Decided January 13, 2022
National Federation of Independent Business v. Occupational Safety and Health Administration, No. 21A244; and
Ohio v. Occupational Safety and Health Administration, No. 21A247
On Thursday, January 13, 2022, by a 6–3 vote, the Supreme Court prevented the implementation of an OSHA rule that would have imposed a vaccine-or-testing regime on employers with 100 or more employees.
Background:
On November 5, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an emergency temporary standard (“ETS”) governing employers with 100 or more employees. The ETS mandated covered employers to “develop, implement, and enforce a mandatory COVID-19 vaccination policy, with an exception for employers” that require unvaccinated employees to undergo weekly COVID-19 testing and to wear a mask during the workday.
Business groups and States filed petitions for review of the ETS in each regional Court of Appeals, contending that OSHA exceeded its statutory authority under the Occupational Safety and Health Act. The Fifth Circuit stayed the ETS and later held that the OSHA mandate was overly broad, not justified by a “grave” danger from COVID-19, and constitutionally dubious. After all petitions for review were consolidated in the Sixth Circuit, that court dissolved the Fifth Circuit’s stay. The panel majority held that COVID-19 was an emergency warranting an ETS and that OSHA had likely acted within its statutory authority.
Issue:
Whether to stay implementation of the vaccine-or-testing mandate pending the outcome of litigation challenging OSHA’s statutory authority to require employers with 100 or more employees to develop, adopt, and enforce a vaccine-and-testing regime for their employees.
Court’s Holding:
The vaccine-or-testing mandate should be stayed because OSHA likely lacks the statutory authority to adopt the vaccine-or-test mandate in the absence of an unmistakable delegation from Congress.
“It is telling that OSHA, in its half century of existence, has never before adopted a broad public health regulation of this kind—addressing a threat that is untethered, in any causal sense, from the workplace.”
Per Curiam Opinion of the Court
What It Means:
- The Court’s decision prevents the implementation of the OSHA mandate, which applies to 84 million Americans. Echoing its recent decision in Alabama Ass’n of Realtors v. Dep’t of Health & Human Services, the Court emphasized that agency action with such “vast economic and political significance” requires a clear delegation from Congress. It is doubtful that the stay will be lifted to allow OSHA to enforce the mandate before the ETS expires in May, meaning that it is unlikely employers will ever actually be subject to the ETS’s vaccine-or-testing mandate.
- The challengers had argued that covered employers would incur unrecoverable compliance costs and that employees would quit rather than comply. The federal government, for its part, had argued that the OSHA mandate would save over 6,500 lives and prevent hundreds of thousands of hospitalizations. The Court stayed the mandate without resolving this dispute on the ground that only Congress could properly weigh such tradeoffs.
- The Court’s decision to hear oral argument on the stay applications may signal the beginning of a trend, as this is the second time this Term that the Court moved an application to vacate a stay from the emergency docket to the argument calendar.
- Other Mandates: The Court stayed lower court injunctions against the vaccine mandate issued by the Centers for Medicare & Medicaid Services (“CMS”). See Biden v. Missouri, 21A240; Becerra v. Louisiana, 21A241. By a 5–4 vote, the Court ruled that the Secretary of Health and Human Services likely has the statutory authority to require vaccination for healthcare workers at facilities that participate in Medicare and Medicaid. Today’s decisions do not address the federal contractor vaccine mandate that is presently enjoined on a nationwide basis by a federal district court in Georgia. Four other federal district courts also have enjoined the government from enforcing that mandate. So far, the Sixth and Eleventh Circuits have refused to stay the injunctions against the federal contractor mandate pending appeal.
The Court’s opinions are available here and here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 [email protected] |
Mark A. Perry +1 202.887.3667 [email protected] |
Lucas C. Townsend +1 202.887.3731 [email protected] |
| Bradley J. Hamburger +1 213.229.7658 [email protected] |
Related Practice: Labor and Employment:
| Eugene Scalia +1 202.955.8543 [email protected] |
Jessica Brown +1 303.298.5944 [email protected] |
Jason C. Schwartz +1 202.955.8242 [email protected] |
| Katherine V.A. Smith +1 213.229.7107 [email protected] |
As the COVID-19 pandemic continued into 2021, lawmakers and regulators around the world faced the dual-pronged challenge of reversing the slowdown in enforcement seen in 2020 while working to combat new forms of bribery and corruption that emerged as a result of the pandemic. This webcast will explore the approach taken by emerging markets in addressing these challenges and examine the trends seen in FCPA and local anti-corruption enforcement. In China, companies face increased scrutiny over their compliance programmes as the country introduces its first pilot programme for corporate criminal compliance and non-prosecution. Chinese regulators have continued their assault on key industries, such as big tech and healthcare, and sweeping reforms to data protection laws have had seismic effects on the conduct of cross-border investigations. In Russia, the topic of corruption remains a source of great tension while the complexity of sanctions regimes increases and cybercrime activities become the latest driving force behind white-collar enforcement. In Latin America, anti-corruption efforts have struggled to gain a strong foothold amid the practical challenges caused by COVID-19 and political instability in key markets.
In India, enforcement has fallen as a result of the COVID-19 pandemic and new legislation which has made it more difficult to commence investigations. State governments have also withdrawn the general consent previously provided to authorities to investigate corruption allegations, which has caused delays in resolving cases. Nevertheless, while anti-corruption enforcement remains inconsistent, recent cases highlight the heightened risks for multinationals doing business in the country. Across Africa, companies and individuals face significant fines, bidding suspensions, and other sanctions as investigations by authorities from the United States, the United Kingdom, the World Bank, and African authorities concluded in several countries in the region. Meanwhile, high-profile trials of former heads of state, including Benjamin Netanyahu and Jacob Zuma, resumed after delays due to the pandemic and claims of bias and political interference.
Join our team of experienced international anti-corruption attorneys to learn more about how to do business in China, Russia, Latin America, India and across Africa without running afoul of anti-corruption laws, including the Foreign Corrupt Practices Act (“FCPA”).
Topics to be Discussed:
- An overview of FCPA enforcement statistics and trends for 2021;
- The corruption landscape in key emerging markets, including recent headlines and scandals;
- Lessons learned from local anti-corruption enforcement in China, Russia, Latin America, India, and across Africa;
- Key anti-corruption legislative changes in China, Russia, Latin America, India, and across Africa;
- The effect of COVID-19 on corruption and anti-corruption efforts; and
- Mitigation strategies for businesses operating in high-risk areas
View Slides (PDF)
MODERATOR:
F. Joseph Warin is Co-Chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and he is chair of the over 200-person Litigation Department of the Washington, D.C. office. Mr. Warin is ranked in the top-tier year after year by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations experience. He has handled cases and investigations in more than 40 states and dozens of countries involving federal regulatory inquiries, criminal investigations and cross-border inquiries by international enforcers, including UK’s SFO and FCA, and government regulators in Germany, Switzerland, Hong Kong, and the Middle East. Mr. Warin has served as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ.
PANELISTS:
Kelly Austin is Partner-in-Charge of Gibson Dunn’s Hong Kong office and a member of the firm’s Executive Committee. Ms. Austin is ranked annually in the top-tier by Chambers Asia Pacific and Chambers Global in Corporate Investigations/Anti-Corruption: China. Her practice focuses on government investigations, regulatory compliance and international disputes. Ms.. Austin has extensive expertise in government and corporate internal investigations, including those involving the FCPA and other anti-corruption laws, and anti-money laundering, securities, and trade control laws.
Joel Cohen is Co-Chair of the firm’s global White Collar Defense and Investigations Practice Group and a partner in the New York office. Mr. Cohen’s successful defense of clients has been noted in numerous feature articles in the American Lawyer and the National Law Journal, including for pretrial dismissal of criminal charges and trial victories. He is highly-rated in Chambers and named by Global Investigations Review as a “Super Lawyer” in Criminal Litigation. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.
Benno Schwarz is Co-Chair of the firm’s Anti-Corruption & FCPA Practice Group and a partner in the Munich office, where his practice focuses on white collar defense and compliance investigations. Mr. Schwarz is ranked annually as a leading lawyer for Germany in White Collar Investigations/Compliance by Chambers Europe and was named by The Legal 500 Deutschland 2021 and The Legal 500 EMEA 2021 as one of four Leading Individuals in Internal Investigations, and also ranked for Compliance. He is noted for his “special expertise on compliance matters related to the USA and Russia.” Mr. Schwarz advises companies on sensitive cases and investigations involving compliance issues with international aspects, such as the implementation of German or international laws in anti-corruption, money laundering and economic sanctions, and he has exemplary experience advising companies in connection with FCPA and NYDFS monitorships or similar monitor functions under U.S. legal regimes.
Patrick Stokes is Co-Chair of the firm’s Anti-Corruption and FCPA Practice Group and a partner in the Washington, D.C. office, where he focuses his practice on internal corporate investigations, government investigations, enforcement actions regarding corruption, securities fraud, and financial institutions fraud, and compliance reviews. Mr. Stokes is ranked nationally and globally by Chambers USA and Chambers Global as a leading attorney in FCPA. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit.
Karthik Ashwin Thiagarajan is of counsel in the Singapore office. He represents clients in transactional, compliance and anti-corruption matters across the South Asia and ASEAN regions. Mr. Thiagarajan advises multi-national corporations on acquisitions, joint ventures and divestments across key emerging markets in Asia, including India and Indonesia. He frequently assists clients with internal investigations, anti-corruption reviews and regulatory actions in these markets.
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Once more, 2021 demonstrated that constant change should become your friend and ally. After a second year of global uncertainty caused by the formidable challenges of the COVID-pandemic, we all long for a return “back-to-normal.” However, chances are that 2022 will continue to present drastic and unpredictable challenges.
Let us start with the consequences of the pandemic that are already visible: Instead of bringing the world together to fight the global challenge, each country has chosen its own approach, ranging from very restrictive policies with modest vaccination rates such as in China to an approach that strives to push vaccination rates to the maximum in order to stay open for business such as in Israel.
The pandemic has also brought back big government: State-imposed restrictions significantly impact our private lives and the business community. Hundreds of billions of dollars have been disseminated to mitigate the effect of the crisis, all managed through state aid or state subsidies. Further do’s and don’ts are imposed by the national sanctions regimes which have become the new weapon of choice in the battle for economic and military supremacy.
As if this was not enough, at a time when Government budgets have exploded and corporate debt levels are at historic peaks in various countries, inflation – a term forgotten for almost a generation – made a spectacular comeback. While experts still disagree whether this is an episode or a trend, the economy and private consumers are already suffering from rising asset prices, and it would seem only a matter of time until the party of cheap and easy money will be a thing of the past.
You still want more? Add some autocratic and eternal state leaders to the mix (China, Russia, Belarus), a few more instable countries striving to achieve nuclear arms capacities (Iran, North Korea), countries plagued by armed conflict (Afghanistan, Iraq), then raise the world’s temperature levels by two or more degrees through climate change, and you might be heading for the kind of explosive cocktail that could make your nightmares come true.
As lawyers, nonetheless, we truly believe that change is our friend. We consider ourselves agents of change: In our Corporate Transactions and related practices, we help transform the corporate world through acquisitions, mergers and disposals. Our Data Privacy & Technology practices explore the boundaries of new technologies whilst protecting vulnerable data and our Regulatory practices and litigators help shape the legal and regulatory landscape that will become the level playing field for tomorrow’s businesses.
We must resist the sort of short-term fears that others might justifiably feel in light of all the threats around us. We also are well-advised to fight any complacency that comes with decades of peace and prosperity that most of us have enjoyed until now.
We embrace the opportunities of change and seek to influence developments that will make the world a better and fairer place, through good lawyering of positions that we believe are proper and just, by facilitating the transition from one technological era to another, but also through our many pro bono efforts that focus on other important matters that fall outside of the scope of big business or big law, and we fight for cases and causes which could easily be forgotten without pro-bono efforts.
With this in mind, we have again prepared this year’s legal update on German law developments, which are equally reflective of significant changes: The advent of a new coalition government under Chancellor Olaf Scholz inaugurated on December 8, 2021 after sixteen years of Angela Merkel’s tenure, the fundamental change of the German economy to a more climate friendly industry, and the awakening to long forgotten security threats posed by Russia and other aggressive autocracies and kleptocracies.
As one of the largest economies in the world, Germany cannot and should not stay passive and wait for others to shape the future. Therefore, embrace the legal changes we present below as a sign of things to come and as good faith efforts to shape the future in times of great uncertainty. Amidst all the change and the many challenges we face, some things remain as they were, however. We have therefore again focused our topical updates on three questions: What’s new? Why is it relevant? What’s next?
We hope you will find this update helpful in all your dealings with Germany next year and beyond. We are grateful for all the opportunities you gave us in the past year to work with you to solve your most important and sensitive issues. We look forward to continue changing the world together with you in the years to come.
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9. International Trade / Sanctions
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1. Corporate, M&A
1.1 Recent Reform of the Legal Framework for Civil Law Partnerships and other Commercial Partnerships
On June 25, 2021, the German legislator adopted the Act on the Modernization of the Law on Partnerships (Gesetz zur Modernisierung des Personengesellschaftsrechts – MoPeG). While the new law will only enter into force on January 1, 2024, this reform will result in a number of changes which civil law partnerships (Gesellschaft Bürgerlichen Rechts, GbR – “Civil Partnership”) and their partners, but also other forms of commercial partnerships and their partners, ought to be aware of in order to be prepared for the new legal regime.
Consequently, we highlight below a number of selected changes which we would consider to be of particular interest for general industrial players but also for real estate investors who often choose to operate via partnership structures in Germany:
a) Registration of Civil Partnerships
Under the new law, Civil Partnerships will have the option, and in some cases the need, to seek registration in a newly introduced company register (Gesellschaftsregister) maintained by the local courts (Amtsgerichte). Such registration in the public commercial register (Handelsregister) is already mandatory for both (i) corporations such as the GmbH (private limited liability company) or the AG (stock corporation), as well as (ii) commercial partnerships such as the OHG (commercial open partnership with only personally liable partners) or the KG (limited partnership).
This new company register will be particularly relevant for Civil Partnerships that own real estate because their registration in the new company register will be mandatory after January 1, 2024, the current grace period, as soon as there are any legal changes triggering registration in any of the existing registers (e.g. encumbrances or changes in real estate ownership in the land register (Grundbuch)).
Newly incorporated Civil Partnerships who acquire real estate will always require registration in the new company register after the entry into force of the MoPeG based on the above rationale.
Similarly, the position of a Civil Partnership as a shareholder of a limited liability company or as a named shareholder (Namensaktionär) in a stock corporation will trigger the need for registration in the new company register for the Civil Partnership.
If registered, Civil Partnerships must use the abbreviation “eGbR” (eingetragene Gesellschaft bürgerlichen Rechts – Registered Civil Partnership). The registration in the new company register will also increase the level of information available to the public on such registered Civil Partnerships significantly: The filing for registration will have to contain full personal or corporate details of all partners, the details of their representation powers and a confirmation that the relevant partnership is not yet registered in the commercial register or the partnership register (Partnerschaftsregister).
In particular in real estate transactions, where the use of Civil Partnerships is relatively common, such increased transparency on the particulars of the partners and their representation powers will be welcome.
Finally, the registration of a Civil Partnership in the new company register will also result in the need for its partners to disclose information on the registered Civil Partnership’s ultimate beneficial owners in or to the German transparency register (Transparenzregister).
b) Confirmation of Permanence of the Seat of Partnership
The MoPeG brought another welcome and long overdue clarification: The new law clarifies that all German partnerships have their corporate seat either at the place where their business is actually conducted (Verwaltungssitz) or – in case of both registered Civil Law Partnerships and commercial partnerships – at a contractually fixed place in Germany (Vertragssitz), irrespective of the place where the relevant partnership’s business is actually conducted.
Due to the specifics of German partnership law, there had always been some doubt over whether commercial partnerships, which are registered as such in the existing German commercial register, might lose their status as German commercial partnerships (and thus potentially their liability limitations) if they are managed entirely from abroad because they are deemed to no longer be German-based. This statutory confirmation of the permanence of a partnership’s chosen seat means that this dogmatic discussion is now settled. German corporate law remains applicable to partnerships for as long as their chosen contractual seat remains in Germany, irrespective of the factual place where managerial decisions are taken. Consequently, limited partnerships with foreign partners or managed from abroad no longer have to fear that such foreign management may invalidate or otherwise question their limitation of liability under German law. Going forward, the German partnerships concerned are thus free to operate predominantly or entirely abroad.
c) Qualification under the German Conversion Act (Umwandlungsgesetz, UmwG)
The reform also clarifies that Civil Partnerships can in the future be transformed into other corporate formats or merged into other entities by way of universal legal succession. One requirement for such conversion will, however, be a prior registration of the Civil Partnership in question in the new company register.
d) Key Changes for Commercial Partnerships
The reform also introduces certain changes that apply to commercial open partnerships or limited partnerships in Germany. Chief among them are increased information rights for limited partners, new rules on the determination and distribution of profits to the partners and provisions on the taking of partner resolutions and the consequences of defective partner resolutions.
e) Outlook
Existing Civil Partnerships should familiarize themselves with the reform with a view to (i) identifying any necessary or opportune amendments to their partnership agreements and (ii) potential issues related to a future registration in the respective company register. They should assess whether their business activities are of a nature that makes registration either opportune or legally required.
The changes to the law for commercial partnerships may, at first sight, appear less fundamental or far-reaching. Nevertheless, the interim period until December 31, 2023 should also be used to ascertain to which extent existing partnership agreements may need to be revised to either reflect some or all of these changes or to opt out of the new law that might otherwise apply.
1.2 Did Brexit Spell the End for UK Limited Companies in Germany?
Once the UK opted to leave the European Union, the continued existence and legal qualification of British private limited companies with an administrative seat in Germany became the subject of intense legal speculation and debate: Would German courts continue to afford such UK companies the protection of the EU Company Law Directive (Directive (EU) 2017/1132 – the “Company Law Directive”) and the freedom of establishment (Art. 49, 54 AUEV) or would they default back to the “corporate domicile theory” (Sitztheorie) for UK companies in the way they do for other non-EU companies that are not governed by relevant bilateral treaties?
