks that have been reported.

With Additional Guidance Almost A Year Away, What Can Reporting Companies Do Now. Although the fate of SB 253 and 261 is unclear given the pending litigation, companies can consider the following steps, as appropriate depending on their circumstances, as they prepare for potential SB 253 and 261 reporting:

consulting with counsel to determine whether they would be required to report under SB 253 or 261. Where companies’ current revenue levels or activities do not meet the thresholds, but are very close, monitor acquisition activity and any anticipated increases in revenue that may push the company into scope in future years;
if there is no current emissions reporting process, consulting with internal stakeholders and external advisors to estimate the time for developing such a process;
if there is a current emissions reporting process, review the current process and controls to assess differences between the company’s current methodology and the Greenhouse Gas Protocol and what updates may need to be made;
reviewing the time required to obtain limited assurance on Scope 1 and 2 GHG emissions data. If limited assurance is not currently being obtained, conduct a gap analysis to determine what additional work may be required to obtain it and identify potential third-party firms who could provide assurance;
conducting a gap analysis of any current climate-related risk reporting against the reporting standards referenced in SB 261—the Task Force on Climate-related Financial Disclosure (“TCFD”) or International Sustainability Standards Board (“ISSB”) standards—including reports currently described as TCFD or ISSB reports. Such reports have historically been voluntary, and additional disclosure may be required now that the disclosures are being prepared for legal compliance purposes; and
revisiting environmental policies and voluntary sustainability reporting. Companies may currently describe climate-related issues in different documents prepared by different teams for different purposes, such as committee charters, environmental policies, CDP questionnaire responses, and proxy statement or other public or regulatory reporting. In advance of potential mandatory reporting, consideration should be given to aligning these teams and internal controls.

AB 1305: No Pending Changes, But A Wealth of Examples.

AB 1305 does not specify the first reporting deadline for required disclosures: instead, it requires that the disclosures be updated no less than annually. The resulting uncertainty as to whether the first reporting deadline would be January 1, 2024—when the law first became effective—or January 1, 2025, resulted in some companies providing responsive disclosures late in 2023 and early 2024. To address this question, in January 2024, the author of AB 1305 published a statement of legislative intent reflecting his expectation that the first responsive disclosures be posted by January 1, 2025.

The California Legislature then progressed on a number of amendments to AB 1305 through AB 2331, including to push the first reporting deadline further (to July 1, 2025), carve out certain renewable energy credits (“RECs”) from the definition of voluntary carbon offsets, and substantively revise the information required under the law, particularly for the marketing or sale of voluntary carbon offsets. AB 2331 was not passed by the California Legislature prior to the close of the general session in August, leaving the original reporting requirements in place for now. However, the California Attorney General has issued a formal legal opinion concluding that RECs used by reporting companies outside of California’s regulatory programs would not be considered voluntary carbon offsets for purposes of AB 1305.

Early Filers Provide a Range of Reporting Approaches. AB 1305 does not contain specific formatting or presentation requirements. This is a notable contrast to other more prescriptive California website reporting requirements and has resulted in a variety of approaches to AB 1305-related reporting across the more than 90 reports that have been published as of early September 2024. Key takeaways from our review of these reports include:

Most Filers are Public Companies. We identified at least 68 public company reports and 26 private company reports across a range of industries. As one public company subsequently took down their report, we have excluded it from the following statistics, for a total sample of 93 companies. Below, we have summarized the market capitalization for reporting public companies.

Most Acknowledge a Sample or Category of Potentially In-Scope Claims. Most companies (70, or 75%) provided some reference to potential in-scope claims they had made, whether it was noting a specific achievement or corporate goal (e.g., achieving carbon neutral operations or adopting a net zero goal) or making a generic reference to its past reporting on targets and emissions reductions.
Few Companies Provide an Explicit Tie to Each Requirement. Only 12 companies (13%) provided an index or heading identifying their claims or supporting information side by side with each reporting requirement.
Most Do Not Summarize AB 1305’s Requirements. More than three-quarters of the companies surveyed (72, or 77%) did not include a description of AB 1305’s reporting requirements, while the remaining 21 companies (23%) provided a full or partial description.
Most Do Not Include an “As Of” Date or Disclaimer. Less than half of companies (37, or 40%) included a clear “as of” date for the disclosure, which must be updated no less than annually. Twenty-seven companies (or 29%) included a general disclaimer regarding the report’s contents and/or a more extensive forward-looking-statement-type disclaimer.
Most Disclosures Focus Only on Applicable Requirements. Only a quarter of companies (23, or 25%) included an affirmative statement that some portion of the law did not apply to them (e.g., that they did not purchase or use voluntary carbon offsets). Otherwise, companies typically were silent on this but addressed only the sections of the law that were applicable to them: in other words, if they only market or sell voluntary carbon offsets, they only addressed the disclosures required for that activity.
Most Prefer a Standalone PDF Format. Over half of the companies (53, or 57%) provided their AB 1305 disclosure in a standalone PDF available on their website. A smaller portion (28, or 30%) provided the disclosure on their websites as a standalone webpage, while 11 companies (or 12%) addressed AB 1305 as a subset or reference on an existing page. In one instance, the disclosure was available only by clicking an “AB 1305” link on the website that downloaded an Excel file.

Considerations for Preparing (or Updating) AB 1305 Disclosures. In addition to the reporting trends noted above, reporting companies preparing or updating their AB 1305 disclosures should also consider:

reviewing current website disclosure and corporate publications to identify relevant claims and conducting a gap analysis between AB 1305’s requirements and current public disclosure. The results of our survey only reflect those public disclosures that were clearly identified as being provided for purposes of AB 1305 and may not represent the full universe of disclosure approaches. For example, some companies may already provide the responsive disclosure in existing reports and determine a standalone report or heading is not necessary;
building out internal controls and resources to collect relevant claims, activities, and corresponding support throughout the year;
educating relevant stakeholders that will be important to support the identification of claims or activities, including the marketing, sales, product, procurement, and investor relations teams. For example, AB 1305 can apply to claims about the company’s products, and such claims can appear in locations that the legal or compliance teams are less involved with, such as advertisements, mailings, press releases, or product literature that can reach California consumers. The relevant internal controls may therefore run through the legal or compliance teams, but will likely rely in part on information from other areas of the business; and
monitoring for future developments, because while changes proposed by AB 2331 were not ultimately adopted this year, similar changes may be sought in future legislative sessions.

The following Gibson Dunn attorneys assisted in preparing this update: Aaron Briggs, Elizabeth Ising, Cynthia Mabry, Michael Murphy, Lauren Assaf-Holmes, and Meghan Sherley.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Securities Regulation and Corporate Governance or Environmental, Social and Governance practice groups, or the following authors:

Aaron Briggs – San Francisco (+1 415.393.8297, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Cynthia M. Mabry – Houston (+1 346.718.6614, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

The UK Court of Appeal has confirmed that ICSID Contracting States’ agreement to Art. 54 of the ICSID Convention is to be interpreted as a “written agreement” waiving State immunity and a submission to jurisdiction under the UK’s State Immunity Act 1978. The decision is positive news for parties looking to enforce ICSID awards in the UK; it re-affirms the UK’s pro-enforcement stance in relation to investor-State awards.

1. Executive Summary

On 22 October 2024, the UK Court of Appeal issued an important judgment in relation to arbitral award enforcement in the combined appeals of Infrastructure Services Luxembourg S.À.R.L. v Kingdom of Spain (“Infrastructure Services v Spain”) and Border Timbers Limited v Republic of Zimbabwe (“Border Timbers v Zimbabwe”).[1] The lead judgment was delivered by Lord Phillips, with whom Lord Newey and Sir Julian Flaux Chancellor of the High Court agreed.

The decision is critical to jurisdictional and State immunity issues arising in the context of enforcement of arbitral awards against sovereign States, pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (the “ICSID Convention” and “ICSID”).

In short, the Court of Appeal has confirmed that, whilst the UK’s State Immunity Act 1978 (the “1978 Act”) does apply to ICSID enforcement proceedings, there is an applicable exception to State immunity. The relevant exception arises from s. 2 of the 1978 Act, which provides that a State may waive its immunity by a “prior written agreement” (read together with s. 17(2) of the 1978 Act, which provides that a “prior written agreement” includes references to a “treaty, convention or other international agreement”). The Court of Appeal affirmed that such prior written agreement is found in Art. 54 of the ICSID Convention.[2]

2. Background to the Court of Appeal’s Judgment

a. Infrastructure Services v Spain

The award creditors (the “ISL Claimants”) obtained an ICSID award worth approx. EUR 101 million for Spain’s violations of the Energy Charter Treaty stemming from the regulatory changes Spain introduced to its renewable energy subsidy scheme.

The ISL Claimants commenced enforcement proceedings in the UK pursuant to s. 1(2) of the Arbitration (International Investment Disputes) Act 1966 (the “1966 Act”) and obtained a registration order, which Spain sought to set aside on State immunity grounds. At first instance, Mr Justice Fraser dismissed Spain’s set-aside application and upheld the registration order.[3] A central finding in that decision—the one on appeal—was that Art. 54 of the ICSID Convention constitutes a “prior written agreement” under s. 2(2) of the 1978 Act.[4]

b. Border Timbers v Zimbabwe

The award creditors (the “Border Claimants”) obtained an ICSID award worth approx. USD 124 million arising out of Zimbabwe’s expropriation of the Border Claimants’ land in breach of the bilateral investment treaty between Switzerland and Zimbabwe (1996). Mirroring the Infrastructure Services v Spain case, the Border Claimants obtained a registration order under the 1966 Act, which Zimbabwe applied to set aside on State immunity grounds.

At first instance, Mrs Justice Dias dismissed Zimbabwe’s set-aside application and upheld the registration order but on a different basis to (and expressly disagreeing with) Fraser J in Infrastructure Services v Spain.[5] In Dias J’s view, the bespoke procedure for registration of ICSID awards set out in CPR 62.21 does not require service of any originating process on the respondent, and, as such, the doctrine of State immunity is not engaged at all in relation to such an application.[6] However, Dias J also separately held that Art. 54 of the ICSID Convention does not constitute a “prior written agreement” pursuant to s. 2(2) of the 1978 Act.[7]

Spain and Zimbabwe each obtained permission to appeal. The Court of Appeal decided to hear the appeals jointly in light of the overlapping issues, in particular as regards the “prior written agreement” exception under s. 2 of the 1978 Act. The appeals were heard between 17–20 June 2024 and the Court of Appeal handed down its judgment on 22 October 2024.

3. The Court of Appeal’s Judgment

In the appeal, the parties largely maintained their positions taken at first instance. The Border Claimants also advanced a new argument: that Zimbabwe did not benefit from State immunity because s. 23(3) of the 1978 Act excluded from the scope of s. 1(1) of the 1978 Act “matters that occurred before the date of the coming into force of [the 1978 Act]”, and the ICSID Convention and the 1966 Act were such “matters”.[8]

As such, the Court of Appeal had to resolve the following three questions:[9]

whether State immunity applies, in principle, to the registration of ICSID awards against a foreign State under the 1966 Act;

if State immunity does apply, whether Contracting States to the ICSID Convention have nonetheless waived that immunity from enforcement proceedings pursuant to s. 2 of the 1978 Act by ratifying the ICSID Convention (and, specifically, Art. 54 therein); and

if there is no such waiver by prior written agreement, whether a foreign State is estopped or otherwise prevented from asserting the invalidity of the underlying award, with the result that the arbitration exception in s. 9 of the 1978 Act is necessarily satisfied.

In relation to the first question, the Court of Appeal held that State immunity applies to applications for the registration of ICSID awards under the 1966 Act.[10] Disagreeing with Dias J’s decision, the Court of Appeal concluded that the registration of an ICSID award as a judgment of the Court is not merely a ministerial or administrative act as it requires a judge to be satisfied to the requisite standard as to the proof of authenticity and the “other evidential requirements” of the 1966 Act.[11] The Court of Appeal also rejected the Border Claimants’ new argument described above, holding that the phrase “matters” in s. 23(3) of the 1978 Act cannot be stretched to encompass treaties and legislation (such as the ICSID Convention and the 1966 Act).[12]

The Court of Appeal (disagreeing with Fraser J) also held that the UK Supreme Court’s judgment in Micula v Romania[13] is not a binding authority for the proposition that State immunity does not apply to enforcement proceedings for ICSID awards (as opposed to execution proceedings).[14] That is because Micula did not expressly concern State immunity[15] and the 1978 Act is a complete code with regards to exceptions to State immunity, which does not exclude the “regime” for registration of ICSID awards under the 1966 Act from the scope of State immunity.[16]

As regards the second question, the Court of Appeal followed Fraser J’s reasoning, concluding that Art. 54 of the ICSID Convention amounts to a sufficiently clear and express waiver of State immunity under s. 2 of the 1978 Act.[17] As such, it held that by ratifying the ICSID Convention, Contracting States have waived immunity, and submitted to the courts of the UK, for the purposes of enforcement of ICSID awards, although immunity in respect of execution is preserved by Art. 55 of the ICSID Convention.[18]

In reaching these conclusions, the Court of Appeal extensively referred to (and quoted from) the decision of the High Court of Australia (“HCA”), Australia’s apex court, in the enforcement proceedings brought by the ISL Claimants against Spain there,[19] noting that, “[a]s a general rule it is desirable that international treaties should be interpreted by the courts of all the states uniformly.”[20] Lord Phillips observed that the HCA’s decision was a “highly persuasive opinion” and, also, on the interpretation of Art. 54 of the ICSID Convention, “plainly right”.[21]

The Court of Appeal considered that the language of Art. 54 of the ICSID Convention is clear and unambiguous, flowing from the “straightforward reading of the text”, which is also supported “rather than undermined, by the clear object and purpose of the Convention, as evidenced by the Preamble.”[22]

In response to an argument raised by Zimbabwe, the Court of Appeal also considered briefly (and obiter) the potential impacts of its findings on Art. 54 of the ICSID Convention with respect to Art. III of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”): i.e., whether its conclusions meant that Art. III of the New York Convention also amounts to a waiver of immunity. Although providing limited observations, the Court of Appeal did not answer that question, noting that it had not heard full arguments and was not in a position to decide the issues.[23]

In light of its findings on the second question, the Court of Appeal considered that it was unnecessary to consider the third question.[24] Regardless, the Court did observe (obiter) that “it is difficult to interpret section 9 of the SIA other than as imposing a duty on the court to satisfy itself that the state in question has in fact agreed in writing to submit the dispute in question to arbitration.”[25]

4. Comment

The Court of Appeal’s judgment is significant. It lends further weight to the growing body of international jurisprudence on the effect of Art. 54 of the ICSID Convention. The UK Court of Appeal, like the HCA, has confirmed that Contracting States’ agreement to Art. 54 by ratifying the ICSID Convention is to be interpreted as a written agreement waiving State immunity and a submission to jurisdiction for the purposes of enforcement of an ICSID award. As recognised by the Court of Appeal, this also brings the UK position in line with the law in Australia, New Zealand, France, and Malaysia, as well as multiple decisions in the US.[26]

The decision is positive news for parties looking to enforce ICSID awards in the UK; it re-affirms the UK’s pro-enforcement stance in relation to investor-State awards.

We note that the decision may well be subject to a further appeal to the UK Supreme Court.

[1] Infrastructure Services Luxembourg SARL v Kingdom of Spain and Border Timbers Ltd v Republic of Zimbabwe [2024] EWCA Civ 1257 (Sir Julian Flaux Chancellor of the High Court, Newey LJ, Phillips LJ) (the “Judgment”).

[2] Judgment, para. 103.

[3] Infrastructure Services Luxembourg SARL v Kingdom of Spain [2023] EWHC 1226 (Comm) (Fraser J). See further our client alert on this decision.

[4] Infrastructure Services Luxembourg SARL v Kingdom of Spain [2023] EWHC 1226 (Comm) (Fraser J), para. 95.

[5] Border Timbers Ltd v Republic of Zimbabwe [2024] EWHC 58 (Comm) (Dias J).

[6] Border Timbers Ltd v Republic of Zimbabwe [2024] EWHC 58 (Comm) (Dias J), para. 106.

[7] Border Timbers Ltd v Republic of Zimbabwe [2024] EWHC 58 (Comm) (Dias J), paras. 72–73.

[8] Judgment, para. 11.

[9] Judgment, para. 12.

[10] Judgment, para. 58.

[11] Judgment, paras. 35–39.

[12] Judgment, paras. 40–42.

[13] Micula & Ors v Romania (European Commission intervening) [2020] UKSC 5 (Lady Hale, Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Sales SCJJ). See further our client alert on this decision.

[14] Judgment, paras. 51–52.

[15] Romania did not challenge the registration of the ICSID award on state immunity or any other grounds in that case.

[16] Judgment, paras. 43–58.

[17] Judgment, para. 103.

[18] Judgment, paras. 77-79.

[19] Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2023] HCA 11 (Kiefel CJ, Gageler, Gordon, Edelman, Steward, Gleeson and Jagot JJ). See further our client alert on this decision.

[20] Judgment, para. 60, quoting Islam v Secretary of State for the Home Department [1999] 2 AC 629, 657A-B, per Lord Hope.

[21] Judgment, para. 77.

[22] Judgment, para. 80.

[23] Judgment, paras. 99–102.

[24] Judgment, para. 104.

[25] Judgment, para. 105.

[26] Judgment, para. 60.

The following Gibson Dunn lawyers prepared this update: Doug Watson, Piers Plumptre, Ceyda Knoebel, Alexa Romanelli, Theo Tyrrell, and Dimitar Arabov.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement, or Transnational Litigation practice groups, or the authors in London:

Doug Watson (+44 20 7071 4217, [email protected])
Piers Plumptre (+44 20 7071 4271, [email protected])
Ceyda Knoebel (+44 20 7071 4243, [email protected])
Alexa Romanelli (+44 20 7071 4269, [email protected])
Theo Tyrrell (+44 20 7071 4016, [email protected])
Dimitar Arabov (+44 20 7071 4063, [email protected])

The advisory is another indication of the U.S. government’s increasing focus on financial institutions in the implementation and enforcement of export controls.

On October 9, 2024, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS” or the “Bureau”) issued the latest in a series of advisories to financial institutions (“FIs”) regarding the evolving regulatory expectations for FIs and their compliance obligations with U.S. export controls that regulate the transfer of U.S. commodities, software and technology (“goods”) around the world.[1]

This advisory is another indication of the U.S. government’s increasing focus on financial institutions in the implementation and enforcement of export controls. While banks have long been viewed as on the frontlines of sanctions implementation and enforcement, they have traditionally not been a principal tool of export controls implementation. This has been so in large part given the fundamental challenge of FIs providing trade finance and other products to definitively know what its customers are importing and exporting using bank financing. This is no longer the case.

