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Announcements

On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the Federal Reserve Board and the UK Financial Conduct Authority, announced plans to consult on specific timing for the path forward to cease the publication of USD LIBOR. In particular, IBA plans to consult on ceasing the publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors (i.e., overnight, one month, three month, six month and 12 month tenors). This announcement is significant as regulators had indicated that all USD LIBOR tenors would cease to exist or become non-representative at the end of 2021. This proposal significantly lengthens the transition period to June 30, 2023 for most legacy contracts, allowing time for many contracts to mature before USD LIBOR ceases to exist. Legacy contracts with maturities beyond June 30, 2023 would still need to be amended to incorporate appropriate fallback provisions to address the ultimate cessation of USD LIBOR.

This announcement follows on the heels of IBA’s November 18^th announcement that it plans to consult on ceasing publication of all GBP, EUR, CHF and JPY LIBOR settings after December 31, 2021. IBA plans to close the consultation for feedback on both proposals by the end of January 2021. IBA noted that any publication of the overnight and one, three, six and 12 month USD LIBOR settings based on panel bank submissions beyond December 31, 2021 will need to comply with applicable regulations, including as to representativeness.

Concurrently, a statement by the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation included supervisory guidance that encourages banks to stop new USD LIBOR issuances by the end of 2021, noting that entering into new USD LIBOR-based contracts creates safety and soundness risks.

The regulators and IBA make clear that these announcements should not be read as an index cessation event for purposes of contractual fallback language (i.e., they should not be read to say that LIBOR has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative). IBA will need to receive feedback on the consultation and will make separate announcement(s) regarding the cessation dates once final. Accordingly, the IBA proposal is not final and is subject to the feedback on the consultation.

The Alternative Reference Rates Committee (the “ARRC”) also released a statement in support of the announcements, expressing that the developments “would support a smooth transition for legacy contracts by allowing time for most to mature before USD LIBOR is proposed to cease, subject to consultation outcomes.” The ARRC further stated that “these developments align with the ARRC’s transition efforts, and will accelerate market participants’ use of the Secured Overnight Financing Rate (SOFR), the ARRC’s preferred alternative to USD LIBOR.”

Impact

If commonly used USD LIBOR tenors continue to be published and remain representative until June 30, 2023, this will provide an extra 18 months for the completion of the LIBOR transition process beyond what was previously expected. Fallback provisions in existing contracts using these USD LIBOR tenors would not be triggered until June 30, 2023, when, under the proposal, LIBOR would ultimately cease to exist. This will also allow additional time for the development of a forward-looking version of SOFR (“Term SOFR”), which could further ease the transition.

Counterparties with existing loans, derivatives and other contracts that mature prior to June 30, 2023 and reference most USD LIBOR rates would not need to incorporate fallback amendments, since these contracts will terminate before the transition. Additionally, with respect to derivatives and loans that reference USD LIBOR and have maturities beyond June 30, 2023, counterparties are likely to consider delaying adoption of fallback amendments because there no longer is an immediate threat of application of the fallback, yet uncertainty remains as to the extent of the mismatch between the ARRC-recommended fallback provisions for loans (Term SOFR, if available, or, otherwise, daily simple SOFR) and the ISDA 2020 IBOR Fallbacks Protocol for derivatives (SOFR compounded in arrears).

Furthermore, counterparties may opt to wait and see how the market develops before amending legacy contracts, especially given uncertainty around the appropriate adjustment to contractually specified spreads over the reference rate when adopting SOFR in place of LIBOR.

Although certain tenors of USD LIBOR may continue to be published until mid-2023, banks have now been advised, for safety and soundness concerns, not to enter into any new contracts that reference LIBOR after December 31, 2021. This will result in a longer period during which banks and other market participants will have both LIBOR loans and swaps and SOFR loans and swaps. Banks and other market participants should consider the operational and pricing impacts of maintaining products based on both benchmarks and confirm whether they have any contracts that reference one week or two month USD LIBOR, which are expected to be discontinued after December 31, 2021.

Gibson Dunn’s Capital Markets, Derivatives, and Financial Institutions practice groups are available to answer questions about the LIBOR transition in general and these developments in particular. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets, Derivatives, or Financial Institutions practice group, or the authors of this client alert:

Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Ben Myers – London (+44 (0) 20 7071 4277, bmyers@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
John J. McDonnell – New York (+1 212-351-4004, jmcdonnell@gibsondunn.com)

Please also feel free to contact any of the following practice leaders:

Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Derivatives Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

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

The California Air Resources Board (CARB) recently approved significant changes to the requirements for reporting emissions from stationary sources to help monitor air pollution at local levels. Local air pollution control districts previously controlled reporting, but as of January 1, 2020, the Regulation for the Reporting of Criteria Air Pollutants and Toxic Air Contaminants implements uniform statewide annual reporting of criteria air pollutant and toxic air contaminant emissions data. The amendments adopted last week aim to improve this program by creating a unified reporting mechanism and establishing expanded and consistent reporting criteria.[1] Thus, sources should stay up to date on changes to the regulation’s reporting triggers and formats.

Among other changes, the amendments do the following:

“Establish additional applicability specifications for sources emitting more than four tons per year of criteria pollutants (or 100 tons per year for carbon monoxide).”[2]
“Establish additional toxics-based applicability specifications based on identified activity levels for specified permitted emissions processes.”[3]
Establish a new applicability category encompassing “additional facilities located both statewide, as well as in the most highly impacted communities,” including, for example “retail gasoline fueling stations, dry cleaners, print shops, auto body and auto paint shops, metal plating, metal grinding and finishing facilities, coating and finishing facilities, industrial cleaning and degreasing operations, welding operations, facilities with backup diesel generators and emergency fire pumps, and others.”[4]
Create “abbreviated reporting options for specified industrial sectors to simplify reporting requirements.”[5]
Expand the regulation’s applicability from about 1,300 facilities to more than 60,000 facilities.[6]
Increase the number of reportable emission-producing chemicals from approximately 450 to more than 1,300 over a phase-in period based on chemicals’ known health effects, toxicity, and carcinogenic risks.[7]
Include provisions that allow the public to report information about potential emissions sources.[8]

A CARB Board Member explained that emission inventories are “a fundamental tool for understanding the sources that contribute to California’s air quality and climate challenges.”[9] The new amendments are designed to improve data collection and trend assessment to better prioritize reduction efforts in emissions hot spots.

The amendments’ cost impact on the private sector is “projected to be $9.6 million annually, maximum,” primarily for data reporting.[10] Local and state governments are expected to incur “a maximum of $5.6 million and $149,000 per year, respectively,” in implementation costs.[11]

The next step in the process is for the Office of Administrative Law to review the amendments, and when they become final, they may be challenged by industry members who are impacted.[12]

_____________________

[1] See Proposed Amendments to the Regulation for the Reporting of Criteria Air Pollutants and Toxic Air Contaminants, art.2 (Requirements for Calculating and Reporting Criteria Pollutant and Toxic Air Contaminant Emissions), https://ww3.arb.ca.gov/regact/2020/ctr/pro.pdf.

[2] Public Hearing to Consider Amendments to the Regulation for the Reporting of Criteria Air Pollutants and Toxic Air Contaminants Staff Report: Initial Statement of Reasons at 5 (Sept. 29, 2020), https://ww3.arb.ca.gov/regact/2020/ctr/isor.pdf.

[3] Id.

[4] Id. at 9-10.

[5] Id. at 5.

[6] Id. at 2.

[7] CARB Approves New Approach to Measuring Stationary Source Emissions to Aid Local Air Pollution Inventory Efforts (Nov. 24, 2020), https://ww2.arb.ca.gov/news/carb-approves-new-approach-measuring-stationary-source-emissions-aid-local-air-pollution.

[8] Id.

[9] Id.

[10] Public Hearing to Consider Amendments to the Regulation for the Reporting of Criteria Air Pollutants and Toxic Air Contaminants Staff Report: Initial Statement of Reasons at 2 (Sept. 29, 2020), https://ww3.arb.ca.gov/regact/2020/ctr/isor.pdf.

[11] Id.

[12] Amendments to the Regulation for the Reporting of Criteria Air Pollutants and Toxic Air Contaminants, https://ww2.arb.ca.gov/rulemaking/2020/proposed-amendments-reporting-criteria-air-pollutants-and-toxic-air-contaminants (last visited Nov. 30, 2020) (tracking status of proposed amendments).

The following Gibson Dunn lawyers assisted in preparing this client update: Thomas Manakides, Abbey Hudson, Joseph Edmonds and Jessica Pearigen.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental Litigation and Mass Tort practice group, or any of the following:

Stacie B. Fletcher – Co-Chair, Washington, D.C. (+1 202-887-3627, sfletcher@gibsondunn.com)
Daniel W. Nelson – Co-Chair, Washington, D.C. (+1 202-887-3687, dnelson@gibsondunn.com)
Thomas Manakides – Orange County (+1 949-451-4060, tmanakides@gibsondunn.com)
Abbey Hudson – Los Angeles (+1 213-229-7954, ahudson@gibsondunn.com)
Joseph D. Edmonds – Orange County (+1 949-451-4053, jedmonds@gibsondunn.com)
Jessica M. Pearigen – Orange County (+1 949-451-3819, jpearigen@gibsondunn.com)

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

President-elect Joe Biden has signaled that robust consumer protections will be a major focus of his policy agenda in what is anticipated to be a dramatic shift from the deregulatory policies of the Trump administration.

In this article, we preview the incoming administration’s anticipated consumer protection agenda in two areas: data privacy and consumer financial protection. We also consider what, if any, impact this policy shift is likely to have on state-level enforcement.

Assuming that Republicans retain control of the Senate, and with a divided Congress consumed at least in the short term with negotiations over COVID-19 relief, we expect to see an initial focus of the Biden administration on pursuing its policy agenda through increased enforcement and regulatory activity. That said, both the Biden administration and key members of Congress are focused on identifying common ground for potential bipartisan legislation.

Read more

Originally published by Law360 on November 24, 2020.

The following Gibson Dunn lawyers assisted in the preparation of this article: Alexander H. Southwell, Ryan Bergsieker and Sarah E. Erickson.

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

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)

Europe
Ahmed Baladi – Co-Chair, PCCP Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0)20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0)20 7071 4203, swazen@gibsondunn.com)

Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, co’neill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)

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

The European Commission (Commission) has launched a centralized complaints system through which EU-registered companies, industry associations, trade unions and NGOs can report market access barriers or breaches by third countries of their ‘trade and sustainable development’ (TSD) commitments or commitments undertaken under the EU’s Generalised Scheme of Preferences (GSP).[1]

The centralized complaints system[2] forms part of the Commission’s increased efforts in strengthening the enforcement and implementation of trade agreements that the EU has concluded with third countries and follows the appointment in July 2020 of the first Chief Trade Enforcement Officer (CTEO).[3]

The stated objective of the centralized complaints system is to establish a more accessible, responsive, and structured process for handling complaints by the Commission’s Directorate General for Trade (DG Trade).

The centralized complaints system does not create an obligation for the Commission to pursue each and every complaint and provides for no deadlines for the Commission to act. Complainants will be informed as to whether the complaint leads to an enforcement action. If the Commission decides to take action, it will communicate an action plan and indicative timeline to the complainant. The Commission will prioritize the treatment of complaints on the basis of objective criteria such as the likelihood of resolving the issue, the legal basis, and the economic/systemic impact of market access barriers and the seriousness of the violation of the TSD and GSP commitments.

The entry into force of this new complaints mechanism is accompanied by the Commission’s Operating Guidelines[4] as well as the Commission’s Working Approaches[5] which set out the ways in which the different elements of the EU’s recent enforcement efforts are meant to operate together.

A. Market access barriers complaints

This type of complaint relates to the reporting of market access barriers which may include the imposition of standards and other technical requirements, the restriction to foreign participation in a services sector, quantitative restrictions related to imports, lack of transparency of national trade regulation, unfair application of customs formalities and procedures, unreasonable labelling, marking and packaging requirements etc.
Market access barriers complaints may be lodged by EU Member States, entities registered within the EU, industry associations of EU companies, associations of EU employers, and trade unions or trade union associations formed in accordance to the laws of any EU Member State.
Complainants will have to demonstrate that the market access barrier directly concerns them.

B. Complaints regarding TSD/GSP commitments

This type of complaint relates to the reporting of breaches of commitments made by third countries in trade agreements with the EU or by third countries benefitting from the EU’s General Scheme of Preferences.
Recent EU trade agreements contain rules on trade and sustainable development, in the form of trade and sustainable development commitments. TSD commitments are for instance included in the 2017 EU-Canada Comprehensive Economic and Trade Agreement (CETA)[6] as well as in the EU-Georgia Association Agreement of 2014,[7] among many.[8]
The EU’s General Scheme of Preferences removes import duties from products coming into the EU market from vulnerable developing countries. The GSP offers: (i) a partial or full removal of customs duties on two third of tariff lines for low and lower-middle income countries, such as India, Indonesia, Kenya, Nigeria etc.; (ii) 0% tariffs for vulnerable low and lower-middle income countries that implement 27 international conventions related to human rights, labour rights, protection of the environment and good governance, such as Pakistan, Philippines, Sri Lanka etc.; (iii) a duty-free, quota-free access for all products except arms and ammunition for least developed countries such as Afghanistan, Ethiopia, Mali etc.
TSD/GSP complaints may be lodged by citizens of any EU Member State, EU Member States, entities having their registered office, central administration or principal place of business within the EU, industry associations of EU companies, associations of EU employers, trade unions or trade union associations formed in accordance with the laws of any EU Member State and NGOs formed in accordance with the laws of any EU Member State. Importantly, complainants will need to disclose if they are acting exclusively on their own behalf or if they are representing other interests as well.
Complainants will have to provide details of the impact and seriousness of the alleged breach in addition to the description of the factual and legal elements.

Beyond the Complaint Mechanism

The centralized complaints system is part of the Commission’s broader enforcement toolkit. The Commission will continue with the overall monitoring of trade barriers and how third countries implement their TSD/GSP commitments. In this, the Commission relies on its network of delegations and on information provided by Member States.

It remains to be seen how many formal complaints will be lodged by the various stakeholders and how many complaints DG Trade will be willing to formally pursue. If sufficient resources are dedicated at DG Trade to reviewing and effectively pursuing stakeholders’ complaints, the centralized complaints system could play an important role in the Commission’s wider push for reaffirming the EU’s economic interest with major trading partners; together with bolder trade defence enforcement[9] and the proposed new mechanism to control foreign State subsidies in the EU.[10]

_______________________

[1] Official Press Release available at: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2213.

[2] The complaint forms are accessible at: https://trade.ec.europa.eu/access-to-markets/en/contact-form.

[3] For more information on the CTEO’s competences please refer to: https://ec.europa.eu/trade/trade-policy-and-you/contacts/chief-trade-enforcement-officer/.

[4] For the full text of the Commission’s Operating Guidelines of 16 November 2020, please refer to: https://trade.ec.europa.eu/doclib/docs/2020/november/tradoc_159074.pdf.

[5] For the full text of the Commission’s Working Approaches of 16 November 2020, please refer to: https://trade.ec.europa.eu/doclib/docs/2020/november/tradoc_159075.pdf.

[6] Chapter 22 of the CETA contains provisions on sustainable development. With this Chapter, both sides agree to ensure economic growth supports their social and environmental goals. The chapter also creates a Joint Committee on Trade and Sustainable Development, and commits both sides to promoting forums with interest groups.

[7] Chapter 13 of the EU-Georgia Association Agreement contains commitments on sustainable development relating to sustainable management of forests and trade in forest and fish products, the conservation and the sustainable use of biological diversity etc.

[8] For a full list of EU trade agreements which include rules on trade and sustainable development, please refer to: https://ec.europa.eu/trade/policy/policy-making/sustainable-development/.

[9] Gibson Dunn Client Alert of 24 June 2020, regarding the European Commission’s imposition of countervailing duties on imports from Egypt for subsidies provided by China, available at: https://www.gibsondunn.com/european-commission-imposes-countervailing-duties-on-imports-from- egypt-for-subsidies-provided-by-china/.

