Publications Archives

Orange County of counsel Anne Brody is the co-author of “Ten Years Post-Therasense: Closing the Gap Between Walker Process Fraud and Inequitable Conduct,” [PDF] published by The Journal of the Antitrust and Unfair Competition Law Section of the California Lawyers Association in its Fall 2021, Vol. 31, No. 2. issue.

Following on from the recent launch of our Global Financial Regulatory Practice Group, please join us for the inaugural webcast from our global team, where we will be discussing the latest legal and regulatory developments while identifying key themes and trends across the major financial centers in relation to:

Environmental, Social and Governance (ESG)
Culture and conduct in financial services
Digital assets/cryptocurrencies

We will discuss the supervisory and enforcement approaches and priorities currently being taken by global regulators, including those across the Asia-Pacific region, on these issues and provide views on best practices for managing compliance requirements and the new regulatory risks for firms and their senior management. In addition, the team will bring their predictions for the future of regulatory policy, supervision and enforcement based on their extensive experience in these areas with the key global regulators.

View Slides (PDF)

MODERATOR:

Kelly Austin: The Partner-in-Charge of Gibson Dunn’s Hong Kong office, a Co-Chair of the Firm’s Anti-Corruption & FCPA Practice, and a member of the Firm’s Executive Committee. Her practice focuses on government investigations, regulatory compliance and international disputes. She has extensive expertise in government and corporate internal investigations, including those involving the Foreign Corrupt Practices Act and other anti-corruption laws, and anti-money laundering, securities, and trade control laws. She also regularly guides companies on creating and implementing effective compliance programs.

PANELISTS:

William Hallatt: is a partner in the Hong Kong office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Mr. Hallatt’s practice includes internal and external regulatory investigations involving high-stakes enforcement matters brought by key financial services regulators, including the Hong Kong Securities & Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA), covering issues such as IPO sponsor conduct, anti-money laundering and terrorist financing compliance, systems and controls failures, and cybersecurity breaches. He has led the financial industry response on a number of the most significant regulatory change issues in recent years, working closely with major regulators, including the SFC, HKMA, Hong Kong Insurance Authority (IA) and the Monetary Authority of Singapore (MAS), together with leading industry associations, including the Asia Securities Industry & Financial Markets Association (ASIFMA) and the Alternative Investment Management Association (AIMA).

Michelle M Kirschner: is a partner in the London office and Co-Chair of the firm’s Global Financial Regulatory Practice Group. Ms. Kirschner advises a broad range of financial institutions and fintech businesses on areas such as systems and controls, market abuse, conduct of business and regulatory change management, and she conducts internal investigations and reviews of corporate governance and systems and controls in the context of EU and UK regulatory requirements and expectations.

Thomas Kim: former Chief Counsel and Associate Director of the SEC’s Division of Corporation Finance, and a former Counsel to the SEC Chairman, is a partner in the Washington D.C. office. He is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim advises a broad range of clients on SEC enforcement investigations involving disclosure, registration and auditor independence issues. Because of his SEC experience on the question of what is a security, Mr. Kim has advised many cryptocurrency companies on whether their particular digital assets constitute securities.

Matthew Nunan: former Head of Department for Wholesale Enforcement at the UK Financial Conduct Authority (FCA), is a partner in the London office. He is a member of the firm’s Dispute Resolution Group. When at the FCA, Mr. Nunan oversaw a variety of investigations and regulatory actions including LIBOR-related misconduct, insider dealing, and market misconduct matters, many of which involved working extensively with non-UK regulators and prosecuting authorities including the DOJ, SEC, CFTC, and others. Mr. Nunan also was Head of Conduct Risk for Europe, Middle East and Africa at a major global bank. He specializes in financial services regulation and enforcement, investigations and white collar defense.

Jeffrey Steiner: former special counsel at the U.S. Commodity Futures Trading Commission (CFTC), is a partner in the Washington D.C. office. He is Co-Chair of the firm’s Derivatives Practice and Digital Currencies and Blockchain Technologies Practice. Mr. Steiner advises a range of clients on regulatory, legislative, enforcement and transactional matters related to OTC and listed derivatives, commodities and securities. He also advises clients, including exchanges, financial institutions and fintech firms, on matters related to digital assets and cryptocurrencies.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hour, of which 1.5 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

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

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.5 hour.

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

Environmental, Social and Governance (ESG)
Culture and conduct in financial services
Digital assets/cryptocurrencies

We will discuss the supervisory and enforcement approaches and priorities currently being taken by global regulators on these issues and provide views on best practices for managing compliance requirements and the new regulatory risks for firms and their senior management. In addition, the team will bring their predictions for the future of regulatory policy, supervision and enforcement based on their extensive experience in these areas with the key global regulators.

View Slides (PDF)

MODERATOR:

Stephanie Brooker: former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and a former federal prosecutor, is a partner in the Washington, D.C. office. She is Co-Chair of the firm’s White Collar Defense and Investigations, the Financial Institutions, and the Anti-Money Laundering Practice Groups. Ms. Brooker also previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia. She has been named a National Law Journal White Collar Trailblazer and a Global Investigations Review Top 100 Women in Investigations. She handles a wide range of white collar matters, including representing financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions. She routinely handles complex cross-border investigations.

PANELISTS:

MCLE CREDIT INFORMATION:

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

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.5 hour.

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

Gibson Dunn’s Supreme Court Round-Up provides the questions presented in cases that the Court will hear in the upcoming Term, summaries of the Court’s opinions when released, and other key developments on the Court’s docket. To date, the Court has granted certiorari in 35 cases and set 1 original-jurisdiction case for argument for the 2021 Term.

Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.

To view the Round-Up, click here.

Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 15 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 32 petitions for certiorari since 2006.

* * * *

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 attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

Theodore B. Olson (+1 202.955.8500, [email protected])
Amir C. Tayrani (+1 202.887.3692, [email protected])
Jacob T. Spencer (+1 202.887.3792, [email protected])
Joshua M. Wesneski (+1 202.887.3598, [email protected])

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

As we head into a new year, and the California Privacy Rights Act (“CPRA”) inches closer to its effective date of January 1, 2023 (with enforcement scheduled to begin six months later), the new California Privacy Protection Agency (“CPPA”) has begun holding regular public meetings. The CPPA’s chair and board members were appointed in March, and the tasks ahead are substantial: the board is charged with writing and revising a slew of new regulations to implement the sweeping privacy law under the pioneering agency’s purview, before it turns to enforcing them. At the CPPA’s recent meetings, board members have discussed the agency’s goals and the steps they have taken to launch the new agency.

By way of background, the California Attorney General (“AG”) already drafted rules under the CPRA’s predecessor, the California Consumer Privacy Act (“CCPA”), and both the CCPA and its implementing regulations remain enforceable until July 1, 2023, when enforcement of the CPRA begins.[1] The CPRA will amend the CCPA when it takes effect, and the CPPA has the authority to update the current CCPA regulations, in addition to writing new regulations that will implement the CPRA.

The CPPA’s first meeting took place in June 2021, and the board has met several times since then, including as recently as Monday, November 15. These initial meetings have given some clues about what to expect from its rulemaking—and when to expect it:

Impact of Hiring Delays: The CPPA’s five-member board noted that the pace of hiring has slowed the CPPA’s ability to structure the organization, hold informational hearings, and conduct research to determine the focus of its rulemaking. That said, the pace may pick up soon—in October, the CPPA hired an executive director, Ashkan Soltani, a former FTC chief technologist who is now running the agency’s day-to-day operations. Those operations include hiring much of the staff, with the board’s input. The CPPA’s board has also been tackling the minutiae of creating a new agency, from finding office space in Sacramento, to adopting a required conflict-of-interest code. In the meantime, the AG’s Office has been providing the CPPA with administrative support as the agency gets off the ground.
Current Clues on Timing of the Draft Regulations: The CPPA will soon replace the AG’s Office in drafting implementing regulations, and could begin promulgating those rules as soon as April, though timing is still unclear. Under the CPRA, the CPPA will supersede the AG’s authority to promulgate rules the later of July 1, 2021, or six months after the CPPA formally notifies the AG that it is prepared to issue rules. (Note that although the language in the CPRA initially stated that this deadline would be the earlier of the two, AB 694 clarified that it would be the later of the two, including in light of the delays noted above.) In its October meeting, the CPPA approved providing that notice to the AG’s Office. Depending on when the notice was actually sent, and whether the CPPA will issue rules at the time the authority is transitioned, the CPPA could issue rules around April 19, 2022. Interestingly, however, the final regulations must be adopted by July 1, 2022. As some may remember from CCPA’s regulatory rulemaking process, there were various required comment periods, which would make meeting that deadline difficult even with promulgation of a draft on that day.
Considerations of Expedited Rulemaking or Delayed Enforcement: In the November meeting, the board considered potential solutions for the challenges it is facing in connection with its rulemaking responsibilities, including the complexity of the issues and its limited staff. These potential solutions include (i) engaging in emergency rulemaking to write rules faster than the standard timeline, (ii) delaying enforcement of the CPRA, (iii) hiring temporary staff, and (iv) staggering rulemaking, many of which could have significant effects on companies’ compliance programs and timing.
Public Comment Period: In September 2021, the board called for public comment on its preliminary rulemaking activities, asking the public for feedback on “any area on which the [CPPA] has authority to adopt rules.” Some of the specific areas it sought comments on included: when a business’s processing of personal information creates a “significant risk” for consumers, triggering additional compliance steps for businesses; how to regulate automated decision making; what information should be provided to respond to a consumer’s request for their information; how to define various terms; and specifics regarding effectuating consumers’ rights to opt out of the sale of their information, to delete their information, and others. According to the board, it received “dozens” of comments to this initial open-ended call for comments by the November 8, 2021 deadline.
Rulemaking Priorities: While the CPPA reviews its initial public comments, board members are also studying a number of areas for potential rulemaking and considering topics for informational hearings—presumably similar to what we saw in the CCPA rulemaking process—which are used to gather information on certain key issues. To tackle its many tasks, the CPPA board has divided itself into several subcommittees, including ones focused on updates to existing CCPA rules, new CPRA rules, and on the rulemaking process itself. Those subcommittees are considering for rulemaking areas such as defining the terms “business purposes” and “law enforcement agency approved investigation;” recordkeeping requirements for cybersecurity audits, risk assessments, automated decision making, and other areas; clarifying how the CPRA will apply to insurance companies; and prescribing how to conduct the rulemaking process itself. For informational hearings, the board highlighted areas such as automated decision-making technologies, profiling, and harmonization with global frameworks; and how the current rules governing consumer opt outs are operating “in the wild” for consumers and businesses.
Additional Goals: Board members also noted they want to make sure they are educating Californians about their privacy rights and ensure that outreach is available to speakers of languages other than English.

Further Legislative Privacy Measures

The CPPA is not alone in crafting new data privacy requirements. In October, California Governor Gavin Newsom signed legislation that made technical changes in the CPRA through AB 694 (mentioned above), clarifying when the CPPA would assume its rulemaking authority.

Also in October, Governor Newsom signed the Genetic Information Privacy Act to impose new requirements on direct-to-consumer genetic testing companies and other companies that use the genetic data they collect. The new law requires those companies to, among other things, make additional disclosures to consumers, obtain express consumer consent for different uses of consumers’ genetic information, and timely destroy consumers’ genetic samples if requested. The law allows the AG to collect civil penalties of up to $10,000 for each willful violation. Separately, the governor also signed a bill that adds “genetic information” to the definition of personal information in California’s data-breach law.

Next Steps

Despite Governor Newsom’s initiatives and all of the CPPA’s efforts so far, we can expect months of uncertainty before companies have a clear sense of what rules may supplement the CPRA’s language. But companies cannot wait until the CPPA completes its rulemaking to start thinking about their compliance programs, particularly in those areas not covered under existing regulations, such as automated decision making and profiling. Given the complexity of the CPRA and its new requirements—and important sunsetting provisions on employment and B2B data that may have left companies with opportunities to avoid compliance with CCPA on large swaths of data—companies should begin planning now for how they will comply with the enacted amendments to the CCPA. In particular, companies should, sooner than later:

(Re)consider collection and storage of personal information: Even though the CPRA does not come into effect until January 2023, the CPRA will give consumers the right to request access to personal information collected on or after January 1, 2022, and for any personal information collected from January 1, 2023 forward, the CPRA may give consumers the right to request their historical information beyond the CCPA’s 12-month look back. Companies should start thinking about how to collect and store personal information in a way that will allow them to respond to such a request (if such information is indeed subject to the right), and begin analyzing how new rights such as the right to limit the use of sensitive personal information, right to opt out of sharing, and right of employees to the same protections, may apply to your business. In particular, the distinction between personal information and sensitive personal information may affect how information should be collected and stored.
Design a plan to revise privacy-related documents: In light of changes to service provider and contractor requirements, transparency and disclosure requirements (including relating to data subject rights), retention limitation requirements, and additional changes in the CPRA, it is a good time to start reviewing vendor contracts, privacy statements, data retention practices and policies, and other privacy-related documents.
Prepare for compliance with respect to employment and B2B data: The CPRA extended until January 1, 2023, exemptions in the CCPA for business-to-business and employment-related data. To the extent companies have avoided bringing those categories of data into compliance so far, they may want to revisit those decisions as the exemptions near their end.
Don’t neglect CCPA compliance: Given that CCPA will continue to be enforceable until July 1, 2023, and the roll-out of regulations over the course of 2020 may have left some with outdated compliance programs that should be updated, it is a good time to revisit that compliance as well.
Remain nimble: Rulemaking will clarify certain requirements. Companies should therefore be prepared to modify certain aspects of their compliance programs as those rules take shape.

Of course, businesses should also take heed that it’s not just California they should be paying attention to: Colorado and Virginia have also implemented comprehensive privacy laws that will take effect in 2023, as our prior updates have detailed, and consideration of a national privacy program from the ground up may be most efficient.

We will continue to monitor developments, and are available to discuss these issues as applied to your particular business.

__________________________

[1] Cal Civ. Code § 1798.185(d).

This alert was prepared by Ashlie Beringer, Alexander H. Southwell, Cassandra L. Gaedt-Sheckter, Abbey A. Barrera, Eric M. Hornbeck, and Tony Bedel.

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])

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

On November 12, 2021, the Delaware Court of Chancery issued a post-trial decision finding that the general partner of a Master Limited Partnership (“MLP”) breached the partnership agreement of the MLP that it controlled and engaged in willful misconduct that left the general partner unprotected from the exculpatory provisions in the partnership agreement. It is rare for a court to find such a breach on the part of the general partner of an MLP, and this decision is based on the particular facts of the case, not a change in established law. The decision offers useful reminders to participants in MLP transactions about the limits of acceptable conduct under standard partnership agreement provisions.

Background

In 2005, Loews Corporation (“Loews”) formed and took Boardwalk Pipeline Partners, LP (the “Partnership” or “Boardwalk”) public as an MLP after the Federal Energy Regulatory Commission (“FERC”) implemented a regulatory policy that made MLPs an attractive investment vehicle for pipeline companies. Boardwalk served as a holding company for its subsidiaries that operate interstate pipeline systems for transportation and storage of natural gas. Loews, through its control of the general partner of the Partnership (the “General Partner”), controlled Boardwalk.

The General Partner itself was a general partnership controlled by its general partner, Boardwalk GP, LLP (“GPGP”). GPGP had a sole member, Boardwalk Pipelines Holding Corp., a wholly owned subsidiary of Loews (“Holdings”). Holdings had exclusive authority over the business and affairs of GPGP not relating to the management and control of Boardwalk. Holdings’ board of directors consisted entirely of directors affiliated with Loews. GPGP had its own eight-person board (the “GPGP Board”), consisting of four directors affiliated with Loews and four directors unaffiliated with Loews. The GPGP Board had authority over the business and affairs of GPGP related to the management and control of Boardwalk. The different composition of the GPGP Board and the Holdings Board meant that if Holdings made a decision for GPGP as its sole member, then Loews controlled the decision. If the GPGP Board made the decision for GPGP, however, then the four directors unaffiliated with Loews could potentially prevent GPGP from taking the action that Loews wanted.

Boardwalk’s Agreement of Limited Partnership (“Partnership Agreement”) included a provision that would allow the General Partner to acquire all of the common equity of Boardwalk not owned by Loews through the exercise of a Call Right, so long as three conditions were met. First, the General Partner had to own “more than 50% of the total Limited Partnership Interests of all classes then Outstanding.” Second, the General Partner had to receive “an Opinion of Counsel (the “Opinion”) that Boardwalk’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers” (the “Opinion Condition”). Third, the General Partner had to determine that the Opinion was acceptable (the “Acceptability Condition”). The Partnership Agreement did not specify whether the GPGP Board, as the board that managed the publicly traded partnership, or Holdings, as the General Partner’s sole member, should determine whether the Opinion was acceptable on behalf of the General Partner.

If the three conditions above were met, then, under the terms of the Partnership Agreement, the General Partner could exercise the Call Right in its individual capacity “free of any fiduciary duty or obligation whatsoever to the Partnership, any [l]imited [p]artner or [a]ssignee” and not subject to any contractual obligations. The Call Right would be exercised based on a trailing market price average.

