On November 3, 2020, only four months after the California Consumer Privacy Act (“CCPA”) became enforceable by the California Attorney General, Californians will vote on Alastair Mactaggart’s newest consumer privacy ballot initiative, the California Privacy Rights Act (“CPRA”), styled as California Proposition 24.  We previously issued a brief client alert on the CPRA when it secured sufficient signatures to get on the November ballot (available here), and promised to provide additional information on the ballot measure as the vote drew closer.  Below, we delve into the pertinent details of the CPRA and analyze how it may change data privacy and cybersecurity regulation in California, and potentially elsewhere, should the initiative pass.

I.   Background and Context

The CPRA ballot initiative, sometimes colloquially referred to as “CCPA 2.0,” represents an effort to address the perceived inadequacies of the CCPA, which, according to Mactaggart and others, was hastily enacted by the California state legislature to avoid a more restrictive ballot initiative.  As we noted in our prior alert, unlike the legislatively-enacted CCPA, should the CPRA be approved by California voters and become state law as written, it could not be readily amended by the state legislature.  Instead, any significant changes to the law would similarly require further voter action.  However, by its terms, the CPRA would not go into effect until January 1, 2023, and thus the CCPA would remain in full force and effect for the interim.

In September 2019, even before the CCPA went into effect, Alastair Mactaggart and the Californians for Consumer Privacy (the non-profit group behind the original CCPA initiative in 2018), proposed the CPRA initiative in an attempt to provide California consumers with expanded privacy rights and to counterbalance efforts by large companies to “actively and explicitly prioritize[] [the] weakening [of] the CCPA,”[1]  Californians for Consumer Privacy sponsored the consumer privacy bill, called the Consumer Right to Privacy Act, for the November 2018 ballot. After the initiative was proposed but before it was qualified to appear on the ballot, the California State Legislature agreed to pass what would become the CCPA in exchange for the removal of the ballot initiative by its backers. The CCPA passed in June of 2018, and was signed into law by California Governor Jerry Brown (please see our prior alerts regarding the CCPA here, here, here, here, and here).

In what might feel like a bit of déjà vu, on June 24, 2020, the Secretary of State of California announced that the Mactaggart-backed CPRA had enough valid signatures and was qualified to appear on the November 2020 ballot.  However, we will not see a repeat of 2018’s last-minute, backroom deal-making to avoid the 2020 CPRA’s enactment as a ballot initiative, because the California Elections Code only allows a proponent to remove a “proposed,” initiative, and not one that has “qualified” for the ballot.[2]

Though we will have to wait until the ballots are counted in November to know the results, preliminary polling conducted by Goodwin Simon Strategic Research in October 2019 suggested that 88% of California voters would likely vote for the initiative,[3] and more recent polling conducted by the firm and released by the Yes on Prop. 24 in July 2020 similarly suggests that 81% of voters will likely vote for the initiative.[4]  That same poll showed that even after being presented with opposition arguments against the measure, as set out in the official voter ballot guide, voters still overwhelmingly supported the initiative, with 72% in favor.[5]

II.   Timing – When Would the CPRA Go Into Effect and When Will It Be Finalized?

If the CPRA were enacted, it would largely impose new obligations that would apply only to personal information collected after January 1, 2023; however, it would also provide consumers with a right to access personal information collected in the prior 12 months, which would mean such a right would extend to personal information collected on or after January 1, 2022.  As a result, compliance with the CPRA will likely require steps to be taken over a year before the law would go into full effect.  Similarly, with respect to implementing regulations—a topic that was quite an ordeal for the CCPA and which resulted in initial regulations being proposed just months before the CCPA took effect, with the final regulations being adopted nearly eight months after—the CPRA would grant the California Attorney General the power at the outset to adopt regulations to expand upon and update the CCPA until July 1, 2021, at which point a newly created California Protection Agency (described further below) would assume responsibility for administering the law.  In addition, the final regulations arising from the CPRA would need to be adopted by July 1, 2022, a full year before the CPRA becomes enforceable on July 1, 2023.

III.   CPRA’s Key Rights and Provisions

a.   Higher Threshold for Applicability – Who Must Comply with the CPRA?

The CPRA narrows the definition of covered entities, or “businesses” from that set out in the CCPA.  Specifically, the CPRA alters the scope of covered entities by clarifying how to measure the gross revenue threshold, increasing the threshold number of consumers or households (eliminating the consideration of devices from this number)[6] from 50,000 to 100,000 (exempting smaller businesses), and extending the source for the threshold percentage of annual revenue to also include revenue derived from sharing personal information.

In light of these changes, the CPRA would apply to any “business,” including any for-profit entity that collects consumers’ personal information, which does business in California, and which satisfies one or more of the following thresholds:

• had annual gross revenues in excess of twenty-five million dollars ($25,000,000) for the preceding calendar year, as of January 1 of the calendar year;
• possesses the personal information of 100,000 or more consumers or households; or
• earns more than half of its annual revenue from selling or sharing consumers’ personal information.[7]

Because many medium-to-large businesses satisfy the threshold requirement just with the revenue threshold, the changes to the scope of covered entities will not practically affect many of our clients.

However, for commonly-controlled business, or businesses that share common branding, the CPRA also narrows the definition of covered entities to require that such businesses also share consumers’ personal information.  This can be significant for companies with multiple related and commonly-controlled entities that may share common branding, but which operate entirely separately for data privacy purposes, with no comingling of consumer’s personal data.

b.   New Enforcement Agency: California Privacy Protection Agency

The most significant addition of the CPRA is the proposed creation of a new state agency, the California Privacy Protection Agency, a body vested with full administrative power, authority, and jurisdiction to implement and enforce the CPRA.[8]  The California Privacy Protection Agency would be the first enforcement agency in the United States dedicated solely to privacy.  It would be provided with funding of $5M during the 2020-2021 fiscal year, and $10M during each fiscal year thereafter, to undertake privacy-related investigations.

The California Privacy Protection Agency would be led by a five-member board.  The Governor is to appoint the Chair and one member of the board, whereas the Attorney General, Senate Rules Committee, and Speaker of the Assembly would each appoint one other member.

The California Privacy Protection Agency is to assume enforcement responsibilities for the CCPA from the Attorney General within six months of the agency providing the Attorney General with notice that it is prepared to assume rulemaking responsibilities or, by no later than July 1, 2021.[9]  It is unclear how the agency would enforce privacy laws during this period prior to full enforcement of the CPRA, but we expect that the agency may seek to model itself in light of similar regulatory and enforcement agencies abroad like, for example, the data protection authorities or supervisory authorities under the EU’s General Data Protection Regulation (“GDPR”).

c.   New Category of “Sensitive Personal Information” and Right to Restrict Use of Sensitive Personal Information

The CPRA would establish a new category of “sensitive personal information,” which would be defined to include Social Security Numbers, driver’s license numbers, passport numbers, financial account information, precise geolocation, race, ethnicity, religion, union membership, personal communications, genetic data, biometric or health information, and information about sex life or sexual orientation.[10]  This definition more closely tracks the definition and distinction of “special categories” of personal data under Art. 9 of the GDPR.  Similar to how “personal information” is defined under the CCPA, “sensitive personal information” would not include publicly available information (as defined narrowly to be public information available from government sources).

In establishing a new category of data, the CPRA would provide consumers with the right, at any time, to direct a business that collects sensitive personal information about the consumer to “limit its use of the consumer’s sensitive personal information to that use which is necessary to perform the services or provide the goods reasonably expected by an average consumer who requests such goods or services…”[11]  In order to exercise this right, the CPRA includes requirements for a business to provide a “clear and conspicuous link” to consumers on its homepage titled, “Limit the Use of My Sensitive Personal Information” or a “clearly-labeled link on the business’s internet homepage(s)” that allows a consumer to opt-out of the sharing of personal information and limit the use/disclosure of sensitive personal information.[12]  This would be in addition to the already existing link requirement under the CCPA allowing consumers to opt out of the sale of their personal information.  However, businesses can use a single link if it “easily allow[s] a consumer to [both] opt-out of the sale or sharing of the consumer’s personal information and to limit the use or disclosure of the consumer’s sensitive personal information.”[13]

d.   New Rights to Correct Personal Information and to Data Minimization, and Storage Limitation Requirements

Like the GDPR, the CPRA would also grant consumers the right to correct inaccurate personal information.[14]  Under the CPRA, businesses that collect personal information about consumers must disclose this right to correct to consumers and must use “commercially reasonable efforts” to correct their personal information upon receipt of a verifiable consumer request.[15]

The CPRA further resembles the GDPR by introducing the right to data minimization.  Specifically, the CPRA would require that a business’s collection, use, retention, and sharing of a consumer’s personal information be “reasonably necessary and proportionate to achieve the purposes for which the personal information was collected or processed…”[16]  Furthermore, the CPRA provides clarification regarding the CCPA’s current prohibition against collecting or using additional categories of personal information for additional purposes without providing the consumer with notice[17]: Per proposed § 1798.100(a)(1), businesses would be further prohibited from collecting or using additional categories of personal information that are “incompatible with the disclosed purpose for which the personal information was collected” without providing the consumer with notice.[18]  While these data minimization steps are generally considered best practices in the United States, and are the subject of guidance from the Federal Trade Commission, the CPRA would seek to codify these requirements in California.

Also, whereas the CCPA was relatively silent on retention, the CPRA would impose storage limitation requirements, whereby businesses are prohibited from storing personal information, including sensitive personal information, for longer than is necessary or beyond a disclosed time period.  The CPRA would also take it a step further and grant consumers the right to know at or before the point of collection the length of time a business intends to retain each category of personal information.[19]

e.   Expanded Right to Opt-Out of “Sale” of Personal Information Explicitly Includes Sharing of Personal Information and Cross-Context Behavioral Advertising

Significantly, in an apparent attempt to clarify the meaning of “sale” of personal information—and in particular, its application to behavioral advertising—the CPRA expands the CCPA’s right to opt-out of “sale” of personal information to include “sharing” of personal information.[20] The “sharing” of personal information is specifically defined as the transfer of or making available of “a consumer’s personal information by the business to a third party for cross-context behavioral advertising.”[21]

Though the CCPA’s existing definition of “sale” is widely debated, and some argue already includes various aspects of the AdTech industry, this clarification seeks to settle the debate in the affirmative as to whether businesses need to provide consumers with a right to opt out of third-party sharing for advertising purposes, including through cookie-based collection on their websites and apps.

f.   New Automated Decision-Making Right and Restrictions on Profiling

The CPRA would require first the Attorney General, and then the California Privacy Protection Agency, to adopt regulations “governing access and opt-out rights with respect to a business’s use of automated decision-making technology, including profiling…”[22]  “Profiling” under the CPRA is defined as “any form of automated processing of personal information…to evaluate certain personal aspects relating to a natural person, and in particular to analyze or predict aspects concerning that natural person’s performance at work, economic situation, health, personal preferences, interests, reliability, behavior, location or movements.”[23]  As a result, a business’s response to an access request would be required to include “meaningful information about the logic involved in such decision-making processes, as well as a description of the likely outcome of the process with respect to the consumer.”[24]

Businesses already complying with the GDPR, which grants EU citizens the right not to be subject to a decision based solely on automated processing, including profiling, and to request an explanation of how and why an automated decision was reached, may be familiar with this new requirement.[25]  However, the right under the CPRA may in fact be broader than its equivalent under the GDPR because the CPRA would grant consumers the right to opt-out of “any form” of automated-decision making, whereas the GDPR restricts the right to not be subject to decisions based solely on automated-processing.  Furthermore, this requirement would be the first of its kind in the United States that would require such transparency and limitations on automated decision-making generally.

g.   Cybersecurity Audit Requirements for High-Risk Data Processors

The CPRA also introduces audit requirements for high-risk data processors.  Once again, first the Attorney General, and then the California Privacy Protection Agency, would be required to issue “regulations requiring businesses whose processing of consumers’ personal information presents significant risk to consumers’ privacy or security” to perform an annual cybersecurity audit.[26]

Businesses in this category would also be required to perform an annual cybersecurity audit and regularly submit risk assessments with respect to their processing of personal information to the California Privacy Protection Agency, “identifying and weighing the benefits resulting from the processing to the business, the consumer, other stakeholders, and the public, against the potential risks to the rights of the consumer associated with such processing.”[27]

h.   Loyalty and Rewards Programs Are Not Prohibited

In one clarification of an issue that caused some consternation with regard to the CCPA, the CPRA explicitly allows businesses to offer “loyalty, rewards, premium features, discounts, or club card programs” in exchange for consumer’s opt-in consent.[28]  Though the final CCPA regulations adopted by the Attorney General and approved on August 24, 2020, provided some needed clarity on this point, the CCPA remains ambiguous as to how to balance the requirement not to discriminate against consumers for exercising their rights, on the one hand, with the offering of programs that require using the very personal information for which the consumer can request deletion, on the other.  The CPRA would resolve this ambiguity by expressly allowing such loyalty programs to be conditioned on opt-in consent.

i.   New Categories and Obligations for Service Providers, Contractors, and Third Parties

The CPRA would also amend the CCPA’s definitions of “service provider” and “third party,” and create a new category of “contractor,” to impose new obligations for service providers and contractors.[29]  The CPRA clarifies that a third party is anyone other than the business, a service provider, or contractor.   The newly-defined “contractor” means “a person to whom the business makes available a consumer’s personal information for a business purpose pursuant to a written contract…”[30]  Among other things, this written contract must prohibit the contractor from selling or sharing the personal information it receives; using or disclosing the personal information for any purpose other than for the contract’s business purpose; and combining the personal information with data received or collected through other means, with limited exceptions.[31]

These requirements are indirectly imposed by the definition of “service provider” under the CCPA – in order to considered a “service provider,” an entity must “process information on behalf of a business” for a business purpose, pursuant to a written contract that prohibits the entity from “retaining, using, or disclosing the personal information for any purpose other than for the specific purpose of performing the services specified in the contract.”[32]  However, the definition of “contractor” under the CPRA explicitly limits the service provider’s ability to share information, or to combine it with information obtained through other means, which is likely designed to exclude behavioral advertisers that create profiles using data from multiple clients from the definition of contractor.  Further, the CPRA additionally imposes affirmative obligations on service providers and contractors to cooperate and assist businesses in responding to a consumer’s request to delete and correct personal information, and limit the use of sensitive personal information.[33]  However, service providers and contractors are not required to comply with consumer requests “received directly from a consumer or a consumer’s authorized agent…to the extent that the service provider or contractor has collected personal information about the consumer in its role as a service provider or contractor.”[34]

j.   Explicit Requirement to Implement Reasonable Security Procedures and Practices for Businesses, Service Providers, and Contractors

Though the CCPA indirectly required businesses to maintain reasonable security procedures and practices by tying the private right of action to a business’s failure to implement such measures, the CPRA would create an affirmative requirement for businesses to implement “reasonable security procedures and practices” for all categories of personal information,[35] and extends this duty to third parties, service providers, and contractors to provide the “same level of privacy protection” as is required of the business.[36]

IV.   Changes to Potential Liability

Under the CPRA, if the California Privacy Protection Agency determines that a violation or violations have occurred, the agency can seek an administrative fine of up to $2,500 for each violation, or up to $7,500 for each intentional violation or each violation involving the personal information of minor consumers, which is similar to the CCPA’s current level of potential exposure; the difference being that the CPRA instead provides an administrative fine through the Agency.[37]

To the surprise of many, the CPRA does not include a significantly broader private right of action, but similarly limits the private right of action to breaches of non-encrypted, non-redacted personal information as under the CCPA.  Nonetheless, the CPRA expands upon the CCPA to include a private right of action for unauthorized access or disclosure of both an “email address in combination with a password or security question and answer that would permit access to the account…” and personal information, as defined under California’s data breach notification law, as opposed to just the latter as under the CCPA.[38]

V.   Expanded Moratoria for Employee and B2B Personal Information

The CCPA currently exempts personal information obtained from employees and job applicants in the context of employment as well as certain personal information obtained in certain business-to-business (“B2B”) transactions until January 1, 2021 (please see our prior alert here).  On August 30, 2020, the California legislature voted to pass Assembly Bill 1281 (“AB 1281”), which extends the CCPA’s current employee and B2B exemptions from January 1, 2021 to January 1, 2022—Governor Gavin Newsome has until September 30, 2020 to sign the bill.

If enacted, the CPRA would extend these moratoria even further, until January 1, 2023.[39] However, while the California legislature can extend the exemptions under the CCPA, they will be unable to do so under the CPRA, unless another ballot initiative is approved by California voters.

VI.   Certain Consumer Privacy Advocates Are Against the CPRA

Perhaps surprisingly, though the CPRA was proposed by consumer advocates Californians for Consumer Privacy as a pro-consumer response to the perceived weakening of the rights granted to consumers under the CCPA, a number of civil rights advocacy groups, including the American Civil Liberties Union (“ACLU”) of California, California Alliance for Retired Americans, and Color of Change, have all publicly called on Californians to vote “No” on the ballot initiative in November.

These groups have stated that the ballot initiative is “full of giveaways to social media and tech giants” by giving companies new ways to collect personal information, letting companies profit further from consumers’ personal information, and restricting enforcement of privacy rights in court.[40]  Specifically, these advocacy groups argue that this ballot initiative is asking Californians to “approve ‘pay for privacy,” by letting companies charge more for safeguarding consumer personal information, which has “racially discriminatory impacts, disproportionately pricing out working people, seniors, and Black and Latino families.”  Furthermore, these groups argue that the CPRA would restrict the ability of Californians to enforce their privacy rights in court because it asks them to unpersuasively trust a newly created agency, created during a budget crunch, to enforce consumer rights under the CPRA.  Lastly, these groups state:  “[The CPRA] was written behind closed doors with input from the same tech companies with histories of profiting off of [] personal information in unfair and discriminatory ways.  It puts more power in the hands of tech companies like Facebook that already have too much power.  It protects big tech business, not people.”[41]

That said, it does not appear that the No on Proposition 24 position has been significantly funded, and the Yes on Proposition 24 position appears to have been funded primarily by Mr. Mactaggart himself.

*  *  *

As we continue to counsel our clients through CCPA compliance, we understand what a major undertaking it is and has been for many companies.  As other states and the federal government continue to grapple with implementing any privacy laws, California is already considering its second precedent-setting comprehensive privacy law, causing additional consternation.  Given that the CPRA would introduce a host of new consumer rights and related business requirements if enacted, we anticipate that compliance with the CPRA would similarly require a complex and nuanced compliance program for companies.

