https://www.lexisnexis.com/authorcenter/the-journal/en-USTelligent Community 9https://www.lexisnexis.com/authorcenter/the-journal/b/pa/p/archive-pageWed, 27 Oct 2021 15:54:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:f9a9ba11-7a0e-48da-b3a0-83e06387e1c6Journal Archive Browse the complete collection of Journalshttps://www.lexisnexis.com/authorcenter/the-journal/m/lpa-image/37Wed, 27 Oct 2021 15:44:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:2e5c215e-253b-4c7e-8ec3-3d574b50f80cAlainna NicholsFall 2021https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/green-buildings-and-sustainable-technology-design-and-constructionWed, 27 Oct 2021 14:49:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:d8584c8a-b72d-4678-9014-03f9683464f4sheikaBy: Jed E. Ruccio, MIRRIONE SHAUGHNESSY & UITTI, LLC This article explains the concept of green building, both as a description of a type of building constructed and operated by employing sustainable technology, and as a reference to the design and construction techniques used to construct that building. THIS ARTICLE ALSO DESCRIBES HOW YOU MAY OBTAIN a green building designation upon construction of a new building or retrofitting of an existing building, including qualification for a Leadership in Energy and Environmental Design (LEED) certification and a federal Energy Star designation. With respect to LEED certification, this article explains the significant changes made by LEED Version 4.1 (v4.1) from the previously commonly used LEED Version 4.0 (v4). This article also discusses the American Institute of Architects (AIA) Document E204-2017, Sustainable Projects Exhibit, which was developed for use on a wide variety of sustainable projects. Why Green Buildings? The COVID-19 pandemic and renewed attention on racial justice issues spurred corporations to review their corporate practices and, among other things, focus more on Environmental, Social, and Governance (ESG) issues. According to the World Economic Forum, real estate is responsible for around 40% of global carbon emissions, so it makes sense that companies should look at the carbon footprint of the buildings they inhabit and own. The Global Real Estate Sustainability Benchmark (GRESB) is the ESG benchmark for real assets. It validates, scores, and benchmarks ESG performance data, providing business intelligence and engagement tools to investors and managers. Investors use GRESB data and analytical tools to monitor ESG opportunities, risks, and impacts, and engage with investment managers. Businesses are now looking for ways to maximize their ESG performance, and green building and healthy building certifications are especially important because they provide validation that an organization has made good on the ESG principles it espouses. More than 120 institutional and financial investors use GRESB data and benchmarks to monitor their investments, engage with their managers, and make decisions that lead to a more sustainable real asset industry. The 2020 real estate benchmark covers more than 120 property companies, real estate investment trusts, funds, and developers. GRESB represents $5.3 trillion in real asset value. In addition to achieving a reputation as a socially responsible company, increased productivity, higher retention of employees, and cost savings, tax-advantaged investment opportunities are also factors in the growth of green buildings and tenants seeking green options. Another incentive for adopting green building practices comes from the federal government’s increasing requirements to use green building practices for buildings owned or leased by federal, state, and local government agencies. CLICK HERE TO SIGN UP FOR A FREE TRIAL TO GET ACCESS TO THE FULL ARTICLE .Real EstateFall 2021FEATURESPECIALPractice Trendshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/the-international-climate-finance-planWed, 27 Oct 2021 14:25:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:941a8cce-c4dc-44f7-a5e1-a3a8b25b6925sheikaBy: Kevin L. Turner and Amy L. Edwards , HOLLAND & KNIGHT LLP In this article, the authors discuss the five broad areas of focus of the International Climate Finance Plan that impact international private sector development. IN THE BIDEN ADMINISTRATION’S EXECUTIVE ORDER 14008 , “Tackling the Climate Crisis at Home and Abroad,” on January 27, 2021, President Joseph Biden called for a climate finance plan “making strategic use of multilateral and bilateral channels and institutions, to assist developing countries in implementing ambitious emissions reduction measures, protecting critical ecosystems, building resilience against the impacts of climate change, and promoting the flow of capital toward climate-aligned investments and away from high-carbon investments.” Building on this commitment, the administration on April 22, 2021, released the U.S. International Climate Finance Plan (the International Climate Plan). 1 The stated goal of the International Climate Plan is: “The United States intends to double, by 2024, our annual public climate finance to developing countries relative to the average level during the second half of the Obama-Biden Administration (FY 2013–2016). As part of this goal, the United States intends to triple our adaptation finance by 2024.” The International Climate Plan has five broad areas of focus, as outlined below, and this article focuses on the key items that impact international, private sector development. Scaling Up International Climate Finance and Enhancing Its Impact The Development Finance Corporation (DFC) will update its development strategy not only to include climate for the first time, but also to make investments in climate mitigation and adaptation a top priority. DFC will release calls for applications for climate-focused investment funds and other climate-related investment opportunities in partnership with aligned organizations. DFC will hire its first chief sustainability/climate officer to lead its internal and external coordination on climate-related investments. DFC also commits to providing $50 million in technical assistance over the next five years to projects that advance U.S. and international climate objectives. The Millennium Challenge Corporation (MCC) adopted a new, agency-wide Climate Strategy in April 2021, centered on investing in climate-smart development and sustainable infrastructure and aims to have more than 50% of its program funding go to climate-related investments over the next five years. The U.S. Department of Energy, including through its National Laboratories, will continue to lead international efforts to research, develop, and deploy technologies that reduce emissions, helping to drive down the costs of current and future technologies critical to reducing emissions around the world. The U.S. Trade and Development Agency (USTDA) plans to dedicate up to $60 million over the next three years to advance climate-smart infrastructure solutions that will open emerging markets for the export of U.S.-manufactured goods, technologies, and services. The U.S. Department of the Treasury, through its Office of Technical Assistance, will provide technical assistance to help governments mobilize private-sector financing for high-quality infrastructure development, incorporating economic, environmental, social, and governance standards consistent with the G20 Principles on Quality Infrastructure Investment. Mobilizing Private Finance Internationally DFC will increase its climate-related investments so that, beginning in FY2023, at least one-third of all its investments are linked to addressing the climate crisis. DFC will collaborate with U.S. Agency for International Development (USAID), MCC, State, Commerce, the Export-Import Bank of the United States (Ex-Im Bank), and USTDA, with the goal of developing stronger project pipelines in the areas of climate mitigation and adaptation. DFC will work to develop a risk-sharing platform with private sector insurance partners to reduce barriers to financing climate projects. USTDA will leverage its relationships with private banks and development finance institutions around the world to mobilize private financing for climate-smart infrastructure projects overseas that use U.S. goods, services, and technologies. USTDA will also align its project preparation activities, where appropriate, to support