Palo Alto partner Mark Lyon is the author of “Designing for Why: The Case for Increasing Transparency in AI Systems,” [PDF] published by PLI Current: The Journal of PLI Press on June 10, 2020.

San Francisco partner Matthew Kahn is the author of “Think Your Client is Up to No Good? You May Have a Duty to Inquire,” [PDF] published by the Bar Association of San Francisco Bulletin on June 24, 2020.

On June 19, 2020, the French Administrative Supreme Court (“Conseil d’Etat”) dismissed Google LLC’s appeal against the French Data Protection Authority’s decision of January 21, 2019, imposing a fine of 50 million euros on Google LLC. This fine is, to date, the highest fine issued under the GDPR in the European Union. The decision is now final with no further possibility of appeal before French courts.

This Client Alert lays out the key aspects and implications of the decision.

I. Context of the decision  

On January 21, 2019, the French Data Protection Authority (“CNIL”) imposed a fine of 50 million euros on Google LLC for breach of EU transparency and information obligations and lack of valid consent to process data for targeted advertising purposes under the General Data Protection Regulation (EU) 2016/679 (“GDPR”).

Google filed an appeal against the CNIL’s decision with the French Administrative Supreme Court, which issued its final ruling on June 19, 2020. Google raised two requests for preliminary rulings from the Court of Justice of the European Union (one in relation to the jurisdiction of the CNIL and another in relation to the consent mechanism the company had used) but the French Administrative Supreme Court determined that there was no need to refer such questions to the Court of Justice of the European Union.

II. CNIL’s jurisdiction

In its ruling, the French Administrative Supreme Court first confirmed the CNIL’s jurisdiction.

In order to challenge the CNIL’s jurisdiction, Google claimed that its main establishment, as defined under the GDPR, was Google Ireland Limited, which is its head office in Europe, has human and financial resources and assumes the responsibility of “many organizational functions” in Europe.

In doing so, Google tried to demonstrate that the Irish supervisory authority (the DPC) should have had jurisdiction in this matter considering the one-stop-shop mechanism provided by the GDPR under which an organization established in multiple EU Member States shall have, as its sole interlocutor, the supervisory authority of its “main establishment” (also called, the “lead supervisory authority”). Under the GDPR, the “main establishment” should correspond to the place of the central administration in the EU, unless decisions on the purposes and means of data processing are taken in another establishment which has the power to have such decisions implemented, in which case the latter establishment should be considered the main establishment.

The French Administrative Supreme Court found that Google Ireland Limited did not exercise, at the time of the challenged conduct, control over the other European affiliates of the company, so that it could not be regarded as the “central administration,” and that Google LLC was determining alone the purposes and means of the processing. The Court noted that Google Ireland Limited was assigned new responsibilities in relation to data processing in Europe, but highlighted that this new scope of responsibility was in any event effective only after the date the CNIL issued its decision.

The Court also pointed out that while the CNIL cooperated with other supervisory authorities in the EU in relation to its jurisdiction, none of them raised a concern with respect to the CNIL’s exercise of jurisdiction, and the Irish supervisory authority even publicly stated at that time that it was not the lead supervisory authority of Google LLC.

Therefore, the Court rejected Google’s jurisdictional arguments, including the request for preliminary rulings from the Court of Justice of the European Union regarding that issue.

III. GDPR violation

The French Administrative Supreme Court also confirmed the breaches identified by the CNIL regarding Google’s transparency and information obligations, as well as the lack of valid consent to process its users’ personal data for targeted advertising purposes.

First, the Court found that Google’s consumer disclosures were scattered, thus hindering the accessibility and clarity of information for users, while the data processing carried out was particularly intrusive.

Furthermore, with respect to the validity of the consent collected, the Court confirmed that the information Google provided to consumers that was related to targeted advertising was not presented in a sufficiently clear and distinct manner for the user’s consent to be valid. In particular, the consent was collected in a global manner for various purposes and through a pre-ticked box, which do not meet the requirements of the GDPR. In that respect, the French Administrative Supreme Court also determined that there was no need to raise a request for preliminary rulings from the Court of Justice of the European Union.

Finally, the French Administrative Supreme Court stated that the administrative fine of 50 million euros was not disproportionate and confirmed its amount.

IV. Conclusion

This decision is an important reminder that providing clear disclosures and consent mechanisms are key obligations to be complied with when a company’s processing of personal data is subject to the GDPR, as shortcomings in those areas may lead to significant monetary sanctions. For organizations with multiple subsidiaries or affiliates in the EU, this decision also illustrates the importance of clarifying their corporate organization, identifying their main establishment in the EU, and ensuring that this main establishment satisfies the criteria set out in the GDPR in order to benefit from the one-stop-shop mechanism.

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The following Gibson Dunn lawyers prepared this client alert: Ahmed Baladi, Vera Lukic, Adelaide Cassanet, Clemence Pugnet, and Ryan T. Bergsieker. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the Privacy, Cybersecurity and Consumer Protection Group:

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])
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])

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])

© 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.

Los Angeles partner Bradley Hamburger, Los Angeles associate Lauren Blas and Washington, D.C. associate Kelley Pettus are the authors of “9th Circ. Unequal Class Cert. Appeal Treatment Is Problematic,” [PDF] published by Law360 on June 19, 2020.

Washington, D.C. partners Elizabeth Ising and Jason Meltzer, of counsels Gillian McPhee and Lissa Percopo and Orange County associate Lauren Assaf-Holmes are the co-authors of “ESG Legal Update: What Corporate Governance and ESG Professionals Need to Know,” [PDF] published in collaboration with the Society for Corporate Governance in June 2020.

On June 16, 2020, the Los Angeles City Council voted 13-0 to approve a motion instructing the City Attorney to draft an ordinance for consideration by voters on the November 3, 2020 citywide ballot, to impose an annual “vacancy tax” on certain unoccupied multi-family residential and other vacant real property in the City of Los Angeles. Under California Proposition 218, the proposal requires voter approval prior to the imposition or increase of any tax assessment.[1] In order to be eligible for the November 3, 2020 ballot, the ordinance must be finalized and approved by the City Council no later than July 1, 2020. As of today, the item has not yet been placed on the agenda for a regularly scheduled City Council meeting.[2]

A motion to consider adoption of a vacancy tax in Los Angeles was originally passed by the Los Angeles City Council on June 11, 2019, and was presented by Mike Bonin (11th District), Marqueece Harris-Dawson (8th District), Paul Koretz (5th District), and David Ryu (4th District). The stated purpose of the tax is to “encourage, push or require existing vacant and habitable housing units to be put on the rental market,” in order to help alleviate Los Angeles’ ongoing housing and homelessness crises. It is estimated that there are approximately 3,000 vacant parcels, 2,500 unoccupied commercial units, and 20,000 unoccupied residential units in the City.[3] A report ordered by the Los Angeles Commission on Revenue Generation and released on May 8, 2020 determined that a vacancy tax would generate annual revenue of $128 million for the City of Los Angeles during the first year of implementation, and approximately $100 million in revenue annually thereafter.[4]

Vacancy taxes are generally designed to motivate owners to develop vacant parcels and to either sell or rent unoccupied units, while also serving as an additional source of revenue for the local jurisdiction. Vacancy taxes were adopted in Washington, DC in 2016; Vancouver, British Columbia in 2017; and Oakland, California in 2018. However, the Vancouver vacancy tax is currently being contested in court, while the Oakland vacancy tax has not been fully implemented, as the Oakland ordinance provides that the tax will not be levied prior to the 2020-2021 tax year. As a result of the limited sample of vacancy taxes currently in effect, the Los Angeles Chief Legislative Analyst (the “CLA”) notes: “[g]iven that a vacancy tax has only recently been implemented in other cities, there is minimal information on its efficacy and clarity on whether the tax or other economic factors will result in anticipated outcomes.”[5] The CLA further suggests that “[a]n assessment of the long-term impacts and policy implications of a vacancy tax is limited at this time due to the recent implementation of similar measures. Further, there are numerous uncertainties that complicate the analysis of a tax under the current economic conditions and legal challenges. The City could benefit from collecting and analyzing this information prior to formulating a framework for a potential tax.”[6]

City Council Guidance, Major Policy Decisions, and Oakland Model

As a draft of the Los Angeles ordinance has not yet been made available, the exact scope of the proposed Los Angeles vacancy tax is unclear. However, during the June 16 City Council meeting, it was agreed that (i) the ordinance drafted by the City Attorney would be based on the Oakland vacancy tax model; (ii) the vacancy tax would not apply to commercial non-mixed-use units or to single family households owned by individuals; and (iii) the tax rate would be $5,000 per parcel per year, with a proportionately higher rate for “larger” parcels,[7] as set forth in the Los Angeles Commission on Revenue Generation report. The CLA further identified certain major policy decisions to be considered by the City Council:[8]

1. Determine if the tax should apply to residential properties only or both residential and commercial properties, and if the tax applies to vacant and/or underutilized sites, units, and buildings.

The City Council stated at its June 16 meeting that a vacancy tax in Los Angeles would not apply to commercial units (other than commercial units within a mixed-use development) or to single family homes owned by individual homeowners. It appears that all other vacant lots and residential buildings and units would be subject to the new vacancy tax.

2. Define “vacant” and/or “underutilized,” including the number of vacancy days allowed.

Under the Oakland model, the following are considered “vacant” parcels: (i) any parcel of land, whether undeveloped, residential, or non-residential, that is in use less than fifty (50) days during a calendar year; (ii) any condominium, duplex, or townhouse unit under separate ownership that is in use less than fifty (50) days during a calendar year; (iii) any parcel of land where ground floor commercial activities are allowed by applicable zoning or are a legal nonconforming use where all of the ground floor space that could lawfully be occupied by commercial activities is in use less than fifty (50) days in a calendar year.[9] The City Council discussed at its June 16 meeting adopting a similar fifty (50) day vacancy requirement.

Further, under the Oakland vacancy tax ordinance, the following functions or operations are considered “use” for purposes of determining whether a property is vacant: (i) physical occupancy of a residential parcel, condominium, duplex, or townhouse unit by a lawful inhabitant; (ii) carrying on any civic, commercial, industrial, agricultural, or extractive activity (as defined in the Oakland Planning Code) in or on a non-residential parcel; (iii) maintenance of an undeveloped parcel that is contiguous or within 500 feet of an occupied residential parcel owned by the same owner; (iv) ingress and egress of persons or vehicles across substantially all of the parcel; and (v) other functions or operations as the Oakland City Administrator may deem appropriate.[10]

We note that in Oakland a parcel with multiple units, whether residential or non-residential, is not considered “vacant” if any unit on the parcel is not vacant. However, this does not apply to any condominium, duplex, or townhouse until under separate ownership. It is unclear if the Los Angeles ordinance will include the same exception.

3. Determine the City’s process for identifying properties subject to the tax.

The Oakland vacancy tax provides that the Oakland City Administrator may develop administrative methods appropriate to identify properties “based on objective, available data” that are “most likely to be vacant,” and the City Administrator may send initial determination notices to the owners of such properties. Upon receiving an initial determination notice, an owner may, within twenty (20) days of the receipt of such notice, file a petition of vacancy, which must include appropriate evidence demonstrating that the property was not vacant or was entitled to an exemption. The Oakland City Administrator will then make a determination regarding the vacancy of the property based on the evidence provided by the owner. An owner may appeal the City Administrator’s decision within twenty (20) days, and an “independent hearing officer” will be appointed to hear such an appeal.[11] As the Oakland City Administrator only began sending out vacancy notices in February 2020, at present there is little guidance on how this will work as a practical matter.