On February 16, 2021, the German Federal Supreme Court (Bundesgerichtshof, BGH) (no. II ZB 25/17) ruled on the above question for the first time and held that the Company Law Directive and the freedom of establishment (Art. 49, 54 AUEV) will no longer apply to a UK limited company as a result of Brexit. The BGH’s judgment suggests that the court will continue to apply the traditional German corporate domicile theory to non-Member States and that it now considers the United Kingdom a non-Member State. Accordingly, the choice of the applicable company law for companies from a non-Member State depends, from a German law perspective, on the administrative seat of the company. In other words, German law will apply to UK companies with a German administrative seat.
It then follows that UK companies with a German administrative seat would, due to their lack of compliance with the incorporation formalities applicable to German corporations, regularly be reclassified either as a German civil law partnership (GbR) or as a commercial open partnership when operating a commercial enterprise (OHG). The partners in both of these partnerships are generally faced with unlimited personal liability. The resulting risks arising from such a corporate reclassification for the owners of UK limited companies which are active in the German market are obvious.
UK limited companies with elements of their decision making powers or administrative headquarters in Germany are thus well advised to restructure their company to avoid personal liability risks for the limited company’s shareholders. The required measures may include (i) a transfer of the effective administrative seat to the United Kingdom, (ii) the transfer of the business operations of the UK Limited to another new or existing German limited liability company (i.e. GmbH) or a German entrepreneurial company with limited liability (UG haftungsbeschränkt) by way of asset deal or (iii) under certain specific circumstances, a cross-border merger of the relevant UK Limited into a limited liability company of one of the other EU Member States.
Which one of the above options is the most suitable approach for any given company must be thoroughly considered in each case and will also depend on tax considerations and/or the business in which the respective company trades in.
1.3 Further Revision of the German Foreign Direct Investment Law – An Ongoing Exercise?
As already predicted in Section 1.3 of our 2020 German Year-End Alert, 2021 saw another significant expansion of the scope of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) by incorporating 16 new business sectors into the cross-sectoral review that are considered critical. In addition to the sectors already included in the AWV, a mandatory filing is now also required if a German M&A transaction target operates in one of these new sectors and the investor intends to acquire more than 20% (compared to 10% applicable to the “old” sectors) of its voting rights. These newly introduced sectors include satellite systems, artificial intelligence, robots, autonomous driving/unmanned aircrafts, quantum mechanics, and critical materials and broadly reflects the sectors mentioned in the EU Screening Regulation. The total number of “critical sectors” which require a mandatory filing has now increased to 27.
The revision also extended the sector-specific review (in particular with respect to defense-related activities). This is relevant to all non-German investors, even if they are located in the EU/EFTA. The following are now included: (i) all products of Part I Section A of the German Export List including their modification and handling, (ii) military goods/technologies that are based on restricted patents or utility models and (iii) defense-critical facilities.
In addition to expanding the scope of the foreign direct investment (“FDI”) review, the 2021 AWV revisions led to certain procedural changes and clarifications, including the following:
- Additional mandatory filings are required, if the investor acquires additional voting rights and exceeds certain thresholds (e.g., 25%, 40%, 50% and 75%, in case of the initial threshold of 20%, or 20%, 25%, 40%, 50% and 75% in case of the initial threshold of 10%).
- The application for a certificate of non-objection (Unbedenklichkeitsbescheinigung) is not available if the transaction is subject to mandatory filing requirements.
- The German Ministry for Economic Affairs (BMWi) may review transactions falling below the relevant voting rights threshold, if so-called atypical control rights are granted to the investor (e.g. granting the investor an additional board seat or veto rights and/or access to particular information). This, however, does not trigger a mandatory filing requirement but allows the BMWi to investigate the transaction ex officio for five years post-signing.
- Individual investors may be considered as acting together in certain acquisition structures involving purchasers from the same country.
Since April 2020, the German FDI regime faced three substantial revisions, which led to a significant increase in case load for the BMWi. Many EU Member States have implemented or amended their FDI regimes in light of the EU Screening Regulation and the EU cooperation mechanism. This has led to a solid information flow between the European Commission and the EU Member States. Investors are therefore well-advised to conduct a multi-jurisdictional FDI analysis as early as possible in the M&A process. The risk of potentially severe legal consequences for gun jumping (including imprisonment) requires a thorough advance assessment.
For further details please refer to our client alert on the topic from May 2021.
1.4 German Transparency Register: Expiry of Transition Periods for Registration of Beneficial Ownership Information
Effective as of August 1, 2021, the German transparency register, which was introduced in 2017 as part of EU measures to combat money laundering and terrorist financing, has finally been upgraded to a genuine public register for information on a beneficial owner. A beneficial owner is an individual (natürliche Person) who directly or indirectly owns or controls more than 25 per cent of the share capital or voting rights in the relevant entity.
Previously it was not a requirement to file beneficial ownership information with the German transparency register if the information was already available in electronic form in other public German registers – for example through shareholder lists retrievable from the commercial register or because the registered managing directors of the German subsidiary were deemed to be beneficial owners absent individuals controlling the parent. Now all legal entities (juristische Personen) and registered partnerships under German private law are required to file beneficial ownership information for registration with the German transparency register. If there is no beneficial owner, the legal representatives, managing shareholders or partners must be registered with the German transparency register as deemed beneficial owners, irrespective of their registration in another German public register.
The (staggered) transition periods for entities that had to file for the first time due to the new rules will expire (i) on March 31, 2022 (for stock corporations (Aktiengesellschaft, AG), European stock corporations (Societas Europaea, SE) and partnerships limited by shares (Kommanditgesellschaft auf Aktien, KGaA)), (ii) June 30, 2022 (for limited liability companies (Gesellschaft mit beschränkter Haftung, GmbH), cooperatives (Genossenschaften), European cooperatives (europäische Genossenschaften) and partnerships (Partnerschaftsgesellschaften)) and (iii) December 31, 2022 (for all other legal entities and registered partnerships). Although there is a further leniency period of one year following the aforementioned filing deadlines, in which no administrative fines shall be imposed on the relevant entities, international groups in particular should confirm with their German operations to ensure a timely filing of the required beneficial ownership information with the transparency register. It is important to bear in mind that the above transition periods do not apply in case the change occurs after August 1, 2021: Accordingly, any new managing directors deemed to be beneficial owners should also be registered immediately in the transparency register to avoid an administrative fine.
Finally, in this context it is also important to note that since August 1, 2021, the obligations of foreign entities and trustees residing or headquartered outside of the EU to file beneficial ownership information for registration in the German transparency register have been significantly expanded. In particular, if German real property is involved in a transaction, the rules now not only capture asset deals but also direct and indirect share deals. These new filing obligations should be taken into due consideration by all companies planning to – directly or indirectly – acquire real property in Germany in 2022 in order to avoid any unexpected delays of the transaction due to missing filings.
For a more detailed analysis we refer to our specific client alert on the topic in June 2021.
1.5 New Requirements for the Corporate Governance and External Audit of Listed German Companies in the Aftermath of the Wirecard Scandal
As a reaction to the seismic shake of public confidence in the effectiveness of the internal and external governance and control systems of German public companies following the spectacular collapse of German Dax listed Wirecard, the German legislature has adopted the Act on Strengthening the Financial Market Integrity (Finanzmarktintegritätsgesetzt – FISG). The FISG entered into force on July 1, 2021. This law establishes a number of new requirements designed to enhance the corporate governance and external audit of listed German companies as well as other public-interest companies which clients would be well advised to familiarize themselves with as some of them may necessitate changes to the constitutional documents of the affected listed German companies and other public-interest companies.
For a more detailed analysis of these changes, please see our client alert on the topic in June 2021 and Section 1.2 in last year’s German Year-End Alert.
1.6 ESG – What’s Next? The Delayed EU Initiative on Sustainable Corporate Governance
Sustainability and social responsibility are continuously attracting awareness and gaining in importance. One encounters these issues in a wide variety of areas, from everyday errands such as grocery shopping to complex processes such as corporate governance. The current legislative initiative on Sustainable Corporate Governance (2020/2137 INI of the European Commission, the “Initiative”) by the European Commission is aimed at ensuring that companies focus on long-term sustainable value creation rather than short-term benefits and would be subject to a broader set of policies under the EU Green Deal.
The Commission was originally set to adopt the Initiative in December 2021. After public consultation was completed in early 2021, and after an initial delay due to the rejection of the underlying impact study by the EU Regulatory Scrutiny Board, pressure has increased on the Commission to act soon. On December 8, 2021, an open letter signed by 47 civil society and trade union organizations was sent to the President of the European Commission, Ursula von der Leyen. Publication of the proposed legislation is now expected for early 2022.
According to the inception impact assessment (a project plan setting out the elements for new legislation) by the Commission, the Initiative is expected to impose a combination of the following corporate and directors’ duties with a view to requiring (i) companies to adhere to the “do no harm” principle and (ii) directors to integrate a wider range of sustainability interests, such as climate, environment and human rights, into their business decisions:
- Due diligence duty: The due diligence duty for companies operating in the EU would require them to “take measures to address their adverse sustainability impacts, such as climate change, environmental, human rights […] harm in their own operations and in their value chain by identifying and preventing relevant risks and mitigating negative impacts” to identify and prevent relevant risks for climate, environment and human rights; and
- Duty of care: The duty for company directors would oblige them to take into account stakeholders’ interests “which are relevant for the long-term sustainability of the firm or which belong to those affected by it ([such as] employees, environment, other stakeholders affected by the business)”. Companies’ strategies under these requirements would need to be implemented “through proper risk management and impact mitigation procedures”.
It remains to be seen how and to what extent the Commission will implement these plans. Especially the suggested duty of care for management was met with criticism from Nordic countries such as Denmark, Finland, Estonia and others.
In Germany, ESG is – at least, to a certain degree – already part of corporate law: Certain disclosure obligations contained in the German Commercial Code (Handelsgesetzbuch, HGB), which originated from the EU Corporate Social Responsibility Directive, and the new German Act on Corporate Due Diligence in Supply Chains (Lieferkettensorgalfspflichtengesetz, LkSG), which will come into effect in 2023 (regarding the LkSG see below section 5.2), are two such examples. Furthermore, the – non-binding – German Corporate Governance Code (Deutscher Corporate Governance Kodex) covers the issue of sustainability and states that companies have ethical, environmental and social responsibilities for their employees, stakeholders and the community, deviating from the narrow shareholder value towards the broader stakeholder value principle.
The political trends in Germany point towards increased support for an initiative on social corporate governance: the 2021 coalition agreement of the newly elected German government between the Social Democratic Party (SPD), the Green Party (Bündnis 90/Die Grünen) and the Liberal Democratic Party (FDP) has placed strong emphasis on sustainability (the word appears more than 100 times in the 170-page agreement) and the protection of the environment. The document expressly states support for a “Corporate Sustainability Reporting Directive”.
Given the suggested scope of the Initiative, companies should be prepared to take not only economic, but also environmental and social responsibility along the entire value chain seriously and implement respective processes throughout their operations. For example, in order to comply with the proposed due diligence duty and the duty of care, companies would likely be required to adapt newly tailored decision-making processes, taking into account aspects such as sustainable corporate governance, climate protection, resource conservation, data responsibility, human rights, integrity and compliance, supply chain and corporate citizenship.
2. Tax
2.1 Tax Policy Program of the New Coalition
In the coalition agreement presented on November 24, 2021, the incoming government coalition of the Social Democratic Party (SPD), the Green Party (Bündnis 90/Die Grünen) and the Liberal Democratic Party (FDP) presented a tax policy program for the new governmental legislative period.
The program sets out the guidelines and statements of intent for the future tax policy for the next four years, but does not include any detailed or concrete tax law changes. Contrary to what had been announced by the SPD and the Green Party before the election, under the new tax policy program no wealth tax or increase in inheritance tax are anticipated. In addition to minor improvements to the offsetting of losses and to the preferential tax treatment for retained earnings, the coalition announced an obligation to report purely national tax arrangements for companies with sales of more than EUR 10 million. Under current law, a reporting obligation only exists for tax arrangements in cross-border transactions (known as DAC 6 reporting).
Other measures worthy of mention include the addition of an unspecified “interest rate cap” to the interest barrier rule, the expansion of withholding taxation, in particular, through the amendment of double taxation agreements, a renewed legislative amendment of real estate transfer tax in case of share deals, the intensification of the fight against tax evasion, money laundering and tax avoidance, and active support for the introduction of a global minimum taxation under the OECD initiatives.
With the coalition agreement, the coalition made it clear that there is no intention to reduce or increase corporate income tax, the solidarity surcharge or the income tax rate for individuals. Further details are currently unclear and reserved for future legislative initiatives.
2.2 Revision of the Anti-Treaty Shopping Rule
For the third time in recent years, the European Court of Justice (case C-440/17) has ruled that the German Anti-Treaty Shopping provisions are not in compliance with EU law. The Anti Treaty Shopping provisions are relevant for cross boarder payment of, inter alia, dividends, interest and royalties where the parties of such payments rely on reduced withholding tax rates on such payments under an applicable double taxation treaty.
With effect for all open cases the German legislator amended the existing Anti-Treaty Shopping provisions on June 2, 2021 and implemented a two-step approach and the possibility to rebut any presumption of treaty abuse. The two step approach consists of a shareholder and an activity test. Under the shareholder test (look-through approach) treaty abuse would be presumed where the shareholder of a foreign entity that receives the cross-border payments would not be entitled to the same benefits claimed by the foreign entity if the shareholder of that entity received the payments directly. Under the activity test a foreign entity would not be entitled to treaty benefits if the source of its income subject to withholding tax does not have a material link or connection with the foreign entity’s own activity. A simple pass through of income to shareholders or activities that lack physical substance do not qualify as sufficient economic activity. If both tests fail, the presumption of treaty abuse can be rebutted if it can be proven that none of the main reasons for interposing the foreign entity was to obtain a tax advantage.
The new rule results in a significant tightening of the conditions to benefit from a reduced withholding tax rate under an applicable double taxation treaty. The shareholder test to be passed would effectively be limited to shareholders that are resident in the same country as the foreign entity that receives the payment. The preconditions for the activity test are still unclear and require further guidance by the tax authorities. The main purpose exception, under which “none of the main reasons” for the interposition of an entity was to obtain a tax advantage is not limited to withholding tax considerations, or even to German tax considerations, which significantly limits the ability to successfully rely on the rebuttal exception.
Foreign investors with income from German sources should review their structures to determine whether reduced withholding tax rates under an applicable double taxation treaty can still be claimed under the amended rules.
2.3 New German Check-the-Box Rules
In Germany, corporate entities are subject to corporate income tax and local trade tax. The combined tax load typically ranges between 30% and 33%. Partnerships are subject to trade tax in the same way as corporate entities. However, as partnerships are treated as transparent for income tax purposes, profits of a partnership are automatically deemed to be distributed to the partners and are subject to the income tax rate that may be applicable at the level of an individual partner of up to 45%. Profits of a corporation are taxed at shareholder level only upon dividend distribution, which – in contrast to partnerships – has a tax deferral effect at shareholder level until a distribution is made.
To mitigate such unequal tax treatment, the new check-the-box rules allow for an option for partnerships to be taxed as corporate entities. The election would have to be made before the beginning of the fiscal year for which the election becomes valid. For legal purposes, the partnership would still be treated as a partnership. The election to be treated as a corporate entity for income tax purposes would need to be made by the partnership with approval from all partners (unless the partnership agreement provides for a 75% majority). After the election, the relationship between the partners in the partnership would be governed by the rules regarding the relationship between a corporate entity and its shareholders, i.e., the taxation of dividends and deemed dividends (including withholding tax consequences) would need to be considered.
An election needs to be clearly analyzed in order not to trigger other negative tax consequences. An election may lead to a forfeiture of net operating losses at partnership level and may trigger real estate transfer tax for past reorganizations. Non-EU limited partners may suffer capital gains tax upon election and, even if a capital gains tax upon election is avoided, there would be a seven year holding period for shares after the election becomes effective.
Due to the possible negative side effects of such election, it remains to be seen whether the new check-the-box rules will be a successful tax planning alternative for partnerships in the future.
3. Financing & Restructuring
3.1 LIBOR Cessation: Impact on Existing Loan Agreements
In most European financings, when calculating interest rates for floating rate loans or other instruments, the interest rate has historically been made up of (i) a margin element, and (ii) an inter-bank offered rate (IBOR). Most prominent IBORs used in European financings are USD LIBOR and LIBOR for loans denominated in USD and GBP, respectively, and EURIBOR for euro-denominated loans. In the aftermath of the LIBOR scandal that surfaced in the year 2016 and the manipulation of this rate by certain market participants, regulators have decided to discontinue and replace such rates by alternative risk-free rates. While IBOR reference rates are determined on the basis of quotations provided by a small group of market participants of their expected refinancing costs (and therefore are look-forward in nature), risk-free rates are based on active, underlying transactions. The cessation of LIBOR for GBP loans will take place by the end of 2021. For USD loans, only the reference rates for certain limited tenors will cease to be published as at such date, while the majority USD LIBOR rates will continue in effect until June 30, 2023, thus giving the market additional time for transition to alternative interest rates.
In the absence of statutory fallback solutions, upon the cessation of the relevant IBOR, the fallback provisions incorporated into the relevant loan documentation (if any) will apply in the first instance. Given that these themselves usually refer to the same IBOR (but different tenors or determined as of a different point in time), it is not unlikely that the applicable interest rate will eventually be based on the costs of funds of the relevant lenders as ultimate fallback provision for lack of other alternatives. From a borrower’s perspective, calculating the interest rate on the basis of the actual costs of funds provides much less certainty as regards funding costs than a reference-rate-based approach. Borrowers should therefore seek to enter into negotiations with their lender with a view to amending their financing agreements by replacing IBOR-based interest rates with risk-free rates. Regarding the specific risk-free rates to be used, in the UK financing space, the market has settled on SONIA (Sterling Overnight Index Average) compounded daily on a look back basis as the replacement reference rate to GBP LIBOR while in the U.S., the Secured Overnight Financing Rate (SOFR) appears to be the reference rate of choice for most financings.
