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Recently, the SEC’s Division of Corporation Finance has issued a number of comment letters relating exclusively to climate-change disclosure issues. The letters we have seen to date comment on companies’ most recent Form 10-K filings, including those of calendar year companies who filed their Form 10-K more than 6 months ago, and have been issued by a variety of the Division’s industry review groups, including to companies that are not in particularly carbon-intensive industries. Many of the climate change comments appear to be drawn from the topics and considerations raised in the SEC’s 2010 guidance on climate change disclosure, as reflected in the sample comments that we have attached in the annex to this alert. We expect this is part of a larger Division initiative because the letters are similar (although not identical), contain relatively generic comments, and have been issued in close proximity to one another. Accordingly, it is reasonable to expect that additional comment letters will be issued in the coming weeks and months.

The issuance of these comments and their focus comes as no surprise given the SEC’s Chair and several commissioners have indicated that climate change disclosures are a priority. As detailed in Gibson Dunn’s client alert of June 21, 2021, the SEC also recently announced its anticipated rulemaking agenda, which includes a near-term focus on rules that would prescribe climate change disclosures.

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The following Gibson Dunn attorneys assisted in preparing this update: Andrew Fabens, Brian Lane, Courtney Haseley, Elizabeth Ising, James Moloney, Lori Zyskowski, Michael Titera, Thomas Kim, and Ronald Mueller.

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

On September 17, 2021, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) imposed sanctions in response to the ongoing humanitarian and human rights crisis in Ethiopia, particularly in the Tigray region of the country.[1] The new sanctions program provides authority to the Secretary of the Treasury, in consultation with the Secretary of State, to impose a wide range of sanctions for a variety of activities outlined in a new Executive Order (“E.O.”). No individuals or entities have yet been designated under the E.O. However, U.S. Secretary of State Antony Blinken has warned that “[a]bsent clear and concrete progress toward a negotiated ceasefire and an end to abuses – as well as unhindered humanitarian access to those Ethiopians who are suffering – the United States will designate imminently specific leaders, organizations, and entities under this new sanctions regime.”

This action comes on the heels of repeated calls by the United States for all parties to the conflict to commit to an immediate ceasefire as evidenced in the Department of State’s press statement on May 15, 2021, and Secretary of State Blinken’s phone call to Ethiopian Prime Minister Abiy Ahmed on July 6, 2021. Similarly, on August 3-4, 2021, U.S. Agency for International Development (“USAID”) Administrator Samantha Power traveled to Ethiopia to “draw attention to the urgent need for full and unhindered humanitarian access in Ethiopia’s Tigray region and to emphasize the United States’ commitment to support the Ethiopian people amidst a spreading internal conflict” according to a USAID press release at the time. And prior to the actions on September 17, on August 23, 2021, OFAC sanctioned General Filipos Woldeyohannes,Chief of Staff of the Eritrean Defense Forces, for engaging in serious human rights abuses under the Global Magnitsky sanctions program and condemned the violence and ongoing human rights abuses in the Tigray region of Ethiopia.

The nature and scope of this new sanctions regime suggests that the Biden administration is taking a measured, flexible, and cautious approach to the situation in Ethiopia. OFAC is able to impose sanctions measures of varying degrees of severity, without those sanctions necessarily flowing down to entities owned by sanctioned parties – which should limit ripple effects on the Ethiopian economy. Alongside the Chinese Military Companies sanctions program, this new sanctions program is one of the very few instances where OFAC’s “50 Percent Rule” does not apply, perhaps signaling a more patchwork approach to sanctions designations going forward. The decision to hold off on any initial designations is also telling, and makes clear the focus on deterrence – as opposed to punishment for past deeds. Moreover, at the outset, OFAC has issued general licenses and related guidance allowing for humanitarian activity in Ethiopia to continue. The approach here, although slightly different, is broadly consistent with the Biden administration’s handling of the situation in Myanmar, in which it has gradually rolled out sanctions designations over a period of many months and prioritized humanitarian aid in its general licenses and guidance.[2]

Menu-Based Sanctions Permit Targeted Application of Restrictions

With respect to persons or entities engaged in certain targeted activities, the E.O. permits the Department of the Treasury to choose from a menu of blocking and non-blocking sanctions measures. In keeping with recent executive orders of its kind, the criteria for designation under the E.O. are exceedingly broad. The E.O. provides that the Secretary of the Treasury, in consultation with the Secretary of State, may designate any foreign person determined:

to be responsible for or complicit in, or to have directly or indirectly engaged or attempted to engage in, any of the following:
- actions or policies that threaten the peace, security, or stability of Ethiopia, or that have the purpose or effect of expanding or extending the crisis in northern Ethiopia or obstructing a ceasefire or a peace process;
- corruption or serious human rights abuse in or with respect to northern Ethiopia;
- the obstruction of the delivery or distribution of, or access to, humanitarian assistance in or with respect to northern Ethiopia, including attacks on humanitarian aid personnel or humanitarian projects;
- the targeting of civilians through the commission of acts of violence in or with respect to northern Ethiopia, including involving abduction, forced displacement, or attacks on schools, hospitals, religious sites, or locations where civilians are seeking refuge, or any conduct that would constitute a violation of international humanitarian law;
- planning, directing, or committing attacks in or with respect to northern Ethiopia against United Nations or associated personnel or African Union or associated personnel;
- actions or policies that undermine democratic processes or institutions in Ethiopia; or
- actions or policies that undermine the territorial integrity of Ethiopia;
to be a military or security force that operates or has operated in northern Ethiopia on or after November 1, 2020;
to be an entity, including any government entity or a political party, that has engaged in, or whose members have engaged in, activities that have contributed to the crisis in northern Ethiopia or have obstructed a ceasefire or peace process to resolve such crisis;
to be a political subdivision, agency, or instrumentality of the Government of Ethiopia, the Government of Eritrea or its ruling People’s Front for Democracy and Justice, the Tigray People’s Liberation Front, the Amhara regional government, or the Amhara regional or irregular forces;
to be a spouse or adult child of any sanctioned person;
to be or have been a leader, official, senior executive officer, or member of the board of directors of any of the following, where the leader, official, senior executive officer, or director is responsible for or complicit in, or who has directly or indirectly engaged or attempted to engage in, any activity contributing to the crisis in northern Ethiopia:
- an entity, including a government entity or a military or security force, operating in northern Ethiopia during the tenure of the leader, official, senior executive officer, or director;
- an entity that has, or whose members have, engaged in any activity contributing to the crisis in northern Ethiopia or obstructing a ceasefire or a peace process to resolve such crisis during the tenure of the leader, official, senior executive officer, or director; or
- the Government of Ethiopia, the Government of Eritrea or its ruling People’s Front for Democracy and Justice, the Tigray People’s Liberation Front, the Amhara regional government, or the Amhara regional or irregular forces, on or after November 1, 2020;
to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any sanctioned person; or
to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any sanctioned person.

Upon designation of any such foreign person, the Secretary of the Treasury may select from a menu of sanctions options to implement as follows:

the blocking of all property and interests in property of the sanctioned person that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in;
the prohibiting of any United States person from investing in or purchasing significant amounts of equity or debt instruments of the sanctioned person;
the prohibiting of any United States financial institution from making loans or providing credit to the sanctioned person;
the prohibiting of any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the sanctioned person has any interest; or
the imposing on the leader, official, senior executive officer, or director of the sanctioned person, or on persons performing similar functions and with similar authorities as such leader, official, senior executive officer, or director, any of the sanctions described in (1)-(4) above.

The restrictions above not only prohibit the contribution or provision of any “funds, goods, or services to, or for the benefit of” any sanctioned person, but also the receipt of any such contribution of provision of funds, goods, or services from any sanctioned person. Those persons subject to blocking sanctions would be added to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”), while those subject to non-blocking sanctions would be added to the Non-SDN Menu-Based Sanctions List (“NS-MBS List”).[3]

In addition to the restrictions described above, the E.O. directs other heads of relevant executive departments and agencies to, as necessary and appropriate, to (1) “deny any specific license, grant, or any other specific permission or authority under any statute or regulation that requires the prior review and approval of the United States Government as a condition for the export or reexport of goods or technology to the sanctioned person” and (2) deny any visa to a leader, official, senior executive officer, director, or controlling shareholder of a sanctioned person.

OFAC’s “50 Percent Rule” Does Not Automatically Apply

Importantly, and unlike nearly all other sanctions programs administered by OFAC, this E.O. stipulates that OFAC’s “50 Percent Rule” does not automatically apply to any entity “owned in whole or in part, directly or indirectly, by one or more sanctioned persons, unless the entity is itself a sanctioned person” and the sanctions outlined within the E.O. are specifically applied. OFAC makes clear in Frequently Asked Questions (“FAQs”) 923 and 924 that such restrictions do not automatically “flow down” to entities owned in whole or in part by sanctioned persons regardless of whether such persons are listed on OFAC’s SDN List or NS-MBS List.

Parallel Issuance of New General Licenses and FAQs to Support Wide Range of Humanitarian Efforts

Recognizing the importance of humanitarian efforts to addressing the ongoing crisis in northern Ethiopia, OFAC concurrently issued three General Licenses and six related FAQs:

General License 1, “Official Activities of Certain International Organizations and Other International Entities,” authorizes all transactions and activities for the conduct of the official business of certain enumerated international and non-governmental organizations by their employees, grantees, or contractors. FAQ 925 provides additional information on which United Nations organizations are included within this authorization.
General License 2, “Certain Transactions in Support of Nongovernmental Organizations’ Activities,” authorizes transactions and activities that are ordinarily incident and necessary to certain enumerated activities by non-governmental organizations, including humanitarian projects, democracy-building initiatives, education programs, non-commercial development projects, and environmental or natural resource protection programs. FAQ 926 provides additional examples of the types of transactions and activities involving non-governmental organizations included within this authorization.
General License 3, “Transactions Related to the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Devices, Replacement Parts and Components, or Software Updates,” authorizes transactions and activities ordinarily incident and necessary to the exportation or reexportation of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, and software updates for medical devices to Ethiopia or Eritrea, or to persons in third countries purchasing specifically for resale to Ethiopia or Eritrea. The authorization is limited to those items within the definition of “covered items” as stipulated in the general license, and the general license includes a note that the compliance requirements of other federal agencies, including the licensing requirements of the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), still apply. As of this writing, licenses from BIS for exports to Ethiopia are still required for any items controlled for reasons of chemical and biological weapons (CB1 and CB2), nuclear nonproliferation (NP1), national security (NS1, NS2), missile technology (MT1), regional security (RS1 and RS2), and crime control (CC1 and CC2) unless a license exception under the Export Administration Regulations (15 C.F.R. § 730 et seq.) applies.

Concluding Thoughts and Predictions

The implementation of this new sanctions program targeting “widespread violence, atrocities, and serious human rights abuse” in Ethiopia highlights the Biden administration’s efforts to apply pressure to Ethiopian and Eritrean forces to implement a ceasefire and permit the free flow of humanitarian aid into the Tigray region. We will continue to monitor further developments to see how the Biden administration chooses to deploy the flexible tools of economic pressure that it has created. As noted, we anticipate that, based on the administration’s recent past practice, its approach to designations under the new Ethiopia-related sanctions program will be gradual and measured as opposed to sweeping. Notably, the administration’s decision to create a new sanctions program as opposed to simply designating additional individuals and entities under an existing OFAC program (such as the Global Magnitsky sanctions program) may indicate the administration’s desire to put the Ethiopian and Eritrean governments on alert before additional actions are taken. The new Ethiopian sanctions program’s broad general licenses as well as the non-application of OFAC’s “50 Percent Rule” give further support to this assessment.

Moreover, the new sanctions program appears calibrated to minimize any collateral effects on international and non-governmental organizations operating within the humanitarian aid space, and may signal that the Biden administration will include broad humanitarian allowances in new sanctions actions moving forward.

Although the Department of the Treasury had not yet designated any foreign persons pursuant to this new sanctions regime, companies considering engaging with parties in the Horn of Africa should remain abreast of any new developments and designations, as unauthorized interactions with designated persons can result in significant monetary penalties and reputational harm to individuals and entities in breach of OFAC’s regulations.

__________________________

[1] According to the accompanying press release from the Department of the Treasury, the imposition of new sanctions represents an escalation of the Biden administration’s efforts to hold accountable those persons “responsible for or complicit in actions or policies that expand or extend the ongoing crisis or obstruct a ceasefire or peace process in northern Ethiopia or commit serious human rights abuse.” In the same statement, the Treasury Department made clear the purpose of the E.O. was to target “actors contributing to the crisis in northern Ethiopia” and was not “directed at the people of Ethiopia, Eritrea, or the greater Horn of Africa region.”

[2] For more on Myanmar sanctions developments, please see our prior client alerts on February 16, 2021, and April 2, 2021.

[3] For more background on the NS-MBS List, please see our December 2020 client alert which discussed the designation of Republic of Turkey’s Presidency of Defense Industries (“SSB’) to the then newly created NS-MBS List. To date, SSB remains the only designee on the NS-MBS List.

The following Gibson Dunn lawyers assisted in preparing this client update: Chris Mullen, Audi Syarief, Judith Alison Lee, Adam Smith, Stephanie Connor, Christopher Timura, Allison Lewis, and Scott Toussaint.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Laura R. Cole – Washington, D.C. (+1 202-887-3787, [email protected])
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Qi Yue – Beijing – (+86 10 6502 8534, [email protected])

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Susy Bullock – London (+44 (0)20 7071 4283, [email protected])
Patrick Doris – London (+44 (0)207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 20 7071 4205, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Steve Melrose – London (+44 (0)20 7071 4219, [email protected])
Matt Aleksic – London (+44 (0)20 7071 4042, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33-160, [email protected])

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

The California Court of Appeal last week issued the first published California appellate decision to expressly confirm that trial courts have the authority to strike an unmanageable Private Attorneys General Act (“PAGA”) claim. In Wesson v. Staples the Office Superstore, LLC, No. B302988, — Cal.App.5th — (Sept. 9, 2021), the Court of Appeal held that trial courts have the inherent authority to manage complex litigation, and under this authority can evaluate whether PAGA claims can be manageably adjudicated at trial; if a PAGA claim cannot be manageably tried, the court may strike the claim. This is a critical ruling for California employers who are litigating PAGA actions in California state courts.

Wesson involved a PAGA claim on behalf of over 300 store managers who contended that Staples had misclassified them as exempt executive employees. After defeating class certification, Staples moved to strike the PAGA claim on the ground that individual variations in evidence relevant to each manager’s proper classification also rendered the PAGA claim unmanageable. The trial court granted Staples’s motion, and the Court of Appeal affirmed.

The Court of Appeal’s opinion emphasized that courts have “inherent authority to fashion procedures and remedies as necessary to protect litigants’ rights and the fairness of trial.” Slip op. at 25. Representative claims under PAGA pose challenges for efficient and fair case management, particularly where adjudicating the claims would require “minitrials . . . with respect to each” represented person. Id. at 28–29. The Court of Appeal further explained that “PAGA claims may well present more significant manageability concerns than those involved in class actions,” because PAGA lacks many of the protections associated with class litigation. Id. at 30 (emphasis added). The court also made clear that trial courts faced with those issues are not “powerless to address the challenges presented by large and complex PAGA actions” or “bound to hold dozens, hundreds, or thousands of minitrials involving diverse questions.” Id. at 31. Instead, if a trial court determines that a PAGA claim would be unmanageable at trial, it “may preclude the use of th[at] procedural device.” Id. at 32.

The California Supreme Court in Williams v. Superior Court, 3 Cal. 5th 531 (2017), had previously suggested in discussing the scope of discovery under PAGA that the “trial of the action” needed to be “manageable.” Id. at 559. And a number of federal district court decisions have recognized that courts have the inherent authority to strike PAGA claims as unmanageable, often based on Williams; Wesson, however, is the first published California appellate decision expressly recognizing that authority. After Wesson, employers who have active PAGA litigation may consider whether to move to strike the PAGA claim on manageability grounds.

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

Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
Megan Cooney – Orange County (+1 949-451-4087, [email protected])
Matt Aidan Getz – Los Angeles (+1 213-229-7754, [email protected])

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

National Security is the highest priority of the Justice Department and remains a key focus for other enforcement agencies, including the Treasury Department, the Commerce Department, and State Department. This webcast will discuss developments and trends in enforcement across a wide range of national security topics. A team of national security practitioners with experience both inside and outside of government will address, among other things:

Terrorism Financing
Sanctions & Export Controls
Theft of Intellectual Property & Economic Espionage
Cyber Attacks and Ransomware
The Foreign Agents Registration Act
Foreign Investment in the United States

View Slides (PDF)

PANELISTS:

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.

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.

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 Division. Civil, Criminal, and Antitrust 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.

Adam M. Smith, a partner in Washington, D.C., was Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business.

Courtney Brown, a senior associate in Washington, D.C., practices in the areas of white collar criminal defense and corporate compliance. Ms. Brown has experience representing and advising multinational corporate clients and boards of directors in internal and government investigations on a wide range of topics, including anti-corruption, anti-money laundering, healthcare fraud, sanctions, securities, and tax. She has participated in two government-mandated FCPA compliance monitorships and conducted compliance trainings for in-house counsel and employees.

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.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.25 hours.

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1 hour. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1.25 hours toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

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

Participants should anticipate receiving their certificates of attendance via e-mail in approximately 8 weeks following the webcast.

New York partner Eric Stock, Washington, D.C. partner Michael Perry, and Orange County associate Matthew Parrott are the authors of “Pharma Cos. Should Prepare For New Drug-Rebate Scrutiny,” [PDF] published by Law360 on September 13, 2021.

Yesterday, September 9, President Biden announced several initiatives regarding COVID-19 vaccine requirements for U.S. employers. This alert provides a brief overview of the content and timing of the principal initiatives, and previews certain objections likely to be raised in legal challenges that some governors and others have said they will file.

OSHA rule requiring all employers with 100+ employees to ensure their workers are vaccinated or tested weekly, and to pay for vaccination time.

The President announced that the Department of Labor’s Occupational Safety and Health Administration (OSHA) is developing an Emergency Temporary Standard (ETS) that will 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. The rule—which is expected to issue within weeks—will require employers with more than 100 employees to provide paid time off for the time it takes for workers to get vaccinated and to recuperate if they experience serious side effects from the vaccination.

OSHA ETS’s are authorized by statute, which permits the Secretary of Labor to promulgate an ETS when he determines (1) “that employees are exposed to grave danger from exposure to substances or agents determined to be toxic or physically harmful or from new hazards,” and (2) “that such emergency standard is necessary to protect employees from such danger.”[1] An ETS may be in place for up to six months, at which point OSHA must issue a permanent standard that has been adopted through ordinary rulemaking processes.[2] This would be OSHA’s second COVID ETS, following an ETS adopted in June that was limited to the health care sector.[3]

OSHA likely does not plan a notice-and-comment process for the forthcoming rule, which is not required for an ETS. As a consequence, the standard’s specific requirements likely will become known the day of publication, with an effective date shortly thereafter. Uncertainties that issuance of the rule should resolve include how it would apply to employees working at home, or to workers at remote locations without contact with other employees.

The decision to adopt the rule as an “emergency” and “temporary” standard, without notice and comment, could be one focus of a legal challenge. A challenge may also target the rule’s wage-payment requirement; wages are not a subject that OSHA ordinarily regulates, and the requirement arguably contrasts with Congress’s decision to let the COVID-related paid leave programs established by the Families First Coronavirus Response Act expire after December 31, 2020. If the ETS requires vaccination for workers who recently had and recovered from COVID-19, that could be targeted also.

Executive Orders requiring vaccinations for employees of federal contractors, and for all federal workers.

In announcing the OSHA ETS, the President also issued separate Executive Orders regarding vaccination of employees of federal contractors, and regarding vaccination of federal workers.

The federal contractor Order imposes no immediate workplace requirements. Rather, the requirements—which the White House has said will include a vaccine mandate—are to be delineated by September 24 by the White House’s “Safer Federal Workforce Task Force” (Task Force), established by the President in January. Under the Order, by September 24, the Task Force is to provide “definitions of relevant terms for contractors and subcontractors, explanations of protocols required of contractors and subcontractors to comply with workplace safety guidance, and any exceptions to Task Force Guidance that apply to contractor and subcontractor workplace locations and individuals in those locations working on or in connection with a Federal Government contract.”[4] The Task Force Guidance is to be accompanied by a determination, issued by the Director of the Office of Management and Budget (OMB), that the Guidance “will promote economy and efficiency in Federal contracting, if adhered to by Government contractors and subcontractors.”[5] The Order cites the Federal Property and Administrative Services Act (the Procurement Act), as authority for the new federal contractor mandate.[6]

The Order is effectuated by requiring 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.”[7] 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.”[8]

A legal challenge to the Order is likely to focus on the President’s authority under the Procurement Act to use a White House Task Force to develop workplace safety rules for federal contractors. As discussed in a prior alert, presidents of both parties increasingly use the Procurement Act to regulate terms and conditions of employment at federal contractors, including most recently a $15 minimum wage requirement.[9] A challenge to this COVID Executive Order could produce an important legal precedent on presidential authority in this area.

Separate from the Order regarding contractors, President Biden also signed an Executive Order requiring that all federal executive branch workers be vaccinated, with minimal exceptions.[10] The Order requires federal agencies to “implement, to the extent consistent with applicable law, a program to require COVID-19 vaccination for all of [their] Federal employees.”[11] The Order does not allow employees to avoid vaccination through frequent testing. Instead, “only” those “exceptions . . . required by law” will be permitted.[12] Those exceptions are likely to concern disabilities and religious objections.[13] The President directed the Task Force to “issue guidance within 7 days . . . on agency implementation of” the Order’s requirements for federal employees.[14]

COVID-19 vaccinations for health care workers at Medicare and Medicaid participating hospitals, and at other health care settings.

The President announced that the Centers for Medicare & Medicaid Services (CMS) will require COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. This action is an extension of a vaccination requirement for nursing facilities recently announced by CMS, and will apply to nursing home staff as well as staff in hospitals and other CMS-regulated settings, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient, resident, or client care.[15]

* * *

We anticipate providing further updates later this month, as actions on the President’s directives proceed.

_______________________

[1] 29 U.S.C. § 655(c)(1).

[2] Id. § 655(c)(3).

[3] See OSHA National News Release, US Department of Labor’s OSHA issues emergency temporary standard

to protect health care workers from the coronavirus (June 10, 2021), https://www.osha.gov/news/newsreleases/national/06102021.

[4] 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/.

[5] Id. § 2.

[6] Id. (citing 40 U.S.C. 101 et seq).

[7] Id.

[8] Id.

[9] Gibson Dunn, Department of Labor Initiates Rulemaking to Raise the Minimum Wage to $15 Per Hour For Federal Contractors (July 29, 2021), https://www.gibsondunn.com/wp-content/uploads/2021/07/department-of-labor-initiates-rulemaking-to-raise-the-minimum-wage-to-15-dollars-per-hour-for-federal-contractors.pdf.

[10] Executive Order on Requiring Coronavirus Disease 2019 Vaccination for Federal Employees (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-requiring-coronavirus-disease-2019-vaccination-for-federal-employees/.

[11] Id. § 2.

[12] Id.

[13] Press Briefing by Press Secretary Jen Psaki (September 9, 2021), https://www.whitehouse.gov/briefing-room/press-briefings/2021/09/09/press-briefing-by-press-secretary-jen-psaki-september-9-2021/ (stating that there would be exceptions for “legally recognized reasons, such as disability or religious objections”).

[14] Executive Order on Requiring Coronavirus Disease 2019 Vaccination for Federal Employees (Sept. 9, 2021) at § 2; see also Safer Federal Workforce, https://www.saferfederalworkforce.gov/.

[15] See also CMS, Press Release, Biden-Harris Administration Takes Additional Action to Protect America’s Nursing Home Residents From COVID-19 (Aug. 18, 2021), https://www.cms.gov/newsroom/press-releases/biden-harris-administration-takes-additional-action-protect-americas-nursing-home-residents-covid-19.

The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Helgi C. Walker, Katherine V.A. Smith, Jason C. Schwartz, Jessica Brown, Karl G. Nelson, Amanda C. Machin, Lindsay M. Paulin, Zoë Klein, Chad C. Squitieri, and Marie Zoglo.

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])

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

On August 20, 2021, the Standing Committee of China’s National People’s Congress passed the Personal Information Protection Law (“PIPL”), which will take effect on November 1, 2021. We previously reported on this development here, when the law was in draft form. An unofficial translation of the newly enacted PIPL is available here and the Mandarin version of the PIPL is available here.[1]

The PIPL applies to “personal information processing entities (“PIPEs”),” defined as “an organisation or individual that independently determines the purposes and means for processing of personal information.” (Article 73). The PIPL defines “personal information” broadly as “various types of electronic or otherwise recorded information relating to an identified or identifiable natural person,” excluding anonymized information, and defines “processing” as “the collection, storage, use, refining, transmission, provision, public disclosure or deletion of personal information.” (Article 4).

The PIPL shares many similarities with the EU’s General Data Protection Regulation (the “GDPR”), including its extraterritorial reach, restrictions on data transfer, compliance obligations and sanctions for non-compliance, amongst others. The PIPL raises some concerns for companies that conduct business in China, even where such companies’ data processing activities take place outside of China, and the consequences for failing to comply could potentially include monetary penalties and companies being placed on a government blacklist.

Below, we describe the companies subject to the PIPL, key features of the PIPL, and highlight critical issues for companies operating in China in light of this important legislative development.

I. Which Companies are Subject to PIPL?

The PIPL applies to cross-border transmission of personal information and applies extraterritorially. Where PIPEs transmit personal information to entities outside China, they must inform the data subjects of the transfer, obtain their specific consent to the transfer, and ensure that the data recipients satisfy standards of personal information protection similar to those in the PIPL.The PIPL applies to organisations operating in China, as well as to foreign organisations and individuals processing personal information outside China in any one of the following circumstances: (1) the organisation collects and processes personal data for the purpose of providing products or services to natural persons in China; (2) the data will be used in analysing and evaluating the behaviour of natural persons in China; or (3) under other unspecified “circumstances stipulated by laws and administrative regulations” (Article 3). This is an important similarity between the PIPL and GDPR, as the GDPR’s data protection obligations apply to non-EU data controllers and processors that track, analyze and handle data from visitors within the EU. Similarly, under the PIPL, a foreign receiving party must comply with the PIPL’s standard of personal information protection if it handles personal information from natural persons located in China.
The PIPL gives the Chinese government broad authority in processing personal information. State organisations may process personal information to fulfil statutory duties, but may not process the data in a way that exceeds the scope necessary to fulfil these statutory duties (Article 34). Personal information processed by state organisations must be stored within China (Article 36).