4. Determine any exemptions to the tax that would apply.

The Oakland vacancy tax includes exemptions for the following taxpayers: (i) an owner who qualifies as “very low income”;[12] (ii) an owner for whom the payment of the vacancy tax would be a financial hardship; (iii) an owner whose property is vacant as a result of a demonstrable hardship that is unrelated to the owner’s personal finances; (iv) an owner who can demonstrate that “exceptional specific circumstances” prevent the use or development of the property (i.e. damage from a recent natural disaster); (v) an owner of a property that is under active construction; (vi) an owner of property for which an active building permit application is being processed; (vii) an owner who is sixty-five (65) years of age or older and qualifies as “low income”;[13] (viii) an owner who receives supplemental security income for a disability or social security disability benefits and whose yearly income does not exceed 250% of the 2012 federal poverty guidelines; (ix) an owner that is a non-profit organization or entity owned or controlled by a non-profit organization; and (x) an owner of a parcel included in a substantially complete application for planning approvals that has not yet received approval.[14] It is likely the Los Angeles vacancy tax will include similar exemptions, but it is unclear whether subjective terms such as “hardship” will be clearly defined, and what documentation will need to be provided to substantiate any claims for exemption.

5. Consider phasing in the tax so as not to “flood the market” with available vacant properties and depress property values.

The Oakland vacancy tax, which was passed in 2018, provided that the tax could not be levied prior to the 2020-2021 tax year, commencing on July 1, 2020, but does not otherwise include an express phasing mechanism. It is unclear if the Los Angeles ordinance will allow for phasing, and if so, the first tax year in which the vacancy tax would be levied.

6. Establish tax rates, and consider not-to-exceed maximums with the ability to adjust in any given year.

Per the June 16 City Council meeting, it appears the Los Angeles vacancy tax will include the rates set forth in the Commission on Revenue Generation’s report, which is a $5,000 tax per parcel per year, with a proportionately higher rate for “larger” parcels. The definition of “larger parcels,” and the corresponding increase in taxes, is not defined in the report.[15]

7. Consider uses for the special tax, and designate the use of tax revenues.

The Oakland vacancy tax is imposed as a special tax on the vacant parcels, and it appears that, once in effect, Alameda County will collect vacancy taxes at the same time and in the same manner, and subject to the same penalties and procedures, as the other property taxes collected by the County. Any vacancy taxes assessed will be included on the property tax bill for the fiscal year that begins July 1 following the end of the calendar year in which the parcel was determined vacant by the City of Oakland.[16]

As in Oakland, the CLA notes that a Los Angeles vacancy tax could be structured as a parcel tax as part of the annual property tax assessment process, as the City Attorney has determined that a financial penalty or fine assessed on vacant units or parcels would not be feasible, as the State of California does not currently recognize vacancy as an illegal activity. It is unclear whether the Los Angeles vacancy tax will be categorized as a general tax or a special tax.

Proceeds from the Oakland vacancy tax are to be used only for (i) providing services and programs to persons experiencing homelessness, to reduce homelessness, and to support the protection of existing housing and production of new housing affordable to lower income households; (ii) paying the cost of audits for the use of funds; (iii) paying for the City of Oakland’s costs of the election required to obtain voter approval of the vacancy tax; and (iv) paying for the costs of administering the vacancy tax.[17]

8. Consider a sunset provision for the tax.

The Oakland vacancy tax has a term of twenty (20) years. It is unclear if the proposed Los Angeles vacancy tax will have a similar limitation.

9. Establish the administering City department.

The Oakland ordinance grants the City Administrator broad authority to adopt rules and regulations to enforce the Oakland vacancy tax, including the establishment of administrative rules to determine how a vacant property is identified.[18] It is unclear which City department would administer a vacancy tax in Los Angeles.

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Gibson Dunn will continue to monitor the progress of the proposed vacancy tax and provide updates as available.

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   [1]   If categorized as a “general tax,” a simple majority vote will be required. However, if earmarked as a “special tax” for a specific purpose, a two-thirds majority vote will be needed to pass the tax.

   [2]   The vacancy tax has not been included on the agenda for the City Council meetings on June 23 or June 24, 2020, but the item could be heard on June 26 or June 30, 2020.

   [3]   See Report of the Chief Legislative Analyst on Vacancy Tax and Empty Homes Penalty, Council File No. 19-0623, Assignment No. 19-12-1124, dated as of June 8, 2020 (the “CLA Report”).

   [4]   See Commission on Revenue Generation Final Report 2020. These revenue figures assume that a vacancy tax would cover residential units, ground floor commercial space, and vacant land at a rate of $5,000 per unit or parcel, with “larger parcels paying proportionately more.” The report does not state how such an increase would be calculated.

   [5]   See CLA Report.

   [6]   Id.

   [7]   The size of such parcels and the corresponding increases in taxes have not been disclosed.

   [8]   See CLA Report.

   [9]   See Oakland Municipal Code, Title 4, Chapter 4.56.020.

[10]   See Oakland Municipal Code, Title 4, Chapter 4.56.080.

[11]   See Oakland Municipal Code, Title 4, Chapter 4.56.100 and 4.56.110.

[12]   The “very low” income exemption applies if an owner’s combined family income for the relevant calendar year is equal to or less than the United States Department of Housing and Urban Development “Very Low Income Limit” for the Oakland-Fremont, CA HUD Metro FMR Area.

[13]   The “low income senior” exception applies if the owner is at least sixty-five (65) years of age or older and their combined family income for the relevant calendar year is equal to or less than the United States Department of Housing and Urban Development “Low Income Limit” for the Oakland-Fremont. CA HUD Metro FMR Area.

[14]   See Oakland Municipal Code, Title 4, Chapter 4.56.030(J) and 4.56.090.

[15]   The Oakland vacancy tax includes a maximum tax of $6,000 per vacant residential, non-residential, or undeveloped parcel, and a maximum tax of $3,000 per vacant condominium, duplex, or townhouse under separate ownership or a parcel with ground floor commercial activity allowed, but vacant. See Oakland Municipal Code, Title 4, Chapter 4.56.030.

[16]   See Oakland Municipal Code, Title 4, Chapter 4.56.030.

[17]   See Oakland Municipal Code, Title 4, Chapter 4.56.050.

[18]   See Oakland Municipal Code, Title 4, Chapter 4.56.120.

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Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Real Estate or Land Use practice groups, or the following authors:

Doug Champion – Los Angeles (+1213-229-7128, [email protected])
Lauren Traina – Los Angeles ( +1 213-229-7951, [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.

Decided June 22, 2020

Liu v. Securities and Exchange Commission, No. 18-1501

Today, the Supreme Court held 8-1 that although the SEC may seek disgorgement in civil enforcement actions, the remedy must be limited to the wrongdoer’s net profits and be awarded for the benefit of victims. 

Background:
When alleging securities fraud in a civil action, the SEC is authorized to seek civil penalties and any “equitable relief” that “may be appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). Here, the SEC alleged that Petitioners misappropriated millions of dollars of investor money after soliciting funds for the construction of a cancer-treatment center. Finding for the SEC, the district court imposed a civil penalty and ordered disgorgement equal to the full amount Petitioners raised from investors less the amount that remained in the corporate accounts for the project.

Petitioners objected that the disgorgement award failed to account for their business expenses. Petitioners relied on Kokesh v. SEC, 137 S. Ct. 1635 (2017), which held that a disgorgement order in an SEC enforcement action imposes a “penalty” for purposes of the applicable statute of limitations. Because courts of equity historically could not impose punitive sanctions, Petitioners reasoned, the court lacked statutory authority to impose the disgorgement remedy. But the Ninth Circuit disagreed, concluding that the proper amount of disgorgement was the entire amount raised minus the money paid back to investors.

Issue:
Whether, and to what extent, disgorgement is statutorily authorized “equitable relief” in an SEC civil enforcement action.

Court’s Holding:
A disgorgement award in an SEC civil enforcement action is “equitable relief” so long as it does not exceed a wrongdoer’s net profits and is awarded for victims.

“[A] disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under § 78u(d)(5).”

Justice Sotomayor, writing for the Court

What It Means:

• The Supreme Court held that a disgorgement remedy may constitute “equitable relief” under 15 U.S.C. § 78u(d)(5), but only if limited to the wrongdoer’s net profits and awarded for victims. This holding, the Court noted, was consistent with the “circumscribed” power of courts of equity to strip wrongdoers of ill-gotten gains. The Court therefore vacated the Ninth Circuit’s judgment and remanded with instructions to ensure that any legitimate business expenses are deducted from the disgorgement award.
• The opinion casts doubt on several SEC disgorgement practices that have appeared in recent decades. The Court observed that disgorgement awards are “in considerable tension” with equity practice when they (1) order the funds deposited in the U.S. Treasury instead of disbursing them to victims; (2) impose joint-and-several liability; or (3) decline to deduct business expenses that are legitimate or that have value independent of fueling a fraudulent scheme. The Court left those questions to the Ninth Circuit to address on remand.
• The Court’s decision reinforces the need, in a variety of contexts, to examine and apply traditional limits on awarding “equitable relief.” The Court examined traditional equitable practice in concluding that courts of equity would not award more than the wrongdoer’s net profits to the victims of the offense.

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The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 [email protected]

Mark A. Perry +1 202.887.3667 [email protected]

Securities Enforcement Practice

Barry R. Goldsmith +1 212.351.2440 [email protected]

Richard W. Grime +1 202.955.8219 [email protected]

Mark K. Schonfeld +1 212.351.2433 [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.

Orange County partner Blaine Evanson and Los Angeles associates Daniel Adler and William Cole are the authors of “COVID-19 Is No Excuse for Suspicionless Searches of Electronic Devices at the Border,” [PDF] published by Reason on June 19, 2020.

In the current environment, public companies may find it more challenging to raise capital, particularly through traditional public offerings. Despite market turmoil, private placements of various securities afford issuers the opportunity to support liquidity and bridge valuation gaps. These private investment in public equity deals (PIPEs) offer a quick, bespoke and discrete option in capital raising. The securities issued in PIPEs, such as common stock, preferred stock and convertible notes, can be easily tailored to the goals and risks of both the issuer and the investors.

Please join our panel as they discuss current developments in private investment in PIPEs, including deal structures, legal considerations, business and governance terms, and special regulatory requirements as a result of the recent market downturn.

View Slides (PDF)

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PANELISTS: 

Hillary Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Energy and Infrastructure, 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 represents issuers, underwriters, MLPs, financial advisors, private investors, management teams and private equity firms in all forms of capital markets transactions. Her experience comprises IPOs, registered offerings of debt and equity securities, private placements of debt and equity securities, structured preferred equity, joint ventures and private equity investments. She frequently advises boards of directors, special committees, and financial advisors in M&A transactions involving conflicts of interest or unique complexities.

Eric M. Scarazzo is of counsel in the New York office of Gibson, Dunn & Crutcher. He is a member of the firm’s Capital Markets, Securities and Regulation and Corporate Governance, Power and Renewables, Global Finance, and Mergers & Acquisitions Practice Groups.As a key member of the capital markets practice, Mr. Scarazzo is involved in some of the firm’s most complicated and high-profile securities transactions. Additionally, he has been a certified public accountant for nearly 20 years. His deep familiarity with both securities and accounting matters permits Mr. Scarazzo to play an indispensable role supporting practice groups and offices throughout the firm. He provides critical guidance to clients navigating the intersection of legal and accounting matters, principally as they relate to capital markets financings and M&A disclosure obligations.

The COVID-19 pandemic is undoubtedly the biggest public health crisis of our times. Like many other countries, the UK Government has exercised broad powers and passed new laws that impact how we do business and interact as a society.

