On September 23, 2020, the Securities and Exchange Commission (the “Commission”) voted to adopt amendments (the “Amended Rules”) (available here)[1] to key aspects of the Commission’s shareholder proposal rule. The Amended Rules:

modestly increase the current stock ownership threshold to submit a shareholder proposal for shareholders who have not held a company’s stock for at least three years;
expand the procedural requirements on the submission of proposals, including changes to limit abuse of the process when non-shareholders submit a “proposal by proxy;”
change the rules to apply the one-proposal rule to each person instead of each shareholder, thereby limiting representatives to one proposal per meeting; and
increase the levels of shareholder support a shareholder proposal must receive in order to be eligible for resubmission at future meetings.

While the Amended Rules will be effective 60 days after publication in the Federal Register, they only apply to shareholder proposals submitted for an annual or special meeting held on or after January 1, 2022, and thus will not affect the upcoming proxy season.

The Amended Rules represent the first substantive amendments to the shareholder proposal resubmission and stock ownership thresholds since 1954 and 1998, respectively. The Amended Rules are substantially the same as the amendments proposed by the Commission in November 2019 (the “Proposed Rules”) (available here), but reflect amendments made in response to concerns raised on the Proposed Rules. Among other changes, the Amended Rules include a transition period ensuring that any shareholder who currently satisfies the ownership eligibility rules may continue to do so and do not include the “momentum requirement,” which would have permitted exclusion of a previously voted on proposal if the level of voting support had declined significantly in the most recent vote.[2]

The Amended Rules were approved by a 3-2 vote, with the majority viewing the Amended Rules as “reasonable and limited”[3] steps to “adjust these rules to reflect our current markets.”[4] As Chairman Jay Clayton explained, the Amended Rules are intended as a “restructuring and recalibrating [of] the current shareholder ownership threshold for initial submissions as well the shareholder support thresholds for resubmissions” in light of “the many changes in our markets over the past 30 plus years, as well as [the Commission’s] experience with the shareholder proposal process under Rule 14a-8.”[5] At the same time, the Amended Rules reflect that shareholder proposals impose costs on companies and their shareholders, and that some shareholder proponents have effectively outsourced their involvement to representatives. As explained by Commissioner Roisman, “The amendments … aim to strike a better balance by ensuring that a shareholder who submits a proposal to a public company has interests that are more likely to be aligned with the other shareholders who bear the expense.” In contrast, Commissioners Crenshaw and Lee expressed concern that the Amended Rules will suppress the rights of shareholders, undermine environmental, social and governance (ESG) initiatives and dial back shareholder oversight of management.

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[1] For a comparison of the Amended Rules with the current rules, see Attachment A to this client alert.

[2] The Proposed Rules included a “momentum requirement” that would have allowed companies to exclude shareholder proposals submitted three or more times in the preceding five years if they received less than 50% of the vote and support declined by 10% or more compared to the immediately preceding shareholder vote on the proposal.

[3] Commissioner Hester M. Peirce, “Statement at Open Meeting on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8” (Sept. 23, 2020), available at https://www.sec.gov/news/public-statement/peirce-14a-8-09232020.

[4] Commissioner Elad L. Roisman, “Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8” (Sept. 23, 2020), available at https://www.sec.gov/news/public-statement/roisman-14a8-2020-09-23.

[5] Chairman Jay Clayton, “Statement of Chairman Jay Clayton on Proposals to Enhance the Accuracy, Transparency and Effectiveness of Our Proxy Voting System” (Sept. 23, 2020), available at https://www.sec.gov/news/public-statement/clayton-shareholder-proposal-2020-09-23.

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

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Michael A. Titera – Orange County (+1 949-451-4365, mtitera@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Aaron Briggs – San Francisco (415-393-8297, abriggs@gibsondunn.com)
Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com)
Geoffrey Walter – Washington, D.C. (+1 202-887-3749, gwalter@gibsondunn.com)

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

OVERVIEW

On September 22, 2020, President Trump issued an Executive Order “On Combating Race and Sex Stereotyping” (“the EO”), which prohibits government contractors from including certain so-called “divisive concepts” in employee workplace training.[1] The EO aims to curb workplace training materials “teaching that men and members of certain races, as well as our most venerable institutions, are inherently sexist and racist.” The EO follows on the heels of a September 4 Office of Management and Budget (“OMB”) memorandum, which instructed federal agencies to identify contracts or agency funds being used for such trainings as a first step toward ensuring that agencies “cease and desist from using taxpayer dollars” to fund the targeted trainings.[2]

To accomplish its goal of ending the targeted trainings, the EO requires that federal contracts entered into 60 days after the EO’s September 22 effective date (i.e., contracts entered into on or after November 21, 2020) prohibit contractors from using workplace training that “inculcates . . . any form of race or sex stereotyping or any form of race or sex scapegoating.” The EO defines “race or sex stereotyping” as “ascribing character traits, values, moral and ethical codes, privileges, status, or beliefs to a race or sex, or to an individual because of his or her race or sex.” And the phrase “race or sex scapegoating” is defined to mean “assigning fault, blame, or bias to a race or sex, or to members of a race or sex because of their race or sex.”

The EO further states that federal contractor workplace trainings may not “inculcate” what are described as “divisive concepts,” which are defined to include that:

one race or sex is inherently superior to another race or sex;
an individual, by virtue of his or her race or sex, is inherently racist, sexist, or oppressive, whether consciously or unconsciously;
an individual should be discriminated against or receive adverse treatment solely or partly because of his or her race or sex;
members of one race or sex cannot and should not attempt to treat others without respect to race or sex;
an individual’s moral character is necessarily determined by his or her race or sex;
an individual, by virtue of his or her race or sex, bears responsibility for actions committed in the past by other members of the same race or sex;
any individual should feel discomfort, guilt, anguish, or any other form of psychological distress on account of his or her race or sex; or
meritocracy or traits such as a hard work ethic are racist or sexist, or were created by a particular race to oppress another race.

An OMB memorandum issued on September 28—while primarily focused on federal agency training requirements—reiterates that unless specifically exempted, “every government contract must include the provisions” required by the EO.[3]

Thus, unless exempted by rule, regulation, or order, federal contractors must include the training prohibitions in their own subcontracts or purchase orders, and they must enforce those requirements as directed by the Secretary of Labor. If a contractor is threatened with or becomes involved in litigation with a subcontractor or vendor, it may request that the federal government intervene.

Notably, while most Executive Orders include language directing the relevant agency and Federal Acquisition Regulatory Council to issue regulations implementing the Order’s requirements, the EO does not specifically require the promulgation of regulations to implement this new contract clause. It is not immediately clear whether agencies will adopt regulations to implement the requirement, notwithstanding the lack of an express directive in the EO, or how agencies will consistently implement the new contract clause requirement in the absence of such regulations. In addition, neither the EO nor the September 28 OMB memorandum provide further clarity as to whether the requirement will apply only to new contracts awarded on or after November 21, as the express language of the EO seems to suggest, or whether agencies also must insert the clause into any new contract modifications or task orders issued on or after that date.

Notice Requirements

The applicable federal agency’s contracting officer must provide a contractor with a notice of the new training requirements, which the contractor must post “in conspicuous places available to employees and applicants for employment.” The contractor is also required to provide the notice to any labor union or worker representative with which it has a collective bargaining or similar agreement.

Penalties and Enforcement

Federal contractors failing to abide by these requirements may be subject to enforcement action by the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”), which is tasked with enforcing the EO. The EO directs the OFCCP to establish a hotline and investigate complaints regarding the use of prohibited trainings. On September 28, the OFCCP announced that it had established such a hotline (and an email address) to receive complaints.[4] Violations of the EO may result in cancellation, termination, or suspension of the relevant contract, as well as suspension or debarment from future federal contracts.

Within 30 days of the EO, the Director of OFCCP must publish a request for information in the Federal Register, seeking information about employee training from federal contractors, subcontractors, and their employees. While the EO states that the request should seek “copies of any training, workshop, or similar programing having to do with diversity and inclusion as well as information about the duration, frequency, and expense of such activities,” it provides no detail regarding how the OFCCP should use this information.

The EO instructs the Attorney General to “continue to assess the extent to which workplace training that teaches the divisive concepts set forth” in the EO “may contribute to a hostile work environment and give rise to potential liability under Title VII.” It is not clear why this responsibility is assigned to the Attorney General instead of the Equal Employment Opportunity Commission (“EEOC”)—the agency that is otherwise principally tasked with the enforcement of Title VII. But the EO directs the Attorney General and EEOC to jointly issue guidance “to assist employers in better promoting diversity and inclusive workplaces consistent with Title VII” “if appropriate.”

Application to Grant Recipients

The EO also directs federal agencies to identify grant programs for which the agencies may require grant recipients to certify that their trainings comply with the EO’s requirements.

IMPLICATIONS FOR FEDERAL CONTRACTORS

Assuming the EO’s requirements are fully implemented in new federal contracts after 60 days, they will have a significant impact on private federal contractors’ unconscious bias training, which could in some circumstances run afoul of the new prohibitions. Such trainings—which have become an increasingly popular part of companies’ diversity and inclusion initiatives—focus on identifying employees’ possible unconscious biases about various demographic groups and providing strategies to interrupt and reduce the role of those potential biases in decision-making and interactions in the workplace. Notably, the EO expressly states that “[n]othing in this order shall be construed to prohibit discussing, as part of a larger course of academic instruction, the divisive concepts” referenced in the EO “in an objective manner and without endorsement.” Therefore, it is possible that current unconscious bias training, to the extent it might arguably be in tension with the EO, could be modified to describe unconscious bias as an academic concept in an “objective manner and without endorsement.”

Companies entering new federal contracts will be required to cease any prohibited training or run the risk of contract cancellation or sanctions up to and including debarment for future contracts. Federal contractors also will be required to include the training prohibitions in new contracts with their own subcontractors and vendors and prominently post notices describing them.

The EO is likely to be subject to legal challenge, and it is possible the EO will be delayed, enjoined, or invalidated. The EO also may be revoked by an incoming Democratic administration if President Trump is not reelected.

In the interim, private entities contracting with the federal government should inform relevant personnel of the new requirements and review any unconscious bias training or other similar training with the EO in mind.

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[1] Exec. Order No. 13,950 (2020), available at https://tinyurl.com/y2emrxng (last visited Sept. 30, 2020).

[2] Memorandum for the Heads of Executive Departments and Agencies, M-20-34, U.S. Office of Mgmt and Budget, Training in the Federal Government (Sept 4, 2020), available at https://tinyurl.com/y6njnbuw (last visited Sept. 30, 2020).

[3] Memorandum for the Heads of Executive Departments and Agencies, M-20-37, U.S. Office of Mgmt and Budget, Ending Employee Trainings that Use Divisive Propaganda to Undermine the Principle of Fair and Equal Treatment for All (Sept 28, 2020), available at https://tinyurl.com/yb55hm39 (last visited Sept. 30, 2020).

[4] See News Release, U.S. Dep’t of Labor, U.S. Department of Labor Launches Hotline to Combat and Sex Stereotyping by Federal Contractors (Sept. 28, 2020), available at https://tinyurl.com/y975y2tj (last visited Sept. 30, 2020).

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

Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
Molly T. Senger – Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com)

Please also feel free to contact the following practice group leaders:

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

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

On Wednesday, September 23, 2020, the Securities and Exchange Commission approved—on a 3-2 vote—amendments to its whistleblower program. Democratic members Allison Herren Lee and Caroline Crenshaw voted in opposition. These amendments, in particular those pertaining to the determination of whistleblower award amounts, have attracted considerable public attention. Although the award amount provisions have been the most eye-catching, there are other critical changes contained in the amendments that warrant mention. Below, we survey and summarize the most significant new provisions and offer some key takeaways for consideration.

Revised whistleblower definition: In accordance with the Supreme Court’s holding in Digital Realty Trust, Inc. v. Somers, the amendments provide whistleblower protections against retaliation only for individuals who make reports, in writing, to the SEC.
Measures to address frivolous claims: The amendments include provisions designed to facilitate faster resolution of plainly non-meritorious whistleblower claims.
Clarification on the types of resolutions that can be predicates for awards: The amendments clarify that various types of resolutions, including deferred prosecution agreements (“DPAs”) or non-prosecution agreements (“NPAs”), can serve as the basis for a whistleblower award.
Interpretive guidance on independent analysis: The SEC is publishing interpretive guidance clarifying that “independent analysis” means “evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.”
Amendments/guidance on award determinations: The amendments grant the Commission authority to adjust small awards upward and also clarify the Commission’s discretion in determining awards.

The cumulative effect of these amendments—and whether they meet their stated goals—remains to be seen. But several outcomes appear likely. On the one hand, truly frivolous whistleblower claims may decrease in light of the Commission’s new procedure for summarily disposing of meritless tips. Nevertheless, total whistleblower activity—including for lower-stakes cases—may increase. That is because the amendments (consistent with the 2018 decision in Digital Realty) reinforce the incentive to prioritize reporting directly to the SEC over reporting internally to receive whistleblower protections under the rules. This in turn could discourage internal reporting and complicate companies’ internal efforts to prevent and detect misconduct. Moreover, the Commission’s revised rules on award determinations suggest a willingness to issue a greater volume of smaller awards, which could incentivize increased reporting. Thus, companies should be vigilant and continuously evaluate and improve their internal compliance reporting and investigations protocols, as well as auditing and monitoring controls to prevent and detect potential misconduct.

Whistleblower Program Background

The SEC’s whistleblower program was established in 2010 to incentivize individuals to report high-quality tips and to help the Commission detect wrongdoing. Since the program’s inception, “[o]riginal information provided by whistleblowers has led to enforcement actions in which the Commission has obtained over $2.5 billion in financial remedies, most of which has been, or is scheduled to be, returned to harmed investors.”[1] Along the way, the SEC has awarded more than $500 million to whistleblowers.[2] Seven of the ten largest whistleblower awards were made in the last three years, with the largest individual award on record—$50 million—made in June 2020.[3]

Critical Changes Under The Final Rule

1. Revised Definition of “Whistleblower” For Anti-Retaliation Provisions

The amendments to the rule limit the SEC’s whistleblower protections to individuals who report information in writing directly to the SEC. The previous rule applied anti-retaliation protections both to internal reports and to reports to the SEC, and the SEC did not define the manner of providing information to qualify for retaliation protection.

This amendment brings Rule 21F-2 in line with the Supreme Court’s 2018 ruling in Digital Realty Trust, Inc. v. Somers, where the Court found that under the plain language of the statute, an individual is a Dodd-Frank Act “whistleblower” for purposes of the Act’s anti-retaliation provision only if she reports information directly to the SEC.[4] Therefore, under Digital Realty and the amended Rule 21F-2(d)(4), an individual who only reported alleged misconduct internally is not protected from retaliation under these regulations. (The existing rule already limits the availability of whistleblower awards to such individuals.)

Critics of the amendment argue that it will negatively impact the integrity of internal compliance programs and will further chill internal reporting. Moreover, Commissioner Crenshaw criticized the Commission’s decision to limit the “anti-retaliation protections to whistleblowers who submit information in writing,” thus failing “to protect those who cooperate with [its] exams and investigations,” for example, “through interviews or testimony.”[5]

The SEC will issue interpretive guidance defining the scope of retaliatory conduct prohibited by Section 21(h)(1)(A), which may provide much needed clarity for companies as they navigate complex employment and disciplinary determinations when addressing potential whistleblower issues. In the meantime, companies should bear in mind that internal reporting (made prior to written reporting to the SEC) may still be protected under the Sarbanes-Oxley Act and other federal and state laws with whistleblower provisions. And companies should also brace themselves for the possibility that the requirement that whistleblowers report to the SEC to avail themselves of Dodd-Frank’s anti-retaliation provision, though already announced in Digital Realty, could incentivize complainants to make written reports to the SEC sooner, more frequently, and at the same time as internal reports.

2. Measures to Increase Efficiency of Claims Review Process

Two changes were made to increase efficiency in processing whistleblower award applications. First, new rule 21F-8(e) allows the SEC to bar individuals from submitting whistleblower award applications where they have been found to have submitted false information to the SEC, and allows the SEC to bar individuals who have made three frivolous claims in SEC actions. The latter provision is particularly important because frivolous claims lead to significant expenditures of time and resources both for the Commission and corporate compliance departments.

Second, new rule 21F-18 creates a summary disposition procedure for certain types of award applications, including untimely applications, applications that involve a tip that was provided in the incorrect form, and applications where the claimant’s information was never provided to or used for the investigation. As Jane Norberg, chief of the SEC’s Office of the Whistleblower, explained, “some individuals [] submit claims that have absolutely no connection to the enforcement action. Under our current rules, we’re unable to quickly address clearly nonmeritorious claims and known serial frivolous submitters.”[6]

These changes could enable the SEC to more expeditiously dispense with nonmeritorious claims, including any uptick in such claims due to the potential increase in lower-dollar-value awards.

