In the current environment, public companies may find it more challenging to raise capital through traditional public offerings. Despite market volatility, private placements of various securities afford issuers the opportunity to support liquidity and bridge valuation gaps. These private investment in public equity deals (PIPEs) offer a quick, bespoke and discrete option in capital raising. The securities issued in PIPEs, such as common stock, preferred stock and convertible notes, can be easily tailored to the goals and risks of both the issuer and the investors. Please join our panel as they discuss current developments in private investment in PIPEs, including deal structures, legal considerations, business and governance terms, and special regulatory requirements as a result of the recent market volatility.
PANELISTS:
Hillary Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets Practice Group, and a member of the firm’s Securities Regulation and Corporate Governance, Energy, M&A and ESG Practice Groups. Ms. Holmes’ practice focuses on capital markets, securities regulation, corporate governance and ESG counseling. She is Band 1 ranked by Chambers USA in capital markets for the energy industry and a recognized leader in Energy Transactions nationwide. Ms. Holmes represents issuers and underwriters in all forms of capital raising transactions, including sustainable financings, IPOs, registered offerings of debt or equity, private placements, and structured investments. Ms. Holmes also frequently advises companies, boards of directors, special committees and financial advisors in M&A transactions, conflicts of interest and special situations.
Eric Scarazzo is a partner in Gibson Dunn’s New York office. He is a member of the firm’s Capital Markets, Securities Regulation and Corporate Governance, Energy, M&A and Global Finance Practice Groups. As a key member of the capital markets practice, Mr. Scarazzo is involved in some of the firm’s most complicated and high-profile securities transactions. Additionally, he has been a certified public accountant for over 20 years. His deep familiarity with both securities and accounting matters permits Mr. Scarazzo to play an indispensable role supporting practice groups and offices throughout the firm. He provides critical guidance to clients navigating the intersection of legal and accounting matters, principally as they relate to capital markets financings and M&A disclosure obligations.
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In a major development on 13 September 2022, the UAE Ministry of Justice called upon the Dubai Courts to enforce judgments of the English Courts in the UAE going forward, based on principles of reciprocity.
The English Courts were historically reluctant to enforce UAE-issued judgments; and the UAE courts had for decades used the lack of reciprocity as a bar to the enforcement of English judgments. The English High Court’s recent decision in Lenkor Energy Trading DMCC v Puri (2020) EWHC 75 (QB) was a welcome development. In that seminal case, which was upheld on appeal, the High Court enforced a ‘bounced cheque’ judgment of the Dubai Court of Cassation. The High Court and Court of Appeal both ruled that the Dubai judgment was a final and conclusive judgment of a court of competent jurisdiction, which did not offend English public policy.
Days ago, on 13 September 2022, the UAE Ministry of Justice issued an official communication to the Dubai Courts, confirming that the Lenkor decision “constitutes a legal precedent and a principle binding on all English Courts according to their judicial system”.
In an unprecedented move, the UAE Ministry of Justice therefore asked the Dubai Courts to:
“take the relevant legal actions regarding any requests for enforcement of judgments and orders issued by the English Court, in accordance with the laws in force in both countries, as a confirmation of the principle of reciprocity initiated by the English Courts and assurance of its continuity between the English Courts and the UAE Courts.”
This important development provides confidence for creditors looking to enforce English Court judgments in the UAE. It is an encouraging development in terms of the ongoing judicial cooperation between the English and Dubai courts.
It also opens additional avenues for the enforcement of arbitral awards. Creditors of London-seated arbitral awards may now consider proceeding directly to the Dubai courts after enforcing their awards at the seat of arbitration under s. 66 of the Arbitration Act. This is a useful alternative to the traditional path of asking the Dubai Courts to recognise and enforce arbitral awards under the New York Convention, which has produced mixed results. It is also an alternative to the to the well-trodden path of using the (award creditor-friendly) DIFC Courts as a gateway to the enforcement of London-seated arbitral awards in Dubai and beyond.
The context: no applicable enforcement and recognition treaties between the UK and the UAE
There is no bilateral treaty between the UAE and the UK for the reciprocal recognition and enforcement of judgments (other than the Treaty between the UK and the UAE on Judicial Assistance in Civil and Commercial Matters, which lacks an enforcement mechanism, and the memoranda of understanding issued by the Courts of the DIFC and the ADGM).
In the absence of a treaty, judgment creditors must bring a claim to enforce a UAE judgment in England and Wales under common law. Under the common law test, the English court must be satisfied that the relevant UAE court: (i) had original jurisdiction to render its judgment; (ii) issued a final and conclusive judgment; and (iii) issued a judgment for a definite and calculable sum. If that is proven, then there are only limited defences available to a judgment debtor – chief amongst which is that enforcement of the foreign judgment would contravene English public policy.
Likewise, in the absence of a bilateral enforcement treaty, the UAE Courts will only enforce foreign judgments “under the same conditions laid down in the jurisdiction issuing the order”—in other words, when reciprocity exists with the issuing jurisdiction. This is set out in Article 85 of Cabinet Resolution No. 57 of 2018 concerning the Executive Regulations of Federal Law No. 11 of 1992 (as amended). Prior to the Lenkor decision, the English Courts were not in the practice of readily enforcing Dubai Court judgments; and the UAE courts had treated this lack of reciprocity as a bar to enforcement.
The Lenkor decision: a landmark decision of the English court to enforce a judgment of the UAE court
The English High Court enforced a ‘bounced cheque’ judgment from the Dubai court in Lenkor.
Mr Puri, a UK citizen, was the principal and controller of IPC Dubai. He had signed two security cheques in favour of Lenkor on IPC’s behalf. Lenkor and IPC then fell into dispute. Lenkor prevailed in an arbitration against IPC, and when IPC failed to satisfy the resulting arbitral award, Lenkor attempted to cash the cheques. When the cheques bounced, Lenkor brought Dubai court proceedings against Mr Puri personally.
The Dubai courts—including the final appellate court, the Dubai Court of Cassation—found that Mr Puri had contravened Article 599/2 of the UAE Commercial Transactions Law (UAE Federal Law No. 18 of 1993). Under that provision, the person who draws a cheque is deemed personally liable for the amount of the cheque; and a cheque may not be issued unless the drawer has, at the time of drawing the cheque, sufficient funds to meet it. The Dubai Court of First Instance entered judgment against Mr Puri for an AED equivalent of about USD 33.5 million, plus 9% interest per annum. This was upheld on multiple rounds of appeal, including ultimately by the Dubai Court of Cassation.
Mr Puri challenged the enforcement of the Dubai judgment in the English Courts. He argued that the judgment offended English public policy, on the bases that: (i) the underlying transaction between IPC and Lenkor was tainted by illegality; (ii) unlike Dubai law, English would not find Mr Puri personally liable for IPC’s debt and would not permit the piercing of the corporate veil; and (iii) the 9% interest awarded was unduly high and an unenforceable penalty.
The English High Court dismissed these arguments, because: (i) the question was whether the UAE Court’s judgment offended public policy, not the underlying transaction; (ii) the finding of Mr Puri’s personal liability was a question of Dubai law; and (iii) the interest rate awarded was not unduly high or an unenforceable penalty.
The English Court of Appeal upheld the decision on appeal in Lenkor Energy Trading DMCC v Puri [2021] EWCA Civ 770.
The 13 September 2022 direction from the UAE Ministry of Justice
The Lenkor decision is seminal in that it has demonstrated reciprocity between the UAE and the UK—certainly from the perspective of the UAE Ministry of Justice. The 13 September 2022 communication, issued from Judge Abdul Rahman Murad Al-Blooshi, Director of International Cooperation Department of the Ministry of Justice, to His Excellency Tarish Eid Al-Mansoori, Director General of the Dubai Courts, confirms (in an unofficial translation) that:
“…based on the Treaty between the United Kingdom of Great Britain and Northern Ireland and the United Arab Emirates on Judicial Assistance in Civil and Commercial Matters, and the desire to strengthen fruitful cooperation in the legal and judicial field;
Whereas, the aforementioned Treaty does not provide for enforcement of foreign judgments, and states that the judgments should be enforced according to the relevant applicable mechanism set forth in the local laws of both countries;
Whereas, Article (85) of the Executive Regulation of the Civil Procedures Law, as amended in 2020, stipulates that judgments and orders issued in a foreign country may be enforced in the State under the same conditions prescribed in the law of that country, and the legislator does not require an agreement for judicial cooperation to enforce foreign judgments, and such judgments may be enforced in the State according to the principle of reciprocity; and
Whereas, the principle has been considered by the English Courts upon previous enforcement of a judgment issued by Dubai Courts by virtue of a final judgment issued by the High Court of the United Kingdom in Lenkor Energy Trading DMCC v Puri (2020) EWHC 75 (QB), which constitutes a legal precedent and a principle binding on all English Courts according to their judicial system,
Therefore, we kindly request you to take the relevant legal actions regarding any requests for enforcement of judgments and orders issued by the English Court, in accordance with the laws in force in both countries, as a confirmation of the principle of reciprocity initiated by the English Courts and assurance of its continuity between the English Courts and the UAE Courts.”
The Arabic original is available below:
Closing comment
This development provides confidence for creditors looking to enforce English Court judgments in the UAE. It also opens additional avenues for arbitral award creditors to proceed directly to the Dubai courts once a London-seated award has been enforced at the seat of arbitration (as an alternative to the standard New York Convention route or the use of the DIFC Courts as a gateway). It remains to be seen whether the courts of Abu Dhabi will adopt a similar view. Either way, this is an important development given the close trade links between the UAE and the UK, and it demonstrates a pro-enforcement stance from the UAE Ministry of Justice, which is welcome news.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Penny Madden KC and Nooree Moola.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement or Transnational Litigation practice groups, or any of the following practice leaders and members:
Cyrus Benson – London (+44 (0) 20 7071 4239, [email protected])
Penny Madden KC – London (+44 (0) 20 7071 4226, [email protected])
Jeff Sullivan KC – London (+44 (0) 20 7071 4231, [email protected])
Nooree Moola – Dubai (+971 (0) 4 318 4643, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The European Commission (the “EC”) is expected to announce a proposal shortly that will ban products made using forced labour. The move follows a public consultation earlier this year by the EC seeking public opinion on an initiative “to keep the EU market free from products made, extracted or harvested with forced labour, whether they are made in the EU or elsewhere in the world.”[1] The proposal could have a significant impact on corporates’ supply chain management and approach to human rights due diligence; areas which are already under close scrutiny by the EU.
While the EU’s proposal has not yet been released, several media outlets report to have seen an EU document which states that a ban should apply to products (including their components) for which forced labour has been used at any stage of production, manufacture, harvest or extraction, including working or processing.
The proposed prohibition is also expected to apply regardless of the origin of the products, whether they are domestic or imported, or placed or made available on the EU market or exported outside of the EU.
It is understood that each EU member state will be responsible for detection and enforcement and that national authorities will be tasked with proving that relevant products were made or processed using forced labour. At least one report suggests that a database of forced labour risk in specific geographic areas or specific products made with forced labour imposed by state authorities will be set up and made available to the public as part of implementation.
A step further than the U.S.
The enactment of the Uyghur Forced Labor Prevention Act (the “UFLPA”) on 21 June, 2022, introduced a presumptive ban on all imports to the U.S. from China’s Xinjiang Uyghur Autonomous Region (the “XUAR”) and from certain entities designated by the U.S. Department Homeland Security Customs and Border Protection. The UFLPA’s presumptive ban modified Section 307 of the U.S. Tariff Act of 1930, which generally bans the importation of any products mined, produced or manufactured wholly or in part by forced or indentured child labour.
While the EU will follow the U.S. in legislating to end forced labour practices, it appears that the geographic scope of the EU proposal will be broader than current U.S. law, because it also applies internally to products made within the EU.
Next steps
Details of the proposal will need to be addressed with lawmakers and EU countries, but the intended prohibition looks set to be sweeping and significant. We will monitor these developments and provide further details as the draft law evolves.
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[1] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13480-Effectively-banning-products-produced-extracted-or-harvested-with-forced-labour_en
The following Gibson Dunn lawyers prepared this client alert: Susy Bullock, Perlette Jura, Christopher Timura, Sean J. Brennan*, and Rebecca McGrath.
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, the authors, or the following members and leaders of the firm’s Environmental, Social and Governance (ESG) or International Trade practice groups:
Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213-229-7121, [email protected])
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])
Rebecca McGrath – London (+44 (0) 20 7071 4219, [email protected])
International Trade Group:
United States
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Annie Motto – Washington, D.C. (+1 212-351-3803, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])
Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])
Europe
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Patrick Doris – London (+44 (0) 207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33 115, [email protected])
* Sean Brennan is an associate working in the firm’s Washington, D.C. office who currently is admitted only in New York.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Following the settlement of an Attorney General enforcement action, defendants often face new and expensive private lawsuits for the same conduct. These subsequent private lawsuits often result in years of additional litigation, legal fees, and further monetary penalties and damages. Due to the likelihood of follow-on suits, we suggest clients consider taking several proactive and strategic steps when structuring a settlement with the California Attorney General in order to mitigate the risk of subsequent civil lawsuits and associated penalties.
The following strategic considerations provide a general framework to consider in maximizing the possibility of barring subsequent lawsuits: (1) taking steps to negotiate which statute will be used in the complaint accompanying the consent judgment; (2) including a broad statement of facts in the settlement agreement and complaint; and (3) structuring and characterizing any settlement payment with a preclusion strategy in mind. Though courts in California ultimately engage in a case-specific inquiry as to whether private litigants’ claims are barred by prior settlement of a government action, all of these factors influence the likelihood of a successful claim preclusion defense, and have important underlying strategic advantages.[1]
Statutes Underlying the Government Enforcement Action
The statutes underlying the California Attorney General’s enforcement action, and identified in the settlement agreement, impact the likelihood of success of a future res judicata defense in subsequent private litigation. If the statute underlying the Attorney General’s action provides a private right of action, subsequent private litigation redressing individual harms is unlikely to be barred. For example, in CS Wang & Assoc. v. Wells Fargo Bank, N.A., the California Attorney General brought an enforcement action under the California Unfair Competition Laws (“UCL”) asserting claims through the California Invasion of Privacy Act (“CIPA”). The government action sought to protect the public from unfair and harmful business practices resulting from Wells Fargo’s alleged failure to disclose the recording of communications with California residents.[2] Despite the fact that the enforcement action sought to redress public harm, CIPA created a private right of action which allowed a subsequent class action to move forward. The inability to bar the private litigation hinged on CIPA’s dual enforcement mechanism – the explicit private right of action within the statute, and the UCL’s authorization to enforce CIPA on behalf of the People.[3]
To the extent possible, settling parties looking to maximize the success of precluding subsequent private suits should attempt to negotiate with the Attorney General regarding the underlying statutory basis for the enforcement action. Because certain statutes allow both private and public enforcement for the same conduct, it is advantageous to specify statutes that do not contain private rights of action in the settlement agreement in order to encompass potential private plaintiffs’ claims. Although the private plaintiff may still attempt to recover under different statutes to avoid a res judicata defense, if the prior government action was based on the same primary right asserted by the private party, the subsequent suit is more likely to be precluded.[4]
Broadening the Statement of Facts
Parties should also consider including a broad and comprehensive statement of facts within the settlement documents in order to cover most or all claims underlying the state’s investigation. The more claims and factual allegations that are encompassed in the settlement with the government, the less likely that a private plaintiff will be able to justify how their claims are sufficiently distinct from the government’s case to withstand dismissal.