[10] Gibson Dunn Client Alert of 18 June 2020, regarding the European Commission’s White Paper on Foreign Subsidies, available at: https://www.gibsondunn.com/european-commission-publishes-white-paper-on-foreign-subsidies-political-power-meets-legal-ambiguity/.

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

Attila Borsos – Brussels (+32 2 554 72 11, aborsos@gibsondunn.com)
Vasiliki Dolka – Brussels (+32 2 554 72 01, vdolka@gibsondunn.com)
Kirsty Everley – London (+44 (0)20 7071 4043, keverley@gibsondunn.com)

International Trade Group:

Europe and Asia:
Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0)20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 (0)20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)

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

On November 20, 2020, the Office of the Comptroller of the Currency (“OCC”) proposed a rule to require large national banks and federal savings associations to offer and provide “fair access” to financial services (Fair Access Proposal).[1] The Fair Access Proposal can be seen as a potential preemptive strike against regulatory encouragement of moves to “debank” certain bank customers, such as the fossil fuel industry and agribusiness. This Client Alert contains a summary of the Fair Access Proposal, the OCC’s justifications for it, and the OCC’s asserted legal authority for promulgating it. The deadline for comments on the Fair Access Proposal is January 4, 2021 – suggesting that the OCC may be seeking to finalize it before a new Comptroller of the Currency is appointed and confirmed.

I. Scope of Fair Access Proposal

The Fair Access Proposal applies to a subset of national banks and federal savings associations – those that have the ability either to (A) raise the price a person has to pay to obtain an offered financial service from the bank or from a competitor or (B) significantly impede a person, or a person’s business activities, in favor of or to the advantage of another person (Covered Bank). A bank or savings association with $100 billion or more in total assets would be presumed to be a Covered Bank; such a bank could rebut this presumption by submitting to the OCC written materials that demonstrate that the bank does not meet the Covered Bank definition. The OCC justified focusing on large banks on the ground that such banks have the greatest potential to affect customers if they withdraw services. It noted that national banks and federal savings associations with $100 billion or more in total assets controlled approximately 55 percent of the nation’s bank assets and deposits.

The OCC also invited public comment on whether a threshold linked to national market share of any financial service should be included, and if so, what percentage share would be appropriate.

II. Substantive Provisions

Under the Fair Access Proposal, a Covered Bank would be required:

To make each financial service it offers available to all persons in the geographic market served by the Covered Bank on proportionally equal terms;
Not to deny any person a financial service the Covered Bank offers except to the extent justified by such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank;
Not to deny any person a financial service the Covered Bank offers when the effect of the denial is to prevent, limit, or otherwise disadvantage the person (i) from entering or competing in a market or business segment or (ii) in such a way that benefits another person or business activity in which the Covered Bank has a financial interest; and
Not to deny, in coordination with others, any person a financial service the Covered Bank offers.

Providing financial services “on proportionally equal terms” would include ensuring that pricing and denial decisions are commensurate with measurable risks based on quantitative and qualitative characteristics. This provision would also prohibit a Covered Bank from engaging in geography-based redlining, for example, by refusing to provide financial services to customers solely based on where the customer or the customer’s business activity is located when the customer or business activity is within the geographic market served by the Covered Bank.

A Covered Bank’s decision to deny services would not be permitted to include consideration of the Covered Bank’s opinions of a customer or the customer’s lawful activities. A Covered Bank should, by contrast, consider factors like safety and soundness and compliance with applicable laws, like the Bank Secrecy Act and consumer protection laws, when deciding to provide services to a customer. It should also consider whether it has the knowledge or expertise to offer a service in a particular market.

Because the Fair Access Proposal, if finalized, would be a regulation that had been subject to notice and comment, it would have the force of law. The OCC would examine Covered Banks for compliance, and failure to comply could lead to enforcement actions.

III. Justifications for the Fair Access Proposal

In justifying the Fair Access Proposal, the OCC asserted that some banks have been employing category-based, as opposed to individualized, risk evaluations to deny access to financial services. The OCC contended that those banks had reacted to pressure from policy advocates whose objectives are served when banks deny financial services to certain categories of customers. It cited calls for boycotts of banks that support family planning organizations, reports that some banks have ceased to provide financial services to owners of privately owned correctional facilities, and the alleged debanking of firearm manufacturers, as evidence of such practices.

In particular, the OCC mentioned Operation Choke Point, dating from the Obama Administration, in which it was alleged that certain regulators, not including the OCC, had pressured banks to terminate their business relationships with payday lenders. It also noted a letter that it had received from the Alaska Congressional delegation that discussed decisions by several banks to stop lending to new oil and gas projects in the Arctic. Upon receiving that letter, the OCC requested information from several large banks in order to evaluate their criteria for denying access to financial services. The OCC further stated that certain banks had ceased providing lending and advisory services to coal-mining, coal-fired electricity generation, and oil exploration customers, and such banks intended to make exceptions only when certain non-financial criteria were met, such as whether the country in which a project is located had committed to international climate agreements and whether the project controls carbon emissions adequately. The OCC criticized such actions, declaring that neither it nor banks themselves are capable of evaluating risks unrelated to credit and operational risk.

IV. Legal Authority

The Fair Access Proposal would be a significant development in the scope of OCC regulation, and, as noted above, would have the force of law, thus subjecting Covered Banks to potential enforcement actions for noncompliance. The OCC grounded the proposal in the statutory changes to the National Bank Act made by the the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

In particular, Title III of the Dodd-Frank Act revised the OCC’s mission statement set forth in the National Bank Act by charging the OCC with, among other purposes, “assuring . . . fair access to financial services.”[2] The OCC stated that the concept of “fair access” as used in Title III includes a right of individual bank customers to have access to financial services based on their individual characteristics and not on their membership in a particular customer category. It further stated that as the agency charged by Congress with implementing the National Bank Act, its interpretation of “fair access” was entitled to judicial deference. The OCC also indicated that during the Obama Administration, it had previously focused on individualized customer risk assessments in precedents involving the banking and debanking of money services businesses and correspondent banks, and thus the Fair Lending Proposal was not a novel approach.

Conclusion

The Fair Lending Proposal has a relatively short, 45-day comment period that expires on January 4, 2021. This may reflect that fact that Comptrollers of the Currency may be dismissed by a President without cause, and therefore Acting Comptroller Brooks’ remaining tenure at the OCC may be short after President-elect Biden is inaugurated, notwithstanding that Mr. Brooks was recently nominated by President Trump for a full term as Comptroller. It is therefore reasonable to view the Fair Lending Proposal as seeking to head off, or at least restrict, certain actions by the incoming Biden Administration. Prior to the election, for example, Democratic policy papers advocated for an increased focus on climate change by the banking regulators, and there are other industries where a change in Administrations will mean heightened scrutiny. For this reason, it bears watching whether the OCC’s interpretation of “fair access” in the Dodd-Frank Act ultimately becomes law.

______________________

[1] OCC, Notice of Proposed Rule Making: Access to Financial Services (November 20, 2020), available at https://www.occ.gov/news-issuances/federal-register/2020/nr-occ-2020-156a.pdf.

[2] 12 U.S.C. § 1.

The following Gibson Dunn lawyers assisted in preparing this client update: Arthur S. Long and Samantha J. Ostrom.

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

Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein – New York (+1 212-351- 3850, mdenerstein@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
James O. Springer – New York (+1 202-887-3516, jspringer@gibsondunn.com)
Samantha J. Ostrom – Washington, D.C. (+1 202-955-8249, sostrom@gibsondunn.com)

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Decided November 25, 2020

Roman Catholic Diocese of Brooklyn, New York v. Cuomo, No. 20A87

On Wednesday, November 25, 2020, the Supreme Court ruled in favor of Gibson Dunn client The Roman Catholic Diocese of Brooklyn, New York, holding that provisions of a New York Executive Order that imposed “severe” fixed-capacity restrictions on attendance at religious services likely violate the Free Exercise Clause of the First Amendment, were causing irreparable harm, and must be enjoined pending appeal.

Background:
New York Governor Andrew Cuomo’s Executive Order 202.68 was issued on October 6, 2020, in response to localized upticks in COVID-19 cases. The Executive Order imposes 10- and 25-person fixed-capacity caps on “house of worship” attendance in so called “red” and “orange” zones throughout New York State.

On October 8, The Roman Catholic Diocese of Brooklyn, New York (the “Diocese”), represented by Gibson Dunn partners Randy M. Mastro and Akiva Shapiro, filed suit in the U.S. District Court for the Eastern District of New York. The Diocese alleged that the fixed-capacity restrictions—which applied to “houses of worship” alone, while many secular businesses in those same “zones” remained free to operate without restriction—violated the Free Exercise Clause as applied.

Despite finding that the Diocese had adequately alleged irreparable harm, the district court declined to enter a preliminary injunction. A divided Second Circuit panel denied the Diocese’s motion for an injunction pending appeal, along with a parallel motion brought by an Orthodox Jewish organization and synagogues. Among other things, the lower courts held that the Executive Order was facially neutral because some secular businesses were shut down entirely, and that the State’s interest in combating the pandemic outweighed any harm to religious organizations and their congregants.

Issue:
Whether the provisions of Executive Order 202.68 that limit in-person “house of worship” attendance to 10 or 25 people, but allow numerous secular businesses to operate without capacity restrictions, violate the First Amendment’s Free Exercise Clause and should be enjoined on an emergency basis pending appeal.

Court’s Holding:
Yes. The Diocese made a strong showing that the challenged restrictions likely violate the First Amendment because they single out houses of worship for especially harsh treatment. And denying emergency relief would cause irreparable injury, while granting such relief would not harm the public interest, justifying the issuance of an injunction pending appeal. In a companion order, the Court granted the same relief to the synagogues.

“[E]ven in a pandemic, the Constitution cannot be put away and forgotten. The restrictions at issue here, by effectively barring many from attending religious services, strike at the very heart of the First Amendment’s guarantee of religious liberty.”

Per Curiam Opinion of the Court

What It Means:

Executive Order 202.68’s 10- and 25-person fixed-capacity caps cannot be enforced during the pendency of appellate proceedings, allowing New Yorkers to prudently attend services in churches, synagogues, and other houses of worship, while complying with all social distancing, mask-wearing and other safety protocols, as well as generally applicable percentage-capacity restrictions.
The five-Justice majority held that strict scrutiny applies where restrictions “single out houses of worship for especially harsh treatment.” Slip. op. 3. Under the Executive Order, for example, while churches in a red zone may not admit more than 10 persons, businesses “such as acupuncture facilities, camp grounds, garages, as well . . . all plants manufacturing chemicals and microelectronics and all transportation facilities” may “admit as many people as they wish.” Ibid. And because the restrictions are “far more severe than has been shown to be required to prevent the spread of the virus” at religious services, they likely violate the First Amendment. Slip. op. 4 (internal quotation marks omitted).
The majority rejected the dissenting Justices’ view that emergency relief was unwarranted simply because the restrictions had been modified during the litigation to temporarily allow gatherings at the affected churches and synagogues. As the Court explained, “injunctive relief is still called for because the applicants remain under a constant threat that the area in question will be reclassified as red or orange.” Slip. op. 6.
In a concurring opinion, Justice Gorsuch took issue with Chief Justice Roberts’s May 2020 concurrence in South Bay Pentecostal Church v. Newsom, 140 S. Ct. 1613 (2020), which has been cited by a number lower courts around the country as affording blanket deference to state-imposed restrictions on religious worship during the COVID-19 pandemic. Justice Gorsuch cautioned that, “[r]ather than apply a nonbinding and expired concurrence from South Bay, courts must resume applying the Free Exercise Clause,” and that “[e]ven if the Constitution has taken a holiday during this pandemic, it cannot become a sabbatical.” Slip. op. at 3 (Gorsuch, J., concurring).
Justice Kavanaugh also concurred, acknowledging the seriousness of the pandemic but concluding that the Governor’s “restrictions on houses of worship are not tailored to the circumstances given the First Amendment interests at stake.” Slip. op. 3 (Kavanaugh, J., concurring). Like Justice Gorsuch, Justice Kavanaugh cautioned that “judicial deference in an emergency or a crisis does not mean wholesale judicial abdication, especially when important questions of religious discrimination, racial discrimination, free speech, or the like are raised.” Ibid.
Chief Justice Roberts dissented solely on the procedural ground that the applicants’ houses of worship are not presently in “red” and “orange” zones, but agreed that the fixed-capacity caps “seem unduly restrictive” and “raise serious concerns under the Constitution.” Slip. op. 1-2 (Roberts, C.J., dissenting).
Justice Breyer, with whom Justices Sotomayor and Kagan joined, issued a separate dissent, and Justice Sotomayor issued a separate dissent joined by Justice Kagan. These dissenters would have denied the injunction on procedural and substantive grounds.

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 Randy M. Mastro (+1 212.351.3825, rmastro@gibsondunn.com) or Akiva Shapiro (+1 212.351.3830, ashapiro@gibsondunn.com), the Gibson Dunn partners representing the Diocese, or the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
aho@gibsondunn.com

Mark A. Perry
+1 202.887.3667
mperry@gibsondunn.com

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The Commodity Futures Trading Commission (“CFTC” or the “Commission”) recently announced that its Division of Enforcement (the “Division”) issued new guidance to its staff when considering a recommendation that the Commission recognize a respondent’s cooperation, self-reporting, or remediation in an enforcement order (the “Guidance”).[1] The Guidance represents the latest step in the Commission’s ongoing efforts to provide clarity and transparency regarding the Division’s practices and procedures.

Prior Advisories on Cooperation, Self-Reporting and Remediation Remain in Effect

The Guidance explicitly states that it does not change how the Division evaluates self-reporting, cooperation, or remediation, nor how the Division considers reductions in penalties in connection with self-reporting, cooperation, or remediation.[2] Rather, these evaluations are guided by factors described in prior advisories published by the Division (the “Advisories”)[3] and set forth in the agency’s Enforcement Manual,[4] which continue to remain in effect.

While the Advisories remain in effect, they are not binding on Division staff. Instead, they emphasize the discretionary nature of both the Division’s evaluation of cooperation and its resulting recommendations.[5] Moreover, the Advisories caution that they “should not be read as requiring the Division staff to recommend, or the Commission to impose or authorize, a reduction of sanctions based on the presence or absence of particular cooperation factors.”[6] Thus, in certain circumstances, and at the discretion of the Division staff, cooperation, self-reporting, and/or remediation may result in a recommendation of recognition and of reduced sanctions in a Commission enforcement order.[7] The Advisories do note, however, that—at the far end of the self-reporting/cooperation/remediation spectrum—“if a company or individual self-reports, fully cooperates, and remediates, the Division will recommend that the Commission consider a substantial reduction from the otherwise applicable civil monetary penalty.”[8] However, where an individual or company did not self-report but otherwise fully cooperated and remediated deficiencies, the Advisories provide that the Division may recommend a reduced civil monetary penalty.[9]

The New Guidance: Clarity on When and How

The Guidance builds upon the Advisories by providing transparency and clarity regarding “when and how” the Division will recommend that assessments relating to self-reporting, cooperation, or remediation be reflected and recognized by the CFTC in its enforcement orders.[10] To achieve this objective, the Guidance sets forth the following four scenarios and the corresponding level of recognition and penalty reduction (if any) to be recommended by the Division.

Scenario	Degree of Self-Reporting, Cooperation and Remediation	Recognition/ Penalty	Enforcement Order Language
1	None	No Recognition in Enforcement Order	N/A
2	No Self-Reporting, But Cognizable Cooperation and/or Remediation	Recognition, But No Reduction in Penalty	“In accepting Respondent’s offer, the Commission recognizes the cooperation of [name of Respondent] with the Division of Enforcement’s investigation of this matter. The Commission also acknowledges Respondent’s representations concerning its remediation in connection with this matter.”
3	No Self-Reporting, But Substantial Cooperation and/or Remediation	Recognition *and* Reduced Penalty	“In accepting Respondent’s Offer, the Commission recognizes the substantial cooperation of [name of respondent] with the Division of Enforcement’s investigation of this matter. The Commission also acknowledges Respondent’s representations concerning its remediation in connection with this matter. The Commission’s recognition of Respondent’s substantial cooperation and appropriate remediation is further reflected in the form of a reduced penalty.”
4	Self-Reporting, Substantial Cooperation *and* Remediation	Recognition *and Substantially* Reduced Penalty	“In accepting Respondent’s Offer, the Commission recognizes the self-reporting and substantial cooperation of [name of Respondent] in connection with the Division’s investigation of this matter. The Commission also acknowledges Respondent’s representations concerning its remediation in connection with this matter. The Commission’s recognition of Respondent’s self-reporting, substantial cooperation, and appropriate remediation is further reflected in the form of a substantially reduced penalty.”