However, there is still quite a lot of movement and room for development as these risk-free rates evolve, including the development of a look-forward “term SOFR”. Consequently, other or additional rates may yet become customary in the future. Regardless of whether these or other alternative rates are used, amending the interest rate provisions in existing loan agreements generally requires the borrower and the lenders to agree any alternative rate subject to the amendment and waivers provisions applicable to the financing. This will usually require a majority lenders’ decision, thus requiring the consent of two thirds of lenders’ commitments. Prompt action is thus required for borrowers unless specific contractual safeguards sufficiently taking into account the borrower’s interest have already been incorporated.
While discussions have started regarding a discontinuation and replacement of EURIBOR as well, such developments are still in their early stages and no definite timeline for such interest reference rate cessation has been determined. Thus, there currently is no need to specifically address such issue for EURIBOR-based loans at this point in time.
3.2 Avoidance of Transactions Due to Intention to Prejudice Creditors – A Turning Point?
After years of handing down relatively avoidance-friendly rulings, on May 5, 2021, the German Federal Supreme Court (Bundesgerichtshof, BGH) tightened the requirements for an insolvency administrator to attempt avoidance in insolvency (Insolvenzanfechtung) of transactions based on a debtor’s intent to prejudice the insolvent estate’s creditors pursuant to Section 133 of the German Insolvency Code (Insolvenzordnung, InsO) (BGH – IX ZR 72/20).
Prior to the ruling, in general, all an insolvency administrator had to show for a successful challenge was the debtor’s knowledge of its (impending) illiquidity (drohende Zahlungsunfähigkeit), which then led to a presumption of the debtor’s intent to disadvantage other creditors. As far as the counterparty to the contract was concerned, it was sufficient that such party was aware of the (impending) illiquidity. This case law was quite harsh on business partners of a debtor in financial difficulties, as it is possible to contest pre-insolvency performance acts or the completion even of congruent contracts for up to four years. New contracts entered into during a state of imminent illiquidity or incongruent performance actions are even at risk for ten years. The only “safe” way for a business partner to deal with a distressed contract partner under such circumstances was to insist on the submission of a restructuring opinion.
Pursuant to the new BGH ruling, the insolvency administrator will now have to show that the debtor – in addition to the (impending) illiquidity – knew or, at least, tacitly accepted that he would also not be able to meet the claims of all the estate’s creditors in the future. In addition, the intent to disadvantage creditors can no longer simply be inferred from illiquidity but requires additional evidentiary elements such as, for example, payments prior to maturity, or otherwise payment of creditors outside the ordinary course of business.
It will be interesting to see how insolvency administrators and lower instance courts faced with future insolvency avoidance cases interpret these tightened requirements on a case by case basis. Ultimately, insolvency administrators and creditors alike will likely attempt to appeal cases to enable the German Federal Supreme Court to provide for further guidance. In the meantime, at least in restructuring cases involving a party in a state of impending illiquidity, the almost automatic conclusion from knowledge of the financial situation to knowledge of intent to prejudice creditors should no longer apply.
3.3 Pre-Insolvency Restructuring – The First Twelve Months and What Next?
Exactly a year ago, the German Business Stabilization and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG, ‑ the “Restructuring Act”) was introduced with effect as of January 1, 2021 (see last year’s German Year-End Alert in section 3.2). Since restructuring proceedings under the Restructuring Act are in general non-public, official statistics on the number of proceedings applied for or completed are not available. However, publicly available sources suggest that (i) around ten applications were made in the first eight months of the year 2021, (ii) no large multinational company was involved and (iii) most of the companies concerned were local entities rather than international players.
In addition, there already is a somewhat limited body of court orders related to the Restructuring Act. These early cases hint at two critical aspects of any German pre-insolvency restructuring:
- Several cases have honed in on the determination of impending illiquidity (drohende Zahlungsunfähigkeit). This key determination works in two ways, namely to prevent premature attempts to make use of the pre-insolvency restructuring regime even though the required liquidity shortfall is not severe enough to meet the legal threshold of impending illiquidity. On the other hand, courts have had to deal with cases at the other end of the spectrum when actual illiquidity (Zahlungsunfähigkeit) either existed (and full insolvency proceedings would have to be applied for under mandatory law) or such actual illiquidity later occurred while proceedings under the Restructuring Act were pending (when the continuation of lawfully commenced pre-insolvency restructuring remains the exception).
- A second focal point in the early cases available seems to be the comparative calculation (Vergleichsrechnung) where opposing creditors can show that the restructuring plan disadvantages them when compared to hypothetical alternative scenarios. In this context, the courts are grappling with the question of how to pick the appropriate hypothetical comparator ranging from third-party sale options or other forms of business continuation to full liquidation in formal insolvency proceedings which have to be provided by the debtor in support of an envisaged cross-class cramdown.
It is still too early for a conclusive evaluation of the Restructuring Act, of course, but restructuring professionals have made the following interim observations after one year of experience with the new law:
- Financing banks seem concerned about the risk of being overruled in restructuring proceedings and are looking for additional safeguards to protect their interests. At the same time, affected companies urgently need reliable (bank) financing also during pre-insolvency restructuring.
- The shift of fiduciary duties of management to primarily safeguard the interests of creditors (rather than shareholders) should already apply when a debtor reaches a state of impending illiquidity to allow for an early restructuring without interference from shareholders.
- The last minute deletion in the legislative process of the option to terminate contracts which are obstacles to a successful pre-insolvency restructuring from the toolkit under the Restructuring Act considerably weakens and limits the scope of application of German restructuring proceedings, in particular in the international competition between other EU, UK and US restructuring laws.
All of the above concerns would require certain amendments to the Restructuring Act. The coalition agreement of the newly elected German government between the Social Democratic Party (SPD), the Green Party (Bündnis 90/Die Grünen) and the Liberal Democratic Party (FDP) has not placed particular emphasis on restructuring in its government program and a cross-party consensus may not be easy to achieve. Having said that, the general goal of “modernizing” Germany would, of course, be sufficiently wide to allow for a prompt response through governmental initiatives or parliamentary discussion if serious frictions became apparent in the continued application of the Restructuring Act.
4. Labor & Employment
4.1 Purchaser of Insolvent Assets not Liable for Previous Claims
The German Federal Labor Court (Bundesarbeitsgericht, BAG) has reinforced its existing case law with regard to acquisitions out of insolvency, protecting the buyer of insolvent companies (3 AZR 139/17). The court has ruled that the buyer will not be liable for any employee claims that have arisen prior to the insolvency proceedings. This important clarification particularly affects pension entitlements, which can often impede or complicate a distressed transaction. In this context, a decision by the European Court of Justice in 2020 (C 647/18) had left some loose ends (we had covered this ruling in last year’s German Year-End Alert 2020 in section 4.3). The German precedent has now closed the loop on this issue and thus provides legal certainty for purchasers of insolvent companies in Germany.
4.2 COVID: Employer Entitled to Ask for Vaccination Status
According to a brand-new law which came into force in November 2021 in connection with protective rules designed to combat the pandemic, employers are now within their rights to ask employees for their COVID-19 vaccination status. Consequently, employers can establish a “VRT” regime (vaccinated, recovered, or tested) for their employees. In addition, several large companies have started to devise other creative steps to protect their staff, e.g. by separate cafeteria areas reserved only for vaccinated staff. German employers are also free to decide whether to allow only vaccinated or recovered staff onto their premises. Any employee who can work from home has to be offered the opportunity to do so and has to accept such offer absent any viable counter-indications.
4.3 Strengthening Female Corporate Leadership (FüPoG II)
Germany has continued its efforts in promoting the equal participation of women and men in executive positions by way of the Second Management Position Act (Zweites Führungspositionen-Gesetz, FüPoG II), the draft of which we already discussed in last year’s German Year-End Alert 2020 in section 1.4.
For listed companies subject to the Co-Determination Act (MitbestG), the German legislator has introduced fixed gender quotas for boards with more than three members: Such boards must now contain at least one male and one female member. Currently, this applies to approximately 70 of Germany’s largest companies. In addition, specific quotas apply for companies in which governmental authorities hold a majority and public law corporations (Körperschaften des öffentlichen Rechts).
Another key element of Germany’s efforts to strengthen female corporate leadership is the newly created option for board members to take temporary “time off” during maternity leave, parental leave, illness and/or times spent caring for a relative. This provision was a direct response to events in 2020, when the founder of a major listed German online furniture retailer (Westwing) was forced to resign from her position as member of the board in order to go on maternity leave. Under the previous legal regime, such a resignation had been the only safe way to avoid serious liability risks also for actions taken in the absence of such board member by the remaining board members.
4.4 Works Council Rights Extended
Mainly in response to the enhanced digitalization of the workplace, the German legislator has in 2021 adapted and extended the rights of works councils in German companies (Works Councils Modernization Act) in several respects:
(i) The election processes for works councils have been simplified.
(ii) The works councils now have a co-determination right regarding remote work (e.g. work from home) and the use of AI (Artificial Intelligence) in personnel processes (e.g. Workday or SuccessFactors).
(iii) Furthermore, the employer is now responsible for the data processing by works council members, who in return are subject to control by the company’s data protection officer.
(iv) Finally, the dismissal protection of works council members and candidates has been extended to cover also employees who only undertake preparatory steps to establish a works council.
5. Compliance & White Collar
5.1 White Collar: What to Expect from Germany’s New Coalition Government
Following Angela Merkel’s sixteen-year tenure, Germany will – for the first time in its history – be ruled by a coalition consisting of the Social Democratic Party (SPD), the Green Party (Bündnis 90/Die Grünen) and the Liberal Democratic Party (FDP). While white-collar crime is certainly not the primary cornerstone of their coalition agreement, their joint government program does give an indication of what to expect from the new German government.
Most notably, the coalition agreement does not mention the Corporate Sanctions Act draft bill proposed by the former government (see German Year-End Alert 2020, section 6.1) which ultimately did not pass Parliament. If this draft bill had been enacted, the proposal would have introduced a genuine corporate criminal liability currently unknown by German law. However, the new government wants to revise the existing regime of corporate sanctions, i.e. corporate fines based on the Act on Regulatory Offenses (Ordnungswidrigkeitengesetz, OWiG), including an adjustment of sanction levels and a more precise regulation of internal investigations.
The federal government is also seeking to implement the EU Whistleblower Directive 2019/1937. Importantly, the coalition wants to make use of the opening clause of the Directive, i.e. have breaches of national law covered by the same legal framework as reports of breaches of EU law (for a more detailed analysis see section 5.3 below).
Digitalization may take hold of Germany’s courtrooms as the new government plans to make video recordings of police and criminal court hearings obligatory in order to allow defendants to appeal rulings in a more targeted way. In addition, negotiated agreements in criminal proceedings will be subject to new rules.
Furthermore, the new government aims to strengthen law enforcement inter alia by providing customs authorities, the Federal Financial Supervisory Authority (BaFin) and the Financial Intelligence Unit (FIU) with further adequate resources. Both BaFin and the FIU had to tackle serious problems in 2020/2021. BaFin was accused of having insufficiently exercised its supervisory duties in connection with the possibly fraudulent activities of the Wirecard Group, while the FIU encountered significant problems with processing suspicious activity reports based on the Money Laundering Act (Geldwäschegesetz, GWG). The public prosecutor even opened a criminal investigation against officials of the FIU for the offense of obstructing criminal prosecution in public office.
Together with the contemplated new measures to combat tax evasion and tax avoidance more aggressively and consistently to recover tax losses, which shall also be taken by the coalition (see with regard to tax issues also section 2.1 above), it can thus be assumed that there will be an increase in enforcement activities regarding white-collar crime.
5.2 Germany’s New Supply Chain Due Diligence Act
After lengthy negotiations, the German Parliament adopted the Act on Corporate Due Diligence in Supply Chains (Lieferkettensorgfaltspflichtengesetz – LkSG) on June 21, 2021 (the “Supply Chain Law”).
The Supply Chain Law will come into force on January 1, 2023 for companies that have their central administration, headquarters, registered office or a branch office in Germany if they have more than 3,000 employees in Germany. From January 1, 2024 onwards, the Supply Chain Law will be expanded to also apply to companies in the foregoing categories which have at least 1,000 employees in Germany.
The Supply Chain Law introduces a binding obligation for relevant companies to implement dedicated due diligence procedures to safeguard human rights and the environment in their own operations as well as in their direct supply chain, including inter alia a dedicated risk management system, an internal complaints procedure as well as taking remedial actions in case a violation has occurred or is imminent. In lower, more remote tiers of supply chains, companies are required to take certain actions only in case they obtain “substantiated knowledge” of violation of human rights or environmental standards.
Depending on the severity of the violation, affected companies may be fined under the Supply Chain Law. Large companies with an annual global turnover of more than EUR 400 million (approx. USD 475 million) can be required to pay fines of up to 2% of their annual global turnover. Furthermore, companies that have been fined a minimum of EUR 175,000 can be excluded from public procurement for up to three years.
In parallel, the EU Commission is working on a corresponding proposal for a human rights and environmental due diligence legislation which would introduce a harmonized minimum standard in these areas across all EU Member States. The respective EU legislative initiative has, however, been subject to intense debate and lobbying which has resulted in the respective legislative proposal having been postponed multiple times. It remains to be seen if Germany’s Supply Chain Law will serve as model for the respective EU legislation.
5.3 Whistleblower Protection
The German legislature has missed the deadline for implementing the EU Whistleblower Directive (EU 2019/1937), which lapsed on December 17, 2021. However, the newly elected government has agreed in its coalition contract in December to implement the directive and to also extend it to grave violations against German law. The EU Whistleblower Directive obliges all companies with at least 50 employees to establish internal channels to report violations against certain EU law provisions. Legitimate whistleblowers can report such violations both internally and externally – without giving structural priority to internal reporting as had previously been the case in many jurisdictions. If such reporting is fruitless or in emergency cases, even public disclosure is allowed. In such cases, the whistleblower is protected against any kind of retaliation, including the non-renewal of a fixed term employment contract. If an employee who has reported violations suffers any kind of disadvantage, it shall be presumed that such disadvantages occurred in retaliation to the report, unless the employer succeeds in proving otherwise (reversed burden of proof).
6. Data Privacy & Technology
6.1 (Private) Enforcement Trends, New Data Privacy Laws and Fines
a) Data Privacy Enforcement Trends
As already highlighted in our German 2020 Year-End Alert in section 7, the trend towards greater data privacy enforcement by the German Data Protection Authorities (“DPAs”) continues. In 2021, the German DPAs have especially focused on international data transfers with an increased level of scrutiny. For example, in June 2021 several German DPAs initiated a coordinated investigation into international data transfers of several companies within their respective jurisdictions.
We expect this trend to continue well into the new year, in particular since companies cannot simply rely on the new standard contractual clauses issued by the European Commission in June 2021, but need to implement additional safeguards in order to ensure an adequate level of data protection when transferring personal data to third countries (including the US outside of the EU/EEA.
Further, the Administrative Court (Verwaltungsgericht) of Wiesbaden just decided on December 1, 2021 (case 6 L 738/21.WI) that it is not permissible for a German university to use the “Cookiebot” service to manage the cookie consent process for the purpose of recording consent or its refusal because personal data (i.e. the IP address and the consent/refusal information) are sent to the United States by Cookiebot without a legal basis.
Private enforcement of data privacy provisions has not lost its momentum in 2021, either. German courts are increasingly pushing the boundaries and are willing to expand the reach of data privacy access requests. For example, the German Federal Supreme Court (Bundesgerichtshof, BGH) issued a ruling that extends the scope of such requests, noting that access claims are not limited to “essential biographical information”. The BGH further stated that the data subject can also assert his or her access right even if he or she is already aware of the information requested (e.g., in case of correspondence between the data subject and the controller) and that the access request may also encompass internal notes or internal communications related to the data subject.
b) New Data Privacy Laws
On December 1, 2021, two important new laws came into force: the Data Protection and Privacy in Telecommunications and Telemedia Act (Telekommunikation-Telemedien-Datenschutz-Gesetz, or “TTDSG”) as well as the Telecommunications Modernization Act (Telekommunikationsmodernisierungsgesetz, or “TKMoG”). Both laws aim to modernize German telecommunications law and are intended to create a comprehensive regulation on data privacy in telecommunications and telemedia while implementing the requirements of the European Electronic Communications Code (“EECC”) and the e-Privacy Directive (Directive 2002/58/EC of July 12, 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector) into German law. As a result, so called “over-the-top” (“OTT”) services are brought into the scope of the German data privacy and telecommunications regime. These OTT services are defined in the new laws as “number-independent interpersonal communications services” and may include messenger services, web-based email services and video conferencing services. Notably, as the last EU Member State, Germany finally transposes into national law the consent requirement for cookies as provided for by the e-Privacy Directive. Consent is thus expressly required for so-called non-essential cookies (and irrespective of whether these cookies process personal data). This resolves the uncertainty under the previous Telemedia Act (Telemediengesetz – TMG) and implements corresponding decisions by the European Court of Justice and the German Federal Supreme Court.
c) Update on Fining Activity
In 2021, the German DPAs issued a number of fining decisions, the following of which we would regard as particularly instructive.
In January 2021, the Supervisory Authority of Lower-Saxony imposed a fine of EUR 10.4 million (approx. USD 11.73 million) against a company selling electronic products online for having implemented an excessive and unlawful video surveillance system with regard to its employees and some of its clients without sufficient legal basis. According to the Supervisory Authority, a video surveillance system to detect criminal offences is only lawful if there is a reasonable suspicion towards certain individuals. If this is the case, it may be permissible to monitor these individuals with cameras for a limited period of time. At the company, however, the video surveillance was neither limited to a specific period nor to specific employees.
6.2 New Copyright Law
On August 1, 2021 the new German Copyright Service Provider Act (Urheberrechts-Diensteanbieter-Gesetz, or “UrhDaG”) came into force, which transposes the requirements of Art. 17 of the European Directive (EU) 2019/790 into German law. This new law introduces the principle of direct intermediary liability into German law and effectively requires online platforms to scan public user content uploaded to their platform and block illegal content. Pursuant to the UrhDaG, the online platform may be exempted from liability if the platform fulfils certain requirements, such as acquiring licenses for copyright-protected third-party content that users publish and distribute. The platform may also use “upload filters” if it does not have the necessary license for the uploaded content.