Specifically, the CPRA would expand upon the CCPA to grant the right to limit the sharing and use of consumers’ sensitive personal information, the right to correct personal information, the right to data minimization, and the expanded right to opt-out of the sale of personal information, as well as impose requirements and restrictions on businesses, including new storage limitation requirements, new restrictions on automated decision-making, and new audit requirements.  Additionally, the CPRA also establishes an entirely new enforcement agency—the California Privacy Protection Agency—removing enforcement authority for both the CCPA and the CPRA from the Attorney General, and expands breach liability.  As such, it will remain to be seen how this new agency would approach enforcement.

In light of this potential sweeping new law, we will continue to monitor developments, and are available to discuss these issues as applied to your particular business. 

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Alexander H. Southwell, Benjamin Wagner, H. Mark Lyon, Cassandra Gaedt-Sheckter, and Lisa V. Zivkovic.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s California Consumer Privacy Act Task Force or its Privacy, Cybersecurity and Consumer Protection practice group:

California Consumer Privacy Act Task Force:
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])

Please also feel free to contact any member of the Privacy, Cybersecurity and Consumer Protection practice group:

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, [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])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [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])
Deborah L. Stein (+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])

Europe
Ahmed Baladi – Co-Chair, PCCP 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])
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])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0)20 7071 4203, [email protected])

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

© 2020 Gibson, Dunn & Crutcher LLP

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

In the current equity capital markets environment, innovative offerings that avoid massive dilution can be advantageous. ATM offering programs provide public companies an efficient means of raising capital over time by allowing a company to tap into the existing trading market for its shares on an as-and-when-needed basis. Rights offerings allow public companies to raise capital while offering all current shareholders the opportunity to participate equally, thereby allowing each shareholder to avoid objectionable dilution when trading prices are relatively low.

In this presentation, we will discuss the mechanics of and recent developments in the uses and structures of ATM programs and rights offerings, including:

• advantages and disadvantages of each type of offering;
• an overview of the basic mechanics of each type of offering;
• securities laws and stock exchange rules in each type of offering;
• managing conflicts of interest and affiliate purchasers in both types of offerings;
• disclosure requirements and guidelines;
• considerations during insider trading blackout periods;
• timing of reporting significant ATM issuances;
• effecting block trades and bought deals under ATM programs;
• the role and compensation of banks in each type of offering;
• challenges in the economics of warrants issued in rights offerings; and
• recent SEC Staff guidance on how and when a company may register the securities issued in rights offerings

View Slides (PDF)

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PANELISTS:

Hillary H. Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s SRCG, Oil and Gas, M&A and Private Equity practice groups. Ms. Holmes advises companies in all sectors of the energy industry on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws and corporate governance issues. She has deep experience with all kinds of equity and debt capital markets transactions, including ATM programs and rights offerings. Ms. Holmes is Chambers Band 1 ranked for Capital Markets Central U.S. and ranked for Energy Transactional Nationwide. Ms. Holmes also advises boards of directors, special committees and financial advisors in transactions and situations involving complex issues and conflicts of interest.

Brian Lane, a partner with Gibson, Dunn & Crutcher, is a corporate securities lawyer with extensive expertise in a wide range of SEC issues. He counsels companies on the most sophisticated corporate governance and regulatory issues under the federal securities laws. He is a nationally recognized expert in his field as an author, media commentator, and conference speaker. BTI Consulting Group named Mr. Lane as a 2019 and 2018 BTI Client Service All-Star among the lawyers “who truly stand out as delivering the absolute best client service”, and a 2014 BTI Client Service All-Star for delivering “outstanding legal skills enveloped in a rare combination of practical business knowledge, extraordinary attention to client needs and noteworthy responsiveness.” Mr. Lane ended a 16 year career with the Securities and Exchange Commission (“SEC”) as the Director of the Division of Corporation Finance where he supervised over 300 attorneys and accountants in all matters related to disclosure and accounting by public companies (e.g. M&A, capital raising, disclosure in periodic reports and proxy statements). In his practice, Mr. Lane advises a number of companies undergoing investigations relating to accounting and disclosure issues.

Ryan Murr is a partner in the San Francisco office of Gibson, Dunn & Crutcher, where he serves as a member of the firm’s Corporate Transactions Department, with a practice focused on representing leading companies and investors in the life sciences and technology space. Mr. Murr currently serves as a Co-Chair of the firm’s Life Sciences Practice Group and previously served as a member of the firm’s Executive Committee and Management Committee. Mr. Murr represents public and private companies and investors in the biotechnology, pharmaceutical, technology, medical device and diagnostics industries in connection with securities offerings and business combination transactions. In addition, Mr. Murr regularly serves as principal outside counsel for publicly traded companies and private venture-backed companies, advising management teams and boards of directors on corporate law matters, SEC reporting, corporate governance, licensing transactions, and mergers & acquisitions. Recognized by Chambers USA in the area of Life Sciences, clients describe Mr. Murr as “creative and smart” and someone who “gets the better of the other side.” Legal Media Group (Euromoney) has ranked Mr. Murr nationally as a “Star” in Life Sciences in the areas of Corporate, Licensing & Collaboration, Mergers & Acquisitions and Venture Capital. Mr. Murr has twice been nominated by Legal Media Group as “Finance & Transactional Attorney of the Year.”

Robyn E. Zolman is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Capital Markets, Securities Regulation & Corporate Governance and Energy Practice Groups. Her practice is concentrated in securities regulation and capital markets transactions. Ms. Zolman represents clients in connection with public and private offerings of equity and debt securities, tender offers, exchange offers, consent solicitations and corporate restructurings. She also advises clients regarding securities regulation and disclosure issues and corporate governance matters, including Securities and Exchange Commission reporting requirements, stock exchange listing standards, director independence, board practices and operations, and insider trading compliance. She provides disclosure counsel to clients in a number of industries, including energy, telecommunications, homebuilding, consumer products, life sciences and biotechnology.  In 2015, Law360 selected Ms. Zolman as one of eight “Rising Star” capital markets attorneys under 40 to watch nationwide.  She was named a Top Woman in Energy by the Denver Business Journal in 2015 and 2017 -2020 and to its Who’s Who in Energy list in 2019, and was one of the Denver Business Journal’s 40 under 40 in 2017.  Ms. Zolman was selected as a “Next Generation Lawyer in Capital Markets: Debt Offerings” by The Legal 500 U.S. in 2018 -2020 and as a Top Lawyer: Securities by 5280 Magazine in 2018-2020. Ms. Zolman was named a 2021 Lawyer of the Year for Securities/Capital Markets Law, Denver by Best Lawyers in America®.

Branden Berns is an associate in the San Francisco office of Gibson, Dunn & Crutcher, where he practices in the firm’s Corporate Transactions Practice Group. Mr. Berns advises clients in connection with a variety of financing transactions, including initial public and secondary equity offerings and investment grade, high yield and convertible debt offerings, as well as companies, private equity firms, boards of directors and special committees in connection with a wide variety of complex corporate transactions, including mergers and acquisitions, asset sales, spin-offs, joint ventures, private placements and leveraged buyouts. Mr. Berns also advises clients regarding securities regulation, SEC reporting requirements and corporate governance matters.

Exclusion of Spouses in Same-Sex Marriages from Certain Legal Entitlements and Benefits Relating to Intestacy and Inheritance Held Unconstitutional

On 18 September 2020, the Court of First Instance (CFI) of the High Court of Hong Kong ruled in Ng Hon Lam Edgar v Secretary for Justice [2020] HKCFI 2412 (Ng case) that the exclusion of spouses in same-sex marriages from the legal entitlements and benefits that are accorded to spouses in opposite-sex marriages under the Intestates’ Estates Ordinance (Cap 73) (IEO) and the Inheritance (Provision for Family and Dependants) Ordinance (Cap 481) (IPO) constitutes unlawful discrimination on the ground of sexual orientation.

The precise form of relief – being a declaration and remedial interpretation of the expressions “valid marriage”, “husband” and “wife” in the IEO and the IPO – remains to be seen.[1]

This CFI judgment (Judgment) may have potentially profound implications and ramifications on the inheritance, estate and succession planning for members of the LGBT community residing in Hong Kong. However, same-sex marriage remains not recognized under Hong Kong law and it appears that the Court is only prepared to consider granting appropriate relief (including an updated interpretation of any relevant legislation) upon consideration of the specific subject matter and in the relevant context. In this connection, please see our Client Alert “Hong Kong Case Update: Sham Tsz Kit v Secretary for Justice” concerning the CFI judgment also handed down on 18 September 2020 rejecting a judicial review application which sought, inter alia, a declaration that, in so far as the laws of Hong Kong do not recognize foreign same-sex marriage, they are unconstitutional.

BACKGROUND

The Judgment was handed down in respect of the judicial review brought by Mr Edgar Ng challenging the definitions of “valid marriage”, “husband” and “wife” under ss 2 and 3 of the IEO and s 2 of the IPO (Marriage Provisions).

Mr Ng is a male Hong Kong permanent resident, who married another male Hong Kong permanent resident “H” in London in January 2017. Following their marriage in London, the couple had a blessing service at a church in Hong Kong.[2]

In April 2018, Mr Ng purchased a flat under the Home Ownership Scheme (HOS) to be used as the matrimonial home with H. However, since the same-sex marriage of Mr Ng and H is not recognised in Hong Kong, H is unable to become a joint owner of the HOS flat with Mr Ng under the relevant HOS policy of the Housing Authority. Mr Ng is concerned that his properties, including the HOS flat, would not be passed to H under the IEO if he dies intestate.[3]

In June 2019, Mr Ng, through his solicitors, sought clarification from the Secretary for Justice as to whether same-sex marriages performed in accordance with the laws of foreign jurisdictions would be recognized by the Hong Kong government as marriages for the purpose of probate, inheritance and intestacy. The Secretary for Justice rejected the request on the basis that it was not a role of the Department of Justice to provide legal advice to private individuals or their solicitors.[4]

TWO-STAGE APPROACH – IS THERE UNLAWFUL DISCRIMINATION?

In the Ng case, the CFI followed the decisions of the Court of Final Appeal (CFA) in Leung Chun Kwong v Secretary for Civil Service (2019) 22 HKCFAR 127 (Leung case) and QT v Director of Immigration (2018) 21 HKCFAR 324 (QT case) and adopted the following two-stage approach in determining whether there is unlawful discrimination.

• First, to determine whether there is differential treatment on a prohibited ground.
• Second, and only if differential treatment can be demonstrated, to examine whether differential treatment can be justified: it is not unlawful discrimination if the differential treatment can be justified; but if it cannot be justified, it constitutes unlawful discrimination.[5]

First stage – any differential treatment on a prohibited ground?

To establish there is differential treatment, the complainant must show that:

•  He or she has been treated less favourably than a person in a relevant comparator group.
•  The reason for differential treatment is based on a prohibited ground, such as sexual orientation, race or religion.[6]

Second stage- is the differential treatment justified?

Where differential treatment is established, the court then examines whether such differential treatment is justified by applying the “four-step justification test”,[7] which asks the following questions. If any of these questions is answered in the negative, the differential treatment cannot be justified.

• Does the differential treatment pursue a legitimate aim?
• Is the differential treatment rationally connected to that legitimate aim?
• Is the differential treatment no more than necessary to accomplish the legitimate aim?
• Has a reasonable balance been struck between the societal benefits arising from the application of differential treatment and the interference with the individual’s equality rights?

THE DECISION

“Yes” to the first question: is there differential treatment on a prohibited ground?

Having undertaken the above analysis, the CFI held that it is clear that differential treatment is being accorded to parties to a same-sex marriage and parties to an opposite-sex marriage for the purposes of the IEO and the IPO on the prohibited ground of sexual orientation.[8]

The CFI has identified the differential treatment in three main aspects:

Under the IEO

• The surviving spouse in a same-sex marriage are not accorded any legal entitlements and benefits that are enjoyed by the surviving spouse in an opposite-sex marriage under the IEO,[9] because the definition of “valid marriage” under s 3 of the IEO only covers an opposite-sex marriage (but not a same-sex marriage) and hence the surviving spouse to a same-sex marriage is not qualified as a “husband” or ‘wife” of the deceased under the IEO to enjoy the legal entitlements and benefits provided for in it.[10]

Under the IPO

• The surviving “husband” or “wife” in an opposite-sex marriage is entitled without more to apply for an order under s 4 of the IPO for financial provision; whilst the surviving spouse in a same-sex marriage may only make such application if he or she was being maintained, either wholly or substantially, by his or her spouse immediately before the death of the deceased.[11]
• Under the IPO, the surviving “husband” or “wife” in an opposite-sex marriage is entitled under the IPO to “such financial provision as it would be reasonable in all the circumstances of the case for such a person to receive, whether or not that provision is required for his or her maintenance” (emphases added). However, the surviving spouse in a same-sex marriage is only entitled to “such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance” (emphases added).[12]

“Yes” to the 1^st step of the second question: the Marriage Provisions serve legitimate aims

The CFI is satisfied that the Marriage Provisions serve the three broad legitimate aims as identified by the Secretary for Justice, namely:

• The Marriage Aim – “To support and uphold the integrity of the traditional institution of marriage in Hong Kong.”
• The Family Aim – To encourage opposite-sex unmarried couples to marry with a view to ensuring their spouses will be accorded spousal status or priority under inheritance law.
• The Coherence Aim (which the CFI considers to be simply a variation of the Marriage aim) – “To maintain and optimize the overall coherence, consistency and workability of the extensive and interlocking schemes of Hong Kong legislation that rest upon or otherwise involve the institution of marriage as recognised under domestic law and [article 37 of the Basic Law]”.[13]

“No” to the 2^nd step of the second question: no rational connection

However, the CFI is not satisfied that the differential treatment is rationally connected to the legitimate aims identified by the Secretary of Justice. The CFI points out that the relevant question to ask is whether the denial of benefits under the IEO or IPO to same-sex couples would promote the three legitimate aims, which the CFI answers in the negative.[14]

“No” to the 3^rd step and “debatable” re the 4^th step of the second question

Having answered the 2^nd step of the justification test in the negative, it is unnecessary to consider the third and fourth steps of the justification test. However, the CFI offers its view that, if it had become necessary for it to do so, it would have found that the differential treatment cannot pass the 3^rd step of the justification test, which asks whether the differential treatment is no more than necessary to accomplish the legitimate aim; whilst it is debatable as to whether it can pass the 4^th step.[15]

Conclusion

In light of the above, the CFI allowed the judicial review sought by Mr Ng and ordered that a declaration and remedial interpretation of the expressions “valid marriage”, “husband” and “wife” in the IEO and IPO be granted as the remedy. The form of such declaration and remedial interpretation remains to be seen as they are to be formulated by the parties for the court’s approval.[16]

COMMENT

The Judgment may have important ramifications and implications on the inheritance, estate and succession planning for members of the LGBT community residing in Hong Kong, and will need to be taken into account in any dispute concerning the probate and inheritance of a deceased individual who was in a same-sex marriage immediately before his or her passing.

Alongside recent decisions of the Hong Kong court concerning rights of same-sex married couples, including the recent CFA decisions in the Leung case (9 June 2019) and the QT case (4 July 2018), and the CFI decision in Infinger, Nick v The Hong Kong Housing Authority [2020] 1 HKLRD 1188 (4 March 2020), the Judgment made in the Ng case is no doubt a significant decision in Hong Kong in advancing equality of rights for couples in same-sex marriages. However, it is apparent that the Hong Kong court is not prepared to grant a wholesale declaration that non-recognition of same-sex marriages is unconstitutional, and prefers to limit its analysis to the specific context that is before it. Please see our Client Alert “Hong Kong Case Update: Sham Tsz Kit v Secretary for Justice”.

The Judgment also provides important takeaway for prospective judicial review applicants – that one should consider carefully his/her standing and limit any declaratory relief sought accordingly. Mr Ng suffered costs consequences as he has sought as part of his declaratory relief to cover also persons in civil partnership or civil union, which he has no standing to do so as he has not entered into any such civil partnership or union.[17] Mr Ng is awarded only 90% of his costs to reflect the fact that he has failed to challenge the Marriage Provisions in so far as they concern civil partnerships and civil unions.[18]

The Honourable Mr Justice Chow also remarks that, in future judicial review applications, legal advisers to applicants should carefully consider and concentrate on the real grounds of judicial review, rather than putting in as many grounds of review that simply do not add any substance, with a view to avoiding unnecessary time and costs being spent.[19]

__________________

   [1]   The CFI directed the parties to submit an agreed form of order for the court’s approval within 21 days from the date of judgment, failing which a combined draft order with differences between the parties clearly indicated shall be submitted within 28 days of the Judgment (see § 53, the Judgment). The Judgment may also be subject to appeal.

   [2]   §§ 3 and 4, the Judgment

   [3]   §§ 6 and 7, the Judgment

   [4]   § 8, the Judgment.

   [5]   § 32, the Judgment.

   [6]   §§ 34 and 35, the Judgment.

   [7]   § 39 of the Judgment, which cites the explanation of the four-step justification test given by the CFA in the Leung case.

   [8]   §§ 15, 25, 33 and 38, the Judgment. The CFI also rejected the arguments put forward on behalf of the Secretary for Justice that same-sex married couples and opposite-sex married couples are not in a comparable position for the purposes of IEO and the IPO (see §37 of the Judgment).

   [9]   These include the right of a surviving spouse in an opposite-sex marriage to acquire the premises in which he or she was residing at the time of the intestate’s death (see § 13 of the Judgment), and to take the deceased’s “personal chattels” (as defined in the IEO) and the whole or part of the residuary estate of the deceased depending on the circumstances (see § 12 of the Judgment).

[10]   §§ 12 to 15, the Judgment.

[11]   § 24(1), the Judgment.

[12]   § 24(2), the Judgment.

[13]   §§ 40 and 41, the Judgment.

[14]   §§ 42 to 44, the Judgment.

[15]   §§ 46 and 47, the Judgment.

[16]   §§ 52 and 53, the Judgment.

[17]   §§ 51 and 53, the Judgment.

[18]   §§ 51 and 54, the Judgment.

[19]   § 50, the Judgment.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, [email protected])

Elaine Chen (+852 2214 3821, [email protected])

Alex Wong (+852 2214 3822, [email protected])

Celine Leung (+852 2214 3823, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

Hong Kong Court Refused to Grant a Wholesale Recognition of Right to Marry for Same-Sex Couples

Two judgments were handed down by the Court of First Instance (CFI) of the High Court of Hong Kong on 18 September 2020 concerning two separate judicial review applications seeking to advance the equality of rights of members of the LGBT community. The CFI granted the relief sought concerning certain statutes on intestacy and inheritance in one of these two cases (please see our Client Alert “Hong Kong Case Update: Ng Hon Lam Edgar v Secretary for Justice”), but it rejected the declaratory relief seeking the recognition of same-sex marriage in Hong Kong generally in the case Sham Tsz Kit v Secretary for Justice [2020] HKCFI 2411 (Sham case), which judgment (Judgment) we will discuss in this Client Alert.