To address the pandemic, the Government announced several sweeping regulations and ushered through the Coronavirus Act 2020. These actions have a broad impact on law, public policy and daily life, impacting areas including health, social welfare, commerce, trade, competition, employment and the free movement of people.

Join our team of Gibson Dunn London lawyers, led by partner and former Lord Chancellor Charlie Falconer QC, for a discussion of these changes and to answer your questions on how they will affect British businesses and community, including the impact on new and ongoing business relationships.

In this webinar we will cover:

• The new travel quarantine rules, current and potential exceptions, and the airline industry’s court challenge
• Novel approaches to dealing with legal disputes during and arising from the crisis, including negotiated solutions and alternative dispute resolution mechanisms

We want to hear from you about the impacts the current measures and conditions are having on your business and the legal issues you are facing. We therefore welcome suggested topics, as well as questions in advance of each webinar, to ensure that we can address issues relevant to your business.

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PANELISTS:

Charlie Falconer QC: An English qualified barrister and Gibson Dunn partner. Former UK Lord Chancellor and first Secretary of State for Justice, he spent 25 years as a commercial barrister, and became a QC in 1991.

Matt Aleksic: An associate in the Litigation and International Arbitration practice groups of Gibson Dunn. He has experience in a wide range of disputes, including commercial litigation, international arbitration and investigations.

Moeiz Farhan: An associate in the Litigation and International Arbitration practice groups of Gibson Dunn.  He specialises in complex commercial litigation and international arbitration.

Gibson Dunn’s lawyers regularly counsel clients on issues raised by the COVID-19 pandemic, and we are working with many of our clients on their response to COVID-19. The following is a round-up of today’s client alerts on this topic prepared by the Gibson Dunn team. Our lawyers are available to assist with any questions you may have regarding developments related to the outbreak. As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Coronavirus (COVID-19) Response Team.

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GLOBAL OVERVIEW

New York State Businesses Must Adhere to Strict Compliance Requirements As They Reopen

Yesterday, New York Governor Andrew Cuomo announced that New York City and Long Island will proceed to the next phase of the State’s reopening process. The City will enter Phase 2 on Monday, June 22, 2020, while Long Island will enter Phase 3 on Wednesday, June 24, 2020. Phase 2 and Phase 3 allow a far broader number of businesses to open than previously available.
Read more

COVID-19 UK Bulletin – June 17, 2020

This bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas: Competition and Consumers; Corporate Governance (including accounts, disclosure and reporting obligations); Cybersecurity and Data Protection; Disputes; Employment; Energy; Finance; Financial Services Regulatory; Force Majeure; Government Support Schemes; Insolvency; International Trade Agreements (private and public); Lockdown and Public Law issues; M&A and Private Equity; Real Estate; and UK Tax.
Read more

On June 17, 2020, the European Commission (the Commission) issued a White Paper asking for views on its plans for tackling foreign State subsidies that affect EU markets. If adopted, the reform will have far-reaching consequences on how non-EU owned businesses are run in the EU and how foreign entities can invest in Europe.

The White Paper is premised on the idea that subsidies provided by non-EU States are liable to distort competition within the EU, either through foreign States’ financing of acquisitions of EU targets or through their subsidization of companies that are already active in the EU, thereby providing them with an unfair competitive advantage against their peers. The new tools are designed to address a regulatory gap and will complement existing legal instruments, such as merger control, foreign investment control in strategic sectors and anti-subsidy investigations.

The White Paper also reflects a move to shield EU merger control from a potential reform that would include public interest considerations being taken into account in the merger review process. Those calls have come from a number of Member States which have expressed their preference for the creation of “European champions” that would be better equipped to compete with their foreign rivals, and have called for the possibility that in the EU merger review process public interest considerations would outweigh competition concerns.

The Commission has proposed three new legal instruments: Module I, aims to address the distortions caused by foreign subsidies provided to an economic operator active in the EU market. Module II, is designed to address the issues around foreign State-subsidised acquisitions of EU target companies, as well as the potentially distortive effect of foreign subsidies in the context of acquisitions of EU targets. Module III envisages the introduction of a compulsory notification system for foreign subsidies in the context of individual public tender procedures.

Module I – Sweeping ex post foreign subsidy control

This instrument is the basis upon which the negative effects of foreign subsidies that are provided by non-EU states to companies established or active in the EU can be captured. As such, Module I is meant to close an existing regulatory gap, given that EU State aid control only covers subsidies provided by EU Member States, while the WTO anti-subsidy instrument only covers the import of subsidised goods to the EU and neither covers services nor production within the EU that has been subsidized by non-EU States.

In addition, Module I would provide for the Commission (or the relevant authorities of the EU Member States) to review ex post acquisitions of EU targets that have been facilitated by foreign subsidies. The review under Module I would likely take place once the acquisition has been completed.

• The White Paper proposes a broad definition of foreign subsidies that could be covered under Module I. Specifically, there would be two large categories of subsidies covered:
  • Foreign subsidies that are presumed to cause per se a distortion in the internal market (a presumption that in principle cannot be rebutted), such as subsidies in the form of export financing (unless the export financing is provided in line with the OECD Arrangement on officially supported export credits), government guarantees of debts or liabilities of certain undertakings without any limitation as to the amount or duration, subsidies (such as debt forgiveness) to ailing undertakings, subsidies directly facilitating the acquisition of an EU target, and operating subsidies in the form of tax reliefs.
  • Any other foreign subsidy that does not fall under the category of inherently distortive foreign subsidies could still be found to cause distortions in the internal market of the EU. For this category of subsidies, the Commission would carry out a case by case assessment based on the following indicators in order to determine their precise impact:
    • the relative size of the subsidy in question;
    • the situation of the beneficiary (e.g., the larger a beneficiary, the more likely that the subsidy would be distortive);
    • the situation on the market concerned (e.g., subsidies to beneficiaries active in markets with structural excess capacity are more likely to be distortive);
    • the market conduct in question (e.g., outbidding efficient bidders in acquisitions); and
    • the level of activity of the beneficiary in the internal market (e.g., subsidies granted to undertakings with limited activity in the internal market are less likely to be distortive).
• Foreign subsidies below a certain mandatory threshold would be deemed not to generate distortive effects. The Commission proposes to set this threshold at EUR 200,000 over a period of three consecutive years, in line with the de minimis threshold that applies to subsidies (State aid) granted by EU Member States.[1]
• Ultimately, both categories of subsidies would be assessed on the basis of an EU interest test, whereby the distortion would be weighed up against its possible positive impact. When determining whether or not there is a positive impact in the EU, public policy objectives such as job creation, achieving climate neutrality and protecting the environment, digital transformation, or public safety, would be taken into account.
• Under Module I, the competent supervisory authorities (the Commission and the relevant Member State authorities) would be able to act ex officio upon any information concerning the grant of a foreign subsidy to a beneficiary active in the EU. The Commission and the Member States authorities will have vast investigation powers similar to what we know from State Aid or other competition investigations.
  • Similar to a situation in a State aid investigation, any investigation of foreign subsidies would consist of a preliminary review, followed by an in-depth investigation.
  • If it is confirmed by an in-depth investigation that the internal market has been distorted through a foreign subsidy, the Commission or the competent authorities of the Member States can decide (at their discretion) to impose measures to redress those distortions, such as the elimination of the financial benefit of a foreign subsidy through payments to the third country in order to restore the level playing field. The competent supervisory authority may be given the power to impose a variety of alternative redressive measures, ranging from structural remedies over behavioral measures to redressive payments to the EU and the Member States (e.g., divestment of assets, prohibition of certain investments, third party access, licensing on FRAND terms, etc.). The undertaking concerned may offer commitments to mitigate the distortion.

Module II – Prior notification of acquisition of EU targets

Module II has a somewhat narrower scope than Module I, as it is intended to specifically address distortions caused by foreign subsidies which facilitate the acquisition of EU targets,[2] either: (1) directly, by explicitly linking a subsidy to a given acquisition or (2) indirectly, by de facto increasing the financial strength of the acquirer, which would in turn facilitate the acquisition.

The competent supervisory authority (in all likelihood the Commission) would ex ante review acquisitions involving possible foreign subsidies under a compulsory notification mechanism. The Commission would also have the right to conduct an ex officio review of the acquisition which should have been notified by the acquirer, including after it has been completed. The review could ultimately result in the prohibition of the acquisition or, if it has been already completed, in its unwinding.

• The scope of notifiable acquisitions will be wider than under EU merger control. In addition to the acquisition of control, it will also include the acquisition of at least a certain percentage of shares or voting rights (which, in an earlier version of the White Paper, was set at 35%) or the acquisition of material influence over the target company.
• Potentially subsidised acquisitions would be defined as acquisitions of an EU target where a party has received a financial contribution by any third country government in the past three years or expects such contribution in the coming year.
• The framework described above might include thresholds to better target the potentially problematic cases of subsidised acquisitions. The actual value of such thresholds will likely depend on the options chosen regarding the notion of “EU target”, the trigger for notification and the appropriate competent supervisory authorities.
  • An “EU target” triggering a filing requirement could be defined by reference to various thresholds to ensure that all acquisitions of interest are caught. In particular, the White Paper suggests a qualitative threshold referring to all assets likely to generate a significant EU turnover in the future and a quantitative threshold. A quantitative threshold based on turnover could be set at, for example, EUR 100 million, but other values, thresholds or alternative approaches could also be envisaged.
  • The trigger of potentially subsidised acquisitions could be limited to acquisitions facilitated by a certain volume of financial contributions from third country authorities. This could, for instance, be the case where the total amount of financial contribution received by the acquiring undertaking in the three calendar years prior to the notification is in excess of a certain amount or a given percentage of the acquisition price.
  • The value of each of these thresholds will most likely also depend on the supervisory authority entrusted with the implementation of Module II (whether the Commission or authorities at the national level).

• The notification would entail a stand-still obligation throughout the Commission’s review. If, after having reviewed the notification, it is not concluded that there is sufficient indication that the acquirer benefitted from foreign subsidies facilitating the acquisition, the Commission may decide to open an in-depth investigation, upon which, the Commission may decide not to oppose the acquisition, to clear the acquisition subject to certain conditions or to prohibit the acquisition.
• In order to block a subsidised acquisition, the Commission will need to demonstrate that the acquisition was facilitated by a foreign subsidy and that it would result in a distortion of the internal market, based on the following proposed non-exhaustive indicators, namely:
  • the size of the subsidy in question (e.g., the greater the subsidy in relative terms, the more likely it is to have a negative impact on the internal market);
  • the situation of the beneficiary (e.g., the larger the EU target or the acquirer, the more likely that the subsidised acquisition is distortive);
  • the situation on the relevant markets (e.g., subsidised acquisitions where the EU target is active in markets with structural excess capacity are more likely to cause distortions than others); and
  • the level of activity in the internal market of the parties concerned (e.g., subsidised acquisitions where the parties, notably the target company, have limited activities in the internal market in comparison with their global activities are less likely to distort the internal market).

Module III – Review mechanisms to monitor foreign subsidies in the context of public tenders in the EU

Under Module III, economic operators participating in public procurement procedures would be obliged to notify to the contracting authority when submitting their bid whether they (or any of their consortium members or subcontractors and suppliers) have received a financial contribution within the past three years preceding the participation in the procedure, and whether such a financial contribution is expected to be received during the period of execution of the contract.