6.3 German Legislation on Autonomous Driving
As previewed in our German Year-End German 2020 in section 8.2, on March 15, 2021, the German legislator has proposed a new law on fully automated driving (SAE level 4). The law aims to establish uniform conditions for testing new technologies, such as driverless cars with SAE level 4, throughout Germany. Pursuant to the law, autonomous vehicles will be permitted to drive in regular operation without a driver being physically present, albeit limited to certain locally defined operating areas, for the time being.
The law came into force on July 28, 2021. According to the former German Minister of Transport, Germany is the first country in the world to permit fully automated vehicles in regular operation (subject to local operating areas to be defined by the respective German state authorities).
7. Antitrust & Merger Control
7.1 Enforcement Overview 2021
The German Federal Cartel Office (Bundeskartellamt, “FCO”), Germany’s main antitrust watchdog, has had another active year.
On the cartel prosecution side, in 2021, the FCO imposed fines totaling approximately EUR 105 million. The fines were imposed on eleven companies and eight individuals for anticompetitive conduct and agreements in the area of specialty steels and steel forging and for vertical price-fixing agreements concerning consumer electrics, music instruments and school bags. However, the total amount of these fines is roughly 70% lower compared to the year 2020 which may reflect both the impact of the COVID-19 pandemic but also the increasing risks associated with private follow-on damage claims that impact on companies’ willingness to cooperate with the FCO under its leniency regime (see the update on private enforcement below in section 7.4 below).
In a similar downward trend, the FCO only conducted two dawn raids in 2021 – but has indicated that it may soon conduct additional dawn raids and that it has received information from nine companies under the FCO’s leniency program. The FCO also continues to focus on the digital economy and opened several investigation against global tech companies under an amendment to Germany’s competition law (see below section 7.2).
In the domain of merger control, the FCO reviewed approximately 1,000 merger control filings in 2021 (which is approximately 16 % down on 2020). As in prior years, approximately 99 % of these filings were concluded during the one-month phase-one review. Fourteen merger filings required an in-depth phase-two examination (which is 50% more than in 2019). Of those, one transaction was prohibited (this concerned the takeover of a newspaper), five filings were withdrawn by the parties, four cases were cleared in phase-two (subject to conditions in one case), and four phase-two proceedings are still pending. For further details, please see the merger control update below in section 7.2.
Also in 2021, the FCO finally launched its public procurement competition register which is accessible to government and other public procurement bodies and enables them to determine whether companies were involved in competition law infringements and/or other serious economic offences that may justify their exclusion from public procurement proceedings.
7.2 More Surveillance of Digital Companies and Less Merger Control – Reallocating Resources
At the start of 2021, the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB, or “ARC”) was significantly revised with the aim of creating a more effective regulatory framework for the digital economy.
One of the two key elements of the new regulatory framework is the strengthening of the FCO’s powers, in particular to control digital companies. A newly introduced instrument now allows the FCO ex-ante to prohibit companies with “paramount significance for competition across markets” from engaging in anti-competitive practices by leveraging their market power onto new product markets.
The FCO will assess and reach a formal decision on whether the relevant company has, in fact, “paramount significance for competition across markets”. If this is the case, the FCO can now address alleged anticompetitive practices early on. The FCO has already initiated antitrust proceedings against several global tech companies on this basis. Companies have standing to appeal the FCO’s decision directly to the German Federal Supreme Court (Bundesgerichtshof, BGH) whose decision represents the final word on the matter. The rationale behind this “fast track” proceeding is to enable the FCO to reach and enforce legally binding decisions in an expeditious manner in order to act effectively in fast evolving markets.
In order to free up resources at the FCO, the second key objective of the most recent amendment of the ARC was to reduce the sheer number of merger control proceedings handled by the FCO and to focus on the (likely) more important cases. Compared to other jurisdictions, the number of merger notifications to the FCO has traditionally been very high due to the relatively low turnover thresholds. The turnover thresholds are now set at a significantly higher value. Mergers now have to be notified to the FCO only if one of the involved parties has generated at least EUR 50 million with customers in Germany (formerly: EUR 25 million) and, additionally, another involved party generated at least EUR 17.5 million with customers in Germany (formerly: EUR 5 million). Notably, the alternative transaction value threshold (Euro 400 million) remains unchanged. Pursuant to the FCO’s updated guidelines on the transaction value threshold, however, this threshold will not be triggered regularly if the target company has a domestic turnover of less than EUR 17.5 million which adequately reflects the company’s market position and competitive potential. So far, with approximately 1,000 mergers notified to the FCO in 2021 compared to approximately 1,200 mergers in 2020, the effect of the amendments on the FCO’s workload has been limited. That said, it may be too early to reach conclusions on the effectiveness of the amendments since the number of mergers notified to the FCO had already declined from approx. 1,400 notifications in 2019 to 1,200 in 2020 due to the pandemic.
7.3 The FCO’s Revised Leniency and Fining Guidelines
First established in 2000 as part of general administrative principles and comprehensively set out in the 2006 leniency program, the FCO’s leniency program has received yet another upgrade in 2021: in order to transpose the requirements of the Directive (EU) 2019/1 of the European Parliament and of the Council of December 11, 2018 (ECN+ Directive) into national law, as of 2021, the basic principles of the leniency program are now enshrined in the ARC (Sections 81h – 81n). Against this background, the FCO also published its revised guidelines on the leniency program in October 2021 which, however, left the basic cornerstones of the German leniency program largely untouched.
With its revision of the guidelines on setting cartel fines, the FCO has transferred into writing what had already been the established decision practice for some time: the starting point for calculating a fine within the statutory fine framework continues to be the “duration and gravity of the infringement”. However, the FCO clarified that the primary element of establishing the gravity of the infringement shall be the turnover achieved specifically with the products or services subject to the antitrust infringement during the relevant period. With regard to the subsequent balancing exercise of aggravating and mitigating elements, the guidelines on setting cartel fines now include specific criteria linked to the specific infringement and the infringing company to be taken into account when determining the final fine amount. There are some good news for companies which want to or have already established compliance programs: going forward, the FCO will consider such compliance programs – whether already established before the alleged infringement or only introduced as a consequence of or in response to such infringement – as a mitigating factor taken into account in the fine calculation.
In summary, the amendments increase the authority’s discretion for setting antitrust fines in the individual case. A substantive change in the scope or level of fines is, however, not expected.
Lastly, the revision of the leniency program falls short of addressing the real elephant in the room: the FCO itself concedes that the number of leniency applications has decreased in past years due to the existential threat of follow-on damages claims from direct or indirect customers or other market players. This threat is not addressed by the leniency program. Leniency applications are, however, an important element for the detection and prosecution of cartels. In order to incentivize companies to apply for leniency, further safeguards will have to be considered, especially with respect to follow-on cartel litigation. The FCO has already stated that it will advocate at the EU level for further incentives for leniency applicants.
7.4 Private Enforcement Update
The enforcement of antitrust damage claims continues to be one of the “hottest topics” in the German antitrust law arena. Particularly the Rail Cartel, fined by the FCO in 2013, and the Trucks Cartel, fined by the European Commission in 2016, led to a substantial increase of cases in German courts of lower instance as well as for the Federal Supreme Court (Bundesgerichtshof, BGH), which established a permanent “Cartel Panel” in 2019.
“Follow-on” damage claims benefit from the broad binding effect of (fine) decisions issued by the Commission or national competition authorities. German courts therefore mainly dealt with questions relating to the substantiation and proof of damages. Thus far in these cases, German courts have been reluctant to issue judgments which award a specific amount of damages. This has not fundamentally changed since the BGH encouraged the lower courts to estimate damages by reducing the applicable standard of proof in its Rail Cartel II decision in 2020 (Case KZR 24/17). The following developments are particularly noteworthy:
- There seem to be only few recent court decisions in which estimated damages were awarded to customers of a cartel, e.g. the District Court (Landgericht) of Dortmund in another Rail Cartel decision (2020, Case 8 O 115/14), and the Higher District Court (Oberlandesgericht) of Celle in a Chipboard Cartel decision (2021, Case 13 U 120/16).
- Interestingly, the Regional Court of Dortmund (2020, Case 8 O 115/14) based its estimate on a contractually agreed penalty for competition law infringements of 15% of the net price which it considered the minimum damage. This approach arguably finds support in the recent judgment of the BGH in Rail Cartel VI, in which the BGH held that a contractual clause which provides for a specific percentage of the value of commerce as damages in case of a competition law infringement is generally valid (2021, Case KZR 63/18).
- In its Truck Cartel II decision (2021, Case KZR 19/20), the BGH re-confirmed the high likelihood that a cartel price is higher than a hypothetical price found in competition. Like in its Rail Cartel II decision in 2020 (Case KZR 24/17), the court held that this high likelihood is, however, not sufficient to establish a rebuttable presumption in the sense of prima facie evidence.
- In Truck Cartel II (2021, Case KZR 19/20), the BGH also noted that the passing-on defense, i.e. the argument of the defendant that damages have been passed on to the next market level as a damage-reducing factor, can only be successful in exceptional cases. There is no rebuttable presumption to this effect and the defendant must substantiate that the market conditions made a pass-on likely. If the pass-on led to dispersed damages, the pass-on defense can be excluded since claimants with only low-value damages are unlikely to sue (so-called rational apathy). The court also clarified that the suspension of the period of limitations for private plaintiffs begins with the first official measure (e.g. dawn raid) and ends when the time-limit to bring a claim against the authority’s decision has expired.
Besides loss calculation issues, another important development has been the admissibility of certain collective debt collection business models. In the past, German courts regularly dismissed these claims on the basis that the underlying assignments of the damage claims were void due to an infringement of the Legal Services Act (Rechtsdienstleistungsgesetz, RDG). This year, the BGH clarified in its decision AirDeal that this business model does not generally conflict with the Legal Services Act (2021, Case II ZR 84/20).
Recent developments at the EU level will also have a direct impact on private enforcement in Germany. In October 2021, the European Court of Justice (“ECJ”) decided in Sumal (case C-882/19) that a subsidiary can be an addressee of claims for damages resulting from a cartel in which only the ultimate parent entity participated. This judgment expanded the established case law according to which a parent company which exercised decisive influence over its subsidiary could be held liable for competition law infringements of this subsidiary.
Finally, on October 28, 2021 Advocate General Rantos issued an opinion (Truck Cartel Spain, Case C-267/20) in which he reasoned that substantive provisions (including those dealing with the statute of limitations) in the EU Directive could not apply to cases in which the competition law infringements ended prior to the date on which the transposing national provisions came into force. If the ECJ follows the line of Advocate General Rantos, the intertemporal application of several provisions of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) might have to be interpreted in a different way.
8. Litigation
8.1 A new Role of Courts as Climate Protectors? Latest Developments in German Climate Change Litigation
Climate change litigation is a growing phenomenon around the globe. Since the adoption of the Paris Agreement in 2015, organizations and individuals seeking the implementation of more ambitious climate change measures brought a number of lawsuits against governments and the private sector (for a French landmark decision in 2021, see our client alert prepared by the Paris office of Gibson Dunn). Even though the Huaraz-Case brought in 2015 is still pending in the Higher District Court (Oberlandesgericht) of Hamm, climate change litigation definitely landed on German shores in 2021: The Federal Constitutional Court (Bundesverfassungsgericht) delivered a landmark decision on March 24, 2021 (1 BvR 2656/18; 78/20; 96/20; 288/20), ordering the German legislator to amend the 2019 Federal Climate Protection Act (Bundes-Klimaschutzgesetz – the “Climate Act”). The court held that the Climate Act violated fundamental freedom rights of the complainants because the – at the time – existing and planned climate protection measures were insufficient to prevent future burdens arising from restrictions that will become necessary in case of unmitigated global warming.
While the German legislator quickly complied by passing amendments to the Climate Act, activists are now trying to transfer the rationale of the decision to the private sector: in the fall of 2021, three directors of a German environmental organization announced that they have filed lawsuits against three car manufacturers and a gas and oil producer, demanding the reduction of their respective carbon emissions to zero by 2030. They claim that the companies’ carbon emissions contribute to future restrictions they will have to endure if the world fails to control climate change.
However, it remains to be seen whether German courts will accept this line of argument in the private sector. The claim is based on provisions of general civil law (Sections 1004 para. 1 s. 2, 823 para. 1 of the German Civil Code (BGB)) that technically provide for the protection of property and similar rights. The plaintiffs, thus, would need to show that these provisions are applicable to the facts at hand, and that the relevant companies can be held liable even though they comply with all environmental laws and standards. Moreover, it appears difficult to establish a clear causal link between carbon emissions by a single company and future restrictions arising for individuals.
Having said that, the decision by the District Court of the Hague (Rechtbank Den Haag) in the Netherlands, ordering oil and gas producer Shell to reduce its carbon emissions, indicates that judges may be willing to break new legal ground. Especially companies in market sectors where decarbonization will take longer to achieve are therefore well advised to closely monitor the developments and prepare for potential risks.
8.2 A More Agile and Digital Judiciary
In 2021, an ever increasing case load due to mass consumer litigation exposed the German civil judiciary’s existing Achilles heel: scarce personnel, no or limited equipment for digital hearings, and a traditional dependency on paper files and fax machines. In a number of open letters and workshop proposals, judges from around the country have decried the status quo and called for reform. Academics, too, are proposing to modernize Germany’s procedural system in order to allocate judicial resources more sensibly. As of today, in the mass consumer litigation sagas sweeping the German courts, judges have to decide each case individually while knowing fully well that their judgments, regardless of the outcome, will likely be appealed.
In 2018, the declaratory model action was introduced as a first step to bundle mass consumer claims. However, it has proven to be an inefficient tool so far as plaintiffs take little interest in it, in practice. The German legislator anticipated over 400 declaratory model actions per year. Instead, between 2018 and 2021, fewer than 20 model actions were filed.
Germany’s new government coalition took notice. In its coalition agreement, the government promises to reform collective redress in Germany. Existing forms of redress shall be modernized and new instruments created. Small businesses will get the opportunity to join collective consumer actions, and specialized commercial courts shall adjudicate international commercial disputes in English.
In June 2021, the Federal States’ ministers of justice (JustizministerInnen der Länder) discussed and proposed a new procedure allowing to submit previously unsettled legal questions to the German Federal Supreme Court (Bundesgerichtshof, BGH) in the early stages of mass litigation. We expect such a procedure to feature among the remedies which the new government will ultimately propose.
It remains to be seen, however, whether and how promptly the new government can indeed respond in the required expeditious and efficient manner to address the practical concerns of its over-loaded judiciary. Reforms of the court system in the digital space can, in any event, be expected to rumble on for some time yet, and interested industry circles are well advised to monitor such reforms and their practical implications.
9. International Trade / Sanctions – Moving Human Rights to Center Stage – the EU’s Recast of its EU-Dual-Use Regulation
Already in 2011, the European Union launched a review of EU-wide controls on exports of dual-use items. This review resulted in the “Regulation (EU) 2021/821 of the European Parliament and of the Council of May 20, 2021 setting up a Union regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items (recast)” (the “New EU Dual-Use Regulation”).
The New EU Dual-Use Regulation forms part of the export control regime which EU Member States apply and, same as its predecessor, concerns dual-use items, i.e. mandates export control restrictions on goods, technologies and software that may be used for both civilian and military purposes. The New EU Dual-Use Regulation is in force since September 9, 2021 and replaced Council Regulation (EC) No. 428/2009 in its entirety.
The New EU Dual-Use Regulation (i) widens the range of export control restrictions on emerging dual-use technologies, specifically by adding cyber-surveillance tools, (ii) specifies new due diligence obligations for exporters, emphasizing their contribution to an effective enforcement of dual-use regulations and (iii) increases coordination between EU Member States and serves as a basis for further global cooperation with third countries.
The New EU Dual-Use Regulation specifically includes a list of certain cyber-surveillance items that are seen as being at risk of misuse for violations of human rights, making such items subject to EU Member State export restrictions. An authorization may be required even for certain unlisted cyber-surveillance items, if the exporter has been informed by the competent authority that the items may be intended for internal repression or violations of human rights. And vice versa, an obligation to inform the competent authority may arise where an exporter is aware that unlisted cyber-surveillance items proposed to be exported may be used for human rights violations.
The New EU Dual-Use Regulation further recognizes as vital the contribution of exporters, brokers, providers of technical assistance or other relevant stakeholders to the overall aim of export controls. In this context, it specifically refers to due diligence obligations to be carried out through transaction-screening measures that must be implemented as part of an Internal Compliance Program (“ICP”). This specifically is relevant for the use of general licenses (e.g. for the use of general license EU007 for the intra-group export of software and technology) as well as in the context of possible human rights concerns more broadly.
Finally, the New EU Dual-Use Regulation also provides a strong basis for the EU and EU Member States to engage with each other, but also with third countries, in order to support a level playing field and enhance international security through more convergent approaches to export controls at the global level. An example is the EU-US Trade and Technology Council, which serves as a forum to coordinate their approaches to key global trade and economic relations.
As early as 2019, the EU voiced what it expects from exporters when setting-up their respective ICP (see our corresponding client alert). With the New EU Dual-Use Regulation now enacted and the clearly stated commitment of the new German government to the protection of human rights, exporters would be well-advised to continuously monitor this space and take 2022 as an opportunity to review their respective ICP, focusing specifically on human rights considerations.