It appears that whilst the Hong Kong court is prepared to consider whether certain specific statute or policy of the government may constitute unlawful discrimination on the basis of sexual orientation, it is not prepared to grant a wholesale recognition to same-sex marriage under the laws of Hong Kong at this stage.

BACKGROUND

Mr Sham, a male Hong Kong permanent resident, and his same-sex partner got married in the United States in November 2013. The applicant submitted that they would have married in Hong Kong if the laws had allowed it. He contended that it was highly unfair and discriminatory against same-sex couples that the current Hong Kong law does not recognize same-sex marriage, thereby depriving same-sex couples of the rights and benefits currently enjoyed by opposite-sex couples.[1]

On 22 November 2018, he commenced a judicial review application to challenge the constitutionality of two statutory provisions, namely s 4 of the Marriage Ordinance (Cap 181) and s 20(1)(d) of the Matrimonial Causes Ordinance (Cap 179).[2]

Mr Sham put forward three alternative grounds of judicial review:

• Ground 1: the “exclusion of same-sex couples from the institution of marriage constitutes a violation of the right to equality” as protected under the Hong Kong Bill of Rights (BOR) and the Basic Law (BL).
• Ground 2: “the laws of Hong Kong, in so far as they do not allow same-sex couples to marry and fail to provide any alternative means of legal recognition of same-sex partnerships” constitute a violation of the right to privacy and the right to equality as protected by the BOR and/or the BL.
• Ground 3: “the laws of Hong Kong, in so far as they do not recognize foreign same-sex marriages, constitute a violation of the right to equality” as protected under the BOR and the BL.[3]

Since another case, MK v Government of the HKSAR [2019] 5 HKLRD 259 (MK case), raised the same or similar issues under Grounds 1 and 2, the court stayed the proceedings of the Sham case pending the determination of the MK case.

On 18 October 2019, the court dismissed the judicial review made in the MK case, which effectively ruled against Grounds 1 and 2, holding that:

• It is not a violation of any constitutional rights for same-sex couples to be denied the right of marriage under the laws of Hong Kong.
• The government is subject to no positive legal obligation to provide an alternative legal framework giving same-sex married couples the same rights and benefits enjoyed by opposite-sex married couples.[4]

In view of the determination of the MK case, the court lifted the stay of proceedings in the Sham case in so far as it applies to Ground 3 on 22 November 2019. It was argued in support of Ground 3 in the trial that, the recognition by the laws of Hong Kong of foreign opposite-sex marriages but not foreign same-sex marriages constitutes differential treatment on the prohibited ground of sexual orientation, and the differential treatment is not justified as it does not pass the four-step justification test.[5]

THE DECISION

In determining the Sham case, the CFI adopted the two-stage approach endorsed by the Court of Final Appeal (CFA) of Hong Kong in two recent decisions, Leung Chun Kwong v Secretary for Civil Service (2019) 22 HKCFAR 127 (Leung case) and QT v Director of Immigration (2018) 21 HKCFAR 324 (QT case). Please see our Client Alert “Hong Kong Case Update: Ng Hon Lam Edgar v Secretary for Justice” for an explanation of the two-stage approach.

The CFI held that:

• Whether foreign opposite-sex marriages and foreign same-sex marriages are relevant comparators depends on the subject matter being considered and the relevant context. It cannot be said in a vacuum, and there is no general rule, that the two groups of persons in foreign opposite-sex marriages and foreign same-sex marriages are in an analogous or a comparable position.[6]
• Similarly, whether any differential treatment is based on a prohibited ground and whether such differential treatment (if any) can be justified upon an analysis through the four-step justification test depends on specific facts and context.[7]

The CFI therefore rejected the general declaration sought that the non-recognition of foreign same-sex marriages under Hong Kong law violates the constitutional right to equality. Upon the invitation of the applicant’s Counsel, (so as to allow any appeal to be pursued on all grounds in one-go), the CFI also lifted the stay of proceedings in so far as it relates to Grounds 1 and 2 of the judicial review and dismissed them for the reasons given in the MK case.[8]

COMMENT

As with the decision made the MK case (which followed, inter alia, the CFA decisions in the Leung case and the QT case), the CFI endorsed in the Sham case that whilst the right to marriage of opposite-sex couples is protected by the constitution, no such protection is accorded to same-sex couples. Same-sex marriages remain invalid marriages in Hong Kong as the law stands now.

It is apparent that the Hong Kong court is open to consider challenges against specific legislation, or policies or decisions of the government or other public bodies on the ground of unlawful discrimination based on sexual orientation.[9] In fact, the CFI pointed out in the Judgment, some specific government policies and/or statutes may be held unconstitutional upon challenge.[10] However, the court is not prepared to grant a general declaration to the effect that same-sex marriages have the same legal recognition as opposite-sex marriages regardless of the subject matter under consideration and the relevant context.[11]

___________________

   [1]   §§ 4-6, the Judgment.

   [2]   § 7, the Judgment.

s 40 of the Marriage Ordinance (Cap 181) states that “(1) Every marriage under this Ordinance shall be a Christian marriage or the civil equivalent of a Christian marriage. (2) The expression Christian marriage or the civil equivalent of a Christian marriage (基督敎婚禮或相等的世俗婚禮) implies a formal ceremony recognized by the law as involving the voluntary union for life of one man and one woman to the exclusion of all others.”

s 20(1)(d) of the Matrimonial Causes Ordinance (Cap 179) provides that “A marriage which takes place after 30 June 1972 shall be void on any of the following grounds only – (d)     that the parties are not respectively male and female.”

   [3]   § 8, the Judgment.

   [4]   § 10, the Judgment.

   [5]   §§ 11 and 12, the Judgment. Please see our Client Alert “Hong Kong Case Update: Ng Hon Lam Edgar v Secretary for Justice” for an explanation of the four-step justification test.

   [6]   §§ 21 and 22, the Judgment.

   [7]   §§ 23 to 25, the Judgment.

   [8]   §§ 27 and 28, the Judgment.

   [9]   See § 57 of the judgment of the MK case.

   [10]   § 26, the Judgment.

   [11]   § 26, the Judgment.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, [email protected])

Elaine Chen (+852 2214 3821, [email protected])

Alex Wong (+852 2214 3822, [email protected])

Celine Leung (+852 2214 3823, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

Today, the UK Government announced its “Winter Economy Plan” – a series of employment and business support and tax measures intended to support the UK economy as the COVID-19 pandemic continues to impact economic output. These latest support measures mark a shift in focus to keeping the UK economy open whilst providing support to businesses as reduced demand continues to impact many businesses during the winter months and through to Q1 2021. It remains to be seen whether further support measures are announced as the UK grapples both with economic recession and the impact of COVID-19 on public health.

The Jobs Support Scheme

The UK Government has announced the Jobs Support Scheme (“JSS”) as the successor to the Coronavirus Job Retention Scheme (“CJRS”), starting 1 November 2020 for a period of 6 months. Unlike the CJRS, which was designed to support employees unable to work as a result of the requirement to stay at home, the aim of the JSS is to protect viable jobs by supporting the wages of those in work, providing employers with the option to retain employees on shorter hours rather than making them redundant. Whilst employers participate in the JSS, they are not able to issue redundancy notices to employees on the JSS scheme.

To be eligible for the JSS, employees must be working at least 33% of their usual hours and be paid for those hours by their employer as normal. For the remaining hours not worked, the employer and the UK Government will each pay one third of the employee’s wages, resulting in the employee receiving at least 77% of their total wages (the employer paying 55% and the UK Government paying 22%). The level of the grant will be calculated based on an employee’s usual salary, capped at £697.92 per month. The JSS is open to employers with a UK bank account and UK PAYE scheme and is not limited to those employers who made use of the CJRS; all small and medium sized businesses may apply and larger businesses may apply if their turnover has been reduced as a result of the pandemic. Employers may also claim for JSS in addition to claiming the job retention bonus announced earlier in the year. The UK Government has stated that it expects that large employers using the JSS will not be making capital distributions, such as dividend payments or share buybacks, whilst accessing the JSS.  Further guidance on the JSS is expected to be issued in due course and we will update our clients once this has been announced.

Self-Employed Support

The UK Government has also announced the extension of the Self Employment Income Scheme Grant (“SEISS”). An initial taxable grant will be provided to those who are currently eligible for SEISS and are continuing to actively trade but face reduced demand due to the Coronavirus pandemic. The initial lump sum will cover three months’ worth of profits for the period from November to the end of January next year, capped at £1,875. An additional second grant, which may be adjusted to respond to changing circumstances, will be available for self-employed individuals to cover the period from February 2021 to the end of April 2021.

UK Government Funding Schemes

Bounce Back Loans – the UK Government announced the Pay As You Grow Scheme, which will allow businesses to pay back government Bounce Back Loans over a period of 10 years. This is an extension on the original 6-year term of these loans, together with the UK Government’s 100% guarantee of these loans. In addition, firms in financial difficulty will be permitted to suspend their repayments for up to 6 months and also elect to make interest only payments for the same period, without impacting a firm’s credit rating. The deadline for applications for Bounce Back Loans has also been extended to 31 December 2020.

Coronavirus Business Interruption Loan Scheme – the Coronavirus Business Interruption Loan Scheme will also be extended to 31 December 2020 for applications and the UK Government has announced its intention to provide lenders with the ability to extend the term of a loan from 6 years to 10 years. This also has the effect of extending the UK Government’s 80% guarantee of these loans.

Coronavirus Large Business Interruption Loan Scheme – the deadline for applications for Coronavirus Large Business Interruption Loans has been extended to 31 December 2020.

Future Fund – the deadline for applications for funding under the Future Fund scheme has been extended to 31 December 2020.

Tax Measures

The temporary cut in VAT from 20% to 5% for the tourism and hospitality sectors that was due to expire in January 2021 has been extended through to 31 March 2021.

In addition, businesses that deferred their VAT payments due in March to June 2020 will be given the option to pay their VAT in smaller instalments. Instead of paying a lump sum in full at the end March 2021, these businesses will be able to make 11 equal instalments over 2021-2022.  It has been announced that businesses will need to opt into this VAT deferral mechanism and that HM Revenue & Customs will put in place an opt-in process in “early 2021”.

A further tax deferral has been introduced for self-assessment income tax payers (building on the deferral provided in July 2020): details are still be provided at the time of writing, but it has been announced that taxpayers with up to £30,000 of self-assessment income tax liabilities will be able to use the “Time to Pay” facility to secure a further 12 months to pay those liabilities due in January 2021, meaning that payments may now not need to be made until January 2022.

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This client update was prepared by James Cox, Sandy Bhogal, Benjamin Fryer, Amar Madhani, and Georgia Derbyshire.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak.  For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows:

James A. Cox – London, Employment (+44 (0)20 7071 4250, [email protected])

Sandy Bhogal  – London, Tax (+44 (0)20 7071 4266, [email protected])

Benjamin Fryer – London, Tax (+44 (0)20 7071 4232, [email protected])

Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, [email protected])

Georgia Derbyshire – London, Employment (+44 (0)20 7071 4013, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

With talk about a second Coronavirus wave gathering pace, the German Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) is proposing to extend the temporary COVID-19-related legislation of March 2020 significantly simplifying the passing of shareholders’ resolution, including, in particular, the possibility to hold virtual-only shareholders’ meetings. The extension is proposed in unchanged form for another year until the end of 2021. A respective draft regulation has been published at short notice on 18 September 2020 and stakeholders are invited to submit their comments until 25 September 2020.

While the legislation of March 2020 was well received in the rise of the COVID-19 crisis the reactions to an extension were mixed so far. Criticism focuses on the significant restrictions of shareholders’ rights by this legislation (e.g. no right to ask questions or to counter-motions in real time, wide discretion of the management with respect to answering submitted questions, only limited appeal right etc.). This was raised not only by shareholders’ activists but also by various parliament members including prominent experts of the ruling coalition.

In the reasons of the draft regulation, the ministry strongly emphasizes that companies should only hold virtual-only meetings if actually required in the individual circumstances due to the pandemic. In addition, the ministry encourages the corporations in question to handle the Q&A process as shareholder-friendly as technically possible, including allowing for questions in real- time, if they decide to hold a virtual meeting.

The time window to debate the proposal is extremely short. The new shareholders’ meeting season is already approaching quickly, starting as early as in January/February 2021 for companies with business years ending on 30 September 2020. While the Ministry of Justice and Consumer Protection is authorized to extend the period of application of the legislation for another year without any modifications, modifications in substance would require the involvement of parliament and are thus deemed rather unlikely. If the proposal is adopted, it would be up to the corporations themselves to take the ministry’s appeal seriously and to make use of the virtual format in a responsible and shareholder-friendly manner.

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The following Gibson Dunn lawyers have prepared this client update: Ferdinand Fromholzer, Silke Beiter, Johanna Hauser.

Gibson Dunn’s lawyers in the two German offices in Munich and Frankfurt are available to assist you in addressing any questions you may have regarding the issues discussed in this update.

For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the three authors:

Ferdinand Fromholzer (+49 89 189 33 170, [email protected])
Silke Beiter (+49 89 189 33 170, [email protected])
Johanna Hauser (+49 89 189 33 170, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

One of the thornier areas of law for U.S.-regulated banks and their holding companies is that regarding confidential supervisory information (CSI). U.S. regulators treat bank examination reports and related correspondence and materials, which are often the most useful sources of information about a financial institution, as the regulators’ own property, with parties subject to severe penalties for disclosing such information without prior regulatory approval.[1] Receiving approval is often a time-consuming process that may frustrate corporate transaction and litigation deadlines. In addition, each of the federal regulators – the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Consumer Financial Protection Bureau (CFPB) – and each state financial regulatory authority – such as the New York Department of Financial Services (NYDFS) – has its own rules on the subject.

There have been two recent meaningful developments in the law regarding CSI. First, the Federal Reserve recently finalized revisions to its CSI regulation (Fed Final Rule); those revisions become effective on October 15th. Second, on September 9th, the NYDFS reproposed a regulation (NYDFS Proposed Rule) that would liberalize its approach to CSI disclosure. This Client Alert discusses these two developments.

In addition, the Alert contains a summary of the principal provisions of the CSI regulations of the four federal banking regulators and NYDFS, on the assumption that the NYDFS regulation is finalized in the form that NYDFS proposed it.

I. Federal Reserve Final Rule

The Fed Final Rule is an improvement, albeit a modest one, in terms of providing Federal Reserve-supervised institutions – bank and thrift holding companies, including their nonbank subsidiaries, state member banks, and branches, agencies and representative offices of non-U.S. banks – flexibility in sharing CSI without the Federal Reserve’s prior approval. Enhancements to the Federal Reserve’ regulatory framework demonstrate an effort to streamline the approval process in certain areas.

A. Scope of CSI

The Fed Final Rule defines CSI as “information that is or was created or obtained in furtherance of the [Federal Reserve’s] supervisory, investigatory or enforcement activities,” and includes reports of examination, inspection and visitation; confidential operating and condition reports; supervisory assessments; investigative requests for documents or other information; and supervisory correspondence or other supervisory communications, as well as “any information derived from or related to such information.”[2] In a clarification, the Fed Final Rule states that CSI does not include documents that are prepared “for or by” a supervised financial institution for its own business purposes that are in its own possession and do not otherwise contain CSI, even though copies of such documents in the Federal Reserve’s possession do constitute CSI.[3] Therefore, turning over such non-CSI to the Federal Reserve does not make the information CSI in the hands of the supervised financial institution.

B. Disclosure to Affiliates

The Fed Final Rule states that a supervised institution may disclose CSI without prior Federal Reserve approval not only to its own directors, officers and employees, but also, when it is “necessary or appropriate for business purposes,” to directors, officers, employees of its affiliates.[4] This position liberalizes the regulation from prior practice and aligns the Federal Reserve’s position more closely with that of the CFPB, under which CSI may be disclosed to [directors, officers and employees of] affiliates to the extent that it “is relevant to the performance of such individuals’ assigned duties.”[5] As shown in the Appendix, neither the OCC nor the FDIC has adopted this position in their CSI rules; disclosure to a parent may be permitted without prior regulatory approval, but not to other affiliates.[6]

C. Disclosure to Legal Counsel, Auditors, and Service Providers

The Fed Final Rule also makes a change from the prior regulation in permitting supervised institutions to disclose CSI to external legal counsel and their auditors, without prior written approval, when “necessary or appropriate in connection with the provision of legal or auditing services to the supervised financial institution.”[7] This change aligns the Federal Reserve’s position with that of the OCC and the even more permissive CFPB; the FDIC, however, has not adopted this position with respect to external legal counsel, and therefore the default provision of specific prior approval obtains under its regulations.[8]

In addition, under the revised Federal Reserve framework, supervised institutions are also able to disclose CSI to service providers to the institution and service providers to the institution’s external counsel and auditors (such as consultants, contractors, and technology providers), without prior written approval, in instances where such disclosure is “necessary to the service provider’s provision of services.”[9] The Fed Final Rule requires that the service provider first enter into a written agreement with the supervised institution, external counsel or auditor in which the service provider agrees that (i) it will treat the CSI in accordance with applicable regulations and (ii) it will not use the CSI for any purpose other than as provided under its contract to provide services to the supervised institution.[10] The rule requires supervised institutions to maintain a written account of such service provider disclosures and provide the Federal Reserve a copy of the written account on request.[11]

The Fed Final Rule also liberalizes the manner of disclosure. Under prior practice, disclosure of CSI to external auditors and counsel was required to be limited to on-premises review; the Federal Reserve did not permit the information to be copied or shared off-site. The Fed Final Rule strikes this outdated requirement and allows for disclosure in any manner when “necessary or appropriate in connection with the provision of legal or auditing services to the supervised financial institution.”[12]

D. Disclosure to Other Regulators

The Fed Final Rule also somewhat modifies the manner in which CSI requests for disclosure to other regulators are handled. Historically, any disclosure by a supervised institution of Federal Reserve CSI to another regulatory body (e.g., other banking regulators, state and federal, or the Securities and Exchange Commission) required the prior written consent of the Federal Reserve’s General Counsel. With respect to CSI about a supervised institution “that is contained in documents prepared by or for the institution for its own business purposes,” such as internal minutes, the Fed Final Rule changes this practice and permits institutions to make requests to share such CSI with other bank regulators to the “central point of contact at the Reserve Bank, equivalent supervisory team leader, or other designated Reserve Bank employee.”[13] Disclosure will be permitted upon a determination by the Federal Reserve point of contact that [the other regulator] “has a legitimate supervisory or regulatory interest in the [requested internally prepared CSI].”[14] Disclosure of all other CSI to another regulator, however, still requires the consent of the Federal Reserve’s General Counsel.[15]

II. NYDFS Proposed Rule

 Like the Fed Final Rule, the NYDFS Proposed Rule, which is a re-proposal of a November 2019 proposal, is a welcome development because it demonstrates a greater willingness to harmonize the NYDFS CSI regime with those of other regulators. If finalized, New York would, for the first time, have a CSI regulation in addition to a statutory provision, Section 36.10 of the Banking Law.