By arranging the list of factors set forth in the Advisories into four typical combinations (scenarios), and noting when each particular combination should result in a specific recommendation to the Commission, the Guidance provides the Division’s staff with a clear roadmap for exercising its discretion under the Advisories. The Guidance also provides the staff with the exact language it should recommend be included by the Commission in an enforcement order to describe the nature and extent of a respondent’s self-reporting, cooperation, or remediation for each scenario. In addition, the Division’s recommendation to the Commission should include a description of the particular acts of cooperation, self-reporting, or remediation that should be included in the enforcement order. Significantly, the Guidance—unlike the Advisories—is binding on the Staff.[11]

Implications of the Guidance

The new Guidance has several important implications. First, the Guidance is an important contribution to the Commission’s initiative to provide consistency, transparency, and clarity to market participants regarding its enforcement actions. The CFTC published its first Enforcement Manual in May 2019, noting its core value of clarity.[12] On the heels of that publication, the Division issued new civil monetary penalty guidance and compliance program evaluation guidance in, respectively, May 2020 and September 2020.[13] In connection with these publications, the Commission has noted that clarity serves multiple purposes, including deterring misconduct and assisting respondents by enhancing predictability.[14] As explained by Chairman Tarbert, the new Guidance furthers these objectives “by ensuring the public understands the levels of recognition the CFTC may provide in its enforcement orders.”[15]

Second, the Guidance will facilitate consistent practices by the enforcement staff with regard to their recommendations for the recognition of cooperation, self-reporting, or remediation. The binding nature of the Guidance will help promote consistency in that the various geographic offices of the Division will now be required to interpret and apply the Advisories in accordance with the Guidance. Consistent practices by the enforcement staff will, in turn, enhance predictability. While the Commission will continue to exercise its independent judgment in determining when and how self-reporting, cooperation, or remediation should be recognized in its orders, market participants who are considering whether to negotiate a resolution of an enforcement investigation will benefit significantly from increased predictability by the staff.[16] Moreover, increased predictability will further incentivize self-reporting, cooperation, and remediation, which will advance some of the key goals of the Division’s enforcement program.

Finally, the Guidance—as well as enforcement orders issued by the Commission as a result of the Guidance—will be valuable reference points for market participants who are negotiating settlements with the Division. The Guidance, coupled with the Advisories, can be used by parties to frame arguments regarding the nature and extent of the credit they should receive for their self-reporting, cooperation, or remediation. Similarly, enforcement orders issued under the Guidance can be used as benchmarks when parties negotiate settlements. The Guidance’s requirements that staff recommendations include a description of the particular acts of self-reporting, cooperation, or remediation by the respondent and that proposed enforcement orders use uniform language for the recognition of such acts should foster benchmarking. Although parties can still use enforcement orders issued before the Guidance as reference points, such orders sometimes include disparate language to describe what are essentially the same levels of self-reporting, cooperation, or remediation. Going forward, it will be easier for parties to compare “apples to apples.”

In sum, although the Guidance has been issued by the Division for its staff, it will be beneficial both to market participants who are considering whether to self-report, cooperate, or remediate, and to parties who are considering whether to attempt to resolve an investigation being conducted by the Division.

_____________________

[1] CFTC Press Release No. 8296-20.

[2] Memorandum from Vincent A. McGonagle, Acting Director, Division of Enforcement, to Division of Enforcement Staff, Recognizing Cooperation, Self-Reporting, and Remediation in Commission Enforcement Orders (Oct. 29, 2020) (the “Guidance”), at 1.

[3] Enforcement Advisory: Cooperation Factors in Enforcement Division Sanction Recommendations for Individuals (Jan. 19, 2017) (the “Individual Cooperation Guidance”); Enforcement Advisory: Cooperation Factors in Enforcement Division Sanction Recommendations for Companies (Jan. 19, 2017) (the “Company Cooperation Guidance”); Enforcement Advisory: Updated Advisory on Self-Reporting and Full Cooperation (Sept. 25, 2017) (the “Updated Self-Reporting and Cooperation Guidance”).

[4] See Commodity Futures Trading Commission, Enforcement Manual (2020).

[5] See Individual Cooperation Guidance at 5; Company Cooperation Guidance at 5.

[6] Updated Self-Reporting and Cooperation Guidance at 2.

[7] Id. at 1, 5.

[8] Updated Self-Reporting and Cooperation Guidance at 2.

[9] Id.

[10] Guidance at 1.

[11] Guidance at 2.

[12] CFTC Press Release No. 7925-19.

[13] CFTC Press Release Nos. 8165-20 and 8235-20.

[14] See CFTC Press Release No. 7925-19 (“Clarity and transparency in our policies should promote fairness, increase predictability, and enhance respect for the rule of law.”); CFTC Press Release No. 8165-20 (“Clarity about how our statutes and rules are applied is essential to deterring misconduct and maintaining market integrity.”); CFTC Press Release No. 8235-20 (“It’s in both the agency’s interest and the interest of compliance personnel that the Commission is clear about how and what we’ll evaluate.”).

[15] CFTC Press Release No. 8296-20 (quoting Chairman Heath Tarbert); see also CFTC Press Release No. 8296-20 (“Providing clarity to market participants and the public is one of the CFTC’s core values. . . . Through this and the other public guidance, the division seeks consistency and transparency across CFTC enforcement actions.” (quoting Acting Director Vincent McGonagle)).

[16] See Cooperation Recognition Guidance at 2, n.4.

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

Lawrence J. Zweifach – New York (+1 212-351-2625, lzweifach@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Lauren M.L. Nagin – New York (+1 212-351-2365, lnagin@gibsondunn.com)
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Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com).com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
Lawrence J. Zweifach – New York (+1 212-351-2625, lzweifach@gibsondunn.com)

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

On November 19, 2020, the U.S. Department of Transportation’s National Highway Traffic Safety Administration (“NHTSA”) announced that it is seeking public comment on the potential development of a framework of principles to govern the safe behavior of automated driving systems (“ADS”) for use in connected and autonomous vehicles (“CAVs”).[1] On the same day, NHTSA issued an advance notice of proposed rulemaking (“NPRM”) on a possible ADS framework (the “ADS NPRM”).[2] The ADS NPRM sends a strong signal that vehicles with ADS may in future be subject to a new generation of performance and safety (as well as design) standards.

Background

Last year, NHTSA announced that it was seeking public feedback about the possibility of removing “regulatory barriers” relating to the introduction of automated vehicles in the United States.[3] Subsequently, NHTSA sought stakeholder comments on proposed regulations intended to address the challenges involved in determining which requirements of the existing Federal Motor Vehicle Safety Standards (“FMVSS”)[4] are relevant to the safety needs of ADS-equipped vehicles without traditional manual controls, as well as on “adapting or developing the requirements and the associated test procedures so that the requirements can effectively be applied to the novel vehicle designs that may accompany such vehicles without adversely affecting safety.”[5]

NHTSA started seeking such public comments as a result of increasing confusion in the industry on how NHTSA plans to address ADS technologies. Although wide-scale deployment still may be years away, many companies are actively developing and testing ADS technology throughout the United States. The lack of specific regulatory guidance for ADS has created obstacles for OEMs trying to meet, and certify compliance with, FMVSS while developing and deploying their products in a way that establishes safety equivalence between traditionally operated vehicles and ADS-DVs. Several CAV manufacturers have applied for exemptions from compliance with existing FMVSS.[6] In February 2020, NHTSA announced its first approved exemption—from three federal motor vehicle standards—to Nuro, a California-based company that plans to deliver packages with a robotic vehicle smaller than a typical car.[7] The exemption allows the company to deploy and produce no more than 5,000 of its “low-speed, occupant-less electric delivery vehicles” in a two-year period, which would be operated for local delivery services for restaurants and grocery stores.[8]

In addition to these actions, on March 17, 2020 (the “March NPRM”), NHTSA issued an earlier NPRM “to improve safety and update rules that no longer make sense such as requiring manual driving controls on autonomous vehicles.”[9] The March NPRM aimed to “help streamline manufacturers’ certification processes, reduce certification costs and minimize the need for future NHTSA interpretation or exemption requests.” Specifically, the March NPRM proposed removing “unnecessary regulatory barriers to ADS-equipped vehicles” in the crashworthiness FMVSS, while seeking to maintain current levels of occupant protection under these standards and also remaining “technology neutral.” For example, the proposed regulation would apply front passenger seat protection standards to the traditional driver’s seat of a CAV, rather than safety requirements that are specific to the driver’s seat. The March NPRM did not propose any changes to existing occupant protection requirements for traditional vehicles with manual controls. NHTSA described the March NPRM as a “[h]istoric first step for the agency to remove unnecessary barriers to motor vehicles equipped with automated driving systems.”

The ADS NPRM

Now, as noted above, NHTSA has issued a new ADS NPRM. According to the ADS NPRM, the contemplated ADS framework would “objectively define, assess, and manage the safety of ADS performance while ensuring the needed flexibility to enable further innovation,” drawing upon “existing Federal and non-Federal foundational efforts and tools in structuring the framework as ADS continue to develop.”

NHTSA is seeking public comments on how to select and design the structure and key elements of a framework and the appropriate administrative mechanisms to achieve the goals of improving safety, mitigating risk, and enabling the development and introduction of new safety innovations, as well as on what aspects of ADS performance are suitable for potential safety standard setting. “This rulemaking will help address legitimate public concerns about safety, security and privacy without hampering innovation in the development of automated driving systems,” said U.S. Secretary of Transportation Elaine Chao.[10]

While NHTSA takes the view that the establishment of FMVSS for ADS would be premature at this stage, it seeks feedback on a proposed governmental safety framework specifically tailored to ADS and the role NHTSA would play with respect to guidance and potential regulation. The proposed framework spans a broad range of potential regulatory approaches—from a “hands-off” approach that would include the issuance of guidance documents addressing best industry practices, providing information to consumers, and describing different approaches to research and summarizing the results of research, to more formal regulation such as rules requiring reporting and disclosure of information or the adoption of ADS-specific FMVSS.[11]

The primary ADS components that would be the focus of NHTSA’s attention are (1) sensors (how the ADS receives information about its environment); (2) “perception” functions (how the ADS detects and categorizes other road users (vehicles, motorcyclists, pedestrians, etc.), infrastructure (traffic signs, signals, etc.), and conditions (weather events, road construction, etc.)); (3) “planning” components (how the ADS analyzes the situation, plans the route it will take on the way to its intended destination, and makes decisions on how to respond appropriately to the road users, infrastructure, and conditions detected and categorized); and (4) “control” functions (how the ADS executes the driving functions necessary to carry out that plan (“control”) through interaction with other parts of the vehicle).[12] NHTSA also seeks feedback on what kind of engineering measures should be included in the framework, and whether ADS-specific regulations should be issued prior to testing and validation or commercial deployment of the technology.[13]

Written comments from stakeholders will be due within 60 days from the date of publication of the ADS NPRM in the Federal Register, likely to be November 24 or 25. After considering such comments, we anticipate that regulatory changes to testing procedures (including pre-programmed execution, simulation, use of external controls, use of a surrogate vehicle with human controls, and technical documentation) and modifications to current FMVSSs (such as crashworthiness, crash avoidance, and indicator standards) will be finalized by NHTSA in 2021. We encourage our clients to contact us if they would like further information or assistance in developing and submitting comments.

Given the fast pace of developments and tangle of applicable rules, it is essential that companies operating in this space stay abreast of legal developments in states as well as cities in which they are developing or testing AVs, while understanding that any new federal regulations may ultimately preempt states’ authorities to determine, for example, safety policies or how they handle their passengers’ data. For more information on legal and policy developments related to CAVs, please contact the authors or see Gibson Dunn’s previous legal updates on legislative developments and NHTSA’s broader policy efforts, including the re-introduction of the SELF-DRIVE Act (here) and NHTSA’s Autonomous Vehicle (“AV”) 4.0 Guidelines (here).

_____________________

[1] NHTSA, Press Release, U.S. Department of Transportation Seeks Public Comment on Automated Driving System Safety Principles (Nov. 19, 2020), available at https://www.nhtsa.gov/press-releases/public-comment-automated-driving-system-safety-principles.

[2] Framework for Automated Driving System Safety, 49 Fed. Reg. 571 (Nov. 19, 2020), available here.

[3] Removing Regulatory Barriers for Vehicles With Automated Driving Systems, 84 Fed. Reg. 24,433 (May 28, 2019) (to be codified at 49 Fed. Reg. 571); see also Removing Regulatory Barriers for Vehicles with Automated Driving Systems, 83 Fed. Reg. 2607, 2607 (proposed March 5, 2018) (to be codified at 49 Fed. Reg. 571).

[4] FMVSS provide the minimum safety performance requirements for motor vehicles or items of motor vehicle equipment, but were drafted with traditionally operated vehicles in mind. ADS, as defined by NHTSA, is the “hardware and software that are, collectively, capable of performing the entire dynamic task of driving on a sustained basis.” (Within the SAE automation taxonomy, ADS describes automation Levels 3, 4, and 5).

[5] Supra, n.3 at 6.

[6] See, e.g., the petition filed by General Motors requesting temporary exemption from FMVSSs which require manual controls or have requirements that are specific to a human driver. General Motors, LLC – Receipt of Petition for Temporary Exemption from Various Requirements of the Safety Standards for an All Electric Vehicle with an Automated Driving System, 84 Fed. Reg. 10182.

[7] Congressional Research Service, Issues in Autonomous Vehicle Testing and Deployment (Feb. 11, 2020), available at https://fas.org/sgp/crs/misc/R45985.pdf; U.S. Dep’s of Transp., NHTSA Grants Nuro Exemption Petition for Low-Speed Driverless Vehicle, available at https://www.nhtsa.gov/press-releases/nuro-exemption-low-speed-driverless-vehicle.

[8] For more information, see our Artificial Intelligence and Automated Systems Legal Update (1Q20), available at https://www.gibsondunn.com/artificial-intelligence-and-automated-systems-legal-update-1q20/.

[9] U.S. Dep’t of Transp., NHTSA Issues First-Ever Proposal to Modernize Occupant Protection Safety Standards for Vehicles Without Manual Controls, available at https://www.nhtsa.gov/press-releases/adapt-safety-requirements-ads-vehicles-without-manual-controls; see further Gibson Dunn’s Artificial Intelligence and Automated Systems Legal Update (1Q20), available at https://www.gibsondunn.com/artificial-intelligence-and-automated-systems-legal-update-1q20/.

[10] NHTSA, Press Release (Nov. 19, 2020), supra, n.1.

[11] NHTSA, Framework for Automated Driving System Safety, supra, n.4 at 8.

[12] Id.

[13] Id. at 11.

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

H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Frances A. Waldmann – Los Angeles (+1 213-229-7914, fwaldmann@gibsondunn.com)

Please also feel free to contact any of the following practice group members:

Artificial Intelligence and Automated Systems Group:
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Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)

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On 23 November 2020 the UAE government announced that Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE, had issued a decree (the “New Decree”) amending Law No. 2 of 2015 on Commercial Companies (the “2015 Law”). The New Decree is yet to be published, but it will reportedly overhaul the foreign ownership rules in respect of commercial companies in the UAE. Under the 2015 Law (and its predecessors), foreign investors were permitted to hold up to a maximum of 49% of the shares of locally incorporated “onshore” companies, with the remaining 51% required to be held by UAE national(s).

In its latest bid to attract foreign investment and strengthen its position as an international hub, the UAE has overhauled the 2015 Law, removing the requirement for a UAE shareholder to hold at least 51% of the shares of onshore companies (other than in relation to certain strategically important sectors).