climate-smart infrastructure projects that are suitable to receive financing and other support from the DFC and Ex-Im Bank. MCC will explore opportunities to bring in new private-sector partners and expand the use of blended finance to catalyze private sector finance aligned with climate objectives. MCC will also leverage private sector finance for climate solutions by de-risking investments through a closer partnership with DFC and possibly the development finance institutions of international partners. Ex-Im Bank will identify ways to significantly increase support for environmentally beneficial, renewable energy, energy efficiency, and energy storage exports from the United States. USAID is scaling up private sector engagement to provide technical support to governments, including support for public-private partnerships; build the pipeline of activities; enhance the capacity of local private-sector, civil society, and governments to access and use finance; and create policy environments to facilitate private sector climate finance. USAID is exploring ways to further mobilize private sector investment in humanitarian assistance, as well as in renewable energy/energy efficiency, water security, climate-smart food and agriculture systems, adaptation, resilient infrastructure, and natural climate solutions, in collaboration with DFC and other agencies. Ending International Official Financing for Carbon-Intensive Fossil Fuel-Based Energy U.S. agencies will seek to end international investments in and support for carbon-intensive fossil fuel-based energy projects. However, in limited circumstances, there may be a compelling development or national security reason for U.S. support for a project to continue. DFC will implement a net-zero emissions strategy to transition its portfolio to net-zero emissions by 2040, including by increasing investment in projects that capture and store carbon. The Treasury Department, with partners in the Organization for Economic Cooperation and Development (OECD) and in close partnership with other U.S. government departments and agencies, will spearhead efforts to modify disciplines on official export financing provided by OECD export credit agencies (ECAs), to reorient financing away from carbon-intensive activities. It will also advocate to further incentivize ECA support for climate-aligned investments (e.g., broadening the scope of projects eligible for preferential terms), including in the area of adaptation and resilience, and to adopt methodologies to take climate risks into account when assessing risks to prospective loans and existing portfolio assets. Further, the Treasury Department will develop guidance on fossil fuel energy activities at multilateral development banks, which it will use as part of its criteria when casting U.S. votes on specific projects. Making Capital Flows Consistent with Low-Emissions, Climate-Resilient Pathways The Treasury Department, in coordination with other U.S. agencies, will: Engage with the Financial Stability Board (FSB) and international insurance forums and coordinate with U.S. regulators engaging in financial standard-setting bodies and other forums, to improve approaches for assessing and managing climate-related financial risks Support and help guide, in coordination with U.S. regulators, the direction of work undertaken by the International Financial Reporting Standards Foundation, the International Organization of Securities Commissions, and the FSB toward consistent, comparable, and reliable climate-related financial disclosures and help shape any forthcoming recommendations or international standards to be compatible with the U.S. domestic framework and regulatory process Work with the State Department, USAID, DFC, and other agencies to promote climate-aligned infrastructure development, including by coordinating programs to facilitate climate-resilient investments under the Small and Less Populous Island Economies Initiative. The State Department, DFC, USAID, and Treasury Department will support efforts such as the Blue Dot Network and the development of indicators to identify climate-aligned infrastructure projects for investors through the implementation of the G20 Principles for Quality Infrastructure Investment. Defining, Measuring, and Reporting U.S. International Climate Finance In order to provide for more detailed reporting, tracking finance for vulnerable populations, and enhanced reporting on mobilization and impact, the Administration will: Work with agencies to ensure that the full range of relevant public and private finance mobilized is reported clearly, accurately, and consistently. Encourage departments and agencies to track and report specific results achieved on the ground by U.S. climate finance, which will facilitate analysis of the effectiveness of such finance and assess value-for-money. Agencies will also be encouraged to track U.S. climate finance flowing to Small Island Developing States and Least Developed Countries and to efforts supporting indigenous peoples, women and girls, and other affected communities. Encourage departments and agencies to track the amount of U.S. development finance that has been screened for, or made resilient to, future climate risks. Key Takeaways For businesses involved in the renewable energy, climate finance, and climate technology sectors, there has never been a more unified, whole-of-U.S.-government approach to supporting international project development in these areas. Now is the time to engage with DFC, Ex-Im Bank, and other U.S. agencies regarding your viable, bankable projects. The goals set forth in the International Climate Plan are ambitious, and meeting these goals is not within the sole control of the administration. Achieving these goals is dependent upon the cooperation of foreign governments (especially developing countries) in shifting development priorities toward climate finance and renewable production, which may not be feasible on the ground in many of these countries. Achieving these goals is largely dependent on the private sector. The U.S. model of development finance is grounded in mobilizing private sector capital in private sector-led projects. In short, there must be viable, bankable projects for U.S. government development finance capital and private sector capital to flow into. 2 Kevin L. Turner, a partner in the Washington, D.C., office of Holland & Knight LLP, focuses his practice on international financing transactions and is the former general counsel of the U.S. International Development Finance Corporation and the Export-Import Bank of the United States. He can be reached at kevin.turner@hklaw.com. Amy L. Edwards, is a partner in Holland & Knight’s Public Policy & Regulation Group in Washington, D.C. She is co-chair of the firm’s National Environmental Team. She may be contacted at amy.edwards@hklaw.com. This article was first published in the September 2021 issue of Pratt’s Energy Law Report. All rights reserved. Visit the website to subscribe: https://store.lexisnexis.com/categories/shop-by-jurisdiction/national-194/pratts-energy-law-report-skuusSku20750419 . To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH Energy & Utilities > Trends & Insights > Articles Related Content For an overview of practical guidance related to climate change in multiple practice areas, see > CLIMATE CHANGE RESOURCE KIT For a collection of Practical Guidance resources addressing ESG issues, see > ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) RESOURCE KIT For a discussion of climate change considerations for the global business community, see > CLIMATE CHANGE CONSIDERATIONS IN M&A TRANSACTIONS 1 . Source info https://www.whitehouse.gov/wp-content/uploads/2021/04/U.S.