A. Scope of CSI

The NYDFS Proposed Rule defines CSI as “any information that is covered by Section 36.10 of the [New York] Banking Law.”[16] Section 36.10, in turn, refers to “reports of examinations and investigations [of any NYDFS-supervised institution and affiliates], correspondence and memoranda concerning or arising out of such examination and investigations, including any duly authenticated copy or copies thereof,” and includes any confidential materials shared by NYDFS with any governmental agency or unit.[17]

B. Disclosure to Affiliates

Under Section 36.10, the default standard for disclosure of any CSI is the prior written approval of NYDFS. The NYDFS Proposed Rule contains an exception for disclosure of CSI to affiliates and their directors, officers and employees when “necessary and appropriate for business purposes.”[18] We note that this standard is different from the Federal Reserve and OCC standard, which is “necessary or appropriate” for business purposes.[19]

C. Disclosure to Legal Counsel, Auditors and Other Service Providers

 The NYDFS Proposed Rule would also ease current restrictions on NYDFS-supervised institutions’ disclosure of CSI to certain advisors. It would provide a “limited exception” for disclosure to “legal counsel or an independent auditor that has been retained or engaged by such [supervised institution] pursuant to an engagement letter or written agreement.”[20] The applicable engagement letter or written agreement would be required to contain certain acknowledgements by the legal counsel or independent auditor; inter alia, it would be required to state (i) that the information will be used solely to provide “legal representation or auditing services” and (ii) that the information will be disclosed solely to employees, directors, or officers only “to the extent necessary and appropriate for business purposes.[21]

Notably, unlike the Fed Final Rule, the NYDFS Proposed Rule does not contain an exception for third-party vendors to legal counsel and external auditors. In declining to permit what it characterized as “a broad exception,” NYDFS noted that the OCC’s regulations do not contain one.[22]

D. Disclosure to Other Regulators

With respect to the disclosure of NYDFS CSI to other regulators, including, for non-U.S banks, their home country supervisors, the NYDFS Proposed Rule would require the prior written consent of both the Senior Deputy Superintendent of NYDFS for Banking and the General Counsel of NYDFS, or their respective delegates, prior to disclosure.[23] There is no streamlined procedure, as in the Fed Final Rule, for internally generated CSI.

E. Duty to Notify NYDFS of Requests for CSI

The NYDFS Proposed Rule requires each supervised institution, affiliate of a supervised institution, legal counsel, and independent auditor that is served with a request, subpoena or order to provide CSI to notify the Office of the General Counsel of the request immediately so that NYDFS will be able to intervene in the action as appropriate.[24] But it does not – in a relaxation from NYDFS’s November 2019 position – require external counsel and independent auditors to agree contractually to assert legal privileges and protections as requested by NYDFS on the agency’s behalf.[25] The proposal instead would mandate that CSI holders only inform the requester and the relevant tribunal of the obligations set forth in the NYDFS Proposed Rule and the substance of Section 36.10 of the New York Banking Law.[26] Relatedly, the NYDFS Proposed Rule does not require that supervised institutions maintain a record of all disclosed CSI.[27]

Conclusion

The Fed Final Rule and the NYDFS Proposed Rule signal a growing awareness by regulators of the inefficiencies posed by the current CSI regulatory framework. One hopes that the Fed Final Rule will help establish a regulatory benchmark for the other federal banking regulators, and that NYDFS’s willingness to reexamine its own processes will perhaps inspire other state regulators to revisit their regulations. Nonetheless, the overriding traditional principle of CSI law and regulation – that the regulators consider CSI their property, to be disclosed only upon their specific consent – remains a key feature of all regulatory regimes.

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Appendix: Comparison of CSI Requirements

Topic		Federal Reserve	OCC	FDIC	CFPB	NYDFS Proposed Rule
Supervisory Jurisdiction		Bank/thrift holding companies and their nonbank subsidiaries, financial holding companies, state member banks, branches, agencies and representative offices of non-U.S. banks, and systemically significant nonbank financial companies when designated.	National banks, federally chartered savings associations, and federally licensed branches and agencies of non-U.S. banks.	FDIC-insured state banks that are not members of the Federal Reserve System and FDIC-insured state savings associations.	Depository institutions with more than $10 billion in assets and certain nonbank financial entities, including mortgage-related firms, lenders (e.g., student loans, payday), certain other large nonbank consumer financial entities (e.g., debt collection/relief and consumer finance firms, credit reporting agencies), and prepaid and credit card issuers.	Any entity licensed, chartered, authorized, registered, or otherwise subject to supervision by NYDFS under the New York Banking Law.
Scope		Information that is or was created or obtained in furtherance of the Board’s supervisory, investigatory, or enforcement activities.[28] Includes any portion of a document in the possession of any person, entity, agency or authority, including a supervised institution, that contains or would reveal confidential supervisory information is CSI. New 12 C.F.R. § 261.2(b)(1). Excludes internally prepared documents for business purposes that do not contain CSI (even if such information is in possession by the Board and such copies constitute CSI. New 12 C.F.R. § 261.2(b)(2).	(a)  Records created or obtained by the OCC in connection with its supervisory responsibilities; (b)  Records compiled by the OCC in connection with its enforcement responsibilities; (c)  Examination reports, supervisory correspondence, investigatory files complied, agency memoranda; (d)  CSI obtained by a third party; (e)  Testimonies and interviews with current or former agency employees, officers, or agents concerning information acquired in course of such person’s official duties or status; and (f)  Information related to current and former supervised institutions and their subsidiaries and affiliates. 12 C.F.R. § 4.37(b)(1).	(a)  Records designated pursuant to an executive order; (b)  Records relating solely to internal personnel rules and practices; (c)  Records otherwise exempt from disclosure by statute; (d)  Intra-agency memoranda or letters; (e)  Certain records compiled for law enforcement purposes; and (f)  Records related to examination, operation, or condition of the supervised institution, prepared by or on behalf of the FDIC or other regulatory body. 12 C.F.R. § 309.5(g).	(a)  Reports of examination, inspection and visitation, non-public operating, condition, and compliance reports, and any information contained in, derived from, or related to such reports; (b)  Any document, including reports of examination, prepared by, on behalf of, or for the use of the CFPB or any other federal, state or foreign regulator supervising such financial institution, and any information derived from such documents; (c)  Intra-agency communications; and (d)  Information provided to the CFPB by the supervised institution regarding consumer risk in the offering or provision of consumer financial products or services, or to assess whether such supervised institution is a “covered person.” 12 C.F.R. § 1070.2(b)(1).	All reports of examinations and investigations, correspondence and memoranda concerning or arising out of such examination and investigations, including any duly authenticated copy or copies thereof in the possession of any supervised institution or its affiliates, including any confidential materials shared by NYDFS with any governmental agency or unit. NY Banking Law § 36.10.
Default Disclosure Standard		“[P]rior written permission of the General Counsel” New § 261.20(a). Supervised institution must demonstrate “a substantial need to . . . disclose such information that outweighs the need to maintain confidentiality.” New 12 C.F.R. § 261.23(a)(1).	Prior written consent. 12 C.F.R. § 4.37(b)(1).	Prior written consent. 12 C.F.R. § 309.6(b). Default Standard: “[G]ood cause for disclosure.” 12 C.F.R. § 309.6(b).	Prior written consent. 12 C.F.R. §1070.2(b)(2)(ii).	Prior written consent. NY Banking Law § 36.10. Default Standard: “[T]he ends of justice and the public advantage will be subserved by the publication thereof.” NY Banking Law § 36.10.
Certain Exceptions to Disclosure	Parent Holding Company	No consent or written request required, when “necessary or appropriate for business purposes.” New 12 C.F.R. § 261.21(b)(1).	No consent or written request required, when “necessary or appropriate for business purposes.” 12 C.F.R. § 4.37(b)(2).	For majority shareholders, supervised institution’s board must authorizes disclosure via board action. 12 C.F.R. § 309.6(b)(7)(iii).	No consent or written request required for parent holding company personnel, to the extent that it “is relevant to the performance of such individuals’ assigned duties.” 12 C.F.R. § 1070.42(b)(1).	No consent or written request required, when “necessary and appropriate for business purposes.” 3 NYCRR § 7.2(c) (proposed 2020).
	Affiliates	No consent or written request required, when “necessary or appropriate for business purposes.” New § 261.21(b)(1).	Non-parent holding company affiliates require prior written consent   12 C.F.R. § 4.37(b)(2).	Non-parent holding company affiliates require prior written consent. 12 C.F.R. § 309.6(b)(7)(iii).	No consent or written request required for affiliate personnel, to the extent that it “is relevant to the performance of such individuals’ assigned duties.” 12 C.F.R. § 1070.42(b)(1).	No consent or written request required, when “necessary and appropriate for business purposes.” 3 NYCRR § 7.2(c) (proposed 2020).
	Outside Counsel / Auditors	No consent or written request required, when “necessary or appropriate in connection with the provision of legal or auditing services.” New 12 C.F.R. § 261.21(b)(3).	No consent or written request required, when “necessary or appropriate for business purposes.” 12 C.F.R. § 4.37(b)(2).	For outside counsel, prior written consent required, and a showing of “good cause.”     12 C.F.R. § 309.6(b)(7)(i) and (iv). For external auditors, no consent or written request required. See FDIC Financial Institutions Letter (FIL-57-92), dated July 24, 1992.	No consent or written request required. 12 C.F.R. § 1070.42(b)(2)(i).	No consent or written request required for disclosure “to legal counsel or an independent auditor [if]. . . retained or engaged by such regulated entity pursuant to an engagement letter or written agreement” where the legal counsel or independent auditor states, among other things, that CSI will be used solely to provide “legal representation or auditing services”; and that the information will be disclosed solely to employees, directors, or officers only “to the extent necessary and appropriate for business purposes.” 3 NYCRR § 7.2(b) (proposed 2020).
	Other Service Providers:	CSI may be shared with service providers of attorneys or auditors if the service provider is under a written agreement with the legal counsel or auditor pursuant to which it agrees to treat the CSI in accordance with 12 C.F.R. § 261.20(a) and use CSI only “as necessary to provide the services..” New 12 C.F.R. § 261.21(b)(3). Other Service Providers to Institution: Allowed when “necessary to the service provider’s provision of services” and such provider is bound by written agreement with the supervised institution, agreeing to treat CSI in accordance with 12 C.F.R. § 261.20(a) and use CSI only “as provided under its contract to provide services.” New 12 C.F.R. § 261.21(b)(4).	CSI may be provided by the supervised institution to a consultant if the consultant enters into a written contract, agreeing to abide by OCC rules and use CSI only to provide services. 12 C.F.R. § 4.37(b)(2).	Prior written consent, and a showing of “good cause.” 12 C.F.R. § 309.6(b)(7)(i) and (iv).	No consent or written request required for disclosure to a contractor, consultant, or service provider. 12 C.F.R. § 1070.42(b)(2)(i). Other persons require prior written consent. 12 C.F.R. § 1070.42(b)(2)(ii).	Prior written consent required. NY Banking Law § 36.10.
	Other regulators	Consent of “central point of contact at the Reserve Bank, equivalent supervisory team leader, or other designated Reserve Bank employee” to disclose internally prepared material containing CSI to the FDIC, OCC, CFPB, state regulators supervising such institution; prior written consent required to disclose all other CSI. New 12 C.F.R. § 261.21(b)(2).	Prior written consent required. 12 C.F.R. § 4.37(b)(1).	Prior written consent required, and a showing of “good cause.” 12 C.F.R. § 309.6(b)(7)(i) and (iv).	Prior written consent required. 12 C.F.R. § 170.42(b)(2)(ii).	Prior written consent of the Senior Deputy Superintendent of NYDFS for Banking and the General Counsel required. 3 NYCRR § 7.2(f) (proposed 2020).

____________________

   [1]   Federal bank examination reports, for example, cite 18 U.S.C. § 641, which makes it a felony to convert, knowingly, government property to one’s own use. Lesser sanctions for alleged CSI violations have included substantial fines and prohibitions on consulting arrangements with supervised institutions for a period of years.

   [2]   New 12 C.F.R. § 261.2(b)(1).

   [3]   See id. § 261.2(b)(2)(1).

   [4]   See id. § 261.21(b)(1).

   [5] 12 C.F.R. § 1070.42(b)(1).

   [6]   See Appendix.

   [7]   New 12 § 261.21(b)(3).

   [8]   See Appendix. The FDIC does not require prior approval for a bank’s independent auditor.

   [9] New 12 § 261.21(b)(3)-(4).

[10] Id.

[11]   Id. § 261.21(b)(4).

[12]   Id. § 261.21(b)(3).

[13]   Id. § 261.21(b)(2).

[14]   Id.

[15]   Id. § 261.23(b)-(c).

[16]   3 N.Y.C.R.R. § 7.1(a) (proposed 2020).

[17]   New York Banking Law, Section 36.10.

[18]   3 N.Y.C.R.R. § 7.2(c) (proposed 2020).

[19]   See Appendix.

[20]   3 N.Y.C.R.R. § 7.2(b) (proposed 2020).

[21] Id. (emphasis added).

[22]   NYS Register, page 12 (Sept. 9, 2020), available at
https://www.dos.ny.gov/info/register/2020/090920.pdf.

[23]   3 N.Y.C.R.R. § 7.2(f) (proposed 2020).

[24]   Id. § 7.2(d) (proposed 2020).

[25]   See 3 N.Y.C.R.R. § 7.2(c) (proposed 2019) (institution “agrees to notify the Department, promptly and in writing, of any demand or request for the supervisory confidential information, and agrees to assert on behalf of the Department all such legal privileges and protections as the Department may request”).

[26]   3 N.Y.C.R.R. § 7.2(d) (proposed 2020).

[27]   This too is a change from the 2019 position. See 3 N.Y.C.R.R. § 7.2(f) (proposed 2019) (“Regulated entities must keep a written record of all confidential supervisory information disclosed pursuant to the provisions of this Part and a copy of each party’s written agreement mentioned in subdivision (b) of this section for inspection and review by the Department”).

[28]   Includes “reports of examination, inspection, and visitation; confidential operating and condition reports; supervisory assessments; investigative requests for documents or other information; and supervisory correspondence or other supervisory communications.” New 12 C.F.R. § 261.2(b)(1).

        Excludes “[d]ocuments prepared by or for a supervised financial institution for its own business purposes that are in its own possession and that do not include confidential supervisory information as defined in paragraph (b)(1) of this section, even though copies of such documents in the Board’s or Reserve Bank’s possession constitute confidential supervisory information.” Id.

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The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long, James Springer and Samantha Ostrom.

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

Financial Institutions Group:
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Mylan L. Denerstein (+1 212-351- 3850, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
James O. Springer – New York (+1 202-887-3516, [email protected])
Samantha J. Ostrom – Washington, D.C. (+1 202-955-8249, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

U.S. and EU Enforcers to Renew Focus on “Below the Radar” Transactions

On September 3, 2020, the Antitrust Division of the U.S. Department of Justice (the “Division”) released a new Merger Remedies Manual (the “Manual”). The Division traditionally reviews mergers involving airlines, health insurance, finance, publishing, media, beer, telecommunications, and other industries. In 2018, Assistant Attorney General Makan Delrahim formally withdrew the 2011 Policy Guide to Merger Remedies (“2011 Guide”), relying instead on the Policy Guide to Merger Remedies published in 2004 (“2004 Guide”), while the Division reconsidered its remedy policies.[1] This new Manual is the culmination of that process.

The Manual, which only governs DOJ procedures and not those of the Federal Trade Commission,[2] expresses a strong preference for structural relief—including for vertical transactions (i.e., transactions involving parties that operate at different levels of a supply chain, such as a merger between a manufacturer and a distributor). The Manual also addresses new topics such as structuring remedies in the context of consummated mergers and coordination with global enforcers and regulatory agencies. Lastly, the Manual describes certain provisions the Division will require in consent decrees to ensure effective enforcement.

In addition, FTC Chairman Simons and European Commissioner Vestager recently made comments signaling increased scrutiny of deals that do not meet the HSR or EU thresholds. These comments indicate that both the FTC and the EC will be more aggressive in using their existing authority to investigate smaller acquisitions that might involve future competitors.

New DOJ Merger Remedy Manual Issued

The Division’s new Manual includes a number of important revisions, although some reflect existing practice as opposed to new policy.

Strong Preference for Structural Relief for Horizontal and Vertical Concerns. Signaling a clear break from the DOJ’s 2011 Guide[3] and the FTC’s merger remedies policy,[4] which allow for non-structural “conduct” or “behavioral” remedies in vertical merger cases, the Manual expresses a “strong[] prefer[ence]” for structural remedies in both horizontal and vertical merger cases: “[a]lmost all merger remedies are structural,” and that conduct remedies are only appropriate in “limited circumstances.”[5] The Manual acknowledges that short-term conduct remedies may be needed to facilitate structural relief,[6] but states that a stand-alone conduct remedy is only appropriate where: “(1) the transaction generates significant efficiencies that cannot be achieved without the merger; (2) a structural remedy is not possible; (3) the conduct remedy will completely cure the anticompetitive harm; and (4) the remedy can be enforced effectively.”[7]

Characteristics of Potentially Ineffective Divestitures. The Manual outlines characteristics of divestitures that may be ineffective in preserving competition, including where the divestiture is of less than an existing standalone business; where it combines previously independent capital; where the merged firm retains rights to critical intangible assets; where ongoing entanglements remain between the firms; and where there are substantial regulatory or logistical hurdles.[8] However, while the 2004 Guide “strongly disfavored” so-called “crown jewel provisions” that require certain valuable assets be included in the divestiture package if the parties are unable to sell the initially agreed-upon assets within a certain time.[9] The new Manual does not comment on such provisions. The FTC merger remedies policy, in contrast, expressly allows for the use of “crown jewel” provisions and the FTC has a record of approving such provisions.[10]

Under existing policy, the Division will appoint a “divestiture trustee” in the event the parties are unable to find a buyer and sell the divested assets by the agreed-upon deadline, which is in most cases 90 days after the entry of a hold separate order. With this change in the Division’s policy, Division might be more willing to consider crown jewel provisions as an alternative to divestiture trustees. While a crown jewel might place additional risk on the merging parties because it requires them to sell valuable assets, in some cases a crown jewel enables the Division to accept a divestiture remedy that it would otherwise be unwilling to agree to—giving merging parties another option for settling merger cases without litigation. Crown jewel provisions might be an attractive alternative resolution for the Division and the merging parties in cases where there is heightened risk that the parties will be unable to find an acceptable buyer for the divested assets within an acceptable timeframe.