Illustratively, in Villalobos, the defendant settled the entirety of an Attorney General enforcement action that alleged poor workplace conditions and wage violations, agreeing to pay an undisclosed amount in restitution to cover all claims related to the unlawful employment practices. In precluding the subsequent private litigation, the court noted that the government action and settlement broadly addressed the terms of employment and work conditions that gave rise to the plaintiffs’ new claims, despite the lack of factual specificity in the settlement and government complaint. The expansive coverage of the settlement precluded the private litigants’ lawsuit because the prior action ultimately encompassed the plaintiffs’ claims.[5]
This approach is not risk-free even in the context of no-admit settlements. For example, a broader statements of facts makes public, and puts potential follow-on plaintiffs on notice of, more factual allegations than necessary to effectuate the settlement. These risks should be weighed against the cost of potential follow-on private litigation due to narrow admissions that do not cover the private litigant’s claims.
Paying Restitution rather than Civil Penalties
In structuring a settlement with the California Attorney General, and in cases where a settlement includes monetary payment, it is generally preferable that the payment be in the form of restitution, rather than civil penalties. In assessing the preclusive effect of a settlement reached by the state, the court pays particular attention to the specific terms of the agreement and the types of relief obtained on behalf of consumers. Courts in California look at whether or not the government properly represented a private litigant’s interests in a prior action, and in that analysis courts consider the type of relief sought by the government.[6] Courts have found that in instances where the Attorney General seeks predominantly injunctive relief and civil penalties, the government action serves a law enforcement function to protect the public, rather than to vindicate the rights of private plaintiffs.[7] In such instances, a res judicata defense fails because the interests of the government and private plaintiff differ.[8]
On the other hand, when a settlement involves paying restitution and the restitution constitutes all or most of the monetary relief specified in the settlement agreement, courts are more likely to find an identity of interests between the government and private plaintiffs. However, the private plaintiffs in the subsequent litigation must fall within the class of restitution recipients as defined by the government action and settlement. The settling defendant should define the class of restitution recipients as broadly as possible to encompass future private plaintiffs, risking a greater payment to the government but potentially precluding future private lawsuits. For example, in Villalobos, the court barred a private lawsuit following an enforcement action partly because the Attorney General dedicated monetary relief solely to restitution and the plaintiffs fell within the class of recipients.[9] The government recovered restitution on behalf of all Calandri Sonrise Farm workers, and the private plaintiffs were eligible for such relief because of their employment at Calandri. Because the government exclusively sought restitution, the court found that government represented the private plaintiffs’ interests since the Attorney General enforcement action compensated the plaintiffs for their alleged harms.
To the extent possible, a settling defendant should negotiate restitution that encompasses potential plaintiffs over other types of relief when settling with the Attorney General to optimize the success of a future claim preclusion defense. Where restitution constitutes a small portion of the overall monetary settlement, courts are less likely to find that the government represented the private litigants’ interests, whereas paying out more in restitution strengthens such a finding.[10] Thus, there is a tension between the instinct to limit the settlement amount and paying out more to the government to bar future claims. That said, if civil penalties cannot be avoided, a settling defendant should ensure that restitution relief is clearly delineated and remains a large part of the settlement to tip the scale toward the government representing the private plaintiff’s interests.
Conclusion
In order to mitigate the potential risk of costly follow-on litigation after the settlement of an Attorney General enforcement action, it is important for a party to consider structuring a government settlement with an eye toward strategic factors that can impact future preclusion arguments. Engaging in negotiations with the Attorney General regarding the statute underlying the government’s complaint, structuring the settlement to encompass potential private claims through a broad statement of facts, and pushing to pay restitution rather than injunctive relief or civil penalties, all bolster the efficacy of a future res judicata defense. Though such strategies may potentially increase the degree of factual disclosure and ultimate payout in settling government claims, the ability to preclude private litigation may very will lead to overall cost savings in the long term.
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[1] The California Attorney General often carves-out private litigation and private rights of action from the release of liability provision in a settlement. For example, in a recent settlement between the California Attorney General and Dermatology Industry Inc., the release of liability provision specifically excluded “any liability which any … Released Part[y] has or may have to individual consumers.” Stipulation for Entry of Final J. and Permanent Inj., Ex. 1, at 10-11, People v. Dermatology Indus., Inc., No. 37-2022-00009826-CU-MC-CTL (Cal. Super. Ct. 2022). Though this language may leave open the possibility for private follow-on litigation, it is not dispositive. Courts ultimately assess the claim preclusive effect of a government action through a three-part test: whether there is (1) the same cause of action; (2) final judgment on the merits; and (3) privity between the parties. Boeken v. Philip Morris USA, Inc., 48 Cal. 4th 788, 797 (2010).
[2] No. 16-C-11223, 2020 WL 5297045, at *6, *9 (N.D. Ill. Sept. 4, 2020).
[4] See Villalobos v. Calandri Sonrise Farms LP, No. CV 12-2615, 2012 WL 12886832, at *7 (C.D. Cal. Sept. 11, 2012) (barring a plaintiffs’ lawsuit for asserting injuries already redressed in a prior Attorney General enforcement action despite raising claims under different statutes).
[6] It may also be helpful to include a provision in the agreement to demonstrate that the Attorney General provided adequate representation to the citizens it purported to represent. See Taylor v. Sturgell, 128 S. Ct. 2161, 2176 (2008) (“[a] party’s representation of a nonparty is ‘adequate’ for preclusion purposes only if, at a minimum: (1) the interests of the nonparty and her representative are aligned, and (2) either the party understood herself to be acting in a representative capacity or the original court took care to protect the nonparty’s interests”). This can be demonstrated by noting that the Attorney General received some preliminary discovery sufficient to assess the adequacy of any proposed relief.
[7] See Payne v. Nat’l Collection Sys. Inc., 91 Cal. App. 4th 1037, 1045 (2001).
[8] See People v. Pac. Land Rsch. Co., 20 Cal. 3d 10, 17 (1977).
[9] 2012 WL 12886832, at *2, *7.
[10] See id.; cf. CS Wang & Assoc. v. Wells Fargo Bank, N.A., No. 16-C-11223, 2020 WL 5297045, at *6 (N.D. Ill. Sept. 4, 2020) (rejecting cy pres restitution as an indication of privity because it “constituted a small portion” of the overall settlement).
The following Gibson Dunn lawyers assisted in preparing this client update: Winston Chan, Charles Stevens, and Justine Kentla.
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, the authors, or any of the following members of the firm’s White Collar Defense and Investigations practice group in California:
Los Angeles
Nicola T. Hanna (+1 213-229-7269, [email protected])
Debra Wong Yang (+1 213-229-7472, [email protected])
Marcellus McRae (+1 213-229-7675, [email protected])
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas Fuchs (+1 213-229-7605, [email protected])
Eric D. Vandevelde (+1 213-229-7186, [email protected])
Palo Alto
Benjamin B. Wagner (+1 650-849-5395, [email protected])
San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8234, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn’s D.C. Circuit Foreign Sovereign Immunities Act Enforcement Update summarizes recent decisions within the D.C. Circuit that are relevant to the enforcement of judgments and arbitral awards against foreign states.
This edition summarizes:
(1) the D.C. Circuit’s decision in Estate of Levin v. Wells Fargo Bank, N.A., Nos. 21-7036, 21-7041, 21-7044, 21-7052, 21-7053, 2022 WL 3364493, addressing the attachment of electronic fund transfers (“EFTs”) by victims of state-sponsored terrorism;
(2) the district court’s decision in Chiejina v. Federal Republic of Nigeria, No. 21-2241, 2022 WL 3646377 (D.D.C.), addressing the proper framework that applies when a foreign state opposes enforcement of an arbitral award by disputing the existence of a valid arbitration agreement between the parties; and
(3) the district court’s decisions in ConocoPhillips Petrozuata B.V. v. Bolivarian Republic of Venezuela, No. 19-0683, 2022 WL 3576193 (D.D.C.) and Tethyan Copper Co. PTY Ltd. v. Islamic Republic of Pakistan, No. 19-2424, 2022 WL 715215 (D.D.C.), addressing the enforcement of arbitral awards issued pursuant to the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”).
D.C. Circuit Opens The Door For Victims Of Terrorism To Attach Blocked Assets Of State Sponsors Of Terrorism
On August 16, 2022, the D.C. Circuit broke with the Second Circuit and issued a significant decision for victims of terrorism in Estate of Levin v. Wells Fargo Bank, N.A., Nos. 21-7036, 21-7041, 21-7044, 21-7052, 21-7053, 2022 WL 3364493. Ruling in favor of terrorism victims represented by Matt McGill (argued) and Jessica Wagner of Gibson Dunn, the court unanimously reversed the district court’s dissolution of orders of attachment on nearly $10 million in blocked Iranian funds. The decision opens the door for victims of terrorism to attach blocked funds of state sponsors of terrorism under the Terrorism Risk Insurance Act (“TRIA”) more generally.
Background
Victims of terrorism often struggle to collect on judgments against state sponsors of terrorism. Even when those states’ funds surface in U.S. financial institutions and are blocked by sanctions laws, sovereign immunity can place them beyond the reach of judgment creditors. To address these enforcement challenges, Congress enacted TRIA, codified at 28 U.S.C. § 1610 Note. This law ensures that when funds of state sponsors of terrorism are blocked by sanctions, those funds remain available for “execution or attachment” by plaintiffs holding judgments against those states—”[n]otwithstanding any other provision of law.” TRIA, § 201(a).
In order for blocked funds to fall within the protection of TRIA, they must be “blocked assets of” the relevant state or its agency or instrumentality. TRIA, § 201(a). The Second Circuit, however, has adopted a narrow view of ownership in the context of EFTs, in which funds move quickly from one account to another through a series of intermediary banks. Relying on Article 4A of the Uniform Commercial Code (“UCC”), the Second Circuit has held that the only entity with an ownership interest in funds blocked at an intermediary bank is the entity immediately preceding that bank in the chain of electronic transfers—even if the chain of transfers was initiated by a state sponsor of terrorism. See Doe v. JPMorgan Chase Bank, N.A., 899 F.3d 152 (2d Cir. 2018). Until Levin, however, the D.C. Circuit had not decided this issue.
In Levin, two groups of terrorism victims—including nearly 90 victims represented by Gibson Dunn (the “Owens victims”)—who hold approximately $1 billion in judgments against the Islamic Republic of Iran obtained writs of attachment against funds blocked at Wells Fargo by the Office of Foreign Assets Control (“OFAC”) during an attempted EFT initiated by an agent of Iran seeking to purchase an oil tanker. The United States—which had earlier sought forfeiture of the same funds—intervened and moved to quash the writs. Adopting the Second Circuit’s approach in Doe, the district court granted the government’s motion, holding that the funds were not subject to attachment under TRIA because only the bank immediately preceding Wells Fargo in the chain of transfers held an ownership interest.
Decision
The D.C. Circuit unanimously reversed, rejecting the Second Circuit’s reliance on UCC Article 4A in favor of a broader rule grounded in tracing principles. The court explained—as Gibson Dunn had argued on behalf of the Owens victims—that “[w]hile [Article 4A] seeks to minimize disruptions in electronic funds transfers, OFAC’s blocking does the opposite—its purpose is to disrupt terrorist [EFTs].” Given this mismatch, the court concluded that Article 4A is a poor fit for determining ownership of blocked EFTs. Instead, the court held that ownership should be determined according to tracing principles: under TRIA, “terrorist victims may attach OFAC blocked electronic funds transfers if those funds can be traced to a terrorist owner,” and “no intermediary or upstream bank asserts an interest as an innocent third party.”
Judge Pillard filed a concurrence arguing that a tracing rule—which accounts for the funds’ path through the financial system—does not, on its own, accomplish the statutorily required showing of ownership. Judge Pillard would have adopted, “instead of or in addition to tracing,” the common law rule of agency that the Owens victims proposed, which would have treated banks as agents rather than owners when they effectuate EFTs originated by state sponsors of terrorism.
The D.C. Circuit’s decision has significant implications for judgment enforcement actions brought by victims of terrorism. It clears the way for victims to attach blocked funds that would have been unreachable under the Second Circuit’s rule, and effectuates Congress’ intent to make blocked funds of state sponsors of terrorism available—”notwithstanding any other provision of law”—to victims holding judgments against those states. By creating a circuit split, moreover, the decision may provide an avenue for terrorism victims to challenge the prevailing standard in the Second Circuit.
D.D.C. Reaffirms Arbitrability Disputes Do Not Implicate U.S. Courts’ Jurisdiction
On August 23, 2022, a district court in the D.C. Circuit issued a decision reaffirming that arbitrability disputes do not implicate subject-matter jurisdiction under the arbitration exception of the Foreign Sovereign Immunities Act (“FSIA”). See Chiejina v. Federal Republic of Nigeria, No. 21-2241, 2022 WL 3646377 (D.D.C. Aug. 23, 2022). In Chiejina, Nigeria opposed confirmation of an arbitration award against it on the grounds that one of the petitioners was not a party to the underlying agreement to arbitrate. Consistent with “every case” the district court has decided on this issue, the court determined that arbitrability disputes such as this one implicate the merits of the petition and not the court’s subject-matter jurisdiction under the FSIA. The court thus denied Nigeria’s motion to dismiss, which means that Nigeria’s arbitrability challenge will have to be litigated at the merits stage under a more deferential standard of review, rather than decided de novo as an issue of subject-matter jurisdiction.
Background
Petitioners seeking to confirm a foreign arbitral award issued against a foreign state typically must overcome two obstacles. First, under the FSIA, 28 U.S.C. § 1605(a), foreign states are presumptively immune from suit in U.S. court unless one of the FSIA’s enumerated exceptions to jurisdictional immunity is satisfied. One such exception, the FSIA’s arbitration exception, 28 U.S.C. § 1605(a)(6), provides for subject-matter jurisdiction in an action against a foreign state to “confirm an award made pursuant to” an arbitration agreement. Second, once jurisdiction is established, the petitioner must establish on the merits that the award is subject to confirmation under the applicable legal framework—typically, either the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) or the ICSID Convention. Both Conventions limit a court’s authority to review the merits of the arbitral award or question the determinations of the tribunal that issued it.
