Richard Manfredi, Author at Gibson Dunn

As many companies prepare their quarterly reports on Form 10-Q for the quarter ended June 30, 2023, we offer the following observations and reminders regarding new disclosure requirements taking effect for this reporting period, as well as risk factor considerations that may be relevant to upcoming Form 10-Q reporting. For convenience, this publication also includes a summary of certain upcoming compliance dates for public companies.

Rule 10b5-1 Trading Arrangement Disclosures

Beginning with the filing that covers the first full fiscal period that begins on or after April 1, 2023 (i.e., Q2 2023 Form 10-Q for calendar year companies), the “Other Information” section of each periodic report (i.e., Part II, Item 5 of Form 10-Q and Part II, Item 9B of Form 10-K) must disclose whether any director or Section 16 officer adopted or terminated a trading arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or a “non-Rule 10b5–1 trading arrangement.” By its terms, the disclosure requirement (Item 408(a) of Regulation S-K) is triggered when a trading arrangement is “adopted or terminated”; however, the SEC deems certain modifications to a trading arrangement to be the termination of one arrangement and entry into another.

The disclosure must identify whether the arrangement is a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, and provide a brief description of the material terms (other than price), including (i) the name and title of the director or officer, (ii) the date of adoption or termination of the trading arrangement, (iii) the duration of the trading arrangement, and (iv) the aggregate number of securities to be sold or purchased under the trading arrangement (including pursuant to the exercise of any options).

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Originally published on Gibson Dunn’s Securities Regulation and Corporate Governance Monitor. The following Gibson Dunn attorneys assisted in preparing this update: Mike Titera, Ronald Mueller, Thomas Kim, Lori Zyskowski, Elizabeth Ising, James Moloney, Julia Lapitskaya, Aaron K. Briggs, Chris Ayers, and Lauren Assaf-Holmes.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

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Decided July 17, 2023

Adolph v. Uber Techs., S274671

The California Supreme Court held yesterday that an order requiring an employee to arbitrate PAGA claims brought on his or her own behalf does not, on its own, deprive the employee of standing to litigate non-individual PAGA claims on behalf of other employees.

Background: Erik Adolph, a driver who used Uber’s “Eats” platform, alleged that Uber misclassified drivers as independent contractors rather than employees. He filed a claim under the Private Attorneys General Act of 2004, California Labor Code section 2698 et seq. (“PAGA”), seeking civil penalties on behalf of himself and other drivers.

Uber moved to compel arbitration of Adolph’s PAGA claim on the ground that the parties signed an agreement requiring Adolph to individually arbitrate his claims against Uber. The trial court and Court of Appeal rejected that argument based on the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC (2014) 58 Cal.4th 380, which held that PAGA claims are not subject to arbitration. But while Uber’s petition for review was pending before the California Supreme Court, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906, which held that the Federal Arbitration Act preempted Iskanian in relevant part and that individual PAGA claims could be compelled to arbitration.

Viking River also concluded, based on its analysis of California law, that a plaintiff lacks statutory standing to litigate his non-individual PAGA claims once his individual PAGA claim is compelled to arbitration. The California Supreme Court granted review to resolve this issue of state law and heard argument in May 2023.

Issue: Does an aggrieved employee who is compelled to arbitrate an individual PAGA claim lose statutory standing to litigate non-individual PAGA claims on behalf of other employees?

Court’s Holding:

No. “Where a plaintiff has brought a PAGA action comprising individual and non-individual claims,” an order “compelling arbitration of the individual claims does not strip the plaintiff of standing as an aggrieved employee to litigate [non-individual PAGA] claims on behalf of other employees.”

“[W]here a plaintiff has filed a PAGA action comprised of individual and non-individual claims, an order compelling arbitration of individual claims does not strip the plaintiff of standing to litigate non-individual claims in court.”

Justice Liu, writing for the Court

Gibson Dunn Represented Defendant and Appellant: Uber Technologies, Inc.

What It Means:

The Court acknowledged that the U.S. Supreme Court adopted a different interpretation of state law in Viking River but held that it was “not bound by the high court’s interpretation of California law.” The Court declined to grant the U.S. Supreme Court’s interpretation of state law deference because the case did not involve “a parallel federal constitutional provision or statutory scheme.”
A plaintiff has statutory standing to litigate non-individual PAGA claims if he (1) “was employed by the alleged violator” and (2) is someone “against whom one or more of the alleged violations was committed.” A plaintiff who satisfies both requirements does not lose standing based on the “enforcement of an agreement to adjudicate [his] individual claim in another forum.” The Court reached this conclusion in part because of its determination that the plaintiff’s case remains a single action even if the individual and non-individual PAGA claims are split and pursued in different forums under Viking River.
The Court suggested that trial courts should stay non-individual PAGA claims pending arbitration of the individual PAGA claim, and that named plaintiffs would lose standing if they are unsuccessful in arbitration. Specifically, the Court acknowledged that if the arbitrator determines that the plaintiff is “not an aggrieved employee” for purposes of the individual PAGA claim and the court “confirms that determination and reduces it to a final judgment,” the court should “give effect to that finding” and dismiss the plaintiff’s non-individual PAGA claims for lack of standing.
The Court “express[ed] no view on the parties’ arguments regarding the proper interpretation of the arbitration agreement” at issue in the case and remanded to the Court of Appeal for further proceedings.

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Blaine H. Evanson +1 949.451.3805 bevanson@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Michael J. Holecek +1 213.229.7018 mholecek@gibsondunn.com

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
jschwartz@gibsondunn.com

Katherine V.A. Smith
+1 213.229.7107
ksmith@gibsondunn.com

Related Practice: Litigation

Theodore J. Boutrous, Jr.
+1 213.229.7804
tboutrous@gibsondunn.com

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

In a July 13, 2023 letter, Attorneys General of 13 states (Alabama, Arkansas, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, South Carolina, Tennessee, and West Virginia) issued a warning to the CEOs of Fortune 100 companies, threatening “serious legal consequences” over race-based employment preferences and diversity policies. The letter refers to the recent Supreme Court decision in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. UNC, in which the Supreme Court held that two colleges’ use of race in their admissions policies was unlawful, and warns that race-based employment decisions likewise violate federal and state laws prohibiting employment discrimination. While the Supreme Court’s holding addressed only college and university admissions and not private-sector employers, this letter confirms that the Court’s decision may have broader implications that could accelerate an existing trend of challenges to private employers’ workplace diversity, equity and inclusion efforts. The group emphasized the Court’s statement that “[e]liminating racial discrimination means eliminating all of it,” suggesting that this language in the Court’s opinion could be used as ammunition to challenge various private-sector diversity policies, including in actions by certain Attorneys General who have enforcement authority under the anti-discrimination laws of their respective states.

In their letter, the group of Attorneys General stated their view that “racial discrimination in employment and contracting is all too common among Fortune 100 companies and other large businesses.” They warned that if a company “previously resorted to racial preferences or naked quotas to offset its bigotry, that discriminatory path is now definitively closed” as a result of the Supreme Court’s decision in SFFA v. Harvard, and that those companies must “overcome [their] underlying bias and treat all employees, all applicants, and all contractors equally, without regard for race.” The letter provides specific examples of the ways in which employers allegedly engage in unlawful discrimination, such as “explicit racial hiring quota[s]” and preferences to contractors with diverse staff or minority leadership. The letter does not address federal and state government contracting requirements, including for the certification of minority and women-owned business enterprises (MWBEs). The Attorneys General further criticized pledges by several major companies to foster diversity and support minority-owned businesses during racial justice protests in 2020.

The letter indicates that challenges to employers’ diversity programs could stem from a comparison of the legal framework under Title VI (which governs race discrimination in government-funded programs) and Title VII (which governs race discrimination in employment). Specifically, the letter refers to Justice Gorsuch’s concurrence in the Harvard/UNC decision, where Justice Gorsuch reasoned that principles of Title VI “apply equally to Title VII and other laws restricting race-based discrimination in employment and contracting.” The letter also notes that courts “routinely interpret Title VI and Title VII in conjunction with each other, adopting the same principles and interpretation for both statutes.”

Democrat and Republican appointees to the EEOC have stated that the Supreme Court’s decision should not affect employers’ diversity programs, although they have widely divergent views on the implications of the decision in practice. The Chair of the EEOC, Charlotte A. Burrows, released an official statement, taking the view that the Court’s decision does “not address employer efforts to foster diverse and inclusive workforces,” and that “[i]t remains lawful for employers to implement diversity, equity, inclusion, and accessibility programs that seek to ensure workers of all backgrounds are afforded equal opportunity in the workplace.” Chair Burrows will preside over a Democrat majority at the EEOC with the confirmation last week of Commissioner Kalpana Kotagal. Although EEOC Commissioner Andrea Lucas similarly stated that the decision does not alter federal employment law, she noted that race-based decision-making by employers is already presumptively illegal under Title VII, and expressed her view that many employers’ programs already run afoul of existing law.

The AG’s letter serves as an important reminder that employers should carefully evaluate whether any of their diversity and inclusion policies could face additional scrutiny or threats of litigation. Please refer to our previous client alert for an analysis of the Court’s opinion, as well as a discussion of some potential implications for private employers.

Please note that the purpose of this alert is to summarize the letter by the Attorneys General, and not to opine on the accuracy of its contents. Gibson Dunn has formed a Workplace DEI Task Force, bringing to bear the Firm’s expertise in employment, appellate and Constitutional law, DEI programs, securities and corporate governance, and government contracts to help our clients conduct legally privileged audits of their DEI programs (including for employees, applicants, suppliers, directors and other constituents), assess litigation risk, develop creative and practical approaches to accomplish their DEI objectives in a lawful manner, and defend those programs in private litigation and government enforcement actions as needed.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Angela Reid, and Emily Lamm.

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

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group, New York
(+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer, Washington, D.C.
(+1 202-955-8503, zswilliams@gibsondunn.com)

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)

Join us for a 60-minute briefing covering key SEC rule changes that will significantly impact the timing, manner and nature of the disclosures required for company share repurchases, including nuanced interpretive issues and tax implications. Gibson Dunn attorneys Tom Kim, Jim Moloney, Matt Donnelly and Melanie Neary outline the key aspects of the SEC’s stock buyback amendments. The discussion also covers traps for the unwary and provide practical tips to help you prepare for these new disclosure requirements applicable to shares repurchases starting in Q4 2023 for companies that file on domestic forms.

Topics discussed:

An overview of the SEC’s new share repurchase rules covering: daily repurchase activities, exhibit filings and EDGAR tagging, coordination with insiders and their trading activities, enhanced narrative discussions regarding the company’s objectives and rationales for repurchases, and comparison with the SEC’s recent Rule 10b5-1 amendments
Tax implications for share repurchases
Interpretive issues and guidance on nuances lurking in the amendments
Tips on how to implement new controls and procedures to capture the critical information required under the new rules

PANELISTS:

Thomas J. Kim is a partner in the Washington D.C. office of Gibson, Dunn & Crutcher, LLP, where he is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim focuses his practice on a broad range of SEC disclosure and regulatory matters, including capital raising and tender offer transactions and shareholder activist situations, as well as corporate governance, environmental social governance and compliance issues. He also advises clients on SEC enforcement investigations – as well as boards of directors and independent board committees on internal investigations – involving disclosure, registration, corporate governance and auditor independence issues. Mr. Kim has extensive experience handling regulatory matters for companies with the SEC, including obtaining no-action and exemptive relief, interpretive guidance and waivers, and responding to disclosures and financial statement reviews by the Division of Corporation Finance. Mr. Kim served at the SEC for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance, and for one year as Counsel to the Chairman.

Jim Moloney is a corporate partner resident in the Orange County office of Gibson Dunn and serves as Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. He is also a member of the firm’s Corporate Transactions Practice Group, focusing primarily on securities offerings, mergers & acquisitions, friendly and hostile tender offers, proxy contests, going-private transactions and other corporate matters. Mr. Moloney was with the Securities & Exchange Commission in Washington, D.C. for six years before joining Gibson Dunn in June 2000. He served his last three years at the Commission as Special Counsel in the Office of Mergers & Acquisitions in the Division of Corporation Finance. In addition to reviewing merger transactions, Mr. Moloney was the principal draftsman of Regulation M‑A, a comprehensive set of rules relating to takeovers and shareholder communications, that was adopted by the Commission in October 1999. Mr. Moloney advises a wide range of listed public companies on reporting and other obligations under the securities laws, the establishment of corporate compliance programs, and continued compliance with corporate governance standards under the securities laws and stock exchange rules. He advises public company boards and committees of independent directors in connection with mergers, stock exchange proceedings, as well as SEC and other regulatory investigations.

Matt Donnelly is a partner in the Washington, D.C. office of Gibson Dunn & Crutcher and a member of the firm’s Tax Practice Group. Mr. Donnelly represents public and private companies on a broad range of U.S. federal and state income tax matters, with a concentration on domestic and international mergers and acquisitions, dispositions, spin-offs, Reverse Morris Trust transactions, joint ventures, financing transactions, capital markets transactions, restructurings and internal reorganizations. In addition, Mr. Donnelly regularly advises clients on tax issues relating to the development, financing, acquisition and disposition of energy and real estate projects. Mr. Donnelly is an adjunct professor at Howard University School of Law, where he has taught corporate tax law since 2017, and at Georgetown University Law Center, where he has taught since 2020 and in 2024 will teach a first-of-its-kind course on tax incentives under the Inflation Reduction Act of 2022. In addition, Mr. Donnelly regularly speaks and writes on tax-related topics, including at USC’s Gould School of Law’s Tax Institute, the American Petroleum Institute Federal Tax Forum, Practising Law Institute’s Tax Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures & Other Strategic Alliances conference, and the University of Chicago Federal Tax Conference (Fall 2023).

Melanie Neary is an associate in the San Francisco office of Gibson, Dunn & Crutcher. She currently practices in the firm’s Corporate Department. Her practice is focused on capital markets transactions and mergers & acquisitions, and includes representation of clients in connection with corporate governance and Exchange Act reporting matters. Melanie received her J.D. from the University of Michigan Law School in 2016, where she was the Managing Editor of the Michigan Business & Entrepreneurial Law Review. While in law school, she worked in the Transactional Lab and Clinic, advising large organizations around the country and small organizations in the Ann Arbor community on transactional matters.

