Washington, D.C. partner David Fotouhi is the author of “9th Circ. Chromium Ruling May Expand Water System Liability,” [PDF] published by Law360 on October 14, 2021.
Second of four industry-specific programs
The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the government contracting sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.
Please join us to discuss developments in the FCA, including:
- The latest trends in FCA enforcement actions and associated litigation affecting government contractors;
- Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
- New proposed amendments to the FCA introduced by Senator Grassley; and
- The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.
View Slides (PDF)
PANELISTS:
Jonathan M. Phillips is a partner in the Washington, D.C. office where he is co-chair of the False Claims Act/Qui Tam Defense practice. Mr. Phillips focuses on compliance, enforcement, and litigation in the government contracting and health care fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.
Nicola Hanna is a partner in the Los Angeles office and co-chair of the firm’s global White Collar Defense and Investigations practice. Mr. Hanna previously served as the presidentially appointed and Senate-confirmed United States Attorney for the Central District of California for three years. In this role, he was the chief federal law enforcement officer for the Los Angeles-based district, the largest Department of Justice office outside of Washington, D.C., and oversaw approximately 280 Assistant U.S. Attorneys. Under his leadership, the Central District brought and litigated some of the most impactful cases in the country and recovered nearly $4.5 billion in criminal penalties, civil recoveries, forfeited assets, and restitution. During his tenure as U.S. Attorney, Mr. Hanna served as the Chair of the Attorney General’s Advisory Committee’s White Collar Fraud Subcommittee. He also was a member of the Department of Justice Corporate Enforcement and Accountability Working Group, and one of two U.S. Attorneys on the Task Force on Market Integrity and Consumer Fraud chaired by the Deputy Attorney General.
James Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.
Lindsay Paulin is an associate in the Washington, D.C. office. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, and government investigations under the False Claims Act. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and insurance.
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 hours, of which 1.5 credit hours 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 hours.
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.
RELATED WEBCASTS IN THIS SERIES:
- The False Claims Act – 2021 Update for Financial Services (October 6, 2021)
- The False Claims Act – 2021 Update for Drug & Device Manufacturers (October 20, 2021)
- The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)
On September 10, 2021, the Democratic majority of the United States House Committee on Ways and Means (“House Ways and Means Committee”) released draft legislation of its contributions to the Build Back Better Act (the “Legislative Recommendations”), designed to be enacted through the budget reconciliation process. On September 15, 2021, following close to 40 hours of debate over the course of four days, the House Ways and Means Committee advanced the Legislative Recommendations. Ten days later, on September 25, 2021, the House Budget Committee advanced the Legislative Recommendations. If enacted into law, the Legislative Recommendations would substantially extend and expand available clean energy tax incentives, helping to bring President Biden’s campaign promise to “reform and extend” these incentives to “unleash a clean energy revolution in America” closer to fruition.[1]
The Legislative Recommendations materially extend existing incentives, including the investment tax credit (“ITC”), the production tax credit (“PTC”), and the carbon capture and sequestration credit, including incentives that had begun (or were about to begin) to expire or phase down. These extensions will make the incentives available well into the next decade, while at the same time imposing new requirements designed to enhance the benefit to U.S. workers from spending on clean energy infrastructure (including prevailing wage and apprenticeship requirements). The Legislative Recommendations also expand the scope and availability of incentives, including making the ITC available for standalone energy storage and energy transmission assets and introducing new incentives for the production of clean hydrogen.
Perhaps most importantly, investors would have the option to elect to treat the applicable credit as a payment made against the tax imposed by subtitle A (the so-called “direct pay” option), and this option would be available for classes of investors (i.e., tax-exempt entities, taxpayers with substantial losses, and certain governmental entities) that have historically not been able to benefit directly from tax credits. If enacted, the “direct pay” option may make it easier for taxpayers without substantial taxable income (and an attendant need for tax credits) to make equity investments in clean energy projects.
In addition, the Legislative Recommendations propose to make income generated by various types of renewable energy assets (as well as facilities that install sufficient carbon capture equipment) “qualifying income” for “publicly traded partnerships,” opening up another source of capital for the development of clean energy projects.
Under budget reconciliation, Democrats only need 50 votes in the Senate to pass legislation through an equally divided Senate (the Vice President breaks the tie). But Democratic progressives and moderates disagree on the price tag and the scope of the Build Back Better Act. For the Legislative Recommendations to become law, they will need to pass muster with key Democratic moderates in both the House and Senate. If the Legislative Recommendations are enacted into law, we would expect that they will spur significant new investment in clean energy projects, providing increased certainty in an area of the law that has historically been subject to year-end stopgap extensions and a complicated patchwork of ever-changing and unpredictable qualification rules.
Direct Pay
The PTC, ITC, and section 45Q[2] carbon capture and sequestration credits (each of which is discussed in greater detail in a later subsection) have historically been non-refundable credits, meaning that substantial taxable income was generally a necessary prerequisite to benefit from the incentives.[3] The Legislative Recommendations would take steps to change that through a “direct pay” option, effective for projects whose placed in service date is after December 31, 2021. Under the “direct pay” option, an owner of a clean energy facility that would otherwise qualify for certain credits (including the ITC (including for transmission property), the PTC, the carbon capture and sequestration credit, and the advanced energy project credit) is authorized to make an irrevocable “direct pay” election. If the owner makes such an election, the owner will be treated as having paid tax in an amount equal to the credit amount (such that the investor is entitled to an overpayment or refund to the extent the deemed payment exceeds its tax liability).[4] In addition, partnerships and S corporations (i.e., entities not subject to entity-level income tax) are eligible to receive “direct pay” payments. The Legislative Recommendations provide that such payments will be made directly to the partnership or S corporation (rather than to their partners or shareholders).
The irrevocable (it appears, solely for a particular taxpayer with respect to a particular year) “direct pay” election would be required to be made no later than the due date (including extensions) for the return of tax for the taxable year for which the applicable credit is determined. Under the Legislative Recommendations, it appears (but is not entirely clear) that direct pay elections will not be able to be made on a facility-by-facility basis. The Legislative Recommendations provide even less clarity as to whether taxpayers will be able to make elections on a credit-by-credit basis. Further legislative clarity on these points would be useful, although the Secretary of the Treasury is legislatively authorized to address the time and manner for making the direct pay election and so may have some flexibility to provide clarification through regulatory guidance.
In addition to making renewable energy incentives available to entities lacking sufficient taxable income, the “direct pay” option would make such incentives available to various classes of investors that have historically not benefited directly from them, including state and local governments, Native American tribal governments, and tax-exempt organizations.
The “direct pay” option would, however, be subject to various restrictions and limitations. Perhaps most notable is the “domestic content” requirement, which focuses on whether the facility is composed of iron, steel or manufactured products that were produced in the United States, where a “manufactured product” is deemed manufactured in the United States if not less than 55 percent of the total cost of the components are attributable to components mined, produced or manufactured in the United States (the “Domestic Content Requirement”). This requirement would phase in over time, first applying to facilities whose construction begins in 2024 (which would be subject to a ten percent haircut if the Domestic Content Requirement was not met), gradually ramping up in 2025 (projects starting construction in 2025 would be subject to a 15 percent haircut), and then becoming subject to a cliff in 2026 (when projects must meet the Domestic Content Requirement or face the complete loss of any “direct pay” benefit). While there is a long onramp to applicability of the Domestic Content Requirement and the Secretary of the Treasury is permitted to waive the “domestic manufacture” requirement for projects the construction of which starts later in the decade, these new requirements could become a material impediment to the utility of the “direct pay” option.
In addition, the combination of the irrevocability of the “direct pay” election and the Domestic Content Requirement may deter taxpayers from the “direct pay” option. If a taxpayer elects into the “direct pay” option but fails to satisfy the Domestic Content Requirements, such taxpayer would not only be ineligible to receive the full amount of the “direct payment,” but would also apparently lose its ability to claim any alternative tax credit (e.g., the PTC, ITC, and section 45Q credits), at least for the taxable year for which the election was made.[5] Had the taxpayer not made the “direct pay” election, such credits would, at the very least, have been available to the taxpayer.
Moreover, the Legislative Recommendations clarify that direct payments elected with respect to ITCs will be subject to recapture and basis adjustment rules similar to the existing ITC rules.
In general, the “direct pay” option would be expected to reduce the need for tax-equity investors (i.e., investors with significant taxable income that have the ability to utilize tax credits) to partner with developers to monetize clean energy tax credits. But tax-equity financing would still yield benefits because a tax-equity investor may be willing to monetize not just the federal clean energy tax incentives produced by a renewable energy project, but also the future cash flows, depreciation deductions, and other state-level incentives resulting from that project. Tax-equity financing could also provide timing benefits, as tax-equity investors generally fund before (in the case of the ITC) or shortly after (in the case of the PTC) a project is placed in service, whereas the “direct pay” payment would be a refund of a tax deemed paid, with the tax not being deemed paid until the later of the due date of the tax return for the taxable year to which the “direct pay” payment relates or the date on which the return is actually filed, resulting in a delay of cash payment to sponsors until such time. Moreover, tax-equity investors can also effectively offset tax credits received under the ITC and PTC regimes against estimated tax payments, so the “direct pay” option may result in the loss of an additional timing benefit available to some taxpayers.
In addition, the Legislative Recommendations provide that the Secretary of the Treasury may require such information or registration as the Secretary determines is necessary or appropriate for purposes of preventing duplication, fraud, improper payments, or excessive payments under these provisions. Drawing on regulatory authority to prevent any “direct payment” from exceeding the credit to which a taxpayer would otherwise be entitled, we would anticipate that the Secretary would clarify that other limitations imposed under the U.S. Internal Revenue Code, as amended (the “Code”), and any applicable Treasury Regulations (including, for example, the limitation in section 38(c) on the portion of a taxpayer’s tax liability that can be reduced through the general business credit (which includes the energy credit)) to apply to direct payments. And, if the Secretary determines that there has been an excessive payment, a penalty is imposed (in an amount equal to the sum of the excessive payment plus 20 percent).
Furthermore, given the expected size of some of the refund claims contemplated by the “direct pay” arrangement, it is uncertain whether or not such claims may in the future be subjected to mandatory review by the Congressional Joint Committee on Taxation (the “JCT”). Treasury Regulations exclude refunds of overpayments (such as estimated tax payments and withholdings reported on original returns) from JCT review. The Internal Revenue Service has interpreted the applicable Treasury Regulations to exclude all refundable credits reported on original returns as well, but historically there have been few, if any, refundable business credits. The U.S. Treasury Inspector General for Tax Administration has prepared a report that criticizes the existing Treasury Regulations on this matter, which notes that the JCT should review more original returns. Making PTCs and ITCs refundable and adding the “direct pay” option could significantly increase the pressure to move that issue forward and require JCT review of original returns claiming PTC and ITC refund claims and claims under the “direct pay” option.
Expansion and Extension of Renewable Electricity Production Credit (PTC) under Section 45
The PTC available to taxpayers under section 45 of the Code applies to “qualified facilities” (as currently defined in section 45 of the Code) at a specified percentage of certain credit amounts (as adjusted by the “inflation adjustment factor” in section 45(e)(2), the “PTC Credit Amounts”).
Under the current PTC regime, the full PTC is only available for projects the construction of which began by the end of 2016 (with the PTC phasing down for projects on which construction began in 2017 or later).
The Legislative Recommendations would extend the duration of the PTC for more than a decade, and expand the scope and amount of the credit in various respects, but would also impose new requirements that need to be satisfied in order to qualify for the credit.
In terms of the duration of the credit, for projects beginning construction between January 1, 2022 and December 31, 2031 (and for projects the construction of which began in 2020 or 2021, but only if those facilities are placed in service in 2022 or later), the credit would be available at 100 percent of the PTC Credit Amounts. This 100 percent credit would be a boon for taxpayers relative to the current regime, given that the PTC was going to be completely unavailable to projects beginning construction in 2022 or later, and (as noted) projects the construction of which began in 2017 or later were subject to phaseouts (e.g., a 40 percent reduction for a 2021 start of construction project). Importantly, however, the Legislative Recommendations do not extend the full PTC to projects the construction of which began prior to 2020. While this may be a drafting glitch, if the Legislative Recommendations are enacted in their current form, we would expect that taxpayers who already began construction on a project (under the flexible regulatory “begun construction” guidance) would have incentives to try to take available steps to abandon or otherwise recommence the work that was done previously on such project, and in light of the placed in service rule for 2020 or 2021 start of construction projects, we would expect taxpayers to delay placing in service such projects until 2022 where feasible to benefit from being able to claim the credit at a 100 percent rate.
Under the Legislative Recommendations, the PTC would be subject to a gradual phaseout beginning more than a decade in the future, with a 20 percent phaseout for projects beginning construction during the year 2032, 40 percent for projects beginning construction during 2033, and a complete phaseout for projects beginning construction after December 31, 2033.
Beyond its temporal expansion, the Legislative Recommendations would also expand the scope of projects to which the PTC is available. The Legislative Recommendations permit credits for electricity generated by solar power for the first time in nearly two decades, at a PTC Credit Amount of 2.5 cents per kilowatt hour for facilities placed in service after December 31, 2021 and the construction of which begins before January 1, 2034. In addition, the Legislative Recommendations contain proposed section 45W, which creates a PTC for zero-emission nuclear power equal to the amount by which (1) the product of (a) 1.5 cents multiplied by (b) the kilowatt hours produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year, exceeds (2) the “reduction amount” for such taxable year. The “reduction amount” is equal to the lesser of subparagraph (1) above, or 80 percent of the excess of (A) the gross receipts from any electricity produced by such qualified nuclear power facility and sold to an unrelated person during the taxable year, over (B) the product of (i) 2.5 cents and (ii) the figure calculated in subparagraph (b) above.
As part of an effort to incentivize domestic manufacturing, the Legislative Recommendations would create a bonus for certain projects, increasing the applicable PTC Credit Amount by ten percent for any qualified facility that satisfies the Domestic Content Requirement. This incentive approach deviates from the “direct pay” rules (which, as described previously, penalize taxpayers who place in service a facility that would otherwise be eligible for PTCs, make a “direct pay” election, but fail to satisfy the Domestic Content Requirement).
As noted, however, in addition to expanding the PTC in various respects, the Legislative Recommendations would impose new requirements to qualify for the full PTC, subjecting projects that do not satisfy certain prevailing wage and apprenticeship requirements to a substantial 80 percent reduction to the otherwise available PTC Credit Amounts. Such requirements would apply broadly, to any project with a maximum net output of at least one megawatt, the construction of which begins on or after the date the Legislative Recommendations are signed into law.
The proposed wage requirements (the “Prevailing Wage Requirements”) in the Legislative Recommendations would require the taxpayer to provide written certification to the government that all laborers and mechanics employed in the construction (and, for the ten-year period beginning on the date of service, alteration or repair) of a qualified facility are paid wages at rates not less than the prevailing rates on projects of similar character in the locality, as determined by the Secretary of Labor. If a taxpayer underpays its employees and its available PTC is slashed (to 20 percent of the otherwise available credit amount) as a result, it could cure such violation by both (1) compensating each of its employees that worked on the project in an amount equal to the sum of (a) the difference between the actual wages paid during the applicable period and the amount of wages required to be paid under the Legislative Recommendations, and (b) applicable interest, and (2) paying a penalty to the U.S. government of $5,000 for each underpaid employee. The Legislative Recommendations leave unanswered practical questions about how or when the determination as to whether the Prevailing Wage Requirements has been satisfied would be made. Assuming such determination is to be made on audit, that audit would likely occur several years after the relevant credit had been claimed, requiring taxpayers (and contractors who work for them) to provide service providers with additional compensation at that time, even though certain service providers might no longer be affiliated in any way with the project (or the owner of the project that is claiming the credit).
The proposed apprenticeship requirement in the Legislative Recommendations (the “Apprenticeship Requirement,” and, together with the Prevailing Wage Requirements, the “Prevailing Wage and Apprenticeship Requirements”) would require the taxpayer to ensure that an “applicable percentage” of the total labor hours (which excludes hours worked by foremen, superintendents, owners, or executives) connected with the construction (and, for the ten-year period beginning on the date of service, alteration or repairs) on a project be performed by “qualified apprentices.” The term “qualified apprentice” means an individual who is (1) an employee of the project’s contractor or subcontractor, and (2) participating in an apprenticeship program registered under the National Apprenticeship Act. For projects beginning construction before January 1, 2023, five percent of the total labor hours must be performed by qualified apprentices. For projects beginning construction during calendar year 2023, ten percent of the total labor hours must be performed by qualified apprentices, and for projects beginning construction after December 31, 2023, 15 percent of the total labor hours must be performed by qualified apprentices. Each contractor or subcontractor who employs four or more individuals to perform construction, alteration, or repair work on a project must employ at least one qualified apprentice to assist in the work. The taxpayer may be excused for failing to satisfy these requirements if (1) the taxpayer can demonstrate that there is a dearth of qualified apprentices available for employment in the geographic area of the project, and (2) the taxpayer makes a good faith effort to comply with the Apprenticeship Requirement, including by requesting qualified apprentices from a registered apprenticeship program (even if such request is denied, the taxpayer will be excused as long as the denial is not the result of the refusal by contractors or subcontractors involved in the project to comply with the standards of a registered apprenticeship program).