This latest issuance is the most prescriptive and detailed advisory BIS has released regarding the specific types of controls that the Bureau expects FIs to employ in order to mitigate the risk that their financial services support violations of U.S. export controls. It does so, even as it acknowledges the continued challenges and limitations for FIs when it comes to identifying export controls risks in the ordinary course of business acting as a financial services intermediary. The guidance, for the first time, provides the Bureau’s strong suggestions as to the controls and legal standards it expects. Importantly, the Bureau has tried to appropriately tailor these expectations to the limitations stemming from how FIs operate.

Despite is strides towards clarity with respect to regulatory expectations for FIs, ambiguities remain, and this will continue to be an area of uncertainty and risk as banks and other FIs work to operationalize the controls called for in the guidance.

Below we discuss some of the key elements and takeaways.

“Prohibition 10” and Evolving BIS Expectations for Financial Institutions

Historically, export controls compliance and related risk has been a concern primarily for the commercial parties who export or reexport the items subject to these controls. However, in recent years, as restrictions mounted and export controls began to play a much more central role in U.S. efforts to confront major geopolitical challenges (including, but no limited to, China and Russia), BIS has increasingly signaled that intermediaries who provide services related to the movement of these items are also in the crosshairs. Initially focused on freight forwarders and distributors of controlled goods and technologies, BIS also began to focus on the FIs who finance or otherwise facilitate underlying trade transactions.

As laid out in the October 9th guidance, the primary regulatory risk for financial institutions acting as intermediaries stems from General Prohibition No. 10 (“GP 10”) of the Export Administration Regulations (“EAR”). This extremely broad and temporally and geographically unbounded regulation prohibits the financing or servicing of an item subject to the EAR “with knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item.”

BIS exercises very far reaching jurisdiction under the EAR. As the guidance notes, items “subject to the EAR” include all items in the United States, including in a U.S. Foreign Trade Zone or moving in-transit through the United States from one foreign country to another (with certain exceptions); U.S.-origin items wherever located; certain foreign-made items that incorporate more than a de minimis amount of U.S.-origin controlled content; and even completely foreign-produced items if they are produced using certain controlled U.S. software, technology, or tools.

Thus, parties to an export, reexport or even an in-country transfer of items anywhere in the world can potentially find themselves subject to the EAR, even where there may not appear to be any U.S. nexus to the transaction. As the guidance indicates, BIS jurisdiction is not dependent on the involvement of U.S. persons or U.S. FIs, although there are provisions in the EAR which do apply specifically to U.S. persons (including U.S. FIs) anywhere in the world, prohibiting them from financing or otherwise supporting certain specified activities (and as we noted in a previous Gibson Dunn alert, these latter U.S. person support rules are poised to expand).[2]

Accordingly, under GP 10, BIS jurisdiction can reach the activities of FIs around the world. This jurisdiction exists regardless of whether U.S. or non-U.S. institutions are involved or if institutions are engaging in transactions in the United States or using the U.S. Dollar. Jurisdiction is based solely on the product in question.

The standard of “knowledge” within GP 10 concerns not only positive knowledge that a specific circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. On an enforcement basis, this can be inferred from a FI’s conscious disregard or willful avoidance of certain facts.

The challenge for banks and other FIs who act as intermediaries or service providers to customers involved in trade has been how to identify circumstances where a FI would be deemed by BIS to be acting with such requisite knowledge. FIs are typically given limited information regarding such trade – often lacking the full list of parties, the nature of the items being exported, how items are to be used, and the types of services involved in an underlying trade transaction. Each of these considerations speaks to whether U.S. export control authorizations would be required – and thus whether an underlying transaction could give risk to an EAR violation if such authorizations were not received.

Over the past several years, BIS, working with other U.S. agencies and U.S.-allied governments, has taken a number of steps to increase awareness of export controls risks. This has included, among other things, providing industry with a list of potential red flags which indicate possible export control issues as well as more detailed information about goods that are of heightened concern (to provide some notice that particular transactions deserve greater diligence).[3] These actions have effectively lowered the bar in terms of what BIS may need to do to establish that an intermediary acted with “knowledge,” and consequently inconsistent with GP 10.

This recent BIS guidance, acknowledging the challenges that remain for FIs, offers further, more concrete recommendations, cautions and prescriptions to address the GP 10 risks and BIS diligence expectations regarding the evolving knowledge standard.

Recommended Controls for FIs

The October 9th guidance recommends FIs implement controls around customer due diligence and screening, post-transaction reviews for potential red flags and, in certain circumstances, real-time transaction screening, to avoid violations of GP 10.

Specifically, BIS advises:

screening customers against the Consolidated Screening List, which includes against various BIS restricted party lists (which indicate various, often highly technical and nuanced, transfer restrictions for goods subject to the EAR) before onboarding and as part of a periodic due diligence refresh;
screening customers – “and, where appropriate, customers’ customers” – against a list maintained by the non-governmental organization Trade Integrity Project (“TIP”) of entities which have allegedly shipped items on the “Common High Priority List” to Russia;
where a customer is identified on a BIS restricted or TIP list, and the FI determines the customer is involved in transactions involving U.S. exports, seeking a certification from the customer that it complies with the EAR, as well as employing enhanced due diligence controls on that customer’s trade transactions;
employing post-transaction, risk-based assessments to identify possible export controls-related red flags;
where a red flag is uncovered post-transaction and cannot be resolved satisfactorily through requests for further information from the customer, refraining from processing future transactions related to the parties associated with the red flags; and,
in certain circumstances involving “cross-border payments and other transactions that are likely to be associated with exports from the United States (or re-exports or in-country transfers outside the United States),” conducting real-time screening against a subset of BIS restricted persons and addresses and halting processing of the transaction until and unless the FI can obtain comfort the transaction is not prohibited under the EAR.

FIs are also reminded that they are required to report any suspicious activities related to potential EAR violations to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) via the filing of Suspicious Activity Reports (SARs). FIs are also encouraged to submit Voluntary Self-Disclosures to BIS if deemed necessary. Following an FI’s filing of a SAR with FinCEN, BIS may, under certain circumstances, provide the FI with additional information that would establish “knowledge” under GP 10, which then obliges the FI to take further steps in ensuring compliance (e.g., by termination of the customer relationship).

Key Takeaways and Open Questions

The October 9th guidance moves the needle in terms of providing FIs with concrete steps they can take to begin addressing their evolving export compliance risks, and it provides some comfort concerning BIS’s expectations about compliance standards and expectations. However, there remains ambiguity, and some of the recommended controls will be operationally challenging for most FIs to implement. We address a few of the key takeaways and potential issues below.

Reasonable Reliance

BIS explicitly recognizes the relative disparity in information which FIs have about goods underlying a trade transaction compared with the commercial parties to the transaction, and the guidance notes that FIs may “generally rely on their customers’ representations regarding compliance…unless such reliance would be unreasonable – for example, when the FI has reason to know that such representations may be false.”

This is a welcome further ratification of the principle that most FIs have long followed – namely that they should be able to reasonably rely on a customer’s attestations and representations regarding the nature of any items it is exporting using the FI’s services. Moreover, this confirms that the FI itself is, in most circumstances, not expected to conduct its own independent investigation of the goods being transacted by their customers. In order to be complete such an analysis would require not just a technical assessment of the types of goods being traded (and an assessment of their sensitivity), but also the end users and end uses for such goods.

Focus on Customer Due Diligence and Post Transaction Review, Not Real-time Screening

FIs may also take some comfort that, as a general matter, BIS is not expecting them to engage in real time screening of transactions as a preventative measure. BIS recognizes the challenges that would arise from requiring a real-time ‘catch-and-release’-type control to triage export controls risks in transaction processing similar to the way FIs are expected to triage risks associated with economic sanctions. Instead, the October 9th guidance explicitly states that, generally, “BIS does not expect FIs to engage in real-time screening of parties to a transaction to prevent violations of GP 10.”

This is welcome acknowledgement that the U.S. Government understands the difficulties (and likely significant challenges to the ready flow of global commerce) that FI’s would face in attempting to screen underlying goods at the point of transaction processing.

But…Some Real-Time Screening?

However, the BIS guidance does recommend real time screening in certain situations – namely “cross-border payments and other transactions that are likely to be associated with exports from the United States (or re-exports or in-country transfers outside the United States),” where those transactions involve a subset of parties or addresses restricted under various BIS rules and lists. The identified lists are generally those that are the most restrictive and apply to transactions that involve items that are “subject to the EAR,” even if such items are not particularly sensitive (e.g., those that do not have a dual civilian and military use).

In those circumstances, BIS “recommends that FIs decline to proceed with a transaction until the FI can determine that the underlying export, reexport, or transfer (in-country) is authorized under the EAR (or alternatively not subject to the EAR). Failure to do so risks liability for a knowing violation of the EAR under GP 10.”

Absent further guidance from BIS, this recommendation to real-time screen in limited situations creates ambiguity and some operational and enforcement risk for FIs.

It will be challenging to determine which cross-border payments or transactions are “likely” to be associated with exports, reexports or in-country transfers of such items. In addition, for most FIs, it is technically and/or operationally challenging to employ real time screening against only a specific subset of BIS restricted persons. Address screening, as a general matter, may also present difficulties when trying to employ an effective and efficient screening program.

Conclusion

The October 9th guidance from BIS is a welcome addition to the U.S. Government’s guidance to FIs working to understand their export control compliance obligations in a rapidly evolving regulatory and enforcement environment. It provides some clarity concerning specific expectations and regulatory standards in an area of compliance that is new and largely untested for the financial sector. It is also new and untested for regulators – as such it is not surprising that ambiguities and challenges remain.

In the interim we assess that it would be a best practice for those FIs involved in international trade to develop a protocol to map out what criteria they will use to assess where within their portfolio of services exists a “likelihood” of GP 10 or other export controls issues. The challenge will be to do so while staying true to the BIS guidance, being neither under-inclusive and missing risky transactions, or over-inclusive and potentially imperiling the free flow of the significant majority of trade that is without export control issues.

We will continue to work closely with our clients, with industry and the U.S. Government to share our understandings and to align market practice with regulatory expectations in this space.

[1] “Bureau of Industry and Security Issues New Guidance to Financial Institutions on Best Practices for Compliance with the Export Administration Regulations,” Oct. 9, 2024.

[2] Proposed Rule, “End-Use and End-User Based Export Controls, Including U.S. Persons Activities Controls: Military and Intelligence End Uses and End Users,” Jul. 29, 2024; Gibson Dunn Client Alert “Proposed Rules Call for Significant Restrictions on Facial Recognition Technologies, Defense Services, U.S. Persons Activities, and New Classes of Foreign End-Users,” Aug. 13, 2024.

[3] See, e.g., publication of the “Comon High Priority List,” Feb. 23, 2024; “Department of Commerce, Department of the Treasury, and Department of Justice Tri-Seal Compliance Note: Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls,” Mar. 2, 2023; “Department of Commerce, Department of the Treasury, Department of Justice, Department of State, and Department of Homeland Security Quint-Seal Compliance Note: Know Your Cargo: Reinforcing Best Practices to Ensure the Safe and Compliant Transport of Goods in Maritime and Other Forms of Transportation,” Dec. 11, 2023; “FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Increased Vigilance for Potential Russian and Belarusian Export Control Evasion Attempts,” June 28, 2022; publication of a list of private and commercial aircraft who violated GP 10 by flying into Russia, Mar. 18, 2022.

The following Gibson Dunn lawyers prepared this update: David Wolber, Adam M. Smith, Christopher Timura, and Samantha Sewall.

Gibson Dunn lawyers are monitoring the proposed changes to U.S. export control laws closely and are available to counsel clients regarding potential or ongoing transactions and other compliance or public policy concerns.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade or Financial Institutions practice groups:

Financial Institutions:
Stephanie Brooker – Co-Chair, Washington, D.C. (+1 202.887.3502, [email protected])
M. Kendall Day – Co-Chair, Washington, D.C. (+1 202.955.8220, [email protected])

International Trade:

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, [email protected])
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
David P. Burns – Washington, D.C. (+1 202.887.3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213.229.7269, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, [email protected])
Mason Gauch – Houston (+1 346.718.6723, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, [email protected])
Sarah L. Pongrace – New York (+1 212.351.3972, [email protected])
Anna Searcey – Washington, D.C. (+1 202.887.3655, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, [email protected])
Claire Yi – New York (+1 212.351.2603, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, [email protected])

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing (+86 10 6502 8534, [email protected])
Dharak Bhavsar – Hong Kong (+852 2214 3755, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Patrick Doris – London (+44 207 071 4276, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Penny Madden KC – London (+44 20 7071 4226, [email protected])
Irene Polieri – London (+44 20 7071 4199, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Nikita Malevanny – Munich (+49 89 189 33 224, [email protected])
Melina Kronester – Munich (+49 89 189 33 225, [email protected])
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, [email protected])

From the Derivatives Practice Group: On October 15, ESMA, the European Commission and the European Central Bank announced the next steps to support the preparations towards a transition to T+1 in a Joint Statement. In the Joint Statement, ESMA expressed that close cooperation between regulators and the financial industry is of the utmost importance to facilitate the transition to T+1.

New Developments

CFTC Staff Issues Supplemental Letter Regarding No-Action Position Related to Reporting and Recordkeeping Requirements for Fully Collateralized Binary Options. On October 4, the CFTC’s Division of Market Oversight and the Division of Clearing and Risk announced they have taken a no-action position regarding swap data reporting and recordkeeping regulations in response to a request from KalshiEX LLC, a designated contract market, and Kalshi Klear LLC, a derivatives clearing organization, to modify CFTC Letter No. 21-11 to cover transactions cleared through Kalshi Klear LLC. According to the announcement, the divisions will not recommend the CFTC initiate an enforcement action against KalshiEX LLC, Kalshi Klear LLC, or their participants for failure to comply with certain swap-related recordkeeping requirements and for failure to report to swap data repositories data associated with binary option transactions executed on or subject to the rules of KalshiEX LLC and cleared through Kalshi Klear LLC, subject to the terms and conditions in the no-action letter.
US Appeals Court Clears Kalshi to Restart Elections Betting. On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s order that permitted KalshiEX LLC to list contracts that allow Americans to bet on election outcomes. The Court said that the CFTC did not show how the agency or the public interest would be harmed by the “event” contracts. The CFTC’s motion was denied “without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of appeal.”

New Developments Outside the U.S.

ESMA Responds to the Commission Rejection of Certain MiCA Technical Standards. On October 16, ESMA responded to the European Commission proposal to amend the Markets in crypto-assets Regulation (“MiCA”) Regulatory Technical Standards (“RTS”). In their response, ESMA emphasized the importance of the policy objectives behind the initial proposal. [NEW]
ESAs Respond to the European Commission’s Rejection of the Technical Standards on Registers of Information under the Digital Operational Resilience Act and Call for Swift Adoption. On October 15, the European Supervisory Authorities (“ESAs”) issued an Opinion on the European Commission’s rejection of the draft Implementing Technical Standards (“ITS”) on the registers of information under the Digital Operational Resilience Act. The ESAs raise concerns over the impacts and practicalities of the proposed EC changes to the draft ITS on the registers of information in relation to financial entities’ contractual arrangements with ICT third-party service providers. [NEW]
ESMA, ECB and EC Announce Next Steps for the Transition to T+1 Governance. On October 15, ESMA, the European Commission and the European Central Bank announced the next steps to support the preparations towards a transition to T+1 in a Joint Statement. ESMA stressed in the Joint Statement that they believe a coordinated approach across Europe is desirable, with efforts to reach consensus on the timing of any move to T+1. [OPEN]
ESMA Publishes Its First Annual Report on EU Carbon Markets. On October 7, ESMA published the 2024 EU Carbon Markets report, providing details and insights into the functioning of the EU Emissions Trading System market. The report indicates that prices in the EU ETS have declined since the beginning of 2023; emission allowance auctions remain significantly concentrated, with 10 participants buying 90% of auctioned volumes, reflecting a preference by most EU ETS operators to source allowances from financial intermediaries; and the vast majority of emission allowance trading in secondary markets takes place through derivatives, reflecting the annual EU ETS compliance cycle where non-financial sector firms hold long positions (for compliance purposes) while banks and investment firms hold short positions. The report builds on ESMA’s 2022 report on the trading of emission allowances, mandated in the context of rising energy prices and a three-fold increase of emission allowances’ prices in 2021.
The European Supervisory Authorities Share Highlights from the 2024 Joint Consumer Protection Day in Budapest. On October 3, the European Supervisory Authorities and ESMA organized the 11th edition of their annual Consumer Protection Day, in Budapest. The event followed the theme of “Empowering EU consumers: fair access to the future of financial services” and had three panels covering the topics of artificial intelligence in financial services, access to consumer centric products and services, and sustainable finance. Speakers and panelists included leaders from consumer organizations, regulatory authorities, EU institutions, academia, and market participants from across the European Union. [NEW]
ESMA Launches New Consultations Under the MiFIR Review. On October 3, ESMA launched two consultations on transaction reporting and order book data under the Markets in Financial Instruments Regulation (“MiFIR”) Review. ESMA is seeking input on the amendments to the RTS for the reporting of transactions and to the RTS for the maintenance of data relating to orders in financial instruments.
Joint UK Regulators Issue Press Release on the End of LIBOR. On October 1, the Bank of England published a joint press release with the FCA and the Working Group on Sterling Risk-Free Reference Rates on the end of LIBOR. On September 30, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased. The Working Group has met its objective of finalizing the transition away from LIBOR and will be wound down effective as of October 1. Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency and should ensure their use of term risk-free reference rates are limited and remain consistent with the relevant guidance on best practice on the scope of use.
ESAs Appoint Director to Lead their DORA Joint Oversight. On October 1, the European Supervisory Authorities appointed Marc Andries to lead their new joint Directorate in charge of oversight activities for critical third-party providers established by the Digital Operational Resilience Act (“DORA”). In his role as DORA Joint Oversight Director, Marc Andries will be responsible for implementing and running an oversight framework for critical third-party service providers at a pan-European scale, contributing to the smooth operations and stability of the EU financial sector.
ESMA 2025 Work Programme: Focus on Key Strategic Priorities and Implementation of New Mandates. On October 1, ESMA published its 2025 Annual Work Programme (AWP). A significant portion of ESMA’s work in 2025 will comprise policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, and the preparation of new mandates, such as the European Green Bonds and the ESG Rating Providers Regulations.