II. Key Features of PIPL

The PIPL establishes guiding principles on protection of personal information. According to the PIPL, processing of personal information should have a “clear and reasonable purpose” and should be directly related to that purpose (Article 6). The PIPL requires that the collection of personal information be minimized and not excessive (Article 6), and requires PIPEs to ensure the security of personal information (Articles 8-9). To that end, the PIPL imposes a number of compliance obligations on PIPEs, including requiring PIPEs to establish policies and procedures on personal information protection, implement technological solutions to ensure data security, and carry out risk assessments prior to engaging in certain processing activities (Articles 51 – 59).
The PIPL adopts a risk-based approach, imposing heightened compliance obligations in specified high-risk scenarios. For instance, PIPEs whose processing volume exceeds a yet-to-be-specified threshold must designate a personal information protection officer responsible for supervising the processing of personal data (Article 52). PIPEs operating “internet platforms” that have a “very large” number of users must engage an external, independent entity to monitor compliance with personal information protection obligations, and regularly publish “social responsibility reports” on the status of their personal information protection efforts (Article 58).The law mandates additional protections for “sensitive personal information,” broadly defined as personal information that, once disclosed or used in an illegal manner, could infringe on the personal dignity of natural persons or harm persons or property (Article 28). “Sensitive personal information” includes biometrics, religious information, special status, medical information, financial account, location information, and personal information of minors under the age of 14 (Article 28). When processing “sensitive personal information,” according to the PIPL, PIPEs must only use information necessary to achieve the specified purpose of the collection, adopt strict protective measures, and obtain the data subjects’ specific consent (Article 28-29).
The PIPL creates legal rights for data subjects. According to the new law, PIPEs may process personal information only after obtaining fully informed consent in a voluntary and explicit statement, although the law does not provide additional details regarding the required format of this consent. The law also sets forth certain situations where obtaining consent is unnecessary, including where necessary to fulfil statutory duties and responsibilities or statutory obligations, or when handling personal information within a reasonable scope to implement news reporting, public opinion supervision and other such activities for the public interest (Articles 13-14, 17). Where consent is required, PIPEs should obtain a new consent where it changes the purpose or method of personal information processing after the initial collection (Article 14). The law also requires PIPEs to provide a convenient way for individuals to withdraw their consent (Article 15), and mandates that PIPEs keep the personal information only for the shortest period of time necessary to achieve the original purpose of the collection (Article 19).If PIPEs use computer algorithms to engage in “automated decision making” based on individuals’ data, the PIPEs are required to be transparent and fair in the decision making, and are prohibited from using automated decision making to engaging in “unreasonably discriminatory” pricing practices (Article 24, 73). “Automated decision-making” is defined as the activity of using computer programs to automatically analyze or assess personal behaviours, habits, interests, or hobbies, or financial, health, credit, or other status, and make decisions based thereupon (Article 73(2)).When individuals’ rights are significantly impacted by PIPEs’ automated decision making, individuals can demand PIPEs to explain the decision making and decline automated decision making (Article 24).

III. Potential Issues for Companies Operating in China

The passage of the PIPL and the uncertainty surrounding many aspects of the law creates a number of potential issues and concerns for companies operating in China. These include the following:

Foreign organisations may be subject to the PIPL’s regulatory requirements. The PIPL applies to data processing activities, even where those activities take place outside of China, provided they are carried out for the purpose of conducting business in China or evaluating individuals’ behavior in the country. The law is currently silent on how close the nexus must be between the data processing and Chinese business activities. The law also mandates that data processing activities taking place outside of China are subject to the PIPL under “other circumstances stipulated by laws and administrative regulations.” At present there is no guidance as to what these circumstances will be.Foreign organisations subject to the PIPL will need to comply with requirements including security assessments, assigning local representatives to oversee data processing, and reporting to supervisory agencies in China, though the exact parameters of these requirements remain unclear (Articles 51–58).
The PIPL creates penalties for organisations that fail to fulfil their obligations to protect personal information (Article 66). These penalties include disgorgement of profits and provisional suspension or termination of electronic applications used by PIPEs to conduct the unlawful collection or processing. Companies and individuals may be subject to a fine of not more than 1 million RMB (approximately $154,378.20) where they fail to remediate conduct found to be in violation of the PIPL, with responsible individuals subject to fines of 10,000 to 100,000 RMB (approximately $1,543.81 to $15,438.05).Companies and responsible individuals face particularly stringent penalties where the violations are “grave,” a term left undefined in the statute. In these cases, the PIPL allows for fines of up to 50 million RMB (approximately $7,719,027.00) or 5% of annual revenue, although the PIPL does not specify which parameter serves as the upper limit for the fines. Authorities may also suspend the offending business activities, stop all business activities entirely, or cancel all administrative or business licenses. Individuals responsible for “grave” violations may be fined between 100,000 and 1 million RMB (approximately $15,438.29 to $154,382.93), and may also be prohibited from holding certain job titles, including Director, Supervisor, high-level Manager or Personal Information Protection Officer, for a period of time. In contrast, fines for severe violations of the GDPR can be up to €20 million (approximately $23,486,300.00) or up to 4% of the undertaking’s total global turnover of the preceding fiscal year (whichever is higher).
Foreign organisations may also be subject to consequences under the PIPL for violating Chinese citizens’ personal information rights or harming China’s national security or public interest. The state cybersecurity and informatization department may place offending organisations on a blacklist, resulting in restrictions on receiving personal information for blacklisted entities (Article 42). The PIPL does not provide clarity on what constitutes a violation of Chinese citizens’ personal information rights or what qualifies as harming China’s national security or public interest.

Companies operating in China should pay particular attention to the cross-border data transfer issues raised by the PIPL:

Foreign organisations will need to disclose certain information when transferring personal information outside of China’s borders. Under the PIPL, PIPEs must obtain the data subject’s consent prior to transfer, although the required form and method of that consent is not clear (Article 39). Entities seeking to transfer data must also provide the data subject with information about the foreign recipient, including its name, contact details, purpose and method of the data processing, the categories of personal information provided and a description of the data subject’s rights under the PIPL (Article 39).
Certain companies may need to undergo a government security assessment prior to cross-border data transfers. In addition to the consent and disclose requirements under Article 39, “critical information infrastructure operators” and PIPEs processing personal information in quantities exceeding government limits must pass a government security assessment prior to transferring data outside of China (Article 40). The term “critical information infrastructure operator” is not further defined within the PIPL, the term is, however, broadly defined within the newly passed Regulations on the Security and Protection of Critical Information Infrastructure (the “Regulations on Critical Information Infrastructure”), which come into effect on September 1, 2021 (the Mandarin version is available here). Under Article 2 of the Regulations on Critical Information Infrastructure, a “critical information infrastructure operator” is a company engaged in important industries or fields, including public communication and information services, energy, transport, water, finance, public services, e-government services, national defense and any other important network facilities or information systems that may seriously harm national security, the national economy and people’s livelihoods, or public interest in the event of incapacitation, damage or data leaks.The PIPL also does not specify the data thresholds beyond the quantities provided by the state cybersecurity and information department or the nature of the security assessment, nor does it reference any specific legislation issued by the state cybersecurity and informatization department for purposes of determining such data thresholds (Article 40).
PIPEs outside China that conduct personal data processing activities for the purpose of conducting business in China or evaluating individuals’ behaviour in the country must establish an entity or appoint an individual within China to be responsible for personal information issues. Such foreign organisations must report the name of the relevant entity or the representative’s name and contact method to the departments fulfilling personal information protection duties, although the PIPL does not specify or name to which departments foreign organisations must report in such instances (Article 53).
Companies and individuals may not provide personal information stored within China to foreign judicial or enforcement agencies, without prior approval of the Chinese government. As summarized in our prior client alert, the PIPL adds to a growing list of laws that restrict the provision of data to foreign judiciaries and government agencies, which could have a far-reaching impact on cross-border litigation and investigations. Chinese authorities will process requests from foreign judicial or enforcement agencies for personal information stored within China in accordance with applicable international treaties or the principle of equality and reciprocity (Article 41). The PIPL does not provide any guidance on how a company should seek approval if it wishes to export personal data in response to a request from a foreign government agency or a foreign court.

IV. Next Steps

The passage of the PIPL comes during a time where China has increased its regulatory scrutiny on technology companies and other entities with large troves of sensitive public information, and their data usage. Given the broad scope of the PIPL and its extraterritorial reach, organisations inside and outside of China will need to review their data protection and transfer strategies to ensure they do not run afoul of this network of legislation.

Even for companies that currently have GDPR compliance programs in place, the PIPL introduces new requirements not currently required under the GDPR. Examples of such requirements unique to the PIPL include, amongst others, establishing a legal entity within China and passing a security review prior to exporting personal data that reaches a certain undisclosed threshold. How the government enforces the statute and interprets its provisions remain to be seen, and a PIPL compliance program will likely require a nuanced understanding of Chinese cultural and business practices.

Companies operating in China should pay close attention to regulations, guidance documents and enforcement actions related to the PIPL as the Chinese government continues to bolster its data protection legal infrastructure, and seek guidance from knowledgeable counsel.

___________________________

[1] Please note that the discussion of Chinese law in this publication is advisory only.

This alert was prepared by Connell O’Neill, Kelly Austin, Oliver Welch, Ning Ning, Felicia Chen, and Jocelyn Shih.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Privacy, Cybersecurity and Data Innovation practice group, or the following authors:

Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Oliver D. Welch – Hong Kong (+852 2214 3716, [email protected])

Privacy, Cybersecurity and Data Innovation Group:

Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Connell O’Neill – Hong Kong (+852 2214 3812, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0) 20 7071 4250, [email protected])
Patrick Doris – London (+44 (0) 20 7071 4276, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0) 20 7071 4203, [email protected])

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, [email protected])
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
David P. Burns – Washington, D.C. (+1 202-887-3786, [email protected])
Nicola T. Hanna – Los Angeles (+1 213-229-7269, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Robert K. Hur – Washington, D.C. (+1 202-887-3674, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Ashley Rogers – Dallas (+1 214-698-3316, [email protected])
Deborah L. Stein – Los Angeles (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])

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

On September 9, the Supreme Court of California issued its ruling in Sandoval v. Qualcomm Inc., No. S252796, ___ Cal.5th ___. The decision is the latest in a line of cases reinforcing the strong presumption under California law that a person who hires an independent contractor delegates to the contractor all responsibility for the safety of contract workers.

In Sandoval, a contract worker hired by Qualcomm to examine electrical equipment on its campus was severely injured. He sued Qualcomm for negligence and premises liability under the theory that Qualcomm should have implemented more precautions that would have protected him from injuring himself on a live circuit. A jury found Qualcomm liable for negligently exercising control over the worksite, and the Court of Appeal affirmed the judgment.

In a unanimous opinion by Justice Cuéllar, the California Supreme Court reversed and remanded with instructions to enter judgment for Qualcomm. The Court explained that because contractors are generally hired based on their expertise and independence, there is a strong presumption that all responsibility for ensuring the safety of contract workers rests with contractors, not the hirer. And although there are exceptions to that general rule when the hirer fails to disclose a concealed hazard to the contractor or retains control over the contractor’s work and affirmatively contributes to the worker’s injury, neither of those narrow exceptions applied to this case.

**I. The Court Narrowly Construes the Hooker Retained-Control Exception to the Presumption That Hirers Are Not Liable for Injuries to Contract Workers**

California law recognizes a presumption that a hirer of an independent contractor delegates to the contractor all responsibility for injuries to contract workers. That rule is grounded in the principles that hirers typically do not control the work of contractors and that contractors have a greater ability to perform contracted work safely and, if necessary, can build the cost of safety measures into the contract.

There are two exceptions to this general rule. The first, not at issue in Sandoval, applies when the hirer owns or operates the property on which work occurs and fails to disclose a concealed hazard to the contractor and its workers. The second, which was at issue in Sandoval, is the “Hooker” or “retained control” exception. It permits hirer liability “if the hirer retains control over any part of the work and actually exercises that control so as to affirmatively contribute to the worker’s injury.” See id. at [p. 12]. The Court has been reluctant to add to these two exceptions; in Gonzalez v. Mathis (Aug. 19, 2021) No. S247677, ___ Cal.5th ___, decided last month, the Court declined to recognize a third exception that would have held hirers liable for injuries to contract workers from known hazards on the premises that could not be avoided through reasonable precautions.

Sandoval addresses “the meaning of Hooker’s three key concepts: retained control, actual exercise, and affirmative contribution.” Sandoval, supra, at [p. 17].

Retained control. For Hooker to apply, the hirer must “retain[] a sufficient degree of authority over the manner of performance of the work entrusted to the contractor.” Id. The hirer must “sufficiently limit the contractor’s freedom to perform the contracted work in the contractor’s own manner.” Id. at [p. 18]. And that interference with the contractor’s work must be meaningful: A hirer can exercise a “broad general power of supervision and control”—including by maintaining a right to inspect, stop work, make recommendations, or prescribe alterations—without “retaining control” over the contracted work. Id. at [pp. 18–19]. Under that framework, the Court concluded that “Qualcomm did not retain control over the inspection merely by declining to shut down [all] circuits” or failing to let the contractor do so. Id. at [p. 27].

Actual exercise. A hirer “actually exercises” retained control if it involves itself to such an extent that the contractor “is not entirely free to do the work in [its] own manner.” Id. at [p. 20] (citation omitted). This analysis requires a finding that the hirer “exert[ed] some influence over the manner in which the contracted work is performed,” either through “direction, participation, or induced reliance.” Id. Notably, however, the Court made clear that “actual exercise” does not require active participation by the hirer—Sandoval approvingly cited a decision applying the Hooker exception to a hirer that had merely “contractually prohibited” a contractor from undertaking certain safety measures. See id. at [p. 21 n.6]. With respect to Sandoval’s case, the Court concluded that Qualcomm did not “actually exercise” any retained control because the contractor “remained entirely free to implement (or not) any . . . precautions in its own manner,” a decision “over which Qualcomm exerted no influence.” Id. at [p. 28].

Affirmative contribution. Finally, “affirmative contribution” requires that the hirer’s exercise of retained control “contribute[] to the injury in a way that isn’t merely derivative of the contractor’s contribution.” Id. at [p. 21]. The hirer must, in other words, “induce[]” the injury rather than merely “fail[] to prevent” it. Id. The Court also corrected two misconceptions in decisions applying Hooker. First, it clarified that both “affirmative” acts and failures to act can support liability—the relevant question is “the relationship between the hirer’s conduct and the contractor’s conduct” and whether “the hirer’s exercise of retained control contributes to the injury independently of the contractor’s contribution (if any).” Id. at [pp. 22–23]. Second, the affirmative-contribution requirement is distinct from substantial-factor causation; negligent hiring, for instance, may be a substantial factor in a contract worker’s injury, but it does not affirmatively contribute to that injury because it derives from the contractor’s negligence. Id. at [p. 23]. Applying this analysis to Sandoval’s case, the Court held that even if Qualcomm had exercised some form of retained authority by leaving protective covers over live circuits, those actions did not “affirmatively contribute” to the contractor’s injuries—that conduct, the Court explained, had no role in the contractor’s decision to open the protective cover. Id. at [p. 29].

II. Implications of the Court’s Decision

Gonzalez and Sandoval both demonstrate that the California Supreme Court is committed to preserving the presumption that hirers aren’t liable for injuries to contract workers and will not lightly expand or broadly construe exceptions to that general rule. Gonzalez rejected a plaintiff’s effort to add a new exception, and Sandoval reinforces the narrowness of the existing exceptions. By clarifying that hirers must actually exercise any retained authority and affirmatively contribute to a contract worker’s injury before facing liability under Hooker, Sandoval sends a strong signal to businesses that they can hire independent contractors, set general guidelines, and maintain some supervisory authority over the contractors’ work without exposing themselves to potential liability.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court, or in state or federal appellate courts in California. Please feel free to contact the following lawyers in California, or any member of the Appellate and Constitutional Law Practice Group.

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, [email protected])
Julian W. Poon – Los Angeles (+1 213-229-7758, [email protected])
Theane Evangelis – Los Angeles (+1 213-229-7726, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
Michael Holecek – Los Angeles (+1 213-229-7018, [email protected])
Daniel R. Adler – Los Angeles (+1 213-229-7634, [email protected])
Ryan Azad – San Francisco (+1 415-393-8276, [email protected])
Matt Aidan Getz – Los Angeles (+1 213-229-7754, [email protected])

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

For the sixth successive Congress, Gibson Dunn is pleased to release a table of authorities summarizing the investigative authorities of each House and Senate committee. Understanding the full extent of a committee’s investigative arsenal is crucial to successfully navigating a congressional investigation.

Congressional committees have broad investigatory powers. These authorities include the power to issue subpoenas to compel witnesses to produce documents, testify at committee hearings, and, in some cases, appear for depositions. Committees generally may adopt their own procedural rules for issuing subpoenas, taking testimony, and conducting depositions; in the House, general deposition procedures applicable to all committees are subject to regulations issued by the Chair of the Committee on Rules. In addition to the rules included in our Table of Authorities, committees also are subject to the rules of the full House or Senate.

The failure to comply with a subpoena and adhere to committee rules during an investigation may have severe legal, strategic, and reputational consequences. Indeed, if a subpoena recipient refuses to comply with a subpoena adequately, committees may resort to additional demands, initiate contempt proceedings and/or generate negative press coverage of the noncompliant recipient. Although rarely utilized, criminal contempt prosecutions can also be brought in the event of willful refusals to comply with lawful congressional subpoenas. As we have detailed in a prior client alert this year, however, defenses exist to congressional subpoenas, including challenging a committee’s jurisdiction, asserting attorney-client privilege and work product claims, and raising constitutional challenges.[1]

We have highlighted noteworthy changes in the committee rules below, which House and Senate Committees of the 117th Congress adopted earlier this year.

Some items of note:

House:

Pursuant to the House Rules of the 117th Congress, every House committee chair of a standing committee, as well as the Chair of the Permanent Select Committee on Intelligence, is empowered to issue deposition subpoenas unilaterally, that is, without the Ranking Member’s consent or a committee vote, after “consultation” with the Ranking Member.[2]
In the 116th Congress, the House eliminated a prior requirement that one or more members of Congress be present during a deposition.[3] The House rules for the 117th Congress likewise do not require a member to be present for a deposition.[4] Without having to accommodate members’ schedules, these provisions make taking depositions significantly easier.
The Rules of the 117th Congress have reauthorized two oversight select committees, the Select Committee on the Climate Crisis and the Select Subcommittee on the Coronavirus Crisis, which will proceed with the mandates they were provided in the prior Congress.[5] The Rules also created the bipartisan Select Committee on Economic Disparity and Fairness in Growth, established by House Democrats to “investigate, study, make findings, and develop recommendations on policies, strategies, and innovations to make our economy work for everyone, empowering American economic growth while ensuring that no one is left out or behind in the 21st Century Economy.”[6] Recently, House Democrats also established the Select Committee to Investigate the January 6th Attack on the United States Capital, which is directed “[t]o investigate and report upon the facts, circumstances, and causes relating to the January 6, 2021, domestic terrorist attack upon the United States Capitol Complex . . . and relating to the interference with the peaceful transfer of power.”[7]
- Note that while the Select Committee on Economic Disparity and Fairness in Growth lacks independent subpoena power, it may request standing committees with appropriate jurisdiction to issue them. The Select Committee on the Coronavirus Crisis and the Select Committee to Investigate the January 6th Attack on the United States Capitol have subpoena power; staff deposition authority, enforceable by subpoena; and the authority to issue interrogatories enforceable by subpoena. Hence, they have more investigative tools at their disposal than do standing House committees.
The House Rules Committee has reissued regulations instituted in the 116th Congress governing depositions by committee counsel. Of note, these rules allow for the immediate overruling of objections raised by a witness’s counsel and immediate instructions to answer, on pain of contempt.[8] As a result, this procedure seemingly eliminates the witness’s right to appeal rulings on objections to the full committee without risking contempt (although committee members may still appeal). This procedure was intended to streamline the deposition process, as prior to the 116th Congress, the staff deposition regulations required a recess before the Chair could rule on an objection. The Rules Committee’s deposition regulations also expressly allow for depositions to continue from day-to-day[9] and permit, with notice from the Chair, questioning by members and staff of more than one committee.[10] Objections from staff counsel or members are also permitted, not just by the witness and his or her lawyer.[11]
As the COVID pandemic continues, the House Rules Committee has adopted special regulations governing remote hearings, which were first authorized in the prior Congress.[12] The regulations address several practical considerations, including a mandate that members “must be visible on the [remote] software platform’s video function to be considered in attendance and to participate unless connectivity issues or other technical problems render the member unable to fully participate on camera” and that “[m]embers and witnesses participating remotely should appear before a nonpolitical, professionally appropriate background that is minimally distracting to other members and witnesses, to the greatest extent possible.” The rules also require committee chairs to “respect members’ disparate time zones when scheduling committee proceedings,” meaning few remote hearings will be scheduled before midday, Eastern Standard Time. The regulations also authorize remote depositions in accordance with the same rules and procedures as required for in-person depositions.[13]

Senate:

In contrast to the House, where virtually every chair has unilateral subpoena authority, only the Chair of the Permanent Subcommittee on Investigations (“PSI”) can issue a subpoena without the consent of the Ranking Member. With the exception of PSI, the rules of the remaining Senate Committees allow for the Ranking Member to object to a subpoena issuance within a specified timeframe of receiving notice from the Chair, requiring a majority vote to issue a subpoena. In prior Congresses, the minority at times used the majority vote requirement as a delaying tactic, but rarely ever prevented a subpoena issuance since the vote would proceed along party lines. However, the majority vote requirement assumes greater significance this Congress given the Senate’s 50-50 split and power-sharing agreement between the parties. The agreement provides that each Committee must be equally composed of Democrats and Republicans, meaning a party-line vote on a subpoena issuance would result in a deadlock. Senate procedure permits a motion to discharge a “measure or matter,” which we believe would include a subpoena, but we think this procedure would be employed only in extraordinary cases. Hence, investigations that require the issuance of subpoenas likely will need to be bipartisan.
As in the last Congress, seven Senate committees have received express authorization to take depositions. The Judiciary Committee and the Committee on Homeland Security and Governmental Affairs and its Permanent Subcommittee on Investigations receive the authority to do so each Congress from the Senate’s funding resolution.[14] The Aging and Indian Affairs Committees are authorized to conduct depositions by S. Res. 4 in 1977. The Ethics Committee’s deposition power is authorized by S. Res. 338 in 1964, which created the Committee and is incorporated into its rules each Congress. And the Intelligence Committee was authorized to take depositions by S. Res. 400 in 1976, which it too incorporates into its rules each Congress. Of these, staff is expressly authorized to take depositions except in the Indian Affairs and Intelligence Committees.[15] The Senate’s view appears to be that Senate Rules do not authorize staff depositions pursuant to subpoena. Hence, Senate committees cannot delegate that authority to themselves through committee rules. It is thus understood that such authority can be conferred upon a committee only through a Senate resolution.[16]
The Committees on Agriculture, Commerce, and Foreign Relations authorize depositions in their rules. However such deposition authority has not been expressly authorized by the Senate and, hence, it is not clear whether appearance at a deposition can be compelled.
The Judiciary Committee remains the only committee to expressly require a member to be present for a deposition. This requirement may be waived by agreement of the Chair and Ranking Member. In addition, the Rules of the Select Committee on Intelligence require a quorum of one member for purposes of taking sworn testimony, but it is not specified whether this would include depositions.

Our table of authorities provides an overview of how individual committees can compel a witness to cooperate with their investigations. But each committee conducts congressional investigations in its own particular way, and investigations vary materially even within a particular committee. While our table of authorities provides a general overview of what rules apply in given circumstances, it is essential to look carefully at a committee’s rules and be familiar with its practices to understand specifically how its authorities apply in a particular context.

Gibson Dunn lawyers have extensive experience defending targets of and witnesses in congressional investigations. They know how investigative committees operate and can anticipate strategies and moves in particular circumstances because they also ran or advised on congressional investigations when they worked on the Hill. If you have any questions about how a committee’s rules apply in a given circumstance or the ways in which a particular committee tends to exercise its authorities, please feel free to contact us for assistance. We are available to assist should a congressional committee seek testimony, information or documents from you.

Table of Authorities of House and Senate Committees:

https://www.gibsondunn.com/wp-content/uploads/2021/08/Congressional-Investigations-Table-of-Authorities-117th-Congress-09.21.pdf

___________________________

[1] See Congressional Investigations in the 117th Congress: Choppy Waters Ahead for the Private Sector?, https://www.gibsondunn.com/congressional-investigations-in-the-117th-congress-choppy-waters-ahead-for-the-private-sector/.

[2] See H.R. Res. 8, 117th Cong. § 3(b)(1) (2021).

[3] See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019).

[4] See H.R. Res. 8, 117th Cong. § 3(b) (2021).

[5] Id. §§ 4(d), (f).

[6] Id. § 4(d)(g).

[7] See H. R. Res. 503, § 3(1), 117th Cong. (2021).

[8] See 167 Cong. Rec. H41 (Jan. 4, 2021) (117th Congress Regulations for Use of Deposition Authority).

[9] Id. The regulations provide that deposition questions “shall be propounded in rounds” and that the length of each round “shall not exceed 60 minutes per side” with equal time to the majority and minority. The regulations, however, do not expressly limit the number of rounds of questioning. In this manner, they differ from the Federal Rules of Civil Procedure which expressly limit the length of depositions. See Fed. R. Civ. P. 30(d)(1) (“Unless otherwise stipulated or ordered by the court, a deposition is limited to 1 day of 7 hours.”).

[10] See 167 Cong. Rec. H41.

[11] Id.

[12] Id.

[13] Id.

[14] See S. Res. 70, § 13(e) (2019) (Judiciary); id. § 12(e)(3)(E) (Homeland Security).

[15] However, Rule 8.3 of the Rules of the Senate Intelligence Committee allows staff to question witnesses if authorized by the Chair, Vice Chair, or Presiding Member, though depositions are not specified.

[16] See Jay R. Shampansky, Cong. Research Serv., 95-949 A, Staff Depositions in Congressional Investigations 8 & n.24 (1999); 6 Op. O.L.C. 503, 506 n.3 (1982). The OLC memo relies heavily on the argument that the Senate Rules never mentioned depositions at that time and those rules still do not mention depositions today.

The following Gibson Dunn attorneys assisted in preparing this client update: Michael D. Bopp, Thomas G. Hungar, Roscoe Jones, Jr., Tommy McCormac, and Amanda LeSavage.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Congressional Investigations group in Washington, D.C.:

Michael D. Bopp – Chair, Congressional Investigations Group (+1 202-955-8256, [email protected])
Thomas G. Hungar (+1 202-887-3784, [email protected])
Roscoe Jones, Jr. (+1 202-887-3530, [email protected])

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

Since the collapse of the Afghan government and the Taliban’s takeover of Kabul more than three weeks ago, tens of thousands of Afghans, along with U.S. citizens and U.S. permanent residents, have desperately tried to flee the country and the Taliban’s oppressive rule. This humanitarian crisis continued to worsen as the emergency evacuation operation ran up against the deadline of U.S. withdrawal on August 31, 2021. Some of the most vulnerable Afghans at risk of imminent harm from the Taliban include those who previously supported the U.S. military or government, promoted democracy in Afghanistan, or worked on behalf of women’s rights, as well as members of ethnic and religious minorities. As of today, thousands of Afghans continue to search for safe pathways out of the country.

Over the past few weeks, Gibson Dunn sprang into action to help individuals at heightened risk of Taliban reprisals evacuate to safety. Section I of this report briefly summarizes some of the events on the ground in Afghanistan, with a particular focus on the humanitarian crisis that has resulted from recent developments. Section II highlights the Firm’s efforts, which are still ongoing and evolving to meet the rapidly changing situation in Afghanistan and across the globe. Understanding that many families are in urgent need of short-term evacuation from Afghanistan as well as long-term immigration relief, our teams are taking a holistic approach that focuses both on helping at-risk individuals pursue pathways to enter the United States as expeditiously as possible and on identifying ways they can obtain lawful immigration status in the United States on a permanent basis. Additional information detailing several avenues of legal relief—humanitarian parole, Special Immigrant Visas (“SIVs”), refugee resettlement, and asylum—can be found in Section III of this report. If you are interested in learning more about these efforts or how to get involved, please reach out to Katie Marquart, Partner & Pro Bono Chair.

I. Overview of the Current Situation in Afghanistan

The United States completed its military withdrawal ahead of its August 31 deadline, which had been set pursuant to an agreement with the Taliban signed in February 2020. Since the evacuation operation began on August 14, more than 123,000 people, most of them Afghans, have been evacuated, according to the U.S. government. But thousands more have been left behind, including Afghan interpreters and others who worked directly alongside U.S. military and government officials. In acknowledging that it did not get everyone out of the country that it wanted to, the United States has promised to find other ways for individuals to leave Afghanistan that do not require a U.S. military presence.