3. Broadening Array of Resolutions That Can Serve as Predicates for Awards

The amendments also resolve an open question as to the types of resolutions that qualify for awards. The Commission can issue awards to whistleblowers who contribute to the successful enforcement of “covered judicial or administrative actions” brought by the Commission and certain “related actions.”[7] However, prior to the amendments, the Commission’s rules were silent as to whether certain resolutions, such as DPAs or NPAs entered into by the Department of Justice (“DOJ”) or state attorneys general in criminal cases, qualified for awards. NPAs presented a particular dilemma, because—unlike DPAs—NPAs are not filed in court and thus did not squarely fit within the concept of a “judicial or administrative action[].” The rules were also silent as to whether the Commission’s own NPAs and DPAs were outside of a judicial or administrative action.[8]

In closing this gap, the Commission took the view that “Congress did not intend for meritorious whistleblowers to be denied awards simply because of the procedural vehicle that the Commission (or the other authority) has selected.”[9] As a result, the Commission’s revised definitions make clear that a broad array of resolutions can serve as predicates for whistleblower awards.

Specifically, the Commission’s amendments change the definition of “action” in Rule 21F-4(d) to include (i) DPAs/NPAs brought by DOJ or state attorneys general in a criminal case, and (ii) a settlement with the Commission, even if brought outside of a judicial or administrative proceeding. The amendments also clarify that a “required payment” made under a DPA, an NPA, or an SEC settlement outside of a judicial or administrative proceeding, is a “monetary sanction[]” under Rule 21F-4(e), on the basis of which the amount of a resulting whistleblower award can be determined. And “required payments” now include funds “designated as disgorgement, a penalty, or interest,” or funds “otherwise required as relief” in resolving a covered action.

These additions may prove significant because DOJ and some regulators rely heavily on DPAs and NPAs in reaching resolutions with corporate defendants, and because DOJ and the SEC continue to conduct parallel investigations in key areas.[10]

4. Interpretive Guidance on Independent Analysis

In addition to the proposed amendments to the rules, the SEC included proposed interpretive guidance to help clarify the meaning of “independent analysis” as defined in Exchange Act Rule 21F-4. Under the whistleblower program, (1) the whistleblower must have provided “original information” to the Commission; and (2) such information must have “led to” the successful enforcement of an action. Congress defined “original information” as information that is derived from either a whistleblower’s “independent knowledge” or the whistleblower’s “independent analysis.” The SEC’s guidance clarifies that “independent analysis” means “evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.”[11]

In the final rule, the Commission added that, subject to Section 21F(a)(3)(C) of the Exchange Act, the Commission may determine that a whistleblower’s examination and evaluation of publicly available information reveals information that is “not generally known or available to the public”—and therefore is “analysis” within the meaning of Rule 21F-4(b)(3)—where: (1) the whistleblower’s conclusion of possible securities violations derives from multiple sources, including sources that, although publicly available, are not readily identified and accessed by a member of the public without specialized knowledge, unusual effort, or substantial cost; and (2) these sources collectively raise a strong inference of a potential securities law violation that is not reasonably inferable by the Commission from any of the sources individually.[12]

The Commission noted that they expect to treat as “independent analysis” highly probative submissions in which the whistleblower’s insights and evaluation provide significant independent information that “bridges the gap” between the publicly available information itself and the possibility of securities violations.[13] This amendment raises the bar for whether an individual’s provision of information to the SEC will qualify them for a whistleblower award.

5. Provisions Regarding Award Amounts

a. Upward Adjustments for Smaller Awards

Under the current whistleblower program, a whistleblower who provides information that leads to a successful enforcement action against a company can be eligible for an award of between 10% and 30% of an overall monetary sanction over $1 million. Within that range, Rule 21F-6(a) and (b) identifies four criteria that may increase an award percentage, and three that may decrease it.[14]

The amendments add a new paragraph (c) to the 21F-6 framework, giving the SEC the discretion to apply upward adjustments to awards of $5 million or less. In addition to other limitations, such as the negative award factors described above, the Commission would not be permitted to use any upward adjustment to raise the award payout above $5 million, or to raise the total amount awarded to all whistleblowers in the aggregate above 30%.

In the June 2018 proposed amendments, the SEC had suggested allowing upward adjustments only to awards to a single whistleblower under $2 million. In the final rule, the SEC made a number of modifications to the proposed rule, including, but not limited to, the following:

The SEC selected $5 million, rather than $2 million, as the ceiling for upward adjustments. From August 2012 to July 2020, 74% of awards were less than $5 million, of which 56% were less than $2 million.[15]
In the final rule, the SEC noted that unreasonable delay under Rule 21F-6(b)(2) will not automatically disqualify individuals from receiving enhancements.
Subject to exceptions, the new rule embodies a presumption that, where the statutory maximum is $5 million or less in the aggregate, the Commission will pay a meritorious claimant the statutory maximum amount where none of the negative award criteria specified in Rule 21F-6(b) are implicated and the award claim does not trigger Rule 21F-16. The Commission may determine that an otherwise eligible claimant will not receive the statutory maximum if it determines that the claimant’s assistance was limited or providing the statutory maximum to the claimant would be inconsistent with the public interest, investor protection or the objectives of the program.

Although the amendments to the rules have yet to officially go into effect, the implications are already being felt. On Friday, September 25, 2020, the Commission awarded over $1.8 million to a whistleblower for providing a tip about overseas conduct that formed the basis for an SEC action against the company involved.[16] The Commission wrote that after considering the administrative record and applying the award criteria in Rule 21F-6 to the facts and circumstances, it chose to increase the award amount to the whistleblower above the preliminary determination by the Claims Review Staff.

These amendments reflect the Commission’s belief that bringing meritorious whistleblowers forward is critical to the program’s success. Although the effects remain to be seen, the prospect of upward increases in smaller awards is likely to lead to an increase of whistleblower claims.

b. Clarifying SEC Discretion Regarding Awards

In the commentary to the final rule, the SEC noted that the comments in response to proposed rules Rule 21F-6(c) and (d) illuminated a disconnect between the SEC’s and the public’s understanding of the SEC’s discretion to consider the dollar amount of monetary sanctions collected, as opposed to focusing exclusively on a percentage amount (i.e., between 10% and 30%) in the statutory range, when applying the award factors and setting the award amount. To clarify the Commission’s discretionary authority, the final rules modify Rule 21F-6 to state that the Commission may consider only the factors set forth in Rule 21F-6 in relation to the facts and circumstances of each case.

The original 2018 proposal reflected a belief that the Commission would be unable to consider the application of the award criteria in dollar terms and adjust the “award amount downward if it found that amount unnecessarily large for purposes” of achieving the program’s goals.[17] Commissioner Lee objected to the final rule because she believed that instead of providing the Commission with a limited ability to adjust the award amounts downward based on their size, with which she also disagreed, with the new clarification to Rule 21F-6 the SEC now “claim[s] that we do not need a new rule at all, that we’ve had this discretion all along.”[18] Commissioner Lee added “the new rule is even more problematic than the proposal because we are no longer even restricted to the largest awards.”[19] It remains to be seen how the Commission will exercise this discretion in future awards.

Conclusion

The new rules will become effective 30 days after their publication. As described above, the amendments aim to resolve open interpretive questions, to streamline the award process, and to provide improved incentives for future whistleblowers. Whether these goals are achieved remains an open question, but both proponents and skeptics of the amendments will be eager to see whether future developments bear out their predictions.

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[1] Press Release, Sec. & Exch. Comm’n, SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program (Sept. 23, 2020), https://www.sec.gov/news/press-release/2020-219.

[2] Sec. & Exch. Comm’n, Whistleblower Awards Over $500 Million for Tips Resulting in Enforcement Actions, https://www.sec.gov/page/whistleblower-100million (June 4, 2020).

[3] Press Release, Sec. & Exch. Comm’n, SEC Awards Record Payout of Nearly $50 Million to Whistleblower (June 4, 2020), https://www.sec.gov/news/press-release/2020-126.

[4] Digital Realty Trust Inc. v. Somers, 583 U.S. __ (2018).

[5] Public Statement, Caroline Crenshaw, Comm’r, Sec. & Exch. Comm’n, Statement of Comm’r Caroline Crenshaw on Whistleblower Program Rule Amendments (Sept. 23, 2020), https://www.sec.gov/news/public-statement/crenshaw-whistleblower-2020-09-23.

[6] Al Barbarino, SEC’s Whistleblower Chief Reflects After $500M Milestone, Law360 (July 28, 2020), https://www.law360.com/articles/1294863/sec-s-whistleblower-chief-reflects-after-500m-milestone.

[7] 15 U.S.C. 78u-6(b)(1).

[8] Press Release, Sec. & Exch. Comm’n, SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations (Jan. 13, 2010), https://www.sec.gov/news/press/2010/2010-6.htm.

[9] Whistleblower Program Rules, Rel. No.34-89963, at 14.

[10] See Gibson Dunn, 2020 Mid-Year Update On Corporate Non-Prosecution Agreements And Deferred Prosecution Agreements (July 15, 2020), https://www.gibsondunn.com/wp-content/uploads/2020/07/2020-mid-year-npa-dpa-update.pdf

[11] Whistleblower Program Rules, Rel. No.34-89963, at 115.

[12] Whistleblower Program Rules, Rel. No.34-89963, at 121-122.

[13] Whistleblower Program Rules, Rel. No.34-89963, at 122.

[14] The criteria that may increase an award percentage are: (1) significance of the information provided by the whistleblower; (2) assistance provided by the whistleblower; (3) law enforcement interest in making a whistleblower award; and (4) participation by the whistleblower in internal compliance systems. Rule 21F-6(a). The criteria that may decrease the percentage are: (1) culpability of the whistleblower; (2) unreasonable reporting delay by the whistleblower; and (3) interference with internal compliance and reporting systems by the whistleblower. Rule 21F-6(b).

[15] Whistleblower Program Rules, Rel. No.34-89963, at 139.

[16] SEC Whistleblower Award Proceeding, Release No. 34-89996, https://www.sec.gov/rules/other/2020/34-89996.pdf.

[17] Whistleblower Program Rules, Rel. No. 34-83557, at 45.

[18] Public Statement, Allison Herren Lee, Comm’r, Sec. & Exch. Comm’n, June Bug vs. Hurricane: Whistleblowers Fight Tremendous Odds and Deserve Better (Sept. 23, 2020), https://www.sec.gov/news/public-statement/lee-whistleblower-2020-09-23.

[19] Id.

The following Gibson Dunn lawyers assisted in preparing this client update: Michael Diamant, Richard Grime, Michael Scanlon, Jason Schwartz, Patrick Stokes, Oleh Vretsona, Molly Senger, Elizabeth Niles, Michael Jaskiw, Michael Dziuban, and Allison Lewis.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you usually work, or the following authors in Washington, D.C.:

Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com)
Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com)
Michael J. Scanlon (+1 202-887-3668, mscanlon@gibsondunn.com)
Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com)
Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com)

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

Securities Enforcement Group:
Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com)
Richard W. Grime – Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com)
Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com)

White Collar Defense and Investigations Group:
Joel M. Cohen – New York (+1 212-351-2664, jcohen@gibsondunn.com)
Charles J. Stevens – San Francisco (+1 415-393-8391, cstevens@gibsondunn.com)
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, fwarin@gibsondunn.com)

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

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
James J. Moloney – Orange County (+1 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)

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

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

Summary of the New York State Sick Leave Law

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

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

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

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

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

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

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

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

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

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

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

Interaction with Other Laws

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

Takeaways for Employers

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

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

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

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

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

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

On September 21, 2020, the Office of the Comptroller of the Currency, the U.S. regulator of national banks, issued an interpretive letter that concluded that national banks may hold deposits that serve as reserves for certain stablecoin issuers (Stablecoin Letter).[1] The Stablecoin Letter’s guidance is another example of the active role the OCC has recently taken in the cryptocurrency and financial technology (fintech) space.

I. Prior Developments

Since becoming Acting Comptroller of the Currency on May 29th, Brian Brooks has made it clear that he views the OCC as taking the lead on technological developments in banking. For example, on July 22nd, the OCC issued an interpretive letter that concluded that national banks may provide “cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.”[2] The July interpretive letter reaffirms the OCC’s view that national banks may provide traditional banking services – i.e., custody – to any lawful business, including cryptocurrency businesses, “so long as they effectively manage the risks and comply with applicable law.”[3] In July as well the OCC granted the first full-service national bank charter to a fintech company, stating that it represented “the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”[4]

II. What Are Stablecoins?

As the OCC explains, a stablecoin is “a type of cryptocurrency designed to have a stable value as compared with other types of cryptocurrency, which frequently experience significant volatility.”[5] Cryptocurrencies often utilize cryptography and distributed ledger technology to act as a medium of exchange that is created and stored electronically. But unlike other cryptocurrencies like bitcoin and ether, a stablecoin is specifically designed to maintain a stable value by being backed by another asset with a relatively stable value, such as a fiat currency.

For example, during 2020, the value of one bitcoin in U.S. dollars has fluctuated from below $5,000 to $12,000. In contrast, one USD Coin – a stablecoin created by Centre Consortium (a collaboration between Coinbase and Circle Internet Financial) and traded on digital currency exchanges like Coinbase – can always be redeemed to the issuer for $1 (minus any fees where applicable), despite its price on third-party platforms fluctuating above $1 (having reached a high of $1.17) or below (having reached a low of $0.92).[6] This reduced volatility results from the stablecoin issuer holding in custody accounts fiat currency or other assets for each stablecoin issued (e.g., USD Coin’s issuer maintains in custody accounts at least $1 for every unit of USD Coin issued)[7] – other cryptocurrencies, such as bitcoin, typically do not maintain such a reserve.

Among other things, stablecoins (1) act as a digital store of value; (2) enable the exchange of one cryptocurrency for another without the need to either sell a cryptocurrency for fiat currency or buy it with fiat; and (3) maintain a more predictable and less volatile value compared to other cryptocurrencies, making it an attractive option as a medium of exchange for transactions such as remittances.

III. The Stablecoin Letter

The Stablecoin Letter addresses a national bank’s authority to hold reserves only for a stablecoin backed on a one-to-one basis by a single fiat currency and held in a hosted wallet.[8] The OCC issued the Stablecoin Letter because certain bank customers, particularly stablecoin issuers, “may desire to place assets in a reserve account with a national bank to provide assurance that the issuer has sufficient assets backing the stablecoin.”

In approving the activity, the OCC stated that national banks are expressly authorized to receive deposits and receiving deposits in a core banking activity. National banks are permitted to provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks of those services and comply with applicable law.

The Stablecoin Letter also sets forth the compliance measures necessary for doing business with stablecoin issuer. National banks should conduct “sufficient due diligence commensurate with the risks associated with maintaining a relationship with a stablecoin issuer.” Such due diligence should include a review to ensure compliance with the customer due diligence requirements under the Bank Secrecy Act and the customer identification requirements under § 326 of the USA PATRIOT Act. In addition, national banks must identify and verify the beneficial owners of legal entity customers opening accounts, comply with applicable federal securities laws, provide accurate and appropriate disclosures regarding deposit insurance coverage, and ensure that deposit activities comply with all other applicable laws and regulations.

Finally, drawing an analogy to audit agreements with program managers for bank-issued prepaid cards, the OCC advised national banks to enter into the necessary agreements with stablecoin issuers to allow the banks to verify at least daily that the reserve account balances for the fiat currency backing the stablecoins are always equal to or greater than the number of the stablecoin issuer’s outstanding stablecoins.

IV. Conclusion

The Stablecoin Letter is another example of the OCC’s interpreting the “business of banking” provision of the National Bank Act in the light of technological advancements. It therefore shows that the agency is seeking to take a lead on fintech banking issues. As part of the business of banking under the National Bank Act, holding deposits for stablecoin issuers should also be permissible for state-chartered banks under the “wild card” provisions of state banking statutes. The Stablecoin Letter is also strong evidence that cryptocurrencies continue to become more and more mainstream, and that traditional legal regimes can no longer shy away from considering them.

________________________

[1] OCC Interpretive Letter No. 1172, at 1 (Sept. 21, 2020), available at https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf. Note that references herein to “national banks” include Federal savings associations.

[2] OCC Interpretive Letter No. 1170, at 1 (July 22, 2020), available at https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf.

[3] Id.

[4] Acting Comptroller of the Currency Presents Varo Bank, N.A. Its Charter (July 31, 2020), available at https://occ.gov/news-issuances/news-releases/2020/nr-occ-2020-99.html (last visited Sept. 28, 2020).

[5] Stablecoin Letter at 1.

[6] See Circle USDC Risk Factors, available at https://support.usdc.circle.com/hc/en-us/articles/360001314526-Circle-USDC-Risk-Factors (last visited Sept. 28, 2020).