Private Equity Firms as Divestiture Buyers. The Division has as long-standing preference for identifying an upfront divestiture buyer, and the Manual notes that “identification of an upfront buyer is particularly important in cases where the Division determines that there are likely to be few acceptable and interested buyers.”[11] In the past, however, the Division has not indicated a preference for any particular type of otherwise qualified buyer for the to-be-divested assets. In a departure from this practice, the Division’s Manual remarks that, in some cases, a private equity purchaser “may be preferred,” recognizing that private equity purchasers may have “flexibility in investment strategy,” be “committed to the divestiture,” and be “willing to invest more when necessary.”[12] The Division cites an FTC study in support of its favorable view of private equity purchasers, although the FTC has not expressed a similar preference in its remedies guide.

Consummated Mergers. For the first time, the Manual explicitly addresses remedies for transactions challenged post-consummation.[13] The Manual recognizes that consummated mergers “may pose unique issues,” as the parties often have already integrated their assets, making it difficult to craft an effective divestiture that would eliminate anticompetitive effects. But the Manual reiterates that structural relief may be necessary in some circumstances to eliminate anticompetitive effects. For example, it may be necessary to unwind a merger and divest more or less than the acquired assets to effectively restore competition. The Division has advocated a similar point in prior proceedings, so this change does not mark a significant departure from existing Division practice.[14]

Global Enforcement and Regulatory Collaboration. As antitrust merger enforcement and merger control has proliferated around the world, and is now a staple of antitrust enforcement in 120 countries and in state AG offices, mergers are commonly subject to multiple investigations by authorities in and outside the United States. The Manual includes new sections outlining the Division’s practice of collaborating with foreign and state antitrust enforcers to minimize unnecessary jurisdictional conflict structure remedies that are effective across jurisdictions.[15] The Division will also work with regulatory agencies to avoid inconsistent requirements. While the Division will consider the impact of regulations on competitive dynamics, the Manual notes that the “existence of regulation typically does not eliminate the need for an antitrust remedy to preserve competition effectively.”[16]

Consent Decree Terms. The Manual also provides greater detail on consent decree terms that the Division likely will require in future settlements.[17] For example, the Manual recommends consent decrees explicitly provide for Division appointment of a selling trustee,[18] and that, in certain circumstances, a decree may require the merged firm to report otherwise non-reportable deals.[19] And the Manual details certain “standard provisions” that must be included in consent decrees to allow for effective enforcement, including (1) reducing DOJ’s burden to establish violation of a consent decree from clear and convincing to preponderance of the evidence; (2) allowing the Division to apply for a one-time extension of the consent decree terms upon a court finding a violation; (3) allowing the Division to terminate the decree upon notice to the court and the parties; (4) allowing courts to enforce provisions that are stated specifically and in reasonable detail; and (5) requiring parties to provide reimbursement to the Division for costs incurred in connection with a successful enforcement effort.[20] While the Division has increasingly been including these provisions in their Final Judgments over the last couple of years, the Manual memorializes these requirements. As a whole, these new provisions will strengthen the Division’s ability to police and seek fines for alleged consent decree violations.

New Compliance Unit. Lastly, the Manual outlines the responsibilities of the newly created Office of Decree Enforcement and Compliance.[21] This Office is charged with ensuring rigorous enforcement of merger remedies, and it will evaluate and provide oversight over all remedies. While on its face this new office appears to mimic the FTC Bureau of Competition’s Compliance Section, it will only monitor post-decree compliance, whereas the FTC’s Compliance Section is an active participant in remedy negotiations. Whether this has a practical impact on DOJ merger remedies remains an open question.

FTC Chair and EC Competition Commissioner Signal Increased Scrutiny of “Below the Radar” Transactions

Also noteworthy are recent statements by FTC Chairman Joseph Simons and EU Commissioner for Competition Margrethe Vestager[22] promising stepped-up review and scrutiny of “non-reportable transactions”—that is, deals that fall below applicable merger reporting statutory thresholds.

Referring to so-called “killer acquisitions” in which transactions by established incumbents that take out a nascent or potentially disruptive competitor, Commissioner Vestager observed that “there are a handful of mergers each year that could seriously affect competition, but which we don’t see because the companies’ turnover doesn’t meet thresholds” that would trigger a mandatory filing and review by the European Commission.[23] Commissioner Vestager promised to use an existing provision, Article 22 of the EU Merger Regulation, which allows the European Commission to review transactions that affect “trade between member States and [threaten] to significantly affect competition within the territory of the member State or States making the request.” Originally designed as a catch-all referral mechanism for EU member states lacking a home-based merger control authority, Article 22 contains no minimum filing thresholds, giving the Commission a tool to immediately implement Commissioner Vestager’s policy announcement.

Likewise, the FTC has recently directed several large technology companies to provide information about acquisitions that were not reportable under the HSR Act to “better understand” some of these non-reported transactions, in particular, those of nascent or potential competitors.[24]  Chairman Simons noted that “[o]ne potential outcome of this study is that we may decide to issue an additional special order requiring premerger filings for acquisitions by these companies at levels well below the normal statutory thresholds” and that the FTC would have “the option” to take an enforcement action “where warranted.”[25] Following this statement, the FTC also announced that it has revamped its Bureau of Economics’ Merger Retrospective Program to expand the Bureau’s retrospective research efforts analyzing the effects of consummated mergers over the last 35 years.[26]

These actions followed Chairman Simons’ February 2020 announcement of the FTC’s investigation of the large technology companies.[27] A statement by Commissioners Christine Wilson and Rohit Chopra from February 2020 echoed Simons’ sentiments, stating that the “Commission will benefit from a deeper understanding of the kinds of transactions – and the nature of their competitive impact – that were not reportable under the HSR requirements.”[28]

Chairman Simons’ and Commissioner Vestager’s statements continue a recent pattern of enforcers signaling increased scrutiny of transactions that fall below applicable reporting thresholds—scrutiny that is designed to target acquisitions of potential or nascent rivals to the acquiring company. Transactions in the tech and pharma sectors where startups often generate little or no revenue, but might potentially pose a competitive threat in the future, could be subject to investigations under this new policy.

In the United States, parties may consummate a transaction only to later discover that the FTC has opened an antitrust investigation that casts doubt on the deal’s ultimate prospects. In Europe, there will be an increased chance that a relatively small transaction may nevertheless be subjected to a more involved and burdensome EU-level review (as opposed to review at the member state level). This increased uncertainty will have a knock-on effect for transaction planning and documentation, which must account for expected regulatory filings and clearance timelines.

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   [1]   U.S. Dep’t. of Justice, Justice Department Issues Modernized Merger Remedies Manual (Sept. 3, 2020), available at https://www.justice.gov/atr/merger-enforcement.

   [2]   The Federal Trade Commission adopted its own guide to negotiating merger remedies in 2012 that remains in effect. Federal Trade Comm’n, Negotiating Merger Remedies (Jan. 2012), available at https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf.

   [3]   U.S. Dep’t. of Justice, Antitrust Division Policy Guide to Merger Remedies – June 2011, https://www.justice.gov/atr/page/file/1098656/download.

   [4]   Federal Trade Comm’n, Negotiating Merger Remedies (Jan. 2012), available at https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf.

   [5]   U.S. Dep’t. of Justice, Merger Remedies Manual (Sept. 2020), available at https://www.justice.gov/atr/page/file/1312691/download at 12 (“Manual”); see also id. at Part III.B (“Structural Relief Is the Appropriate Remedy for Both Horizontal and Vertical Mergers”).

   [6]   Id. at Part III.B.1 (“Conduct Relief to Facilitate Structural Relief”).

   [7]   Id. at Part III.B.2. (“Stand-Alone Conduct Relief”).

   [8]   Id. at Part III.F (“Characteristics that Increase the Risk a Remedy Will Not Preserve Competition”).

   [9]   2004 Guide at Part IV.H (“Crown Jewel Provisions Are Strongly Disfavored”).

[10]   For example, the FTC’s consent decree in connection with Pinnacle Entertainment’s 2013 acquisition of Ameristar Casinos contained a “crown jewel” clause providing for a potential forced divestiture of Ameristar’s St. Charles casino—a centerpiece of the transaction—if Pinnacle did not divest the Lumiere casino identified by the FTC as the source of competitive concern. See Federal Register Notice: Analysis of Agreement Containing Consent Orders to Aid Public Comment; Proposed Consent Agreement, August 19, 2013, https://www.ftc.gov/sites/default/files/documents/cases/2013/08/130819pinnaclefrn.pdf.

[11]   Manual at Part IV.A (“Identifying a Buyer”).

[12]   Id. at Part IV.B (“The Division Must Approve the Proposed Purchaser”).

[13]   Id. at Part III.D (“Remedies for Transactions Challenged Post-Consummation”).

[14]   See Brief for the U.S. as Amicus Curiae in Support of Appellee Steves and Sons, Inc., Steves and Sons, Inc. v. Jeld-Wen, Inc., No. 19-1397 (4th Cir. Aug. 23, 2019) (arguing that laches should not bar all private-party divestiture suits even after a merger has been consummated, as a party may be injured by a merger after it has been consummated, or the threat of antitrust injury may not materialize until post-closing).

[15]   Manual at Part III.E (“Collaboration When Structuring a Remedy”).

[16]   Id.

[17]   Id. at Part VI (“Decree Terms”).

[18]   Id. at Part VI.C (“Selling Trustee Provisions Must Be Included in Consent Decrees”).

[19]   Id. at Part VI.F (“Prior Notice Provisions May Be Appropriate”).

[20]   Id. at Part VI.I (“Consent Decrees Must Include Standard Provisions Allowing Effective Enforcement”).

[21]   Id. at Part VII.A (“The Office of the Chief Legal Advisor Oversees Compliance and Enforcement”).

[22]   “The Future of EU Merger Control,” International Bar Association Annual Conference (Sept. 11, 2020).

[23]   Id.

[24]   Prepared Remarks of Chairman Joseph Simons, ICN 2020: Digital Showcase Introductory Remarks (Sept. 14, 2020), here.

[25]   Id.

[26]   Press Release, Overview of the Merger Retrospective Program in the Bureau of Economics, FTC (Sept. 17, 2020), here.

[27]   Press Release, FTC to Examine Past Acquisitions by Large Technology Companies (Feb. 11, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftc-examine-past-acquisitions-large-technology-companies.

[28]   Statement of Commissioner Christine S. Wilson, Joined by Commissioner Rohit Chopra, Concerning Non-Reportable Hart-Scott-Rodino Act Filing 6(b) Orders (Feb. 11, 2020), here.

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The following Gibson Dunn lawyers prepared this client alert: Adam Di Vincenzo, Kristen Limarzi, Chris Wilson, Kaitlin Zumwalt and JeanAnn Tabbaa.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work, the authors, or any member of the firm’s Antitrust and Competition Practice Group:

Antitrust and Competition Group:

Washington, D.C.
Adam Di Vincenzo (+1 202-887-3704, [email protected])
Scott D. Hammond (+1 202-887-3684, [email protected])
Kristen C. Limarzi (+1 202-887-3518, [email protected])
Joshua Lipton (+1 202-955-8226, [email protected])
Richard G. Parker (+1 202-955-8503, [email protected])
Cynthia Richman (+1 202-955-8234, [email protected])
Jeremy Robison (+1 202-955-8518, [email protected])
Andrew Cline (+1 202-887-3698, [email protected])
Chris Wilson (+1 202-955-8520, [email protected])

New York
Eric J. Stock (+1 212-351-2301, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])

Los Angeles
Daniel G. Swanson (+1 213-229-7430, [email protected])
Samuel G. Liversidge (+1 213-229-7420, [email protected])
Jay P. Srinivasan (+1 213-229-7296, [email protected])
Rod J. Stone (+1 213-229-7256, [email protected])

San Francisco
Rachel S. Brass (+1 415-393-8293, [email protected])

Dallas
Veronica S. Lewis (+1 214-698-3320, [email protected])
Mike Raiff (+1 214-698-3350, [email protected])
Brian Robison (+1 214-698-3370, [email protected])
Robert C. Walters (+1 214-698-3114, [email protected])

Brussels
Peter Alexiadis (+32 2 554 7200, [email protected])
Attila Borsos (+32 2 554 72 11, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Christian Riis-Madsen (+32 2 554 72 05, [email protected])
Lena Sandberg (+32 2 554 72 60, [email protected])
David Wood (+32 2 554 7210, [email protected])

Munich
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charles Falconer (+44 20 7071 4270, [email protected])
Ali Nikpay (+44 20 7071 4273, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Deirdre Taylor (+44 20 7071 4274, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Sébastien Evrard (+852 2214 3798, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

When the COVID 19 pandemic first hit European shores in early spring 2020, the German legislator was quick to introduce wide-reaching legislative reforms to protect the German business world from unwanted consequences of an economy struggling with unprecedented upheaval, the lock-down and the ensuing social strain.[1] One key element of the overall legal reform in March 2020 was the temporary derogation from the regular mandatory German-law requirement to file for insolvency immediately whenever a company is either illiquid (Zahlungsunfähigkeit) or over-indebted (Überschuldung). This derogation has now been extended in time for over-indebted companies, but restricted in scope for illiquid companies.

I.  The Temporary Insolvency Law Reform in March 2020

At the time the German Act on the Temporary Suspension of the Insolvency Filing Obligation and Liability Limitation of Corporate Body in cases of Insolvency caused by the COVID-19 Pandemic (“Gesetz zur vorübergehenden Aussetzung der Insolvenzantragspflicht und zur Begrenzung der Organhaftung bei einer durch die COVID-19-Pandemie bedingten Insolvenz” – COVInsAG)[2] was introduced in March 2020, it was felt that the strict insolvency filing requirement that obliges management to file for insolvency without undue delay, but in any event no later than three weeks after such insolvency reason first occurs, would (i) place undue time pressures on companies to file for insolvency in situations where this short time period did not even allow management to canvass its financial or restructuring options or access to newly introduced state funding or other financing sources, (ii) result in a wave of insolvencies of otherwise healthy entities based purely on the traumatic impact of the pandemic and (iii) result in unwanted distortions of the market by failing to differentiate appropriately between businesses facing merely temporary cash-flow problems and genuinely moribund companies with long-standing challenges or issues.

In a nutshell and without going into all details, the interim reform of the German Insolvency Code (Insolvenzordnung, InsO) via the COVInsAG introduced a temporary suspension of the mandatory insolvency filing requirement until September 30, 2020 for both the insolvency reasons of illiquidity (Zahlungsunfähigkeit) and of over-indebtedness (Überschuldung) by way of a strong legal assumption that any such insolvency was caused by the pandemic if (i) the company in question was not yet illiquid on December 31, 2019 and (ii) could show that it would (still or again) be in a position to pay all of its liabilities when due on and after September 30, 2020.

This temporary exemption from having to file for insolvency was flanked by a number of other legislative tweaks to the Insolvency Code that privileged and protected a company’s continued trading during such time window against management liability risks and/or later contestation rights of the insolvency administrator in case the temporary crisis in the spring and summer of 2020 would ultimately result in a later insolvency, after all. Access to new financing was similarly privileged in this time window when the company could show that it traded under the protection of the COVID 19 exemption from the regular insolvency filing requirement.

Finally, the COVInsAG also contained a clause that allowed an extension of this protective time window beyond September 30, 2020 up to the maximum point of March 31, 2021 by way of separate legislative act.

II.  The Modified Extension Adopted on September 17, 2020

While an extension of the temporary suspension of the filing requirement was consistently deemed likely by insolvency experts and in political cycles, Germany has since moved beyond the initial lock-down and has mostly opened up the country for trading again. It has also become apparent that, in particular, a continued blanket derogation from the mandatory filing requirement for companies facing severe cash-flow problems to the point of illiquidity (i) would often only delay the inevitable and (ii) create an unwanted cluster of many insolvency proceedings which are ultimately all filed for at the same time when the suspension comes to an end, rather than a steady and progressive cleansing of the market by gradually removing companies that have failed to recover from the pandemic in a reasonably short period of time.

As a consequence, Germany has chosen not simply to extend the current provisions in unchanged form, but rather has significantly modified the wording of the COVInsAG to address the above concerns.

1. Over-Indebtedness

In particular, as of October 1, 2020 and until December 31, 2020, a continued derogation from the immediate obligation to file for insolvency henceforth only applies to companies which otherwise would only file for insolvency due to over-indebtedness (Überschuldung) but which are not also illiquid. Such companies remain protected from having to file for insolvency based on the above-described rules until December 31, 2020, if (i) they were not already illiquid by December 31, 2019 and will not be illiquid after September 30, 2020 and thereafter.

Unlike illiquid companies, it was felt that companies which are over-indebted, i.e. (i) whose assets based on specific insolvency-driven valuation rules are not sufficient to cover their liabilities and (ii) which do not currently have a positive continuation prognosis (positive Fortführungsprognose), deserve a further grace period during which they may address their underlying structural issues, provided they do not enter illiquidity during this time window.

This extension until year end for over-indebted companies also addresses the often-voiced concerns that the uncertain future effects of the pandemic on a company’s medium-term prospects currently do not allow for a meaningful continuation prognosis which by general consensus has to cover the liquidity situation over the next 12 to 24 months.

2. Illiquidity

This new restriction of the interim derogation from the filing requirement to over-indebtedness only, in turn, means that companies that cannot pay their liabilities when they fall due on September 30, 2020 (and beyond) and, therefore, are illiquid under German insolvency law terms, may no longer justify such financial distress by claiming it is caused by the pandemic. Instead, they will now be obliged to file for insolvency based on illiquidity once the initial protection accorded to them by the March 2020 rules runs out at the end of September 30, 2020.

With it being mid-September 2020 already, this will give the management of any entity facing serious current cash-flow problems only another two weeks to either remedy such cash flow problems and restore full solvency or file for insolvency on or shortly after October 1, 2020 due to their illiquidity at that point in time.

3. Consequential Issues

The new, changed wording of the COVInsAG consequently restricts the other privileges connected with the temporary exemption from the filing requirement, i.e. that companies are permitted to keep trading during the extended time-window with certain protections against subsequent insolvency contestation rights, personal liability derogations or privileges and simplified access to new external or internal restructuring financing or loans, only to over-indebted companies. For them, these additional rules, which they may have already become accustomed to in the period between March 2020 and September 30, 2020, are simply extended until December 31, 2020.

III.  Immediate Outlook

This law reform is of utmost importance for the management and the shareholders of any German entities that are currently in significant financial distress. The ongoing, periodic monitoring of their own financial position will need to determine in an extremely short time-frame whether or not the respective company is either illiquid or over-indebted as of September 30, 2020. If necessary such analysis should be firmed up by involving external advice or restructuring experts.