Even before the withdrawal of troops, the Taliban made it more difficult for civilians to flee the country and find safe harbor by erecting checkpoints and controlling access to Hamid Karzai International Airport and Afghanistan’s land borders. Those who were able to reach the airport faced additional dangers of being crushed by crowds, abused by the Taliban, and targeted by terrorist attacks like the August 26 ISIS-K suicide attack that killed nearly 200 people.

With U.S. and allied forces now gone, the road to safety has gotten even more challenging. Despite this, thousands of people are continuing to search for pathways to safety. Gibson Dunn will not stop working on behalf of these families. Rather, we will pursue all legal avenues to ensure that Afghans eligible to travel to another country will be not be turned away.

II. Gibson Dunn’s Efforts on Behalf of Affected Families

More than 100 Gibson Dunn attorneys and staff are working on the cases of dozens of families—well over 200 people—seeking refuge in the United States to escape the Taliban regime. These families, like many others, face a heightened risk of persecution, physical violence, and even death because of their collaboration with the U.S. military or government, their work to promote the Afghan government and civil society, or their public support for causes seen as antithetical to the Taliban’s rule.

These families’ stories are incredibly compelling. Several were interpreters for the U.S. military, including for Gibson Dunn associates who previously served in the U.S. military, while others were members of the Afghan military and Afghan National Police working alongside U.S. forces in hostile regions. Others are women and children whose husbands and fathers already immigrated to the United States on SIVs to begin building a home for their families. Some are pregnant or have infants and small children. Some are being targeted because they were journalists, open critics of the Taliban, or female professionals. Many of our clients already have faced threats and physical abuse at the hands of the Taliban, while others are being actively hunted by the Taliban. Although many of these families initially wished to remain in Afghanistan to help rebuild their home country, recent developments made them face the difficult reality that they had to leave.

The danger these families face cannot be overstated. A handful of families were able to safely escape before the American withdrawal, but many remain in hiding. Some families have abandoned their houses and are now homeless with limited, dwindling resources—and no way of supporting themselves given their need to stay hidden and evade the Taliban’s attention. Many are afraid the internet will be cut at any time, leaving them without any lifeline outside the country. Most can only communicate at certain times of the day, when there is less risk the Taliban will find them and search their phones for U.S. phone numbers or English messages. All are afraid the Taliban will find them and their families before they can escape.

In light of the severe risks and the urgency of these families’ need to travel to the United States, we have advocated for our clients using every avenue at our disposal. We have called on members of Congress, the State Department, the Department of Defense, and the Department of Homeland Security, as well as former government officials, to seek their help and insight. We gathered intelligence from teams on the ground to notify our clients of critical information in real time. While the United States remained in Afghanistan, we were also able to connect our clients inside the airport with U.S.-sponsored non-governmental organizations (“NGOs”) coordinating flights to ensure they were placed on manifests when possible.

Although the current situation is dire, we continue to fight for those who remain in Afghanistan until they can find their way to safety. This includes helping our corporate clients whose employees and representatives in Afghanistan similarly have found themselves in need of immediate assistance to escape persecution and leave the country. We have provided round-the-clock assistance to help our corporate clients navigate legal challenges in carrying out emergency on-the-ground actions related to their evacuation efforts and measures to ensure employee safety.

Our pro bono efforts thus far have largely focused on filing humanitarian parole applications to help families at risk of Taliban reprisals enter the United States on a temporary basis. Although our current focus is on helping these families reach safety outside Afghanistan, we also hope to assist with their long-term immigration cases upon arrival in the United States. Many of these families are eligible for SIVs or other priority visas and currently are awaiting resolution of their applications. The rest intend to apply for asylum upon their arrival in the United States. In the short term, however, we believe humanitarian parole remains the best chance for many of these families to gain authorization to travel to the United States.

III. Avenues of Legal Relief in the United States for Afghans Fleeing the Taliban

As we look ahead to what is to come, Gibson Dunn is eager to help provide access to the various forms of legal relief available to help these brave families. Although many logistical and safety challenges will persist, we are committed to doing what we can to help these courageous families navigate the legal pathways to obtaining temporary or permanent safe harbor in the United States or in other countries around the world. To date, most of our efforts have focused on resettlement into the United States. For that reason, we focus here on those avenues, which include: humanitarian parole for individuals facing urgent humanitarian needs; SIVs for those who worked for U.S. forces in Afghanistan; refugee admission under the P-1, P-2, and P-3 programs for certain Afghans who remain outside the United States; and asylum for those who arrive in the United States and are unable to return to Afghanistan.

A. Humanitarian Parole

Humanitarian parole is an option for temporary resettlement in the United States based on urgent humanitarian or significant public benefit needs. Under INA § 212(d)(5), the Secretary of Homeland Security “may, in his or her discretion, parole into the United States temporarily . . . on a case by case basis, for urgent humanitarian reasons or significant public benefit, any alien applying for admission to the United States.” Although it is typically an extraordinary measure, humanitarian parole may be the most direct pathway for many Afghans to enter the United States, given the current situation in Afghanistan.

Because individuals can seek humanitarian parole for “urgent humanitarian reasons or significant public benefit,” it is available to Afghan nationals who would not otherwise qualify for entry via SIV or the U.S. Refugee Admissions Program (“USRAP”), discussed below. For example, humanitarian parole is an important option for those who worked for the Afghan government, collaborated with U.S. forces without meeting the stringent SIV employment requirements, or otherwise are in danger due to their beliefs or minority status. It also might be a more expeditious option for those who may qualify for SIV or USRAP resettlement, but who face such urgent danger that they cannot wait to be processed through those more traditional pathways. To reduce the processing time, applicants can request “expedited processing” in urgent, life-threatening situations. Given the exponential increase in the number of humanitarian parole applications filed in recent weeks, however, it is difficult to predict how long it will take to adjudicate these applications.

Afghans facing persecution by the Taliban can apply for humanitarian parole for themselves, without depending on a referral or support from an employer or other entity. Alternately, individuals in the United States, including SIV holders, can submit a petition for humanitarian parole on behalf of Afghans currently outside the United States. In either case, a financial sponsor with lawful immigration status in the United States must submit an affidavit agreeing to sponsor the parolee(s) upon arrival in the United States. If approved, parolees are permitted to enter the United States for a specified period of time (typically one year). Once in the United States, parolees can apply for asylum or obtain permanent residence through other lawful means.

B. Special Immigrant Visa

Recognizing the danger our Afghan allies faced due to their work with U.S. forces, Congress created the SIV programs in 2006 and 2009 to allow certain Afghans to resettle in the United States as legal permanent residents with access to resettlement assistance and other benefits. Afghan nationals who were employed by or on behalf of the U.S. government in Afghanistan, or those who served as interpreters or translators for U.S. military personnel or under Chief of Mission Authority at the U.S. Embassy in Baghdad or Kabul, may be eligible for SIVs. However, the SIV application process often takes many years—time that many Afghan allies no longer have.

There are two SIV programs for which Afghan allies, including their spouses and children under age 21, might be eligible. First, a limited number of SIVs is available under Section 1059. To qualify, an Afghan must have worked directly with U.S. forces or the Chief of Mission authority as a translator/interpreter for at least one year and must obtain a favorable recommendation from a General or Flag Officer in their chain of command or at the embassy where they worked. Second, and more commonly, Afghans can apply for SIVs under Section 602(b) if they (1) were employed for at least one year by the U.S. government, a U.S. government contractor, or the International Security Assistance Force working with U.S. forces; (2) provided faithful and valuable service; and (3) face an ongoing serious threat because of their qualifying work.

C. The U.S. Refugee Admissions Program

Afghan nationals also may enter the United States through USRAP, which provides an opportunity for permanent resettlement in the Unites States to various classes of refugees. As a general rule, individuals seeking resettlement as refugees must be outside the United States and go through processing in a third country, rather than within their country of nationality.

P-1 Refugees: The first of three categories under USRAP, Priority 1, is for individuals who have been referred by an Embassy, a designated NGO, or the United Nations High Commissioner for Refugees (“UNHCR”), due to the applicant’s circumstances and need for resettlement. Typically, P-1 refugees are referred to the United States by UNHCR.
P-2 Refugees: Priority 2 designations are given to individuals the Department of State determines to be part of a group of “special concern” due to their circumstances and need for resettlement. In August 2021, the Department of State announced that certain Afghan nationals and their family members who are at risk due to their affiliation with the United States may be eligible for refugee resettlement under the P-2 program. Eligible individuals could include Afghans who (1) did not meet the minimum time-in-service for an SIV but who otherwise would be eligible for an SIV; (2) worked for a U.S. government-funded program or project supported through a U.S. government grant; or (3) were employed by U.S.-based media organizations or NGOs in Afghanistan. Spouses and children of any age, whether married or unmarried, also can resettle in the United States with someone who has been given a P-2 designation. Although many Afghans might be eligible for resettlement under the P-2 program, there are two significant challenges. First, Afghans seeking refugee resettlement under the P-2 program must be referred by their employer; they cannot apply for themselves. Second, the State Department has not yet explained how or where processing, which includes interviews and security checks, will occur.
P-3 Refugees: The third refugee designation, Priority 3, provides an opportunity for permanent resettlement for Afghan refugees outside Afghanistan who have immediate family members (i.e., spouses, parents, and children) who already have been admitted to the United States. The family member in the United States must file within five years of the date when they were admitted as a refugee or special immigrant, or granted asylum.

D. Asylum

In addition to these more extraordinary pathways, Afghans also may pursue more traditional avenues of immigration relief in the United States, such as family-based visas and asylum. Asylum, in particular, likely will be the next step for many Afghans who enter the United States via humanitarian parole. Like other immigrants, Afghans can apply for asylum if they fear persecution based on race, religion, nationality, political opinion, or membership in a particular social group. They can do so upon entry in the United States or within one year of entering the country.

IV. Conclusion

We understand that there is a long road ahead, and that the process of reaching physical safety is just beginning for many individuals and families facing the threat of violence from the Taliban. We will continue to fight for short- and long-term immigration solutions on behalf of these brave individuals and families, using every avenue at our disposal. Gibson Dunn also is engaging in broader efforts to assist these individuals and families as they resettle in countries across the globe. We hope these efforts, together with the work of so many other organizations that have pulled together to help evacuate and resettle vulnerable Afghans, will remind our Afghan allies that they are not forgotten, and that they have many advocates fighting for them.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work or the following:

Katie Marquart – New York (+1 212-351-5261, [email protected])
Patty Herold – Denver (+1 303-298-5727, [email protected])

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

This edition of Gibson Dunn’s Federal Circuit Update summarizes new petitions for certiorari in cases originating in the Federal Circuit concerning the Patent Trial and Appeal Board’s NHK-Fintiv Rule. This Update also discusses recent Federal Circuit decisions. Notably, starting with the September 2021 court sitting, the court has now resumed in-person arguments.

Federal Circuit News

Supreme Court:

The Court did not add any new cases originating at the Federal Circuit.

Noteworthy Petitions for a Writ of Certiorari:

There are two new certiorari petitions currently before the Supreme Court concerning the Patent Trial and Appeal Board’s NHK-Fintiv Rule, under which the Board may deny institution of inter partes review proceedings when the challenged patent is subject to pending district court litigation.

Apple Inc. v. Optis Cellular Technology, LLC (U.S. No. 21-118): “Whether the U.S. Court of Appeals for the Federal Circuit may review, by appeal or mandamus, a decision of the U.S. Patent & Trademark Office denying a petition for inter partes review of a patent, where review is sought on the grounds that the denial rested on an agency rule that exceeds the PTO’s authority under the Leahy-Smith America Invents Act, is arbitrary or capricious, or was adopted without required notice-and-comment rulemaking.”
Mylan Laboratories Ltd. v. Janssen Pharmaceuticals, N.V. (U.S. No. 21-202): “Does 35 U.S.C. § 314(d) categorically preclude appeal of all decisions not to institute inter partes review?” 2. “Is the NHK-Fintiv Rule substantively and procedurally unlawful?”

The following petitions are still pending:

Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20-891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler doctrine.

Upcoming Oral Argument Calendar

The court has now resumed in-person arguments for the September 2021 court sitting.

The list of upcoming arguments at the Federal Circuit is available on the court’s website.

Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.

Key Case Summaries (August 2021)

Qualcomm Incorporated v. Intel Corporation (Fed. Cir. No. 20-1589): Intel petitioned for six inter partes reviews (IPRs) challenging the validity of a patent owned by Qualcomm. During the IPRs, neither party disputed that the challenged claims required signals that increased user bandwidth. The PTAB, however, construed the claims in a way that omitted any requirement that the signals increase bandwidth. Qualcomm appealed the PTAB’s decision and argued that it was not afforded notice and an opportunity to respond to the PTAB’s construction.

The Federal Circuit (Moore, C.J., joined by Reyna, J. and Stoll, J.) vacated and remanded the PTAB’s decisions. Although the PTAB may adopt a different construction from a disputed, proposed construction, the court held that the Board may not adopt a claim construction that diverges from an agreed-upon requirement for a term. Because neither party could have anticipated the PTAB’s deviation, especially where the International Trade Commission had adopted the increased bandwidth requirement, the court held that the Board needed to provide notice and an adequate opportunity to respond. Because all briefing included the increased bandwidth requirement, the court rejected Intel’s argument that Qualcomm was not prejudiced. The court also found that a single question relating to the bandwidth requirement at the PTAB hearing did not provide adequate notice. Finally, the court found that the ability to seek rehearing from the PTAB’s decision was not a substitute for notice and an adequate opportunity to respond.

Personal Web Technologies LLC v. Google LLC (Fed. Cir. No. 20-1543): PersonalWeb sued Google and YouTube (collectively, “Google”) in the Eastern District of Texas, asserting three related patents directed to data-processing systems. After the cases were transferred to the Northern District of California, that district court granted Google’s motion for judgment on the pleadings that the asserted claims were ineligible under 35 U.S.C. § 101.

The panel (Prost, J., joined by Lourie and Reyna, J.J.) affirmed. At step one, the panel agreed with the district court that the asserted claims are directed to a three-step process: “(1) using a content-based identifier generated from a ‘hash or message digest function,’ (2) comparing that content-based identifier against something else, [that is,] another content-based identifier or a request for data; and (3) providing access to, denying access to, or deleting data.” The panel held that this claimed process amounted to the abstract idea of using “an algorithm-generated content-based identifier to perform the claimed data-management functions.” The panel explained that these functions are ineligible mental processes. Pointing to its prior cases, the panel explained that each of the three functions—generating, comparing, and using content-based identifiers to manage data—are concepts the Federal Circuit previously described as abstract. At step two, the Court concluded that the alleged inventive concept—“making inventive use of cryptographic hashes”—is simply a restatement of the abstract idea itself. The panel agreed with the district court that “using a generic hash function, a server system, or a computer does not render these claims non-abstract,” and explained that each of the supposed improvement disclosed in the specification was likewise abstract.

GlaxoSmithKlein LLC v. Teva Pharmaceuticals USA, Inc. (Fed. Cir. No. 18-1976): GlaxoSmithKline (“GSK”) sued Teva in the District of Delaware. After a jury returned a verdict of induced infringement against Teva, the district court granted Teva’s renewed JMOL, holding that Teva could not induce infringement with its “skinny label” because that label carved out the patented use of carvedilol. The district court also held that GSK had failed to prove that Teva caused inducement because it did not show that it was Teva’s actions that actually caused doctors to directly infringe by prescribing generic carvedilol to treat CHF.

The panel majority (Moore, C.J., and Newman, J.) vacated the grant of the JMOL and reinstated the jury’s verdict of induced infringement, with Judge Prost dissenting. Teva petitioned for rehearing, which the panel granted. The panel issued a new decision, in which the same majority once more reinstated the jury’s verdict of induced infringement against Teva. The majority held that whether a carve-out indication instructs a patented use is a question of fact. Considering the evidence in the record, the majority concluded that substantial evidence supported the jury’s determination that Teva induced infringement by not effecting a section viii carve-out because Teva advertised its drug as a generic equivalent and thereby actively encouraged a patented therapeutic use. The majority warned that this was a decision based on a “narrow, case-specific review of substantial evidence,” and agreed with amici that a “generics could not be held liable for merely marketing and selling under a ‘skinny’ label omitting all patented indications, or for merely noting (without mentioning any infringing uses) that FDA had rated a product as therapeutically equivalent to a brand-name drug.”

Judge Prost dissented again, arguing that the majority’s decision weakens the section viii carve-out by creating confusion for generic companies as to when they may face liability. Judge Prost pointed out that GSK expressly told the FDA that only one use was patented, and so Teva carved out that use. Judge Prost also argued that the majority’s decision changes the law of inducement by blurring the line between merely describing an infringing use and actually encouraging, recommending, or promoting an infringing use. Judge Prost explained that unlike direct infringement, induced infringement requires a showing of intent, and argued that no such intent by Teva could be shown because by carving out the patented use, it was actually taking steps to avoid infringement.

Andra Group, LP v. Victoria’s Secret Stores, LLC (Fed. Cir. No. 20-2009): Andra Group sued several related Victoria’s Secret entities in the Eastern District of Texas. Three entities (“Non-Store Defendants”)—corporate parent L Brands, Inc., Victoria’s Secret Direct Brand Management, LLC, and Victoria’s Secret Stores Brand Management, Inc.—do not have any employees, stores, or any other physical presence in the Eastern District of Texas. The fourth entity (“Store Defendant”) operates retail stores in the Eastern District of Texas. The Non-Store Defendants moved to dismiss the infringement suit for improper venue, and the district court granted the motion. Andra Group appealed.

The Federal Circuit (Hughes, J., joined by Reyna, J. and Mayer, J.) affirmed. The court held that the Store Defendant’s retail stores were not a regular and established place of business of the Non-Store Defendants. The court noted that the evidence showed that the Non-Store Defendants did not have the right to direct or control the Store Defendant’s employees. The court also found that the Store Defendant’s acceptance of returns for merchandise purchased on the website (which was run by a Non-Store Defendant) was a discrete task insufficient to establish an agency relationship. The court also rejected Andra’s argument that the Non-Store Defendants ratified the Store Defendant’s retail stores as their own place of business. The court held that a defendant must actually engage in business from that location and simply advertising a place of business is not sufficient to make it a place of business.

Omni MedSci, Inc. v. Apple Inc. (Fed. Cir. No. 20-1715): In a patent infringement suit brought by Omni against Apple, Apple filed a motion to dismiss for lack of standing. Apple contended that the asserted patents were not owned by Omni, but by University of Michigan (“UM”). Dr. Islam, the named inventor, was employed by UM and had signed an employment agreement that stated, inter alia, that intellectual property developed using university resources “shall be the property of the University.” Dr. Islam took a leave of absence during which he filed multiple provisional patent applications, which ultimately issued as the asserted patents. Dr. Islam then assigned these patents to Omni. The district court determined that the provision in Dr. Islam’s employment agreement “was not a present automatic assignment of title, but, at most, a statement of a future intention to assign.” Apple requested the district court grant certification of the standing question to the Federal Circuit, which was granted.

The majority (Linn, J., joined by Chen, J.) affirmed, and agreed that Dr. Islam’s employment agreement did not constitute a present automatic assignment or a promise to assign in the future. The majority found that the agreement did not include language such as “will assign” or “agrees to grant and does hereby grant,” which have been previously held to constitute a present automatic assignment of a future interest. At most, UM’s agreement with phrases such as “shall be the property of the University” and “shall be owned as agreed upon in writing,” was a promise of a potential future assignment, not as a present automatic transfer. The majority also found a lack of present tense words of execution, such as “hereby grants and assigns,” supported its interpretation.

Judge Newman dissented. She reasoned that because the employment agreement necessarily applies only to future inventions, in which future tense is used, the future tense “shall be the property of the University” is appropriate, and should have vested ownership of the patents in the University. Thus, she concluded that Omni did not have standing to bring the infringement suit.

Campbell Soup Company v. Gamon Plus, Inc. (Fed. Cir. No. 20-2344): Gamon sued Campbell Soup and Trinity Manufacturing (together, “Campbell”) for infringing two design patents, the commercial embodiment of which was called the iQ Maximizer. Campbell petitioned for inter partes review on the grounds that Gamon’s patents would have been obvious over another design patent (“Linz”). The Patent Trial and Appeal Board concluded that Campbell failed to prove unpatentability based on Linz, reasoning that although Linz had the same overall visual appearance as the claimed designs, it was outweighed by objective indicia of nonobviousness. The Board presumed a nexus between those objective indicia and the claimed designs because it found that the iQ Maximizer was coextensive with the claims.

Campbell appealed, and the Federal Circuit (Moore, C.J., Prost and Stoll, JJ.) reversed. The Court held that substantial evidence supported the Board’s finding that Linz creates “the same overall visual appearance as the claimed design[s].” However, under the next step of the design patent obviousness analysis, the Court held that the Board failed to answer the question of “whether unclaimed features are ‘insignificant,’” and that “[u]nder the correct legal standard, substantial evidence does not support the Board’s finding of coextensiveness.” The Court wrote, “We do not go so far as to hold that the presumption of nexus can never apply in design patent cases. It is, however, hard to envision a commercial product that lacks any significant functional features such that it could be coextensive with a design patent claim.” Finally, the Court held that Gamon failed to show that the objective indicia are the “direct result of the unique characteristics of the claimed invention,” because, for example, characteristics of the iQ Maximizer that led to commercial success “were not new.”

Venue in the Western District of Texas:

In re: Hulu, LLC (Fed. Cir. No. 21-142): The panel (Taranto, Hughes, and Stoll, JJ.) granted Hulu’s petition, holding that Judge Albright clearly abused his discretion in evaluating Hulu’s transfer motion and denying transfer. In particular, the panel held that the district court at least erred in its analysis for each factor that it found weighed against transfer: (1) the availability of compulsory process to secure the attendance of witnesses; (2) the cost of attendance for willing witnesses; and (3) the administrative difficulties flowing from court congestion.

In re: Google LLC (Fed. Cir. No. 21-144): The panel (O’Malley, Reyna, and Chen, JJ.) denied Google’s petition because it did not “ma[k]e a clear and indisputable showing that transfer was required.” The district court had found that one or more Google employees in Austin, Texas were potential witnesses, and the panel was “not prepared on mandamus to disturb those factual findings.”

In re: Apple Inc. (Fed. Cir. No. 21-147): The panel (Reyna, Chen, and Stoll, JJ.) denied Apple’s petition because Apple did not show entitlement to the “extraordinary relief.” The panel did not, however, find that the district court’s analysis was free of error. For example, the panel explained, the district court “improperly diminished the importance of the convenience of witnesses merely because they were employees of the parties.”

In re: Dish Network L.L.C. (Fed. Cir. No. 21-148): The panel (O’Malley, Reyna, and Chen, JJ.) denied Dish’s petition but held that it “do[es] not view issuance of mandamus as needed here because” the panel was “confident the district court will reconsider its determination in light of the appropriate legal standard and precedent on its own.” The panel explained that, in light of In re Apple Inc., 979 F.3d 1332 (Fed. Cir. 2020), the district court erred in relying on Dish’s general presence in Western Texas without tying that presence to the events underlying the suit. The panel also explained that “[t]he need for reconsideration here” is additionally confirmed by In re Samsung Electronics Co., 2 F.4th 1371 (Fed. Cir. 2021), because the district court here improperly diminished the convenience of witnesses in the transferee venue because of their party status and by presuming they were unlikely to testify despite the lack of relevant witnesses in the transferor venue.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, [email protected])
Jessica A. Hudak – Orange County (+1 949-451-3837, [email protected])

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])

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])

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

This week the UK Government published yet more updates on the application of the new National Security and Investment Act 2021 (NSI Act), which will come into effect on 4 January 2022.

Now seemed like a good time to take stock of all of the developments and guidance to date and to provide a helpful overview of the new regime, with all of the draft legislation and guidance in one place.

The big question is, what do companies need to take into account right now?

1. Background

In November last year, we reported on the UK Government’s announcement to overhaul the UK’s approach to foreign investment review and the introduction of its National Security and Investment Bill. The Bill received Royal Assent in April to become the NSI Act.

The NSI Act will introduce a new standalone hybrid regime of mandatory and voluntary notifications for certain acquisitions that could harm the UK’s national security. The regime also includes a Government power to call in any deal which raises a “national security risk”.

In late July 2021, the UK Government confirmed that the NSI Act will take effect from 4 January 2022 and also published four new pieces of guidance[1] as well as an updated draft of sector definitions for the mandatory notification regime under the NSI Act and a statement on how it proposes to exercise its new call-in powers.

This week the UK Government published a further updated draft of sector definitions for the mandatory notification regime and an explanatory note. Other than an amendment to state they will come into force on 4 January 2022, the draft definitions are in substantially the same form as the July draft. The Government also published draft regulations on monetary penalties under the NSI Act, together with an explanatory memorandum. These regulations are broadly in line with the rules for calculating penalties under the Enterprise Act 2002 (EA2002), but there are some differences.

2. Impact for companies

The introduction of the NSI Act forms part of a trend towards stricter control of foreign direct investment seen elsewhere in the world, including in the U.S. and in Europe. As far as foreign investment in the UK is concerned, the NSI Act will afford the UK Government one of the highest levels of scrutiny of any regime globally.

Although it is expected to be rare that a deal will be blocked (or require remedies) under the NSI Act, the impact for investors will be significant in terms of deal certainty and timeline.

The Government initially estimated that there will be 1,000–1,800 transactions notified each year, and 70 – 95 of those transactions are expected to be called in for a full national security assessment. This compares to a total of less than 25 transactions which have been reviewed by the Government since 2003 under the EA2002 public interest regime.[2] Since these estimates were made, the Government has increased the threshold for mandatory notification from the acquisition of 15% of shares or voting rights to 25%. Nonetheless, given the broad nature of the regime and the current uncertainty around its application, we would anticipate that a high number of notifications will be made, at least initially.

Faced with mandatory notification obligations in many cases, as well as severe criminal and civil consequences for non-compliance, companies must pay close attention to national security risks when investing in the UK.

3. What do companies need to consider right now?

Consider the existing public interest regime

Over the next four months, transactions which raise national security concerns are still subject to the existing public interest intervention regime under the EA2002 and, accordingly, parties should ensure their transaction documents adequately cater for both regimes. For example, in relation to conditions and the process and approach to preparing and securing relevant regulatory approvals.

The risk of intervention under the current regime is not theoretical. In the last few years, the numbers and the nature of intervention in UK transactions on public interest grounds has increased. In December 2019, the CMA issued a Public Interest Intervention Notice (PIIN) in relation to the proposed acquisition of Mettis Aerospace by Aerostar following which the parties decided not to proceed with the acquisition. In that same month the CMA issued a PIIN in relation to Gardener Aerospace’s proposed acquisition of Impcross Limited which was subsequently blocked.

More recently, in April of this year, Digital Secretary Oliver Dowden issued instructions in relation to the proposed acquisition of ARM Limited by NVIDIA Corporation. The Secretary of State for Business, Energy and Industrial Strategy (BEIS) is reported as taking an active interest in Parker-Hannafin’s proposed acquisition of British defence technology firm, Meggitt. In August of this year, Director of National Security & International, Jacqui Ward, issued a PIIN in relation to Cobham’s proposed acquisition of the defence aerospace and security solutions provider, Ultra Electronics plc.

Once the NSI Act enters into force, the existing national security ground under the EA2002 will be repealed. However, the public health, media plurality and financial stability heads of intervention will remain in place and apply in parallel after commencement of the new NSI Act regime.