To avoid the New York and ICSID Conventions’ limits on judicial review, foreign states often attempt to frame their challenges to enforcement of an arbitral award as raising issues of subject-matter jurisdiction under the FSIA, rather than the merits. In particular, in a number of recent cases, foreign states have argued that the FSIA’s arbitration exception does not apply—and the state is therefore immune from suit—because there is no valid arbitration agreement between the parties. The D.C. Circuit and the D.D.C. have repeatedly held, however, that issues of “arbitrability”—including the existence of a valid arbitration agreement—go to the merits rather than to subject-matter jurisdiction under the FSIA. See, e.g., LLC SPC Stileks v. Republic of Moldova, 985 F.3d 871, 877-78 (D.C. Cir. 2021); Chevron Corp. v. Ecuador, 795 F.3d 200, 204 (D.C. Cir. 2015).
In Chiejina, petitioners are seeking to confirm and enforce under the New York Convention a $2.9 million award, plus interest, issued against the Federal Republic of Nigeria. Like the defendants in Stileks, Chevron, and Tethyan, Nigeria moved to dismiss for lack of subject-matter jurisdiction, arguing that the FSIA’s arbitration exception did not apply because one of the petitioners was not a party to the relevant arbitration agreement. Nigeria also argued that the court lacked personal jurisdiction because the petitioners failed to properly effect service of process consistent with the FSIA’s service provision, 28 U.S.C. § 1608(e).
Decision
The district court rejected Nigeria’s challenge to subject-matter jurisdiction, explaining that under the D.C. Circuit’s decisions in Stileks and Chevron, arbitrability “is a question that goes to the merits of whether the award should be confirmed pursuant to the New York Convention,” rather than “a basis on which to conclude that the Court lacks jurisdiction under the FSIA.” For that reason, Nigeria could not challenge subject-matter jurisdiction by arguing that petitioners’ claims in the arbitration were “not encompassed by the underlying agreement to arbitrate” because one of the petitioners was not a party to that agreement. Instead, the court indicated that it would address arbitrability—including the existence of a valid arbitration agreement between the parties—at the merits stage under the deferential standard for confirmation of foreign arbitral awards under the New York Convention. The decision thus reaffirms the principle that arbitrability is not an issue of subject-matter jurisdiction.
The court also addressed service of process. When a plaintiff enters into a “special arrangement” for service on a foreign state, the FSIA, 28 U.S.C. § 1608(a)(1), requires the plaintiff to attempt service through that arrangement before proceeding with other methods of service. In Chiejina, the underlying construction contract at issue in the arbitration included a notice provision specifying a method for serving notices related to the contract. Rather than follow that notice provision, the petitioner served Nigeria through a separate method applicable in the absence of a “special arrangement” between the parties. The court held that service was properly effected on Nigeria because the contractual notice provision applied only to notices that were “‘required or authorized’ by the Contract itself,” not service of process in the lawsuit. In doing so, the court reaffirmed the principle that a notice provision in an underlying contract creates a “special arrangement” for purposes of FSIA service “only where the language is ‘all encompassing’ rather than ‘confined to the contract or agreement at issue.’” Berkowitz v. Republic of Costa Rica, 288 F. Supp. 3d. 166, 173 (D.D.C. 2018) (quoting Orange Middle East & Africa v. Republic of Equatorial Guinea, No. 1:15-CV-849 2016 WL 2894857, at *4 (D.D.C. May 18, 2016)).
D.D.C. Reaffirms U.S. Courts’ Obligation To Enforce ICSID Awards
On August 19, 2022, a district court in the D.C. Circuit issued a decision reaffirming the obligation of U.S. courts to enforce arbitral awards issued pursuant to the ICSID Convention. See ConocoPhillips Petrozuata B.V. v. Bolivarian Republic of Venezuela, No. 1:19-cv-683, 2022 WL 3576193 (D.D.C. Aug. 19, 2022). Consistent with precedent and federal law, the court held that it had subject-matter jurisdiction under both the arbitration and waiver exceptions of the FSIA on account of Venezuela’s decision to join the ICSID Convention. In doing so, the court reaffirmed the principle that a foreign state that joins the ICSID Convention waives immunity to the enforcement of ICSID awards in U.S. court.
Background
The ICSID Convention is a treaty signed by the United States and 164 other nations of the world that provides a comprehensive framework for resolving investment disputes between participating nations and the private investors of other participating nations. The Convention provides for arbitration before an international tribunal and streamlined enforcement procedures for any resulting arbitral award. Each contracting party agrees to “recognize an award rendered pursuant to [the] Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.” ICSID Convention, art. 54(1). The United States has implemented this treaty obligation through legislation providing that an ICSID award “shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of the several States.” 22 U.S.C. § 1650a(a).
Despite this congressional mandate, foreign states often attempt to oppose enforcement of ICSID awards by challenging the U.S. court’s subject-matter jurisdiction under the FSIA. But the D.C. Circuit held in Tatneft v. Ukraine that when a foreign state joins a treaty that “contemplate[s] arbitration-enforcement actions in other signatory countries, including the United States”—as the ICSID Convention does—it “waives its immunity from arbitration-enforcement actions” under the FSIA. 771 F. App’x 9, 10 (D.C. Cir. 2019). The Second Circuit has applied this principle in the context of the ICSID Convention, holding that a foreign states “waive[s] its sovereign immunity” from enforcement of an ICSID award “by becoming a party to the ICSID Convention.” Blue Ridge Invs., L.L.C. v. Republic of Argentina, 735 F.3d 72, 84 (2d Cir. 2013). These decisions provide an alternative basis—in addition to the arbitration exception at issue in Chiejina—for establishing subject-matter jurisdiction in an action to enforce an ICSID award.
Decision
The petitioners in ConocoPhillips sought to confirm and enforce an ICSID award issued against the Bolivarian Republic of Venezuela. When Venezuela failed to timely respond to the enforcement petition, the petitioners sought entry of a default judgment, and the district court granted the motion. Although the motion was not opposed, the district court addressed subject-matter jurisdiction under the FSIA, holding that Venezuela was not immune from suit—and the court therefore had subject-matter jurisdiction—on two grounds: (1) the FSIA’s arbitration exception; and (2) the FSIA’s waiver exception, 28 U.S.C. § 1605(a)(1), which provides jurisdiction where a foreign state has waived its immunity to suit in U.S. court.
First, the court concluded that when a foreign state agrees to arbitration pursuant to the ICSID Convention, the arbitration exception permits enforcement even if the state subsequently withdraws from the Convention, so long as “the relevant rights and obligations of the parties arose before [the] denunciation took effect.” This holding means that a foreign state cannot evade its obligations to parties holding ICSID awards by withdrawing from the ICSID Convention.
Second, the court confirmed that the waiver exception also applied because “Venezuela implicitly waived its sovereign immunity with respect to suits to recognize and enforce ICSID awards by becoming a Contracting State to the ICSID Convention.” The court emphasized that “[t]o hold otherwise would be to disrespect Venezuela’s choice (at the time) to be a Contracting State, and it would diminish other Nations’ ability to attract investment in the future by committing themselves to resolving investment disputes through arbitration.” The court thus referenced one of the key purposes of the ICSID Convention: By providing investors with a remedy through arbitration and strong guarantees that any resulting award will be subject to enforcement, the Convention helps contracting parties attract foreign investment. ConocoPhillips thus strengthens the chorus of decisions recognizing that parties to the ICSID Convention and other arbitration enforcement treaties waive their immunity from enforcement of arbitral awards issued pursuant to those treaties.
D.D.C. Clears The Way For Landmark $6.5 Billion Judgment Enforcing Arbitration Award Against Pakistan
On March 10, 2022, a district court in the D.C. Circuit issued a groundbreaking decision on behalf of Tethyan Copper Company PTY Limited (“Tethyan”), an Australian mining company represented by Matt McGill, Robert Weigel, Jason Myatt, and Matt Rozen of Gibson Dunn in its long-running efforts to enforce a $4 billion plus interest arbitration award issued against Pakistan pursuant to the ICSID Convention. Tethyan Copper Co. PTY Ltd. v. Islamic Republic of Pakistan, No. 1:19-cv-2424, 2022 WL 715215 (D.D.C. Mar. 10, 2022). In its opinion and accompanying order, the court denied Pakistan’s motion to dismiss or, in the alternative, to stay enforcement proceedings, and directed the parties to submit a proposed judgment, clearing the way for the entry, after interest and costs, of a more than $6.5 billion judgment as of this writing, which would be one of the largest judgments ever entered by the D.C. federal district court. The decision reinforces three principles concerning the enforcement of ICSID awards.
First, the decision emphatically rejects the recurring argument that enforcement of such awards should universally be stayed while the losing party tries to vacate or set aside the award in parallel proceedings. Under the ICSID Convention, only an ICSID tribunal or committee—not the courts of any contracting state—may decide whether an award should be set aside, either through revision by the original tribunal pursuant to Article 51 of the Convention, or through annulment by an ad hoc committee pursuant to Article 52 of the Convention. Article 54 of the Convention expressly provides that ICSID awards are immediately enforceable as “final judgment[s]” even while revision or annulment proceedings are pending, and it tasks the ICSID tribunal or committee overseeing those proceedings with deciding whether a stay of enforcement is appropriate.
In TCC, Pakistan sought both revision and annulment, but the tribunal and committee overseeing those proceedings allowed enforcement to proceed. Pakistan then moved in the district court to stay the U.S. enforcement proceedings. But the district court rejected that request. The court acknowledged some prior decisions from the same district that had stayed enforcement proceedings pending set aside proceedings. In the court’s view, however, the interest in judicial economy and the potential hardship to Tethyan from a stay clearly outweighed any potential hardship to Pakistan from denying a stay. Tethyan had waited over a decade for compensation, and the court concluded that “[a] stay only prolongs justice denied.”
Second, the court rejected the state’s attempt to relitigate in enforcement proceedings jurisdictional arguments already raised before and rejected by the arbitral tribunal. Specifically, Pakistan had challenged the tribunal’s jurisdiction on the ground that there was no valid arbitration agreement, because Pakistan purportedly had not properly consented to arbitration under the ICSID Convention. The tribunal rejected the argument. In the subsequent enforcement proceedings, Pakistan attempted to renew the same objection—that there was no valid arbitration agreement between the parties—as a challenge both to the district court’s jurisdiction under the FSIA and its authority to grant full faith and credit to the award. Relying on the above-described principles from the D.C. Circuit’s decisions in Stileks and Chevron, however, the TCC court refused to second-guess the tribunal’s rulings on arbitrability—including the existence of a valid agreement to arbitrate. The court held that once such issues have been resolved in arbitration, they cannot be revisited through a collateral attack on the tribunal’s rulings, whether in the guise of a challenge to jurisdiction under the FSIA or to the merits of the enforcement petition.
Finally, the court’s order, directing the parties to promptly meet and confer and submit a proposed judgment, with interest, recognizes that once the court has determined that it has subject-matter jurisdiction to enforce an ICSID award, the award holder is entitled to prompt entry of judgment as soon as interest is calculated. (In an effort to facilitate settlement, the court later granted the parties’ joint request for an extension of time to submit a proposed judgment until December 15, 2022.) If followed elsewhere, the court’s order may greatly streamline efforts by future litigants to enforce arbitral awards against foreign sovereigns in U.S. courts.
Gibson Dunn’s Judgment and Arbitral Award Enforcement Practice Group offers top-tier international arbitral award and judgment enforcement strategies and solutions, deep proficiency in cross-border litigation and international arbitration, and best-in-class advocacy that not only applies the law, but, time and again, has crafted and shaped new law to achieve our clients’ objectives.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the D.C. Circuit. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Judgment and Arbitral Award Enforcement practice group, or the following:
Matthew D. McGill – Co-Chair, Washington, D.C. (+1 202-887-3680, [email protected])
Robert L. Weigel – Co-Chair, New York (+1 212-351-3845, [email protected])
Jason Myatt – New York (+1 212-351-4085, [email protected])
Matthew S. Rozen – Washington, D.C. (+1 202-887-3596, [email protected])
This client update was prepared by Matt McGill, Robert Weigel, Jason Myatt, Matt Rozen, Jessica Wagner, Jeff Liu, Luke Zaro, and Sam Speers.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Washington, D.C. partner Judith Alison Lee is the author of “Collateral damage – US sanctions target the secondary market in Russian stocks and bonds” [PDF] published by Financier Worldwide in its September 2022 issue.
In an August 11, 2022 letter to the Department of Justice (“DOJ”), Senators Elizabeth Warren (D-Mass) and Ben Ray Lujan (D-N.M.) signaled renewed congressional interest in the Government’s right to suspend or debar government contractors and federal financial assistance recipients from obtaining new business, and pressed for DOJ to boost its use of this administrative remedy in connection with its prosecution of criminal or fraud cases.
The bases for discretionary suspension and debarment include “making false statements” and “any other offense indicating a lack of business integrity or business honesty.”[1] It is no surprise, then, that companies subject to investigations, litigation, and resolutions under the civil False Claims Act (“FCA”) often find themselves faced with the prospect of suspension or debarment from future government work—even when they dispute the merits of the FCA allegations in question.
In most cases, government agencies have significant discretion to decide whether there are sufficient grounds to exclude an entity from receiving government contracts or financial assistance awards. DOJ has traditionally taken an agnostic approach to the interplay between its FCA investigations and the suspension and debarment authority of the government agency affected by the underlying conduct. The Warren-Lujan letter, however, presses DOJ to take a more activist role in suspending or debarring not just the companies it is pursuing as “corporate criminals,” but companies that are the subject of “corporate fraud cases” like those under the civil FCA.
While DOJ’s response to this congressional outreach remains to be seen, any attempt by the Department to address the Senators’ concerns as articulated in the letter would represent a meaningful change in policy and would undoubtedly affect companies’ evaluation of whether to litigate or settle FCA claims with the Government. Companies subject to FCA investigations, litigation, and resolutions should be particularly mindful of how they approach mitigating the risk of suspension or debarment in the context of DOJ investigations and resolutions, in light of the Warren-Lujan letter.
Discretionary Suspension and Debarment
The ability to compete for new Government work is critical to the success of any government contractor. So too for companies that depend on Government funding – whether directly, through government grants or cooperative agreements, or indirectly, through state, local, or educational institution projects.