MCLE CREDIT INFORMATION:

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

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

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.0 hour. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Virginia, Texas and Washington State Bars.

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide to: Anti-Money Laundering 2023. Gibson Dunn partners Stephanie L. Brooker and M. Kendall Day were contributing editors to the publication which covers issues including criminal enforcement, regulatory and administrative enforcement and requirements for financial institutions and other designated businesses. The Guide, comprised of 10 expert analysis chapters and 23 jurisdictions, is live and FREE to access HERE.

Ms. Brooker, senior associate Chris Jones, and Managing Director and Associate General Counsel at the Securities Industry and Financial Markets Association Bernard Canepa co-authored “Key BSA/AML Compliance Trends in the Securities Industry.” Sandy Moss and Ben Belair provided invaluable assistance with the article.

In addition, Mr. Day and Gibson Dunn of counsels Ella Capone and Linda Noonan co-authored the jurisdiction chapter on “USA: Anti-Money Laundering 2023.”

You can view these informative and comprehensive chapters via the links below:

CLICK HERE to view Key BSA/AML Compliance Trends in the Securities Industry

CLICK HERE to view USA: Anti-Money Laundering 2023

About Gibson Dunn’s Anti-Money Laundering and White Collar Practices:

Gibson Dunn’s Anti-Money Laundering practice provides legal and regulatory advice to all types of financial institutions and nonfinancial businesses with respect to compliance with federal and state anti-money laundering laws and regulations, including the U.S. Bank Secrecy Act. We represent clients in criminal and regulatory government investigations and enforcement actions. We also conduct internal investigations involving money laundering and Bank Secrecy Act violations for a wide range of clients in the financial services industry and companies with multinational operations. For further information, please visit our practice page and feel free to contact Stephanie L. Brooker (+1 202.887.3502, sbrooker@gibsondunn.com) or M. Kendall Day (+1 202.955.8220, kday@gibsondunn.com) in Washington, D.C.

The White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions. The group is composed of more than 250 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. We provide white collar client services around the world, with certain of our non-U.S. locations offering particular capabilities. For example, our Hong Kong office leads Gibson Dunn’s anti-corruption and compliance practice for Asia and our London disputes lawyers work regularly with complex internal and regulatory investigations, with particular familiarity in cross-border investigations in the financial services sector.

About the Authors:

Stephanie Brooker is Co-Chair of Gibson Dunn’s White Collar Defense and Investigations and Financial Institutions Practice Groups. She also co-leads the firm’s Anti-Money Laundering practice. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker’s practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling. She handles a wide range of white collar matters, including representing financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving sanctions; anti-corruption; anti-money laundering (AML)/Bank Secrecy Act (BSA); securities, tax, and wire fraud; foreign influence; “me-too;” cryptocurrency; and other legal issues. Ms. Brooker’s practice also includes BSA/AML and FCPA compliance counseling and deal due diligence and asset forfeiture matters. Ms. Brooker has been consistently recognized as a leading practitioner in the areas of white collar criminal defense and anti-money laundering compliance and enforcement defense. Chambers USA has ranked her and described her as an “excellent attorney,” who clients rely on for “important and complex” matters, and noted that she provides “excellent service and terrific lawyering.” Ms. Brooker has also been named a National Law Journal White Collar Trailblazer, a Global Investigations Review Top 100 Women in Investigations, and an NLJ Awards Finalist for Professional Excellence—Crisis Management & Government Oversight.

Kendall Day is Co-Chair of Gibson Dunn’s Financial Institutions Practice Group, co-leads the firm’s Anti-Money Laundering practice, and is a member of the White Collar Defense and Investigations Practice Group. Prior to joining Gibson Dunn, Mr. Day was a white collar prosecutor for 15 years, eventually rising to become an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions; fintech, crypto-currency, and multi-national companies; and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, false claims act, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Mr. Day is consistently recognized as a leading White Collar attorney in the District of Columbia by Chambers USA – America’s Leading Business Lawyers. Most recently, Mr. Day was recognized in Best Lawyers 2023 for white-collar criminal defense.

Ella Alves Capone is Of Counsel in the Washington, D.C. office, where she is a member of the White Collar Defense and Investigations and Anti-Money Laundering practice groups. Her practice focuses in the areas of white collar investigations and advising clients on regulatory compliance and the effectiveness of their internal controls and compliance programs. Ms. Capone routinely advises multinational companies and financial institutions, including cryptocurrency and other digital asset businesses, gaming businesses, fintechs, and payment processors, on BSA/AML and sanctions compliance matters. She also has extensive experience representing clients before DOJ, SEC, OFAC, FinCEN, and federal banking regulators on a variety of white collar matters, including those involving BSA/AML, sanctions, anti-corruption, securities, and fraud matters.

Linda Noonan is Of Counsel in the Washington, D.C. office and a member of the firm’s Financial Institutions and White Collar Defense and Investigations Practice Groups. She joined the firm from the U.S. Department of the Treasury, Office of General Counsel, where she had been Senior Counsel for Financial Enforcement. In that capacity, she was the principal legal advisor to Treasury officials on domestic and international money laundering and related financial enforcement issues. She specializes in BSA/AML enforcement and compliance issues for financial institutions and non-financial businesses.

Chris Jones is a senior associate in the Los Angeles office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations, Litigation, Anti-Money Laundering, and National Security Practice Groups, among others. His practice focuses primarily on internal investigations and enforcement defense, regulatory and compliance counselling, and complex civil litigation. Mr. Jones has experience representing clients in a wide range of anti-corruption, anti-money laundering, litigation, sanctions, securities, and tax matters. He has represented various client in investigations by the DOJ, SEC, FinCEN, and OFAC, including a number of AML-related investigations.

We are pleased to provide you with Gibson Dunn’s ESG monthly updates for June 2023. This month, our update covers the following key developments. Please click on the links below for further details.

I. International

1. ISSB publishes first two IFRS Sustainability Disclosure Standards

In June 2023, the International Sustainability Standards Board (“ISSB”) issued its IFRS Sustainability Disclosure Standards based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). IFRS S1 relates to the General Requirements for Disclosure of Sustainability-related Financial Information. It is effective for annual reporting period beginning on or after January 1, 2024 – earlier application is permitted if IFRS S2 is also applied. IFRS S2 relates to Climate-related Disclosures. It is effective for annual reporting period beginning on or after January 1, 2024 – earlier application is permitted if IFRS S2 is also applied. The ISSB is continuing to seek feedback on its future priorities for its next two-year work plan, which consultation closes on September 1, 2023.

2. ICMA announces updates to the Climate Transition Finance Handbook and Sustainability Principles

On June 22, 2023, the International Capital Markets Association (“ICMA”) announced that the Green, Social, Sustainability and Sustainability-Linked Bond Principles (the “Principles”) published revised 2023 editions of: (i) the Climate Transition Finance Handbook, which was originally launched in 2020 – the revisions include the progress made on climate transition guidance and disclosures; (ii) the Sustainability-Linked Bond Principles – the revisions include language for sovereign issuers together with revisions to the accompanying Key Performance Indicator registry; (iii) the Social Bond Principles – the revisions reflect the need to identify target populations and separately provide specific guidance for impact reporting for Social Bonds; and (iv) additional Q&As for green, social and sustainable bond securitisation, among other updates.

3. New reporting window open for signatories of the UN PRI and guidance published

Our May 2023 Update included an update on the release by the United Nations Principles for Responsible Investment (“PRI”) of a report on “Minimum Requirements for PRI Investor Signatories.” On June 14, 2023, the new reporting window for signatories of the PRI opened – this closes on September 6, 2023. PRI also published guidance on net zero and climate reporting in PRI’s Investor Reporting Framework, including (a) guidance to assist signatories of the Net Zero Asset Owner Alliance (“NZAOA”) who choose to report on their NZAOA requirements through PRI’s Investor Reporting Framework; (b) guidance to assist signatories of the Net Zero Asset Managers (“NZAM”) initiative to report on their NZAM commitments; and (c) guidance for all PRI signatories on climate reporting, based on TCFD-aligned indicators.

4. OECD updates its Guidelines for Multinational Enterprises on Responsible Business Conduct

On June 8, 2023, the Organisation for Economic Co-operation and Development (“OECD”) published an updated version of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. Key updates include recommendations for enterprises to align with internationally agreed goals on climate change and biodiversity, recommendations on risk-based due diligence, and specific environmental responsibilities.

5. IEA-IFC issue a special joint report calling for ramping up clean energy investments in emerging and developing countries

On June 21, 2023, the International Energy Agency (“IEA”) and the International Finance Corporation (“IFC”) published a special joint report. The report examines how to scale up private finance for clean energy transitions, identifies key barriers and how to remove them, and sets out policy actions and financial instruments to deliver acceleration in private capital flows for energy transition.

6. Climate Action 100+ announces its second phase

On June 8, 2023, Climate Action 100+ announced the launch of its second phase. The second phase will run until 2030 and intends to drive greater corporate climate action, by shifting the focus from corporate climate-related disclosure to the implementation of climate transition plans.

7. Nature Action 100 releases investor expectations to support urgent corporate action on nature loss

Nature Action 100, which is a global investor engagement initiative to address biodiversity and nature loss, and its impact on shareholder value, has released a set of corporate actions intended to protect and restore nature and ecosystems. The Investor Expectation for Companies outlines six key focus areas for action: ambition, assessment, targets, implementation, governance and engagement. Among other expectations, target companies will be expected to publicly commit to minimising contributions to key drivers of nature loss and to conserve and restore ecosystems at the operational level and throughout value chains by 2030. The eight key sectors identified for action are: biotechnology and pharmaceuticals; chemicals, such as agricultural chemicals; household and personal goods; consumer goods retail, including e-commerce and speciality retailers and distributors; food, ranging from meat and dairy producers to processed foods; food and beverage retail; forestry and paper, including forest management and pulp and paper products; metals and mining.

II. United Kingdom

1. FCA outlines concerns about sustainability-linked loans market

The Financial Conduct Authority (“FCA”) has outlined its concerns about the sustainability-linked loans (“SLLs”) market by way of a letter to interested stakeholders and parties on June 29, 2023. Concerns have been raised around credibility (including increased transparency), market integrity, greenwashing, conflicts of interest and potentially weak incentives to issue SLLs. The FCA has noted that some of these concerns have been addressed by the recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles, which the FCA believes should be more broadly adopted to drive further growth. The FCA does not currently plan to introduce regulatory standards or a code of conduct for the SLLs market, but has stated that it may reconsider this if the market needs it.

2. Climate Change Committee criticises UK’s slow efforts to scale up climate action

The Climate Change Committee (“CCC”) is an independent statutory body established under the UK Climate Change Act 2008 to advise the UK and devolved Governments on emissions targets, to report on progress and to prepare for the impacts of climate change. On June 28, 2023, the CCC issued its statutory progress report providing an overview of the Government’s progress to date in reducing emissions. The report includes criticism of the Government’s progress as slow and notes that the CCC’s confidence in the UK’s 2030 target has markedly declined since 2022.

3. CMA’s enforcement powers to combat greenwashing under the UK Digital Markets, Competition and Consumers Bill

The UK Digital Markets, Competition and Consumers Bill was introduced to Parliament on April 25, 2023. It is presently in the Committee Stage with Committee debates having taken place through the month of June 2023. If adopted in its current form, it will give the UK Competition Markets Authority (“CMA”) the power to, without a court process, impose directions or fines for the breach of consumer law protections which could extend to greenwashing.

4. FRC publishes report on influence of proxy voting advisors and ESG rating agencies and HMT consultation on regulation of ESG ratings providers ends

On June 15, 2023, the Financial Reporting Council (“FRC”) published its report commissioned to look into the influence of proxy voting advisors and ESG rating agencies on actions and reporting by FTSE350 companies and investor voting decisions. This report was published during a period when His Majesty’s Treasury had been consulting on a proposed regulatory regime for ESG ratings providers, which consultation period ended on June 30, 2023.

5. Consultation on UK non-financial reporting requirements

On June 8, 2023, the UK Department of Business and Trade (“DBT”) and the FRC opened consultation in relation to a review of the non-financial reporting requirements UK companies need to comply with in their annual report filings and to meet requirements broader than the UK Companies Act (e.g. gender pay gap and modern slavery reporting). The review will also consider if certain matters remain fit for purpose, such as the current company size thresholds that determine certain non-financial reporting requirements, and the preparation and filing of accounts with Companies House. The consultation closes on August 16, 2023.

III. Europe

1. New Sustainable Finance Package published and crackdown on ESG rating providers

Our May 2023 Update included an update on the impending publication of the EU sustainable finance package as part of the EU’s long-term vision to make Europe climate-neutral by 2050. On June 13, 2023, the European Commission published the new sustainable finance package with a view to encouraging private funding of transition projects and technologies and facilitating sustainable investments. The European Commission has added additional activities to the EU Taxonomy and, to mitigate the risk of greenwashing, proposed new rules for ESG rating providers to improve integrity, reliability and transparency in the sustainable investments market. If the rules are approved, ESG rating providers offering ratings in the EU will be required to seek prior authorisation from the European Securities and Markets Authority and to divest from conflicting activities (e.g. offering insurance to businesses that they rate).

2. European Commission consults on the first set of European Sustainability Reporting Standards

On June 9, 2023, the European Commission proposed for consultation the first set of European Sustainability Reporting Standards (“ESRS”) under the Corporate Sustainability Reporting Directive (“CSRD”). This consultation closes on July 7, 2023. The ESRS will apply from January 1, 2024 (for financial years beginning on or after January 1, 2024). The first set of ESRS are sector-agnostic, with sector-specific standards to be adopted by June 2024.

3. European Parliament adopts position on Corporate Sustainability Due Diligence Directive

On June 1, 2023, the European Parliament adopted its position on the proposal for a directive on Corporate Sustainability Due Diligence and amending Directive (“CSDDD”). In April 2023, the European Parliament’s committee on legal affairs adopted a draft report setting out a suite of amendments to the CSDDD as proposed by the European Commission, which the European Parliament has now adopted. Inter-institutional negotiations between the European Commission, the European Parliament and EU Member States on the CSDDD will now commence. Following formal adoption of the CSDDD, EU Member States will have two years to implement it into national legislation. The subject matter relates to rules to integrate (prevent, identify and mitigate) human rights and environmental impact into companies’ governance and along their value chain, including pollution, environmental degradation and biodiversity loss.