If the company is found to be over-indebted but not illiquid, the focus of any future turn-around must be December 31, 2020, i.e. the continued applicability of the COVInsAG rules may continue to provide some respite until then. If the company is found to be illiquid, the remaining time until September 30, 2020 must be used productively to either restore future liquidity via external or internal funding in the shortness of the available time or the filing for insolvency in early October 2020 becomes inevitable and should be prepared.

Managing directors of illiquid companies that do not file for insolvency without undue delay, but continue trading regardless of the insolvency reason, will again face the twin risks of personal civil and criminal liability based on a delayed or omitted filing. They and their trading partners and creditors, furthermore, face the full power of the far-reaching array of insolvency contestation rights (Insolvenzanfechtungsrechte) for a subsequent insolvency administrator of any measures now taken outside of the protective force of the COVInsAG interim rules.

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  [1]  In this context, see our earlier general COVID 19 alerts under: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ as well as under: https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

  [2]  In this context, again see: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, under section II.2, as well as with further analysis in this regard https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

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The following Gibson Dunn lawyers have prepared this client update: Lutz Englisch, Birgit Friedl, Marcus Geiss.

Gibson Dunn’s lawyers in the two German offices in Munich and Frankfurt are available to assist you in addressing any questions you may have regarding the issues discussed in this update.

For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the three authors:

Lutz Englisch (+49 89 189 33 150, [email protected])
Birgit Friedl (+49 89 189 33 122, [email protected])
Marcus Geiss (+49 89 189 33 115, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

London partners Susy Bullock and Allan Neil and associate Stephanie Collins are the authors of “National Contact Points: A Unique Grievance Mechanism for Resolving Responsible Business Conduct Disputes,” [PDF] published by Corporate Disputes Magazine in its October-December 2020 issue.

Gibson Dunn’s Supreme Court Round-Up provides the questions presented in cases that the Court will hear in the upcoming Term, summaries of the Court’s opinions when released, and other key developments on the Court’s docket.  To date, the Court has granted certiorari in 30 cases and set 1 original-jurisdiction case for argument for the 2020 Term, and Gibson Dunn is co-counsel for a party in 1 of those cases.

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

To view the Round-Up, click here.

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Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases.  During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 16 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in separation of powers, administrative law, intellectual property, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 29 petitions for certiorari since 2006.

*   *   *  *

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

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

© 2020 Gibson, Dunn & Crutcher LLP

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

The past several months have seen record volumes of debt issuance at historically low interest rates. At the same time, the COVID-19 pandemic has led to unforeseen challenges and novel practices for issuers, underwriters and their advisors working on these transactions. This webcast will discuss key legal, financial and logistical issues that are affecting debt offerings, as well as best practices for raising capital in the current environment. Please join our panel as they discuss recent developments in investment-grade and high-yield debt offerings, including market trends and disclosure considerations, as well as our expectations for the months ahead.

View Slides (PDF)

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PANELISTS:

Boris Dolgonos is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the Capital Markets and Securities Regulation & Corporate Governance Practice Groups. Mr. Dolgonos has more than 20 years of experience advising issuers and underwriters in a wide range of equity and debt financing transactions, including initial public offerings, high-yield and investment-grade debt offerings, leveraged buyouts, cross-border securities offerings, and private placements. Mr. Dolgonos has represented public and private companies, investment banks and other financial institutions and sovereign entities in transactions across North and South America, Europe, Asia and Africa. He has experience in many industries, including metals and mining, biotechnology, industrials, aviation, hospitality, media and telecommunications, financial services, technology, and retail.

Doug Rayburn is a partner in the Dallas and Houston offices of Gibson, Dunn & Crutcher and a member of the firm’s Capital Markets, Energy & Infrastructure, Mergers & Acquisitions, Global Finance, Private Equity and Securities Regulation & Corporate Governance Practice Groups. His principal areas of concentration are securities offerings, mergers and acquisitions and general corporate matters. He has represented issuers and underwriters in over 200 public offerings and private placements, including initial public offerings, high-yield offerings, investment-grade and convertible note offerings, offerings by MLPs, and offerings of preferred and hybrid securities. Additionally, Mr. Rayburn represents purchasers and sellers in connection with mergers and acquisitions involving both public and private companies, including private equity investments and joint ventures. His practice also encompasses corporate governance and other general corporate concerns.

Robyn E. Zolman is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Capital Markets, Securities Regulation & Corporate Governance and Energy Practice Groups. Her practice is concentrated in securities regulation and capital markets transactions. Ms. Zolman represents clients in connection with public and private offerings of equity and debt securities, tender offers, exchange offers, consent solicitations and corporate restructurings. She also advises clients regarding securities regulation and disclosure issues and corporate governance matters, including Securities and Exchange Commission reporting requirements, stock exchange listing standards, director independence, board practices and operations, and insider trading compliance. She provides disclosure counsel to clients in a number of industries, including energy, telecommunications, homebuilding, consumer products, life sciences and biotechnology.

Brussels partner Attila Borsos is the author of “The EU is set to control foreign subsidies,” [PDF] published by Financier Worldwide in its September 2020 issue.

San Francisco partner Ethan Dettmer and Washington, D.C. associate Suria Bahadue are the authors of “The future of DACA is far from clear,” [PDF] published by the Daily Journal on August 27, 2020.

Century City partner Scott Edelman and San Francisco associates Vivek Gopalan and Zach Tan are the authors of “Ruling in gun case puts every Californian at risk,” [PDF] published by the Daily Journal on August 27, 2020.

On August 26, 2020, as part of its continued effort to update and modernize public company disclosure requirements, the U.S. Securities and Exchange Commission (the “Commission”) adopted amendments to Item 101 (“Description of Business”), Item 103 (“Legal Proceedings”) and Item 105 (“Risk Factors”) of Regulation S-K at an open meeting of the Commission.[1] These amendments, which mark the first time that these disclosure requirements have been substantially updated in over 30 years, were designed to result in improved disclosure, tailored to reflect a registrant’s particular circumstances, and reduce disclosure costs and burdens. Many of the amendments reflect the Commission’s “long-standing commitment to a principles-based, registrant-specific approach to disclosure,” which Commission Chairman Jay Clayton referred to at the open meeting as the “envy of the world.”

As discussed in greater detail below, the key changes are:

• Revisions to the rules for the Description of Business to more broadly embrace a principles-based standard identifying a non-exclusive list of topics that may be addressed when material.
• Revisions to the rules for disclosure of Legal Proceedings to confirm the ability to incorporate by reference from other disclosures in the same document and to raise the dollar threshold for disclosing legal proceedings involving environmental protection laws in which the government is a party.
• Revisions to the Risk Factors standards to encourage more concise and company-specific discussions of material factors that make investment in a company or its securities speculative or risky.

In developing the proposed amendments, the Commission stated that it considered input from comment letters received in response to its disclosure modernization efforts, the SEC staff’s experience with Regulation S-K arising from the Division of Corporation Finance’s disclosure review program, and changes in the regulatory and business landscape since the adoption of Regulation S-K. As a recent example, in response to the COVID-19 pandemic, the Division of Corporation Finance closely monitored registrants’ disclosures about how COVID-19 affected their financial condition and results of operations. Division staff observed that the current principles-based disclosure requirements generally elicited detailed discussions of the impact of COVID-19 on registrants’ liquidity position, operational constraints, funding sources, supply chain and distribution challenges, the health and safety of workers and customers, and other registrant- and sector-specific matters. Chairman Clayton stated that “[t]he effectiveness of this framework in providing the public with the information necessary to make informed investment decisions has proven its merit time and time again as markets have evolved when we have faced unanticipated events.”[2] However, this view was not shared by all of the Commissioners, as evidenced by the amendments’ adoption by a 3-2 vote, with the two Democratic Commissioners dissenting.

This client alert begins with a general overview of the amendments adopted by the Commission and their practical impact on existing public company disclosure requirements, as well as the arguments raised by the dissent. A table providing a more detailed review of and observations on the amendments is provided at the end of this alert. For a comparison of the Regulation S-K language from before and after the amendments, please refer to the attached Annex A.

Read More

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   [1]   See Modernization of Regulation S-K Items 101, 103, and 105, Exchange Act Release No. 33-10825 (August 26, 2020), available at https://www.sec.gov/rules/final/2020/33-10825.pdf.

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

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

Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Brian J. Lane – Washington, D.C. (+1 202-887-3646, [email protected])
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
James J. Moloney – Orange County (+1 949-451-4343, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael A. Titera – Orange County (+1 949-451-4365, [email protected])
Peter W. Wardle – Los Angeles (+1 213-229-7242, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])
William Bald – Houston (+1 346-718-6617, [email protected])
Rodrigo Surcan – New York (+1 212-351-5329, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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

New York partner Avi Weitzman and of counsel Tina Samanta are the authors of “Liu v. SEC: Supreme Court Cabins SEC Disgorgement Remedy,” [PDF] published in the Wall Street Lawyer in its July 2020 issue.

Please join members of Gibson Dunn’s Capital Markets and Mergers and Acquisitions Practice Groups as they provide both practical advice and information about the latest legal developments regarding SPACs. Specifically, the panelists will discuss:

• IPO Market Overview
• IPO Considerations and Trends
• Business Combinations –
  • Target Perspective
  • SPAC Perspective
• London Listed SPACs

View Slides (PDF)

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PANELISTS:

Evan M. D’Amico is a corporate partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where his practice focuses primarily on mergers and acquisitions. Mr. D’Amico advises companies, private equity firms, boards of directors and special committees in connection with a wide variety of complex corporate matters, including mergers and acquisitions, asset sales, leveraged buyouts, spin-offs and joint ventures. He also has experience advising issuers, borrowers, underwriters and lenders in connection with financing transactions and public and private offerings of debt and equity securities.

Matthew B. Dubeck is a partner in the Los Angeles office of Gibson, Dunn & Crutcher, where he practices in the firm’s Private Equity, Mergers and Acquisitions and Securities Regulation and Corporate Governance Practice Groups. He advises private equity firms, companies and investment banks across a wide range of industries, focusing on public and private merger transactions, stock and asset sales and joint ventures and strategic partnerships. Mr. Dubeck has particular expertise and experience in the use of transactional liability insurance, such as representation and warranty, tax and litigation risk insurance, to reallocate risk and to consummate transactions more efficiently on superior terms, particularly in the private equity and real estate industries.

Christopher Haynes is an English qualified corporate partner in the London office of Gibson, Dunn and Crutcher. Chris has extensive experience in equity capital markets transactions and mergers and acquisitions including advising corporates, investment banks and selling shareholders on initial public offerings (including dual track processes), rights issues and other equity offerings as well as on public takeovers, private company M&A and joint ventures. He also advises on corporate and securities law and regulation.

Stewart McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Transactions Practice Group, Co-Chair of the Capital Markets Practice Group. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.

Gerry Spedale is a partner in the Houston office of Gibson, Dunn & Crutcher.  He has a broad corporate practice, advising on mergers and acquisitions, joint ventures, capital markets transactions and corporate governance. He has extensive experience advising public companies, private companies, investment banks and private equity groups actively engaging or investing in the energy industry. His over 20 years of experience covers a broad range of the energy industry, including upstream, midstream, downstream, oilfield services and utilities.

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MCLE INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit.

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

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

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

1.   Introduction

On December 28, 2019, China’s Standing Committee of the National People’s Congress (“NPC”) published the draft Export Control Law of the People’s Republic of China (“2019 Draft”), a revised version of an earlier draft first published by the Chinese Ministry of Commerce (“MOFCOM”) on June 16, 2017 (“2017 Draft”).[1] On July 3, 2020, the NPC published a further revised draft Export Control Law of the People’s Republic of China (“2020 Draft”) (the 2019 Draft and the 2020 Draft collectively the “Draft Laws”). The resultant set of draft legislation is China’s first step towards a comprehensive and unified export control regime.

Against this backdrop, we take this opportunity to (i) summarize the current status quo of China’s export control regime; (ii) discuss in depth the key features of both Draft Laws; and (iii) analyze their potential impact on our clients around the globe.

2.   Status Quo of China’s Export Control Regime

2.1   Overview

Currently, China’s export control regime is scattered across multiple laws, administrative regulations, and other guidelines, including but not limited to: (i) the Foreign Trade Law (rev. 2016); (ii) the Customs Law (2017); (iii) the Administrative Regulations on Import and Export of Goods (2001); (iv) the Administrative Regulations on Import and Export of Technologies (2019); (v) the Regulations on Control of Arms Export (2002); (vi) the Regulations on Control of Nuclear Export (2006); (vii) the Administrative Regulations on Monitored Chemicals (2011); (viii) the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007); (ix) the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002); and (x) the Regulations on Control of Biological Dual-Use Items and Related Equipment and Technologies Export (2002). Apart from the foregoing, the Criminal Law (as amended) and the Customs Law (2017) as well as the Implementation Regulations on Customs Administrative Penalties (2004) prescribe criminal liability and administrative penalties for violations of Chinese export control regulations.[2]

2.2   Scope

2.2.1   General

Through the various regulations described above, China’s export control laws and regulations cover items ranging from finished goods (such as products and equipment), components, and raw materials, to intellectual property (such as technologies and software). Generally speaking, China’s current export control regime regulates a wide range of activities such as “the export for trade purpose […], gifting, exhibition, scientific and technological cooperation, assistance, services and […] transfers by other means.”[3]

To date, China’s export control regulations have been focused on equipment, technologies, and services relating to sensitive items, including but not limited to missiles, arms, nuclear, certain chemicals, biological dual-use items, and explosives. In addition, MOFCOM, sometimes together with other authorities, has announced interim export control measures from time to time on items not specifically covered by the existing regulations upon approval of the Chinese State Council and other competent authorities. For example, in 2015, MOFCOM, China’s General Administration for Customs (the “China Customs”), the former State Administration for Science, Technology and Industry for National Defense (“SASTIND”), and the People’s Liberation Army General Armaments Department (“PLA Armaments”) jointly announced restrictions on the export of certain military and civil dual-use unmanned aerial vehicles.[4]

2.2.2   Extraterritoriality

Unlike some components of the U.S. export control regime and U.S. secondary sanctions, China’s export control regime currently generally does not purport to extend to re-exports by foreign persons that are not subject to Chinese jurisdiction.

However, as more fully described in Section 2.5 below, the end user and end-use requirements with respect to certain items effectively already have some (limited) extraterritorial effect. In addition, for clarification purposes, transit, transshipment and through shipment of dual-use items and technologies and export of the same via special customs supervision areas or bonded supervision areas are also subject to current Chinese export control law.[5]

2.3   Registration of Exporters

Article 9 of the Foreign Trade Law requires all exporters (whether or not the relevant products are subject to export control measures) to file and register with the “department of the State Council in charge of foreign trade” (currently MOFCOM), or any authorities entrusted by it, unless such filings and registrations are otherwise exempted. Failure to submit the necessary filings or be duly registered will be an impediment to obtaining clearance or relevant declarations from China Customs. This is especially the case for exporters of items subject to export control, and is a requirement that is duplicated in other export control regulations. For example, the Regulations on Control of Missiles and Missile-related Items and Technologies Export require relevant exporters to register with the “department of the State Council in charge of foreign economy and trade” (currently MOFCOM). Likewise, the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export also require relevant exporters to register with MOFCOM.

2.4   Quota Restrictions and Export Licenses

Pursuant to Article 19 of the Foreign Trade Law, quota restrictions and export licenses are the most powerful and widely used tools in China for exerting export control over controlled items and technologies.

Where a quota restriction applies to the export of any item, applications are required to be made to governmental authorities in charge of export quota administration, currently MOFCOM (including its local counterparts) in early November each year to apply for such quota for next year. Successful applicants will each receive a quota certification and then may be able to apply for an export quota license again at MOFCOM.

For controlled items that are not subject to a quota (e.g., nuclear, arms, explosives), export licenses are required. Typically, exporters are required to apply to MOFCOM or other competent authorities. For proposed exports that may have a material influence on national security, public interests or likewise, the application may even be subject to approval by the State Council.[6]

To export restricted technologies, exporters are required to apply for export licenses through a two-step process. First, an exporter shall apply to the department of State Council in charge of foreign economy and trade, currently MOFCOM, which will examine the technologies to be exported along with certain agencies in charge of science and technology. With MOFCOM’s approval, as evidenced by issuing a letter of intent for a technology export license, the exporter may then negotiate the terms of and enter into a technology export agreement with the counterparty. Then, following the execution of the technology export agreement, such exporter will again have to apply to MOFCOM for a formal export license.

2.5   End User and End-Use Certification

For export of missile, nuclear, certain chemical and biological dual-use related products and technologies, exporters are generally required to submit end user and end-use certifications and other application documents to competent governmental authorities. Recipients of such products or technologies shall also undertake that the exported products and technologies will not be (i) used for any purpose other than the declared end-use, or (ii) transferred to any third party other than the declared end user, unless otherwise approved by the Chinese government. In case of violation of such end user and end-use certification, any export licenses already issued may be suspended or cancelled.

2.6   Lists of Items and Technologies Restricted from Free Export

China has maintained controlled items lists setting forth details on the items and technologies that are subject to export restrictions, such as: (i) the Missiles and Missile-related Items and Technologies Export Control List; (ii) Arms Export Control List and Nuclear Export Control List; (iii) Certain Chemicals and Related Equipment and Technologies Export Control List; and (iv) Biological Dual-Use Items and Related Equipment and Technologies Export Control List.

Upon approval of the State Council, MOFCOM and other competent authorities may jointly announce interim export control measures against items and technologies that are not already included in these lists.

2.7   Liabilities for Violations under the Current Export Control Regime

Violations of China’s current export control laws and regulations may be subject to administrative penalties and criminal liability.

Pursuant to the customs-related laws and regulations, as well as the abovementioned export control regulations, administrative penalties range from a warning, confiscation of products to be exported and/or illegal income (if any), and/or a fine up to five times the illegal income, to cancellation of export licenses. In addition, local counterparts of China Customs may take temporary measures to detain suspected perpetrators as well as products to be exported and vehicles used for transportation. Criminal liabilities include a monetary penalty, confiscation of all assets and even imprisonment for severe violations that constitute crimes relating to smuggling, illegal business operations, and license forgery.