New Industry-Led Developments

Central Database of Reporting Entity Contact Details for EU and UK EMIR. On October 17, ISDA produced a central database of contact details to assist members resolve reconciliation breaks with counterparties for EU and UK European Market Infrastructure Regulation (“EMIR”) reporting. The central database was created by contributing firms’ submissions and includes details such as entity names, legal entity identifiers and reporting contact emails.
ISDA, GFXD respond to ESMA on Order Execution Policies. On October 16, ISDA and the Global FX Division of the Global Financial Markets Association responded to a consultation paper from ESMA on “Technical Standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies.” In the response, the associations discuss the requirement for pre-selected execution venues, mandatory consumption of consolidated tapes and categorization of financial instruments under the Markets in Financial Instruments Regulation, among other issues. [NEW]
ISDA Submits Paper to ESMA on MIFIR Post-Trade Transparency. On October 8, ISDA submitted a paper to ESMA, in which it outlined its views on the scope of OTC derivatives post-trade transparency in the revised MiFIR. The paper outlines ISDA’s view on the treatment of certain interest rate derivatives, index credit default swaps and securitized derivatives. ISDA indicated that it is anticipating the publication of ESMA’s consultation paper on the revised regulatory technical standards, covering OTC derivatives, later in 2024 or in the first quarter of 2025.
ISDA, FIA Respond to BoE Consultations on CCP Recovery and Resolution. On October 4, ISDA and FIA submitted a joint response to two Bank of England (“BoE”) consultations on central counterparty (“CCP”) recovery and resolution: the BoE’s power to direct a CCP to address impediments to resolvability ; and the BoE’s approach to determining commercially reasonable payments for contracts subject to a statutory tear up in CCP resolution. In response to the BoE’s consultation on its power to direct a CCP to address impediments to resolvability, the associations said that they welcome the clarity provided on the timescales the BoE would follow when using its power to address impediments to resolvability. However, the response notes that the BoE should more explicitly set out whether and how it would consider informing clearing members ahead of using this power. In response to the BoE’s consultation on its approach to determining commercially reasonable payments for contracts subject to statutory tear up in CCP resolution, the associations expressed caution on the proposed approach, which they indicated could result in placing too much reliance on the CCP’s own rules and arrangements to generate commercially reasonable prices for contracts subject to tear up. The response highlights that in a situation where the BoE would have to use its power to tear up contracts – i.e., after a failed auction – there might not exist a clear price for those contracts.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

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 Derivatives practice group, or the following practice leaders and authors:

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

A quarterly update of high-quality education opportunities for Boards of Directors.

Gibson Dunn’s summary of director education opportunities has been updated as of October 2024. A copy is available at this link. Boards of Directors of public and private companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update to the summary of director education opportunities includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities are available for both public and private companies’ boards.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Julia Lapitskaya, Lori Zyskowski, Elizabeth Ising, Ronald Mueller, Caroline Bakewell, Jason Ferrari, and To Nhu Huynh.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Regulation and Corporate Governance practice group, or the following authors:

Hillary H. Holmes – Houston (+1 346.718.6602, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])
Julia Lapitskaya – New York (+1 212.351.2354, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, [email protected])
Lori Zyskowski – New York (+1 212.351.2309, [email protected])

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

A buyer seeking to rely on an MAE clause in a share purchase agreement to justify termination should proceed with caution, whether in the US or under English law.

In the recent case of BM Brazil & Ors v Sibanye BM Brazil & Anor [2024] EWHC 2566 (Comm) (“Sibanye”), the English Commercial Court considered whether the buyer under two sale and purchase agreements relating to nickel mines in Brazil (the “SPAs”) was entitled to terminate the SPAs on the basis that a material adverse effect (“MAE”) had occurred at one of the mines prior to completion. The Court’s decision was rendered by The Hon. Mr Justice Butcher.

Background

A buyer may seek to include MAE provisions in a share purchase agreement to allow it to terminate the agreement if the target suffers an MAE between the signing and completion of the transaction.

An MAE provision will typically cover events or changes which materially and adversely affect a target’s business, operations, assets, liabilities, condition (whether financial, trading or otherwise) or operating results, but will often be subject to carve-outs relating to changes in interest rates, commodity prices, wars, natural disasters, etc. MAEs are a customary provision in share purchase agreements governed by Delaware law (and other US state law), but less common where English law is the governing law.

In Sibanye, a “geotechnical event” occurred at one of the mines between signing and completion. The buyer claimed this constituted an MAE so as to discharge it from its obligation to complete the transactions and allow it to terminate the SPAs. The seller asserted that the geotechnical event was not an MAE and that the purported termination was therefore wrongful and repudiatory, allowing the seller to terminate the SPAs and bring a claim against the buyer.

Decision

The Court ruled that the geotechnical event was not, and was not reasonably expected to be, an MAE under the SPA. In reaching that decision the Court had to decide on the central issue of whether the geotechnical event was an MAE.

There being no standard meaning of “material adverse effect” or “material adverse change” under English law, the Court confirmed that the proper approach to determining this issue was to apply the ordinary principles of construction of contracts governed by English law. The three main issues of construction or interpretation of the MAE provisions considered by the court in reaching this decision were:

Whether a ‘revelatory event’ would be an MAE for purposes of the SPAs. The Court considered that matters did not count as material for the purposes of the MAE definition by reason only of their ‘revelatory’ effects.
The assessment of what ‘would reasonably be expected to be material and adverse’. The Court considered that it was common ground that this analysis required an objective rather than subjective assessment, and that the assessment should be made from the perspective of a reasonable person in the position of the parties at the time when cancellation on the basis of the alleged MAE is notified.
What is meant by ‘material’. The Court determined that the geotechnical event was not material. On this point, the Court agreed with certain Delaware case law^[1] that there is no bright line test for what constitutes materiality that will be applicable to all MAE clauses. In Sibanye, the Court considered that the size of the transaction, the nature of the assets concerned, including that they are susceptible to such matters as geotechnical events, the length of the process of the sale of the mines and the complexity of the SPAs were all relevant factors militating against setting the bar of materiality too low. Although not determinative in establishing materiality in Sibanye, the Court referred to Laster VC’s view in Akorn that a reduction in the equity value of the target of more than 20% was material in that case, and went on to note that a reduction of more than 15% might well be considered material.

Relevance of the United States perspective

In contrast to practice in the US, MAE clauses are not customarily included in share purchase agreements governed by English law (i.e. buyers are required to complete a transaction even in the event an MAE occurs), although this will be dependent on the circumstances, including the location and respective bargaining power of the parties.

As a result, there is a relative dearth of relevant English authority on MAE clauses with a better developed body of case law in the US, notably in Delaware^[2]. Interestingly, the Court noted in Sibanye that the “comparative dearth is beginning to be made good” by reference to four English law authorities[3].

While agreeing that US cases are neither binding nor formally persuasive, the Court considered various US authorities which many lawyers in the US consider seminal (including Re IBP, Frontier Oil, Hexion and Akorn)[4] in reaching its decision. Although it did not view those decisions as binding precedent, the Court weaved into its own textual and contextual analysis some of the key thinking from those US cases. Particularly on how to analyse the qualitative, quantitative and durational impact of an event on the equity value of a company.

Notably, the Delaware court has in certain cases[5] granted the seller the remedy of specific performance and ordered the buyer to close the transaction, flowing from the Court’s findings that there has been no MAE excusing the buyer from closing.

Whilst there are multiple grounds for the English Court to refuse an order for the equitable remedy of specific performance, there are instances where the Court has granted orders requiring parties to close on contracts for the sale of shares[6]. However, these cases have not involved the invocation by the buyer of MAE provisions under such contracts.[7] Those cases determined that specific performance could be granted on the basis that damages would not be an adequate remedy. In Gaetano, damages were not considered to be adequate because there was no ready market for the shares and the shareholding was difficult to sell as a result of the target’s poor financial performance.

Therefore, a well-advised buyer negotiating an English law share purchase agreement will seek to exclude, and a well-advised seller will seek to include, specific performance as a remedy – particularly in circumstances where it is likely that there would not be a ready market for the shares.

The Sibanye decision adds to the growing body of English authority on MAE clauses and will reassure parties seeking deal certainty that England and Wales continues to be a strong jurisdictional choice for major M&A transactions on the basis that establishing the occurrence of an MAE is not an easy route to abandon a transaction.

Invoking an MAE clause

A buyer seeking to rely on an MAE clause in a share purchase agreement to justify termination should proceed with caution, whether in the US or under English law. The buyer will need to establish that the MAE has occurred within the meaning of the contract and, as proved to be the case in Sibanye, that can be a challenging task. The exercise is heavily fact-specific and it is hard to know what it might entail at the time of contracting. If the buyer wrongly asserts an MAE, it risks incurring liability to the seller for wrongful termination and/or repudiatory breach of contract.

[1] Akorn Inc v Fresenius Kabi AG (Court of Chancery of Delaware, Memorandum Opinion 1 October 2018, Laster VC) and Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).

[2] Cockerill J in Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm) (at [175]-[176]).

[3] Grupo Hotelero Urvasco v Carey Added Value SL [2013] EWHC 1039; Decura IM Investments LLP v UBS AG [2015] EWHC 171 (Comm); Travelport Ltd v WEX Inc [2020] EWHC 2670 (Comm); and Finsbury Food Group PLC v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm).

[4] Re IBP Inc. Shareholders Litigation Del. Ch., 789 A.2d 14 (2001), the Court of Chancery of Delaware (Strine VC); Frontier Oil Corp. v Holly Corporation (Court of Chancery of Delaware, Memorandum Opinion 29 April 2005, Noble VC); Hexion Spec. Chemicals v Huntsman Corp Del. Ch. 965 A. 2d. 715 (2008); Akorn Inc v Fresenius Kabi AG (Court of Chancery of Delaware, Memorandum Opinion 1 October 2018, Laster VC); and Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).

[5] Snow Phipps Group LLC v KCake Acquisition Inc (Court of Chancery of Delaware, Memorandum Opinion 30 April 2021, McCormick VC).

[6] Gaetano Ltd v Obertor Ltd [2009] EWHC 2653 (Ch); and MSAS Global Logistics Ltd v Power Packaging Inc [2003] EWHC 1393 (Ch).

[7] Specific performance was not part of the decision in Sibanye, where the claim was for declaratory relief and damages.

The following Gibson Dunn lawyers prepared this update: Sarah Leiper-Jennings, Anne MacPherson, George Sampas, Piers Plumptre, and Will Summers.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Mergers and Acquisitions, Private Equity, or Transnational Litigation practice groups:

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, [email protected])
Saee Muzumdar – New York (+1 212.351.3966, [email protected])
George Sampas – New York (+1 212.351.6300, [email protected])

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, [email protected])
Wim De Vlieger – London (+44 20 7071 4279, [email protected])
Federico Fruhbeck – London (+44 20 7071 4230, [email protected])
Scott Jalowayski – Hong Kong (+852 2214 3727, [email protected])
Ari Lanin – Los Angeles (+1 310.552.8581, [email protected])
Michael Piazza – Houston (+1 346.718.6670, [email protected])
John M. Pollack – New York (+1 212.351.3903, [email protected])
Will Summers – London (+44 20 7071 4203, [email protected])

Transnational Litigation:
Susy Bullock – London (+44 20 7071 4283, [email protected])
Perlette Michèle Jura – Los Angeles (+1 213-229-7121, [email protected])
Piers Plumptre – London (+44 20 7071 4271, [email protected])
Markus Rieder – Munich (+49 89 189 33-260, [email protected])
Andrea E. Smith – New York (+1 212-351-3883, [email protected])
William E. Thomson – Los Angeles (+1 213-229-7891, [email protected])

Policymakers in Washington and other allied capitals have continued to push the limits of economic statecraft by imposing new sanctions and export controls on major economies such as Russia and China, and aggressively enforcing existing measures. A recent surge of collaboration among sister agencies and partner countries has also sharply increased the compliance burden on multinational firms. To help make sense of this fast-shifting landscape, attorneys from Gibson Dunn explain how U.S. sanctions and export controls work, discuss notable new trade restrictions and recent record-setting enforcement activity, and share best practices in multi-agency and multi-jurisdictional investigations and defense.

PANELISTS:

Adam M. Smith is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and serves as co-chair of the firm’s International Trade Practice Group. He is an experienced international lawyer with a focus on international trade compliance and white collar investigations, including federal and state economic sanctions enforcement, CFIUS, the Foreign Corrupt Practices Act, embargoes, and export and import controls.

Clients benefit from Adam’s experience in the Obama Administration, where he was Senior Advisor to the Director of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and Director for Multilateral Affairs on the National Security Council. At OFAC, he was instrumental in shaping and enforcing sanctions policies, briefing Congressional and private sector leaders, conducting extensive international outreach, and negotiating complex agreements. On the National Security Council, he advised the President on international sanctions, coordinated inter-agency efforts, and developed strategies to counter corruption and promote asset recovery. Adam is admitted to practice in District of Columbia and the State of Maryland.

Christopher T. Timura is a partner in the Washington D.C. office of Gibson, Dunn & Crutcher LLP and a member of the firm’s International Trade, White Collar Defense and Investigations, and ESG Practice Groups. Chris helps clients solve problems that arise at the intersection of U.S. national security, foreign policy, and international trade regulation. Chris advises clients on compliance with U.S. export controls (ITAR and EAR), import controls, and economic sanctions, and advocates for clients before the departments of State (DDTC), Treasury (OFAC and CFIUS), Commerce (BIS), Homeland Security (Customs & Border Protection), and Justice in civil and criminal enforcement actions, UFLPA and other forced labor-related detentions, and investment reviews. His clients span sectors and range from start-ups to Global 500 companies. He is regularly ranked in Chambers Global and U.S.A. guides for his work and is a regular speaker and writer on the policy drivers, trends, and impacts of evolving international trade policy and regulation. Chris is admitted to practice in the District of Columbia.

Scott Toussaint is a senior associate in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s International Trade Practice Group. His practice focuses on compliance with U.S. laws governing international business transactions, including economic sanctions, export controls, and foreign investment in the United States. He advises clients on matters before the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Committee on Foreign Investment in the United States (CFIUS), and other regulatory and enforcement agencies. Scott has extensive experience counseling U.S. and foreign companies on compliance with OFAC sanctions, obtaining licenses and authorizations, developing corporate compliance programs, and assessing the national security implications of proposed mergers and acquisitions. Scott is admitted to practice in the State of California and the District of Columbia.

Anna Searcey is a litigation associate in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of both the International Trade, and White Collar Defense and Investigations practice groups. Her experience includes conducting internal investigations for multinational corporate clients, representing corporate and individual clients in government investigations involving the Department of Justice and other regulatory and enforcement agencies, and advising clients regarding the development of their compliance and ethics programs. She also advises clients on U.S. economic sanctions and export controls, including conducting company-wide risk assessments, strengthening trade compliance programs, and developing restricted-party screening protocols. Anna is admitted to practice in the District of Columbia and Virginia. She is also admitted to practice before the United States District Court for the District of Maryland and the United States Court of Appeals for the Fourth Circuit.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Partners from Gibson Dunn’s antitrust group discuss recent changes to the Hart-Scott-Rodino rules, including a review of key changes, their potential impact on HSR filing preparation and transaction timelines, as well as preliminary thoughts on new best practices to address these developments.

PANELISTS:

Joshua Lipton is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He maintains a broad-based antitrust and consumer protection practice, including litigation in state and federal courts, merger and acquisition investigations, civil and criminal antitrust and consumer protection investigations by government authorities, and antitrust counseling.

Admissions: District of Columbia Bar

Sophia (Vandergrift) Hansell is a partner in the Washington, D.C. office of Gibson, Dunn and Crutcher. She is a member of the Antitrust and Competition Practice Group. Before joining the firm, Ms. Hansell served as an attorney in the Mergers IV Division of the Federal Trade Commission’s Bureau of Competition, where she focused on merger review and enforcement litigation. At the FTC, Ms. Hansell was a core member of trial teams that blocked proposed mergers for Sysco and US Foods, Advocate Health Care and NorthShore University HealthSystem, and Wilhelmsen and Drew Marine. Previously, Ms. Hansell served in the United States Attorney’s Office for the District of Columbia as a Special Assistant United States Attorney in the General Crimes Division. Leveraging her experience in government enforcement, Ms. Hansell’s practice focuses on complex antitrust litigation and investigations before the Department of Justice, Federal Trade Commission, and state attorneys general. She also has experience counseling companies on a broad range of competition issues relating to M&A transactions, including pre-deal risk assessments, transaction negotiations, and gun jumping issues. Ms. Hansell also develops and executes strategies to secure merger clearance with U.S. and foreign competition authorities.

Admissions: District of Columbia Bar, Virginia Bar

Michael Perry is a partner in the Washington, D.C. office of Gibson Dunn & Crutcher and a member of the firm’s Antitrust and Competition Practice Group. Michael represents clients in merger and non-merger related investigations before the U.S. Federal Trade Commission and the U.S. Department of Justice, and complex private and government antitrust litigation. His practice spans a variety of industries, including healthcare and life sciences, energy, and technology, and he is experienced in issues at the intersection of antitrust and intellectual property law. Michael previously served as Counsel to the Director of the Federal Trade Commission’s Bureau of Competition from 2015 to 2016 and as an attorney in the agency’s healthcare division. During his tenure at the FTC, Michael played an integral role in many of the agency’s most significant antitrust enforcement actions, including FTC v. Actavis, FTC v. Cephalon, FTC v. Sysco, and FTC v. St. Luke’s Health System.

Admissions: District of Columbia Bar, California Bar

Jamie France is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s Antitrust and Competition Practice Group. She represents clients in antitrust merger and non-merger investigations before the U.S. Federal Trade Commission, U.S. Department of Justice Antitrust Division, state Attorneys General, and international competition authorities, as well as in complex private and government antitrust litigation. She also counsels clients on a range of antitrust merger and conduct matters. Jamie joined the firm after six years as an attorney in the Mergers IV Division of the Federal Trade Commission’s Bureau of Competition, where she served in lead roles on high-profile merger investigations and enforcement actions. Jamie has significant experience litigating merger challenges and was an integral member of the FTC’s trial teams on FTC v. Thomas Jefferson University, FTC v. Hackensack Meridian Health, FTC v. Sanford Health, FTC v. Advocate Health Care Network, and FTC v. Benco Dental Supply. She was twice honored with the FTC’s Janet D. Steiger Award for her contributions to the Sanford and Advocate litigations.

Admissions: District of Columbia Bar, New York Bar

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

An overview of International Trade considerations that most frequently impact deal timing, valuation, and ability to operate after closing.

In today’s global economy, geopolitical risks are on the rise and international trade controls are a tool of first resort deployed by the United States and other jurisdictions to achieve foreign policy and national security goals. International trade controls include financial and trade sanctions, export and import controls, national security reviews of foreign direct investment, and (anticipated) controls on outbound investment. These controls can have an impact on a target’s valuation, ability to continue operating in the same manner or in the same jurisdictions as prior to an acquisition or affect deal timing and certainty. Liability for a target’s past conduct can be imputed to the buyer in many circumstances, including for strict liability offenses.

In addition to potential civil and criminal liability, violations of international trade laws can result in other adverse consequences for buyers, including substantial reputational harm, costly government investigations or monitorships, or even halting the deal. Many acquisition targets—especially smaller, fast-growing targets—may lack adequate policies and procedures to mitigate the risk of violating applicable international trade laws. Therefore, it is critical to understand a target’s risk profile, internal controls, and potential exposure to regulatory, commercial, and reputational risks during pre-acquisition due diligence.