In order to focus the instrument on the most relevant cases, the White Paper envisages that notification could be subject to certain conditions, for example if the financial contribution is above a certain value and the value of the tendered contract exceeds the threshold of the EU Public Procurement Directives. In those cases of subsidised bidding in public procurement procedures that falls outside the scope of Module III, the possibility remains that this conduct can be addressed under Module I. Similar to Module II, this procedure also requires a degree of self-assessment by tender participants.

• The effect of any foreign subsidy would be assessed in relation to the specific procurement procedure that is applied. Following the notification, a relevant foreign subsidy would be referred to the relevant competent authority, which may start an investigation.
• This investigation would also consist of two steps. In the preliminary review, the competent national authority may either conclude that there is no foreign subsidy and close the investigation, or proceed to conduct an in-depth investigation. The White Paper envisages the adoption of strict time limits, which could be extended in certain circumstances (e.g., 15 working days for the preliminary review and no more than three months for an in-depth review).
• Within the context of cooperation and coordination, the national supervisory authority in question is obliged to inform the Commission, the contracting authority and all the competent supervisory authorities of the Member States of these decisions and communicate its prior draft conclusions to the Commission. During the investigation, the relevant contracting authority is prevented from awarding the contract to the economic operator that is under investigation.
• Following an investigation of the effects of the subsidy, the participant could, in certain circumstances under which the foreign subsidy is found to be distortive, be excluded from the tender as well as future tenders (for a period of maximum three years) or have any existing contracts terminated.

Finally, in an attempt to potentially further broaden the scope of Module III, the White Paper considers that the measures put in place to address foreign subsidies under the generally applicable public procurement rules should apply equally to prevent EU funding that has been deployed through procurement from contributing to distortions of the internal market.

Preliminary Observations

Module I is a far reaching instrument which bestows upon the EU and the Member States a wide arsenal of investigative and remedial powers. However, although it sets very concrete goals in terms of the results it wishes to achieve, the details of the concrete legislative proposal remain to be seen, as there is a number of questions that the White Paper leaves unanswered.

First, while it provides examples of the types of foreign subsidies that it intends to address, the White Paper lacks a concrete definition as to what will constitute a foreign subsidy that might warrant the Commission’s attention. Given the sweeping powers that the Commission and the relevant Member States authorities will have to investigate and address any distortions of the internal market caused by foreign subsidies, it will be crucial to ensure at least some level of legal certainty by adopting a precise definition of ‘foreign subsidy’.

The reference made in the White Paper to the notion of “aid” under State aid rules and to the notion of “subsidy” under the WTO SCM Agreement on subsidies are particularly unhelpful, as the two instruments are very distinct in terms of their respective scope.

Second, similarly to the notion of foreign subsidy, the notion of “distortion of the internal market” will also need to be defined. It is unlikely that the notion of “distortion of competition” could be directly transposed from State aid control rules, as that would result in virtually each and every foreign subsidy qualifying as being distortive and therefore can be redressed.

Third, the Commission’s proposals rely on the assumption that third countries will accept the extraterritorial application of the proposed law in much the same way as they do the EU merger rules. However, this ignores the fact that almost all countries with competition law regimes operate merger rules that apply to foreign entities. That is not the case as regards foreign subsidies; the proposed new tools are unprecedented and there are no similar instruments in the legislative arsenal of the EU’s major economic partners. More generally, the concept of controlling State subsidies, other than in the rather limited context of the WTO SCM Agreement, is unknown outside the EU (other than those who are engaged in bilateral agreements with the EU), which makes it even less likely that third countries would simply accept the EU’s new instruments and cooperate with a foreign subsidy investigation.

Fourth, the White Paper seems to grant an unusually wide margin of discretion to the Commission in its deliberations. Not only has the Commission (or the competent authorities of the Member States) absolute discretion into which cases it will conduct a preliminary review or open an in-depth investigation, but it can also simply decide to close an in-depth investigation on the grounds that it is no longer a priority.

According to the White Paper, an investigation by the Commission’s or by the competent authorities of the Member States’ investigation will rely on stakeholders’ contributions.

It remains to be seen, and will to a large extent depend on how the Commission will use its new powers, whether stakeholders will indeed make the effort and commit resources to support such investigations if they can be terminated at the Commission’s sole discretion and without any obligation on the Commission to state the reasons for such a termination in proceedings (other than the investigation no longer being a priority). The possibility that the Commission might terminate an in-depth investigation on the ground that it is no longer a priority in effect insulates any desire to terminate proceedings from any effective judicial oversight, similar to the power enjoyed by the Commission under Article 106 TFEU.[3]

In the same vein, it is noticeable that investigations would only be initiated ex officio with the White Paper not providing for the possibility of complaints being submitted. Stakeholders will then be likely to have even more limited rights within the framework for foreign subsidy investigations that complainants currently do in relation to State aid investigations.

The unusually wide margin of discretion accorded to the Commission in foreign subsidy investigations, coupled with the lack of any legal standing for stakeholders, may render the new regime prone to being used as a political tool in the service of the political priorities of a particular Commissioner at a given point in time, thereby undermining the credibility of the new instruments.

The White Paper proposes to level the playing field by closing the regulatory gap that is not covered by EU State aid controls and trade defense instruments. However, Module II goes well beyond the closing of that gap, and has the potential to lead to discrimination against direct foreign investment in the EU. This might have far reaching consequences for Europe’s economy.

First, EU State aid control is neutral as regards State or private ownership. State ownership and the participation of the State as an actor in the economy is not in and of itself an element that the Commission could or would regulate or over which it would require oversight powers. Nothing prevents Member States or publicly owned companies from investing in the economy, by, for example, acquiring undertakings established in the EU. As long as the publicly owned acquirer has paid the market price for the target company, the acquisition escapes EU State aid control. A typical, and according to the Commission’s own guidelines, also the most desirable, way to determine whether the price paid for a certain asset represents the market price is to conduct a competitive bidding process.

However, it is exactly this type of bidding process that the White Paper considers might lead to an undesirable outcome where one of the bidders is backed by a foreign State subsidy, thereby allowing it to pay a higher price for the target company. This is in stark contrast with the situation where a bidder is backed by an EU Member State and can therefore outbid other potential acquirers. Whereas the latter situation falls outside the scope of the notion of “State aid” and thus escapes scrutiny, the former situation may be considered to cause distortion in the internal market.

If adopted, not only will Module II introduce a notification requirement for foreign State investments in the EU, but it may also end up treating such investments more strictly, ultimately discouraging foreign direct investments.

Second, while its exact details still need to be resolved, it may be a challenge to define the notion of “foreign subsidy” in such a way that is both practicable and does not undermine the principle of legal certainty. If the Commission decides to attach the notification obligation to acquisitions that have been directly subsidised by foreign States, it might not be overly burdensome for acquirers to circumvent the filing obligation by making arrangements to receive the subsidy via a different channel. The Commission’s new powers to investigate such a circumvention of the rules would quickly reach their limits when the Commission would need to investigate, assess and opine upon whether a foreign State has deliberately structured its financial support to a company in such a way as to avoid the filing obligation. As mentioned in relation to Module I, it appears to be overly optimistic to expect any third country to willingly cooperate with the Commission in the context of these new types of instruments, not to mention that third countries, unlike EU Member States have no obligation of loyal cooperation with the Commission.

By contrast, adopting a broad definition of the concept of “foreign subsidies” that is liable to trigger a notification obligation could render the operation of the new regulatory regime impracticable and, may discourage direct foreign investment in the EU. Under a broad definition, any subsidy that the acquirer received in the past three years could lead to a notification obligation and, eventually, to an in-depth investigation. For example, an acquirer established in the United States that benefitted from subsidies to revamp its production facilities domestically and which would then go on to acquire an EU target could be considered to have been “subsidised” for the purposes of its acquisition in the EU, since the subsidies it received for its US facility freed up its financial resources for the acquisition.

The proposed regulatory framework presented in the present White Paper constitutes an undeniably ambitious project for the stronger regulatory oversight of the role that foreign subsidies play in the EU’s economy.

The details of both the substantive scope and the procedural rules of the proposed new instruments will ultimately determine how important and how effective these tools will be in the Commission’s regulatory arsenal. The reaction of the EU’s major economic partners will also be likely to influence how far the Commission will be seeking to push the boundaries of this new regulatory regime and how effectively it can implement it in practice.

While introducing new tools to level the playing field in the internal market may indeed be necessary and a welcome development, it will be important for the Commission and the Member States to not lose sight of the existence of established instruments and perhaps to rely more boldly on trade defense measures and other existing tools to achieve the same objectives.

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      [1]    Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, p. 1.

      [2]    There is still no concrete and definitive proposal for the definition of “EU Target” under Module II but the White Paper proposed the following: “any undertaking established in the EU and meeting a certain turnover threshold in the EU”, without excluding the consideration of other criteria.

      [3]    Article 106 TFEU prohibits Member States, with respect to public undertakings or (private) undertakings endowed with special rights, from enacting or maintaining in force any measure contrary to the rules contained in the Treaties, and in particular, Articles 101 and 102 TFEU.

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Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition or International Trade practice groups, or the following authors:

Attila Borsos – Brussels (+32 2 554 72 11, [email protected])
Peter Alexiadis – Brussels (+32 2 554 7200, [email protected])
Ali Nikpay – London (+44 20 7071 4273, [email protected])
Jens-Olrik Murach – Brussels (+32 2 554 7240, [email protected])
Vasiliki Dolka – Brussels (+32 2 554 72 01, [email protected])

© 2020 Gibson, Dunn & Crutcher LLP

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Decided June 18, 2020

Department of Homeland Security, et al., v. Regents of the University of California, et al. and related cases, Nos. 18-587, 18-588, and 18-589

Today, in a 5-4 decision, the Supreme Court held that DHS’s decision to terminate the Deferred Action for Childhood Arrivals policy is unlawful. 

Background:
Since 2012, the Deferred Action for Childhood Arrivals (“DACA”) policy has enabled undocumented individuals who arrived in the United States as children—including nearly 700,000 current recipients—to live and work here without fear of deportation, so long as they qualify and remain eligible for the policy. In September 2017, Acting Secretary of Homeland Security Elaine Duke terminated DACA based on the Attorney General’s determination that the policy was unlawful.

Respondents challenged DHS’s action, contending that the decision to rescind DACA was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” in violation of the Administrative Procedure Act (“APA”), 5 U.S.C. § 706(2)(A), because DHS failed to explain or consider the costs of its policy change, and relied on an incorrect legal premise, i.e., that DACA is unlawful.

Gibson Dunn represented six individual DACA recipients in obtaining and defending on appeal the first nationwide preliminary injunction halting the termination of DACA. The Supreme Court granted certiorari to review the Ninth Circuit’s decision affirming that injunction and two other district court decisions enjoining or vacating DHS’s action. Gibson Dunn partner Ted Olson represented DACA recipients, businesses, and nonprofits challenging the policy in presenting oral argument before the Supreme Court.

Issue:
Does the APA or the Immigration and Nationality Act (“INA”) preclude judicial review of the Secretary’s decision to terminate DACA? If the decision is reviewable, was it “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” in violation of the APA?

Court’s Holding:
The Court held that DHS’s decision to terminate DACA is subject to judicial review and violated the APA.

“[W]hen so much is at stake, . . . the Government should turn square corners in dealing with the people.”