-International-Climate-Finance-Plan-4.22.21-Updated-Spacing.pdf 2. For more detailed, agency-specific information related to the International Climate Plan, see: Development Finance Corporation, at https://www.dfc.gov/media/press-releases/dfc-commits-net-zero-2040-increases-climate-focused-investments Export-Import Bank of the United States, at https://www.exim.gov/news/exim-announces-chairs-council-climate-advise-increasing-support-for-clean-energy-exports U.S. Trade and Development Agency, at https://ustda.gov/?s=ustda+launches+global+partnership Millennium Challenge Corporation, at https://www.mcc.gov/resources/doc/doc-042221-climate-commitment U.S. Department of Energy, at https://www.energy.gov/articles/doe-launches-international-clean-energy-initiatives-tackle-climate-crisis U.S. Agency for International Development, at https://www.dfc.gov/media/press-releases/dfc-commits-net-zero-2040-increases-climate-focused-investments U.S. Department of the Treasury, at https://home.treasury.gov/news/press-releases/jy0134 U.S. Department of State, at https://www.state.gov/clean-energy-diplomacy-on-climate-bureau-of-energy-resources-enr/Fall 2021Practice TrendsEnergy & Utilitieshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/infrastructure-greenification-opportunities-for-the-u-s-energy-gridWed, 27 Oct 2021 13:17:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:7ba53f7d-8891-41a6-85c2-f7c1fd2f1eafsheikaBy: Michael Bonsignore and Eli Keene , Clifford Chance In this article, the authors explain that as the Biden Administration lays out its vision for a clean energy future, a confluence of economic and policy factors is providing a unique opportunity to greenify the power grid’s physical infrastructure by leveraging the economic opportunity in retired fossil power plants. THE UNITED STATES IS ON THE PRECIPICE OF A WATERSHED moment for clean energy following the inauguration of Joseph R. Biden Jr. as America’s 46th president. On the campaign trail and following his election and inauguration, President Biden has pledged and begun to implement an ambitious set of climate goals, striving to achieve net-zero emissions nationally by 2050, 1 with a goal of achieving carbon pollution-free energy generation by 2035, and to do so in a manner that encourages economic growth and environmental justice. Federal energy policy under a Biden Administration stands to supercharge a transition already consuming the U.S. power sector, where a fleet of aging, carbon-intensive coal plants is moving rapidly to retirement. Between 2011 and the middle of 2020, American coal-fired power plants representing 95 gigawatts (GW) of capacity 2 were taken offline. While some of these shuttered generating stations have been converted to natural gas-fired plants, the majority have entered a state of limbo—ceasing operations but remaining unremediated and unutilized. While the rapidly expanding ranks of shuttered coal plants might initially call to mind images of blight and unemployment, there is opportunity lurking. As the number of old coal sites grows, developers, operators, and asset managers will have more opportunities to greenify these old assets, by converting them to renewable energy hubs and storage centers. By leveraging the physical attributes and advantages of these sites with a variety of policy incentives, greenification projects can pose an attractive opportunity to turn idling liabilities into new, clean, economically viable assets. Greenification: The Basics For a developer, operator, independent power producer, or asset manager, aging and shuttered fossil plants present a few clear models for redevelopment, depending on the stage of the plant’s life cycle. For generating stations that have already ceased operating, a site can be acquired, remediated, and outfitted with new solar and battery storage; carbon capture and sequestration technology; clean hydrogen; or any other variety of clean energy equipment, much as with any other new facility. The same financing incentives can be deployed as would be used in a greenfield project, including tax equity financing via the investment tax credit (ITC), the premium tax credit (PTC), the Section 45Q tax credit, 3 or other tax credits. Existing infrastructure with remaining useful lifespan (including technical infrastructure such as substations, but also run-of-the-mill infrastructure, such as roads and parking) can be repurposed and built into the new facility. A plant need not be sitting abandoned for it to present an attractive greenification target. An alternative model might involve greenifying a site while it remains in operation. Under this model, a fossil plant could continue to operate during a gradual revitalization ramp-up period, all while continuing to generate cash flows from its existing operations. As the coal-fired units on site enter retirement, new power purchase agreements (PPAs) could be entered into for clean energy generation on the site, leaving the owner with two very different, but continuously operating assets. Despite the radically different asset classes, each model can present an owner or operator distinct advantages over greenfield developments. Leveraging the Opportunity in Shuttered Coal Power Plants Repurposing retired industrial sites—including for renewable energy development—is not a new idea. The U.S. Environmental Protection Agency (EPA) launched its Brownfields Program in 1995, and state programs followed, encouraging the redevelopment of polluted or potentially polluted sites through provision of grants, technical assistance, and, following the passage of amendments to the Comprehensive Environmental Response, Compensation, and Liability Act in 2002, certain limitations on federal environmental liability. Retired coal plants have already garnered some redevelopment interest in the United States. In 2018, Google broke ground on a new, $600 million data center, sited on the campus of the Widows Creek fossil plant in Jackson County, Alabama, a 1.6 GW Tennessee Valley Authority-operated facility that was shuttered in 2015. But the repurposing of coal plants specifically for clean energy generation, storage, and technology is a separate, growing phenomenon, with some attractive benefits for the right participants. The benefits and potential opportunities available to greenification projects include: Existing infrastructure. While coal-fired plants themselves may continue to become outdated and uneconomical to operate, the existing transmission infrastructure associated with these power stations can be utilized and repurposed. In practice, utilizing a plant’s existing interconnection and transmission infrastructure and the ability to avoid initiating a new interconnection process solves one of the biggest complications facing clean energy projects today—obtaining access to the grid. And while greenfield renewables projects frequently struggle with the lack of transmission infrastructure to bring power to load centers, dated fossil plants largely present the advantage of being sited in or near urban areas. Location, siting, and permitting . Unlike with greenfield projects, greenifying an existing power station means that the project site will already be zoned for industrial use and (likely) owned by a single landowner, significantly easing the site acquisition phase of project development (though additional environmental permits may be needed, depending on remediation and development activities). In addition, the fact that many existing structures are located near energy and transportation hubs provides unique geographic advantages. For example, in the burgeoning offshore wind industry, certain developers have already begun exploring opportunities to acquire retired generating stations located near the coasts to store the energy generated offshore (through rapidly advancing storage technology) that will inevitably face complications coming onshore and online. Cost opportunities. While every plant and potential transaction will have its own unique cost considerations, as a general matter there is economic opportunity in greenifying distressed or soon-to-be distressed assets. Sites themselves can be obtained for as little as one dollar, 4 financed or refinanced, and revitalized at a fraction of typical development costs. As discussed above, existing infrastructure can be repurposed for the new facility, cutting construction costs. These savings come on top of a trend of falling development costs for clean power installations, where the price of components (including photovoltaic panels and batteries) continues to fall and clean tech capabilities (including clean hydrogen and carbon capture utilization and storage (CCUS)) are accelerating. Emergence of storage, carbon capture, clean hydrogen, and related technology. Another recent trend making greenification an economic reality is the booming technological advances and practices in the energy storage, CCUS, and clean hydrogen businesses. The