Because projects whose construction begins prior to the enactment of the Legislative Recommendations would be exempted from the proposed Prevailing Wage and Apprenticeship Requirements, we can expect to see taxpayers seek to “grandfather” in projects by beginning construction before these requirements are enacted. For projects seeking to qualify for the full PTC, taxpayers will need timely and clear guidance from the government about how to meet the requirements (e.g., clear guidance from the Secretary of Labor about how to determine the prevailing wages in a particular location). While the Prevailing Wage Requirement can generally be satisfied through the mere payment of additional wages (and so should be relatively easy to satisfy), the Apprenticeship Requirement will force taxpayers to closely monitor (and force their contractors and subcontractors to closely monitor) who performs construction, alterations, and repairs on projects, likely necessitating new certification processes, particularly because the Legislative Recommendations do not have a mechanism to “cure” failures to comply with the requirement through the payment of a penalty. In terms of tax-equity financings, we would expect that tax-equity investors will seek to push noncompliance risk onto project sponsors, particularly the risk that activities that occur following funding (such as repairs) might jeopardize PTC qualification.
Expansion and Extension of Energy Credit (ITC) under Section 48
The ITC available under section 48 of the Code would be significantly extended under the Legislative Recommendations. In particular, a solar facility on which construction began prior to 2032 (and which is placed in service after 2022 but before 2036) would be eligible for the ITC without phase-down if such solar facility meets the continuity of construction requirements issued by the IRS. Without the extension under the Legislative Recommendations, the ITC would continue to phase down through the end of 2023, and for projects beginning construction in 2024 would only be available at a modest ten percent rate.
It is worth noting that the Legislative Recommendations would not increase the ITC for solar projects for which construction began after 2019 if such projects are placed in service before the end of 2021. Beginning with projects placed in service in 2022, however, certain solar projects on which construction begins prior to 2032 would be eligible for the ITC at the rate of 30 percent—which is the highest amount of the ITC for which solar projects have been eligible in recent years. Thereafter, the credit would begin to step down, with the ITC being equal to 26 percent for projects beginning construction in 2032, and 22 percent for solar projects beginning construction in 2033. In addition, the Legislative Recommendations push out the statutory deadline (December 31, 2036) by which solar projects must be placed in service to qualify for an ITC greater than ten percent. The structure of the Legislative Recommendations, as it pertains to solar projects, would seem to incentivize sponsors that are developing solar projects that are nearly complete and operational to delay placing these projects into service until after the end of this year. All else being equal (and assuming enactment), an owner of a project eligible for the ITC could receive (at least) an additional four percentage points in ITCs if the owner (or sponsor) waited to place the solar project in service until after the end of this year.
The Legislative Recommendations also expand the list of renewable energy projects eligible for the ITC in various respects (including to “qualified biogas property” and “microgrid controllers”). Most notable, perhaps, is the expansion of the ITC to “energy storage technology” which is equipment, other than equipment primarily used in the transportation of goods or individuals and not for the production of electricity, that uses batteries or certain other technologies to store energy for conversion to electricity and that has capacity of at least five kilowatt hours. Equipment that would meet these requirements, but has a capacity of less than five kilowatt hours, can qualify for this credit if such equipment is modified or refitted such that it has at least five kilowatt hours of capacity. However, no portion of the tax basis that was part of such equipment before its modification can be taken into account in calculating the ITC after modification. The expansion of the ITC to standalone batteries could be of key importance to the renewable energy industry. Under current law, only certain storage technologies that are directly tied to facilities that generate electricity and that are otherwise eligible to claim the ITC (separate from such storage technologies) are ITC eligible. Not only would the expansion of the ITC to these standalone facilities spur development of such technologies and infrastructure, but it would also support the build-out of what many industry observers have described as a missing piece of the puzzle for the renewable energy space—sufficient battery storage to build reserves of renewably generated electricity for use during the periods of time when renewable facilities are not generating sufficient energy for public consumption (e.g., storage of solar energy generated during the day for use during nights and evenings).
As with other portions of the Legislative Recommendations, for projects with a maximum net output of at least one megawatt, any credit claimed under section 48 would only be eligible for the full rate if the Prevailing Wage and Apprenticeship Requirements are satisfied. If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 48 could be claimed at a rate equal to only 20 percent of the otherwise available credit amount. These requirements are similar to the requirements that apply to facilities seeking to claim PTCs, although the Prevailing Wage and Apprenticeship Requirements only apply for five years after a facility is placed in service (rather than for ten years). See the discussion of these requirements above under “Expansion and Extension of Renewable Electricity Production Credit (PTC) under Section 45.” The exception from the Prevailing Wage and Apprenticeship Requirements for projects with a maximum net output of less than one megawatt would be particularly helpful to the residential rooftop solar industry.
With respect to an energy property that satisfies the Domestic Content Requirement, such energy property is eligible for a step-up—or bonus—in the amount of ITC that can be claimed in respect of that project. For a project that meets the Domestic Content Requirement but that (1) has a maximum net output of one megawatt or more, and (2) does not meet the Prevailing Wage and Apprenticeship Requirements, that project is eligible for a two percentage point increase in the amount of ITC that can be claimed. For projects that meet the Domestic Content Requirement and that either (1) have a maximum net output of less than one megawatt or (2) satisfy the Prevailing Wage and Apprenticeship Requirements, then such a project is eligible for a ten percentage point increase in the amount of ITC that can be claimed.
Certain solar facilities with a nameplate capacity of less than five megawatts are eligible for a ten percentage point step-up in the ITC if the facility is located in a “low-income community” (defined by cross-reference to the new markets tax credit rules in section 45D of the Code). If a solar facility with a nameplate capacity of less than five megawatts is part of a “qualified low-income residential building project or a qualified low-income economic benefit project,” then it is eligible for a step-up in the ITC equal to 20 percentage points.[6] The property with respect to which this step-up in ITC can be claimed includes certain energy storage property installed in connection with such solar facility and the amount of expenditures incurred for “qualified interconnection property” (as defined in the Legislative Recommendations). In sum, under the Legislative Recommendations, certain small scale solar facilities that are installed as part of a “qualified low-income residential building project” and that meet the Domestic Content Requirements could be eligible for the ITC at an amount equal to 60 percent of the basis of the energy property placed in service in connection with that project.
Qualifying Electric Transmission Property (Section 48D)
In addition to expanding the ITC (as described above), the Legislative Recommendations provide for a new tax credit (similar to the ITC) claimable in respect of “qualifying electric transmission property” for an amount equal to 30 percent of the basis of the applicable property. “Qualifying electric transmission property” is generally defined to include an electric transmission line that is capable of transmitting electricity at a voltage of not less than 275 kilovolts that has a transmission capacity of not less than 500 megawatts and any property that, with respect to a credit-eligible electric transmission line, is necessary for the operation of such electric transmission line (or is otherwise listed as “transmission plant” in the Uniform System of Accounts for the Federal Energy Regulatory Commission).
A qualifying electric transmission line can be a replacement to, or upgrade to, an existing electric transmission line, but only if the transmission capacity of such electric transmission line, as upgraded, increases to an amount equal to the existing capacity of such transmission line plus 500 megawatts. The basis allocable to such existing transmission line also would not be eligible for any credit under section 48D. This new section 48D credit is not claimable with respect to property on which construction begins prior to January 1, 2022 or if a state or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission, or an electric cooperative has previously (before the date when the Legislative Recommendations are enacted) “selected for cost allocation such property for cost recovery.”
As with other portions of the Legislative Recommendations, any credit claimed under section 48D would only be eligible for the full rate if the Prevailing Wage and Apprenticeship Requirements are satisfied, although these requirements will not apply to projects the construction of which begins before the Legislative Recommendations are enacted. Depending on when the Legislative Recommendations might be enacted, however, there may be little opportunity to plan around the Prevailing Wage and Apprenticeship Requirements, given that the credit does not apply to property the construction of which begins before January 1, 2022. If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 48D could be claimed at a rate equal to only 20 percent of the full credit amount.
With respect to an energy project that is composed of “steel, iron, or manufactured products which were produced in the United States” (i.e., that satisfies the Domestic Content Requirement), such energy property is eligible for a step-up—or bonus—in the amount of ITC that can be claimed in respect of that project. If a transmission project satisfies the Domestic Content Requirement but does not satisfy the Prevailing Wage and Apprenticeship Requirements, then that project is eligible for a two percentage point increase in the amount of ITC that can be claimed. Those projects that satisfy the Domestic Content Requirement and meet the Prevailing Wage and Apprenticeship Requirements are eligible for a ten percentage point increase in the amount of ITC that can be claimed.[7]
In general, any credit claimed under section 48D would have to be claimed in respect of property that is placed in service prior to January 1, 2032.
Expansion and Extension of Credit for Carbon Oxide Sequestration under Section 45Q
The Legislative Recommendations extend the date by which construction must have begun on a “qualified facility” for purposes of section 45Q from January 1, 2026 to January 1, 2032. The Legislative Recommendations leave many aspects of the tax credit rules for facilities that capture carbon oxide intact, but also makes some significant expansions and revisions to the rules.
The Legislative Recommendations would accelerate certain scheduled section 45Q rate increases (to be effective in 2022, rather than 2026 under current law): to $35 per metric ton, for qualified carbon oxide captured and used in an enhanced oil or natural gas recovery (or other allowable uses), and to $50 per metric ton for qualified carbon oxide captured and disposed of in secured geological storage.[8] For direct air capture facilities, each metric ton of qualified carbon oxide that is captured and disposed of in a geological storage would be eligible for a $180 credit, and each metric ton of carbon oxide that is captured and used in an enhanced oil or natural gas recovery (or another allowable use) would be eligible for a $130 credit.[9]
Under the Legislative Recommendations, the “qualified facilities” eligible for these expanded credits include:
- “direct air capture facilities” that capture 1,000 metric tons or more of qualified carbon oxide during a taxable year (under current law, the applicable threshold is not less than 100,000 metric tons),[10]
- electricity generating facilities that capture 18,750 metric tons or more of qualified carbon oxide during the taxable year and at least 75 percent of the carbon dioxide from such facilities would otherwise be released into the atmosphere by such facility during such taxable year (under current law, the applicable threshold is not less than 500,000 metric tons, but there is no minimum percentage capture requirement under current law), and
- any other facilities that capture 12,500 metric tons or more of qualified carbon oxide during the taxable year and at least 50 percent of the carbon oxide from such facilities would otherwise be released into the atmosphere during such taxable year (the facilities described in this paragraph, “Industrial Facilities”) (under current law, the applicable threshold is not less than 25,000 metric tons, but there is no minimum percentage capture requirement under applicable law).
As with other portions of the Legislative Recommendations, any credit claimed under section 45Q would only be creditable in full if the Prevailing Wage and Apprenticeship Requirements are satisfied.[11] If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 45Q could be claimed at a rate equal to 20 percent of the full credit amount.
Modification of Special Rules for Offshore Wind Projects
The Legislative Recommendations modify special rules that excepted certain offshore wind projects from ITC phase-outs under current law in light of such projects’ significantly longer development timelines. Under the Legislative Recommendations, offshore wind projects are generally subjected to the same extended construction deadlines as onshore wind projects. The Legislative Recommendations make clear, however, that the 100 percent ITC remains available in respect of certain offshore wind projects placed in service before 2022.[12]
Going forward, the Legislative Recommendations would revert to prior law regarding the geographic boundaries for offshore wind projects eligible for the ITC. Under current law (which applies to projects that begin construction before 2022), for a project to be PTC eligible, it must be located within the United States or in a possession, which is defined for PTC purposes to include an exclusive economic zone (which generally extends as much as 200 nautical miles from a territorial sea baseline). For the ITC, on the other hand (which, under current law, is available for offshore wind projects that begin construction through 2025) the facility must be “located in the inland navigable waters of the United States or in the coastal waters of the United States.” The narrower geographic ITC boundary for offshore wind projects would only apply to projects that were placed in service before 2022.
Publicly Traded Partnerships
In general, under existing law, a “publicity traded partnership” (which is any partnership if the interests in such partnership are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof)) is taxed as a corporation (and therefore subject to entity-level U.S. federal income tax) unless an exception applies. The primary exception to these rules is for partnerships that earn 90 percent or more “qualifying income” (which includes a variety of types of passive income as well as income and gains from exploration, development, mining, production, processing, refining, transportation, and marketing of any mineral or natural resource). Historically, the income generated by a renewable energy facility would not have been “qualifying income.” Under the Legislative Recommendations, however, the definition of “qualifying income” would be revised to include various types of income derived from clean energy projects (including PTC and ITC eligible property and income or gain from a “qualified facility” under section 45Q(d)).
This aspect of the Legislative Recommendations, if enacted, would open up a potential source of new capital for clean energy projects, making it possible for investors in the public markets to more easily participate (through a flow-through vehicle) in such projects. The impact of this proposal on traditional tax-equity investors is not entirely clear. On the one hand, “publicly traded partnerships” could compete against tax-equity investors, reducing returns as additional capital competes for the right to invest in projects. On the other hand, publicly traded partnerships would not be well situated to directly capture the key benefits generated by renewable energy projects—tax credits and depreciation deductions—because deductions and credits attributable to an investment in a renewable energy project would generally pass through to the holders of interests in the partnership, who may or may not be able to effectively monetize those items, although (with respect to the tax credits, but not depreciation deductions) publicly traded partnerships could seek to avail themselves of the “direct pay” election, subject to the limitations and restrictions on “direct pay” described previously in this alert, and subject to the limitations described in the next sentence. In addition, certain rules that can reduce or eliminate the availability of the ITC or accelerated depreciation (including the tax-exempt use property rules) based on tax characteristics of the owners of a partnership could make it challenging for publicly traded partnerships to partner with tax-equity investors in a way that would allow those investors to effectively monetize tax benefits from a clean energy project.
Clean Hydrogen Incentives
The Legislative Recommendations also propose to add section 45X, which would provide a tax credit for the production of clean hydrogen. This new credit would be available (subject to the Prevailing Wage and Apprenticeship Requirements[13]) for clean hydrogen projects the construction of which begins before January 1, 2029 that are placed in service after December 31, 2021, and, with respect to those projects, the credit would be claimable for the ten-year period beginning on the placed in service date of the clean hydrogen project. This credit is not available for clean hydrogen produced at a facility that includes property for which a section 45Q carbon oxide sequestration credit is allowed (i.e., “blue” hydrogen facilities taking advantage of the section 45Q credit would not also be entitled to the section 45X credit).
The amount of the credit is equal to the product of (1) the number of kilograms of “qualified clean hydrogen” (hydrogen that is produced through a process that achieves a percentage reduction in lifecycle greenhouse gas emissions of at least 40 percent as compared to hydrogen produced by steam-methane reforming of non-renewable natural gas) produced during the applicable taxable year, and (2) the “applicable amount” of $3.00 (adjusted for inflation) multiplied by the “applicable percentage.” The “applicable percentage” is a percentage available to taxpayers based on the percentage reduction in “lifecycle greenhouse gas emissions” (as defined in the Clean Air Act) as compared to hydrogen produced by steam-methane reforming. The “applicable percentage” can be: (a) 20 percent (for a less than 75 percent reduction), (b) 25 percent (for a reduction greater than or equal to 75 percent and less than 85 percent), (c) 34 percent (for a reduction greater than or equal to 85 percent and less than 95 percent), and (d) 100 percent (for a 95 percent or greater reduction). In other words, the higher the reduction, the higher the applicable percentage, and therefore, the larger the available tax credit eligible to be claimed under section 45X would be.
Tax Credits and BEAT
Tax credits are only useful to the extent they are able to actually reduce cash taxes payable. Under the Legislative Recommendations, the general business credit (which includes the PTC, the ITC, and section 45Q credits and would include the proposed section 48D and section 45X credits) would be fully creditable against BEAT liability. Under current law, only up to 80 percent of the otherwise-available section 48 ITC and the section 45 PTC (and none of the section 45Q credit) are able to reduce BEAT liability (and then only through 2025, after which the ITC and PTC would also effectively cease to reduce BEAT liability).
This modification to the rules would be expected to make the credit more desirable to tax-equity investors with meaningful potential BEAT liability, particularly if BEAT liability is expanded as has been proposed.
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[1] Democratic National Committee, The Biden Plan To Build A Modern, Sustainable Infrastructure And An Equitable Clean Energy Future, JoeBiden.com (last visited Oct. 13, 2021), https://joebiden.com/clean-energy/.
[2] Unless otherwise noted, section references refer to sections of the Internal Revenue Code of 1986, as amended.
[3] Substantial taxable income was not, however, needed for developers/owners of certain renewable energy projects to benefit from the “cash grant” program under section 1603 of the American Recovery and Reinvestment Tax Act of 2009. Under this program, eligible developers/owners of certain renewable energy projects were able to forgo tax credits in lieu of a direct cash payment from the Treasury Department that would defray part of the cost of the project.
[4] Curiously, the payment is to be treated as a payment against “the tax imposed by subtitle A,” which includes sections 1 through 1563. Thus, if enacted in its current form, the deemed payment would offset not only income tax liability (imposed under chapter 1 of subtitle A), but also liability for self-employment taxes, the net investment income tax, and various withholding taxes (including liability to remit taxes withheld on various payments to non-U.S. taxpayers). It is possible that the offset was intended be limited to income taxes.
[5] As noted, it appears that election is only irrevocable with respect to a particular taxable year. Thus, for credits that accrue over a period of time (e.g., the PTC, which is available over ten years), it appears that taxpayers may be able to toggle between “direct pay” and PTCs from year to year. For facilities that would otherwise seek to claim the ITC, however, a “direct pay” election could completely foreclose the ability to claim that credit (which is a one-time credit, available in the year when a facility is placed in service).