Some foreign investors and business owners have, in the past, hesitated to establish or invest in onshore companies because of such ownership restrictions. The new measures, which are expected to take effect from 1 December 2020, should facilitate making investments into and doing business in the UAE and provide flexibility for foreign business owners wishing to operate outside of free zones. In particular, the New Decree should open up UAE-based businesses to investment from international private equity houses and venture capital firms without the need to resort to complex structuring arrangements.

The New Decree builds on Federal Legislative Decree No. 19 of 2018 (the “FDI Law”) which signaled an initial shift away from the strict foreign ownership restrictions by opening up certain activities (a “positive list”) to 100% foreign ownership through an approval process. While the New Decree supersedes (and effectively cancels) the provisions of the FDI Law on foreign ownership requirements, the relaxation will not apply to ownership of state-owned entities and companies that are deemed to operate in strategically important sectors, such as, for example, oil and gas exploration, utilities and transport.

The New Decree represents a clear break from the past and we anticipate that it will strengthen the UAE’s position as a leading international financial center and lead to an increase in foreign direct investment. While the terms of the New Decree are yet to be made available, the announcement is positive and encouraging.

Gibson Dunn’s Middle East practice focuses on regional and global multijurisdictional transactions and disputes whilst also acting on matters relating to financial and investment regulation. Our lawyers, a number of whom have spent many years in the region, have the experience and expertise to handle the most complex and innovative deals and disputes across different sectors, disciplines and jurisdictions throughout the Middle East and Africa.

Our corporate team is a market leader in MENA mergers and acquisitions as well as private equity transactions, having been instructed on many of the region’s highest-profile buy-side and sell-side transactions for corporates, sovereigns and the most active regional private equity funds. In addition, we have a vibrant finance practice, representing both lenders and borrowers, covering the full range of financial products including acquisition finance, structured finance, asset-based finance and Islamic finance. We have the region’s leading fund formation practice, successfully raising capital for our clients in a difficult fundraising environment.

For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors in the firm’s Dubai office, with any questions, thoughts or comments arising from this update.

Hardeep Plahe (+971 (0) 4 318 4611, hplahe@gibsondunn.com)

Fraser Dawson (+971 (0) 4 318 4619, fdawson@gibsondunn.com)

Aly Kassam (+971 (0) 4 318 4641, akassam@gibsondunn.com)

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

On 10 November 2020, the European Data Protection Board (EDPB) issued important new guidance on transferring personal data out of the European Economic Area (EEA). The guidance addresses a key question for many companies: how to transfer personal data out of the EEA to the United States or other countries not recognized by the European Commission as ensuring an adequate level of protection for personal data. The guidance thus begins to lessen some of the uncertainty caused by the Court of Justice of the European Union’s July 2020 ruling in the landmark Schrems II decision.

The EDPB’s guidance have been published for consultation by citizens and stakeholders until 21 December 2020, and may thus be subject to further changes or amendments. Although the guidance take the form of non-binding recommendations, companies that transfer personal data out of the EEA would be well-served to review their approach to such transfers in light of the EDPB guidance.

I. Context

As a reminder, under the EU’s omnibus privacy law, the General Data Protection Regulation (GDPR), a transfer of personal data out of the EEA may take place if the receiving country ensures an adequate level of data protection, as determined by a decision of the European Commission. In the absence of such an adequacy decision, the exporter may proceed to such data transfer only if it has put in place appropriate safeguards.

In the Schrems II ruling in July 2020, the CJEU invalidated the EU-U.S. Privacy Shield, which had been a framework used by companies transferring personal data from the EEA to the U.S. to provide reassurance that the data would be protected after the transfer. The CJEU’s decision allowed the use of the Standard Contractual Clauses, known as the “SCCs,” approved by the European Commission, to continue as another framework or method to cover such transfers. However, the CJEU required companies to verify, prior to any transfer of personal data pursuant to the SCCs, whether data subjects would be granted a level of protection in the receiving country essentially equivalent to that guaranteed within the EU, pursuant to the GDPR and the EU Charter of Fundamental Rights.[i]

The Court specified that the assessment of that level of protection must take into consideration both the contractual arrangements between the data exporter and the recipient and, as regards any access by the public authorities of the receiving country, the relevant aspects of the legal system of that third country.

Due to their contractual nature, SCCs cannot bind the public authorities of third countries, since they are not party to the contract. Consequently, under Schrems II, data exporters may need to supplement the guarantees contained in the SCCs with supplementary measures to ensure compliance with the level of protection required under EU law in a particular third country.

The EDPB issued on 10 November 2020 two sets of recommendations:

Recommendations 01/2020 on measures that supplement transfer tools to ensure compliance with the EU level of protection of personal data, which are aimed at providing a methodology for data exporters to determine whether and which additional measures would need to be put in place for their transfers; and
Recommendations 02/2020 on the European Essential Guarantees (EEG) for surveillance measures, which are aimed at updating the EEG[ii], in order to provide elements to examine whether surveillance measures allowing access to personal data by public authorities in a receiving country, whether national security agencies or law enforcement authorities, can be regarded as a justifiable interference.

II. Recommendations on how to identify and adopt supplementary measures

The EDPB describes a roadmap of the steps to adopt in order to determine if a data exporter needs to put in place supplementary measures to be able to legally transfer data outside the EEA.

Step 1 – Know your transfers. The data exporter should map all transfers of personal data to countries outside the EEA (and verify that the data transferred is adequate, relevant and limited to what is necessary in relation to the purposes for which it is transferred to and processed in the third country).

Step 2 – Verify the transfer tool on which the transfer relies. If the European Commission has already declared the country as ensuring an adequate level of protection for personal data, there is no need to take any further steps, other than monitoring that the adequacy decision remains valid.

In the absence of an adequacy decision, the data exporter and the data importer would need to rely on one of the transfer tools listed under Articles 46 of the GDPR (including the SCCs) for transfers that are regular and repetitive. Derogations provided for in Article 49 of the GDPR[iii] may be relied on only in some cases of occasional and non-repetitive transfers.

Step 3 – Assess if there is anything in the law or practice of the third country that may impinge on the effectiveness of the appropriate safeguards of the transfer tools relied on, in the context of the transfer (see section III below).

The recommendations specify that: (i) the data importer should be in a position to provide the relevant sources and information relating to the third country in which it is established and the laws applicable to it; and (ii) the data exporter may also refer to several sources of information (e.g., case law of the CJEU and of the European Court of Human Rights; adequacy decisions in the country of destination if the transfer relies on a different legal basis; national caselaw or decisions taken by independent judicial or administrative authorities competent on data privacy and data protection of third countries).

If the assessment reveals that the receiving country’s legislation impinges on the effectiveness of the transfer tool contained in Article 46 of the GDPR, Step 4 should be implemented[iv].

Step 4 – Identify and adopt supplementary measures to bring the level of protection of the data transferred up to the EU standard of “essential equivalence”.

Supplementary measures may have a contractual[v], technical[vi], or organizational[vii] nature—and combining diverse measures may enhance the level of protection and contribute to reaching EU standards.

The EDPB provides for:

Various examples of measures that are dependent upon several conditions being met in order to be considered effective (e.g., technical measures such as encryption or pseudonymization; contractual measures such as obligation to use specific technical measures, transparency obligations, obligations to take specific actions, empowering data subjects to exercise their rights; organizational measures such as internal policies for governance of transfers especially with groups of enterprises, transparency and accountability measures, organization methods and data minimization measures, adoption of standards and best practices); and
A non-exhaustive list of factors to identify which supplementary measures would be most effective: (a) format of the data to be transferred (i.e. in plain text, pseudonymized or encrypted); (b) nature of the data; (c) length and complexity of the data processing workflow, number of actors involved in the processing, and the relationship between them; (d) possibility that the data may be subject to onward transfers, within the same receiving country or even to other third countries.

The EDPB clarifies that certain data transfer scenarios may not lead to the identification of an effective solution to ensure an essentially equivalent level of protection for the data transferred to the third country. Therefore, in these circumstances, supplementary measures may not qualify to lawfully cover data transfers (e.g., where transfer to processors requires access to data in clear text or remote access to data for business purposes).

In addition, the EDPB specifies that contractual and organizational measures alone will generally not overcome access to personal data by public authorities of the third country. Thus, there will be situations where only technical measures might impede or render ineffective such access.

If no supplementary measure can ensure an essentially equivalent level of protection for a specific transfer, in particular if the law of the receiving country prohibits the application of the possible supplementary measures envisaged (e.g., prohibits the use of encryption) or otherwise prevents their effectiveness, the transfer should be avoided, suspended or terminated.

Step 5 – Implement procedural steps if effective supplementary measures have been identified[viii].

For example, this could consist of entering into an amendment to complete the SCCs to provide for the supplementary measures. When the SCCs themselves are modified or where the supplementary measures added “contradict” directly or indirectly the SCCs, the procedural step should consist in requesting the authorization from the competent supervisory authority.

Step 6 – Re-evaluate at appropriate intervals, i.e., monitor developments in the third country that could affect the initial assessment.

III. Recommendations on how to assess the level of protection of a third country (Step 3)

The “Recommendations 02/2020 on the European Essential Guarantees for surveillance measures” specify the four EEGs to be taken into consideration in assessing whether surveillance measures allowing access to personal data by public authorities in a receiving country (whether national security agencies or law enforcement authorities), can be regarded as a justifiable interference. Such EEGs should be seen as the essential guarantees to be found in the receiving country when assessing the interference (rather than a list of elements to demonstrate that the legal regime of a third country as a whole is providing an essentially equivalent level of protection):

Processing should be based on clear, precise and accessible rules;
Necessity and proportionality with regard to the legitimate objectives pursued must be demonstrated;
An independent oversight mechanism should exist; and
Effective remedies need to be available to the individual.

IV. Consequences

Many companies will likely continue to transfer personal data outside of the EEA on the basis of the transfer tools listed under Articles 46 of the GDPR (including the SCCs and binding corporate rules). Companies, in particular data exporters, must therefore document the efforts implemented in order to ensure that the level of protection required by EU law will be complied within the third countries to which personal data are transferred.

Such efforts should include, first, to assess whether the level of protection required by EU law is respected in the relevant third country and, if this is not the case, to identify and adopt supplementary measures (technical, contractual and/or organizational) to bring the level of protection of the data transferred up to the EU standard of “essential equivalence”. If no supplementary measure can ensure an essentially equivalent level of protection for a specific transfer, the transfer should be avoided, suspended or terminated.

It is difficult to predict how local supervisory authorities will assess compliance efforts or sanction non-compliant transfers. While the EDPB’s recommendations are to be implemented on a case-by-case basis based on the specifics of the concerned transfer, we may not exclude supervisory authorities to assess independently the level of protection of certain receiving countries and identifying relevant supplemental measures.

In addition, these recommendations raise sensitive issues with respect to Brexit, and come at a critical moment in the Brexit negotiations. The U.K. will, in the event of a “No-Deal” Brexit, become a third state from the end of the transition period on 31 December 2020, and there is unlikely to be, at least immediately, an adequacy decision in place in respect of the U.K. One might reasonably expect that, given its membership throughout the currency of the GDPR and the forerunner directive, an adequacy decision in favor of the U.K. would be rapidly forthcoming. While that would be a determination for the European Commission, the EDPB has expressed reservations, making specific reference to the October 2019 agreement between the U.K. and the U.S. on Access to Electronic Data for the Purpose of Countering Serious Crime, which, it says, “will have to be taken into account by the European Commission in its overall assessment of the level of protection of personal data in the UK, in particular as regards the requirement to ensure continuity of protection in case of “onward transfers” from the UK to another third country.” The EDPB has indicated that if the Commission presents an adequacy decision in favor of the U.K., it will express its own view in a separate opinion. Absent an adequacy decision, transfers from the EEA to the U.K. would fall to be treated in the same way as transfers to other third countries, requiring consideration of Articles 46 and 49, SCCs, supplementary measures, etc.

A separate question is how the U.K. will, post-Brexit transition, treat these recommendations from the EDPB, and the question of transfers to third countries generally (and to the U.S. specifically). It cannot be excluded that this may be among the first area in which we begin to see a limited divergence between EU and U.K. data privacy laws.

It is also worth noting that on 12 November 2020, the European Commission published a draft implementing decision on SCCs for the transfer of personal data to third countries along with a draft set of new SCCs[ix]. The new SCCs include several modules to be used by companies, depending on the transfer scenario and designation of the parties under the GDPR, namely: (i) controller-to-controller transfers, (ii) controller-to-processor transfers, (iii) processor-to-processor transfers and (iv) processor-to-controller transfers. These new SCCs also incorporate some of the contractual supplementary measures recommended by the EDPB as described above. They are open for public consultation until 10 December 2020 and the final new set of SCCs are expected to be adopted in early 2021. At this stage, the draft provides for a grace period of one year during which it will be possible to continue to use the old SCCs for the execution of contracts concluded before the entry into force of the new SCCs[x].

In light of the above, we recommend that companies currently relying on SCCs to consult with their data protection officer or counsel to evaluate tailored ways to document and implement the steps to be taken in order to minimize the risks associated with continued data transfers to non-EEA countries — particularly to the U.S.

________________________________

[i] The Charter of Fundamental Rights brings together all the personal, civic, political, economic and social rights enjoyed by people within the EU in a single text.

[ii] The European Essential Guarantees were originally drafted in response to the Schrems I judgment (CJEU judgment of 6 October 2015, Maximillian Schrems v Data Protection Commissioner, Case C‑362/14, EU:C:2015:650).

[iii] Under article 49.2 of the GDPR, a transfer to a third country or an international organization may take place only if the transfer is not repetitive, concerns only a limited number of data subjects, is necessary for the purposes of compelling legitimate interests pursued by the controller which are not overridden by the interests or rights and freedoms of the data subject, and the controller has assessed all the circumstances surrounding the data transfer and has on the basis of that assessment provided suitable safeguards with regard to the protection of personal data.

[iv] The CJEU held, for example, that Section 702 of the U.S. FISA does not respect the minimum safeguards resulting from the principle of proportionality under EU law and cannot be regarded as limited to what is strictly necessary. This means that the level of protection of the programs authorized by 702 FISA is not essentially equivalent to the safeguards required under EU law. As a consequence, if the data importer or any further recipient to which the data importer may disclose the data is subject to 702 FISA, SCCs or other Article 46 of the GDPR transfer tools may only be relied upon for such transfer if additional supplementary technical measures make access to the data transferred impossible or ineffective.

[v] Example of contractual measures: The exporter could add annexes to the contract with information that the importer would provide, based on its best efforts, on the access to data by public authorities, including in the field of intelligence provided the legislation complies with the EDPB European Essential Guarantees, in the destination country. This might help the data exporter to meet its obligation to document its assessment of the level of protection in the third country. Such measure would be effective if (i) the importer is able to provide the exporter with these types of information to the best of its knowledge and after having used its best efforts to obtain it, (ii) this obligation imposed on the importer is a mean to ensure that the exporter becomes and remains aware of the risks attached to the transfer of data to a third country.

[vi] Example of technical measures: A data exporter uses a hosting service provider in a third country to store personal data, e.g., for backup purposes. The EDPB considers that encryption measure provides an effective supplementary measure if (i) the personal data is processed using strong encryption before transmission, (ii) the encryption algorithm and its parameterization (e.g., key length, operating mode, if applicable) conform to the state-of-the-art and can be considered robust against cryptanalysis performed by the public authorities in the recipient country taking into account the resources and technical capabilities (e.g., computing power for brute-force attacks) available to them, (iii) the strength of the encryption takes into account the specific time period during which the confidentiality of the encrypted personal data must be preserved, (iv) the encryption algorithm is flawlessly implemented by properly maintained software the conformity of which to the specification of the algorithm chosen has been verified, e.g., by certification, (v) the keys are reliably managed (generated, administered, stored, if relevant, linked to the identity of an intended recipient, and revoked), and (vi) the keys are retained solely under the control of the data exporter, or other entities entrusted with this task which reside in the EEA or a third country, territory or one or more specified sectors within a third country, or at an international organization for which the Commission has established in accordance with Article 45 of the GDPR that an adequate level of protection is ensured.