On March 15, 2018, the FERC proposed a package of regulatory policies that potentially made MLPs an unattractive investment vehicle for pipeline companies. The trading price of Boardwalk’s common units declined following the FERC announcement. In response to the March 15th FERC action, several MLPs issued press releases stating that they did not anticipate the proposed FERC policies would have a material impact on their rates, primarily because customers were locked into negotiated rate agreements. Boardwalk issued a press release stating that it did not expect FERC’s proposed change to have a material impact on revenues (rather than rates). A few weeks after the press release, Boardwalk publicly disclosed the General Partner’s intention to potentially exercise the Call Right (the “Potential-Exercise Disclosure”). The common unit price of Boardwalk further declined.

Loews retained outside counsel to prepare the Opinion required under the Partnership Agreement. The Court found that counsel, after discussion with Loews, created a “contrived” opinion in order to find an adverse impact on rates when the FERC proposals were not final. Loews also sought advice from additional outside counsel to advise on whether the Opinion was sufficient for purposes of the Opinion Condition requirements under the Partnership Agreement and whether Holdings had the authority to make the acceptability determination, or whether the GPGP should make such determination. Ultimately, following the legal advice it received, Loews had the Holdings board, comprised entirely of Loews insiders, find the Opinion acceptable.

On May 24, 2018, Boardwalk’s unitholders filed suit in the Court of Chancery seeking to prevent the General Partner from exercising the Call Right using a 180-day measurement period that included trading days affected by the Potential-Exercise Disclosure, claiming that the disclosure artificially lowered the unit trading price and undermined the contractual call price methodology. The parties soon reached a settlement on the 180-day measurement period. On July 18, 2018, Loews exercised the Call Right and closed the transaction just one day before FERC announced a final package of regulatory measures that made MLPs an even more attractive investment vehicle. After the Court of Chancery rejected the settlement Loews reached with the original plaintiffs, the current plaintiffs took over the litigation.

The Court’s Findings

In its post-trial opinion, the Court held that the General Partner breached the Partnership Agreement by exercising the Call Right without first satisfying the Opinion Condition or the Acceptability Condition. The Court found that the General Partner acted manipulatively and opportunistically and engaged in willful misconduct when it exercised the Call Right. Further, the Court held that the exculpatory provisions in the Partnership Agreement do not protect the General Partner from liability.

The Court held the Opinion failed to satisfy the Opinion Condition, because the Opinion did not reflect a good faith effort on the part of the outside counsel to discern the facts and apply professional judgment. In making the determination, the Court reviewed in detail factual events submitted at trial and took into account the professional and personal incentives the outside counsel faced in rendering the Opinion.

In holding the General Partner failed to satisfy the Acceptability Condition, the Court noted that a partnership agreement for an MLP is not the product of bilateral negotiations and the limited partners do not negotiate the agreement’s terms, and, as a result, Delaware courts would construe ambiguous provisions of the partnership agreement against the general partner. The Court found that, “because the question of who could make the acceptability determination was ambiguous, well-settled interpretive principles require that the court construe the agreement in favor of the limited partners.” As such, the Court determined that the GPGP Board, which included directors who were independent of Loews, was the body that had the authority to make the acceptability determination. Because the GPGP Board did not make the determination regarding the Acceptability Condition, the General Partner breached the Partnership Agreement by exercising the Call Right.

The Court further held that the provision in the Partnership Agreement stating the General Partner would be “conclusively presumed” to have acted in good faith if it relied on opinions, reports or other statements provided by someone that the General Partner reasonably believes to be an expert did not apply to protect the General Partner from liability, because the General Partner participated knowingly in the efforts to create the “contrived” Opinion and provided the propulsive force that led the outside counsel to reach the conclusions that Loews wanted.

In addition, the Court held the exculpation provision in the Partnership Agreement, which would generally protect the General Partner from liability except in case of bad faith, fraud or willful misconduct, did not apply because the General Partner engaged in willful misconduct when it exercised the Call Right.

The Court found the General Partner liable for damages of approximately $690 million, plus pre- and post-judgment interest.

Key Takeaways

While this case does not reflect a departure from established law, it provides helpful lessons for participants in MLP transactions to consider, including:

Outside counsel and advisors should be independent. The Boardwalk decision highlights the importance of retaining independent outside counsel and advisors in transactions involving conflicts of interest. Outside counsel and advisors should independently discern the facts, conduct analysis, and apply professional judgment.
Ambiguity in the partnership agreement may be resolved in favor of the public limited partners. MLPs and their sponsors should carefully consider their approach when making determinations with respect to any ambiguous provisions of the partnership agreement. Although the partnership agreement may provide for a presumption that they have acted in good faith, the general partner and sponsor should conduct their activities with respect to a conflict transaction as if there were no such presumptive provision.
Focus on precise compliance with the partnership agreement. Consistent with previously issued case law, to obtain the benefits provided in the partnership agreement, MLPs and their sponsors must strictly comply with the terms of the partnership agreement. Equally as important, they should be prepared to establish a clear and consistent record of satisfaction of such conditions.
Always be mindful of written communications and that actions will be judged with benefit of hindsight. The Court cited multiple emails, handwritten notes and other written communications (including from lawyers and within law firms) introduced as evidence at the trial. The Court also cited drafts of minutes of committee meetings in reviewing the written record. Participants in MLP transactions should be mindful that any written communications, including those thought to be privileged, could be evidence in litigation. Participants should also recognize that communications and actions taken will be reviewed with the benefit of 20/20 hindsight.

For the full opinion, please reference: Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Mergers and Acquisitions, Oil and Gas or Securities Litigation practice groups, or the following authors:

Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Gerry Spedale – Houston (+1 346-718-6888, [email protected])
Tull Florey – Houston (+1 346-718-6767, [email protected])
Brian M. Lutz – San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])

Special appreciation to Stella Tang and Matthew Ross, associates in the Houston office, for their work on this client alert.

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

On November 15, 2021, President Biden signed into law HR 3684, the “Infrastructure Investment and Jobs Act” (the “Act”), commonly referred to as the “infrastructure bill.” The Act allocates funding and other resources focused on roads and bridges, water infrastructure, resilience, internet and cybersecurity, among other areas (a full summary of the Act from Gibson Dunn is forthcoming).

The 1039-page Act also contains three pages adding new reporting requirements for certain cryptocurrency transactions that have little to do with infrastructure, but could have potentially dramatic implications for millions of United States businesses and consumers who have embraced cryptocurrency for its efficiency, transparency, and accessibility.

Here are the key takeaways for the Act’s expanded “cash” reporting provision applicable to cryptocurrencies:

The Act extends traditional reporting requirements for certain transactions involving over $10,000 in physical cash to transactions involving a newly defined category of “digital assets,” including cryptocurrencies.
Depending on how this new reporting obligation is interpreted and implemented, it could require businesses to collect new types of information and report to the IRS details of crypto transactions, in circumstances that bear little resemblance to cash purchases—or face civil and criminal penalties for failing to do so. An expansive application could have sweeping and unintended consequences for the cryptocurrency industry, potentially driving crypto transactions towards unregulated services and private wallet transactions, defeating the core policy objectives behind these requirements.
To avoid these consequences, it will be critical for stakeholders in the cryptocurrency ecosystem to advocate for regulators to adhere to the traditionally narrow scope of the cash-reporting requirement when it comes to digital assets, to educate legislators and regulators alike on the privacy and democratic values served by peer-to-peer blockchain technologies, and to explain the pitfalls of creating disincentives for consumers to participate in the regulated system of digital transactions.

In the coming months and years, there will be critical opportunities for industry participants to shape legislation and regulation on these issues. Gibson Dunn represents many clients at the forefront of crypto and blockchain innovation and stands ready to help guide industry players through these complex challenges at the intersection of regulation, public policy, and technology.

“Cash Reporting” Requirements Extended to Digital-Asset Transactions Greater than $10,000

The Act amends the anti-money-laundering “cash reporting” requirements of 26 U.S.C. § 6050I to encompass transactions in “digital assets.”

Section 6050I requires businesses that “receive” over $10,000 in cash (or other untraceable instruments like cashiers’ checks and money orders) to file a Form 8300 with the IRS, which includes the name, address, and taxpayer identification number, among other information, of both the payer and the beneficiary (usually the recipient) of the transaction. Because the “receipt” of physical cash generally involves an in-person transaction, Section 6050I historically has been applied mainly to transactions involving the in-person purchase of goods or services, such as when a person pays cash for jewelry, a car, or legal representation. See 26 C.F.R. § 1.6050I-1. Importantly, Section 6050I does not apply to transactions at financial institutions, which are subject to parallel requirements under the Bank Secrecy Act. See 31 U.S.C. §§ 5312, 5313. Nor does it apply to traceable electronic transactions involving credit cards, debit cards, or peer-to-peer payment services like PayPal and Venmo.

The Act forays into the digital world by amending Section 6050I’s definition of “cash” to include “digital assets,” thereby requiring persons that “receive” greater than $10,000 worth of digital assets in the course of their trade or business to file Form 8300 reports. The Act broadly defines digital asset as follows: “Except as otherwise provided by the Secretary, the term ‘digital asset’ means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” Sec. 80603(b)(1)(B) (emphasis added). That definition potentially could encompass a broad range of digital assets, including traditional cryptocurrencies and even non-fungible tokens (“NFTs”). Likewise, the Treasury Secretary’s authority to “provide[]” “otherwise” would allow the Secretary to exempt certain digital assets or scenarios.

The Act does not alter the information that must be reported for digital-asset transactions on Form 8300, but the Secretary and the IRS may seek to clarify how Form 8300 applies to digital-asset transactions through regulation. This discretion will be important because, as discussed below, there are potential pitfalls in applying reporting requirements that were designed for retail purchases in cash to transactions involving cryptocurrency.

Failure to comply with Section 6050I can result in civil penalties of up to $3 million per year—with much higher penalties possible if the failure is due to “intentional disregard” of the filing requirements. 26 U.S.C. §§ 6721, 6722. In addition, willful violation of Section 6050I is a federal felony, with violators facing up to 5 years imprisonment and corporate violators facing fines of up to $100,000. Id. § 7203.

This new reporting requirement will not take effect until 2024. The delayed effective date gives time for the Treasury Secretary and the IRS to consider whether to issue regulations clarifying: (1) the scope of the definition of digital assets; and (2) the reporting requirements for digital-asset transactions above $10,000. It also provides time for parties affected by the legislation to engage in the rulemaking process to shape the outcome of these regulations.

In addition to the amendment to Section 6050I, the Act also expands existing IRS Form 1099 reporting obligations by amending the definition of “broker” under 26 U.S.C. § 6045 to include businesses “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Sec. 80603(a)(3). This amendment would appear to apply to cryptocurrency exchanges, peer-to-peer money transmission services, and financial institutions that support cryptocurrency transactions. Its reach beyond that is unclear and regulations are expected to be issued addressing the scope of the new provision. As discussed in Part III, members of Congress have expressed interest in amending the newly expanded definition of broker, suggesting that there may be future legislation addressing this issue.

II.

Real-World Consequences

The Act’s new requirement for businesses to collect and report personal information about the parties to certain cryptocurrency transactions greater than $10,000 could have unintended consequences, but much will depend on how this new reporting obligation is implemented. More broadly, the Act highlights the challenges of applying old-world legislative concepts to emerging technologies that are not well understood.

As discussed, Section 6050I’s cash-reporting requirements traditionally have applied mainly to in-person and otherwise untraceable cash payments for goods and services. Those requirements, and the rationales underlying them, do not map cleanly onto digital assets, which are transacted online and in a public and traceable manner by virtue of blockchain technology. If forthcoming regulations clarify that Section 6050I, as amended, will cover only “cash-like” digital-asset transactions—such as the use of bitcoin to pay for goods and services (like a car) in person—then the Act may have a more limited impact on the cryptocurrency industry. Even then, though, there will be many gaps for the Secretary and the IRS to fill in attempting to translate a reporting scheme designed for mostly in-person, cash transactions in the physical world to the cryptographic world of digital-asset transactions.

If, however, the implementing regulations sweep more broadly and seek to encompass parties that “receive” cryptocurrency as payments in online or peer-to-peer transactions (or the intermediaries that facilitate those transactions), the Act could have sweeping consequences for the future of the new and rapidly evolving cryptocurrency technology.

Privacy, efficiency, and decentralization are the core features driving the proliferation of blockchain technology. Blockchain enables radical transparency with respect to every transaction through a publicly available distributed ledger, and it is built on technology that enables secure and trusted peer-to-peer transactions without the costs and other implications associated with centralized intermediaries. This appeals to privacy-conscious consumers, as well as those who may have faced barriers to access to the traditional financial system, for reasons of cost or due to the need to pass credit requirements or other hurdles.

To the extent that the regulations under the Act require online businesses receiving payments in cryptocurrency (versus via a fiat-linked wallet or credit card) to collect and report new forms of information, this would put cryptocurrency at a fundamental disadvantage relative to other forms of traceable currency that have not been subject to cash reporting requirements. Moreover, requiring and reporting extensive information about the parties to a cryptocurrency transaction could alienate privacy-conscious customers or those who have embraced the simplicity and agency inherent in managing transactions directly from their digital wallet. Unlike consumers of traditional banking products, digital-asset customers have readily accessible alternatives to transact digital assets using any number of private and unlicensed services that operate outside the system of regulated transactions. Given this, an expansive and unprecedented application of cash reporting requirements to cryptocurrency transactions could have the effect of driving digital-asset consumers away from industry participants operating inside the U.S. and global regulatory system and towards a rapidly expanding market of unencumbered alternatives.

The Act also presents challenges for a new category of digital asset “brokers.” Digital-asset brokers with customers outside the United States may have complex reporting, withholding, and other compliance challenges that could encourage users to move their cryptocurrency activities to non-U.S. competitors. Moreover, a broad implementation of the cash reporting provision could overlap with the new broker reporting rules, creating duplicative and burdensome reporting for the same transactions (e.g., where a transferor broker facilitates and reports a transaction under Section 6045 and a transferee broker facilitates and reports the same transaction under Section 6050I).

In addition, if the Act is interpreted to apply to certain participants in decentralized finance (“DeFi”) transactions, it could pose an existential threat to the burgeoning industry. At present, it is unclear whether many DeFi participants could gather the information necessary to report digital-asset transactions over $10,000. In some decentralized exchanges (DEXs), for example, there is no way for a business that receives a digital asset from a liquidity pool to trace the asset to particular individuals or entities. Nor is there a centralized third party that could collect this information—indeed, the distinguishing feature of many DEXs is that they rely on automated smart contracts. If the Act’s reporting requirements nevertheless are interpreted to apply in this context—for example, by requiring smart-contract developers to modify DeFi protocols to collect customer information—the effect might be to handcuff this emerging industry.

To avoid these or other consequences that could unintentionally burden cryptocurrency moving forward, it will be critical to develop early and strategic advocacy with the IRS and Treasury during rulemaking, and to educate regulators and legislators alike on the distinguishing and beneficial features of blockchain technology and the dangers of disincentivizing customers to use licensed and regulated institutions to host and enable their digital assets and transactions.

III.

Looking Forward

Congress and regulators are increasingly active in regulating blockchain and cryptocurrency technology, but in many cases lack critical context and understanding of the benefits and application of this technology to address long-running policy objectives, including access to capital, particularly for unbanked and underbanked communities.

Near Term

In the short term, opportunities will exist to shape the Treasury Department’s rulemaking to implement the Act. Before the recently passed cryptocurrency provisions take effect in 2024, the Treasury Secretary and the IRS are expected to clarify the scope of Section 6050I as applied to digital assets, including the definition of “digital assets,” the scenarios that give rise to reporting requirements, and the particular reporting requirements for digital assets. Such a rulemaking would represent both a risk and an opportunity for companies, consumers, and other stakeholders in the cryptocurrency space. It will be critical for industry participants to ensure that in applying Section 6050I to digital assets, the Secretary and the IRS adhere to the traditional and narrow understanding of that provision, and do not inadvertently sweep in online or peer-to-peer digital-asset transactions. It likewise will be important to ensure that any regulations properly account for the private, traceable, and decentralized nature of cryptocurrency transactions.

Moreover, the current Congress is not done passing legislation that could impact cryptocurrency businesses and consumers. The $1.7 trillion reconciliation bill, officially known as the Build Back Better Act, is expected to address cryptocurrency again and may pass Congress before the end of the year. Though the exact provisions continue to be negotiated, the current bill would address the tax treatment of certain cryptocurrency transactions. For example, the reconciliation bill may subject cryptocurrency transactions to the “wash sale rule” (which prohibits reporting a tax loss by selling a security at a loss but then buying the same security within 30 days), and constructive sale rules (which prevent a taxpayer from deferring gains by holding opposing positions on a security). There may be opportunities to advocate for legislative changes to avoid some of the pitfalls created by the Act.