[6] A solar facility is part of “qualified low-income residential building project” if (1) the facility is installed on a residential rental building that is part of one of various enumerated legislative programs (e.g., a “covered housing program” defined in section 41411(a) of the Violence Against Women Act of 1994), and (2) the financial benefits of the electricity produced by the facility are equitably allocated among the building occupants. A facility is treated as part of a “qualified low-income economic benefit project” if at least 50 percent of the financial benefits of the electricity produced by the facility are provided to households that meet certain income requirements. For purposes of determining whether there has been a “financial benefit,” the Legislative Recommendations specify that electricity acquired at below-market rates “shall not fail to be taken into account as a financial benefit.”
[7] The Prevailing Wage and Apprenticeship Requirements also include an exception (similar to the ITC and PTC) for projects with a maximum net output of less than one megawatt, which in this instance appears to be a drafting glitch. First, it does not comport with the 500 megawatt requirement for “qualifying electric transmission property” described in the Legislative Recommendations. Second, this requirement is not noted in the JCT’s report discussing the Legislative Recommendations, entitled “Description Of The Chairman’s Modification To The Provisions Of The ‘Clean Energy For America Act’.” Similar issues arise with respect to the Prevailing Wage and Apprenticeship Requirements that would be made applicable to sections 45Q and 45X (discussed below). We would expect that these exceptions may be subsequently revised as the Legislative Recommendations make their way through the legislative process.
[8] Credit amounts are subject to inflation adjustments.
[9] The Legislative Recommendations expanding section 45Q appear to contain several drafting oversights. The caption for new subparagraph (B) of section 45Q(b)(1), as provided for by section 136107(c) of the Legislative Recommendations, describes a “Special Rule for Direct Air Capture Facilities” but then, by its terms, would only apply to those facilities described in section 45Q(d)(2)(C), which (as amended by the Legislative Recommendations) only pertains to Industrial Facilities and not the “direct air capture facilities” that would be described in section 45Q(d)(2)(A). We note that section 136107(e)(1)(C) of the Legislative Recommendations would also revise section 45Q(b)(1)(B) without coordination with the changes proposed by section 136107(c). Also, the “direct pay” rules for a partnership or S corporation seeking direct payments for section 45Q credits would require the qualified facility be “held” by the partnership or S corporation.
[10] Note that a “direct air capture facility” is any facility that captures carbon dioxide, and the eligibility for such a “direct air capture facility” for the enhanced credit under section 45Q is calculated on the basis of the number of metric tons of “qualified carbon oxide” captured. However, with respect to a “direct air capture facility,” “qualified carbon oxide” only includes, for purposes of section 45Q, carbon dioxide (1) that is captured directly from the ambient air, and (2) that is measured at the source of capture and verified at the point of disposal, injection, or utilization. As a result, and assuming that legislators clarify that a “direct air capture facility” is eligible for the expanded credit under section 45Q, any “direct air capture facility” can earn the expanded tax credits under the Legislative Recommendations only if such facility captures 1,000 metric tons or more of carbon dioxide during the taxable year, and meets certain other requirements.
[11] In the Legislative Recommendations, the Prevailing Wage and Apprenticeship Requirements for section 45Q contain an exception for a qualified facility with a maximum net output of less than one megawatt, which (similar to the issue in proposed sections 48D and 45X) may be a drafting glitch.
[12] To date, there are only two operating offshore wind projects in the United States, although a third project is reportedly slated for construction.
[13] In the Legislative Recommendations, the Prevailing Wage and Apprenticeship Requirements for section 45X contain an exception for a project with a maximum net output of less than one megawatt, which (similar to the issue in proposed sections 45Q and 48D) may be a drafting glitch.
This alert was prepared by Matt Donnelly, Michael Desmond, Roscoe Jones, Jr., Eric Sloan, Mike Cannon, Josiah Bethards, and Laura Pond.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax, Public Policy, or Power and Renewables practice groups, or any of the following:
Tax Group:
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
David Sinak – Dallas (+1 214-698-3107, [email protected])
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Josiah Bethards – Dallas (+1 214-698-3354, [email protected])
Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, [email protected])
Power and Renewables Group:
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, [email protected])
Gerald P. Farano – Denver (+1 303-298-5732, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
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Over the past few years we have observed a trend in companies seeking to outsource (and monetize) certain core, best-in-class processes. These transactions, dubbed “lift-outs”, include examples such as insurance companies lifting-out their insurance claims processing capabilities, medical device companies lifting-out their medical device manufacturing capabilities, and pharmaceutical companies lifting-out their research and development capabilities.
While the benefits of these transactions are potentially significant, lift-outs are complex and require a broad array of legal disciplines, such as technology, corporate, tax, privacy, real estate, intellectual property, and employment law specialists, often in multiple jurisdictions. They also demand a significant amount of effort and advance planning in order to address issues such as pricing, governance, change management, limits on liability, indemnification obligations, intellectual property rights, termination rights, and exit rights, among others. As a result, successful lift-out transactions require robust legal expertise in order to document and support the long term goals, opportunities and arrangements of the parties.
From a legal perspective, many of the challenges that arise from lift-out transactions stem from the fact that lift-outs are a hybrid of several better known transactions, namely IT outsourcing transactions, business process outsourcing transactions and carve-out divestiture transactions. While lift-outs have elements that on their face look familiar to either an outsourcing attorney or M&A attorney, these elements and issues are often not addressed in a traditional manner. As such, understanding how to address these elements is critical to a successful lift-out transaction. This alert will discuss several of these key elements.
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From October 11 to 15, 2021, the most significant global biodiversity summit in over a decade convenes in Kunming, China. The Kunming conference marks the 15th meeting of the Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity (CBD), and aspires to do for biodiversity what the Paris Agreement did for climate change—namely, producing a landmark multinational accord to address one of the most pressing ecological and economic issues of our time.
COP15 is anticipated to finalize a Post-2020 Global Biodiversity Framework, outlining what countries need to do going forward, individually and collectively, to align humanity’s trajectory with CBD’s overall vision of “living in harmony with nature” by 2050. The world has continued veering off-course to date, failing to meet any of the 20 Aichi biodiversity targets[i] which CBD set in 2010.
However, optimists will observe that the goals proposed in the draft Post-2020 Framework[ii] are more outcome-oriented than CBD’s previous goals, buttressed by targeted, time-bound measures to address the drivers of biodiversity loss. The draft goals are as ambitious as they are potentially far-reaching, including proposals to conserve 30% of the world’s oceans and land by 2030, reduce pollution from pesticides, plastic waste, and nutrient excess by 50% by 2030, support integration of biodiversity-related information into business reporting, and promote the sustainable harvest of wild species.
Addressing biodiversity loss is by no means viewed solely as a responsibility of nation-states and governments. Corporations are increasingly under pressure from investors, the communities in which they operate, and other stakeholders to address biodiversity loss and account for their biodiversity impacts. In this alert, we discuss the significance of global action on biodiversity, and also provide a landscape overview of the modern regulatory developments (with our initial focus on Europe and the United States) and voluntary disclosure frameworks, reporting standards, initiatives, and performance assessment tools that are reshaping how the business community views, discloses, and addresses biodiversity risk.
- The Import of COP15 and Biodiversity
Biodiversity – Why it is so important – A quick recap: Encompassing the variety of life, ecosystems, and species on Earth and the natural patterns they form,[iii] biodiversity is critical to the quality and function of the ecosystem services that society derives from nature. The World Economic Forum estimated that more than half the world’s GDP (around US$44 trillion) is moderately or highly dependent on these services, and accordingly found that biodiversity loss is among the existential threats facing society today, in terms of both impact and likelihood.[iv]
Scientists have warned that human activity is currently driving a sixth mass extinction of life on Earth.[v] Such biodiversity loss and consequent damage to ecosystems could drain nearly US$10 trillion from the global economy by 2050[vi], with the deterioration of crop yields, buffers against the physical effects of climate change, soil and water quality, and other biodiversity-related forms of natural capital depreciation translating into lower productivity, supply chain disruptions, higher raw material costs, social instability, and other negative ramifications for many businesses.
The IPCCC Report: The recently published[vii] Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCCC) stresses that climate change, disaster risk, economic development, biodiversity conservation, and human well-being are tightly interconnected. Biodiversity loss has nevertheless been overshadowed, somewhat understandably, by the threat of climate change. But as data collection methods, metrics, and technologies used to identify and evaluate both biodiversity degradation and the value of natural capital have advanced, so too has the business community—investors, businesses, lenders, credit agencies, and ESG raters alike—awakened to the reality that biodiversity loss is a serious systemic economic risk in its own right.[viii]
Perhaps more significantly, biodiversity risk is also climbing up the agenda of global regulators and supervisors.
- Modern Regulatory Action on Biodiversity
Should COP15 produce a Paris Agreement analogue for biodiversity, we expect an increase in momentum behind the introduction of next generation regulations requiring businesses to disclose, diligence, and/or mitigate their risks relating to and impacts on biodiversity, paralleled by an increase in shareholder/stakeholder pressure of equal measure.
Global Finance: The Network for Greening the Financial System (NGFS), a group of central banks and financial supervisors, published an interim report[ix] jointly with INSPIRE (the International Network for Sustainable Financial Policy Insights, Research and Exchange) on Biodiversity and Financial Stability on October 8, 2021. The report highlights growing evidence that biodiversity loss could have significant economic and financial implications and recommends that central banks and financial supervisors undertake a series of measures to upskill in the area, develop methodologies to capture the risks of impacts, and importantly, start to take actions in relation to the financial institutions they supervise, including encouraging institutions to seek information from borrowers on biodiversity plans, exposures, and performance. Whilst it may take time for some of the specific recommended actions of the NGFS to filter through to financial institutions, other more immediately applicable regulations impacting the investment management industry and larger corporations have already surfaced.
European Union: The biodiversity ball has been rolling at some pace in Europe. This past summer, the European Union (EU) approved a report concluding that a new EU biodiversity governance framework is needed to set enforceable biodiversity protection targets and support the formation of Europe-specific biodiversity reporting rules (EU Biodiversity Strategy for 2030).[x] In addition, the EU is set to propose and adopt further technical screening criteria[xi] for environmental objectives, including biodiversity, under its Taxonomy Regulation (EU Taxonomy) by December 2021 and the first half of 2022, respectively.
This “Green Taxonomy” is, in part, designed to enable the designation of company activities as either sustainable or unsustainable based on whether a company’s activities meet to-be-determined “substantial contribution” and “do no significant harm” criteria with respect to biodiversity. Consequently, companies required to report sustainability information under the EU’s existing Non-Financial Reporting Directive (NFRD) or the proposed Corporate Sustainability Reporting Directive—which would expand upon the NFRD’s biodiversity disclosure mandates and scope of applicability—will also have to disclose the share of their activities that are aligned with the EU Taxonomy’s biodiversity protection criteria. Similarly, in connection with the EU’s recently enacted Sustainable Finance Disclosure Regulation (SFDR), “financial market participants” will need to determine and disclose whether their economic activities, if linked to financial products offered as sustainable, qualify as taxonomy-aligned with respect to biodiversity.
European countries (including the UK): Further, on an individual basis, France[xii] and the Netherlands[xiii] have promulgated non-financial reporting laws for businesses and/or investors which require the consideration and/or disclosure of biodiversity impacts, with the United Kingdom (UK) appearing poised to follow suit. Biodiversity-related funds and initiatives[xiv], as well as legislation for the adoption of biodiversity net-gain principles for new significant infrastructure[xv], have gained considerable traction since the publication of the findings of the watershed “Dasgupta Review” of the economics of biodiversity.[xvi] In particular, the Dasgupta Review argues that institutional change is required (particularly in finance) such that (i) financial institutions and businesses are required to report on their dependencies and impacts on nature, and (ii) investors are provided with credible, decision-grade data based on measurement and disclosure of both climate- and nature-related financial risks.
Separately, the UK has announced plans to mandate the adoption of the Taskforce on Climate-related Financial Disclosures (TCFD) across the major segments of the UK economy by 2025. Changes have already been implemented to the UK Listing Rules introducing a requirement for all UK premium listed companies to comply with the TCFD recommendations and disclose how they are considering the impacts of climate change, and on a comply or explain basis report against the TCFD framework. Consultations also recently closed on extending these requirements to issuers of standard listed equity shares, certain regulated firms, and certain large UK registered companies and LLPs, with rules expected to come into force in 2022.[xvii] Whilst the efforts to mandate the TCFD across the UK are to be lauded, the TCFD in and of itself touches but does not adequately cover biodiversity loss. Certain aspects of the TCFD, including categories of physical and transition risk, are relevant to biodiversity loss, but there is a clear need for a distinct framework designed to focus on nature-related financial risks and incorporate the concept of natural capital (see 3 below for recent developments involving the Taskforce on Nature-related Financial Disclosures).
United States: The United States Securities Exchange Commission (SEC) is expected to propose similar climate disclosure rules, or updated disclosure guidance, this month, and its request for public comment on its potential rulemaking has elicited calls for separate mandatory biodiversity risk disclosures.[xviii] The advent of such disclosures cannot be ruled out during the Biden Administration, which signaled its interest in preserving biodiversity when setting a target to conserve 30% of the nation’s land and water by 2030.
In the meantime, voluntary disclosure frameworks, reporting standards, initiatives, and performance assessment tools addressing biodiversity risk are proliferating, providing inspiration and bases for nascent biodiversity regulations, supporting compliance with existing rules, and gradually equipping investors with much needed data to facilitate effective engagement and stewardship on biodiversity loss issues.
- Voluntary Biodiversity Disclosure Frameworks, Reporting Standards, Initiatives, and Performance Assessment Tools
Disclosure Frameworks and Reporting Standards
Existing Standards & Frameworks – How Biodiversity Loss is Incorporated: A number of voluntary disclosure frameworks and reporting standards addressing businesses’ biodiversity risks and impacts have been developed to date. Sustainability reporting standard No. 304 of the Global Reporting Initiative, for example, directs companies to report on their significant biodiversity impacts, how they manage such impacts, and the habitats they have protected and restored.[xix] CDP (formerly the Carbon Disclosure Project) has also begun incorporating biodiversity-focused questions into its business questionnaires, to date adding questions on biodiversity impacts, risks and/or opportunities to its forests questionnaires for the metals and mining and coal sectors. More recently, the Climate Disclosure Standards Board (CDSB) closed public consultation on its nascent biodiversity application guidance,[xx] which will support companies in reporting material land use and biodiversity-related information through the CDSB disclosure framework. The new guidance will focus on the first six reporting elements of the CDSB framework, including the topics of governance, management’s environmental policies, strategies and targets, risks and opportunities, and sources of impact.
New Initiative – Taskforce on Nature-related Financial Disclosures: The disclosure framework that has received the most attention from observers, however, is not expected to be finalized until 2023. The recently-formed Taskforce on Nature-related Financial Disclosures (TNFD) is developing a framework specifically for nature-related disclosures, modelled on its climate-focused cousin, the TCFD. On October 6, 2021, in the run-up to COP15, the TNFD officially kicked-off their work on developing the TNFD framework.[xxi] Accordingly, the TNFD’s recommendations are expected to focus on company disclosures around certain biodiversity impact metrics and targets as well as governance around the strategic impact of, and the assessment and management of, biodiversity risks and opportunities. More broadly, the TNFD aims to align with CBD’s target of no net biodiversity loss by 2030 and net gain by 2050. Given the broad endorsement the TCFD has received from the business community, and the extent to which governments crafting climate risk disclosure regulations have referred to the TCFD as a model, it is widely expected that the TNFD (which already has the backing of the G7) will become an equally influential model for biodiversity disclosures.
Initiatives – Coalitions & Networks
Corporations seeking to elevate biodiversity loss on their ESG agendas and to meaningfully commit to actions in this area should actively consider participation in and support of one or more of the initiatives, charters, and coalitions noted below.
Among the growing chorus of initiatives calling for science-based biodiversity protection targets, the Science Based Targets Network[xxii] and U.N. Principles for Responsible Banking[xxiii] have each recently developed guidance for companies setting such objectives. Financial institutions in particular are coming under pressure to set targets, and the Finance for Biodiversity Pledge, for its part, has sought to commit its signatories to commit to science-based targets by 2024 (in addition to suggesting that financial institutions become legally liable for their impacts on ecosystems).
Members of the broader business and investor community are also uniting behind the biodiversity agenda through initiatives such as Act4Nature, One Planet Business for Biodiversity, and Business for Nature. Representing more than 900 companies with a cumulative revenue exceeding US$4 trillion, the Business for Nature Coalition, for example, has called on governments to adopt policies to reverse nature loss in this decade. Hundreds of coalition members have already made commitments to support three biodiversity-related U.N. Sustainable Development Goals (SDGs)[xxiv], and investor-oriented initiatives such as the U.N. Principles of Responsible Investment (which has been adopted by leading global asset owners and investment managers) have similarly recognized the business case for preserving biodiversity and the importance of biodiversity to achieving the SDGs generally.[xxv]
Other common initiatives focus more narrowly on the biodiversity effects of the cultivation of high-impact soft commodities such as palm oil, beef, and soy. Companies with ties to these industries have increasingly adopted “No Deforestation, No Peat, No Exploitation” (NDPE) procurement or lending policies, creating stranded asset risk for certain industry members. We expect NPDE policies to continue gaining traction going forward and other sector-specific biodiversity initiatives to rise to similar prominence.