Chief Justice Roberts, writing for the Court

Gibson Dunn Represented Respondents:

DACA Recipients
Dulce Garcia;
Miriam Gonzalez Avila;
Saul Jimenez Suarez;
Viridiana Chabolla Mendoza;
Norma Ramirez;
and
Jirayut Latthivongskorn

What It Means:

• The Court’s decision reinstates DACA for the immediate future, granting a significant victory to hundreds of thousands of individuals that currently enjoy or may be eligible for relief. As a result of the preliminary injunction obtained by Gibson Dunn, the large majority of DACA recipients have been able to renew their DACA applications during the more than two-year period since DHS announced its decision to terminate the program. Today’s decision secures that victory and restores the opportunity for new applicants to apply to the program for the first time. The decision also reinstates key aspects of the DACA policy, including the ability of DACA recipients to seek advance parole so that they can travel abroad with assurances that they will be permitted to return to the United States.
• Although Dreamers may continue to live and work in the United States, they should be aware that this administration or a future administration could revoke DACA, provided that the agency meets the requirements for reasoned decisionmaking. The Court also did not decide the legality of the DACA policy. Unless Congress enacts permanent legislation to allow Dreamers to continue living and working in the country without fear of deportation, Dreamers’ fate will remain uncertain.
• The Court held that the decision to rescind DACA was subject to judicial review notwithstanding the provision of the APA that precludes judicial review of agency decisions that are “committed to agency discretion by law.” 5 U.S.C. § 701(a)(2). In Heckler v. Chaney, 470 U.S. 821, 831 (1985), the Court held that this provision barred judicial review of an agency’s decision not to prosecute or initiate an enforcement proceeding. The Court determined that Chaney did not apply here because DHS’s decision to grant DACA to individuals went beyond simple non-enforcement and instead “created a program for conferring affirmative immigration relief.”
• On the merits, the Court limited its analysis to the explanations that Acting Secretary Duke provided in her original September 2017 memorandum terminating DACA. The Court declined to consider a later memorandum in which Duke’s successor, Secretary Kirstjen Nielsen, offered “additional explanation” for the September 2017 memorandum. The Court explained that limiting judicial review of agency action to “the grounds that the agency invoked when it took the action” promotes “agency accountability, “ensur[es] that parties and the public can respond fully and in a timely manner to an agency’s exercise of authority,” and “instills confidence that the reasons given are not simply convenient litigating positions.” In light of this holding, an agency that seeks to provide “new justifications” for a prior policy decision may now be required to issue “a new decision” before a court can consider those justifications.
• The Court found two defects in Acting Secretary Duke’s explanation of DHS’s policy change: She never considered alternatives to the outright rescission of DACA, and she never addressed the effect of the termination of DACA on the reliance interests of DACA recipients and their families, schools, and employers. The Court emphasized that before rescinding a policy “in full,” an agency must consider available alternatives, including a partial repeal. And while it was up to DHS to determine whether reliance on DACA was warranted, and what weight to give that reliance, DHS never made that determination.

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The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Theodore J. Boutrous, Jr. +1 213.229.7804 [email protected]

Stuart F. Delery +1 202.887.3650 [email protected]

Ethan Dettmer +1 415.393.8292 [email protected]

Allyson N. Ho +1 214.698.3233 [email protected]

Mark A. Perry +1 202.887.3667 [email protected]

Theodore B. Olson +1 202.955.8668 [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.

Yesterday, New York Governor Andrew Cuomo announced that New York City and Long Island will proceed to the next phase of the State’s reopening process. The City will enter Phase 2 on Monday, June 22, 2020, while Long Island will enter Phase 3 on Wednesday, June 24, 2020. Phase 2 and Phase 3 allow a far broader number of businesses to open than previously available:

Phase 2 – New York City

• Offices
• Real Estate
• Essential and Phase 2 In-Store Retail
• Vehicle Sales, Leases, and Rentals
• Retail Rental, Repair, and Cleaning
• Commercial Building Management
• Hair Salons and Barbershops
• Outdoor and Take-Out/Delivery Food Services

Phase 3 – Long Island

• Food Services (limited reopening, e.g., allowing establishments to utilize up to 50% of their maximum indoor capacity)
• Personal Care

The State has further directed that as businesses reopen, they must adhere to New York’s safety compliance guidelines. Businesses that have continued to operate as essential must also adhere to safety guidelines.  Those guidelines vary widely by industry, so it is crucial that each business complies with the specific requirements laid out by the state according to its type of business and, for “non-essential” businesses, the phase during which it will reopen. That said, there are several common actions that businesses must take regardless of when they reopen.  These obligations include:

• Reviewing the guidelines for their sector;
• Electronically affirming that they understand those state-issued industry guidelines and that they will implement them;
• Posting conspicuous signage to remind both customers and employees to adhere to proper hygiene and social distancing protocols; and
• Adopting and conspicuously posting safety plans on site based on New York’s business-specific guidelines

Businesses in New York should ensure that they follow these general requirements as well as the regulations specific to their industry as they reopen.  The industry-specific guidelines New York has established are comprehensive.  We summarize those guidelines here but encourage businesses to review them in detail.

Take businesses operating out of offices, for example.  Offices are permitted to reopen in Phase 2 so long as they comply with a set of mandatory and optional obligations as they reopen.  Mandatory obligations include maintaining 6 feet of distance between employees, limiting the occupancy of any area to 50% of its maximum capacity, closing non-essential common areas, limiting the sharing of objects, providing consistent cleaning services and others.  Optional obligations include staggering worker shifts, adding social distancing markers, and using screening tools at building entrances.

A second example of an essential New York sector about to reopen in Phase 2 in the City is real estate.  Real estate, too, is expected to comply with mandatory and optional steps upon reopening.  Examples of mandatory steps real estate businesses must take include ensuring that the combination of employees and customers do not exceed 50% of the maximum occupancy of a given space, maintaining social distancing and/or face coverings, limiting in-person gatherings, and closing non-essential common areas.  For real estate showings, the guidelines require that showings occur only in properties where the current tenant is not present, that all participants have face coverings, that high-touch services be disinfected, and that showings be scheduled to avoid congregations among other things.  Optional steps businesses should take include installing physical barriers in work spaces, prohibiting non-essential visitors, and providing face coverings and gloves.

Businesses planning to reopen and businesses that have operated during the pandemic as essential should all pay close attention to these requirements as businesses operating in New York State in a broad number of industries are required to affirm both that they have read and understand state guidelines before reopening and also commit to complying with them.  Gibson Dunn is continuing to monitor developments relating to the restriction of non-essential business activity in various states. Additional developments can be expected to follow in the coming days and weeks.

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Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy Group, or the authors:

Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351- 3850, [email protected])
Lauren J. Elliot – New York (+1 212-351-3848, [email protected])
Andrew A. Lance – New York (:+1 212-351-3871, [email protected])
Lee R. Crain – New York (+1 212-351-2454, [email protected])
Stella Cernak – New York (+1 212-351-3898, [email protected])
Doran Satanove – New York (+1 212-351-4098, [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.

This bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas:

1. Competition and Consumers
2. Corporate Governance (including accounts, disclosure and reporting obligations)
3. Cybersecurity and Data Protection
4. Disputes
5. Employment
6. Energy
7. Finance
8. Financial Services Regulatory
9. Force Majeure
10. Government Support Schemes
11. Insolvency
12. International Trade Agreements (private and public)
13. Lockdown and Public Law issues
14. M&A and Private Equity
15. Real Estate
16. UK Tax

Links to various English law alerts prepared by Gibson Dunn during this period are also included in the relevant sections.

As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the UK COVID-19 Taskforce (listed at the end of this bulletin), or one of the taskforce co-leads:

Charles Falconer – London (+44 (0)20 7071 4270, [email protected])
Anna Howell – London (+44 (0)20 7071 4241, [email protected])

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1. COMPETITION AND CONSUMERS

Merger control

The COVID-19 pandemic is continuing to impact the administrative timetables of cases.

Of particular note, on 2 June 2020, the Competition Appeal Tribunal (CAT) granted JD Sports Fashion plc an extension of time to file an application to appeal the Competition and Markets Authority’s (CMA) decision to prohibit its acquisition of Footasylum plc. An extension of 14 days was granted. The CAT noted that the demands placed on relevant individuals at JD Sports by reason of the COVID-19 pandemic, particularly because it is in the retail industry, had disrupted the effective preparation of a potential notice of application. The CMA consented to the extension.

On 10 June 2020, the CMA also extended the statutory deadline for its review of Amazon’s acquisition of a stake (and certain rights) in Deliveroo by eight weeks. This was in part because additional time was needed to reflect the impact of the COVID-19 outbreak in its assessment.

Consumer protection

As mentioned previously, the CMA has identified holiday accommodation as a priority area for investigation by its COVID-19 Taskforce with respect to the approach adopted to cancellations and refunds during the pandemic. On 9 June 2020, the CMA announced that it has received a formal commitment from Vacation Rentals to offer the option of a full refund for bookings cancelled because of lockdown restrictions associated with the coronavirus outbreak. The CMA’s investigation into other holiday lets firms is continuing. It has described common complaints in this area as including the refusal to provide full refunds or offering only vouchers rather than cash refunds.

The CMA has stated that it will continue its inquiries into the holiday accommodation sector and warned that this may ultimately lead to court action against companies which fail to comply. Other areas of focus for its investigation include weddings and private events; nurseries and childcare providers; and package travel. Consumers still have the option to report having been affected by unfair cancellation terms to the CMA using an online form.

The CMA has previously issued guidance on its views on consumer protection law in relation to cancellation and refunds during the crisis (see further our COVID-19 UK Bulletin – 6 May 2020).

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2. CORPORATE GOVERNANCE (INCLUDING ACCOUNTS, DISCLOSURE AND REPORTING OBLIGATIONS)

Companies House announces an exception to its suspension of strike-off activity and a new virtual document upload service

Strike-off activity

Companies House has updated its COVID-19 guidance for customers, employees and suppliers to include an exception to the suspension and relaxation of strike off activity in cases where law enforcement agencies have concluded following investigation that a company is no longer in operation. In such circumstances, on and from 1 June 2020, the registrar will continue with strike off action in relation to those companies.

Further information can be accessed here.

Document upload service

Companies House has developed a new online service which will enable customers to file documents digitally, where such documents were previously required to be submitted in paper form. The service will not be available for documents that can already be filed online. Existing online services must continue to be used to file accounts and confirmation statements, to make changes to a company and to wind-up a company.

To find out which documents can be uploaded using the new temporary service, see here. These include applications for rectification of details relating to certain information on directors and registered addresses. To upload a document to Companies House, see here.

Guidance issued in relation to the Corporate Insolvency and Governance Bill 2020

On 20 May 2020, the Government introduced into the House of Commons the Corporate Insolvency and Governance Bill 2020 (the Bill). The Bill proposes to relax various statutory obligations in relation to wrongful trading, company filings, AGMs and general meetings (amongst other things) to provide companies and other corporate bodies with greater flexibility in the midst of the current crisis (see our COVID-19 UK Bulletin – 3 June 2020 for a summary of these proposals). Following the introduction of the Bill:

• the Department for Business, Energy & Industrial Strategy has published ten factsheets on the Bill, which explain each of the measures in the Bill; and
• the Financial Reporting council (FRC) has updated its previous Q&A Guidance in relation to the Bill to include a section on best practice for AGMs (please see our COVID-19 Bulletin – 20 May 2020 for a summary of the Q&A previously issued by the FRC).

The next stages of the Bill are currently being considered.

The London Stock Exchange plc (LSE) has announced temporary measures in relation to the publication of half-yearly reports for AIM companies

The LSE has published a new Inside AIM report which introduces temporary measures to allow AIM listed companies that require extra time to prepare their half-yearly report one additional month in which to notify AIM Regulation. The extension is temporary during the disruption caused by the current pandemic and will be kept under review.

An AIM company wishing to utilise the additional one month period must notify the public of its intention to do so via an RIS prior to the AIM company’s reporting deadline under section 18 of the AIM Rules for Companies (AIM Rules). The company’s nominated adviser must separately inform AIM Regulation of the delay.