This is an area of intensive congressional focus, and there will be many opportunities to educate legislators and shape legislation. For example, recent reports indicate that Senate Finance Committee Chairman Ron Wyden (OR-D) and Senator Cynthia Lummis (WY-R) are planning to introduce legislation that would narrow the definition of “broker” included in the Act. (The Block) Senator Pat Toomey (R-PA) also has stated that he would work to amend the definition of broker so as to exempt miners and other parties not involved with directly handling customers’ cryptocurrency transactions. Senator Toomey conceded that Congress will “have to do it in subsequent legislation” if the infrastructure bill was not amended before its passage (Yahoo Finance). Others in Congress have also noted the need to amend the current definition. In August, the bipartisan co-chairs of the Congressional Blockchain Caucus—Rep. Tom Emmer (R-MN-6), Rep. Darren Soto (D-FL-9), Rep. David Schweikert (R-AZ-6), and Rep. Bill Foster (D-IL-11)—called for “amending this language.”

Long Term

In the longer term, it may be necessary to lobby Congress to modify legislation and advocate before federal agencies to influence rulemaking. As described above, it is quite likely that Congress will continue to pass legislation addressing cryptocurrency and other digital assets. And regardless of these potential legislative developments, the Act alone will require substantial rulemaking from the Treasury Department and the IRS to address critical definitions and specifics regarding reporting requirements.

That said, any long-term developments need not be adversarial. There will continue to be opportunities to work on these complicated issues and align the goals of federal and state lawmakers and clients when it comes to this important new technology.

As things stand today, there is a rapidly expanding patchwork of federal and state legislation and regulation, as legislators and regulators struggle to map traditional financial regulatory structures onto digital assets. At the federal level, the SEC, CFTC, OFAC, and FinCEN all have asserted enforcement authority over various, sometimes overlapping sectors of the cryptocurrency industry. And these same businesses often are subject to dozens of state licensing requirements, leading some to advocate for a centralized federal approach.

This complex regulatory framework—which was developed for banking in the twentieth century—is unlikely to effectively handle the needs of the government, businesses, and individuals in the twenty-first century with respect to cryptocurrency and other digital assets. It therefore will be essential to work closely with federal and state legislators and regulators to develop a coherent regulatory structure for digital assets that will promote, rather than hinder, innovation. As the Congressional Blockchain Caucus Co-Chairs explained in their August 2021 letter: “Cryptocurrency tax reporting is important, but it must be done correctly” and must “ensure that civil liberties are protected.”

Gibson Dunn stands ready to help guide industry players through the most complex challenges that lay at the intersection of regulation, public policy and technical innovation of blockchain and cryptocurrency. If you wish to discuss any of the matters set out above, please contact Gibson Dunn’s Crypto Taskforce ([email protected]), or any member of its Financial Institutions, Global Financial Regulatory, Public Policy, Administrative Law and Regulatory, Privacy, Cybersecurity and Data Innovation, or Tax Controversy and Litigation teams, including the following authors:

Ashlie Beringer – Co-Chair, Privacy, Cybersecurity & Data Innovation Group, Palo Alto
(+1 650-849-5327, [email protected])

Matthew L. Biben – Co-Chair, Financial Institutions Group, New York
(+1 212-351-6300, [email protected])

M. Kendall Day – Co-Chair, Financial Institutions Group, Washington, D.C.
(+1 202-955-8220, [email protected])

Michael J. Desmond – Co-Chair, Global Tax Controversy & Litigation Group, Los Angeles/ Washington, D.C.
(+1 213-229-7531, [email protected])

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C.
(+1 202-887-3530, [email protected])

Elizabeth P. Papez – Member, Administrative Law and Regulatory Group, Washington, D.C.
(+1 202-955-8608, [email protected])

Eugene Scalia – Co-Chair, Administrative Law and Regulatory Group, Washington, D.C.
(+1 202-955-8543, [email protected])

Jeffrey L. Steiner – Co-Chair, Global Financial Regulatory Group, Washington, D.C.
(+1 202-887-3632, [email protected])

The following associates contributed to this client alert: Sean Brennan, Nick Harper, Prachi Mistry and Luke Zaro.

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

We previously reported on the introduction by certain Democrat members of Congress of proposed legislation (H.R.4777, Nondebtor Release Prohibition Act of 2021 (the “NRPA”)) to amend the Bankruptcy Code to prohibit non-consensual third party releases and provide for the dismissal of bankruptcy cases filed after the implementation of a divisional merger transaction (such as the so-called “Texas two-step” transaction). Recently, the House Judiciary Committee voted 23-17 to recommend that the NRPA be considered by the full House of Representatives. A full House vote has not yet been scheduled. The analogous Senate version of the NRPA (S.2497) is still being considered by the Senate Judiciary Committee.

Gibson Dunn lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or the following authors:

Michael J. Cohen – New York (+1 212-351-5299, [email protected])
Michael A. Rosenthal – New York (+1 212-351-3969, [email protected])
Matthew J. Williams – New York (+1 212-351-2322, [email protected])

Please also feel free to contact the following practice leaders:

Business Restructuring and Reorganization Group:
David M. Feldman – New York (+1 212-351-2366, [email protected])
Scott J. Greenberg – New York (+1 212-351-5298, [email protected])
Robert A. Klyman – Los Angeles (+1 213-229-7562, [email protected])

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

On November 17, 2021, the Securities and Exchange Commission (SEC) approved amendments to the federal proxy rules to mandate the use of a universal proxy card in public solicitations involving director election contests. After the rules become effective on August 31, 2022, proxy cards distributed by both public companies and activist shareholders in a contested director election will have to include both sides’ director nominees, such that shareholders casting their vote can “mix and match” nominees from the company’s and dissident’s slates of nominees. We believe that the new rules are likely to embolden activists and increase the incidence of contested director elections.

Rule Amendments

The final rules adopted by the SEC require that both public companies and activists use a universal proxy card when soliciting shareholders in a director election contest – that is, each proxy card, regardless of who delivers it, must include the names of both the company and activist nominees. Such a proxy card allows shareholders to combine candidates from the separate slates submitted by the company and activist shareholder. This contrasts with the current system in which shareholders generally have a binary choice of casting their vote for the company’s slate in the company’s proxy card, or the activist’s slate in the activist’s proxy card.[1]

In order to implement the use of universal proxy cards, the new rules also mandate the following in connection with director election contests:

Activist’s Notice of Intent to Solicit: Activist shareholders must provide companies with notice of their intent to solicit proxies and provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting. We expect this “guardrail” to provide no benefit to most public companies since standard advance notice bylaws require activists to give notice of their intent to make director nominations 90 calendar days or more before the anniversary of the previous year’s annual meeting.
Company’s Notice to Activist: Companies must notify activists of the names of the company’s nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting.
Deadline for Filing of Activist’s Proxy Statement: The activist will be required to file its definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the company files its definitive proxy statement. Again, we expect this rule to have no practical implication on activists’ behavior since they already typically file their definitive proxy materials at least one month before the meeting.
Minimum Solicitation: The activist must solicit the holders of shares representing at least 67% of the voting power of the shares entitled to vote at the meeting. Although the SEC touts this provision as “a key piece” of the universal proxy requirement, it is a provision of no real consequence: activist campaigns involving director contests almost invariably involve solicitations by the activist of holders of over 67% of the outstanding shares. Of note, “soliciting” for purposes of the rule does not involve knocking on the door or otherwise meeting and actively engaging a shareholder. Mailing proxy materials to beneficial owners via Broadridge, standard practice for activists, would satisfy the requirement. The rule even permits the use of notice-and-access solicitation; as noted by Commissioner Hester M. Peirce in her dissent “sending a postcard with a website link to proxy materials will suffice.”

The new rules also require each side of the contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees, and establish presentation and formatting requirements for universal proxy cards.

What Does Universal Proxy Mean For Public Companies?

Although the impact of mandated universal proxies has been the subject of intense debate since 2016, the reality is that before the rules come into effect in the fall of 2022, we are all only able to engage in (educated) speculation:

More Contested Director Elections: Shareholders will be more inclined to support one or two dissident nominees when they can do it on a universal proxy card, as opposed to the current system that generally requires shareholders voting by proxy to sign the activist’s card if they want to support any member of the activist’s slate. Therefore, the use of universal proxies should make it easier for activists to win at least one board seat, which will likely embolden traditional and new ESG-focused activists to run director campaigns.
Potential for Cheaper Activist Election Campaigns: One of the traditional economic barriers for conducting a director proxy contest was the activist’s strategic need to make multiple mailings of its proxy card. This results from the fact that in a proxy contest only the last executed proxy card counts, so it has been imperative in a proxy contest for each side to make sure that it matches every proxy card mailing by the other side with one of its own to mitigate against the risk that a shareholder switches proxy cards (and thus entire slates). When a universal ballot is used by both the company and dissident, the consequences of a shareholder switching cards is less important as every proxy card, regardless of which side mails it, includes the nominees from both the company and dissident. Activists can therefore avoid the expense of making multiple mailings of a proxy card.

At the risk of oversimplifying: going forward an activist can comply with state law and the company’s governing documents to submit a nomination within the prescribed timeline, file electronically with the SEC a proxy statement, disseminate the proxy statement via notice-and-access with distribution of electronic copy (pdf) to the largest institutional holders, lobby ISS and Glass Lewis, and rely on the company’s mailing of a universal proxy card to get the activist’s nominees across the finish line. There is certainly more to it, but even the perception of a faster and cheaper process is likely to encourage activists (and aspiring activists) to launch a director election campaign. And needless to say, the new system compels companies to make sure they have state-of-the-art advance notice bylaws to protect the integrity of the director election process.

Nirvana For Proxy Advisors: Proxy advisors such as ISS and Glass Lewis have traditionally expressed frustration at the constraints imposed by being unable to “mix and match” candidates from the management and dissident slate in making recommendations. Proxy advisors will feel liberated by universal proxy and will be more ready to recommend slates that include one or two dissident nominees in situations where they might have felt previously compelled to recommend that clients vote on the company’s proxy card. This will further embolden activists.
But Universal Proxy Might Not Always Be Good For Activists: For those looking for the silver lining, it is not difficult to imagine a scenario where an activist might have been better off forcing shareholders into a binary choice of voting on the company’s proxy card (for all of the company’s nominees) versus the activist’s card (for the activist’s nominees). This phenomenon might be more pronounced where the activist was seeking to take control of the board, including hostile M&A situations.

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[1] In the case of certain short slate elections, the activist’s slate may include company nominees cherry-picked by the activist.

Gibson Dunn’s lawyers are available to assist with 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 in the firm’s Mergers and Acquisitions, Capital Markets, or Securities Regulation and Corporate Governance practice groups, or the following authors:

Eduardo Gallardo – New York (+1 212-351-3847, [email protected])
James J. Moloney – Orange County, CA (+ 949-451-4343, [email protected])
Andrew Kaplan – New York (+1 212-351-4064, [email protected])

Please also feel free to contact the following practice leaders:

Mergers and Acquisitions Group:
Eduardo Gallardo – New York (+1 212-351-3847, [email protected])
Robert B. Little – Dallas (+1 214-698-3260, [email protected])
Saee Muzumdar – New York (+1 212-351-3966, [email protected])

Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213-229-7242, [email protected])

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County, CA (+ 949-451-4343, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])

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

New York of counsel Karin Portlock and associate Jabari Julien are the authors of “In Internal Investigations, Diverse Teams Are Better,” [PDF] published by Global Investigations Review on November 12, 2021.

On October 25, 2021, the Dubai Financial Services Authority (“DFSA”) updated its Rulebook for “crypto” based investments by launching a regulatory framework for “Investment Tokens”. This framework follows, on the whole, the approach proposed in the DFSA’s “Consultation Paper No. 138 – Regulation of Security Tokens”, published in March 2021 (the “Consultation Paper”).

Peter Smith, Managing Director, Head of Strategy, Policy and Risk at the DFSA has noted that: “Creating an ecosystem for innovative firms to thrive in the UAE is a key priority for both the UAE and Dubai Governments, and the DFSA. Our consultation on Investment Tokens enabled us to understand what firms were looking for in a regulatory framework and introduce a regime that is relevant to the market. We look forward to receiving applications from interested firms and contributing to the ongoing growth of future-focused financial services in the DIFC.”[1]

What is an “Investment Token”?

An “Investment Token” is defined as either a “Security Token” or a “Derivative Token”[2]. Broadly speaking, these are:

a security (which includes, for example, a share, debenture or warrant) or derivative (an option or future) in the form of a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using Distributed Ledger Technology (“DLT”) or other similar technology; or
a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using DLT or other similar technology and: (i) confers rights and obligations that are substantially similar in nature to those conferred by a security or derivative; or (ii) has a substantially similar purpose or effect to a security or derivative.

However, importantly, the definition of “Investment Token” will not capture virtual assets which do not either confer rights and obligations substantially similar in nature to those conferred by a security or derivative, or have a substantially similar purpose or effect to a security or derivative. This means that key cryptocurrencies such as Bitcoin and Ethereum, as well as stablecoins such as Tether, will remain unregulated under the Investment Tokens regime.

Scope of framework

This regulatory framework applies to persons interested in marketing, issuing, trading or holding Investment Tokens in or from the Dubai International Financial Centre (“DIFC”). It also applies with respect to DFSA authorised firms wishing to undertake “financial services” relating to Investment Tokens. Such financial services would include (amongst other things) dealing in, advising on, or arranging transactions relating to, Investment Tokens, or managing discretionary portfolios or collective investment funds investing in Investment Tokens.

Approach taken by the DFSA

The approach taken by the DFSA has been to, rather than establish an entirely separate regime for Investment Tokens, bring these instruments within scope of the existing regime for “Investments”, subject to certain changes. The Consultation Paper noted that “in line with the approach adopted in the benchmarked jurisdictions, [the] aim is to ensure that the DFSA regime for regulating financial products and services will apply in an appropriate and robust manner to those tokens that [the DFSA considers] to be the same as, or sufficiently similar to, existing Investments to warrant regulation”.

The Consultation Paper proposed to do this through four means: (i) by making use of the existing regime for “Investments” as far as possible, whilst addressing specific risks associated with the tokens, especially technology risks; (ii) by not being too restrictive, so that the DFSA can accommodate the evolving nature of the underlying technologies that might drive tokenization of traditional financial products and services; (iii) by addressing risks to investor/customer communication and market integrity, and systemic risks, should they arise, where new technologies are used in the provision of financial products or services in or from the DIFC; and (iv) remaining true to the underlying key characteristics and attributes of regulated financial products and services, as far as practicable.

As noted at (i) above, the changes brought about on October 25, 2021 necessarily involved the addition of new requirements to address specific issues related to Investment Tokens. For instance, added requirements are imposed on firms providing financial services relating to Investment Tokens in Chapter 14 of the Conduct of Business Module of the DFSA Rulebook.

This sets out (amongst other things):

technology and governance requirements for firms operating facilities (trading venues) for Investment Tokens – for instance, they must: (i) ensure that any DLT application used by the facility operates on the basis of permissioned access, so that the operator is able to maintain adequate control of persons granted access; and (ii) have regard to industry best practices in developing their technology design and technology governance relating to DLT that is used by the facility;
rules relating to operators of facilities for Investment Tokens which permit direct access – for example, the operator must ensure that its operating rules clearly articulate: (i) the duties owed by the operator to the direct access member; (ii) the duties owed by the direct access member to the operator; and (iii) appropriate investor redress mechanisms available. The operator must also make certain risk disclosures and have in place adequate systems and controls to address market integrity, anti-money laundering and other investor protection risks;
requirements for firms providing custody of Investment Tokens (termed “digital wallet service providers”) – for example: (i) any DLT application used in providing custody of the Investment Tokens must be resilient, reliable and compatible with any relevant facility on which the Investment Tokens are traded or cleared; and (ii) the technology used and its associated procedures must have adequate security measures (including cyber security) to enable the safe storage and transmission of data relating to the Investment Tokens; and
a requirement that firms carrying on one or more financial services with respect to Investment Tokens (such as dealing in investments as principal/agent, arranging deals in investments, advising on financial products and managing assets), provide the client with a “key features document” in good time before the service is provided. This must contain, amongst other things: (i) the risks associated with, and the essential characteristics of, the Investment Token; (ii) whether the Investment Token is, or will be, admitted to trading (and, if so, the details of its admission); (iii) how the client may exercise any rights conferred by the Investment Tokens (such as voting); and (iv) any other information relevant to the particular Investment Token that would reasonably assist the client to understand the product and technology better and to make informed decisions in respect of it.

Comment

In taking the approach to Investment Tokens outlined in this alert, the DFSA has aligned with the approach taken by certain key jurisdictions. It is similar to that taken by the U.K. Financial Conduct Authority, for example, which has issued guidance to the effect that tokens with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument (the U.K. version of Investment Tokens) be treated as specified investments and, therefore, be considered within the existing regulatory framework[3].