Performance Assessment Tools for Organizations & Asset Managers – Nascent Stages of Development
As with all ESG factors—as asset owners and managers are acutely aware—you cannot manage what you do not measure. Hence, the growing importance of performance assessment tools and measures in the biodiversity loss and impact space.
Historically, biodiversity value and/or business impacts on diversity have been measured on a location-by-location basis or on a nation-by-nation basis (based on national biodiversity indicators, for example). Important improvements in satellite imagery and other technologies used to measure localized impacts, and advancements toward a common lexicon to discuss impacts (e.g., coalescence around metrics such as Mean Species Abundance), are currently being made with greater urgency. But perhaps more significantly, tools designed to measure organization-level biodiversity impact have recently multiplied.
In 2020, the Mission Économie de la Biodiversité presented its Global Biodiversity Score, a tool designed to assess the biodiversity footprint of business and financial assets. The U.N. Environment Programme Finance Initiative and Center for Sustainable Organizations then made their own contributions to the assessment cause in 2021 in launching the “ENCORE”[xxvi] module and Biodiversity Performance Index (BPI) prototype, respectively. Focused on the mining and agricultural sectors, the ENCORE module aims to allow banks and investors to explore the extent to which their financial portfolios indirectly drive species extinction risk and impact on ecological integrity. Over 30 financial institutions are currently testing the module. The BPI prototype, meanwhile, holds itself out as the world’s first context-based biodiversity metric designed for companies and investors, using a composite of 10 biodiversity-related indicators to weigh organization-level performance in relation to ecological thresholds.
Continuing on the Road to Biodiversity
Understandably governments around the world are focused on achieving net zero deadlines, pushing ahead with decarbonization projects, and low-carbon strategies, and the intense “buzz” around COP26 will continue for weeks to come. These steps are not only critical to the reduction of greenhouse gas emissions, but also create local jobs, assist in retraining (and retaining) the existing workforce and help grow economies.
However, much like climate change, the loss of biodiversity is irreversible and immediate action is necessary. Let’s see if natural capital receives the attention it requires this week and Kunming brings about global alignment for urgent action on biodiversity loss.
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[i] 20 Aichi biodiversity targets available at: https://www.cbd.int/sp/targets/.
[ii] The first detailed draft of the new Post-2020 Global Biodiversity Framework is available at: https://www.cbd.int/conferences/post2020.
[iii] The United Nations Environment Programme defines biological diversity or biodiversity as the variety of life on Earth and the natural patterns it forms. See: https://www.unep.org/unep-and-biodiversity.
[iv] The World Economic Forum’s 2021 Global Risks Report is available at: https://www.weforum.org/reports/the-global-risks-report-2021.
[v] The World Wide Fund for Nature’s (WWF) 2020 Living Planet Report, for example, shows a 68% decline in animal population size and 84% decline in freshwater wildlife in the past few decades. The report is available at: https://livingplanet.panda.org/en-us/.
[vi] As detailed in WWF’s 2020 Global Futures report, available at https://wwf.panda.org/?359334.
[vii] The IPCC Sixth Assessment Report was published on August 7, 2021 and is available at https://www.ipcc.ch/assessment-report/ar6/.
[viii] See, for example, the opening statement of the U.N. Principles for Responsible Investment Association’s (UNPRI) “Investor Action on Biodiversity” discussion paper, available here.
[ix] https://www.ngfs.net/sites/default/files/medias/documents/ngfs-press-release_2021-10-08_interim-report.pdf
[x] The report is available here.
[xi] Technical screening criteria have already been adopted for climate change.
[xii] France passed its Law on Climate and Energy in 2019, which includes an update to the 2015 Energy Transition Law’s requirements on non-financial reporting by investors. Only climate issues are covered under the 2015 law, but the 2019 law takes into account the preservation of the biodiversity of the ecosystems.
[xiii] The Netherlands passed legislation on the mandatory disclosure of non-financial information in 1997 and, in 2003, produced a reporting guide stating that sustainability reporting should disclose information on the effects of business operations on biodiversity and the measures taken to mitigate these effects.
[xiv] Initiatives and funds include the England Trees Action Plan, Peat Action Plan, Benyon Review on Highly Protected Marine Areas (and the response to it), development of a Nature for Climate Impact Fund (£640 million announced at Budget 2020), Blue Planet Fund (£500 million), International Biodiversity Fund (£220 million), Green Recovery Challenge Fund (proposed to increase to £80 million) to deliver up to 100 nature projects in two years, and 25 Year Environment Plan.
[xv] Amendments to the Environment Bill to legislate (among other matters) for the introduction of: (i) biodiversity net gain for new nationally significant infrastructure are currently pending (requiring all new developments to demonstrate a 10% net gain in biodiversity at or near their sites); (ii) biodiversity credits allowing developers to purchase credits from the UK Government to be used to fund the creation of conservation sites; and (iii) prohibition on the use by large businesses of illegally produced commodities, due diligence requirements in relation to forest-risk commodities, and reporting on compliance. The Environment Bill still remains in the House of Lords and has not yet progressed to the final stages of receiving Royal Assent.
[xvi] The final report of the independent review (commissioned in 2019 by Her Majesty’s Treasury (HMT)) on the Economics of Biodiversity led by Professor Sir Partha Dasgupta (Dasgupta Review) was published in February 2021. The report restarted the conversation on biodiversity in the UK, with HMT publishing the UK Government’s response to the Dasgupta Review in July 2021 and emphasizing its commitment to (among other matters) delivering a nature positive future and to reverse biodiversity loss by 2030.
[xvii] From January 1, 2021, the UK Financial Conduct Authority (FCA) implemented changes to the Listing Rules (Listing Rule 9.8.6) introducing a requirement for all UK premium listed companies to comply with the TCFD recommendations and disclose how they are considering the impacts of climate change, and on a comply or explain basis report against the TCFD framework. The FCA also recently consulted on extending these requirements to issuers of standard listed equity shares and certain regulated firms. The UK Government’s Department for Business, Energy & Industrial Strategy also recently concluded a consultation relating to mandatory climate-related financial disclosures by publicly quoted and large private companies and LLPs and the TCFD. The Government response is still pending. The proposals apply to UK companies currently required to produce a non-financial information statement, those being UK companies with more than 500 employees and transferable securities admitted to trading on a UK regulated market, and relevant public interest entities; UK registered companies with securities admitted to AIM with more than 500 employees; UK registered companies which are not included in the categories above with more than 500 employees and a turnover of more than £500 million; and LLPs with more than 500 employees and a turnover of more than £500 million. These rules are expected to come into force for accounting periods on or after April 6, 2022.
[xviii] From the Commonwealth Climate and Law Imitative, for example. Comments submitted to the SEC are available at: https://www.sec.gov/comments/climate-disclosure/cll12.htm.
[xix] The Global Reporting Initiative (GRI) provides the most widely used sustainability reporting standards in the world. The GRI standards are available at: https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/.
[xx] The CDSB’s draft Biodiversity Guidance and further information on the consultation is available at: https://www.cdsb.net/biodiversity.
[xxi] The Agence Française de Développement (AFD) launched the TNFD Development Finance Hub at the first plenary meeting, which will sit under the umbrella of the TNFD’s broader Knowledge Hub. Further information is available at: https://tnfd.global/news/first-plenary-launch-of-development-finance-hub/.
[xxii] The Science Based Targets Network’s initial guidance on science-based targets for nature is available at: https://sciencebasedtargetsnetwork.org/wp-content/uploads/2020/09/SBTN-initial-guidance-for-business.pdf.
[xxiii] The Principles for Responsible Banking’s Guidance on Biodiversity Target-setting is available at: https://www.unepfi.org/publications/guidance-on-biodiversity-target-setting/.
[xxiv] The three SDGs are: SDG6 (Clean water and sanitation), SDG 14 (Life below Water) and SDG 15 (Life on Land). The commitments of Business for Nature Coalition members involve acting and advocating for more ambitious nature policies and work on protecting and restoring nature. Before making commitments, companies are encouraged to understand their dependencies and impacts on biodiversity as they relate to their direct operations or supply chain.
[xxv] As reflected in UNPRI’s “Investor Action on Biodiversity” discussion paper.
[xxvi] ENCORE stands for Exploring Natural Capital Opportunities, Risks and Exposure.
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 of the following leaders and members of the firm’s Environmental, Social and Governance (ESG) practice group, or the following authors:
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])
Mitasha Chandok – London (+44 (0)20 7071 4167, [email protected])
Kyle Neema Guest – Washington, D.C. (+1 202-887-3673, [email protected])
Please also feel free to contact the following practice leaders:
Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213-229-7121, [email protected])
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])
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September 2021 was certainly the month of sustainability initiatives for the UK’s competition watchdog.
On 20 September, the Competition & Markets Authority (CMA) published a Green Claims Code aimed at protecting consumers from misleading environmental claims amidst concerns over ‘greenwashing’. Greenwashing refers to overstated, unsubstantiated green credentials of a product or service. The Code is also intended to protect businesses from unfair competition and ensure a level playing field.
And then on 29 September, the CMA launched a public consultation, to help inform its advice to government on how competition and consumer regimes can better support the UK’s Net Zero and sustainability goals. The consultation runs until 10 November 2021.
Impact: who needs to take the Green Claims Code into account
The new Code potentially impacts any company which puts forward claims of positive environmental impact in relation to its products or services. It is particularly important for businesses involved in textiles and fashion, travel and transport, and fast-moving consumer goods because the CMA has flagged these industries as priorities. These are the sectors where consumers appear to be most concerned about misleading claims. Any other sector where the CMA finds significant concerns could also become a priority in due course. Financial services, for example, is not currently one of the CMA’s priority areas, but the Code would nonetheless apply in this sector. For example, to companies selling “ethical” or “green” investment services, which would also be a focus area of the UK’s financial services regulator, the Financial Conduct Authority (FCA).
The purpose of the Code is to help businesses understand and comply with their existing obligations under consumer protection law when making environmental claims. The Green Claims Code is broad and applies to all commercial practices, including advertisements, product labelling, packaging, and even product names.
The Code will operate in parallel with and not to the exclusion of other applicable rules and regimes. Accordingly businesses should consider whether they are subject to any sector- or product-specific requirements and ensure they comply with them, as well as their obligations under general consumer protection law.
Consequences: what happens if the Code is breached?
The Code is not new legislation, it draws on enforcement powers derived from existing consumer protection rules under the Consumer Protection from Unfair Trading Regulations (CPUT) 2008 and Business Protection from Misleading Marketing Regulations 2008.
The CMA and other bodies (for example, Trading Standards Services) can bring court proceedings in relation to the Code.
Any business found to be in breach of consumer law can face civil action or criminal prosecution. Breach of CPUT can attract criminal liability, including for directors and other officers of corporate bodies.
There is also a direct civil right of redress by consumers against traders who conduct misleading or aggressive practices. If found to be in breach, companies may be required to pay redress to any consumers harmed as a result of the breach.
More generally, a company’s reputation, and sales, could also suffer damage.
Timing: when will enforcement ramp up?
The CMA has announced that it will begin a review of misleading green claims in January 2022. It is not required to wait until January 2022 to take action, and has noted that where there is evidence of breaches of consumer law, it may take action before the start of the formal review.
The CMA shares consumer protection law enforcement powers with other bodies, such as Trading Standards Services and sectoral regulators. And, where appropriate, the CMA has flagged that it may work with other enforcement or regulatory bodies in relation to environmental claims.
Significance: why is greenwashing of importance to the CMA?
Consumers are increasingly environmentally-minded. A recent YouGov survey showed that 57% of UK consumers are willing to pay more for environmentally friendly products, increasing up to 69% of consumers for the younger generations. Mintel found in 2019 that nearly half of new UK beauty and personal care launches had an ethical or environmental claim, an increase of almost 100% compared to four years earlier. The CMA notes the increase in claims by businesses to meet this consumer demand, and considers that many of these claims may be misleading. A beauty product promoted as ‘microbead free’, for example, may be misleading in its suggestion of a benefit over other products because microbeads in rinse-off cosmetics and personal care products are, in any event, banned in the UK.
Earlier this year, the International Consumer Protection Enforcement Network (ICPEN) hosted its annual sweep of websites, led by the CMA and the Dutch Competition Authority. The global review found that 40% of green claims made online could be misleading consumers, through tactics such as:
- Making vague claims and unclear language including terms such as ‘eco’ or ‘sustainable’ or reference to ‘natural products’ without adequate explanation or evidence of the claims.
- Using own brand eco logos and labels that are not associated with an accredited organisation.
- Hiding or omitting certain information, such as a product’s pollution levels, to appear more eco-friendly.
More detail on the Code
In November 2020, the CMA announced an investigation into misleading environmental claims. The CMA’s final guidance has now been published, with the Green Claims Code announced on Monday 20 September. This work ties in to the CMA’s Annual Plan commitment to support the move towards a low carbon economy.
The aim of the new Code is to protect consumers from misleading environmental claims, and to protect businesses from unfair competition. The CMA intends to create a level playing field for businesses whose products or services genuinely represent a better choice for the environment, thus incentivising them to invest in the environmental performance of their products.
There are six principles set out in the Code:
- claims must be truthful and accurate
- claims must be clear and unambiguous
- claims must not omit or hide important relevant information
- comparisons must be fair and meaningful
- claims must consider the full life cycle of the product or service
- claims must be substantiated
The focus of the Code is on environmental claims made by businesses, but the guidance is also relevant to the wider category of sustainability claims.
The CMA is not alone: a trending initiative across Europe
The CMA’s new Green Claims Code forms part of a broader trend where competition regulators are taking an interest in the link between competition regulation and the green economy. This includes clamping down on suspected greenwashing practices.
There is also ongoing work in the advertising space in the UK by the Advertising Standards Authority, with new guidelines covering environmental claims in advertising. There are separate and specific regulations in place and being developed in relation to financial services products, for example the EU’s Sustainable Finance Disclosure Regulation and EU Taxonomy. Earlier this year, HM Treasury announced that a new advisory group had been set up to advise the UK Government on standards for green investment, and will oversee the creation of a Green Taxonomy.
The Dutch Competition Authority published new guidelines for sustainability claims in January 2021, which set out five rules for companies to follow, for example to substantiate sustainability claims with evidence.
The European Commission launched an initiative last year which aims to harmonise green claims across Europe, including the prevention of overstated environmental information (‘greenwashing’) and the sale of products with a covertly shortened lifespan. The EC held a public consultation on the initiative which closed in October 2020, and intends to propose a new directive as a result.
These recent developments are part of a trend in which failings traditionally thought to have fallen into soft-edged Environmental, Social and Governance territory are being hardened into actionable standards. Companies are increasingly being held to account for the claims they make about their own ethical and sustainability performance, particularly where these claims can negatively impact outcomes or choices for customers.
Dos and Don’ts: some practical tips for Green Claims
Companies potentially affected are well advised to review current business practices, in order to ensure compliance with the CMA’s new Code and avoid potentially incurring civil and criminal penalties and reputational damage for misleading consumers.
In particular, they should:
- Avoid using broad, general terms, such as ‘green’, ‘eco’ and ‘sustainable’. These claims will be considered to apply to the whole life cycle of the product and must be substantiated with evidence.
- Avoid conflating the environmental goals of the business with specific product claims.
- Clearly state any caveats that apply to product claims.
- Consider implicit claims being made by a product, for example through the use of images and colours on packaging.
- Avoid claiming as environmental benefits any features or benefits that are necessary standard features or legal requirements of that product or service type.
Following the CMA’s guidance is a good starting point. But multinational companies will also need to consider guidance available in other jurisdictions besides the UK.
The future: environmental sustainability and competition rules
There has been a lot of global interest in the interaction between climate change and competition law in recent years, with thought-provoking debate around how to tackle a global crisis through collaboration, without encouraging harmful collusion between competitors.
On 29 September 2021, the CMA opened a consultation on advice to the UK government. The consultation, which runs until 10 November 2021, calls for views to help inform its advice to government on how competition and consumer regimes can better support the UK’s Net Zero and sustainability goals, including preparing for climate change. The key areas in which the CMA is seeking information are:
- competition law enforcement;
- merger control;
- consumer protection law; and
- market investigations.
The CMA’s consultation is similar to the EU consultation on competition policy and the Green Deal, which ran in late 2020. Both consultations consider how antitrust policy and environmental and climate policies work together, and how the merger control regimes could better contribute to protecting the environment and supporting sustainability goals. The EC’s consultation is somewhat wider, as it also considered State aid rules, which is not within the scope of the CMA consultation.
On 10 September the EC published a Brief titled Competition Policy in Support of Europe’s Green Ambition which gives an overview of its consultation. Executive Vice-President Vestager recently stated in a speech at the IBA Competition Conference that “one of the main messages from our consultation and the conference was the need to support the green transition by enforcing our rules more vigorously than ever.” DG COMP’s ongoing reviews of its vertical and horizontal block exemption regulations (and accompanying guidelines) provide a perfect opportunity for the EC to take a more proactive approach to promote sustainability through the application of EU competition law. The new vertical guidelines are expected to be in place by May 2022, with the new horizontal guidelines following by the end of December 2022 and so we will need to wait until then to see how Vestager’s message will translate in practice.
We expect the results of the UK consultation process to yield similar results to the EU consultation. But how the CMA will respond in its application of UK competition laws going forward is a development to be watched carefully.