Make a jurisdictional assessment

Parties who are currently contemplating a deal that will complete after the commencement date (4 January 2022) need to assess whether their deal falls within the new mandatory notification regime. If so, the deal will need to be notified to the Investment Security Unit (ISU) of the Secretary of State for BEIS before closing.

An acquisition which is subject to the mandatory notification regime will be void if is completed without notifying and gaining approval from the Government. In such cases, parties need to ensure that their transaction documents contain appropriate conditions and that the long stop date is sufficient. Parties will need to take account of the time-frames that the ISU has to (i) determine whether to accept or reject a notification, (ii) assess whether they wish to issue a call-in notice and (iii) make its substantive assessment of the transaction, if it decides to call-in or screen the transaction.

Assess the risk of retrospective call-in for deals between 12 November 2020 and 4 January 2022

The NSI Act affords BEIS the power to retrospectively call-in deals and carry out a full national security assessment. These retroactive call-in powers apply to deals closed between 12 November 2020 and commencement of the NSI Act on 4 January 2022 (the interim period). They do not apply to deals closed before 12 November 2020.

This means that for deals contemplated now, even if they will close before 4 January 2022, parties have to carry out a risk assessment of the likelihood that BEIS will use its call-in powers post 4 January.

The call-in powers may be exercised where the Government reasonably suspects that a “trigger event” (see below) has occurred and that the trigger event has given rise or may give rise to a national security risk. If a transaction that closed in the interim period would have fallen within the mandatory regime had the NSI Act been in force at the time, it could be a prime candidate for call-in by BEIS once the NSI Act commences.[3]

For deals which closed in the interim period but would not have been caught by the mandatory regime, parties will still need to consider whether their deal may reasonably be considered to raise national security concerns within the meaning of the NSI Act. And, as such, whether the deal is a likely candidate for call-in by BEIS.

The period during which the Government can call-in a deal is five years from completion. This period is reduced to six months from the date at which the BEIS becomes aware of the transaction. For deals closing during the interim period, the call-in power will be available for a five year period from the date of closing, or six months from 4 January, if the parties informed BEIS of the transaction during the transitional period.

This is important because parties to a transaction which closes during the interim period and which could reasonably be considered to give rise to a national security, should consider whether to discuss the transaction informally with the ISU. Making BEIS aware through consultation with the ISU would have the effect of shortening the window for call-in to six months from commencement of the Act. It may also help parties decide whether a voluntary notification would be prudent once the Act commences. Such an approach may be advantageous from a deal certainty view point, in particular in terms of mitigating buy-side transactional risk.

4. A quick recap on the rules

4.1 What type of transactions does the NSI Act apply to?

The NSI Act applies to acquisitions of control over qualifying entities or assets – this is called a “trigger event” – where BEIS reasonably suspects that there is a risk to national security as a result of the acquisition.

The definition of control under the NSI Act is broad and applies to the acquisition of more than 25%, 50% and 75% of votes or shares in a qualifying entity (or the acquisition of voting rights that allow the acquirer to pass or block resolutions governing the affairs of the entity). In addition, outside of the mandatory regime, BEIS will also be able to call-in or accept voluntary notifications in relation to transactions falling below this 25% threshold where there is “material influence”. This can mean acquisitions of shareholdings as low as 10-5%.[4]

A qualifying entity must be a legal person, that is not an individual. It must have a tie to the UK, either because it is registered in the UK or because it carries on activities in the UK or supplies goods or services to persons in the UK.

Acquisitions of qualifying assets such as land and IP may be subject to call-in or the voluntary regime (but not the mandatory regime).[5]

4.2 Mandatory notifications

Notifications will be mandatory for acquisitions of control over a qualifying entity active in 17 defined sectors designated as particularly sensitive for national security. These are wide-ranging: from energy, defence and transport to AI, quantum technologies, and satellite and space technologies.[6] In these sectors, such transactions must receive Government approval before completion and so the NSI Act has a suspensory effect.

Failure to notify under the mandatory regime will render completion of the acquisition void. There are also civil and criminal penalties for completing a notifiable acquisition without approval. Civil penalties can be up to 5% of the organization’s global turnover or £10 million (whichever is greater).[7]

The Government has engaged extensively with stakeholders on the mandatory sector definitions, since the publication of the first draft in November 2020. Throughout this process, the Government has refined and developed the proposed definitions. The latest set of definitions were published on 6 September and are set out in the draft notifiable acquisition regulation. These are broadly in line with what the Government has published previously. The Government has indicated that it will continue to refine its definitions, even after commencement of the NSI Act in January.

One important point in the guidance issued in July[8] is that a qualifying entity falls within a description of the 17 mandatory sectors only if it carries on the activity specified in the UK or supplies relevant goods or services in the UK.[9]

4.3 Call-in and voluntary notifications

Acquisitions of control over qualifying entities outside of the 17 mandatory regime sectors do not need to be notified. But, if the Government reasonably suspects that an acquisition has given rise to, or may give rise to, a risk to national security, it can be scrutinized by the Government using its call-in powers.

Given these expansive call-in powers, parties may decide to voluntarily notify their transactions where there is a perceived risk of call-in and a desire for deal certainty. A voluntary notification forces BEIS to decide within 30 business days whether to proceed with a review.

As noted above, the voluntary regime may also apply to asset acquisitions and to transactions falling below this 25% threshold where there is “material influence”.[10]

5. How to assess the call-in risk

The Government published a new draft statement in July, setting out how it expects to exercise the power to give a call-in notice. This is referred to as the draft statement for the purposes of section 3. The Government again consulted on this statement, with the consultation closing on 30 August.

Whilst qualifying acquisitions across the whole economy are technically in scope, the call-in power will be focussed on acquisitions in the 17 areas of the economy subject to mandatory notification and areas of the economy which are closely linked to these 17 areas. Acquisitions which occur outside of these areas are unlikely to be called in because national security risks are expected to occur less frequently in those areas. This is new compared to the previous statement of intent of policy, which split areas of the economy into three risk levels (core areas, core activities and the wider economy), and is a welcome clarification.

The risk factors have stayed largely the same as in previous iterations, with some tweaks. Essentially, to assess the likelihood of a risk to national security, the Secretary of State will consider three risk factors:

Target risk: whether the target is being used, or could be used, in a way that poses a risk to national security. BEIS will consider what the target does, is used for, or could be used for, and whether that could give rise to a risk to national security. BEIS will also consider any national security risks arising from the target’s proximity to sensitive sites.
Acquirer risk: whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target. Characteristics include sector(s) of activity, technological capabilities and links to entities which may seek to undermine or threaten the interests of the UK. Threats to the interests of the UK include the integrity of democracy, public safety, military advantage and reputation or economic prosperity. Some characteristics, such as a history of passive or longer-term investments, may indicate low or no acquirer risk.
Control risk: whether the amount of control that has been, or will be, acquired poses a risk to national security. A higher level of control may increase the level of national security risk.

The risk factors will be considered together, but an acquisition may be called in if any one risk factor raises the possibility of a risk to national security.

The same risk factors will be applied to qualifying acquisitions of assets as to qualifying acquisitions of entities.

At present there are no turnover or market share safe-harbours for investors (below which transactions would fall outside the scope of the NSI Act). The Government has, to date, firmly rejected calls from industry professionals and practitioners to introduce such a safe-harbour or exemption.

6. What’s next?

We expect the Government to publish final regulations and guidance as the year draws to an end. We do not expect the scope of the 17 sensitive sectors to change now, before the NSI Act comes into effect.

In the meantime, parties should consider the possible impact of the new regime on any proposed divestments or acquisitions which are in the mandatory sectors or which are not in one of these designated sectors but which may nonetheless give rise to national security concerns. The ISU has encouraged parties to contact them to discuss possible acquisitions and how the NSI Act may impact their transaction or their responsibilities.

More generally, the Government has emphasised that the UK remains open for investment and that the new regime aims to proportionately mitigate national security risks. It is keen to stress its ambition that the new regime will enable the fastest, most proportionate foreign investment screening in the world, while not undermining predictability and certainty.

_______________________

[1] (i) How to Prepare for the New NSIA Rules on Acquisitions; (ii) Application of the NSIA to People or Acquisitions Outside the UK; (iii) Guidance for the Higher Education & Research Intensive Sectors; and (iv) NSIA and Interaction with Other UK Regulatory Regimes.

[2] The Government’s powers to review transactions on public interest grounds are currently set out in the Enterprise Act 2002. The Government can issue a Public Interest Intervention Notice (PIIN) on certain strictly defined public interest considerations. It can only do so where a transaction meets the jurisdictional thresholds under the UK merger control rules (with limited exceptions).

[3] For such transactions, which were legitimately closed before commencement, the suspension obligation does not apply and there can be no fines for failing to notify.

[4] The Government has stated that any assessment of an acquisition of material influence under the NSI Act will follow the CMA’s guidance on material influence in a merger control context.

[5] The Government has indicated that investigations of asset acquisitions that are not linked to the 17 mandatory sectors are expected to be rare and, generally, the Secretary of State expects to call-in acquisitions of assets rarely and significantly less frequently than acquisitions of entities.

[6] The full list is: Advanced Materials, Advanced Robotics, Artificial Intelligence, Civil nuclear, Communications, Computing hardware, Critical suppliers to Government, Critical suppliers to the emergency services, Cryptographic Authentication, Data Infrastructure, Defence, Energy, Military and Dual-use, Quantum technologies, Satellite and space technologies, Synthetic biology, Transport.

[7] See draft regulations on monetary penalties and the accompanying explanatory memorandum published on 6 September 2021.

[8] See guidance referred to in item (i) in footnote 1.

[9] The guidance also the proposed Section 3 statement (see section 4 of this alert below) provides helpful examples and case studies of the types of entities and assets both in and outside of the UK which may fall within scope of the new regime.

[10] See footnote 4.

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, Mergers and Acquisitions, or International Trade practice groups, or the authors:

Ali Nikpay – Antitrust and Competition (+44 (0) 20 7071 4273, [email protected])
Deirdre Taylor – Antitrust and Competition (+44 (0) 20 7071 4274, [email protected])
Selina S. Sagayam – International Corporate (+44 (0) 20 7071 4263, [email protected])
Attila Borsos – Competition and Trade (+32 2 554 72 11, [email protected])
Mairi McMartin – Antitrust and Competition (+32 2 554 72 29, [email protected])

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

On 2 September 2021, the Court of Justice of the European Union (the “CJEU”) issued its ruling in Republic of Moldova v Komstroy[1] (the “Decision” or “Komstroy”) concluding that, as a matter of EU law, Article 26 of the Energy Charter Treaty (the “ECT”) is not applicable to “intra-EU” disputes (that is, disputes between an investor of an EU Member State on the one hand, and an EU Member State on the other).

The CJEU’s Decision largely follows the CJEU’s controversial reasoning in Achmea BV v Slovak Republic[2] (“Achmea”) (2018), which concerned a bilateral investment treaty (“BIT”) between two EU Member States (as opposed to a multilateral treaty such as the ECT). Achmea was addressed in a previous client alert here.[3]

Background

In October 2019, the Paris Court of Appeal (cour d’appel de Paris) made a request to the CJEU for a preliminary ruling addressing three questions.[4] These pertained to set-aside proceedings brought by Moldova in respect of an UNCITRAL arbitral award rendered against it for certain breaches of obligations under the ECT. Paris was the seat of the underlying arbitration.

The CJEU’s Decision

Only one of the three questions referred by the Paris Court of Appeal ultimately was addressed by the CJEU. That question asked the CJEU to determine whether the definition of “investment” in Article 1(6) of the ECT requires any economic contribution on the part of the investor in the host State. The Decision found, in essence, that an economic contribution was required in its view.

The CJEU also set out its views on whether Article 26 of the ECT is compatible with EU law insofar as it provides for arbitration between EU based investors and EU Member States.[5] This question was not referred by the Paris Court of Appeal, nor was it directly relevant to the questions before the CJEU (which concerned investments in a non-EU Member State (Moldova)). This separate question had been raised by the European Commission, together with certain EU Member States,[6] acting as interveners in the CJEU proceedings. The Decision indicates that intra-EU arbitration under the ECT is incompatible with EU law. The CJEU’s reasoning is summarised below.

First, following its reasoning in Achmea, the CJEU explained that in order to preserve the autonomy of EU law, as well as its effectiveness, national courts of EU Member States may make a preliminary reference to the CJEU pursuant to Article 267 of the Treaty on the Functioning of the European Union (the “TFEU”). This referral procedure was described as the “keystone” of the EU judicial system with the “objective of securing the uniform interpretation of EU law, thereby ensuring its consistency, its full effect and its autonomy”.[7]

Second, the CJEU reasoned that because the EU is a Contracting Party to the ECT, the ECT itself is a so-called “act of EU law”.[8] Having reached this conclusion, the CJEU then determined that because the ECT is an “act of EU law”, an ECT tribunal would necessarily be required to interpret, and even apply, EU law when deciding a dispute under Article 26.[9] This reasoning appears to be directly at odds with the CJEU’s Opinion 1/17, in which it accepted that CETA tribunals[10]– though standing outside the judicial system of the EU – could nonetheless interpret and apply the CETA itself without running afoul of EU law.[11] The Decision does not explain how CETA, to which the EU is also a party and must likewise be considered an “act of the EU” by the CJEU, can be compatible with EU law, but the ECT cannot. Likewise, the CJEU did not explain how its finding that the ECT is an “act of EU law” would not apply equally in the extra-EU context (i.e., where a dispute involves an EU Member State and an investor from a third State), leaving these questions unanswered.

Third, having found that an ECT tribunal would need to apply EU law on the basis that the ECT is an “act of EU law”, the CJEU then ascertained whether an ECT tribunal is situated within the judicial system of the EU such that a preliminary reference could be made to the CJEU to ensure the effectiveness of EU law.[12] In the CJEU’s view – in “precisely the same way” as in Achmea – ECT tribunals are outside the EU legal system, thus preventing effective control over EU law.[13] The CJEU found that the judicial review that arises in the context of EU-seated investor-state arbitration is limited since the referring court can only perform a review insofar as its domestic law permits.[14] In other words, according to the CJEU, the full effectiveness of EU law cannot be guaranteed.

Finally, given that commercial arbitration tribunals routinely interpret and apply EU law outside of the EU legal system (which could mean that any arbitration would be incompatible with EU law), the Decision attempts to distinguish investor-state arbitration from commercial arbitration. The distinction, according to the CJEU, is that commercial arbitration is different because it “originate[s] in the freely expressed wishes of the parties concerned”, whereas investor-state arbitration apparently is not based on the parties’ “freely expressed wishes”.[15] Unfortunately, however, the CJEU did not elaborate on its conclusion in this regard. That conclusion appears to be inconsistent with well-established principles of public international law, which confirm that States can (and must) enter into treaties such as the ECT of their own free will.

In light of the foregoing, the CJEU concluded that Article 26 of the ECT is incompatible with EU law insofar as it provides for arbitration between EU investors and EU Member States.[16]

Implications of the CJEU’s Decision

The ECT remains in force between all Contracting Parties, which includes all EU Member States, as well as the EU. Indeed, a modification of the ECT to remove its application as between EU Member States would require the participation not just of the EU and its Member States, but of all 53 Contracting Parties to the ECT. The CJEU’s Decision does not (and cannot) modify the express terms of the ECT itself.

To date, all ECT tribunals that have considered jurisdictional objections based on the intra-EU nature of the dispute have rejected the suggestion that the ECT does not apply on an intra-EU basis. That is unlikely to change in light of the Decision. Indeed, the CJEU did not offer any analysis under the Vienna Convention on the Law of Treaties (the “VCLT”), which governs the interpretation of the ECT. Nor did the CJEU address the substantial body of case law under the ECT on the interpretation of Article 26 of the ECT, all of which reaches the opposite conclusion to the CJEU. Those cases set forth what is now a well-established principle that EU law is not relevant to the question of jurisdiction under the ECT. Thus, the Decision (which is limited to an analysis under EU law) should have no bearing on an ECT tribunal’s jurisdiction.

Another implication of the Decision is that EU-based investors considering energy investments in EU Member States may now view these investments as more risky. First, the applicability of Article 26 to intra-EU disputes was not a question that was before the CJEU and it had no impact on the Komstroy case, which (paradoxically) did not involve an intra-EU dispute. The Decision provides scant and inconsistent reasoning and may therefore be considered to be based on political considerations rather than a sound and reasoned interpretation of the law. The Decision thus has the potential to undermine investor confidence in the EU judicial system and the rule of law within the EU.

Second, the CJEU’s Decision may create uncertainty regarding the extent of investor protection within the EU for energy investments as EU Member States may believe that they can (or must) disapply the ECT to investors from other EU Member States. This, of course, would make investments by EU investors into EU Member States both less attractive and more expensive (as it will drive up risk premiums). The CJEU’s decision may, therefore, undermine investor confidence at a time when the EU is seeking substantial private investment in its energy sector as part of its efforts to de-carbonise. In other words, the Decision ultimately could be an “own goal” for the EU and its Member States.

____________________________

[1] Judgment of the Court (Grand Chamber), Case C‑741/19, Republic of Moldova v Komstroy, a company the successor in law to the company Energoalians, ECLI:EU:C:2021:655, 2 September 2021 (the “Decision”), available here.

[2] Judgment of the Court (Grand Chamber), Case C‑284/16, Slowakische Republik (Slovak Republic) v Achmea BV, ECLI:EU:C:2018:158, 6 March 2018, available here.

[3] In short, in Achmea, the CJEU determined that arbitration provisions such as the one found in the intra-EU BIT at issue in that case (which, in contrast to the ECT, explicitly required a tribunal to consider EU law) are not compatible with EU law.

[4] Request for a preliminary ruling from the Cour d’appel de Paris, Case C-741/19, Republic of Moldova v Komstroy, a company the successor in law to the company Energoalians, 8 October 2019, available here.

[5] Decision, ¶ 40.

[6] France, Germany, Spain, Italy, The Netherlands and Poland.

[7] Decision, ¶ 46.

[8] Decision, ¶ 49.

[9] Decision, ¶¶ 49-50.

[10] I.e., tribunals established to hear disputes arising under the under the EU-Canada Comprehensive Economic and Trade Agreement (“CETA”).

[11] Opinion 1/17 of the Full Court (CETA), ECLI:EU:C:2019:341, 20 April 2019, ¶¶ 116-118, available here.

[12] See Article 267 TFEU (the preliminary reference procedure).

[13] Decision, ¶ 52.

[14] Decision, ¶ 57.

[15] Decision, ¶ 59.

[16] Decision, ¶ 66.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Jeff Sullivan QC, Ceyda Knoebel, Stephanie Collins and Theo Tyrrell.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement or Transnational Litigation practice groups, or any of the following in London:

Cyrus Benson (+44 (0) 20 7071 4239, [email protected])
Penny Madden QC (+44 (0) 20 7071 4226, [email protected])
Jeff Sullivan QC (+44 (0) 20 7071 4231, [email protected])
Ceyda Knoebel (+44 (0) 20 7071 4243, [email protected])
Stephanie Collins (+44 (0) 20 7071 4216, [email protected])
Theo Tyrrell (+44 (0) 20 7071 4016, [email protected])

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

1.	INTRODUCTION
1.1	Singapore has become an increasingly popular destination for trust listings in the recent years. Real estate investment trusts (“REITs”), business trusts (“BTs”) and stapled trusts are some of the more popular vehicles that property players opt for to tap capital on Singapore Exchange Securities Trading Limited (the “SGX-ST”).
1.2	This primer provides an overview of the structure of such vehicles, the main regulations regulating them, the process to getting listed on the SGX-ST as well as the various ways of acquiring control of these vehicles post-listing. This primer also explores the lessons to be learnt from the controversy surrounding Eagle Hospitality Trust (“EHT”) and the failed merger between ESR REIT and Sabana REIT.

2.	STRUCTURE
2.1	REIT

2.1.1

A REIT may generally be described as a trust that invests primarily in real estate and real estate-related assets with the view to generating income for its unitholders.

2.1.2

It is constituted pursuant to a trust deed entered into between the REIT manager and the REIT trustee.

2.1.3

The REIT manager manages the assets of the REIT while the REIT trustee holds the assets on behalf of the unitholders and generally helps to safeguard the interests of the unitholders.

2.1.4

REITs are popular with investors as the income from the assets (after deducting trust expenses) is distributed to the unitholders at regular intervals. A REIT which distributes at least 90% of its taxable income to its unitholders in the same year in which the income is derived can enjoy tax transparency treatment under the Income Tax Act, Chapter 134 of Singapore. It is also not uncommon for REITs to pledge to distribute the entire of its annual distributable income in the initial period post-listing.

2.1.5

The typical roles in a REIT structure are as follows:

(a)	*REIT Manager*: The REIT manager manages the assets of the REIT and is responsible for the overall strategic direction of the REIT, including asset acquisitions and divestments as well as capital management. In return, the REIT manager charges a management fee which typically comprises a base fee and a performance fee. The REIT manager would typically also be entitled to an acquisition fee, divestment fee and development management fee;
(b)	*Property Manager*: The property manager manages and maintains the properties of the REIT in return for a property management fee;
(c)	*REIT Trustee*: The REIT trustee holds the assets of the REIT on behalf of the unitholders and generally ensures that the REIT complies with applicable rules and regulations. In return, the REIT trustee is paid a trustee’s fee; and
(d)	*Sponsor*: The sponsor is the party that injects the initial portfolio of assets into the REIT and will continue to provide the REIT with a pipeline of assets moving forward. Typically, the sponsor also holds a substantial stake in the REIT and/or the REIT manager.

2.1.6

SGX-ST-listed REITs typically adopt an external management model where the REIT manager is owned by the sponsor of the REIT. This is in contrast to an internal management model (adopted by a majority of REITs in the United States of America) where the REIT manager is instead owned by the REIT itself. Proponents of an internal management model in Singapore argue that an internal management model avoids conflicts of interest and lowers the fees payable to the REIT manager (which ultimately translates to better returns for unitholders). The success of the Hong Kong-listed internally managed Link REIT, Asia’s largest REIT in terms of market capitalization, may bear testament to this. However, whether an internal management model takes off in Singapore remains to be seen. Singapore investors could well prefer sponsor participation due to the various advantages that a sponsor can bring, such as marketability, expertise, support and pipeline of assets.

2.2

2.2.1

A BT is a trust that can generally engage in any type of business activity, including the management of real estate assets or the management or operation of a business.

2.2.2

It is constituted pursuant to a trust deed entered into by the trustee-manager, a single entity that has the dual responsibility of safeguarding the interests of the unitholders of the BT and managing the business conducted by the BT.

2.2.3

BTs, unlike companies, can make distributions out of operating cash flows (instead of profits). They suit businesses which involve high initial capital expenditures with stable operating cash flows, such as real estate assets.

2.2.4

Compared to REITs, BTs are also more lightly regulated and may therefore be preferred for their flexibility. Property BTs often also pledge to provide REIT-like distributions to the unitholders.

2.2.5

The typical roles in a BT structure are as follows:

(a)	*Trustee-Manager*: The trustee-manager is both the trustee and the manager of the BT. As trustee, it holds the assets of the BT on behalf of the unitholders and helps to safeguard the interests of the unitholders. As manager, it manages the business and strategic direction of the BT. In return, the trustee-manager is paid a trustee’s fee as well as a management fee, which typically comprises a base fee and a performance fee. The trustee-manager would typically also be entitled to an acquisition fee, divestment fee and development management fee;
(b)	*Property Manager*: In the case of a property BT, a property manager is typically engaged to manage and maintain the properties of the BT in return for a property management fee; and
(c)	*Sponsor*: The sponsor is the party that injects the initial portfolio of assets into the BT and will continue to provide the BT with a pipeline of assets moving forward. Typically, the sponsor also holds a substantial stake in the BT and/or the trustee-manager.

2.3	Stapled Trust

	2.3.1	A stapled trust on the SGX-ST typically comprises a REIT and a BT. Pursuant to a stapling deed, units of the REIT and units of the BT are stapled together and cannot be traded separately. The REIT and the BT would continue to exist as separate structures, but the stapled securities would trade as one counter and share the same investor base.
	2.3.2	A stapled trust structure may be preferred when an issuer wishes to bundle two distinct (but related) businesses into a single tradeable counter. Such stapled trust structure is commonly adopted for hospitality assets which provide both a passive (through the receipt of rental income from the lease of such assets) and an active (through the management and operation of such assets) income stream.
	2.3.3	In such cases, the REIT will be constituted to hold the income-producing real estate assets and the BT will be constituted to either (a) be the master lessee of the real estate assets who will manage and operate these assets or (b) remain dormant and only step in as a “master lessee of last resort” to manage and operate these assets when there are no other suitable master lessees to be found. The presence of a BT also offers flexibility for the stapled trust to undertake certain hospitality and hospitality-related development projects, acquisitions and investments which may not be suitable for the REIT.
	2.3.4	Investors who value the business and income diversification may therefore find such a model attractive.
	2.3.5	The typical roles in a REIT and a BT have been discussed above.

REGULATIONS

3.1

REIT

3.1.1

A REIT is regulated as a collective investment scheme under the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”).

3.1.2

The REIT, the REIT manager and the REIT trustee must comply with the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore (the “MAS”, and such Code on Collective Investment Schemes issued by the MAS, the “CIS Code”), which prescribes the many distinctive characteristics of a REIT.

3.1.3

For example, Appendix 6 of the CIS Code requires a REIT to, among others:

(a)	enshrine certain provisions in the trust deed constituting the REIT (such as the right of unitholders to remove the REIT manager by way of a resolution passed by a simple majority of unitholders present and voting at a general meeting, with no participant being disenfranchised);
(b)	generally have at least 75% of its deposited property invested in income-producing real estate;
(c)	not derive more than 10% of its revenue from sources other than (i) rental payments from the tenants of the real estate held by the REIT or (ii) interest, dividends and other similar payments from special purpose vehicles and other permissible investments of the REIT; and
(d)	not have a gearing ratio exceeding 50% (before 1 January 2022) and 45% (on or after 1 January 2022, except that such gearing ratio may exceed 45% (up to a maximum of 50%) if the REIT has a minimum adjusted interest coverage ratio of 2.5 times after taking into account the interest payment obligations arising from the new borrowings).

3.1.4

A REIT manager is required to hold a capital markets services licence (“CMS Licence”) for REIT management before it can engage in the regulated activity of REIT management.

3.1.5

The Guidelines to All Holders of a Capital Markets Services Licence for Real Estate Investment Trust Management (Guideline No. SFA04-G07) set out further guidance relating to, among others, minimum licensing criteria and corporate governance arrangements.

3.1.6

CMS Licence holders would also need to abide by the Securities and Futures (Licensing and Conduct of Business) Regulations, which set out, among others, requirements relating to licensing, representative notification and key appointments.

3.1.7

A REIT trustee must be an approved trustee under the SFA. Further requirements of an approved trustee are set out under the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (the “SF(OI)(CIS)R”).

3.2

3.2.1

Pursuant to the SFA, a Singapore-constituted BT must be registered by the MAS before its units can be offered to the public. The Business Trusts Act, Chapter 31A of Singapore (the “BTA”), and the Business Trusts Regulations (the “BTR”) are the chief regulations governing registered BTs.

3.2.2

Among others, the BTA and the BTR contain provisions regulating:

(a)	the responsibilities, powers and liabilities of a trustee-manager (including corporate governance arrangements);
(b)	the contents of the trust deed constituting a registered BT;
(c)	the rights of unitholders (such as the right to remove the trustee-manager by way of a resolution passed by unitholders holding in the aggregate not less than three-fourths of the voting rights of all the unitholders who, being entitled to do so, vote in person or where proxies are allowed, by proxy present at a meeting of the unitholders); and
(d)	the winding up of a registered BT.