4. EU Deforestation Regulation enters into force

Our May 2023 Update included an update on the adoption by the European Parliament of the final text of the EU Regulation aimed at tackling deforestation and forest degradation (the “EU Deforestation Regulation”). The EU Deforestation Regulation entered into force on June 29, 2023. Please refer to our earlier update in relation to the scope, purpose and applicability.

IV. United States

1. SEC delays climate change disclosure rulemaking once again

On June 13, 2023, in its updated rulemaking agenda for Spring 2023, the U.S. Securities and Exchange Commission (“SEC”) indicated a goal of October 2023 for the adoption of proposed climate change rules. Although the “Reg Flex” agenda is not binding and target dates frequently are missed or further delayed, the Spring agenda indicates that these remain a near-term priority for the SEC. If adopted, the proposed rules will require a registrant to provide information regarding: (a) climate-related risks that are reasonably likely to have a material impact on its business, results of operations or financial condition; (b) greenhouse gas emissions; and (c) certain climate-related financial metrics in its audited financial statements.

2. PCAOB proposes an expansive non-compliance standard

On June 6, 2023, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment a draft auditing standard, A Company’s Noncompliance with Laws and Regulations, PCAOB Release 2023-003, that could significantly expand the scope of audits and potentially alter the relationship between auditors and their SEC-registered clients. The standard would require auditors to identify all laws and regulations applicable to the company and from that set determine those laws and regulations “with which noncompliance could reasonably have a material effect on the financial statements”; incorporate potential noncompliance into the auditor’s risk assessment; and identify whether noncompliance may have occurred through enhanced procedures and testing. If potential noncompliance is identified, the auditor must perform procedures to understand the nature of the matter and “determine” if noncompliance in fact occurred. This standard would mean, for example, that auditors would need to assess whether any climate change or other ESG-related regulations issued at the federal, state, local, international level could have a material effect on a company’s financial statements and, if so, assess noncompliance. Our client alert on this proposal is available here.

3. North Carolina passes anti-ESG bill

In our May 2023 Update, we provided an update on various U.S. states that remained split on their approach to ESG matters. An anti-ESG bill has become law in North Carolina, after legislators voted to override the Governor’s veto. The legislation bars state entities from considering ESG criteria when making investment and employment decisions.

4. House Appropriations Committee releases FY24 Financial Services and General Government Appropriations Bill prohibiting SEC funding for climate disclosure rules

The House Appropriations Committee released the Financial Services and General Government Bill for the fiscal year 2024 and approved the bill with riders that would prohibit the SEC from spending on various proposals, including the climate disclosure rules. The next step is for the legislation to be introduced in the Senate (where it may face resistance given the Democratic-majority).

5. July rumoured to be “ESG month” and Republican ESG Working Group releases interim report

Plans are rumoured to be afoot for the House Financial Services Committee’s flagship “ESG month,” with a full committee hearing on ESG on July 12 and subcommittee hearings to follow thereafter. The Republican ESG Working Group, which was formed in February 2023, released an interim report highlighting anti-ESG concerns on June 23, 2023.

6. ISS responds to State Treasurers’ letter

On June 29, 2023, the Institutional Shareholder Services Inc. (“ISS”) issued its response to a group of U.S. state treasurers and financial officers to address issues they raised in a letter dated May 15, 2023 to proxy advisory firms, including ISS. The response emphasises that ISS tailors its proxy voting advice, including on ESG, based on a client’s needs and preferences, such that it may offer two different clients opposing recommendations about the same ballot measure. It further notes that many investors believe that incorporating material ESG factors into fundamental investment analysis can be consistent with their duty to manage the long-term financial prospects of their investment portfolios and a growing number of investors consider ESG factors as material to their proxy voting determinations as well. ISS has developed Special Voting Policies, such as a Climate Policy (based on the TCFD), Socially Responsible Investor Policy, Sustainability Policy, among others.

V. APAC

1. Updated ASEAN Taxonomy Version 2 released

On June 9, 2023, the ASEAN Taxonomy Board released the updated ASEAN Taxonomy for Sustainable Finance Version 2. The ASEAN Taxonomy has a multi-tiered approach which allows for different levels of adoption based on the individual member states’ readiness. Version 2 provides the methodology that will be applied in setting the technical screening criteria for the Plus Standard and contains the technical screening criteria for all four environmental objectives for the energy sector, as well as the carbon storage, utilisation and storage enabling sector. Alongside the “Do No Significant Harm” and “Remedial Measures to Transition” criteria, Version 2 also introduces a third essential criteria – “Social Aspects.” Three key social aspects are to be considered as part of the assessment: Respect Human Rights, Prevention of Forced and Child Labour and Impact on People Living Close to Investments.

2. Thailand issues Phase One of its green taxonomy

The Bank of Thailand and Thailand’s Securities and Exchange Commission, together with the Climate Bonds Initiative, published the Thailand Taxonomy Phase One on June 30, 2023. Phase One of the Taxonomy focuses on economic activities relating to the energy and transportation sectors, and may be used as a reference for access to financial tools and services that support transition activities to address climate change. Phase Two of the Thailand Taxonomy will focus on the manufacturing, agriculture, real estate, construction and waste management sectors. The Thailand Taxonomy will employ the traffic light system, which is also employed in the ASEAN Taxonomy.

3. Malaysia rolls out new mandatory sustainability onboarding programme for PLC directors

The Securities Commission of Malaysia and the Malaysian stock exchange, Bursa Malaysia, have rolled out a new mandatory sustainability programme for onboarding directors of public listed companies. The “Mandatory Accreditation Programme (MAP) Part II: Leading for Impact (LIP)” is the second part of Bursa Malaysia’s listing requirements and will take effect on August 1, 2023, requiring first-time directors and directors of listing and transfer applicants to complete the sustainability programme within 18 months from appointment/admission. Existing PLC directors will have up to 24 months to complete the programme.

4. Singapore consults on ESG data and ratings code of conduct, to digitise basic ESG credentials for MSMEs, and to strengthen access to climate transition data

On June 28, 2023, the Monetary Authority of Singapore (“MAS”) launched a public consultation on a voluntary industry governance framework / code of conduct for providers of ESG ratings and ESG data products, which is modelled after the International Organization of Securities Commissions’ recommendations of good practices set out in its global call for action in November 2022. The regime is proposed to be voluntary, where providers would ratify the code of conduct and explain why they are unable to comply. The consultation closes on August 22, 2023. MAS is also seeking feedback on its proposed criteria for the early phase-out of coal-fired power plants under its draft green taxonomy (which is to be named the Singapore-Asia Taxonomy). This consultation closes on July 28, 2023. On June 22, 2023, MAS, the United Nations Development Programme and the Global Legal Entity Identifier Foundation executed a statement of intent for “Project Savannah,” to develop digital ESG credentials for micro, small and medium-sized enterprises (MSMEs). On June 27, 2023, MAS, the Secretariat of the Climate Data Steering Committee and Singapore Exchange executed a memorandum of understanding to strengthen access by stakeholders to key climate transition-related data.

5. UAE Independent Climate Change Accelerators launches UAE Carbon Alliance

The UAE Independent Climate Change Accelerators (“UICCA”) has launched the UAE Carbon Alliance, a new coalition to advance the development and scaling of a carbon market ecosystem in the UAE and to facilitate the transition to a green economy in line with the UAE’s Net Zero by 2050 Strategic Initiative. Founding members of the UAE Carbon Alliance include the UICCA, AirCarbon Exchange, First Abu Dhabi Bank, Mubadala Investment Company, TAQA, and Masdar.

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

Warmest regards,

Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Selina S. Sagayam

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

The following Gibson Dunn lawyers prepared this client update: Mitasha Chandok, Grace Chong, Elizabeth Ising, Patricia Tan Openshaw, Selina Sagayam, and David Woodcock.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Environmental, Social and Governance practice group:

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, mmurphy@gibsondunn.com)
Patricia Tan Openshaw – Hong Kong (+852 2214-3868, popenshaw@gibsondunn.com)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
David Woodcock – Dallas (+1 214-698-3211, dwoodcock@gibsondunn.com)

Gibson Dunn’s summary of director education opportunities has been updated as of July 2023. A copy is available at this link. Boards of Directors of public and private companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities include unique events for members of private boards.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Lori Zyskowski, Ronald Mueller, and Elizabeth Ising, with assistance from Mason Gauch and To Nhu Huynh from the firm’s Houston office.

Decided June 30, 2023

Biden, et al. v. Nebraska, et al., No. 21-869; Department of Education, et al., v. Brown, et al., No. 22-535

Today, the Supreme Court held 6-3 that the HEROES Act does not authorize the Secretary of Education to cancel hundreds of billions of dollars in student loan balances.

Background: Under the Higher Education Relief Opportunities for Students Act of 2003 (“HEROES Act”), the Secretary of Education may “waive or modify any statutory or regulatory provision” governing student loans in times of “national emergency” to ensure no borrower is “placed in a worse position financially” because of the emergency. During the COVID-19 pandemic, the Secretary exercised that authority to defer student loan repayments. When lifting the deferment in August 2022, however, the Secretary purported to exercise the same authority to cancel up to $20,000 in student loan principal for approximately 43 million qualifying individuals.

Six states that service or hold federally backed student loans sued in Missouri—and two individuals who were denied loan cancellation sued in Texas—to challenge the Secretary’s loan-cancellation program. The plaintiffs argued that the Secretary exceeded his power under the HEROES Act by cancelling debts, and that the program violated the Administrative Procedure Act both because it was arbitrary and capricious and because it was adopted without following the proper procedures.

Both the Eighth Circuit and a Texas district court barred enforcement of the Secretary’s loan-cancellation program. In both cases the Secretary sought stays from the U.S. Supreme Court, and the Supreme Court treated the Secretary’s stay applications as petitions for a writ of certiorari before judgment and granted review of both decisions.

Issues:

(1) Does at least one plaintiff have standing to challenge the Secretary’s loan-cancellation program?

(2) Does the loan-cancellation program exceed the Secretary’s authority under the HEROES Act?

Court’s Holding:

(1) At a minimum, the state of Missouri had standing because it suffered an injury in fact to a state-created government corporation that would lose servicing fees for the cancelled loans.

(2) On the merits, the Secretary exceeded his statutory authority under the HEROES Act.

“The Secretary asserts that the HEROES Act grants him the authority to cancel $430 billion of student loan principal. It does not.”

Chief Justice Roberts, writing for the Court in Biden v. Nebraska

What It Means:

The Court’s decision rested primarily on statutory interpretation of the HEROES Act. The Court interpreted the Secretary’s authority to “waive or modify” any statutory or regulatory provision applying to federal student-loan programs to allow only “modest adjustments” to existing provisions. Slip op. 13. That power did not include authority to “draft a new section of the [Higher] Education Act from scratch.” Id. at 17.
The Court also found support for its holding in the major-questions doctrine. Under that doctrine, courts will require a clear statement from Congress before presuming that Congress entrusted questions of deep “economic and political significance” to agencies. The Court rejected the government’s argument that the major-questions doctrine should apply only to government’s power to regulate, not to the provision of government benefits, remarking that the Court had “never drawn that line” because one of “Congress’s most important authorities is its control of the purse.” Slip op. 24.
Justice Barrett, who joined the Court’s opinion, penned a separate concurrence to elaborate on her view that the major-questions doctrine “is a tool for discerning—not departing from—the text’s most natural interpretation.” Justice Barrett explained that the doctrine reflects “common sense as to the manner in which Congress is likely to delegate a policy decision of such economic and political magnitude to an administrative agency.” Slip. op. 2, 5.
Today’s decision represents the second time the Supreme Court has applied the “major questions doctrine” since first acknowledging the doctrine by name in West Virginia v. EPA, 142 S. Ct. 2587 (2022). This case also continues the Court’s trend in recent years of reining in the administrative state as well as granting certiorari before judgment to resolve high-profile cases.

The Court’s opinion in Biden v. Nebraska is available here and its opinion in Department of Education v. Brown is available here.

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

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com
James L. Zelenay Jr. +1 213.229.7449 jzelenay@gibsondunn.com

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia
+1 202-955-8210
escalia@gibsondunn.com

Helgi C. Walker
+1 202.887.3599
hwalker@gibsondunn.com

On June 13, 2023, in its updated rulemaking agenda for Spring 2023, the Securities and Exchange Commission (“SEC”) indicated a goal of October 2023 for the adoption of proposed cybersecurity rules applicable to public companies and registered investment advisers and funds. The two rule proposals were issued by the SEC at the beginning of 2022 to address cybersecurity governance and cybersecurity incident disclosure, and the SEC had previously targeted adoption by no later than April 2023. Although the “Reg Flex” agenda is not binding and target dates frequently are missed or further delayed, the Spring agenda indicates that cybersecurity rulemakings remain a top, near-term priority for the SEC.

The Proposed Rules

Publicly Traded Companies

In March 2022, the SEC proposed new rules under the Securities Exchange Act of 1934 (the “Exchange Act”), titled Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure (the “Exchange Act Proposal”). If adopted in its proposed form, the Exchange Act Proposal would require standardized disclosures regarding specific aspects of a company’s cybersecurity risk management, strategy, and governance. The Exchange Act Proposal also would require reporting on material cybersecurity incidents within four business days of a company’s materiality determination and periodic disclosures regarding, among other things, a company’s policies and procedures to identify and manage cybersecurity risk, oversight of cybersecurity by the board of directors and management, and updates to previously disclosed cybersecurity incidents.

Registered Investment Advisers and Funds

In February 2022, the SEC proposed new rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, titled “Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies“ (the “RIA Proposal”). If adopted in its proposed form, the RIA Proposal would require both registered investment advisers and investment companies to adopt and implement written cybersecurity policies and procedures to address cybersecurity risk. The RIA Proposal would also require registered investment advisers to report significant cybersecurity incidents affecting the investment adviser or the funds it advises to the SEC, and would impose a new recordkeeping policy and internal review requirements related to cybersecurity.

In addition to the two proposals described above, the SEC has also proposed a cybersecurity rule for broker-dealers, clearing agencies, and other security market participants, but final action on this rule proposal is not expected until April 2024.