Gibson Dunn’s lawyers are available to assist in addressing any questions that you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following authors:
Deirdre Taylor – London (+44 (0) 20 7071 4274, [email protected])
Mairi McMartin – Brussels (+32 2 554 72 29, [email protected])
Kirsty Everley – London (+44 (0) 20 7071 4043, [email protected])
Please also feel free to contact the following practice leaders and members:
Ali Nikpay – London (+44 (0) 20 7071 4273, [email protected])
Deirdre Taylor – London (+44 (0) 20 7071 4274, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Patrick Doris – London (+44 (0) 20 7071 4276, [email protected])
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Mairi McMartin – Brussels (+32 2 554 72 29, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
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First of four industry-specific programs
The False Claims Act (FCA) is one of the most powerful tools in the government’s arsenal to combat fraud, waste, and abuse involving government funds. After several years of statements and guidance indicating that the Department of Justice (DOJ) might alter its approach to FCA enforcement, the Biden Administration appears to be taking a different, more aggressive approach. Meanwhile, newly filed FCA cases remain at historical peak levels, and the government has recovered nearly $3 billion or more annually under the FCA for a decade. The government also continues to pursue new, large spending projects in COVID-related stimulus and infrastructure—which may bring yet more vigorous efforts by DOJ to pursue fraud, waste, and abuse in government spending. As much as ever, any company that receives government funds—especially in the financial services sector—needs to understand how the government and private whistleblowers alike are wielding the FCA, and how they can defend themselves.
Please join us to discuss developments in the FCA, including:
- The latest trends in FCA enforcement actions and associated litigation affecting financial services;
- Updates on the Biden Administration’s approach to FCA enforcement, including developments impacting DOJ’s use of its statutory dismissal authority;
- New proposed amendments to the FCA introduced by Senator Grassley; and
- The latest trends in FCA jurisprudence, including developments in particular FCA legal theories affecting your industry and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.
View Slides (PDF)
PANELISTS:
F. Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm’s White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation.
James Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.
Casey Kyung-Se Lee is a senior associate in the New York office and a member of the firm’s White Collar Defense and Investigations, and Litigation Practice Groups. Mr. Lee’s practice focuses on representing clients in litigation and investigations involving the federal government. Mr. Lee rejoined Gibson Dunn in 2020 after serving as an Assistant United States Attorney in the Civil Division of the U.S. Attorney’s Office for the Southern District of New York, where he investigated allegations of fraud against the United States under the False Claims Act, Anti-Kickback Statute, and other statutes.
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 hours, of which 1.5 credit hours 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 hours.
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RELATED WEBCASTS IN THIS SERIES:
- The False Claims Act – 2021 Update for Government Contractors (October 14, 2021)
- The False Claims Act – 2021 Update for Drug & Device Manufacturers (October 20, 2021)
- The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)
In Horror Inc. v. Miller, the Second Circuit affirmed that Victor Miller had successfully reclaimed his rights in the screenplay for Friday the 13th by invoking the Copyright Act’s termination provisions, notwithstanding his assignment of those rights to a film production company in 1980. The Court reached that conclusion after finding that Miller’s assignment was made as an independent contractor, rather than as an employee.[1]
In certain situations, an author of a copyrighted work that has been transferred to another can terminate the transfer and reclaim the copyright. A transfer of a copyrighted work created as a work-for-hire, however, cannot be terminated. For purposes of determining if a work is a work-for-hire under the Copyright Act, Horror Inc. held that copyright law—not labor law—determines whether the creator and a hiring party are in an employer-employee relationship. The court further held that, because Miller wrote the screenplay as an independent contractor under copyright law, the screenplay was not a work-for-hire and Miller was entitled to terminate his decades-earlier transfer of the screenplay’s copyright.
Statutory Background
The Copyright Act of 1976[2] provides that copyright ownership “vests initially in the author or authors of the work.”[3] Under well-established case law, the person who “actually creates the work, that is, the person who translates an idea into a fixed, tangible expression entitled to copyright protection,” is generally considered to be the work’s “author.”[4] But the Copyright Act creates an exception for “a work made for hire,” which is defined as one “prepared by an employee within the scope of his or employment,” or, in certain instances, “a work specially ordered or commissioned for use as contribution to a collective work.”[5] In the case of a work-for-hire, “the employer or other person for whom the work was prepared is considered the author.”[6]
Authors can transfer ownership of any or all of the exclusive rights comprised in a copyright,[7] but Section 203 of the Copyright Act permits an author (or his or her successors) in certain circumstances to terminate prior transfers of copyrights during a specified window of time.[8] Congress added this termination right to the Copyright Act to address “the unequal bargaining position of authors” in negotiations over conveyance of their ownership rights “resulting . . . from the impossibility of determining the work’s value until the value has been exploited.”[9] A creator of a work-for-hire cannot take advantage of this provision, however, because the termination right expressly does not apply to works-for-hire.[10]
Factual Background
Victor Miller, a professional screenplay writer, has long been a member of the Writers Guild of America (“WGA”), a labor union representing writers in the film and television industries. In 1979, Miller agreed to write the screenplay for a horror film, which would eventually be titled Friday the 13th and introduce the iconic character of Jason Voorhees.[11] Friday the 13th opened on May 9, 1980 and enjoyed “unprecedented box office success for a horror film,” leading to eleven sequels to-date and a host of other derivative products.[12] But before that took place, in exchange for only $9,000, Miller assigned his rights in the screenplay to a film production and distribution company.
In 2016, Miller sought to reclaim copyright ownership of the screenplay by serving notices of termination pursuant to Section 203(a) of the Copyright Act. The companies to whom the copyrights had been transferred then sued Miller in the United States District Court for the District of Connecticut, seeking a declaration that Miller wrote the screenplay as an employee and that the screenplay therefore was a work-for-hire, which would prevent Miller from terminating the companies’ rights. On cross-motions for summary judgment asserting largely undisputed facts, the District Court concluded that Miller did not create the screenplay as a work-for-hire. Because he was the “author” of the screenplay, his termination notices were valid and served to restore his ownership of the copyright for the Friday the 13th screenplay. After the companies appealed, the Second Circuit affirmed the District Court’s ruling in Miller’s favor.
The Second Circuit’s Decision
Because the Copyright Act’s termination provision is not applicable to works-for-hire, the courts had to resolve whether Miller was an employee or independent contractor of the film production company to which he assigned his rights at the time that he wrote the screenplay for Friday the 13th. This required the Second Circuit to decide as a matter of first impression what body of federal law governed Miller’s employment status under the Copyright Act.
The production companies first argued that “Miller’s WGA membership ‘inherently’ created an employer-employee relationship” pursuant to the National Labor Relations Act (the “NLRA”), under which screenwriters are permitted to unionize because they are classified as production companies’ employees.[13] The Second Circuit rejected that argument because “the definition of ‘employee’ under copyright law is grounded in the common law of agency” and “serves different purposes than do the labor law concepts regarding employment relationships,” such that there was “no sound basis for using labor law to override copyright law goals.”[14]
In reaching this conclusion, the Court provided a thorough overview of the Supreme Court’s decision in Community for Creative Non-Violence v. Reid, which set forth a thirteen-factor test for determining in the copyright context whether the creator of a work did so as an employee or as an independent contractor.[15] As explained in Reid, the Copyright Act provides a “restrictive definition of employment, one aimed at limiting the contours of the work-for-hire determination and protecting authors.”[16] In the labor and employment law context, on the other hand, “the concept of employment is broader, adopting a more sweeping approach suitable to serve workers and their collective bargaining interests and establishing rights” related to their compensation and safety, among other issues.[17] Stated otherwise, “[t]hat labor law was determined to offer labor protections to independent writers does not have to reduce the protections provided to authors under the Copyright Act.”[18] The Court of Appeals thus found that in analyzing whether the Friday the 13th screenplay was a work-for-hire, “[t]he District Court correctly set aside NLRA-based doctrine in favor of common law principles and the Reid factors” “regardless of Miller’s employment status under the NLRA and his membership in the WGA.”[19]
Having failed to persuade the Second Circuit to follow principles of labor law to find that Miller was an employee when he wrote the script, the production companies next argued that Miller’s WGA membership should have been considered as an additional factor in applying the Reid multi-factor work-for-hire test. The Second Circuit deemed this argument “simply another attempt to shift Reid’s analytic focus from agency law to labor law and convince us the labor law framework governs here.”[20] Because Reid “instructs [courts] to look at the overall context of the parties’ relationship based on . . . specific factors,” Miller’s WGA membership did “not alter or control [the Second Circuit’s] analysis of the Reid factors for copyright purposes.”[21] Rather, it was “relevant only insofar as it informs [the] analysis of other factors, namely whether Miller received benefits commonly associated with an employment relationship.”[22]
Applying the Reid factors, the Second Circuit proceeded to analyze whether Miller created the screenplay as an employee or as an independent contractor. In doing so, it found that only three of Reid’s thirteen factors—that the hiring party exercised some control over Miller’s writing, that the hiring party was a business entity, and that soliciting the screenplay was part of its regular business—supported the production companies’ arguments for classifying the screenplay as a work-for-hire under the Copyright Act. On balance, however, the Second Circuit found that the factors “weigh[ed] decisively in Miller’s favor,” leading the Court of Appeals to affirm the District Court’s finding that Miller had created the screenplay as an independent contractor.[23] Accordingly, under the Copyright Act, Miller had the right to terminate his decades-earlier transfer of the copyright to the screenplay for Friday the 13th.
Conclusion
For purposes of applying the Copyright Act’s termination provisions, Horror Inc. held that whether a work was “made for hire”—which in this case turned on the creator’s status as an employee or independent contractor—is strictly governed by copyright law principles, rather than labor and employment law. Accordingly, it further held that to the extent the creator of a work is a union member, that fact has no independent weight in determining whether the creator was in an employment relationship with the entity for whom the work was created. These determinations may have significant implications for a broad array of copyrighted works, the ownership of which may be similarly subject to the Copyright Act’s termination provisions.
___________________________
[1] Horror Inc. v. Miller, No. 18-3123-cv, 2021 WL 4468980 (2d Cir. Sept. 30, 2021).
[4] Community for Creative Non-Violence v. Reid, 490 U.S. 730, 737 (1989).
[9] H.R. Rep. No. 94-1476, 24th Cong. 2d Sess. at 124 (1976)
[10] 17 U.S.C. § 203(a) (termination right applies “[i]n the case of any work other than a work made for hire”).
[11] Horror Inc., 2021 WL 4468980, at *1-2.
[16] Horror Inc., 2021 WL 4468980, at *8.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Brian Ascher, Ilissa Samplin, Michael Nadler, and Doran Satanove.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s Media, Entertainment & Technology Practice Group:
Media, Entertainment and Technology Group:
Scott A. Edelman – Co-Chair, Los Angeles (+1 310-557-8061, [email protected])
Kevin Masuda – Co-Chair, Los Angeles (+1 213-229-7872, [email protected])
Benyamin S. Ross – Co-Chair, Los Angeles (+1 213-229-7048, [email protected])
Orin Snyder – New York (+1 212-351-2400, [email protected])
Brian C. Ascher – New York (+1 212-351-3989, [email protected])
Anne M. Champion – New York (+1 212-351-5361, [email protected])
Michael H. Dore – Los Angeles (+1 213-229-7652, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Ilissa Samplin – Los Angeles (+1 213-229-7354, [email protected])
Nathaniel L. Bach – Los Angeles (+1 213-229-7241,[email protected])
Please also feel free to contact the following practice leaders:
Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, [email protected])
Y. Ernest Hsin – San Francisco (+1 415-393-8224, [email protected])
Josh Krevitt – New York (+1 212-351-4000, [email protected])
Jane M. Love, Ph.D. – New York (+1 212-351-3922, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Munich partner Michael Walther and associate Richard Roeder are the co-authors of the “Germany” [PDF] chapter of International Comparative Legal Guides’ Sanctions 2022, 3rd Edition published in October 2021.
On September 22, 2021, the Public Company Accounting Oversight Board (the “PCAOB”) adopted a final rule (the “Final Rule”) implementing the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law in December 2020 and prohibits foreign companies from listing their securities on U.S. exchanges if the company has been unavailable for PCAOB inspection or investigation for three consecutive years. The Final Rule (available here) requires U.S. Securities and Exchange Commission (the “SEC”) approval before it goes into effect.
In May 2021, the SEC adopted interim final amendments (the “Amendments”, available here) to certain forms, including Forms 20-F and 10-K, to implement the disclosure and submission requirements of the HFCAA. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years, instead of three years.
Three aspects of the HFCAA and the PCAOB’s Final Rule should be kept in mind.
The following Gibson Dunn attorneys assisted in preparing this update: Michael Scanlon, David Lee, David Ware, and Maggie Zhang.
To continue assisting US companies with planning for SEC reporting and capital markets transactions into 2022, we offer our annual SEC Desktop Calendar. This calendar provides both the filing deadlines for key SEC reports and the dates on which financial statements in prospectuses and proxy statements must be updated before use (a/k/a financial staleness deadlines).
You can download a PDF of Gibson Dunn’s SEC Desktop Calendar for 2022 at the link below.
https://www.gibsondunn.com/wp-content/uploads/2021/09/SEC-Filing-Deadline-Calendar-2022.pdf
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On September 23, 2021, President Joseph Biden announced his intention to nominate Professor Saule Omarova of Cornell Law School to be the next Comptroller of the Currency. The Comptroller heads the Office of the Comptroller of the Currency (OCC), the Treasury bureau that supervises national banks and federal thrifts; the Comptroller is also an ex officio member of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC).
If confirmed by the Senate, Professor Omarova will have significant influence over regulatory policy, not only for banking institutions, but also for fintech companies that seek to enter the banking system via either a national bank or FDIC-insured industrial bank charter or that have bank partners.
Professor Omarova worked in the Bush Treasury Department and has published numerous articles on financial regulation. This Alert touches on the key themes of her academic writings and addresses how these themes could translate into regulatory priorities at the OCC and FDIC, and in view of the fact that President Biden will likely soon nominate a new Vice Chair for Supervision at the Board of Governors of the Federal Reserve System (Federal Reserve).
A. Key Themes
Professor Omarova has written on numerous topics in her academic career. Early on, she analyzed 1990s OCC interpretations that expanded national bank derivatives activities to include derivatives on commodities and equities; the Federal Reserve’s granting of Section 23A exemptions immediately before and during the 2008 Financial Crisis; and the historical exemptions from the definition of a “bank” under the Bank Holding Company Act.[1] More recently, she has written on bank governance, innovation in the financial industry, “culture” at financial institutions, restructuring the Federal Reserve to take customer demand deposits, and the “Too Big to Fail” problem, among other topics.[2]
Several key themes emerge from these writings:
- Concerns that post-Financial Crisis reforms have only magnified the size and interconnectedness of the largest banking organizations
- Concerns that banking and related financial activities frequently serve only private interests
- Concerns that activities outside of narrow banking – derivatives, commodities, trading, and even certain capital markets activities – are inherently risky
- Concerns that a focus on “innovation” may result in a weakening of supervisory standards
Perhaps most interesting, however, is Professor Omarova’s recurring theme that traditional bank supervision is too narrowly focused on what she calls “micro” issues and solutions, and that a new regulatory paradigm centered on overall “macro” economic and public interest goals, and including substantially increased government intervention in the financial sector, may be needed.