3.2.3

The BTA stipulates certain requirements of a trustee-manager. For example, only a company (not being an exempt private company) shall act as trustee-manager of a registered BT. The trustee-manager of a registered BT shall also not carry on any business other than the management and operation of the registered BT as its trustee-manager.

3.2.4

The regulations governing a collective investment scheme do not apply to a collective investment scheme that is also a registered BT.

3.2.5

Accordingly, BTs can offer issuers with considerably more flexibility as compared to REITs since BTs have no statutory gearing limit and can engage in a wider scope of business activity.

3.3

Stapled Trust

3.3.1	A stapled trust that comprises a REIT and a BT would be subject to the respective rules and regulations set out above.
3.3.2	Under Appendix 6 of the CIS Code, a REIT may only staple its units with the securities of an entity with active operations only if that entity (a) has business operations that are in the same industry segment as the REIT or (b) is operating a business or providing a service that is ancillary to the assets held by the REIT.

LISTING

4.1

Due Diligence

4.1.1

Due diligence is conducted to evaluate an issuer’s suitability for listing on the SGX-ST. Under the listing manual of the SGX-ST (the “Listing Manual”), the issue manager (who will manage the issuer’s listing application) is tasked with the responsibility to “conduct adequate due diligence on the applicant”.

4.1.2

Through the due diligence process, the issue manager (with the assistance of its advisers and other experts) identifies the necessary information for the preparation of a prospectus. Notably, the SFA imposes on certain persons criminal and civil liabilities for any false or misleading statement in or omission of material information from a prospectus.

4.1.3

The issue manager is guided by the due diligence guidelines issued by The Association of Banks in Singapore (the “ABS Listings Due Diligence Guidelines”), which the SGX-ST will have regard to when assessing the adequacy of due diligence conducted.

4.1.4

Among others, the ABS Listings Due Diligence Guidelines recommend that an issue manager should:

(a)	review the educational and professional qualifications, experience and expertise of the proposed directors and executive officers of the issuer to assess their suitability;
(b)	achieve a thorough understanding of the issuer and its business through reasonable due diligence and with the assistance of advisers, carry out reasonable checks and make enquiries as are reasonable in the circumstances to satisfy itself that the information contained in the prospectus (subject to reasonable reliance on experts) is compliant with law; and
(c)	where there is reliance on the reports and opinions of experts, take measures to satisfy itself that such reliance is reasonable in the circumstances and there are no reasonable grounds to believe that the information in such reports and opinions is untrue or misleading in any material respect or contains any material omission.

4.1.5

In the context of a REIT, property BT or stapled trust listing, due diligence on the initial portfolio of properties is of utmost importance. In this regard, due diligence will generally involve:

(a)

on-site visits to the properties;

(b)

the engagement of independent property valuer(s) to conduct a valuation of the properties as well as provide a thorough analysis of the properties;

(c)

the engagement of legal advisers to conduct legal due diligence to, among others:

(i)	confirm that good title to the properties will be obtained;
(ii)	identify key approvals;
(iii)	confirm that material contracts (such as leases) are legal, binding and enforceable;
(iv)	identify ongoing and past litigations and investigations;
(v)	identify scope of insurance coverage;
(vi)	identify caveats, security interests, easements, covenants and licenses;
(vii)	assess compliance with zoning and planning permissions; and
(viii)	obtain information on road line plans, survey plans and property boundaries;

(d)

the engagement of technical consultants to assess the structural integrity of the properties and identify material defects; and

(e)

the engagement of environmental consultants to assess the environmental conditions of the properties in order to identify actual and potential environmental liabilities.

4.1.6

Financial due diligence should be conducted with the assistance of reporting accountants to analyze the financial health of the issuer and to prepare the pro forma financial information as well as the profit forecast and profit projection sections, which are to be included in the prospectus.

4.1.7

Taxation experts should also be engaged to identify and assess the taxation issues in connection with a listing. To the extent necessary, favorable tax rulings may need to be obtained from the relevant authorities.

4.2

Listing Process

4.2.1	There are quantitative requirements (such as minimum profit, minimum operating track record, operating revenue and minimum market capitalization), among others, which must be met before an issuer can list on the Mainboard of the SGX-ST.
4.2.2	As it is not uncommon for REITs and BTs to only be constituted shortly prior to listing, the Listing Manual allows REITs and BTs who have a market capitalization of not less than S$300 million based on the issue price and post-invitation issued unit capital to apply for listing even if they do not have historical financial information, provided they are able to demonstrate that they will generate operating revenue immediately upon listing.
4.2.3	To list on the Mainboard of the SGX-ST, the issue manager, on behalf of the issuer, submits the listing application (including Section (A) of the listing admissions pack of the SGX-ST (the “LAP”), which sets out the general information of the issuer and key issues for listing) to the SGX-ST for review.
4.2.4	Upon completion of such review, the issuer then submits Section (B) of the LAP (which includes the draft prospectus) to the SGX-ST for review.
4.2.5	To shorten time-to-market, Sections (A) and (B) of the LAP may also be submitted together. A pre-lodgment submission to the MAS for the concurrent review of the draft prospectus is typically also made during the submission of Section (B) of the LAP.
4.2.6	Prospective cornerstone investors are then approached at this juncture. A typical cornerstone process involves having the prospective investors execute non-disclosure agreements before they are provided with copies of the draft prospectus. Prospective cornerstone investors may also be given the opportunity to meet with the management team.
4.2.7	During the review process, the regulators may raise queries which the issuer will need to resolve to the regulators’ satisfaction. Upon completion of such review (which generally takes at least four weeks from the submission of Section (B) of the LAP ), the SGX-ST will issue an eligibility-to-list letter (containing certain conditions) (the “ETL Letter”). The MAS will also inform the issuer to proceed with the lodgment of its preliminary prospectus once it has completed its review.
4.2.8	The issuer will thereafter lodge its preliminary prospectus (along with the accompanying documents, such as the product highlights sheet) with the MAS, upon which the preliminary prospectus will be subject to public exposure. Institutional book-building commences at this juncture.
4.2.9	The public offer commences only upon the registration of the prospectus by the MAS, which takes place between the seventh and 21st day (both days inclusive) from the date of lodgment of the preliminary prospectus. This may also be extended to a maximum of 28 days if the MAS gives notice of such extension. Pursuant to the Listing Manual, a public offer is required to be open for at least two market days.
4.2.10	Upon the close of the public offer and provided the SGX-ST is satisfied that the conditions set out in the ETL Letter have been met, the units or stapled securities will be allotted and listing and quotation of the units or stapled securities may commence.
4.2.11	In the case of a REIT, a Singapore-constituted REIT must be authorized by the MAS prior to an initial public offering of units to investors in Singapore. Further, a REIT manager is required to hold a CMS Licence for REIT management before it can engage in REIT management.
4.2.12	In the case of a BT, a Singapore-constituted BT would also need to be registered by the MAS prior to an initial public offering of units to investors in Singapore.
4.2.13	These applications are made concurrently during the listing process.

4.3

Prospectus

4.3.1

The prospectus is the primary offering document on which investors base their investment decisions. It should generally include all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matters specified under the SFA and the matters prescribed by the MAS.

4.3.2

The contents of the prospectus of a REIT, BT and stapled trust are prescribed by, among others, the SFA, the Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018, the SF(OI)(CIS)R, the CIS Code and the Listing Manual (such rules and regulations regulating the contents of such prospectus, the “Prospectus Regulations”).

4.3.3

The prospectus of a REIT, property BT or stapled trust will generally include, among others, the following information:

(a)	overview of the issuer’s business and organizational structure;
(b)	risk factors;
(c)	use of proceeds;
(d)	ownership of the units;
(e)	capitalization and indebtedness;
(f)	unaudited pro forma financial information;
(g)	management’s discussion and analysis of financial condition and results of operations;
(h)	profit forecast and profit projection;
(i)	business and properties;
(j)	formation and structure of the issuer;
(k)	overview of the material agreements relating to the issuer and its properties;
(l)	overview of relevant laws and regulations; and
(m)	expert reports (such as the reporting accountants’ reports on the unaudited pro forma financial information and the profit forecast and profit projection, the independent taxation report(s), the independent property valuation summary report(s) and the independent market research report).

4.3.4

With respect to risk factors, the Prospectus Regulations generally require risks specific to the issuer to be disclosed. Risk factors which are typically included in the prospectus of a REIT, property BT or stapled trust include:

(a)	risks relating to the properties (such as certain properties being subject to restrictions, concentration risk and risk that due diligence on the properties may not have uncovered all material defects);
(b)	risks relating to the issuer’s operations (such as risk of failure in implementing investment strategy, the lack of an operating track record of the REIT manager and/or the trustee-manager and risk of breach of obligations by the lessees);
(c)	risks relating to the jurisdiction(s) in which the issuer operates;
(d)	risks relating to investing in real estate (such as the relative illiquidity of real estate investments and risk that the rate of increase in rentals of the properties may be less than the inflation rate); and
(e)	risks relating to an investment in the units or stapled securities (such as the risk that substantial unitholders or substantial stapled securityholders could sell a substantial number of units or stapled securities and risk of change in taxation laws).

4.4

Continuing Listing Obligations

Post-listing, REITs, BTs and stapled trusts are subject to continuing listing obligations under the Listing Manual, such as the requirement to announce specific and material information, requirements relating to secondary offerings, interested person transactions and significant transactions, as well as requirements relating to circulars and annual reports.

4.5

Case Study of EHT

4.5.1	Despite the safeguards in the listing framework put in place by the SGX-ST, the case of EHT has illustrated that the continued success of a REIT, property BT or stapled trust which adopts a master lease arrangement will ultimately depend on the commitment and financial strength of the master lessees (who will typically be affiliates of the sponsor).
4.5.2	EHT is a stapled trust, comprising Eagle Hospitality Real Estate Investment Trust (“EHREIT”) and Eagle Hospitality Business Trust (“EHBT”), which made its debut on the Mainboard of the SGX-ST in May 2019 with an initial portfolio of 18 hotel properties. EHREIT was established with the principal investment strategy of investing in income-producing real estate used primarily for hospitality and/or hospitality-related purposes while EHBT will initially remain dormant.
4.5.3	EHT adopted a master lease arrangement under which affiliates of its sponsor (collectively, the “Master Lessees”), Urban Commons, would lease the hotels from EHREIT. The Master Lessees would in turn enter into (a) franchise agreements with various hotel franchisors to operate under their brands and (b) hotel management agreements with third-party hotel management companies to manage the day-to-day operations of each hotel.
4.5.4	Indications that things may be less than perfect surfaced shortly post-listing in October 2019 when an article appeared in the press that EHT had been served with a notice of default by the City of Long Beach in respect of one of its properties, The Queen Mary (a hotel operated aboard a historic British ocean liner which had been leased from the City of Long Beach), as a result of failure to make repairs. The same article also quoted a marine survey conducted in 2017 (the “2017 Marine Survey”) which alleged that The Queen Mary was in deteriorating condition and in need of substantial repairs (collectively, the “Queen Mary Allegations”).
4.5.5	The Queen Mary Allegations were swiftly disputed by EHT, which clarified that there was no default and that the supposed notice of default was merely a “formal request for information by the City”. EHT also called the 2017 Marine Survey’s estimate of the scope of work and costs “grossly inaccurate”. To substantiate its claims, EHT further relied on an independent structural engineer’s report by John A. Martin & Associates, Inc. (which was commissioned by Urban Commons prior to EHT’s listing) which concluded that The Queen Mary “remains in excellent structural condition”. Despite the assurances from EHT, the price of its stapled securities reportedly fell 14%.
4.5.6	In late 2019 to early 2020, EHT’s financial resources started to deplete due to the impact of Coronavirus Disease 2019 and various delinquencies by the Master Lessees. Among others, the Master Lessees (a) breached the master lease agreements by failing to pay rent on time, (b) received notice of default from various hotel managers due to, among others, failure to provide and/or maintain sufficient working capital for the hotels’ operations and failure to pay management fees and (c) received notice of termination from various hotel managers due to failure to cure the default of maintaining sufficient working capital for the hotels’ operations. During this period, EHT received a notice of default and acceleration in respect of a US$341 million loan it had taken out in connection with its listing.
4.5.7	In March 2020, EHT called for a voluntary suspension of trading. In April 2020, EHT established a special committee to safeguard value and conduct a strategic review. EHT subsequently appointed a financial adviser and implemented caretaker arrangements at the hotels which were the subject of the notice of termination by the relevant hotel managers.
4.5.8	In May 2020, the strategic review uncovered that the founders of Urban Commons (in their capacity as directors of various subsidiaries of EHREIT) had, on behalf of these subsidiaries, entered into certain interested person transactions which were prejudicial to the interests of EHT and its minority stapled securityholders. This discovery prompted their resignations from the board of directors of the manager of EHREIT (the “EHREIT Manager”) and the trustee-manager of EHBT (the “EHBT Trustee-Manager”).
4.5.9	In June 2020, EHT announced that an initial request for proposal (“RFP”) process conducted by its financial adviser was interrupted by Urban Commons’ entry into a letter of intent with Far East Consortium International Limited (“FECIL”) in relation to FECIL’s proposed acquisition of a 70% interest in each of the EHREIT Manager and the EHBT Trustee-Manager. Against this, the MAS and the Commercial Affairs Department of the Singapore Police Force commenced a joint investigation into current and former directors and officers responsible for managing in EHT in connection with suspected breach of disclosure requirements under the SFA.
4.5.10	Discussions with FECIL, however, collapsed and the trustee of EHREIT (the “EHREIT Trustee”) restarted the RFP process in late 2020, which culminated in the selection of SCCPRE Hospitality REIT Management Pte. Ltd. as the replacement manager of EHREIT (the “SCCPRE Proposal”). The SCCPRE Proposal was contingent on a number of resolutions being passed at an extraordinary general meeting (“EGM”) to be held on 30 December 2020. On or around the same period, EHT terminated the master lease agreements and the EHREIT Trustee also received a directive from the MAS to remove the EHREIT Manager.
4.5.11	On 30 December 2020, the EHREIT Manager was removed. However, not all the requisite resolutions for the SCCPRE Proposal were passed at the EGM held on the same day. In view of the absence of a replacement manager and inability to continue as a going concern because of the depletion of funds, EHT filed for insolvency protection under Chapter 11 of the United States Bankruptcy Code.
4.5.12	As at the time of writing of this primer, EHT has disposed 15 of its 18 hotel properties and also surrendered The Queen Mary back to the City of Long Beach. Stapled securityholders are, however, not expected to receive the sale proceeds as the cash is insufficient to repay all the claims on EHT.
4.5.13	The case of EHT has shown that the continued success of a REIT, property BT or stapled trust which adopts a master lease arrangement will ultimately depend on the commitment and financial strength of the master lessees. Where a master lease arrangement is adopted, concentration risk is at its highest (given the lack of diversity in lessees) and the ability of the master lessees to keep up with timely rental payments becomes even more important. Rental income is ultimately the chief source of income for a REIT, property BT or stapled trust. As seen in the case of EHT, in certain cases, rental defaults could even result in the REIT, property BT or stapled trust defaulting on its debt obligations and ultimately wind up.
4.5.14	The case of EHT has also resulted in the public calling for the authorities to review the current disclosure regime. In particular, it has been questioned if the rules should also require disclosure of the financials of a sponsor (especially if a master lease arrangement with the sponsor is adopted). Where a master lease arrangement is adopted, valuations of the properties and financials presented in the prospectus would be based on the rental income received under such master lease arrangement. For these figures to remain accurate, the master lessees need to be able to perform their end of the bargain. Requiring such disclosures would allow investors to better assess a sponsor’s financial strength.
4.5.15	Short of any amendment to the disclosure regime, issuers will do well to treat the required disclosures as the minimum standard and aim to go above and beyond in the interests of investors.

Acquiring Control of a REIT, BT or Stapled Trust

5.1

An acquisition of all the units of a REIT or BT or all the stapled securities of a stapled trust listed on the SGX-ST (“Target Entity”) may be effected in various ways, such as a take-over offer, a trust scheme of arrangement (“Trust Scheme”) and a reverse take-over (“RTO”).

5.2

Any merger or acquisition involving a Target Entity would be subject to the Listing Manual, the CIS Code (in the case of a REIT) and the Singapore Code on Take-overs and Mergers (the “Take-over Code”). The Take-over Code is enforced by the Securities Industries Council (the “SIC”), which is part of the MAS.

5.3

Take-over Offer

5.3.1

Take-over offers of a Target Entity generally take three forms under the Take-over Code – a mandatory offer, a voluntary offer and a partial offer. A mandatory offer is triggered by an acquiror’s holdings in a Target Entity. A voluntary offer occurs where the acquiror makes an offer for all the units or stapled securities of a Target Entity and this offer does not trigger the mandatory offer rules in the Take-over Code. A partial offer is a voluntary offer for less than 100% of the outstanding units or stapled securities in a Target Entity.

5.3.2

The acquiror can stipulate objective conditions for a voluntary offer such as a particular level of acceptances, unitholders’ or stapled securityholders’ approval and certain regulatory approvals. However, no conditions should be imposed in a mandatory offer other than the mandatory offer being conditional upon the acquiror obtaining acceptances which, together with the units or stapled securities carrying voting rights acquired or agreed to be acquired before or during the offer, will result in the acquiror and parties acting in concert with it holding units or stapled securities carrying more than 50% of the voting rights of the Target Entity.

5.3.3

The acquiror can also seek irrevocable undertakings from the unitholders or stapled securityholders of a Target Entity to accept its offer. Such undertakings must be publicly disclosed.

5.3.4

The consideration for a mandatory offer should be in cash or accompanied by a cash alternative, while the consideration for a voluntary offer may be in cash or securities or a combination thereof.

5.3.5

Steps

The principal steps of a take-over offer are as follows:

(a)	*Due Diligence*: The acquiror may request that it be allowed to conduct due diligence on the Target Entity by notifying the board of directors of the REIT manager or trustee-manager or their advisers;
(b)	*Offer*: The acquiror announces that it wishes to make an offer for the Target Entity, the consideration and any conditions for the offer;
(c)	*Offer Document*: The acquiror issues an offer document in compliance with the Take-over Code to all the unitholders or stapled securityholders of the Target Entity;
(d)	*Target Entity Circular*: The Target Entity issues a circular to the unitholders or stapled securityholders containing the advice of the independent financial adviser to the independent directors of the REIT manager or the trustee-manager on the offer and the recommendation of such directors whether or not to accept the offer; and
(e)	*Close of the Offer*: At the close of the offer, if the conditions of the offer are met, the offer is declared unconditional in all respects, and payment for the units or stapled securities must be made.

5.3.6

Examples of Take-over Offers

(a)

Take-over of Forterra Trust

(i)	In 2015, New Precise Holdings Limited (“New Precise Holdings”), an indirect wholly owned subsidiary of Nan Fung International Holdings Limited, triggered the requirement to make a mandatory offer under the Take-over Code to acquire all the units (other than the units that were already owned, controlled or agreed to be acquired by New Precise Holdings and the parties acting in concert with it) in Forterra Trust, a SGX-ST-listed BT, at an offer price of S$2.25 per unit.
(ii)	Prior to the announcement of the offer, New Precise Holdings had exercised 3,050,000 options in respect of 3,050,000 units in Forterra Trust (the “Options Exercise”). After the issuance of the units to New Precise Holdings pursuant to the Options Exercise, the total number of issued units in Forterra Trust was 257,019,717, and New Precise Holdings and the parties acting in concert with it held units that represented approximately 30.79% of the total number of issued units in Forterra Trust. Accordingly, New Precise Holdings was required under the Take-over Code to make a mandatory offer.
(iii)	At the close of the offer, New Precise Holdings and the parties acting in concert with it owned units representing approximately 97.11% of the total number of issued units in Forterra Trust. New Precise Holdings thereafter exercised its right to acquire the remaining units pursuant to the BTA. Forterra Trust was subsequently delisted from the SGX-ST.

(b)

Take-over of Perennial China Retail Trust (“PCRT”)

(i)	In 2015, Perennial Real Estate Holdings Limited (“PREH”) proposed to acquire all the units (other than the units that were already owned, controlled or agreed to be acquired by PREH and the parties acting in concert with it) in PCRT, a SGX-ST-listed BT, by a voluntary offer at a consideration per unit of (A) S$0.70 and (B) 0.52423 ordinary shares in the capital of PREH.
(ii)	At the close of the offer, PREH and the parties acting in concert with it owned units representing approximately 96.32% of the total number of issued units in PCRT. PREH thereafter exercised its right to acquire the remaining units pursuant to the BTA. PCRT was subsequently delisted from the SGX-ST.

5.4

Trust Scheme

5.4.1

In a Trust Scheme, the acquiror typically acquires all the units or stapled securities of a Target Entity in consideration for cash and/or the issuance of new securities of the acquiror to the existing unitholders or stapled securityholders of the Target Entity. A Trust Scheme will typically be adopted in a situation where the acquiror wishes to acquire all the units or stapled securities of a Target Entity.

5.4.2

A Trust Scheme will typically require:

(a)	the approval by the unitholders or stapled securityholders of the Target Entity to amend the trust deed constituting the Target Entity to include provisions that will facilitate the implementation of the Trust Scheme;
(b)	the approval by a majority in number of the unitholders or stapled securityholders of the Target Entity representing at least three-fourths in value of the units or stapled securities held by the unitholders or stapled securityholders present and voting either in person or by proxy at the meeting of the unitholders or stapled securityholders to be convened to approve the Trust Scheme; and
(c)	the grant of the order of the High Court of the Republic of Singapore (the “High Court”) sanctioning the Trust Scheme.

5.4.3

All Trust Schemes are subject to compliance with the Take-over Code although the SIC may, subject to conditions, exempt a Trust Scheme from selected provisions of the Take-over Code, such as those relating to the timetable of the offer.

5.4.4

Steps

The principal steps of a Trust Scheme are as follows:

(a)	*Implementation Agreement*: The acquiror and the Target Entity will typically enter into an implementation agreement setting out the terms and conditions on which the Trust Scheme will be implemented;
(b)	*Trust Scheme Announcement*: The Target Entity announces that it wishes to propose the Trust Scheme to its unitholders or stapled securityholders;
(c)	*Court Application to Convene Meeting: The Target Entity files with the High Court an application for an order to convene a meeting for its unitholders or stapled securityholders to approve the Trust Scheme (the “Trust Scheme Meeting*”);
(d)	*Trust Scheme Document*: The Target Entity issues a scheme document to its unitholders or stapled securityholders which typically sets out the terms and conditions of the Trust Scheme, its rationale and gives notice of (i) the EGM to approve amendments to the trust deed constituting the Target Entity to include provisions that will facilitate the implementation of the Trust Scheme and (ii) the Trust Scheme Meeting. The EGM and the Trust Scheme Meeting are typically convened on the same day;
(e)	*EGM and the Trust Scheme Meeting*: The unitholders or stapled securityholders approve (i) the amendments to the trust deed constituting the Target Entity at the EGM and (ii) the Trust Scheme at the Trust Scheme Meeting;
(f)	*Court Application to Sanction the Trust Scheme*: The Target Entity files with the High Court the results of the Trust Scheme Meeting and an application for the High Court to sanction the Trust Scheme; and
(g)	*Court Order Sanctioning the Trust Scheme*: The High Court grants an order sanctioning the Trust Scheme.

5.4.5

Examples of Trust Schemes

(a)

Merger of CapitaLand Mall Trust (“CMT”) and CapitaLand Commercial Trust (“CCT”)

(i)	In 2020, CMT merged with CCT by a Trust Scheme (the “CMT-CCT Trust Scheme”) where CMT acquired all of the units of CCT at a consideration per unit of (A) S$0.259 and (B) 0.72 units in CMT.
(ii)	At CCT’s Trust Scheme Meeting, the CMT-CCT Trust Scheme was approved by approximately 90.31% of the CCT unitholders who were present and voting either in person or by proxy, which represented approximately 98.23% in value of the total number of units held by the CCT unitholders who voted.
(iii)	The High Court sanctioned the CMT-CCT Trust Scheme and CCT was subsequently delisted. Following CCT’s delisting, the enlarged trust was renamed CapitaLand Integrated Commercial Trust and had a market capitalization of approximately S$11.4 billion and a total portfolio property value of approximately S$22.4 billion.

(b)

Merger of OUE Commercial REIT (“OUE C-REIT”) and OUE Hospitality Trust (“OUE HT”)

(i)	In 2020, OUE C-REIT merged with OUE HT by a Trust Scheme (the “OUE C-REIT-OUE HT Trust Scheme”) where OUE C-REIT acquired all of the stapled securities in OUE HT at a consideration per stapled security of (A) S$0.04075 and (B) 1.3583 units in OUE C-REIT.
(ii)	At OUE HT’s Trust Scheme Meeting, the OUE C-REIT-OUE HT Trust Scheme was approved by approximately 89.47% of the OUE HT stapled securityholders who were present and voting either in person or by proxy, which represented approximately 96.19% in value of the total number of stapled securities held by the OUE HT stapled securityholders who voted.
(iii)	The High Court sanctioned the OUE C-REIT-OUE HT Trust Scheme and OUE HT was subsequently delisted. This was the first merger in Singapore between a SGX-ST-listed BT and a SGX-ST-listed REIT, and the enlarged trust had a market capitalization of approximately S$2.9 billion and a total portfolio property value of approximately S$6.9 billion.

5.5

RTO

5.5.1	In a RTO, the acquiror transfers to a Target Entity certain assets in consideration for new units or stapled securities in the Target Entity, following which the acquiror may be required to make, or may decide to make, a take-over offer for all the remaining units or stapled securities of the Target Entity that it does not hold. The acquiror will thereafter hold all the units or stapled securities of the Target Entity.
5.5.2	A RTO will typically require the approval of the SGX-ST and the unitholders or stapled securityholders for (a) the acquisition of the assets from the acquiror and (b) the issuance of new units or stapled securities in the Target Entity to the acquiror and listing of such units or stapled securities on the SGX-ST.
5.5.3	The principal steps of a RTO are the same as a take-over offer (as set out in paragraph 5.3.5 above) with a preliminary step of the Target Entity (a) acquiring the assets from the acquiror and (b) issuing new units or stapled securityholders in the Target Entity to the acquiror.
5.5.4	As at the time of writing of this primer, there has only been one instance of an acquiror attempting to carry out a RTO of a Target Entity, which was eventually aborted.
5.5.5	In 2016, following a Lone Star Funds’ affiliate’s acquisition of all the real estate assets in Saizen REIT’s portfolio in Japan, Saizen REIT announced that it had entered into an implementation agreement with Sime Darby Property Singapore Limited (“SDPSL”), Sime Darby Eastern Investments Private Limited and Perpetual Corporate Trust Limited (in its capacity as trustee of Sime REIT Australia) in respect of Saizen REIT’s proposed acquisition of some of SDPSL’s industrial properties in Australia (the “Properties Acquisition”). The Properties Acquisition was part of a proposed RTO of Saizen REIT by SDPSL.
5.5.6	However, this transaction was eventually aborted as Saizen REIT, without delving into the specifics, announced that “it [was] not possible to complete the [Properties Acquisition and the RTO] by the long-stop date of the implementation agreement”.

5.6

Which method to adopt?

5.6.1

Whether a take-over offer, a Trust Scheme or a RTO should be adopted ultimately depends on the commercial objective of the acquiror. If the acquiror wishes to acquire all of the units or stapled securities of a Target Entity, a Trust Scheme may be preferable, evident in how almost all the mergers involving REITs or BTs in Singapore till date were implemented by a Trust Scheme.