Suspension and debarment are administrative actions taken by the U.S. Government to disqualify a contractor from contracting with or receiving funding from the Federal Government based upon the Government’s determination that the contractor is not “presently responsible” (i.e., that it lacks the necessary integrity to be a business partner of the Government). Suspensions and debarments are not meant to be employed by the Government “for purposes of punishment.”[2] Notably, suspending and debarring officials (“SDOs”) often have complete discretion as to whether to exercise the right to suspend or debar.[3] Even when a Government agency finds some past violation that could provide a basis for suspension or debarment, an agency SDO is not required to, and should not, suspend or debar a contractor that is “presently responsible.” In addition, an SDO could also decline to suspend or debar a contractor, even where grounds exist to do so, because it would not be in the Government’s best interest.[4]
The grounds for suspension and for debarment are substantially similar to one another, with different evidentiary thresholds. Both the suspension and debarment frameworks permit the exclusion of a company based on “adequate evidence” (suspension) or a civil judgment (debarment) for civil fraud, or other conduct that affects an entity’s present responsibility, or an offense that indicates a lack of business integrity or business honesty.[5]
FCA Violations as Grounds for Suspension or Debarment
The FCA is the government’s primary tool for addressing alleged fraud related to government funds. Under the FCA, both DOJ and would-be whistleblowers (who may file FCA lawsuits on the government’s behalf and obtain a percentage of any recovery) can pursue lawsuits against companies that do business with the government, and if successful, obtain treble damages, per-claim penalties, and attorneys’ fees and costs.
The FCA creates liability for any party that submits a false claim for payment to the federal government, or who makes a false statement that is material to a false claim. 31 U.S.C. § 3729(a)(1)(A), (B). The Government often takes the position that a violation of contract requirements can create fraud liability under the FCA if it is done with knowledge and is material to payment. Under the “reverse” false claims provision, liability also exists for anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” Id. § 3729(a)(1)(G).
Therefore, the potential bases for FCA liability substantially overlap with the grounds for potential suspension or debarment—i.e., “making false statements” and “any other offense indicating a lack of business integrity or business honesty.”[6] Accordingly, the consequences of being found liable in an FCA case can be catastrophic, resulting in suspension or debarment from government contracts or exclusion from participation in government programs.
As a matter of policy, DOJ attorneys are required to coordinate with the Government’s relevant criminal, civil, regulatory, and administrative attorneys when initiating an FCA suit or investigation, including with regard to suspension and debarment.[7] A 2012 DOJ memorandum, for example, stresses the importance of “[e]ffective and timely communication with representatives of the agency . . . including suspension and debarment authorities,” to ensure that appropriate remedies are pursued at the correct time.[8] The Interagency Suspension and Debarment Committee (“ISDC”) is tasked with overseeing and coordinating all executive agencies’ implementation of suspension and debarment regulations.[9] One such coordination activity involves the designation of a “lead” agency where a case may affect the missions of multiple agencies.[10] Under the current system, the lead agency is the ultimate decision maker as to what suspension or debarment action, if any, will be taken.
The Warren-Lujan Letter
The Warren-Lujan letter to Attorney General Merrick Garland and Deputy Attorney General Lisa O. Monaco criticizes DOJ for not using its authority to suspend or debar “corporate criminals” from the government contracting process, and urges DOJ to “pursue more robust use of its suspension and debarment authority.” Notably, the letter advocates for DOJ to use its suspension and debarment authority even for “companies that it does not directly do business with,” rather than relying on the contracting or lead agencies to pursue suspension or debarment, and calls for DOJ to “adopt policies that call for [DOJ] prosecutors to systematically refer corporate misconduct to” DOJ’s own “debarring officials for review in all appropriate cases.”
Senators Warren and Lujan propose four ways in which DOJ should “expand its use of debarment”:
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- Use debarment authority for corporate entities, not just individuals.
- Use debarment government-wide (i.e., DOJ should suspend or debar entities that contract with any federal agency, rather than just its own contractors).
- Consider debarment for all corporate misconduct, including “defraud[ing] the government…[t]ax evasion, bribery, unsatisfactory performance, and other harmful conduct,” “in any contract—whether the government was harmed or not….”
- Use suspension authority while an investigation is pending.
The Senators’ letter betrays a failure to appreciate several critical facets of the suspension and debarment regime—particularly the non-punitive nature of such exclusions, the focus on present responsibility rather than past misconduct, and the primacy of the government’s interest in making such exclusion decisions. Moreover, these proposals introduce the possibility for a sea change in DOJ policy that would have dire impacts for companies subject to FCA prosecution.
Implications for FCA Defendants
If adopted as a matter of practice or policy by DOJ, the Warren-Lujan approach could have significant effects for companies facing FCA lawsuits and investigations.
The potential for FCA liability is already a significant risk for government contractors in light of the potential for massive treble damage awards and civil penalties. Indeed, FCA settlements and judgments total billions of dollars every year, with individual settlements often reaching tens or even hundreds of millions of dollars. But debarment or suspension for companies that depend on government business would be ruinous, because those penalties would effectively put companies out of business altogether. The Warren-Lujan approach to suspension and debarment significantly heightens these risks, and makes resolving FCA suits considerably more difficult in several regards:
- Imposing a Suspension During an Investigation May Force Unfavorable Settlements. In many cases, companies settle or otherwise resolve FCA lawsuits before trial as part of a negotiated resolution, in part precisely because of the risk that an adverse judgment on the merits could result in debarment. This is so even where companies dispute the merits of the FCA claim but wish to avoid the cost and uncertainty of a trial and the resulting collateral consequences of suspension or debarment. Through a negotiated resolution, companies can ensure there is no formal judgment of a false statement, and negotiate a path forward that does not include any suspension or debarment, for example through entering into a Corporate Integrity Agreement (CIA) or other administrative agreement. But the Warren-Lujan approach would encourage DOJ to increase its use of its authority to suspend contractors while an investigation is pending, which would significantly increase pressure on companies to quickly settle cases. FCA investigations can last years, and few companies could weather a multi-year suspension while defending against an FCA investigation. Moreover, uncertainties regarding when an investigation might result in “adequate evidence” to suspend an entity may lead even companies that have strong defenses and have done nothing wrong to enter into hasty settlements, without a full opportunity to defend themselves, to avoid an interim suspension – though as discussed below, the resolution itself may still raise the specter of exclusion.
- Government-Wide, Corporate-Level Suspensions and Debarment Could Disincentivize Any Settlements Whatsoever. Even in cases where debarment or suspension is on the table, FCA defendants typically negotiate to keep those penalties carefully circumscribed. For example, companies may engage with agency SDOs early in settlement negotiations in an effort to limit any suspension or debarment to individual wrongdoers or corporate divisions (as opposed to the entire company). The Warren-Lujan approach would make this far more difficult by calling for DOJ to impose suspensions and debarments at the corporate level. When broad, unlimited penalties of that nature are on the table, a contractor may be unable or unwilling to even consider a negotiated resolution, since it would be a death knell to most government contractors if the corporation was barred from all government business.
- Supplanting Lead Agency Discretion with DOJ’s Could Result in Suspensions or Debarments That Are Not in the Government’s Interest. Furthermore, by advocating for DOJ to pursue suspension or debarment directly—instead of working through the lead contracting agency—the Warren-Lujan approach ignores an important consideration in the use of suspension and debarment. Agencies that work directly with contractors are best placed to understand the work those contractors do, and often rely deeply on the contractors to compete for new work to serve the agencies’ missions. Those agencies are therefore attuned to the practical, disruptive implications of suspending or debarring a contractor. Indeed, the suspension and debarment regulations specifically contemplate that SDOs must consider the government’s interest in making suspending or debarring decisions.[11] Moreover, those agencies are also in the best position to assess whether a contractor is “presently responsible.” DOJ attorneys are likewise supposed to take into account “the adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of a charging decision” when evaluating corporate settlements,[12] but the Warren-Lujan approach would have DOJ pursue a suspension and debarment decision apparently with little regard for either corporate compliance improvements or whether an agency is “presently responsible” despite past misconduct. Supplanting an agency’s judgment with DOJ’s judgment could mean that suspension and debarment decisions are made without a full appreciation of these practical realities, and without consideration of the governmental interests.
Although whether and to what extent DOJ will heed the Warren-Lujan admonitions remains to be seen, clients facing FCA investigations, litigation, and potential resolutions must consider how a possible shift in Department policy could impact the appropriate steps to be taken to mitigate against the corporate “death sentence” of suspension or debarment.
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[1] FAR 9.406-2; FAR 9.407-2; 2 C.F.R. § 180.800.
[2] FAR 9.402(b); 2 C.F.R. § 180.125(c).
[3] FAR 9.406-1(a), 9.407-1(a); 2 C.F.R. § 180.700; 2 C.F.R. § 180.800.
[4] FAR 9.406; see 2 C.F.R. § 180.845(a).
[5] See FAR 9.406-2; FAR 9.407-2; 2 C.F.R. § 180.800.
[6] Id.
[7] Attorney General, Memorandum for All U.S. Attorneys, Director of the Federal Bureau of Investigation, All Assistant U.S. Attorneys, All Litig. Divs., and All Trial Attorneys, Coordination of Parallel Criminal, Civil, Regulatory, and Admin. Proceedings (Jan. 30, 2012), available at https://www.justice.gov/jm/organization-and-functions-manual-27-parallel-proceedings.
[8] Id.
[9] See Exec. Order No. 12549, Debarment and Suspension, 51 Fed. Reg. 6370 (Feb. 21, 1986).
[10] See Interagency Suspension and Debarment Committee, “About the ISDC,” available at https://www.acquisition.gov/isdc-home.
[11] FAR 9.406; see 2 C.F.R. § 180.845(a).
[12] U.S. Dep’t of Justice, Justice Manual § 9-28.300 (Dec. 2018), https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.300.
The following Gibson Dunn lawyers assisted in the preparation of this alert: Jonathan M. Phillips, Lindsay M. Paulin, Joseph D. West, and Reid F. Rector.
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, the authors, or any member of the firm’s False Claims Act/Qui Tam Defense, Government Contracts, or White Collar Defense and Investigations practice groups.
Washington, D.C.
Jonathan M. Phillips – Co-Chair, False Claims Act/Qui Tam Defense Group (+1 202-887-3546, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])
Joseph D. West (+1 202-955-8658, [email protected])
Robert K. Hur (+1 202-887-3674, [email protected])
Geoffrey M. Sigler (+1 202-887-3752, [email protected])
Lindsay M. Paulin (+1 202-887-3701, [email protected])
San Francisco
Winston Y. Chan – Co-Chair, False Claims Act/Qui Tam Defense Group (+1 415-393-8362, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
New York
Reed Brodsky (+1 212-351-5334, [email protected])
Mylan Denerstein (+1 212-351-3850, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Brendan Stewart (+1 212-351-6393, [email protected])
Casey Kyung-Se Lee (+1 212-351-2419, [email protected])
Denver
John D.W. Partridge (+1 303-298-5931, [email protected])
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Reid Rector (+1 303-298-5923, [email protected])
Dallas
Robert C. Walters (+1 214-698-3114, [email protected])
Andrew LeGrand (+1 214-698-3405, [email protected])
Los Angeles
Nicola T. Hanna (+1 213-229-7269, [email protected])
Timothy J. Hatch (+1 213-229-7368, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
James L. Zelenay Jr. (+1 213-229-7449, [email protected])
Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Los Angeles partner Perlette Jura and of counsel Miguel Loza Jr. are the authors of “United States: Enforcement of Judgments in Civil and Commercial Matters” [PDF] published by The Legal 500 in August 2022.
Following a three-month consultation period, the Securities and Futures Commission’s (“SFC”) Code of Conduct (“Code”) provision, paragraph 21, has come into effect on August 5, 2022.[1] The provision outlines new conduct requirements for intermediaries carrying out bookbuilding and placing activities in equity and debt capital market transactions, including, the introduction of enhanced obligations applicable to an Overall Coordinator (“OC”). This client alert discusses these new requirements and how they could raise certain sanctions-related questions for the OC as they consider their new obligations under the Code during their review of the order book.
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- The Role of the Overall Coordinator
The OC is the “head of syndicates” responsible for the overall management of the share or debt offering, coordination of bookbuilding or placing activities, and exercise control over bookbuilding activities and market allocation recommendations to the issuer. In order to address deficiencies in bookbuilding and allocation practices, the SFC has expanded the role of an OC in paragraph 21 of the Code.
In particular, in its Consultation Paper on (i) the Proposed Code of Conduct on Bookbuilding and Placing Activities in Equity Capital Market and Debt Capital Market Transactions and (ii) the “Sponsor Coupling” Proposal (“Consultation Paper”), the SFC highlighted the following key concerns:[2]
- Inflated demand: The SFC observed practices where intermediaries knowingly placed orders in the order book which they knew had been inflated. There had also been instances where heads of syndicate disseminated misleading book messages which overstated the demand for an Initial Public Offering (“IPO”). The SFC considered that these inflated orders undermine the price discovery process and can mislead investors.
- Lack of transparency: In debt capital market bookbuilding activities, the SFC considered the use of “X-orders,” which are orders where the identities of investors are concealed, as problematic. In these cases, since investors’ identities are only known to the syndicate members who place the orders and to the issuers, the SFC was concerned that duplicated, or potentially fictitious orders might not be identified.
- Lack of documentation: Heads of syndicates did not properly maintain records of incoming client orders, important discussions with the issuer or the rest of the syndicate, or the basis for making allocation recommendations. The SFC criticized this practice as it undermined the integrity of the book-building process, which is meant to be the keeping of contemporaneous records to establish the position in case of any dispute.
In order to plug the gaps in the bookbuilding process identified above, the SFC has expanded the role of an OC to cover additional responsibilities, such as, consolidating orders from all syndicate members in the order book, taking reasonable steps to identify and eliminate duplicated orders, inconsistencies and errors, ensuring that identities of all investor clients are disclosed in the order book (except for orders placed on an omnibus basis), and making enquiries with capital market intermediaries[3] if any orders appear to be unusual or irregular.[4]
The OC is under an obligation to advise the issuer on pricing and allocation matters. With respect to allocation, the OC is expected to develop and maintain an allocation policy which sets out the criteria for making allocation recommendations to the issuer, for example, the policy should take account into the types, spread, and characteristics of targeted investors, as well as the issuer client’s objectives, preferences and recommendations. The OC should then make allocation recommendations in accordance with the policy.[5] In practice, the OC’s powers are limited to providing recommendations or advice to the issuer on a best efforts basis, and do not go as far as preventing or rejecting an allocation. The final decision on whether to make an allocation lies with the issuer. Therefore, where an issuer decides not to adopt the OC’s advice or recommendations, the OC should explain the potential concerns of doing so (i.e., that the issuer’s decision may lead to a lack of open market, an inadequate spread of investors, or may negatively affect the orderly and fair trading of such shares in the secondary market), and advise the issuer against the decision.[6]
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- Potential Sanctions Considerations
These new requirements, however, which aimed to plug the gaps in the bookbuilding process as noted above, may raise new risks or questions for OCs in other regulatory areas, namely whether there may be implications for the OC in terms of its compliance and legal obligations under the various economic and trade sanctions laws and regulations to which the OC may also be subject, such as those issued by the United Nations, United States (“U.S.”), European Union (“EU”), United Kingdom (“UK”) and others. Specifically, because OCs will now be made aware of the identities of the ultimate investors in an allocation, a financial institution operating as an OC may have concerns about being able to perform its duties under the SFC requirements in cases where an investor has been identified as a possible subject of sanctions under laws that are applicable to the OC.