1. Concern with Size and Interconnectedness
Professor Omarova, like other observers, has noted one of the ironies of post-Financial Crisis regulation – that although the size and interconnectedness of the global banking sector contributed significantly to the Crisis, the financial system was saved only by increasing the size of the nation’s largest banks:
The post-crisis increase in the level of concentration of the U.S. financial industry is difficult to deny. For example, as of the year-end 2017, top five U.S. bank holding companies (BHCs) held forty-eight percent of the country’s BHC assets. By early 2018, there were four U.S. BHCs with more than $1.9 trillion in assets on their individual balance sheets. Despite the post-crisis passage of the Dodd-Frank Act, the most wide-ranging regulatory reform in the U.S. financial sector since the 1930s, [too big to fail] remains a “live” issue on the public policy agenda.[3]
This in turn, she believes, imposes considerable challenges for supervisors: “today’s financial system is growing increasingly complex and difficult to manage. This overarching trend manifests itself not only in the dazzling organizational complexity of large financial conglomerates, but also in the exponential growth of complex financial instruments – derivatives, asset-backed securities, and other structured products – and correspondingly complex markets in which they trade.”[4] The result is that it is “extremely difficult to measure and analyze not only the overall pattern of risk distribution in the financial system but also the true level of individual financial firms’ risk exposure.”[5]
2. Private Versus Public Interest
It is fair to say that Professor Omarova is not a strong believer in the “Invisible Hand.” Her articles frequently posit a dichotomy between the driving forces of finance and the “public interest.” Her article on bank culture, for example, makes this assertion:
[New York Federal Reserve Bank President] Gerald Corrigan argued that, in exchange for the publicly-conferred benefits uniquely available to them, banks have an obligation to align their implicit codes – and their actual conduct – with the public good. In practice, however, there has been little evidence of such an alignment . . . . One of the most troubling revelations [about bank conduct before the Financial Crisis] was that, in the vast majority of these cases, banks’ and their employees’ socially harmful and ethically questionable business conduct was perfectly permissible under the existing legal rules. In each of those instances, bankers voluntarily, and often knowingly, chose to pursue a particular privately lucrative but socially suboptimal business strategy. And, as long as mortgage markets kept going up and speculative trading in mortgage assets remained profitable, bankers showed no interest in fulfilling their public duties or prioritizing moral values over pecuniary self-interest.[6]
In an article on bank governance, she returns to this theme, stating that “[a]ll too often, however, the incentives of bank managers and shareholders to pursue short-term private gains are perfectly aligned but work directly against the public interest in preserving long-term financial stability. The recent financial crisis . . . made abundantly clear that the modern system of corporate governance . . . is not a sufficiently reliable or consistent mechanism for managing this insidious and apparently pervasive conflict in a publicly beneficial way.”[7]
Although it is clear how Professor Omarova views what then-Chief Judge Cardozo called “the forms of conduct permissible in a workaday world for those acting at arm’s length,”[8] it is less clear how she defines the “public interest.” Her writings do, however, suggest that it includes a focus on maintaining financial stability and appropriately allocating capital and credit to productive use, which she argues is not likely to occur absent government intervention:
[T]o date, there has been no meaningful debate on improving the system-wide allocation of financial resources to productive enterprise. In most, if not all, post-crisis discussions on financial regulation, the underlying presumption remains that private market actors are inherently better at assessing financial risks and spotting potentially beneficial investment opportunities ‘on the ground.’ Accordingly, the existing dysfunctions in the process of system-wide credit allocation are framed predominantly in terms of specific private incentive misalignments or more general political-economy frictions.[9]
3. Preference for Narrow Banking
From her earliest writings, Professor Omarova has expressed a distrust of activities that are not at the core of traditional commercial banking. In an early article, she took issue with the OCC’s increasingly flexible approach to interpreting the phrase “business of banking” in the National Bank Act to include derivative activities related to commodities and equities, including hedging such activities through physically settled transactions, and related activities such as national bank participation in power marketing and clearing organizations.[10] She similarly criticized Federal Reserve interpretations of the Gramm-Leach-Bliley Act under which commodity activities were deemed “complementary” to financial activities, and investments in commodity-related assets could be permissible merchant banking investments.[11] (It is worthwhile remembering that under Governor Daniel Tarullo, the Federal Reserve commenced an advanced notice of proposed rulemaking to consider established commodity activities by financial holding companies.[12]) And Professor Omarova strongly supported the statutory Volcker Rule but feared that the law’s mandated administrative rulemakings had great potential to weaken it.[13]
These concerns about risks from non-traditional activities extend to capital markets activities generally, including those that were broadly permissible for bank holding companies even before the Gramm-Leach-Bliley Act was enacted. (By 1997, the Federal Reserve had interpreted the Glass-Steagall Act in a manner that posed few limits on corporate debt and equity underwriting and dealing, in addition to underwriting and dealing in bank-permissible assets.[14]) Professor Omarova states that “[i]n today’s world, secondary markets in financial assets are far bigger, more complex, and more systemically important than primary markets. . . . It is not surprising, therefore, that today’s secondary markets in financial instruments are the principal sites of both relentless transactional ‘innovation’ and chronic over-generation of systemic risk.”[15] In criticizing the Federal Reserve’s Section 23A exemptions granted during the Financial Crisis, she argued that “it is hard to deny that these extraordinary liquidity backup programs also functioned to prop up the banks’ broker-dealer affiliates, which . . . were in the business of creating, trading, and dealing in securities that needed . . . financing and, as a result, had direct exposure to . . . highly unstable markets.”[16]
4. Innovation as a Source of Risk
In contrast to former Acting Comptroller Brian Brooks, who encouraged financial innovation, most notably with respect to national charters for virtual currency companies, Professor Omarova has had a skeptical eye on the question. One of her early articles, as noted above, criticized the OCC for its interpretive approach with respect to equity and commodity derivatives:
[T]he OCC’s highly expansive interpretation of the “business of banking” . . . served to undermine the integrity and efficacy of the U.S. system of bank regulation. Through the seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial “super-intermediaries,” or wholesale dealers in pure financial risk.[17]
This view carries over in later discussions of pre-Financial Crisis loan securitizations and credit default swaps, as well as fintech generally. Of the latter, Professor Omarova has written:
By making transacting in financial markets infinitely faster, cheaper, and easier to accomplish, fintech critically augments the ability of private actors to synthesize tradable financial claims – or private liabilities – and thus generate new financial risks on an unprecedented scale. Moreover, as the discussion of Bitcoin and ICOs shows, new crypto-technology enables private firms to synthesize tradable financial assets effectively out of thin air. . . . The sheer scale and complexity of the financial market effectively “liberated” from exogenously imposed constraints on its growth will make it inherently more volatile and unstable . . . . The same factors, however, will also make it increasingly difficult, if not impossible, for the public to control, or even track, new technology-driven proliferation of risk in the financial system.[18]
5. The Futility of Bank Supervision
Perhaps most interestingly for someone who would be the lead supervisor of most of the nation’s largest banks, Professor Omarova’s writings show a decidedly pessimistic view of the effectiveness of financial regulation. She frequently points out the failures of what she terms “micro” entity-specific solutions to such risks, in order to argue in favor of a revised “macro,” i.e., far more fundamental and structural, approach. One example comes from her article on Too Big To Fail: “At the heart of the TBTF problem, there is a fundamental paradox: TBTF is an entity-centric, micro-level metaphor for a cluster of interrelated systemic, macro-level problems. This inherent conceptual tension between the micro and the macro, the entity and the system, frames much of the public policy debate on TBTF.”[19]
Professor Omarova’s “macro” approach includes suggestions of potential governmental interventions in the financial system on a scale unprecedented even in times of crisis – government “golden shares” in large financial companies that would allow the government to override management decisions to forestall a crisis,[20] Federal Reserve counter-cyclical intervention in a broader range of financial markets,[21] “public interest” guardians who would supplement regulatory bodies to correct the self-interest of the financial sector,[22] and a significant National Investment Authority to counteract the biases of the private investment community.[23] As Professor Omarova acknowledges, such measures would require new legislation, for which there does not currently appear to substantial appetite.
B. Consequences For Regulatory Priorities
What then do these themes likely foretell should Professor Omarova receive Senate confirmation? It is of course always a challenge to predict the future, and academic writing is frequently at its best when it seeks to challenge traditional paradigms and manners of thought. This said, it does seem that the following outcomes are certainly within the realm of possibility.
1. Size and Interconnectedness
The OCC currently supervises eight of the country’s ten largest banks: JPMorgan Chase, Bank of America, Wells Fargo, Citibank, US Bank, PNC Bank, TD Bank, and Capital One, ranging from just under $400 billion in assets to over $3 trillion in assets. Some, but not all, of them also engage broadly in investment banking activities. The OCC also regulates many banks in the next asset tier below.
The OCC does not have any general authority to break up well-managed banks or to order them to cease activities, but it is not unusual for the OCC to adjust its supervisory approach based on the risk profile of an institution. What Professor Omarova might add to this traditional approach given her views of increasing systemic risk and the importance of the “macro” is a more holistic approach, in which not only will a particular institution’s own risk profile determine its supervision, but also the perceived risks created by those institutions to which it is most connected. In addition, large banks that fail to meet supervisory expectations can face activities limitations; an early article by Professor Omarova analyzed the idea of requiring regulatory approval of complex financial products.[24]
Moreover, although mergers of bank holding companies must be approved only by the Federal Reserve, in many cases once the holding company merger has been approved, the parties seek to merge the subsidiary banks for efficiency reasons. If the resulting bank will be a national bank, the OCC must approve the transaction under the Bank Merger Act. The statutory factors that the OCC must consider are similar to those the Federal Reserve considers, but the OCC makes an independent decision. Many of the required factors relate to size – competitive effect, ability of management (including on integrating institutions), and financial stability.[25]
2. Private Interest Versus Public Interest
In terms of constraining what Professor Omarova views as the self-interest of the financial sector, it is noteworthy that the responsible agencies, including the OCC, have never completely finalized the executive compensation rulemaking required by Dodd-Frank, something to which SEC Chair Gary Gensler has recently called attention.[26] One of the more controversial aspects of the original rulemaking was the extent of permissible clawbacks of compensation, if actions by individual bankers ended up imposing losses on the financial institution involved. On this question, Professor Omarova’s characterization of the “morals of the marketplace” could be significant.
Another means by which the bank regulators have sought to address privatizing gains and socializing losses since the Crisis is bank governance. The OCC’s principal contribution in this regard is its Guidelines Establishing Heightened Standards for large national banks and federal thrifts, which impose a prescriptive approach to certain aspects of bank corporate governance.[27] These Guidelines were adopted as safety and soundness standards pursuant to Section 39 of the Federal Deposit Insurance Act, which gives the OCC the authority to issue orders for noncompliance, orders that may be enforced by the issuance of civil money penalties or in federal district court actions. The OCC could further strengthen these standards or take a more aggressive approach to enforcing them.
3. Narrow Banking
Historically, as Professor Omarova herself has noted, the OCC has been one of the most flexible agencies in its interpretations of its governing statute, the National Bank Act. Although certain of the activities that she has criticized for increasing systemic risk are conducted by bank affiliates, not all of them are: national banks conduct significant derivative activities, certain capital markets activities are bank permissible, and numerous bank activities implicate the broad definition of proprietary trading contained in the Volcker Rule. Even in the absence of revisiting, for example, the National Bank Act interpretations relating to permissible derivatives activities, the OCC has the authority to examine all national bank activities. Those banking institutions with substantial businesses in areas that Professor Omarova has characterized as non-core and risk-creating should therefore expect a much stricter supervisory approach. The Volcker Rule regulations, which as revised still invite significant supervisory discretion in practice due to the difficulty of distinguishing between prohibited trading and permissible activities like risk-mitigating hedging, could well see ramped up examination interest, and expectations of compliance programs could increase.
4. Innovation and Fintechs
There are currently several pressing fintech-related issues at the OCC. First is the question of whether the OCC will grant a national bank charter to a company that proposes to make loans but not take FDIC-insured deposits, and that is not a statutorily authorized national trust bank. The OCC has claimed the authority under the National Bank Act to issue such a charter, but it has not acted on one such application, and it has been sued in federal court by state banking supervisors who believe that granting such a charter goes beyond the business of banking in the National Bank Act. Professor Omarova’s statements on the potential perils of innovation for supervisors and her general “public interest” concerns may well be relevant on this question.
Second, shortly before and just after President Biden was inaugurated, the OCC granted three trust company charters to digital currency companies, and issued a broad interpretation of permissible digital currency activities under the National Bank Act. The OCC is currently re-examining the bases for such charters, with Acting Comptroller Hsu expressing safety and soundness concerns over certain virtual currency activities. For Professor Omarova, virtual currencies and other digital assets are one of the areas where innovation is most likely to cause systemic risk.[28]
Third, Professor Omarova will be a voting member of the FDIC Board, which determines whether a state industrial bank may receive deposit insurance, and which also must approve any change of control transaction involving an FDIC-insured industrial bank. Under Chair Jelena McWilliams – but with a Republican-appointed Comptroller and Republican-appointed Director of the Consumer Financial Protection Bureau – the FDIC Board approved two such applications, one for Square and one for Nelnet. In one of her earliest articles, Professor Omarova analyzed the historical exemption for industrial banks in the Bank Holding Company Act,[29] and since that writing, Congress has refused to repeal the exemption, and the FDIC has finalized a framework for supervising the parents of industrial banks. It is certainly possible that given her preference was “narrow” banking, Professor Omarova would wish to see a linkage to traditional banking activities, with ancillary activities being preferable when conducted in an agency capacity, when considering such applications.
Finally, many fintechs operate via bank partnerships. Under the Trump Administration, the OCC issued fintech-friendly interpretations regarding the “true lender” and “valid when made” doctrines, which engendered opposition from consumer groups and certain state regulators and attorneys general. Congress used the Congressional Review Act this summer to void the “true lender” rule, but the “valid when made” interpretation remains. Professor Omarova’s criticism of the elasticity of the OCC’s interpretations of the National Bank Act on derivatives matters during the 1990s could extend beyond the derivatives area to bank-fintech partnership issues. Demonstrating a lack of increased risk to banks and the system from such partnerships, therefore, could become significant.
5. The Quarles/Brainard Divide – Likely Positioning
It is also important to note that Professor Omarova’s appointment is not taking place in a vacuum. In several weeks, Vice Chair Randal Quarles’s term as the Federal Reserve Governor in charge of bank supervision will come to an end, although a mere Governor Quarles could remain at the Federal Reserve for another decade. During the last four years, Vice Chair Quarles has shepherded through a number of “reforms to the reform” wrought by the Dodd-Frank Act. Many of the more important actions drew dissents from Governor Lael Brainard, who is one of the contenders to be Governor Quarles’ successor. Of these actions, quite a few implicated rules promulgated by the OCC as well as the Federal Reserve:
- Loosening the regulatory restrictions of the Volcker Rule
- Tailoring capital and liquidity requirements for an institution’s asset size and other factors, with institutions between $100 billion and $250 billion in assets particularly benefiting
- Reducing margin requirements for inter-affiliate uncleared swap transactions
- Proposing to reduce the enhanced supplementary leverage ratio for the largest banks and their holding companies
From her articles, Professor Omarova would appear to be decidedly in Governor Brainard’s camp on these four issues.
Conclusion: The Limits of Bank Supervision and Regulation
In her writings, Professor Omarova is a strong proponent for government intervention in the financial system, and a skeptic of a light-touch supervisory approach. In this way, she is reminiscent of the first de facto Federal Reserve Governor for bank supervision, another banking law professor turned regulator, Daniel Tarullo. Governor Tarullo, of course, oversaw the implementation of a highly prescriptive top-down approach to bank supervision at the Federal Reserve, which even he noted in his “farewell address” may have gone too far in some areas, particularly for non-systemic banks.[30] Professor Omarova also has quite a bit in common with former FDIC Chair Sheila Bair, who herself was a professor of regulatory policy, was critical of bank derivative activities, and pushed the Collins Amendment to the Dodd-Frank Act because of her suspicions regarding internal bank financial models.
But it is also fair to say that neither Governor Tarullo nor Chair Bair appeared to have quite as skeptical views on the limitations of bank supervision and regulation as Professor Omarova. What will a proponent of a new paradigm approach to the American banking industry do in the absence of any legislative appetite for departing from the reigning paradigm since the New Deal?
This is perhaps the most difficult question of all to answer. A logical response, however, is that in those areas that are perceived to pose the greatest risk, such a proponent would double down on the supervisory tools that are currently available in order to counter perceived risks at inception. Large federal banking institutions that depart from core deposit and lending activities should therefore expect searching supervisory reviews of their non-traditional activities.
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[1] Saule T. Omarova, “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking,’” 63 U. Miami L. Rev. 1041 (2009); Saule Omarova, “From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act,” 89 N.C. L. Rev. 1683 (2011); Saule T. Omarova and Margaret E. Tahyar, “That Which We Call a Bank: Revisiting the History of Bank Holding Company Regulation in the United States,” 31 Rev. Banking & Fin. L. 113 (2012).
[2] Saule T. Omarova, “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” 68 Ala. L. Rev. 1029 (2017); Saule T. Omarova, “New Tech v. New Deal: Fintech as a Systemic Phenomenon,” 36 Yale J. on Reg. 735 (2019); Saule T. Omarova, “Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure,” 27 Cornell J.L. & Pub. Pol’y 797 (2018); Saule T. Omarova, “The ‘Too Big to Fail’ Problem,” 103 Minn. L. Rev. 2495 (2019).
[3] “The ‘Too Big to Fail’ Problem,” supra note 2.
[6] “Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure,” supra note 2.
[7] “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” supra note 2.
[8] Meinhard v. Salmon, 164 N.E. 528 (N.Y. 1928).
[9] Saule T. Omarova, “What Kind of Finance Should There Be?”, 83 Law & Contemp. Probs. 195 (2020).
[10] “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking,’” supra note 1.
[11] Saule T. Omarova, “The Merchants of Wall Street: Banking, Commerce, and Commodities,” 98 Minn. L. Rev. 265 (2013).
[12] See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20140114a.htm.
[13] Saule T. Omarova, “The Dodd-Frank Act: A New Deal for A New Age?”, 15 N.C. Banking Inst. 83 (2011)
[14] See https://www.federalreserve.gov/boarddocs/press/boardacts/1996/19961220/ (increasing limit on bank ineligible revenues for Section 20 companies to 25 percent of total revenues).
[15] “What Kind of Finance Should There Be?”, supra note 9.
[16] “From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act,” supra note 1.
[17] “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking,’” supra note 1.
[18] “New Tech v. New Deal: Fintech as a Systemic Phenomenon,” supra note 2.
[19] “The ‘Too Big to Fail’ Problem,” supra note 2.
[20] “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” supra note 2.
[21] “The ‘Too Big to Fail’ Problem,” supra note 2.
[22] Saule T. Omarova, “Bankers, Bureaucrats, and Guardians: Toward Tripartism in Financial Services Regulation,” 37 J. Corp. L. 621 (2012).
[23] Robert C. Hockett & Saule T. Omarova, “Private Wealth and Public Goods: A Case for a National Investment Authority,” 43 J. Corp. L. 437 (2018).
[24] Saule T. Omarova, “License to Deal: Mandatory Approval of Complex Financial Products,” 90 Wash. U. L. Rev. 63 (2012).