As discussed in our prior client alert on the Exchange Act Proposal, the SEC’s proposals were controversial, and many of the comments submitted on the proposals were critical of both the prompt incident reporting standard and prescriptive disclosures on board oversight and director cybersecurity expertise. Since that time, the SEC has adopted a number of rules substantially as proposed, but has significantly revised other rule initiatives in response to commenter concerns, and has also taken varied approaches with respect to new rules’ effective dates. As a result, it is difficult to predict what form the SEC’s final rules will take, and how soon companies will need to adapt their disclosures. Our prior client alert lists a number of actions companies can take in preparation for the final rules, and our recent article offers additional practical guidance given the SEC’s increased enforcement focus on cyber disclosures.

The following Gibson Dunn attorneys assisted in preparing this update: Cody Poplin, Matthew Dolloff, Sheldon Nagesh, Nicholas Whetstone, Stephenie Gosnell Handler, Vivek Mohan, Elizabeth Ising, Ronald Mueller, and Lori Zyskowski.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Privacy, Cybersecurity and Data Innovation or Securities Regulation and Corporate Governance practice groups:

Privacy, Cybersecurity and Data Innovation Group:
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Jane C. Horvath – Washington, D.C. (+1 202-955-8505, jhorvath@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, shandler@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650-849-5345, vmohan@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)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)

Investment Funds Group:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com)
Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com)
Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com)

On June 20, 2023 the Securities and Exchange Commission (the “SEC” or the “Commission”) announced the settlement of an enforcement action against Insight Venture Management LLC (d/b/a Insight Partners) (“Insight”) and published an Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (the “Order”).[1] In the Order, the SEC found that Insight (1) charged excess management fees to its investors through “inaccurate application of its permanent impairment policy” and (2) failed to disclose a conflict of interest to investors concerning the same policy.[2] This action reflects a growing trend we continue to see in our representation of private fund managers in their routine examinations by the SEC–direct and explicit inquiry into the decision by a given fund manager to not permanently impair (i.e., “write-down”) a given fund asset when such impairment would reduce the basis on which management fees are calculated. We view this as a clear indication of the Commission’s focus on scrutinizing the calculation of management fees, in particular after the termination of the commitment period.

I. Calculation of Management Fees

Insight operated multiple funds (the “Funds”) whose respective limited partnership agreements (“LPAs”) required, like many do, that management fees be calculated during the “commitment period” (i.e., the period during which the Funds were permitted to make investments) on the basis of committed capital and during the “post-commitment period” (i.e., the period after the commitment period during which the Funds look to exit investments and realize returns)[3] based on invested capital (i.e., “the acquisition cost of portfolio investments held by the Funds”). Pursuant to the LPAs, when an asset had suffered a “permanent impairment in value” that basis was to be reduced commensurately.[4] The Commission took issue with Insight’s approach to determining whether a permanent impairment had occurred (and whether Insight resultantly calculated management fees on too large a basis).

Specifically, the Commission identified three of Insight’s practices as problematic:

Lack of written criteria in LPA. Insight did not include any language in the Funds’ LPAs indicating how a permanent impairment determination would be made.[5]
Subjective evaluation criteria. In practice, Insight employed a four pronged test to determine whether a permanent impairment was appropriate[6] which included whether: “(a) the valuation of the Fund’s aggregated investments in a portfolio company was currently written down in excess of 50% of the aggregate acquisition cost of the investments; (b) the valuation of the Fund’s aggregated investments in a portfolio company had been written down below its aggregate acquisition cost for six consecutive quarters; (c) the write-down was primarily due to the portfolio company’s weakening operating results, as opposed to market conditions or comparable transactions, or valuations of comparable public companies; and (d) the portfolio company would likely need to raise additional capital within the next twelve months.”[7]
Portfolio Company Level v. Portfolio Investment Level. The Funds’ LPAs included separate definitions for “portfolio company” (i.e., “an entity in which a [p]ortfolio [i]nvestment is made by the [p]artnership directly or through one or more intermediate entities of the [p]artnership”) and “portfolio investment” (i.e., “any debt or equity (or debt with equity) investment made by the [p]artnership”). Further, the LPA provision governing permanent impairments indicated that they were to be assessed on a portfolio investment level rather than a portfolio company level (emphasis added).[8] The Commission took the position that Insight’s aforementioned evaluation criteria failed to honor this distinction and instead only analyzed the need for a permanent impairment at the aggregate portfolio company level.[9]

Taken together, the Commission found that these practices caused Insight to fail to permanently impair certain of their Funds’ assets to the correct extent. As a result, the Commission determined that Insight failed to adequately reduce the basis upon which post-commitment period management fees were calculated, and overcharged their investors.

II. Conflicts of Interest

In addition to the miscalculation of management fees, the Commission also found that the subjective nature of the criteria Insight used to determine whether a permanent impairment had occurred created a conflict of interest between Insight and its investors. Put differently, because Insight was the party ultimately determining whether to find a permanent impairment had occurred, Insight had the right to reverse any permanent impairment it had previously applied, and finding a permanent impairment had occurred would result in Insight collecting fewer management fees, it should have, at the very least, disclosed the existence of this conflict to its investors.[10]

III. Violations and Penalties

As part of its settlement with the SEC, Insight was ordered to reimburse its investors upwards of $4.6 million, corresponding to excess management fees charged and interest thereon, and was required to pay a civil penalty of an additional $1.5 million. It is also notable that although the Commission acknowledged Insight’s prompt remedial efforts (which included mid-exam reimbursement) and cooperation during the course of the investigation, they still decided to proceed with enforcement.

IV. Analysis & Key Takeaways

When determining whether to find a permanent impairment, fund managers should consider listing the criteria they apply in the operative provisions of their LPA(s). Note also that if this practice is adopted, it will be imperative that fund managers adhere closely to the criteria included in the LPA.
Though we expect criteria for finding a permanent impairment will always involve some level of subjectivity, including objective factors to the extent possible and/or involving a third-party valuation professional in the process could provide a meaningful level of enforcement risk mitigation. However, while the Order indicates that Insight did, to the satisfaction of the Commission, subsequently apply more objective criteria when determining the amount of management fees it had overcharged its investors, the Order provides no clear guidance as to what criteria the Commission considers sufficiently objective.
In addition to common valuation related conflicts of interest disclosed in private placement memoranda and similar disclosure documents, fund managers should consider including explicit disclosure around the conflict of interest inherent in the fund manager deciding whether to permanently impair a fund’s assets when such decision would negatively impact the amount of management fees the fund manager would be owed.

V. Conclusion

The SEC’s recent settlement of its enforcement action against Insight reflects the overall trend towards increased scrutiny of the private funds industry generally, including pursuant to its increased rulemaking related to the same. More specifically, this emphasis on valuation and write-down practices is in harmony with the Commission’s 2023 Examination Priorities Report,[11] as well as other recently settled enforcement actions.[12] We expect this trend to continue.

__________________________

[1] Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 6332 (June 20, 2023), link.

[2] Id., Paragraph 1

[3] Id., Paragraph 11

[4] Id., Paragraph 11

[5] Id., Paragraph 14

[6] We note that the Order did not make it clear whether this four-pronged test was maintained or recorded by Insight in any formal investment or valuation policy, but the Commission did note that “Insight did not adopt or implement written policies or procedures reasonably designed to prevent violations of the Advisers Act relating to the calculation of management fees…” See Id., Paragraph 18.

[7] Id., Paragraph 15

[8] Id., Paragraph 12

[9] Id., Paragraph 16

[10] Id., Paragraph 17

[11] Securities and Exchange Commission, Division of Examinations, 2023 Examination Priorities, link.

[12] See e.g., Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 6104 (Sept. 2, 2022) (Finding that Energy Innovation Capital Management LLC, an exempt reporting adviser, improperly calculated management fees by failing to make adjustments for dispositions of its investments, which included any write-down in value of individual portfolio company securities, when the value of such securities provided the basis on which management fees were calculated, resulting in charging its investors excessive management fees), link; Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Release No. 5617 (Oct. 22, 2020) (Finding that EDG Management Company, LLC failed to write-down the value of certain of its portfolio securities as required by the applicable LPA, which resulted in overcharging management fees to its investors which were calculated using the value of such portfolio securities as the basis), link.

Should you wish to review how your actual management fee calculations synch up with the mechanics set forth in your limited partnership agreement and disclosure set forth in your private placement memoranda, or if you have any questions about how best to prepare for examination scrutiny related to the same, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Investment Funds practice group, or the following authors:

Kevin Bettsteller – Los Angeles (+1 310-552-8566, kbettsteller@gibsondunn.com)
Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com)
Shannon Errico – New York (+1 212-351-2448, serrico@gibsondunn.com)
Zane E. Clark – Washington, D.C. (+1 202-955-8228 , zclark@gibsondunn.com)

Investment Funds Group Contacts:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com)
Albert S. Cho – Hong Kong (+852 2214 3811, acho@gibsondunn.com)
Candice S. Choh – Los Angeles (+1 310-552-8658, cchoh@gibsondunn.com)
John Fadely – Singapore/Hong Kong (+65 6507 3688/+852 2214 3810, jfadely@gibsondunn.com)
A.J. Frey – Washington, D.C./New York (+1 202-887-3793, afrey@gibsondunn.com)
Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com)
James M. Hays – Houston (+1 346-718-6642, jhays@gibsondunn.com)
Kira Idoko – New York (+1 212-351-3951, kidoko@gibsondunn.com)
Eve Mrozek – New York (+1 212-351-4053, emrozek@gibsondunn.com)
Roger D. Singer – New York (+1 212-351-3888, rsinger@gibsondunn.com)
Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com)
William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, wthomas@gibsondunn.com)

Earlier today, the Supreme Court released its much-anticipated decisions in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina. By a 6–3 vote, the Supreme Court held that Harvard’s and the University of North Carolina’s use of race in their admissions processes violated the Equal Protection Clause and Title VI of the Civil Rights Act. Chief Justice Roberts wrote the majority opinion.

Although the majority opinion does not explicitly modify existing law governing employers’ consideration of the race of their employees (or job applicants), the decisions nevertheless have important strategic and atmospheric ramifications for employers. In particular, the Court’s broad rulings in favor of race neutrality and harsh criticism of affirmative action in the college setting could accelerate the trend of reverse-discrimination claims.

As a formal matter, the Supreme Court’s decision does not change existing law governing employers’ use of race in employment decisions. But existing law already circumscribes employers’ ability to use race-based decision-making, even in pursuit of diversity goals.

I. Background

Students for Fair Admissions (“SFFA”), an organization dedicated to ending the use of race in college admissions, brought two lawsuits that were considered together at the Supreme Court. One lawsuit challenged Harvard’s use of race in admissions on the ground that it violates Title VI, which prohibits race discrimination in programs or activities receiving federal assistance (including private colleges that accept federal funds). SFFA v. Harvard, No. 20-1199. The second lawsuit challenged the University of North Carolina’s use of race in the admissions process on the ground that it violates the Equal Protection Clause, which applies only to state actors (e.g., public universities). SFFA v. University of North Carolina, No. 21-707. The plaintiffs argued, and the defendants did not meaningfully contest, that the law governing the use of race in college admissions under Title VI and the Equal Protection Clause is the same.

Prior to today’s decisions, the law governing colleges’ use of race in admissions was set forth in two Supreme Court cases decided on the same day in 2003: Grutter v. Bollinger, 539 U.S. 306 (2003), and Gratz v. Bollinger, 539 U.S. 244 (2003). In Grutter, the Supreme Court upheld a law school’s consideration of applicants’ race as a “‘plus’ factor . . . in the context of its individualized inquiry into the possible diversity contributions of all applicants.” 539 U.S. at 341. In Gratz, the Supreme Court struck down a university’s consideration of race pursuant to a mechanical formula that “automatically distribute[d] 20 points . . . to every single ‘underrepresented minority’ applicant solely because of race.” 539 U.S. at 271.

SFFA asked the Court to overrule Grutter and adopt a categorical rule that colleges cannot consider applicants’ race in making admissions decisions. It also argued that Harvard’s and North Carolina’s use of race is unlawful even under Grutter because both colleges allegedly engage in racial balancing, discriminate against Asian-American applicants, and reject race-neutral alternatives that would achieve the colleges’ diversity goals.

II. Analysis

A. The Supreme Court’s Opinion

The Supreme Court held that both Harvard and UNC’s affirmative-action programs violated the Fourteenth Amendment’s Equal Protection Clause. In a footnote, the Court explained that the Equal Protection Clause analysis applies to Harvard by way of Title VI, 42 U.S.C. § 2000d, which prohibits “any educational program or activity receiving Federal financial assistance” from discriminating on the basis of race. Because “discrimination that violates the Equal Protection Clause of the Fourteenth Amendment committed by an institution that accepts federal funds also constitutes a violation of Title VI,” the Court “evaluate[d] Harvard’s admissions programs under the standards of the Equal Protection Clause.”

Applying strict scrutiny, the Court asked whether universities could “make admissions decisions that turn on an applicant’s race.” The Court emphasized that Grutter, which was decided in 2003, predicted that “25 years from now, the use of racial preferences will no longer be necessary to further the interest approved today.” The Court explained that college affirmative-action programs “must comply with strict scrutiny, they may never use race as a stereotype or negative, and—at some point—they must end.”

The Court then determined that Harvard and UNC’s admissions programs are unconstitutional for several reasons. First, the Court concluded that universities’ asserted interests in “training future leaders,” “better educating [their] students through diversity,” and “enhancing … cross-racial understanding and breaking down stereotypes” were “not sufficiently coherent for purposes of strict scrutiny.” Second, the Court found no “meaningful connection between the means [the universities] employ and the goals they pursue.” The Court concluded that racial categories were “plainly overbroad” by, for instance, “grouping together all Asian students” or by employing “arbitrary or undefined” terms such as “Hispanic.” Third, the Court held that the universities impermissibly used race as a “negative” and a “stereotype.” Because college admissions “are zero-sum,” the Court held, a racial preference “provided to some applicants but not to others necessarily advantages the former group at the expense of the latter.” Finally, the Court observed that the universities’ use of race lacked a “logical end point.”

The Court’s opinion employs broad language against racial preferences, reasoning that “[e]liminating racial discrimination means eliminating all of it.” As such, universities and colleges can no longer consider race in admissions decisions (subject to a narrow exception for remediating past discrimination). But the Court clarified that “nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise,” as long as the student is “treated based on his or her experiences as an individual—not on the basis of race.” The Court also made clear, however, that “universities may not simply establish through application essays or other means the regime we hold unlawful today.”