An AIM company should continue to consider its disclosure obligations under the AIM Rules in conjunction with the advice and guidance of its nominated adviser.

The Prudential Regulation Authority (PRA) has issued a clarificatory statement on the use of electronic signatures during COVID-19

Evidence forms and other regulatory documents submitted to the PRA may be signed by way of electronic signature, following a new statement issued by the PRA. Provided there is no applicable specific legal provisions to the contrary, the PRA has confirmed that it will process documents that have been signed electronically, although the PRA has said that it may in specific instances (not detailed) request a “wet ink signature” where it is appropriate to do so. The statement has been issued in response to a number of questions received by the PRA in the context of the current pandemic and remote working. The approach will be reviewed as working practices evolve.

Firms should obtain their own legal advice on the validity of electronic signatures more generally.

For further information, see here.

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3. CYBERSECURITY AND DATA PROTECTION

Data protection

The Government has laid its Age Appropriate Design Code, also known as the Children’s Code, before Parliament. It sets out 15 standards that online services should meet to protect children’s privacy online. The ICO last week issued a statement in which it commended the “huge step towards protecting children online especially given the increased reliance on online services at home during COVID-19”. The ICO intends to develop a package of support to help businesses implement the Code.

The Government, faced with imminent court action by openDemocracy, released details of its large data-sharing contracts with Amazon, Microsoft, Google, Faculty and Palantir. The contracts show that Faculty and Palantir, companies involved in the NHS datastore project, were originally granted intellectual property rights to create their own databases, allowing them to train their models and profit off their unprecedented access to NHS data. The Government’s lawyers have now amended Faculty’s contract to cure this problem, however the debate continues to intensify around private companies profiting from patient data during the current pandemic.

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4. DISPUTES

Operation of the Courts – general update

On 10 June 2020, HM Courts & Tribunals published an updated tracker list of open, staffed and suspended courts. On 8 June 2020 a further 16 courts and tribunals were reopened for face-to-face hearings. There are now 182 courts open to the public for essential face-to-face hearings, 98 staffed courts operating via virtual means, and 61 temporarily suspended courts. Whilst physical hearings are still being avoided where possible, possible alternative venues to house so-called “Nightingale” courts (named after the temporary “Nightingale Hospital” that was built in a London convention centre at the start of the pandemic) are being identified, to facilitate continued delivery of justice whist maintaining social distancing measures. The Queen’s Bench Division issued its eighth Coronavirus Bulletin setting out arrangements for hearings, with remote hearings remaining the default position unless the Master considers otherwise.

Remote hearings

The Civil Justice Council published a report on 5 June 2020 on the impact of COVID-19 on the Civil Justice System, based on survey responses from over 1,000 participants (871 of whom were lawyers). Overall, respondents noted that they were satisfied with their experience of remote hearings and praised the efforts of the Courts. Respondents were largely inclined towards reserving remote hearings for less contentious or interlocutory hearings. Many reported technical difficulties, and noted the inability to facilitate participation of all parties and representatives, emotionally and practically.

While some trials are proceeding remotely, courts are assessing on a case-by-case basis whether physical trials would be more appropriate, if feasible, to avoid hindering proceedings. One such example is the clinical negligence trial before the Queen’s Bench Division in SC v University Hospital Southampton NHS Foundation Trust. This had originally been posited as a remote trial by video conference, but the Defendant applied to adjourn the trial on the basis that a remote hearing would be unfair. To avoid adjournment, however, a socially distanced trial was ordered. Mr Justice Johnson found that although a fair hearing could be conducted remotely (as the work done by the courts since late March demonstrates), it was not appropriate in all cases. He ruled that a remote trial would be unsuitable in this case on the basis that witnesses’ demeanour and others’ reactions would be difficult to assess, ability to communicate with the parties’ legal teams would be hindered, the “solemnity, formality and focus of the courtroom” could not easily be replicated, and the “complex multi-layered human communications and observations” would be impeded.

SIFoCC Memorandum on the future use of technology

The Standing International Forum of Commercial Courts (SIFoCC, a global forum of the world’s commercial courts) published a memorandum on “Delivering justice during the COVID-19 pandemic and the future use of technology”, which summarises different ways in which justice systems worldwide have adapted to the new circumstances arising out of the COVID-19 pandemic, and how this may impact their future operations. It includes observations of the positions of 19 specific jurisdictions, as well as listing specific issues that will be important going forward. The Memorandum details how Technology has been particularly successful in commercial disputes and interlocutory hearings. According to SIFoCC, it is likely that the use of online hearings (which had been emerging already before the pandemic in some jurisdictions) will be increasingly prevalent particularly in commercial cases. The Memorandum notes the importance of justice systems sharing their experience and knowledge, to address issues such as the current backlog of disputes, and streamline the use of resources to continue to deliver justice. The memorandum supplements the SIFoCC’s publication of its First International Working Group’s report: “International Best Practice in Case Management” which discusses the use of technological developments to improve case management to cope with the COVID-19 pandemic and the harnessing of technology to continue to deliver justice.

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5. EMPLOYMENT

Travel quarantine

• Regulations requiring 14-day self-isolation for travellers to the UK came into force on 8 June 2020 (see Lockdown and Public Law section below for more information); however, they do not provide for the position of individuals who may be prevented from working during their 14-day self-isolation period and whether they are entitled to statutory sick pay. We hope to see further clarity from the Government in relation to this.

Coronavirus Job Retention Scheme (CJRS)

The Government announced that the CJRS cut-off date of 10 June 2020 will not apply to parents on family-related leave. Employees returning from maternity, adoption, paternity, shared parental or parental bereavement leave can be added to the CJRS after 10 June 2020, as long as the employer had furloughed other eligible employees by that date.

Further to our recent client article regarding changes to the CJRS, the promised guidance of 12 June 2020 sets out further details of flexible furlough and indicates that from 1 July 2020 there will be two sets of variations:

• Employees can work some of their hours yet be paid via the CJRS for the remainder of their hours (hours on furlough).
  • Employees can work any hours/shifts, and their employers must pay them for these.
  • For the hours not worked, employers can claim CJRS and the employee must receive 80% of their wages (up to £2,500 per month) for those hours.
  • “Wage caps are proportional to the hours an employee is furloughed. For example, an employee is entitled to 60% of the £2,500 cap if they are placed on furlough for 60% of their usual hours.” We take this to mean that the employer may claim, and must pay to the employee, the same proportion of 80% of their wages (up to £2,500) as the proportion of their hours that they work.
• The proportion of the remainder hours (hours on furlough) that CJRS will cover, versus the employer paying for, will be scaled back gradually:
  • For June and July 2020, the CJRS will pay 80% of wages (up to £2,500), plus employer National Insurance Contributions and pension contributions, for these hours.
  • For August 2020, the CJRS will pay 80% of wages (up to £2,500), and the employer will pay employer National Insurance Contributions and pension contributions, for these hours.
  • For September 2020, the CJRS will pay 70% of wages (up to £2,187.50), and the employer will pay the difference between this and 80% of wages (up to £2,500) and also employer National Insurance Contributions and pension contributions, for these hours.
  • For October 2020, the CJRS will pay 60% of wages (up to £1,875), and the employer will pay the difference between this and 80% of wages (up to £2,500) and also employer National Insurance Contributions and pension contributions, for these hours.
  • Employers can still “top up” wages for these hours at their own expense if they wish.
  • The CJRS will close on 31 October 2020.

As indicated in our recent client alert, employers will need to submit information on the usual versus actual hours worked by an employee in a claim period. They will also have to agree any new flexible furlough arrangement with employees and confirm that agreement in writing, so fresh agreements/side letters that permit work to be carried out may well be necessary.

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6. ENERGY

Market update

The Energy sector is continuing to experience turbulence as the prospect of a second wave of COVID-19 infection comes up against burgeoning confidence in the market. A number of energy company share prices rose for much of last week but these gains began to tail off on Friday. Commodity price fluctuations are affecting certain countries more than others: the US LNG market for example has seen over 60% of its July deliveries cancelled. However this trend may not last, with some observers pointing to political reasons for the US to limit dependence on Russian or Middle Eastern LNG, echoing the US State Department’s description of the hydrocarbon market as “molecules of freedom”. It remains to be seen whether the political considerations will outweigh the commercial.

Energy transition

Britain has continued to break its record of not using coal for energy generation, which we previously commented on here. This comes as excellent weather conditions for renewables production combined with lower demand continue to shift as the National Grid away from coal. Commentators are disagreeing, though, about what production will look like in the winter, when demand is expected to rise again. The longer term picture of the energy transition is also still developing. Doug Parr, chief scientist at Greenpeace UK, has cast doubt on the commercial viability of running coal plants for only six months of usage, while other industry observers counter that there remain considerable costs involved in closing such facilitates for good. The Government’s self-imposed deadline for ending coal power in the UK is 2025, but Prime Minister Boris Johnson has suggested that this may be brought forward to 2024.

In the US, the growing solar panel installation market has been hit by restrictions on movement, and the Solar Energy Industries Association estimates that 72,000 jobs out of a total of over 260,000 employed in the industry have been lost. This news comes as Congress plans to reduce the tax breaks available to the industry.

Impact of COVID-19 on projects and companies

The effects of COVID-19 continue to take their toll on transactions, sites and projects globally, with some predicting global upstream Capex cuts to fall by nearly 30% (see our previous reporting on Capex cuts here). Some specific examples of note include:

• US-based Extraction Oil & Gas may be preparing to file for bankruptcy and just hit a deadline to pay a missed interest payment in May on 14 June 2020. Its total debt is US $1.6 billion but its market value is US $100 million.
• Shell is facing questions from shareholders after cutting its dividend for this quarter by two-thirds. It has previously spoken of its plans to cut annual Capex from US $25 billion to US $20 billion, but investors are calling for more clarity on the company’s plans.
• Both BP and Chevron have announced plans to cut 15% of their workforce.

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7. FINANCE

No update to our COVID-19 UK Bulletin – 3 June 2020.

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8. FINANCIAL SERVICES REGULATORY

No update to our COVID-19 UK Bulletin – 3 June 2020.

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9. FORCE MAJEURE

No update to our COVID-19 UK Bulletin – 3 June 2020.

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10. GOVERNMENT SUPPORT SCHEMES

Coronavirus funding schemes

The Government announced that as of 7 June 2020:

• Approximately £9.56 billion had been approved for lending to 47,650 businesses under the Coronavirus Business Interruption Loan Scheme from 93,305 applications.
• Approximately £1.57 billion had been approved for lending to 244 businesses under the Coronavirus Large Business Interruption Loan Scheme from 615 applications.
• Approximately £23.78 billion had been approved for lending to 782,246 businesses under the Bounce Back Loan Scheme from 964,414 applications.
• Approximately £55.9 million of convertible loans to 53 businesses had been approved from 533 applications under the Future Fund scheme.

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11. INSOLVENCY

Corporate Insolvency and Governance Bill 2020

On 20 May 2020, the Government introduced the Corporate Insolvency and Governance Bill 2020. See the Corporate Governance section above for an update.

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12. INTERNATIONAL TRADE AGREEMENTS (PRIVATE AND PUBLIC)

No update to our COVID-19 UK Bulletin – 3 June 2020.