storage market in the United States is growing exponentially, and it will only continue to grow as technological advances emerge (such as long-duration battery storage), larger batteries get built, and costs continue to fall. Relatedly, following the Internal Revenue Service’s recent clarification of the 45Q tax credit for carbon capture and sequestration project and President Biden’s recent executive orders on climate change, the U.S. carbon capture industry could also see significant growth in the coming years. Clean hydrogen, likewise, is becoming increasingly viewed as key to a net-zero emissions economy due to its potential industrial and transportation applications. While the economics of clean hydrogen remain difficult, certain utilities and project developers, such as NextEra, are already pursuing greenification projects at retired coal plants, or updating existing natural gas plants, to use turbines that can be powered by natural gas in the short term with the goal of converting completely to clean hydrogen in the long term. Community buy-in and environmental justice. Among the primary motivations for the EPA Brownfields Program were complaints that abandoned brownfield sites were a physical blight on communities, and shuttered coal plants are no exception. One of the most beneficial aspects of greenifying idle plants is that it allows generators to develop community buy-in. In today’s environmental, social, and corporate governance-driven investing world, replacing a polluting power source with clean power can help achieve buy-in from the full range of stakeholders: from local community members to shareholders. Government Programs Can Help One critical advantage of greenification projects is the broad variety of government incentives that may be available to them. A number of state and federal programs exist specifically to promote the redevelopment of brownfields and the revitalization of the communities in which they are sited. These programs are likely to receive renewed focus under the Biden Administration. In one of the Administration’s first climate actions, an executive order on “Tackling the Climate Crisis at Home and Abroad,” the federal government was specifically directed to coordinate efforts on turning idled dirty energy assets into “new hubs for the growth of our economy.” Among the government programs and incentives already in existence today are: RE-Powering America’s Lands. The RE-Powering America’s Lands program, 5 launched in 2008, has established itself as a clearinghouse for information about these projects by identifying sites, commissioning feasibility studies, convening stakeholders, and promoting the use of liability comfort letters. The RE-Powering program also maintains a compendium of renewable energy projects on contaminated lands, identifying 417 such installations to date (though only two such projects are sited on retired coal-generating facilities). POWER initiative and the Appalachia Regional Commission. In 2015, the Obama Administration launched the multi-agency Partnerships for Opportunity and Workforce and Economic Revitalization (POWER) initiative, aimed at revitalizing communities suffering economically from the decline of the coal industry. While much of the POWER initiative has lain dormant since 2016, the Appalachia Regional Commission (ARC) 6 has continued to receive funding to implement the program and could be a program revitalized through its grantmaking authority by the Biden Administration. ARC has used its grant-making authority to aid a number of coal plant conversion projects. Federal and state tax incentives. Federal and state incentives—including tax credits offered by a number of states for remediation and redevelopment of brownfields—may further support the economics of greenification projects. These tax credits would be on top of any ITC, PTC, or 45Q tax incentives that a project may be eligible for, as well as any state-law renewables incentives. Department of Energy Loan Programs Office. Pursuant to the Title 17 Innovative Energy Loan Guarantee Program (and other programs specifically related to the automotive sector and tribal lands), the Department of Energy Loan Programs Office (LPO) has more than $40 billion in loan and loan guarantee authority to help develop innovative energy projects in the United States. Greenification projects involving renewable energy technology or CCUS could potentially take advantage of an LPO loan or loan guarantee. With the release of its American Jobs Plan in March 2021, the Biden Administration specifically called for increasing the capacity of these and other government programs to engage with these projects. The American Jobs Plan pointed to the Economic Development Agency’s Public Works program and HUD’s Main Street program, both of which provide government grants for municipal-level revitalization projects. An increase in federal grant dollars for economic redevelopment may lead to increased pressure from communities themselves to bring former generating facilities into productive use. An Early Model for Success While the opportunities to greenify retiring coal stations are growing rapidly, only a handful of these projects have been developed to date in the United States. One of the early successes has been ENGIE North America’s redevelopment of Mount Tom station in Holyoke, Massachusetts. The 146-megawatt (MW) coal plant, originally built in 1960, powered down in 2014, and was immediately targeted by the city of Holyoke for redevelopment. The resulting redevelopment took only four years, with ENGIE opening a six-MW solar farm on the site in 2017 and a three-MW integrated storage system (at the time, Massachusetts’ largest) the following year. The greenification of the Mount Tom site was made possible by the right alignment of opportunities and incentives. The Massachusetts Clean Energy Center—a state economic development agency—provided early technical assessments and assisted in convening stakeholders on the site’s redevelopment. Transmission infrastructure was repurposed, allowing easy interconnection with the grid. On the money side, tax equity financing was put in place for the redevelopment, and Massachusetts’ renewable portfolio standard helped pave the way for the project’s 20-year PPA with local utility HG&E. The model may be rapidly scaling for success. In January 2021, rapper-turned-solar developer Akon announced the creation of the Black Sunrise Fund, with an initial investment of $725 million, dedicated to recommissioning coal plants as solar energy facilities. Similarly, just recently, J-Power and Fortress Investment Group have partnered on the development of a greenification hub on the site of the Birchwood coal plant in King George County, Virginia. Some Key Issues Remain Though greenification projects carry a number of advantages, as with any new project type, developers will need to work through some key issues. The elephant in the room, of course, is environmental liability. While state and federal brownfields programs provide some comfort here, parties will need to carefully consider how known and unknown environmental liabilities are priced into and segregated within these transactions. With public support for greenification coming directly from the Biden Administration, it is not unreasonable to suspect that further incentives relating to environmental matters could be on the table for parties willing to take on such revitalization projects. Financing considerations will also need to be addressed. Despite existing brownfields policies, lenders may remain skittish about the prospect of potential exposure under state and federal environmental laws. And even where a developer is greenifying a site it already owns, it may need to navigate its own financing covenants—either funding the greenification project with equity or convincing its lenders to assume a new type of project risk. Finally, despite the various economic advantages, greenification results in a new scale of project. Only portions of a given site will be suitable for renewables development, and the resulting projects are likely to be a fraction of the capacity of the original plant, leaving a fundamentally different project in its place. Takeaways As the Biden Administration lays out its vision for a clean energy future, a confluence of economic and