[7] USD Coin’s reserves are verified monthly by Grant Thornton LLP and published on Circle Internet Financial’s website, available at https://www.circle.com/en/usdc (last visited Sept. 28, 2020).

[8] Cryptocurrencies are held in “wallets,” which are often software programs that store the cryptographic keys associated with a unique unit of a cryptocurrency. See OCC Interpretive Letter No. 1170, at 5. The OCC defines a “hosted wallet” as a wallet in which the stored cryptographic keys are controlled by an identifiable third party, on behalf of accountholders that do not generally have access to the cryptographic keys. See Letter at note 3.

The following Gibson Dunn lawyers assisted in preparing this client update: Arthur S. Long, Jeffrey L. Steiner and Rama Douglas.

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 in the firm’s Financial Institutions practice group, or the following:

Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein – New York (+1 212-351- 3850, mdenerstein@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

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

On November 3, 2020, only four months after the California Consumer Privacy Act (“CCPA”) became enforceable by the California Attorney General, Californians will vote on Alastair Mactaggart’s newest consumer privacy ballot initiative, the California Privacy Rights Act (“CPRA”), styled as California Proposition 24. We previously issued a brief client alert on the CPRA when it secured sufficient signatures to get on the November ballot (available here), and promised to provide additional information on the ballot measure as the vote drew closer. Below, we delve into the pertinent details of the CPRA and analyze how it may change data privacy and cybersecurity regulation in California, and potentially elsewhere, should the initiative pass.

I. Background and Context

The CPRA ballot initiative, sometimes colloquially referred to as “CCPA 2.0,” represents an effort to address the perceived inadequacies of the CCPA, which, according to Mactaggart and others, was hastily enacted by the California state legislature to avoid a more restrictive ballot initiative. As we noted in our prior alert, unlike the legislatively-enacted CCPA, should the CPRA be approved by California voters and become state law as written, it could not be readily amended by the state legislature. Instead, any significant changes to the law would similarly require further voter action. However, by its terms, the CPRA would not go into effect until January 1, 2023, and thus the CCPA would remain in full force and effect for the interim.

In September 2019, even before the CCPA went into effect, Alastair Mactaggart and the Californians for Consumer Privacy (the non-profit group behind the original CCPA initiative in 2018), proposed the CPRA initiative in an attempt to provide California consumers with expanded privacy rights and to counterbalance efforts by large companies to “actively and explicitly prioritize[] [the] weakening [of] the CCPA,”[1] Californians for Consumer Privacy sponsored the consumer privacy bill, called the Consumer Right to Privacy Act, for the November 2018 ballot. After the initiative was proposed but before it was qualified to appear on the ballot, the California State Legislature agreed to pass what would become the CCPA in exchange for the removal of the ballot initiative by its backers. The CCPA passed in June of 2018, and was signed into law by California Governor Jerry Brown (please see our prior alerts regarding the CCPA here, here, here, here, and here).

In what might feel like a bit of déjà vu, on June 24, 2020, the Secretary of State of California announced that the Mactaggart-backed CPRA had enough valid signatures and was qualified to appear on the November 2020 ballot. However, we will not see a repeat of 2018’s last-minute, backroom deal-making to avoid the 2020 CPRA’s enactment as a ballot initiative, because the California Elections Code only allows a proponent to remove a “proposed,” initiative, and not one that has “qualified” for the ballot.[2]

Though we will have to wait until the ballots are counted in November to know the results, preliminary polling conducted by Goodwin Simon Strategic Research in October 2019 suggested that 88% of California voters would likely vote for the initiative,[3] and more recent polling conducted by the firm and released by the Yes on Prop. 24 in July 2020 similarly suggests that 81% of voters will likely vote for the initiative.[4] That same poll showed that even after being presented with opposition arguments against the measure, as set out in the official voter ballot guide, voters still overwhelmingly supported the initiative, with 72% in favor.[5]

II. Timing – When Would the CPRA Go Into Effect and When Will It Be Finalized?

If the CPRA were enacted, it would largely impose new obligations that would apply only to personal information collected after January 1, 2023; however, it would also provide consumers with a right to access personal information collected in the prior 12 months, which would mean such a right would extend to personal information collected on or after January 1, 2022. As a result, compliance with the CPRA will likely require steps to be taken over a year before the law would go into full effect. Similarly, with respect to implementing regulations—a topic that was quite an ordeal for the CCPA and which resulted in initial regulations being proposed just months before the CCPA took effect, with the final regulations being adopted nearly eight months after—the CPRA would grant the California Attorney General the power at the outset to adopt regulations to expand upon and update the CCPA until July 1, 2021, at which point a newly created California Protection Agency (described further below) would assume responsibility for administering the law. In addition, the final regulations arising from the CPRA would need to be adopted by July 1, 2022, a full year before the CPRA becomes enforceable on July 1, 2023.

III. CPRA’s Key Rights and Provisions

a. Higher Threshold for Applicability – Who Must Comply with the CPRA?

The CPRA narrows the definition of covered entities, or “businesses” from that set out in the CCPA. Specifically, the CPRA alters the scope of covered entities by clarifying how to measure the gross revenue threshold, increasing the threshold number of consumers or households (eliminating the consideration of devices from this number)[6] from 50,000 to 100,000 (exempting smaller businesses), and extending the source for the threshold percentage of annual revenue to also include revenue derived from sharing personal information.

In light of these changes, the CPRA would apply to any “business,” including any for-profit entity that collects consumers’ personal information, which does business in California, and which satisfies one or more of the following thresholds:

had annual gross revenues in excess of twenty-five million dollars ($25,000,000) for the preceding calendar year, as of January 1 of the calendar year;
possesses the personal information of 100,000 or more consumers or households; or
earns more than half of its annual revenue from selling or sharing consumers’ personal information.[7]

Because many medium-to-large businesses satisfy the threshold requirement just with the revenue threshold, the changes to the scope of covered entities will not practically affect many of our clients.

However, for commonly-controlled business, or businesses that share common branding, the CPRA also narrows the definition of covered entities to require that such businesses also share consumers’ personal information. This can be significant for companies with multiple related and commonly-controlled entities that may share common branding, but which operate entirely separately for data privacy purposes, with no comingling of consumer’s personal data.

b. New Enforcement Agency: California Privacy Protection Agency

The most significant addition of the CPRA is the proposed creation of a new state agency, the California Privacy Protection Agency, a body vested with full administrative power, authority, and jurisdiction to implement and enforce the CPRA.[8] The California Privacy Protection Agency would be the first enforcement agency in the United States dedicated solely to privacy. It would be provided with funding of $5M during the 2020-2021 fiscal year, and $10M during each fiscal year thereafter, to undertake privacy-related investigations.

The California Privacy Protection Agency would be led by a five-member board. The Governor is to appoint the Chair and one member of the board, whereas the Attorney General, Senate Rules Committee, and Speaker of the Assembly would each appoint one other member.

The California Privacy Protection Agency is to assume enforcement responsibilities for the CCPA from the Attorney General within six months of the agency providing the Attorney General with notice that it is prepared to assume rulemaking responsibilities or, by no later than July 1, 2021.[9] It is unclear how the agency would enforce privacy laws during this period prior to full enforcement of the CPRA, but we expect that the agency may seek to model itself in light of similar regulatory and enforcement agencies abroad like, for example, the data protection authorities or supervisory authorities under the EU’s General Data Protection Regulation (“GDPR”).

c. New Category of “Sensitive Personal Information” and Right to Restrict Use of Sensitive Personal Information

The CPRA would establish a new category of “sensitive personal information,” which would be defined to include Social Security Numbers, driver’s license numbers, passport numbers, financial account information, precise geolocation, race, ethnicity, religion, union membership, personal communications, genetic data, biometric or health information, and information about sex life or sexual orientation.[10] This definition more closely tracks the definition and distinction of “special categories” of personal data under Art. 9 of the GDPR. Similar to how “personal information” is defined under the CCPA, “sensitive personal information” would not include publicly available information (as defined narrowly to be public information available from government sources).

In establishing a new category of data, the CPRA would provide consumers with the right, at any time, to direct a business that collects sensitive personal information about the consumer to “limit its use of the consumer’s sensitive personal information to that use which is necessary to perform the services or provide the goods reasonably expected by an average consumer who requests such goods or services…”[11] In order to exercise this right, the CPRA includes requirements for a business to provide a “clear and conspicuous link” to consumers on its homepage titled, “Limit the Use of My Sensitive Personal Information” or a “clearly-labeled link on the business’s internet homepage(s)” that allows a consumer to opt-out of the sharing of personal information and limit the use/disclosure of sensitive personal information.[12] This would be in addition to the already existing link requirement under the CCPA allowing consumers to opt out of the sale of their personal information. However, businesses can use a single link if it “easily allow[s] a consumer to [both] opt-out of the sale or sharing of the consumer’s personal information and to limit the use or disclosure of the consumer’s sensitive personal information.”[13]

d. New Rights to Correct Personal Information and to Data Minimization, and Storage Limitation Requirements

Like the GDPR, the CPRA would also grant consumers the right to correct inaccurate personal information.[14] Under the CPRA, businesses that collect personal information about consumers must disclose this right to correct to consumers and must use “commercially reasonable efforts” to correct their personal information upon receipt of a verifiable consumer request.[15]

The CPRA further resembles the GDPR by introducing the right to data minimization. Specifically, the CPRA would require that a business’s collection, use, retention, and sharing of a consumer’s personal information be “reasonably necessary and proportionate to achieve the purposes for which the personal information was collected or processed…”[16] Furthermore, the CPRA provides clarification regarding the CCPA’s current prohibition against collecting or using additional categories of personal information for additional purposes without providing the consumer with notice[17]: Per proposed § 1798.100(a)(1), businesses would be further prohibited from collecting or using additional categories of personal information that are “incompatible with the disclosed purpose for which the personal information was collected” without providing the consumer with notice.[18] While these data minimization steps are generally considered best practices in the United States, and are the subject of guidance from the Federal Trade Commission, the CPRA would seek to codify these requirements in California.

Also, whereas the CCPA was relatively silent on retention, the CPRA would impose storage limitation requirements, whereby businesses are prohibited from storing personal information, including sensitive personal information, for longer than is necessary or beyond a disclosed time period. The CPRA would also take it a step further and grant consumers the right to know at or before the point of collection the length of time a business intends to retain each category of personal information.[19]

e. Expanded Right to Opt-Out of “Sale” of Personal Information Explicitly Includes Sharing of Personal Information and Cross-Context Behavioral Advertising

Significantly, in an apparent attempt to clarify the meaning of “sale” of personal information—and in particular, its application to behavioral advertising—the CPRA expands the CCPA’s right to opt-out of “sale” of personal information to include “sharing” of personal information.[20] The “sharing” of personal information is specifically defined as the transfer of or making available of “a consumer’s personal information by the business to a third party for cross-context behavioral advertising.”[21]

Though the CCPA’s existing definition of “sale” is widely debated, and some argue already includes various aspects of the AdTech industry, this clarification seeks to settle the debate in the affirmative as to whether businesses need to provide consumers with a right to opt out of third-party sharing for advertising purposes, including through cookie-based collection on their websites and apps.

f. New Automated Decision-Making Right and Restrictions on Profiling

The CPRA would require first the Attorney General, and then the California Privacy Protection Agency, to adopt regulations “governing access and opt-out rights with respect to a business’s use of automated decision-making technology, including profiling…”[22] “Profiling” under the CPRA is defined as “any form of automated processing of personal information…to evaluate certain personal aspects relating to a natural person, and in particular to analyze or predict aspects concerning that natural person’s performance at work, economic situation, health, personal preferences, interests, reliability, behavior, location or movements.”[23] As a result, a business’s response to an access request would be required to include “meaningful information about the logic involved in such decision-making processes, as well as a description of the likely outcome of the process with respect to the consumer.”[24]

Businesses already complying with the GDPR, which grants EU citizens the right not to be subject to a decision based solely on automated processing, including profiling, and to request an explanation of how and why an automated decision was reached, may be familiar with this new requirement.[25] However, the right under the CPRA may in fact be broader than its equivalent under the GDPR because the CPRA would grant consumers the right to opt-out of “any form” of automated-decision making, whereas the GDPR restricts the right to not be subject to decisions based solely on automated-processing. Furthermore, this requirement would be the first of its kind in the United States that would require such transparency and limitations on automated decision-making generally.

g. Cybersecurity Audit Requirements for High-Risk Data Processors

The CPRA also introduces audit requirements for high-risk data processors. Once again, first the Attorney General, and then the California Privacy Protection Agency, would be required to issue “regulations requiring businesses whose processing of consumers’ personal information presents significant risk to consumers’ privacy or security” to perform an annual cybersecurity audit.[26]

Businesses in this category would also be required to perform an annual cybersecurity audit and regularly submit risk assessments with respect to their processing of personal information to the California Privacy Protection Agency, “identifying and weighing the benefits resulting from the processing to the business, the consumer, other stakeholders, and the public, against the potential risks to the rights of the consumer associated with such processing.”[27]

h. Loyalty and Rewards Programs Are Not Prohibited

In one clarification of an issue that caused some consternation with regard to the CCPA, the CPRA explicitly allows businesses to offer “loyalty, rewards, premium features, discounts, or club card programs” in exchange for consumer’s opt-in consent.[28] Though the final CCPA regulations adopted by the Attorney General and approved on August 24, 2020, provided some needed clarity on this point, the CCPA remains ambiguous as to how to balance the requirement not to discriminate against consumers for exercising their rights, on the one hand, with the offering of programs that require using the very personal information for which the consumer can request deletion, on the other. The CPRA would resolve this ambiguity by expressly allowing such loyalty programs to be conditioned on opt-in consent.

i. New Categories and Obligations for Service Providers, Contractors, and Third Parties

The CPRA would also amend the CCPA’s definitions of “service provider” and “third party,” and create a new category of “contractor,” to impose new obligations for service providers and contractors.[29] The CPRA clarifies that a third party is anyone other than the business, a service provider, or contractor. The newly-defined “contractor” means “a person to whom the business makes available a consumer’s personal information for a business purpose pursuant to a written contract…”[30] Among other things, this written contract must prohibit the contractor from selling or sharing the personal information it receives; using or disclosing the personal information for any purpose other than for the contract’s business purpose; and combining the personal information with data received or collected through other means, with limited exceptions.[31]

These requirements are indirectly imposed by the definition of “service provider” under the CCPA – in order to considered a “service provider,” an entity must “process information on behalf of a business” for a business purpose, pursuant to a written contract that prohibits the entity from “retaining, using, or disclosing the personal information for any purpose other than for the specific purpose of performing the services specified in the contract.”[32] However, the definition of “contractor” under the CPRA explicitly limits the service provider’s ability to share information, or to combine it with information obtained through other means, which is likely designed to exclude behavioral advertisers that create profiles using data from multiple clients from the definition of contractor. Further, the CPRA additionally imposes affirmative obligations on service providers and contractors to cooperate and assist businesses in responding to a consumer’s request to delete and correct personal information, and limit the use of sensitive personal information.[33] However, service providers and contractors are not required to comply with consumer requests “received directly from a consumer or a consumer’s authorized agent…to the extent that the service provider or contractor has collected personal information about the consumer in its role as a service provider or contractor.”[34]

j. Explicit Requirement to Implement Reasonable Security Procedures and Practices for Businesses, Service Providers, and Contractors

Though the CCPA indirectly required businesses to maintain reasonable security procedures and practices by tying the private right of action to a business’s failure to implement such measures, the CPRA would create an affirmative requirement for businesses to implement “reasonable security procedures and practices” for all categories of personal information,[35] and extends this duty to third parties, service providers, and contractors to provide the “same level of privacy protection” as is required of the business.[36]

IV. Changes to Potential Liability

Under the CPRA, if the California Privacy Protection Agency determines that a violation or violations have occurred, the agency can seek an administrative fine of up to $2,500 for each violation, or up to $7,500 for each intentional violation or each violation involving the personal information of minor consumers, which is similar to the CCPA’s current level of potential exposure; the difference being that the CPRA instead provides an administrative fine through the Agency.[37]

To the surprise of many, the CPRA does not include a significantly broader private right of action, but similarly limits the private right of action to breaches of non-encrypted, non-redacted personal information as under the CCPA. Nonetheless, the CPRA expands upon the CCPA to include a private right of action for unauthorized access or disclosure of both an “email address in combination with a password or security question and answer that would permit access to the account…” and personal information, as defined under California’s data breach notification law, as opposed to just the latter as under the CCPA.[38]

V. Expanded Moratoria for Employee and B2B Personal Information

The CCPA currently exempts personal information obtained from employees and job applicants in the context of employment as well as certain personal information obtained in certain business-to-business (“B2B”) transactions until January 1, 2021 (please see our prior alert here). On August 30, 2020, the California legislature voted to pass Assembly Bill 1281 (“AB 1281”), which extends the CCPA’s current employee and B2B exemptions from January 1, 2021 to January 1, 2022—Governor Gavin Newsome has until September 30, 2020 to sign the bill.