5.6.2

However, if the acquiror wishes to acquire only some of the units or stapled securities of a Target Entity, a partial offer would be preferable. A RTO is generally not adopted as the acquiror will have to provide certain assets prior to the take-over.

5.6.3

The composition of unitholders or stapled securityholders of the Target Entity would also be a relevant consideration, such as whether there are any minority unitholders or stapled securityholders which could potentially reject the take-over offer or vote against the Trust Scheme at the Trust Scheme Meeting. If so, it would be prudent for the REIT manager or the trustee-manager to engage with these minority unitholders or stapled securityholders and require them to sign irrevocable undertakings to accept the offer or vote in favor of all resolutions relating to the Trust Scheme prior to the announcement of the take-over offer or the Trust Scheme. If there is any resistance, the REIT manager or the trustee-manager should also work together with the potential acquiror to sweeten the deal.

5.6.4

An example of minority unitholders derailing the implementation of a Trust Scheme could be seen in the failed merger between ESR REIT and Sabana REIT.

(a)

In 2020, ESR REIT and Sabana REIT issued a joint announcement of ESR REIT’s intention to merge with Sabana REIT by a Trust Scheme (the “ESR-Sabana Trust Scheme”) with ESR REIT acquiring all the units in Sabana REIT for a consideration per unit of 0.94 units in ESR REIT (the “ESR Consideration”). The ESR-Sabana Trust Scheme required the approval by, among others:

(i)	the unitholders of Sabana REIT holding in aggregate 75% or more of the total number of votes cast for and against the resolution to approve the amendments to the trust deed constituting Sabana REIT to include provisions that will facilitate the implementation of the ESR-Sabana Trust Scheme (the “Sabana REIT Trust Deed Amendments Resolution”); and
(ii)	a majority in number of the unitholders of Sabana REIT representing at least three-fourths in value of the units held by the unitholders of Sabana REIT present and voting either in person or by proxy at the Trust Scheme Meeting (the “Sabana REIT Trust Scheme Resolution”).

The Sabana REIT Trust Scheme Resolution was contingent upon the approval of the Sabana REIT Trust Deed Amendments Resolution. This meant that in the event that the Sabana REIT Trust Deed Amendments Resolution was not passed, Sabana REIT would not proceed with the Trust Scheme Meeting.

(b)

At the EGM convened by Sabana REIT to pass the Sabana REIT Trust Deed Amendments Resolution (the “Sabana REIT EGM”), approximately 66.67% of the total number of votes for and against the resolution voted for the Sabana REIT Trust Deed Amendments Resolution. As less than 75% of the votes were cast in favor of the Sabana REIT Trust Deed Amendments Resolution, the Sabana REIT Trust Deed Amendments Resolution was not passed and, accordingly, Sabana REIT did not proceed with the Trust Scheme Meeting and the ESR-Sabana Trust Scheme was not implemented.

(c)

The failure of the Trust Scheme however did not come as a surprise.

Prior to the Sabana REIT EGM, Black Crane Investment Management Limited (“Black Crane”) and Quartz Capital Management Ltd (“Quartz Capital”), who collectively hold approximately 10% of the issued units in Sabana REIT, were vocal of their objections to the merger and embarked on a bruising campaign against the merger, which included:

(i)

Black Crane and Quartz Capital issuing a letter to the manager of Sabana REIT (the “Sabana REIT Manager”) on 7 August 2020 which stated that:

(A)

both Black Crane and Quartz Capital intend to vote against the merger of ESR REIT and Sabana REIT as, among others:

(I)	the ESR Consideration was at a substantial discount to the book value of Sabana REIT and “in the 18-year history of the Singapore REIT market with multiple takeovers/mergers, there has never been a single takeover/merger of a REIT target at such a substantial discount to book value”; and
(II)	the merger was a “bold attempt by ESR to potentially solve [a] conflict of interest issue at the expense of Sabana [REIT] unitholders”;

(B)

a conflict of interest existed as (I) ESR Cayman Limited was the ultimate controlling shareholder of the manager of ESR REIT (the “ESR REIT Manager”) and the Sabana REIT Manager and (II) ESR Cayman Limited, together with the parties acting in concert with it, were “top unitholders of both REITs with overlapping investment mandates”; and

(C)

the “substantial undervaluation” of the ESR Consideration “raises concerns on whether the fiduciary duty of [the Sabana REIT Manager’s] board and management to act and protect all unitholders’ interest has been potentially compromised”;

(ii)

Black Crane and Quartz Capital issuing a letter to the MAS and the SGX-ST on 17 August 2020 highlighting, among others, the “significant conflict of interest and corporate governance issues resulting from ESR Cayman Limited controlling [the ESR REIT Manager and the Sabana REIT Manager]”;

(iii)

Black Crane and Quartz Capital issuing a letter to the trustee of Sabana REIT on 3 September 2020 highlighting, among others, the “corporate governance and potential conflicts of interests of the [Sabana REIT Manager] due to: (A) the controlling ownership of ESR [Cayman Limited] in both [the ESR REIT Manager and the Sabana REIT Manager]; (B) the overlapping investment mandate of Sabana REIT and ESR REIT; and (C) ESR [Cayman Limited] together with its concert parties being substantial unitholders of both Sabana REIT and ESR REIT”;

(iv)

Black Crane and Quartz Capital requisitioning an EGM under the CIS Code relating to (A) the appointment of Ms. Ng Shin Ein as an independent director despite Ms. Ng Shin Ein having had “substantial business relationships with ESR Cayman [Limited] and its affiliates” and (B) the employment of three ex-ESR employees to senior management roles at the Sabana REIT Manager;

(v)

Black Crane and Quartz Capital requisitioning an EGM under the CIS Code relating to (A) the proposed removal of the Sabana REIT Manager and (B) the appointment of an “internal REIT manager owned by and for all unitholders”;

(vi)

Black Crane and Quartz Capital hosting a zoom webinar on 25 November 2020 relating to their vote against the merger;

(vii)

Black Crane and Quartz Capital issuing a letter to the Sabana REIT Manager on 15 December 2020 stating, among others, that the Sabana REIT Manager “is fully responsible for the failure of the disastrous and value destructive proposed merger between Sabana and ESR REITs”; and

(viii)

Black Crane and Quartz Capital creating the website, <www.savesabanareit.com> “to enable visitors to carefully monitor how sincerely the board and management of Sabana REIT address unitholders’ proposals, listen to unitholders’ views and endeavour to increase the value of the Sabana REIT units in the best interest of all unitholders”.

(d)

Both the ESR REIT Manager and the Sabana REIT Manager attempted to put out the fire created by Black Crane and Quartz Capital through a series of announcements which in summary:

(i)	acknowledged that there was a discount to the net asset value (“NAV”) of Sabana REIT, but the merger of ESR REIT and Sabana REIT would create an enlarged REIT, which “offer[ed] the best opportunity for re-rating and for reducing the NAV discount in the long term as part of a larger, more liquid and scalable REIT”;
(ii)	stated that (A) there were “strict internal controls” in both ESR REIT and Sabana REIT, (B) ESR Cayman Limited’s stake in the Sabana REIT Manager is held through an independent third party trustee licensed in Singapore, (C) there are no overlaps in the management teams of both the ESR REIT Manager and the Sabana REIT Manager and (D) there is no sharing of information between both the ESR REIT Manager and the Sabana REIT Manager; and
(iii)	stated that Black Crane’s and Quartz Capital’s claims were unsubstantiated and they “owe it to unitholders to act responsibly and justify their statements”.

(e)

Suffice to say both the ESR REIT Manager’s and the Sabana REIT Manager’s efforts were not successful against Black Crane’s and Quartz Capital’s onslaughts on the merger.

(f)

If the Sabana REIT Manager had engaged with Black Crane and Quartz Capital prior to the announcement of the Trust Scheme, perhaps this debacle would not have occurred, with no ink spilled and no sharp exchanges between both sides.

Even if the Sabana REIT Manager was not able to engage with Black Crane and Quartz Capital prior to the announcement of the Trust Scheme due to perhaps confidentiality reasons, it should have done so the moment the first signs of resistance surfaced. Instead of going on the defensive, the Sabana REIT Manager could have engaged with Black Crane and Quartz Capital, while simultaneously working with the ESR REIT Manager to sweeten the deal.

It is crucial to note that Quartz Capital had on 14 November 2019 proposed that ESR REIT merge with Sabana REIT “in a cash and unit transaction where 0.92 units of ESR REIT and S$0.067 of cash will be exchanged for one unit of Sabana REIT” so as to “solve the critical issue of overlapping investment mandates between the two trusts”. This may suggest that the minority unitholders’ principal objection lay in the offer price and if there were any sweeteners to the deal, such as revising the offer price, the minority unitholders’ could likely be struck by cupid’s arrow and agree to the merger. After all, no one is entirely immune from cupid’s arrow.

Introducing deal sweeteners is not uncommon. In the merger of CMT and CCT, the respective REIT managers worked together and sweetened the deal by ensuring a higher accretion to their respective distribution per unit and the manager of CMT also waived the acquisition fees due from CMT that amounted to approximately S$111.2 million. In the take-over of Forterra Trust, New Precise Holdings raised its cash offer from S$1.85 to S$2.25 per unit.

If the foregoing actions were taken, the merger could perhaps have succeeded. More importantly, the Sabana REIT Manager would not be caught in the situation it is in after the failed merger – dealing with the reputational fallout arising from the failed merger and the adversarial stance of Black Crane and Quartz Capital, as well as the increased public scrutiny on its management of Sabana REIT.

Black Crane and Quartz Capital, perhaps emboldened by the failed merger, have repeatedly opposed certain management decisions of the Sabana REIT Manager since the failed merger. Recently, after Mr. Chan Wai Kheong was appointed as an independent non-executive director of the Sabana REIT Manager, Black Crane and Quartz Capital requisitioned an EGM on 2 August 2021 to pass a resolution that the appointment of Mr. Chan Wai Kheong “be endorsed by the independent unitholders”. Black Crane and Quartz Capital highlighted that Mr. Chan Wai Kheong was arguably not independent and there exists a “real and significant risk” of a conflict of interest as he “had received a substantial premium of approximately S$22 million over market price from ESR Cayman [Limited] and is also a substantial unitholder of AIMS APAC, a major competitor to Sabana REIT”.

The Sabana REIT Manager rejected convening the EGM stating, among others, that (i) the unitholders have “the opportunity to vote in relation to the endorsement of Mr. Chan Wai Kheong as an independent director by the next annual general meeting” and (ii) “it would be in the best interest of unitholders for the [Sabana REIT Manager] to be allowed to focus on improving Sabana REIT’s performance and results instead of convening [the EGM]”.

(g)

Whether the failed merger is a victory or pyrrhic victory for the unitholders of Sabana REIT remains to be seen. It is nevertheless a cautionary tale of the importance of considering the composition of the unitholders or stapled securityholders and engaging any minority unitholders or stapled securityholders prior to announcing any take-over offer or Trust Scheme. Where necessary, deal sweeteners should be introduced.

5.6.5

If the acquiror wishes to gain control of the management of a Target Entity, a more cost effective alternative to acquiring the units or stapled securities in the Target Entity would be to acquire the shares of the REIT manager and/or trustee-manager of the Target Entity. As a REIT manager manages the business of a REIT and a trustee-manager manages the business of a BT, such an acquisition allows the acquiror to effectively control the Target Entity. Additional approvals (such as approval from the MAS in relation to an acquisition of shares of a REIT manager) may however be required.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the authors of this primer in the firm’s Singapore office:

Robson Lee (+65.6507.3684, [email protected])
Kai Wen Chua (+65.6507.3658, [email protected])
Zan Wong (+65.6507.3657, [email protected])

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Los Angeles partner Jennifer Bellah Maguire is featured in “Outlook for private equity – challenges and opportunities” [PDF] published by Financier Worldwide in its September 2021 issue.

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The torrid pace of new securities class action filings over the last several years slowed a bit in the first half of 2021, a period in which there have been many notable developments in securities law. This mid-year update briefs you on major developments in federal and state securities law through June 2021:

In Goldman Sachs, the Supreme Court found that lower courts should hear evidence regarding the impact of alleged misstatements on the price of securities to rebut any presumption of classwide reliance at the class-certification stage, and that defendants bear the burden of persuasion on this issue.
Just before its summer recess, the Supreme Court granted certiorari in Pivotal Software, teeing up a decision on whether the PSLRA’s discovery-stay provision applies to state court actions, which may impact forum selection in private securities actions.
We explore various developments in Delaware courts, including the relative decline of appraisal litigation, and the Court of Chancery’s (1) decision to enjoin a poison pill, (2) rejection of a claim that the COVID-19 pandemic constituted a material adverse effect, (3) approach in a potential bellwether SPAC case, and (4) analysis of post-close employment opportunities with respect to Revlon fiduciary duties.
We continue to survey securities-related lawsuits arising in connection with the coronavirus pandemic, including securities class actions, stockholder derivative actions, and SEC enforcement actions.
We examine developments under Lorenzo regarding disseminator liability and under Omnicare regarding liability for opinion statements.
Finally, we explain important developments in the federal courts, including (1) the widening circuit split regarding the jurisdictional reach of the Exchange Act based on recent decisions in the First and Second Circuits, (2) the Eighth Circuit’s holding that class action allegations, including those under Section 10(b), can be struck from pleadings, (3) Congress’s codification of the SEC’s disgorgement authority in the National Defense Authorization Act, (4) a federal district court’s holding that a forum selection clause superseded anti-waiver provisions in the Exchange Act, and (5) the Ninth Circuit’s broad interpretation of the PSLRA’s safe harbor for forward-looking statements.

I. Filing and Settlement Trends

According to Cornerstone Research, both the number of new filings and the average approved settlement amount in securities class actions decreased relative to the same period last year and historically. However, the number of approved settlements is the highest it has been since the second half of 2017, indicating that 2021 may be on track to set a record in terms of the number of approved securities class action settlements even if the total dollar amount falls short of last year.

The decline in total filings is driven by a sharp decline in new mergers and acquisitions filings, which are at the lowest level since the second half of 2014. Despite the decline in filings, 2021 has nonetheless already set a record for new SPAC-related filings by doubling both the 2020 and 2019 full-year totals in this category.

A. Filing Trends

Figure 1 below reflects filing rates for the first half of 2021 (all charts courtesy of Cornerstone Research). The first half of the year saw 112 new class action securities filings, a nearly 40% decrease from the same period last year and a 25% decrease from the second half of 2020. The decrease is largely driven by a drop in new M&A filings, from 64 and 35 in the two halves of 2020, respectively, to 12 in the first half of 2021. This represents a 66% decline in M&A filings from the second half of 2020, and 83% decline against the biannual average for M&A filings dating back through 2016.

Figure 1:

Semiannual Number of Class Action Filings (CAF Index^®)
January 2012 – June 2021

B. Industry and Other Trends in Cases Filed

Keeping with recent trends, new filings against consumer non-cyclical firms continued to make up the majority of new federal, non-M&A filings in the first half of 2021, as shown in Figure 2 below. New filings against communications and technology sector firms remained fairly steady, and an increase in filings against firms in the consumer cyclical and energy sectors partially offset the decline in filings against firms in the basic materials, industrial and financial sectors.

Figure 2:

Core Federal Filings by Industry
January 1997 – June 2021

As noted at the start and illustrated in Figure 3 below, the number of SPAC-related filings in the first half of 2021 exceeds those filed in both 2019 and 2020 combined. The increase is driven by filings in the consumer cyclical industry, and specifically, firms in the Auto manufacturers and Auto Parts & Equipment industries. In addition to notable activity in the SPAC space, cybersecurity-, cryptocurrency- and cannabis-related filings are all on pace to meet or exceed the 2020 totals, and 2021’s increased activity in ransomware attacks has already resulted in an uptick in cybersecurity filings in the second half of 2021. On the other hand, the majority of the new filings related to COVID-19 occurred earlier in the year, indicating that, as mentioned below, it is still too early to tell what the full year brings in terms of filings related to COVID-19.

Figure 3:

Summary of Trend Case Filings
January 2017 – June 2021

C. Settlement Trends

As shown in Figure 4, the total settlement dollars, adjusted for inflation, is down 72.7% against the same period last year despite a 35% increase in the number of settlements approved. Two settlements in the first half of 2021 exceeded $100 million, as compared to six such settlements last year and four in 2019, and the median value of approved settlements through the first half of the year is $7.9 million, reflecting an 18% decline against the same period last year. The difference between the magnitude of the decline in settlement amounts is likely driven by an outlier settlement in first half of last year.

Figure 4:

Total Settlement Dollars (in billions)
January 2016 – June 2021

II. What to Watch for in the Supreme Court

A. Supreme Court Issues Narrow Decision in Price-Impact Case

As we previewed in our 2020 Year-End Securities Litigation Update, in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, 141 S. Ct. 1951 (2021), the Supreme Court this Term considered questions regarding price-impact analysis at the class-certification stage in securities class actions. Recall that in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), the Supreme Court preserved the “fraud-on-the-market” theory that enables courts to presume classwide reliance in Rule 10b-5 cases, but also permitted defendants to rebut that presumption with evidence that the alleged misrepresentation did not affect the issuer’s stock price.

Goldman Sachs presented the Court with the opportunity to decide how courts can address cases in which plaintiffs plead fraud through the “inflation maintenance” price impact theory, which claims that misstatements caused a preexisting inflated price to be maintained instead of causing the artificial inflation in the first instance. In granting certiorari, the Supreme Court accepted two questions for review: (1) “[w]hether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality,” and (2) “[w]hether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.” Petition for a Writ of Certiorari at I, Goldman Sachs, 141 S. Ct. 1951 (No. 20-222).

In its June 21, 2021 decision, the Court declined to take a position on the “validity or . . . contours” of the inflation-maintenance theory in general, which it has never directly approved. Goldman Sachs, 141 S. Ct. at 1959 n.1. On the first question, the Court unanimously agreed with the parties that lower courts should hear evidence—including expert evidence—and rely on common sense to make determinations at the class-certification stage as to whether the alleged misrepresentations were so generic that they did not distort the price of securities. Id. at 1960. This analysis is permitted at the class-certification stage even though such evidence may also be relevant to the question of materiality, which is reserved for the merits stage. Id. at 1955 (citing Amgen Inc. v. Connecticut Ret. Plans and Tr. Funds, 568 U.S. 455, 462 (2013)). Importantly, the Court noted that in the context of an inflation-maintenance theory, the mismatch between generic misrepresentations and later, specific corrective disclosures will be a key consideration in the price-impact analysis. Goldman Sachs, 141 S. Ct. at 1961. “Under those circumstances, it is less likely that the specific disclosure actually corrected the generic misrepresentation, which means that there is less reason to infer front-end price inflation—that is, price impact—from the back-end price drop.” Id. The Court, with only Justice Sotomayor dissenting, then remanded the case for further consideration of the generic nature of the statements at issue here, explicitly directing the Second Circuit to “take into account all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue.” Id. (emphasis in original).

As to the second question, the Court held by a 6–3 majority that defendants at the class-certification stage bear the burden of persuasion on the issue of price impact in order to rebut the presumption of reliance—that is, to convince the court, by a preponderance of the evidence, that the challenged statements did not affect the price of securities. The Court determined that this rule had already been established by its previous decisions in Basic and Halliburton II: Basic recognized that defendants could rebut the presumption of classwide reliance by making “[a]ny showing that severs the link between the alleged misrepresentation and . . . the price,” and in Halliburton II, the Court again referenced defendants’ ability to rebut the Basic presumption with a “showing.” Id. at 1962 (internal citations omitted). The majority rejected an argument by the defendants, taken up by Justice Gorsuch (joined by Justices Thomas and Alito), that these references to a “showing” by the defense imposed only a burden of production. Id. at 1962; see also id. at 1965–70 (Gorsuch, J., concurring in part and dissenting in part). That reading would have allowed defendants to rebut the presumption of reliance “by introducing any competent evidence of a lack of price impact”—and would have imposed on plaintiffs the requirement to “directly prov[e] price impact in almost every case,” a requirement that had been rejected in Halliburton II. Id. at 1962–63 (emphasis in original). However, the Court noted that imposing the burden of persuasion on defendants would be unlikely to alter the outcome in most cases, as the “burden of persuasion will have bite only when the court finds the evidence is in equipoise—a situation that should rarely arise.” Id. at 1963.

B. Supreme Court to Decide whether the PSLRA’s Discovery Stay Applies in State Court

On July 2, 2021, just before its summer recess, the Court granted certiorari in Pivotal Software, Inc. v. Tran, No. 20-1541, which raises the question of whether the Private Securities Litigation Reform Act’s (“PSLRA”) discovery-stay provision applies to state court actions in which a private party raises a Securities Act claim. The PSLRA provides that the stay applies “[i]n any private action arising under” the Securities Act before a court has addressed a motion to dismiss, 15 U.S.C. § 77z-1-(b)(1), but state courts are sharply divided over whether the stay applies to suits in state court, rather than only to those in federal court. In opposition, respondent plaintiffs argued that not only is the issue moot (because they have agreed to adhere to the stay provision and the state court will have issued a decision on the motion to dismiss before the Supreme Court can issue an opinion), but also that no court of appeals has ever decided the issue. Brief in Opposition at 7–16, Pivotal Software, Inc. v. Tran, No. 20-1541. Petitioners countered that the issue will only ever arise in state courts and that state trial courts are divided, with at least a dozen decisions refusing to apply the stay and seven applying it, with many more decisions unreported. Moreover, the issue evades appellate review because it is time-sensitive and unlikely to affect a final judgment, rendering any error harmless. Reply Brief for Petitioners at 1–12, Pivotal Software, Inc. v. Tran, No. 20-1541.

Given the costs of discovery in securities actions, Pivotal could have a lasting impact on both the choice of forum in which securities actions are brought and on how discovery progresses in the early stages of a case.

C. The Court Addresses Constitutional Challenges to Administrative Adjudicators

Recall that in Lucia v. SEC, 138 S. Ct. 2044 (2018), the Court held that the SEC’s administrative law judges (“ALJs”) were “Officers of the United States” who must be appointed by the President, a court of law, or the SEC itself. Building on Lucia, the Supreme Court issued two decisions this Term that raised further questions on the constitutionality of administrative officers’ appointments.

Following Lucia, the petitioners in Carr v. Saul and Davis v. Saul sought judicial review of administrative decisions of the Social Security Administration (“SSA”), challenging in the district courts for the first time the constitutionality of SSA ALJ appointments. Carr v. Saul, 141 S. Ct. 1352, 1356–57 (2021). The district courts split on the question of whether petitioners had been required to raise their constitutional challenges during their administrative hearings in the first instance, but both the Eighth and Tenth Circuits agreed that the challenges had been forfeited. Id. at 1357. In its April 22, 2021 decision in these consolidated cases, the Supreme Court unanimously reversed, holding that the petitioners were not required to raise the appointments issue in SSA administrative proceedings, though the Justices were split in their reasoning. Id. at 1356.

The majority opinion held that the benefits claimants were not required to administratively exhaust the appointment issue, in the absence of any statutory or regulatory requirement, for three primary reasons. First, the Court had previously held that the SSA’s Appeals Council conducts proceedings that are more “inquisitorial” than “adversarial,” and that in the absence of “adversarial development of issues by the parties” before the agency tribunal, there was no basis for requiring a petitioner to raise all claims before the agency in order to preserve the issues for judicial review. Id. at 1358–59 (citing Sims v. Apfel, 530 U.S. 103, 112 (2000)). The Court applied the Sims rationale to SSA ALJs who, like the Appeals Council, conduct “informal, nonadversarial proceedings,” even though SSA ALJ proceedings may be considered “relatively more adversarial.” Id. at 1359–60. Second, as the Court has “often observed,” agency decision-makers “are generally ill suited to address structural constitutional challenges, which usually fall outside the adjudicators’ areas of technical expertise.” Id. at 1360. And third, the Court recognized that requiring issue exhaustion here would be futile as the agency adjudicators “are powerless to grant the relief requested.” Id. at 1361. The Court’s consolidated decision in Carr and Davis was dependent on features specific to the SSA’s review, so the question of whether issue exhaustion is required may be answered differently if it arises in future cases, either in the context of an agency with more adversarial administrative review procedures or if the constitutional challenge at issue is “[outside] the context of [the] Appointments Clause.” Id. at 1360 n.5.

In United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021), the Court took up the question of whether administrative patent judges (“APJs”) in the Patent and Trademark Office (“PTO”) are “principal” or “inferior” officers under the Appointments Clause. (Readers should note that Gibson Dunn represented the private parties arguing alongside the government that APJs are inferior officers permissibly appointed by the Secretary of Commerce.) By a 5–4 vote, the majority held that the “unreviewable authority” of APJs to resolve inter partes review proceedings was incompatible with their appointment to an inferior office because “[o]nly an officer properly appointed to a principal office may issue a final decision binding the Executive Branch.” Id. at 1985.

In fashioning a remedy supported by seven Justices, the Court opted for a “tailored approach,” rather than striking down the entire inter partes review regime as unconstitutional. Id. at 1987. Specifically, the Court severed a provision of the statutory scheme that prevented the PTO Director from reviewing APJ decisions. Id. According to the Chief Justice, this remedy would align the Patent Trial and Appeal Board adjudication scheme with others in the Executive Branch and within the PTO itself. Id. In finding that the Constitutional violation is the restraint on the Director’s review authority rather than the APJs’ appointment by the Secretary, the Court found that the proper remedy was remand to the Director rather than to a new panel of APJs for rehearing. Id. at 1987–88.

The majority opinion drew opinions concurring and dissenting in part by Justice Gorsuch (objecting to the Court’s severability analysis) and Justice Breyer (joined by Justices Sotomayor and Kagan, agreeing with Justice Thomas’s analysis on the merits, but supporting the Court’s remedy), as well as a full dissent by Justice Thomas, who criticized the Court’s failure to take a clear position on whether APJs are inferior officers and whether their appointment complies with the Constitution. Id. at 1988–2011. He also disagreed with the Court’s modification of the statutory scheme because, in his view, APJs “are both formally and functionally inferior to the Director and to the Secretary,” and those officers already had sufficient control over APJs. Id. at 2011 (Thomas, J., dissenting).

III. Delaware Developments

**A. Court of Chancery Invalidates Poison Pill under Second Unocal Prong**

In February, the Court of Chancery in Williams Companies Stockholder Litigation, 2021 WL 754593 (Del. Ch. Feb. 26, 2021), enjoined a stockholder rights plan, also known as a “poison pill.” In March 2020, The Williams Companies, Inc. (“Williams”), a natural gas infrastructure company, adopted a stockholder rights plan after the company’s stock price declined substantially due to fallout from the COVID‑19 pandemic, which decreased demand and lowered prices in the global natural gas markets. Id. at *1. Williams adopted the plan in response to multiple perceived threats, including stockholder activism generally, concerns that activist investors may pursue disruptive, short-term agendas, and the potential for rapid and undetected accumulation of Williams stock (a “lightning strike”) by an opportunistic outside investor. Id. at *2.

The court employed the two-part Unocal standard of review to analyze whether (1) the Williams Board had a reasonable basis to implement a poison pill to respond to a legitimate threat, and (2) the reasonableness of the actual terms of the poison pill in relation to the threat posed. Id. at *22 (citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)). Assuming for the sake of analysis that the “lightning strike” concern constituted a legitimate corporate objective, the court held that the plan’s terms were unreasonable. Id. at *33–34. The plan included a triggering ownership threshold of just 5%, compared to a typical market range of 10% to 15%. Id. at *35–36. It also contained an expansive definition of “beneficial ownership” that covered even synthetic interests, an expansive definition of “acting in concert” that covered any parallel conduct by multiple parties, and a relatively narrow definition of the term “passive investor,” which limited the number of investors exempt from the plan’s provisions. Id. at *35. The court concluded that the combined impact of these terms went well beyond that of comparable rights plans and could impermissibly stifle legitimate stockholder activity. Id. at *35–40. Notably, the court looked beyond the stated rationales listed in board resolutions, board minutes, and company disclosures, and instead sought to determine the actual intent of the directors based on testimony and other evidence. Id. The ruling offers an important reminder that rights plans have limits and that the Court of Chancery will not hesitate to assess a board’s subjective basis for implementing a rights plan and its specific terms.