For example, under U.S. sanctions administered and enforced by the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), U.S. financial institutions and their foreign branches are generally prohibited from engaging in, approving or otherwise facilitating transactions with individuals and entities designated to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List. The contours of what kind of activity constitutes prohibited “facilitation” under U.S. sanctions law is not completely defined and is largely fact dependent. Thus, it is unclear whether or not, under U.S. law, the subsequent actions a U.S. financial institution might perform in its role as OC after an investor has been identified as a potential sanctioned person could run afoul of U.S. sanctions regulations. Similar issues may exist under the laws of other jurisdictions such as the EU or UK, depending on the jurisdictional hooks over the OC in question.
Whether or not there is risk here will depend on a variety of factors, including but not limited to: the precise nature of the OC’s actions subsequent to the identification of a sanctions concern (is the OC “approving” or “recommending” action, merely passing along information, recusing itself, etc.); the role, if any, of the OC in actual transactions involving the sanctioned person; the ability of the OC to affect or direct the actual allocation; the precise nature of the sanctions in question; and potentially any contractual protections that may be in place in the underlying operative agreements governing the OC’s role.
In addition, OCs will need to weigh the extent to which any potential sanctions obligations, including anti-boycott / blocking statute related, could conflict with the OC’s obligations under the Code, to provide adequate allocation advice to the issuer with due skill, care and diligence.[7]
Our view is that ultimately both sets of risks and obligations can be effectively managed and met, and we are working with clients and industry to understand and address the impact of these new regulations on the policies and procedures of financial institutions serving in the OC capacity.
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[1] Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (August 2022), published by the Securities and Futures Commission, https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for-persons-licensed-by-or-registered-with-the-securities-and-futures-commission/Code_of_conduct_05082022_Eng.pdf.
[2] Consultation Paper on (i) the Proposed Code of Conduct on Bookbuilding and Placing Activities in Equity Capital Market and Debt Capital Market Transactions and (ii) the “Sponsor Coupling” Proposal (February 2021), published by the Securities and Futures Commission, https://apps.sfc.hk/edistributionWeb/api/consultation/openFile?lang=EN&refNo=21CP1.
[3] “Capital Market Intermediaries” is defined as licensed or registered persons that engage in capital market activities, namely bookbuilding and placing activities and any related advice, guidance or assistance. See paragraph 21.1.1 of the Code.
[4] Paragraph 21.4.4(a)(i) of the Code.
[5] Paragraph 21.4.4(c) of the Code.
[6] Paragraph 21.4.2(c) of the Code.
[7] Paragraph 21.4.2(a) of the Code.
The following Gibson Dunn lawyers prepared this client alert: William Hallatt, David Wolber, Becky Chung, Richard Roeder and Jane Lu*.
If you wish to discuss any of these developments, please contact any of the authors of this alert, the Gibson Dunn lawyer with whom you usually work or any of the following leaders and members of the firm’s Global Financial Regulatory or International Trade teams:
Global Financial Regulatory Group:
William R. Hallatt – Co-Chair, Hong Kong (+852 2214 3836, [email protected])
Michelle M. Kirschner – Co-Chair, London (+44 (0) 20 7071 4212, [email protected])
Jeffrey L. Steiner – Co-Chair, Washington, D.C. (+1 202-887-3632, [email protected])
Emily Rumble – Hong Kong (+852 2214 3839, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])
Becky Chung – Hong Kong (+852 2214 3837, [email protected])
Chris Hickey – London (+44 (0) 20 7071 4265, [email protected])
Martin Coombes – London (+44 (0) 20 7071 4258, [email protected])
International Trade Group:
Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
David A. Wolber – Hong Kong (+852 2214 3764, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])
Europe
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Patrick Doris – London (+44 (0) 207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33 115, [email protected])
United States
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Annie Motto – Washington, D.C. (+1 212-351-3803, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])
* Jane Lu is a trainee solicitor working in the firm’s Hong Kong office who is not yet admitted to practice law.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On August 25, 2022, the Securities and Exchange Commission (“SEC” or “Commission”), in a 3-to-2 vote, adopted final rules implementing the pay versus performance disclosure requirement called for under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The final rules require proxy statements or information statements that include executive compensation disclosures to include a new compensation table setting forth for each of the five most recently completed fiscal years, the “executive compensation actually paid” (as defined in the final rule) to the company’s principal executive officer (“PEO”) and the average of such amounts for the company’s other named executive officers (“NEOs”), total compensation as disclosed in the Summary Compensation Table for the PEO and the average of such amounts for the other NEOs, total shareholder return (TSR), peer group TSR, net income and a company-selected financial measure that represents the “most important financial measure” used by the company to link compensation actually paid to company performance. In addition, based on the information set forth in the new table, a company must provide a clear description of the relationship between each of (1) the executive compensation actually paid to the PEO and to the non-PEO NEOs and the company’s TSR, the company’s net income and the company-selected financial measure over the previous five years, and (2) the company’s TSR and the TSR of a peer group chosen by the company. Finally, the rule requires companies to provide a list of three to seven other financial performance measures that the company determines are its most important measures “used to link compensation actually paid . . . to company performance.”
The final rule release is available here, and the SEC’s pay versus performance fact sheet is available here. The final rule will become effective 30 days after its publication in the Federal Register, and companies will be required to comply with the requirements in proxy and information statements that are required to include executive compensation disclosures for fiscal years ending on or after December 16, 2022. Set forth below is a summary of the final rules and considerations for companies.
Summary of the Final Rules
New Tabular Disclosure under Item 402(v) of Regulation S-K. Section 953(a) of the Dodd-Frank Act instructs the Commission to adopt rules requiring companies to provide “a clear description of . . . information that shows the relationship between executive compensation actually paid and the financial performance of the issuer.” To address this mandate, Item 402(v) of Regulation S-K will now require companies to include a new table (set forth below) in any proxy statement or information statement setting forth executive compensation disclosure, reporting:
- The “executive compensation actually paid” to the PEO and the total compensation reported in the Summary Compensation Table for the PEO. If more than one person served as the PEO during the covered fiscal year, then each PEO would be reported separately in additional columns with information provided for the applicable year such individual was a PEO.
- An average of the “executive compensation actually paid” to the remaining NEOs and an average of the total compensation reported in the Summary Compensation Table for the remaining NEOs. Footnote disclosure of the names of individual NEOs and the years in which they are included is also required.
- The company’s cumulative annual TSR calculated and presented as the dollar value of an investment of $100 (i.e., in the same manner as in the Stock Price Performance Graph required under Item 201(e) of Regulation S-K).
- The cumulative annual TSR of the companies in a peer group chosen by the company (which must be the same index or peer group used for the purposes of Item 201(e) or, if applicable, the peer group used for purposes of the Compensation Discussion and Analysis disclosures). Footnote disclosure of any year-over-year changes in peer group constituent companies as well as the reasons for any such change will be required along with a comparison of the issuer’s cumulative annual TSR with that of both the new and prior fiscal year peer group.
- The company’s net income for the fiscal year calculated in accordance with U.S. GAAP.
- A financial performance measure chosen by the company (the “Company-Selected Measure”) that the company has determined represents the “most important financial performance measure” that the company uses to link compensation actually paid to the NEOs to company performance for the most recently completed fiscal year. If such measure is a non-GAAP measure, disclosure must be provided as to how the number is calculated from the issuer’s audited financial statements, but a full reconciliation is not required.
PAY VERSUS PERFORMANCE
|
Year |
Summary Compensation Table Total for PEO |
Compensation Actually Paid to PEO |
Average Summary Compensation Table Total for Non-PEO NEOs |
Average Compensation Actually Paid to Non-PEO NEOs |
Value of Initial Fixed $100 Investment Based On: |
Net Income |
[Company-Selected Measure] |
|
|
Total Shareholder Return |
Peer Group Total Shareholder Return |
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The table is required to set forth this information for each of the five most recently completed fiscal years, subject to a transition rule and certain exceptions described below.
The final rule requires companies to provide disclosure accompanying the table that “use[s] the information provided in the table . . . to provide a clear description of the relationship” between:
- Executive compensation actually paid to the PEO and the other NEOs and the company’s TSR across the last five fiscal years;
- Executive compensation actually paid to the PEO and the other NEOs and the company’s net income across the last five fiscal years;
- Executive compensation actually paid to the PEO and the other NEOs and the Company-Selected Measure; and
- The company’s TSR and the peer group TSR.
These descriptions could include narrative or graphic disclosure (or a combination of the two). If any additional, voluntary performance measures are included in the table, the disclosure must also include a description of the relationship between executive compensation actually paid to the PEO and the other NEOs and the additional performance measure across the last five fiscal years.
In addition, under the final rule companies must provide a tabular list of three to seven other financial performance measures that the company has determined represent the most important financial performance measures used to link compensation actually paid for the most recent fiscal year to company performance. So long as at least three of the measures are financial performance measures, the company may include non-financial performance measures in the tabular list. If fewer than three financial performance measures were used by the company to link compensation and performance, such list must include all such measures, if any, that were used.
Companies will also be required to tag each value disclosed in the table, block-text tag the footnote and relationship disclosure, and tag specific data points within the footnote disclosures in interactive data format using eXtensible Business Reporting Language, or XBRL.
“Executive Compensation Actually Paid.” Under the final rule, “executive compensation actually paid” is somewhat of a misnomer, as it includes both amounts paid or earned, as well as incremental accounting valuations for unvested equity awards that may never be earned or that could have different intrinsic values when earned. For these purposes, “executive compensation actually paid” is defined as the total compensation reported in the Summary Compensation Table, with adjustments made to the amounts report for pension values and equity awards.
Pension Values. With respect to pension values, the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans will be deducted from the reported total compensation, and instead “executive compensation actually paid” will include both (1) the actuarially determined service cost for services rendered by the executive during the applicable year (“service cost”) and (2) the entire cost of benefits granted in a plan amendment (or initial plan adoption) during the applicable year that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or adoption (“prior service cost”), in each case, calculated in accordance with U.S. GAAP. If the prior service cost is a negative amount as a result of an amendment that reduces benefits relating to prior periods of service, then such amount would reduce the compensation actually paid.
Equity Awards. With respect to the stock award and option award values, the amounts included in the Summary Compensation Table, representing the grant date fair value, will be deducted, and the following adjustments will be made, in each case, with fair value calculated in accordance with U.S. GAAP:
- For awards granted in the covered fiscal year:
- add the year-end fair value if the award is outstanding and unvested as of the end of the covered fiscal year; and
- add the fair value as of the vesting date for awards that vested during the year.
- For any awards granted in prior years:
- add or subtract any change in fair value as of the end of the covered fiscal year compared to the end of the prior fiscal year if the award is outstanding and unvested as of the end of the covered fiscal year;
- add or subtract any change in fair value as of the vesting date (compared to the end of the prior fiscal year) if the award vested during the year; and
- subtract the amount equal to the fair value at the end of the prior fiscal year if the award was forfeited during the covered fiscal year.
- Add the dollar value of any dividends or other earnings paid on stock awards or options in the covered fiscal year prior to the vesting date that are not otherwise reflected in the fair value of such award or included in any other component of total compensation for the covered fiscal year.
Footnote disclosure is required to identify the amount of each adjustment, as well as valuation assumptions used in determining any equity award adjustments that are materially different from those disclosed as of the grant date of such equity awards.
Filings and Timing of Disclosures. Companies will be required to include the pay versus performance disclosure in all proxy and information statements that are required to include executive compensations disclosures under Item 402 of Regulation S-K for fiscal years ending on or after December 16, 2022. Under the transition rules, companies will only be required to provide disclosure for three years in the first proxy or information statement in which disclosure is provided, adding one additional year in each of the two subsequent years. In addition, disclosure is only required for fiscal years in which the company was a reporting company. The Item 402(v) disclosure will be treated as “filed” for the purposes of the Exchange Act and will be subject to the say-on-pay advisory vote under Exchange Act Rule 14a-21(a).
Issuers Subject to the Final Rules. The final rules require pay versus performance disclosure for all companies other than emerging growth companies (which are statutorily exempt from the requirements pursuant to the Jumpstart Our Business Startups Act), foreign private issuers, and registered investment companies.
Smaller reporting companies are subject to scaled disclosure requirements. They are not required to provide peer group TSR or any Company-Selected Measure, and the calculation of executive compensation actually paid may exclude amounts relating to pensions. In addition, smaller reporting companies are only required to provide disclosure for the most recent three years and are allowed initially to provide disclosure for two years, adding one additional year in the next year. Smaller reporting companies also are afforded a transition period with respect to XBRL requirements and are not required to provide inline XBRL data until the third filing in which it provides the pay versus performance disclosure.
Observations and Considerations for Companies
The new rules will require extensive calculations and disclosures. For many companies, however, the biggest challenge will be drafting disclosure that uses the information in the table to provide a clear description of the relationship between “compensation actually paid” and the prescribed performance measures. This disclosure is, appropriately, not presented in the Compensation Discussion and Analysis, as it will not necessarily relate to the performance measures utilized by a company’s compensation committee in designing and awarding executive compensation. Indeed, in our experience few compensation committees (if any) currently evaluate executive compensation based on the “compensation actually paid” formula prescribed under the new rules. As such, the required description may best be viewed as an after-the-fact review of whether and how this prescriptive and non-routine measure of “compensation actually paid” aligns with the discrete measures of corporate performance prescribed under the rule, if at all. In light of this disconnect between how compensation committees evaluate performance in awarding and paying out executive compensation and how compensation and performance will be presented under the new rules, some companies may determine to include additional voluntary disclosures that reflect how they view the connection between realized or realizable compensation and corporate performance. Indeed, while the final rules check the box in fulfilling a Dodd-Frank mandate to require a pay-for-performance presentation, it’s unclear whether the manner in which the Commission chose to implement the Dodd-Frank mandate justifies the time and expense that companies will need to expend to produce the disclosures and whether investors will expend the effort that would be needed to assess the disclosures.