The Chief Justice’s opinion for the Court was joined by Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett. Justices Kagan, Sotomayor, and Jackson dissented. Justices Thomas, Gorsuch, and Kavanaugh wrote separate opinions concurring in the Court’s decision. Justices Sotomayor and Justice Jackson wrote dissenting opinions.

B. Existing law governing reverse-discrimination claims against employers

Even prior to the SFFA decisions, an employer’s consideration of the race of its employees, contractors, or applicants was already subject to close scrutiny under Title VII and Section 1981. “Without some other justification, . . . race-based decisionmaking violates Title VII’s command that employers cannot take adverse employment actions because of an individual’s race.” Ricci v. DeStefano, 557 U.S. 557, 579 (2009).

Supreme Court precedent allows a defendant to defeat a reverse-discrimination claim under Section 1981 or Title VII by demonstrating that the defendant acted pursuant to a valid affirmative-action plan. See, e.g., Johnson v. Transportation Agency, Santa Clara County, California, 480 U.S. 616, 626–27 (1987); see also, e.g., Doe v. Kamehameha Sch./Bernice Pauahi Bishop Estate, 470 F.3d 827, 836–40 (9th Cir. 2006) (en banc) (applying Johnson in Section 1981 case). If a defendant invokes the affirmative-action defense (under Title VII or Section 1981), then the plaintiff bears the burden of proving that the “justification is pretextual and the plan is invalid.” Johnson, 480 U.S. at 626–27.

“[A] valid affirmative action plan should satisfy two general conditions.” Shea v. Kerry, 796 F.3d 42, 57 (D.C. Cir. 2015). First, the plan must be remedial and rest “on an adequate factual predicate justifying its adoption, such as a ‘manifest imbalance’ in a ‘traditionally segregated job category.’” Id. (quoting Johnson, 480 U.S. at 631) (alteration omitted). “Second, a valid plan refrains from ‘unnecessarily trammeling the rights of white employees.’” Shea, 796 F.3d at 57 (quoting Johnson, 480 U.S. at 637–38 (alterations omitted)). A valid affirmative-action plan “seeks to achieve full representation for the particular purpose of remedying past discrimination,” but cannot seek “proportional diversity for its own sake” or seek to “maintain racial balance.” Id. at 61.

In addition, plaintiffs alleging discrimination under Title VII or Section 1981 must show that they were harmed in some way. For example, Title VII generally requires a plaintiff to show that discrimination affected “his compensation, terms, conditions, or privileges of employment.” 42 U.S.C. § 2000e-2(a)(1). Courts often interpret this to mean a plaintiff must show a concrete and objective “adverse employment action,” e.g., Davis v. Legal Services Alabama, Inc., 19 F.4th 1261, 1265 (11th Cir. 2021) (quotation marks omitted), although other courts have indicated that in some circumstances less tangible harms might be sufficient, see, e.g., Chambers v. District of Columbia, 35 F.4th 870, 874–79 (D.C. Cir. 2022) (en banc). Under these standards, many employers lawfully seek to promote diversity, equity, inclusion, and equal opportunity through certain types of training, outreach, recruitment, pipeline development, and other means.

III. Implications for employers’ diversity programs

The Supreme Court’s decisions in the SFFA case were made in the unique context of college admissions and were based on the Equal Protection Clause, not Title VII or Section 1981, with the assumption, uncontested by the parties, that the analysis would be the same under both the Equal Protection Clause and Title VI. As such, they do not explicitly change existing law governing reverse-discrimination claims in the context of private employment or private employers’ diversity programs for those private employers not subject to Title VI (i.e., those who do not receive qualifying federal funds). Still, courts often interpret Title VI (at issue in the case against Harvard) to be consistent with Title VII and Section 1981, so there is some risk that lower courts will apply the Court’s decision in the employment context. Justice Gorsuch’s concurrence highlights this risk, observing that Title VI and Title VII use “the same terms” and have “the same meaning.”

EEOC Chair Charlotte A. Burrows released an official statement stating that today’s decisions do “not address employer efforts to foster diverse and inclusive workforces.” EEOC Commissioner Andrea Lucas published an article reiterating a view she has previously expressed, which is that race-based decisionmaking is already presumptively illegal for employers, and stating that the Court’s opinion “brings the rules governing higher education into closer parallel with the more restrictive standards of federal employment law.” She recommended that “employers review their compliance with existing limitations on race- and sex-conscious diversity initiatives” and ensure they are not relying on “now outdated” precedent.

Against that backdrop, the Court’s decision could have important strategic and atmospheric consequences for employers’ diversity efforts. The Court’s holdings likely will encourage additional litigation. Plaintiffs’ firms and conservative public-interest groups likely will bring reverse race-discrimination claims against some employers with well-publicized diversity programs. Government authorities such as state attorneys general might also increase enforcement efforts.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Blaine Evanson, Jessica Brown, Molly Senger, Matt Gregory, and Josh Zuckerman.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment or Appellate and Constitutional Law practice groups, or the following practice leaders and authors:

Labor and Employment Group:

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)

Appellate and Constitutional Law Group:

Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, tdupree@gibsondunn.com)

Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)

Julian W. Poon – Los Angeles (+ 213-229-7758, jpoon@gibsondunn.com)

Decided June 29, 2023

Groff v. DeJoy, No. 22-174

Today, the Supreme Court clarified the standard employers must satisfy to show that granting a religious accommodation would create an “undue hardship” on the employer’s business. The Court unanimously held that an employer must show “substantial increased costs in relation to the conduct of its particular business” to justify the denial of a religious accommodation under Title VII.

Background: Title VII of the Civil Rights Act of 1964 prohibits employers from discriminating on the basis of “religion” unless the employer can demonstrate that it cannot reasonably accommodate a current or prospective employee’s religious observance or practice “without undue hardship on the conduct of the employer’s business.” 42 U.S.C. § 2000e(j). Relying on Trans World Airlines, Inc. v. Hardison, 432 U.S. 63 (1977), many lower courts interpreted “undue hardship” to mean any accommodation for which the employer must bear more than a “de minimis cost.”

Gerald Groff brought a Title VII claim against his employer, the U.S. Postal Service, after the Postal Service disciplined him for refusing to work on Sunday, when he observed the sabbath. The Postal Service contended that accommodating Groff’s religious observance disrupted workflow and created impositions on his coworkers, to the detriment of workplace morale. The district court granted summary judgment to the USPS, and the Third Circuit affirmed, concluding that accommodating Groff would impose more than de minimis costs on the Postal Service.

Issue: Whether Title VII’s “undue hardship” standard for assessing religious accommodations is satisfied by demonstrating only that the employer would incur costs that are “more than de minimis.”

Court’s Holding:

No. To show that granting a religious accommodation would create an “undue hardship,” an employer must show that the burden of granting an accommodation would result in substantial increased costs in relation to the conduct of its particular business.

“[A]n employer must show that the burden of granting an accommodation would result in substantial increased costs in relation to the conduct of its particular business.”

Justice Alito, writing for the Court

What It Means:

The Court emphasized that context matters in assessing whether a religious accommodation imposes an “undue hardship” on employers. Courts must “apply the test in a manner that takes into account all relevant factors in the case at hand, including the particular accommodations at issue and their practical impact in light of the nature, size and operating cost of an employer.”
One additional issue in the case was whether the effect an accommodation had on the plaintiff’s coworkers could amount to an “undue hardship.” The Court clarified that “coworker impacts” would satisfy that standard only if they affect the conduct of the employer’s business.
The Court advised that its opinion likely would not require the EEOC to revisit much of its guidance on what qualifies as an undue hardship. For example, the EEOC would need to make few, “if any,” changes to its guidance explaining that “no undue hardship is imposed by temporary costs, voluntary shift swapping, occasional shift swapping, or administrative costs.”

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
jschwartz@gibsondunn.com

Katherine V.A. Smith
+1 213.229.7107
ksmith@gibsondunn.com

Decided June 29, 2023

Abitron Austria GmbH v. Hetronic Int’l, Inc., No. 21-1043

Today, the Supreme Court held that trademark infringement claims under the Lanham Act apply only where the claimed infringing “use in commerce” occurs in the United States.

Background: The Lanham Act imposes civil liability—potentially including actual, treble, and statutory damages—on anyone who “use[s] in commerce” a trademark in a manner “likely to cause confusion, or to cause mistake, or to deceive.” 15 U.S.C. §§ 1114(1)(a), 1117(a)-(c), 1125(a)(1). Hetronic, a U.S. company, sued Abitron, a group of foreign companies, under the Lanham Act, alleging that Abitron sold products that infringe Hetronic’s trademarks. Less than 0.3 percent of Abitron’s sales were made directly to U.S. buyers. Ninety-seven percent were made in foreign countries, to foreign buyers, for use in foreign countries; and the remainder were made in foreign countries but were designated to and ultimately did enter the United States.

A jury awarded more than $90 million in damages for all of Abitron’s sales, whether inside or outside the United States. The Tenth Circuit affirmed, holding that the Lanham Act applies extraterritorially to foreign sales that have a substantial effect on U.S. commerce. It reasoned that even Abitron’s foreign sales to foreign buyers for foreign use had a domestic effect by depriving a U.S. company of foreign sales that it otherwise would have made.

Issue: Whether the Lanham Act’s provisions that prohibit trademark infringement (15 U.S.C. § 1114(1)(a) and § 1125(a)(1)) apply extraterritorially.

Court’s Holding:

The Court confirmed “that a permissible domestic application” of the Lanham Act “can occur even when some foreign ‘activity is involved in the case,’” but the question of liability reaches only an allegedly infringing “use in commerce” of a trademark that occurs in the United States.

“[W]e hold that § 1114(1)(a) and § 1125(a)(1) are not extraterritorial and that the infringing ‘use in commerce’ of a trademark provides the dividing line between foreign and domestic applications of these provisions.”

Justice Alito, writing for the Court

What It Means:

The Court held 9-0 that the provisions of the Lanham Act that govern infringement claims—§ 1114(1)(a) and § 1125(a)(1)—did not reach Abitron’s foreign sales to foreign buyers for foreign use. But the Court split 5-4 over what counts as a permissible “domestic application” of these provisions. The majority held that the provisions apply only when the allegedly infringing “use in commerce” occurs in U.S. territory.
The majority distinguished the prior controlling case on extraterritorial application of the Lanham Act, Steele v. Bulova Watch Co., 344 U.S. 280 (1952), which looked to the effects of alleged infringement on U.S. commerce, as decided before more recent Supreme Court case law on the extraterritoriality of U.S. statutes and based on facts present in that case that “implicated both domestic conduct and a likelihood of domestic confusion” unlike Abitron’s foreign sales.
Justice Jackson, who offered the fifth vote for the majority, penned a separate concurrence suggesting that a foreign company selling goods in a foreign country could still be engaged in domestic “use in commerce” if the buyer resells the goods in the United States, or if the foreign company engages in other conduct “in the internet age” that would constitute a “use in commerce” in the United States even without a “domestic physical presence.”
Four Justices (Sotomayor, Roberts, Kagan, and Barrett) would have adopted the federal government’s position: foreign sales violate the Lanham Act’s trademark infringement provisions so long as they are likely to cause consumer confusion in the United States. The majority, however, expressly rejected this position, focusing instead on the location of the allegedly infringing “use in commerce” of a trademark.
Because of the decision’s focus on “use in commerce” in the United States, it likely will not affect prior case law that has confirmed the ability of courts to establish personal jurisdiction over trademark infringers and counterfeiters outside the United States that market and sell infringing goods to U.S. consumers. See, e.g., Chloé v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158 (2d Cir. 2010).

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Intellectual Property

Kate Dominguez +1 212.351.2338 kdominguez@gibsondunn.com	Y. Ernest Hsin +1 415.393.8224 ehsin@gibsondunn.com	Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com
Jane M. Love, Ph.D. +1 212.351.3922 jlove@gibsondunn.com

Related Practice: Fashion, Retail and Consumer Products

Howard S. Hogan
+1 202.887.3640
hhogan@gibsondunn.com

Related Practice: Transnational Litigation

Susy Bullock +44 (0) 20 7071 4283 sbullock@gibsondunn.com	Perlette Michèle Jura +1 213.229.7121 pjura@gibsondunn.com	Andrea E. Neuman +1 212.351.3883 aneuman@gibsondunn.com
William E. Thomson +1 213.229.7891 wthomson@gibsondunn.com

On June 21, 2023, the IRS and Treasury published proposed Treasury regulations (the “Proposed Regulations”) that provide eagerly awaited guidance on rules for receiving refund payments in respect of certain credits (more commonly referred to as “direct pay”) under the Inflation Reduction Act of 2022 (the “IRA”).[1] Taxpayers are permitted to rely on the Proposed Regulations until final regulations are published. The IRS and Treasury also released a temporary regulation (the “Temporary Regulation”) that implements a registration system that taxpayers will need to satisfy before any valid direct pay election can be made. (This system is substantially similar to the system that facilitates cash sales of certain credits. We discussed that system in our previous alert, which can be found here.)

This alert begins with some background regarding section 6417 (the statutory provision permitting direct pay) and provides a short summary of some of the most important aspects of the Proposed Regulations and Temporary Regulation,[2] including some observations regarding key implications of the guidance for market participants.

Background

Historically, federal income tax credits associated with the investment in and production of clean energy and carbon capture technologies have been non-refundable,[3] and using non-refundable tax credits has required current tax liability against which the credits could be applied. In our recent client alert on the rules facilitating cash sales of certain credits, we provided background regarding the complicated tax equity arrangements that have been utilized by developers to monetize credits and explained how new rules authorizing the sale of credits could simplify monetization. The “direct pay” rules are expected to serve a similar, albeit more limited, role in reducing the need for complicated tax equity arrangements.

Direct Payment of Credits

The Proposed Regulations and Temporary Regulation provide substantial practical guidance on direct payment of credits, clarifying who may receive direct payments, what a direct payment election covers, how to compute the amount of the direct payment, how (administratively) to elect to receive such payments, how to avoid new excessive payment penalties, and how the rules apply to passthrough entities.[4] The subsections below describe some of the most significant aspects of the guidance on these topics.