B. Court of Chancery Rejects Claim that Pandemic Constituted a Materially Adverse Effect

In April, the Court of Chancery in Snow Phipps Group, LLC v. KCake Acquisition, Inc., 2021 WL 1714202 (Del Ch. Apr. 30, 2021), rejected a claim that the COVID‑19 pandemic constituted a material adverse effect (“MAE”) under the agreement at issue. There, a private equity firm buyer signed a $550 million agreement with Snow Phillips to purchase DecoPac, a company that supplies cake decorations and equipment to grocery stores. Id. at *1, *9–10. The deal coincided with the early months of the COVID-19 pandemic, which caused a significant decline in DecoPac’s sales. Id. at *1–2. The buyer subsequently attempted to terminate the agreement when it was unable to secure financing based on the target’s revised sales projections. Id. at *24–25.

In the ensuing litigation, the buyer alleged that DecoPac breached a representation that no change or development had, or “would reasonably be expected to have,” an MAE on DecoPac’s finances. Id. at *10. The court rejected this argument, observing—consistent with Delaware precedent—that the existence of an MAE must be judged in terms of DecoPac’s long-term financial prospects (measured in “years rather than months”). Id. at *30. Further, the court noted that the reduction in sales fell within a carve-out from the MAE representation, namely, effects arising from changes in laws or governmental orders. Id. at *35. The decision is notable not just for reaffirming the difficulty of invoking MAE clauses, but also for its broad discussion of how MAE clause carve-outs might negate the occurrence of an existing MAE.

C. Bellwether SPAC Litigation Remains in Initial Stages

In June, the defendants in In re MultiPlan Corp. Stockholders Litigation, Cons. C.A. No. 2021-0300-LWW, filed their motion to dismiss a closely watched consolidated class action filed by the stockholders of MultiPlan, a provider of cost management technology services to insurance agencies. MultiPlan was partially acquired in October 2020 via a reverse merger with a Special Purpose Acquisition Company (“SPAC”), Churchill Capital Corp. III. Most notably, the complaint contends that SPAC structures create inherent conflicts, alleging that MultiPlan’s business prospects have weakened and its stock price has decreased approximately 30% since the acquisition, but the personal investments of individuals managing the SPAC entity have increased materially. The plaintiff stockholders accuse the SPAC, its sponsor, and other directors of issuing misleading and deficient disclosures and of grossly mispricing the transaction.

Although some commentators have characterized the case as a bellwether and the claims asserted as novel, the defendants’ motion to dismiss tracks familiar arguments for attacking complaints concerning merger transactions at the pleading stage. For example, the defendants characterize the claims as derivative and urge dismissal for failure to make a demand. The defendants alternatively assert that, if the claims are direct, they are subject to the business judgment rule and warrant dismissal. More notably, the defendants contend that claims regarding plaintiffs’ redemption rights cannot proceed as fiduciary duty claims because they arise solely from contract. A decision on the pending MultiPlan motion to dismiss may have significant implications for the very active SPAC market, as the Court of Chancery weighs in on the efficacy of these entities and any implications their structure may have for deal disclosures.

D. Court of Chancery Determines CEO Breached Fiduciary Duty and Financial Advisor Aided and Abetted That Breach in Course of Executing a Merger

In Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Presidio, Inc., 2021 WL 298141 (Del. Ch. Jan. 29, 2021), the Court of Chancery denied motions to dismiss by Presidio’s CEO for allegedly breaching his fiduciary duty and Presidio’s financial advisor for allegedly aiding and abetting that breach, but dismissed claims against the controlling stockholder and other board members. The class action suit challenged a merger of Presidio, a controlled company, with an unaffiliated third party. The court held that a number of actions the CEO allegedly took, if credited, would yield an unreasonable sales process under Revlon. Id. at 267–68. For example, the court credited allegations that the CEO inappropriately steered the bidding process in favor of a private equity buyer that was more eager to retain existing management and simultaneously downplayed to the board of directors the interests of a strategic bidder. Although the strategic bidder allegedly had the capability to pay a higher price as a result of the synergies, it was more likely to replace the CEO. Id. at 267. The court also credited allegations that Presidio’s financial advisor had tipped the potential private equity buyer to confidential information that enabled it to structure its proposed terms into the ultimately bid-winning offer. Id. Presidio has the potential to serve as informative precedent for transactions entailing potential post-close employment opportunities for executives who guide the company’s sale process.

E. Appraisal Litigation Continues Its Steady Decline

The frequency of appraisal litigation continues to decline, with just four appraisal actions filed in the Delaware Court of Chancery in the first half of 2021, compared to the 13 actions filed in the first half of 2020. Going forward, we expect to see appraisal actions concentrated to a subset of deals involving alleged conflicts, process issues, or a limited market check.

Recent appraisal actions that have proceeded continue to reinforce the rulings in DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017): objective market evidence—including deal price (potentially less synergies) and unaffected market price—generally provides the best indication of a company’s fair value. In In re Appraisal of Regal Entertainment Group, 2021 WL 1916364 (Del. Ch. May 13, 2021), for example, the Court of Chancery awarded a relatively modest 2.6% increase over the original merger price. The court held that the best evidence of the target’s fair value was the deal price, adjusted for post-signing value increases. Id. at *58. The court rejected arguments that Regal’s stock price was the best indicator of fair value, finding that “the sale process that led to the Merger Agreement was sufficiently reliable to make it probable that the deal price establishes a ceiling for the determination of fair value.” Id. at *34.

In the absence of reliable market-based indicators, the Court of Chancery has demonstrated a willingness to fall back on potentially more subjective valuation techniques, including discounted cash flow and comparable company analyses. In January 2021, the Delaware Supreme Court affirmed a Court of Chancery decision awarding a 12% premium on the merger price based solely on a discounted cash flow (“DCF”) valuation. SourceHOV Holdings, Inc. v. Manichaean Capital, LLC, 246 A.3d 139 (Del. 2021). The Court of Chancery’s exclusive use of the petitioner’s DCF valuation was premised on the Respondent’s failure to prove a fair value for the transaction, with the court noting it was “struck by the fact that [Respondent] disagreed with its own valuation expert, relied on witnesses whose credibility was impeached and employed a novel approach to calculate SourceHOV’s equity beta that is not supported by the record evidence. In a word, Respondent’s proffer of fair value is incredible.” Manichaean Capital, LLC v. SourceHOV Holdings, Inc., 2020 WL 496606, at *2 (Del. Ch. Jan. 30, 2020).

IV. Further Development of Disseminator Liability Theory Upheld in Lorenzo

As we initially discussed in our 2019 Mid-Year Securities Litigation Update, in March 2019, the Supreme Court held in Lorenzo v. SEC, 139 S. Ct. 1094 (2019), that those who disseminate false or misleading information to the investing public with the intent to defraud can be liable under Section 17(a)(1) of the Securities Act and Exchange Act, Rules 10b-5(a) and 10b-5(c), even if the disseminator did not “make” the statement within the meaning of Rule 10b-5(b). In practice, Lorenzo creates the possibility that secondary actors—such as financial advisors and lawyers—could face liability under Rules 10b-5(a) and 10b-5(c) (known as the “scheme liability provisions”) simply for disseminating the alleged misstatement of another, if a plaintiff can show that the secondary actor knew the alleged misstatement contained false or misleading information.

In 2021, courts have continued to grapple with Lorenzo’s application, particularly “whether Lorenzo’s language can be read to stretch scheme liability to cases in which plaintiffs are specifically alleging that the defendant did ‘make’ misleading statements (or omissions) as prohibited in Rule 10b5-(b),” or if “Lorenzo merely extends scheme liability to those who ‘disseminate false or misleading statements’ but that it does not hold that ‘misstatements [or omissions] alone are sufficient to trigger scheme liability’” absent additional conduct. Puddu v. 6D Global Techs., Inc., 2021 WL 1198566, at *10 (S.D.N.Y. Mar. 30, 2021) (quoting SEC v. Rio Tinto PLC, 2021 WL 818745, at *2 (S.D.N.Y. Mar. 3, 2021)) (summarizing the divergent views of various district courts).

In June, the Ninth Circuit, in In re Alphabet, Inc. Securities Litigation, 1 F.4th 687 (9th Cir. 2021) (“Alphabet”), signaled its support for the view that disseminator liability does not require “conduct other than misstatements.” Alphabet involved allegations that executives at Google and its holding company, Alphabet, were aware of security vulnerabilities on the Google+ social network. Id. at 693–97. Plaintiffs brought a claim against Alphabet under Rule 10b-5(b), in addition to scheme liability claims under Rule 10b-5(a) and (c), alleging a scheme to defraud shareholders by withholding material and damaging information about the security vulnerabilities from Alphabet’s quarterly filings. See id. at 698. The district court granted Alphabet’s motion to dismiss in full, finding that plaintiffs had failed to adequately allege a misrepresentation or omission of a material fact and failed to adequately allege scienter for the purposes of their Rule 10b-5 claims. Id.

On appeal, the Ninth Circuit reversed in part, holding that that the trial court erred by dismissing the claims under Rule 10b-5(a) and (c) because defendants had not specifically moved to dismiss those claims but instead moved to dismiss only on the basis of Rule 10b-5(b) and Rule 10b-5 generally. Id. at 709. Notably, the panel also disagreed with Alphabet’s “argument that Rule 10b-5(a) and (c) claims cannot overlap with Rule 10b-5(b) statement liability claims” because such an argument “is foreclosed by Lorenzo, which rejected the petitioner’s argument that Rule 10b-5(a) and (c) ‘concern “scheme liability claims” and are violated only when conduct other than misstatements is involved.’” Id. (quoting Lorenzo, 139 S. Ct. at 1101–02).

At the same time, district courts within the Second Circuit are considering the breadth of Lorenzo. See In re Teva Sec. Litig., 2021 WL 1197805, at *5 (D. Conn. Mar. 30, 2021) (summarizing the divergent views). As the Teva court explained, “[s]ome district courts in this circuit apparently agree with the” view that Lorenzo “abrogated the rule that ‘scheme liability depends on conduct that is distinct from an alleged misstatement,’” “[b]ut other district courts cabin Lorenzo and read it more restrictively” to only hold that “‘those who disseminate false or misleading statements to potential investors with the intent to defraud can be liable under [Rule 10b-5(a) and (c)], not that misstatements alone are sufficient to trigger scheme liability.’” Id. (quoting Rio Tinto PLC, 2021 WL 818745, at *2–3).

The Second Circuit itself has not yet squarely addressed the scope of Lorenzo. However, earlier this year, the district court in SEC v. Rio Tinto PLC, 2021 WL 1893165 (S.D.N.Y. May 11, 2021), certified an interlocutory appeal to the Second Circuit, following its dismissal of scheme liability claims where the SEC failed to “allege that Defendants disseminated [the] false information, only that they failed to prevent misleading statements from being disseminated by others.” At the time of this update, the Second Circuit had not ruled on whether it will hear the appeal. Gibson Dunn represents Rio Tinto in this and other litigation.

As these developments suggest, the application of the Lorenzo disseminator liability theory continues to evolve among and within the circuits. We will continue to monitor closely the changing applications of Lorenzo and provide a further update in our 2021 Year-End Securities Litigation Update.

Although the stock market has largely stabilized since COVID-19 first impacted the United States in 2020, courts are still feeling the effects of the economic disruption and attendant securities litigation arising out of the pandemic. While the first series of COVID-19 securities lawsuits focused on select industries, such as travel and healthcare, plaintiffs eventually set their sights on other industries. We surveyed a select number of these cases in our 2020 Year-End Securities Litigation Update.

Since then, there have been several dismissals of COVID-19-related securities cases, including dismissals of some of the earliest cases brought in March 2020 concerning the travel industry. Nevertheless, lawsuits for misstatements regarding safety and risk disclosures are still being brought, and now that the “Delta” variant has spread throughout the United States, such lawsuits may continue for the foreseeable future.

Although it is too soon to tell whether the midpoint of COVID-19 securities litigation has passed, we will continue to monitor developments in this area. Additional resources regarding the legal impact of COVID-19 can be found in the Gibson Dunn Coronavirus (COVID-19) Resource Center.

A. Securities Class Actions

1. False Claims Concerning Commitment to Safety

Douglas v. Norwegian Cruise Lines, No. 20-cv-21107, 2021 WL 1378296 (S.D. Fla. Apr. 12, 2021): As we discussed in our 2020 Mid-Year Securities Litigation Update, the COVID-19 pandemic birthed an entire category of class action lawsuits concerning service companies’ commitments to safety, including a proposed class action lawsuit against Norwegian Cruise Lines. In April 2021, Judge Robert Scola, Jr. dismissed the lawsuit, which had originally alleged that Norwegian violated securities laws by minimizing the impact of the COVID-19 outbreak on its operations and failing to disclose allegedly deceptive sales practices that downplayed COVID-19. Id. at *2–3. Judge Scola, Jr. concluded that “[a]ll the challenged statements constitute corporate puffery” such that no reasonable investor would have relied on them. Id. at *4.

In re Carnival Corp. Securities Litigation, No. 20-cv-22202, 2021 WL 2583113 (S.D. Fla. May 28, 2021): Similarly, in May 2021, a year after plaintiffs filed the complaint, Judge K. Michael Moore dismissed a putative class action against Carnival that alleged that Carnival misrepresented the effectiveness of its health and safety protocols during the COVID-19 outbreak. Id. at *1–3. The court held that the plaintiffs-investors had failed to show that Carnival’s “statements affirming compliance with then-existing regulatory requirements [were] materially false or misleading” because the plaintiffs’ argument relied on the inference that “passengers would ultimately fall ill aboard Carnival’s ships—just as people did in other venues across the globe.” Id. at *15. Accordingly, the court found the inference was “too tenuous to meet the heightened pleading standard applicable in the securities fraud context.” Id.

2. Failure to Disclose Specific Risks

Plymouth Cnty. Retirement Assoc. v. Array Techs., Inc., No. 21-cv-04390 (S.D.N.Y. May 14, 2021): Plaintiffs allege that Array, a solar panel manufacturer, along with several of its directors and underwriters, failed to disclose that “unprecedented” increases in steel and shipping costs negatively impacted the company’s quarterly results until the company’s CFO revealed the results in a conference call. Dkt. No. 1 at ¶¶ 10–42, 113–15. Upon the release of this news, Array’s stock price fell by $11.49 to close at $13.46. Id. at ¶ 118. Array had previously issued warnings on the “global shipping constraints due to COVID-19” but allegedly failed to disclose the impact of dramatically increasing supply prices and increasing freight costs. Id. at ¶¶ 103, 112. This case was later consolidated with Keippel v. Array Technologies, Inc., 21-cv-5658 (S.D.N.Y. June 30, 2021). Dkt. No. 61 at 1. The case remains pending.

Denny v. Canaan Inc., No. 21-cv-03299 (S.D.N.Y. Apr. 15, 2021): A shareholder of Canaan, a company that manufactures and sells Bitcoin mining machines, alleged that the company misleadingly issued positive statements about strong demand for bitcoin mining machines without disclosing how “ongoing supply chain disruptions” and the introduction of its latest machines had “cannibalized sales of [its] older product offerings,” which caused sales to decline. Dkt No. 1 at ¶ 4. Purportedly, Canaan did not reveal these issues until a conference call to discuss fourth quarter earnings, after which Canaan’s American Depository Receipts, which are a type of securities, declined by nearly 30%. Id. at ¶¶ 27–28.

3. Alleged Insider Trading and “Pump and Dump” Schemes

Tang v. Eastman Kodak Co., No. 20-cv-10462 (D.N.J. Aug. 13, 2020): In our 2020 Year-End Securities Litigation Update, we previously discussed this putative class action, in which stockholders contended Eastman Kodak violated securities law by failing to disclose that its officers were granted stock options prior to the company’s public announcement that it had received a loan to produce drugs for the treatment of COVID-19. Dkt. No. 1 at 2. On May 28, the New Jersey federal judge transferred the case to the Western District of New York, where the alleged misconduct occurred. Dkt. No. 62 at 1. In parallel, New York Attorney General Leticia James commenced an action under Section 34 of General Business Law to seek evidence of insider trading from Kodak. NYSCEF No. 451652/2021, Dkt. No. 1 at 1. On June 15, the court ordered Kodak’s executives to publicly testify. Dkt. No. 9 at 2.

B. Stockholder Derivative Actions

1. Disclosure Liability

Berndt v. Kelly, No. 21-cv-50422 (W.D. Wash. June 4, 2021): In this derivative suit, plaintiff alleges that CytoDyn Inc., which is developing a drug with potential benefits for HIV patients, misleadingly touted the drug as a potential COVID-19 treatment, resulting in a significant increase in the company’s stock price. Dkt. No. 1 at ¶¶ 2–4. “[W]hile the [c]ompany’s stock price was sufficiently inflated with the COVID-19 cure hype,” the complaint alleges, a close circle of long-term shareholders “dumped millions of shares.” Id. at ¶ 6. Following the alleged cash-out of company shares, the price of CytoDyn “dropped precipitously” after it was revealed that the COVID-19 treatment was not commercially viable. Id. at ¶ 8. The suit includes claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violations of the Exchange Act. Id. at ¶¶ 78–98.

Golubinski v. Douglas, No. 2021-0172 (Del. Ch. Apr. 20, 2021): An investor of Novavax Inc. derivatively sued the company’s directors and certain officers, claiming that they granted themselves a series of lucrative equity awards in 2020 with the knowledge that Novavax’s stock was going to increase nearly 700% based on promising COVID-19 vaccine news. Dkt. 1 at ¶¶ 5–13. The investor alleges that “management exploited its relationships with regulators and influential players in the vaccine community to both secure funding and position itself to receive even more funding for COVID-19 research prior to granting spring-loaded awards to [c]ompany insiders.” Id. at ¶ 15. The stock granted to executives in April and June 2020 allegedly rose in value within a few months, after the news became public that the company would be getting billions in funding through Operation Warp Speed, the U.S. government’s COVID-19 vaccine initiative. Id. at ¶¶ 9–13. The derivative suit seeks, among other things, to have the stock awards rescinded. Id. at ¶ 16.

2. Oversight Liability

Bhandari v. Carty, No. 2021-0090 (Del. Ch. Feb. 5, 2021): Two stockholders of YRC Worldwide, Inc. sued the company’s directors, claiming that they oversaw a fraudulent scheme to overcharge customers for freight cargo, and then sought a $700 million government bailout purportedly justified by fraudulent concerns relating to COVID-19. Dkt. 1 at ¶¶ 3–15. The bailout, which plaintiffs allege “made the company one of the largest recipients of taxpayer money meant to support businesses and workers struggling amid the coronavirus,” has now “come under scrutiny from” Congress, which is investigating whether it “was really worthy of a rescue,” according to the complaint. Id. at ¶ 15. Plaintiffs allege that the board “could and should have quickly and responsibly taken action to correct management’s wrongdoing,” but failed to do so. Id. at ¶ 5.

3. Insider Trading

Lincolnshire Police Pension Fund v. Kramer, No. 21-cv-01595 (D. Md. June 29, 2021): Plaintiff sued directors of Emergent BioSolutions Inc. derivatively for claims that the board members allegedly sold a combined $20 million of personally held Emergent shares “on the basis of the nonpublic information about the problems at the Bayview Facility,” where the company was working on a COVID-19 vaccine for Johnson and Johnson. Dkt. 1 at ¶¶ 9, 15–26, 89, 101. The fund claims that the directors allegedly “used their knowledge of Emergent’s material, nonpublic information to sell their personal holdings while the Company’s stock was artificially inflated.” Id. at ¶ 89. Specifically, the allegations are that the directors were supposedly aware of Bayview’s history of internal control failures and inability to handle the “massive and critical work required to manufacture [the COVID-19] vaccines.” Id. at ¶ 3.

In Delaware, another Emergent stockholder brought a Section 220 action against Emergent to enforce his statutory right to inspect the company’s books and records. See Elton v. Emergent BioSolutions, Inc., No. 2021-0426 (Del. Ch. May 21, 2021). There, too, the stockholder alleged that there was a “credible basis to infer the Company’s fiduciaries sold Company stock while in possession of material, non-public information” relating to Emergent’s alleged “regulatory, compliance, and manufacturing failures.” Dkt. 1 at ¶ 3.

C. SEC Cases

SEC v. Arrayit Corp., No. 21-cv-01053 (N.D. Cal. Feb. 11, 2021): As we discussed in our 2020 Year-End Securities Litigation Update, the SEC charged Mark Schena, the President of Arrayit Corporation, a healthcare technology company, for “making false and misleading statements about the status of Arrayit’s delinquent financial reports.” SEC v. Schena, No. 20-cv-06717 (N.D. Cal. Sept. 25, 2020), Dkt. No. 1 at ¶ 1. That case was stayed, pending the resolution of a criminal case against Mr. Schena. Dkt. 23. Since then, the SEC has brought a separate case against Arrayit itself, as well as Mark Schena’s wife, who served as Arrayit’s CEO, CFO, and chairman for over a decade. No. 5:21-cv-01053, Dkt. No. 1 at ¶¶ 1, 11. The new claims brought under Sections 10(b) and 13(a) mirror those in the prior action against Mr. Schena, namely that the defendants allegedly misrepresented the company’s capability to develop COVID-19 tests. Id. at ¶ 1. The parties settled on a neither-admit-nor-deny basis, with Ms. Schena also agreeing to a $50,000 penalty. Dkt. No. 11 at 1–3; Dkt No. 12 at 2.

SEC v. Parallax Health Sciences, Inc., No. 21-cv-05812 (S.D.N.Y. July 7, 2021): This enforcement action, brought under Section 17(a)(1)(3) of the Securities Act and Section 10(b) of the Exchange Act, resulted from a series of seven press releases issued by Parallax, a healthcare company, about its ability to capitalize on the COVID-19 pandemic. Dkt. No. 1 at ¶¶ 1, 4. The SEC’s complaint alleges that Parallax falsely claimed that its COVID-19 screening test would be “available soon” despite the company’s insolvency and the company’s own internal projections showing that, even if it had the funds, other factors prevented the company from acquiring the needed equipment. Id. at ¶¶ 1–2. Parallax, its CEO, and CTO settled with the SEC on a neither-admit-nor-deny basis, and agreed to penalties of $100,000, $45,000, and $40,000, respectively. Dkt. No. 4 at 1, 4.

SEC v. Wellness Matrix Grp., Inc., No. 21-cv-1031 (C.D. Cal. June 11, 2021): The SEC charged Wellness Matrix, a wellness company, and its controlling shareholder for allegedly misleading investors about the availability and approval status of its at-home COVID-19 testing kits and disinfectants in violation of Section 10(b) and Rule 10b-5. Dkt. No. 1 at ¶¶ 6–7, 9. The SEC alleges that the company’s claims were false and, to the contrary, defendants knew its distributor was unable to fulfill the order and the products were neither FDA- nor EPA-approved. Id. at ¶¶ 44–48. The SEC had suspended trading in Wellness Matrix’s securities approximately two months before bringing the action. Id. at ¶ 68.

VI. Falsity of Opinions – Omnicare Update

As we discussed in our prior securities litigation updates, lower courts continue to examine the standard for imposing liability based on a false opinion as set forth by the Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015). In Omnicare, the Supreme Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong,” but that an opinion statement can form the basis for liability in three different situations: (1) the speaker did not actually hold the belief professed; (2) the opinion contained embedded statements of untrue facts; or (3) the speaker omitted information whose omission made the statement misleading to a reasonable investor. Id. at 184–89.

In 2021, federal courts have continued to grapple with whether Omnicare—which was decided in the context of a Section 11 claim—applies to claims brought under the Exchange Act. In April, the Ninth Circuit extended the Omnicare standard to claims brought under Exchange Act Section 14(a) and Rule 14a-9. Golub v. Gigamon Inc., 994 F.3d 1102, 1107 (9th Cir. 2021). The court reasoned that such claims contain a “virtually identical limitation on liability” to claims under Section 11 and Rule 10b-5, to which the Ninth Circuit held Omnicare applies. Id.; see also City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605 (9th Cir. 2017).

Two additional cases addressing Omnicare’s application to the Exchange Act came down in the District of New Jersey, with one of them ultimately deciding to apply the Omnicare standard for falsity to claims brought under Section 10(b) and Rule 10b-5. Ortiz v. Canopy Growth Corp., No. 2:19-cv-20543, 2021 WL 1967714 (D.N.J. May 17, 2021). Recognizing the majority view outside the Third Circuit that Omnicare applies to such claims, the court in Ortiz “s[aw] no reason to apply a different rule.” Id. at *33. However, after finding that the alleged statements were actionable under Omnicare, the court still dismissed the complaint for failure to plead scienter. Id. at *44. While plaintiffs adequately pled that defendants did not believe certain statements when they were made and misleadingly omitted certain material facts, plaintiffs could not overcome the PLSRA’s high bar for scienter. Id. at *38–39. The court found that plaintiffs failed to plead facts to support a “strong inference” of scienter because, based on several factors, another more “innocent explanation” was plausible. Id. at *42–43. In another case, a District of New Jersey court found evaluation of Omnicare unnecessary for the same reason: Plaintiffs did not plead facts to “support a ‘strong inference’ of scienter.” In re Amarin Corp. PLC Sec. Litig., No. 3:19-cv-06601, 2021 WL 1171669 at *19 (D.N.J. Mar. 29, 2021). These cases suggest Omnicare may rarely be outcome-determinative for Section 10(b) and Rule 10b-5 claims because opinions that may be actionable under Omnicare may often lack an “intent to deceive, manipulate, or defraud,” as required to demonstrate scienter. See Ortiz, 2021 WL 1967714, at *10.

Omnicare has remained a significant pleading barrier in the first half of 2021. In Salim v. Mobile Telesystems PJSC, No. 19-cv-1589, 2021 WL 796088 (E.D.N.Y. Mar. 1, 2021), the Eastern District of New York held that a statement about potential liability resulting from investigations into alleged FCPA violations “would have necessarily been a statement of opinion until the company could give a reasonable estimate of its potential losses.” Because plaintiff failed to allege sufficient facts to show that defendant did not actually believe what it stated, the court granted defendants’ motion to dismiss. Id. at *8–9. Similarly, in City of Miami Fire Fighters’ and Police Officers’ Retirement Trust v. CVS Health Corp., the District of Rhode Island held that reported results of goodwill assessments conducted under Generally Accepted Accounting Principles are opinion statements that must be assessed under Omnicare because “[e]stimates of goodwill depend on management’s determination of the fair value of the assets acquired and liabilities assumed, which are not matters of objective fact.” No. 19-437-MSM-PAS, 2021 WL 515121, at *9 (D.R.I. Feb. 11, 2021). In granting defendants’ motion to dismiss, the court found allegations “amount[ing] to a retrospective disagreement with [defendant’s] judgment” inadequate “without sufficient facts to undermine the assumptions [defendant] used when it made its goodwill assessments.” Id. at *10.

Other recent district court decisions illustrate the narrow situations in which plaintiffs have overcome Omnicare’s high bar. For instance, in Howard v. Arconic Inc., defendants argued that aluminum manufacturer Arconic’s statement that it “believes it has adopted appropriate risk management and compliance programs to address and reduce” certain risks was a non-actionable opinion under Omnicare. No. 2:17-cv-1057, 2021 WL 2561895, at *7 (W.D. Pa. June 23, 2021). The court disagreed, holding that the statement “conveyed to investors that there was a reasonable basis for [defendants’] belief about the adequacy of the compliance/risk management programs,” but facts regarding Arconic’s practice of selling hazardous products “call[ed] into question the reasonableness of that belief.” Id.