1. Dealings with Sanctioned Parties and Sanctioned Jurisdictions

Whether a target is transacting business in violation of applicable U.S. sanctions is often a top concern for buyers and insurers alike. Unlike some other areas of the law, corporate formality in the structure of an acquisition will not always insulate a buyer from civil liability for past violations of the target. Rather, in enforcing U.S. sanctions, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is usually willing to “pierce the corporate veil.” Nor will a buyer’s lack of knowledge regarding the target’s past sanctions violations necessarily shield it from liability. Even inadvertent violations of U.S. sanctions can result in substantial monetary penalties, at times in the tens of millions, and occasionally beyond. In April of this year, the statute of limitations for sanctions violations was expanded from 5 to 10 years.

Consequently, it is critical to focus on potential exposure to sanctioned persons or sanctioned jurisdictions during pre-acquisition due diligence. U.S. sanctions requirements can be understood to fall into two broad categories:

Dealings with sanctioned parties: U.S. sanctions generally prohibit U.S.-linked business involving “blocked” persons or entities listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List“). Pursuant to OFAC’s 50 Percent Rule, these broad prohibitions extend to entities owned 50% or more by blocked persons, whether directly or indirectly and whether by a single blocked person or in the aggregate.
Dealings with sanctioned jurisdictions: U.S. sanctions generally prohibit U.S.-linked business involving “comprehensively-sanctioned” jurisdictions, which, as of this writing, include Cuba, Iran, Syria, North Korea, Crimea, and the so-called Luhansk People’s Republic and Donetsk People’s Republic regions of Ukraine.

In addition to direct prohibitions on U.S.-nexus dealings, U.S. persons are generally prohibited from “facilitating” foreign transactions that involve a sanctioned party or sanctioned jurisdiction. Consequently, it is essential to ensure that target companies with an international footprint have adequate policies and procedures in place to avoid and detect transactions that may be prohibited by applicable sanctions.

OFAC encourages companies to employ a “risk-based approach” in designing and deploying sanctions compliance programs (see OFAC’s “Framework for Compliance Commitments“). Risk factors include a company’s size and sophistication, products and services, customers and counterparties, and geographic locations. An adequate sanctions compliance program will often include the use of counterparty “screening” tools (which compare counterparty information, including ultimate beneficial owners, against the SDN List and other relevant restricted party lists) as well as procedures for escalating transactions that pose an unacceptable risk of violating applicable sanctions. Screening protocols should be calibrated according to risk profile as well, including use of “fuzzy logic” algorithms. For some targets, reasonable sanctions compliance measures should include Internet Protocol address-based geo-blocking to prevent persons in sanctioned jurisdictions from accessing a company’s online platform or products.

2. Dealings with Russia, Belarus, and Assessing Diversion Risk

Since Russia’s 2022 full-scale invasion of Ukraine, the United States, in coordination with its allies and partners, has imposed a wide range of restrictions on trade with Russia and Belarus. For example, the United States has prohibited new investment in Russia, the importation into the United States of energy products from Russia, and the exportation of any military or dual-use products to Russia. In addition, OFAC has designated thousands of Russian persons and entities, including Russian oligarchs and family members, and imposed severe restrictions on dealings with Russia’s banking, financial, energy, and military-industrial sector. OFAC has prohibited the provision of certain professional services, to persons located in Russia, including accounting, trust and corporate formation, management consulting, quantum computing, architecture, engineering, certain maritime transportation-related services, and IT services, among others. The Department of Commerce’s Bureau of Industry and Security (“BIS”) has imposed stringent export controls targeting Russia and Belarus, which cover a wide range of industrial and commercial items. In some cases, these restrictions extend to products made outside of the United States that depend upon U.S.-origin software, technology, or tools. As such, any business involving Russia and Belarus, directly or indirectly, can pose substantial international trade-related risks—especially if the target maintains a Russian subsidiary or branch office.

U.S. authorities have been particularly focused on diversion risk and efforts by companies to detect and prevent the illicit transfer of goods to restricted destinations via intermediaries and shell companies. More broadly, acquiring a target that is based in a jurisdiction that has not adopted export controls similar to those maintained in G7 states can carry elevated risk of unlawful diversion in violation of applicable sanctions and export controls. While virtually every industry is potentially at risk, the United States and its partners have issued advisories identifying high priority items that Russia is seeking to support its war effort and high-risk industries, for which trade with Russia is severely curtailed. Buyers should be on the lookout for trading patterns of a target that show a substantial shift in trade away from Russia to identified diversion points, or sudden spikes in sales to higher risk jurisdictions.

3. Export Controls

Many targets, including targets that are not traditional “manufacturers” (such as many producers of software), will also carry compliance obligations under export controls set forth in the Export Administration Regulations (“EAR”). Export controls are used by the United States and other nations to restrict the export of items that would contribute to the military potential of adversary countries or to restrict the export of items necessary to further foreign policy objectives and uphold treaty obligations. U.S. export controls have a broad extraterritorial reach, since the obligation to comply with requirements follows U.S. items wherever they are located and, in some instances, extends to foreign-made products that rely upon U.S.-origin technology, software, or tools. Export control requirements can apply based on the technical parameters and performance capabilities of an item or based upon the intended destination, end user, or end use. In some circumstances, the release of technology to a foreign national may require an export license as a “deemed export” to the country of residence of the recipient of the information.

Export control risks are most commonly presented in acquisitions of target companies that produce items with potential defense applications (i.e., “dual-use” items). These targets oftentimes operate in the aerospace, software, connected devices, and specialized and high-tech manufacturing industries. Of special relevance to targets operating in the software and high-tech industries, most encryption technology and software is subject to specialized export controls. Companies operating in these sectors, therefore, must maintain adequate policies and procedures in order to classify and, if applicable, fulfill the reporting requirements set forth in license exception ENC.

Export controls are a fast-developing area of international trade law. For example, on September 6, 2024, BIS published new regulations to control certain advanced and emerging technologies, including quantum computing, semiconductor manufacturing equipment, and additive manufacturing. These regulations represent an early step towards establishing a plurilateral export control regime to eventually replace the Wassenaar Arrangement, the legacy multilateral export control regime that includes Russia. BIS has also signaled its intent to increase penalties and enhance its enforcement efforts, in conjunction with international export control authorities. It is especially likely, therefore, that export controls-related due diligence obligations will expand during 2025.

4. CFIUS Risk

The Committee on Foreign Investment in the United States (“CFIUS“) reviews foreign direct investments in U.S. businesses for national security risks. CFIUS examines certain transactions in which foreign entities gain control or make certain non-controlling investments in U.S. businesses. At the conclusion of its assessment, CFIUS may impose restrictions that address U.S. national security risks arising from those transactions. In 2018, the Foreign Investment Risk Review and Modernization Act expanded the scope of transactions subject to CFIUS review to include (i) certain non-controlling investments in U.S. businesses that implicate critical technology, critical infrastructure, or sensitive personal data of U.S. citizens and (ii) real estate located near sensitive U.S. military installations. CFIUS devotes particular attention to transactions with investors from adverse jurisdictions and transactions that implicate defense and other key supply chains or emerging technologies, such as AI.

The CFIUS review process, which typically begins with the transaction parties filing a mandatory or voluntary notice to CFIUS, can take 4-6 months or longer. Consequently, where an acquisition implicates CFIUS jurisdiction, deal timing should accommodate the time to submit a notification and receive clearance prior to closing. A completed CFIUS review grants “safe harbor,” preventing future scrutiny from CFIUS. Without this safe harbor, CFIUS retains discretion to review and place conditions on transactions after they have been completed. There is no statute of limitations to CFIUS’s ability to review closed transactions. In relatively rare circumstances, CFIUS may also recommend that the President block or unwind a transaction. CFIUS can assess monetary penalties on parties for failure to make a mandatory filing, for making material misstatements or omissions in a filing, or for failure to comply with a national security mitigation agreement.

5. Outbound Investment: “Reverse CFIUS” Risk

It is widely anticipated that the Department of the Treasury will promulgate “reverse CFIUS” outbound investment regulations during the next year. Currently, these regulations are expected to target investments made by U.S. persons in China, Hong Kong, or Macau and involving certain categories of technologies, including the development and production of semiconductors and microelectronics, quantum information technologies, and artificial intelligence systems. Proposed rules would impose recordkeeping and notification requirements on U.S.-person investors. Additionally, certain investments in advanced critical technologies may be prohibited. Diligence obligations during acquisitions will likely mirror those under current CFIUS regulations to identify transactions within the scope of the outbound investment regime.

6. Forced Labor and Importation Concerns

Some targets will present risks under the Uighur Forced Labor Prevention Act (“UFLPA”). The UFLPA presumptively bars from entry into the United States all products that are manufactured in China’s Xinjiang Uyghur Autonomous Region or produced by a list of entities that have been designated by the interagency Forced Labor Enforcement Task Force (“FLETF”), unless the importer can present “clear and convincing” evidence that the product has not been tainted by the use of forced labor. U.S. Customs and Border Protection (“CBP”), which enforces the UFLPA, has been remarkably aggressive in enforcing these provisions. The UFLPA does not contain a de minimis exception, and CBP has barred shipments from entry into the United States where the goods contained under 1% of Xinjiang-origin content by value.

Accordingly, in addition to reviewing the target’s documentation and conducting interviews with management, it may be necessary in some cases to use business intelligence platforms to “screen” targets and their counterparties for risks related to forced labor in the supply chain. Notably, owing to the absence of a de minimis exception, the UFLPA authorizes CBP to detain shipments that are not themselves manufactured in Xinjiang but contain inputs that originate, in whole or in part, in Xinjiang. As such, even targets that depend on imports from third countries, such as Vietnam, may present elevated risk of violating the UFLPA depending on the products involved.

7. Defense Sector Controls

There are unique considerations for targets operating in the defense sector, even if the target only handles defense-related items as a minority of its sales. In particular, the International Traffic in Arms Regulations (“ITAR”) apply to defense articles, defense services, and related technology. The ITAR, like the EAR, “follow the item” and therefore have broad extraterritorial application. Under the ITAR, persons engaged in the business of manufacturing, exporting or temporarily importing defense articles, or furnishing defense services, are required to register with the Department of State’s Directorate of Defense Trade Controls (“DDTC”). When a registered target is acquired, the target and the buyer are required to notify DDTC within five days of the closing. Where a buyer is a non-U.S. person, the buyer and target must submit a notice to DDTC at least 60 days before closing. These requirements apply even if the transaction is an acquisition of assets or a sale in the course of bankruptcy. A transaction that involves an ITAR registrant that occurs in a multi-step process could trigger multiple notifications. In addition to registration, any export licenses that the target holds authorizing it to send defense articles outside of the United States must be requested to transfer to the new parent entity. It is essential that deal timelines accommodate registration, notification, and transfer requirements, as failure to do so could result in a disruption of business activities.

8. Managing Legacy International Trade Issues

If a target company has failed to adhere to relevant international trade controls, post-closing remediation may be necessary, including the possibility of self-disclosure to relevant government agencies. Under enforcement policies of the U.S. Department of Justice’s National Security Division and the U.S. Department of Commerce, the prompt self-disclosure of a target company’s apparent violations of sanctions and export control laws that occurred prior to acquisition may be eligible for significant mitigation credit. Conversely, a target company that has made serial self-disclosures may have systemic compliance issues, which may result in significant penalties for the buyer. In addition, compliance commitments and consent agreement terms may apply to buyers and related entities, even following acquisition.

Our attorneys are leading industry experts, and we regularly advise on international trade matters on behalf of the world’s largest companies. We efficiently identify the costs and resources needed to implement post-acquisition remediation and assist in integrating the international trade practices of target companies into buyers’ global organizations. We also help manage target companies’ pre-existing compliance gaps and provide holistic assessments on the impacts of such events on the transaction or the buyer’s business.

The following Gibson Dunn lawyers prepared this update: Adam M. Smith, Christopher Timura, Stephenie Gosnell Handler, Robert Little, Saee Muzumdar, George Sampas, Samantha Sewall, Michelle Weinbaum, and Zach Kosbie.

International Trade:
Adam M. Smith – Washington, D.C. (+1 202.887.3547, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, [email protected])
Samantha Sewall – Washington, D.C. (+1 202.887.3509, [email protected])
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, [email protected])

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, [email protected])
Ari Lanin – Los Angeles (+1 310.552.8581, [email protected])
Michael Piazza – Houston (+1 346.718.6670, [email protected])
John M. Pollack – New York (+1 212.351.3903, [email protected])

As companies prepare to transition from private ownership to the public markets, the legal landscape surrounding executive compensation and employee benefits becomes increasingly complex. Join us for a 60-minute webcast briefing, where we will delve into the critical securities, governance, disclosure and executive compensation and employee benefits-focused legal issues that companies must plan for in advance to ensure compliance and mitigate risks during the IPO process and as a newly public entity.

This session is essential for C-suite executives, HR professionals, and in-house legal teams who are responsible for advance planning and steering their companies through the IPO process and beyond. Attendees will leave with actionable insights and practical tools to ensure their organizations are well-prepared for the challenges and opportunities of becoming a successful public company.

PANELISTS:

Sean Feller is a partner in Gibson, Dunn & Crutcher’s Century City office. He serves as Co-Chair of the firm’s Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects executive compensation and employee benefits. His practice encompasses tax, ERISA, accounting, corporate, and securities law aspects of equity and other incentive compensation plans; qualified and nonqualified retirement and deferred compensation plans and executive employment and severance arrangements. Mr. Feller has been recognized by his peers as one of The Best Lawyers in America in the area of Employee Benefits (ERISA) Law. In 2020 and 2022, he was ranked by Chambers USA as a Leading Lawyer in Los Angeles in the area of Employee Benefits and Executive Compensation.

Ekaterina (Kate) Napalkova is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the Employee Benefits and Executive Compensation Practice Group. Kate advises public and private companies, private investment funds, boards of directors and management teams on a broad range of compensation and employee benefits matters. Her advice focuses on the compensation and employee benefits aspects of mergers and acquisitions, restructurings, public offerings, spin-offs and other corporate transactions. She is experienced in the negotiation and implementation of benefit and compensation plans, as well as compensation-related securities reporting and corporate governance matters.

Stewart L. McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a Co-Chair of the firm’s Capital Markets Practice Group and a member of the firm’s Corporate Department. Ms. McDowell represents companies, investors and underwriters in a variety of complex capital markets transactions, including IPOs, convertible and non-convertible debt and preferred equity offerings, PIPEs and liability management transactions. She also represents companies in connection with U.S. and cross-border M&A and strategic investments, SEC reporting, corporate governance and general corporate matters.

Gina Hancock is an associate in the Dallas office. She practices in the firm’s Executive Compensation and Employee Benefits Department. Gina has significant experience with executive compensation, complex domestic and international transactional matters, initial public offerings, health and welfare benefit plan, retirement plan, and related matters. Her practice focuses on all aspects of equity compensation; employee stock purchase plans; 401(k), pension and nonqualified deferred compensation plans; executive employment, severance, retention, change in control and restrictive covenant agreements; incentive compensation; and cafeteria and other welfare benefit plans. She also provides advice with respect to general corporate governance and disclosure matters.

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Blaine Evanson and Min soo Kim are the authors of “The Supreme Court’s Social Media Docket” [PDF] published by Orange County Lawyer in its October 2024 issue.

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during June 2024.

I. GLOBAL

Integrity Council for the Voluntary Carbon Markets (ICVCM) announces it has approved its first ever set of carbon-crediting methodologies

On June 6, 2024, the ICVCM announced its first ever set of carbon-crediting methodologies that meet its high-integrity Core Carbon Principles (CCP). The CCPs set a global benchmark for high-integrity carbon credits, enabling the market to maximize its potential to tackle rising greenhouse gas emissions. The CCP label is designed to help buyers identify carbon credits that meet rigorous standards and can now be used on an estimated 27 million carbon credits. The CCPs are designed to build trust in the ICVCM and enable the market to maximize its potential to tackle rising greenhouse gas emissions, unlocking private finance for climate solutions. However, carbon credits generated using CCP-approved methodologies must ensure projects make a genuine impact on emissions.

World Business Council for Sustainable Development (WBCSD) launches initiative to bridge the gap between corporate sustainability commitments and policy engagement

On June 19, 2024, the WBCSD launched the Positive Policy Engagement (PPE) workstream. The PPE workstream was created with the intention of bridging the gap between corporate sustainability commitments and policy engagement. It is estimated that around 58% of the world’s largest corporations have climate commitments that are undermined by their policy influence strategies. The need to narrow this gap is highlighted by investor expectations on corporate climate lobbying statements. The PPE aims to provide tools to ensure that corporate policy and advocacy engagement positively and proactively support climate, nature and equity goals, facilitating greater transparency in corporate policy engagement to achieve net-zero ambitions.

Network for Greening the Financial System (NGFS) issues the second edition of its Guide on climate-related disclosure for central banks

On June 19, 2024, the NGFS published the second edition of its Guide on climate-related disclosure for central banks (Guide). The Guide expands upon the first edition published in December 2021 and calls for central banks to lead by example by disclosing their climate-related risks and opportunities. NGFS believes that this will enable greater transparency and facilitate the transition to a climate and nature friendly economy. The Guide presents a range of disclosure options organized around four areas: governance, strategy, risk management and metrics, and targets. The NGFS acknowledges that there is no ‘one-size-fits-all’ solution in respect to disclosure, instead distinguishing between foundational (‘baseline’) and complementary (‘building block’) recommendations relating to more detailed information that central banks could disclose. By not applying a one-size-fits-all approach, central banks are given greater flexibility on the scope and depth of their climate related disclosures. Although nature-related implications for central banks have not been considered in this Guide, the NGFS will be exploring the possibility of later publication of a supplementary addendum on nature-related disclosures.

The Taskforce on Nature-related Financial Disclosures (TNFD) and the European Financial Reporting Advisory Group (EFRAG) have jointly published a mapping of the correspondence between the European Sustainability Reporting Standards (ESRS) and recommended disclosures and metrics

The TNFD and EFRAG have released a map that assembles the ESRS with the TNFD’s recommended disclosures. The mapping effectively demonstrates that all 14 TNFD disclosures are integrated into the ESRS, facilitating rates at which companies can meet the Corporate Sustainability Reporting Directive requirements. The rationale is to establish some consistency and uniformity between the ESG standards set by the ESRS and recommendations by the TNFD. Notable considerations are the alignment of concepts, definitions, and approaches to materiality, as these center on nature-related consequences and risks. Furthermore, the TNFD’s LEAP mechanism for assessing nature-related hazards aligns with the ESRS materiality assessments. The correspondence works to increase transparency and provide comprehensive data for sustainable development.

The International Sustainability Standards Board (ISSB) delivers further harmonization of the sustainability disclosure landscape as it embarks on new work plan

The ISSB has boosted the sustainability disclosure landscape through the strategic implementation of new collaborations with the Global Reporting Initiative, Greenhouse Gas Protocol, Carbon Disclosure Project, Transition Plan Taskforce, and the Taskforce on Nature-related Financial Disclosure. This was facilitated with the aim of enhancing and consolidating global sustainability reporting. More than 20 jurisdictions are currently in the process of adopting ISSB standards. The latest publications demonstrate the ISSB’s objectives of implementing transition plan disclosures and augmenting greenhouse gas emissions reporting in conjunction with the Greenhouse Gas Protocol.