Who May Receive Direct Payments

In general, any taxpayer can receive refund payments for the following three credits for five years of the applicable credit period:

the carbon capture and sequestration credit (section 45Q);
the clean hydrogen production credit (section 45V); and
the advanced manufacturing production credit (section 45X).

For the section 45Q and section 45V credits, the election is available for the first five years of the applicable credit period and, for section 45X the election, is available for any consecutive five-year period for which the credit is available, in each case, only for taxable periods that end before January 1, 2033. The Proposed Regulations clarify that, for these three credits, taxpayers are allowed refund payments for only a single five-year period and cannot re-elect to receive refund payments again once the five-year period has expired or the election has been revoked.

Notably, several types of tax-exempt entities are entitled to direct payments for the three credits above for the entire applicable credit period, as well as for eight other energy-related credits (including the production tax credit under section 45 and the investment tax credit under section 48).[5] In response to significant comments from taxpayers, the Proposed Regulations clarify that applicable tax-exempt entities that can receive direct payments include the District of Columbia and agencies and instrumentalities of states, Indian tribal governments, and Alaska Native Corporations.

The Proposed Regulations also clarify that direct payments cannot be received for purchased credits.

Like the rules for cash sales of credits, the Proposed Regulations confirm that, where a disregarded entity owns the property that generates the tax credit, the relevant taxpayer entitled to pursue a refund under the “direct pay” rules is the regarded owner of the disregarded entity. The Proposed Regulations also impose the same ownership requirement as the credit sale rules, denying direct payment to, for example, contractual counterparties that otherwise are allowed the credits under special rules such as section 45Q(f)(3)(B) (election to allow the section 45Q credit to the party that disposes, utilizes, or uses the qualified carbon oxide) or section 50(d)(5) (election to allow lessees to claim the investment tax credit, i.e., inverted leases).

What is Covered by a Direct Pay Election

Similar to the rules for cash sales of credits, the Proposed Regulations provide that an election to benefit from direct payments generally must be made on a property-by-property basis, with an exception for the investment tax credit, which can be elected on a project-wide basis.

Unlike the credit transfer rules, taxpayers cannot elect direct payment for only a portion of a credit. Moreover, unlike a transfer election, which must be made yearly, a direct pay election would apply for entire applicable five-year window (or, for tax-exempt entities, the entire credit period).

How to Compute Direct Payment Amounts

The amounts otherwise determined as eligible for direct payment are subject to several special computation rules.

Reduction for Tax-Exempt Financing. First, all production tax credits (sections 45 and 45Y) and investment tax credits (sections 48 and 48E) are subject to as much as a 15% reduction if the construction of the facility is financed with certain tax-exempt debt, regardless of whether direct payments are sought.

Reduction for Restricted Tax-Exempt Funding. Second, in response to taxpayer concerns, the Proposed Regulations helpfully clarify that, for purposes of receiving direct payments for investment-related credits (i.e., credits that are computed by reference to the entity’s cost basis), exempt income used to fund investments (e.g., certain grants and forgivable loans) in property eligible for credits is generally included in that property’s basis for purposes of computing direct payments, regardless of whether those amounts would have been included in basis under general tax principles. However, this taxpayer-favorable rule comes with a significant exception where the grant, forgivable loan, or other exempt funding was made “for the specific purpose” of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment-related credit property. In such a case, if the sum of that restricted exempt funding plus the credit exceeds the cost to acquire or construct the property, then the amount of the credit is reduced so the sum of the credit plus the restricted exempt funding equals the cost of the property.[7]

Reduction for Failing to Satisfy Domestic Content Requirements. Finally, for projects beginning construction in 2024 and after, direct payments for the investment tax credit (sections 48 and 48E) and the production tax credit (sections 45 and 45Y) will be subject to reduction (and will be unavailable entirely beginning in 2026) unless the project also incorporates specified percentages of U.S.-source steel, iron and manufactured components (discussed in our previous client alert, available here).[8]

How (Administratively) to Elect Direct Payments

A direct payment election is made on a taxpayer’s “annual tax return.”[9] For taxpayers that are already required to file an annual tax return, the due date for making a direct pay election is the due date (including extensions) of the taxpayer’s original tax return.[10] For entities that are not otherwise required to file tax returns, the due date is generally the fifteenth day of the fifth month after the end of the entity’s taxable year (or, until further guidance is issued, six months following that date pursuant to an automatic paperless extension).[11] Certain tax-exempt entities that do not otherwise file tax returns (e.g., governmental entities) will need to file IRS Form 990-T to receive direct payments.

The process and rules for making a direct pay election are substantially similar to those applicable to credit transfers. Those requirements include completing a pre-filing registration process and obtaining a registration number for each eligible credit property with respect to which a direct payment election is made and including the relevant registration numbers on the taxpayers tax return for the year of the election. See a summary of those rules here. Like credit transfers, no direct payment election may be made or revised on an amended return or via a partnership administrative adjustment request, and no late filing relief would be available.

When Direct Payments Are Made

When a direct pay election is made, the credit is treated as a payment made against tax, and therefore the cash payment is not made until after the “annual tax return” is filed and processed.

Taxpayers that are required to file a tax return (such as a partnership that is claiming a direct payment of a section 45Q credit or certain section 501(c)(3) organizations) would become eligible for direct payments on the later of their tax return due date (without extensions) and the date on which the return is filed. Entities that are not required to file a tax return would become eligible for a direct payment on the later of the fifteenth day of the fifth month after the end of the taxable year and the date on which that entity submits a claim for refund.

How to Avoid Excessive Payment Penalties

Rules similar to those under the transferability rules (discussed here) apply for purposes of avoiding excessive payment penalties.

Additionally, some of the credits that are eligible for direct pay (e.g., the investment tax credit) are subject to recapture upon the occurrence of certain events. Recapture will operate the same way as with taxpayers that claim credits on their tax returns, i.e., if the credit property ceases to be eligible credit property within the recapture period, the taxpayer’s tax liability for such taxable year will be increased by the recapture amount. Thus, if an applicable entity received a $100,000 direct pay refund in respect of investment tax credit property, and that property is sold 1.5 years after the property was placed in service, the applicable entity’s tax liability will be increased by $80,000 for the year in which the property is sold.

How the Rules Apply to Passthrough Entities

The Proposed Regulations provide additional rules with respect to passthrough entities electing to treat a credit as a payment against tax. The preamble clarifies that passthrough entities can only receive direct payments in respect of credits under sections 45Q, 45V, or 45X. This holds true regardless of how many “applicable entities” are partners in a partnership and even if, for example, all of a partnership’s partners are tax-exempt entities that would be entitled to direct payments if they owned their interests in the project directly. As a result, tax-exempt entities that hold projects through partnerships will be required to sell credits in many instances.[12]

Consistent with the proposed rules for credit transfers, only a passthrough entity – not the owners of the entity – are permitted to make the direct payment election. Also, the passive activity credit rules do not limit direct payments available to a passthrough entity, even if all of the passthrough entity’s owners otherwise would be subject to the passive activity credit rules in their separate capacity. Direct payments made to a passthrough entity are treated as tax-exempt income and each passthrough entity owner’s share of the tax exempt income is equal to its distributive share of the otherwise applicable credit for each taxable year.[13]

Observations

The refund timeline may result in a significant lag (up almost two years) between outlays and receipt of direct payments, which may require sponsors to obtain bridge financing.

The rules for passthrough entities are particularly counter-intuitive because they introduce enormous pitfalls (and sanction planning) in a manner that would otherwise be anathema to the U.S. system of partnership taxation – namely, under these rules, simply interposing a partnership for tax purposes, where there are otherwise no changes to the parties’ economic arrangement, can dramatically alter consequences for direct payments. While these rules will facilitate investments by individuals otherwise subject to the passive activity credit rules, the rules may well discourage investment by tax-exempt entities, which will need to be especially careful to avoid creating unintended tax partnerships with their financial counterparties. In the case of certain credits (e.g., the investment tax credit under sections 48 and 48E), the stakes will be even higher because the IRS has left in place rules that can render partnership projects funded by tax-exempt partners wholly ineligible for such credits, notwithstanding that such tax-exempt partners are effectively treated as taxpayers for all other purposes relevant to such credits.

Effective Date

Taxpayers may rely on these Proposed Regulations for taxable years beginning after December 31, 2022 and before the date the final regulations are published. The Temporary Regulation (i.e., the pre-filing registration regime) is effective for any taxable year ending on or after June 21, 2023.

_______________________

[1] As was the case with the so-called Tax Cuts and Jobs Act, the Senate’s reconciliation rules prevented Senators from changing the Act’s name, and the formal name of the IRA is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”

[2] Unless indicated otherwise, all section references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” or “Prop. Treas. Reg. §” references are to the Treasury regulations or proposed Treasury regulations, respectively, published under the Code.

[3] The investment tax credit for energy property was briefly refundable at its inception (1978-1980) and was effectively payable as a cash grant for projects that began construction in 2009-2011.

[4] For the purposes of this client alert, the term “passthrough” or “passthrough entity” means a partnership or an S corporation, unless otherwise noted.

[5] These entities are (i) any tax-exempt organization exempt from the tax imposed by subtitle A (a) by reason of section 501(a) or (b) because such organization is the government of any U.S. territory or a political subdivision thereof, (ii) any State, the District of Columbia, or political subdivision thereof, (iii) the Tennessee Valley Authority, (iv) an Indian tribal government or subdivision thereof (as defined in section 30D(g)(9)), (v) any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)), (vi) any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas, or (vii) any agency or instrumentality of any applicable entity described in (i)(b), (ii), or (iv).

[6] These credits include the alternative fuel vehicle refueling property credit (section 30C), the qualified commercial clean vehicle credit (section 45W), the qualifying advanced energy project credit (section 48C), and the investment tax credit (section 48 and 48E).

[7] For example, if a public charity uses $20,000 of its own funds plus a $60,000 tax-exempt grant that it received “for the specific purpose” of building solar energy property, and the energy property would otherwise be entitled to a 50% investment tax credit ($40,000) under the general direct payment rules, the investment tax credit is reduced to $20,000 under this special rule for restricted exempt funding.

[8] Under these rules, a 10-percent haircut applies to projects beginning construction in 2024, a 15-percent haircut applies to projects beginning construction in 2025, and projects beginning construction in 2026 and after are wholly ineligible for refunds, in each case, unless the IRS makes an exception to the applicable domestic content requirements. The IRA authorizes the IRS to provide exceptions to the phaseout if (i) the inclusion of steel, iron, or manufactured products that are produced in the United States either increases the overall costs of construction of projects by more than 25 percent or (ii) there are either insufficient materials of these types produced in the United States or the materials produced in the United States are not of satisfactory quality.

[9] “Annual tax return” is defined in the Proposed Regulations to mean (i) for any taxpayer normally required to file an annual tax return with the IRS, such annual tax return (e.g., IRS Form 1065 for partnerships or IRS Form 990-T for organizations with unrelated business income tax), (ii) for any taxpayer not normally required to file an annual tax return with the IRS (such as taxpayers located in U.S. territories), the return such taxpayer would be required to file if they were located in the U.S., or, if no such return is required (such as for governmental entities), IRS Form 990-T, and (iii) for short tax year filers, the short year tax return.

[10] This date cannot be earlier than February 13, 2023.

[11] For entities located outside the United States, the due date generally is the due date (including extensions) that would apply if the entity were located in the United States.

[12] As noted, passthrough entities can still receive direct payments for credits under sections 45Q, 45V, or 45X.

[13] The Proposed Regulations would also modify the partnership audit rules to specify that direct payments for credits are subject to the partnership audit regime.

This alert was prepared by Mike Cannon, Matt Donnelly, Josiah Bethards, Duncan Hamilton, and Simon Moskovitz.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax or Power and Renewables practice groups, or the following authors:

Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com)
Matt Donnelly – Washington, D.C. (+1 202-887-3567, mjdonnelly@gibsondunn.com)
Josiah Bethards – Dallas (+1 214-698-3354, jbethards@gibsondunn.com)
Duncan Hamilton– Dallas (+1 214-698-3135, dhamilton@gibsondunn.com)
Simon Moskovitz – Washington, D.C. (+1 202-777-9532 , smoskovitz@gibsondunn.com)

Power and Renewables Group:
Gerald P. Farano – Denver (+1 303-298-5732, jfarano@gibsondunn.com)
Peter J. Hanlon – New York (+1 212-351-2425, phanlon@gibsondunn.com)
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, npolitan@gibsondunn.com)

On June 27, 2023, the Federal Trade Commission, with the concurrence of the Antitrust Division of the Department of Justice, announced proposed changes to the Premerger Notification and Report Form (the “HSR Form”) and associated instructions, as well as to the premerger notification rules implementing the Hart-Scott Rodino (“HSR”) Act. The 133-page Notice of Proposed Rulemaking (NPRM) represents the first major overhaul of the HSR premerger notification requirements since the HSR program was established 45 years ago.

The FTC’s sweeping proposal, which we expect to be adopted and become effective within four to six months, would dramatically change the current merger filing process in the United States for HSR-reportable deals. Companies seeking U.S. merger clearance would need to expend considerably more effort preparing their HSR filings, including by collecting a broader set of business documents and financial data. Merging parties would also be required to prepare written responses to questions related to the transaction, bringing the U.S. more into line with filing requirements in certain foreign merger control regimes like the EU. The additional volume and scope of information contained in merging parties’ HSR filings would also allow the antitrust agencies to potentially apply more rigorous scrutiny of proposed transactions at an earlier stage because the information provided likely will take considerable time for the agency to review. As a result, the proposed rules raise the possibility of enhanced, or at least delayed, scrutiny of transactions that may previously have not triggered additional questions given their benign nature, including increases in the number of occasions when parties need to pull-and-refile their HSR forms to provide the agency additional time to review the contents of the HSR forms.