The DFSA’s regime has baked-in flexibility, particularly as a consequence of the fairly high level, principles-based approach. This will likely prove helpful, given the evolving nature of the virtual assets world. However, the exclusion of key cryptocurrencies from the scope of this regime may limit the attractiveness of the regime, particularly to cryptocurrency exchanges seeking to offer spot trading. However, this may be offset to some extent by the DFSA regime’s willingness to allow operators of facilities for Investment Tokens to provide direct access to retail clients, subject to those clients meeting certain requirements (such as having sufficient competence and experience). This is in contrast to the approach proposed by the Hong Kong Financial Services and the Treasury Bureau, which has proposed restricting access to cryptocurrency trading to professional investors only.[4]

Next steps

As noted above, the Investment Tokens regime does not cover many key virtual assets. However, we understand that the DFSA is drafting proposals for tokens not covered by the Investment Tokens regulatory framework. These proposals are expected to cover exchange tokens, utility tokens and certain asset-backed tokens (stablecoins). The DFSA intends to issue a second consultation paper later in Q4 of this year.[5]

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[1] https://www.dfsa.ae/news/dfsa-introduces-regulatory-framework-investment-tokens

[2] DFSA Rulebook: General Module, A.2.1.1

[3] FCA Policy Statement (PS 19/22), Guidance on Cryptoassets (July 2019)

[4] See our previous alert on the proposed Hong Kong regime: https://www.gibsondunn.com/licensing-regime-for-virtual-asset-services-providers-in-hong-kong/

[5] https://www.dfsa.ae/news/dfsa-introduces-regulatory-framework-investment-tokens

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Crypto Taskforce ([email protected]) on the Global Financial Regulatory team, or the following authors:

Hardeep Plahe – Dubai (+971 (0) 4 318 4611, [email protected])
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, [email protected])
William R. Hallatt – Hong Kong (+852 2214 3836, [email protected])
Chris Hickey – London (+44 (0) 20 7071 4265, [email protected])
Martin Coombes – London (+44 (0) 20 7071 4258, [email protected])
Emily Rumble – Hong Kong (+852 2214 3839, [email protected])
Arnold Pun – Hong Kong (+852 2214 3838, [email protected])
Becky Chung – Hong Kong (+852 2214 3837, [email protected])

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On November 10, 2021, the UK Supreme Court issued a unanimous Judgment in Lloyd v Google LLC [2021] UKSC 50, overturning a ruling of the Court of Appeal and disallowing a data privacy class action. The Judgment denied Mr. Lloyd the ability to pursue a collective claim for compensation on behalf of around four million iPhone users in England and Wales whose internet activity data were allegedly collected by Google in late 2011 and early 2012 for commercial purposes without the users’ knowledge or consent, and in alleged breach of section 4(4) of the Data Protection Act 1998 (“the 1998 Act”). The 1998 Act has since been replaced by the UK GDPR and the Data Protection Act 2018 (“the 2018 Act”). The claim was backed by substantial litigation funding.

The Supreme Court’s Judgment provides, in brief, that the procedural mechanism used to bring the claims on a collective basis (known as a “representative action”) can be used for claims of this kind, but only for the purposes of establishing liability for a breach of relevant data protection laws. The question of damages cannot be addressed through a representative action, and would have to be dealt with through individual claims, which could be managed together through group litigation case management devices (see below).

The Court held that a representative action is unsuitable for damages assessment in a case of this kind because:

first, damages for mere loss of control of data (as distinct from damages for actual loss or distress caused by the data breach) are not available for breaches of the 1998 Act (although the Supreme Court intimated that they may have been for another tort, misuse of private information); and
second, even if such damages had been available, assessment of loss can only be determined on the basis of an individualised assessment of the alleged misuse of each individual’s data by Google.

The Supreme Court’s official summary of the Judgment can be found here.

In this alert we provide an overview of the Supreme Court’s decision and offer our observations on the implications of the Judgment.

Background to Collective Actions in the UK

There are a number of ways in which collective actions can be brought in the UK. Typically, such claims are brought on an “opt-in” basis. For example under the Data Protection Act 2018, individuals can authorise non-profit organisations to bring certain proceedings on their behalf, or under a group litigation order (“GLO”), courts can manage in a co-ordinated way claims which give rise to “common or related issues” of fact or law (Civil Procedure Rules (“CPR”) Parts 19.10 and 19.11).

However, there are two procedures that can be used in England and Wales to bring collective claims on an “opt-out” basis:

A collective redress regime for competition claims, which was introduced on 1 October 2015 under the Consumer Rights Act 2015, and which provides for opt-out claims to be brought in appropriate circumstances for damages for certain breaches of competition laws (see our alert on the Supreme Court’s 2020 decision in Merricks v Mastercard for more information on these types of claims). Opt-in claims can also be brought under the Consumer Rights Act 2015 regime; and
The “representative action” procedure, under which Lloyd v Google was brought, in which a party brings the claim as a “representative” of a group of litigants who have the “same interest” in the claim (under CPR 19.6). The “same interest” requirement has to date been interpreted strictly by the courts as requiring the claimants to have a common interest and grievance (which generally precludes claims relying on different fact patterns) and to all benefit from the remedy sought (which generally precludes claims for different remedies).

Summary of the Lloyd Action and Judgment

Background

The alleged conduct by Google had given rise to a number of individual claims in the U.S. and the UK which had settled, and had been the subject of a civil settlement between Google and the U.S. Federal Trade Commission. In May 2017, the claimant, Richard Lloyd, a consumer rights activist, commenced proceedings alleging that Google breached the 1998 Act, seeking damages on behalf of himself and other affected individuals under section 13(1) of the 1998 Act. That section provides: “An individual who suffers damage by reason of any contravention by a data controller of any of the requirements of this Act is entitled to compensation from the data controller for that damage.” He did not allege or prove any distinctive facts affecting any of the individuals, save that they did not consent to the abstraction of their data.

Mr. Lloyd applied for permission to serve the claim on Google outside England & Wales, namely, in the U.S. As with any such application, in order to succeed, Mr Lloyd had to establish that his claim has a reasonable prospect of success (CPR Part 6.37(1)(b)), that there is a good arguable case that the claim fell within one of the so-called jurisdictional “gateways” in paragraph 3.1 of CPR Practice Direction 6B (in this case, he sought to show that damage was sustained either within the jurisdiction or from an act committed within the jurisdiction), and that England and Wales was clearly or distinctly the most appropriate jurisdiction in which to try the claim (CPR Part 6.37(3)).

Google opposed the application on the grounds that: (i) the pleaded facts did not disclose any basis for claiming compensation under the 1998 Act; and (ii) the court should not permit the claim to continue as a representative action.

At first instance, Warby J refused to grant Mr. Lloyd permission to serve Google outside the jurisdiction on the basis that: (a) none of the represented class had suffered “damage” under section 13 of the 1998 Act; (b) the members of the class did not have the “same interest” within CPR 19.6(1) so as to justify allowing the claim to proceed as a representative action; and (c) the court’s discretion under CPR Part 19.6(2) should be exercised against allowing the claim to proceed.

The Court of Appeal reversed Warby J’s judgment on each of these issues, holding that: (a) the members of the class were entitled to recover damages pursuant to section 13 of the 1998 Act, based on the loss of control of their personal data alone, regardless of whether they had suffered actual pecuniary loss or distress as a result of Google’s alleged breaches; (b) the members of the class did, in fact, have the “same interest” for the purposes of CPR 19.6(1) and Warby J had defined the concept of “damage” too narrowly; and (c) the Court should exercise its discretion to permit Mr Lloyd to bring the claim on a representative basis.

Issues Before the Supreme Court

The claimant was granted leave to appeal to the Supreme Court. The three issues for determination by the Supreme Court were:

Are damages recoverable for loss of control of data under section 13 of 1998 Act, even if there is no pecuniary loss or distress?
Do the four million individuals allegedly affected by Google’s conduct share the “same interest”?
If the “same interest” test is satisfied, should the Court exercise its discretion and disallow the representative action in any event?

The Supreme Court’s Judgment

The Supreme Court’s unanimous Judgment, delivered by Lord Leggatt, reverses the Court of Appeal and re-instates the order of Warby J denying permission to serve out, essentially bringing the proceedings to an end. The key issues emerging from the Judgment are as follows:

The representative action is a long-standing “flexible tool of convenience in the administration of justice”, which might be used today in appropriate cases to bring mass tort claims arising in connection with alleged misuse of digital technologies, particularly in matters involving mass, low-value consumer claims.
There are limitations on the appropriateness of the use of representative actions to bring damages claims. Damages, as a remedy, by its very nature under English law, will typically require individualised assessment of loss, which requires participation of the affected parties.
In the case at hand, the question of liability (i.e., whether Google had breached the 1998 Act) was suitable to be brought through a representative action. The purpose of such a claim may be to obtain declaratory relief, which could include a declaration that affected persons may be entitled to compensation for the breaches identified. However, damages would need to be assessed on an individualised basis. The Supreme Court noted that the claimant, Mr. Lloyd, had not proposed such a two-stage approach, presumably because that declaratory relief would not itself have generated an award of damages that would provide his litigation funders with a return on their investment.
Section 13 of the 1998 Act does not, on its own wording, allow for damages claims on the “loss of control of data” basis pleaded by Mr. Lloyd. The Supreme Court appears to have acknowledged that “loss of control” damages may be available for the tort of misuse of private information, but held that section 13 could not be interpreted as giving an individual a right to compensation without proof of material damage or distress. Lord Leggatt indicated that, had a claim of this kind been brought, such damages would have been an appropriate way to assess loss, but no case had been brought under that tort. Even if loss of control damages were available, there would be a need to individualised assessment of the unlawful data processing in the case of each individual claimant; again, this would be inconsistent with proceeding by means of a representative action.

Analysis of the Lloyd Judgment

This Judgment appears to represent a significant victory for Google and other major data controllers, and a blow to funding-assisted collective actions in the data protection field in England and Wales.

While it is notable that the Supreme Court was at pains to assert the potential utility of the representative action in mass data rights violations in appropriate circumstances, it is not obvious what those circumstances are, and it seems unlikely that the representative action will represent a fruitful mechanism for bringing such claims going forward. At the very least, future claimants and their funders will need to give careful thought to the economics of bifurcated claims involving the bringing of a representative action for a declaration of liability and entitlement to compensation, followed by a large volume of coordinated damages claims for which a GLO is sought.

The historic nature of the claims offers little comfort to claimants here. The Judgment relates to the regime in place prior to entry to the GDPR. Article 82(1) of the GDPR, which is retained in law in the UK post-Brexit, provides: “Any person who has suffered material or non-material damage as a result of an infringement of this Regulation shall have the right to receive compensation from the controller or processor for the damage suffered.” It is an open question whether the English courts will consider the Supreme Court’s analysis of section 13 to apply equally to Article 82(1), but the reasoning seems to apply.

Furthermore, even in observing, at paragraph 4 of the Judgment, that “Parliament has not legislated to establish a class action regime in the field of data protection”, the Supreme Court did not take the obvious opportunity to encourage Parliament to do so. Parliament will be in no doubt that, if a collective action regime is to be developed to address consumer data rights, it will need to legislate for it – it would now seem unlikely that such a culture can be developed from the procedural tools currently available to claimants.

Some claimants may find encouragement in the Judgment’s indication that the relatively new tort of misuse of private information may be used to recover “loss of control” damages, without proof of specific loss. The circumstances in which that tort will be relevant to breaches of the GDPR and the 2018 Act, however, may be limited in practice, due to the need to establish a reasonable expectation of privacy supported by evidence of facts particular to each individual claimant.

In sum, major data controllers will be content with this outcome, and the nascent plaintiff bar and funding industry in the UK will likely be turning its attention to other areas of potential multi-party actions – unless and until, of course, Parliament intervenes. With the current challenges facing the British government, that may be some time.

This alert was prepared by Patrick Doris, Doug Watson, Harriet Codd, Gail Elman, Ahmed Baladi, Vera Lukic, Ryan Bergsieker, Ashlie Beringer, Alexander Southwell, and Cassandra Gaedt-Sheckter.

Privacy, Cybersecurity and Data Innovation Group:

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

A main area of focus for public companies this past annual reporting season was the new human capital disclosure requirement for annual reports on Form 10-K. This client alerteviews disclosure trends among S&P 500 companies and provides practical considerations for companies as we head into 2022 and the second year of discussing human capital resources and management.

I. Background on the New Requirements

On August 26, 2020, the U.S. Securities and Exchange Commission (the “Commission”) adopted amendments to Items 101, 103 and 105 of Regulation S-K, which became effective as of November 9, 2020.[1] Among other things, these amendments added human capital resources as a disclosure topic under Item 101, which addresses what companies must include in the “Business” section of their Form 10-K. As amended, Item 101(c) requires a registrant to describe its human capital resources “to the extent material to the understanding of that registrant’s business taken as a whole.”[2] Specifically, the human capital disclosure must include “the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”[3] Prior to this amendment, Item 101(c) required the registrant to disclose only the number of persons employed by the registrant.

Consistent with the Commission’s stated desire to implement a more “principles-based” disclosure system,[4] the new rules did not define “human capital” or elaborate on specific requirements for human capital disclosures beyond the few examples provided in the rule text. This lack of specific line item requirements was criticized by Democratic Commissioner Caroline Crenshaw, who stated that “I would have supported today’s final rule if it had included even minimal expansion on the topic of human capital to include simple, commonly kept metrics such as part time vs. full time workers, workforce expenses, turnover, and diversity. But we have declined to take even these modest steps.”[5] As discussed below, following the change in presidential administration, the Commission has indicated that it plans to revisit the human capital disclosure requirements and potentially adopt more prescriptive rules in the future.[6]

To understand how companies have responded to the current disclosure requirements, we conducted a survey of the substance and format of human capital disclosures made by the 451 S&P 500 companies that filed an annual report on Form 10-K between the date the new requirements became effective, November 9, 2020, and July 16, 2021.[7] As is to be expected from principles-based rules, companies provided a wide variety of human capital disclosures,[8] with no uniformity in their depth or breadth. The next three sections highlight our observations from this survey.[9]

II. Disclosure Topics

Our survey breaks down companies’ human capital disclosures into 17 topics, each of which is listed in the following chart, along with the number of companies that discussed the topic. Each topic is described more fully in the sections following the chart.

A. Workforce Composition and Demographics

Of the 451 companies surveyed, 419, or 93%, included disclosures relating to workforce composition and demographics in one or more of the following categories:

Diversity and inclusion. This was the most common type of disclosure, with 82% of companies including a qualitative discussion regarding the company’s commitment to diversity, equity, and inclusion. The depth of these disclosures varied, ranging from generic statements expressing the company’s support of diversity in the workforce to detailed examples of actions taken to support underrepresented groups and increase the diversity of the company’s workforce. Many companies also included a quantitative breakdown of the gender or racial representation of the company’s workforce: 41% included statistics on gender and 35% included statistics on race. Most companies provided these statistics in relation to their workforce as a whole, while a subset (21%) included separate statistics for different classes of employees (e.g., managerial, vice president and above, etc.) and/or for their boards of directors. Some companies also included numerical goals for gender or racial representation—either in terms of overall representation, promotions, or hiring—even if they did not provide current workforce diversity statistics.
Full-time / part-time employee split. While most companies provided the total number of full-time employees, only 16% of the companies surveyed included a quantitative breakdown of the number of full-time versus part-time employees the company employed. Similarly, we saw a number of companies that provided statistics on the number of seasonal employees and/or independent contractors.
Unionized employee relations. 37% of the companies surveyed stated that some portion of their employees was part of a union, works council, or similar collective bargaining agreement. These disclosures generally included a statement providing the company’s opinion on the quality of labor relations, and in many cases, disclosed the number of unionized employees. While never expressly required by Regulation S-K, as a result of disclosure review comments issued by the Division of Corporation Finance over the years and a decades-old and since-deleted requirement in Form 1-A, it has been a relatively common practice to discuss collective bargaining and employee relations in the Form 10-K or in an IPO Form S-1, particularly since the threat of a workforce strike could be material.
Quantitative workforce turnover rates. Although a majority of companies discussed employee turnover and the related topics of talent attraction and retention in a qualitative way (as discussed in Section II.B. below), less than 13% of companies surveyed provided specific employee turnover rates (whether voluntary or involuntary).

B. Recruiting, Training, Succession

395, or 88%, of the companies surveyed included disclosures relating to talent and succession planning in one or more of the following categories:

Talent Attraction and Retention. These disclosures were generally qualitative and focused on efforts to recruit and retain qualified individuals. While providing general statements regarding recruiting and retaining talent were relatively common, with 58% of companies including this type of disclosure, quantitative measures of retention, like workforce turnover rate, were uncommon, with less than 13% of companies disclosing such statistics (as noted above).
Talent Development. The most common type of disclosure in this area related to talent development, with 77% of companies including a qualitative discussion regarding employee training, learning, and development opportunities. This disclosure tended to focus on the broader workforce rather than specifically on senior management. Companies generally discussed training programs such as in-person and online courses, leadership development programs, mentoring opportunities, tuition assistance, and conferences, and a minority also disclosed the number of hours employees spent on learning and development.
Succession Planning. Only 18% of companies surveyed addressed their succession planning efforts, which may be a function of succession being a focus area primarily for executives rather than the human capital resources of a company more broadly.