The following Gibson Dunn lawyers assisted in preparing this client update: Birgit Friedl, Marcus Geiss, Benno Schwarz and Caroline Ziser Smith with contributions from Silke Beiter, Elisa Degner, Andreas Dürr, Lutz Englisch, Ferdinand Fromholzer, Kai Gesing, Valentin Held, Alexander Horn, Katharina Humphrey, Alexander Klein, Markus Nauheim, Markus Rieder, Richard Roeder, Sonja Ruttmann, Hans Martin Schmid, Maximilian Schniewind, Sebastian Schoon, Linda Vögele, Jan Vollkammer, Michael Walther, Georg Weidenbach, Finn Zeidler and Mark Zimmer.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Frankfurt and Munich bring together lawyers with extensive knowledge of corporate and capital markets law, M&A, finance and restructuring, tax and labor law, in the area of antitrust and competition, sanctions and export control, data protection and cybersecurity, technology transactions and IP/IT, as well as extensive experience in compliance matters, white collar defense and investigations and corporate and commercial litigation and arbitration. The German offices are comprised of deeply accomplished lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions, sensitive investigations and high-stakes litigation. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices:
General Corporate, Corporate Transactions and Capital Markets
Lutz Englisch (+49 89 189 33 150), [email protected])
Ferdinand Fromholzer (+49 89 189 33 170, [email protected])
Markus Nauheim (+49 89 189 33 112, [email protected])
Dirk Oberbracht (+49 69 247 411 510, [email protected])
Wilhelm Reinhardt (+49 69 247 411 520, [email protected])
Silke Beiter (+49 89 189 33 170, [email protected])
Birgit Friedl (+49 89 189 33 115, [email protected])
Annekatrin Pelster (+49 69 247 411 521, [email protected])
Tax
Hans Martin Schmid (+49 89 189 33 110, [email protected])
Finance, Restructuring and Insolvency
Sebastian Schoon (+49 69 247 411 540, [email protected])
Birgit Friedl (+49 89 189 33 115, [email protected])
Alexander Klein (+49 69 247 411 518, [email protected])
Labor and Employment
Mark Zimmer (+49 89 189 33 115, [email protected])
Corporate Compliance / White Collar Matters
Ferdinand Fromholzer (+49 89 189 33 170, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
Markus Nauheim (+49 89 189 33 112, [email protected])
Markus Rieder (+49 89 189 33 162, [email protected])
Benno Schwarz (+49 89 189 33 110, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
Finn Zeidler (+49 69 247 411 530, [email protected])
Mark Zimmer (+49 89 189 33 115, [email protected])
Technology Transactions / Intellectual Property / Data Privacy
Kai Gesing (+49 89 189 33 180, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
Antitrust
Kai Gesing (+49 89 189 33 180, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
Georg Weidenbach (+49 69 247 411 550, [email protected])
Litigation
Kai Gesing (+49 89 189 33 180, [email protected])
Markus Rieder (+49 89 189 33 162, [email protected])
Georg Weidenbach (+49 69 247 411 550, [email protected])
Finn Zeidler (+49 69 247 411 530, [email protected])
Mark Zimmer (+49 89 189 33 115, [email protected])
International Trade, Sanctions and Export Control
Michael Walther (+49 89 189 33 180, [email protected])
Richard Roeder (+49 89 189 33 115, [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.
Washington, D.C. partner Eugene Scalia is the author of “The Impact of Agency Commissioners’ Dissents” [PDF] published by The National Law Journal on January 11, 2022.
The tense political battles between former President Donald J. Trump and the United States House of Representatives under Democratic leadership renewed debates over the nature and extent of Congress’s authority to investigate and conduct oversight and have wide-ranging implications for congressional investigation of not just the Executive Branch but also of private parties.
In furtherance of the House of Representatives’ vigorous efforts to investigate President Trump, three House committees issued a series of subpoenas to banks and an accounting firm seeking the personal financial records of the President relating to periods both before and after he took office. The President and his business entities resisted, challenging the congressional subpoenas in court, thus drawing the judiciary into the fray. The President’s challenges culminated in the issuance of the Supreme Court’s historic decision in Trump v. Mazars and Trump v. Deutsche Bank AG, which announced groundbreaking new principles of law that will have profound implications for congressional oversight and investigations. In addition, the D.C. Circuit recently encountered related questions of congressional authority over the Executive Branch in connection with separate information requests to former White House Counsel Donald McGahn, leading to a series of hotly debated rulings (and an eventual settlement) in Committee on the Judiciary v. McGahn.
These cases arose against a seemingly well-established backdrop. It has long been understood that Congress possesses inherent constitutional authority to inquire into matters that could become the subject of legislation, such as through the use of compulsory process directed to both government officials and private citizens. As the Supreme Court recognized nearly a century ago, Congress “cannot legislate wisely or effectively in the absence of information respecting the conditions which the legislation is intended to affect or change.” Thus, “the power of inquiry—with process to enforce it—is an essential and appropriate auxiliary to the legislative function.” The Executive and Legislative Branches often resolve disputes about congressional requests for information through the “hurly-burly, the give-and-take of the political process between the legislative and the executive.” Only recently has Congress resorted repeatedly to the courts in an effort to enforce subpoenas against Executive Branch officials.
Washington, D.C. partners Michael Bopp and Thomas Hungar, with Chantalle Carles Schropp, prepared this article, originally published by the University of Virginia’s Journal of Law & Politics, Vol. 37, No. 1, in 2021.
© 2022 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Los Angeles partner Michael Dore is the author of “How an NFT is like a $5 milkshake” [PDF] published by the Daily Journal on December 27, 2021.
Washington, D.C. partner Adam M. Smith is the author of “SWIFT and Certain Punishment for Russia?” [PDF] published by Foreign Affairs on January 4, 2022.
New York partners Matthew Biben and Mylan Denerstein are the authors of “USA,” [PDF] Chapter 22 of Corporate Investigations 2022 published by International Comparative Legal Guides in January 2022.
Effective January 1, 2023, New York City employers will be restricted from using artificial intelligence machine-learning products in hiring and promotion decisions. In advance of the effective date, employers who already rely upon these AI products may want to begin preparing to ensure that their use comports with the new law’s vetting and notice requirements.
The new law governs employers’ use of “automated employment decision tools,” defined as “any computational process, derived from machine learning, statistical modeling, data analytics, or artificial intelligence, that issues simplified output, including a score, classification, or recommendation, that is used to substantially assist or replace discretionary decision making for making employment decisions that impact natural persons.”
The law prohibits the use of such tools to screen a candidate or employee for an employment decision, unless it has been the subject of a “bias audit” no more than one year prior to its use. A “bias audit” is defined as an impartial evaluation by an independent auditor that tests, at minimum, the tool’s disparate impact upon individuals based on their race, ethnicity, and sex. Notably, the new law does not define who (or what) is deemed an adequate independent auditor. It also does not address employers’ use of an automated employment decision tool that is found to have a disparate impact through a bias audit – neither expressly prohibiting the use of such tools nor permitting their use if, for example, it bears a significant relationship to a significant business objective of the employer.
An employer is not permitted to use an automated employment decision tool to screen a candidate or employee for an employment decision until it makes publicly available on its website: (1) a summary of the tool’s most recent bias audit and (2) the distribution date of the tool.
The new law also includes two notice requirements, both of which must occur at least ten business days before an employer’s use of an automated employment decision tool. Employers interested in using such tools must first notify each candidate or employee who resides in New York City that an automated employment decision tool will be used in connection with an assessment or evaluation of the individual. The candidate or employee then has the right to request an alternative selection process or accommodation. Employers must also notify each candidate or employee who resides in New York City of the job qualifications and characteristics that the tool will use in its assessment.
In addition, a candidate or employee may submit a written request for certain information if it has not been previously disclosed on the employer’s website, including: (1) the type of data collected for the automated employment decision tool, (2) the source of such data, and (3) the employer’s data retention policy. Employers are required to respond within 30 days of receiving such a request.
The new law will be enforced by the City and does not create a private right of action. It does provide for potentially significant monetary penalties, including a penalty of no more than $500 for an initial violation and each additional violation occurring that same day, and then penalties between $500-$1,500 for subsequent violations. Significantly, each day that an automated employment decision tool is used in violation of the new law is considered a separate violation. The failure to provide the requisite notice to each candidate or employee constitutes a separate violation as well.
* * *
The potential for learned algorithmic bias has recently been a topic of interest for legislatures and regulatory agencies. For example, on October 28, 2021, the EEOC announced a new initiative aimed at prioritizing and ensuring that artificial intelligence and other emerging tools used in employment decisions comply with federal civil rights laws.
The following Gibson Dunn attorneys assisted in preparing this client update: Danielle Moss, Harris Mufson, Gabby Levin, and Meika Freeman.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following:
Danielle J. Moss – New York (+1 212-351-6338, [email protected])
Harris M. Mufson – New York (+1 212-351-3805, [email protected])
Gabrielle Levin – New York (+1 212-351-3901, [email protected])
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On December 15, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) held a virtual open meeting where it considered four rule proposals, including two that are particularly pertinent to all public companies: (i) amendments regarding Rule 10b5-1 insider trading plans and related disclosures and (ii) new share repurchase disclosures rules.
Both proposals passed, though only the proposed amendments regarding Rule 10b5-1 insider trading plans and related disclosures passed unanimously; the proposed new share repurchase disclosures rules passed on party lines. Notably, these proposals only have a 45-day comment period, which is shorter than the more customary 60- or 90-day comment periods. Commissioner Roisman, in particular, raised concerns about the 45-day comment periods being too short, noting that the comment periods run “not only over several holidays,” but “also concurrent with five other rule proposals that have open comment periods.”
Below, please find summary descriptions of the these two rule proposals, as well as certain Commissioners’ concerns related to these proposals.
The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Andrew Fabens, James Moloney, Lori Zyskowski, Thomas Kim, Brian Lane, and Elizabeth Ising.
In August 2021, amidst the rapid collapse of the Afghan government and the Taliban takeover of Afghanistan, Gibson Dunn launched a firmwide effort to provide pro bono legal services to the Afghan community. What began as a small-scale effort to provide assistance to individuals and families with ties to the Firm, including through military service or family connections, quickly grew into something much bigger. Over the course of a few short months, the Firm began to work with hundreds of Afghan individuals and families who feared Taliban violence due to their collaboration with the U.S. military or government, their work to promote the Afghan government and civil society, or their public support for causes seen as antithetical to the Taliban’s rule. Our clients included journalists, teachers, lawyers, doctors, women’s rights activists, and those who worked with or for the United States military, most of whom were and are seeking humanitarian parole as a means of traveling to and resettling in the United States. As we close out 2021, that work is ongoing, though some of our focus has begun to pivot to providing pro bono services to those individuals and families who have made it safely to the United States and are now seeking permanent lawful status here, most often as asylees. We invite all our friends, colleagues, and clients to join with us in these efforts in the days, weeks, and months to come.
Section I of this report provides an update regarding the situation in Afghanistan and efforts to evacuate vulnerable Afghans to the United States. Section II discusses Gibson Dunn’s ongoing efforts on behalf of Afghans at imminent risk of Taliban violence, many of whom are applying for humanitarian parole, as well as the Firm’s leadership role in the Welcome Legal Alliance, an initiative to support Afghan evacuees who have arrived in the United States and require pro bono legal representation to navigate the U.S. immigration system and address other legal needs. Finally, Section III of this report provides additional context regarding the resettlement process and benefits available to Afghan evacuees who have arrived in the United States. To learn more about these efforts or to get involved, please reach out to Katie Marquart, Partner & Pro Bono Chair.
I. Overview of the Current Situation in Afghanistan
Beginning in late August 2021, tens of thousands of Afghans, along with U.S. citizens and permanent residents, tried desperately to flee the country—an exodus that has continued over the past several months. In the months following the Taliban’s seizure of power, the situation in Afghanistan has become even more dire, with thousands of individuals internally displaced, in hiding, and at risk of Taliban reprisals. Nearly four months after the United States completed its military withdrawal from Afghanistan, approximately 44,000 displaced Afghans have settled into permanent housing and integrated into local communities throughout the United States. Another 32,000 remain in temporary housing on seven military bases across the country and a few overseas military posts, awaiting resettlement assistance while the Biden Administration, nonprofit organizations, and private sector partners work together to resettle families across the country. Others have been evacuated by U.S. allies and seek to resettle in countries like Canada, Germany, and the United Kingdom.
Thousands of Afghans who sought to escape Taliban rule remain in Afghanistan, where they face a perilous future. Individuals targeted by the Taliban—including dissidents, cultural rights defenders, artists in banned industries, religious and ethnic minorities, and individuals associated with Western culture—live in constant fear, witnessing and experiencing beatings, arrests, enforced disappearances, and killings. U.S. Citizenship and Immigration Services (“USCIS”) has received more than 30,000 humanitarian parole applications from Afghans seeking to enter the United States, and many other Afghans continue searching for alternate routes to safety, either in the United States or elsewhere. Because many of these individuals collaborated with the U.S. government and military, served in the Afghan government, or worked with nonprofit organizations and NGOs, they fear Taliban reprisals. Many of these individuals and families have been forced into hiding in Afghanistan, while others, in desperation, have embarked on perilous journeys to neighboring countries.
Additionally, with winter looming in Afghanistan, the country is facing an economic crisis with potentially devastating consequences for its citizens. There are already approximately 23 million people reportedly on the brink of potentially life-threatening food insecurity. And, as feared, the Taliban’s newly-implemented policies have restricted women’s freedom of movement and imposed compulsory dress codes, denied and curtailed access to education and employment, and restricted rights to peaceful assembly. Moreover, employment opportunities for women have declined, leading to diminished resources for families forced to rely on single income earners. Exacerbating these challenges, many individuals who worked with U.S. and Afghan forces over the last 20 years have gone into hiding and are now unable to support their families.
II. Gibson Dunn’s Efforts on Behalf of Affected Families
a. Pro Bono Humanitarian Parole Applications
In the waning days of August, as the humanitarian crisis in Afghanistan began to unfold, Gibson Dunn began working with dozens of families hoping to apply for humanitarian parole in the United States. These initial efforts were discussed in our September 2021 report, The Humanitarian Crisis in Afghanistan: Overview of Gibson Dunn’s Recent Efforts. Since then, the Firm has remained steadfastly committed to helping these families seek refuge from the threat of Taliban violence, secure legal status in the United States, and reunite with family members.
To date, approximately 200 Gibson Dunn attorneys and staff have dedicated more than 5,000 hours—valued at more than $4 million—to these efforts, including preparing approximately 300 humanitarian parole applications. Of course, Gibson Dunn is only a small part of the broader legal response to the humanitarian crisis in Afghanistan. We are proud to have partnered with in-house attorneys from many of our corporate clients on many of these applications, and we are thankful to have collaborated with attorneys at nonprofit organizations that are on the front lines of these efforts.
The stories of these families and their bravery continue to inspire Gibson Dunn attorneys, who are committed to pursuing all legal avenues to help these families reach safety. Many of these families have demonstrated a longstanding opposition to the Taliban—from attorneys and judges who helped put Taliban fighters behind bars to families who ran clandestine schools for girls, from interpreters who worked with the U.S. military to student activists and advocates for peace, and from former members of the Afghan government to religious and ethnic minorities. By way of example, we have proudly partnered with the International Legal Foundation (“ILF”), an international NGO that hires, trains, and deploys local legal aid attorneys in post-conflict areas, to help file humanitarian parole applications for seven of their Afghan lawyers and their families. We sincerely hope that, while their mission continues around the world, we can help the ILF bring some of their colleagues to safety.
We are honored to work with these courageous individuals and hope to one day welcome them as our new neighbors and friends in the United States.
b. Welcome.US
Gibson Dunn also has played an active role in Welcome.US, a new national effort to empower individuals, nonprofits, businesses, and others to welcome and support Afghan refugees arriving in the United States. In October 2021, Gibson Dunn Managing Partner Barbara Becker joined a roundtable meeting hosted by the White House to discuss ways in which private sector leaders are working together to help support Afghan evacuees.
As part of this effort, Gibson Dunn has teamed up with Welcome.US, Human Rights First, and the Afghan-American Foundation to lead the Welcome Legal Alliance, which will mobilize law firms, corporate legal teams, and the broader legal community to ensure that Afghans arriving in the United States have access to legal services throughout the entire resettlement process. Gibson Dunn, together with other co-leaders of the Alliance, is actively recruiting new legal volunteers from law firms and businesses, sourcing Dari- and Pashto-speaking legal professionals, and coordinating a working group to triage legal needs and reduce the barriers to obtaining quality legal representation. A growing list of organizations and law firms, including The International Refugee Assistance Project, Kids in Need of Defense, Pars Equality Center, Tahirih Justice Center, and We the Action, have committed to joining the Alliance. If you are interested in joining this effort, please reach out to [email protected].
III. Resettlement Process and Benefits for Afghan Arrivals
As an increasing number of Afghan refugees arrive in the United States, the Firm’s work is shifting to help Afghan evacuees settle in their new homes and obtain permanent immigration status. Many of these families are eligible for Special Immigrant Visas (“SIVs”) or other priority visas, and currently are awaiting resolution of their applications. Others, who have been granted humanitarian parole for a period of two years, intend to lawfully seek asylum upon their arrival in the United States.
Given the significant logistical and regulatory challenges inherent in resettling in the United States, Gibson Dunn is committed to helping these families navigate the intimidating and often confusing legal landscape to obtain the benefits to which they are entitled. Below, we describe some of the requirements placed on Afghan humanitarian parolees to maintain their parole status, discuss the process of registering for health and housing benefits, and provide a brief overview of the resettlement process.
a. Parole Requirements and Accommodations Upon Arrival to the United States
Every applicant approved as a humanitarian parolee must undergo a series of processing, screening, and vetting processes—both before and after arrival in the United States—if they wish to maintain their parole. U.S. Customs and Border Protection (“CBP”) has placed conditions on all paroled Afghan nationals, including medical screenings and vaccination requirements. Intelligence, law enforcement, and counterterrorism professionals conduct biometric and biographic screenings for all Afghan arrivals into the United States. Additionally, parolees are tested for COVID-19 upon arrival to the airport, and are given the option to receive the COVID-19 and other required vaccinations at various U.S. government-run sites, or at a designated Department of Defense (“DOD”) facility. The testing and vaccinations are provided at no cost to the Afghan arrivals.
Once tested, Afghan parolees are welcomed onto U.S. military bases, where they have the option to receive services through the U.S. government’s Afghan Placement and Assistance (“APA”) program. The APA is an emergency program created in response to the evacuation efforts in Afghanistan, and is designed to provide initial relocation support and benefits to Afghan parolees admitted to the United States between August 20, 2021, and March 31, 2022.