policy factors is providing a unique opportunity to greenify the physical infrastructure of the U.S. energy grid. As more fossil plants continue to shutter, there will be increasing opportunity to repurpose the valuable infrastructure that has tied them to the grid for decades at attractive costs. A solar, storage, and carbon capture industry that is rapidly growing cheaper and more versatile is primed to seize the moment. And with a new administration that has organized itself on the principle of building back into a clean energy future, developers and operators may find themselves with very willing governmental partners. Michael Bonsignore is a partner in the Washington, D.C., office of Clifford Chance. He is a member of the firm’s Corporate M&A and Energy & Projects groups, focusing on the renewable energy and clean energy technology sectors. He may be contacted at michael. bonsignore@cliffordchance.com. Eli Keene is an associate at Clifford Chance. He can be reached at eli.keene@cliffordchance.com. This article first appeared in Pratt’s Energy Law Report. All rights reserved. Visit the website to subscribe: https://store.lexisnexis.com/products/pratts-energy-law-report-skuusSku20750419 . To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: Energy & Utilities > Trends & Insights > Articles Related Content For a collection of resources addressing ESG issues, see > ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) RESOURCE KIT For an overview of the carbon capture and sequestration credit contained in IRC Section 45Q, see > 4 TAKEAWAYS FROM THE FINAL IRS CARBON CAPTURE RULES For a discussion of the Biden Administration’s American Jobs Plan, including its emphasis on climate change, see > PRESIDENT BIDEN’S AMBITIOUS AMERICAN JOBS PLAN WITH SIGNIFICANT CLIMATE-RELATED PROPOSALS For practical guidance related to climate change in a variety of practice areas, including real estate, finance, energy and utilities, and corporate governance, see > CLIMATE CHANGE RESOURCE KIT 1 . https://joebiden.com/climate-plan/ . 2 . https://www.eia.gov/todayinenergy/detail.php?id=44976 . 3. 26 U.S.C.S. § 45Q. 4. https://www.enchantenergy.com/farmington-agreement/ . 5. https://www.epa.gov/re-powering . 6. https://www.arc.gov/ .Fall 2021Practice TrendsEnergy & Utilitieshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/corporate-social-responsibility-and-the-supply-chainWed, 27 Oct 2021 02:59:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:bbe0a1fb-7b12-4aab-ad79-e8e6e428963dsheikaBy: Timothy Murray, MURRAY, HOGUE & LANNIS Corporate social responsibility (CSR) is an amorphous concept that defies simple explanation. At its heart, CSR is a philosophy that a business entity has certain societal obligations beyond the bottom line of its owners—obligations to be a good citizen. IT IS AN ACKNOWLEDGEMENT THAT THERE ARE stakeholders aside from the business entity’s owners, including employees, local communities, and society at large, that are affected by the business entity’s decisions. In essence, it is a form of corporate self-regulation, pursuant to which a company voluntarily agrees to carry out and monitor its business in a manner designed to ensure it is and remains in compliance with certain ethical standards and norms, which often involve social and environmental obligations and ethical labor practices. CSR standards often extend beyond what is required by applicable law and may also entail philanthropic and charitable activities. CSR traditionally has been practiced by business entities via self-regulation, pursuant to which companies voluntarily engaged in practices that promoted CSR. The practice of voluntary CSR self-regulation is changing now, as laws have been enacted that mandate compliance with various CSR-related matters, as described below. It is therefore important for counsel to be conversant about concepts related to CSR since such issues are playing increasingly important roles in the operations of business clients. Common CSR Concepts A commonly discussed CSR concept is sustainability. A 1987 United Nations report defined sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability must balance often-competing interests. The effort to promote sustainability must make economic sense for the company both in terms of capital investments by the company and costs to the consumer. It must also meet the customer’s quality demands. CLICK HERE TO SIGN UP FOR A FREE TRIAL TO GET ACCESS TO THE FULL ARTICLE .Fall 2021FEATURESPECIALPractice NotesCommercial Transactionshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/financial-institutions-gear-up-for-climate-related-financial-risk-implications-under-executive-order-14030Wed, 27 Oct 2021 01:53:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:e2bd7394-c75f-4cac-af3a-1915b677ab8esheikaBy: Celeste Mitchell-Byars, LEXIS PRACTICAL GUIDANCE President Biden recently signed Executive Order 14030, Climate-Related Financial Risk (May 20, 2021) (Executive Order) 1 to address the climate-related financial risks of federal programs. The Executive Order directs a number of federal agencies to take action to address climate-related financial risks. This article explores key areas of the Executive Order that could have potential implications for financial institutions. The Executive Order establishes clear policy objectives to: Advance consistent, clear, intelligible, comparable, and accurate disclosures on climate-related financial risk Mitigate climate-related financial risks and drivers Identify causes of and address disparate impacts on disadvantaged communities and communities of color Drive the creation of well-paying jobs Achieve a net-zero emissions economy by no later than 2050 This Executive Order is directed to federal agencies in respect of federal programs. However, the Executive Order also highlights that the failure of financial institutions to account for climate-related financial risk threatens the competitiveness of companies and markets, negatively impacts consumers, and hinders the ability of financial institutions to serve their community appropriately and adequately. It stands to reason that financial institutions should expect increased regulatory focus on financial risks arising from climate change, including weather events that increase physical and transition risks. Summary Key provisions of the Executive Order and implications for financial institutions are summarized below. Government-Wide Climate-Related Financial Risk Strategy The Executive Order calls for development of a government-wide climate-related financial risk strategy (strategy) to address climate-related financial risks. The strategy will focus on: Measuring, assessing, analyzing, and mitigating climate-related financial risk to government programs, assets, and liabilities Assessing the financing needs associated with achieving net-zero greenhouse gas emission and adapting to impacts of climate change Evaluation of private and public investments to meet financing needs while advancing economic opportunities, worker empowerment, and environmental mitigation in disadvantaged communities and communities of color Achieving net-zero greenhouse gas emission by 2050 is the goal stated in the Executive Order. Significant federal funding is earmarked for emission-reducing solutions, and financial institutions will be relied upon to provide sustainably linked loans and other climate commitments. The assessment of the federal government climate-related fiscal risk exposure will be published upon completion and annually thereafter. Financial institutions should begin assessment of climate-related financial risk as it relates to federal lending programs. Institutions should expect regulatory changes around financial risk and regulatory reporting that impact key risk categories: credit, liquidity, operations, and strategy; changes to risk appetite to include climate-related financial risk; and enhanced risk management, particularly around stress-testing and modeling. Advancing Equality and Equity Agencies are asked to undertake analysis of the risk climate change will have not only on the federal government, but on the financial security and viability of consumers, businesses, and the U.S. financial system. Advancing equity to create opportunities for improvement of historically underserved communities is another goal