3.   Reform of China’s Export Control Regime

3.1   Overview

The introduction of the new comprehensive Draft Laws comes on the heels of the U.S.-China trade war, which seemed to have culminated in both countries signing the “Phase One” trade deal on January 15, 2020.[7] Much ink has been spilled over the trade war, which featured the U.S. Bureau of Industry and Security’s (“BIS”) inclusion of Huawei onto the Entity List, the U.S. House of Representatives passing legislation in December 2019 in response to the Uighur conflict in Xinjiang, a move which could impose export controls on U.S.-made items used by the Chinese government for certain surveillance and repressive activities (as elaborated here[8]), recent designations of Chinese entities, and new export controls rules on military end uses and end users in China. In response, China has threatened to publish an “Unreliable Entity List” that could lead to trade sanctions against U.S. companies[9] and also recently imposed sanctions on four U.S. politicians, one congressional committee and one U.S. company.[10] The implementation of the 2020 Draft could arguably provide China with ammunition to counter U.S. export control measures targeting China, and spell wider implications for the international business community in dealing with Chinese goods. This includes potential further complications for European companies that may be caught in the middle of the U.S.-China trade war.

According to Minister of Commerce Zhong Shan at the 15th Session of the 13th National People’s Congress Standing Committee on December 24, 2019, the 2019 Draft drew inspiration from a “common international practice” to regulate trade, and therefore enhances China’s obligations to fulfill its international commitments as well as to safeguard national security interests. This sentiment is also echoed in Article 1 of both Draft Laws.[11]

Broadly speaking, the 2019 Draft addressed key matters such as: (i) the formal establishment of an export control system; (ii) the requirement for exporters to establish an internal compliance review system to monitor export controls; (iii) end user and end-use certifications; and (iv) enhanced penalties for violations of the 2019 Draft.

The 2020 Draft largely resembles the 2019 Draft but is also different in a few ways. For example, (i) the 2020 Draft explicitly applies to foreign entities and individuals who violate such law; (ii) it is no longer a mandatory obligation for exporters to establish an internal compliance review system; and (iii) it is now unclear how long it would take to apply for an export license, among others.

3.2   Scope

3.2.1   General

(a)   The 2019 Draft

The 2019 Draft comprised 48 articles that are set out over six chapters. This represents a considerable streamlining of the 2017 Draft that contained 70 provisions.[12] We detail the areas we consider most relevant below. The 2019 Draft provided for the establishment of a unified export control system with extraterritorial reach and several additional new features.

The 2019 Draft specifically targeted China’s nuclear, military, and dual-use items,[13] as well as other goods, technology, and services that could have an impact on China’s international obligations and national security.[14] The State Council and the Central Military Commission are the primary enforcers of the legislation, though responsibility for regulating and licensing the various controlled items will be shared between different state agencies.[15]

(b)   The 2020 Draft

The 2020 Draft also has 48 articles that are set out in only five chapters – the second chapter (control policy and list) and the third chapter (control measures) in the 2019 Draft have been consolidated to one chapter in the 2020 Draft, namely, control policy, list and measures. There is no material change to the general scope and coverage of the 2019 Draft, except as described below.

3.2.2   Extraterritoriality

(a)   Re-exports, Deemed Exports and Likewise

The 2017 Draft defined “re-export” as the transfer of an item from a jurisdiction outside of China to a third country, and provided that the export control provisions would apply to certain Chinese-origin controlled items or foreign-made items that contain Chinese-origin controlled items that are determined with reference to a “percentage test.”[16]

The above definition of “re-export” has been removed in both Draft Laws, although the reasons for doing so are unclear.[17] As stands, the relevant Article 45 of both Draft Laws states: “The transit, transshipment, through shipment, or re-export of a controlled item, or the export of a controlled item to overseas from special customs supervision areas such as bonded areas and export processing zones, as well as bonded supervision places such as export supervision warehouses and bonded logistics centers shall be governed by the relevant provisions of this Law.”

Yet, while the definition of “re-export” and the de minimis rule were removed in the Draft Laws, a reference to “re-export” remained.

Accordingly, it remains to be seen whether Article 45 of the Draft Laws will include extraterritorial reach and expand to all re-exports of controlled items, such as a U.S. company re-exporting a controlled item that originates from China to Mexico.

Under Article 2 of both Draft Laws, “deemed exports” refers to the provision of regulated goods and technologies to non-Chinese citizens, legal persons, and organizations.[18] Ostensibly, this provision was included to regulate the trade activities of foreign entities based in China with access to controlled equipment or sensitive technical data. Although unlike the 2017 Draft, neither the 2019 Draft nor the 2020 Draft includes the language that it also applies to exports to Taiwan, Hong Kong and Macau, we believe it may still capture exports to such regions based on China’s geopolitical understanding and prior export control practice.

Other trade activities that are captured under the Draft Laws include transit, transshipment and through shipment of controlled items and export via special customs supervision areas and bonded supervision areas and the above noted re-exports.[19]

We expect China to address these questions, specifically whether “re-exports” will include re-exports from a non-Chinese country to a third country, either in a revised draft or in implementing regulations that provide more details and guidance after the 2020 Draft is enacted.

(b)   Legal Liabilities of Foreign Perpetrators

The 2020 Draft, however, has brought clarity to legal liabilities of foreign entities and individuals engaged in China, by introducing Article 44, which reads: “An organization or individual outside the territory of the PRC which violates the provisions (…) of the Export Control Law, hinders the performance of non-proliferation and other international obligations (…), or endangers China’s national security and interests, shall be (…) held legally liable.”

3.3   Registration of Exporters

While the requirement of exporters’ filing and registration obligations remains unchanged, the first new feature of the export control system under both Draft Laws is the introduction of a licensing regime for exporters who wish to export controlled items, as well as any other items that exporters know or should know : (i) may threaten national security; (ii) are used in the design or development of weapons of mass destruction or their delivery vehicles; or (iii) are used for terrorism purposes.[20] According to the Draft Laws, the following eight factors will be taken into consideration in assessing a license application: (i) international obligations and commitments; (ii) national security; (iii) type of export; (iv) sensitivity of items; (v) countries or regions the items are destined for; (vi) end user and end-use; (vii) credit history of the exporters; and (viii) any other circumstances as prescribed by laws and regulations.[21]

3.4   Controlled Items List

Another novel feature of the Draft Laws is the creation of a controlled items list. To that end, Article 9 of the 2019 Draft states that three separate lists will be generated for dual-use items, military items, and nuclear items respectively.[22] However, according to Article 9 of the 2020 Draft, it appears only one list is contemplated to include all covered items.

Article 10 of the 2019 Draft contains a further catchall provision that provides that goods, technology, or services that are not otherwise on a controlled items list may nevertheless be placed on a temporary restriction list for up to two years.[23] The 2020 Draft has also prescribed the same[24] but has introduced a new assessment regime prior to the expiration of the two-year temporary restriction period.[25] Items that are subject to a temporary restriction will not be automatically exempted from such restraint. Instead, such temporary restriction may be cancelled, extended or turned into a permanent restriction by including such items into the controlled items list, depending on the result of the assessment.

Neither the 2019 Draft nor the 2020 Draft contains an initial list of controlled and/or restricted items. Although the controlled items list(s) referenced in both Draft Laws is expected to include largely the same items on the existing lists subject to the current export control regime,[26] this could still prove worrying for businesses based in China due to the uncertainty of goods that will eventually make it onto the controlled items lists or the temporary restriction list.

While both Draft Laws primarily cover dual-use items, military items, and nuclear items, we do not expect the 2020 Draft, once enacted, to affect China’s current export quota administration primarily regulating the export of certain plants and livestock.

3.5   End User and End-Use Certifications

Unlike the 2017 Draft that gave regulatory authorities the power to request exporters or importers to provide end user and end-use certifications, Article 17 of the 2019 Draft and Article 15 of the 2020 Draft now make it mandatory for exporters to submit end user and end-use certifications to the national export control authorities.[27] In effect, this appears to be a uniform requirement regardless of the sensitivity of the controlled items exported, which is a significant departure from Article 25 of the 2017 Draft that limited the requirement for certification “based on the degree of sensitivity of controlled items and end users.”[28] The end-use and/or end user certificates may be issued by either end users themselves, or the governments in countries or regions where such end users are located.

Furthermore, to add on an additional layer of compliance requirements, exporters who are aware of changes to the end user or end-use of controlled items must immediately report the changes to the national export control authorities.[29] However, both Draft Laws are unclear on what the consequences are of violating these disclosure obligations.

In addition, importers and end users who violated either end user or end-use certifications may be placed on a controlled list. National export control authorities may impose bans or restrictions on transactions with entities on the list, among other sanctions.[30]

3.6   Entity Lists

3.6.1   Proposed “Unreliable Entity List”

In the midst of the China-U.S. trade war, MOFCOM announced on May 31, 2019 that China will introduce an “unreliable entity list” with an aim to “safeguard the international economy and trade rules and multilateral trading regime” and “object to unilateralism and trade protectionism.”[31] This announcement has been seen as a reaction to BIS’s inclusion of Huawei Technologies Co., Ltd. and its 70 affiliates (collectively, “Huawei”) to its Entity List on May 15, 2019 (as described here[32]). Over the course of several press conferences convened by MOFCOM and the Ministry of Foreign Affairs (“MFA”) in late 2019, spokesmen for the respective agencies repeatedly responded that such a list will be published soon.[33] However, there has not been any further development to date.

Nonetheless, we compare China’s proposed “unreliable entity list” against BIS’s Entity List in the table below.

	China’s Proposed “Unreliable Entity List”	BIS’s Entity List
Background and Purpose	“Certain foreign entities have cut off the supplies or taken other discriminating measures, impairing Chinese companies’ legitimate interests, endangering China’s national security and interests, posing a threat to global industry chain and supply chain, as well as negatively affecting the global economy.”[34] The “unreliable entity list” will be introduced to “safeguard the international economy and trade rules and multilateral trading regime, in objection to unilateralism and trade protectionism, safeguard China’s national security, public interests and companies’ legitimate rights and interests.”[35]	BIS first published the Entity List in February 1997 as part of its efforts to inform the public of entities that have engaged in activities that could result in an increased risk of the diversion of exported, re-exported, or transferred (in-country) items to weapons of mass destruction (WMD) programs. Since its initial publication, grounds for inclusion on the Entity List have expanded to activities sanctioned by the State Department and activities contrary to U.S. national security and/or foreign policy interests.[36]
Grounds for Inclusion	When weighing which entities might be included, the following factors will be taken into consideration: (i)  whether such entities have implemented a blockade, cutoff of supplies, or other discriminating measures targeting Chinese entities; (ii)  whether such entities’ conducts are based on non-commercial purpose and violate market rules and the spirit of contract; (iii)  whether such entities’ conducts have caused substantial damage to Chinese companies or relevant industries; and (iv)  whether such entities’ conducts pose a threat or potential threat to national security.[37]	Pursuant to Section 744.11(b) of the Export Administration Regulations (the “EAR”), the Entity List identifies persons or organizations reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy interests of the United States.[38]
Legal Basis	Foreign Trade Law; Anti-Monopoly Law; and National Security Law.	Export Control Reform Act of 2019; International Emergency Economic Powers Act; the EAR.
Effect after Inclusion	It is unclear what effect inclusion to such list will have. We expect China to at least impose restrictions on import from and export to the included entities, and such restrictions may even extend to their respective affiliates.	The Entity List imposes specific license requirements for the export, re-export, or transfer (in-country) of specified items to the persons named on it. The persons on the Entity List are subject to individual licensing requirements and policies supplemental to those found elsewhere in the EAR. BIS considers that transactions of any nature with listed entities carry a “red flag” and recommends that U.S. companies proceed with caution with respect to such transactions.[39]
Relief	Listed entities will be entitled to object. After corrective measures are taken, relevant authorities may consider adjusting the “unreliable entity list.”[40]	Listed parties may seek removal from such list.

3.6.2   Introduction of Embargo, “Blacklist,” and National/Regional Risk Assessment

The 2017 Draft, the 2019 Draft and the 2020 Draft formally introduce trade concepts such as embargoes, “blacklists,” and national/regional risk assessments into China’s export control regime. Article 8 of both Draft Laws allows national export control authorities to conduct an assessment of countries and regions where controlled items are exported, identify the level of risks, and take corresponding control measures. Article 10 of both Draft Laws now makes it possible for national export control authorities to ban the export of certain items or to certain countries or regions or to certain persons (both individuals and entities), in order to “fulfill … international obligations and safeguard national security.” Article 18 of the 2020 Draft and Article 20 of the 2019 Draft also introduce a controlled list of importers and end users which (i) violate end user or end-use certifications as stated above, (ii) may impair national security, or (iii) use controlled items for terrorism purposes. Pursuant to the 2020 Draft, transactions with those on the controlled list will be restricted, banned or suspended.[41] These additions arguably will provide a legal framework and broad discretion for China to impose export control measures on an ad hoc basis.

3.7   Liabilities for Violations under the Draft Laws

3.7.1   Enhanced Penalties in Both Draft Laws

Finally, both Draft Laws significantly ratchet up the penalties for violations in contrast to the 2017 Draft by providing for stiffer fines. Examples of violations under the Draft Laws include, but are not limited to: (i) unauthorized export of controlled items; (ii) obtaining an export license for the export of controlled items through bribery or other improper means; (iii) falsifying or trading an export license; or (iv) conducting business with controlled importers or end users in violation of the Draft Laws.[42] Article 30 of the 2019 Draft and Article 28 of the 2020 Draft provide Chinese authorities with enforcement powers if they suspect violations of the new export control laws. Penalties for violations include confiscation of illegal income (if any) and a fine up to a multiple of the amount of illegal income if such amount is greater than a certain threshold or, if lower, a cap, in each case depending on the specific type of violation. Other administrative penalties include but are not limited to suspension of business for rectification as well as cancellation of export licenses.[43]

The enforcement powers given to Chinese authorities under the 2019 Draft, which now largely remain the same in the 2020 Draft, have been criticized by international organizations. For example, the Federation of German Industries (“BDI”) believes the missing independent judicial oversight is a key problem of the new export control regime.[44] It views the Chinese authorities’ enforcement powers available upon suspicion of a violation as highly problematic. The BDI also suggests publishing decisions about further export controls and measures in order to increase transparency.[45]

3.7.2   China’s Export Control Enforcement Actions

China’s export control enforcement actions result in liabilities ranging from administrative penalties imposed by China Customs to criminal fines and imprisonment.

Existing regulations[46] relating to export control do not specifically authorize China Customs to impose administrative fines. Instead, China Customs usually does so under Articles 14 and 15 of Implementation Regulations of Customs on Administrative Penalties (2004) when parties are seeking to export controlled items without export licenses[47] or when violations would compromise “the accuracy of China Customs’ statistics,” “China Customs’ supervision and administration,” or “China’s administration of licenses.”[48] Pursuant to these articles, a fine would range from RMB1,000 to RMB30,000 (approximately US$ 140 to US$ 4,200) or no more than 30% of the value of exported goods.[49] The value of goods sought to be illegally exported without the required export license, in most administrative cases we were able to find from publicly available information, was under RMB 0.5 million (approximately US$ 70k), with a few at around RMB 2 million (approximately US$ 280k), and one at around RMB 4 million (approximately US$ 560k). Fines imposed by China Customs ranged from a few thousand RMB (approximately a few hundred US dollars) to RMB 284k (approximately US$ 40k), representing 1% – 18% of the value of goods at issue.

Exporters, export agencies and their agents may be held criminally liable in severe violations, for example, when large amounts of valuable controlled items are illegally exported. Fines imposed on exporters may be as high as RMB 14 million (approximately US$ 2 million), and individuals in charge of such exporters or export agencies facilitating the illegal export are typically sentenced to less than five years in prison and fined for a few hundred thousand RMB. The most severe penalty against individuals we were able to find in the public domain was a fine of around RMB 1 million (approximately US$ 156k)[50] and imprisonment of 13 years.[51]

3.7.3   Potential Impact of the Draft Laws on Future Enforcement Actions

As discussed above, the existing export control laws and regulations do not themselves authorize China Customs to impose administrative penalties. Accordingly, China Customs has to resort to other regulations where the prescribed penalties are generally inconsequential. Once the 2020 Draft is enacted, China Customs will be authorized to impose significantly higher fines. In the case of exporting controlled items without an export license, the fine will range from five to 10 times the illegal income with a minimum of RMB 500k (approximately US$ 70,625 at the prevailing exchange rate) even if there is no illegal income,[52] almost twice the administrative fine imposed by China Customs in the most serious violation noted above. If exporters transact with those on the “blacklist” described in Section 4.5 below, the fine can be as high as 10 to 20 times the illegal income with a minimum of RMB 500k.[53]

Most severe export control violations will continue to be subject to criminal liabilities under China’s criminal law.

3.8   Internal Compliance Review System

3.8.1   2019 Draft

More significantly, the 2019 Draft made it mandatory for all exporters to establish an internal compliance review system to monitor their export control obligations. An internal compliance review system is required in order to be eligible for certain licenses – this is in contrast to the 2017 Draft which simply “encouraged” the establishment of an internal compliance program.[54] It is worth noting that under the current export control laws and regulations, only exporters of nuclear dual-use items and technologies are required to establish an internal control system. However, the 2019 Draft did not specify how regulators should evaluate this internal compliance review system and what constitutes a significant violation of this obligation.

3.8.2   2020 Draft

In contrast to the 2019 Draft, establishing an internal compliance system is no longer a mandatory obligation under the 2020 Draft. Article 14 of the 2020 Draft encourages, instead of mandating, exporters to establish such system by granting simplified export measures to those that have established such internal compliance review system that works well.

4.   Impact of the Draft Laws on International Trade Relations

The reference to extraterritoriality of the Draft Laws means that China’s new export control regime, if and when the extraterritoriality is enacted, will impact businesses within and outside China that deal with Chinese controlled items.[55] That said, the vagueness of several of the Draft Laws’ provisions creates a layer of uncertainty within the international business community, specifically regarding its extraterritorial application and as to which activities specifically will be affected. This could be a deliberate move on China’s part in order to create sufficient room to augment the scope and reach of this export control regime through the issuance of supplementary regulations.[56]

For example, even with the abolishment of the definition of “re-exports” (but not the concept itself) and references to a de minimis rule, it is unclear if the 2020 Draft will apply to the re-export of foreign-made items that contain Chinese-origin controlled items to a jurisdiction outside of China. Following a public consultation, various trade associations from the U.S., Europe, and Japan have made calls for the 2019 Draft to clarify the scope of the affected re-export activities,[57] while the 2020 Draft remains unchanged in this regard.

Furthermore, the requirements to determine end-use and end-users for exporters may also give rise to increased compliance costs for businesses in China as they now have to undertake more stringent third-party due diligence into their trade counterparties, in order to avoid a potential violation of any controlled items list or restricted list that is published pursuant to the 2020 Draft.