Afghan parolees receive temporary housing facilities on military bases until they are resettled into the local community. DOD has provided temporary housing facilities to parolees at eight installations: Marine Corps Base Quantico, Virginia; Fort Pickett, Virginia; Fort Lee, Virginia; Holloman Air Force Base, New Mexico; Fort McCoy, Wisconsin; Fort Bliss, Texas; Joint Base McGuire-Dix-Lakehurst, New Jersey; and Camp Atterbury, Indiana.
b. Health Insurance and Other Health Benefits
Almost all Afghan parolees receive health coverage provided by the Office of Refugee Resettlement (“ORR”) during their stay on the DOD bases. After leaving the bases, almost all Afghan refugees will be eligible for health insurance through Medicaid, the Children’s Health Insurance Program (“CHIP”), the Health Insurance Marketplace, or the Refugee Medical Assistance Program (“RMA”). These benefits are available under Section 2502 of the Extending Government Funding and Delivering Emergency Assistance Act, H.R. 5305, P.L. 117-43 (enacted September 30, 2021), which extends health insurance to Afghans paroled into the United States on or after July 31, 2021. The act expands eligibility for resettlement assistance, entitlement programs, and other benefits available to refugees until March 31, 2023, or the term of parole granted to the parolee, whichever is later.
c. Access to Resettlement Agencies and Additional Benefits
Parolees may resettle in a community either on their own or through a resettlement agency. The agencies factor in a parolee’s geographical preference for resettlement, but housing shortages in certain locations may require resettlement elsewhere. On base, parolees eventually will be processed and connected to a local resettlement agency that will complete the process of fully integrating the parolee into a local community. Parolees may remain on the military base while they await being connected to a resettlement agency, or they may voluntarily depart from the base and independently seek assistance from a resettlement agency. Although the process of being connected to an agency and resettled off base has been quite lengthy—a recent report estimated it to take more than a month—for evacuees on the military bases, the government hopes to complete these efforts by February 15, 2022.
Regardless of how the parolee is connected to the resettlement agency, the parolee will receive certain benefits and services through the agency after processing is complete. Although benefits available to parolees will vary by location, resettlement agencies typically offer benefits and resources relating to housing, clothing, cultural orientation, counseling, English language training, job skills training, and job placement. The resettlement agency also can assist the parolee in signing up for government benefits like Supplemental Security Income (if eligible) or temporary assistance for needy families (“TANF”). Parolees ineligible for these benefits may still receive assistance through ORR’s Refugee Cash Assistance (“RCA”) program, which provides eight months of cash assistance to help families meet their most basic needs (e.g., food, shelter, and transportation).
The nine resettlement agencies working with the U.S. government are:
|
Lutheran Immigration & Refugee Service (“LIRS”) |
United States Conference of Catholic Bishops (“USCCB”) |
|
Ethiopian Community Development Council, Inc. (“ECDC”) |
U. S. Committee for Refugees and Immigrants (“USCRI”) |
|
HIAS |
International Rescue Committee (“IRC”) |
|
Church World Service (“CWS”) |
World Relief (“WR”) |
|
Domestic & Foreign Missionary Society (“DFMS”) |
IV. Conclusion
The mobilization of lawyers to help those affected by the continuing—and worsening—upheaval in Afghanistan has only just begun. Gibson Dunn is proud to partner with the broader legal community, including legal aid organizations, resettlement agencies, and attorneys across the private sector, to fight on behalf of these courageous families. Through coordinated and cooperative efforts, such as the Welcome Legal Alliance, we can maximize our impact and assist Afghans in need, both in Afghanistan and here in the United States.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work or the following:
Katie Marquart – New York (+1 212-351-5261, [email protected])
Patty Herold – Denver (+1 303-298-5727, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
This year marks an important turning point for the seven-member Court, as new judges will soon comprise nearly half its bench. In June, the New York Senate confirmed the appointment of Anthony Cannataro and Madeline Singas. Judge Cannataro, who was formerly the Administrative Judge of the Civil Court of the City of New York, filled the vacancy left by Judge Paul Feinman, who passed away. Judge Singas, who was formerly the Nassau County District Attorney, filled the vacancy left by the retired Judge Leslie Stein. As Judges Feinman and Stein often voted with Chief Judge DiFiore and Judge Garcia to form a majority in the Court’s decisions, it remains to be seen if that pattern continues.
The Court will also change in 2022 because Judge Eugene Fahey, a swing vote, reaches his mandatory retirement age at the end of this year. To fill his seat, Governor Kathy Hochul nominated Shirley Troutman, a justice in the Appellate Division, Third Department. If confirmed, she would be the second African American woman to sit on the Court. Justice Troutman has extensive experience as a prosecutor and a judge. She also has spent her career upstate, providing geographic balance. On the other hand, analysts have expressed concern that the Court lacks “professional diversity,” as it would include four former prosecutors and only one judge (Fahey, or Troutman) with judicial experience in the Appellate Division.
Despite this turnover, the Court continued previous trends, with the pace of decisions reduced and a high number of fractured opinions. After Judge Feinman’s passing, the Court ordered several cases to be reargued in a “future court session,” which may suggest that his was a potential swing vote in those cases. Nevertheless, the Court continued to resolve significant issues in a wide array of areas, from territorial jurisdiction and agency deference to consumer protection and insurance contracts.
The New York Court of Appeals Round-Up & Preview summarizes key opinions primarily in civil cases issued by the Court over the past year and highlights a number of cases of potentially broad significance that the Court will hear during the coming year. The cases are organized by subject.
To view the Round-Up, click here.
Gibson Dunn’s New York office is home to a team of top appellate specialists and litigators who regularly represent clients in appellate matters involving an array of constitutional, statutory, regulatory, and common-law issues, including securities, antitrust, commercial, intellectual property, insurance, First Amendment, class action, and complex contract disputes. In addition to our expertise in New York’s appellate courts, we regularly brief and argue some of the firm’s most important appeals, file amicus briefs, participate in motion practice, develop policy arguments, and preserve critical arguments for appeal. That is nowhere more critical than in New York—the epicenter of domestic and global commerce—where appellate procedure is complex, the state political system is arcane, and interlocutory appeals are permitted from the vast majority of trial-court rulings.
Our lawyers are available to assist in addressing any questions you may have regarding developments at the New York Court of Appeals, or any other state or federal appellate courts in New York. Please feel free to contact any member of the firm’s Appellate and Constitutional Law practice group, or the following lawyers in New York:
Mylan L. Denerstein (+1 212-351-3850, [email protected])
Akiva Shapiro (+1 212-351-3830, [email protected])
Seth M. Rokosky (+1 212-351-6389, [email protected])
Please also feel free to contact the following practice group leaders:
Allyson N. Ho – Dallas (+1 214.698.3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202.887.3667, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
San Francisco partner Rachel Brass and associate Julian Kleinbrodt are the authors of “National Football League tackles antitrust claims,” [PDF] published by the Daily Journal on December 13, 2021.
On December 15, 2021, New York City issued much-anticipated guidance on its COVID-19 vaccine mandate for private sector employers, which goes into effect on December 27, 2021. It is the first state or local private-sector vaccination mandate of its kind in the nation, and it is expected to apply to approximately 184,000 businesses.
This alert provides need-to-know information about the mandate for New York City private-sector employers.
Covered Entities
The mandate generally applies to any business that employs more than one worker or operates a workplace in New York City, as well as any self-employed individual or solo practitioner who works at a workplace, or interacts with workers or the public in the course of their business. A “workplace” is defined as any place where work is performed in the presence of another worker or member of the public, including vehicles. The City specifies that this includes coworking spaces, which must check the proof of vaccination of individuals, as well as the workers of small companies, who rent space there.
The mandate does not apply to businesses or individuals who are already subject to another Order of the Commissioner of the Department of Health and Mental Hygiene (DOHMH), Board of Health, the Mayor, or a federal or state entity that requires proof of full vaccination.
Workers of Covered Entities and Exceptions
A “worker” is defined by the mandate as an individual who works in-person in New York City at a workplace and includes a full-time or part-time staff member, employer, employee, intern, volunteer, or contractor of a covered entity, as well as a self-employed individual or solo practitioner. Since the mandate applies to workplaces in New York City, workers’ residency is not relevant, apart from a limited exception for performing artists and athletes (discussed below).
There are a few notable exceptions. First, the mandate does not apply to workers who qualify for a reasonable accommodation (discussed below). Second, the mandate does not apply to workers who are only entering the workplace for a “quick and limited purpose.” The City provides the following examples of a “quick and limited purpose”: using the bathroom, making a delivery, clocking in and receiving an assignment before leaving to begin a solitary assignment. Third, the mandate does not apply to non-NYC resident performing artists, college or professional athletes, and anyone who accompanies them. Fourth, the mandate does not apply to workers who work alone without in-person contact with co-workers or others in the course of their business.
For workers who refuse to comply with the mandate, and who do not otherwise qualify for exemption or reasonable accommodation, the City makes clear that it is in the covered entity’s discretion whether to discipline or fire such workers, so long as they are kept out of the workplace.
Verification of Workers’ Proof of Vaccination
By December 27, covered workers must have received at least one-dose of a COVID-19 vaccine. Covered entities must confirm all workers’ proof of vaccination, which requires reviewing (1) a form of identification and (2) proof of vaccination.
Acceptable forms of identification include:
- Driver’s license
- Non-driver government ID card
- IDNYC card
- Passport
- School or work ID card
Copies of the above identification documents are permitted, including pictures.
Acceptable proof of vaccination includes:
- A photo or hard copy of a CDC vaccination card
- NYC COVID Safe App
- New York State Excelsior Pass
- CLEAR Digital Vaccine Card
- CLEAR Health Pass
- Official vaccination record
- A photo or hard copy of an official vaccination record of one of the following vaccines administered outside the United States: AstraZeneca/SK Bioscience, Serum Institute of India/COVISHIELD and Vaxzevria, Sinopharm, or Sinovac
If the vaccine is authorized to be administered in a two-dose series, workers have 45 days after providing proof of their first dose to receive their second dose. If workers do not show proof of a second dose within the requisite 45 days, covered entities must exclude them from the workplace until they provide proof of a second dose.
Reasonable Accommodation Requests
The City also provides important guidance for covered entities with regard to workers who request a reasonable accommodation to the mandate based on a sincerely held religious belief or disability. Any such existing workers must apply for a reasonable accommodation by December 27, 2021, and covered entities may permit workers to continue coming into the workplace while the request is being evaluated.
Covered entities are required to keep a record of accommodation requests, including when the request was granted or denied, the basis for doing so, and any supporting documents provided by the worker with respect to the request.
Importantly, the City’s guidance includes a checklist that covered entities may follow to process a reasonable accommodation, which “will demonstrate that the employer handled the reasonable accommodation request appropriately.”
Recordkeeping Requirements
Covered entities are also required to keep a record of each worker’s proof of vaccination. (For workers who have received an accommodation, the employer must maintain documentation as described above). The City has outlined three ways to meet this requirement:
- Maintaining a copy of the worker’s proof of vaccination;
- Maintaining a paper or electronic record created by the covered entity that includes: (i) the worker’s name; (ii) whether the worker is fully vaccinated; and (iii) for workers who have submitted proof of one-dose, the date by which the worker must provide proof of a second dose; or
- Checking workers’ proof of vaccination each day before they enter the workplace and keeping a record of each verification.
For workers employed by a contractor, covered entities may either keep a record of proof of vaccination or may request that the contractor’s employer confirm the contractor is vaccinated and then maintain a record of that request and confirmation.
Covered entities with multiple locations (e.g., a chain restaurant) may store vaccination and reasonable accommodation records in one central location. In case of inspection by the City, each location should have available the contact information of the business representative who is centrally storing such records.
Finally, records should be stored in a secure manner and only made accessible to individuals who have a legitimate need to access such information for purposes of compliance with the mandate or other governmental orders, laws, or regulations.
Public-Facing Affirmation Sign
By December 27, covered entities are additionally required to fill out and post in a conspicuous location the DOHMH’s Affirmation of Compliance with Workplace Vaccination Requirements. Businesses, such as restaurants, fitness centers, and entertainment venues, that have previously posted the requisite Key to NYC notice poster do not have to post the additional DOHMH affirmation sign.
Mandate Enforcement
The mandate will be enforced by inspectors from various City agencies and monetary penalties may be assessed for covered entities that are non-compliant. This includes an initial fine of $1,000 and escalating penalties for persisting violations. According to the City’s guidance, enforcement of the mandate will begin immediately – i.e., December 27.
* * *
Although legal challenges to the City’s mandate might be filed, covered entities may wish to act promptly in light of the mandate’s fast-approaching December 27 deadline.
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jessica Brown, Harris M. Mufson, Lauren Elliot, Andrew G.I. Kilberg, Kate Googins, and Meika Freeman.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Administrative Law and Regulatory or Labor and Employment practice groups, or the following:
Jessica Brown – Denver (+1 303-298-5944, [email protected])
Harris M. Mufson – New York (+1 212-351-3805, [email protected])
Lauren Elliot – New York (+1 212-351-3848, [email protected])
Gabrielle Levin – New York (+1 212-351-3901, [email protected])
Danielle J. Moss – New York (+1 212-351-6338, [email protected])
Eugene Scalia – Co-Chair, Administrative Law & Regulatory Group, Washington, D.C. (+1 202-955-8543, [email protected])
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles (+1 213-229-7107, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
During 2021, companies accessing the capital markets have had to navigate the ongoing challenges of the COVID-19 pandemic, change in US administration and increased emphasis by investors on ESG-related matters. Join partners of Gibson Dunn’s Capital Markets and Securities Regulation and Corporate Governance practice groups, as well as Chuck Park, a Managing Director in Goldman Sachs’ Equity Capital Markets Group, as they provide an overview of market activity in 2021 and how companies reacted to the market impact of these developments. This webcast will also discuss thoughts on 2022 capital raising and the key issues and opportunities that may impact companies looking to go to market next year.
PANELISTS:
Andrew Fabens is a partner in the New York 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, Fashion, Retail and Consumer Products and ESG practice groups. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He is recognized by Chambers USA in the Capital Markets: Debt & Equity category. Mr. Fabens represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. In addition, he regularly advises companies and investment banks on corporate and securities law issues, including M&A financing, spinoff transactions and liability management programs.
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, and corporate governance. She is Band 1 ranked by Chambers USA in capital markets for the energy industry and recognized in nationwide Energy Transactions and M&A/Corporate. Ms. Holmes represents issuers and underwriters in all forms of capital raising transactions, including IPOs, registered offerings of debt or equity, private placements, joint ventures, structured investments, and sustainable financings. Ms. Holmes also frequently advises companies, boards of directors, special committees and financial advisors in M&A transactions, and conflicts of interest and other special situations.
Tom Kim is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the firm’s Securities Regulation and Corporate Governance practice group. Mr. Kim focuses his practice on advising companies, underwriters and boards of directors on registered and exempt capital markets transactions, SEC regulatory and reporting issues, and corporate governance, as well as on general corporate and securities matters. Mr. Kim has been recognized by Chambers USA in the Securities Regulation: Advisory category since 2015. Mr. Kim served for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance at the SEC.
Stewart McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher, Co-Chair of the Capital Markets practice group and a member of the firm’s Corporate Department. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.
Chuck Park is a member of the Equity Capital Markets Group of Goldman Sachs in New York. He focuses on origination, advisory and execution of equity and equity-linked offerings, including initial public offerings, follow-on offerings, block trades and convertible financings for Natural Resources corporate clients. Through his industry responsibilities, Mr. Park works closely with oil and gas, utility and power, and renewable energy companies throughout the United States. He joined Goldman Sachs in 1998 and has been dedicated to the financing and capital markets areas of the firm, first in the Fixed Income Capital Markets Group, then as a member of the Equity and Equity-linked Capital Markets Groups. Mr. Park was named managing director in 2006.
Mike Titera is a partner in the Orange County office of Gibson, Dunn & Crutcher and a member of the firm’s Securities Regulation and Corporate Governance, Capital Markets and M&A practice groups. His practice focuses on advising public companies regarding securities disclosure and compliance matters, financial reporting, and corporate governance. Mr. Titera often advises clients on accounting and auditing matters and the use of non-GAAP financial measures. He also has represented clients in investigations conducted by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
Virginia and Colorado, which earlier this year enacted comprehensive state privacy laws following California’s 2018 lead, are now poised to follow California in another way in 2022: writing implementing regulations and weighing changes to the laws themselves. Companies should account for these regulations and changes as they develop programs to comply with the laws, which take effect in 2023.
In Virginia, lawmakers are exploring possible updates to the Virginia Consumer Data Protection Act (“VCDPA”), which passed in March 2021, such as giving a state agency rulemaking authority. Unlike the California and Colorado laws, the VCDPA itself does not give a state agency the power to issue regulations to implement the new law. But a recent report mandated by the VCDPA recommended that the legislature give the Virginia Attorney General’s Office (“Virginia AG”) or another agency such rulemaking authority.
The report was issued in response to a provision in the VCDPA, which required the creation of a working group made up of government, business, and community representatives to study potential changes to the VCDPA before it goes into effect. The group met six times before issuing its final report in November. In addition to rulemaking authority, the report also suggested other significant changes, including increasing the Virginia AG’s enforcement budget, allowing the Virginia AG to collect actual damages from violations that cause consumer harm, giving companies a right to cure violations that would sunset in the future, requiring companies to honor an automated global opt-out signal, changing the “right to delete” to a “right to opt out of sale,” and considering amending statutory definitions such as “sale,” “personal data,” “publicly available information,” and “sensitive data,” among others. The final report is available here.
In Colorado, meanwhile, the Colorado Attorney General’s Office (“Colorado AG”), which already has rulemaking authority, has begun the rulemaking process for the Colorado Privacy Act (“CPA”), which passed in July 2021. In its regulatory agenda for 2022, the Colorado AG stated that it expects to propose and finalize rules for universal opt-out tools, which are mechanisms that allow users to automatically inform websites that they want to opt out of the processing of their personal data.
As we have reported in prior updates, California is tackling these issues in its own privacy laws, particularly as California is transitioning from the California Consumer Privacy Act (“CCPA”) to the California Privacy Rights Act (“CPRA”), which will take effect in 2023. In the meantime, the California Attorney General’s Office (“California AG”) promulgation of CCPA regulations that were last revised in March 2021, remain in force. Now, the new CPRA-created California Privacy Protection Agency has embarked in earnest on its own rulemaking to consider amending the California AG’s CCPA rules and to enact its own rules for the CPRA. In response to a request for comments on its proposed rulemaking, the agency received scores of comments from individuals, organizations, and government officials, which are available here.