For companies with calendar year fiscal years, the pay versus performance disclosures will be required in the 2023 proxy statement, and for companies that are not smaller reporting companies, the first year of disclosure will cover the 2022, 2021 and 2020 fiscal years. Given the substantial undertaking required to prepare the historical disclosures and the likelihood that significant interpretive questions will arise when applied to companies’ particular facts, companies should begin preparing for the new rules now by collecting the information that will be necessary for the disclosures, particularly with respect to the historical pension and equity award adjustments for calculating executive compensation actually paid, and should begin to mock up the required table now for historical periods. In addition, companies should begin discussions regarding what financial performance measure should be utilized as the Company-Selected Measure, understanding that it should be focused on the most recently completed fiscal year (i.e., 2022 for companies with calendar year fiscal years). Consultation with the company’s compensation committee and its independent compensation consultant will be key in ensuring that appropriate performance measures are utilized for both the Company-Selected Measure and in the tabular list. As well, companies should also consider whether any supplemental, voluntary disclosures or presentations may be appropriate. For instance, TSR amounts presented in the table may not align with the performance periods applicable to incentive and equity compensation awards.
The following Gibson Dunn lawyers assisted in the preparation of this alert: Krista Hanvey, Thomas Kim, Ronald Mueller, and Gina Hancock.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Executive Compensation and Employee Benefits or Securities Regulation and Corporate Governance practice groups, or any of the following practice leaders and members:
Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
Sean C. Feller – Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey – Dallas (+ 214-698-3425, [email protected])
Gina Hancock – Dallas (+1 214-698-3357, [email protected])
Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ron Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Brussels partner Lena Sandberg and associate Yannis Ioannidis, “Proposed Foreign Subsidy Regulation Has Political Overtones,” [PDF] published by Law360 on August 23, 2022.
Towards the end of 2022, Europe will likely see a wave of class action legislation. Many member states of the European Union (“EU”) will have to either devise new class action regimes or amend their existing provisions on collective redress. They have until Christmas Day 2022 to implement the EU Directive on Representative Actions into national law. The new procedural rules must be applied to new collective claims raised by 25 June 2023.
So far, only the Netherlands has voted to amend its class action regime to comply with the Directive. Most other EU countries will have to take legislative action in the fall. The EU directive, once implemented, will allow for more cross-border mass litigation throughout Europe. Some states will use the opportunity to strengthen their jurisdiction by incentivizing plaintiffs to file cross-border representative actions in their courts, paving the way for cross-border forum shopping in Europe.
1. The EU’s Directive on Representative Actions and Its Core Requirements
In 2020, the European Union issued a Directive on Representative Actions (EU Directive 2020/1828), which obliges all EU member states to amend their respective national rules of civil procedure to allow qualified entities to file collective actions for a class of consumers.
The member states enjoy considerable leeway to transfer the Directive’s broad requirements into their national legal system. For example, member states are free to implement either an opt-in or an opt-out mechanism for consumers to join the collective action. Consequently, national provisions on collective actions will still differ from country to country. However, for the first time, all of Europe will have some form of collective redress to allow consumers to directly claim compensation from a defendant. Still, the Directive does not change the current European law on cross-border jurisdiction or conflict of laws.
The core requirements under the Directive which each member state must implement at a minimum are:
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- Relief? Member states have to provide at least one procedural mechanism by which a qualified entity can sue on behalf of consumers for a variety of redress measures (compensation, repair, replacement, contract termination) or injunctive relief. Some preexisting representative actions in Europe (i.e. in Germany) have so far allowed only declaratory judgments for consumers.
- Claimant? Only qualified entities have standing to sue on behalf of consumers; special criteria apply for entities bringing cross-border actions. This procedural setup is designed to avoid abusive litigation. In the legislative ideal, representative actions should be driven by consumer protection organizations who have the consumers’ best interests instead of their own financial interest in mind.
- Predicate Laws? The Directive requires that such representative actions can be filed for the violation of 66 EU laws for consumer protection, which are listed in the Directive’s annex. Over the past 30 years, member states have transferred this EU consumer protection legislation into their national laws. Today, core provisions in the member states’ civil codes (i.e. contract formation with consumers and defects liability) are based on the referenced EU legislation. The scope of the Directive also includes more ancillary EU legislation regarding claims by consumers arising out of, inter alia, unfair commercial practices, air travel, financial services, loans, food safety, electronic communication, and data protection. Seemingly every transaction with consumers in the EU could therefore be subject of a representative action in the future.
- Funding? Qualified entities may be funded by third parties as long as conflicts of interests are prevented. When justified doubts regarding a conflict arise, qualified entities shall disclose their sources of funds used to support the representative action.
- Discovery? In accordance with pre-existing national and EU law, member states shall allow courts to order the defendant or third parties to disclose additional evidence which lies in the control of the defendant or a third party. Some EU jurisdictions already have such procedural mechanisms in place. These mechanisms are generally limited in scope compared to US discovery. For example, in Germany, plaintiffs have to show that they require a specific document that would buttress their case before the court can order the defendant to turn it over. The Directive ensures that member states can keep these pre-existing national procedural provisions. They are also free, however, to vote for procedural rules more akin to US-style discovery, if they desire.
- Cost-Shifting? As is customary in the EU (and unlike the US), the losing party shall bear the costs of the litigation. This is meant to discourage frivolous lawsuits. So if the case is dismissed, the qualified entity that brought the lawsuit on behalf of consumers will have to bear the entire cost of the proceedings. This – theoretically – includes the opposing party’s attorneys’ fees. However, the recoupable amount for attorneys’ fees is often capped by national law. The Directive does not affect these caps and it is unlikely that member states will change them to the detriment of qualified consumer protection entities. Even if successful, defendants will therefore not be able to shift their costs entirely to the plaintiff. The consumers behind the representative action generally will not bear any costs..
- Tolling of Statutes of Limitations? Pending representative actions (both for redress measures and injunctive relief) shall suspend or interrupt the national statutes of limitation for the consumers’ individual claims.
- Settlements? Similar to US class actions, all settlements in EU representative actions must be scrutinized by the court. The court will not approve the settlement if it violates mandatory national law or includes unenforceable conditions. Additionally, member states can allow the court to reject the settlement, if it is “unfair”. Settlements are final and binding for the parties as well as the consumers. However, consumers may opt-out of a settlement.
2. The Netherlands Set the Tone with a Plaintiff-Friendly Interpretation of the Directive
Many European countries either remain hesitant to approach legislation on collective redress or are still debating how to allow consumers to effectively resolve their grievances without inviting the specter of a US-style “class action industry” into European courtrooms.
The Netherlands, on the other hand, have already embraced the new procedure and have taken a leading role in its implementation. The Dutch parliament already passed class action legislation in 2020. In June 2022, as the first country in the EU to do so, the Netherlands amended this regime to fully comply with the EU Directive. Rather than simply implementing the Directive’s core requirements, the Netherlands have used the legislative leeway afforded by the EU to create a plaintiff-friendly class action regime which will strengthen the position of Dutch courts to resolve cross-border collective disputes. The main staples of the new Dutch representative action are:
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- Its scope goes far beyond the required minimum of sanctioning violations against EU consumer protection law. All subject-matters fit for a civil lawsuit can be litigated. Most notably, this includes climate change litigation, for which Dutch courts have built a plaintiff-friendly reputation with major verdicts against the Dutch Government in 2018 and Royal Dutch Shell in 2021.
- The representative action is not limited to consumers. Companies can join a representative action as well.
- For purely national litigation, the Netherlands pose very limited requirements for the representing qualified entities. Even entities which were founded for the sole purpose of bringing one particular representative action will have standing in Dutch courts. In cross-border litigation the requirements will be stricter as set out by the Directive.
- Similar to a US class action, Dutch plaintiffs will have to opt-out of the class should they not want to participate in the litigation. Dutch representative actions are also open to plaintiffs residing outside the Netherlands, as long as they belong to the class and actively opt-in. International plaintiffs will also be part of any settlement. This will drive up the amounts in dispute compared to representative actions in neighboring countries like France and Germany, which favor opt-in mechanisms. Consequently, representative actions in the Netherlands will be particularly attractive for plaintiffs and third-party litigation funders.
- Other than the Directive’s minimum requirements, the Netherlands have not imposed any restrictions on third-party funding. Litigation funders may not influence litigation strategy and the financial independence of the qualified entity must be safeguarded.
Some significant differences to US class actions still remain. The Netherlands have not introduced US-style discovery into their representative action, which the Directive would have allowed for. Plaintiffs will also not be able to sue for punitive damages.
3. Outlook: A Diverse Litigation Landscape in Europe with Opportunities for Plaintiffs
The European landscape for collective redress will remain diverse even after 2023. Not all EU member states will implement the Directive as broadly as the Dutch. For example, the German Attorney General has already indicated he will propose legislation that will be more narrowly tailored to the underlying EU Directive instead of overhauling Germany’s collective redress mechanisms in one legislative swoop.
However, following the example set by the Netherlands, some countries might try to incentivize plaintiffs and litigation funders to sue multi-national companies in their own courts by devising plaintiff-friendly procedural rules.
Even if such a competition among member states will not ensue, any reform of Europe’s collective redress system will present new opportunities for plaintiffs, in particular if last-minute legislation to meet the deadline of 25 December 2022 results in loopholes or unprecise statutes. Companies, courts, and law firms will have to adapt to the ensuing new legal challenges. With no or little case law on the books after the reform, plaintiffs have particular incentives to file creative lawsuits.
The following Gibson Dunn lawyers prepared this client alert: Markus Rieder, Patrick Doris, Alexander Horn, Kahn Scolnick, and Christopher Chorba.
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 in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, the authors, or any of the following leaders and members of the Class Actions Group:
Munich:
Markus Rieder (+49 89 189 33 162, [email protected])
Alexander Horn (+49 89 189 33 161, [email protected])
Paris:
Eric Bouffard (+33 (0) 1 56 43 13 00), [email protected])
Jean-Pierre Farges (+33 (0) 1 56 43 13 00, [email protected])
Pierre-Emmanuel Fender (+33 (0) 1 56 43 13 00, [email protected])
Brussels:
Christian Riis-Madsen (+32 2 554 72 05, [email protected])
London:
Susy Bullock (+44 (0) 20 7071 4283, [email protected])
Patrick Doris (+44 (0) 20 7071 4276, [email protected])
Osma Hudda (+44 (0) 20 7071 4247, [email protected])
Ali Nikpay (+44 (0) 20 7071 4273, [email protected])
Philip Rocher (+44 (0) 20 7071 4202, [email protected])
Deirdre Taylor (+44 (0) 20 7071 4274, [email protected])
Doug Watson (+44 (0) 20 7071 4217, [email protected])
United States:
Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, [email protected])
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, [email protected])
Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles (+1 213-229-7726, [email protected])
Lauren R. Goldman – New York (+1 212-351-2375, [email protected])
Kahn A. Scolnick – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7656, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
Lauren M. Blas – Los Angeles (+1 213-229-7503, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Los Angeles partner Debra Wong Yang is the author of “How I Owned My Power As An Asian American Woman In Law,” [PDF] published by Law360 on August 22, 2022. In the article, Yang shares the obstacles she’s had to overcome as an Asian American Woman in the legal industry with the goal of inspiring other AAPI women attorneys and women attorneys of color to find their voice and power in the legal industry.
Decided August 18, 2022
Serova v. Sony Music Entertainment, S260736
The California Supreme Court held yesterday that a seller’s promotional statements about an artistic work of interest to the public amounted to commercial speech, regardless of whether the seller knew of the statements’ falsity.
Background: The plaintiff sued Sony under the Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) on the theory that promotional materials for a posthumous Michael Jackson album misrepresented that Jackson was the lead singer. Sony filed a motion to strike under California’s anti-SLAPP statute, arguing that the plaintiff’s UCL and CLRA claims were unlikely to succeed because those statutes target only commercial speech, not noncommercial speech about art protected by the First Amendment.
The Court of Appeal held that the motion should be granted because the plaintiff’s claims targeted protected speech that was immune from suit under the UCL and CLRA. It reasoned that the promotional statements about the album related to a public issue—the controversy over whether Jackson was the lead singer on the album—and were more than just commercial speech because they were connected to music. The plaintiff’s allegation that the statements were false did not strip them of First Amendment protection, according to the Court of Appeal, because Sony didn’t know the statements were false.
Issues: Were Sony’s representations that Michael Jackson was the lead singer on Michael noncommercial speech subject to First Amendment protection (in which case California’s anti-SLAPP statute would apply) or commercial speech (in which case the plaintiff could pursue UCL and CLRA claims against Sony)?
Court’s Holding:
Sony’s representations about the album constituted commercial speech, which can be prohibited entirely if the speech is false or misleading. And those representations did not lose their commercial nature simply because Sony made them without knowledge of their falsity or about matters that are difficult to verify.
“[C]ommercial speech does not lose its commercial nature simply because a seller makes a statement without knowledge or that is hard to verify.”
Justice Jenkins, writing for the Court
What It Means:
-
- Although artistic works often enjoy robust First Amendment protections, the marketing of such works can constitute commercial speech that is regulated by consumer-protection laws.
- It makes no difference whether a seller knew or didn’t know its statements are false, or whether the seller could or couldn’t find out whether its statements are false. If the seller’s speech is commercial, it will not receive full First Amendment protection in California.
- In deciding motions to strike under the anti-SLAPP statute, courts have discretion to skip over the question whether a claim arises from the exercise of free-speech rights and first analyze whether the movant has shown a probability of success.
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:
Litigation Practice
| Theodore J. Boutrous, Jr. +1 213.229.7804 [email protected] |
Theane Evangelis +1 213.229.7726 [email protected] |
Appellate and Constitutional Law Practice
| Thomas H. Dupree Jr. +1 202.955.8547 [email protected] |
Allyson N. Ho +1 214.698.3233 [email protected] |
Julian W. Poon +1 213.229.7758 [email protected] |
| Blaine H. Evanson +1 949.451.3805 [email protected] |
Bradley J. Hamburger +1 213.229.7658 [email protected] |
Michael J. Holecek +1 213.229.7018 [email protected] |
Related Practice: Media, Entertainment & Technology
| Scott A. Edelman +1 310-557-8061 [email protected] |
Kevin Masuda +1 213-229-7872 [email protected] |
Benyamin S. Ross +1 213-229-7048 [email protected] |
| Katherine V.A. Smith +1 213.229.7107 [email protected] |
Washington, D.C. partner Svetlana Gans and Denver associate Natalie Hausknecht are the authors of “FTC Launches Commercial Surveillance Rulemaking,” [PDF] published by Truth on the Market on August 17, 2022.
Carbon capture, utilization, and sequestration (“CCUS”) projects around the United States received a significant boost from the Inflation Reduction Act of 2022 (the “IRA”).[1] The IRA, which President Biden recently signed into law, includes approximately $369 billion in incentives for clean energy and climate-related program spending, including CCUS projects.[2]
Notably, the IRA (1) substantially increases the availability of the federal income tax credits available for domestic CCUS projects (often referred to as “45Q credits”),[3] (2) makes it easier for CCUS projects to qualify for 45Q credits, and (3) provides significant new avenues for monetizing 45Q credits.[4] The IRA also extends the deadline to begin construction on 45Q credit-eligible projects from 2026 to 2033.