If enacted, the CPRA would extend these moratoria even further, until January 1, 2023.[39] However, while the California legislature can extend the exemptions under the CCPA, they will be unable to do so under the CPRA, unless another ballot initiative is approved by California voters.

VI. Certain Consumer Privacy Advocates Are Against the CPRA

Perhaps surprisingly, though the CPRA was proposed by consumer advocates Californians for Consumer Privacy as a pro-consumer response to the perceived weakening of the rights granted to consumers under the CCPA, a number of civil rights advocacy groups, including the American Civil Liberties Union (“ACLU”) of California, California Alliance for Retired Americans, and Color of Change, have all publicly called on Californians to vote “No” on the ballot initiative in November.

These groups have stated that the ballot initiative is “full of giveaways to social media and tech giants” by giving companies new ways to collect personal information, letting companies profit further from consumers’ personal information, and restricting enforcement of privacy rights in court.[40] Specifically, these advocacy groups argue that this ballot initiative is asking Californians to “approve ‘pay for privacy,” by letting companies charge more for safeguarding consumer personal information, which has “racially discriminatory impacts, disproportionately pricing out working people, seniors, and Black and Latino families.” Furthermore, these groups argue that the CPRA would restrict the ability of Californians to enforce their privacy rights in court because it asks them to unpersuasively trust a newly created agency, created during a budget crunch, to enforce consumer rights under the CPRA. Lastly, these groups state: “[The CPRA] was written behind closed doors with input from the same tech companies with histories of profiting off of [] personal information in unfair and discriminatory ways. It puts more power in the hands of tech companies like Facebook that already have too much power. It protects big tech business, not people.”[41]

That said, it does not appear that the No on Proposition 24 position has been significantly funded, and the Yes on Proposition 24 position appears to have been funded primarily by Mr. Mactaggart himself.

* * *

As we continue to counsel our clients through CCPA compliance, we understand what a major undertaking it is and has been for many companies. As other states and the federal government continue to grapple with implementing any privacy laws, California is already considering its second precedent-setting comprehensive privacy law, causing additional consternation. Given that the CPRA would introduce a host of new consumer rights and related business requirements if enacted, we anticipate that compliance with the CPRA would similarly require a complex and nuanced compliance program for companies.

Specifically, the CPRA would expand upon the CCPA to grant the right to limit the sharing and use of consumers’ sensitive personal information, the right to correct personal information, the right to data minimization, and the expanded right to opt-out of the sale of personal information, as well as impose requirements and restrictions on businesses, including new storage limitation requirements, new restrictions on automated decision-making, and new audit requirements. Additionally, the CPRA also establishes an entirely new enforcement agency—the California Privacy Protection Agency—removing enforcement authority for both the CCPA and the CPRA from the Attorney General, and expands breach liability. As such, it will remain to be seen how this new agency would approach enforcement.

In light of this potential sweeping new law, we will continue to monitor developments, and are available to discuss these issues as applied to your particular business.

[1] “A Letter from Alastair Mactaggart, Board Chair and Founder of Californians for Consumer Privacy,” Californians For Consumer Privacy (Sept. 25, 2019), available at https://www.caprivacy.org/a-letter-from-alastair-mactaggart-board-chair-and-founder-of-californians-for-consumer-privacy/.

[2] “Initiative and Referendum Qualification Status,” California Secretary of State, available at https://www.sos.ca.gov/elections/ballot-measures/initiative-and-referendum-status .

[3] Amy Simon and John Whaley, “Summary of Key Findings from California Privacy Survey,” Goodwin Simon Strategic Research (Oct. 16, 2019), available here.

[4] “New Poll From Goodwin/Simon Research Shows Prop 24, The California Privacy Rights Act, Receives 81% Support From Voters,” Californians For Consumer Privacy (Aug. 3, 2020), available at https://www.caprivacy.org/new-poll-from-goodwin-simon-research-shows-prop-24-the-california-privacy-rights-act-receives-81-support-from-voters/.

[5] Id.

[6] Whereas the CCPA defines “business” in part as a for-profit entity that collects consumers’ personal information, which does business in California and possesses “the personal information of 50,000 or more consumers, households, or devices,” Cal. Civ. Code § 1798.140(c)(1)(B)(emphasis added), the CPRA removes devices from consideration. See Cal. Civ. Code § 1798.140(d)(1).

[7] Cal. Civ. Code § 1798.140(d)(1).

[8] CPRA Section 24, adding Cal. Civ. Code § 1798.199.10.

[9] CPRA Section 24, adding Cal. Civ. Code § 1798.199.40(b).

[10] CPRA Section 14, adding Cal. Civ. Code § 1798.140(ae).

[11] CPRA Section 10, adding Cal. Civ. Code § 1798.121.

[12] CPRA Section 13, adding Cal. Civ. Code § 1798.135(a)(2).

[13] CPRA Section 13, adding Cal. Civ. Code § 1798.135(a)(3).

[14] CPRA Section 6, adding Cal. Civ. Code § 1798.106(a).

[15] Id.

[16] CPRA Section 4, adding Cal. Civ. Code § 1798.100(a)(3)(c).

[17] Cal. Civ. Code § 1798.100(b).

[18] Cal. Civ. Code § 1798.100(a)(1).

[19] CPRA Section 4, adding Cal. Civ. Code § 1798.100(a)(3).

[20] CPRA Section 9, amending Cal. Civ. Code § 1798.120.

[21] CPRA Section 14, amending Cal. Civ. Code § 1798.140(ah).

[22] CPRA Section 21, adding Cal. Civ. Code § 1798.185(a)(16).

[23] CPRA Section 14, adding Cal. Civ. Code § 1798.140(z).

[24] Id.

[25] GDPR, Article 22.

[26] CPRA Section 21, adding Cal. Civ. Code §1798.185(a)(15).

[27] CPRA Section 21, adding Cal. Civ. Code §1798.185(a)(15)(A)-(B).

[28] Section 11 of the CPRA, amending Cal. Civ. Code § 1798.125.

[29] CPRA Section 14.

[30] CPRA Section 14, adding Cal. Civ. Code § 1798.140(j)(1).

[31] Id.

[32] Cal. Civ. Code § 1798.140(v).

[33] CPRA Section 3, adding Cal. Civ. Code § 1798.100(d).

[34] CPRA Section 12, adding Cal. Civ. Code § 1798.130(2)(B)(3).

[35] CPRA Section 4.

[36] CPRA Section 4, adding Cal. Civ. Code § 1798.100(d).

[37] CPRA Section 4, adding Cal. Civ. Code § 1798.100(e).

[38] CPRA Section 16, amending Cal. Civ. Code § 1798.150(a).

[39] Section 15 of the CPRA, amending Cal. Civ. Code § 1798.145.

[40] “No on Proposition 24 Rebuttal Argument,” available at
https://consumercal.org/wp-content/uploads/2020/07/No-on-Proposition-24-Rebuttal-Argument.pdf.

[41] Id.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Alexander H. Southwell, Benjamin Wagner, H. Mark Lyon, Cassandra Gaedt-Sheckter, and Lisa V. Zivkovic.

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, or any member of the firm’s California Consumer Privacy Act Task Force or its Privacy, Cybersecurity and Consumer Protection practice group:

California Consumer Privacy Act Task Force:
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Deborah L. Stein (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)

Please also feel free to contact any member of the Privacy, Cybersecurity and Consumer Protection practice group:

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Deborah L. Stein (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)

Europe
Ahmed Baladi – Co-Chair, PCCP Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0)20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0)20 7071 4203, swazen@gibsondunn.com)

Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)

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the role and compensation of banks in each type of offering;
challenges in the economics of warrants issued in rights offerings; and
recent SEC Staff guidance on how and when a company may register the securities issued in rights offerings

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PANELISTS:

Hillary H. Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s SRCG, Oil and Gas, M&A and Private Equity practice groups. Ms. Holmes advises companies in all sectors of the energy industry on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws and corporate governance issues. She has deep experience with all kinds of equity and debt capital markets transactions, including ATM programs and rights offerings. Ms. Holmes is Chambers Band 1 ranked for Capital Markets Central U.S. and ranked for Energy Transactional Nationwide. Ms. Holmes also advises boards of directors, special committees and financial advisors in transactions and situations involving complex issues and conflicts of interest.

Brian Lane, a partner with Gibson, Dunn & Crutcher, is a corporate securities lawyer with extensive expertise in a wide range of SEC issues. He counsels companies on the most sophisticated corporate governance and regulatory issues under the federal securities laws. He is a nationally recognized expert in his field as an author, media commentator, and conference speaker. BTI Consulting Group named Mr. Lane as a 2019 and 2018 BTI Client Service All-Star among the lawyers “who truly stand out as delivering the absolute best client service”, and a 2014 BTI Client Service All-Star for delivering “outstanding legal skills enveloped in a rare combination of practical business knowledge, extraordinary attention to client needs and noteworthy responsiveness.” Mr. Lane ended a 16 year career with the Securities and Exchange Commission (“SEC”) as the Director of the Division of Corporation Finance where he supervised over 300 attorneys and accountants in all matters related to disclosure and accounting by public companies (e.g. M&A, capital raising, disclosure in periodic reports and proxy statements). In his practice, Mr. Lane advises a number of companies undergoing investigations relating to accounting and disclosure issues.

Ryan Murr is a partner in the San Francisco office of Gibson, Dunn & Crutcher, where he serves as a member of the firm’s Corporate Transactions Department, with a practice focused on representing leading companies and investors in the life sciences and technology space. Mr. Murr currently serves as a Co-Chair of the firm’s Life Sciences Practice Group and previously served as a member of the firm’s Executive Committee and Management Committee. Mr. Murr represents public and private companies and investors in the biotechnology, pharmaceutical, technology, medical device and diagnostics industries in connection with securities offerings and business combination transactions. In addition, Mr. Murr regularly serves as principal outside counsel for publicly traded companies and private venture-backed companies, advising management teams and boards of directors on corporate law matters, SEC reporting, corporate governance, licensing transactions, and mergers & acquisitions. Recognized by Chambers USA in the area of Life Sciences, clients describe Mr. Murr as “creative and smart” and someone who “gets the better of the other side.” Legal Media Group (Euromoney) has ranked Mr. Murr nationally as a “Star” in Life Sciences in the areas of Corporate, Licensing & Collaboration, Mergers & Acquisitions and Venture Capital. Mr. Murr has twice been nominated by Legal Media Group as “Finance & Transactional Attorney of the Year.”

Robyn E. Zolman is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Capital Markets, Securities Regulation & Corporate Governance and Energy Practice Groups. Her practice is concentrated in securities regulation and capital markets transactions. Ms. Zolman represents clients in connection with public and private offerings of equity and debt securities, tender offers, exchange offers, consent solicitations and corporate restructurings. She also advises clients regarding securities regulation and disclosure issues and corporate governance matters, including Securities and Exchange Commission reporting requirements, stock exchange listing standards, director independence, board practices and operations, and insider trading compliance. She provides disclosure counsel to clients in a number of industries, including energy, telecommunications, homebuilding, consumer products, life sciences and biotechnology. In 2015, Law360 selected Ms. Zolman as one of eight “Rising Star” capital markets attorneys under 40 to watch nationwide. She was named a Top Woman in Energy by the Denver Business Journal in 2015 and 2017 -2020 and to its Who’s Who in Energy list in 2019, and was one of the Denver Business Journal’s 40 under 40 in 2017. Ms. Zolman was selected as a “Next Generation Lawyer in Capital Markets: Debt Offerings” by The Legal 500 U.S. in 2018 -2020 and as a Top Lawyer: Securities by 5280 Magazine in 2018-2020. Ms. Zolman was named a 2021 Lawyer of the Year for Securities/Capital Markets Law, Denver by Best Lawyers in America®.

Branden Berns is an associate in the San Francisco office of Gibson, Dunn & Crutcher, where he practices in the firm’s Corporate Transactions Practice Group. Mr. Berns advises clients in connection with a variety of financing transactions, including initial public and secondary equity offerings and investment grade, high yield and convertible debt offerings, as well as companies, private equity firms, boards of directors and special committees in connection with a wide variety of complex corporate transactions, including mergers and acquisitions, asset sales, spin-offs, joint ventures, private placements and leveraged buyouts. Mr. Berns also advises clients regarding securities regulation, SEC reporting requirements and corporate governance matters.

Exclusion of Spouses in Same-Sex Marriages from Certain Legal Entitlements and Benefits Relating to Intestacy and Inheritance Held Unconstitutional

On 18 September 2020, the Court of First Instance (CFI) of the High Court of Hong Kong ruled in Ng Hon Lam Edgar v Secretary for Justice [2020] HKCFI 2412 (Ng case) that the exclusion of spouses in same-sex marriages from the legal entitlements and benefits that are accorded to spouses in opposite-sex marriages under the Intestates’ Estates Ordinance (Cap 73) (IEO) and the Inheritance (Provision for Family and Dependants) Ordinance (Cap 481) (IPO) constitutes unlawful discrimination on the ground of sexual orientation.

The precise form of relief – being a declaration and remedial interpretation of the expressions “valid marriage”, “husband” and “wife” in the IEO and the IPO – remains to be seen.[1]

This CFI judgment (Judgment) may have potentially profound implications and ramifications on the inheritance, estate and succession planning for members of the LGBT community residing in Hong Kong. However, same-sex marriage remains not recognized under Hong Kong law and it appears that the Court is only prepared to consider granting appropriate relief (including an updated interpretation of any relevant legislation) upon consideration of the specific subject matter and in the relevant context. In this connection, please see our Client Alert “Hong Kong Case Update: Sham Tsz Kit v Secretary for Justice” concerning the CFI judgment also handed down on 18 September 2020 rejecting a judicial review application which sought, inter alia, a declaration that, in so far as the laws of Hong Kong do not recognize foreign same-sex marriage, they are unconstitutional.

BACKGROUND

The Judgment was handed down in respect of the judicial review brought by Mr Edgar Ng challenging the definitions of “valid marriage”, “husband” and “wife” under ss 2 and 3 of the IEO and s 2 of the IPO (Marriage Provisions).

Mr Ng is a male Hong Kong permanent resident, who married another male Hong Kong permanent resident “H” in London in January 2017. Following their marriage in London, the couple had a blessing service at a church in Hong Kong.[2]

In April 2018, Mr Ng purchased a flat under the Home Ownership Scheme (HOS) to be used as the matrimonial home with H. However, since the same-sex marriage of Mr Ng and H is not recognised in Hong Kong, H is unable to become a joint owner of the HOS flat with Mr Ng under the relevant HOS policy of the Housing Authority. Mr Ng is concerned that his properties, including the HOS flat, would not be passed to H under the IEO if he dies intestate.[3]

In June 2019, Mr Ng, through his solicitors, sought clarification from the Secretary for Justice as to whether same-sex marriages performed in accordance with the laws of foreign jurisdictions would be recognized by the Hong Kong government as marriages for the purpose of probate, inheritance and intestacy. The Secretary for Justice rejected the request on the basis that it was not a role of the Department of Justice to provide legal advice to private individuals or their solicitors.[4]

TWO-STAGE APPROACH – IS THERE UNLAWFUL DISCRIMINATION?

In the Ng case, the CFI followed the decisions of the Court of Final Appeal (CFA) in Leung Chun Kwong v Secretary for Civil Service (2019) 22 HKCFAR 127 (Leung case) and QT v Director of Immigration (2018) 21 HKCFAR 324 (QT case) and adopted the following two-stage approach in determining whether there is unlawful discrimination.

First, to determine whether there is differential treatment on a prohibited ground.
Second, and only if differential treatment can be demonstrated, to examine whether differential treatment can be justified: it is not unlawful discrimination if the differential treatment can be justified; but if it cannot be justified, it constitutes unlawful discrimination.[5]

First stage – any differential treatment on a prohibited ground?

To establish there is differential treatment, the complainant must show that:

He or she has been treated less favourably than a person in a relevant comparator group.
The reason for differential treatment is based on a prohibited ground, such as sexual orientation, race or religion.[6]

Second stage- is the differential treatment justified?

Where differential treatment is established, the court then examines whether such differential treatment is justified by applying the “four-step justification test”,[7] which asks the following questions. If any of these questions is answered in the negative, the differential treatment cannot be justified.

Does the differential treatment pursue a legitimate aim?
Is the differential treatment rationally connected to that legitimate aim?
Is the differential treatment no more than necessary to accomplish the legitimate aim?
Has a reasonable balance been struck between the societal benefits arising from the application of differential treatment and the interference with the individual’s equality rights?

THE DECISION

“Yes” to the first question: is there differential treatment on a prohibited ground?