There is no sign of a slowdown in the development of state privacy laws. In fact, more than two dozen other states have floated their own proposals for comprehensive privacy laws.
Although the precise contours of these laws remain in flux, the laws will almost certainly usher in notable regulatory changes affecting how companies collect and manage data while imposing a host of new obligations and potential liability. Companies would be well-served to focus their compliance programs accordingly.
We will continue to monitor developments, and are available to discuss these issues as applied to your particular business.
This alert was prepared by Ryan T. Bergsieker, Cassandra L. Gaedt-Sheckter, and Eric M. Hornbeck.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the firm’s Privacy, Cybersecurity and Data Innovation practice group.
Privacy, Cybersecurity and Data Innovation Group:
United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Robert K. Hur – Washington, D.C. (+1 202-887-3674, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0) 20 7071 4250, [email protected])
Patrick Doris – London (+44 (0) 20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0) 20 7071 4203, [email protected])
Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
- Executive Summary
On Monday, December 6, 2021, the Biden-Harris Administration released the United States Strategy on Countering Corruption (the “Strategy”),[1] the first of its kind. The Strategy culminates a months-long process set in motion when President Biden declared that the U.S. Government’s efforts against corruption represent a “core United States national security interest.” As the Administration explained in a June 3, 2021 National Security Study Memorandum, “corruption threatens United States national security, economic equity, global anti-poverty and development efforts, and democracy itself.”
The Strategy seeks to broaden and energize the Government’s anti-corruption efforts by focusing on a range of policy and enforcement strategies coordinated across executive branch agencies. While many of the goals and programs described in the Strategy have been discussed for years by U.S. Government officials, the Strategy signals that the White House is elevating the priority of anti-corruption policy and enforcement efforts above those seen in recent years. Ultimately, while the Strategy is an important affirmation of an anti-corruption agenda for the Administration, time will be needed to assess its impact on reducing corruption globally, its stated goal. From an enforcement perspective, the Administration’s significant emphasis on combating corruption strongly points toward increased action, which echoes recent U.S. Department of Justice (“DOJ”) pronouncements pledging a renewed focus on corporate criminal enforcement. For the private sector, these developments emphasize the importance of implementing and monitoring corporate anti-corruption compliance programs.
The Strategy announced this week identifies five “pillars” on which the Administration intends to build its evolving anti-corruption efforts:
- Modernizing, coordinating, and resourcing U.S. Government efforts to fight corruption;
- Curbing illicit finance;
- Holding corrupt actors accountable;
- Preserving and strengthening the multilateral anti-corruption architecture; and
- Improving diplomatic engagement and leveraging foreign assistance to advance policy goals.
As detailed below, the Strategy has the potential to impact, among other programs, (1) DOJ’s enforcement activities, (2) the U.S. Government’s overarching anti-money laundering regime, and (3) the Administration’s anti-corruption work abroad—both on its own and through multilateral initiatives in conjunction with the European Union and other foreign governments.
- Background: The United States Strategy on Countering Corruption
The Strategy outlines in broad terms the Administration’s plan for the U.S. Government to tackle corruption—including through increased coordination among federal agencies, foreign governments, multinational entities, and non-governmental organizations; increased funding for established U.S. anti-corruption enforcement activities; the integration of enhanced anti-corruption practices into various federal programs; and the creation of new, targeted initiatives. The Strategy highlights deficiencies in the U.S. Government’s current approach, such as the inability of officials to timely access information regarding beneficial ownership of shell companies and insufficient information-gathering regarding U.S. real estate transactions, as well as successful practices that the Administration will continue and expand. The Strategy includes both initiatives that can and will be executed through federal agencies and plans that the Administration aspires to implement but that depend on congressional legislation or agreement with foreign governments.
The Strategy comprises five overarching parts, or pillars, each divided into two to five strategic objectives.
Pillar One – Modernizing, Coordinating, and Resourcing U.S. Government Efforts to Better Fight Corruption. In addition to improving data collection and information sharing among federal agencies, this pillar outlines new initiatives within federal agencies, such as new anti-corruption teams in the Treasury and Commerce Departments and a new beneficial ownership data system for use by law enforcement as part of the Administration’s support of Financial Crimes Enforcement Network (“FinCEN”) authorities. This Pillar also reveals the Administration’s plans to integrate anti-corruption practices into its other priorities, as by placing new conditions on foreign aid to fight the COVID-19 pandemic and to counter climate change.
Pillar Two – Curbing Illicit Finance. This pillar describes initiatives to improve the U.S. anti-money laundering regime, including its coordination with U.S. allies and other partners. For example, because billions of dollars in criminal proceeds are reported to be laundered through the U.S. real estate market, the Strategy announces that the Treasury will issue reporting requirements for “those with valuable information regarding real estate transactions.” In a similar vein, the Treasury will consider reviving a 2015 proposed rulemaking that would prescribe minimum standards for anti-money laundering programs and reporting requirements for certain investment advisors. Federal agencies also are ordered to consider ways to increase policing of professionals and service providers, such as lawyers, accountants, and trust and company service providers (“TCSPs”), who have frequently been alleged to play key roles in facilitating money laundering.
Pillar Three – Holding Corrupt Actors Accountable. This pillar lays out the White House’s vision for scaling up efforts to enforce anti-money laundering and other criminal and civil anti-corruption laws. The Strategy places a renewed focus on efforts to counter kleptocracy, such as the Treasury’s pilot Kleptocracy Assets Recovery Rewards program, which would make payments to individuals who provide information that leads to the recovery of stolen assets linked to foreign government corruption held at U.S. financial institutions. This pillar surveys the Administration’s plan to continue targeting the tools used by corrupt actors to scrutinize “the demand side of bribery”—by using diplomatic and foreign assistance programming to enforce and enact legislation in countries where bribery is prevalent. This plan also includes the launch of a new Democracies Against Safe Havens initiative to coordinate international efforts to eradicate safe havens for illicit funds. Further, this pillar previews that, following the priorities for anti-money laundering and counter-terrorism financing policies FinCEN issued in June 2021, FinCEN plans to regulate how financial institutions should incorporate anti-corruption measures into their risk-based anti-money laundering programs.
Pillar Four – Preserving and Strengthening the Multilateral Anti-Corruption Architecture. As this pillar describes, the Administration plans to work with allies and partners to more effectively implement multilateral treaties and frameworks for combatting corruption. Domestically, this pillar also lays out initiatives to improve the resilience of security and defense institutions. For example, the Department of Defense will elevate and prioritize funds for institutional capacity-building activities, aligned with NATO’s Building Integrity program. In particular, the U.S. Government and other donor countries will collaborate with international financial institutions and multilateral trust funds to strengthen anti-corruption efforts in their programs and allocation systems.
Pillar Five – Improving Diplomatic Engagement and Leveraging Foreign Assistance Resources to Advance Policy Goals. The final pillar outlines the Administration’s objectives for making anti-corruption efforts a key component of its foreign policy. For example, it will launch initiatives to reduce transnational corruption, such as a new Anti-Corruption Solutions through Emerging Technology program, which will engage government, civil society, and private sector actors to collaborate on tracking, developing, improving, and applying new and existing technological anti-corruption solutions. To further develop ways to respond quickly to emerging areas of risk, the U.S. Government also will launch two new response funds: (1) the Anti-Corruption Response Fund implemented by USAID to support, test, and pilot anti-corruption programming; and (2) the Global Anti-Corruption Rapid Response Fund implemented by DOJ and the State Department to enable expert advisors to consult with and assist foreign anti-corruption counterparts.
- DOJ Anti-Corruption Enforcement
The Strategy emphasizes that “aggressive enforcement action” is crucial to root out widespread corruption. The Strategy plans to expand criminal and civil law enforcement activities under the Foreign Corrupt Practices Act (“FCPA”) and other statutes, to increase coordination across the U.S. Government (and with foreign government partners and private actors), and to develop and implement new tools to broaden U.S. regulators’ reach. Responsibility for implementing these core components of the Strategy will naturally fall on DOJ, the SEC and other enforcement authorities.
Increased Enforcement: Given the Strategy’s focus on “vigorous enforcement,” the coming years likely will see a renewed DOJ focus on complex investigations into foreign bribery, misuse of cryptocurrency, and money laundering, among other areas. The uptick in investigations may arise through cross-referral of corruption matters between U.S. Government agencies and from other countries—as the Strategy calls on the U.S. Government to rely on greater cross-border cooperation in detecting, tracking, and investigating corruption schemes. The Strategy also contemplates greater cooperation with partner countries through joint investigations and coordinated prosecutions.
Increased Public-Private Coordination: In addition to prioritizing cooperation within the U.S. Government and with partner countries, the Strategy elevates the importance of coordination across various public and private institutions—with the goal of deepening and broadening anti-corruption enforcement capabilities and impact. As an example, the Strategy outlines enhanced collaboration among the U.S. Government and foreign policy partners to identify industries, financial channels, geographic areas, and governmental institutions and officials for increased scrutiny.
The Strategy focuses on expanding successful asset recovery programs that rely on individual whistleblowers. For example, the Strategy highlights DOJ’s existing “Kleptocracy Asset Recovery Initiative,” which since 2010 has facilitated the recovery of more than $1.7 billion in corruption proceeds by targeting the associates of corrupt foreign regimes. Building on this work, the Strategy introduces a new pilot Kleptocracy Asset Recovery Rewards Program, funded pursuant to the FY21 National Defense Authorization Act, that will create concrete financial incentives for reporting proceeds of foreign bribery. Treasury will run the pilot program and “provide payments to individuals for information leading to the identification and recovery of stolen assets linked to foreign government corruption held at U.S. financial institutions.”
Development of New Anti-Corruption Tools: The Strategy recognizes the need for new tools to broaden the reach of anti-corruption enforcement activities. In particular, the Strategy emphasizes the Administration’s commitment to working with allies and partners on “enacting legislation criminalizing the demand side of bribery” and enforcing such laws here and abroad—in the “countries where the bribery occurs.” Among the legislative fixes under consideration is an amendment to the FCPA to expand its application to foreign persons and government officials directly involved in bribery schemes—a perennial proposal that may finally find greater traction among lawmakers.
- Enhancements to the U.S. Anti-Money Laundering Regime
In the name of combating corruption, the White House is signaling strongly through the Strategy that it intends to push forward several long-standing recommendations for enhancing the U.S. anti-money laundering regime. These recommendations focus on financial gatekeepers, corporate transparency, and industry-specific initiatives.
Gatekeepers—Overview: The Strategy’s most controversial area of AML enhancements is the potential extension of mandatory compliance and reporting requirements to non-financial institution professional service providers. These include lawyers, accountants, trust and company service providers, incorporators, registered agents, and nominees, who are “gatekeepers” to the U.S. and international financial system.
The lack of mandatory AML requirements for gatekeepers has long been an area of discussion and past and current proposed legislation, but has faced objections from self-regulating professions, especially the legal profession, on the basis that regulations would not deter lawyers who knowingly facilitate money laundering and that reporting requirements would undermine traditional expectations of client confidentiality. Because the extension of mandatory AML requirements to gatekeeper professions would require legislative amendment to the Bank Secrecy Act (“BSA”), the Strategy explains that the White House will work with Congress as necessary to try to secure additional authorities.
Corporate Transparency: The Strategy highlights that FinCEN will continue efforts already underway to establish a beneficial ownership database as required by the Corporate Transparency Act. Doing so not only would meet the congressional mandate, but also answer the call of law enforcement, prosecutors, and the Financial Action Task Force to allow timely access to adequate, accurate, and current beneficial ownership information to federal agencies and financial institutions. Gibson Dunn published a detailed summary of the 2020 AML Act here and further analysis of the Corporate Transparency Act here.
Real Estate: The Strategy announces that FinCEN will move forward with applying permanent AML regulations to the real estate industry. In conjunction with the Strategy, FinCEN published an advance notice of proposed rulemaking on December 8, 2021 requesting public comment on effective methods to collect and report information relevant to preventing money laundering through real estate purchases in the United States.
Investment Advisors: The Strategy reveals the Biden Administration’s intent to re-examine a proposed rule, originally published in 2015, to require registered investment advisors to implement Bank Secrecy Act/anti-money laundering programs and to report suspicious activity. Imposing AML requirements on registered investment advisors, which work closely with private equity funds and hedge funds, would address a gap in the U.S. AML regime identified by the FATF and bring the United States closer to the legal regimes of other financial-center jurisdictions. Gibson Dunn published a client alert discussing the 2015 proposed rule in detail.
Antiquities and Art Dealers: The Strategy notes FinCEN’s recent actions with respect to dealers in arts and antiquities. FinCEN will submit a report to Congress later this year, as required by the 2020 AML Act, on facilitation of money laundering, terrorism finance, and other illicit financial dealings through trade in works of art. Further, FinCEN solicited public comment in September 2021 on an advance notice of proposed rulemaking as the first step to implementing the recent amendment to the BSA to extend the definition of financial institution to include dealers in antiquities.
In sum, most of the proposals in the Strategy have been the subject of debate and proposed rulemaking for several years, but have languished due to a lack of clear administration priorities or resources (or both). The Strategy renews efforts in this area, which may result in substantial expansions to the U.S. AML regime.
- Anti-Corruption and National Security
The Strategy was published on the eve of the Summit for Democracy, an effort to bolster cooperation among like-minded democracies. This Summit was timed to coincide with International Anti-Corruption Day (December 9) and International Human Rights Day (December 10). More than 100 countries were invited to the Summit, but China and Russia were not among the invitees.
In the lead-up to the Summit, U.S. officials clarified that they consider corruption a threat to democracy. Treasury Secretary Janet Yellen and USAID Administrator (and former UN Ambassador) Samantha Power wrote in a joint editorial in the Washington Post that corruption has made democratic decline possible: “Autocrats use public wealth to maintain their grip on power, while in democracies, corruption rots free societies from within.”
To address the transnational nature of corrupt financial flows, the Strategy highlights action taken by the Office of Foreign Assets Control (“OFAC”) to freeze the assets of foreign officials who have engaged in major schemes to embezzle public funds and corrupt public procurement. OFAC has imposed asset-freezing sanctions and visa restrictions on more than 200 foreign officials since Executive Order 13818, which was issued on December 20, 2017, implementing the Global Magnitsky Act.
The Strategy highlights the United States’ intent to increase multilateral cooperation in levying economic sanctions and visa restrictions to curtail corruption. The Strategy also notes the close cooperation between the United States and the United Kingdom on the United Kingdom’s Global Anti-Corruption Sanctions. On December 2, 2021, Australia’s Parliament adopted the Autonomous Sanctions Amendment, granting sanctions authority similar to the U.S. Global Magnitsky Act by unanimous vote.
- Recent European Union Anti-Corruption and AML Actions
The Biden Administration prioritized talks with the EU regarding the joint fight against corruption from the very beginning during its first months in office. As part of the EU-U.S. summit on June 15, 2021, the parties—in a joint statement—stated that the EU resolves to “lead by example at home” by implementing “concrete actions to […] fight corruption.”
The Treaty on the Functioning of the EU recognizes corruption as a “euro-crime,” among the particularly serious crimes with a cross-border dimension for which minimum rules on the definition of criminal offences and sanctions may be established (TFEU Art. 83.1). With the adoption of the Stockholm Program in 2010, the European Commission (in close cooperation with the Council of Europe Group of States against Corruption) has been given a political mandate to measure efforts in the fight against corruption and develop a comprehensive EU anti-corruption policy. The European Commission has, however, not made meaningful progress since then. Currently, the anti-corruption laws of the 27 member states—including their extraterritorial reach—vary across the EU, and the EU has not yet adopted any harmonization measures to change this.
Cross-Border Enforcement: Over the past decade, we have seen increasing cooperation among U.S. enforcement agencies and their counterparts in Europe and worldwide. We expect this to continue and grow in the years to come. One of the most evident examples of this trend is an investigation that led to parallel settlements between a European company and the authorities in the United States, France, and the United Kingdom in January 2020. As part of the global settlement, the company agreed to pay combined penalties of more than $3.9 billion to resolve foreign bribery charges, making this settlement the largest anti-corruption settlement to date.
New Anti-Money Laundering Regulations: During the past few years, the EU has significantly increased its fight against money laundering. Most notably, the EU member states had to implement into their national laws the changes introduced by Directive (EU) 2018/843 on preventing the use of the financial system for money laundering or terrorist financing (the Fifth Anti-Money Laundering Directive) by January 10, 2020. As a result, many economic players were subjected to new or enhanced AML requirements—including private financial institutions, cryptocurrency traders, real estate agencies, and notaries. The Directive is intended to bring more transparency to the ultimate beneficial owners of legal entities, including foreign associations, and expands the number of individuals entitled to inspect transparency registers. It also increases reporting obligations of so-called “obliged persons.” Further, the Directive sets stricter standards with respect to customer due diligence requirements (i.e., know-your-customer requirements).
Continuing this trend, on July 20, 2021, the European Commission presented an ambitious package of legislative proposals to strengthen the EU’s anti-money laundering and countering the financing of terrorism (“AML/CFT”) rules. The package consists of four legislative proposals: a regulation establishing a new EU AML/CFT authority; a regulation on AML/CFT containing directly applicable rules, including in the areas of customer due diligence and beneficial ownership; a sixth directive on AML/CFT; and a revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU).
- Conclusion
The Strategy may well reflect an inflection point in the anti-corruption enforcement landscape under the Biden Administration, particularly when viewed in conjunction with Deputy Attorney General Lisa Monaco’s pronouncements in October 2021 on corporate criminal enforcement. These Administration initiatives and public statements are an important reminder of the value of actively reviewing corporate anti-corruption compliance programs, both to prevent violations and to obtain mitigation in a self-disclosure or enforcement context. In terms of its focus, specificity of effort, and call for cross-government coordination, the Strategy may reflect real change in the coming years of the Administration. The commitment to increased coordination between U.S. agencies as well as with foreign law counterparts, the focus on the demand side along with the supply side of bribery, and the use of anti-money laundering tools to combat corrupt financial flows, point toward a heightened enforcement environment in the near term. Companies, senior executives, and industry participants should expect an intensifying regulatory and enforcement anti-corruption landscape in the United States and abroad.
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[1] The White House, United States Strategy on Countering Corruption (Dec. 6, 2021), https://www.whitehouse.gov/wp-content/uploads/2021/12/United-States-Strategy-on-Countering-Corruption.pdf.