Key changes under the proposal include:

Transaction Details and Draft Item 4(c) Documents. Under the proposed rules, filing companies would be required to make a comprehensive disclosure of the details of their transaction, including submission of a transaction diagram, a projected closing timeline, and a detailed description of the strategic rationale for the transaction. Most significantly, the proposed rules would require the submission of drafts of so-called “Item 4” documents (i.e., documents analyzing the deal as it relates to competition-related issues) where such drafts are provided to an officer, director, or deal team lead or supervisor. The FTC noted that this new requirement is designed to prevent filing companies from submitting only the final, “sanitized” versions of Item 4 documents.
Competition Narratives. The proposed rules would require filing companies to provide narrative responses describing the competitive landscape and the supply chain, as well as certain information pertaining to labor markets and employees. For example, the proposed rules would require disclosing any labor law violations by the filing companies from the past five years. According to the FTC, a history of labor law violations may be indicative of “a concentrated labor market where workers do not have the ability to easily find another job.” This requirement underscores the U.S. antitrust agencies’ current spotlight on labor conditions and use of antitrust law to regulate conditions for employees.
Prior Acquisitions. The proposed rules would create new disclosure requirements related to the parties’ prior acquisitions. Under the proposal, the acquiror and target would be required to identify all prior acquisitions of any size for the previous ten years in any line of business where there is a potential overlap. The FTC noted that this change is aimed to address the antitrust agencies’ competitive concerns about “roll-up strategies.”
Periodic Plans and Reports. The proposed rules would expand the document submission requirements to cover certain strategic documents and reports created in the ordinary course of business, even if they do not relate to the proposed transaction. Documents called for under this new requirement would include semi-annual and quarterly plans that discuss markets and competition and that were shared with certain senior executives, as well as other similar plans or reports if they were shared with one of the filing companies’ Boards of Directors.
Organizational Structure. The proposed rules would require the identification of individuals and entities that may have influence over business decisions or access to confidential business information. On the buyer side, this could include certain minority shareholders and limited partners holding 5% or more of the voting securities or non-corporate interests in the acquiring company or entities controlling or controlled by it.

In light of the significant proposed changes detailed above, firms considering transactions should continue to proactively consult with antitrust counsel to develop appropriate antitrust risk mitigation strategies. Most importantly, merging parties should ensure that they build in considerably more time to prepare their HSR filings, including by not over-committing in Merger Agreements regarding filing deadlines. Currently, it is customary for parties to commit to making HSR filings in Merger Agreements within 7 to 10 business days, a timeframe that likely will be challenging if and when the new filing requirements are adopted. The FTC itself estimates that the proposed new rules could extend the time required to prepare an HSR filing from about 37 hours to 144 hours.

The proposed rules also suggest that firms should pay greater attention to the antitrust risks posed by non-reportable transactions. These transactions, while not reportable at the time they occur, would need to be disclosed in connection with any future HSR-reportable transaction involving a similar line of business. Those prior transactions could come under scrutiny at that time or enhance risk for the larger transaction under review.

Finally, if the proposed rules are adopted, document creation and retention policies – already critical components of any firm’s antitrust compliance program – will become more important than ever. The types of documents that would need to be submitted with the HSR filing would include not just transaction-specific materials but also ordinary course strategic plans and reports related to the relevant businesses. We will continue to keep you posted as developments occur.

The following Gibson Dunn lawyers prepared this client alert: Steve Weissman, Sophia Hansell, Jamie France, Chris Wilson, Steve Pet, and Emma Li.*

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

Antitrust and Competition Group:
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Sophia A. Hansell – Washington, D.C. (+1 202-887-3625, shansell@gibsondunn.com)
Chris Wilson – Washington, D.C. (+1 202-955-8520, cwilson@gibsondunn.com)
Jamie E. France – Washington, D.C. (+1 202-955-8218, jfrance@gibsondunn.com)

Mergers and Acquisitions Group:
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Private Equity Group:
Richard J. Birns – Co-Chair, New York (+1 212-351-4032, rbirns@gibsondunn.com)
Ari Lanin – Co-Chair, Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Co-Chair, Houston (+1 346-718-6670, mpiazza@gibsondunn.com)

*Emma Li is a recent law graduate in the firm’s New York office and not yet admitted to practice law.

Join us for a 30-minute briefing covering several M&A practice topics. The program is the third in a series of quarterly webcasts designed to provide quick insights into emerging issues and practical advice on how to manage common M&A problems. Robert Little, co-chair of the firm’s Global M&A Practice Group, acts as moderator.

Topics discussed:

Doug Horowitz discusses current trends in leveraged acquisition finance
Quinton Farrar and Brennan Halloran discusses lessons from the Mindbody litigation
Daniel Alterbaum discusses the implications of the recent McDonald’s decision on officer fiduciary duties for M&A transactions

PANELISTS:

Daniel Alterbaum is a partner in Gibson, Dunn & Crutcher’s New York office and is a member of the firm’s Mergers and Acquisitions and Private Equity Practice Groups. Mr. Alterbaum has been recognized as a “Rising Star” by New York Metro Super Lawyers in the area of mergers and acquisitions from 2015-2022, as well as by The Deal. He represents buyers, sellers and investors in a wide variety of transactions in the private equity, fintech, renewable energy and infrastructure sectors. His experience includes leveraged buyouts, negotiated sales of private companies, carve-out sales and spinoffs of subsidiaries and cross-border asset sales. He also represents issuers and investment funds in connection with venture capital, growth equity and structured preferred equity investments. Mr. Alterbaum is admitted to practice in the states of New York and Connecticut.

Quinton C. Farrar is a partner in Gibson Dunn & Crutcher’s New York office and is a member of the firm’s Mergers and Acquisitions and Private Equity Practice Groups. Mr. Farrar was named “Rising Star” in Private Equity by Euromoney Legal Media Group. He advises public and privately held companies, including private equity sponsors and their portfolio companies, investors, financial advisors, boards of directors and individuals in connection with a wide variety of complex corporate matters, including mergers and acquisitions, asset sales, leveraged buyouts, spin-offs, joint ventures and minority investments and divestitures. He also has substantial experience advising clients on corporate governance issues as well as in advising issuers and underwriters in connection with public and private issuances of debt and equity securities. Mr. Farrar is admitted to practice in the state of New York.

Douglas S. Horowitz is a partner in Gibson, Dunn & Crutcher’s New York office. Mr. Horowitz is the Head of Leveraged and Acquisition Finance, Co-Chair of Gibson Dunn’s Global Finance Practice Group, and an active member of the Capital Markets Practice Group and Securities Regulation and Corporate Governance Practice Group. Mr. Horowitz has been recognized as a leading finance lawyer by Chambers USA, Chambers Global, The Legal 500 and Euromoney’s IFLR 1000: The Guide to the World’s Leading Financial Law Firms. Mr. Horowitz represents leading private equity firms, public and private corporations, leading investment banking firms and commercial banks with a focus on financing transactions involving private credit, syndicated institutional and asset based loans, new issuance of secured and unsecured high-yield debt securities, equity and equity-linked securities, as well as out-of-court restructurings. Mr. Horowitz is admitted to practice in the state of New York.

Robert B. Little is a partner in Gibson, Dunn & Crutcher’s Dallas office, and he is a Global Co-Chair of the Mergers and Acquisitions Practice Group. Mr. Little has consistently been named among the nation’s top M&A lawyers every year since 2013 by Chambers USA. His practice focuses on corporate transactions, including mergers and acquisitions, securities offerings, joint ventures, investments in public and private entities, and commercial transactions. Mr. Little has represented clients in a variety of industries, including energy, retail, technology, infrastructure, transportation, manufacturing and financial services. Mr. Little is admitted to practice in the state of Texas.

Brennan Halloran is an associate in Gibson, Dunn & Crutcher’s New York office. He is a member of the firm’s Mergers and Acquisitions and Private Equity Practice Groups. Mr. Halloran represents both public and private companies and financial sponsors in connection with mergers, acquisitions, divestitures, joint ventures, minority investments, restructurings and other complex corporate transactions. He also advises clients with respect to governance and general corporate matters. Mr. Halloran is admitted to practice in the state of New York.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of .50 credit hour, of which .50 credit hour may be applied toward the Ethics & Professionalism. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of .50 Ethics.

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

Decided June 27, 2023

Mallory v. Norfolk Southern Railway Co., No. 21-1168

Today, the Supreme Court held in a fractured 5-4 decision that the Due Process Clause does not prohibit Pennsylvania from requiring businesses that register to do business in Pennsylvania to consent to general jurisdiction in the state’s courts, but a majority of the Justices questioned whether other constitutional principles limit states’ power to require such consent.

Background: Robert Mallory sued his former employer, Norfolk Southern, for alleged workplace injuries. Mallory sued in Pennsylvania even though he’s a citizen of Virginia, his injuries allegedly occurred in Ohio and Virginia, and Norfolk Southern was incorporated and had its principal place of business in Virginia. He asserted jurisdiction on the theory that Norfolk Southern registered to do business in Pennsylvania under a statute that requires corporations to submit to general personal jurisdiction in Pennsylvania over all suits.

Norfolk Southern moved to dismiss the suit for lack of personal jurisdiction on the grounds that the suit had no connection to Pennsylvania, and Pennsylvania’s consent-to-jurisdiction statute violates the Due Process Clause. Although the Supreme Court held in Pennsylvania Fire Insurance Co. v. Gold Issue Mining & Milling Co., 243 U.S. 93 (1917), that a similar consent-to-jurisdiction statute did not violate due process, Norfolk Southern argued that Pennsylvania Fire had been implicitly overruled by later cases. The Pennsylvania Supreme Court agreed, holding that the state’s registration statute violated due process by coercing Norfolk Southern to consent to general personal jurisdiction.

Issue: Whether the Due Process Clause prohibits a state from requiring an out-of-state corporation to consent to general personal jurisdiction in that state as a condition of registering to do business there.

Court’s Holding:

No. Due process does not prohibit a state from requiring that businesses consent to general personal jurisdiction as a condition of registering to do business in the state.

“To decide this case, we need not speculate whether any other statutory scheme and set of facts would suffice to establish consent to suit. It is enough to acknowledge that the state law and facts before us fall squarely within Pennsylvania Fire’s rule.”

Justice Gorsuch, writing for the Court

Gibson Dunn submitted an amicus brief on behalf of the Association of American Railroads in support of respondent: Norfolk Southern Railway Co.

What It Means:

The Court’s opinion was fractured, and the only holding joined by a majority of the Justices was narrow, concluding only that Pennsylvania’s consent-by-registration statute did not violate due process under Pennsylvania Fire. The majority made clear that Pennsylvania Fire had not been implicitly overruled by later cases.
Justice Alito concurred, providing the necessary fifth vote to vacate the Pennsylvania Supreme Court’s decision and remand for further consideration. Critically, Justice Alito opined that consent-by-registration statutes might violate other constitutional provisions and principles, including the dormant Commerce Clause.
Justice Barrett dissented, joined by Chief Justice Roberts and Justices Kagan and Kavanaugh, opining that Pennsylvania’s consent-by-registration scheme is inconsistent with both due process and principles of interstate federalism.
Given the Court’s fractured and narrow opinion, and Justice Alito’s concurrence, it is likely that consent-by-registration statutes will continue to face constitutional challenges.

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: General Litigation

Reed Brodsky +1 212.351.5334 rbrodsky@gibsondunn.com	Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com	Veronica S. Moyé +1 214.698.3320 vmoye@gibsondunn.com
Helgi C. Walker +1 202.887.3599 hwalker@gibsondunn.com

The EU Markets in Cryptoassets Regulation (“MiCA”) was published in the EU’s official journal on 9 June 2023 and will enter into force on 29 June 2023, the 20^th day following the date of its publication. As a result, the provisions on stablecoins (asset-referenced tokens and e-money tokens) will become applicable 12 months after this date, and will apply from 30 June 2024. The other provisions will apply from 30 December 2024.

MiCA establishes a harmonised pan-EU regime for cryptoassets. This new regulatory framework aims to protect investors and preserve financial stability, while allowing innovation and fostering the attractiveness of the cryptoasset sector. It will apply directly across the EU member states replacing the existing domestic laws and harmonising all national legislation in the area of cryptoassets and activities related to them.

MiCA sets out the framework for the regulation of cryptoassets in the EU but certain details will be settled in technical standards and delegated acts. The European Banking Authority (the “EBA”) is required to develop draft regulatory technical standards by 30 June 2024 to establish standard forms, templates and procedures for the cooperation and exchange of information between national competent authorities, as well as issuing guidelines that cryptoasset service providers should consider when conducting assessments and risk mitigation measures. This client alert provides an overview of MiCA, how it impacts on different market participants and what steps cryptoasset firms need to take now to ensure compliance.

Which cryptoassets are in-scope?

MiCA defines a crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. Although a limited number of cryptoassets are regulated under existing legislation, MiCA catches previously unregulated cryptoassets that did not fall within the regulatory perimeter. MiCA creates a hierarchy of cryptoassets based on the perceived risks posed by these different tokens.

Cryptoasset	Overview
Utility token	Defined as: “A type of cryptoasset that is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token.” Deemed as less risky than stablecoins and, therefore, a lighter touch regime applies to them. While issuers of these tokens do not need to be authorised, they must comply with the obligations set out in Title II of the MiCA.
Stablecoins (being “asset-referenced tokens” and “e-money tokens”)	Asset-referenced tokens Defined as: “A type of cryptoasset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several cryptoassets, or a combination of such assets.” They are a type of stablecoin. However, the definition excludes algorithmic stablecoins and central bank digital currencies (“CBDCs”). The EU considers that they pose increased risks in terms of consumer protection and market integrity compared to other cryptoassets and so issuers should be subject to more stringent requirements. The requirements that apply relate to: authorisation; governance; conflicts of interests; disclosure of stabilisations mechanism; investment rules; and additional white paper requirements. E-money tokens Defined as: “A type of cryptoasset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a single fiat currency that is legal tender.” Again, as e-money tokens are a type of stablecoin, the EU considers them to be of higher risk than utility tokens. E-money tokens can only be issued by credit institutions (i.e. banks) or authorised electronic money institutions. E-money token issuers must comply with both the Second Electronic Money Directive and MiCA.
Significant asset-referenced tokens or significant e-money tokens	MiCA permits the European Banking Authority to identify tokens as “significant”. A significant token is a type of asset-referenced or e-money token which is considered to pose significant risks for financial stability and consumer protection across the EU. The criteria for determining whether a token is a significant token are set out at Article 43 of MiCA. At least 3 of the criteria must be met, including among others the size of the customer base or the issuer’s reserve, the value of the tokens issued or transactions, the significance of the cross-border activities of the issuer, or the interconnectedness with the financial system. Significant tokens are subject to the strictest requirements in MiCA.