C. Employee Compensation

Of the companies surveyed, 300, or 67%, included disclosures relating to employee compensation. Most of those companies, or 64% of companies surveyed, included a qualitative description of the compensation and benefits program offered to employees. However, only 16% of companies surveyed addressed pay equity practices or assessments, and even fewer companies (4% of companies surveyed) included quantitative measures of the pay gap between diverse and non-diverse employees or male and female employees.

D. Health and Safety

Of the companies surveyed, 288, or 64%, included disclosures relating to health and safety in one or both of the following categories:

Workplace health and safety. 53% of companies surveyed included qualitative disclosures relating to workplace health and safety, typically with statements around the company’s commitment to safety in the workplace generally and compliance with applicable regulatory and legal requirements. However, only 12% of companies surveyed provided quantitative disclosures in this category, generally focusing on historical and/or target incident or safety rates or investments in safety programs. These disclosures generally were more prevalent among industrial and manufacturing companies, as discussed in Section G below. Many companies also provided disclosures on safety initiatives undertaken in connection with COVID-19, which is discussed separately below.
Employee mental health. In connection with disclosures about standard benefits provided to employees, or additional benefits provided as a result of the pandemic, 23% of companies disclosed initiatives taken to support employees’ mental or emotional health.

E. Culture and Engagement

In addition to the many instances where companies mentioned a general commitment to culture and values, 229, or 51%, of the companies surveyed discussed specific initiatives they were taking related to culture and engagement in one or more of the following categories:

Culture and engagement initiatives. Only 20% of companies surveyed included specific disclosures relating to practices and initiatives undertaken to build and maintain their culture and values. These disclosures most commonly discussed company efforts to communicate with employees (e.g., through town halls, CEO outreach, trainings, or conferences and presentations) and to recognize employee contributions (e.g., awards programs and individualized feedback). Many companies also discussed culture in the context of the diversity-related initiatives to help foster an inclusive culture.
Monitoring culture. Disclosures about the ways that companies monitor culture and employee engagement were much more common, with 45% of companies providing such disclosure. Companies generally disclosed the frequency of employee surveys used to track employee engagement and satisfaction, with some reporting on the results of these surveys, sometimes measured against prior year results or industry benchmarks.

F. COVID-19

A majority of companies (67% of those surveyed) included information regarding COVID-19 and its impact on company policies and procedures or on employees generally. COVID-19-related topics addressed ranged from work-from-home arrangements and safety protocols taken for employees who worked in person to additional benefits and compensation paid to employees as a result of the pandemic and contributions made to organizations supporting those affected by the pandemic.

G. Human Capital Management Governance and Organizational Practices

A minority of companies (34% of those surveyed) addressed their governance and organizational practices (such as oversight by the board of directors or a committee and the organization of the human resources function).

III. Industry Trends

One of the main rationales underlying the adoption of principles-based—rather than prescriptive—requirements for human capital disclosures is that the relative significance of various human capital measures and objectives varies by industry. This is reflected in the following industry trends that we observed:[10]

Finance Industries (Asset Management & Custody Activities, Consumer Finance, Commercial Banks and Investment Banking & Brokerage). For the 34 companies in the Finance Industries, a majority included quantitative diversity statistics regarding race (61%) and gender (70%). Most companies also included qualitative disclosures regarding employee compensation (70%), and, compared to other industries discussed below, a relatively higher number discussed pay equity (35%) and quantified their pay gap (17%). Relatively uncommon disclosures among this group included part-time and full-time employee statistics, unionized employee relations, quantitative workforce turnover rates, and succession planning (in each case less than 20%).
Technology Industries (E-Commerce, Internet Media & Services, Hardware, Software & IT Services and Semiconductors). For the 68 companies in the Technology Industries, 66% discussed talent development and training opportunities and 58% discussed talent attraction, recruitment, and retention. Relatively uncommon disclosures among this group included part-time and full-time employee statistics (7%), quantitative workforce turnover rates (16%), workplace health and safety measures (23%), culture initiatives (19%), and quantitative pay gap (2%).
Manufacturing Industries (Industrial Machinery & Goods, Auto Parts, Automobiles, and Appliance Manufacturing). For the 21 companies in the Manufacturing Industries, 85% of the companies discussed their workplace health and safety measures. Other common disclosures included those related to COVID-19 (66%), unionized employee relations (52%), employee training and development (80%), and employee compensation (57%). Relatively uncommon disclosures among this group included those relating to corporate governance, part-time and full-time employee statistics, quantitative measures of diversity like race, ethnicity or gender workforce statistics, quantitative workforce turnover rates, employee mental health, culture initiatives, succession planning, pay equity or quantitative measures of the pay gap (in each case less than 25%).
Travel Industries (Airlines and Cruise Lines). For the 8 companies in the Travel Industries, all but one discussed COVID-19, and all 8 companies discussed their unionized employee relations. Other common disclosures related to diversity and inclusion (87%), talent development (62%), and employee compensation (62%). None of the companies in this group discussed pay equity or provided quantitative workforce turnover rates or pay gap analysis.
Retail Industries (Food Retailers & Distributors and Multiline and Specialty Retailers & Distributors). Of the 22 companies in this Retail Industries category of our survey, 36% included disclosures related to part-time and full-time employee statistics. Relatively uncommon disclosures among this group included quantitative workforce turnover rates, employee mental health, culture initiatives, pay equity, and quantitative pay gap analysis (in each case less than 20%).
Aerospace & Defense Industry. For the 10 companies in the Aerospace & Defense Industry, all but one included a disclosure regarding talent development and training, and 80% of the companies also discussed talent attraction and retention. Other common disclosures include those related to COVID-19 (60%), qualitative discussion of diversity and inclusion (70%), unionized employee relations (60%), workplace health and safety measures (70%), and qualitative discussion of employee compensation (60%). Uncommon disclosures for companies in this group related to part-time and full-time employee statistics, quantitative workforce turnover rates, employee mental health, culture initiatives, pay equity or quantitative measures of the pay gap (in each case 10% or less).
Food & Beverage Industries (Agricultural Products, Alcoholic Beverages, Non-Alcoholic Beverages, Processed Foods, Meat, Poultry & Dairy). For the 17 companies in the Food & Beverage Industries, the most common disclosures included those related to qualitative discussions on diversity and inclusion (94%), workplace health and safety measures (70%), and talent development and training (82%). Less than 20% of the companies in this group included disclosures related to part-time and full-time employee statistics, quantitative workforce turnover rates, succession planning (none of the companies in this group included this type of disclosure), pay equity, or quantitative measures of the pay gap.
Personal Goods Industries (Apparel, Accessories & Footwear, Household & Personal Products, Toys and Sporting Goods). For the 13 companies in the Personal Goods Industries, the most common disclosures were those related to a qualitative discussion on diversity and inclusion (92%), quantitative diversity statistics about gender (61%), COVID-19 (61%), talent attraction and retention (61%), talent development (76%), employee compensation (61%), and corporate governance and organization (61%). Relatively uncommon disclosures for companies in this group include quantitative workforce turnover rates (7%), employee mental health (23%), culture initiative (23%), pay equity (15%), and the quantitative pay gap (0%).
Biotechnology & Pharmaceutical Industry. For the 18 companies in the Biotechnology & Pharmaceutical Industry, 100% included a qualitative discussion of diversity and inclusion, with many including workforce diversity statistics for race (55%) or gender (50%). Other common disclosure topics for this industry were COVID-19 (72%), workplace health and safety measures (66%), monitoring culture (61%), talent development (77%), and employee compensation (72%). Less than 25% of the companies in this industry included disclosures regarding part-time and full-time employee statistics, quantitative workforce turnover rate, culture initiative, succession planning, or quantitative pay gap measures.
Health Care Industries (Drug Retailers, Health Care Delivery, Health Care Distributors, and Medical Equipment & Supplies). For the 37 companies in the Health Care Industries, the most common disclosures were those related to COVID-19 (67%), qualitative discussion of diversity and inclusion (86%), diversity workforce statistics of gender (56%) (statistics about race were only disclosed by 43% of this group), workplace health and safety (59%), talent development and training (83%), and employee compensation (70%). The least common disclosures, with less than 20% each, included quantitative workforce turnover rates, culture initiatives, succession planning, pay equity, and quantitative pay gap measures.
Building Industries (Building Products & Furnishings, Engineering & Construction Services, and Home Builders). For the 11 companies in the Building Industries, the most common disclosures were those related to COVID-19 (63%), workplace health and safety (54%), talent attraction and retention (72%), talent development (72%), and employee compensation (54%). The least common disclosures, with 10% or less of the companies in this group including such disclosures, were part-time and full-time employee statistics, quantitative workforce turnover rate, employee mental health, culture initiatives, pay equity (0%) and quantitative pay gap measures (0%).
Hotel Industries (Casinos & Gaming, Hotels & Lodging, and Leisure Facilities). Of the 9 companies in the Hotel Industries, 100% included COVID-19-related disclosure. Disclosures of over 80% of companies in this group include in their annual report a qualitative discussion on diversity and inclusion, unionized employee relations, and employee compensation. Relatively uncommon disclosures include those related to governance and corporate organization, quantitative diversity statistics regarding race and gender, quantitative workforce turnover rates, culture initiatives, monitoring culture, succession planning, pay equity, and quantitative pay gap (in each case less than 25%).
Utilities Industries (Electric Utilities and Power Generators, Gas Utilities & Distributors, and Water Utilities). For the 26 companies in the Utilities Industries, the most common disclosures included those related to COVID-19 (69%), qualitative discussion regarding diversity and inclusion (88%), unionized employee relations (88%), workplace health and safety (88%) and workforce training (80%). Relatively uncommon disclosures among this group included part-time and full-time employee statistics, quantitative workforce turnover rate, employee mental health, culture initiatives, pay equity, and quantitative pay gap (in each case less than 20%).
Electrical Equipment Industry (Electric & Electrical Equipment (excluding computer or similar technology equipment)). For the 18 companies in the Electrical Equipment Industry, the most common disclosures include qualitative discussion regarding diversity (83%), workplace health and safety (83%), and employee training (89%). The least common disclosures included part-time and full-time workforce statistics, employee mental health, culture initiatives, succession planning, pay equity, and quantitative pay gap measures (in each case less than 25%).
Oil & Gas Industry. For the 21 companies in the Oil & Gas Industry, the most common disclosures included corporate governance and organization measures (57%), COVID-19 (71%), qualitative discussion of diversity (95%), workplace health and safety measures (80%), talent acquisition and retention (80%), talent development and training (80%), and employee compensation (76%). The least common disclosures for the Oil & Gas Industry, in each case less than 20%, were part-time and full-time workforce statistics, unionized workforce relations, quantitative workforce turnover rates, culture initiatives, pay equity, and quantitative pay gap measures (0% for this disclosure).
Real Estate Industry. For the 24 companies in the Real Estate Industry, the most common disclosures included those related to COVID-19 (70%), qualitative discussion of diversity (79%), monitoring culture (67%), talent development (79%), and employee compensation (75%). Relatively uncommon disclosures among this group included unionized workforce relations, quantitative workforce turnover rates, succession planning, pay equity and quantitative pay gap (in each case less than 20%).
Insurance and Professional Industries (Insurance and Professional & Commercial Services). For the 28 companies in the Insurance and Professional Industries, the disclosures with over 70% of occurrence each were those related to qualitative discussions of diversity, talent development and training and employee compensation. The disclosures with a less than 25% rate of inclusion were related to unionized employee relations, employee mental health, succession planning, and the pay gap.

IV. Disclosure Format

The format of human capital disclosures in companies’ annual reports varied greatly.

Word Count. The length of the disclosures ranged from 10 to 2,180 words, with the average disclosure consisting of 797 words and the median disclosure consisting of 765 words.

Metrics. While the disclosure requirement specifically asks for a description of “any human capital measures or objectives that the registrant focuses on in managing the business” (emphasis added), our survey revealed that approximately 25% of companies determined not to include any quantitative metrics in their disclosure beyond headcount numbers. Given the materiality threshold included in the requirement and the fact that it is focused on what is actually used to manage the business, this is not a surprising result. It was common to see companies identify important objectives they focus on, but omit quantitative metrics related to those objectives. For example, while 82% of companies discussed their commitment to diversity, equity, and inclusion, only 41% and 35% of companies disclosed quantitative metrics regarding gender and racial diversity, respectively.

Graphics. Although the minority practice, approximately 25% of companies surveyed also included charts or other graphics, which were generally used to present statistical data, such as diversity statistics or breakdowns of the number of employees by geographic location.

Categories. Most companies organized their disclosures by categories similar to those discussed above and included headings to define the types of disclosures presented.

V. Comment Letter Correspondence

Often times comment letter correspondence from the staff of the Division of Corporation Finance (the “Staff”) helps put a finer point on disclosure requirements like this one that are relatively open-ended and give companies broad discretion to decide what to disclose. While there have been approximately two dozen comment letters published that address the new human capital requirements, the letters we have seen so far shed relatively little light on how the Staff believes the new requirements should be interpreted. Rather, the comment letters, all of which involved reviews of registration statements, were generally issued to companies whose disclosures about employees were limited to the bare-bones items companies have discussed historically, such as the number of persons employed and the quality of employee relations. From these companies, the Staff simply sought a more detailed discussion of the company’s human capital resources, including any human capital measures or objectives upon which the company focuses in managing its business. In other words, similar to historical Staff comment practices generally in the context of the first year of new disclosure requirements, the Staff targeted “low-hanging fruit,” basically just asking companies that disclosed nothing in response to the new requirements to provide responsive disclosure. Based on our review of the responses to those comment letters, we have not seen a company take the position that a discussion of human capital resources was immaterial and therefore unnecessary.

VI. Conclusion

The principles-based nature of the new human capital requirements predictably resulted in companies providing a wide variety of disclosures, with significant differences in depth and breadth. Companies’ responses to the new requirements underscore some of the potential advantages and disadvantages of principles-based rulemaking. On one hand, the largely principles-based requirements gave each company wide latitude to tailor its discussion to its own circumstances and to highlight the measures and objectives focused on by its management team. The resulting disclosures seemed to provide insight into how each company views its human capital resources and manages that aspect of its business. On the other hand, the general lack of prescriptive requirements limited the comparability of disclosures from one company to another and failed to facilitate quantitative analyses of companies’ human capital resources. While some would argue that precluding surface-level quantitative comparisons across companies is a virtue of the new rule, others, including SEC Chair Gensler, favor more specificity. On August 18, 2020 Chair Gensler tweeted: “Investors want to better understand one of the most critical assets of a company: its people. I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure…. This could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.”[11]

Until the Commission proposes and adopts new rules governing the disclosure of human capital management, however, we expect the wide variance in Form 10-K human capital disclosures to continue. As companies prepare for the upcoming Form 10-K reporting season, they should consider the following:

Confirming (or reconfirming) that the company’s disclosure controls and procedures support the statements made in human capital disclosures so that they are reliable, consistent, and appropriately updated, and that there is a robust verification process in place. While many companies have historically provided information like this in other contexts (e.g., hiring brochures and company websites), given the potential liability attached to disclosures in SEC filings, more rigorous controls will likely need to be put in place to ensure the accuracy and completeness of the information.
Confirming (or reconfirming) that the human capital disclosures included in the Form 10-K remain appropriate and relevant. In this regard, companies may want to compare their own disclosures against what their industry peers did this past year as well as against any internal reporting frameworks (such as the human capital information that is regularly reported to senior management and the board or a committee).
Setting expectations internally that these disclosures likely will evolve. Companies should expect to develop their disclosure over the course of the next couple of annual reports in response to peer practices, regulatory changes and investor expectations, as appropriate. The types of disclosures that are material to each company may also change in response to current events.
Addressing in the upcoming disclosure the progress that management has made with respect to any significant objectives it has set regarding its human capital resources as investors are likely to focus on year-over-year changes and the company’s performance versus stated goals.
Ensuring consistency across disclosures by being mindful of other human capital disclosures the company has already made and what the company has already said about its human capital in other filings or voluntary statements in sustainability reports, investor outreach, college campus recruiting materials or elsewhere (e.g., how is the composition of the company’s workforce described in the CEO pay ratio disclosure?).
Addressing significant areas of focus highlighted in engagement meetings with investors and other stakeholders. In a 2020 survey, 64% of institutional investors surveyed said they planned to focus on human capital management when engaging with boards (second only to climate change, at 91%).[12]
Addressing, to the extent material, the effect that return-to-work policies, vaccine mandates, or other COVID-related policies may have on the workforce.
Revalidating the methodology for calculating quantitative metrics and assessing consistency with the prior year. Former Chairman Clayton commented that he would expect companies to “maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics.”

_____________________________

[1] See, A Double-Edged Sword? Examining the Principles-Based Framework of the SEC’s Recent Amendments to Regulation S-K Disclosure Requirements, available here.

[2] See, 17 C.F.R. § 229.101(c)(2)(ii).

[3] Id.