II. UNITED KINGDOM

UK Supreme Court rules that local authorities must consider downstream gas emissions when weighing planning approval

On June 20, 2024, the UK Supreme Court ruled that authorities must examine the climatic consequences arising from the combustion of oil from new wells. Despite the ruling not prohibiting proposals of new oil well constructions, a key consideration for the future is in relation to downstream emissions. These are not direct by-products of on-site procedures but are formed due to oil extraction activities. This judgment determined that it will be critical for companies to assess the potential consequences for Scope 3 emissions when burning oil from planned construction projects. In case you missed it…

English High Court rules that the process by which the government’s climate change plans were adopted was unlawful

On May 3, 2024, the High Court ruled that the UK government had fallen through with its plans for the implementation of a net-zero strategy, subsequently leading to a breach of the UK Climate Change Act. The plaintiffs (Friends of the Earth, ClientEarth, and Good Law Project), argued that the revised plan published in March 2023, and titled the ‘Carbon Budget Delivery Plan’, had unjustifiably attributed the success of the project to the implementation of uncertain technologies. It was submitted that the UK government must produce an updated plan within 12 months to ensure that carbon budgets and emission targets are adequately set and met. This is in line with the government’s pledge to cut greenhouse gas emissions within five years and by over 68% by 2030.

III. EUROPE

European Supervisory Authorities (ESAs) publish final reports on greenwashing

On June 4, 2024, three ESAs (European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority (ESMA)) published final reports on greenwashing within the financial sector. The ESMA’s Final Report (Final Report) follows its Progress Report on May 31, 2023 and comes after the European Commission requested involvement from ESAs on greenwashing supervision and risks of sustainable financial policies in May 2022. The Final Report finds that National Competent Authorities (NCAs) have taken steps to prioritize the supervision of sustainability-related claims and that only a limited number of actual or potential occurrences of greenwashing have been detected. The Final Report also states that existing EU rules are sufficient in capturing greenwashing as a form of miscommunication or misconduct, but that greenwashing can be further addressed through acting on infringements of a range of specific sustainability-related requirements recently introduced in the EU. The Final Report notes that ESMA will publish an opinion setting out how the EU regulatory framework may be improved for the ‘investors’ journey’ and will continue to monitor its supervisory progress on greenwashing risks.

EU Council adopts its position on the “Green Claims Directive”, which aims to address greenwashing

On June 17, 2024, the EU Council adopted its position on the proposed Directive on Substantiation and Communication of Explicit Environmental Claims, commonly referred to as the ‘Green Claims Directive’ aimed at combatting greenwashing and ensuring consumers have reliable information when making environmental choices. The directive aims to set minimum requirements for the substantiation, communication and verification of explicit environmental claims made by companies about their products and services. The new proposal targets explicit environmental claims and environmental labels that companies use voluntarily when marketing their greenness. It also applies to existing and future environmental labelling schemes, both public and private. Companies should use clear criteria and the latest scientific evidence to substantiate their claims and labels, with a focus on clarity and ease of understanding. Acknowledging the importance of existing national and regional public labelling schemes, ministers agreed on the possibility of establishing new schemes and exempting those regulated by EU or national law from third-party verification, provided the latter meet EU standards. The Council’s position will serve as the foundation for negotiations with the European Parliament, aiming to finalize the directive in line with the European Green Deal’s goal of achieving climate neutrality by 2050.

EU Council approves new Nature Restoration Law

On June 17, 2024, the European Environmental Council approved the Nature Restoration Law, a regulation setting a legally binding target to preserve 20% of the EU’s land and seas by 2030. The regulation is a key part of the EU Biodiversity Strategy which is geared towards restoring degraded ecosystems, particularly prioritizing Natura 2000 protected areas. The regulation is particularly targeted towards supporting (i) pollinator populations, (ii) forest, agricultural, marine and urban ecosystems, and (iii) river connectivity. The aim is to ensure at least 90% of ecosystems are restored by 2050. Member states will be required to submit their National Restoration Plans within two years and will be required to monitor and report on their progress. In case you missed it…

French Agency for Ecological Transition (ADEME) publishes an updated version of its Anti-Greenwashing Guide

In April 2024, the French Agency for Ecological Transition published an updated version of its Anti-Greenwashing Guide (Guide). The Guide sets out (i) how to identify greenwashing, (ii) the main anti-greenwashing methods, and (iii) how important it is for brands to avoid greenwashing, particularly when promoting their services, products and/or sustainable development approaches. The Guide advises that to safeguard against greenwashing, companies should establish that they have adequate knowledge of the ecological advantages of their products prior to advertisement. ADEME also provides concrete guidelines for companies to follow and highlights limited scenarios where certain ecological and sustainable development arguments may apply.

EU Council approves Net-Zero Industry Act (NZIA)

On May 27, 2024 the EU Council adopted the NZIA, a regulation which, by focusing on developing the EU’s manufacturing capacity for clean technologies, aims to (i) speed up progress to the EU’s 2030 energy and climate targets and create high-quality jobs, (ii) strengthen the competitiveness and resilience of net-zero technologies manufacturing, reducing the reliance on highly concentrated imports, and (iii) improve the conditions for setting up net-zero projects in Europe and in so doing attract foreign direct investments into the EU. The NZIA supports strategic net zero technologies, including solar technologies, onshore wind, geothermal energy and biogas, with the aim of the EU’s manufacturing capacity of such technologies meeting at least 40% of the EU’s annual requirements by 2030.

IV. NORTH AMERICA

Federal District Court dismisses ExxonMobil’s (Exxon) lawsuit against activist investors

On June 17, 2024, the U.S. District Court for the Northern District of Texas dismissed Exxon’s lawsuit against Arjuna Capital concerning a shareholder proposal that was submitted for Exxon’s 2024 annual proxy statement and withdrawn, finding that Arjuna Capital’s covenant not to submit any other climate or greenhouse gas shareholder proposals to Exxon mooted any actual and ongoing controversy between the parties and removed the court’s power to adjudicate the dispute. More detail regarding the litigation is available in our January and May ESG alerts.

More than 20 U.S. regulatory agencies publish updated climate adaptation plans

On June 20, 2024, the White House announced that nearly two-dozen U.S. regulatory agencies had published updated Climate Adaptation Plans, designed to enhance the resiliency of each agency’s resources, operations, employees, and facilities against the impacts of climate change. Some key actions outlined in the various plans include retrofitting and upgrading federal buildings, establishing procedures to support continuous operations, and encouraging climate-smart supply-chain sourcing.

City of Baltimore sues PepsiCo, Coca-Cola, and others for plastic pollution

On June 20, 2024, the Mayor of Baltimore announced that the city was bringing a landmark lawsuit against plastic manufacturing companies as well as Frito Lay, PepsiCo, and Coca-Cola. In its complaint, the city describes health and environmental harms from single-use plastics and related costs and includes allegations of false claims, failure to warn, defective design, deceptive practices, and other violations of various state and local laws, including the Maryland Illegal Dumping and Litter Control Law. The city seeks criminal penalties and compensatory damages, among other relief.

Canada amends Competition Act to target corporate “greenwashing”

On June 20, 2024, Canada passed a series of amendments to the Competition Act that address corporate “greenwashing,” among other matters. The amendments increase the potential scrutiny for environmental claims by bringing them within the scope of deceptive marketing practices. Under the newly amended law, public representations about a product’s environmental benefits or mitigations need to be based on an “adequate and proper test,” and public representations about the beneficial impact of a business or business activity must be “based on adequate and proper substantiation in accordance with internationally recognized methodology.” Importantly, the burden for demonstrating a statement’s validity is on the person making the representation. The Amendments accordingly introduce significant risk for companies operating in Canada when they make environmental claims. On July 4, 2024, the Competition Bureau Canada published a release following “a large number of requests” and indicated it would be providing guidance for the new provisions “on an accelerated basis” following public consultation.

U.S. Supreme Court stays U.S. Environmental Protection Agency’s (EPA) application of the Clean Air Act’s “Good Neighbor” provision

As summarized in our alert, on June 27, 2024, the U.S. Supreme Court granted a stay sought by Ohio and several other applicants to suspend the EPA’s federal plan applying the Clean Air Act’s “Good Neighbor” provision as it applied to such states. The provision required states located “upwind” to reduce their emissions to account for pollution they may export to any “downwind” states. As a result of the stay, only 11 states are currently subject to the federal plan.

V. APAC

Asia Pacific Loan Market Association (APLMA) publishes Model Provisions for Green Loans

On June 3, 2024, the APLMA announced the publication of its Model Provisions for Green Loans (Model Provisions) to bring clarity to green loan classification in the APAC loan markets. Green loans are defined by the APLMA as loans made available exclusively to finance or refinance eligible green projects, although an exhaustive definition of “green” has yet to be released in the market. The APLMA recommends that the Model Provisions are used by entities as a negotiation starting point rather than as mandatory guidelines. The Model Provisions are also intended to be adapted for different green loan structures in the APAC loan markets and have been designed for use in the APLMA’s recommended forms of facility agreement where the loan or facility in question is to be marketed as a ‘green facility’ or ‘green loan’. In particular, the Model Provisions recommend appointing a ‘green loan coordinator’, a detailed declassification mechanism, optional external reviews of annual green loan reports, and specific green loan reporting requirements. The APLMA has advised that it is keeping the Model Provisions under review as the market develops.

China announces plan to introduce a carbon footprint management system by 2027

On June 5, 2024, China’s Ministry of Ecology and Environment announced a plan to implement a comprehensive product carbon footprint management system by 2027. Product carbon footprint is the measurement of the total greenhouse gas emissions generated by a product during its lifecycle. The planned system aims to track and reduce carbon emissions across various industries to meet climate goals and align with international standards. The Chinese government aims to create a preliminary national system for product carbon footprint labelling and authentication, with a focus on electricity, coal, and fuel oils. The first target is to develop calculation guidelines for approximately 100 key high-emitting products such as coal, steel, lithium batteries and natural gas by 2027, expanding to 200 products by 2030. This effort in producing a comprehensive database and providing analytics tools is part of China’s broader strategy to engage in the development of international product carbon footprint rules by 2030 and achieve carbon neutrality by 2060.

Singapore and the Bank for International Settlements (BIS) collectively develop a blueprint for a climate risk platform for financial authorities

On June 12, 2024, the BIS Innovation Hub Singapore Centre and the Monetary Authority of Singapore (MAS) announced the development of a blueprint for a climate-risk platform for financial authorities known as Project Viridis (Blueprint). By using natural language processing to extract climate data from corporate disclosures, the climate-risk platform aims to integrate regulatory and climate data to help financial authorities identify, monitor, and manage climate-related financial risks. The development of such a platform is aimed at enhancing global financial stability by enabling more effective climate risk analysis. The Blueprint outlines the key features and metrics necessary for a climate-risk platform, including data on financed emissions, physical risk exposure, and forward-looking climate assessments.

Hong Kong publishes its legislative-focused hydrogen development plan

On June 17, 2024, Hong Kong’s Environment and Ecology Bureau announced its Strategy of Hydrogen Development (Hydrogen Strategy) to develop hydrogen energy as part of its climate change efforts, aiming for carbon neutrality and international competitiveness. The ‘Inter-departmental Working Group on Using Hydrogen as Fuel’ (Working Group), established in 2022, is also integrated into the Hydrogen Strategy. The Working Group is responsible for studying the development and commercialization of various hydrogen energy technologies and exploring future hydrogen regulatory frameworks, and has already given agreement-in-principle to 14 hydrogen projects, including cross-boundary hydrogen transportation and supply facilities. The Hydrogen Strategy addresses topics such as technology, infrastructure, and public acceptance to create a supportive environment for hydrogen energy in Hong Kong. Legislative amendments will be introduced by 2025 to regulate hydrogen use, and the Hong Kong government plans to align hydrogen standards with international practices by 2027. The Hydrogen Strategy forms part of Hong Kong’s ambitions to promote regional cooperation, investment, and its expansion into a demonstration base for hydrogen energy development.

Australia releases its Sustainable Finance Roadmap

On June 19, 2024, Australia’s Department of the Treasury published its Sustainable Finance Roadmap (Roadmap), setting out its vision to implement key sustainable finance reforms and related measures to help with its transition to a net-zero economy. The key initiatives include (i) mandatory climate-related finance disclosures for large businesses with a progressive rollout from January 1, 2025, (ii) the development of a sustainable finance taxonomy by the Australian Sustainable Finance Institute by the end of 2024 to guide private capital towards sustainable activities, and (iii) the establishment of a sustainable investment labelling regime to take effect in 2027. These reforms aim to ensure transparency, investor confidence and the mobilization of private capital. There is also an additional focus by the Australian government to integrate nature-related finance objectives and enhance greenwashing supervision. The Roadmap forms part of the Australian government’s wider Sustainable Finance Strategy which was first announced in November 2023.

Malaysia launches new certification program in sustainability and responsible investment

On June 20, 2024, Malaysia’s Securities Industry Development Corporation (SIDC), part of Malaysia’s Securities Commission, launched a new certification program: the Certified Capital Market Professional in Sustainable and Responsible Investment (CCMP-SRI). The CCMP-SRI aims to raise competency standards among professionals in the capital market to meet a growing demand for sustainable and responsible investment products. Notably, sustainable investments in Malaysia surged from seven Sustainable and Responsible Investment (SRI) funds worth RM 1.46 billion in 2020 to 68 SRI funds worth RM 7.7 billion in 2023. The program addresses critical sustainability concepts, practices, and strategies, ensuring graduates’ abilities to lead in the sustainable investment industry by understanding financial performance and the broader impact of investments on society and the environment. The CCMP-SRI was also developed to align with the SIDC’s Industry Competency Framework to meet the evolving landscape of sustainable investment while contributing to Malaysia’s sustainability goals.

Australia reverses decision on its disclosure standards to extend beyond climate-related financial disclosures

On June 26, 2024, the Australian Accounting Standards Board (AASB) decided to reverse its October 2023 decision to limit the scope of the draft Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (Australian Standards) to climate-related financial disclosures so that the Australian Standards will now incorporate references to general sustainability. The decision has been taken to re-align the proposed Australian Standards with the International Sustainability Standard Board’s two global baseline standards on general sustainability (IFRS S1) and climate (IFRS S2) following significant pushback from investors, sustainable finance bodies and non-profit organizations. The AASB’s next board meeting is scheduled for mid-July 2024, with the aim for the draft Australian Standards to be finalized by the end of August 2024. The current plan is for large entities in Australia with the highest emission levels to be subject to disclosures obligations from January 2025, with mandatory reasonable assurance on all climate-related disclosures to begin in the fourth year of an entity reporting on such disclosures. In case you missed it…

Japan’s Financial Services Agency (JFSA) proposes implementing mandatory sustainability disclosures from 2027

On May 1, 2024, the Working Group on Sustainability Disclosure (Reporting) and Assurance established by the JFSA (Working Group), proposed two timelines for mandatory sustainability disclosure and assurance requirements for all companies listed on the Tokyo Stock Exchange, including foreign companies. This follows the Sustainability Standards Board of Japan issuing three Exposure Drafts of the Sustainability Disclosure Standards on March 21, 2024, which are modelled after the ISSB’s sustainability disclosure standards (as reported in our April 2024 update). Under the Working Group’s proposal, ‘Prime’ Tokyo-listed companies with a market capitalization of ¥ 3 trillion or more would issue their first sustainability report for the fiscal year ending March 2027, whilst those with a market capitalization of ¥ 1 trillion would begin reporting for the fiscal year ending March 2028. The JFSA is also considering pushing this timeline back by one year. A deadline for finalization of this reporting timeline remains under discussion and has yet to be announced.

Hong Kong Monetary Authority (HKMA) extends the green and sustainable finance grant scheme to include transition bonds

On May 10, 2024, the extension of the HKMA’s Green and Sustainable Finance Grant Scheme (GSF Grant Scheme) for three additional years until 2027 came into effect, following its inclusion in Hong Kong’s 2024-25 budget. Initially launched in May 2021, the GSF Grant Scheme has since provided subsidies to eligible bond issuers and loan borrowers for more than 340 green and sustainable debt instruments in Hong Kong, totaling approximately US$ 100 billion. The extension includes the HKMA’s updated Guidelines on the GSF Grant Scheme which expand it to cover transition bonds and loans that seek to support industries transitioning towards decarbonization. The HKMA will continue to administer and update the GSF Grant Scheme over time based on market developments and industry feedback. Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update. Warmest regards, Susy Bullock Elizabeth Ising Perlette M. Jura Ronald Kirk Michael K. Murphy Selina S. Sagayam Chairs, Environmental, Social and Governance Practice Group, Gibson Dunn & Crutcher LLP For further information about any of the topics discussed herein, please contact the ESG Practice Group Chairs or contributors, or the Gibson Dunn attorney with whom you regularly work.

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Ayshea Baker, Alex Eldredge*, Natalie Harris, Elizabeth Ising, Nathan Marak, and Selina S. Sagayam.

*Alex Eldredge, trainee solicitor in the London office, is not admitted to practice law.

Environmental, Social and Governance (ESG):

Susy Bullock – London (+44 20 7071 4283, [email protected])

Elizabeth Ising – Washington, D.C. (+1 202.955.8287, [email protected])

Perlette M. Jura – Los Angeles (+1 213.229.7121, [email protected])

Ronald Kirk – Dallas (+1 214.698.3295, [email protected])

Michael K. Murphy – Washington, D.C. (+1 202.955.8238, [email protected])

Selina S. Sagayam – London (+44 20 7071 4263, [email protected])

An overview of the incoming rules on preventing sexual harassment as well as the steps the Labour government has taken and intends to take under the Employment Rights Bill.

In our last publication “What Employers Can Expect in the UK under the New Labour Government“ on 8 July 2024, we outlined the extensive reforms the newly formed Labour government had proposed to employment law during the General Election campaign and the potential consequences of these anticipated developments for employers. As expected, the Labour government has since published its Employment Rights Bill on 10 October 2024 (the “Bill”), providing a more fulsome insight into how its self-proclaimed “New Deal for Working People” will impact employers.

The publication of the Bill on 10 October 2024 means the Labour government has delivered on its commitment to put legislation before Parliament on its “Plan to Make Work Pay” within 100 days of entering office. Yet, while the Bill provides a broad framework for an eventual overhaul of the employment landscape, the measures outlined in the draft legislation do not require employers to make the immediate and wide-reaching changes to policies and procedures which might have been foreseen based on signals prior to the General Election. In fact, a significant number of original proposals have been omitted from the Bill – including, crucially, the proposed shift to a two-part framework of employment status – with the Labour government pledging to implement its further proposals after concluding extensive reviews and consultations with stakeholders. The consultation process is expected to begin in 2025, which means that the majority of reforms will not take effect until 2026. As such, the real scope and scale of the proposed reforms will not become fully clear until far later in the lifetime of this Parliament.

More pressing for employers will be changes to the law on preventing sexual harassment which were introduced by the previous Conservative government and which come into force on 26 October 2024.