[26] Akayla Gardner & Ben Bain, “Wall Street Pay Clawback Rule to Get New Push at SEC,” Bloomberg News (September 22, 2021).
[27] 12 C.F.R. Part 30 (Appendix D).
[28] “New Tech v. New Deal: Fintech as a Systemic Phenomenon,” supra note 2.
[29] “That Which We Call a Bank: Revisiting the History of Bank Holding Company Regulation in the United States,” supra note 1.
[30] See https://www.federalreserve.gov/newsevents/speech/tarullo20170404a.htm.
The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long.
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])
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Arthur S. Long – New York (+1 212-351-2426, [email protected])
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On Friday, September 24, the White House’s “Safer Federal Workforce Task Force” (“Task Force”) issued new guidance (the “Guidance”) regarding vaccination requirements and other COVID-safety measures for federal contractor employees. This Guidance implements President Biden’s Executive Order regarding COVID precautions for government contractors, issued September 9, 2021.
Key terms of the Guidance include a vaccination mandate for all covered employees of federal contractors, except in “limited circumstances” for workers “legally entitled” to accommodation. The vaccination mandate applies to covered employees working from home and who have recovered from COVID-19. There is no alternative for workers to present a weekly negative COVID test, as expected in the forthcoming Occupational Safety and Health Administration Emergency Temporary Standard (“OSHA ETS”) for large employers. Employers covered by both the Guidance and the OSHA ETS (i.e., federal contractors with 100 or more employees) would be held to this higher standard. The Guidance also directs masking and distancing practices in accordance with CDC guidelines.
This alert provides a brief overview of these and other provisions of the Guidance for contractors.
I. President Biden’s September 9 Executive Order Regarding Vaccinations for Employees of Federal Contractors
The Executive Order for federal contractors called for the Task Force, which the President established in January, to establish vaccination requirements for federal contactors by September 24.[1] The Order is effectuated by directing federal agencies to include a clause in contracts requiring “the contractor and any subcontractors (at any tier)” to “comply with all guidance for contractor or subcontractor workplace locations published by the Safer Federal Workforce Task Force,” “for the duration of the contract.”[2] Under the Order, this clause is to be included in new contracts and extensions and renewals of existing contracts, and “shall apply to any workplace locations . . . in which an individual is working on or in connection with a Federal Government contract.”[3]
The Order cited the Federal Property and Administrative Services Act (the Procurement Act) as authority for the new federal contractor mandate.[4] As noted in prior alerts, there is some question whether the Procurement Act authorizes the imposition of workplace safety standards in this manner, and legal challenges are possible.
II. Key Definitions
The Guidance defines the following key terms:
- A covered contractor is “a prime contractor or subcontractor at any tier who is party to a covered contract.”
- A covered contractor employee is “any full-time or part-time employee of a covered contractor (1) working on or in connection with a covered contract or (2) working at a covered contractor workplace.”
- An employee works “in connection with a covered contract” when he performs “duties necessary to the performance of the covered contract, but who are not directly engaged in performing the specific work called for by the covered contract,” such as human resources, billing, and legal review.
- A covered contractor workplace is a “location controlled by a covered contractor at which any employee of a covered contractor working on or in connection with a covered contract is likely to be present during the period of performance for a covered contract. A covered contractor workplace does not include a covered contractor employee’s residence.”
III. Three Areas of COVID-19-Safety Protocols
The Guidance addresses three key safety requirements for covered contractors and subcontractors at all tiers, except for contracts which are “under the Simplified Acquisition Threshold as defined in section 2.101 of the FAR” and contracts or subcontracts “for the manufacturing of products.”[5] The FAQs go on to state that these safety protocols do not apply to “subcontracts solely for the provision of products” and “covered contractor employees who only perform work outside the United States or its outlying areas.” Thus, the Guidance’s exceptions to the safety protocols largely do not expand or contract the scope of applicable contracts from the Executive Order.
(1) Vaccination:
The Guidance states that all covered contractor employees, including those who previously had COVID-19 as well as covered contractor employees working from home, must be fully vaccinated by December 8. The only exceptions are for employees who are “legally entitled to an accommodation” for medical or religious reasons.
A covered contractor is responsible for reviewing requests for accommodation and determining what, if any, accommodations to offer. Covered contractors are not responsible for providing vaccines to their employees (but may choose to do so), nor are they instructed to pay employees for the time and expenses associated with getting vaccinated (however, this may be a requirement of state and local law and is expected to be a requirement for large employers in the forthcoming OSHA ETS).
Contractors are instructed to review and verify, but not necessarily collect or store, documents to ensure that their employees are fully vaccinated. Acceptable documents include physical or electronic CDC cards, state health records, or private medical records. Unacceptable documents include positive antibody tests and attestations that an employee is vaccinated.
Agencies have discretion to grant temporary exemptions from the vaccine requirement when there is “an urgent, mission-critical need” to have contractors begin work before becoming fully vaccinated. Even then, employees must be fully vaccinated within 60 days of beginning work on the contract. They also must adhere to physical distancing and masking requirements for unvaccinated workers in the meantime.
(2) Physical Distancing and Masks:
Contractors must ensure that all employees and visitors present in covered contractor workplaces follow CDC guidance pertaining to physical distancing and masks. Fully vaccinated employees do not have to physically distance, but unvaccinated employees should maintain six feet of distance from others whenever practicable.
In areas of high community transmission (as determined by the CDC), everyone, including visitors, whether vaccinated or not, must wear masks indoors. In areas of low community transmission, only the unvaccinated must wear masks indoors (they also must wear masks outdoors in certain circumstances). Contractors are responsible for checking the CDC’s website weekly to determine the transmission rate of the local community. When the transmission rate increases, additional safety measures are effective immediately. When the transmission rate decreases to a low or moderate level, safety measures can be removed after two consecutive weeks at that lower level.
These mask mandates apply in all shared spaces and common areas. They do not apply in enclosed office spaces or when individuals are eating or drinking and maintaining appropriate distancing. Contractors can create exceptions to the mask mandate for situations where masks can burden breathing or otherwise pose a safety concern as determined by a workplace risk assessment. And the mask requirements do not apply when employees are working remotely from their residences.
As with the vaccination requirement, employers must review and consider what, if any, religious and medical accommodations to the mask requirement they must offer.
(3) Implementation:
All covered contractors must designate a COVID-safety coordinator. The coordinator is an employee responsible for coordinating, implementing, and enforcing compliance with the Guidance. The coordinator must provide relevant information about the Guidance to employees and visitors likely to enter a covered contractor workplace. The Guidance is silent as to whether a coordinator is required for each worksite or whether a single coordinator can fulfill these responsibilities for more than one worksite.
IV. Relationship to Other Federal and State Mandates
The Guidance purports to apply in all states and municipalities, even those that prohibit employers from imposing vaccination, mask, and distancing requirements. It claims to supersede any contrary state laws and local ordinances. It does not, however, excuse covered contractors from complying with stricter measures imposed by state and local governments. The Guidance also says that agencies may impose additional safety requirements on covered contractor employees while present on federal property.
The Guidance states that all contractors must comply with its COVID-19 protocols, even those employers that will also be subject to the forthcoming OSHA ETS. As we previously explained, the ETS—which is anticipated within weeks of September 9—is expected to require all employers with 100 or more employees to ensure that their workforce is fully vaccinated or to require any workers who remain unvaccinated to produce a negative test result at least weekly before coming to work. However, the Guidance for contractors states that “[c]overed contractors must comply with the requirements set forth in this Guidance regardless of whether they are subject to other workplace safety standards,” such as the forthcoming ETS. Given that the Guidance does not indicate that employees can undergo regular COVID testing in lieu of being vaccinated (and in fact does not mention testing at all), large employers who are also federal contractors will not be able to avoid a vaccination requirement by relying on the ETS testing option.
Finally, new contracts must state that if the Safer Federal Workforce Task Force updates its Guidance to add new requirements, those requirements will apply to existing contracts.
________________________
[1] Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-ensuring-adequate-covid-safety-protocols-for-federal-contractors/.
[4] Id. (citing 40 U.S.C. 101 et seq).
[5] The Executive Order exempted “(i) grants; (ii) contracts, contract-like instruments, or agreements with Indian Tribes…; (iii) contracts or subcontracts whose value is equal to or less than the simplified acquisition threshold, as that term is defined in section 2.101 of the Federal Acquisition Regulation; (iv) employees who perform work outside the United States or its outlying areas, as those terms are defined in section 2.101 of the Federal Acquisition Regulation; or (v) subcontracts solely for the provision of products.” Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors.
The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Jason C. Schwartz, Katherine V.A. Smith, Jessica Brown, Lucas C. Townsend, Lindsay M. Paulin, Andrew G. I. Kilberg, Chad C. Squitieri, Marie Zoglo, and Josh Zuckerman.
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, or any of the following in the firm’s Administrative Law and Regulatory, Labor and Employment or Government Contracts 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])
Government Contracts Group:
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-7366, [email protected])
Joseph D. West – Washington, D.C. (+1 202-955-8658, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
U.S. businesses invest significant capital, resources, and time to develop highly valuable technology and processes. Business competitors – and, increasingly, state actors or affiliates of state actors – are stealing that technology at an alarming rate for economic or national strategic advantage to devastating consequences to U.S. industry and national security. This webcast will examine developments regarding the nature of the theft risk, including risk from insiders, cyber intrusions, or other means, and enforcement trends from the Department of Justice and other government agencies.
A team of national security, cyber-crime, and litigation practitioners with experience both inside and outside of government will share their experiences in investigating and defending companies that fall victim to theft of their trade secrets and highlight a number of notable recent criminal prosecutions under the Economic Espionage Act and related statutes. We will discuss best practices for minimizing risk in this important area.
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PANELISTS:
David Burns, a partner in Washington, D.C. and co-chair of the firm’s National Security Practice Group, served in senior positions in both the National Security Division and the Criminal Division of the U.S. Department of Justice. As Principal Deputy Assistant Attorney General of the National Security Division he supervised the Division’s investigations and prosecutions, including counterterrorism, counterintelligence, economic espionage, cyber hacking, FARA, disclosure of classified information, and sanctions and export controls matters. Mr. Burns’ practice focuses on national security, white-collar criminal defense, internal investigations, and regulatory enforcement matters.
Zainab Ahmad, a partner in New York and co-chair of the firm’s National Security Practice Group, previously served as Deputy Chief of the National Security and Cybercrime section at the U.S. Attorney’s Office in the Eastern District of New York. Ms. Ahmad is a decorated former prosecutor who has received both of DOJ’s highest honors, the Attorney General’s Award and the FBI Director’s Award, and whose work prosecuting terrorists was profiled by The New Yorker magazine. Her practice is international and focuses on cross-border white collar defense and investigations, including corruption, anti-money laundering, sanctions and FCPA issues, as well as data privacy and cybersecurity matters.
Alexander Southwell, a partner in the New York office and co-chair of the firm’s Privacy, Cybersecurity and Data Innovation Practice Group, previously served as an Assistant United States Attorney in the United States Attorney’s Office for the Southern District of New York where he focused on cyber-crimes and intellectual property offenses, in addition to securities and commodities and other white collar frauds. Mr. Southwell advises companies and boards across industries victimized by cyber-crimes and which experienced data breaches and he has particular expertise counseling on issues under the Computer Fraud and Abuse Act, the Economic Espionage Act, the Electronic Communications Privacy Act, and related federal and state computer fraud and consumer protection statutes.
Robert Hur, a partner in Washington, D.C. and co-chair of the firm’s Crisis Management Practice Group, served as the 48th United States Attorney for the District of Maryland. During his tenure as United States Attorney, the Office handled numerous high-profile matters including those involving national security, cybercrime, public corruption, and financial fraud. Before serving as United States Attorney, Mr. Hur served as the Principal Associate Deputy Attorney General (“PADAG”) at the Department of Justice, a member of the Department’s senior leadership team and the principal counselor to Deputy Attorney General Rod J. Rosenstein. Mr. Hur assisted with oversight of all components of the Department, including the National Security, Criminal, and Civil Divisions, all 93 U.S. Attorney’s Offices, and the Federal Bureau of Investigation. He also liaised regularly on behalf of the Justice Department with the White House, Congressional committees, and federal intelligence, enforcement and regulatory agencies.
Mark Lyon, a partner in Palo Alto and co-chair of the firm’s Artificial Intelligence and Automated Systems Practice Group, has extensive experience representing and advising clients on the legal, ethical, regulatory, and policy issues arising from emerging technologies. As practice group chair, Mr. Lyon has extensive experience representing and advising clients on the legal, ethical, regulatory, and policy issues arising from emerging technologies like artificial intelligence. As a member of the firm’s Privacy, Cyber Security and Consumer Protection practice group, Mr. Lyon brings a global focus to help his clients develop, implement, and audit appropriate policies and procedures to comply with applicable data privacy and cyber security regulations.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.
This course is approved for transitional/non-transitional credit. 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 1.0 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.
The U.S. Department of Justice’s increased focus on the private equity sector in recent years has coincided with that sector’s growing investment in the highly regulated healthcare and life sciences industries. That increased focus has been further fueled by the CARES Act and its Paycheck Protection Program, which was in operation from April 2020 through May 31, 2021. In March 2021, the DOJ announced new enforcement priorities focusing on CARES Act fraud. Chief among the potential targets are private equity-backed companies. While private equity firms were ineligible for PPP loans, their portfolio companies may have been eligible, and it is likely that prosecutors and private plaintiffs will seek to hold private equity firms liable under the False Claims Act for a portfolio company’s actions with respect to PPP.
The Small Business Administration released data on the companies that received PPP loans and analysis of this data revealed that over 8,100 privately backed companies were approved for PPP loans of $150,000 or more. Of these, 2,528 were private equity-backed companies. Under the CARES Act, businesses were eligible to receive PPP loans issued by private lenders and credit unions but backed by the SBA. PPP loans were to be used for select purposes including: funding payroll and benefits paying mortgage interest, rent, or utilities; and other worker protection costs related to COVID-19. In April 2020, due to confusion about private equity firms’ eligibility for the loans, the SBA issued an interim final rule stating that private equity firms were ineligible for PPP loans.
Portfolio companies, however, would continue to qualify for the loans if they met special size requirements under the SBA’s affiliation rules. The affiliation analysis under the SBA’s rules involves six different bases for affiliation, including ownership, stock options, control, management, identity of interest, and the existence of franchise and license agreements. While this is a fact-specific analysis, for the purposes of the PPP, a private equity firm was likely to be considered an “affiliate” of a portfolio company, and portfolio companies controlled by the same private equity firm were likely to be “affiliates” of each other. Under the rules, if the aggregate number of employees at the borrower and its affiliates exceeded a certain size, the borrower was ineligible for PPP loans. In addition, upon application, borrowers were required to certify in good faith that the loan was necessary, that they satisfied the affiliation rules for size and eligibility, and that they agreed to use the funds appropriately. If these certification requirements are determined to have not been met, the SBA will seek immediate repayment of the loan.
Originally published by the Daily Journal on September 17, 2021.
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 False Claims Act or Private Equity groups, or the authors in San Francisco:
Winston Y. Chan (+1 415-393-8362, [email protected])
Trisha Parikh (+1 415-393-8314, [email protected])
Please also feel free to contact the following practice leaders and members:
Private Equity Group:
Richard J. Birns – New York (+1 212-351-4032, [email protected])
Scott Jalowayski – Hong Kong (+852 2214 3727, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
False Claims Act/Qui Tam Defense Group:
San Francisco
Winston Y. Chan – Co-Chair (+1 415-393-8362, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Washington, D.C.
Jonathan M. Phillips – Co-Chair (+1 202-887-3546, [email protected]),
F. Joseph Warin (+1 202-887-3609, [email protected])
Joseph D. West (+1 202-955-8658, [email protected])
Robert K. Hur (+1 202-887-3674, [email protected])
Geoffrey M. Sigler (+1 202-887-3752, [email protected])
New York
Reed Brodsky (+1 212-351-5334, [email protected])
Mylan Denerstein (+1 212-351-3850, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Casey Kyung-Se Lee (+1 212-351-2419, [email protected])
Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])
John D.W. Partridge (+1 303-298-5931, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Dallas
Robert C. Walters (+1 214-698-3114, [email protected])
Andrew LeGrand (+1 214-698-3405, [email protected])
Los Angeles
Nicola T. Hanna (+1 213-229-7269, [email protected])
Timothy J. Hatch (+1 213-229-7368, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
James L. Zelenay Jr. (+1 213-229-7449, [email protected])
Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Corporate carveouts, whether conducted in the context of a sale, spin-off or other divestiture, are among the most complex transactions a company may undertake, but nevertheless, these deals have been an increasingly common means of unlocking value for both the divesting company and business to be separated. Ensuring that the transaction perimeter is appropriately defined is a key area of executing these transactions and can be one of the most time and resource-consuming aspects of the deal. Furthermore, navigating the complexity of the operational separation of the two entities, and ensuring each company is set up to operate independently at close requires detailed planning and executional support, which must also not distract from the ongoing performance of the base business.
This webcast brings together leading divestiture practitioners from both Gibson Dunn and Boston Consulting Group to discuss some of the key areas of consideration in preparing for and executing a carveout, including: (1) appropriately defining the “business,” (2) identifying entities, assets and liabilities within the scope of the business and developing a plan for allocating or splitting up shared assets and liabilities, (3) strategies for utilizing internal and external resources to manage the process efficiently in the preparation, execution, consummation and post-closing stages of the transaction and (4) key learnings and best practices from our experience on the front lines supporting the operational separation during a carveout.