in the Executive Order. According to President Biden, advancing equity requires a systematic approach to embedding fairness in federal government decision-making processes, and working to redress inequities in federal policies and programs that serve as barriers to equal opportunity. Each agency is required under the Executive Order to examine and report on barriers to enrollment, access to federal benefits and service programs, and procurement and contracting opportunities for disadvantaged communities and communities of color. Financial Regulators Assessment of Climate-Related Financial Risk The Secretary of the Treasury is directed to work with the Financial Stability Oversight Council to perform climate-related financial risk assessments and provide recommendations on: Climate-related financial risks to the stability of the U.S. financial system and approaches to mitigate these risks Coordination and information sharing of climate-related financial risk data amongst agencies and executive departments, as appropriate Accountability reports on climate-related financial risk policies and programs Assessment and integration of climate-related financial risk to federal programs Further, the Executive Order accounts for the potential of major disruptions in private insurance coverage as a result of climate change impacts. The increase in insurance payouts as a result of weather events, cost of assets, and property damage from extreme weather change, is predicted to have a substantial economic impact on the financial system. The agency is required to perform an assessment of climate-related issues and gaps in the supervision and regulation of insurers. The financial regulatory agencies are to focus on climate change and financial risk attributed to many other risk areas including operations, credit, liquidity, reputation, and strategy risks. The emphasis of physical and transition risk in the Executive Order, as a component of climate-related financial risk, emphasizes the impact of these events on the financial system. Physical risk is the risk from climate change such that increased extreme weather conditions lead to supply chain disruptions and present physical risk to assets, publicly-traded securities, private investments, and companies. Transition risk is the global shift away from carbon-intensive energy sources and industrial processes. Life Savings and Pensions The Secretary of Labor is directed under the Executive Order to identify and recommend actions that can be undertaken by law to protect the life savings and pensions of U.S. workers and families from the threats of climate-related financial risks. The Employee Retirement Income Security Act (ERISA) sets out fiduciary duties and obligations that include responsibility for investing the savings or selecting employee investment alternatives. ERISA imposes these duties and obligations on fiduciaries of ERISA-governed employee benefit plans. The Executive Order provides for rulemaking under ERISA where such rules are designed to protect the interests of plan participants and beneficiaries. The Secretary of Labor is authorized to take actions including suspending, revising, or rescinding rules passed during the prior administration that do not consider ESG factors in investment of savings and pensions. Rulemaking to integrate ESG factors into retirement laws and regulations is a likely result of any action taken by this agency. Integration of Climate-Related Financial Risk in Federal Lending, Underwriting, and Procurement The Executive Order requires an assessment and integration of climate-related financial risk into federal financial management and financial reporting, especially as that risk relates to federal lending programs. The lending, underwriting, and procurement functions of a financial institution are likely to undergo changes once regulations are developed. The Executive Order is not intended to discourage lending or underwriting to companies that produce large amounts of carbon emissions. In fact, according to the Executive Order, preference in federal procurement and contracting may be advanced as necessary to companies that provide greenhouse gas disclosures and reduction targets in line with the Executive Order. Amendments to federal programs and appropriate regulations will require: Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set informed reduction targets based on science and behavioral analysis Federal agency procurements to consider the social cost of greenhouse gas emissions in procurement and give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions where appropriate and feasible Federal lending policies and programs, as well as underwriting standards, loan terms and conditions, asset management, servicing, and procurement, to effectively integrate climate-related financial risk into overall processes Climate-Related Financial Risk Disclosures The Executive Order directs federal agencies to develop climate-related financial risk disclosure guidelines that reflect behavioral-science insights and are consistent, clear, intelligible, comparable, and accurate. The Executive Order does not contain a mandate for climate-related financial risk reporting. Such information on climate-related financial risk is essential for informed financial decision-making by individuals, businesses, and the government. It can be used to design government policies to better serve the American people. Financial institutions should expect changes to regulations requiring climate-related financial risk disclosures. The proposed changes are directed to be in line with the following components, spelled out in Executive Order 13707, Using Behavioral Science Insights to Better Serve the American People (September 15, 2015): 2 Streamlined forms Comprehensible content Effective presentation Promote public welfare, as appropriate Encourage or make it easier for Americans to take specific actions Environmental, Social, and Governance (ESG) Disclosures Public companies are currently required under federal regulation to provide material information disclosures including those resulting from ESG matters. While there is no single regulatory standard for reporting on ESG, increasingly ESG disclosures are included in material information reports. ESG disclosures provide reporting on financial risks and impacts associated with climate change, an institution’s use of natural resources, and the effect of its operations on the environment, diversity/inclusion, equity, and community investments and other matters that are material to shareholders. Consistent with current efforts by federal agencies, institutions will be required to disclose the impact of climate change and ESG matters as part of the company’s financial statements. Greenhouse Gas Disclosure The Executive Order establishes an Interagency Working Group to determine the social cost of greenhouse gases (carbon, methane, and nitrous oxide), whose recommendations will be used to advance the Administration's goal to reduce greenhouse gas emissions and other regulatory actions. Greenhouse gases are proven to deplete the Earth’s protective ozone layer resulting in extreme weather conditions due to climate change. The Interagency Working Group is directed to assess disclosures on the emission of greenhouse gas, particularly as it relates to federal lending programs and procurement. Anticipated changes to the Federal Acquisition Regulations will require federal suppliers to disclose: Greenhouse gas emissions and climate-related financial risk Greenhouse gas reduction targets Regulations around climate-related areas are anticipated for financial institutions, both directly to ensure the stability of the U.S. financial system and indirectly through lending and investments in affected sectors. Financial risk reporting for climate-related change faces challenges in light of the lack of comprehensive and consistent data to analyze climate-related financial risks and equity by categories of race, ethnicity, religion, income, geography, gender identity, sexual orientation, and disability. Policymakers will need to coordinate approaches to mitigating climate-related financial risk; such efforts are currently being standardized in various areas. Implications for Financial Institutions Climate change is inevitable and also fundamental to the core of this Executive Order. Key areas of the Executive Order will necessitate changes to laws and regulations by federal financial agencies thereby affecting the financial services industry. Agencies have begun amending policies and performing impact assessments of climate change on the financial system. The Federal Emergency Management Agency (FEMA) begun implementing the Federal Flood Risk Management Standards as set out in Executive Order 13690 of January 30, 2015 (Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input). 