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13. LOCKDOWN AND PUBLIC LAW ISSUES

Lockdown easing

Further regulations have been introduced to amend the existing lockdown restrictions in place since 26 March 2020. The amendment, The Health Protection (Coronavirus, Restrictions) (England) (Amendment) (No. 4) Regulations 2020, came into force on 15 June 2020 and makes provisions for: reopening of retail businesses and certain outdoor attractions; enabling places of worship to open for private prayer by individuals; allowing single-adult household to link with one other household to form a “support bubble”; and permitting certain gatherings. The next review of these regulations is due by 25 June 2020. The Government separately made regulations making face coverings mandatory for passengers on public transport .

Travel quarantine

On 8 June 2020 regulations came into force requiring most people arriving from abroad to self-isolate for 14 days. The Health Protection (Coronavirus, International Travel) (England) Regulations 2020 require anyone arriving from outside the common travel area (United Kingdom, Republic of Ireland, Isle of Man, Channel Islands) to self-isolate, subject to certain excuses, and provide contact details on where they will be doing so. People in certain professions are not required to self-isolate. Failure to self-isolate without a valid exception can carry a fine of up to £1000 or further action. Under The Health Protection (Coronavirus, Public Health Information for Passengers Travelling to England) Regulations 2020, commercial transport service operators are likewise required to furnish relevant information to passengers.

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14. M&A AND PRIVATE EQUITY

Walk-away rights

In the uncertainty caused by COVID-19, it is no surprise that M&A deals have been hit. The Financial Times analysis of US public deals in mid-March 2020 found a gap averaging 15% between the deal price and the target’s trading price, the gap in “normalised” market conditions being less than 5%.

Despite an already discounted market, many purchasers are walking away or attempting to walk away. In the US, reportedly 16 public M&A deals and 31 private M&A deals are, at time of writing, experiencing delays and/or terminations. In the UK, we are aware of at least one deal where a claim against a purchaser attempting to rely on a material adverse event (MAE) has been filed in court. This development arises against a backdrop of deal volume in April 2020 having dropped by 99%, totalling just 35 deals across the whole month with a combined value of £409.1 million, according to data consultancy Refinitiv.

Some sale and purchase contracts in US and UK public deals will give the buyer an easy out – a minimum share price, for example, which may not be met at the moment or within the timeframe allowed under the contract. Several deals in the UK have also been mutually terminated and/or restructured.

In US M&A related litigation, sellers are, in almost all cases, calling for specific performance in an attempt to oblige the buyers to complete the purchase; reluctant buyers are claiming MAEs often whilst also alleging seller defaults in complying with covenants. MAEs, however, have historically been extremely difficult to prove to court, with only one successful instance in the US, in Delaware in 2018.  Further, sellers are often able to point to the buyers’ lenders not having called an MAE which weakens buyers’ position in demonstrating a MAE. Many expect that MAEs will remain as difficult to prove as ever and a number of US cases have already settled with neither party reported to have paid a termination fee.

In the UK, MAEs are far less common in private M&A transactions. In UK public M&A transactions, whilst it is usual to include material adverse type conditions to a public takeover, in practice, no bidder has ever been able to successfully rely on a MAE condition to lapse a bid. The extremely high bar which is set in UK public deals was recently reaffirmed in the bid for the retail outlet Moss Bros. The owners of Crew Clothing had made a recommended cash offer for Moss Bros in early April 2020 but a few weeks later (in the light of the deepening impact of COVID-19 on the UK retail sector) sought to invoke certain conditions to its bid (including certain material adverse change type conditions) to lapse its offer. The Takeover Panel Executive ruled that the bidder had not been able to establish that circumstances had arisen which were of “material significance to [the bidder] in the context of its offer” which would give it the right to lapse its bid. In addition, in the context of other remedies available to buyers, the English courts will not grant specific performance where damages would be an adequate remedy. As a result of this combination of factors, we have not seen the same trend of court cases in England and Wales requiring buyers to complete on deals, in particular given deposits are a common feature of transactions and regarded as an adequate remedy.  Despite the parties’ options seeming more limited in the UK because of the UK court’s approach to specific performance, frustrated sellers are at least able to keep the deposit, if the transaction’s term allow and the amount of the deposit is not penal. In the US, M&A deposits are much less common, with the exception of real estate deals, so sellers may have to turn to court to enforce payments of any agreed termination fees.  With the current uncertainty, the culture in the UK of using deposits may appear weighted against reluctant buyers, but at least their risk and liability is easily measurable. The US cases may end up with different outcomes and hence may drive buyers and sellers towards resorting to litigation.

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15. REAL ESTATE

Commercial outlook

The draft Code of Conduct for landlords and tenants, previously reported on here, has been criticised by both groups. James Daunt, CEO of Waterstones, said the code “isn’t worth the paper it’s printed on”; Melanie Leech, CEO of the British Property Federation, a group representing landlords, warned that “without Government grant support many businesses face an insurmountable challenge”. The Code of Conduct is still in draft status, and will not be mandatory when released in any case, which has also been an issue raised by some tenant groups.

The London Office market, hailed by some as a sector of the real estate industry which would remain strong, has seen an 88% slump in take-up in Q2. This is hardly surprising given travel restrictions and, as previously reported on here, some prospective company moves have been delayed or abandoned.

Some retail bosses have called for a reduction in the recommended 2-metre social distancing rule as Paul Martin, head of retail at KPMG, has warned that this limit may prevent stores from opening at all. Gavin Peck, CEO of The Works, which operates 465 stores in the UK, has called for the Government and the industry to think about this “ahead of Christmas.”

Court action

In an anonymised judgment (Re: A Company (Injunction to restrain presentation of petition) [2020] EWHC 1406 (Ch)), the High Court has ruled against a landlord who issued a winding-up petition against a tenant. The Landlord wanted to forfeit the lease but couldn’t due to the Coronavirus Act 2020. The Court held that the winding-up petition was unlikely to be heard before the Corporate Governance and Insolvency Bill, previously reported on here, was enacted, so it was able to base its decision on Schedule 10 of the Bill, even though the Bill has not yet come into force. The Court also referenced the recent Travelodge Ltd v Prime Aesthetics Ltd decision (see our previous coverage of Travelodge’s issues with its landlords here), which prevented another winding-up petition.

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16. UK TAX

Temporary breaks in trading activity

HMRC has updated its Business Income Manual to confirm that if a business closed its doors to customers, or otherwise ceased trading during the coronavirus lockdown period, but intended to continue trading after restrictions were lifted, then the trade should not be treated as having ceased. Any income and expenses relating to the gap in trading will be taken account of in the calculation of trade profits or losses, subject to the usual tax rules and case law.  The update also clarifies that, depending on the fact pattern, a business that starts carrying on a new activity that is broadly similar to its existing trade should not be treated as commencing a separate trade.  Other crisis-driven changes to trading activities are also covered. For further details see here.

HMRC delays construction services VAT reverse charge

HMRC announced that the Government will delay the implementation of the VAT domestic reverse charge for construction services from 1 October 2020 until 1 March 2021, because of the coronavirus crisis’ impact on the construction industry. For further details see here.

New HMRC guidance on impact of COVID-19 on share schemes

HMRC has issued guidance on how employment related securities are affected by the coronavirus pandemic, including how such arrangements interact with furlough grant payments. HMRC’s guidance notes that the impact on EMI schemes is still being considered and HMRC will provide an update on this as soon as possible. For further details see here.

Limited extension of three-year window for disposals of previous residence to trigger refund of SDLT supplemental 3% charge

The Government has announced a limited extension of the three-year window in which to sell a previous residence, for a refund of the supplemental 3% SDLT charge paid on the purchase of an additional residential property. Updates to HMRC’s guidance indicate the exceptional circumstances in which sales outside the three-year window will trigger a refund. For further details see here.

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COVID-19 UK TASKFORCE LEADERS

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 contact or any member of the Firm’s (COVID-19) UK Taskforce:

Areas	Task Force Leaders
Competition and Consumers	Ali Nikpay – [email protected]
Corporate Governance	Selina Sagayam – [email protected]
Cybersecurity and Data Protection	James Cox – [email protected]
Disputes	Charlie Falconer – [email protected]
Employment	James Cox – [email protected]
Energy	Anna Howell – [email protected]
Finance	Greg Campbell – [email protected]
Financial Regulatory	Michelle Kirschner – [email protected]
Force Majeure	Patrick Doris – [email protected]
Government Support Schemes	Amar Madhani – [email protected]
Insolvency	Greg Campbell – [email protected]
International Trade Agreements	Patrick Doris – [email protected]
Lockdown and Public Law issues	Patrick Doris – [email protected]
M&A	Jeremy Kenley – [email protected]
Private Equity	James Howe – [email protected]
Real Estate	Alan Samson – [email protected]
UK Tax	Sandy Bhogal – [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.

Numerous public companies are experiencing cash flow pressure and going concern issues as a result of COVID-19. Raising capital quickly and with certainty of execution is a priority. Many private equity clients are considering opportunities to invest substantial capital through PIPE (Private Investment in Public Equity) transactions. Gibson Dunn lawyers briefly outline these opportunities.

Decided June 15, 2020

Bostock v. Clayton County, Georgia, No. 17-1618;

Altitude Express, Inc. v. Zarda, No. 17-1623; and

R.G. & G.R. Harris Funeral Homes, Inc. v. Equal Employment Opportunity Commission, No. 18-107

Today, the Supreme Court held 6-3 that the prohibition on sex discrimination in Title VII of the Civil Rights Act of 1964 encompasses employment discrimination because of a person’s sexual orientation or transgender status. 

Background:
Title VII of the Civil Rights Act of 1964 prohibits employers from discriminating against employees “because of . . . sex.” 42 U.S.C. § 2000e-2(a)(1). Donald Zarda was a former skydiving instructor at Altitude Express. Gerald Bostock worked as a child welfare services coordinator for Clayton County, Georgia. Aimee Stephens worked at R. G. & G. R. Harris Funeral Homes and originally presented as a male, but later told her employer that she planned to live and work as a woman. All three were fired allegedly because of their sexual orientation or transgender status, and they initiated sex discrimination claims against their former employers under Title VII. In Zarda’s case, the Second Circuit held that discrimination based on sexual orientation is a “subset of sex discrimination.” In Bostock’s case, the Eleventh Circuit held that Title VII does not apply to discrimination based on sexual orientation and affirmed the dismissal of Bostock’s Title VII claim. And in Stephens’ case, the Sixth Circuit held that Title VII applies to discrimination on the basis of transgender status.

Issue:
Whether discrimination against an employee because of sexual orientation or transgender status constitutes prohibited discrimination within the meaning of Title VII.

Court’s Holding:
Yes. Title VII’s prohibition on discrimination based on sex encompasses sexual orientation and transgender status. An employer violates Title VII when it discharges an employee in part because of sexual orientation or transgender status.

“[I]t is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.”