Having undertaken the above analysis, the CFI held that it is clear that differential treatment is being accorded to parties to a same-sex marriage and parties to an opposite-sex marriage for the purposes of the IEO and the IPO on the prohibited ground of sexual orientation.[8]

The CFI has identified the differential treatment in three main aspects:

Under the IEO

The surviving spouse in a same-sex marriage are not accorded any legal entitlements and benefits that are enjoyed by the surviving spouse in an opposite-sex marriage under the IEO,[9] because the definition of “valid marriage” under s 3 of the IEO only covers an opposite-sex marriage (but not a same-sex marriage) and hence the surviving spouse to a same-sex marriage is not qualified as a “husband” or ‘wife” of the deceased under the IEO to enjoy the legal entitlements and benefits provided for in it.[10]

Under the IPO

The surviving “husband” or “wife” in an opposite-sex marriage is entitled without more to apply for an order under s 4 of the IPO for financial provision; whilst the surviving spouse in a same-sex marriage may only make such application if he or she was being maintained, either wholly or substantially, by his or her spouse immediately before the death of the deceased.[11]
Under the IPO, the surviving “husband” or “wife” in an opposite-sex marriage is entitled under the IPO to “such financial provision as it would be reasonable in all the circumstances of the case for such a person to receive, whether or not that provision is required for his or her maintenance” (emphases added). However, the surviving spouse in a same-sex marriage is only entitled to “such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance” (emphases added).[12]

“Yes” to the 1^ststep of the second question: the Marriage Provisions serve legitimate aims

The CFI is satisfied that the Marriage Provisions serve the three broad legitimate aims as identified by the Secretary for Justice, namely:

The Marriage Aim – “To support and uphold the integrity of the traditional institution of marriage in Hong Kong.”
The Family Aim – To encourage opposite-sex unmarried couples to marry with a view to ensuring their spouses will be accorded spousal status or priority under inheritance law.
The Coherence Aim (which the CFI considers to be simply a variation of the Marriage aim) – “To maintain and optimize the overall coherence, consistency and workability of the extensive and interlocking schemes of Hong Kong legislation that rest upon or otherwise involve the institution of marriage as recognised under domestic law and [article 37 of the Basic Law]”.[13]

“No” to the 2^nd step of the second question: no rational connection

However, the CFI is not satisfied that the differential treatment is rationally connected to the legitimate aims identified by the Secretary of Justice. The CFI points out that the relevant question to ask is whether the denial of benefits under the IEO or IPO to same-sex couples would promote the three legitimate aims, which the CFI answers in the negative.[14]

“No” to the 3^rd step and “debatable” re the 4^th step of the second question

Having answered the 2^nd step of the justification test in the negative, it is unnecessary to consider the third and fourth steps of the justification test. However, the CFI offers its view that, if it had become necessary for it to do so, it would have found that the differential treatment cannot pass the 3^rd step of the justification test, which asks whether the differential treatment is no more than necessary to accomplish the legitimate aim; whilst it is debatable as to whether it can pass the 4^th step.[15]

Conclusion

In light of the above, the CFI allowed the judicial review sought by Mr Ng and ordered that a declaration and remedial interpretation of the expressions “valid marriage”, “husband” and “wife” in the IEO and IPO be granted as the remedy. The form of such declaration and remedial interpretation remains to be seen as they are to be formulated by the parties for the court’s approval.[16]

COMMENT

The Judgment may have important ramifications and implications on the inheritance, estate and succession planning for members of the LGBT community residing in Hong Kong, and will need to be taken into account in any dispute concerning the probate and inheritance of a deceased individual who was in a same-sex marriage immediately before his or her passing.

Alongside recent decisions of the Hong Kong court concerning rights of same-sex married couples, including the recent CFA decisions in the Leung case (9 June 2019) and the QT case (4 July 2018), and the CFI decision in Infinger, Nick v The Hong Kong Housing Authority [2020] 1 HKLRD 1188 (4 March 2020), the Judgment made in the Ng case is no doubt a significant decision in Hong Kong in advancing equality of rights for couples in same-sex marriages. However, it is apparent that the Hong Kong court is not prepared to grant a wholesale declaration that non-recognition of same-sex marriages is unconstitutional, and prefers to limit its analysis to the specific context that is before it. Please see our Client Alert “Hong Kong Case Update: Sham Tsz Kit v Secretary for Justice”.

The Judgment also provides important takeaway for prospective judicial review applicants – that one should consider carefully his/her standing and limit any declaratory relief sought accordingly. Mr Ng suffered costs consequences as he has sought as part of his declaratory relief to cover also persons in civil partnership or civil union, which he has no standing to do so as he has not entered into any such civil partnership or union.[17] Mr Ng is awarded only 90% of his costs to reflect the fact that he has failed to challenge the Marriage Provisions in so far as they concern civil partnerships and civil unions.[18]

The Honourable Mr Justice Chow also remarks that, in future judicial review applications, legal advisers to applicants should carefully consider and concentrate on the real grounds of judicial review, rather than putting in as many grounds of review that simply do not add any substance, with a view to avoiding unnecessary time and costs being spent.[19]

__________________

[1] The CFI directed the parties to submit an agreed form of order for the court’s approval within 21 days from the date of judgment, failing which a combined draft order with differences between the parties clearly indicated shall be submitted within 28 days of the Judgment (see § 53, the Judgment). The Judgment may also be subject to appeal.

[2] §§ 3 and 4, the Judgment

[3] §§ 6 and 7, the Judgment

[4] § 8, the Judgment.

[5] § 32, the Judgment.

[6] §§ 34 and 35, the Judgment.

[7] § 39 of the Judgment, which cites the explanation of the four-step justification test given by the CFA in the Leung case.

[8] §§ 15, 25, 33 and 38, the Judgment. The CFI also rejected the arguments put forward on behalf of the Secretary for Justice that same-sex married couples and opposite-sex married couples are not in a comparable position for the purposes of IEO and the IPO (see §37 of the Judgment).

[9] These include the right of a surviving spouse in an opposite-sex marriage to acquire the premises in which he or she was residing at the time of the intestate’s death (see § 13 of the Judgment), and to take the deceased’s “personal chattels” (as defined in the IEO) and the whole or part of the residuary estate of the deceased depending on the circumstances (see § 12 of the Judgment).

[10] §§ 12 to 15, the Judgment.

[11] § 24(1), the Judgment.

[12] § 24(2), the Judgment.

[13] §§ 40 and 41, the Judgment.

[14] §§ 42 to 44, the Judgment.

[15] §§ 46 and 47, the Judgment.

[16] §§ 52 and 53, the Judgment.

[17] §§ 51 and 53, the Judgment.

[18] §§ 51 and 54, the Judgment.

[19] § 50, the Judgment.

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, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, bgilchrist@gibsondunn.com)

Elaine Chen (+852 2214 3821, echen@gibsondunn.com)

Alex Wong (+852 2214 3822, awong@gibsondunn.com)

Celine Leung (+852 2214 3823, cleung@gibsondunn.com)

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

Hong Kong Court Refused to Grant a Wholesale Recognition of Right to Marry for Same-Sex Couples

Two judgments were handed down by the Court of First Instance (CFI) of the High Court of Hong Kong on 18 September 2020 concerning two separate judicial review applications seeking to advance the equality of rights of members of the LGBT community. The CFI granted the relief sought concerning certain statutes on intestacy and inheritance in one of these two cases (please see our Client Alert “Hong Kong Case Update: Ng Hon Lam Edgar v Secretary for Justice”), but it rejected the declaratory relief seeking the recognition of same-sex marriage in Hong Kong generally in the case Sham Tsz Kit v Secretary for Justice [2020] HKCFI 2411 (Sham case), which judgment (Judgment) we will discuss in this Client Alert.

It appears that whilst the Hong Kong court is prepared to consider whether certain specific statute or policy of the government may constitute unlawful discrimination on the basis of sexual orientation, it is not prepared to grant a wholesale recognition to same-sex marriage under the laws of Hong Kong at this stage.

BACKGROUND

Mr Sham, a male Hong Kong permanent resident, and his same-sex partner got married in the United States in November 2013. The applicant submitted that they would have married in Hong Kong if the laws had allowed it. He contended that it was highly unfair and discriminatory against same-sex couples that the current Hong Kong law does not recognize same-sex marriage, thereby depriving same-sex couples of the rights and benefits currently enjoyed by opposite-sex couples.[1]

On 22 November 2018, he commenced a judicial review application to challenge the constitutionality of two statutory provisions, namely s 4 of the Marriage Ordinance (Cap 181) and s 20(1)(d) of the Matrimonial Causes Ordinance (Cap 179).[2]

Mr Sham put forward three alternative grounds of judicial review:

Ground 1: the “exclusion of same-sex couples from the institution of marriage constitutes a violation of the right to equality” as protected under the Hong Kong Bill of Rights (BOR) and the Basic Law (BL).
Ground 2: “the laws of Hong Kong, in so far as they do not allow same-sex couples to marry and fail to provide any alternative means of legal recognition of same-sex partnerships” constitute a violation of the right to privacy and the right to equality as protected by the BOR and/or the BL.
Ground 3: “the laws of Hong Kong, in so far as they do not recognize foreign same-sex marriages, constitute a violation of the right to equality” as protected under the BOR and the BL.[3]

Since another case, MK v Government of the HKSAR [2019] 5 HKLRD 259 (MK case), raised the same or similar issues under Grounds 1 and 2, the court stayed the proceedings of the Sham case pending the determination of the MK case.

On 18 October 2019, the court dismissed the judicial review made in the MK case, which effectively ruled against Grounds 1 and 2, holding that:

It is not a violation of any constitutional rights for same-sex couples to be denied the right of marriage under the laws of Hong Kong.
The government is subject to no positive legal obligation to provide an alternative legal framework giving same-sex married couples the same rights and benefits enjoyed by opposite-sex married couples.[4]

In view of the determination of the MK case, the court lifted the stay of proceedings in the Sham case in so far as it applies to Ground 3 on 22 November 2019. It was argued in support of Ground 3 in the trial that, the recognition by the laws of Hong Kong of foreign opposite-sex marriages but not foreign same-sex marriages constitutes differential treatment on the prohibited ground of sexual orientation, and the differential treatment is not justified as it does not pass the four-step justification test.[5]

THE DECISION

In determining the Sham case, the CFI adopted the two-stage approach endorsed by the Court of Final Appeal (CFA) of Hong Kong in two recent decisions, Leung Chun Kwong v Secretary for Civil Service (2019) 22 HKCFAR 127 (Leung case) and QT v Director of Immigration (2018) 21 HKCFAR 324 (QT case). Please see our Client Alert “Hong Kong Case Update: Ng Hon Lam Edgar v Secretary for Justice” for an explanation of the two-stage approach.

The CFI held that:

Whether foreign opposite-sex marriages and foreign same-sex marriages are relevant comparators depends on the subject matter being considered and the relevant context. It cannot be said in a vacuum, and there is no general rule, that the two groups of persons in foreign opposite-sex marriages and foreign same-sex marriages are in an analogous or a comparable position.[6]
Similarly, whether any differential treatment is based on a prohibited ground and whether such differential treatment (if any) can be justified upon an analysis through the four-step justification test depends on specific facts and context.[7]

The CFI therefore rejected the general declaration sought that the non-recognition of foreign same-sex marriages under Hong Kong law violates the constitutional right to equality. Upon the invitation of the applicant’s Counsel, (so as to allow any appeal to be pursued on all grounds in one-go), the CFI also lifted the stay of proceedings in so far as it relates to Grounds 1 and 2 of the judicial review and dismissed them for the reasons given in the MK case.[8]

COMMENT

As with the decision made the MK case (which followed, inter alia, the CFA decisions in the Leung case and the QT case), the CFI endorsed in the Sham case that whilst the right to marriage of opposite-sex couples is protected by the constitution, no such protection is accorded to same-sex couples. Same-sex marriages remain invalid marriages in Hong Kong as the law stands now.

It is apparent that the Hong Kong court is open to consider challenges against specific legislation, or policies or decisions of the government or other public bodies on the ground of unlawful discrimination based on sexual orientation.[9] In fact, the CFI pointed out in the Judgment, some specific government policies and/or statutes may be held unconstitutional upon challenge.[10] However, the court is not prepared to grant a general declaration to the effect that same-sex marriages have the same legal recognition as opposite-sex marriages regardless of the subject matter under consideration and the relevant context.[11]

___________________

[1] §§ 4-6, the Judgment.

[2] § 7, the Judgment.

s 40 of the Marriage Ordinance (Cap 181) states that “(1) Every marriage under this Ordinance shall be a Christian marriage or the civil equivalent of a Christian marriage. (2) The expression Christian marriage or the civil equivalent of a Christian marriage (基督敎婚禮或相等的世俗婚禮) implies a formal ceremony recognized by the law as involving the voluntary union for life of one man and one woman to the exclusion of all others.”

s 20(1)(d) of the Matrimonial Causes Ordinance (Cap 179) provides that “A marriage which takes place after 30 June 1972 shall be void on any of the following grounds only – (d) that the parties are not respectively male and female.”

[3] § 8, the Judgment.

[4] § 10, the Judgment.

[5] §§ 11 and 12, the Judgment. Please see our Client Alert “Hong Kong Case Update: Ng Hon Lam Edgar v Secretary for Justice” for an explanation of the four-step justification test.

[6] §§ 21 and 22, the Judgment.

[7] §§ 23 to 25, the Judgment.

[8] §§ 27 and 28, the Judgment.

[9] See § 57 of the judgment of the MK case.

[10] § 26, the Judgment.

[11] § 26, the Judgment.

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, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, bgilchrist@gibsondunn.com)

Elaine Chen (+852 2214 3821, echen@gibsondunn.com)

Alex Wong (+852 2214 3822, awong@gibsondunn.com)

Celine Leung (+852 2214 3823, cleung@gibsondunn.com)

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

Today, the UK Government announced its “Winter Economy Plan” – a series of employment and business support and tax measures intended to support the UK economy as the COVID-19 pandemic continues to impact economic output. These latest support measures mark a shift in focus to keeping the UK economy open whilst providing support to businesses as reduced demand continues to impact many businesses during the winter months and through to Q1 2021. It remains to be seen whether further support measures are announced as the UK grapples both with economic recession and the impact of COVID-19 on public health.

The Jobs Support Scheme

The UK Government has announced the Jobs Support Scheme (“JSS”) as the successor to the Coronavirus Job Retention Scheme (“CJRS”), starting 1 November 2020 for a period of 6 months. Unlike the CJRS, which was designed to support employees unable to work as a result of the requirement to stay at home, the aim of the JSS is to protect viable jobs by supporting the wages of those in work, providing employers with the option to retain employees on shorter hours rather than making them redundant. Whilst employers participate in the JSS, they are not able to issue redundancy notices to employees on the JSS scheme.

To be eligible for the JSS, employees must be working at least 33% of their usual hours and be paid for those hours by their employer as normal. For the remaining hours not worked, the employer and the UK Government will each pay one third of the employee’s wages, resulting in the employee receiving at least 77% of their total wages (the employer paying 55% and the UK Government paying 22%). The level of the grant will be calculated based on an employee’s usual salary, capped at £697.92 per month. The JSS is open to employers with a UK bank account and UK PAYE scheme and is not limited to those employers who made use of the CJRS; all small and medium sized businesses may apply and larger businesses may apply if their turnover has been reduced as a result of the pandemic. Employers may also claim for JSS in addition to claiming the job retention bonus announced earlier in the year. The UK Government has stated that it expects that large employers using the JSS will not be making capital distributions, such as dividend payments or share buybacks, whilst accessing the JSS. Further guidance on the JSS is expected to be issued in due course and we will update our clients once this has been announced.

Self-Employed Support

The UK Government has also announced the extension of the Self Employment Income Scheme Grant (“SEISS”). An initial taxable grant will be provided to those who are currently eligible for SEISS and are continuing to actively trade but face reduced demand due to the Coronavirus pandemic. The initial lump sum will cover three months’ worth of profits for the period from November to the end of January next year, capped at £1,875. An additional second grant, which may be adjusted to respond to changing circumstances, will be available for self-employed individuals to cover the period from February 2021 to the end of April 2021.

UK Government Funding Schemes

Bounce Back Loans – the UK Government announced the Pay As You Grow Scheme, which will allow businesses to pay back government Bounce Back Loans over a period of 10 years. This is an extension on the original 6-year term of these loans, together with the UK Government’s 100% guarantee of these loans. In addition, firms in financial difficulty will be permitted to suspend their repayments for up to 6 months and also elect to make interest only payments for the same period, without impacting a firm’s credit rating. The deadline for applications for Bounce Back Loans has also been extended to 31 December 2020.

Coronavirus Business Interruption Loan Scheme – the Coronavirus Business Interruption Loan Scheme will also be extended to 31 December 2020 for applications and the UK Government has announced its intention to provide lenders with the ability to extend the term of a loan from 6 years to 10 years. This also has the effect of extending the UK Government’s 80% guarantee of these loans.