3 Executive Order 13690 was reinstated under this Executive Order, providing the go-ahead for FEMA to implement the standards. Federal Flood Risk Management Standard was established to address the increased flood risk as a result of climate change impact of flooding. The Securities and Exchange Commission (SEC) is continuing its focus on climate-related disclosure requirements. The SEC created a task force for climate change and ESG. ESG disclosure requirements for public companies are anticipated in late 2021. Other financial regulatory agencies, including the Federal Reserve Board, the Office of the Comptroller of the Currency, and many federal agencies have all conducted assessments on the impact of climate change to the financial system broadly and are proposing new goals and policies to advance the objectives of the Executive Order and in particular ensuring equal and equitable access to government programs by all Americans. It is pertinent that institutions anticipate new or revised regulatory standards around climate-related financial risks and begin establishing a culture of preparedness within the institution, assessing government programs and climate-related financial risk disclosures to include physical and transition risk, incorporating climate-related financial risk into overall risk and controls framework of the institution, identifying and redressing inequities in the institution’s policies and programs to ensure equal opportunity with a focus on disadvantaged communities and communities of color, and enhancing disaster recovery plans and other business continuity controls to mitigate financial risks in areas prone to extreme weather-related events. Celeste Mitchell-Byars is a Content Manager and attorney writer for Practical Guidance, focused on Financial Services Regulation. Ms. Mitchell-Byars has spent more than 20 years in-house at U.S. and foreign financial services institutions advising boards and management in connection with bank regulatory, risk and compliance management, finance, and financial technology. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: Financial Services Regulation > Bank Activities and Regulatory Enforcement Actions > Articles Related Content For information on sustainable actions to address climate change, disclosure requirements, and corporate governance, see > ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) RESOURCE KIT For an analysis of the fiduciary duties and obligations of employment benefit plans under ERISA, see > ERISA FIDUCIARY DUTIES For an overview of practical guidance related to climate change in multiple practice areas, see > CLIMATE CHANGE RESOURCE KIT For a discussion of climate change considerations for the global business community, see > CLIMATE CHANGE CONSIDERATIONS IN M&A TRANSACTIONS For an examination of the Biden Administration’s American Jobs Plan, including its emphasis on climate change, see > PRESIDENT BIDEN’S AMBITIOUS AMERICAN JOBS PLAN WITH SIGNIFICANT CLIMATE-RELATED PROPOSALS 1 . 86 Fed. Reg. 27,967 (May 25, 2021). 2 . 80 Fed. Reg. 56,365 (Sept. 18, 2015). 3 . 80 Fed. Reg. 6,425 (Feb. 4, 2015).Financial Services RegulationFall 2021Practice Trendshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/lexisnexis-joins-forces-with-lgbtq-bar-association-in-anti-discrimination-effortsTue, 26 Oct 2021 21:35:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:1345fa4b-1a35-4a38-804c-cbc6c7911e7csheikaAs part of its commitment to the rule of law in the United States and across the globe, LexisNexis has joined forces with the LGBTQ+ Bar Association to bring awareness to critical issues facing the LGBTQIA+ community, including the use of the “panic defense” in the prosecution of violent crimes against members of the community. THE PANIC DEFENSE—THE ASSERTION THAT A VICTIM’S sexual orientation or gender identity excuses a defendant’s violent actions, including murder—has been banned in 15 states—California, Illinois, Rhode Island, New York, New Jersey, Washington, Colorado, Virginia, Vermont, Oregon, Nevada, Connecticut, Maine, Hawaii, and Maryland—and the District of Columbia. The LGBTQ+ Bar Association has undertaken a campaign to ban the practice in all states and to enact federal legislation prohibiting its use. As part of its commitment to support the work of the LGBTQ+ Bar Association, LexisNexis participated in the organization’s annual Lavender Law Conference & Career Fair, both as a paid sponsor and a presenter at the virtual event, July 28-30. The conference is the largest LGBTQ+ legal conference in the country with approximately 1700 attendees attending annually. The Lexis presentation emphasized employment law materials, including litigation and transactional tools and other resources from LexisNexis Practical Guidance, for both employees and employers. Eva Harte, a Practice Area Consultant for LexisNexis Practical Guidance who participated in the presentation, said, “As a prior employment litigator, I strongly support Lavender Law and the momentum it generates around LGBTQ rights. I believe in the celebration of the unique dignity of each human being on this planet. Recent landmark cases interpreting Title VII, especially the 2020 Supreme Court Bostock case, recognize that an employee’s sexual orientation or gender identity is protected from sex-based discrimination. I am excited to be able to collaborate with law students and practitioners to continue the march forward to broaden inclusivity and diversity in the workplace and beyond.” LexisNexis promotes the rule of law around the globe through its Rule of Law Foundation and its daily operations, products, and services; the efforts of its employees; and collaboration with customers, governments, non-profits, and intergovernmental organizations. Information about the LexisNexis Rule of Law Foundation is available at https://www.lexisnexisrolfoundation.org/ . For additional information about the LGBTQ+ Bar Association, visit https://lgbtqbar.org/ .Fall 2021Rule of Lawhttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/keepers-of-the-green-gate-duties-of-esg-professionalsTue, 26 Oct 2021 21:00:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:d9f856fb-eb32-4425-bb77-b71ca76f9630sheikaBy: Sarah E. Fortt , VINSON & ELKINS LLP The market for Environmental, Social, and Governance (ESG) professionals is hot. As companies, consulting firms, financial institutions, law firms and government agencies race to build out their sustainability and ESG teams, qualified ESG professionals are in high demand. THIS DEMAND IS ALSO CREATING A PUSH FOR INDIVIDUALS with more traditional professional backgrounds, who may not have any substantive experience in ESG, to quickly find their ESG expertise. I recently Googled “becoming an ESG professional” out of curiosity. “How to move into an ESG focused role with little to no ESG experience” was the fifth link. This movement bothers me less than some may think. It is both normal and efficient for individuals to shift towards professions that they perceive to be in high demand, and arguably, spaces dedicated to sustainability should encourage those shifts to take place across many sectors of the global economy. However, the vastness of ESG can make the space particularly vulnerable to “competence greenwashing,” 1 where individuals may have some awareness but lack the expertise needed to meaningfully participate in the implementation of complex ESG strategies. This can be exacerbated by the fact that ESG is simultaneously incredibly broad and incredibly deep, but the markets, particularly in the United States, have thus far been more focused on the breadth than the depth, so individuals can know a little about a lot and know more than most. But a shift is here and is moving quickly, and in order for ESG professionals—whether we have been in the space