[vii] Example of organizational measures: Regular publication of transparency reports or summaries regarding governmental requests for access to data and the kind of reply provided, insofar publication is allowed by local law. The information provided should be relevant, clear and as detailed as possible. National legislation in the third country may prevent disclosure of detailed information. In those cases, the data importer should employ its best efforts to publish statistical information or similar type of aggregated information.

[viii] It is worth noting that the EDPB indicates that it will provide more details “as soon as possible” on the impact of the Schrems II judgement on other transfer tools (in particular binding corporate rules and as hoc contractual clauses).

[ix] This set of new SCCs should be distinguished from the new draft of clauses published by the Commission on the same day which relates to Article 28.3 of the GDPR (also called SCCs by the Commission). This new draft of clauses will only be optional (the parties may choose to continue using their own data processing agreements) and is also subject to public consultation until 10 December 2020.

[x] Provided the contract remains unchanged, with the exception of necessary supplementary measures; on the contrary, in case of relevant changes to the contract or new sub-contracting, the old SCCs must be replaced by the new ones.

The following Gibson Dunn lawyers prepared this client alert: Ahmed Baladi, Ryan T. Bergsieker, Patrick Doris, Kai Gesing, Alejandro Guerrero, Vera Lukic, Adelaide Cassanet, and Clemence Pugnet. 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, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0)20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0)20 7071 4203, swazen@gibsondunn.com)

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)

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

New York partner Alexander Southwell, Denver partner Ryan Bergsieker and Denver associate Sarah Erickson are the authors of “Where Data Privacy And CFPB Are Headed Under Biden,” [PDF] published by Law360 on November 24, 2020.

Californians have ushered in a law protecting individuals’ privacy unlike any other in the United States, and businesses are well-advised to evaluate its impact and prepare to comply. Proposition 24, which passed during this month’s vote, establishes the California Privacy Rights Act (CPRA), which will take effect Jan. 1, 2023. If this seems like déjà vu, it is because just two years ago, the California legislature passed an unprecedented privacy law, the California Consumer Privacy Act (CCPA), which the CPRA amends. The continuing shift in privacy law embodied by the CPRA is set to make a significant impact on businesses’ compliance efforts and operational risk, as well as individuals’ expectations.

Businesses should take comfort that the Jan. 1, 2023 effective date, and delayed enforcement start (July 1, 2023), means there is time to come into compliance. However, the law imposes various changes that will require businesses to address new considerations—even factoring in the efforts many already have made to comply with the CCPA.

Read more

Originally published by The Recorder on November 18, 2020.

The following Gibson Dunn lawyers assisted in the preparation of this article: Cassandra Gaedt-Sheckter, Alexander H. Southwell and Ryan Bergsieker.

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

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

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

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)

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

The UK Government (the “Government”) has announced plans to upgrade and widen significantly its intervention powers on grounds of national security.

The proposal is for a ‘hybrid regime’ whereby notification and approval would be mandatory prior to completing certain deals (described further below) in specified areas of the economy deemed particularly sensitive. Here, clearance would be required to be obtained prior to closing. Further, any failure to notify would result in a transaction that is ‘legally void’,[1] sanctions would be applicable and the Government would have a potentially indefinite period to ‘call-in’ the deal (a period which would be reduced to 6 months if the Secretary of State for Business, Energy and Industrial Strategy (the “SoS”) becomes aware of the deal). Notification will otherwise be voluntary. However, the Government will be able to ‘call-in’ such transactions for a period of up to 5 years (again, this period would be reduced to a period of 6 months if the SoS becomes aware of the deal). Once a transaction has been called in and assessed, where necessary and proportionate, the Government will have the power to impose a range of remedies to address any national security concerns.

The proposed regime represents a significant expansion and extension of the current rules, including a significant broadening of the nature of transactions that can be reviewed (e.g. removing safe harbours based on turnover and market share and including acquisitions of certain qualifying assets, including acquisitions of land, physical assets and IP).[2] It is expected to result in significantly higher levels of scrutiny going forward. Indeed, the Government estimates that around 1,000-1,830 notifications could be received a year with 70-95 cases called in for a full national security assessment under the new regime. However, practitioners are of the view that the bill and the proposed secondary legislation detailing the sensitive sectors (as currently drafted) could result in many more notifications.

The Government, however, continues to emphasise the importance of foreign direct investment projects in the UK and the need to ensure that the UK remains an attractive place to invest. Indeed, the Government’s commitment to staying open to foreign investment is reflected in the Prime Minister’s recent announcement of the creation of the Office for Investment. This is a Government unit aimed at driving foreign investment into the UK (tasked to land high value investment opportunities and to resolve potential barriers to landing ‘top tier’ investments).[3] The Business Secretary Alok Sharma also specifically stated on the bills introduction to Parliament that: “The UK remains one of the most attractive investment destinations in the world and we want to keep it that way […] This Bill will mean that we can continue to welcome job-creating investment to our shores, while shutting out those who could threaten the safety of the British people.” The emphasis of the new proposals is thus on encouraging engagement, so that the Government becomes aware of a greater number of deals and can check that they do not pose risks to the UK’s national security. It has been emphasised that a targeted and proportionate approach to enforcement will be adopted, and that most transactions will be cleared without intervention (albeit that conditions will be required to be imposed in some cases and reviews will impact transaction timetables). The regime also introduces a clearer and more defined process for national security reviews than is currently the case, which should assist with transaction planning.[4]

The proposal is set out in the ‘National Security and Investment Bill’ (the “NSIB”) which will be subject to Parliamentary scrutiny before being passed into law.[5] However, in the interim, investors will need to be aware that the proposed legislation will give the Government the retroactive power from commencement to open an investigation into a transaction that has been completed following the introduction of the NSIB to Parliament (i.e. on or from 12 November 2020) but prior to the commencement of the Act. In such circumstances, the Government will have 6 months from the commencement day to intervene, if the SoS previously became aware of the transaction. Otherwise, the Government will be able to ‘call-in’ the deal up to 5 year’s following the commencement date, unless the SoS becomes aware of the transaction earlier in which case this period is reduced to 6 months from when the SoS becomes aware of the deal.[6]

Key aspects of the proposed new regime are detailed below. At the end of this briefing, we also include some practical tips for transacting parties.

Mandatory vs voluntary notification

The NSIB provides for the mandatory pre-closing notification of certain acquisitions of voting rights or shares (see “Trigger events/qualifying transactions”, below) in entities active in specified sectors and involved in activities considered higher risk.
The Government is currently consulting on the proposed sectors, and which parts of each sector, should fall within the scope of the mandatory regime, which will later be defined through secondary legislation.[7]
As currently proposed, the following 17 sectors would be affected: advanced materials; advanced robotics; artificial intelligence; civil nuclear; communications; computing hardware; critical suppliers to government; critical suppliers to the emergency services; cryptographic authentication; data infrastructure; defence; energy; engineering biology; military or dual-use technologies; quantum technologies; satellite and space technologies and transport.
The NSIB will provide the Government with powers to amend the types of transactions in scope of the mandatory notification regime – which will include powers to amend the sectors subject to mandatory notification as well as the nature of transactions giving rise to mandatory notification requirements (discussed further below) and exempting certain types of acquisition. It is not clear as yet the circumstances in which dispensations will be granted – it is expected that these will be developed over time (if, for example, the Government finds that certain types of transactions caught by the mandatory regime routinely do not require remedies and thus do not present sufficient security concerns – this may, for example, be based on the characteristics of the investors involved or the type of transaction).
The fact that sectors of the economy giving rise to mandatory notification requirements will be defined in secondary legislation gives ministers significant discretion to alter the regime without full parliamentary scrutiny. Indeed, it has been specifically called out by the Government that such sectors are ‘highly likely to change over time’, in response to changing risks.
As mentioned above, if parties fail to notify a trigger event that is subject to mandatory notification, the Government can call it in whenever it is discovered – albeit that the Government is under a 6 month deadline from which the SoS becomes aware of the transaction to call-in the deal. This does not apply to events which take place prior to the commencement of the NSIB, as no mandatory notification requirement will apply until that point.
In addition to the mandatory regime, parties will be able to voluntary notify deals. The NSIB will permit ministers to ‘call-in’ transactions (not subject to the mandatory regime) up to 6 months after the SoS becomes aware of the transaction (including potentially, through coverage of the deal in a national news publication[8]) provided that this is done within 5 years and there is a ‘reasonable suspicion’ that it may give rise to a national security risk (a transaction cannot be ‘called-in’ for any broader economic interest issues such as employment).[9]

Trigger events / qualifying transactions

The NSIB envisages that a number of transactions will give rise to so called ‘trigger events’, which will provide an opportunity for the Government to review a transaction. These include acquisitions of:
1. More than 25%, 50% and 75% of the voting rights or shares of an entity (with increases in shareholding passing over these thresholds notifiable);
2. Voting rights that ‘enable or prevent the passage of any class of resolution governing the affairs of the entity’;
3. ‘Material influence’ over an entity’s policy; and

The concept of ‘material influence’ is an existing concept under the UK’s competition regime. It can be based on an acquirer’s shareholding, its board representation or other factors. For shareholdings, the CMA may examine shareholdings of 15% or more to determine whether an acquirer will have material influence. Even a shareholding of less than 15% might attract scrutiny in exceptional cases (where other factors indicate that the ability to exercise material influence over policy are present).

1. A right or interest in, or in relation to, a qualifying asset providing the ability to:
  1. use the asset, or use it to a greater extent than prior to the acquisition; or
  2. direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.

Assets in scope of the regime will be defined in the NSIB – as currently proposed, this includes land, tangible moveable property,[10] and ideas, information, or techniques with industrial, commercial or other economic value (including, for example, trade secrets, databases, algorithms, formulae, non-physical designs and models, plans, drawings and specifications, software, source code and IP).

The mandatory notification requirement would apply to the trigger events specified in (i) and (ii), above, plus an acquisition of 15% or more of the voting rights or shares of an entity. Whilst the latter is not a ‘trigger event’ for notification per se, it is designed to bring transactions to the attention of the SoS so that they can decide whether trigger event (iii) has occurred.
So, in summary, the NSIB envisages that it could apply to shareholding as low as 10-15% and will cover deals involving a broad range of asset types.
Moreover there are currently no safe harbour provisions (e.g. in terms of UK market share or turnover requirements) pursuant to which the Government would not have jurisdiction to review the transaction. However, transactions will require a UK nexus (as discussed below).

UK nexus

The new regime will apply to investors from any country, including where acquirers and sellers do not have a direct link to the UK. To intervene in such circumstances, the SoS must be satisfied that:
1. in respect of a target entity formed or recognised under laws outside of the UK, the entity carries on activities in the UK or supplies goods or services to persons in the UK; and
2. in respect of a target asset situated outside of the UK or intellectual property, the asset must be used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK.[11]
This means, for example, that a business in one country acquiring a business in another country may fall within the regime if the latter carries out activities or provides services or goods in the UK with national security implications. This is also the case in relation to assets which may be used in connection with goods or services provided to UK persons e.g. deep-sea cables located outside of the UK’s geographical borders delivering energy to the UK or intellectual property located outside of the UK but key to the provision of critical functions in the UK.
The Government intends to legislate for a tighter nexus test in the case of mandatory transactions, but this would not preclude the Government from using the call-in power to intervene in transactions with less direct links to the UK.

Likelihood of intervening – voluntary notifications

The Government intends to publish a Statutory Statement of Policy Intent (which will be reviewed at least every 5 years), setting out when the Government expects to use its call-in power. This document will assist with the assessment of when a voluntary notification is more likely to be called in – however, a large amount of discretion will still be exercisable when deciding whether or not to intervene.
The current draft Statutory Statement of Policy Intent, published alongside the NSIB,[12] states that the SoS will consider three factors when deciding whether or not to exercise its powers, namely:
1. Acquirer risk (i.e. the extent to which the acquirer raises national security concerns);
2. Target risk (i.e. the nature of the target and whether it is active in an area of the economy where the Government considers risks more likely to arise e.g. within the headline sectors where mandatory notification is required); and
3. Trigger event risk (i.e. the type and level of control being acquired and how this could be used in practice to undermine national security).

Examples of trigger event risk include – but are not limited to – the potential for: (i) disruptive or destructive actions: the ability to corrupt processes or systems; (ii) espionage: the ability to have unauthorised access to sensitive information; (iii) inappropriate leverage: the ability to exploit an investment to influence the UK; and (iv) gaining control of a crucial supply chain or obtaining access to sensitive sites, with the potential to exploit them. The risk will be assessed according to the practical ability of a party to use an acquisition to undermine national security.

The type of asset acquisitions where Government may encourage a notification will also be set out in the Statutory Statement of Policy Intent. The current draft suggests that the SoS will intervene ‘very rarely’ in asset transactions. However, where assets are integral or closely related to activities deemed particularly sensitive (e.g. in sectors subject to the mandatory regime) or, in the case of land, where it is or is proximate to a sensitive site or location (e.g. critical national infrastructure sites or government buildings), acquisitions are more likely to be called in. The SoS may also take into account the intended use of the land.

Procedure

Unsurprisingly, decisions will be taken by the SoS (currently responsible for making decisions in most national security cases under the current regime) rather than an independent body (as with competition cases).
The SoS will be supported by the Investment Security Unit, which will sit within the Department for Business, Energy and Industrial Strategy and provide a single point of contact for businesses wishing to understand the NSIB and notify the Government about transactions. The unit will also coordinate cross-government activity to identify, assess and respond to national security risks arising through market activity.
Where a notification has been made (whether mandatory or voluntary) the SoS will have an initial 30 working day ‘screening period’ to issue a ‘call-in’ notice. Where a transaction is ‘called in’ (including for non-notified transactions), the Government will then have a 30 working day preliminary assessment period. This period would be extendable by a further 45 working days where the initial assessment period is not sufficient to fully assess the risks involved. Further extensions, beyond 75 working days, may be agreed between the acquirer and the SoS for problematic transactions. The SoS will also have the ability to ‘stop the clock’ through formally issuing an information notice or attendance notice during the process, until such a notice is complied with.
At the end of its review, the SoS will either clear the transaction or must decide to issue a final order, if satisfied that the transaction poses, or would pose, a national security risk (on the balance of probabilities). Such orders may impose conditions or may rule that the transaction should be blocked or unwound.
The SoS will have a range of remedies available to address national security risks associated with transactions, both while assessments take place and after their completion.
It is not intended, as under the current regime, that parties will be able to voluntarily offer up undertakings to address concerns (however, parties will be encouraged to maintain a dialogue with the Government throughout the assessment process and it is anticipated that these conversations will assist in designing remedies; further, there will be opportunity for the parties to make representations on remedies during the assessment process). All conditions to approval will be formalised in an order and enforceable through sanctions.
During an investigation, the Government may also issue interim orders to prevent parties from completing a transaction or, where deals have closed, integrating their operations. Such orders may have extra-territorial effects.
Legal challenges to decisions will be subject to the standard judicial review process (subject, for certain decisions, to a shortened time limit – 28 days as opposed to the usual three-month period, although the court can give permission to bring the claim after the expiry of the 28 days). The key implication being that it will not be possible to open up decisions for a full appeal on the merits (except in respect of decisions relating to civil penalties, for which a full merits appeal will be available). Close material procedures (“CMPs”) will be utilised to ensure that sensitive materials are not improperly disclosed.[13]

Sanctions

The proposed legislation creates a number of sanctions, civil and criminal, that will apply in the event of non-compliance. For instance, criminal and civil sanctions are applicable where an acquirer progresses to completion an acquisition subject to the mandatory notification regime, without first obtaining clearance from the SoS. The recommendation would thus be to engage early with the Government and complete the notification process in such circumstances.[14]

Anticipated impact

According to Government data, the NSIB could result in approximately 1,000-1,830 notifications a year, with call-ins/full national security assessments conducted in 70-95 cases a year and remedies anticipated in around 10 cases a year.

By comparison, the UK’s competition regime typically investigates less than 100 deals per year whilst the EU merger control regime – which is one of the toughest in the world – covered 645 cases in 2019 (283 of which were under its simplified procedure regime). Further, the current regime has involved just 12 interventions on a national security basis since 2002 (the peak year for interventions being 2019, in which 4 interventions were issued).