Coronavirus Large Business Interruption Loan Scheme – the deadline for applications for Coronavirus Large Business Interruption Loans has been extended to 31 December 2020.

Future Fund – the deadline for applications for funding under the Future Fund scheme has been extended to 31 December 2020.

Tax Measures

The temporary cut in VAT from 20% to 5% for the tourism and hospitality sectors that was due to expire in January 2021 has been extended through to 31 March 2021.

In addition, businesses that deferred their VAT payments due in March to June 2020 will be given the option to pay their VAT in smaller instalments. Instead of paying a lump sum in full at the end March 2021, these businesses will be able to make 11 equal instalments over 2021-2022. It has been announced that businesses will need to opt into this VAT deferral mechanism and that HM Revenue & Customs will put in place an opt-in process in “early 2021”.

A further tax deferral has been introduced for self-assessment income tax payers (building on the deferral provided in July 2020): details are still be provided at the time of writing, but it has been announced that taxpayers with up to £30,000 of self-assessment income tax liabilities will be able to use the “Time to Pay” facility to secure a further 12 months to pay those liabilities due in January 2021, meaning that payments may now not need to be made until January 2022.

This client update was prepared by James Cox, Sandy Bhogal, Benjamin Fryer, Amar Madhani, and Georgia Derbyshire.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows:

James A. Cox – London, Employment (+44 (0)20 7071 4250, jcox@gibsondunn.com)

Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, sbhogal@gibsondunn.com)

Benjamin Fryer – London, Tax (+44 (0)20 7071 4232, bfryer@gibsondunn.com)

Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, amadhani@gibsondunn.com)

Georgia Derbyshire – London, Employment (+44 (0)20 7071 4013, GDerbyshire@gibsondunn.com)

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

With talk about a second Coronavirus wave gathering pace, the German Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) is proposing to extend the temporary COVID-19-related legislation of March 2020 significantly simplifying the passing of shareholders’ resolution, including, in particular, the possibility to hold virtual-only shareholders’ meetings. The extension is proposed in unchanged form for another year until the end of 2021. A respective draft regulation has been published at short notice on 18 September 2020 and stakeholders are invited to submit their comments until 25 September 2020.

While the legislation of March 2020 was well received in the rise of the COVID-19 crisis the reactions to an extension were mixed so far. Criticism focuses on the significant restrictions of shareholders’ rights by this legislation (e.g. no right to ask questions or to counter-motions in real time, wide discretion of the management with respect to answering submitted questions, only limited appeal right etc.). This was raised not only by shareholders’ activists but also by various parliament members including prominent experts of the ruling coalition.

In the reasons of the draft regulation, the ministry strongly emphasizes that companies should only hold virtual-only meetings if actually required in the individual circumstances due to the pandemic. In addition, the ministry encourages the corporations in question to handle the Q&A process as shareholder-friendly as technically possible, including allowing for questions in real- time, if they decide to hold a virtual meeting.

The time window to debate the proposal is extremely short. The new shareholders’ meeting season is already approaching quickly, starting as early as in January/February 2021 for companies with business years ending on 30 September 2020. While the Ministry of Justice and Consumer Protection is authorized to extend the period of application of the legislation for another year without any modifications, modifications in substance would require the involvement of parliament and are thus deemed rather unlikely. If the proposal is adopted, it would be up to the corporations themselves to take the ministry’s appeal seriously and to make use of the virtual format in a responsible and shareholder-friendly manner.

The following Gibson Dunn lawyers have prepared this client update: Ferdinand Fromholzer, Silke Beiter, Johanna Hauser.

Gibson Dunn’s lawyers in the two German offices in Munich and Frankfurt are available to assist you in addressing any questions you may have regarding the issues discussed in this update.

For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the three authors:

Ferdinand Fromholzer (+49 89 189 33 170, ffromholzer@gibsondunn.com)
Silke Beiter (+49 89 189 33 170, sbeiter@gibsondunn.com)
Johanna Hauser (+49 89 189 33 170, jhauser@gibsondunn.com)

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

One of the thornier areas of law for U.S.-regulated banks and their holding companies is that regarding confidential supervisory information (CSI). U.S. regulators treat bank examination reports and related correspondence and materials, which are often the most useful sources of information about a financial institution, as the regulators’ own property, with parties subject to severe penalties for disclosing such information without prior regulatory approval.[1] Receiving approval is often a time-consuming process that may frustrate corporate transaction and litigation deadlines. In addition, each of the federal regulators – the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Consumer Financial Protection Bureau (CFPB) – and each state financial regulatory authority – such as the New York Department of Financial Services (NYDFS) – has its own rules on the subject.

There have been two recent meaningful developments in the law regarding CSI. First, the Federal Reserve recently finalized revisions to its CSI regulation (Fed Final Rule); those revisions become effective on October 15th. Second, on September 9th, the NYDFS reproposed a regulation (NYDFS Proposed Rule) that would liberalize its approach to CSI disclosure. This Client Alert discusses these two developments.

In addition, the Alert contains a summary of the principal provisions of the CSI regulations of the four federal banking regulators and NYDFS, on the assumption that the NYDFS regulation is finalized in the form that NYDFS proposed it.

I. Federal Reserve Final Rule

The Fed Final Rule is an improvement, albeit a modest one, in terms of providing Federal Reserve-supervised institutions – bank and thrift holding companies, including their nonbank subsidiaries, state member banks, and branches, agencies and representative offices of non-U.S. banks – flexibility in sharing CSI without the Federal Reserve’s prior approval. Enhancements to the Federal Reserve’ regulatory framework demonstrate an effort to streamline the approval process in certain areas.

A. Scope of CSI

The Fed Final Rule defines CSI as “information that is or was created or obtained in furtherance of the [Federal Reserve’s] supervisory, investigatory or enforcement activities,” and includes reports of examination, inspection and visitation; confidential operating and condition reports; supervisory assessments; investigative requests for documents or other information; and supervisory correspondence or other supervisory communications, as well as “any information derived from or related to such information.”[2] In a clarification, the Fed Final Rule states that CSI does not include documents that are prepared “for or by” a supervised financial institution for its own business purposes that are in its own possession and do not otherwise contain CSI, even though copies of such documents in the Federal Reserve’s possession do constitute CSI.[3] Therefore, turning over such non-CSI to the Federal Reserve does not make the information CSI in the hands of the supervised financial institution.

B. Disclosure to Affiliates

The Fed Final Rule states that a supervised institution may disclose CSI without prior Federal Reserve approval not only to its own directors, officers and employees, but also, when it is “necessary or appropriate for business purposes,” to directors, officers, employees of its affiliates.[4] This position liberalizes the regulation from prior practice and aligns the Federal Reserve’s position more closely with that of the CFPB, under which CSI may be disclosed to [directors, officers and employees of] affiliates to the extent that it “is relevant to the performance of such individuals’ assigned duties.”[5] As shown in the Appendix, neither the OCC nor the FDIC has adopted this position in their CSI rules; disclosure to a parent may be permitted without prior regulatory approval, but not to other affiliates.[6]

C. Disclosure to Legal Counsel, Auditors, and Service Providers

The Fed Final Rule also makes a change from the prior regulation in permitting supervised institutions to disclose CSI to external legal counsel and their auditors, without prior written approval, when “necessary or appropriate in connection with the provision of legal or auditing services to the supervised financial institution.”[7] This change aligns the Federal Reserve’s position with that of the OCC and the even more permissive CFPB; the FDIC, however, has not adopted this position with respect to external legal counsel, and therefore the default provision of specific prior approval obtains under its regulations.[8]

In addition, under the revised Federal Reserve framework, supervised institutions are also able to disclose CSI to service providers to the institution and service providers to the institution’s external counsel and auditors (such as consultants, contractors, and technology providers), without prior written approval, in instances where such disclosure is “necessary to the service provider’s provision of services.”[9] The Fed Final Rule requires that the service provider first enter into a written agreement with the supervised institution, external counsel or auditor in which the service provider agrees that (i) it will treat the CSI in accordance with applicable regulations and (ii) it will not use the CSI for any purpose other than as provided under its contract to provide services to the supervised institution.[10] The rule requires supervised institutions to maintain a written account of such service provider disclosures and provide the Federal Reserve a copy of the written account on request.[11]

The Fed Final Rule also liberalizes the manner of disclosure. Under prior practice, disclosure of CSI to external auditors and counsel was required to be limited to on-premises review; the Federal Reserve did not permit the information to be copied or shared off-site. The Fed Final Rule strikes this outdated requirement and allows for disclosure in any manner when “necessary or appropriate in connection with the provision of legal or auditing services to the supervised financial institution.”[12]

D. Disclosure to Other Regulators

The Fed Final Rule also somewhat modifies the manner in which CSI requests for disclosure to other regulators are handled. Historically, any disclosure by a supervised institution of Federal Reserve CSI to another regulatory body (e.g., other banking regulators, state and federal, or the Securities and Exchange Commission) required the prior written consent of the Federal Reserve’s General Counsel. With respect to CSI about a supervised institution “that is contained in documents prepared by or for the institution for its own business purposes,” such as internal minutes, the Fed Final Rule changes this practice and permits institutions to make requests to share such CSI with other bank regulators to the “central point of contact at the Reserve Bank, equivalent supervisory team leader, or other designated Reserve Bank employee.”[13] Disclosure will be permitted upon a determination by the Federal Reserve point of contact that [the other regulator] “has a legitimate supervisory or regulatory interest in the [requested internally prepared CSI].”[14] Disclosure of all other CSI to another regulator, however, still requires the consent of the Federal Reserve’s General Counsel.[15]

II. NYDFS Proposed Rule

Like the Fed Final Rule, the NYDFS Proposed Rule, which is a re-proposal of a November 2019 proposal, is a welcome development because it demonstrates a greater willingness to harmonize the NYDFS CSI regime with those of other regulators. If finalized, New York would, for the first time, have a CSI regulation in addition to a statutory provision, Section 36.10 of the Banking Law.

A. Scope of CSI

The NYDFS Proposed Rule defines CSI as “any information that is covered by Section 36.10 of the [New York] Banking Law.”[16] Section 36.10, in turn, refers to “reports of examinations and investigations [of any NYDFS-supervised institution and affiliates], correspondence and memoranda concerning or arising out of such examination and investigations, including any duly authenticated copy or copies thereof,” and includes any confidential materials shared by NYDFS with any governmental agency or unit.[17]

B. Disclosure to Affiliates

Under Section 36.10, the default standard for disclosure of any CSI is the prior written approval of NYDFS. The NYDFS Proposed Rule contains an exception for disclosure of CSI to affiliates and their directors, officers and employees when “necessary and appropriate for business purposes.”[18] We note that this standard is different from the Federal Reserve and OCC standard, which is “necessary or appropriate” for business purposes.[19]

C. Disclosure to Legal Counsel, Auditors and Other Service Providers

The NYDFS Proposed Rule would also ease current restrictions on NYDFS-supervised institutions’ disclosure of CSI to certain advisors. It would provide a “limited exception” for disclosure to “legal counsel or an independent auditor that has been retained or engaged by such [supervised institution] pursuant to an engagement letter or written agreement.”[20] The applicable engagement letter or written agreement would be required to contain certain acknowledgements by the legal counsel or independent auditor; inter alia, it would be required to state (i) that the information will be used solely to provide “legal representation or auditing services” and (ii) that the information will be disclosed solely to employees, directors, or officers only “to the extent necessary and appropriate for business purposes.[21]

Notably, unlike the Fed Final Rule, the NYDFS Proposed Rule does not contain an exception for third-party vendors to legal counsel and external auditors. In declining to permit what it characterized as “a broad exception,” NYDFS noted that the OCC’s regulations do not contain one.[22]

D. Disclosure to Other Regulators

With respect to the disclosure of NYDFS CSI to other regulators, including, for non-U.S banks, their home country supervisors, the NYDFS Proposed Rule would require the prior written consent of both the Senior Deputy Superintendent of NYDFS for Banking and the General Counsel of NYDFS, or their respective delegates, prior to disclosure.[23] There is no streamlined procedure, as in the Fed Final Rule, for internally generated CSI.

E. Duty to Notify NYDFS of Requests for CSI

The NYDFS Proposed Rule requires each supervised institution, affiliate of a supervised institution, legal counsel, and independent auditor that is served with a request, subpoena or order to provide CSI to notify the Office of the General Counsel of the request immediately so that NYDFS will be able to intervene in the action as appropriate.[24] But it does not – in a relaxation from NYDFS’s November 2019 position – require external counsel and independent auditors to agree contractually to assert legal privileges and protections as requested by NYDFS on the agency’s behalf.[25] The proposal instead would mandate that CSI holders only inform the requester and the relevant tribunal of the obligations set forth in the NYDFS Proposed Rule and the substance of Section 36.10 of the New York Banking Law.[26] Relatedly, the NYDFS Proposed Rule does not require that supervised institutions maintain a record of all disclosed CSI.[27]

Conclusion

The Fed Final Rule and the NYDFS Proposed Rule signal a growing awareness by regulators of the inefficiencies posed by the current CSI regulatory framework. One hopes that the Fed Final Rule will help establish a regulatory benchmark for the other federal banking regulators, and that NYDFS’s willingness to reexamine its own processes will perhaps inspire other state regulators to revisit their regulations. Nonetheless, the overriding traditional principle of CSI law and regulation – that the regulators consider CSI their property, to be disclosed only upon their specific consent – remains a key feature of all regulatory regimes.