Taken together, these changes are anticipated to significantly increase the number of CCUS projects that will enter service over the coming years.
Substantial Increases in Availability of 45Q Credits
The IRA substantially increases the availability of 45Q credits. Under current law, qualified CCUS facilities that captured qualified carbon oxides (“QCO”) and either used the QCO in enhanced oil and gas recovery (“EOR”) or utilized the QCO in certain industrial applications would have been entitled to receive 45Q credits of up to $35/metric ton (“MT”), and facilities that otherwise disposed of QCO in secure geological storage would have been entitled to receive 45Q credits of up to $50/MT (both rates computed before inflation adjustments).
The IRA effectively increases the above rates to $60/MT and $85/MT (before inflation adjustments) respectively; however the IRA conditions the availability of these credit amounts on satisfying new prevailing wage and apprenticeship requirements (otherwise, the new rates are reduced by 80 percent). At a high level, the prevailing wage and apprenticeship requirements are focused on making sure that projects provide well-paying jobs and training opportunities. The new requirements will apply only to projects the construction of which begins within 60 days on or after the date on which Treasury issues regulatory guidance regarding the new requirements.
The IRA makes similar changes to 45Q credits for QCO captured by direct air capture (“DAC”) facilities, but the availability of 45Q credits for DAC facilities is even larger. Under current law, DAC facilities were eligible for 45Q credits at the same rates as industrial facilities. Under the IRA, DAC facilities are eligible for up to $130/MT for captured QCO used in EOR or utilized in certain industrial applications and $180/MT for other geologically sequestered QCO (subject to the same 80 percent haircut as other projects noted above if the DAC facility fails new prevailing wage and apprenticeship requirements).
The table below illustrates the extent to which the IRA is increasing the value of 45Q credits:
|
|
2018 BBA 45Q Credit |
2022 IRA 45Q Credit[5] |
|
QCO Captured by Industrial Facility |
$50/MT |
$85/MT |
|
QCO Captured by Industrial Facility |
$35/MT |
$60/MT |
|
QCO Captured by DAC |
$50/MT |
$180/MT |
|
QCO Captured by DAC |
$35/MT |
$130/MT |
Expansion of Qualified Facilities
The IRA relaxes the annual thresholds that CCUS facilities must satisfy to be eligible for 45Q credits. For electric generating facilities, the IRA lowers the annual threshold from 500,000MT of captured QCO to 18,750MTs of captured QCO.[6] For DAC projects, the IRA lowers the annual threshold from 100,000MTs to just 1,000MTs. The IRA reduces the capture quantity requirements for all other industrial facilities to 12,500MTs. The high thresholds under prior law (combined with the cliff effect of failing to meet those thresholds) were major impediments to the financing of CCUS projects, so these reduced thresholds are a particularly welcome development for the industry.
Additional Options for Easier Monetization of 45Q Credits
The IRA also includes changes that could potentially result in significant adjustments to the manner in which 45Q credits are monetized, potentially diminishing the need for complicated tax equity structures to harvest the benefits of 45Q credits, which could expand the investor marketplace for CCUS projects. Most importantly, the IRA allows an owner of a qualified CCUS project to monetize 45Q Credits by selling any portion of its 45Q credits to third parties for cash or (in certain years) seeking direct payment for 45Q credits from the Treasury. In the case of a transfer, the cash payment received by the transferor will not be treated as taxable income, and the third party transferee may not deduct the cash payment. Once a 45Q credit is transferred to a third party under this rule, the third party may not transfer it again. Although expanded transferability of tax credits opens new potential monetization avenues, many practical questions (such as whether a purchaser that buys credits at a discount to face value would be required to recognize taxable income) remain unanswered and will likely require regulatory guidance. Moreover, the credit transfer regime contemplated by the IRA does not allow for depreciation deductions to be transferred, meaning that sponsors of projects who rely solely on the ability to transfer the 45Q credits will leave tax benefits on the table.
In addition to the new third-party transfer regime, direct payments from the Treasury in lieu of 45Q credits are available; however, with respect to claimants that are taxable entities, such direct payments are only available for the first five years of the twelve-year credit period, limiting the practical utility of the direct payment scheme.
It is important to note that additions to tax may apply to any “excessive credit transfer” (in the case of a credit transfer) or “excessive payments” (in the case of direct payments) in which the credit transferee or taxpayer, respectively, claims in excess of what the credit transferor or taxpayer could validly claim. The addition to tax is 120 percent of the excessive credit transfer or excessive payment. However, the 20 percent penalty component will not apply if the credit transferee or taxpayer can demonstrate reasonable cause for claiming the excessive credit transfer or excessive payment, respectively. Regulatory guidance will be needed to flesh out the details of this reasonable cause exception and other details of how the excessive credit transfer and excessive payment rules will operate in practice.
Conclusion
The IRA potentially fundamentally alters the CCUS landscape in the U.S. The substantially expanded availability of the 45Q credit, broadened scope of qualifying CCUS facilities, and simplified monetization of 45Q credits has the potential to incentivize current CCUS investors to increase the size of their investments, likely will encourage new investors to participate in CCUS projects, and should ensure that CCUS projects will be a significant feature of decarbonization efforts in the U.S.
________________________________
[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 so the so-called Inflation Reduction Act is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”
[2] https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf
[3] 45Q credits are authorized by section 45Q of the Internal Revenue Code of 1986 (the “Code”).
[4] Inflation Reduction Act of 2022 (H.R. 5376), §§13104, 13801.
[5] These credit amounts are reduced by 80% unless new prevailing wage and apprenticeship requirements are satisfied (assuming those requirements apply to a project based on when it started construction).
[6] In addition to meeting this minimum requirement, the capture design capacity of the carbon capture equipment at the applicable electric generating unit at the CCUS project must be at least 75% of the baseline carbon oxide production of that unit.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Oil and Gas or Tax practice groups, or the following authors:
Oil and Gas Group:
Michael P. Darden – Co-Chair, Houston (+1 346-718-6789, [email protected])
Graham Valenta – Houston (+1 346-718-6646, [email protected])
Zain Hassan– Houston (+1 346-718-6640, [email protected])
Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Josiah Bethards – Dallas (+1 214-698-3354, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The Court of Final Appeal (the “CFA”) has recently confirmed that a director is not liable to penalty, by way of additional tax, arising from an incorrect tax return filed by the company which he/she has signed and declared to be correct, on the basis that he/she should not be regarded having made the company’s incorrect tax return.[1]
The CFA’s judgment provides clarity on the meaning and effect of s 82A(1)(a) of the Inland Revenue Ordinance (Cap. 112) (the “IRO”), which empowers the Commissioner of Inland Revenue (the “Commissioner”) to impose additional tax, commonly referred to as penalty tax, on any person who without reasonable excuse “makes” an incorrect tax return.
It should, however, be noted that the relevant provision has also recently been amended to cover a person who “causes or allows to be made on the person’s behalf, an incorrect return”, and it remains to be seen how this amendment will affect a director’s liability in relation to any company’s incorrect returns signed and declared to be correct by him/her.
1. Background and Procedural History
The CFA judgment was on the appeal by the Commissioner against a decision of the Court of Appeal (“CA”) in October 2019, in which the CA dismissed the Commissioner’s appeal against a decision of the Court of First Instance (the “CFI”) made in November 2018. The CFI ruled in favour of Mr Koo Ming Kown (“Mr Koo”) and Mr Murakami Tadao (“Mr Murakami”), who appealed against two earlier decisions of the Board of Review (the “Board”) upholding certain penalty tax assessed against them.[2]
Mr Koo and Mr Murakami were directors of Nam Tai Electronic & Electrical Products Limited (the “Company”) at the material times when the Company’s returns for the years 1996/97, 1997/98 and 1999/2000 were filed. Mr Koo and Mr Murakami respectively signed and declared to be correct the first and third, and the second, of these returns. Mr Murakami and Mr Koo ceased to be directors of the Company in 2002 and 2006 respectively.
Following a tax audit in 2002, the Inland Revenue Department (the “IRD”) disallowed claims for deductions made in the returns, and assessed the Company to undercharged tax under s 60 of the IRO, which the Company challenged unsuccessfully. The Company did not pay the amounts assessed and was eventually wound up in June 2012 by the court on the petition of the Commissioner.
In 2013, Mr Koo and Mr Murakami were assessed to additional tax under s 82A(1)(a) of the IRO in the amount of HK$12,600,000 and HK$5,400,000 respectively, on the basis that the Company’s returns were incorrect. They appealed to the Board, which found against them. The Board found the returns to have been incorrect and increased the overall amounts payable by Mr Koo and Mr Murakami.
Mr Koo and Mr Murakami appealed to the CFI, which accepted their primary argument that they did not fall within s 82A(1)(a) of the IRO. The CFI ordered the annulment of the additional tax assessments against Mr Koo and Mr Murakami. The Commissioner appealed to the CA, which upheld the CFI’s decision that Mr Koo and Mr Murakami were not required by the IRO to make the returns on behalf of the Company, and therefore could not be made liable to additional tax under s 82A(1)(a).
The Commissioner appealed to the CFA but Mr Koo and Mr Murakami informed the CFA that they did not intend to oppose the Commissioner’s appeal and would not attend the hearing in person or instruct lawyers to do so. The CFA appointed Mr Eugene Fung SC and Mr John Leung as amici curiae, who filed submissions addressing the questions before the CFA that supported the CA and CFI decisions.
2. The CFA’s Decision
Whether Mr Koo and Mr Murakami should be liable for the Company’s incorrect returns signed by them depends on whether they fall within the description, in the s 82A(1)(a) prevailing at the material times, of a “person who without reasonable excuse – (a) makes an incorrect return by omitting or understating anything in respect of which he is required by this Ordinance to make a return, either on his behalf or on behalf of another person…”[3]
The Commissioner contended that the individuals specified under s 57(1),[4] which included Mr Koo and Mr Murakami as directors of the Company, were “answerable” for doing all such acts as were required to be done by the Company under the IRO, and accordingly they were required to make the Company’s returns; and further that, by physically signing and declaring to be correct the relevant Company’s returns, they did make the Company’s return on behalf of the Company as a corporate taxpayer. On the case for the Commissioner, the individuals identified under s 57(1) to be “answerable” (for doing all such acts as required to be done by a corporate taxpayer) are required (secondarily) to do such acts which the corporate taxpayer is (primarily) required to do under the IRO.
Upon examining the legislative history and context, the CFA disagreed with the Commissioner’s construction of the relevant provisions in the IRO. The CFA confirmed the decisions of the CFI and the CA and concluded that the Company (being the entity to which the notice for making a return was issued under s 51(1)), rather than the individual who signed the return, was the “person” legally required to make, and did make, the return. There is a distinction between answerability under s 57(1), which means that the individuals specified under s 57(1) are responsible for seeing or ensuring the corporate taxpayer does the act in question, and an obligation or requirement to do such act on behalf of the company.
Accordingly, the CFA dismissed the Commissioner’s appeal.
3. Conclusion
The CFA judgment helpfully clarifies that a director of a company (or any other relevant individual specified under s 57(1)) is not required to “make” the tax return of the company, and does not make such tax return by reason that he/she has signed, and declared his/her belief in the correctness of the information in, the returns filed by the company. Therefore, such director or individual specified under s 57(1) does not incur liability under s 82A(1)(a) of the IRO.
However, as from 11 June 2021, s 82A(1)(a) has been amended to provide that “[a]ny person who without reasonable excuse—(a) makes, or causes or allows to be made on the person’s behalf, an incorrect return by omitting or understating anything in respect of which he is required by this Ordinance to make a return, either on his behalf or on behalf of another person…” (emphasis added to show the amendments).[5]
It remains to be seen whether, notwithstanding that a company’s director signing (or approving the filing of) the company’s tax return is not one who “makes” the tax return, he/she might be caught by the current s 82A(1)(a) as a person who has “caused” or “allowed” the tax return to be made on the company’s behalf, and hence may be exposed to liability should the company’s tax return be found to be incorrect.
_____________________________
[1] Koo Ming Kown & Murakami Tadao v Commissioner of Inland Revenue [2022] HKCFA 18. A copy of the judgment of the Court of Final Appeal is available here. The judgment in the Court of Appeal ([2021] HKCA 1037) is available here. The judgment in the Court of First Instance ([2018] HKCFI 2593) is available here.
[2] Board of Review, Cases D32/16 (available here) and D33/16 (available here).
[3] The current s 82A(1)(a) provides that “[a]ny person who without reasonable excuse—(a) makes, or causes or allows to be made on the person’s behalf, an incorrect return by omitting or understating anything in respect of which he is required by this Ordinance to make a return, either on his behalf or on behalf of another person…” (emphasis added to show the amendments).
[4] The then-prevailing s 57(1) provided that “[t]he secretary, manager, any director or the liquidator of a corporation and the principal officer of a body of persons shall be answerable for doing all such acts, matters or things as are required to be done under the provisions of this Ordinance by such corporation or body of persons”; whilst the current s 57(1) provides that “[t]he following person is answerable for doing all the acts, matters or things that are required to be done under the provisions of this Ordinance by a corporation or body of persons—(b) for any other corporation [that is not an open-ended fund company], the secretary, manager, any director or the provisional liquidator or liquidator of the corporation…”
[5] See the Inland Revenue (Amendment) (Miscellaneous Provisions) Ordinance 2021, Ord. No. 18 of 2021, Gazette published on 11 June 2021, No. 23 Vol. 25 – Legal Supplement No. 1, available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:
Brian Gilchrist (+852 2214 3820, [email protected])
Elaine Chen (+852 2214 3821, [email protected])
Alex Wong (+852 2214 3822, [email protected])
Celine Leung (+852 2214 3823, [email protected])
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On August 2, 2022, the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) released its annual report covering calendar year 2021 (the “Annual Report”).[1] This report represents the first full calendar year in which the Committee operated pursuant to the new regulations implemented in 2020 under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”).[2]
Our top observations from the Annual Report are set forth below.