If enacted, this would clearly take the UK from having one of the lightest touch regimes in Europe to arguably one of the most expansive. However, it is also clear that, whilst the Government expects to be engaged and have the opportunity to review transactions (which may have consequences in terms of deal timelines and give rise to hold separate obligations in anticipated and/or completed deals), most transactions will be cleared without any intervention by way of remedies.

Timing and next steps

It is anticipated that the National Security and Investment Act will commence during the first half of next year. The Second Reading of the NSIB took place on Tuesday 17 November 2020. The committee stage (where the bill will undergo a line by line examination, with every clause agreed to, changed or removed) is scheduled for 24 November 2020.

The consultation period on the mandatory notification sectors closes on 6 January 2021. Industry is encouraged to respond and provide views on the scope of the sectors and activities currently covered by this process – as currently drafted, there a number of areas where the scope is potentially over-reaching and insightful, technical input from the market will be welcome.

Other points of note

The national security assessment will run in parallel to any competition assessment for a transaction (which will continue to be conducted by the UK Competition and Markets Authority, the “CMA”). However, whilst the two processes will be separate, there will be interactions and, in practice, outcomes will be intertwined. In particular, the legislation will include a power that would allow the SoS to intervene where competition remedies run contrary to national security interests, where this is considered necessary and proportionate. Further, the Government’s intention is that, as far as possible, any national security remedies will be aligned with competition remedies (and that the timetables will be aligned, to the extent possible, within the statutory framework to achieve this).

The Government is clear that any conflict between competition remedies and risks posed to national security will be resolved after consultation with the CMA and that mutually beneficial remedies will be imposed wherever possible. Interaction between the two regimes will be covered in more detail in a Memorandum of Understanding with the CMA. The CMA will also be under a duty to share information with the SoS and provide other assistance reasonable required to perform its functions.

What does this mean for transacting parties?

This new proposal will have a potentially significant impact on targets, sellers and acquirers alike.

For targets and sellers, it will be incumbent to undertake a review of the target’s business and activities to consider if they fall within one of the sensitive sectors and to be alive to this risk in conjunction with future capital raises, share transfers or sales of all or parts of the business, including sales of key assets, going forwards. There may be structuring options to consider. If targets or sellers are undertaking sale processes, there will also need to be greater scrutiny of acquirers in assessing transaction risk. Auction processes should also take into account the risk that a bidder may pose.

For acquirers (whether domestic or foreign – as the regime is not only designed to capture non-UK parties) consideration should be given to their ultimate controllers, the track record of those people in relation to other acquisitions or holdings, whether the acquirer has control or significant holdings in other entities active in the same sector and any relevant criminal offences or known affiliations of parties involved in the transaction, whereby an acquirer may be regarded as giving rise to acquirer risk from the SoS perspective. It is not clear to what extent parties may be able to pre-clear or seek constructive guidance in advance from the Government. There is reference in the proposals, for example, to parties having informal discussions with the Government earlier on in a sale process. However, these appear to envisage a situation whereby a specific transaction is under contemplation. Further, the Government has flagged that in a competitive process any mandatory or voluntary notification should only be made by the final bidder or acquirer in the process.

Transactions and investment deals will need to be structured to accommodate this additional risk including through introducing additional conditionality. The UK has always been open to foreign investment and, consistent with this, no transaction has been blocked to date on national security concerns. However, strict conditions have been required for deals to be cleared under the current regime. Such implications need to be considered up-front by an acquirer when planning a transaction (and risk, procedural and timing impacts appropriately factored into contractual documentation).

Given the increasing and widening emphasis on screening transactions for national security concerns, it will be important to analyse early on the risks of Government intervention/concerns arising for a transaction. Whilst concerns will be highest in the context of a takeover by a buyer affiliated to a ‘hostile state or actor’ or where a buyer owes allegiance to a hostile state or organisation, foreign nationality more generally has been considered a risk factor under the current regime. Interventions have been launched, for example, in the past, in response to investments from the United States, Canada and elsewhere in Europe. Any foreign entity may thus face close scrutiny. Concerns over asset stripping and rationalisation motivations may also provoke investigations when the acquiring company is a UK entity.

Appendix – Government Guidance, Flow Charts on Process [15]

[1] Although, the Government will have the power to retrospectively validate a transaction.

[2] ‘Entities’ are also broadly defined , covering any entity (whether or not a legal person) but not individuals. This includes a company, LLPs, other body corporates, partnerships, unincorporated associations and trusts.

[3] See further: https://www.gov.uk/government/news/new-office-for-investment-to-drive-foreign-investment-into-the-uk.
The draft Statutory Statement of Policy Intent published concerning the new national security regime also specified with respect to the new regime that: “Its use will not be designed to limit market access for individual countries; the transparency, predictability, and clarity of the legislation surrounding the call-in power is designed to support foreign direct investment in the UK, not to limit it.”

[4] See further the Government’s press release on this development, available here: https://www.gov.uk/government/news/new-powers-to-protect-uk-from-malicious-investment-and-strengthen-economic-resilience.

[5] See: https://services.parliament.uk/Bills/2019-21/nationalsecurityandinvestment.html.

[6] See Section 2(4) of the NSIB.

[7] See further: https://www.gov.uk/government/consultations/national-security-and-investment-mandatory-notification-sectors.

[8] See, to this effect, the draft Statement of Policy Intent published: https://www.gov.uk/government/publications/national-security-and-investment-bill-2020/statement-of-policy-intent.

[9] The regime only applies to issues of national security. Other public interest issues concerning e.g. media plurality, financial stability or the UK’s ability to maintain in the UK the capability to combat, and to mitigate the effects of, public health emergencies, will continue to be dealt with through the existing channels and processes.

[10] The types of tangible moveable property of greatest national security interest will vary across sectors but are likely to be closely linked to the activities of companies in areas more likely to raise national security concerns (as identified through the requirements of the mandatory notification regime). Examples of such assets may include physical designs and models, technical office equipment, and machinery.

[11] See Sections 7(3) and (7) of the NSIB.

[12] See: https://www.gov.uk/government/publications/national-security-and-investment-bill-2020/statement-of-policy-intent.

[13] CMPs are civil proceedings in which the court is provided with evidence by one party that is not shown to another party to the proceedings. Any restricted evidence is heard in closed hearings, with the other party(ies) excluded and their interests represented by a Special Advocate. The rationale behind CMPs is to ensure that evidence can still be used in the proceedings, rather than being excluded completely under the doctrine of public interest immunity (and, specifically, on grounds of national security).

[14] Further examples are listed below – however, this is not an exhaustive list of proposed sanctions.

Failure to notify or non-compliance with interim or final orders could result in fines of up to 5% of total worldwide turnover or £10 million (whichever is higher) on businesses and prison sentences and/or fines for individuals. Failing to comply, without reasonable excuse, with an information or attendance request could results in fines on companies and fines and/or imprisonment for individuals. It will also be an offence to knowingly or recklessly supply information that is false or misleading in a material respect – punishable through fines and/or through the sentencing of individuals to prison. There would also be an opportunity for the SoS to reconsider decisions and (re-)review a trigger event in these circumstances, even if outside of the prescribed ‘call-in’ period for voluntary transactions. Unauthorised use or disclosure of regime information would also see individuals subject to imprisonment and/or a fine.

[15] Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/934438/process-flow-chart-for-businesses.pdf.

Gibson Dunn’s lawyers are available to assist in addressing any questions that you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition, Mergers and Acquisitions, or International Trade practice groups, or the authors:

Ali Nikpay – Partner – Head of Competition and Consumer Law, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)

Deirdre Taylor – Partner – Antitrust and Competition, London (+44 (0) 20 7071 4274, dtaylor2@gibsondunn.com)

Attila Borsos – Partner – Competition and Trade, Brussels (+32 2 554 72 11, aborsos@gibsondunn.com)

Selina S. Sagayam – Partner – International Corporate, London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)

Sarah Parker – Associate – Competition and Consumer Law, London (+44 (0) 78 3324 5958, sparker@gibsondunn.com)

Tamas Lorinczy – Associate – Corporate, London (+44 (0) 20 7071 4218, tlorinczy@gibsondunn.com)

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

In 2013, California set hydrogen infrastructure targets to promote development and growth of the fuel cell electric vehicle (FCEV) and hydrogen fueling market.[1] Yesterday, the California Air Resources Board (CARB) released a draft annual report that analyzes the industry’s current status and near-term outlook, and recommends “actions necessary to maintain progress and enable continued future expansion.”[2]

Despite the COVID-19 pandemic, California’s hydrogen fueling network and the number of FCEVs on the road have continued to grow over the past year.[3] CARB concluded that the hydrogen fueling industry is “responding favorably” to California’s “maturing support systems.”[4] As of July 3, 2020, there were 42 open-retail stations, with five stations opened and nine newly funded this year.[5] The total network has reached 71 opened and planned projects across the State.[6] And the California Energy Commission is expected to announce the recipients of co-funding for new stations in the near future.[7]

Although growth projections have shifted back one year compared to prior estimate due to the pandemic, auto manufacturers nevertheless seem poised to accelerate production of FCEVs in tandem with projected fueling station development.[8] And deployment data suggests that FCEV technology has a shot at wide-spread consumer adoption based on similar trends for consumer acceptance of the current generation of battery electric vehicles.[9]

While California’s hydrogen fueling network has continued to advance and has become a priority among public and private stakeholders, CARB notes that progress must “not only continue[] but accelerate[]” in order to meet “State and industry targets for both zero-emission infrastructure development and [zero-emission vehicle] deployment.”[10] Although the State is on track to meet its AB 8 goals, “there is little room for station development delays.”[11] Specifically, the market needs “continued and coordinated industry and State support” to achieve economies of scale so that manufacturers will continue to produce FCEVs, and customer-facing costs will drop enough to make FCEV ownership possible for a broader swath of the California population.[12] CARB cites several “complementary factors” that are crucial to successful FCEV market growth: development of new supply chains and manufacturing capacity; increased consumer awareness and acceptance of FCEVs and hydrogen technology; expansion of the hydrogen fuel production network; and use of consumer incentives to make the technology more affordable.[13]

CARB recommends six specific priorities for industry development:

Use AB 8 and HRI program funding, and any other means available, to develop as many light-duty hydrogen fueling stations as possible through the end of the AB 8 program.
Appropriately balance the goals of developing stations in communities statewide and driving larger-capacity growth in highly developed local networks.
Continue to assess ongoing and projected development pace and quickly address bottlenecks as the technology transitions to a broader market.
Understand capacities and opportunities to reduce State funding and transition to a financially self-sufficient industry.
Expand upstream hydrogen supply to ensure fuel availability for customers as the market expands.
Encourage use of renewable hydrogen.[14]

CARB has solicited public and expert review of the draft report and will release a final revised report in 2021.

___________________

[1] Assembly Bill No. 8 (Statutes of 2013).

[2] California Air Resources Board, 2020 Annual Evaluation of Fuel Cell Electric Vehicle Deployment & Hydrogen Fuel Station Network Development xiv.

[3] Id. at xiii, 3.

[4] Id. at xiii.

[5] Id. at xv-xvi.

[6] Id.

[7] Id. at xiii, 4-8.

[8] Id. at xvii-xxii.

[9] Id. at xx-xxi.

[10] Id. at xiii, 62.

[11] Id. at xxi.

[12] Id. at 62.

[13] Id. at xiii-xiv.

[14] Id. at 62-63.

The following Gibson Dunn lawyers assisted in preparing this client update: Thomas Manakides, Abbey Hudson, Joseph Edmonds and Jessica Pearigen.

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

On November 12, 2020, President Trump issued Executive Order (“E.O.”) 13959 restricting the ability of U.S. persons to invest in securities of certain “Communist Chinese military companies.”[1] This E.O. alleges that under China’s national strategy of “Military-Civil Fusion,” China “exploits United States investors” to finance the development of its military, intelligence, and security capabilities. While the E.O. is only the latest in a flurry of actions by the Trump administration directed against Beijing, it is the first measure to focus on securities—including investments in securities of dozens of prominent Chinese companies, as well as mutual funds and index funds that hold such companies’ shares. Under the E.O., U.S. persons—including individual and institutional investors, stock exchanges, fund managers, investment advisers, broker-dealers, and insurance companies—will be prohibited from purchasing for value publicly traded securities of certain Chinese companies starting in early January 2021 and, absent a change in policy by the incoming Biden administration, will be incentivized to engage in divestment transactions through November 11, 2021.

The E.O. currently applies to 31 ostensibly civil companies that the United States alleges have ties to the Chinese military. The names of those companies appear on two lists published by the U.S. Department of Defense in June 2020 and August 2020, and reproduced below. The U.S. Department of the Treasury has yet to publish guidance indicating whether the E.O. extends to those companies’ subsidiaries; however, a plain-language reading of the E.O. suggests that it may only apply to subsidiaries (if any) that the U.S. Secretary of the Treasury identifies by name. Among the targeted entities are substantial enterprises such as China Mobile Communications and Hikvision, many of which have shares traded on mainland Chinese, Hong Kong, or U.S. stock exchanges. Additionally, several of the targeted companies were added earlier this year to the U.S. Department of Commerce’s Entity List and are therefore already subject to stringent restrictions on access to U.S.-origin goods, software, and technologies. In that sense, the new E.O. marks an expansion of U.S. pressure on Beijing from targeting suppliers of certain large Chinese firms to constricting their sources of financing, albeit in a relatively narrow manner. According to a leading China-focused research organization, of the 31 companies identified to date, only 13 are publicly traded components of the MSCI China Index and only Hikvision has substantial foreign ownership.[2]

Effective January 11, 2021—sixty days after the E.O. was issued—U.S. persons are prohibited from engaging in “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company.” “Transaction” is defined to mean the purchase for value of any publicly traded security and the prohibition applies to shares in such companies, as well as shares held indirectly through popular investment vehicles such as exchange traded funds. The E.O. also permits U.S. persons, until November 11, 2021—one year after the E.O. was issued—to engage in otherwise prohibited transactions in order to divest their existing holdings in any of the named Communist Chinese military companies. Although the E.O.’s narrow definition of prohibited transactions does not appear to require U.S. persons to divest holdings in these companies, the prospect of securities becoming illiquid after November 11, 2021 may lead many U.S. investors to divest their holdings during this time.

In this regard the surgical and staggered imposition of restrictions under the E.O. reflects prior approaches the United States used with Venezuela and Russia and is likely animated by similar concerns. When the United States acted to limit the Maduro regime’s access to finance starting in 2017, it, inter alia, restricted transactions associated with certain Venezuela bonds. But, in order to limit the collateral consequences on innocent parties that held significant numbers of those bonds, the United States allowed the limited divestment of those bonds. In the Russia context, following the Crimea incursion in 2014, the United States imposed sanctions on some of the largest enterprises in the Russian financial and energy sectors. However, due to the exposure of U.S. and allied interests to those enterprises, the United States similarly stopped short of imposing blocking sanctions on any of the targeted entities. As with the new China E.O., Russian “sectoral” sanctions prohibit U.S. persons from engaging in only certain types of financial transactions with identified firms. And, importantly, absent some other prohibition, the earlier Russian sectoral sanctions and the new China E.O. permit U.S. persons to continue engaging in all other lawful dealings with listed entities.

The new E.O. is the latest in a series of U.S. measures calculated to address perceived threats to U.S. national security posed by China’s policy of “Military-Civil Fusion.”[3] Like the U.S. Department of Commerce’s expansion of the Military End User Rule, the new Huawei-specific Direct Product Rule, and the recent spate of Entity List designations, as well as the U.S. Government’s procurement ban on certain technologies from several Chinese companies (including two companies that are subject to the new E.O.), this latest action is designed to curtail American support for Chinese companies that allegedly support the Chinese military. The E.O. also complements outreach by the U.S. State Department in August 2020 urging colleges and universities to divest from Chinese holdings more generally,[4] and President Trump’s Working Group on Financial Markets, which has developed guidance that would require companies to provide American regulators with access to audit work papers to remain listed on U.S. exchanges, access that China had historically refused.[5] White House officials are reportedly prioritizing further action against Beijing during President Trump’s final weeks in office.