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PANELISTS:
Daniel Angel is a Partner in Gibson Dunn’s New York office, Co-Chair of the firm’s Technology Transactions Practice Group and a member of its Strategic Sourcing and Commercial Transactions Practice Group. He is a transactional attorney who has represented clients on technology-related transactions since 2003. Mr. Angel has worked with a broad variety of clients ranging from market leaders to start-ups in a wide range of industries including financial services, private equity funds, life sciences, specialty chemicals, insurance, energy and telecommunications.
Stephen Glover is a Partner in Gibson Dunn’s Washington, D.C. office and previous Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies as well as private equity firms in complex mergers and acquisitions, including spin-offs, carveouts and related transactions, as well as other corporate matters. Mr. Glover’s clients include businesses that operate in many different industries.
Saee Muzumdar is a Partner in Gibson Dunn’s New York office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border mergers and acquisitions activities and general corporate counseling.
Ben Aylor is a Managing Director and Senior Partner in the Washington, D.C. office of Boston Consulting Group. He focuses on helping clients meet the challenges of major change efforts including post-merger integrations and broad transformations/ transformational M&A, and also leads BCG’s efforts on manufacturing network design and Global Trade. Ben has led both overall corporate post-merger integration programs and the manufacturing aspects of post-merger integrations, as well as advised several large carveouts and spin-offs in the pharmaceutical industry.
Hob Brooks is a Partner in the Philadelphia office of Boston Consulting Group. Mr. Brooks advises biopharmaceutical and medtech companies on complex large-scale transformation programs and pre-/post-merger transaction planning, execution, and integration. He has worked across several multi-billion dollar carveouts, spin-offs, divestitures and integrations during his tenure with BCG.
MCLE INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.
This course is approved for transitional/non-transitional credit. 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 1.0 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.
Join us to listen to this interactive discussion with an exceptional panel comprising some of the key people at the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA) and Loan Syndications and Trading Association (LSTA) who were responsible for developing their 2021 Revised Sustainability-Linked Loan Principles together with three finance practitioners from Gibson Dunn’s US, U.K. and Asian finance and ESG practices.
View Slides (PDF)
PANELISTS:
Ben Myers – Panelist
London, Partner, Gibson Dunn
Ben Myers is a partner in Gibson Dunn’s global finance and business restructuring teams. His practice focuses on advising funds, sponsors, corporates and financial institutions with a particular focus on leveraged finance, special situations and restructuring transactions. Mr. Myers is one of the leaders of the firm’s UK ESG practice and a member of the firm’s global ESG practice.
Patricia Tan Openshaw – Panelist
Hong Kong, Partner, Gibson Dunn
Patricia is a partner in Gibson Dunn’s energy, infrastructure and global finance teams. Her practice focuses on project development and finance, mergers and acquisitions, and banking and finance transactions in the energy and infrastructure sector. She has substantial experience representing developers, sponsors, contractors, lenders, government agencies and offtakers in connection with the development, financing, and restructuring of power, rail, toll road, water, casinos and other infrastructure projects. She also advises on financings involving commercial banks, export credit agencies, multilateral agencies, private equity funds and Rule 144A/Regulation S offerings and private placements. She has handled transactions in Africa, Australia, China, Fiji, India, Indonesia, Korea, Myanmar, Pakistan, Philippines, Singapore, Thailand, Vietnam and the United States. Ms. Openshaw is a member of the firm’s global ESG practice.
Yair Galil – Panelist
New York, Of Counsel, Gibson Dunn
Yair is of counsel in Gibson Dunn’s global finance team. His experience includes representation of sponsors, corporate issuers, financial institutions and investment funds in a variety of complex financing transactions. The business contexts for these transactions have ranged from corporate finance (including sustainability‐linked credit facilities), to leveraged acquisitions and dividend recaps, to debt buybacks and other out‐of‐court capital restructuring transactions, to debtor‐in‐ possession and bankruptcy exit financings. Mr. Galil is a member of the firm’s global ESG practice.
Hannah Vanstone – Panelist
London, Legal Associate, Loan Market Association
Hannah joined the LMA’s legal team in November 2018 and assists with the Association’s documentation projects, education and training events and regulatory and lobbying matters. Hannah leads the LMA’s real estate finance work and is also involved in all the LMA’s ESG initiatives. Prior to joining the LMA, Hannah was a banking and finance solicitor at Osborne Clarke LLP where she acted for numerous domestic and international corporate banks and UK and international borrowers on a variety of syndicated finance transactions, with a particular focus on real estate finance.
Rosamund Barker – Panelist
Hong Kong, Head of Legal, Asia Pacific Loan Market Association
Rosamund is currently Head of Legal at the Asia Pacific Loan Market Association based in Hong Kong. She has spent much of her career working in the Banking and Finance and Capital Markets teams at Linklaters in London and Hong Kong, most recently as Counsel. She was also Director of Knowledge for Asia Pacific at Baker McKenzie. She is responsible for green and sustainable lending initiatives at the APLMA and has been active in raising awareness of the Green Loan Principles, Sustainability Linked Loan Principles and Social Loan Principles to Borrowers and Lenders alike. Rosamund read law at Churchill College, Cambridge University and is a qualified solicitor both in Hong Kong and England and Wales.
Tess Virmani – Panelist
New York, Associate General Counsel, Executive Vice President, Public Policy of the Loan Syndications and Trading Association (LSTA)
Tess has a broad range of responsibilities at the LSTA. She leads the LSTA’s sustainable finance and ESG initiatives which seek to foster the development of sustainable lending as well as promote greater ESG disclosure in the loan markets. In addition, Tess engages in the LSTA’s policy initiatives, including market advocacy and spearheading industry solutions to market developments, such as the transition to replacement benchmarks. Tess focuses on maintaining and augmenting the LSTA’s extensive suite of documentation, which includes templates, market standards, and market and regulatory guidance. Finally, she is involved in the development and presentation of the LSTA’s robust education programs. Prior to joining the LSTA, Tess practiced as a finance attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York. She received a B.S. in International Politics from the Walsh School of Foreign Service at Georgetown University and a J.D. from Fordham University School of Law. She is admitted as an attorney in New York. Tess is an FSA Level II Candidate.
Los Angeles partners Perlette Michèle Jura and Dhananjay Manthripragada discuss the Gibson Dunn recruitment process for summer associates in “How to land a job at Gibson Dunn, according to two partners leading the Big Law firm’s recruiting efforts” [PDF] published by Business Insider on September 7, 2021.
The use of alternative data in investment decision-making—incorporating large volumes of data found outside a company’s public filings—has expanded rapidly in the last several years, as data has increased in availability. Investment funds commonly have data analysts use a variety of alternative data sources, from data on commercial transactions to information about human behavior, to inform investment decisions in trading securities. And the alternative data industry is continuing to grow. In 2020, the industry was valued at $1.72 billion and, by 2028, is expected to reach close to $70 billion.[1] With increasing popularity, it’s unsurprising this growth has led to increased interest from market regulators. While the SEC has shown interest in alternative data in the past, it recently took the significant step in bringing the first enforcement action against an alternative data provider for securities fraud.
The App Annie Settlement
On September 14, 2021, the SEC announced a settled enforcement action against App Annie, Inc., an alternative data provider, and the Company’s co-founder and former CEO and Chairman Bertrand Schmitt, for misrepresentations both to data sources in connection with the collection of data, and to investment firm subscribers regarding the data underlying its product.[2] Without admitting or denying the findings, App Annie and Schmitt consented to a cease-and-desist order finding a violation of Section 10(b) of the Exchange Act and Rule 10b-5, and imposing a penalty of $10 million for App Annie, and $300,000 for Schmitt, and a three-year officer and director bar against him.
App Annie provides market data analytics on mobile application performance. Companies with mobile applications provide App Annie access to their data in return for free analytics. App Annie sells a data analytics product to investment firms and other subscribers for a fee. App Annie’s Terms of Service represented that its data analytics estimates were generated using statistical models from data that was aggregated and anonymized. In reality, according the SEC, between late 2014 and mid-2018, App Annie used actual non-aggregated and non-anonymized performance data from companies to reduce disparities between model-driven estimates and the actual data and thereby make App Annie’s paid subscription product more accurate and more valuable to its trading firm clients.
According to the SEC’s order, App Annie’s use of non-anonymized and non-aggregated data to enhance the accuracy of its analytics product rendered representations made to the sources of data, as well as the subscribers to the analytics, materially misleading. In collecting data from companies’ applications, App Annie represented to the companies providing access to app usage data that all data would be aggregated and anonymized before utilized in its paid subscription product. In addition, App Annie represented to its investment firm subscribers that the Company’s estimates were generated in a manner consistent with the consents it obtained from the underlying data sources, and that App Annie had effective controls to prevent misuse of confidential data and ensure compliance with federal securities laws. However, the SEC found that because App Annie’s estimates used non-aggregated and non-anonymized data, in contradiction to its representations to its data sources, the Company’s estimates were based on data used in a manner inconsistent with its representations to its data providers. According to the order, App Annie understood that investment firm subscribers were using the Company’s product to make investment decisions and that subscribers did in fact trade based on App Annie’s data product.
The order asserts, without explanation, that the data on app usage “often is material to a public company’s financial performance and stock price.” The order also does not explain how App Annie’s incorporation of actual data into its estimates rendered the various representations to subscribers materially misleading as required by Section 10(b) or how the alleged misrepresentations were “in connection with” the purchase or sale of securities. Rather the order asserts that Schmitt “understood it was material to trading firms’ decisions to use App Annie’s estimates for investment purposes.”
The order does not provide for any disgorgement or even provide a Fair Fund to distribute any of the penalty to customers who may have been harmed. Finally, it is notable that Schmitt agreed to a three year officer and director bar even though App Annie is a private company.
Individual Liability for App Annie CEO Bertrand Schmitt
In bringing claims against Schmitt individually, the order emphasizes Schmitt’s direct involvement in the decision to use non-aggregated and non-anonymized data. The SEC further found Schmitt oversaw a “manual estimate alteration process,” during which engineers made manual adjustments to purportedly statistical models to make them more “accurate” in tracking actual company metrics. When the Company learned of Schmitt’s misconduct in June 2018, it ceased manually adjusting its data and stopped using non-aggregated and non-anonymized data in its subscription product. Around the same time, Schmitt resigned as CEO. He served as Chief Strategy Officer of App Annie until he was terminated in January 2020.
After the SEC published the order, Schmitt addressed the settlement on LinkedIn.[3] He noted that “compliance was a critical element of the business” and that he and App Annie “obtained legal advice on compliance procedures and even hired an in-house compliance team.” Nonetheless, the SEC explicitly found that, contrary to the App Annie’s representations, “during the relevant period, the Company did not have effective internal controls and did not conduct regular compliance reviews,” suggesting the SEC did not credit any advice of counsel defense.
Regulatory Risks and Mitigation Strategies
While this settlement represents the first enforcement action in this space, the SEC has been increasing its focus on the growing alternative data sphere for several years. In its 2020 Examination Priorities, the Commission’s Office of Compliance Inspection and Examinations included for the first time a focus on investment advisers’ use of alternative data.[4] The Commission noted that examinations will “focus on firms’ use of these data sets and technologies to interact with and provide services to investors, firms, and other service providers and assess the effectiveness of related compliance and control functions.”[5] The SEC’s press release announcing the App Annie settlement also acknowledged the role of the examination staff in the investigation that led to the enforcement action.[6]
For years, we have counseled clients on risk mitigation strategies for the use of alternative data. While this settlement highlights the regulatory risks accompanying the use of alternative data, it also validates the importance of the compliance oversight that subscribers have employed to manage those risks. Notably, the representations that subscribers received protected them from the government’s allegation against App Annie’s alleged misuse of company data. Accordingly, it bears repeating compliance and oversight mitigate the risks arising from the use of alternative data.
- Compliance Oversight. An important first step in managing risk is to engage compliance before adopting new data sources. This means that firms should have in place a mechanism to require compliance pre-approval before a new data source is accepted.
- Policies and Procedures. While there is no requirement to have policies and procedures specifically addressing the use of alternative data, where an adviser is making significant use of such data, policies and procedures specifically addressing the risks unique to alternative data sources can be a way to demonstrate a firm’s attention to the risks of its business. Policies and procedures for the use of alternative data could encompass requirements for compliance pre-approval, as well as guidance on compliance diligence of potential data vendors, contractual protections, training of investment professionals and periodic review of the use of alternative data sources.
- Due Diligence on Data Vendors. The diligence process should be part of the compliance oversight process. The diligence process can have multiple components which may vary depending on the nature of the data, the vendor, and the variety of legal issues that might be implicated. Questions examined during the diligence process could include, for example, the original source of the data and the alternative data provider’s right to use and sell the data. If appropriate, direct questioning of vendor representatives may be appropriate in evaluating the care and robustness of a vendor’s compliance approach.
- Documentation and Record Keeping. Before finalizing an approval of the vendor, compliance may also involve documentation of certain representations and warranties to mitigate further the potential regulatory risks associated with alternative data. For example, contracts could incorporate representations concerning: (i) the vendor’s right to use and sell the data; (ii) the vendor’s compliance with relevant laws concerning the collection and use of the data; (iii) the absence of material nonpublic information or a duty of confidentiality concerning the data; (iv) the absence of personal identifying information in the data; and (v) in the case of web-scraping services, compliance with the Computer Fraud and Abuse Act and other relevant laws.
- Monitoring and Periodic Review. Given the rapidly evolving market, vendors engage in a continuous search for new sources of data and the development of better analytical insights. Accordingly, effective compliance monitoring can benefit from periodically reviewing the status of existing vendors as part of the annual compliance review, particularly if the vendor’s offerings change over time.
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[1] Grand View Research, Alternative Data Market Size, Share & Trends Analysis Report by Data Type (Credit & Debit Card Transactions, Social & Sentiment Data, Mobile Application Usage), By Industry, By End User, By Region, And Segment Forecasts 2021 – 2028, Report Overview (Aug. 2021), available at https://www.grandviewresearch.com/industry-analysis/alternative-data-market.
[2] Order Instituting Cease-and-Desist Proceedings, Securities Exchange Act of 1934 Release No. 92975 (Sept. 14, 2021).
[3] Bertrand Schmitt, Lessons Learned, Closing a Chapter, Sept. 14, 2021, available at https://www.linkedin.com/pulse/lessons-learned-closing-chapter-bertrand-schmitt/.
[4] See U.S. Securities and Exchange Commission, Office of Compliance Inspections and Examinations, 2020 Examination Priorities at 14 (OCIE 2020 Priorities), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf.
[6] SEC Press Release, SEC Charges App Annie and its Founder with Securities Fraud (Sept. 14, 2021), available at https://www.sec.gov/news/press-release/2021-176.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement Practice Group, or the following authors:
Mark K. Schonfeld – Co-Chair, New York (+1 212-351-2433, [email protected])
Richard W. Grime – Co-Chair, Washington, D.C. (+1 202-955-8219, [email protected])
Reed Brodsky – New York (+1 212-351-5334, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Zoey G. Goldnick – New York (+1 212-351-2631, [email protected])
Please also feel free to contact any of the following practice group leaders and members:
New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Barry R. Goldsmith (+1 212-351-2440, [email protected])
Mary Beth Maloney (+1 212-351-2315, [email protected])
Mark K. Schonfeld (+1 212-351-2433, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Avi Weitzman (+1 212-351-2465, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Tina Samanta (+1 212-351-2469, [email protected])
Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Jeffrey L. Steiner (+1 202-887-3632, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])
San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8234, [email protected])
Palo Alto
Michael D. Celio (+1 650-849-5326, [email protected])
Paul J. Collins (+1 650-849-5309, [email protected])
Benjamin B. Wagner (+1 650-849-5395, [email protected])
Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])
Los Angeles
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas M. Fuchs (+1 213-229-7605, [email protected])
Nicola T. Hanna (+1 213-229-7269, [email protected])
Debra Wong Yang (+1 213-229-7472, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson, Dunn & Crutcher LLP is pleased to announce that the Asia Pacific Loan Market Association (APLMA) has released an English law term facilities agreement template for Indonesia offshore loans, which is available in the APLMA documentation library.
Gibson Dunn’s lawyers, together with members of the APLMA Indonesian Documentation Steering Committee, worked on the drafting of the English law APLMA template for Single Borrower, Single Guarantor, Single Currency Term Facility Agreement for Indonesia Offshore Loans (the “APLMA Indonesia Template”), to help achieve a degree of consistency amongst financial institutions that lend into Indonesia and facilitate growth of the secondary market there.
The APLMA Indonesia Template not only sets out Indonesia specific provisions that typically are seen in loan documents for Indonesian cross-border transactions, such as those relating to reporting obligations owed to Bank Indonesia and Law No. 24 of 2009 relating to the use of Bahasa Indonesia, but also includes detailed notes to help template users focus on these key Indonesia related issues. A Bahasa Indonesia version of the APLMA Indonesia Template will be published shortly.
The APLMA Indonesian Documentation Steering Committee was founded and spearheaded by Gibson Dunn partner Jamie Thomas, who chairs the committee.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above. Please contact the Gibson Dunn lawyer with whom you usually work, or the lawyers below who worked on the drafting of the APLMA Indonesia Template:
Jamie Thomas – Singapore (+65 6507.3609, [email protected])
U-Shaun Lim – Singapore (+65 6507.3633, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.