- Amidst the Backdrop of a Strong M&A Market, The Committee Reviewed a Record Number of Filings
Parties to a covered transaction may initiate CFIUS’s national security review of the transaction by filing a short-form declaration or a full-length written notice. Consistent with the robust M&A market in 2021, CFIUS reviewed a record number of 436 total filings in 2021, up 39 percent from 2020. 164 (38 percent) of these filings were declarations, and 272 (62 percent) were written notices, both figures representing significant percentage increases from 2020.[3]
| 2020 | 2021 (∆) | |
| Declarations | 126 | 164 (↑30%) |
| Notices | 187 | 272 (↑45%) |
| Total Filings | 313 | 436 (↑39%) |
-
- The Use of Short-Form Declarations and CFIUS Clearance Rates of Such Declarations Have Increased Significantly
Short-form declarations were introduced through the passage of FIRRMA in 2018, as both an optional form of filing and pursuant to mandatory requirements under certain conditions. Although a recent introduction, the statistics noted above indicate that declarations are emerging as a viable alternative to the traditional written notice process in certain situations.
Less than a third of declarations filed in 2021 were subject to mandatory requirements (47 of 164 total declarations), indicating that parties are increasingly seeing value in filing a voluntary declaration, which has fewer requirements and a shorter review timeline. Although, there is always a risk with a declaration that the overall CFIUS timeline and burden could be lengthened should the Committee request the parties to file a written notice or determine it is unable to conclude action on the basis of the declaration after the 30-day declaration review. Thus, deciding whether to file a declaration versus a notice should be based on an overall risk calculus of many factors. As the numbers reflect, the availability of the declaration process does not replace notices as a filing of choice in all instances.
| Committee Action | Number of Declarations (164 Total) |
| Request parties file a written notice | 30 (18%) |
| Unable to conclude action | 12 (7%) |
| Clearance | 120 (73%) |
| Rejected | 2 (1%) [4] |
To put these numbers into perspective, Committee clearance of declarations increased from less than 10 percent in 2018, to 37 percent in 2019, to 64 percent in 2020, and 73 percent this past year.[5] CFIUS also requested slightly fewer written notices from parties who filed declarations (18 percent, down from 22 percent), and reduced the number of instances in which the parties were informed that CFIUS was unable to conclude action on the basis of the declaration—from 13 percent to 7 percent.[6]
- There was a Significant Jump in Withdrawn Notices – But the Percentage of Abandoned Transactions Remained Consistent with 2020
A notable uptick was seen in the number and percentage of withdrawn notices in 2021 – 74 in 2021 (27 percent) versus 29 in 2020 (15.5 percent).[7] Similar to 2020, just under half of all notified transactions proceeded to the subsequent 45-day investigation phase (130).[8] It was during this investigation phase that nearly all (72) of the 74 notices were withdrawn.[9] Most notices were withdrawn after CFIUS informed the parties that the transaction posed a national security risk and proposed mitigation terms.[10] In the vast majority of withdrawn notices in 2021 (85 percent), parties filed a new notice.[11]
Eleven notices, representing four percent of the total number of notices filed in 2021, were withdrawn and the transaction ultimately abandoned either because (i) CFIUS informed the parties that it was unable to identify mitigation measures that would resolve the national security concerns, or the parties rejected mitigation measures proposed by the Committee (nine withdrawals); or (ii) for commercial reasons (two withdrawals).[12] This is relatively consistent with the figures on abandoned transactions in 2020 (just above four percent).[13]
Notably, 2021 was the first year since 2016 in which no Presidential decisions were issued.[14]
- Canadian Acquirers Accounted for the Largest Number of Declarations, while Chinese Investors Greatly Preferred and Led in the Number of Notices Submitted
Investors from Canada accounted for the largest number of declarations filed in 2021 (22), representing approximately 13 percent of the total.[15] Other countries commonly characterized by the U.S. government as presenting lower national security risks also topped the list of declarations, with Australia, Germany, Japan, South Korea, Singapore and United Kingdom cumulatively accounting for 62—or approximately 38 percent—of the 164 declarations submitted in 2021. [16] These numbers are generally consistent with previous years’ trends. From 2019 to 2021, Canadian investors submitted 54 declarations, more than any other country. [17] Japanese and United Kingdom investors accounted for the second and third-most declarations filed over the same three-year period. [18]
While Canadian investors may be increasingly utilizing the declaration process, they also still account for a significant number of full-length notices (28, approximately 10 percent of total notices filed, more than any other country except China). The high volume of Canadian declarations and notices is reflective of the significant business activity between the U.S. and Canada, particularly in sectors that may present national security risk, as discussed in insight #5 below.
In contrast to the Canadian utilization of both declarations and notices, Chinese investors largely eschewed the declaration process, filing only one declaration in 2021. [19] Chinese investors filed the highest number of notices last year, with 44 notices, or 16 percent of the total. [20] This represents a 159 percent increase from 2020, and a 76 percent increase from 2019. [21] This increase may not be fully reflective of economic factors in 2021, as this increase comes as CFIUS is intentionally focusing on non-notified historic transactions.
China’s 2021 numbers are also consistent with the last three years, over which Chinese investors submitted 86 notices, but only nine declarations. [22] As noted in our discussion in insight #2, this apparent preference of Chinese investors to forego the short-form declaration in favor of the prima facia lengthier notice process may indicate a calculus that amidst U.S.-China geopolitical tensions, the likelihood of the Committee clearing a transaction involving a Chinese acquiror through the scaled down declaration process is quite low, and therefore a declaration filing may merely result in the Committee requesting after 30 days that the parties submit a notice, thus actually adding time to the process overall.
The low number of declarations also indicates that Chinese investors may be shying away from the more sensitive transactions, such as those involving critical technologies, which would require mandatory declarations.
- 2021 Figures Confirm Focus on Business Sectors Associated with Critical Technologies and Sensitive Data
Consistent with previous years, a high majority of CFIUS filings in 2021 involved the Finance, Information and Services and Manufacturing sectors, with those two sectors collectively accounting for over 80 percent of CFIUS filings.[23]
| Business Sector | Notices |
| Finance, Information, and Services | 55% |
| Manufacturing | 28% |
| Mining Utilities and Construction | 12% |
| Wholesale Trade, Retail Trade and Transportation | 4% |
In 2021, CFIUS reviewed 184 covered transactions involving acquisitions of U.S. critical technology companies.[24] In contrast to the 2020 data, the number of critical technologies filings have increased by 51 percent.[25] Consistent with the 2020 data, the largest number of notices filed remained to be the Professional, Scientific, and Technical Services subsector of the Finance, Information and Services sector (35) and Computer / Electronic Product Manufacturing subsector of the Manufacturing sector (31).[26]
Further, consistent with the observations made in insight #4 above, countries seen as traditionally U.S.-allied, such as Germany, United Kingdom, Japan, and South Korea, accounted for the most acquisitions of U.S. critical technology in 2021.[27] These four countries accounted for approximately 33 percent of such transactions. Of note, Canada and China each accounted for approximately five percent of transactions involving the acquisition of U.S. critical technologies.[28]
In light of the new policy mandate, critical technologies is expected to be a continuous focus of the Committee in coming years. Although the Annual Report does not specifically report on covered transactions involving acquisitions of U.S. companies with sensitive data, the sector-specific statistics indicate that this continues to be a focus area.
- The Committee Shortened Its Response Times to Respond to Draft Notices and Accept Formal Notices, but Continues to Take Advantage of the Full Time Periods to Complete its Actual Reviews
Parties submitting draft notices to the Committee in 2021 received comments back from the Committee on average in just over six business days, an improvement from the 2020 average of approximately nine days.[29] Similarly, the Committee averaged six business days to accept a formal written notice after submission, which is an improvement from the average of 7.7 business days reported in the 2020 Annual Report.[30]
In terms of the Committee’s turnaround times once a declaration or notice has been filed/accepted, the Committee in 2021 generally utilized the entire available regulatory periods available. With respect to a declaration, the Committee is required to take action [31] within 30 business days after receiving a declaration. Upon acceptance of a formal notice, the Committee has an initial 45 business days to review the filing and may extend the review period into a further investigation period of 45 business days.
Regarding declarations submitted in 2021, it took the Committee, on average, the entire 30-day period to conclude action. [32] Similarly, it took the Committee an average of 46.3 calendar days to close a transaction review during the initial review stage. [33] If the Committee extended the review into the subsequent investigation phase, the Committee completed the investigation, on average, within 65 calendar days. [34] However, this number may be misleading, and in practice parties should expect the Committee to complete investigations closer to the full 90-day deadline because the Annual Report indicates that the median for investigation closures was 89.5 calendar days. [35]
- No Significant Changes Regarding Mitigation Measures and Conditions
In 2020, CFIUS adopted mitigation measures and conditions with respect to 23 notices or 12 percent of the total number of 2020 notices. [36] On a percentage basis, 2021 saw a marginal overall decrease in the adoption of mitigation measures and conditions. The Committee adopted mitigation measures and conditions with respect to 31 notices or 11 percent of the total number of 2021 notices. [37] For 26 notices, CFIUS concluded action after adopting mitigation measures. [38] With respect to four notices that were voluntarily withdrawn and abandoned, CFIUS either adopted mitigation measures to address residual national security concerns, or imposed conditions without mitigation agreements.[39] Lastly, as in 2020, measures were imposed to mitigate interim risk for one notice filed in 2021.[40]
It is worth noting that the Committee conducted 29 site visits in 2021 for the purpose of monitoring compliance with mitigation agreements. [41] Where non-compliance was identified, monitoring agencies worked with the parties to achieve remediation. [42]
While CFIUS reviews are highly fact-specific and nuanced, based on historical data points, we can expect the Committee to complete action on a majority of transactions in 2022 without conditions or mitigating measures.
- Real Estate Transactions Comprise a Minute Portion of CFIUS Reviews
Despite CFIUS’s expanded authority to review real estate transactions that may present a national security risk, such as proximity to sensitive U.S. military or government facilities, such transactions remain a very small portion of the total transactions reviewed by the Committee. Only five notices and one declaration concerning real estate were reviewed in 2021.[43] While the lack of real estate CFIUS filings could be tied to economic factors, this space remains one to watch in future years.
- Requested Filings For Non-Notified/Non-Declared Transactions Decreased
In addition to transaction parties proactively filing with the Committee, the Committee may also identify and initiate unilateral review of a transaction, and may request the parties to submit a filing. The 2020 Annual Report was the first report to contain data relating to the number of non-notified/non-declared transactions identified and put forward to the Committee for consideration.
While CFIUS identified 135 non-notified/non-declared transactions in 2021—compared to 117 in 2020—fewer transactions resulted in a request for filing. [44] Out of 117 identified transactions in 2020, 17 resulted in a request for filing versus just eight requests for filing in 2021.[45]
Given that the number of transactions identified increased, the Committee appears committed to enhancing and utilizing methods for improving the identification of non-notified/non-declared transactions. In fact, in the press release announcing the Annual Report, the Department of Treasury noted as a “key highlight” that CFIUS continues to hire talented staff to support identifying transactions that are not voluntarily filed with the Committee, as well as monitoring and enforcement activities.[46] As such, the trends in the number of non-notified/non-declared transaction will be an important space to watch.
Conclusion
The record increase in CFIUS filings this year reflects the continuing expansion of the Committee’s scope and resources since the enactment of FIRRMA, as well as the recognition by foreign acquirers of the increased risks and sensitivities when it comes to transactions involving U.S. businesses that may pose potential national security risks in the eyes of the Committee. CFIUS has consistently reviewed more covered transactions from year to year, and we see no indication this trend will not continue.
_________________________
[1] Committee on Foreign Investment in the United States, “Annual Report to Congress, Report Period: CY 2021”, available at: https://home.treasury.gov/system/files/206/CFIUS-Public-AnnualReporttoCongressCY2021.pdf.
[2] For further detail on the impact of FIRRMA, see our previous alert “CFIUS Reform: Top Ten Takeaways from the Final FIRRMA Rules,” Feb. 19, 2020, available at: https://www.gibsondunn.com/cfius-reform-top-ten-takeaways-from-the-final-firrma-rules/.
[3] Annual Report at 4, 15.
[4] In one of these instances, the parties re-filed as a notice.
[5] Committee on Foreign Investment in the United States, “Annual Report to Congress, Report Period: CY 2018,” at 31 (the “2018 Annual Report”) available at: https://home.treasury.gov/system/files/206/CFIUS-Public-Annual-Report-CY-2018.pdf; ; Committee on Foreign Investment in the United States, “Annual Report to Congress, Report Period: CY 2019,” at 33 (the “2019 Annual Report”) available at: https://home.treasury.gov/system/files/206/CFIUS-Public-Annual-Report-CY-2019.pdf; Committee on Foreign Investment in the United States, “Annual Report to Congress, Report Period: CY 2020,” at 4 (the “2020 Annual Report”) available at: https://home.treasury.gov/system/files/206/CFIUS-Public-Annual-Report-CY-2020.pdf.
[6] 2020 Annual Report at 4; Annual Report at 4.
[7] 2020 Annual Report at 15; Annual Report at 15.
[8] Annual Report at 15.
[9] Annual Report at 37.
[10] Id.
[11] Id.
[12] Id.
[13] 2020 Annual Report at 15.
[14] Annual Report at 15; 2020 Annual Report at 17.
[15] Annual Report at 11.
[16] Annual Report at 11-12.
[17] Annual Report at 11
[18] Annual Report at 11-12.
[19] Annual Report at 11
[20] Annual Report at 32.
[21] Id.
[22] Annual Report at 11, 32.
[23] Annual Report at 20.
[24] Annual Report at 48.
[25] 2020 Annual Report at 51.
[26] Annual Report at 50.
[27] Annual Report at 49.
[28] Id.
[29] 2020 Annual Report at 18; Annual Report at 18.
[30] 2020 Annual Report at 18; Annual Report at 18.
[31] Upon receiving a declaration, the Committee may request that the parties file a written notice, inform the parties that the Committee is unable to complete action under the initial review phase on the basis of the declaration, initiate a unilateral review, or notify the parties it has completed all action with respect to the transaction. 50 U.S.C. § 4565(b)(1)(C)(v)(III)(aa).
[32] Annual Report at 13.
[33] Annual Report at 18. Considering that the figure of 46.3 days is expressed in calendar days and not business days, we take the view that the time taken by the Committee to close a transaction review is acceptable.
[34] Annual Report at 18.
[35] Id.
[36] 2020 Annual Report at 40.
[37] Annual Report at 38.
[38] Id.
[39] Id.
[40] Id.
[41] Annual Report at 44.
[42] Id.
[43] Annual Report at 4, 22.
[44] Annual Report at 45.
[45] 2020 Annual Report at 48; Annual Report at 45.
[46] “Treasury Releases CFIUS Annual Report for 2021,” (Aug. 2, 2022) available at:
https://home.treasury.gov/news/press-releases/jy0904.
The following Gibson Dunn lawyers prepared this client alert: Stephenie Gosnell Handler, David Wolber, Judith Alison Lee, Adam M. Smith, Annie Motto, and Jane Lu*.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. 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 International Trade practice group:
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Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
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Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
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* Jane Lu is a trainee solicitor working in the firm’s Hong Kong office who is not yet admitted to practice law.
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