While the E.O.’s prohibition will take effect shortly before President-elect Biden is sworn in, the apparent wind-down period for U.S. persons to divest their holdings in the listed Communist Chinese military companies extends nearly a year into the next president’s term. As such, in our assessment, the key date for this new policy is not only January 11, 2021, when the prohibition takes effect, but also nine days later when the new administration assumes power. Because the E.O. is not mandated by statute or any other requirement, once in office President Biden could engage with the E.O. as he sees fit: he could revoke the E.O. outright, narrow its reach through published guidance and the exercise of enforcement discretion, decline to target additional Chinese companies, or allow the E.O. to lapse on November 12, 2021 when the President is required by the International Emergency Economic Powers Act to renew the national emergency determination that allowed for the E.O.

However, even for a Biden administration that will be intent on changing the tone of U.S. foreign policy—including through closer coordination with traditional allies—rescinding or eliminating these and other restrictions on Beijing without receiving any concessions in return could spark bipartisan pushback in the U.S. Congress and potentially in the electorate. Moreover, even if President Biden were to narrow or revoke the new E.O., the measure may nevertheless serve its intended purpose of making U.S. persons (including U.S. financial institutions) less willing to hold securities or other financial instruments of, or do other business with, companies that have been linked to the Chinese military, intelligence, or security services. Furthermore, in light of China’s increasingly robust regulatory responses to U.S. unilateral measures—seen in the Hong Kong national security law, Beijing’s new export control law, and its continued threat of establishing an “unreliable” suppliers list for companies that choose to comply with U.S. regulations and cease certain sales to Chinese companies—we expect that China will also respond to this E.O. How China chooses to react will either reduce tensions between Beijing and Washington or continue to exacerbate the situation by potentially imposing costs on entities that choose to comply with this new measure.

* * *

As of November 12, 2020, the 31 Communist Chinese military companies to which the prohibition will apply are as follows:

Aviation Industry Corporation of China (AVIC)
China Aerospace Science and Technology Corporation (CASC)
China Aerospace Science and Industry Corporation (CASIC)
China Electronics Technology Group Corporation (CETC)
China South Industries Group Corporation (CSGC)
China Shipbuilding Industry Corporation (CSIC)
China State Shipbuilding Corporation (CSSC)
China North Industries Group Corporation (Norinco Group)
Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
Huawei
Inspur Group
Aero Engine Corporation of China
China Railway Construction Corporation (CRCC)
CRRC Corp.
Panda Electronics Group
Dawning Information Industry Co (Sugon)
China Mobile Communications Group
China General Nuclear Power Corp.
China National Nuclear Corp.
China Telecommunications Corp.
China Communications Construction Company (CCCC)
China Academy of Launch Vehicle Technology (CALT)
China Spacesat
China United Network Communications Group Co Ltd
China Electronics Corporation (CEC)
China National Chemical Engineering Group Co., Ltd. (CNCEC)
China National Chemical Corporation (ChemChina)
Sinochem Group Co Ltd
China State Construction Group Co., Ltd.
China Three Gorges Corporation Limited
China Nuclear Engineering & Construction Corporation (CNECC)

_____________________

[1] Exec. Order No. 13959, 85 Fed. Reg. 73185 (Nov. 12, 2020), https://www.govinfo.gov/content/pkg/FR-2020-11-17/pdf/2020-25459.pdf.

[2] Another Trump Attack on Chinese Stocks, Gavekal Dragonomics (Nov. 13, 2020), https://research.gavekal.com/article/another-trump-attack-chinese-stocks.

[3] The Military-Civil Fusion policy is described in China’s national strategic plan “Made in China 2025,” which was announced by Premier Li Keqiang and his cabinet in May 2015.

[4] Kevin Cirilli & Shelly Banjo, U.S. Warns Colleges to Divest China Stocks on Delisting Risk, Bloomberg Quint (Aug. 19, 2020), https://www.bloombergquint.com/business/state-department-urges-colleges-to-divest-from-chinese-companies.

[5] Press Release, President’s Working Group on Financial Markets Releases Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies, U.S. Dep’t of Treasury (Aug. 6, 2020), https://home.treasury.gov/news/press-releases/sm1086.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Jose Fernandez, Chris Timura, Stephanie Connor, R.L. Pratt and Scott Toussaint.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
Jesse Melman – New York (+1 212-351-2683, jmelman@gibsondunn.com)
R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Asia and Europe:
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)
Joerg Bartz – Singapore – (+65 6507 3635, jbartz@gibsondunn.com)
Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0)20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com)
Matt Aleksic – London (+44 (0)20 7071 4042, maleksic@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)

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

Many UK regulated firms will be currently (re-)assessing staff as fit and proper and training staff on the FCA’s (or the PRA’s) Conduct Rules. The FCA has recently banned three individuals from working in the financial services industry for non-financial misconduct outside the workplace. The enforcement actions are, therefore, a timely reminder for regulated firms that the FCA has indicated it will bring an increased focus on how firms deal with non-financial misconduct by employees, both within and outside of the workplace.

Although these three specific cases followed criminal prosecutions for serious sexual offences, regulated firms are faced with particular challenges in determining how to deal with staff issues where the activities are not of the same degree of seriousness, take place outside of the workplace and are unconnected to any regulated activity undertaken by an individual.

Firms should consider what types of employee behaviour within and outside the workplace might be considered non-financial misconduct rendering an individual no longer “fit and proper” or alternatively constitute a breach of the FCA’s (or PRA’s) Conduct Rules reportable to the relevant regulator. Firms would be advised to appropriately document this assessment and consider how this is communicated to staff.

What enforcement action has the FCA taken ?

Russell David Jameson[1] – Jameson was a financial adviser at an authorised firm and was approved by the FCA to hold various significant influence and customer facing functions. In July 2018, he was convicted of serious criminal offences involving the making, possession and distribution of indecent images of children and sentenced to five years’ imprisonment, ordered to sign the sex offenders register indefinitely, and included in the list of individuals barred from working with children or vulnerable adults.
Mark Horsey[2] – Horsey was the sole director and shareholder of an authorised financial advice firm. Horsey had surreptitiously observed and video recorded his tenant having a shower without their consent. Horsey was sentenced to nine months’ imprisonment suspended for 18 months, required to complete 100 hours of unpaid work and 25 days of rehabilitation activity, and required to sign the sex offenders register.
Frank Cochran[3] – Cochran was a director and shareholder of an authorised financial advice firm. In April 2018, he was convicted of sexual assault, engaging in controlling and coercive behaviour and an offence contrary to the Protection from Harassment Act 1997. Cochran was sentenced to seven years’ imprisonment and required to sign the sex offenders register.

These individuals committed the offences whilst they were FCA approved persons. The FCA found that all three were not fit and proper and lacked the necessary integrity and reputation required to work in the regulated financial services sector.

What are the FCA’s expectations as to how firms address non-financial misconduct?

In response to the recent Final Notices, Mark Steward, FCA Executive Director of Enforcement and Market Oversight, stated that: “The FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry and will take action to ensure these standards are maintained.”[4] This indicates that the regulatory direction of travel is an increased focus on how firms address instances of non-financial misconduct. This is supported by other important FCA announcements on this topic.

In September 2018, Megan Butler, FCA Executive Director sent a letter to House of Commons’ Women and Equalities Committee.[5] The letter addressed the important issue of sexual harassment and noted that the FCA regarded it as misconduct that falls within the scope of the FCA’s regulatory framework. Tolerance of this sort of misconduct would be a clear example of a driver of poor culture. Megan Butler noted that sexual harassment and other forms of non-financial misconduct can amount to a breach of the FCA’s Conduct Rules and the Senior Managers and Certification Regime (“SMCR”) imposes requirements on firms to notify the FCA of Conduct Rule breaches. The letter was followed by a speech in December 2018 by Christopher Woolard, FCA Executive Director of Strategy and Competition.[6] Mr Woolard noted that “the way firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to our assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is.”

In January 2020 a “Dear CEO” letter[7] from Jonathan Davidson, FCA Executive Director of Supervision, Retail and Authorisations, was published regarding non-financial misconduct. Although the letter was addressed to the wholesale general insurance sector, it is indicative of the FCA’s approach to non-financial misconduct across the regulated sector. In particular, Mr Davidson noted that non-financial misconduct and an unhealthy culture is a key root cause of harm. How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation and bullying, is regarded as being indicative of a firm’s culture. The FCA expects firms, and senior managers to embed healthy cultures by identifying and modifying the key drivers of their culture. Mr Davidson highlighted that the FCA’s Approach to Supervision document flags the 4 key drivers of culture. These drivers are: leadership; purpose; approach to rewarding and managing people; and governance, systems and controls.

What challenges do firms face relating to non-financial misconduct?

Where the actions of individuals result in convictions and custodial sentences the decision on the fit and proper test is often (but not always) straightforward and the enforcement actions above, together with the various FCA pronouncements also identified, make clear the FCA’s view in this area.

However, regulated firms can be faced with a number of challenges when assessing non-financial misconduct, particularly when it occurs outside of the workplace.

(1) Identifying non-financial misconduct

It is often difficult for firms to identify non-financial misconduct, particularly if it occurs outside of the office. This may be a result of employees incorrectly understanding a firm’s policies and procedures around what must be brought to the firm’s attention or a reluctance of staff to reveal such matters to the firm.

Firms are expected to be able to demonstrate to the FCA that they have that the right processes in place to handle and escalate such cases appropriately. At a time when many employees are working from home the challenge for firms is greater. Firms should ensure that:

staff are trained and have an understanding of their obligations to inform the firm of relevant matters;
guidance for staff is clear on the types of matters about which firms would expect to be notified; and
such guidance should include examples of non-financial misconduct, and the guidance and training should be appropriately documented.

(2) Determining which matters need (immediate) escalation to the FCA

Principle 11 of the FCA’s Principles for Business requires a firm to maintain an open and cooperative relationship with regulators, as well as disclosing appropriately anything relating to the firm of which the FCA would reasonably expect to be notified. Senior Managers are also subject to a Senior Manager Conduct Rule and must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

Not all instances of misconduct would, however, require an immediate notification – firms will have a challenge in determining whether a matter is sufficiently material to warrant disclosure to a regulator. Factors to consider include:

seniority or significance of the individual to the firm; and
seriousness of conduct, potentially as represented by outcome.

(3) Undertaking “fit and proper” assessments

The recent enforcement actions all involved an assessment of the individual concerned under the FCA’s Fit and Proper Test for Employees and Senior Personnel. The most important considerations when assessing the fitness and propriety of a person are the person’s: (1) honesty, integrity and reputation; (2) competence and capability; and (3) financial soundness. Conviction for a serious sexual offence will clearly cause an individual to fail the test. The challenge for firms comes when the scenario is less clear cut. The concepts of “honesty” and “integrity” are inherently subjective and result in a regulated firm often having to make a difficult judgement in a given scenario.

(4) Interplay with the SMCR

The introduction of the SMCR marked a regulatory shift from collective responsibility to individual accountability. For staff subject to the FCA’s Conduct Rules, in addition to the fit and proper test, firms must also make an assessment as to whether any misconduct constitutes a breach of the Conduct Rules. The Conduct Rules are drafted to cover the activities of in-scope staff in both the regulated and unregulated parts of a business. The difficultly arises for firms in assessing when non-financial misconduct, particularly outside of the workplace, also amounts to a breach of the Conduct Rules.

This is important as firms are required to report any disciplinary action taken against an individual for a breach of the Conduct Rules. Firms are also required to include Conduct Rule breaches in regulatory references from new employers once staff have left the firm. It is, therefore, important that firms have a robust process in place for determining what types of employee behaviour within and outside the workplace might be considered a breach of the Conduct Rules and that all such decisions are clearly documented.

What practical steps can firms take to meet regulatory expectations?

It is clear that there is increasing regulatory focus on how regulated firms deal with non-financial misconduct and that failure to tackle such issues appropriately can be taken by the FCA as an indicator of poor culture. Firms would be advised to undertake an assessment as to how they in practice deal, or would deal, with instances of non-financial misconduct by staff.

The following practical steps are examples of matters that firms should consider to ensure that they meet regulatory expectations in this area.

Fitness and propriety assessments of incoming and existing staff should consider a broad spectrum of indicators, including data around financial and non-financial conduct, inside and outside the workplace.
Firms should proactively consider the types of non-financial misconduct that would trigger a fitness and propriety re-assessment and, as applicable, a review of whether a Conduct Rule has been breached.
Appropriate escalation procedures, including whistleblowing, should be in place so that the firm can identify and appropriately investigate allegations of non-financial misconduct by employees both within and outside of the workplace.
Staff must be appropriately trained on the importance of their behaviour within and outside of the workplace and when matters should be raised and to whom. Firms should also consider whether those to whom such matters may be raised also require training in handling what may be sensitive personal matters.
Non-financial, as well as financial, metrics should be included in performance assessments.
Sufficient management information regarding non-financial misconduct should be presented to management for management to receive a complete picture of risk, performance and conduct in the areas for which they are responsible.

_______________________

[1] https://www.fca.org.uk/publication/final-notices/russell-david-jameson-2020.pdf

[2] https://www.fca.org.uk/publication/final-notices/mark-horsey-2020.pdf

[3] https://www.fca.org.uk/publication/final-notices/frank-cochran-2020.pdf

[4] https://www.fca.org.uk/news/press-releases/fca-bans-three-individuals-working-financial-services-industry-non-financial-misconduct

[5] https://www.fca.org.uk/publication/correspondence/wec-letter.pdf

[6] https://www.fca.org.uk/news/speeches/opening-and-speaking-out-diversity-financial-services-and-challenge-to-be-met

[7] https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-non-financial-misconduct-wholesale-general-insurance-firms.pdf

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

Matthew Nunan (+44 (0) 20 7071 4201, mnunan@gibsondunn.com)

Martin Coombes (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)

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

Los Angeles partner James L. Zelenay, Jr. and associate Jeremy S. Smith are the authors of “FCA update: Will the Supreme Court address materiality (again)?” [PDF] published by the Daily Journal on November 11, 2020.

On November 10, 2020, Governor Andrew Cuomo signed legislation that will expand First Amendment protections under New York’s anti-SLAPP law by providing new tools for defendants to challenge frivolous lawsuits. The bill was initially passed by the New York State Senate and Assembly on July 22, 2020. The bill amends and extends New York’s current statute (sections 70-a and 76-a the New York Civil Rights Law) addressing so-called strategic lawsuits against public participation (“SLAPPs”):[1] suits that seek to punish and chill the exercise of the rights of petition and free speech on public issues by subjecting defendants to expensive and burdensome litigation.[2] Prominent First Amendment and free speech advocates, including the Reporters Committee for Freedom of the Press,[3] Time’s Up Now,[4] the New York Civil Liberties Union,[5] and the Authors Guild[6] came out in its support, as did the Editorial Board of The New York Times.[7]

Anti-SLAPP laws currently exist in 30 states and the District of Columbia, yet despite being home to some of the world’s most prominent media and news organizations,[8] New York’s own anti-SLAPP law, enacted in 2008, has been narrowly limited to litigation arising from a public application or permit, often in a real estate development context.[9] The new law, sponsored by Senator Brad Hoylman and Assemblywoman Helene E. Weinstein, amends the civil rights law in several ways to expand and strengthen New York’s anti-SLAPP protections.