[4] See, Modernizing the Framework for Business, Legal Proceedings and Risk Factor Disclosures, available at https://www.sec.gov/news/public-statement/clayton-regulation-s-k-2020-08-26.

[5] See, Regulation S-K and ESG Disclosures: An Unsustainable Silence, available at https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26.

[6] Commission Chair Gary Gensler’s Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions (the “Spring 2021 Reg Flex Agenda”) shows “Human Capital Management Disclosure” as being in the proposed rule stage. Available here.

[7] Our survey captured the following information: company industry, word count of relevant disclosure, category of information covered (e.g., diversity, workplace safety, etc.), and types of metrics included.

[8] See Considerations for Preparing your 2020 Form 10-K, available at https://www.gibsondunn.com/wp-content/uploads/2021/02/considerations-for-preparing-your-2020-form-10-k.pdf; Amit Batish et al., Human Capital Disclosure: What Do Companies Say About Their “Most Important Asset”?, The Harvard Law School Forum on Corporate Governance, May 18, 2021; Marc Siegel et al., How do you value your social and human capital?; Andrew R. Lash et al., Variety of Approaches to New Human Capital Resources Disclosure in 10-K Filings, The Harvard Law School Forum on Corporate Governance, Dec. 13, 2020.

[9] Note that companies often include additional human capital management-related disclosures in their ESG/sustainability/social responsibility reports and websites and sometimes in the proxy statement, but these disclosures are outside the scope of the survey.

[10] For purposes of our survey, we grouped companies in similar industries based on both their four-digit Standard Industrial Classification code and their designated industry within the Sustainable Industry Classification System. The industry groups discussed cover approximately 85% of the companies included in our survey.

[11] Available at https://twitter.com/garygensler/status/1428022885889761292

[12] See Morrow Sodali 2020 Institutional Investor Survey, available at https://morrowsodali.com/insights/institutional-investor-survey-2020.

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

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County (+1 949-451-4343, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Brian J. Lane – Washington, D.C. (+1 202-887-3646, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael A. Titera – Orange County (+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])

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Please join us as our distinguished panelists discuss the challenging interplay between internal audit and white collar investigations. The discussion will include strategies to ensure that internal audit complements the compliance function and how best to deal with legal problems identified by internal audit activities. Our panelists will also discuss recent FCPA enforcement actions that leverage internal audit findings to support alleged violations.

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New Guidance Unwinds Four Years of Staff Precedent and Raises the Burden for Companies Seeking to Exclude Environmental and Social Proposals from Proxy Statements

On November 3, 2021, the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) published Staff Legal Bulletin 14L (“SLB 14L”), which sets forth new Staff guidance on shareholder proposals submitted to publicly traded companies under SEC Rule 14a-8. As discussed in greater detail below, SLB 14L:

rescinds each of the Staff Legal Bulletins issued under the Clayton Commission; specifically, Staff Legal Bulletin 14I (Nov. 1, 2017) (“SLB 14I”), Staff Legal Bulletin 14J (Oct. 23, 2018) (“SLB 14J”), and Staff Legal Bulletin 14K (Oct. 16, 2019) (“SLB 14K”) (collectively, the “Prior SLBs”);
reverses the Prior SLBs’ company-specific approach to evaluating the significance of a policy issue that is the subject of a shareholder proposal for purposes of the ordinary business exclusion in Rule 14a-8(i)(7) (thereby negating the need for a board analysis or “delta” analysis to support future no-action requests);
reverses the Prior SLBs’ approach on micromanagement arguments for purposes of the ordinary business exclusion in Rule 14a-8(i)(7);
outlines the Staff’s view regarding application of the economic relevance exclusion in Rule 14a-8(i)(5), which reverses the Prior SLBs’ approach that proposals raising social concerns could be excludable where not economically or otherwise significant to the company;
republishes prior guidance regarding the use of graphics and images;
furthers the Staff’s retreat in applying the procedural requirements of Rule 14a-8 by reflecting more leniency in interpreting proof of ownership letters and suggesting the use of a second deficiency notice in certain circumstances; and
provides new guidance on the use of email for submission of proposals, delivery of deficiency notices and responses (encouraging a bilateral use of email confirmation receipts by companies and shareholder proponents alike).

The new guidance was issued with the 2022 shareholder proposal season already underway and – unlike with many past Staff Legal Bulletins – was not previewed or discussed in advance at the traditional “stakeholders” meeting with proponents and companies (as the Staff did not host such a meeting this year). As a result, SLB 14L injects more uncertainty for companies evaluating shareholder proposals under Rule 14a-8 and further clouds an already opaque no-action review process. The Staff states that SLB 14L is intended to streamline and simplify the Staff’s process for reviewing no-action requests, and to clarify the standards the Staff will apply. Notably, however, the Staff has not addressed changes to its process for responding to no-action letters, including its 2019 decision to no longer issue individual responses explaining its views on each no-action request, which has been decried by both proponents and companies.

Summary of the New Staff Guidance

In SLB 14I, the Staff addressed standards for evaluating both the ordinary business exclusion and the economic relevance exclusion, including challenges in determining whether a particular proposal focused on a policy issue that was sufficiently significant to the company’s business. SLB 14I also introduced the concept of a board analysis by a company to buttress its no-action analysis on whether a proposal raised a significant policy issue or was relevant to a company’s business. Subsequently, SLB 14J and SLB 14K provided further interpretive gloss on these bases for exclusion, including the use of a “delta” analysis to distinguish whether a proposal’s request represented a significant variance from actions already taken by a company. SLB 14J and SLB 14K also provided the Staff’s expanded view of when proposals could be excluded on the basis of micromanagement (leading to a notable increase in climate proposals subsequently being excluded based on micromanagement). New SLB 14L tosses all of that guidance and analysis and announces, among other things, the Staff’s intent to apply a “realigned” approach to analyzing significance and social policy issues.

Changes to the Application of the Ordinary Business Exclusion in Rule 14a-8(i)(7).

Company-Specific Approach to Significance is Out; Significant Social Policy Issues are Back; and Board and Delta Analyses are No Longer Necessary.

SLB 14L begins with a rebuke of the Staff’s more recent company-specific approach to significance, as articulated and developed in the Prior SLBs. The Staff expressed its current view that this approach has placed undue emphasis on evaluating the significance of a policy issue to a particular company at the expense of whether or not the proposal focuses on a significant social policy, noting too that such approach did not always yield “consistent, predictable results.” SLB 14L states that, going forward, the Staff plans to “realign” its approach with the standard outlined in Release No. 34-12000 (Nov. 22, 1976), and which the Commission subsequently reaffirmed in Release No. 34-40018 (May 21, 1998) (the “1998 Release”), which SLB 14L interprets as having the Staff focus on the social policy significance of the issue that is the subject of the proposal, including considering whether the proposal raises issues with a broad societal impact such that they transcend the company’s ordinary business.

It is unclear how much this reflects a return to past interpretations under Rule 14a-8(i)(7), or represents a wholesale abandonment of any assessment of relevance of a proposal to a company’s business (as compared to relevance to society at large). Notably, SLB 14L states that the Staff “will no longer focus on determining the nexus between a policy issue and the company.” However, the “nexus” concept was embedded in the 1998 Release, as stated in Staff Legal Bulletin 14E (Oct. 27, 2009), at footnote 4 (citing the 1998 Release), and reaffirmed in Staff Legal Bulletin 14H (Oct. 22, 2015). Ominously, SLB 14L states that it also supersedes any earlier Staff Legal Bulletin to the extent the views expressed therein are contrary to the views expressed in SLB 14L. Indeed, SLB 14L concedes that its “realigned” approach will result in nullifying certain recent precedent, citing specifically to a shareholder proposal that raised human capital management issues but which was determined excludable under Rule 14a-8(i)(7) because the proponent failed to demonstrate that the issue was significant to the company.[1]

In connection with the Staff’s rejection of the company-specific approach to evaluating significance, SLB 14L also rejects the use of board analyses and “delta” analyses by companies in their no-action requests. Specifically, the Staff no longer expects a board analysis as part of demonstrating that a proposal is excludable under the ordinary business exclusion, referring to the board analysis as both a distraction from the proper application of Rule 14a-8(i)(7) and as muddying the application of the substantial implementation standard under Rule 14a-8(i)(10) (in situations where the board analysis involved a “delta” component).

Hitting the Brakes on Micromanagement.

The Staff determined that recent application of the micromanagement exclusion, as outlined in SLB 14J and SLB 14K, expanded the concept of micromanagement beyond the Commission’s intent, and SLB 14L specifically rescinds guidance suggesting that any limit on a company’s or board’s discretion constitutes micromanagement. The new guidance indicates that the Staff “will take a measured approach” to evaluating micromanagement arguments, stating that proposals seeking detail, suggesting targets, or seeking to promote time frames for methods do not per se constitute impermissible micromanagement, provided that the proposals afford discretion to management as to how to achieve the desired goals. The Staff will instead focus on the level of granularity sought by the proposal and whether and to what extent it inappropriately limits discretion of the board or management. Moreover, the Staff states that it expects proposals to include the level of detail required to enable investors to assess a company’s impact, progress towards goals, risk or other strategic matters.

While much of the language surrounding the Staff’s new application of the micromanagement exclusion relates to climate change shareholder proposals, including a reference to the Staff’s decision in ConocoPhillips Co. (Mar. 19, 2021)[2] as an example of the Staff’s current approach to micromanagement, SLB 14L also addresses the Staff’s views on the micromanagement exclusion generally. For example, the Staff states that in order to assess whether a proposal probes too deeply into matters of a complex nature, the Staff “may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic” as well as “references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.”[3]

The Staff explained that these changes are designed to help proponents navigate Rule 14a-8: enabling them to craft proposals with sufficient specificity and direction to avoid exclusion under substantial implementation (Rule 14a-8(i)(10)), while being general enough to avoid exclusion under micromanagement. The foregoing should come as no surprise given the Commission’s numerous public statements indicating that climate change and social issues are a priority.[4]

Changes to the Application of the Economic Relevance Exclusion in Rule 14a-8(i)(5).

SLB 14L announces the Staff’s return to a pre-SLB 14I approach to interpreting the economic relevance exclusion under Rule 14a-8(i)(5), in what the Staff described as consistent with Lovenheim v. Iriquois Brands, Ltd.[5] As a result, shareholder proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds in Rule 14a-8(i)(5). Relatedly, a board analysis (which had been largely used to demonstrate the qualitative insignificance of the subject matter of the proposal vis-à-vis the company) will no longer be necessary.

The Staff Reaffirms its Views on the Use of Images in Shareholder Proposals, Including When Exclusion is Appropriate.

SLB 14L republishes the Staff’s guidance on the use of images in shareholder proposals, previously set forth in SLB 14I. The guidance appears to have been republished simply to preserve the Staff’s views on this topic since SLB 14I is rescinded.

In short, the Staff continues to believe that Rule 14a-8(d) does not preclude shareholders from using graphics and/or images to convey information about their proposal. That said, recognizing the potential for abuse in this area, the Staff also reaffirmed its views on when exclusion of such graphics/images would be appropriate under Rule 14a-8(i)(3), and that it is appropriate to include any words used in the graphics towards the total proposal word count for purposes of determining whether or not the proposal exceeds 500 words. Helpfully, SLB 14L indicates that companies do not need to give greater prominence to proponent graphics than to their own, and may reprint graphics in the same colors used by the company for its own graphics.

The Staff Reaffirms its Plain Meaning Approach to Interpreting Broker Letters; Adds New Burden for Companies.

In SLB 14K, the Staff explained its approach to interpreting proof of ownership letters; namely, that it takes a “plain meaning” approach to interpreting the text of proof of ownership letters and generally finds arguments to exclude based on “overly technical reading[s]” unpersuasive.[6] SLB 14L largely republishes and reaffirms the Staff’s prior guidance in this regard, with two notable exceptions.

First, the guidance provides an updated, suggested (but not required) format for shareholders and their brokers or banks to follow when supplying proof of ownership. In this regard, the updated language references the new ownership thresholds reflected in the Commission’s 2020 rulemaking. The format is as follows:

As of [date the proposal is submitted], [name of shareholder] held, and has held continuously for at least [one year] [two years] [three years], [number of securities] shares of [company name] [class of securities].[7]

Consistent with prior guidance, SLB 14L provides that use of the aforementioned format “is neither mandatory nor the exclusive means of demonstrating ownership” under Rule 14a-8(b), and that “companies should not seek to exclude a shareholder proposal based on drafting variances in the proof of ownership letter if the language used in such letter is clear and sufficiently evidences the requisite minimum ownership requirements.”[8] The Staff also confirms that the recent amendments to the ownership standards under Rule 14a-8 are not intended to change the nature of proof of ownership provided by proponents’ brokers and banks.

Second, and more notably, the guidance suggests that if, after receiving an initial deficiency letter from a company, a shareholder returns a deficient proof of ownership, the Staff believes that the company should identify such defects explicitly in a follow-up deficiency notice. SLB 14L provides no citation in support of this position, and it does not attempt to reconcile the position with decades of precedent that are based on the language of Rule 14a-8, which ties the deadlines for addressing a deficiency notice to when a proposal is first submitted. Since in many cases a company may not receive a proponent’s response to a deficiency notice within 14 days of the date that the proposal was received by the company, it is unclear whether the Staff intends this process to impose obligations on companies that are outside the scope of Rule 14a-8 and presents a quandary on whether companies need to follow new procedures beyond those expressly provided for in Rule 14a-8.

Guidance on the Use of Email Communications.

The new guidance recognizes the growing reliance by proponents and companies alike on the use of emails to submit proposals and make other communications. Consistent with prior no-action letter precedent in this area, SLB 14L provides that, unlike third-party mail delivery (which provides the sender with a proof of delivery), methods for email confirmation of delivery may vary. In particular, the Staff states its view that email delivery confirmations and company server logs may not be sufficient to prove receipt of emails as they only serve to prove that emails were sent. In light of this, the Staff suggests that both parties increasingly rely on email confirmation from the recipient expressly acknowledging receipt. The Staff encourages both companies and shareholder proponents to acknowledge receipt of emails when requested, and it suggests the use of email read receipts (if received by the sender).

The Staff goes on to specifically address the use of email for submission of proposals, delivery of deficiency notices, and submitting responses to such notices. In regards to submissions, the Staff encourages shareholders to submit a proposal by means that permit them to prove the date of delivery, including electronic means (though the Staff acknowledges the inherent risk of using email exclusively as a means of submission in the event timely receipt is disputed and if the proponent does not receive confirmation of receipt from the company). If a company does not provide an email address for receiving proposals in its proxy statement, shareholders are encouraged to contact the company to obtain the proper email address. Similarly, if companies use email to deliver deficiency notices, they are encouraged to seek a confirmation of receipt from the proponent, since the company has the burden of proving timely delivery of the notice. Likewise, if a shareholder uses email to respond to a company’s deficiency notice, the burden to show receipt is on the shareholder, and therefore shareholders are encouraged both to use an appropriate company email address and to seek confirmation of receipt.

Commissioners’ Dissent Underscores Deep Divisions within the Commission.

Chair Gensler publicly endorsed the Staff’s new guidance,[9] asserting that SLB 14L will provide greater clarity to companies and shareholders on when certain exclusions may or may not apply. At the same time, Republican Commissioners Hester M. Pierce and Elad L. Roisman (the “Commissioners”) released a joint statement that articulated their concerns regarding the Staff’s new guidance.[10] First, the Commissioners expressed disappointment at SLB 14L’s explicit singling out of proposals “squarely raising human capital management issues with a broad societal impact,” and proposals that “request[] companies adopt timeframes or targets to address climate change” as likely non-excludable.[11] Second, the Commissioners said that the actions of the Staff in publishing the guidance were the result of the current Commission’s “flavor-of-the-day regulatory approach.”[12] Next, the Commissioners espoused the belief that SLB 14L ultimately creates significantly less clarity for companies, dramatically slows down the Rule 14a-8 no-action request process and wastes taxpayer dollars on shareholder proposals that “involve issues that are, at best, only tangential to our securities laws.”[13] Finally, the Commissioners noted that they would be open to either shifting responsibility for the no-action process from the Staff to the Commission directly, or even amending Rule 14a-8 to excise the Commission and Staff from the process altogether. These views, taken together, demonstrate a clear division among the Commission, right down political party lines, on matters relating to shareholder proposals.

Takeaways

While the practical consequences of the Staff’s new interpretive guidance will likely become clearer over time, this much is evident: the Staff’s latest guidance cements the end of the Trump-era Commission and is a bellwether for the challenging shareholder proposal season that awaits companies, particularly with respect to climate and social proposals, as well as the nature of changes that we might expect to see later in 2022 when the Commission revisits Rule 14a-8 rulemaking.[14] In many respects, SLB 14L serves up what the proponent community has been asking for. For example, shareholder proponents have long argued that the Staff should not be involved in assessing the relevancy of a social policy issue for a company – that shareholders can do so through their voting – and SLB 14L appears to lean in that direction. Similarly, after stating in the Prior SLBs that the extent to which a proposal dealt with a “complex” topic was not a determinative factor under a micromanagement analysis, SLB 14L now suggests that complexity was relevant and that it will be assessing that matter differently. Further, it is notable that SLB 14L follows a shareholder proposal season in which the Staff failed to host its annual “stakeholders” meeting, which historically has been an annual opportunity for various parties that are part of the shareholder proposal process to dialogue with the Staff and each other about Rule 14a-8 issues.