Justice Gorsuch, writing for the majority

What It Means:

• Justice Gorsuch’s majority opinion, which was joined by Chief Justice Roberts and Justices Ginsburg, Breyer, Sotomayor, and Kagan, was grounded in the text and the ordinary public meaning of the statutory terms at the time of enactment. Justice Gorsuch reasoned that Title VII’s prohibition on employment discrimination “because of . . . sex” necessarily encompasses discrimination on the basis of sexual orientation or transgender status because “it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex,” slip op. 9, and therefore an employer who fires an employee based on sexual orientation and transgender status “inescapably intends to rely on sex in its decisionmaking,” id. at 11.
• Justice Gorsuch acknowledged that Title VII’s prohibition on discrimination “because of . . . sex” may have been originally intended to cover only gender-based discrimination, not discrimination based on sexual orientation or transgender status. Echoing the late Justice Scalia’s reasoning in Oncale v. Sundowner Offshore Services, Inc., 523 U.S. 75 (1998), where the Court held that same-sex sexual harassment can violate Title VII, Justice Gorsuch explained that even if Title VII’s application in these cases reaches “beyond the principal evil” legislators may have intended or expected to address, the fact that a statute is applied in a new context does not render its meaning ambiguous.
• In dissent, Justice Alito, joined by Justice Thomas, emphasized that there is no evidence that the members of Congress who voted for Title VII in 1964 would have contemplated that it prohibited discrimination based on sexual orientation or transgender status. In a separate dissent, Justice Kavanaugh stated that he believed the majority’s interpretation violated the separation of powers because the responsibility to amend Title VII belongs to Congress and the President in the legislative process, not the courts.
• The Court’s opinion expressly cabins its reach to Title VII, perhaps reducing the likelihood that the decision will have an impact in other areas involving different statutes, such as Title IX or the Americans with Disabilities Act. The Court also noted that it was not addressing questions about “sex-segregated bathrooms, locker rooms, and dress codes.” Slip op. 31. And the Court acknowledged that the Religious Freedom Restoration Act of 1993 “might supersede Title VII’s commands in appropriate cases.” Id. at 32. These issues are likely to arise in future cases.

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The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 [email protected]

Mark A. Perry +1 202.887.3667 [email protected]

Related Practice: Labor and Employment

Catherine A. Conway +1 213.229.7822 [email protected]

Jason C. Schwartz +1 202.955.8242 [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.

Dallas associate Michael Cannon is the author of “Bankruptcy-Proximate Owner Shift? Loss Corporation Beware,” [PDF] published by Tax Notes Federal on May 18, 2020.

1. Introduction

Section 364(e) of the Bankruptcy Code provides important protections to lenders that provide post-bankruptcy financing (known as “DIP Financing”) to companies that are in chapter 11 bankruptcy cases (known as “Debtors”). By its plain terms, Section 364(e) provides a lender with material protections in the event that an order authorizing DIP Financing is later reversed or modified on appeal:

The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith … unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.[1]

These protections have the practical effect of mooting appeals of orders authorizing DIP Financing where the order contained findings that the lender acted in good faith and the objecting party did not obtain a stay of the order pending appeal.

Many courts have held that Section 364(e)’s protections should be strictly limited to (a) lenders providing DIP Financing (“DIP Lenders”) because Section 364 only applies to DIP Financing and (b) preserving the validity of debt incurred and priorities and liens granted by a Debtor to secure DIP Financing.[2] According to one leading decision, “[t]he questions which arise under this section are: (1) whether the creditor attempting to challenge an authorization of credit obtains a stay pending an appeal; and (2) whether the lender or group of lenders acts in good faith in extending the new credit.”[3] In contrast to these other courts, on June 9, 2020, the Ninth Circuit took a more expansive view of the scope of Section 364(e) by applying that section’s protections to pre-bankruptcy lenders that did not provide any DIP Financing. See Official Committee of Unsecured Creditors of Verity Health System of California v. Verity Health System of California (“Verity”).[4] The Ninth Circuit applied Section 364(e) to moot an appeal seeking to revoke certain rights afforded to pre-bankruptcy lenders, even though (a) those rights were wholly unrelated to the validity of debt or any priority or lien granted to a DIP Lender, and (b) the DIP Financing had been paid in full.

1. Background

The Debtors in Verity owned hospitals and other healthcare facilities. On August 31, 2018, the Debtors commenced chapter 11 bankruptcy cases in the United States Bankruptcy Court for the Central District of California. To sustain their operations during the chapter 11 cases, the Debtors sought bankruptcy court approval of DIP Financing. If approved, the DIP Lender would receive a “superpriority lien” on the Debtors’ assets pursuant to Section 364(d) of the Bankruptcy Code, giving the DIP Lender priority over the liens and claims held by the Debtors’ pre-bankruptcy lenders (the “Pre-Bankruptcy Lenders”). The DIP Lender was not one of the Pre-Bankruptcy Lenders, and the Pre-Bankruptcy Lenders provided no DIP Financing in the chapter 11 cases.

The DIP Lender conditioned the DIP Financing on the Pre-Bankruptcy Lenders’ agreement to subordinate their pre-bankruptcy liens and claims to the liens and claims that would secure the DIP Financing. The Pre-Bankruptcy Lenders conditioned that agreement upon, among other things, the bankruptcy court’s approval of waivers of (a) the Debtors’ right to surcharge the Pre-Bankruptcy Lenders’ collateral for the costs and expenses of preserving or disposing of such collateral, and (b) the court’s authority to exclude post-petition proceeds of the Debtors’ assets from the Pre-Bankruptcy Lenders’ collateral based on the “equities of the case,” pursuant to Sections 506(c) and 552(b) of the Bankruptcy Code, respectively. The Official Committee of Unsecured Creditors appointed in the Debtors’ chapter 11 cases (the “Committee”) objected on the grounds that the waivers would undermine the unsecured creditors’ prospect for a recovery by precluding their ability to obtain recoveries from the Pre-Bankruptcy Lenders. The bankruptcy court entered an order overruling the objection and approving the DIP Financing, and granted the waivers demanded by the Pre-Bankruptcy Lenders as necessary to induce the DIP Lender to extend DIP Financing. The bankruptcy court further held that the waivers constituted part of the “adequate protection” afforded pre-bankruptcy lenders under Bankruptcy Code Section 361, which is mandated by Section 364(d) to protect against any diminution in value of the Pre-Bankruptcy Lenders’ claims as a result of the DIP Financing.[5]

The Committee appealed the bankruptcy court’s order to the United States District Court for the Central District of California. Following Ninth Circuit precedent in In re Adams Apple, Inc., 829 F.2d 1484 (9th Cir. 1987), the district court explained that “if the court’s order ‘is within the purview of section 364,’ then the protections of § 364(e) apply.”[6] The district court concluded that the waivers were “a condition that was necessary to obtain credit” and the court was “not persuaded that it can cause the modification of a necessary term in the DIP Agreement without implicating § 364(e).”[7]

Having determined that Section 364(e) applied to the appeal, the district court dismissed the appeal as moot because neither of the exceptions to Section 364(e) applied; the Committee had not obtained a stay of the bankruptcy court’s order pending appeal or contended that the DIP Lender failed to act in “good faith.”[8] The Committee timely appealed to the Ninth Circuit.

III.   The Ninth Circuit Affirms the Dismissal of the Appeal as Statutorily Moot Pursuant to Section 364(e) of the Bankruptcy Code

On appeal, the Committee argued that Section 364(e) did not cover the waivers because the statute’s plain language is limited to appeals regarding “any priority or lien … granted” to a DIP Lender. The Committee further argued that, whereas the purpose of Section 364(e) is to protect DIP Lenders in order to incentivize them to provide DIP Financing, the appeal could not adversely affect the DIP Lender because it had already been repaid in full and the Committee had stipulated that any ruling in the appeal would not affect the DIP Lender.

The Ninth Circuit affirmed the dismissal of the appeal as moot pursuant to Section 364(e). The court reasoned that, although the waivers were part of the Pre-Bankruptcy Lenders’ adequate protection package that is authorized under Section 361 of the Bankruptcy Code and is “not expressly included in § 364,” “the waivers are included in the Final DIP Order−a postpetition financing arrangement authorized under § 364.”[9] The court also relied on Ninth Circuit precedent holding that Section 364(e) “broadly protects any requirement or obligation that was part of a post-petition creditor’s agreement to finance.”[10] According to the Ninth Circuit, “the waivers were ‘part of a post-petition creditor’s agreement to finance’ and ‘helped to motivate [the DIP Lender’s] extension of credit’”[11] because (a) the DIP Lender conditioned the DIP Financing on the Pre-Bankruptcy Lenders’ consent to subordinate their claims and liens, and (b) the Pre-Bankruptcy Lenders conditioned that required consent on receipt of the waivers at issue in the appeal.

The Ninth Circuit also rejected the Committee’s argument that Section 364(e) was inapplicable because the DIP Lender had been repaid in full and the Committee stipulated that the appeal would not affect the DIP Lender. According to the Ninth Circuit, that argument “does not change the analysis” because “the [Pre-Bankruptcy Lenders] are also entitled to § 364(e)’s protections.”[12]

1. Conclusion

Verity is noteworthy because it extended Section 364(e) beyond its plain language to bar any appeal regarding waivers that were approved for the benefit of pre-bankruptcy lenders that did not provide DIP Financing. It remains to be seen whether courts will follow Verity and apply the protections of Section 364(e) to non-DIP Lenders or if courts will seek to distinguish Verity by limiting Section 364(e)’s protections to the plain language of the statute.

_______________________

   [1]   11 U.S.C. § 364(e) (emphasis added).

   [2]   See, e.g., Kham Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1355 (7th Cir. 1990) (holding that the purpose of § 364(e) is to assure a post-petition lender that extends credit in good faith reliance upon a financing order that it is entitled to the benefit of the order regardless of whether it is later determined to be legally or factually erroneous); Shapiro v. Saybrook Mfg. Co. (In re Saybrook Mfg. Co.), 963 F.2d 1490, 1493, 1495 (11th Cir. 1992) (held that Section 364(e) did not moot appeal regarding cross-collateralization of pre-petition debt because, “[b]y its own terms, section 364(e) is only applicable if the challenged lien or priority was authorized under section 364(d),” and section 364(d) “appl[ies] only to future—i.e., post-petition—extensions of credit” and “do[es] not authorize the granting of liens to secure pre-petition loans”); In re Joshua Slocum Ltd, 922 F.2d 1081, 1085 n.1 (3rd Cir. 1990) (“Section 364(e) concerns the validity of debts and liens.”); In re Main, Inc., 239 B.R. 59, 72 (Bankr. E.D. Pa. 1999) (held that Section 364(e) did not moot appeal from order permitting payment of debtor’s counsel because Section 364(e) “relates strictly to appeals from orders creating liens with preferential position or authorizing debt against the bankruptcy estate under 11 U.S.C. § 364(d)”).

   [3] New York Life Ins. Co. v. Revco D.S., Inc. ( In re Revco D.S., Inc.), 901 F.2d 1359, 1364 (6th Cir. 1990).

[4]   Case No. 19-55997 (9th Cir. June 9, 2020). This opinion was not published and, therefore, is not considered precedential even in the Ninth Circuit, though it can be cited to other courts in the circuit. See Ninth Circuit Local Rule 36-3.

   [5]   Section 361 provides that, “[w]hen adequate protection is required under section … 364 of this title of an interest of an entity in property, such adequate protection may be provided by … (1) requiring the trustee to make a cash payment or periodic cash payments to such entity … (2) providing to such entity an additional or replacement lien … or (3) granting such other relief … as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.” 11 U.S.C. § 361. Section 364(d) provides that the bankruptcy court can approve a senior lien only if it finds that “there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted.” 11 U.S.C. § 364(d).

   [6]   In re Verity Health System of California, Inc., Case No. 2:18-cv-10675-RGK, at 6 (C.D. Cal. Aug. 2, 2019) (quoting Adams Apple, 829 F.2d at 1488) (emphasis added).

   [7]   Id. at 7−8.

   [8]   Id. at 7.

   [9]   Verity at 3.

[10]   Id. at 2−3 (quoting Weinstein, Eisen & Weiss, LLP v. Gill (In re Cooper Commons, LLC), 430 F.3d 1215, 1219 (9th Cir. 2005)).

[11]   Id. at 3 (quoting Cooper Commons, 430 F.3d at 1219−20) (bracketed material in original).

[12]   Id. at 4.

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

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New York associates Lee Crain and Randi Brown are the authors of “Administration Should Respect Voice Of America’s Autonomy,” [PDF] published by Law360 on June 12, 2020.