MiCA leaves several components of the digital world outside its scope for now, including CBDCs and cryptoassets that are unique and non-fungible (“NFTs”). MiCA sets out potential areas for future regulation, and an assessment of the necessity and feasibility of regulating NFTs.

Who does MiCA apply to?

MiCA imposes obligations on issuers of in-scope cryptoassets (i.e., those offering cryptoassets to third parties). MiCA also imposes obligations on firms whose business it is to provide certain cryptoasset services to third parties on a professional basis (i.e., cryptoasset service providers or “CASPs”). In particular, the following services are listed and defined in MiCA:

providing advice on cryptoassets;
reception and transmission of orders for cryptoassets;
execution of orders for cryptoassets;
custody and administration of cryptoassets;
operation of a trading platform for cryptoassets;
exchange of cryptoassets for fiat; and
placing of cryptoassets.

Cryptoasset lending is one key service not captured by MiCA. The European Commission is expected to publish a report on the need to regulate this service and, if necessary, a legislative proposal by 30 December 2024.

Non-EU businesses – MiCA applies to those engaged in the aforementioned services “in the Union”. Non-EU businesses wishing to carry on cryptoasset activities within the EU or for EU based customers should consider how the territorial scope of MiCA will impact their current and future business models. MiCA contains provisions which relate to “reverse solicitation” where a third-country firm provides cryptoasset services at the exclusive initiative of an EU customer. However, where a third-country firm solicits clients or potential clients or promotes or advertises crypto-asset services or activities to customers in the EU, the licence requirement will be triggered. Further guidelines will be developed which will specify when a third country firm is deemed to solicit clients within the EU to mitigate against an overreliance on reverse solicitation rules.

Passporting – MiCA provides for passporting across the EU, in line with other EU single market measures. However, as mentioned, there are no provisions on third country equivalence, which may cause issues for service providers seeking to offer services globally.

Impact to existing licensed CASPs – Some EU member states already have in place national regulatory frameworks regulating CASPs. MiCA therefore leaves open a possibility for member states to apply a simplified procedure for applications for authorisation submitted by those entities that are already authorised under national law. In such cases, the national competent authorities will be required to ensure that these applicants comply with key requirements under MiCA. While some firms that are currently operating under national frameworks in some EU member states (i.e. Germany or Malta) will likely be able to leverage their existing internal frameworks to obtain a MiCA licence, non-regulated firms need to be prepared to dedicate a sufficient amount of time, financial and human resources to meet the new regulatory requirements under MiCA.

What areas of MiCA should be key areas of focus for cryptoasset firms?

(1) Offering and marketing of cryptoassets (other than asset-referenced tokens and e-money tokens)

White paper – Subject to certain requirements, issuers may offer such cryptoassets to the public in the EU or apply for admission to a trading platform. Namely, there is a requirement to draw up, notify regulators of, and publish a cryptoasset white paper.
Exemption from the requirement to publish a white paper – In summary, the white paper requirements do not apply where:

(i) the cryptoassets are offered for free, they are created through mining, are unique and not fungible with other cryptoassets;

(ii) are offered to fewer than 150 persons (natural or legal) per member state where such persons are acting on their own account;

(iii) an offer does not exceed EUR 1 million; or

(iv) the offer is solely addressed to qualified investors.

Marketing communications – Marketing communications relating to an offer of cryptoassets to the public or admission to trading must be: (i) clearly identifiable as such; (ii) fair, clear and not misleading; (iii) consistent with the white paper; and (iv) clearly state both that the white paper has been published and an address of the website of the issuer concerned.
Modifications to white paper / marketing communications – The white paper and marketing communications must be updated where there has been a change or new fact that is likely to have a significant influence on the purchase decision of any potential purchaser of the cryptoasset, or on the decision of holders of such cryptoassets to sell or exchange such cryptoassets.

(2) Obligations applying to issuers of asset-referenced tokens

Authorisation procedure – Issuers of asset-referenced tokens will need to be authorised under MiCA and comply with various conduct of business and prudential requirements. Note that issuers must be EU-established legal entities in order to be granted authorisation. Note that there are certain exemptions for small-scale asset-referenced token and where tokens are marketed, distributed and held exclusively by qualified investors.
Enhanced white paper requirements – Issuers of asset-referenced tokens must include additional information in white papers to that described above and the white paper must be pre-approved by national competent authorities. The white paper will need to contain certain mandatory disclosures before it can be issued, offered or marketed while issuers of other tokens need only notify the regulator and provide a copy of their white paper before doing so. The white paper will need to be supported by a legal opinion as to why the asset-referenced token is not an e-money token nor a token excluded from MiCA’s scope.
Prudential and conduct requirements – Issuers must act honestly, fairly and professionally in the best interest of asset-referenced token holders. Requirements also relate to marketing, provision of information, complaints handling, conflicts of interest, governance arrangements, prudential requirements, and maintenance and segregation of reserve assets.
Claims for damages – MiCA contains provisions that allow for asset-referenced token holders with minimum rights to claim damages against an issuer and its management body for certain infringements.
Change in control approval – MiCA contains regulatory change in control approval provisions in advance of acquiring a “qualifying holding in an issuer of asset-referenced tokens”.

(3) Additional requirements relating to significant asset-referenced tokens

Supervision by the EBA – Issuers of significant asset-referenced tokens will be supervised by the EBA given the significant risks they present to financial stability and consumer protection.
Remuneration policy – Issuers must adopt, implement and maintain a remuneration policy that promotes sound and effective risk management and does not create incentives to relax risk standards.
Interoperability – Issuers must ensure that such tokens can be held in custody by different crypto-asset service providers.
Liquidity management policy – Issuers must establish, maintain and implement a liquidity management policy and procedures to ensure that the reserve assets have a resilient liquidity profile that enables issuers of to continue operating normally under scenarios of liquidity stress. Issuers must conduct liquidity stress testing on a regular basis.

(4) Obligations applying to issuers of e-money tokens

Authorisation – Issuers of e-money tokens will need to be authorised as a credit institution or as an e-money institution under the second Electronic Money Directive (2009/110/EC).
White paper requirements – Issuers of e-money tokens must ensure that their white papers contain certain required information as specified in Annex III.
Issuance and redeemability – Upon request by a holder of an e-money token, the issuer must redeem the token, at any time and at par value, by paying in funds, other than electronic money, the monetary value of the e-money token held to the holder of the e-money token. Issuers must prominently state the conditions for redemption in their white paper.
No interest to token holders – Issuers of e-money tokens shall not grant interest to token holders in relation to e-money tokens.
Marketing communications – Marketing communications relating to a public offer or to trading of an e-money token must be (a) clearly identifiable; (b) fair, clear and not misleading; (c) consistent with the white paper, and (d) set out certain information about the white paper and the issuer.
Treatment of funds received – At least 30% of the funds received by issuers in exchange for e-money tokens must be deposited in separate accounts in credit institutions. The remaining funds are to be invested in secure, low-risk assets that qualify as highly liquid financial instruments with minimal market risk, credit risk and concentration risk.

(5) Additional requirements relating to significant e-money tokens

Dual supervision – Issuers of significant e-money tokens will be subject to dual supervision from national competent authorities and the EBA.
New obligations for e-money institutions – E-money institutions issuing significant e-money tokens will not be subject to the own funds and safeguarding requirements under the E-Money Directive (2009/110/EC), but will instead be subject to the requirements specified under MiCA.

(6) Requirements for CASPs

Authorisation procedure – CASPs will need to be authorised under MiCA and have a registered office in the EU. Once authorised in one member state, a CASP will be allowed to provide cryptoasset services throughout the entire EU. Certain institutions which are already authorised under existing financial services legislation do not also need to also be authorised under MiCA to provide cryptoasset services, but must follow certain notification requirements as per Article 60 of MiCA.
Prudential and conduct requirements – CASPs must act honestly, fairly and professionally in the best interest of their clients and prospective clients. Requirements also relate to (among others) marketing, provision of information, prudential requirements, governance arrangements, complaints handling, conflicts of interest, and custody and administration of assets.
Requirements for specific types of CASPs – Chapter 3 of MiCA also sets out specific requirements in respect of different crypto-asset services, including but not limited to: (a) providing custody and administration of cryptoassets; (b) operating a trading platform for cryptoassets; (c) exchanging cryptoassets for funds or other cryptoassets; (d) placing of cryptoassets; and (e) providing advice on, and portfolio management of, cryptoassets.
No new anti-money laundering obligations – MiCA does not include anti-money laundering (AML) provisions with respect to CASPs. However, the Fifth Money Laundering Directive ((EU) 2018/843) (MLD5), which came into force in 2018, contains AML provisions with respect to cryptoasset exchanges and custodian wallet providers. The EU Council also recently agreed its position on a new AML directive (AMLD6), which would extend AML provisions to all CASPs.

(7) Market abuse regime for cryptoassets

Title VI of MiCA establishes a bespoke market abuse regime for cryptoassets. It defines the concept of inside information in relation to cryptoassets and requires the public disclosure of inside information for issuers and offerors seeking admission to trading. It prohibits insider dealing, the unlawful disclosure of inside information, and market manipulation, and expressly imposes requirements relating to systems, procedures and arrangements to monitor and detect market abuse.

When will MiCA enter into force?

MiCA will enter into force 20 days after its publication in the Official Journal of the European Union. The majority of the requirements will apply 18 months after it enters into force. However, the asset-referenced tokens and e-money token requirements will apply 12 months after the entry into force date.

Issuers of asset-referenced tokens other than credit institutions that issued asset-referenced tokens in accordance with applicable law before 12 months after MiCA enters into force may continue to do so until they are granted or refused an authorisation, provided that they apply for authorisation before 13 months after MiCA enters into force. Credit institutions that issued asset-referenced tokens in accordance with applicable law before 12 months after MiCA enters into force may continue to do so until the cryptoasset white paper has been approved or rejected, provided that they notify their competent authority before 13 months after MiCA enters into force.

CASPs already legally providing their services at the date on which MiCA applies may continue to do so until 18 months after the date or they are granted or refused an authorisation, whichever is sooner.

What steps should cryptoasset firms take now?

Firms that are potentially in-scope of MiCA should perform a gap analysis and impact assessment of MiCA on their business models. Ensuring compliance with MiCA is likely to constitute a significant undertaking for firms and firms should not underestimate the time it will take to implement MiCA, including applying for authorisation and implementing MiCA requirements into their systems and processes The first step firm’s should take is consider whether their existing activities fall within scope of MiCA. If so, they will be required to either notify the relevant national regulator or seek authorisation depending on whether they are already authorised financial institutions. Gibson Dunn’s lawyers have a current, substantive and technical understanding of the ever-evolving world of digital assets and would be delighted to assist you with you MiCA implementation projects.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the following members of Gibson Dunn’s Global Financial Regulatory teams in London and Dubai:

Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Martin Coombes – London (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)
Sameera Kimatrai – Dubai (+971 4 318 4616, skimatrai@gibsondunn.com)

Gibson, Dunn & Crutcher LLP is advising Otro Capital and its partner RedBird Capital in their investment in Alpine Racing Ltd., a world class F1 team that finished top 4 in the 2022 F1 World Championship. The investment values the team at approximately $900 million and is being made along with Maximum Effort Investments (led by Ryan Reynolds) and its co-investors Michael B. Jordan and Rob McElhenney, and includes participation from the Huntsman Family and Main Street Advisors.

The Gibson Dunn corporate team is led by partners Stefan dePozsgay and Nick Tomlinson and includes associates Sarah Leiper-Jennings, Sarah Reder and Percy Gao. Partners Sandy Bhogal and Kathryn Kelly and associates Bridget English, Ryan Rott and Isabella Fladée are advising on tax aspects. Partner A.J. Frey and associates Curtis Vella and Fiona Xin are advising on investment funds aspects. Partner Chris Haynes is advising on capital markets aspects. Partner Daniel Angel and associates Jacqueline Malzone and Libby Pica are advising on IP aspects. Partners Michael Collins and James Cox are advising on executive compensation and benefits aspects. Partner Attila Borsos and associate Ben Nunez are advising on competition and foreign investment aspects.

Decided June 23, 2023

Coinbase, Inc. v. Bielski, No. 22-105

Today, the Supreme Court held 5-4 that appealing the denial of a motion to compel arbitration automatically stays district court proceedings pending resolution of that appeal.

Background: The Federal Arbitration Act (“FAA”) authorizes interlocutory appeals from orders refusing to compel arbitration. 9 U.S.C. § 16(a). The FAA does not expressly address stays pending appeal, and a circuit split developed. The majority position, adopted by the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits, held that stays pending appeal are mandatory. The minority position, adopted by the Second, Fifth, and Ninth Circuits, held that the usual, four-factor standard for discretionary stays pending appeal applies.

Bielski brought putative class-action claims against Coinbase in the Northern District of California. Coinbase moved to compel arbitration under its user agreement. After the district court denied Coinbase’s motion, Coinbase appealed and sought a stay pending appeal. The district court declined to stay its proceedings, holding that under Ninth Circuit precedent a stay pending appeal was not mandatory and that a discretionary stay was not warranted. The Ninth Circuit likewise denied a stay.

Issue: Is a stay pending appeal of the denial of a motion to compel arbitration mandatory?

Court’s Holding:

Yes. Appealing the denial of a motion to compel arbitration automatically stays district court proceedings pending resolution of the appeal.

“The sole question before this Court is whether a district court must stay its proceedings while the interlocutory appeal on arbitrability is ongoing. The answer is yes.”

Justice Kavanaugh, writing for the Court

What It Means:

Today’s decision is a win for defendants who appeal the denial of a motion to compel arbitration. Defendants who appeal the denial of a motion to compel arbitration cannot be forced to continue litigating in the district court during the appeal. In practice, this decision also should stay any district court discovery deadlines. This is a significant change for litigants in the Second, Fifth, and Ninth Circuits, which all previously refused to grant such automatic stays.
In reaching this decision, the Supreme Court applied the general rule that an interlocutory appeal divests a district court of control over the issues on appeal. Because the issue on appeal is whether the case can go forward in the district court, the district court lacks power to require further litigation.
The Court reasoned that “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost” without a stay during appeal, even if the court of appeals agrees that arbitration is required. This is especially true in class actions, where “the possibility of colossal liability can lead to . . . blackmail settlements.” Slip op. 5–6.

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

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