In light of the guidance set forth in SLB 14L, we urge public companies to keep the following in mind.

Companies May Need to Send a Second Deficiency Letter in Certain Circumstances. Excluding proposals based on a shareholder proponent’s failure to satisfy the Rule 14a-8 procedural requirements just got harder. The new Staff guidance increases the burden on companies by now suggesting that they may need to send a second deficiency notice in certain situations.[15] Now, even when a proponent only sends ownership proof in response to a company’s deficiency notice requesting such documentation, companies will need to evaluate whether to send a second notice to the proponent identifying any defects in such proof of ownership. At a minimum, this will prolong the uncertainty for companies on whether a proponent has demonstrated eligibility to submit a proposal, and places significant pressure on subsequently challenging eligibility within the time periods set forth in Rule 14a-8. Similarly, while the Staff has objected in years past to arguments to exclude proposals based on minor issues, new SLB 14L reiterates that fact and suggests that the Staff intends for companies to actively assist proponents in complying with well-established procedural requirements.
Companies Should Continue to Send Deficiency Notices Via Mail (and Email). In spite of the Staff’s well-intended guidance encouraging the use of email, because there can be no guarantee that a proponent will promptly confirm receipt via email, companies seeking certainty should continue to send deficiency letters via a means that enables them to indisputably prove receipt by the proponent (g., overnight mail). That said, some companies may be comfortable with email communications alone depending on the specific shareholder proponent and the nature of their relationship with the company.
The Staff Appears Poised to Enforce the New Ownership Thresholds. Although the 2020 amendments to Rule 14a-8 are now in effect for meetings held after January 1, 2022, the Staff has not yet affirmed or denied any no-action requests seeking relief based on any of the amended Rule 14a-8 requirements. That said, despite litigation[16] suggesting that the Staff should not enforce the amended rules, SLB 14L expressly acknowledges the new tiered ownership thresholds (as part of the revised format provided for proof of ownership letters), suggesting that the Staff may concur with exclusion of proposals based on failure to comply with the new one-, two- and three-year ownership requirements.[17]
The Staff Will Once Again be Positioned as Arbiter of Social Issues. Gone is the company-specific approach to analyzing significance under the ordinary business exclusion, and back in vogue are topically significant policy issues, as determined by the Staff. Determining what constitutes a significant policy issue will be all the more difficult to predict and discern given the Staff’s increased reliance on the shareholder proposal no-action response chart[18] and reluctance to issue response letters explaining their reasoning.[19]
Let’s Call it What it is: Open Season for Environmental and Social Proposals. The Staff’s new guidance is likely to lead to an increase in the submission of social, political and environmental shareholder proposals and to an increase in the number of such proposals being included in proxy statements.

___________________________

[1] See Dollar General Corp. (Mar. 6, 2020).

[2] In ConocoPhillips Co., a decision that was inconsistent with the Staff’s position in recent proxy seasons, the Staff denied a request to exclude a shareholder proposal that requested that the company set emission reduction targets. In its only written response letter of the season on this topic, the Staff indicated that the proposal did not impose a specific method and thus did not micromanage to such a degree that exclusion was warranted under Rule 14a-8(i)(7).

[3] See SLB 14L.

[4] In this regard, and as already described in Gibson Dunn’s client alert of June 21, 2021, the SEC’s recently announced rulemaking agenda highlights the SEC’s near-term focus on prescribing climate change disclosure.

[5] 618 F. Supp. 554 (D.D.C. 1985).

[6] See SLB 14L.

[7] Id.

[8] Id.

[9] See Chair Gary Gensler, Statement regarding Shareholder Proposals: Staff Legal Bulletin No. 14L, SEC (Nov. 3, 2021), available here.

[10] See Commissioner Hester M. Peirce & Commissioner Elad L. Roisman, Statement on Shareholder Proposals: Staff Legal Bulletin No. 14L, SEC (Nov. 3, 2021), available here.

[11] Id. (quoting SLB 14L)

[12] Id.

[13] Id.

[14] See Agency Rule List – Spring 2021 Securities and Exchange Commission, Office of Information and Regulatory Affairs (2021), available here, as discussed in Gibson Dunn’s client alert of August 19, 2021.

[15] In this regard, 37% of all successful no-action requests were granted based on procedural grounds in 2021 and the overall success rate for procedural arguments was 84% and 80% in 2021 and 2020, respectively, as discussed in Gibson Dunn’s client alert of August 19, 2021.

[16] Compl., Interfaith Ctr. on Corp. Responsibility v. SEC, No. 1:21-cv-01620-RBW (D.D.C. June 15, 2021), ECF No. 1.

[17] The Commission’s deadline to submit its response in the aforementioned litigation involving Interfaith Ctr. on Corp. Responsibility, As You Sow and James McRitchie is November 19, 2021.

[18] Available here.

[19] As discussed in Gibson Dunn’s client alert of August 19, 2021, the number of Staff response letters declined significantly in 2021, with the Staff providing response letters only 5% of the time during the 2021 proposal season, compared to 18% in 2020.

The following Gibson Dunn attorneys assisted in preparing this update: Courtney Haseley, Elizabeth Ising, Thomas Kim, Ronald Mueller and Lori Zyskowski.

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

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, [email protected])
Ron Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael Titera – Orange County, CA (+1 949-451-4365, [email protected])
Lori Zyskowski – New York, NY (+1 212-351-2309, [email protected])
Aaron Briggs – San Francisco, CA (+1 415-393-8297, [email protected])
Courtney Haseley – Washington, D.C. (+1 202-955-8213, [email protected])
Julia Lapitskaya – New York, NY (+1 212-351-2354, [email protected])
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, [email protected])
David Korvin – Washington, D.C. (+1 202-887-3679, [email protected])
Geoffrey Walter – Washington, D.C. (+1 202-887-3749, [email protected])

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

Yesterday, the proxy advisory firm Institutional Shareholder Services (“ISS”) proposed and published for comment voting policy changes for the 2022 proxy season. There are five proposed updates that would apply to U.S. companies, including two related to “Say on Climate” proposals and a third related to climate issues.

In addition, ISS is proposing (starting in 2023) to begin issuing negative voting recommendations for directors at all companies with multi-class stock structures. Companies that went public before 2015 would no longer be grandfathered under ISS policy. ISS is requesting comment on whether to take a similar approach for companies that have other “poor” governance practices—specifically, a classified board, or the requirement of a supermajority vote to amend the governing documents.

The proposed U.S. policy changes are available here and are summarized below. Comments on the proposals can be submitted by e-mail to [email protected] until 5 p.m. ET on November 16, 2021. ISS will take the comments into account as part of its policy review and expects to release final changes to its voting policies by or around the end of November. It is important to note that ISS’s final 2022 proxy voting policies may reflect additional changes, beyond those on which ISS is soliciting comment. The final voting policies will apply to shareholder meetings held on or after February 1, 2022, except for policies subject to transition periods.

Comments submitted to ISS may be published on its website, unless requested otherwise in the body of email submissions.

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The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Elizabeth Ising, and Lori Zyskowski.

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

Yesterday, November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) released its long-awaited emergency temporary standard (“ETS”) requiring most American workers to be vaccinated or undergo weekly COVID-19 testing. Importantly, the ETS states that it preempts state and local requirements that might stand in the way of employee vaccination (or that regulate testing protocols), even if it is possible for employers to comply with both those state requirements and the ETS.

The ETS applies to employers with more than 100 employees except in workplaces covered by the Safer Federal Workforce Task Force COVID-19 Workplace Safety: Guidance for Federal Contractors and Subcontractors (the “Task Force Guidance”), which implements Executive Order 14042 for federal contractors. Workplaces covered by that Guidance are not covered by the ETS.

As expected, under the ETS employers with 100 or more employees must require employees to either be vaccinated or present a negative COVID-19 test weekly and wear a face covering when indoors. The ETS also requires employers to pay employees for time spent getting vaccinated and recovering from side effects.

By December 6, employers must comply with all requirements other than testing. This includes establishing a vaccination policy, determining employee vaccination status, providing the requisite paid time off, and ensuring that unvaccinated employees are masked.

Beginning on January 4, 2022, unvaccinated employees must undergo weekly testing. Any employee who has received all doses of the vaccine by January 4 does not have to be tested. The Task Force Guidance for Executive Order 14042 will be revised to postpone the current December 8 vaccination deadline and to require, like the ETS, that employees receive all vaccine doses by January 4.

In issuing the ETS, OSHA has also sought notice and comment, so the ETS may be converted to a “permanent” OSHA standard. Under the OSH Act, ETSs are to be in place for only six months. Comments are due December 6, 2021.

Some states and private employers have already announced that they have or will file litigation regarding the ETS, which could potentially result in a stay or in the ETS being invalidated. Litigation that is already pending could have the same impact on Executive Order 14042. Events in court likely will move quickly in the coming weeks.

OSHA has also published FAQs,[1] a summary,[2] and fact sheet.[3] This alert provides an overview of the ETS contents and timing and previews some of its implications for employers.

Who Does (and Doesn’t) the OSHA ETS Cover?

The ETS applies to “all employers with a total of 100 or more employees at any time” the ETS is in effect.

The ETS does not apply to:

Federal contractor workplaces covered under the Task Force Guidance, which we previously discussed here;
Settings where any employee provides healthcare services or healthcare support services subject to the requirements of the Healthcare ETS, issued in June; and
Employees of covered employers:
- Who do not report to a workplace where other individuals such as coworkers or customers are present;
- While working from home; or
- Who work exclusively outdoors.

Can an Employer Require Testing in Lieu of Vaccination?

Yes. Under the OSHA ETS, an employer must either: (1) require that all employees are vaccinated; or (2) require unvaccinated employees to be regularly tested and wear masks in the workplace.

An employee might be exempted from a vaccination requirement if the employee is entitled to reasonable religious or disability accommodations under federal civil rights laws, vaccination is medically contraindicated, or a medical necessity requires delay.
An employer must ensure that each unvaccinated employee regularly submits a negative COVID-19 test result. Testing frequency for unvaccinated employees depends on whether the employee regularly reports to a workplace or was recently diagnosed with COVID-19:
- If an employee regularly reports to a workplace, he must present a COVID-19 test result at least once every 7 days.
- If an employee usually does not report to a workplace, e.g., he regularly works from home, he must test at least 7 days before returning to the workplace.
- If an employee is diagnosed with COVID-19, by a health care professional or by a positive COVID-19 test result, then the employer must not require that employee to undergo testing for 90 days following the date of the positive test or diagnosis.

Must an Employer Pay for Employees’ Time to Get Vaccinated?

The ETS requires that employers compensate employees for the time it takes to get vaccinated and to recover from vaccination side effects. This includes:

Up to four hours paid time, including travel time, at the employee’s regular rate of pay for each vaccination dose; and
Paid sick leave for a “reasonable” amount of time to recover from side effects.
- Employers may require employees to use accrued paid sick leave benefits for recovery from vaccination, but may not require employees to use existing leave entitlements for the time to get vaccinated.
- But if an employee does not have accrued paid sick leave needed to recover from vaccine side effects, an employer may not require the employee to accrue negative paid sick leave or borrow against future paid sick leave.

Must an Employer Pay for Testing Costs?

The ETS does not require employers to pay for any costs associated with testing; however, other laws, regulations, or collective bargaining agreements may require an employer to pay for testing:

California’s Department of Industrial Relations has stated that employers are responsible for the costs of employer-mandated COVID-19 testing under the state’s reimbursable business expense law.
Some other states have business expense reimbursement laws or prohibitions on requiring employees to pay for medical testing in certain circumstances. These types of laws might be interpreted to place the burden on employers to pay for mandated COVID-19 tests.

To What Extent Does the ETS Preempt State Laws?

The ETS states that it preempts all state “workplace requirements relating to the occupational safety and health issues of vaccination, wearing face coverings, and testing for COVID-19, except under the authority of a Federally-approved State Plan.” This includes all “inconsistent state and local requirements relating to these issues . . . regardless of the number of employees.” In the preamble to the ETS, OSHA was clear that it intends for the ETS to preempt state or local requirements that stand in the way of vaccination, testing, or masking, even if it is possible to comply with both the ETS and those state or local requirements. The sweeping language also may be interpreted to preempt state and local anti-discrimination laws that are more accommodating than the federal standard.

The ETS does not purport to preempt more protective generally applicable state and local requirements that apply to the public at large. Such measures might include generally applicable state laws such as vaccine passports and mask mandates or more stringent requirements imposed by OSHA-approved state plans.

Are Masks Required for Unvaccinated Employees?

Under the ETS, employers must ensure that any employee who is not fully vaccinated wear a face covering when indoors or when occupying a vehicle with another person for work purposes.

The ETS includes an exception to the face covering requirement when an employee is alone in a closed room; for a limited time while eating or drinking; for a limited time for identification purposes; when an employee is wearing a respirator or facemask (such as a mask for medical procedures); or where the employer can show that the use of face coverings is not feasible or creates a greater hazard.

The ETS itself “does not require the employer to pay for any costs associated with face coverings.” But, as with other COVID-related costs, other laws or employment agreements may require that employers pay for or provide face coverings.

Notably, the ETS does not require fully vaccinated employees to wear face coverings indoors, even in areas of substantial or high transmission. But other laws or regulations may.

What Recordkeeping Requirements Does the ETS Impose?

The ETS requires employers to maintain a record and roster of each employee’s vaccination status and preserve these records and rosters while the ETS remains in effect. Critically, the ETS provides an exemption from this requirement for employers that previously ascertained (before the ETS was published) and retained records of employee vaccination status through another form of proof (including self-attestation). The ETS also requires employers to make available, for examination and copying by an employee or anyone with written authorization from the employee, the employee’s COVID-19 vaccine documentation and any COVID-19 test results for the employee. Additionally, employers must make available to an employee (or their representative) the aggregate number of fully vaccinated employees and total number of employees at the workplace.

What Else Does the ETS Require?

Employers must require employees to “promptly notify the employer” of a positive test result, remove any employee who receives a positive test from the workplace until the ETS return-to-work criteria are met, and report work-related COVID-19 fatalities and in-patient hospitalizations. The CDC document, “Key Things to Know About COVID-19 Vaccines,” must be provided to all employees, along with the employer’s policies established to comply with the ETS, OSHA’s anti‑discrimination and anti‑retaliation requirements, and information about OSHA’s penalties for supplying false statements or documentation.

What Are the Implications for Federal Contractor Employers?

As noted above, the ETS does not apply to workplaces covered by the Task Force Guidance for federal contractors. But to the extent that a federal contractor has workplaces that are not covered by the Task Force Guidance, it will need to ensure compliance with the ETS for those sites.

The Administration announced that the Task Force Guidance will be revised to mirror the ETS by requiring that covered employees have received all shots by January 4, 2022. That will mean that federal contractor employees, like employees covered by the ETS, would not need to meet the Task Force definition of “fully vaccinated” until January 18, 2022.

How Does the ETS Interact with Accommodation Requirements?

The ETS acknowledges that federal law requires reasonable accommodations for employees who cannot be vaccinated because of a religious belief or medical condition. Employers that elect to comply with the ETS by allowing employees to decide whether to get vaccinated or be tested weekly may not receive many accommodation requests because employees who cannot be vaccinated for medical or religious reasons can choose the weekly testing option.

By contrast, employers that elect to comply with the ETS by adopting a vaccination mandate (rather than opting for testing in lieu) should anticipate and prepare for accommodation requests from their workforces. OSHA predicts that 5% of employees will request accommodations from vaccine requirements, but the actual number may be significantly higher for certain segments of the workforce.

Employers that mandate vaccination should have robust protocols for reviewing and resolving accommodation requests, and should anticipate that such requests will begin immediately upon announcement of their vaccine mandates. For some employers, being prepared to handle accommodation requests will necessitate additional HR personnel training on compliance with federal law in the context of vaccines.

Employers should be aware that the ETS masking and testing requirements for unvaccinated employees will apply to employees who qualify for accommodations. Also of note, the ETS “encourages employers to consider the most protective accommodations such as telework, which would prevent the employee from being exposed at work or from transmitting the virus at work.” Particularly where remote work is not a viable accommodation, compliance with the masking and testing requirements may inform whether an employer can provide accommodations without incurring “undue hardship.”

Additional information about compliance with federal law in the context of employer-mandated vaccines can be found in our client alerts on these topics.

What Impact Could Legal Challenges Have?

Some court challenges to the ETS already have been filed, and more are likely. The challenges are being filed directly in federal courts of appeals, and the challengers are likely to soon seek a stay of the ETS’s requirements pending a decision on the merits. Cases filed in different courts will be consolidated and assigned to a single court by lottery.