The following is a summary of the law’s changes, which take effect immediately upon enactment, and key continuing features:

Expands the statute beyond actions “brought by a public applicant or permittee,” to apply to any action based on a “communication in a . . . public forum in connection with an issue of public interest” or “any other lawful conduct in furtherance of the exercise of the constitutional right of free speech in connection with an issue of public interest, or in furtherance of the exercise of the constitutional right of petition.”[10]
Confirms that “public interest” should be construed broadly, including anything other than a “purely private matter.”[11]
Requires courts to consider anti-SLAPP motions based on the pleadings and “supporting and opposing affidavits stating the facts upon which the action or defense is based.”[12]
Provides that all proceedings—including discovery, hearings, and motions—shall be stayed while a motion to dismiss is pending, except that the court may order limited discovery where necessary to allow a plaintiff to respond to an anti-SLAPP motion.[13]
Alters the formerly permissive standard (“may”) for awarding attorneys’ fees to provide that where the court grants such a motion, an award of fees and costs is mandatory: i.e., “costs and attorney’s fees shall be recovered.”[14]

While the amended statute provides welcome tools to defendants facing SLAPP suits, it remains to be seen how the revisions will function in practice. For example, while the revisions incorporate some of the key language and structure of California’s anti-SLAPP statute[15] —including a stay of discovery, and mandatory attorneys’ fees and costs to prevailing defendants—the proposed law preserves the standard for evaluating the merits: a motion to dismiss such an action “shall be granted” unless the plaintiff can show “that the cause of action has a substantial basis in law or is supported by a substantial argument for an extension, modification or reversal of existing law.”[16] In the context of the previous limited anti-SLAPP law, New York courts have interpreted that standard to impose a “heavy burden” on plaintiffs opposing anti-SLAPP motions,[17] requiring them to make an evidentiary showing of the facts supporting their claim and demonstrating that the defendant cannot establish a defense against it.[18] It will be up to courts to determine how that standard functions when applied to a broader range of cases, including defamation and other tort claims, that may present closer questions.

Separately, the status of the applicability of state anti-SLAPP statutes in federal court remains an open question, especially in light of the Second Circuit’s recent decision that California’s anti-SLAPP statute does not apply in federal court. La Liberte v. Reid, No. 19-3574, 2020 WL 3980223 (2d Cir. July 15, 2020). Whether New York’s revised anti-SLAPP law will be available to defendants in federal lawsuits in the Second Circuit is an open question that federal courts may soon need to confront.

Finally, courts will be asked to determine whether the revised statute is effective in currently pending actions, or if it will only have effect in actions filed after enactment. New York reserves this question as “a matter of judgment made upon review of the legislative goal,” based on “whether the Legislature has made a specific pronouncement about retroactive effect or conveyed a sense of urgency; whether the statute was designed to rewrite an unintended judicial interpretation; and whether the enactment itself reaffirms a legislative judgment about what the law in question should be.”[19] New York courts will likely conclude that the revised statute has “retroactive” effect and will apply in pending cases in light of the statute’s clear “remedial purpose.”[20] The legislature was careful to explain that the revisions intend to correct judicial “narrow[] interpret[ation]” of the existing anti-SLAPP statute and to remedy the courts’ “fail[ure] to use their discretionary power to award costs and attorney’s fees” in SLAPP suits, and that the revised statute “will better advance the purposes that the Legislature originally identified in enacting New York’s anti-SLAPP law.”[21] These factors all suggest that the revisions will take immediate effect in both pending and post-enactment lawsuits.

______________________

[1] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.

[2] Understanding Anti-SLAPP Laws, Reporters Committee for Freedom of the Press, https://www.rcfp.org/resources/anti-slapp-laws/ (last visited August 3, 2020).

[3] Reporters Committee supports legislation that would strengthen New York’s anti-SLAPP law, Reporters Committee for Freedom of the Press, https://www.rcfp.org/briefs-comments/rcfp-supports-ny-anti-slapp-bills/(last visited August 3, 2020).

[4] TIME’S UP (@TIMESUPNOW), Twitter, https://twitter.com/TIMESUPNOW/status/1286031156446728193 (last accessed August 3, 2020).

[5] Senator Brad Hoylman (@bradhoylman), Twitter, https://twitter.com/bradhoylman/status/1286002251685863424 (last accessed August 3, 2020).

[6] Authors Guild Signs Letter in Support of Anti-SLAPP Statute, Authors Guild, https://www.authorsguild.org/industry-advocacy/authors-guild-signs-letter-in-support-of-anti-slapp-statute/ (last accessed August 3, 2020).

[7] The Legal System Should Not Be a Tool for Bullies, N.Y. Times, https://www.nytimes.com/2020/07/17/opinion/new-york-slapp-frivolous-lawsuits.html.

[8] Id.

[9] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.

[10] Id. (emphasis added).

[11] Id.

[12] Id.

[13] Id.

[14] Id. (emphasis added).

[15] Cal. Civ. Proc. Code § 425.16.

[16] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a (emphasis added).

[17] 161 Ludlow Food, LLC v. L.E.S. Dwellers, Inc., 107 N.Y.S.3d 618, at *4 (N.Y. Sup. Ct. 2018), aff’d, 176 A.D.3d 434 (1st Dep’t 2019).

[18] Edwards v. Martin, 158 A.D.3d 1044, 1048 (3d Dep’t 2018).

[19] Nelson v. HSBC Bank USA, 87 A.D.3d 995, 997–98 (2d Dep’t 2011).

[20] In re Gleason (Michael Vee, Ltd.), 96 N.Y.2d 117, 122–23 (2001).

[21] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Anne Champion, Nathaniel Bach, Connor Sullivan, Kaylie Springer, and Dillon Westfall.

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

Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)
Connor Sullivan – New York (+1 212-351-2459, cssullivan@gibsondunn.com)
Scott A. Edelman – Co-Chair, Media, Entertainment and Technology Practice, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Media, Entertainment and Technology Practice, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com)
Nathaniel L. Bach – Los Angeles (+1 213-229-7241, nbach@gibsondunn.com)

San Francisco partner Brian M. Lutz and Orange County associate Colin B. Davis are the authors of “Chancery Court Ruling Confirms High Bar to Pleading a Nonexculpated ‘Revlon’ Claim” [PDF] published by Delaware Business Court Insider on November 11, 2020.

On October 29, 2020, the 16th amendment to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or “AWV”) entered into force. The amendment is the final step of implementing the EU-wide cooperation mechanism introduced by Regulation (EU) 2019/452 of March 19, 2019 establishing a framework for screening of foreign direct investments into the EU (the “EU Screening Regulation”).

New EU-Wide Cooperation Mechanism

The EU Screening Regulation directly applies as of October 11, 2020 which marks the beginning of a coordinated cooperation among EU member states on foreign direct investments (the “FDIs”). This means that, going forward, the German Federal Ministry for Economic Affairs and Energy (the “German Ministry”) will exchange information on FDIs undergoing screening in Germany with the European Commission and fellow EU member states which, in turn, may issue comments or, in case of the European Commission, an opinion. While such comments and/or opinions are non-binding, they need to be given ‘due consideration’ and, thus, may influence the screening decision rendered by the German Ministry. For details on the EU Screening Regulation, see our Client Alert of March 5, 2019.

In order for the German Ministry to be able to consider the potential impact of an FDI on the public order or security of one or more fellow EU member states as well as on projects or programs of EU interest, the grounds for screening under German FDI rules had to be expanded accordingly. For the same reason, the standard under which an FDI may be prohibited or restrictive measures may be imposed has been tightened from “endangering” (Gefährdung) to “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security, as to reflect the EU Screening Regulation. More or less a side effect, this gives the German Ministry more discretion and room to maneuver as it no longer has to determine an “actual and serious threat” (tatsächliche und hinreichend schwere Gefährdung) but now could prohibit a transaction in order to prevent an impairment that has not yet materialized but that is likely to occur as a result of the contemplated FDI.

Recent Changes to German FDI Rules

In light of the implementation of the EU-wide cooperation mechanism, we want to use the opportunity to recap this year’s key changes to the German FDI screening process. We refer to our client alert of May 27, 2020 (available here) for an overview on the overall screening process and a detailed outline of the most relevant amendments (and contemplated changes) to German FDI rules thus far in 2020.

Changes Effective as of October 29, 2020

Expanding the Grounds for Screening. As described above, the grounds for screening have been expanded to include public order or security of a fellow EU member state as well as effects on projects or programs of EU interest.
Tightening the Standard. As described above, the standard under which an FDI may be prohibited or restrictive measures may be imposed has been tightened from “endangering” (Gefährdung) to “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security.

Key Changes Effective as of June 3, 2020

Health-Care Related Additions. As a response to the COVID-19 crisis, the catalog of select industries subject to cross-sector review was expanded to include personal protective equipment, pharmaceuticals that are essential for safeguarding the provision of healthcare to the population as well as medical products and in-vitro-diagnostics used in connection with life-threatening and highly contagious diseases.
Governmental Communication Infrastructure. Also added to the catalog of select industries subject to cross-sector review, and thus, triggering mandatory notification to the German Ministry, have been FDIs acquiring 10% or more of the voting rights in companies providing services ensuring the interference-free operation and functioning of governmental communication infrastructure.
Investor-Related Screening Factors. In line with the EU Screening Regulation, the German Ministry may now consider screening factors that focus on the background and activities of the individual investor. In particular, the German Ministry may now take into account whether the foreign investor (i) is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or more than insignificant funding, (ii) has already been involved in activities affecting the public order or security of the Federal Republic of Germany or of a fellow EU member state, or (iii) whether there is a serious risk that the foreign investor, or persons acting on behalf of it, were or are engaged in activities that, in Germany, would be punishable as a certain criminal or administrative offence, such as terrorist financing, money laundering, fraud, corruption, or violations of the foreign trade or war weapon control rules.
Applicability to Share and Asset Deals. Since June 3, 2020 it has been codified that German FDI control is not limited to the acquisition of shares but equally applies to asset deals.
Notification Modalities. It was further clarified that FDIs triggering a notification obligation are to be notified immediately after signing of the acquisition agreement. The notification generally has to be submitted by the direct acquirer (even if the acquisition vehicle itself is not “foreign”) but may also be made by the indirect acquirer instead.

Key Changes Effective as of July 17, 2020

Effects on Consummating Transactions. In addition to transactions subject to sector-specific review (i.e., the defense industry and certain parts of the IT security industry), all transactions falling under cross-sector review that are notifiable (i.e., FDIs of 10% or more of the voting rights in companies active in industries listed in the catalog of select industries) may only be consummated upon conclusion of the screening process (condition precedent). Note that this has a tangible impact on the transaction practice given the broad range of notifiable FDIs in the cross-sector category, which are affected by this change. Foreign investors need to carefully assess if the target company operates in one of the listed industry categories. From a drafting perspective, acquisition agreements regarding notifiable FDIs should include a closing condition that the FDI is (deemed) cleared by the German Ministry. Buyers should further make sure to include a mechanism allowing for the amendment or termination of the acquisition agreement in case the German Ministry imposes (comprehensive) restrictive measures.
Penalizing the Disclosure of Security-Relevant Information and Certain Consummation Actions Pending Screening. The following actions are now penalized by way of imprisonment of up to five years or fine (in case of willful infringements and attempted infringements) or with a fine of up to EUR 500,000 (in case of negligence):
- Enabling the investor to, directly or indirectly, exercise voting rights;
- Granting the investor dividends or any economic equivalent;
- Providing or otherwise disclosing to the investor information on the German target company with respect to company objects and divisions that are subject to screening on grounds of essential security interests of the Federal Republic of Germany, or of particular importance when screening for effects on public order and security of the Federal Republic of Germany, or that have been declared as ‘significant’ by the German Ministry;
- Non-compliance with enforceable restrictive measures (vollziehbare Anordnungen) imposed by the German Ministry.

The introduction of criminal liability will lead to even greater focus on whether or not the transaction requires FDI clearing. The seller de facto will be forced to include the clearing by the German Ministry as a closing condition to avoid exposure to criminal liability.

According to the explanatory notes (Gesetzesbegründung), the prohibition to disclose security-sensitive information as described above will usually not apply to purely or other company-related commercial information that is exchanged in the course of a transaction in order to allow the investor to conduct a sound evaluation of the economic opportunities and risks of the FDI. Nonetheless, the seller will need to be cautious when preparing the due diligence process, in particular when populating the virtual data room. Typically, security-sensitive information as described above will not be shared with potential buyers prior to closing of the transaction anyway. Should the need arise, however, the use of a red data room and special disclosure and confidentiality obligations based on a clean team agreement are advisable.

Time Periods. In view of necessary adjustments to the timeframe of the screening process to integrate the EU-wide cooperation mechanism, the German legislator took the opportunity to overhaul the framework of screening periods altogether. Time periods are now set forth directly in the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz or “AWG”) instead of the AWV. This way, time periods can only be adjusted by way of legislative procedure, i.e. with involvement of the German parliament, and may no longer be changed unilaterally by executive order of the German government.Note the following changes to the timeline of the screening process (which will only apply to FDIs of which the German Ministry became aware of after July 17, 2020):
- Standardized Time Periods. The same review periods apply to sector-specific (i.e., the defense industry and certain parts of the IT security industry) and to cross-sector (i.e., all industry sectors except for defense/certain IT security) FDIs alike. The German Ministry now has two months from becoming aware of the reviewable FDI – instead of previously three months (sector-specific review) or even four months (cross-sector review) – to decide whether to initiate formal proceedings. Making a mandatory notification or filing for a certificate of non-objection will equally trigger the two-month pre-assessment period. In addition, the formal screening period was standardized and may now take up to four months regardless of the sector.
- Extension of Time Periods. The German Ministry may extend the four-month screening period by three months if the individual case is particularly difficult in either a factual or a legal manner. A further extension by one month is possible if the Federal Ministry of Defense puts forward that defense interests of Germany are notably affected. Moreover, periods may now be extended with the investor’s approval.
- Suspension of Time Periods. The screening period is suspended in case the German Ministry later requests further information on the FDI. Previously, the screening period was not set in motion before the German Ministry received all (initially or later) requested information on the FDI. This change most likely is meant to allow for requests of fellow EU member states for additional information on the FDI within the cooperation process under the EU Screening Regulation while, at the same time, keeping the delay in the screening process to a minimum.
- Resetting of Time Periods. Time periods will reset and start anew in the event that an FDI clearance or certificate of non-objection was revoked or altered (e.g., in case of willful deceit or the subsequent occurrence of facts). Equally, the time period will also reset if a restrictive measure or a contractual provision with the German Ministry is set aside, partly or in full, by a court decision.
Submission of Information. Being a triggering point for the screening period, the submission of information also was moved from the AWV to the AWG and, therefore, may only be amended by the German parliament.
- Triggering of Screening Period. Previously, the screening period was only triggered once all information had been submitted to the German Ministry. It is now provided that the four-month screening period starts when all initially requested information has been submitted which includes, as before, all information set forth in the corresponding general ordinance issued by the German Ministry, and, as of now, all information that the German Ministry additionally may request in its decision to initiate formal screening proceedings.
- Subsequent Request for Additional Information. The German Ministry may, also later in the screening process, request further information from anyone directly or indirectly involved in the acquisition. Although the screening period will be suspended until submission of the requested information, the overall duration of the screening process remains calculable for the investor who can limit the suspension by actively working towards a speedy submission.
More Effective Monitoring of Compliance with Measures. Investors and target companies are to expect more monitoring activity by the German Ministry which now has a right of information as well as a right to carry out examinations (including access to stored data, respective data processing systems, and business premises, in each case also by use of third-party representatives (Beauftragte)) in order to better monitor the investor’s and/or target company’s compliance with contractually agreed or imposed measures.
Imposing Restrictive Measures without Consent of the German Government. Previously, restrictive measures regarding FDIs subject to cross-sector review could only be imposed with the consent of the German government. Now, restrictive measures may be imposed in agreement with and/or consultation of certain federal ministries instead. For the sake of clarity, the German Ministry still requires the consent of the German government if it wants to prohibit an FDI that is subject to cross-sector review. This has not changed.

What Is Next?

Further changes to the AWV are announced to follow in the 17^th amendment to the AWV. In particular, the German Ministry plans to expand the catalog of critical industries which are notifiable and subject to cross-sector review from the acquisition of 10% or more of the voting rights. Based on earlier announcements by the German Ministry on this subject, we expect artificial intelligence, robotics, semiconductors, biotechnology and quantum technology to be potentially declared critical industries. The German Ministry stresses that it will take special consideration of feedback provided by the affected industry circles when proposing the expansion of critical industries to the German government.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the team in Frankfurt or Munich, or the following authors:

Markus Nauheim – Munich (+49 89 189 33 122, mnauheim@gibsondunn.com)
Wilhelm Reinhardt – Frankfurt (+49 69 247 411 502, wreinhardt@gibsondunn.com)
Stefanie Zirkel – Frankfurt (+49 69 247 411 513, szirkel@gibsondunn.com)

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