A brief overview of the incoming rules on preventing sexual harassment as well as the steps the Labour government has taken and intends to take under the Employment Rights Bill is provided below, with more detailed information on each topic available by clicking on the links.

1. Incoming New Rules for October 2024 (view details)

We consider the new legal duty coming into force on 26 October 2024 which requires employers to take reasonable steps to prevent sexual harassment in the workplace (which is expected to extend to sexual harassment by clients, customers and other third parties), as well as the practical steps employers can take to ensure compliance.

2. Employment Reform Proposals under the Bill (view details)

We review the proposed reforms to the employment law landscape under the Bill, including:

Workforce Changes: we summarise the changes proposed to enhance the “Day One” rights available to employees and to protect employees from unfair dismissal. We also summarise the proposals to restrict the controversial practice of dismissing and re-hiring employees as a means of unilaterally changing terms of employment.
Discrimination, Diversity, Equity and Inclusion: we outline the measures which would impose further obligations upon employers to strengthen whistleblower rights; to address the gender pay gap; to extend the gender pay gap regime to include race and disability; and to support employees going through the menopause.
Working Arrangements: we consider the changes proposed to employers’ abilities to engage workers on “zero hours” contracts and the potential enhancements to the right to flexible working. We also consider the proposals to negotiate pay arrangements in specific sectors and to strengthen trade unions.

3. Upcoming Employment Reviews (view details)

We outline the further reforms we expect the Labour government to implement following the successful passage of the Bill, based on the commitments made under its “Plan to Make Work Pay”. These further developments include comprehensive reviews of: (i) employment status; (ii) parental and carers’ leave; (iii) the processes and regulations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”); and the potential new right of employees to collectively raise grievances about workplace conduct with the Advisory, Conciliation and Arbitration Service (“ACAS”).

We will provide further updates as and when the Labour government publishes more details on the implementation of the changes proposed both under the Bill and through the related upcoming consultations. In the meantime, we will continue to work with our clients to navigate the potential developments explored below.

APPENDIX

1. Incoming New Rules for October 2024

Workplace Harassment

Our last publication noted that the previous Conservative government had introduced the Worker Protection (Amendment of Equality Act 2010) Act 2023, under which employers would be required to take “reasonable steps” to prevent sexual harassment in the workplace. Since coming to power, the Labour government has reaffirmed its support for this new duty, which is due to come into force on 26 October 2024.

This new duty creates a positive and anticipatory legal obligation on employers. It will require employers to prevent sexual harassment in the workplace, which guidance suggests will cover sexual harassment by clients, customers and other third parties. Under the new rules, the Employment Tribunal will have the power to uplift compensation for harassment by a maximum of 25% where an employer is found to have breached this duty – an uplift which could prove extremely costly for defaulting employers given the levels of compensation which can be awarded for discriminatory harassment.

In its updated technical guidance, the Equality and Human Rights Commission has provided guidelines on the reasonable steps employers can take to identify risks and prevent sexual harassment including: (i) developing effective anti-harassment policies; (ii) adopting a zero-tolerance approach; (iii) conducting risk assessments; (iv) training staff on dealing with potential incidents; and (v) monitoring complaints and outcomes.

We note that the Bill expands this obligation on employers to require them to take “all reasonable steps” to prevent sexual harassment in the workplace. In addition, the Labour government has codified the obligation on employers to prevent sexual harassment by third parties. Following the passage of the Bill, those amendments will therefore raise the compliance bar even higher on employers.

2. Employment Reform Proposals under the Bill

Workforce Changes

Unfair Dismissal

In our last publication, we outlined the Labour government’s intention for a form of unfair dismissal protection to become a “Day One” right for employees. Currently, employees with less than two years of continuous service do not benefit from protection against unfair dismissal, except in certain limited circumstances.

The Labour government has now made protection from unfair dismissal a “Day One” right in the Bill, removing the two-year qualifying period. Helpfully, employers will continue to be able to operate probation periods to assess new hires by providing a (yet to be determined) period during which the Labour government has promised that there will be a “lighter-touch” process for dismissals. A consultation on the length of this initial period is expected in 2025, however, the Labour government has indicated a preference of nine months. The nature and scope of the lighter-touch process for dismissals during the initial period, and safeguards to provide stability and security for businesses and employees, will be addressed as the Bill makes its way through Parliament. As a requirement for the dismissal process during the initial period, the Labour government has suggested the need for a meeting with the employee outlining the employer’s concerns. We stress that the Labour government does not expect the reforms to unfair dismissal to come into effect any sooner than Autumn 2026, until which time the current two-year qualifying period will continue to apply. This extended time period will allow employers to prepare and adapt to the new regime.

Dismissal and Re-Engagement

We had previously summarised the Labour government’s commitment to ending the practice known as “fire and rehire” (where the employee is dismissed and offered re-employment on less favourable terms) as a lawful means of imposing unilateral changes to employees’ contractual terms of employment.

The Bill renders this practice an unfair dismissal, apart from in certain limited circumstances. As the Bill currently reads, employers will continue to be able to engage in this practice (subject to further safeguards) if: (i) the variation to the terms of employment could not reasonably have been avoided, or (ii) reducing or eliminating financial difficulties which are impacting the employer’s ability to carry on the business as a going concern are the reason for the variation. These carve outs are intended to ensure that businesses can restructure to remain viable where business or workforce demands necessitate it.

Day One Rights

In addition to protection against unfair dismissal, the Labour government has acted on its promise to give employees the below basic rights from the first day of employment:

Parental, paternity and bereavement leave:
- Paternity and parental leave (which are currently subject to a 26-week and a one-year qualifying period respectively) will become “Day One” rights.
Statutory sick pay:
- Under current rules, an employee is only entitled to statutory sick pay if they earn at least the lower earnings limit (£123 in 2024/25). The Bill removes this lower earnings limit requirement, allowing all employees to be entitled to statutory sick pay. The Labour government intends to consult in the near future on the right level of statutory sick pay for low earners.
- The current 3-day waiting period for statutory sick pay is also removed by the Bill, making the entitlement to statutory sick pay a “Day One” right (as it was temporarily during the COVID-19 Pandemic). Businesses should be aware of the potential financial burden that the introduction of statutory sick pay as a “Day One” right will bring.

Discrimination, Diversity, Equity and Inclusion

Whistleblowing

The Bill also classifies sexual harassment as a protected disclosure, meaning that whistleblowing protections are now extended to disclosures relating to sexual harassment. Protections will be granted where an employee makes such a disclosure because of relevant failures to protect against sexual harassment by an employer and the employee reasonably believes there is a public interest concern to the disclosure. Protections extend to unfair dismissal and being subjected to detriment, as a result of the disclosure.

Equality Action Plans

Regulations will require employers with more than 250 employees to develop, publish and implement action plans on how to address gender pay gaps and support employees going through the menopause. The Labour government has furthermore signalled the current gender equal pay regime will be expanded to cover ethnicity and disability pay gaps, with the widened system to be enforced by a Regulatory Enforcement Unit. These measures will be implemented through the Government’s Equality (Race and Disability Bill), with consultations on this legislation expected in due course and a draft bill to be published during this parliamentary session.

Working Arrangements

Engagement of Casual and/or Low Paid Workers

Before the election, the previous Conservative government had planned to implement a new statutory right to a predictable working pattern to limit the controversial practice of “zero hours” contracts. This right would have come into force last month but has now been superseded by the Labour government’s draft legislation.

Under the Bill, workers on “zero hours” contracts will have the right to a contract that guarantees the number of hours they regularly work based on a twelve-week reference period. Any such terms offered will need to be responsive to changing working patterns. If more hours become regular over time, employers must use subsequent reference periods to amend the workers’ contracts accordingly (and the Labour government has committed to consult with employers and workers to ensure any subsequent reference periods are reasonable and proportionate). The Bill also provides that employers must give workers reasonable notice of any change in shifts or working time, with compensation that is proportionate to the notice given for any shifts cancelled, moved or curtailed.

Sector Pay Arrangements

As anticipated, the Bill empowers the Secretary of State to establish specific pay arrangements in the school support and adult social care sectors, including creating statutory negotiating bodies with powers to broker fair pay, terms and conditions, and training standards within those sectors.

Right to Flexible Working

Expanding on the newly introduced right to request flexible working, the Bill makes flexible working the default for all workers from “Day One”. Where an employer refuses a flexible working application, the Bill requires the employer to state the grounds for refusing the application and to explain the basis on which the decision is considered to be reasonable. The specified grounds on which employers can refuse applications include: (i) cost; (ii) meeting customer demand; (iii) inabilities to reorganise work or recruit additional staff; (iv) detrimental impacts on quality or performance; (v) insufficiencies in the proposed arrangements; and (vi) planned structural changes.

Trade Unions

The Labour government has committed to repealing legislation introduced by its predecessor government aimed at restricting trade union activity, including the Strikes (Minimum Service Levels) Act 2023. With the aim of further strengthening trade union protections, the Bill simplifies the trade union recognition process by removing the requirement for a potential trade union to prove there is likely to be majority support for recognition. It introduces extended rights of access for trade union officials, as well as requiring employers to inform employees of their right to join trade unions.

3. Upcoming Employment Reviews

As we have noted, the Labour government has slowed the pace of its proposed overhaul of the employment landscape to embark on comprehensive reviews of various measures which were contemplated under the original “Plan to Make Work Pay” but which have been omitted from the Bill in part or in full. While the Labour government has indicated these reviews will start from Autumn 2024, we expect this process to take several years given the number of stakeholders who will provide input on the proposals. In any event, a brief overview of the reviews which we believe will be of interest to our clients is provided below.

Employment Status

One of the most significant pledges under the original “Plan to Make Work Pay” was the proposed shift towards a single status of “worker” and a simplified two-part framework of employment status. Given the complicated implications of this proposal, the Labour government has indicated there will be a long review period prior to implementation.

As part of this review, the Labour government will also consult on how to strengthen protections for the self-employed, including through a potential right to written contract.

Parental Leave

Alongside the measures outlined above to make parental leave a “Day One” right, the Labour government intends to hold a full review of the parental leave system to facilitate this reform.

Carers’ Leave

The Labour government plans to assess the potential benefits of introducing paid carers’ leave against the potential impact on small businesses.

TUPE

The Labour government intends to holistically examine the TUPE regulations and strengthen existing rights and protections under TUPE.

Collective Grievances

The Labour government plans to consult with ACAS on enabling employees to raise collective grievances about conduct in the workplace.

The following Gibson Dunn lawyers prepared this update: James Cox, Georgia Derbyshire, Olivia Sadler, Finley Willits, and Josephine Kroneberger*.

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, any leader or member of the firm’s Labor and Employment practice group, or the following authors in London:

James A. Cox (+44 20 7071 4250, [email protected])

Georgia Derbyshire (+44 20 7071 4013, [email protected])

Olivia Sadler (+44 20 7071 4950, [email protected])

Finley Willits (+44 20 7071 4067, [email protected])

*Josephine Kroneberger, a trainee solicitor in the London office, is not admitted to practice law.

From the Derivatives Practice Group: The CFTC announced that it has taken a no-action position with respect to KalshiEX LLC and related parties regarding swap-data reporting and recordkeeping regulations.

New Developments

CFTC Staff Issues Supplemental Letter Regarding No-Action Position Related to Reporting and Recordkeeping Requirements for Fully Collateralized Binary Options. On October 4, the CFTC’s Division of Market Oversight and the Division of Clearing and Risk announced they have taken a no-action position regarding swap data reporting and recordkeeping regulations in response to a request from KalshiEX LLC, a designated contract market, and Kalshi Klear LLC, a derivatives clearing organization, to modify CFTC Letter No. 21-11 to cover transactions cleared through Kalshi Klear LLC. According to the announcement, the divisions will not recommend the CFTC initiate an enforcement action against KalshiEX LLC, Kalshi Klear LLC, or their participants for failure to comply with certain swap-related recordkeeping requirements and for failure to report to swap data repositories data associated with binary option transactions executed on or subject to the rules of KalshiEX LLC and cleared through Kalshi Klear LLC, subject to the terms and conditions in the no-action letter. [NEW]
US Appeals Court Clears Kalshi to Restart Elections Betting. On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s order that permitted KalshiEX LLC to list contracts that allow Americans to bet on election outcomes. The Court said that the CFTC did not show how the agency or the public interest would be harmed by the “event” contracts. The CFTC’s motion was denied “without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of appeal.”
CFTC’s Division of Clearing and Risk Announces Staff Roundtable Discussion on New and Emerging Issues in Clearing. On September 27, the CFTC announced that the Division of Clearing and Risk will hold a public roundtable on October 16, to discuss existing, new, and emerging issues in clearing. The roundtable will be held in the Conference Center at CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street N.W., Washington, D.C. The roundtable will include participants from derivatives clearing organizations, futures commission merchants (“FCM”), FCM customers, end-users, custodians, proprietary traders, public interest groups, state regulators, and others. The goal of the roundtable is to gather information and receive expert input from a wide variety of stakeholder groups. Topics to be covered include the custody and delivery of digital assets, digital assets and margin, full collateralization, 24/7 trading, non-intermediated clearing with margin, and conflicts of interest related to vertically integrated entities.
CFTC Requests Public Comment on a Rule Certification Filing by KalshiEX LLC. On September 26, the CFTC requested public comment on a rule certification filing by KalshiEX LLC, which would amend its rulebook to include rules for a request for quote functionality and amendments to its prohibited transactions rule. The CFTC previously stayed KalshiEX LLC’s filing because, according to the CFTC, the submission presents novel or complex issues that require additional time to analyze and is potentially inconsistent with the Commodity Exchange Act or the CFTC’s regulations. Comments must be submitted on or before October 28, 2024.
CFTC Staff Extends No-Action Position for Certain Reporting Obligations Under the Ownership and Control Reports Final Rule. On September 25, the CFTC’s Division of Market Oversight (“DMO”) issued a no-action letter that extends the current no-action position for reporting obligations under the ownership and control reports final rule (“OCR Final Rule”). The OCR Final Rule, approved in 2013, requires the electronic submission of trader identification and market participant data for special accounts and volume threshold accounts through Form 102 and Form 40. DMO said that it is extending its no-action position to address continuing compliance difficulties associated with certain ownership and control reporting obligations identified by reporting parties and market participants. The position extends DMO’s position under CFTC Letter No. 23-14, stating that DMO will not recommend the CFTC commence an enforcement action for non-compliance with certain obligations. These obligations include, among others, the timing of ownership and control report form filings; certain information required to be reported regarding trading account controllers and volume threshold account controllers on Form 102; the reporting threshold that triggers the reporting of a volume threshold account on Form 102; the filing of refresh updates for Form 102; and responses to certain questions on Form 40. The no-action position will remain in effect until the later of the applicable effective date or compliance date of a CFTC action, such as a rulemaking or order, addressing such obligations.
CFTC Announces Four Orders Granting Whistleblower Awards – Marking the Most in a Single Day. On September 23, the CFTC announced awards totaling approximately $4.5 million for whistleblowers who, collectively, provided information that led to the success of multiple enforcement actions brought by the CFTC and another authority. The four orders granting awards, to a total of seven whistleblowers, are the most the CFTC has issued on a single day.

New Developments Outside the U.S.

ESMA Publishes Its First Annual Report on EU Carbon Markets. On October 7, ESMA published the 2024 EU Carbon Markets report, providing details and insights into the functioning of the EU Emissions Trading System market. The report indicates that prices in the EU ETS have declined since the beginning of 2023; emission allowance auctions remain significantly concentrated, with 10 participants buying 90% of auctioned volumes, reflecting a preference by most EU ETS operators to source allowances from financial intermediaries; and the vast majority of emission allowance trading in secondary markets takes place through derivatives, reflecting the annual EU ETS compliance cycle where non-financial sector firms hold long positions (for compliance purposes) while banks and investment firms hold short positions. The report builds on ESMA’s 2022 report on the trading of emission allowances, mandated in the context of rising energy prices and a three-fold increase of emission allowances’ prices in 2021. [NEW]
ESMA Launches New Consultations Under the MiFIR Review. On October 3, ESMA launched two consultations on transaction reporting and order book data under the Markets in Financial Instruments Regulation (“MiFIR”) Review. ESMA is seeking input on the amendments to the regulatory technical standards (“RTS”) for the reporting of transactions and to the RTS for the maintenance of data relating to orders in financial instruments.
Joint UK Regulators Issue Press Release on the End of LIBOR. On October 1, the Bank of England published a joint press release with the FCA and the Working Group on Sterling Risk-Free Reference Rates on the end of LIBOR. On September 30, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased. The Working Group has met its objective of finalizing the transition away from LIBOR and will be wound down effective as of October 1. Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency and should ensure their use of term risk-free reference rates are limited and remain consistent with the relevant guidance on best practice on the scope of use.
ESAs Appoint Director to Lead their DORA Joint Oversight. On October 1, the European Supervisory Authorities appointed Marc Andries to lead their new joint Directorate in charge of oversight activities for critical third-party providers established by the Digital Operational Resilience Act (“DORA”). In his role as DORA Joint Oversight Director, Marc Andries will be responsible for implementing and running an oversight framework for critical third-party service providers at a pan-European scale, contributing to the smooth operations and stability of the EU financial sector.
ESMA 2025 Work Programme: Focus on Key Strategic Priorities and Implementation of New Mandates. On October 1, ESMA published its 2025 Annual Work Programme (AWP). A significant portion of ESMA’s work in 2025 will comprise policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, and the preparation of new mandates, such as the European Green Bonds and the ESG Rating Providers Regulations.
ESMA Announces Next Steps for the Selection of Consolidated Tape Providers. On September 30, ESMA announced it will launch the selection procedure for Consolidated Tapes Providers (“CTPs”) bonds on January 3, 2025. In June 2025, ESMA will launch the selection procedure for the CTP for shares and Exchange-Traded Funds with the objective to adopt a reasoned decision on the selected applicant by the end of 2025.
SFC and HKMA Publish Conclusions on Enhancements to OTC Derivatives Reporting Regime for Hong Kong. On September 26, the Securities and Futures Commission and the Hong Kong Monetary Authority jointly published conclusions on proposed enhancements to the over-the-counter (“OTC”) derivatives reporting regime for Hong Kong, indicating that they will mandate (i) the use of unique transaction identifiers, (ii) the use of unique product identifiers and (iii) the reporting of critical data elements beginning on September 29, 2025.