Notwithstanding the above, both Draft Laws appear to be a more conciliatory version of the 2017 Draft in a move that is arguably designed to ease U.S.-China trade tensions. Of note is the removal of a clause that referred to retaliatory measures that China could take in response to “discriminatory export control measures” taken by other countries against it.[58] It therefore remains to be seen if Beijing will ever follow through with publishing an “Unreliable Entity List” in retaliation against U.S. trade sanctions.

4.1   U.S.-China Trade Relationship

For U.S. companies, what may prove most worrying about China’s new export control regime may be the highly publicized “unreliable entity list” and the “blacklist” to be formulated pursuant to the Draft Laws, in China’s apparent attempt to counter the U.S. sanctions, as well as the risk of leaks of trade secrets and other intellectual property in the case of investigations by China’s national export control authorities.

Based on the principle of reciprocity, a term frequently used by both countries’ governments as justification for its hostile actions against one another, if the U.S. government continues to target Chinese technology companies using its “Entity List” or similar tools, it is conceivable that China will follow through its original announcement for the establishment of the “unreliable entity list” and following the enactment of the 2020 Draft, the “blacklist,” and use these legal measures to counter U.S. export control measures targeting China.

The Draft Laws specify what measures China’s national export control authorities may take in order to investigate a suspected violation, and therefore raising concerns for potential leaks of trade secrets and other intellectual property.[59] Perhaps anticipating such concerns, both Draft Laws also require the authorities and their staff to maintain confidentiality of trade secrets obtained during such investigations.[60]

4.2   EU-China Trade Relationship

The 2020 Draft will likely have an impact on EU-China trade relationships and European companies in particular.

In the past, EU companies had to deal with the extraterritoriality of U.S. sanctions and political pressure from both the U.S. and China, as exemplified by the inclusion of the Chinese telecommunications company Huawei and its named affiliates on the U.S. Entity List in May 2019.[61]

In the future, EU companies will have to deal with the extraterritoriality of U.S. and Chinese sanctions and political pressure from both the West and East.

On the legal front, any Sanctions and Export Compliance Management System of an EU company will have to cover not only national law and EU law, but also be mindful of the extraterritorial reach of both the U.S. and the Chinese Sanctions and Export Controls.

If an entity were to be blacklisted or greylisted by the U.S., but not by China, or vice versa, EU companies would have to decide with whom to do business. As many companies might not have the resources to continuously monitor both the U.S. and the Chinese regime, they might choose to reorganize their supply chain in a way to only source U.S. or Chinese products to limit their legal exposure.

When it comes to export controls in the EU, power usually rests with the various national governments to implement their own laws.[62] Despite the lack of ability to implement EU-wide export controls, EU governments could, on a national level, align with U.S. export controls to ensure a common approach towards China.[63] Otherwise, there is an increasing risk for European companies to be subject to U.S. sanctions. One suggested approach for the EU would thus be to work together with the U.S. to restrict China’s ability of gaining access to advanced technologies.[64]

However, if China uses export controls to counter U.S. sanctions, and if, at the same time, the U.S. imposes further tariffs on EU goods, this could drive European companies closer to China.[65]

On the political front, European manufacturers could also find themselves sidelined by the U.S.-China Phase One deal as elaborated above. A study by the American Chamber of Commerce, for example, predicted that German and French manufacturing sectors may be the most adversely affected by China’s commitment to buy $200 billion more in goods from the U.S. in the Phase One deal.[66]

Finally, this conflict could also lead to European companies diversifying their portfolios by using goods from other third countries.

Overall, after the 2020 Draft is enacted, European companies could find themselves in the difficult position of having to choose between imports from the U.S. or China and evaluating where the larger legal risks and economic and political benefits are.

5.   Conclusion

Both the 2019 Draft and the 2020 Draft change the 2017 Draft in many ways and provide for a comprehensive Chinese export control regime. Besides a few clear requirements, the 2020 Draft remains opaque as to its exact scope & specifically regarding its contemplated extraterritorial reach, and has the potential of making it challenging for companies to navigate through China’s new export control regime.

It is expected that, as is common with the introduction of a new law in China, the Chinese authorities will, in time, issue implementing regulations that provide more details and interpretation of this law, specifically relating to the concept and application of extraterritoriality.

Companies should monitor the current developments, prepare their Sanctions and Export Compliance mechanisms to be able to cope with a comprehensive Chinese Export Control regime and pay special attention to further supplementary Chinese regulations.

________________________

   [1]   Export Control Law of the People’s Republic of China (Draft), available at https://www.cistec.or.jp/service/china_law/202001_pubcom2_souan.pdf.

   [2]   See Xiaoming Liu, Royal United Services Institute, Upgrading to a New, Rigorous System – Recent Developments in China’s Export Controls (Mar. 2016), https://rusi.org/sites/default/files/201603_op_upgrading_to_a_new_rigorous_system_en.pdf.

   [3]   See Article 2 of the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002), Article 2 of the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007), and Article 2 of the Regulations on Control of Biological Dual-Use Items and Related Equipment and Technologies Export (2002) for example.

   [4]   See Announcement on Imposing Interim Export Control Measures on Military and Civil Dual-Use Unmanned Aerial Vehicles issued on June 25, 2015 with effect from July 1, 2015.

   [5]   See Article 28 of the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007).

   [6]   See Article 11 of the Regulations on Control of Nuclear Export (2006), Article 16 of the Regulations on Control of Arms Export (2002), and Article 11 of the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002) for example.

   [7]   See China Briefing, The US-China Trade War: A Timeline (Feb. 26, 2020), https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/.

   [8]   See Gibson, Dunn & Crutcher LLP, 2019 Year-End Sanctions Update (Jan. 23, 2020), https://www.gibsondunn.com/2019-year-end-sanctions-update/.

   [9]   Jeff Black/Daniel Flatley, Bloomberg News, China Hints U.S. Blacklist Imminent in Threat to Trade Talks (Dec. 3, 2019), https://www.bloomberg.com/news/articles/2019-12-03/china-hints-u-s-blacklist-imminent-in-threat-to-trade-talks.

[10]   Michael O’Kane, EU Sanctions, China Designates 4 US Politicians & Congressional Commission (July 13, 2020), https://www.europeansanctions.com/2020/07/china-designates-4-us-politicians-congressional-commission/; and Michael O’Kane, EU Sanctions, China Designates Lockheed Martin for Taiwan Arms Deal (July 14, 2020), https://www.europeansanctions.com/2020/07/china-designates-lockheed-martin-for-taiwan-arms-deal/.

[11]   Xiaolei Pu, Legal Daily, Proposed Inclusion of Military Items and Nuclear into Covered Items (Dec. 24, 2019), http://www.npc.gov.cn/npc/ckgzlf003/201912/03bf295574ad4d5caba56c2fd7a9af24.shtml.

[12]   Leian Kae Naduma, Business Times, China Releases Draft Export Control Law, The Country’s First (Jan. 17, 2020), https://www.btimesonline.com/articles/125133/20200117/china-releases-draft-export-control-law-countrys-first.htm.

[13]   This refers to “goods, technologies and services that have civil uses, and also have military use or enhanced military potential, particularly those which could be used for the design, development, production, or use of weapons of mass destruction.” See Article 2 of the 2019 Draft.

[14]   http://www.npc.gov.cn/npc/ckgzlf003/201912/1c9cab8e27874d51ae79196802b1d894.shtml; see also Article 2 of the 2019 Draft.

[15]   Article 5 of the 2019 Draft.

[16]   Article 64 of the 2017 Draft.

[17]   Pursuant to the 2017 Draft, “re-export” is defined as “the export of controlled items or foreign products containing controlled items whose value reaches a certain percentage from overseas to other countries (regions).”

[18]   Article 2 of the 2019 Draft and Article 2 of the 2020 Draft.

[19]   Article 45 of the 2019 Draft, which states the provisions of law also apply to these trade activities. As such, we expect national export control authorities (or jointly with China Customs) to still regulate these trade activities. Article 45 of the 2020 Draft is also similar to this.

[20]   Articles 13 and 15 of the 2019 Draft and Article 12 of the 2020 Draft.

[21]   Article 13 of the 2019 Draft and Article 13 of the 2020 Draft.

[22]   Article 9 of the 2019 Draft.

[23]   Article 10 of the 2019 Draft.

[24]   Article 9 of the 2020 Draft.

[25]   Ibid.

[26]   See Catalog of Import and Export Licenses Administration of Dual-use Items and Technologies promulgated by MOFCOM and China Customs on December 31, 2005 and last amended on December 31, 2019; Arms Export Administration List promulgated by former SASTIND and PLA Armaments on November 1, 2002; and Nuclear Export Administration List promulgated by former SASTIND on June 28, 2001 and amended by China Atomic Energy Authority, MOFCOM, MFA and China Customs on June 27, 2018.

[27]   See Article 25 of the 2017 Draft, Article 17 of the 2019 Draft and Article 15 of the 2020 Draft.

[28]   See Joint Comments by 11 Industrial Associations of U.S. and Japan (Jan. 26, 2010), available at: cistec.or.jp/english/export/china_law/200210-english.pdf.

[29]   See Article 18 of the 2019 Draft and Article 16 of the 2020 Draft.

[30]   See Article 29 of the 2017 Draft, Article 20 of the 2019 Draft and Article 18 of the 2020 Draft.

[31]   See MOFCOM, MOFCOM: China to Establish the “Unreliable Entity List” Regime (May 31, 2019), http://www.mofcom.gov.cn/article/i/jyjl/e/201905/20190502868927.shtml.

[32]   See Gibson, Dunn & Crutcher LLP, Citing a National Emergency, the Trump Administration Moves to Secure U.S. Information and Communications Technology and Service Infrastructure (May 20, 2019), https://www.gibsondunn.com/citing-national-emergency-trump-administration-moves-to-secure-us-information-and-communications-technology-service-infrastructure/. On August 21, 2019, the Trump Administration increased its Entity List designation of Huawei affiliates to over 100 entities.

[33]   On a press conference of MOFCOM on August 22, 2019, a MOFCOM spokesman responded that the “unreliable entity list” was “going through internal procedures and would be released recently.” A spokesman from MFA repeated the same on October 8, 2019, following the U.S.’s blacklisting an additional 28 Chinese entities on October 7, 2019.

[34]   See MOFCOM, MOFCOM: China to Establish the “Unreliable Entity List” Regime (May 31, 2019), http://www.mofcom.gov.cn/article/i/jyjl/e/201905/20190502868927.shtml.

[35]   Id.

[36]   See FAQs – Entity List FAQs, available at https://www.bis.doc.gov/index.php/2011-09-12-20-18-59/export-and-reexport-faqs/cat/33-entity-list-faqs#faq_105.

[37]   See Reasons to Introduce the “Unreliable Entities List” Regime? MOFCOM’s Response (June 4, 2019), http://coi.mofcom.gov.cn/article/y/gnxw/201906/20190602869699.shtml.

[38]   See Addition of Certain Entities to the Entity List (Oct. 9, 2019), https://www.federalregister.gov/documents/2019/10/09/2019-22210/addition-of-certain-entities-to-the-entity-list.

[39]   See FAQs – Entity List FAQs, available at https://www.bis.doc.gov/index.php/2011-09-12-20-18-59/export-and-reexport-faqs/cat/33-entity-list-faqs#faq_104 and https://www.bis.doc.gov/index.php/2011-09-12-20-18-59/export-and-reexport-faqs/cat/33-entity-list-faqs#faq_118.

[40]   See Sina Finance, Authorities: MOFCOM’s Interpretation of China’s “Unreliable Entity List” Regime (June 2, 2019), https://cj.sina.com.cn/articles/view/1704819467/659d7b0b01900ux8q.

[41]   It is also noteworthy that pursuant to Article 20 of the 2019 Draft, simplified export measures (if previously granted to the exporter) will no longer be applicable to transactions with those on the controlled list. This is no longer the case in the 2020 Draft.

[42]   See Chapter 5 of the 2019 Draft and Chapter 4 of the 2020 Draft.

[43]   Id.

[44]   Nikolas Kessels, BDI, China’s Export Control, Statement regarding the Second Draft of China’s National Export Control (Jan. 23, 2020), https://bdi.eu/artikel/news/peking-legt-neuen-vorschlag-fuer-exportkontrollgesetz-vor/ (in German).

[45]   Id. See also Art. 1 (5) 1. Council Decision (CFSP) 2019/1560 of September 16, 2019 amending Common Position 2008/944/CFSP defining common rules governing control of exports of military technology and equipment. Based on this decision by the European Council, EU member states need to submit information on their exports of military technology and equipment for transparency purposes.

[46]   For example, the Regulations on Control of Arms Export (2002), the Regulations on Control of Nuclear Export (2006), the Administrative Regulations on Monitored Chemicals (2011), the Regulations on Control of Nuclear Dual-Use Items and Related Technologies Export (2007), the Regulations on Control of Missiles and Missile-related Items and Technologies Export (2002), and the Regulations on Control of Biological Dual-Use Items and Related Equipment and Technologies Export (2002).

[47]   See Article 14 of the Implementation Regulations of Customs on Administrative Penalties (2004).

[48]   See Article 15 of the Implementation Regulations of Customs on Administrative Penalties (2004).

[49]   Paragraphs (4) and (5) of Article 15 of the Implementation Regulations of Customs on Administrative Penalties (2004) also provide for fines to be imposed where violations would compromise “China’s tax collection” or “foreign exchange or export tax rebate administration.” Such fines might be higher than those set forth above but these paragraphs are rarely cited by China Customs in administrative penalty cases relating to export control of dual-use items, arms, nuclear, monitored chemicals or likewise.

[50]   See the Case of Yuhong Peng’s Smuggling General Goods available here, (2009) Xia Xing Chu Zi No. 25, where Yuhong Peng assisted a few clients in exporting 1,631,031 kilograms of flour without a valid export license by intentionally and falsely declaring flour as non-controlled goods. Flour was subject to China’s export quota restrictions. Yuhong Peng was found guilty for smuggling general goods and was sentenced to an imprisonment of 10.5 years and fined RMB 1,112,443.77 (approximately US$ 156,980.71 at the prevailing exchange rate).

[51]   See First Trial Criminal Judgement of Huizhou Haihang Industrial Co., Ltd. and Huizhou Jiangfeng Industrial Development Co., Ltd. available here, (2016) Yue 13 Xing Chu No. 11, where Huizhou Haihang Industrial Co., Ltd., Huizhou Jiangfeng Industrial Development Co., Ltd., their respective key persons in charge and a few other individuals exported 689.086 tons of rare earth metals without a valid export license by intentionally and falsely declaring rare earth as non-controlled goods. Huanyong Xu, the manager of Huizhou Haihang Industrial Co., Ltd. was sentenced to an imprisonment of 13 years.

[52]   See Article 34 of the 2020 Draft.

[53]   See Article 37 of the 2020 Draft.

[54]   Article 36 of the 2017 Draft; see also Article 14 of the 2019 Draft.

[55]   See Leian Kae Naduma, Business Times, China Releases Draft Export Control Law, The Country’s First (Jan. 17, 2020), https://www.btimesonline.com/articles/125133/20200117/china-releases-draft-export-control-law-countrys-first.htm.

[56]   Finbarr Bermingham, South China Morning Post, Trade war clues sought in China’s ‘ambiguous’ new export control law (Dec. 31, 2019), https://www.scmp.com/economy/china-economy/article/3044112/trade-war-clues-sought-chinas-ambiguous-new-export-control.

[57]   See Statement by 11 U.S. and Japanese industrial associations, Joint Comments by Industrial Associations of the United States and Japan on China’s Revised Draft Export Control Law (Jan. 26, 2020), https://www.cistec.or.jp/english/export/china_law/200210-english.pdf and Statement by 14 European and Japanese industrial associations, Joint Comments by Industrial Associations of Europe and Japan on China’s Revised Draft Export Control Law (Jan. 21, 2020), https://www.cistec.or.jp/service/china_law/20200123-english.pdf.

[58]   Article 9 of the 2017 Draft.

[59]   See Article 30 of the 2019 Draft and Article 28 of the 2020 Draft. Such measures include “entering into the place of business … for inspection,” “viewing and copying … relevant agreements, accounting books, business correspondence …” and “seizing and detaining relevant items.”

[60]   See Article 31 of the 2019 Draft and Article 29 of the 2020 Draft.

[61]   See Benjamin Wilhelm, World Politics Review, Why America’s Global Campaign Against Huawei Is Failing (Jan. 29, 2020), https://www.worldpoliticsreview.com/trend-lines/28503/why-europe-is-resisting-trump-s-campaign-against-huawei-china.

[62]   Limited exceptions apply in terms of military and dual-use goods.

[63]   Id.

[64]   See Carisa Nietsche/Sam Dorshimer, The Hill, America and Europe will lose to China in transatlantic trade war (Jan. 31, 2020), https://thehill.com/opinion/international/480942-america-and-europe-will-lose-to-china-in-transatlantic-trade-war.

[65]   Id.

[66]   See Greg Knowler, Journal of Commerce, Europe faces $11 billion hit from US-China ‘phase one’ deal: study (Mar. 27, 2020), https://www.joc.com/regulation-policy/europe-faces-11-billion-hit-us-china-%E2%80%98phase-one%E2%80%99-deal-study_20200327.html.

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The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Chris Timura, Fang Xue, Qi Yue, Xuechun Wen, Joerg Bartz and Richard Roeder.

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

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Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
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The California Supreme Court Round-Up previews upcoming cases and summarizes select opinions issued by the Court. This edition includes opinions handed down from December 2019 through August 2020, organized by subject. Each entry contains a description of the case, as well as a substantive analysis of the Court’s decision.

Updates From the Court

Justice Ming Chin will be retiring at the end of August 2020, after 24 years of service on the Court. At the June oral argument, his colleagues presented a virtual tribute, and Justice Chin remarked that the current pandemic could provide an opportunity to improve the judicial system. “The future of law and the future of the courts will be virtual and remote,” Justice Chin said. Governor Gavin Newsom is expected to announce Justice Chin’s successor before the end of the year.

No update would be complete without recognizing the unprecedented COVID-19 pandemic and the decisive actions of the Chief Justice, Supreme Court, and Judicial Council to preserve the health and safety of the courts, judges and staff, and litigants. Since March 2020, the Chief Justice has issued numerous orders announcing emergency measures and implementing emergency Rules of Court approved by the Judicial Council, which suspended court operations and jury trials, tolled civil and criminal case deadlines, and suspended almost all unlawful detainer actions statewide through September 1. The Chief Justice also approved dozens of superior court and Court of Appeal emergency orders, which permitted those courts to implement their own emergency measures and rules. The Court will continue its recent practice of hearing oral argument virtually through at least the end of 2020, and if it does resume in-person hearings in 2021 they will take place only in San Francisco. Finally, the Supreme Court ordered the postponement of the July 2020 Bar examination to October 2020, and ordered the State Bar to make every effort to administer the examination online.

Read More

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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.

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