Appendix: Comparison of CSI Requirements

Topic		Federal Reserve	OCC	FDIC	CFPB	NYDFS Proposed Rule
*Supervisory Jurisdiction*		Bank/thrift holding companies and their nonbank subsidiaries, financial holding companies, state member banks, branches, agencies and representative offices of non-U.S. banks, and systemically significant nonbank financial companies when designated.	National banks, federally chartered savings associations, and federally licensed branches and agencies of non-U.S. banks.	FDIC-insured state banks that are not members of the Federal Reserve System and FDIC-insured state savings associations.	Depository institutions with more than $10 billion in assets and certain nonbank financial entities, including mortgage-related firms, lenders (e.g., student loans, payday), certain other large nonbank consumer financial entities (e.g., debt collection/relief and consumer finance firms, credit reporting agencies), and prepaid and credit card issuers.	Any entity licensed, chartered, authorized, registered, or otherwise subject to supervision by NYDFS under the New York Banking Law.
*Scope*		Information that is or was created or obtained in furtherance of the Board’s supervisory, investigatory, or enforcement activities.[28] Includes any portion of a document in the possession of any person, entity, agency or authority, including a supervised institution, that contains or would reveal confidential supervisory information is CSI. New 12 C.F.R. § 261.2(b)(1). Excludes internally prepared documents for business purposes that do not contain CSI (even if such information is in possession by the Board and such copies constitute CSI. New 12 C.F.R. § 261.2(b)(2).	(a) Records created or obtained by the OCC in connection with its supervisory responsibilities; (b) Records compiled by the OCC in connection with its enforcement responsibilities; (c) Examination reports, supervisory correspondence, investigatory files complied, agency memoranda; (d) CSI obtained by a third party; (e) Testimonies and interviews with current or former agency employees, officers, or agents concerning information acquired in course of such person’s official duties or status; and (f) Information related to current and former supervised institutions and their subsidiaries and affiliates. 12 C.F.R. § 4.37(b)(1).	(a) Records designated pursuant to an executive order; (b) Records relating solely to internal personnel rules and practices; (c) Records otherwise exempt from disclosure by statute; (d) Intra-agency memoranda or letters; (e) Certain records compiled for law enforcement purposes; and (f) Records related to examination, operation, or condition of the supervised institution, prepared by or on behalf of the FDIC or other regulatory body. 12 C.F.R. § 309.5(g).	(a) Reports of examination, inspection and visitation, non-public operating, condition, and compliance reports, and any information contained in, derived from, or related to such reports; (b) Any document, including reports of examination, prepared by, on behalf of, or for the use of the CFPB or any other federal, state or foreign regulator supervising such financial institution, and any information derived from such documents; (c) Intra-agency communications; and (d) Information provided to the CFPB by the supervised institution regarding consumer risk in the offering or provision of consumer financial products or services, or to assess whether such supervised institution is a “covered person.” 12 C.F.R. § 1070.2(b)(1).	All reports of examinations and investigations, correspondence and memoranda concerning or arising out of such examination and investigations, including any duly authenticated copy or copies thereof in the possession of any supervised institution or its affiliates, including any confidential materials shared by NYDFS with any governmental agency or unit. NY Banking Law § 36.10.
*Default Disclosure Standard*		“[P]rior written permission of the General Counsel” New § 261.20(a). Supervised institution must demonstrate “a substantial need to . . . disclose such information that outweighs the need to maintain confidentiality.” New 12 C.F.R. § 261.23(a)(1).	Prior written consent. 12 C.F.R. § 4.37(b)(1).	Prior written consent. 12 C.F.R. § 309.6(b). Default Standard: “[G]ood cause for disclosure.” 12 C.F.R. § 309.6(b).	Prior written consent. 12 C.F.R. §1070.2(b)(2)(ii).	Prior written consent. NY Banking Law § 36.10. Default Standard: “[T]he ends of justice and the public advantage will be subserved by the publication thereof.” NY Banking Law § 36.10.
*Certain Exceptions to Disclosure*	*Parent Holding Company*	No consent or written request required, when “necessary or appropriate for business purposes.” New 12 C.F.R. § 261.21(b)(1).	No consent or written request required, when “necessary or appropriate for business purposes.” 12 C.F.R. § 4.37(b)(2).	For majority shareholders, supervised institution’s board must authorizes disclosure via board action. 12 C.F.R. § 309.6(b)(7)(iii).	No consent or written request required for parent holding company personnel, to the extent that it “is relevant to the performance of such individuals’ assigned duties.” 12 C.F.R. § 1070.42(b)(1).	No consent or written request required, when “necessary and appropriate for business purposes.” 3 NYCRR § 7.2(c) (proposed 2020).
	*Affiliates*	No consent or written request required, when “necessary or appropriate for business purposes.” New § 261.21(b)(1).	Non-parent holding company affiliates require prior written consent 12 C.F.R. § 4.37(b)(2).	Non-parent holding company affiliates require prior written consent. 12 C.F.R. § 309.6(b)(7)(iii).	No consent or written request required for affiliate personnel, to the extent that it “is relevant to the performance of such individuals’ assigned duties.” 12 C.F.R. § 1070.42(b)(1).	No consent or written request required, when “necessary and appropriate for business purposes.” 3 NYCRR § 7.2(c) (proposed 2020).
	*Outside Counsel / Auditors*	No consent or written request required, when “necessary or appropriate in connection with the provision of legal or auditing services.” New 12 C.F.R. § 261.21(b)(3).	No consent or written request required, when “necessary or appropriate for business purposes.” 12 C.F.R. § 4.37(b)(2).	For outside counsel, prior written consent required, and a showing of “good cause.” 12 C.F.R. § 309.6(b)(7)(i) and (iv). For external auditors, no consent or written request required. See FDIC Financial Institutions Letter (FIL-57-92), dated July 24, 1992.	No consent or written request required. 12 C.F.R. § 1070.42(b)(2)(i).	No consent or written request required for disclosure “to legal counsel or an independent auditor [if]. . . retained or engaged by such regulated entity pursuant to an engagement letter or written agreement” where the legal counsel or independent auditor states, among other things, that CSI will be used solely to provide “legal representation or auditing services”; and that the information will be disclosed solely to employees, directors, or officers only “to the extent necessary and appropriate for business purposes.” 3 NYCRR § 7.2(b) (proposed 2020).
	*Other Service Providers:*	CSI may be shared with service providers of attorneys or auditors if the service provider is under a written agreement with the legal counsel or auditor pursuant to which it agrees to treat the CSI in accordance with 12 C.F.R. § 261.20(a) and use CSI only “as necessary to provide the services..” New 12 C.F.R. § 261.21(b)(3). Other Service Providers to Institution: Allowed when “necessary to the service provider’s provision of services” and such provider is bound by written agreement with the supervised institution, agreeing to treat CSI in accordance with 12 C.F.R. § 261.20(a) and use CSI only “as provided under its contract to provide services.” New 12 C.F.R. § 261.21(b)(4).	CSI may be provided by the supervised institution to a consultant if the consultant enters into a written contract, agreeing to abide by OCC rules and use CSI only to provide services. 12 C.F.R. § 4.37(b)(2).	Prior written consent, and a showing of “good cause.” 12 C.F.R. § 309.6(b)(7)(i) and (iv).	No consent or written request required for disclosure to a contractor, consultant, or service provider. 12 C.F.R. § 1070.42(b)(2)(i). Other persons require prior written consent. 12 C.F.R. § 1070.42(b)(2)(ii).	Prior written consent required. NY Banking Law § 36.10.
	*Other regulators*	Consent of “central point of contact at the Reserve Bank, equivalent supervisory team leader, or other designated Reserve Bank employee” to disclose *internally prepared material containing CSI to the FDIC, OCC, CFPB, state regulators supervising such institution*; prior written consent required to disclose all other CSI. New 12 C.F.R. § 261.21(b)(2).	Prior written consent required. 12 C.F.R. § 4.37(b)(1).	Prior written consent required, and a showing of “good cause.” 12 C.F.R. § 309.6(b)(7)(i) and (iv).	Prior written consent required. 12 C.F.R. § 170.42(b)(2)(ii).	Prior written consent of the Senior Deputy Superintendent of NYDFS for Banking and the General Counsel required. 3 NYCRR § 7.2(f) (proposed 2020).

____________________

[1] Federal bank examination reports, for example, cite 18 U.S.C. § 641, which makes it a felony to convert, knowingly, government property to one’s own use. Lesser sanctions for alleged CSI violations have included substantial fines and prohibitions on consulting arrangements with supervised institutions for a period of years.

[2] New 12 C.F.R. § 261.2(b)(1).

[3] See id. § 261.2(b)(2)(1).

[4] See id. § 261.21(b)(1).

[5] 12 C.F.R. § 1070.42(b)(1).

[6] See Appendix.

[7] New 12 § 261.21(b)(3).

[8] See Appendix. The FDIC does not require prior approval for a bank’s independent auditor.

[9] New 12 § 261.21(b)(3)-(4).

[10] Id.

[11] Id. § 261.21(b)(4).

[12] Id. § 261.21(b)(3).

[13] Id. § 261.21(b)(2).

[14] Id.

[15] Id. § 261.23(b)-(c).

[16] 3 N.Y.C.R.R. § 7.1(a) (proposed 2020).

[17] New York Banking Law, Section 36.10.

[18] 3 N.Y.C.R.R. § 7.2(c) (proposed 2020).

[19] See Appendix.

[20] 3 N.Y.C.R.R. § 7.2(b) (proposed 2020).

[21] Id. (emphasis added).

[22] NYS Register, page 12 (Sept. 9, 2020), available at
https://www.dos.ny.gov/info/register/2020/090920.pdf.

[23] 3 N.Y.C.R.R. § 7.2(f) (proposed 2020).

[24] Id. § 7.2(d) (proposed 2020).

[25] See 3 N.Y.C.R.R. § 7.2(c) (proposed 2019) (institution “agrees to notify the Department, promptly and in writing, of any demand or request for the supervisory confidential information, and agrees to assert on behalf of the Department all such legal privileges and protections as the Department may request”).

[26] 3 N.Y.C.R.R. § 7.2(d) (proposed 2020).

[27] This too is a change from the 2019 position. See 3 N.Y.C.R.R. § 7.2(f) (proposed 2019) (“Regulated entities must keep a written record of all confidential supervisory information disclosed pursuant to the provisions of this Part and a copy of each party’s written agreement mentioned in subdivision (b) of this section for inspection and review by the Department”).

[28] Includes “reports of examination, inspection, and visitation; confidential operating and condition reports; supervisory assessments; investigative requests for documents or other information; and supervisory correspondence or other supervisory communications.” New 12 C.F.R. § 261.2(b)(1).

Excludes “[d]ocuments prepared by or for a supervised financial institution for its own business purposes that are in its own possession and that do not include confidential supervisory information as defined in paragraph (b)(1) of this section, even though copies of such documents in the Board’s or Reserve Bank’s possession constitute confidential supervisory information.” Id.

The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long, James Springer and Samantha Ostrom.

Financial Institutions Group:
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein (+1 212-351- 3850, mdenerstein@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
James O. Springer – New York (+1 202-887-3516, jspringer@gibsondunn.com)
Samantha J. Ostrom – Washington, D.C. (+1 202-955-8249, sostrom@gibsondunn.com)

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

U.S. and EU Enforcers to Renew Focus on “Below the Radar” Transactions

On September 3, 2020, the Antitrust Division of the U.S. Department of Justice (the “Division”) released a new Merger Remedies Manual (the “Manual”). The Division traditionally reviews mergers involving airlines, health insurance, finance, publishing, media, beer, telecommunications, and other industries. In 2018, Assistant Attorney General Makan Delrahim formally withdrew the 2011 Policy Guide to Merger Remedies (“2011 Guide”), relying instead on the Policy Guide to Merger Remedies published in 2004 (“2004 Guide”), while the Division reconsidered its remedy policies.[1] This new Manual is the culmination of that process.

The Manual, which only governs DOJ procedures and not those of the Federal Trade Commission,[2] expresses a strong preference for structural relief—including for vertical transactions (i.e., transactions involving parties that operate at different levels of a supply chain, such as a merger between a manufacturer and a distributor). The Manual also addresses new topics such as structuring remedies in the context of consummated mergers and coordination with global enforcers and regulatory agencies. Lastly, the Manual describes certain provisions the Division will require in consent decrees to ensure effective enforcement.

In addition, FTC Chairman Simons and European Commissioner Vestager recently made comments signaling increased scrutiny of deals that do not meet the HSR or EU thresholds. These comments indicate that both the FTC and the EC will be more aggressive in using their existing authority to investigate smaller acquisitions that might involve future competitors.

New DOJ Merger Remedy Manual Issued

The Division’s new Manual includes a number of important revisions, although some reflect existing practice as opposed to new policy.

Strong Preference for Structural Relief for Horizontal and Vertical Concerns. Signaling a clear break from the DOJ’s 2011 Guide[3] and the FTC’s merger remedies policy,[4] which allow for non-structural “conduct” or “behavioral” remedies in vertical merger cases, the Manual expresses a “strong[] prefer[ence]” for structural remedies in both horizontal and vertical merger cases: “[a]lmost all merger remedies are structural,” and that conduct remedies are only appropriate in “limited circumstances.”[5] The Manual acknowledges that short-term conduct remedies may be needed to facilitate structural relief,[6] but states that a stand-alone conduct remedy is only appropriate where: “(1) the transaction generates significant efficiencies that cannot be achieved without the merger; (2) a structural remedy is not possible; (3) the conduct remedy will completely cure the anticompetitive harm; and (4) the remedy can be enforced effectively.”[7]

Characteristics of Potentially Ineffective Divestitures. The Manual outlines characteristics of divestitures that may be ineffective in preserving competition, including where the divestiture is of less than an existing standalone business; where it combines previously independent capital; where the merged firm retains rights to critical intangible assets; where ongoing entanglements remain between the firms; and where there are substantial regulatory or logistical hurdles.[8] However, while the 2004 Guide “strongly disfavored” so-called “crown jewel provisions” that require certain valuable assets be included in the divestiture package if the parties are unable to sell the initially agreed-upon assets within a certain time.[9] The new Manual does not comment on such provisions. The FTC merger remedies policy, in contrast, expressly allows for the use of “crown jewel” provisions and the FTC has a record of approving such provisions.[10]

Under existing policy, the Division will appoint a “divestiture trustee” in the event the parties are unable to find a buyer and sell the divested assets by the agreed-upon deadline, which is in most cases 90 days after the entry of a hold separate order. With this change in the Division’s policy, Division might be more willing to consider crown jewel provisions as an alternative to divestiture trustees. While a crown jewel might place additional risk on the merging parties because it requires them to sell valuable assets, in some cases a crown jewel enables the Division to accept a divestiture remedy that it would otherwise be unwilling to agree to—giving merging parties another option for settling merger cases without litigation. Crown jewel provisions might be an attractive alternative resolution for the Division and the merging parties in cases where there is heightened risk that the parties will be unable to find an acceptable buyer for the divested assets within an acceptable timeframe.

Private Equity Firms as Divestiture Buyers. The Division has as long-standing preference for identifying an upfront divestiture buyer, and the Manual notes that “identification of an upfront buyer is particularly important in cases where the Division determines that there are likely to be few acceptable and interested buyers.”[11] In the past, however, the Division has not indicated a preference for any particular type of otherwise qualified buyer for the to-be-divested assets. In a departure from this practice, the Division’s Manual remarks that, in some cases, a private equity purchaser “may be preferred,” recognizing that private equity purchasers may have “flexibility in investment strategy,” be “committed to the divestiture,” and be “willing to invest more when necessary.”[12] The Division cites an FTC study in support of its favorable view of private equity purchasers, although the FTC has not expressed a similar preference in its remedies guide.

Consummated Mergers. For the first time, the Manual explicitly addresses remedies for transactions challenged post-consummation.[13] The Manual recognizes that consummated mergers “may pose unique issues,” as the parties often have already integrated their assets, making it difficult to craft an effective divestiture that would eliminate anticompetitive effects. But the Manual reiterates that structural relief may be necessary in some circumstances to eliminate anticompetitive effects. For example, it may be necessary to unwind a merger and divest more or less than the acquired assets to effectively restore competition. The Division has advocated a similar point in prior proceedings, so this change does not mark a significant departure from existing Division practice.[14]

Global Enforcement and Regulatory Collaboration. As antitrust merger enforcement and merger control has proliferated around the world, and is now a staple of antitrust enforcement in 120 countries and in state AG offices, mergers are commonly subject to multiple investigations by authorities in and outside the United States. The Manual includes new sections outlining the Division’s practice of collaborating with foreign and state antitrust enforcers to minimize unnecessary jurisdictional conflict structure remedies that are effective across jurisdictions.[15] The Division will also work with regulatory agencies to avoid inconsistent requirements. While the Division will consider the impact of regulations on competitive dynamics, the Manual notes that the “existence of regulation typically does not eliminate the need for an antitrust remedy to preserve competition effectively.”[16]

Consent Decree Terms. The Manual also provides greater detail on consent decree terms that the Division likely will require in future settlements.[17] For example, the Manual recommends consent decrees explicitly provide for Division appointment of a selling trustee,[18] and that, in certain circumstances, a decree may require the merged firm to report otherwise non-reportable deals.[19] And the Manual details certain “standard provisions” that must be included in consent decrees to allow for effective enforcement, including (1) reducing DOJ’s burden to establish violation of a consent decree from clear and convincing to preponderance of the evidence; (2) allowing the Division to apply for a one-time extension of the consent decree terms upon a court finding a violation; (3) allowing the Division to terminate the decree upon notice to the court and the parties; (4) allowing courts to enforce provisions that are stated specifically and in reasonable detail; and (5) requiring parties to provide reimbursement to the Division for costs incurred in connection with a successful enforcement effort.[20] While the Division has increasingly been including these provisions in their Final Judgments over the last couple of years, the Manual memorializes these requirements. As a whole, these new provisions will strengthen the Division’s ability to police and seek fines for alleged consent decree violations.

New Compliance Unit. Lastly, the Manual outlines the responsibilities of the newly created Office of Decree Enforcement and Compliance.[21] This Office is charged with ensuring rigorous enforcement of merger remedies, and it will evaluate and provide oversight over all remedies. While on its face this new office appears to mimic the FTC Bureau of Competition’s Compliance Section, it will only monitor post-decree compliance, whereas the FTC’s Compliance Section is an active participant in remedy negotiations. Whether this has a practical impact on DOJ merger remedies remains an open question.

FTC Chair and EC Competition Commissioner Signal Increased Scrutiny of “Below the Radar” Transactions

Also noteworthy are recent statements by FTC Chairman Joseph Simons and EU Commissioner for Competition Margrethe Vestager[22] promising stepped-up review and scrutiny of “non-reportable transactions”—that is, deals that fall below applicable merger reporting statutory thresholds.

Referring to so-called “killer acquisitions” in which transactions by established incumbents that take out a nascent or potentially disruptive competitor, Commissioner Vestager observed that “there are a handful of mergers each year that could seriously affect competition, but which we don’t see because the companies’ turnover doesn’t meet thresholds” that would trigger a mandatory filing and review by the European Commission.[23] Commissioner Vestager promised to use an existing provision, Article 22 of the EU Merger Regulation, which allows the European Commission to review transactions that affect “trade between member States and [threaten] to significantly affect competition within the territory of the member State or States making the request.” Originally designed as a catch-all referral mechanism for EU member states lacking a home-based merger control authority, Article 22 contains no minimum filing thresholds, giving the Commission a tool to immediately implement Commissioner Vestager’s policy announcement.