New Industry-Led Developments

ISDA Submits Paper to ESMA on MIFIR Post-Trade Transparency. On October 8, ISDA submitted a paper to ESMA, in which it outlined its views on the scope of OTC derivatives post-trade transparency in the revised MiFIR. The paper outlines ISDA’s view on the treatment of certain interest rate derivatives, index credit default swaps and securitized derivatives. ISDA indicated that it is anticipating the publication of ESMA’s consultation paper on the revised regulatory technical standards, covering OTC derivatives, later in 2024 or in the first quarter of 2025. [NEW]
ISDA, FIA Respond to BoE Consultations on CCP Recovery and Resolution. On October 4, ISDA and FIA submitted a joint response to two Bank of England (“BoE”) consultations on central counterparty (“CCP”) recovery and resolution: the BoE’s power to direct a CCP to address impediments to resolvability ; and the BoE’s approach to determining commercially reasonable payments for contracts subject to a statutory tear up in CCP resolution. In response to the BoE’s consultation on its power to direct a CCP to address impediments to resolvability, the associations said that they welcome the clarity provided on the timescales the BoE would follow when using its power to address impediments to resolvability. However, the response notes that the BoE should more explicitly set out whether and how it would consider informing clearing members ahead of using this power. In response to the BoE’s consultation on its approach to determining commercially reasonable payments for contracts subject to statutory tear up in CCP resolution, the associations expressed caution on the proposed approach, which they indicated could result in placing too much reliance on the CCP’s own rules and arrangements to generate commercially reasonable prices for contracts subject to tear up. The response highlights that in a situation where the BoE would have to use its power to tear up contracts – i.e., after a failed auction – there might not exist a clear price for those contracts. [NEW]
ISDA Responds to UK FCA Consultation on DTO and PTRRS. On September 30, ISDA responded to Financial Conduct Authority (“FCA”) consultation CP24/14 on the derivatives trading obligation (“DTO”) and post-trade risk reduction services (“PTRRS”). In the response, ISDA highlights its support for including certain overnight index swaps based on the US Secured Overnight Financing Rate within the classes of derivatives subject to the DTO and expanding the list of PTRRS exempted from the DTO and other obligations.
ISDA Publishes Results of Survey on AT1 Treatment in DRM Model On September 27, ISDA published a survey of its members on the development of the dynamic risk management (“DRM”) model. The survey sought to understand the accounting and regulatory treatment of Alternative Tier 1 (“AT1”) financial instruments and to contribute this information to the development of the International Accounting Standards Board’s DRM model. The survey shows that for balance sheet classification under International Financial Reporting Standards, the majority of respondents classify their AT1s as equity; the majority of respondents include their AT1s for interest rate risk in the banking book (“IRRBB”) as equivalent to financial liabilities; and there is strong desire for the inclusion of AT1s in the current net open position.
ISDA Publishes Updated Best Practices for Confirming Reference Obligations or Standard Reference Obligations. On September 25, ISDA published updated Best Practices for Single-name Credit Default Swaps regarding Reference Obligations or Standard Reference Obligations. The document sets out suggested best practices for confirming the Reference Obligation or Standard Reference Obligations for single-name Credit Default Swaps and is an update to the Best Practice Statement that was published by ISDA on November 18, 2014.
Joint Trade Association Issues Statement on EMIR 3.0 Effective Implementation Dates. On September 23, ISDA, the Alternative Investment Management Association, the European Banking Federation, the European Fund and Asset Management Association and FIA sent a letter urging the European Commission and European supervisory authorities to clarify that market participants are not required to implement the European Market Infrastructure Regulation (“EMIR 3.0”) Level 1 provisions prior to the date of application of the associated Level 2 regulatory technical standards (“RTS”). In the letter, the associations state that they are seeking clarification to avoid firms being required to implement the requirements of EMIR 3.0 twice—first, to comply with the Level 1 provisions once EMIR 3.0 enters into force and then when the associated Level 2 RTS becomes applicable.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

The rulemaking changes represent the first major overhaul of the HSR premerger notification requirements in its 45-year history, and are slated to take effect 90 days from when it is published in the Federal Register, likely sometime in January 2025.

On October 10, 2024, the Federal Trade Commission, with concurrence from the Department of Justice, announced the release and upcoming implementation of changes to the Premerger Notification and Report Form (the “HSR Form”) and associated instructions, as well as to the premerger notification rules implementing the Hart-Scott Rodino (“HSR”) Act.[1] The rulemaking changes represent the first major overhaul of the HSR premerger notification requirements in its 45-year history, and are slated to take effect 90 days from when it is published in the Federal Register, likely sometime in January 2025. While notably less expansive and onerous than initially contemplated, the FTC’s changes, detailed below, nevertheless broadly affect all filings for HSR-reportable deals. Companies seeking clearance for mergers in the U.S. will need to expend more time and effort to prepare HSR filings, as they now will be required to provide both additional narrative data about the merger and any overlapping products or services between the merging parties and more documents and financial data than previously required. The information requested will provide U.S. agencies with more insight on the proposed transaction and associated antitrust earlier in the process, creating more inroads for the agencies to justify expanded “Second Request” investigations. The updated HSR rules do not change who has to file, and no change has been made to the method for accepting filings, though the FTC noted that a new electronic filing system is in development and that it will propagate further rulemaking detailing this initiative when it is ready.[2]

The most significant changes to the HSR filing requirements include:

Additional 4(c)/(d) Documents. The new rules expand the scope of required so-called 4(c) and 4(d) documents. The new rules require documents not only created by or for officers and directors of the filer, but also those created by or for the “supervisory deal team lead,” defined as a single individual who has “primary responsibility for supervising the strategic assessment of the deal, and who would not otherwise qualify as a director or officer.”[3] The rules also now require the inclusion of certain ordinary course business documents from all filers, namely any periodic plans and reports that discuss market shares, competition, competitors, or markets of any overlapping product or service that were shared with the Chief Executive Officer or the Board.[4] The document requirement excludes ad hoc reports and is limited to only those documents created within one year of filing. The relevant products and services in scope are those that both the acquiring and acquired persons produce, sell, or are known to be developing.

Transaction and Competitive Overlap Details. Under the new rules, the acquirer will be required to make additional disclosures on the details of the transaction, including a short description of the operating businesses within the acquiring person, other antitrust jurisdictions besides the U.S. where the parties have filed or will file, and any pre-existing diagrams of the deal structure for the transaction.[5] All filing parties will be required to supply transaction rationales, but for acquired persons, a brief description of the transaction rationale is sufficient so long as it is accurate and does not conflict without explanation with stated rationales in documents submitted with the HSR Filing.[6] All filing parties will be required to identify the entities they control that generate revenue for overlapping NAICS codes between the parties, as well as more detailed narrative and geographic information for those overlap businesses.[7]

Prior Acquisitions. The rules expand existing reporting requirements on prior acquisitions, most notably extending the requirement to acquired persons.[8] Both acquirers and acquired persons will be required to note acquisitions for the past 5 years, excluding as de minimis any acquisitions of entities with less than $10 million in total assets and annual net sales in the year prior to the acquisition. The rules also require including transactions in which the filer acquired substantially all of the assets of a business and not merely acquisitions of voting securities or non-corporate interest. This change aligns with the U.S. antitrust agencies’ focus in the December 2023 Merger Guidelines on “roll-up strategies” by acquirers.

Other Affiliations. The new rules require additional information related to the outside affiliations of the filers and their officers and directors. Filers are already required under Item 6(c) of the HSR rules to list as minority ownership any holdings of greater than 5% but less than 50% where there are NAICS code overlaps with the filers. The updated rules eliminate the alternative option for filers just to list all minority holdings, and now must specifically identify only those with potential competitive overlap products or services.[9] The rules will also require the acquiring person to disclose the board and corporate affiliations that each officer and director holds with other entities outside of the filing company, where those entities are in the same industry as the target.[10] The rules include a short lookback period to include affiliations that ended within 3 months of the filing, and exempt non-profit organizations with political or religious purposes. Officer and director affiliations will only be required for acquirer entities that either have responsibility for the reported overlap products and those that indirectly or directly control or are controlled by those entities. The agencies continue to closely monitor companies for new potential officer/director interlocks under Section 8 of the Clayton Act or avenues of improper coordination under Section 1 of the Sherman Act, and through these additional disclosures will be more armed to investigate concerns resulting from the transaction and potential pre-existing concerns separate from the transaction.[11]

Vertical Supply Relationships. The FTC will now require the parties to identify any supplier relationships between the acquirer and acquired persons or any other person that the parties know or believe competes with either party.[12] The rules establish a de minimis exception for lines of business that account for less than $10 million in revenue, but note that parties must include in their calculations the value of goods they supply to themselves in internal transfers for competitive overlap products.[13] Filers will need to include a brief description of the product or service sold or licensed, and list associated revenues for that supply relationship for the most recent fiscal year.

The new rules will exclude some of these new obligations for “select 801.30 transactions,” defined as those acquisitions that “do not result in the acquisition of control to which § 801.30 applies [such as tender offers] and where there is no agreement or contemplated agreement between any entity within the acquiring and acquired person.”[14] The rules also limit additional information requests in some cases for transactions where there are no competitive overlaps:

[15]

Additional Key Takeaways

Companies contemplating or pursuing transactions will need to be prepared for additional time and burden under the new rules, and should begin to consider how they will approach the filing early in the deal process. In particular, companies should expect that it will take more time to prepare a filing that complies with the new requirements, and take that into account when negotiating timing terms. The additional volume and scope of information contained in HSR filings also raise the possibility of enhanced scrutiny of transactions generally, and more quickly after the filing is completed.

One potentially positive development: in conjunction with announcing the final rule, the FTC announced the planned reinstatement of early termination of the statutory 30-day waiting period following an HSR filing, which could shorten deal timelines for certain merging parties.

Firms considering transactions should continue to proactively consult with antitrust counsel early in the transaction process to identify and mitigate risk.

Gibson Dunn attorneys are closely monitoring these developments and are available to discuss these issues as applied to your particular business. Please reach out to your Gibson Dunn contacts in the Antitrust and Competition group if you have questions about how the updated rules may affect your M&A plans and how best to prepare. If you are interested in challenging the final rule as Gibson Dunn successfully accomplished against the FTC’s non-compete rule in Ryan, LLC v. FTC, please reach out to your Gibson Dunn contacts in the Administrative Law and Regulatory Practice group.

[1] https://www.ftc.gov/news-events/news/press-releases/2024/10/ftc-finalizes-changes-premerger-notification-form?utm_source=govdelivery

[2] Premerger Notification; Reporting and Waiting Period Requirements, Action: Final Rule (“Final Rule”). October 10, 2024, available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014hsrfinalrule.pdf, pg.178

[3] Final Rule, pg. 204

[4] Final Rule, pg. 279

[5] Final Rule, pgs. 256-257

[6] Final Rule, pg. 262

[7] Final Rule, pgs. 342-343

[8] Final Rule, pg. 349

[9] Final Rule, pg. 345

[10] Final rule, pg. 248

[11] See In the Matter of QEP Partners, August 16, 2023, https://www.ftc.gov/news-events/news/press-releases/2023/08/ftc-acts-prevent-interlocking-directorate-arrangement-anticompetitive-information-exchange-eqt

[12] Final Rule, pg. 326

[13] Final Rule, pg. 331

[14] Final Rule, pg. 201

[15] Final Rule, pg. 156

The following Gibson Dunn lawyers prepared this update: Rachel Brass, Jamie France, Sophia Hansell, Michael Perry, Andrew Cline, Zoë Hutchinson, and Steve Pet.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Antitrust and Competition, Administrative Law and Regulatory, Mergers and Acquisitions, or Private Equity practice groups:

Antitrust and Competition:
Rachel S. Brass – San Francisco (+1 415.393.8293, [email protected])
Jamie E. France – Washington, D.C. (+1 202.955.8218, [email protected])
Sophia A. Hansell – Washington, D.C. (+1 202.887.3625, [email protected])
Kristen C. Limarzi – Washington, D.C. (+1 202.887.3518, [email protected])
Joshua Lipton – Washington, D.C. (+1 202.955.8226, [email protected])
Michael J. Perry – Washinton, D.C. (+1 202.887.3558, [email protected])
Cynthia Richman – Washington, D.C. (+1 202.955.8234, [email protected])
Stephen Weissman – Washington, D.C. (+1 202.955.8678, [email protected])

Administrative Law and Regulatory:
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, [email protected])
Eugene Scalia – Washington, D.C. (+1 202.955.8673, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, [email protected])

Partner Benjamin Rapp (Munich and Frankfurt) and associate Daniel Reich (Frankfurt) are the authors of “Steuerliche Zweifelsfragen bei der ertragsteuerlichen Organschaft im Fall von Bilanzierungsfehlern“ (Tax issues in the case of accounting errors in the fiscal unity for income tax purposes), published by Der SteuerBerater in its October 2024 issue. The article examines how accounting errors can affect profit-and-loss transfer agreements in the context of tax groups and highlights different views on how to deal with accounting errors from a German commercial and tax law perspective.

This edition of Gibson Dunn’s Federal Circuit Update for September 2024 summarizes the current status of petitions pending before the Supreme Court and recent Federal Circuit decisions concerning the level of skill of a person of ordinary skill in the art, patent eligibility under 35 U.S.C. § 101, indefiniteness, and the party presentation principle.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There was a potentially impactful petition filed before the Supreme Court in September 2024:

Norwich Pharmaceuticals Inc. v. Salix Pharmaceuticals, Ltd. (US No. 24-294): The question presented is “[w]hether 35 U.S.C. § 271(e)(4)(A) requires courts to issue injunctive orders that are broader in scope than the underlying infringement, thereby delaying FDA approval of generic drug applications for indications that have not been found to infringe any valid patent.”

We provide an update below of the petitions pending before the Supreme Court, some of which were summarized in our August 2024 update:

In Zebra Technologies Corporation v. Intellectual Tech LLC (US No. 24-114), the Court requested a response to the petition, which is due October 16, 2024. The question presented is “[w]hether a party has Article III standing to assert a claim for patent infringement against an accused infringer who has the ability to obtain a license from a third party.”
The Court denied the petitions in United Therapeutics Corp. v. Liquidia Technologies, Inc. (US No. 23-1298), Chestek PLLC v. Vidal (US No. 23-1217), and Cellect LLC v. Vidal (US No. 23-1231).

Federal Circuit En Banc Petitions:

EcoFactor, Inc. v. Google LLC, No. 2023-1101 (Fed. Cir. Sept. 25, 2024): The Federal Circuit granted Google’s petition for rehearing en banc as to the admissibility of EcoFactor’s damages expert assigning a per-unit royalty rate to the three licenses in evidence.

We summarized the original panel opinion in our June 2024 update.

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit is available on the court’s website.

Key Case Summaries (September 2024)

Osseo Imaging, LLC v. Planmeca USA Inc., No. 2023-1627 (Fed. Cir. Sept. 4, 2024): Osseo sued Planmeca for infringing patents directed to orthopedic imaging systems that use X-ray techniques to create tomographic and/or densitometric models of a scanned object. After a jury verdict of infringement and no invalidity, Planmeca moved for judgment as a matter of law of invalidity and noninfringement asserting, inter alia, that Osseo’s technical expert, Dr. Kia, did not qualify as a person of ordinary skill in the art as of the alleged date of invention, because Dr. Kia did not attain the requisite three to five years of diagnostic imaging experience until nearly ten years after the time of the invention. The district court denied Planmeca’s motion, explaining there was no requirement that an expert attain his or her expertise prior to a patent’s effective date, and concluding that the jury was free to credit Dr. Kia’s testimony in reaching its conclusions on infringement.

The Federal Circuit (Stoll, J., joined by Dyk and Clevenger, JJ.) affirmed. The Court first noted the unusual procedural posture of Planmeca’s challenge of Dr. Kia’s expert testimony—Planmeca did not file a Daubert motion or appeal the denial of a motion to exclude Dr. Kia’s testimony or denial of an objection to that testimony at trial, but instead asserts that Dr. Kia’s testimony cannot constitute substantial evidence supporting the jury’s verdict of infringement. The Court then declined to add a temporal requirement, and instead held that an expert “need not have acquired that skill level prior to the time of invention to be able to testify from the vantage point of a person of ordinary skill in the art” and “can acquire the necessary skill level later and develop an understanding of what a person of ordinary skill knew at the time of the invention.”

Contour IP Holding LLC v. GoPro, Inc., Nos. 2022-1654, 2022-1691 (Fed. Cir. Sept. 9, 2024): Contour sued GoPro for patent infringement of several of GoPro’s patents directed to “portable, point of view (‘POV’)” video camera technology. Specifically, they disclose a “‘hands-free, POV action sports video camera’ that is ‘configured for remote image acquisition control and viewing.’” The district court granted GoPro’s summary judgment motion on the basis that the claims were patent ineligible under 35 U.S.C. § 101. Under Alice step one, the court determined that a representative claim “was directed to the abstract idea of ‘creating and transmitting video (at two different resolutions) and adjusting the video’s settings remotely.” At Alice step two, the court said the claim “recites only functional, results-oriented language with ‘no indication that the physical components are behaving in any way other than their basic, generic tasks.’”

The Federal Circuit (Prost, J. joined by Schall and Reyna, JJ.) reversed. The Court held that the claims “require specific, technological means—parallel data stream recording with the low-quality recording wirelessly transferred to a remote device—that in turn provide a technological improvement to the real time viewing capabilities of a POV camera’s recordings on a remote device.” The Court further explained that the “claims are directed to a technological solution to a technological problem,” that enables the claimed POV camera to “operate differently than it otherwise could.” The Court held that the claims therefore recite patent-eligible subject matter at Alice step one, and there was thus no need to proceed to Alice step two.

Vascular Solutions LLC et al. v. Medtronic, Inc. et al., No. 2024-1398 (Fed. Cir. Sept. 16, 2024): Vascular sued Medtronic for infringing its patents directed to a “coaxial guide catheter that is deliverable through standard guide catheters by utilizing a guidewire rail segment to permit delivery without blocking use of the guide catheter.” The district court construed the phrase “substantially rigid portion/segment” as recited in all the asserted claims as indefinite and concluded the claims were therefore invalid. The parties stipulated to final judgment based on that determination.

The Federal Circuit (Mazzant, J. (district judge sitting by designation), joined by Moore, C.J., and Prost, J.) vacated and remanded. The Court first determined that the district court erred in finding that one set of claims were “mutually exclusive” from another set of claims because the first set of claims place a claimed “side opening” within the substantially rigid portion whereas the second set of claims place the side opening distal to the substantially rigid portion. The Court explained that the analysis of indefiniteness must be performed on a claim-by-claim basis, and thus, the boundary of “substantially rigid portion/segment” does not have to be consistent across all the claims. The Court acknowledged, however, that while the claim term should be construed consistently within the same claim or across other claims of the same patent, that construction may be a “functional construction” that does not specify the boundary of the “substantially rigid portion.”

Astellas Pharma, Inc. v. Sandoz Inc., et al., Nos. 2023-2032, 2023-2063, 2023-2089 (Fed. Cir. Sept. 18, 2024): Astellas sued Sandoz for infringing its patent directed to a sustained-release pharmaceutical composition for mirabegron, after Sandoz submitted an ANDA to sell and market generic versions of Astellas’s drug, Myrbetriq. Following the bench trial on issues of infringement and validity under 35 U.S.C. § 112, the district court sua sponte held that the asserted claims were ineligible under 35 U.S.C. § 101. The district court determined that in defending its patent against Sandoz’s Section 112 defenses, Astellas had stated that the “inventive concept” in the claims was the discovery of the correct “dissolution rate” to avoid adverse food effects associated with taking the drug, and that therefore Astellas had conceded its patent was ineligible as directed to a natural law.