The litigation bears watching, since ETSs historically do not have a good track record on judicial review: Of the six challenged in court, only two have been upheld even in part. In the cases now being filed, challengers are likely to argue that OSHA has not met the standard to issue the ETS as an emergency rulemaking without notice and comment. They also are likely to challenge OSHA’s authority to promulgate a vaccine-or-test mandate at all.

In addition, at least twenty-five states have brought challenges to the federal contractor vaccine mandate, which may result in a preliminary injunction prohibiting enforcement of those requirements. If the federal contractor mandate is enjoined, but the ETS is not stayed (or a stay is promptly lifted), federal contractor employers may have to comply with the ETS instead.

Employers should watch these lawsuits and other ETS-related developments carefully. Employers should also continue to monitor for new Task Force Guidance if they are federal contractors.

_____________________________

[1] https://www.osha.gov/coronavirus/ets2/faqs.

[2] https://www.osha.gov/sites/default/files/publications/OSHA4162.pdf.

[3] https://www.osha.gov/sites/default/files/publications/OSHA4161.pdf.

The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jason C. Schwartz, Katherine V.A. Smith, Jessica Brown, Lauren Elliot, Amanda C. Machin, Zoë Klein, Andrew Kilberg, Emily Lamm, Hannah Regan-Smith, Marie Zoglo, Josh Zuckerman, Nicholas Zahorodny, and Kate Googins.

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, the authors, or any of the following in the firm’s Administrative Law and Regulatory or Labor and Employment practice groups.

Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543, [email protected])
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, [email protected])

Labor and Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, [email protected])
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, [email protected])

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

On November 1, 2021, the President’s Working Group on Financial Markets,[1] joined by the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), issued its expected report (Report) on stablecoins, a type of digital asset that has recently grown significantly in market capitalization and importance to the broader digital asset markets.[2]

Noting gaps in the regulation of stablecoins, the Report makes the following principal recommendations:

Congress should promptly enact legislation to provide a “consistent and comprehensive” federal prudential framework for stablecoins –
- Stablecoin issuers should be required to be insured depository institutions
- Custodial wallet providers that hold stablecoins on behalf of customers should be subject to federal oversight and risk-management standards
- Stablecoin issuers and wallet providers should be subject to restrictions on affiliations with commercial entities.
In the absence of Congressional action, the Financial Stability Oversight Council (FSOC) should consider steps to limit stablecoin risk, including designation of certain stablecoin activities as systemically important payment, clearing, and settlement activities.

The Report thus calls for the imposition of bank-like regulation on the world of stablecoins, and it does so with a sense of urgency. Below we summarize the Report’s key conclusions and recommendations, and then preview the path forward if the FSOC is to take up the Report’s call to action.

Stablecoins

A stablecoin is a digital asset that is created in exchange for fiat currency that a stablecoin issuer receives from a third-party; most stablecoins offer a promise or expectation that the stablecoin can be redeemed at par on request. Although certain stablecoins are advertised as being backed by “reserve assets,” there are currently no regulatory standards governing such assets, which can range on the risk spectrum from insured bank deposits and Treasury bills to commercial paper, corporate and municipal bonds, and other digital assets. Indeed, in October, the CFTC took enforcement action against the issuers of US Dollar Tether (USD Tether) for allegedly making untrue or misleading statements about USD Tether’s reserves.[3]

The market capitalization of stablecoins has grown extremely rapidly in the last year; according to the Report, the largest stablecoin issuers had, as of October, a market capitalization exceeding $127 billion.[4] The Report states that stablecoins are predominantly used in the United States to facilitate the trading, lending, and borrowing of other digital assets – they replace fiat currency for participants in the trading markets for Bitcoin and other digital assets and allow users to store and transfer value associated with digital asset trading, lending, and borrowing within distributed ledger environments.[5] The Report further notes that certain stablecoin issuers believe that stablecoins should be used in the payment system, both for domestic goods and services, and for international remittances.[6] Stablecoins, the Report asserts, are also used as a source of collateral against which participants in the digital assets markets can borrow to fund additional activity, “sometimes using extremely high leverage,” as well as to “earn yield,” by using stablecoins as collateral for extending loans and engaging in margined transactions.[7]

Perceived Risks of Stablecoins

The Report views the stablecoin market as currently having substantial risks not subject to regulation.

First, the Report asserts that stablecoins have “unique risks” associated with secondary market activity and market participants beyond the stablecoin issuers themselves, because most market participants rely on digital asset trading platforms to exchange stablecoins with national currencies and other stablecoins.[8] In addition, the Report states that the active trading of stablecoins is part of an essential stabilization mechanism to keep the price of the stablecoin close to or at its pegged value.[9] It further asserts that digital asset trading platforms typically hold stablecoins for customers in non-segregated omnibus custodial wallets and reflect trades on internal records only, and that such platforms and their affiliates may also engage in active trading of stablecoins and as market makers.[10]

Second, the Report argues that stablecoins play a central role in Decentralized Finance (DeFi). It gives two examples – first, stablecoins often are one asset in a pair of digital assets used in “automated market maker” arrangements, and second, they are frequently “locked” in DeFi arrangements to garner yield from interest payments made by persons borrowing stablecoins for leveraged transactions.[11]

As a result, the Report describes a range of risks arising from stablecoins, including risks of fraud, misappropriation, and conflicts of interest and market manipulation; the risk that failure of disruption of a digital asset trading platform could threaten stablecoins; the risk that failure or disruption of a stablecoin could threaten digital asset trading platforms; money laundering and terrorist financing risks; risks of excessive leverage on unregulated trading platforms; risks of non-compliance with applicable regulations; risks of co-mingling trading platform funds with funds of customers; risks flowing from information asymmetries and market abuse; risks from unsupervised trading; risks from distributed-ledger based arrangements, including governance, cybersecurity, and other operational risks; and risks from novel custody and settlement processes.[12]

The Report also notes the risk of stablecoin “runs” that could occur upon loss of confidence in a stablecoin and the reserves backing it, as well as risks to the payment system generally if stablecoins became an important part of the payment system. The Report notes that “unlike traditional payment systems where risk is managed centrally by the payment system operator,” some stablecoin arrangements feature “complex operations where no single organization is responsible or accountable for risk management and resilient operation of the entire arrangement.”[13]

Finally, the Report asserts that the rapid scaling of stablecoins raises three other sets of policy concerns. First is the potential systemic risk of the failure of a significant stablecoin issuer or key participant in a stablecoin arrangement, such as a custodial wallet provider.[14] Second, the Report points to the business combination of a stablecoin issuer or wallet provider with a commercial firm as raising economic concentration concerns traditionally associated with the mixing of banking and commerce.[15] Third, the Report states that if a stablecoin became widely accepted as a means of payment, it could raise antitrust concerns.[16]

Recommendations

The Report’s key takeaway is that the President’s Working Group, the OCC and the FDIC believe that there are currently too many regulatory gaps relating to stablecoins and DeFi. The Report does note that, in addition to existing anti-money laundering and anti-terrorist financing regulations, stablecoin activities may implicate the jurisdiction of the SEC and CFTC, because certain stablecoins may be securities or commodities. Indeed, the CFTC just recently asserted that Bitcoin, Ether, Litecoin and USD Tether are commodities.[17] Nonetheless, the Report states that as stablecoin markets continue to grow, “it is essential to address the significant investor and market risks that could threaten end users and other participants in stablecoin arrangements and secondary market activity.”[18]

The Report therefore calls for legislation to close what it sees as the critical gaps. First, it argues that stablecoin issuance, and the related activities of redemption and maintenance of reserve assets, should be limited to entities that are insured depository institutions: state and federally chartered banks and savings associations that are FDIC insured and have access to Federal Reserve services, including emergency liquidity.[19] Legislation should also ensure that supervisors have authority to implement standards to promote interoperability among stablecoins.[20] Given the global nature of stablecoins, the Report contends that legislation should apply to stablecoin issuers, custodial wallet providers, and other key entities “that are domiciled in the United States, offer products that are accessible to U.S. persons, or that otherwise have a significant U.S. nexus.”[21]

Second, given the Report’s perceived risks of custodial wallet providers, the Report argues that Congress should require those providers to be subject to “appropriate federal oversight,” including restricting them from lending customer stablecoins and requiring them to comply with appropriate risk-management, liquidity, and capital requirements.[22]

Third, because other entities may perform activities that are critical to the stablecoin arrangement, the Report argues that legislation should provide the supervisor of a stablecoin issuer with the authority to require any entity that performs activities “critical to the functioning of the stablecoin arrangement” to meet appropriate risk-management standards, and give the appropriate regulatory agencies examination and enforcement authority with respect to such activities.[23]

Finally, the Report advocates that both stablecoin issuers and wallet providers should, like banks, be limited in their ability to affiliate with commercial firms.[24]

Interim Measures

The Report characterizes the need for legislation as “urgent.” While legislation is being considered, the Report recommends that the Financial Stability Oversight Council (FSOC) consider taking actions within its jurisdiction, such as designating certain activities conducted within stablecoin arrangements as systemically significant payment, clearing, and settlement activities.[25] The Report states that such designation would permit the appropriate federal regulatory agency to establish risk-management requirements for financial institutions[26] that engage in the designated activities.

Such designations would occur pursuant to Title VIII of the Dodd-Frank Act, and it would be the first time that the FSOC would make them.[27] The procedure that the FSOC must follow is set forth in Title VIII, and, absent an emergency, it appears that it would not be a quick one. First, the FSOC must consult with the relevant federal supervisory agencies and the Federal Reserve.[28] Next, it must provide notice to the financial institutions whose activities are to be designated, and offer those institutions the opportunity for a hearing.[29] The institutions may then choose to appear, personally or through counsel, to submit written materials, or, at the sole discretion of FSOC, to present oral testimony or argument.[30] The FSOC must approve the activity designation by a vote of at least two-thirds of its members, including an affirmative vote by the Chair.[31] The FSOC must consider the designation in light of the following factors: (i) the aggregate monetary value of transactions carried out through the activity, (ii) the aggregate exposure of the institutions engaged in the activity to their counterparties, (iii) the relationship, interdependencies, or other interactions of the activity with other payment, clearing, or settlement activities, (iv) the effect that the failure of or a disruption to the activity would have on critical markets, financial institutions, or the broader financial system, and (v) any other factors that the FSOC deems appropriate.[32]

Conclusion

With the Report, Treasury and the relevant federal agencies – the Federal Reserve, the SEC, CFTC, OCC, and FDIC – have made it clear that they believe that the risks of stablecoin activities are not fully mitigated by existing regulation. Their recommendations for legislation look principally to bringing stablecoins within the banking system and to bank regulation as a means of addressing those risks. It is an open question, however, whether Congress will act, much less with the urgency that the Report desires. Action by the FSOC, moreover, will almost certainly take some time, given the statutory designation procedures. In the near term, therefore, it is likely to fall to the existing agencies with some jurisdiction over stablecoins – the CFTC and SEC – to address the gaps with the tools at their disposal.[33]

__________________________

[1] The Working Group comprises representatives of the Treasury Department (Treasury), Board of Governors of the Federal Reserve System (Federal Reserve), the Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC).

[2] See https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.

[3] See https://www.gibsondunn.com/digital-asset-developments-us-commodity-futures-trading-commission-asserts-that-tether-is-a-commodity/.

[4] Report, at 7. In addition to USD Tether, the most circulated stablecoins are USD Coin, Binance USD, Dai Stablecoin, and TrueUSD. All are pegged to the U.S. dollar.

[5] Id. at 8.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at 9.

[12] Id. at 10-11.

[13] Id. at 12-13.

[14] Id. at 14.

[15] Id.

[16] Id.

[17] See https://www.gibsondunn.com/digital-asset-developments-us-commodity-futures-trading-commission-asserts-that-tether-is-a-commodity/.

[18] Report, at 11.

[19] Id. at 16. Unless the insured depository institution in question is an industrial bank, requiring the stablecoin issuer to be an insured depository institution would also be a requirement for the issuer’s parent company, if any, to be a bank or thrift holding company supervised and regulated by the Federal Reserve.

[20] Id.

[21] Id. n. 29.

[22] Id. at 17.

[23] Id.

[24] Id.

[25] Id. at 18.

[26] Title VIII defines “financial institution” broadly to reach “any company engaged in activities that are financial in nature or incidental to a financial activity, as described in section 4 of the Bank Holding Company Act,” in addition to banks, credit unions, broker-dealers, insurance companies, investment advisers, investment companies, futures commission merchants, commodity pool operators and commodity trading advisers.

[27] The FSOC has previously undertaken designations of systemically significant nonbank financial companies under Title I of the Dodd-Frank Act and systemically significant financial market utilities under Title VIII of the Dodd-Frank Act.

[28] 12 U.S.C. § 5463(c)(1).

[29] Id. § 5463(c)(2).

[30] Id. § 5463(b)(1).

[31] Id. § 5463(c)(3).

[32] Id. § 5463(a)(2).

[33] In a press release issued just after the Report, the Director of the Consumer Financial Protection Bureau, Rohit Chopra, stated that “stablecoins may . . . be used for and in connection with consumer deposits, stored value instruments, retail and other consumer payments mechanisms, and in consumer credit arrangements. These use cases and others trigger obligations under federal consumer financial protection laws, including the prohibition on unfair, deceptive, or abusive acts or practices.” See https://www.consumerfinance.gov/about-us/newsroom/statement-cfpb-director-chopra-stablecoin-report/.

The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long and Jeffrey Steiner.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the author, or any of the following members of the firm’s Financial Institutions practice group:

Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Mylan L. Denerstein – New York (+1 212-351- 3850, [email protected])
William R. Hallatt – Hong Kong (+852 2214 3836, [email protected])
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Matthew Nunan – London (+44 (0) 20 7071 4201, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])

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

Independent compliance monitors are typically appointed to assess the sufficiency and effectiveness of a company’s compliance program and adherence to the terms of a settlement with an enforcement authority, like the SEC or DOJ. Compliance monitors have been a part of the SEC’s and DOJ’s enforcement arsenal for over two decades, and corporate monitorships are now a mainstay of corporate resolutions. Although monitors have been an oversight vehicle for the SEC and DOJ for years, there has been an explosion of their employment by other governmental agencies.

Monitors are now a feature of enforcement by the Environmental Protection Agency (EPA), the Federal Highway Safety Administration (FHSA), the Federal Trade Commission (FTC), and the Food and Drug Administration (FDA), as well as for non-U.S. authorities, like the World Bank and the United Kingdom’s Financial Conduct Authority. Understanding the requirements and expectations of a monitorship, and how to manage the associated costs and burdens on operations, are crucial to achieving a successful monitorship and compliance enhancement process.

Our panelists have served as DOJ-appointed monitors and DOJ-appointed counsel to the monitor, and have counseled numerous companies under external compliance monitors. As former DOJ officials, they also bring unique perspectives regarding prosecutors’ and regulators’ expectations for various facets of a corporate compliance program.

Please join the panel discussion, which will include:

Use of monitorships in DOJ and SEC resolutions – statistics and terms (including hybrid monitorships)
- Benczkowski Memo and monitorship selection
- DOJ goals in monitorship use and selection
Being the monitor – goals and strategies
Strategies for companies that have a monitorship
Strategies to avoid the imposition of a monitor

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PANELISTS:

F. Joseph Warin is Co-Chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and Chair of the Washington, D.C. office’s 200-person Litigation Department. He holds the distinguished position as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA; Siemens AG; and Alliance One International. Mr. Warin also served as post-resolution counsel to Innospec, Weatherford, and Diebold, during their FCPA monitorships.

Michael S. Diamant is a partner in the Washington, D.C. office. He helped to execute two major, multi-year DOJ/SEC-appointed compliance monitorships, each of which ended successfully, on-time, and with praise from DOJ and SEC attorneys for the monitorship team’s effectiveness. He also served as post-resolution counsel to several companies during their monitorships, helping them to successfully navigate the process and ensure successful and timely completion of the monitorship. Mr. Diamant’s practice focuses on white collar criminal defense, internal investigations, and corporate compliance, and he regularly advises major corporations on the structure and effectiveness of their compliance programs.

Kristen Limarzi is a partner Gibson Dunn’s Antitrust Practice Group, based in Washington, D.C. She previously served as the Chief of the Appellate Section of the DOJ’s Antitrust Division, where she litigated challenges to the first antitrust compliance monitor imposed following an Antitrust Division civil enforcement action. Leveraging her experience as a top government enforcer, Kristen’s practice focuses on representing clients in merger and non-merger investigations before the DOJ, the Federal Trade Commission, and foreign antitrust enforcers, as well in as appellate and civil litigation.

Patrick F. Stokes is Co-Chair of the Anti-Corruption and FCPA Practice Group. Previously, he headed the DOJ’s FCPA Unit, managing the DOJ’s FCPA enforcement program and all criminal FCPA matters throughout the United States, covering every significant business sector, and including investigations, trials, and the assessment of corporate anti-corruption compliance programs and monitorships. His practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud.

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Los Angeles partners James Zelenay Jr. and Eric Vandevelde and associate Tim Biché are the authors of “DOJ turns to familiar tool to address cybersecurity threats” [PDF] published by the Daily Journal on November 1, 2021.