Finally, in SEC v. Bluepoint Investment Counsel, LLC, the SEC claimed that the investment-advisor defendants had defrauded investors by reporting misleading and unreasonable valuations of fund assets in order to charge excessive management and other fees. No. 19-cv-809, 2021 WL 719647, at *1 (W.D. Wis. Feb. 24, 2021). The court held that the statements were actionable, consistent with Omnicare, because “the SEC has alleged specific facts which, taken as true, involve valuations containing embedded statements of fact that were untrue.” Id. at *17. Specifically, defendants had stated that the valuations would be “based on underlying market driven events,” but the SEC alleged that the appraisal process was far less thorough. Id. This method, the court reasoned, “reflects the kind of ‘baseless, off-the-cuff judgment[]’ that an investor reasonably would not expect in the context of a third-party appraisal that is then relied upon in an investor fund’s financial statements.” Id.

As shareholder litigation arising from the economic impact of COVID-19 continues, including a handful of cases targeting vaccine development and efficacy, Omnicare will likely play a significant role. See Complaint for Violations of the Federal Securities Law, In re AstraZeneca PLC Sec. Litig., No. 1:21-cv-00722 (S.D.N.Y. Jan. 26, 2021) (containing various allegations based on statements or omissions relating to clinical trials for the COVID-19 vaccine). Disclosures and accounting estimates impacted by the rapidly evolving circumstances presented by the pandemic, and other statements and estimates involving interpretation of complex scientific data, are at the heart of Omnicare analysis. We will continue to monitor developments in these and similar cases.

VII. Halliburton II Market Efficiency and “Price Impact” Cases

As previewed in our last two updates, and discussed above in our Supreme Court roundup, the Supreme Court issued its decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System on June 21. 141 S. Ct. 1951 (2021) (“Goldman Sachs”). Practitioners now have confirmation from the Supreme Court that courts must consider the generic nature of allegedly fraudulent statements at the class certification stage when necessary to determine whether the statements impacted the issuer’s stock price, even though that analysis will often overlap with the merits issue of materiality. See id. at 1960–61. The Court also resolved the question of which party bears what burden when defendants offer evidence of a lack of price impact to rebut the presumption of reliance, placing the burdens of both production and persuasion on defendants. See id. at 1962–63.

Recall that in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), the Supreme Court preserved the “fraud-on-the-market” presumption of class-wide reliance in Rule 10b-5 cases, but also permitted defendants to rebut this presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price. Since that decision, as we have detailed in these updates, lower courts have struggled with several recurring questions, including: (1) how to reconcile Halliburton II with Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I”) and Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. 455 (2013), in which the Court held that loss causation and materiality, respectively, were not class certification issues, but instead should be addressed at the merits stage; (2) who bears what burden when defendants present evidence of a lack of price impact; and (3) what evidence is sufficient to rebut the presumption. The Court has now resolved the first two questions in Goldman Sachs.

In its most recent decision, the Second Circuit held that the generic nature of Goldman Sachs’s allegedly fraudulent statements was irrelevant at the class-certification stage and instead should be litigated at trial, and that defendants bore both the burden of production and persuasion in rebutting the presumption of reliance. Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254, 265–74 (2d Cir. 2020). As detailed above, the Supreme Court disagreed with the first holding but agreed with the second. Because it was unclear whether the Second Circuit properly considered Goldman Sachs’s price impact evidence, the Court remanded for further consideration. Goldman Sachs, 141 S. Ct. at 1961. The Court also confirmed that the Second Circuit allocated the parties’ burdens correctly, because the defendant “bear[s] the burden of persuasion to prove a lack of price impact by a preponderance of the evidence,” including at the class-certification stage. Id. at 1958. The Court clarified that its opinions had already placed that burden on defendants—although “the allocation of burden is unlikely to make much difference on the ground,” and will “have bite only when the court finds the evidence in equipoise.” Id. at 1963.

Most importantly, an eight-justice majority made clear that even when the question of price impact overlaps with merits questions, all relevant evidence on price impact must be considered at the class certification stage. Goldman Sachs, 141 S. Ct. at 1960–61 (citing Halliburton II, Comcast Corp. v. Behrend, 569 U.S. 27 (2013), and Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011)). This is the case even though “materiality and price impact are overlapping concepts” and “evidence relevant to one will almost always be relevant to the other.” Id. at 1961 n.2. In other words, the Supreme Court has now confirmed that Halliburton I, Amgen, and Halliburton II are consistent because plaintiffs do not need to prove materiality and loss causation to invoke the presumption of reliance, but defendants can use price impact evidence—including evidence of immateriality or a lack of loss causation—to defeat the presumption of reliance at the class certification stage.

Despite its relevance to the case, the Court declined to offer a view on the validity of the inflation-maintenance theory, under which plaintiffs frequently argue that price movements associated with negative news can be attributed to earlier, challenged statements. See id. at 1959 n.1. However, the Court underscored that the connection between a statement and a corrective disclosure is particularly important in inflation-maintenance cases. Id. at 1961. As the Court noted, the inference that a subsequent price drop proves there was previous inflation “starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure,” which can occur “when the earlier misrepresentation is generic . . . and the later corrective disclosure is specific.” Id.

The Second Circuit has now remanded to the district court to examine all relevant evidence of price impact in the first instance. Arkansas Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., No. 18-3667, 2021 WL 3776297, at *1 (2d Cir. Aug. 26, 2021). We will continue to monitor this and related cases.

VIII. Other Notable Developments

A. Morrison Domestic Transaction Test

The circuit split concerning the application of the domestic transaction test from Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), has widened in the first half of this year. In Morrison, the Supreme Court held that the Exchange Act only applied to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” Id. at 267. This holding was premised on “the focus of the Exchange Act,” which is “not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” Id. at 266. Thereafter, courts have held that a security that is not traded on a domestic exchange satisfies the second prong of Morrison, “if irrevocable liability is incurred or title passes within the United States.” Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012).

This January, in Cavello Bay Reinsurance Ltd. v. Shubin Stein, 986 F.3d 161 (2d Cir. 2021), the Second Circuit reaffirmed its prior holding in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2d Cir. 2014), that the traditional “irrevocable liability” test is necessary, but not sufficient to bring a claim under the Exchange Act. Instead, a plaintiff must additionally show that the transaction was not “‘so predominantly foreign’ as to be impermissibly extraterritorial.” Cavello Bay, 986 F.3d at 165 (citing Parkcentral, 763 F.3d at 216). The Second Circuit considered that this test “uses Morrison’s focus on the transaction rather than surrounding circumstances, and flexibly considers whether a claim—in view of the security and the transaction as structured—is still predominantly foreign.” Id. at 166–67. Under this framework, the court affirmed the dismissal of an action based on “a private offering between a Bermudan investor . . . and a Bermudan issuer” because it was predominantly foreign, even though the fact that the contract was countersigned in the United States may have been sufficient to incur irrevocable liability in the United States. Id. at 167–68.

On the other hand, in its first application of Morrison, the First Circuit, “[l]ike the Ninth Circuit . . . reject[ed] Parkcentral as inconsistent with Morrison.” Sec. & Exch. Comm’n v. Morrone, 997 F.3d 52, 60 (1st Cir. 2021). Because “Morrison says that § 10(b)’s focus is on transactions,” the court found that “[t]he existence of a domestic transaction suffices to apply the federal securities laws under Morrison” and “[n]o further inquiry is required.” Id.

B. Eighth Circuit Strikes Class Allegations under Rule 12(f)

In Donelson v. Ameriprise Financial Services, Inc., 999 F.3d 1080 (8th Cir. 2021), the Eighth Circuit struck class allegations pursuant to Rule 12(f) of the Federal Rules of Civil Procedure, which permits a court to strike from a pleading “any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Id. at 1091 (quoting Fed. R. Civ. P. 12(f)). The court “agree[d] with the Sixth Circuit that a district court may grant a motion to strike class-action allegations prior to the filing of a motion for class-action certification” when certification is a “clear impossibility,” noting that other federal courts have reached the conclusion that this was not permissible. Id. at 1092.

Donelson concerned an investor’s claims, including under Section 10(b) of the Securities Exchange Act, against a broker and investment advisor for mishandling and making misrepresentations about his investment account. Id. at 1086. The plaintiff sought to bring claims on behalf of a class of individuals who had allegedly suffered similar harms. While the agreement governing the plaintiff’s account contained a mandatory arbitration clause, there was an exception for “putative or certified class actions.” Id. The court found that the class allegations should be stricken because they were not “cohesive” and would require “a significant number of individualized factual and legal determinations to be made,” including specifically whether the defendants made misrepresentations to each investor, whether those misrepresentations were material, whether the investor relied upon them, and whether the investor suffered economic harm. Id. at 1092–93. Furthermore, the court found that the circumstances warranted striking the class allegations because delaying the inevitable decision would “needlessly force the parties to remain in court when they previously agreed to arbitrate.” Id. at 1092.

C. Congress Codifies SEC Disgorgement Remedy

On January 1, 2021, Congress codified the SEC’s right to disgorgement remedies as part of the National Defense Authorization Act (“NDAA”). While the SEC has often sought—and courts have often granted—disgorgement remedies, the new law codifies this right and also adds guidance as to the parameters. Section 6501 of the NDAA amends the Exchange Act to allow any United States District Court to “require disgorgement…of any unjust enrichment by the person who received such unjust enrichment as a result of [violations under the securities laws].” Previously, disgorgement was awarded pursuant to the court’s equitable power, rather than statutorily mandated in cases of unjust enrichment.

Significantly, the amendment also provides for a 10-year statute of limitations that applies to “[any actions for disgorgement arising out] of the securities laws for which scienter must be established.” 15 U.S.C. § 78u(d)(8)(A)(ii). The law further provides for a 10-year statute of limitations for “any equitable remedy, including for an injunction or for a bar, suspension, or cease and desist order” irrespective of whether the underlying securities law violation carries a scienter requirement. 15 U.S.C. § 78u(d)(8)(B). The law expands disgorgement to “any equitable remedy” and ensures that a court awards disgorgement in these cases. Moreover, for the purposes of calculating any limitations period under this paragraph, “any time in which the person . . . is outside of the United States shall not count towards the accrual of that period.” 15 U.S.C. § 78u(d)(8)(C).

D. Delaware Exclusive Forum Bylaws Applicable to Section 14

A recent federal decision in the Northern District of California precluded plaintiffs from bringing Section 14(a) claims in the face of an exclusive forum selection clause in a company’s bylaws. Lee v. Fisher, 2021 WL 1659842 (N.D. Cal. Apr. 27, 2021). In Lee, plaintiffs brought derivative claims on behalf of The Gap, Inc. for violation of Section 14(a) of the Securities Exchange Act as a result of allegedly misleading statements about the Gap’s commitment to diversity. Id. at *1. The defendants moved to dismiss the claims on forum non conveniens grounds based on the forum selection clause in Gap’s bylaws, which provided that any action had to be brought in Delaware Chancery Court. Id. at *2. In granting the motion and dismissing the claims, the court noted a strong policy in favor of enforcing forum selection clauses where practicable. Id. at *3. In response to the plaintiff’s objection that Section 14(a) claims must be asserted in federal court because of its exclusive jurisdiction and that the anti-waiver provisions in the Securities Act preclude waiving the jurisdictional requirement, the court noted Ninth Circuit precedent has held that the policy of enforcing forum selection clauses supersedes anti-waiver provisions like those in the Exchange Act. Id. In addition, enforcement of the exclusive forum selection clause would not leave the plaintiff without a remedy because the plaintiff could file separate state law derivative claims in Delaware, even if such action could not include a federal securities law claim. The plaintiffs have filed a notice of appeal in the Ninth Circuit.

E. Ninth Circuit Upholds Broad Protection for Forward-Looking Statements

In Wochos v. Tesla, Inc., 985 F.3d 1180 (9th Cir. 2021), the Ninth Circuit upheld a broad interpretation of the safe harbor protections afforded by the PSLRA. The PSLRA’s safe harbor for forward-looking statements protects against liability that is premised upon statements made about a company’s plans, objectives, and projections of future performance, along with the assumptions underlying such statements. In Wochos, the Ninth Circuit held that this protection applies even when the statements touch on the current state of affairs.

The plaintiffs in Wochos alleged that statements by Tesla officers that the company was “on track” to meet certain production goals was misleading because the company was facing manufacturing problems that made these production goals difficult to attain. Id. at 1185–86. Plaintiffs claimed that the statements were not protected under the PSLRA’s safe harbor provisions because these “predictive statements contain[ed] embedded assertions concerning present facts that are actionable.” Id. at 1191 (emphasis in original). The court disagreed, finding that the definition of forward-looking statements “expressly includes ‘statement[s] of the plans and objectives of management for future operations,’” and “‘statement[s] of the assumptions underlying or relating to’ those plans and objectives.” Id. (emphases in original). Even though Tesla’s statements touched on the current state of the business, the court found that they were forward-looking because “any announced ‘objective’ for ‘future operations’ necessarily reflects an implicit assertion that the goal is achievable based on current circumstances.” Id. at 1192 (emphasis in original). The court reasoned that the safe harbor would be rendered moot if it “could be defeated simply by showing that a statement has the sort of features that are inherent in any forward-looking statement.” Id. (emphasis in original).

The following Gibson Dunn attorneys assisted in preparing this client update: Jeff Bell, Shireen Barday, Monica Loseman, Brian Lutz, Mark Perry, Avi Weitzman, Lissa Percopo, Michael Celio, Alisha Siqueira, Rachel Jackson, Andrew Bernstein, Megan Murphy, Jonathan D. Fortney, Sam Berman, Fernando Berdion-Del Valle, Andrew V. Kuntz, Colleen Devine, Aaron Chou, Luke Dougherty, Lindsey Young, Katy Baker, Jonathan Haderlein, Marc Aaron Takagaki, and Jeffrey Myers.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the Securities Litigation practice group:

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, [email protected])
Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])
Craig Varnen – Co-Chair, Los Angeles (+1 213-229-7922, [email protected])
Shireen A. Barday – New York (+1 212-351-2621, [email protected])
Jefferson Bell – New York (+1 212-351-2395, [email protected])
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Celio – Palo Alto (+1 650-849-5326, [email protected])
Paul J. Collins – Palo Alto (+1 650-849-5309, [email protected])
Jennifer L. Conn – New York (+1 212-351-4086, [email protected])
Thad A. Davis – San Francisco (+1 415-393-8251, [email protected])
Ethan Dettmer – San Francisco (+1 415-393-8292, [email protected])
Mark A. Kirsch – New York (+1 212-351-2662, [email protected])
Jason J. Mendro – Washington, D.C. (+1 202-887-3726, [email protected])
Alex Mircheff – Los Angeles (+1 213-229-7307, [email protected])
Robert F. Serio – New York (+1 212-351-3917, [email protected])
Robert C. Walters – Dallas (+1 214-698-3114, [email protected])
Avi Weitzman – New York (+1 212-351-2465, [email protected])

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

Los Angeles of counsel Nathaniel L. Bach and associate Marissa M. Mulligan are the authors of “Ninth Circuit Unanimously Affirms First Amendment Protection for Rachel Maddow’s ‘Paid Russian Propaganda’ Commentary,” [PDF] published by MLRC MediaLawLetter in August 2021.

The UK’s Competition Appeal Tribunal (the CAT) has certified the first application for a collective proceedings order (CPO) on an opt-out basis in Walter Hugh Merricks CBE v Mastercard Incorporated & Ors.

In the UK, a CPO is pre-requisite for opt-out collective actions seeking damages for breaches of competition law. Opt-out means that an action can be pursued on behalf of a class of unnamed claimants who are deemed included in the action unless they have specifically opted out. Opt-out ‘US style’ class actions have the potential to be far more complex, expensive and burdensome than traditional named party litigation.

Opt-out class actions were introduced for the first time in the UK in 2015 (see our previous alert here). Almost six years on, last week’s judgment by the CAT is therefore an important procedural step towards the first opt-out class action damages award in the UK.

As had been expected, following the Supreme Court’s judgment in December 2020 (see our previous alert here) Mastercard did not resist certification outright. As a result, the CAT’s most recent judgment provides little further clarity on how the test set out in the Supreme Court’s judgment will be applied to future applications for a CPO. However, the CAT’s recent judgment did address certain interesting questions concerning suitability to act as a class representative, whether deceased persons could be included in the proposed class and the suitability of claims for compound interest. These are discussed in more detail below.

Background

In 2017, the CAT had originally refused to grant Mr. Merricks a CPO. However, in December 2020, in Merricks v Mastercard, the UK’s Supreme Court dismissed Mastercard’s appeal against the Court of Appeal’s judgment regarding the correct certification test and remitted the case back to the CAT for reconsideration. The judgment of the Supreme Court was of seminal importance because it provided much needed clarification as to the correct approach for the CAT to take when considering whether claims are suitable for collective proceedings (see our previous alert here).

Following the Supreme Court’s clarification, Mastercard no longer challenged eligibility for collective proceedings in the remitted proceedings before the CAT. However, the CAT was still required to consider: (i) the authorisation of Mr. Merricks as the class representative in light of developments since the CAT’s original judgment in 2017; (ii) whether Mr. Merricks was entitled to include deceased persons in the proposed class; and (iii) whether Mr. Merricks’ claim for compound interest was suitable to be brought in collective proceedings.

Although the CAT reaffirmed that Mr. Merricks was suitable to act as a class representative, it held that deceased persons could not be included in the proposed class and that the claim for compound interest was not suitable to brought in collective proceedings. Whilst this will significantly reduce the damages Mastercard will be required to pay should Mr. Merricks ultimately succeed at the substantive trial, the CAT’s judgment has still paved the way for what could be the largest award of damages in English legal history.

CAT Judgment (Walter Hugh Merricks CBE v MasterCard Incorporated & Ors [2021] CAT 28)

(i) Authorisation of the Class Representative

In relation to the suitability of Mr. Merricks to act as the class representative, two issues arose. The first related to written submissions filed by a proposed class member contending that it was not just and reasonable for Mr. Merricks to act as class representative as a result of Mr. Merricks’ handling of a historic complaint related to a property transaction involving the proposed class member. However, the CAT did not consider that this gave rise to any issue in terms of Mr. Merricks’ suitability to act as class representative.

The second related to the terms of a new litigation funding agreement (LFA) put in place by Mr. Merricks in order to document the replacement of the original funder following the CAT’s 2017 judgment. Here, the CAT made it clear that, even if no objections were raised about the terms of a LFA by a proposed defendant (i.e., Mastercard) “the Tribunal has responsibility to protect the interests of the members of the proposed class, and their interests are of course not necessarily aligned with the interests of Mastercard”.

The CAT therefore independently scrutinised the new LFA with particular focus on the provisions permitting the funder to terminate the new LFA where it ceases to be satisfied about the merits of the claims or believes that the proceedings are no longer commercially viable. The CAT was concerned that this gave the funder too broad a discretion to terminate and, during the course of the remitted hearing, it was agreed that the termination provisions would be amended to include a requirement that the funder’s views had to be based on independent legal and expert advice.

Mastercard’s only objection to the terms of the new LFA was that it had no rights to enforce the new LFA and, as such, Mastercard sought an undertaking from the funder to the CAT that it would discharge any adverse costs award that might be made against Mr. Merricks. The CAT agreed that such an undertaking should be given and directed the parties to agree the wording.

(ii) The Deceased Persons Issue

On remittal, Mr. Merricks wanted to include deceased persons within the proposed class definition and sought to amend the definition to include “persons who have since died”.

Whilst the CAT accepted that a class definition could include the representatives of the estates of deceased persons, section 47B of the Competition Act 1998 did not permit claims to be brought by deceased persons in their own right (as Mr. Merricks’ proposed amendment was seeking to do). In any event, the Tribunal held that Mr. Merricks’ application to amend the proposed class definition was not permissible as the limitation period had already expired.

(iii) The Compound Interest Issue

A claim for compound interest had been included in the Claim Form from the outset. It was alleged by Mr. Merricks that all class members will either have incurred borrowings or financing costs to fund the overcharge they suffered or have lost interest that they would otherwise have earned through deposit or investment of the overcharge, or some combination of the two.

The CAT held that the Canadian jurisprudence in relation to certification had been explicitly recognised by the Supreme Court in the context of the UK regime. As such, a “plausible or credible” methodology for calculating loss had to be put forward at the certification stage in order for a claim to be suitable for collective proceedings. In the case of Mr. Merricks’ claim for compound interest, the CAT held that no credible or plausible methodology had been put forward by Mr. Merricks to arrive at any estimate of the extent of the overcharge that would have been saved or used to reduce borrowings rather than spent, which is the essential basis for a claim to compound interest.

Comment

The CAT’s judgment in Merricks is significant because it is the first class action to be certified on an opt-out basis since the current regime was introduced in 2015.

The CAT’s approach to Mr. Merricks’ claim for compound interest and the requirement for a “plausible or credible” methodology is of particular interest in circumstances where the Supreme Court made it clear that there is only a very limited role for the application of a merits test at the certification stage.

The UK was comparatively slow to introduce a regime for opt-out proceedings in relation to competition law infringements and, since its introduction in 2015, the regime itself has taken some time to find its feet. But momentum has been building and there are now a large number of high value opt-out CPO applications awaiting determination by the CAT covering both follow-on claims and standalone claims. In the next few months, a number of judgments are expected in relation to applications that had been stayed pending the Supreme Court’s judgment in Merricks. These will not only provide greater clarity on the application of the Supreme Court’s judgment but also answer questions that, to date, have not been considered by the CAT. These include, for example, how a carriage dispute between two competing proposed class representatives should be resolved. There will also be significant attention paid to the procedures adopted by the CAT as Mr. Merricks’ claim progresses now that it moves beyond the certification stage.

It is increasingly clear that companies operating in the UK are now at greater risk of facing ‘US style’ class actions for breaches of competition law. In addition, for non-competition claims that fall outside the regime introduced in 2015, parallel developments in the courts raise the possibility of complex group actions. For example, in relation to alleged breaches of data protection laws, the highly anticipated Supreme Court judgment in Lloyd v Google LLC (expected in Autumn) will provide guidance on the potential for representative actions to proceed in England and Wales.

Gibson Dunn is currently instructed on a number of the largest CPO applications currently being heard by the CAT and is deeply familiar with navigating this developing regime.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following authors in London and Brussels:

Ali Nikpay (+44 (0) 20 7071 4273, [email protected])
Doug Watson (+44 (0) 20 7071 4217, [email protected])
Mairi McMartin (+32 2 554 72 29, [email protected])
Dan Warner (+44 (0) 20 7071 4213, [email protected])

UK Competition Litigation Group:
Philip Rocher (+44 (0) 20 7071 4202, [email protected])
Allan Neil (+44 (0) 20 7071 4296, [email protected])
Patrick Doris (+44 (0) 20 7071 4276, [email protected])
Susy Bullock (+44 (0) 20 7071 4283, [email protected])
Deirdre Taylor (+44 (0) 20 7071 4274, [email protected])
Gail Elman (+44 (0) 20 7071 4293, [email protected])
Camilla Hopkins (+44 (0) 20 7071 4076, [email protected])
Kirsty Everley (+44 (0) 20 7071 4043, [email protected])

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

On August 19, 2021, the New York Stock Exchange (“NYSE”) proposed an amendment to Section 314.00 of the NYSE Listed Company Manual (the “NYSE Manual”), the NYSE’s related party transaction approval rule. The proposal follows the NYSE’s recent amendments to Section 314.00, approved by the Securities and Exchange Commission (the “SEC”) on April 2, 2021, which had amended the rules to, among other things, require “reasonable prior review and oversight” of related party transactions and had defined related party transactions (for companies other than foreign private issuers) to be those subject to Item 404 of the SEC’s Regulation S-K, but “without applying the transaction threshold of that provision.” For foreign private issuers, the previous amendments had defined related party transactions to be those subject to disclosure under Form 20-F, but “without regard to the materiality threshold of that provision.” As a result of those amendments, NYSE-listed companies were faced with the prospect of potentially presenting immaterial transactions, or transactions in which related parties’ interests were immaterial, before their independent directors for approval.

In its latest proposal, the NYSE noted that the prior amendment had been intended to “provide greater clarity as to the types of transactions that were specifically subject to review and approval under the rule” but that “[i]n the period since the adoption of that amendment, it has become clear to the Exchange that the amended rule’s exclusion of the applicable transaction value and materiality thresholds is inconsistent with the historical practice of many listed companies, and has had unintended consequences.” As such, the NYSE’s latest amendments to Section 314.00 “provide that the review and approval requirement of that rule will be applicable only to transactions that are required to be disclosed after taking into account the transaction value and materiality thresholds set forth in Item 404 of Regulation S-K or Item 7.B of Form 20-F, respectively, as applicable.” Notably, Item 404 of Regulation S-K only requires disclosure of transactions where the amount involved is greater than $120,000 and in which the related person “had or will have a direct or indirect material interest” in the transaction. The notes to Item 404 also contain various other exclusions.

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

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


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I. The Court Narrowly Construes the Hooker Retained-Control Exception to the Presumption That Hirers Are Not Liable for Injuries to Contract Workers

II. Implications of the Court’s Decision

Some items of note:

House:

Senate:

Table of Authorities of House and Senate Committees:

A. Humanitarian Parole

B. Special Immigrant Visa

C. The U.S. Refugee Admissions Program

D. Asylum

Federal Circuit News

Upcoming Oral Argument Calendar

Key Case Summaries (August 2021)

I. Filing and Settlement Trends

A. Filing Trends

B. Industry and Other Trends in Cases Filed

C. Settlement Trends

II. What to Watch for in the Supreme Court

A. Supreme Court Issues Narrow Decision in Price-Impact Case

B. Supreme Court to Decide whether the PSLRA’s Discovery Stay Applies in State Court

C. The Court Addresses Constitutional Challenges to Administrative Adjudicators

III. Delaware Developments

A. Court of Chancery Invalidates Poison Pill under Second Unocal Prong

B. Court of Chancery Rejects Claim that Pandemic Constituted a Materially Adverse Effect

C. Bellwether SPAC Litigation Remains in Initial Stages

D. Court of Chancery Determines CEO Breached Fiduciary Duty and Financial Advisor Aided and Abetted That Breach in Course of Executing a Merger

E. Appraisal Litigation Continues Its Steady Decline

IV. Further Development of Disseminator Liability Theory Upheld in Lorenzo

V. Survey of Coronavirus-Related Securities Litigation

A. Securities Class Actions

1. False Claims Concerning Commitment to Safety

2. Failure to Disclose Specific Risks

3. Alleged Insider Trading and “Pump and Dump” Schemes

B. Stockholder Derivative Actions

1. Disclosure Liability

2. Oversight Liability

3. Insider Trading

C. SEC Cases

VI. Falsity of Opinions – Omnicare Update

VII. Halliburton II Market Efficiency and “Price Impact” Cases

VIII. Other Notable Developments

A. Morrison Domestic Transaction Test

B. Eighth Circuit Strikes Class Allegations under Rule 12(f)

C. Congress Codifies SEC Disgorgement Remedy

D. Delaware Exclusive Forum Bylaws Applicable to Section 14

E. Ninth Circuit Upholds Broad Protection for Forward-Looking Statements

**I. The Court Narrowly Construes the Hooker Retained-Control Exception to the Presumption That Hirers Are Not Liable for Injuries to Contract Workers**

**A. Court of Chancery Invalidates Poison Pill under Second Unocal Prong**