The Federal Circuit (Lourie, J., joined by Prost and Reyna, J.J.) vacated and remanded. The principle of party presentation states that courts rely on the parties to frame the issues for decision and assign to the courts the role of neutral arbiter of matters the parties present. The Court held that the district court abused its discretion by violating the principle of party presentation in holding the claims ineligible under Section 101—a ground not raised by Sandoz. The Court explained that the presumption of validity applies equally to all grounds of validity. Accordingly, to the extent the district court believed that patent eligibility under Section 101 was a threshold inquiry and should be “treated any differently than validity under §§ 102, 103, and 112 for purposes of the party presentation principle, that was error.” The Court then declined Astellas’s request to reassign the matter to a new judge on remand, finding that although statements made by the district court evidenced a “personal frustration with the pharmaceutical industry as a whole,” it did not amount to “extraordinary circumstances” that would indicate that the judge could not impartially address the outstanding issues on remand.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Jaysen Chung, Audrey Yang, Al Suarez, Vivian Lu, and Julia Tabat.

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, any leader or member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups, or the following authors:

Blaine H. Evanson – Orange County (+1 949.451.3805, [email protected])
Audrey Yang – Dallas (+1 214.698.3215, [email protected])

Appellate and Constitutional Law:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202.955.8547, [email protected])
Allyson N. Ho – Dallas (+1 214.698.3233, [email protected])
Julian W. Poon – Los Angeles (+ 213.229.7758, [email protected])

Intellectual Property:
Kate Dominguez – New York (+1 212.351.2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415.393.8224, [email protected])
Josh Krevitt – New York (+1 212.351.4000, [email protected])
Jane M. Love, Ph.D. – New York (+1 212.351.3922, [email protected])

This webcast focuses on enforcement trends in the Southern and Eastern Districts of New York. The panel includes a former Assistant United States Attorney from the Southern District of New York and a former Assistant United States Attorney from the Eastern District of New York who cover key takeaways and trends from 2024 and look ahead at what these districts will prioritize in 2025.

Discussion topics include:

Meaning and potential impacts of the DOJ’s new whistleblower program and the related SDNY pilot program (www.justice.gov/d9/2024-02/sdny_wb_policy_effective_2-13-24.pdf)
Key takeaways from indictments and civil lawsuits filed by the offices in 2024
How this evolving and dynamic DOJ enforcement landscape may impact companies and executives.

PANELISTS:

Joseph Warin is chair of the 250-person Litigation Department of Gibson Dunn’s Washington, D.C. office, and he is co-chair of the firm’s global White Collar Defense and Investigations Practice Group. Mr. Warin’s practice includes representation of corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries. His credibility at DOJ and the SEC is unsurpassed among private practitioners – a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA (2007-2009); Siemens AG (2009-2012); and Alliance One International (2011-2013). He has been hired by audit committees or special committees of public companies to conduct investigations into allegations of wrongdoing in a wide variety of industries including energy, oil services, financial services, healthcare and telecommunications. Mr. Warin is admitted to practice in the District of Columbia.

Zainab Ahmad is a partner in the New York office of Gibson Dunn, where she is co-chair of the firm’s National Security Practice Group and a member of the White Collar Defense and Investigations, Privacy, Cybersecurity and Data Innovation and Labor and Employment Practice Groups. Zainab served as Senior Assistant Special Counsel in Special Counsel Robert S. Mueller’s Office following a successful career as a prosecutor and trial lawyer at the Department of Justice in both Washington, D.C. and the Eastern District of New York. As former Deputy Chief of the National Security and Cybercrime section at the U.S. Attorney’s Office in the Eastern District of New York, Zainab supervised a unit of over 20 attorneys, investigators, and staff prosecuting sensitive counterterrorism, counterespionage, and cybercrime cases. Zainab’s practice focuses on white collar defense and investigations, as well as regulatory and civil litigation challenges, such as matters involving corruption, anti-money laundering, sanctions and FCPA issues. She also advises clients on cybercrime and intellectual property issues, including handling investigations, enforcement defense, and litigation. She has extensive experience with a wide range of federal, state, and international cybersecurity laws, regulations, and standards.

Zainab previously represented the DOJ at meetings of the World Economic Forum’s Cybercrime Workshop and participated in development of WEF’s Guidance on Public-Private Information Sharing Against Cybercrime. She also organized and led a Cybercrime Roundtable with former FBI Director James Comey and General Counsel and C-suite executives from various industries, including banking, media, health care and pharmaceutical companies, to discuss improved public-private partnership in combatting cybercrime. Zainab is admitted to practice in the State of New York.

Karin Portlock is a partner in the New York office of Gibson Dunn and a member of the White Collar Defense and Investigations, Litigation, Labor and Employment, and Crisis Management Practice Groups. As a former federal prosecutor, Karin has a broad-based government enforcement and investigations practice, ranging from government and internal corporate investigations to criminal defense and regulatory enforcement litigation through trial. She regularly represents individuals and companies under criminal investigation and indictment by the U.S. Department of Justice as well as in civil government probes by federal regulators and state Attorneys General.

Prior to joining Gibson Dunn, Karin was as an Assistant United States Attorney in the U.S. Attorney’s Office for the Southern District of New York from 2015 to 2020. In that role, she tried multiple cases to verdict and prosecuted a broad range of federal criminal violations, including fraud, racketeering, and violent crimes, leading large-scale investigations of murder, firearms, and sex trafficking offenses as well as crimes involving minors and other vulnerable victims. She has particular expertise with victims of trauma and represents victims and witnesses at all stages of investigation and prosecution, including in cases involving highly sensitive subject matter. Karin is admitted to practice in the State of New York and before the U.S. District Courts for the Southern and Eastern Districts of New York and the U.S. Court of Appeals for the Second Circuit.

MCLE CREDIT INFORMATION:

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments:

On October 4, 2024, the U.S. Supreme Court granted a petition for certiorari to review a circuit split regarding a plaintiff’s burden of proof in Title VII “reverse-discrimination” cases. The decision from the Sixth Circuit involved a former Ohio Department of Youth Services employee who claimed that the Department passed her over for a promotion and later demoted her because she was heterosexual, while simultaneously promoting LGBTQ candidates. The district court granted summary judgment to the Department on the sexual orientation discrimination claim. The Sixth Circuit affirmed, holding that plaintiffs in “reverse-discrimination” cases must make an additional showing that “background circumstances . . . support the suspicion that the defendant is that unusual employer who discriminates against the majority.” The Seventh, Eighth, Tenth, and D.C. Circuits have also adopted the background circumstances rule, while the Third and Eleventh Circuits have expressly rejected it. The employee’s petition argued that the Sixth Circuit’s ruling improperly required more evidence from her as a member of a majority group, when this higher burden is not imposed on minority plaintiffs. The case is Marlean A. Ames v. Ohio Department of Youth Services, case number 23-1039. Oral argument has not yet been scheduled.

On September 25, 2024, the U.S. Equal Employment Opportunity Commission (EEOC) filed a lawsuit against a Southern sports bar chain, Battleground Restaurants, in federal district court in North Carolina. EEOC v. Battleground Restaurants, No. 1:24-cv-00792 (M.D.N.C. 2024). The lawsuit alleges that the chain refused to hire men for its front-of-house positions, such as server or bartender jobs, in violation of Title VII. The EEOC’s suit is one of over 50 lawsuits the EEOC filed in the last week of September, prior to the end of its fiscal year on September 30, 2024. For more information about the EEOC’s recent suits, including its strategic aims and enforcement priorities, see our client alert here.

Starting on September 16, 2024, Judge Richard Bennett of the District of Maryland held a bench trial in Students for Fair Admissions v. United States Naval Academy, No. 1:23-cv-02699 (D. Md. 2023). SFFA filed suit against the Naval Academy on October 5, 2023, arguing that the Academy’s consideration of race in its admissions process cannot withstand strict scrutiny under the Equal Protection Clause. During the trial, which lasted nine days, SFFA argued that the Academy’s use of race in its admissions practices violated the Constitution because it was not narrowly tailored to achieve a compelling interest. The Academy countered that its use of race is necessary to achieve a diverse officer corps, which furthers a compelling government interest in national security. Judge Bennett has said that he will issue a decision in November.

On September 24, Paradigm Strategy Inc., an organization that helps companies with their DEI strategies, released a report titled “Unlocking the Potential of Your Workforce: The Benefits of Belonging.” The report discusses the benefits of developing a sense of belonging among employees, including increased engagement and innovation and improved organizational performance. The report focuses on a study of more than 38,000 employees across 53 organizations and finds that in companies where employees feel a strong sense of belonging, they are 10 times more likely to be engaged and 14 times more likely to feel confident in the organization’s decisions. According to Paradigm’s research, developing a sense of belonging requires both that employees see others like them succeed, and that employers develop policies and norms that encourage inclusion. To achieve this, Paradigm suggests identifying and focusing on the groups that feel most disconnected by creating trusting relationships, demonstrating that the company values difference, and building a culture of growth. Lastly, the report finds that when companies focus on developing a sense of belonging for the most marginalized members of the workforce, all employees feel a stronger sense of belonging.

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

Bloomberg, “Caterpillar Joins Ford, Lowe’s in Diversity Rethink as Backlash Grows” (September 19): Bloomberg’s Jeff Green reports on Caterpillar Inc.’s recent decision to revise aspects of its DEI policy following a threatened social media attack by conservative activist Robby Starbuck. In an internal memorandum, Caterpillar leadership indicated that it would focus future employee training programs on performance rather than diversity, require manager approval before engaging external speakers, and impose new rules on employee resource groups. A spokesperson for Caterpillar confirmed both the planned changes and that executives had spoken with Starbuck. But the spokesperson denied that Starbuck’s threats also led Caterpillar to stop participating in the Human Rights Campaign’s ranking of corporate LGBTQ+ policies, saying that the company independently decided last year to end its participation. Green reports that Caterpillar has faced—and resisted—similar challenges in the past. For example, in June 2023, 98.3% of Caterpillar shareholders rejected a proxy proposal from conservative group National Center for Public Policy Research asking the company to audit its DEI programming for potential negative impacts on hiring and promotion.
Bloomberg, “Toyota Deflects Attack by Anti-DEI Activist Over LGBTQ Programs” (September 26): Bloomberg’s Jeff Green reports on Toyota Motor Corp.’s response to Robby Starbuck’s September 26 post on X (formerly Twitter) about the automaker’s perceived LGBTQ+-friendly policies. Starbuck claimed, among other things, that Toyota supports trans-affirming legislation, funds LGBTQ+ groups and programs, and gives preferential treatment to diverse suppliers. Green reports that on October 3, Toyota told its employees that it will refocus its DEI program on business-related issues, halt sponsorship of LGBTQ events, and end participation in the Human Rights Campaign Corporate Equality Index. Green says that in recent weeks, the Human Rights Campaign has cautioned companies against backtracking on LGBTQ efforts and urged supporters to boycott many of the companies that have ended participation in its Corporate Equality Index.
Litigation Daily, “Law Firms Mobilize To Respond to Anti-DEI Backlash” (October 3): Law.com’s Charles Toutant interviews leaders at Gibson Dunn and three other law firms that have formed practice groups designed to support clients in navigating the dynamic legal landscape surrounding corporate DEI programs. Gibson Dunn’s Jason Schwartz acknowledges that conservative activists “have been highly organized and very effective so far in their litigation.” But Schwartz cautions corporate clients “not to overreact” to that success, saying that these groups “filed their early cases in jurisdictions where they thought they would be more successful,” and predicts that the law will “develop in different ways” as these cases are brought “in courts throughout the country.” While at least 50 lawsuits relating to DEI programs have been filed since the Supreme Court’s SFFA decision, Schwartz anticipates that anti-DEI litigation will continue to “heat up before it cools off,” as claims filed under Title VII make their way out of the EEOC administrative process and into federal court.

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

SGCI Holdings III LLC v. FCC, No. 1:24-cv-01204 (D.D.C. 2024): On April 24, 2024, hedge fund manager Soo Kim brought a lawsuit against the Federal Communications Commission and media entities over what he alleges is a racially discriminatory conspiracy to block his fund’s $8.6 billion purchase of media company Tegna. The lawsuit alleges that the FCC stalled Kim’s efforts to purchase Tegna because a competing media executive, who is Black, wanted to purchase Tegna.
- Latest update: On September 9, 2024, the defendants filed motions to dismiss. In its motion to dismiss, the FCC asserted sovereign immunity and argued that the plaintiff had failed to state a claim and lacked standing. The media company defendants argued that the court lacked subject matter jurisdiction and that the plaintiff’s claims were barred by the First Amendment. On September 24, 2024, Dish Network (one of the defendants) filed a motion for Rule 11 sanctions, arguing that the factual allegations against it were unsupported and frivolous. The plaintiff opposed the next day.
Mid-America Milling Company v. U.S. Department of Transportation, No. 3:23-cv-00072-GFVT (E.D. Ky. 2023): On October 26, 2023, two plaintiff construction companies sued the Department of Transportation, asking the court to enjoin the DOT’s Disadvantaged Business Enterprise Program, an affirmative action program that awards contracts to minority-owned and women‑owned small businesses in DOT-funded construction projects, with the statutory aim of granting 10% of certain DOT-funded contracts to these businesses nationally. The plaintiffs alleged that the program constitutes unconstitutional race discrimination in violation of the Fifth Amendment.
- Latest update: On September 23, 2024, the court granted the plaintiffs’ motion for a preliminary injunction, holding that the DOT’s race and gender classifications violate the Equal Protection Clause. The court also held that the plaintiffs have standing based on their allegations that they are “able and ready” to bid on a government contract in the near future. The court denied the defendants’ motion to dismiss pending the resolution of any interlocutory appeal of the injunction order.

2. Challenges to agency rules, laws and regulatory decisions:

Young Americans for Freedom v. United States Department of Education, No. 3:24-cv-00163 (D.N.D. 2024): On August 27, 2024, the University of North Dakota Chapter of Young Americans for Freedom (YAF) sued the U.S. Department of Education (DOE) over its McNair Post-Baccalaureate Achievement Program, a research and graduate studies grant program that supports incoming graduate students who are either low-income first-generation college students or “member[s] of a group that is underrepresented in graduate education.” YAF alleges that the McNair program violates the Equal Protection Clause by restricting admission based on race. YAF requests, among other things, a preliminary injunction enjoining the DOE from enforcing all race-based qualifications for the McNair program.
- Latest update: On September 23, 2024, the DOE responded to the plaintiffs’ motion for a preliminary injunction. DOE argued that the plaintiffs are not likely to succeed on the merits because they lack standing and do not face a threat of irreparable harm because they are ineligible to apply for the program. On September 30, 2024, the plaintiffs replied, arguing that they have standing because they are harmed by the DOE’s use of race in administering the achievement program.

3. Employment discrimination and related claims:

Harker v. Meta Platforms, Inc. et al., No. 23-cv-07865-LTS (S.D.N.Y. 2023): A lighting technician who worked on a set where a Meta commercial was produced sued Meta and a film producers association, alleging that their diversity initiative Double the Line (“DTL”) violated Title VII, Sections 1981 and 1985, and New York law. The plaintiff also claimed that he was retaliated against after raising questions about the qualifications of a coworker hired under DTL. On December 19, 2023, the defendants filed their motions to dismiss the plaintiff’s first amended complaint.
- Latest update: On August 29, 2024, the court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction and closed the case. The court held that the plaintiff lacked standing because he had not actually filed an application to participate in the DTL program, and that arguing that an application is futile is insufficient to establish standing, relying on the Second Circuit’s recent decision in Do No Harm v. Pfizer, 96 F.4th 106 (2d Cir. 2024). On September 24, 2024, the plaintiffs filed a notice of appeal.
Johnson v. Watkin et al., No. 1:23-cv-00848-ADA-CDB (E.D. Cal. 2023): On June 1, 2023, a community college professor in California sued to challenge new “Diversity, Equity and Inclusion Competencies and Criteria Recommendations” enacted by the California Community Colleges Chancellor’s Office, claiming the regulations violated the First and Fourteenth Amendments. The plaintiff alleged that the adoption of the new competency standards, which require professors to be evaluated in part on their success in integrating DEI-related concepts in the classroom, will require him to espouse DEI principles with which he disagrees, or be punished. The plaintiff moved to enjoin the policy.
- Latest update: On September 23, 2024, the court granted the defendants’ motion to dismiss for lack of standing. The court held that the plaintiff had not provided enough details regarding his intent to engage in a constitutionally protected course of conduct that would be abridged by the regulations. The same day, the plaintiff filed a notice of appeal.
Bradley, et al. v. Gannett Co. Inc., 1:23-cv-01100 (E.D.Va. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On August 21, 2024, the court granted Gannett’s motion to dismiss, holding that Gannett’s diversity policy alone did not establish disparate treatment, since it did not define any specific goals or quotas. The court also held that each of the named plaintiffs had failed to state a claim for individual relief pursuant to Section 1981, and dismissed the class allegations because the class was not ascertainable and lacked commonality.
- Latest update: On September 19, 2024, the plaintiffs filed a second amended complaint, adding specific allegations of adverse employment actions that Gannett had purportedly taken pursuant to its policy.
Spitalnick v. King &smp; Spalding, LLP, No. 24-cv-01367-JKB (D. Md. 2024): On May 9, 2024, Sarah Spitalnick, a white, heterosexual female filed a lawsuit against King & Spalding, alleging that when she was a first-year law student at University of Baltimore School of Law, she was deterred from applying to King & Spalding’s Leadership Counsel Legal Diversity internship program. Spitalnick alleges that she was qualified for the program but was deterred because the advertisement for the program stated that candidates “must have an ethnically or culturally diverse background or be a member of the LGBT community.” Spitalnick sued King & Spalding under Title VII and Section 1981 for race and sex discrimination.
- Latest update: On September 19, 2024, King & Spalding moved to dismiss for lack of subject matter jurisdiction and failure to state a claim. The law firm argued that Spitalnick lacked standing because she failed to apply to the program and that she failed to allege sufficient facts to state a claim under Section 1981 and Title VII.
Hogarty v. Cherry Creek School District, No. 1:24-cv-02650-RMR (D. Colo. 2024): On September 25, 2024, America First Legal filed a complaint on behalf of a former employee of Cherry Creek School District, alleging that the District terminated his employment after he expressed disagreement with concepts in a DEI training program. The complaint asserts claims under Section 1983 based on alleged violations of the First Amendment.
- Latest update: The District’s response to the complaint is due on November 6, 2024.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Jenna Voronov, Alana Bevan, Marquan Robertson, Janice Jiang, Elizabeth Penava, Skylar Drefcinski, Mary Lindsay Krebs, David Offit, Lauren Meyer, Kameron Mitchell, Maura Carey, and Jayee Malwankar.

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 Labor and Employment practice group, or the following practice leaders and authors:

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, [email protected])

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, [email protected])

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, [email protected])

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, [email protected])