The following Gibson Dunn lawyers assisted in preparing this client update: Patrick F. Stokes, Stephanie L. Brooker, Adam M. Smith, John D. W. Partridge, Richard W. Grime, Michael S. Diamant, M. Kendall Day, Kelly S. Austin, Courtney M. Brown, David P. Burns, John W.F. Chesley, Benno Schwarz, Linda Noonan, Brendan Stewart, Samantha Sewall, Andreas Dürr, Victoria Granda, Katharina E. Humphrey, Nealofar S. Panjshiri, and Lindsay Bernsen Wardlaw.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 110 attorneys with anti-corruption and FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
Washington, D.C.
F. Joseph Warin (+1 202-887-3609, [email protected])
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David Debold (+1 202-955-8551, [email protected])
Michael S. Diamant (+1 202-887-3604, [email protected])
John W.F. Chesley (+1 202-887-3788, [email protected])
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Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2022 proxy season. The ISS U.S. policy updates are available here. The ISS updates will apply for shareholder meetings on or after February 1, 2022, except for those policies subject to a transition period. ISS plans to release an updated Frequently Asked Questions document that will include more information about its policy changes in the coming weeks.[1]
The Glass Lewis updates are included in its 2022 U.S. Policy Guidelines and the 2022 ESG Initiatives Policy Guidelines, which cover shareholder proposals. Both documents are available here. The Glass Lewis 2022 voting guidelines will apply for shareholder meetings held on or after January 1, 2022.
This alert reviews the ISS and Glass Lewis updates. Both firms have announced policy updates on the topics of board diversity, multi-class stock structures, and climate-related management and shareholder proposals. Glass Lewis also issued several policy updates that focus on nominating/governance committee chairs, as well new policies specific to special purpose acquisition companies (“SPACs”).
A. Board Diversity
- ISS – Racial/Ethnic Diversity. At S&P 1500 and Russell 3000 companies, beginning in 2022, ISS will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) if the board “has no apparent racially or ethnically diverse members.” This policy was announced last year, with a one-year transition. There is an exception for companies where there was at least one racially or ethnically diverse director at the prior annual meeting and the board makes a firm commitment to appoint at least one such director within a year.
- ISS – Gender Diversity. ISS announced that, beginning in 2023, it will expand its policy on gender diversity, which since 2020 has applied to S&P 1500 and Russell 3000 companies, to all other companies. Under this policy, ISS generally recommends “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) where there are no women on the board. The policy includes an exception analogous to the one in the voting policy on racial/ethnic diversity.
- Glass Lewis – Gender Diversity. Beginning in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee at Russell 3000 companies that do not have at least two gender diverse directors (as announced in connection with its 2021 policy updates), or the entire committee if there is no gender diversity on the board. In 2023, Glass Lewis will move to a percentage-based approach and issue negative voting recommendations for the nominating/governance committee chair if the board is not at least 30% gender diverse. Glass Lewis is using the term “gender diverse” in order to include individuals who identify as non-binary. Glass Lewis also updated its policies to reflect that it will recommend in accordance with mandatory board composition requirements in applicable state laws, whether they relate to gender or other forms of diversity. It will not issue negative voting recommendations for directors where applicable state laws do not mandate board composition requirements, are non-binding, or only impose reporting requirements.
- Glass Lewis – Diversity Disclosures. With respect to disclosure about director diversity and skills, for 2021, Glass Lewis had announced that it would begin tracking companies’ diversity disclosures in four categories: (1) the percentage of racial/ethnic diversity represented on the board; (2) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (3) whether the board has a policy requiring women and other diverse individuals to be part of the director candidate pool; and (4) board skills disclosure. For S&P 500 companies, beginning in 2022, Glass Lewis may recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company fails to provide any disclosure in each of these four categories. Beginning in 2023, it will generally oppose election of the committee chair at S&P 500 companies that have not provided any aggregate or individual disclosure about the racial/ethnic demographics of the board.
B. Companies with Multi-Class Stock or Other Unequal Voting Rights
- ISS. ISS announced that, after a one-year transition period, in 2023, it will begin issuing adverse voting recommendations with respect to directors at all U.S. companies with unequal voting rights. Stock with “unequal voting rights” includes multi-class stock structures, as well as less common practices such as maintaining classes of stock that are not entitled to vote on the same ballot items or nominees, and loyalty shares (stock with time-phased voting rights). ISS’s policy since 2015 has been to recommend “against” or “withhold” votes for directors of newly-public companies that have multiple classes of stock with unequal voting rights or certain other “poor” governance provisions that are not subject to a reasonable sunset, including classified boards and supermajority voting requirements to amend the governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so were not subject to this policy. ISS had sought public comment about whether, in connection with the potential expansion of this policy to all U.S. companies, the policy should apply to all or only some nominees. The final policy does not specify, saying that the adverse voting recommendations may apply to “directors individually, committee members, or the entire board” (except new nominees, who will be evaluated case-by-case). For 2022, the current policy would continue to apply to newly-public companies. ISS tweaked the policy language to reflect that a “newly added reasonable sunset” would prevent negative voting recommendations in subsequent years. ISS considers a sunset period reasonable if it is no more than seven years.
- Glass Lewis. Beginning in 2022, Glass Lewis will recommend “against” or “withhold” votes for the chair of the nominating/governance committee at companies that have multi-class share structures with unequal voting rights if they are not subject to a “reasonable” sunset (generally seven years or less).
C. Climate-Related Proposals and Board Accountability at “High-Impact” Companies
- ISS – Say on Climate. In 2021, both shareholders and management submitted Say on Climate proposals. For 2022, ISS is adopting voting policies that document the frameworks it has developed for analyzing these proposals, as supplemented by feedback from ISS’s 2021 policy development process. Under the new policies, ISS will recommend votes case-by-case on both management and shareholder proposals, taking into consideration a list of factors set forth in each policy. For management proposals asking shareholders to approve a company’s climate transition action plan, ISS will focus on “the completeness and rigor of the plan,” including the extent to which a company’s climate-related disclosures align with Task Force on Climate-related Financial Disclosure (“TCFD”) recommendations and other market standards, disclosure of the company’s operational and supply chain greenhouse gas (“GHG”) emissions (Scopes 1, 2 and 3), and whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2 and 3) by 2050. For shareholder proposals requesting Say on Climate votes or other climate-related actions (such as a report outlining a company’s GHG emissions levels and reduction targets), ISS will recommend votes case-by-case taking into account information such as the completeness and rigor of a company’s climate-related disclosures and the company’s actual GHG emissions performance.
- ISS – Board Accountability on Climate at High-Impact Companies. ISS also adopted a new policy applicable to companies that are “significant GHG emitters” through their operations or value chain. For 2022, these are companies that Climate Action 100+ has identified as disproportionately responsible for GHG emissions. During 2022, ISS will generally recommend “against” or “withhold” votes for the responsible committee chair in cases where ISS determines a company is not taking minimum steps needed to understand, assess and mitigate climate change risks to the company and the larger economy. Expectations about the minimum steps that are sufficient “will increase over time.” For 2022, minimum steps are detailed disclosure of climate-related risks (such as according to the TCFD framework”) and “appropriate GHG emissions reduction targets,” which ISS considers “any well-defined GHG reduction targets.” Targets for Scope 3 emissions are not required for 2022, but targets should cover at least a significant portion of the company’s direct emissions. For 2022, ISS plans to provide additional data in its voting analyses on all Climate Action 100+ companies to assist its clients in making voting decisions and in their engagement efforts. As a result of this new policy, companies on the Climate Action 100 + list should be aware that the policy requires both disclosure in accordance with a recognized framework, and quantitative GHG reduction targets, and that ISS plans to address its new climate policies in its updated FAQs, so there may be more specifics about this policy when the FAQs are released.
- Glass Lewis – Say on Climate. Glass Lewis also added a policy on Say on Climate proposals for 2022, but takes a different approach from ISS. Glass Lewis supports robust disclosure about companies’ climate change strategies. However, it has concerns with Say on Climate votes because it views the setting of long-term strategy (which it believes includes climate strategy) as the province of the board and believes shareholders may not have the information necessary to make fully informed voting decisions in this area. In evaluating management proposals asking shareholders to approve a company’s climate transition plans, Glass Lewis will evaluate the “governance of the Say on Climate vote” (the board’s role in setting strategy in light of the Say on Climate vote, how the board intends to interpret the results of the vote, and the company’s engagement efforts with shareholders) and the quality of the plan on a case-by-case basis. Glass Lewis expects companies to clearly identify their climate plans “in a distinct and easily understandable document,” which it believes should align with the TCFD framework. Glass Lewis will generally oppose shareholder proposals seeking to approve climate transition plans or to adopt a Say on Climate vote, but will take into account the request in the proposal and company-specific factors.
D. Additional ISS Updates
ISS adopted the following additional updates of note:
- Shareholder Proposals Seeking Racial Equity Audits. ISS adopted a formal policy reflecting its approach to shareholder proposals asking companies to oversee an independent racial equity or civil rights audit. These proposals, which were new for 2021, are expected to return again in 2022 given the continued public focus on issues related to race and equality. ISS will recommend votes case-by-case on these proposals, taking into account several factors listed in its new policy. These factors focus on a company’s processes or framework for addressing racial inequity and discrimination internally, its public statements and track record on racial justice, and whether the company’s actions are aligned with market norms on civil rights and racial/ethnic diversity.
- Capital Authorizations. ISS adopted what it characterizes as “minor” and “clarifying” changes to its voting policies on common and preferred stock authorizations. For both policies, ISS will apply the same dilution limits to underperforming companies, and will no longer treat companies with total shareholder returns in the bottom 10% of the U.S. market differently. ISS also clarified that problematic uses of capital that would lead to a vote “against” a proposed share increase include long-term poison pills that are not shareholder-approved, rather than just poison pills adopted in the last three years. ISS reorganized the policy on common stock authorizations to distinguish between general and specific uses of capital and to clarify the hierarchy of factors it considers in applying the policy.
- Three-Year Burn Rate Calculation for Equity Plans. Beginning in 2023, ISS will move to a “Value-Adjusted Burn Rate” in analyzing equity plans. ISS believes this will more accurately measure the value of recently granted equity awards, using a methodology that more precisely measures the value of option grants and calculations that are more readily understood by the market (actual stock price for full-value awards, and the Black-Scholes value for stock options). According to ISS, when the current methodology was adopted, resource limitations prevented it from doing the more extensive calculations needed for the Value-Adjusted Burn Rate.
- Updated FAQs on ISS Compensation Policies and COVID-19. ISS also issued an updated set of FAQs (available here) with guidance on how it intends to approach COVID-related pay decisions in conducting its pay-for-performance qualitative evaluation. According to the FAQs, many investors believe that boards are now positioned to return to annual incentive program structures as they existed prior to the pandemic. Accordingly, the FAQs reflect that ISS plans to return to its pre-pandemic approach on mid-year changes to metrics, targets and measurement periods, and on company responsiveness where a say-on-pay proposal gets less than 70% support.
E. Additional Glass Lewis Updates
Glass Lewis adopted several additional updates, as outlined below. Where relevant, for purposes of comparison, the discussion also addresses how ISS approaches the issue.
- Waiver of Retirement or Tenure Policies. Glass Lewis appears to be taking a stronger stance on boards that waive their retirement or tenure policies. Beginning in 2022, if the board waives a retirement age or term limit for two or more years in a row, Glass Lewis will generally recommend “against” or “withhold” votes for the nominating/governance committee chair, unless a company provides a “compelling rationale” for the waiver. By way of comparison, ISS does not have an analogous policy.
- Adoption of Exclusive Forum Clauses Without Shareholder Approval. Under its existing policies, Glass Lewis generally recommends “against” or “withhold” votes for the nominating/governance committee chair at companies that adopted an exclusive forum clause during the past year without shareholder approval. With a growing number of companies adopting exclusive forum clauses that apply to claims under the Securities Act of 1933, Glass Lewis updated its policy to reflect that the policy applies to the adoption of state and/or federal exclusive forum clauses. The existing exception will remain in place for clauses that are “narrowly crafted to suit the particular circumstances” facing a company and/or include a reasonable sunset provision. By way of comparison, ISS does not have an analogous policy.
- Board Oversight of E&S Issues. For S&P 500 companies, starting in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company does not provide “explicit disclosure” about the board’s role in overseeing environmental and social issues. This policy is taking effect after a transition year in which Glass Lewis noted concerns about disclosures it did not view as adequate. For 2022, Glass Lewis also will take the same approach for Russell 1000 companies that it took last year with S&P 500 companies, noting a concern where there is a lack of “clear disclosure” about which committees or directors are charged with oversight of E&S issues. Glass Lewis does not express a preference for a particular oversight structure, stating that boards should select the structure they believe is best for them.
- Independence Standard on Direct Payments for Directors. In evaluating director independence, Glass Lewis treats a director as not independent if the director is paid to perform services for the company (other than serving on the board) and the payments exceed $50,000 or no amount is disclosed. Glass Lewis clarified that this standard also captures payments to firms where a director is the principal or majority owner. By way of comparison, ISS’s independence standards likewise cover situations where a director is a partner or controlling shareholder in an entity that has business relationships with the company in excess of numerical thresholds used by ISS.
- Approach to Committee Chairs at Companies with Classified Boards. A number of Glass Lewis’ voting policies focus on committee chairs because it believes the chair has “primary responsibility” for a committee’s actions. Currently, if Glass Lewis policies would lead to a negative voting recommendation for a committee chair, but the chair is not up for election because the board is classified, Glass Lewis notes a concern with respect to the chair in its proxy voting analysis. Beginning in 2022, this policy will change and if Glass Lewis has identified “multiple concerns,” it will generally issue (on a case-by-case basis) negative voting recommendations for other committee members who are up for election.
- Written Consent Shareholder Proposals. Glass Lewis documented its approach to shareholder proposals asking companies to lower the ownership threshold required for shareholders to act by written consent. It will generally recommend in favor of these proposals if a company has no special meeting right or the special meeting ownership threshold is over 15%. Glass Lewis will continue its existing policy of opposing proposals to adopt written consent if a company has a special meeting threshold of 15% or lower and “reasonable” proxy access provisions. By way of comparison, ISS generally supports proposals to adopt written consent, taking into account a variety of factors including the ownership threshold. It will recommend votes case-by-case only if a company has an “unfettered” special meeting right with a 10% ownership threshold and other “good” governance practices, including majority voting in uncontested director elections and an annually elected board.
- SPAC Governance. Glass Lewis added voting guidelines that are specific to the SPAC context. When evaluating companies that have gone public through a de-SPAC transaction during the past year, it will review their governance practices to assess “whether shareholder rights are being severely restricted indefinitely” and whether restrictive provisions were submitted to an advisory vote at the meeting where shareholders voted on the de-SPAC transaction. If the board adopted certain practices prior to the transaction (such as a multi-class stock structure or a poison pill, classified board or other anti-takeover device), Glass Lewis will generally recommend “against” or “withhold” votes for all directors who served at the time the de-SPAC entity became publicly traded if the board: (a) did not also submit these provisions for a shareholder advisory vote at the meeting where the shareholders voted on the de-SPAC transaction; or (b) did not also commit to submitting the provisions for shareholder approval at the company’s first annual meeting after the de-SPAC transaction; or (c) did not also provide for a reasonable sunset (three to five years for a poison pill or classified board and seven years or less for multi-class stock structures). By way of comparison, as discussed above, for several years, ISS has had voting policies that address “poor” governance provisions at newly-public companies, including multiple classes of stock with unequal voting rights, classified boards and supermajority voting requirements to amend the governing documents. For 2022, ISS has clarified that the definition of “newly-public companies” includes SPACs.
- “Overboarding” and SPAC Board Seats. Under its “overboarding” policies, Glass Lewis generally recommends “against” or “withhold” votes for directors who are public company executives if they serve on a total of more than two public company boards. It applies a higher limit of five public company boards for other directors. The 2022 policy updates clarify that where a director’s only executive role is at a SPAC, the higher limit will apply. By way of comparison, ISS treats SPAC CEOs the same as other public company CEOs, on the grounds that a SPAC CEO “has a time-consuming job: to find a suitable target and consummate a transaction within a limited time period.” Accordingly, SPAC CEOs are subject to the same overboarding limit ISS applies to other public company CEOs (two public company boards besides their own).
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[1] ISS also issued an updated set of FAQs on COVID-related compensation decisions.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Ronald Mueller, and Lori Zyskowski.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following practice leaders and members:
Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Ron Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])
Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, [email protected])
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Topics will include:
- Overview of commodities and derivatives spoofing and market manipulation
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David Burns is a partner in the Washington, D.C. office and co-chair of the firm’s National Security Practice Group. He served in senior positions in both the Criminal Division and National Security Division of the U.S. Department of Justice. Most recently, he served as Acting Assistant Attorney General of the Criminal Division, where he led more than 600 federal prosecutors who conducted investigations and prosecutions involving securities fraud, health care fraud, FCPA violations, public corruption, cybercrime, intellectual property theft, money laundering, Bank Secrecy Act violations, child exploitation, international narcotics trafficking, human rights violations, organized and transnational crime, gang violence, and other crimes, as well as matters involving international affairs and sensitive law enforcement techniques.
Joel M. Cohen is a partner in the New York office and co-chair of the firm’s global White Collar Defense and Investigations Practice Group. He is also a member of the Securities Litigation, Class Actions and Antitrust & Competition Practice Groups. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.
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Darcy C. Harris is a litigation associate in the New York office. She is a member of the firm’s Securities Enforcement, Securities Litigation, and White Collar Defense and Investigations Practice Groups. Her practice focuses on complex commercial litigation, internal and regulatory investigations, securities litigation, and white collar defense. She has represented clients across a variety of industries, including financial services, insurance, accounting and auditing, healthcare, real estate, consumer goods, media and entertainment, and non-profit.
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Jaclyn Neely is an associate in the New York office. She is a member of the firm’s White Collar Defense and Investigations, Securities Enforcement, Anti-Money Laundering, and Litigation Practice Groups. She represents major multinational corporations, financial institutions, and others in criminal, regulatory, and internal investigations, with a focus on anti-corruption and anti-money laundering issues.
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