Likewise, the FTC has recently directed several large technology companies to provide information about acquisitions that were not reportable under the HSR Act to “better understand” some of these non-reported transactions, in particular, those of nascent or potential competitors.[24] Chairman Simons noted that “[o]ne potential outcome of this study is that we may decide to issue an additional special order requiring premerger filings for acquisitions by these companies at levels well below the normal statutory thresholds” and that the FTC would have “the option” to take an enforcement action “where warranted.”[25] Following this statement, the FTC also announced that it has revamped its Bureau of Economics’ Merger Retrospective Program to expand the Bureau’s retrospective research efforts analyzing the effects of consummated mergers over the last 35 years.[26]

These actions followed Chairman Simons’ February 2020 announcement of the FTC’s investigation of the large technology companies.[27] A statement by Commissioners Christine Wilson and Rohit Chopra from February 2020 echoed Simons’ sentiments, stating that the “Commission will benefit from a deeper understanding of the kinds of transactions – and the nature of their competitive impact – that were not reportable under the HSR requirements.”[28]

Chairman Simons’ and Commissioner Vestager’s statements continue a recent pattern of enforcers signaling increased scrutiny of transactions that fall below applicable reporting thresholds—scrutiny that is designed to target acquisitions of potential or nascent rivals to the acquiring company. Transactions in the tech and pharma sectors where startups often generate little or no revenue, but might potentially pose a competitive threat in the future, could be subject to investigations under this new policy.

In the United States, parties may consummate a transaction only to later discover that the FTC has opened an antitrust investigation that casts doubt on the deal’s ultimate prospects. In Europe, there will be an increased chance that a relatively small transaction may nevertheless be subjected to a more involved and burdensome EU-level review (as opposed to review at the member state level). This increased uncertainty will have a knock-on effect for transaction planning and documentation, which must account for expected regulatory filings and clearance timelines.

_____________________

[1] U.S. Dep’t. of Justice, Justice Department Issues Modernized Merger Remedies Manual (Sept. 3, 2020), available at https://www.justice.gov/atr/merger-enforcement.

[2] The Federal Trade Commission adopted its own guide to negotiating merger remedies in 2012 that remains in effect. Federal Trade Comm’n, Negotiating Merger Remedies (Jan. 2012), available at https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf.

[3] U.S. Dep’t. of Justice, Antitrust Division Policy Guide to Merger Remedies – June 2011, https://www.justice.gov/atr/page/file/1098656/download.

[4] Federal Trade Comm’n, Negotiating Merger Remedies (Jan. 2012), available at https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf.

[5] U.S. Dep’t. of Justice, Merger Remedies Manual (Sept. 2020), available at https://www.justice.gov/atr/page/file/1312691/download at 12 (“Manual”); see also id. at Part III.B (“Structural Relief Is the Appropriate Remedy for Both Horizontal and Vertical Mergers”).

[6] Id. at Part III.B.1 (“Conduct Relief to Facilitate Structural Relief”).

[7] Id. at Part III.B.2. (“Stand-Alone Conduct Relief”).

[8] Id. at Part III.F (“Characteristics that Increase the Risk a Remedy Will Not Preserve Competition”).

[9] 2004 Guide at Part IV.H (“Crown Jewel Provisions Are Strongly Disfavored”).

[10] For example, the FTC’s consent decree in connection with Pinnacle Entertainment’s 2013 acquisition of Ameristar Casinos contained a “crown jewel” clause providing for a potential forced divestiture of Ameristar’s St. Charles casino—a centerpiece of the transaction—if Pinnacle did not divest the Lumiere casino identified by the FTC as the source of competitive concern. See Federal Register Notice: Analysis of Agreement Containing Consent Orders to Aid Public Comment; Proposed Consent Agreement, August 19, 2013, https://www.ftc.gov/sites/default/files/documents/cases/2013/08/130819pinnaclefrn.pdf.

[11] Manual at Part IV.A (“Identifying a Buyer”).

[12] Id. at Part IV.B (“The Division Must Approve the Proposed Purchaser”).

[13] Id. at Part III.D (“Remedies for Transactions Challenged Post-Consummation”).

[14] See Brief for the U.S. as Amicus Curiae in Support of Appellee Steves and Sons, Inc., Steves and Sons, Inc. v. Jeld-Wen, Inc., No. 19-1397 (4th Cir. Aug. 23, 2019) (arguing that laches should not bar all private-party divestiture suits even after a merger has been consummated, as a party may be injured by a merger after it has been consummated, or the threat of antitrust injury may not materialize until post-closing).

[15] Manual at Part III.E (“Collaboration When Structuring a Remedy”).

[16] Id.

[17] Id. at Part VI (“Decree Terms”).

[18] Id. at Part VI.C (“Selling Trustee Provisions Must Be Included in Consent Decrees”).

[19] Id. at Part VI.F (“Prior Notice Provisions May Be Appropriate”).

[20] Id. at Part VI.I (“Consent Decrees Must Include Standard Provisions Allowing Effective Enforcement”).

[21] Id. at Part VII.A (“The Office of the Chief Legal Advisor Oversees Compliance and Enforcement”).

[22] “The Future of EU Merger Control,” International Bar Association Annual Conference (Sept. 11, 2020).

[23] Id.

[24] Prepared Remarks of Chairman Joseph Simons, ICN 2020: Digital Showcase Introductory Remarks (Sept. 14, 2020), here.

[25] Id.

[26] Press Release, Overview of the Merger Retrospective Program in the Bureau of Economics, FTC (Sept. 17, 2020), here.

[27] Press Release, FTC to Examine Past Acquisitions by Large Technology Companies (Feb. 11, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftc-examine-past-acquisitions-large-technology-companies.

[28] Statement of Commissioner Christine S. Wilson, Joined by Commissioner Rohit Chopra, Concerning Non-Reportable Hart-Scott-Rodino Act Filing 6(b) Orders (Feb. 11, 2020), here.

The following Gibson Dunn lawyers prepared this client alert: Adam Di Vincenzo, Kristen Limarzi, Chris Wilson, Kaitlin Zumwalt and JeanAnn Tabbaa.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work, the authors, or any member of the firm’s Antitrust and Competition Practice Group:

Antitrust and Competition Group:

Washington, D.C.
Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com)
Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com)
Kristen C. Limarzi (+1 202-887-3518, klimarzi@gibsondunn.com)
Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com)
Richard G. Parker (+1 202-955-8503, rparker@gibsondunn.com)
Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com)
Jeremy Robison (+1 202-955-8518, wrobison@gibsondunn.com)
Andrew Cline (+1 202-887-3698, acline@gibsondunn.com)
Chris Wilson (+1 202-955-8520, cwilson@gibsondunn.com)

New York
Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com)
Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com)

Los Angeles
Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com)
Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com)
Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com)
Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com)

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Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com)

Dallas
Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com)
Mike Raiff (+1 214-698-3350, mraiff@gibsondunn.com)
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Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com)

Brussels
Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com)
Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com)
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Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com)
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Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com)
Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com)

London
Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com)
Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com)
Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com)
Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com)
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Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)

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When the COVID 19 pandemic first hit European shores in early spring 2020, the German legislator was quick to introduce wide-reaching legislative reforms to protect the German business world from unwanted consequences of an economy struggling with unprecedented upheaval, the lock-down and the ensuing social strain.[1] One key element of the overall legal reform in March 2020 was the temporary derogation from the regular mandatory German-law requirement to file for insolvency immediately whenever a company is either illiquid (Zahlungsunfähigkeit) or over-indebted (Überschuldung). This derogation has now been extended in time for over-indebted companies, but restricted in scope for illiquid companies.

I. The Temporary Insolvency Law Reform in March 2020

At the time the German Act on the Temporary Suspension of the Insolvency Filing Obligation and Liability Limitation of Corporate Body in cases of Insolvency caused by the COVID-19 Pandemic (“Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht und zur Begrenzung der Organhaftung bei einer durch die COVID-19-Pandemie bedingten Insolvenz” – COVInsAG)[2] was introduced in March 2020, it was felt that the strict insolvency filing requirement that obliges management to file for insolvency without undue delay, but in any event no later than three weeks after such insolvency reason first occurs, would (i) place undue time pressures on companies to file for insolvency in situations where this short time period did not even allow management to canvass its financial or restructuring options or access to newly introduced state funding or other financing sources, (ii) result in a wave of insolvencies of otherwise healthy entities based purely on the traumatic impact of the pandemic and (iii) result in unwanted distortions of the market by failing to differentiate appropriately between businesses facing merely temporary cash-flow problems and genuinely moribund companies with long-standing challenges or issues.

In a nutshell and without going into all details, the interim reform of the German Insolvency Code (Insolvenzordnung, InsO) via the COVInsAG introduced a temporary suspension of the mandatory insolvency filing requirement until September 30, 2020 for both the insolvency reasons of illiquidity (Zahlungsunfähigkeit) and of over-indebtedness (Überschuldung) by way of a strong legal assumption that any such insolvency was caused by the pandemic if (i) the company in question was not yet illiquid on December 31, 2019 and (ii) could show that it would (still or again) be in a position to pay all of its liabilities when due on and after September 30, 2020.

This temporary exemption from having to file for insolvency was flanked by a number of other legislative tweaks to the Insolvency Code that privileged and protected a company’s continued trading during such time window against management liability risks and/or later contestation rights of the insolvency administrator in case the temporary crisis in the spring and summer of 2020 would ultimately result in a later insolvency, after all. Access to new financing was similarly privileged in this time window when the company could show that it traded under the protection of the COVID 19 exemption from the regular insolvency filing requirement.

Finally, the COVInsAG also contained a clause that allowed an extension of this protective time window beyond September 30, 2020 up to the maximum point of March 31, 2021 by way of separate legislative act.

II. The Modified Extension Adopted on September 17, 2020

While an extension of the temporary suspension of the filing requirement was consistently deemed likely by insolvency experts and in political cycles, Germany has since moved beyond the initial lock-down and has mostly opened up the country for trading again. It has also become apparent that, in particular, a continued blanket derogation from the mandatory filing requirement for companies facing severe cash-flow problems to the point of illiquidity (i) would often only delay the inevitable and (ii) create an unwanted cluster of many insolvency proceedings which are ultimately all filed for at the same time when the suspension comes to an end, rather than a steady and progressive cleansing of the market by gradually removing companies that have failed to recover from the pandemic in a reasonably short period of time.

As a consequence, Germany has chosen not simply to extend the current provisions in unchanged form, but rather has significantly modified the wording of the COVInsAG to address the above concerns.

Over-Indebtedness

In particular, as of October 1, 2020 and until December 31, 2020, a continued derogation from the immediate obligation to file for insolvency henceforth only applies to companies which otherwise would only file for insolvency due to over-indebtedness (Überschuldung) but which are not also illiquid. Such companies remain protected from having to file for insolvency based on the above-described rules until December 31, 2020, if (i) they were not already illiquid by December 31, 2019 and will not be illiquid after September 30, 2020 and thereafter.

Unlike illiquid companies, it was felt that companies which are over-indebted, i.e. (i) whose assets based on specific insolvency-driven valuation rules are not sufficient to cover their liabilities and (ii) which do not currently have a positive continuation prognosis (positive Fortführungsprognose), deserve a further grace period during which they may address their underlying structural issues, provided they do not enter illiquidity during this time window.

This extension until year end for over-indebted companies also addresses the often-voiced concerns that the uncertain future effects of the pandemic on a company’s medium-term prospects currently do not allow for a meaningful continuation prognosis which by general consensus has to cover the liquidity situation over the next 12 to 24 months.

Illiquidity

This new restriction of the interim derogation from the filing requirement to over-indebtedness only, in turn, means that companies that cannot pay their liabilities when they fall due on September 30, 2020 (and beyond) and, therefore, are illiquid under German insolvency law terms, may no longer justify such financial distress by claiming it is caused by the pandemic. Instead, they will now be obliged to file for insolvency based on illiquidity once the initial protection accorded to them by the March 2020 rules runs out at the end of September 30, 2020.

With it being mid-September 2020 already, this will give the management of any entity facing serious current cash-flow problems only another two weeks to either remedy such cash flow problems and restore full solvency or file for insolvency on or shortly after October 1, 2020 due to their illiquidity at that point in time.

Consequential Issues

The new, changed wording of the COVInsAG consequently restricts the other privileges connected with the temporary exemption from the filing requirement, i.e. that companies are permitted to keep trading during the extended time-window with certain protections against subsequent insolvency contestation rights, personal liability derogations or privileges and simplified access to new external or internal restructuring financing or loans, only to over-indebted companies. For them, these additional rules, which they may have already become accustomed to in the period between March 2020 and September 30, 2020, are simply extended until December 31, 2020.

III. Immediate Outlook

This law reform is of utmost importance for the management and the shareholders of any German entities that are currently in significant financial distress. The ongoing, periodic monitoring of their own financial position will need to determine in an extremely short time-frame whether or not the respective company is either illiquid or over-indebted as of September 30, 2020. If necessary such analysis should be firmed up by involving external advice or restructuring experts.

If the company is found to be over-indebted but not illiquid, the focus of any future turn-around must be December 31, 2020, i.e. the continued applicability of the COVInsAG rules may continue to provide some respite until then. If the company is found to be illiquid, the remaining time until September 30, 2020 must be used productively to either restore future liquidity via external or internal funding in the shortness of the available time or the filing for insolvency in early October 2020 becomes inevitable and should be prepared.

Managing directors of illiquid companies that do not file for insolvency without undue delay, but continue trading regardless of the insolvency reason, will again face the twin risks of personal civil and criminal liability based on a delayed or omitted filing. They and their trading partners and creditors, furthermore, face the full power of the far-reaching array of insolvency contestation rights (Insolvenzanfechtungsrechte) for a subsequent insolvency administrator of any measures now taken outside of the protective force of the COVInsAG interim rules.

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[1] In this context, see our earlier general COVID 19 alerts under: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ as well as under: https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

[2] In this context, again see: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, under section II.2, as well as with further analysis in this regard https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

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The following Gibson Dunn lawyers have prepared this client update: Lutz Englisch, Birgit Friedl, Marcus Geiss.

Gibson Dunn’s lawyers in the two German offices in Munich and Frankfurt are available to assist you in addressing any questions you may have regarding the issues discussed in this update.

For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the three authors:

Lutz Englisch (+49 89 189 33 150, lenglisch@gibsondunn.com)
Birgit Friedl (+49 89 189 33 122, bfriedl@gibsondunn.com)
Marcus Geiss (+49 89 189 33 115, mgeiss@gibsondunn.com)

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London partners Susy Bullock and Allan Neil and associate Stephanie Collins are the authors of “National Contact Points: A Unique Grievance Mechanism for Resolving Responsible Business Conduct Disputes,” [PDF] published by Corporate Disputes Magazine in its October-December 2020 issue.

Gibson Dunn’s Supreme Court Round-Up provides the questions presented in cases that the Court will hear in the upcoming Term, summaries of the Court’s opinions when released, and other key developments on the Court’s docket. To date, the Court has granted certiorari in 30 cases and set 1 original-jurisdiction case for argument for the 2020 Term, and Gibson Dunn is co-counsel for a party in 1 of those cases.

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The past several months have seen record volumes of debt issuance at historically low interest rates. At the same time, the COVID-19 pandemic has led to unforeseen challenges and novel practices for issuers, underwriters and their advisors working on these transactions. This webcast will discuss key legal, financial and logistical issues that are affecting debt offerings, as well as best practices for raising capital in the current environment. Please join our panel as they discuss recent developments in investment-grade and high-yield debt offerings, including market trends and disclosure considerations, as well as our expectations for the months ahead.

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PANELISTS:

Boris Dolgonos is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the Capital Markets and Securities Regulation & Corporate Governance Practice Groups. Mr. Dolgonos has more than 20 years of experience advising issuers and underwriters in a wide range of equity and debt financing transactions, including initial public offerings, high-yield and investment-grade debt offerings, leveraged buyouts, cross-border securities offerings, and private placements. Mr. Dolgonos has represented public and private companies, investment banks and other financial institutions and sovereign entities in transactions across North and South America, Europe, Asia and Africa. He has experience in many industries, including metals and mining, biotechnology, industrials, aviation, hospitality, media and telecommunications, financial services, technology, and retail.

Doug Rayburn is a partner in the Dallas and Houston offices of Gibson, Dunn & Crutcher and a member of the firm’s Capital Markets, Energy & Infrastructure, Mergers & Acquisitions, Global Finance, Private Equity and Securities Regulation & Corporate Governance Practice Groups. His principal areas of concentration are securities offerings, mergers and acquisitions and general corporate matters. He has represented issuers and underwriters in over 200 public offerings and private placements, including initial public offerings, high-yield offerings, investment-grade and convertible note offerings, offerings by MLPs, and offerings of preferred and hybrid securities. Additionally, Mr. Rayburn represents purchasers and sellers in connection with mergers and acquisitions involving both public and private companies, including private equity investments and joint ventures. His practice also encompasses corporate governance and other general corporate concerns.

Brussels partner Attila Borsos is the author of “The EU is set to control foreign subsidies,” [PDF] published by Financier Worldwide in its September 2020 issue.

San Francisco partner Ethan Dettmer and Washington, D.C. associate Suria Bahadue are the authors of “The future of DACA is far from clear,” [PDF] published by the Daily Journal on August 27, 2020.

Century City partner Scott Edelman and San Francisco associates Vivek Gopalan and Zach Tan are the authors of “Ruling in gun case puts every Californian at risk,” [PDF] published by the Daily Journal on August 27, 2020.