for years or are newcomers—to be helpful and not harmful, we must hold ourselves accountable to standards informed by the central tenets of ESG. As a governance attorney, I think about duties a lot—the duties companies owe their stakeholders, the duties boards and members of management owe their companies, the duties I owe my clients—and here I outline what I believe should be the duties of ESG professionals for the benefit of the organizations for which they work and the communities in which those organizations do business. The duty to self-educate. The first duty of the ESG professional has to be the duty to educate oneself. The various spaces of ESG are all moving quickly; not a day goes by that does not bring significant events and developments. Even those who have been in ESG spaces for years may find it challenging to keep up to date on a day-to-day basis; however, our profession requires that we do the work of staying informed. Our profession also requires that we be unequivocally clear about the scope of our own competencies. No one person can be, nor should any one person try to be, all things to ESG. As calls for greater levels of sophistication in ESG standard setting and reporting continue to proliferate in the United States while ESG-related regulations expand and come into full effect in non-U.S. jurisdictions, ESG professionals need to weigh the benefits of focusing on breadth versus depth in their respective areas. While some ESG professionals should retain a focus on breadth in order to support collaborative efforts in the profession, as discussed below, many others should focus on depth, honing their expertise in specific subcategories of ESG. All should describe their areas of expertise accurately. The duty to collaborate. ESG is impossibly broad. No single individual, and no single organization, should be expected to address the full scope of every topic that falls under its global umbrella. However, it is dangerous to think that just because ESG seems to be about everything, it is substantively about nothing. This is one reason why I have emphasized in my other articles and talks that ESG should not be viewed as a single strategy, but instead as a series of lenses used to challenge our ideas about value, values, and the relationships between the two. Given this, collaboration among ESG professionals with different competencies and areas of focus is vital. True progress requires that those with expertise in sustainable finance, public policy, the environmental sciences, corporate governance and public disclosure, human rights, poverty and inequity, and community engagement—to name just a few—speak the same language and use that language to integrate more sustainable practices throughout the global economy. This requires intentional collaboration. The duty to evade and report on greenwashing. If 2020 was the year ESG grew up, 2021 may be the year it finally starts to be truly defined. 2 Although many of the efforts to define ESG are in the “E,” efforts to identify and measure the determinants of social outcomes are also underway. These efforts to define and measure ESG initiatives, strategies, and outcomes are integral to shrinking the space in which organizations may freely engage in greenwashing; however, taken alone, they cannot eliminate greenwashing, nor can they help organizations prioritize among the good. For greenwashing in all its forms to be eliminated, and for organizations to be able to prioritize among ESG goals in the most effective and meaningful manner, ESG professionals must hold their organizations accountable. As ESG professionals, we must remember that greenwashing is dangerous not only because it may mislead key stakeholders and create inefficiencies in the market, but also because it creates very real risks for the organization and can be used to discredit the central tenets of ESG. Greenwashing is often defined as providing misleading or incomplete information in an effort to create the perception that a company or its products, operations, or policies are environmentally sustainable or otherwise ESG-friendly. I would define it more broadly. I would add to the definition any ESG efforts that do not directly relate to an organization’s risks, operations, or strategies or that do not otherwise result in a material improvement of the environmental sustainability or social welfare of the communities in which the organization does business. Why this broader definition? In my experience, any expression of corporate values that is not backed up by a commitment of corporate value amounts to little more than virtue signaling and should be included in the definition of greenwashing for the purposes of ESG professionals’ duties to their organizations and the communities in which they do business. As ESG professionals we must be brave enough to actively avoid engaging in greenwashing and call it out if we do see it occurring in our organizations. This requires that we do more than demand that ESG efforts and disclosures be more meaningful than colorful marketing campaigns; we also must see that ESG efforts are integrated into our organizations and reflected in the organization’s operational and strategic plans and audit and internal control processes. The duty to report on ESG risks and violations. Back in 2014 and 2015, statements made by the then-Chair of the SEC, Mary Jo White, and the then-Deputy Attorney General, Sally Quillian Yates, memorialized the U.S. federal law concept of holding key individuals accountable for corporate wrongdoings. 3 The concept of gatekeeper liability has its root in the public policy behind the Sarbanes-Oxley Act; however, the legal concept has grown, evolved, and shifted since then to become a cornerstone of how legal, audit, and compliance professionals and certain members of management frame their duties in the context of corporate conduct. I would argue that ESG professionals should be guided by a similar concept, that we are in fact also gatekeepers. In establishing ourselves as those that guide our organizations with respect to ESG matters, we should also assume the duty to spot and prevent potential ESG misconduct. This includes identifying material ESG risks, 4 as well as identifying the ways in which our organizations are falling short of their ESG commitments. Given that ESG is, as I admit, impossibly broad, this responsibility should be tied to our areas of competency—yet another reason for us to clearly articulate the scope of our expertise. The duty to self-examine. Finally, ESG has to begin and end with the individual. Given the vastness of the questions ESG asks—questions about our values, purpose, and future, and the value we assign to them—ESG professionals as individuals absolutely must practice what we preach. In our quest to promote sustainability, are we willing to embrace the sacrifices we as individuals will be required to make? For every 100 articles and thought pieces championing methods for creating a more sustainable world, there are a very few that state this harder truth: We need to sacrifice to create a more sustainable world. And yet, are we brave enough to consider the ways in which our quest for a more sustainable world is informed by our own privileges and be willing to continue to reassess our own views accordingly? Ultimately, the challenge of ESG lies not in the “E” or the “S” or the “G” but in all of them together, and to be effective ESG professionals, we must consider both the sustainability and the equity of our own actions and efforts. Sarah E. Fortt has spent a decade working with organizations in navigating their relationships and communications with key stakeholders, including their investors, regulators, employees, and communities. She regularly works with boards on managing their approaches to corporate governance, crisis management, succession planning, and board education. She is the mind behind the creation of Vincent & Elkins’ ESG Taskforce, a novel cross-functional team that works to provide companies with end-to-end solutions for navigating non-financial risks and opportunities, including those relating to climate change, human rights, and corporate culture. Sarah is the consistent corporate governance voice across V&E’s corporate governance approach, which includes working with companies across multiple industries. She regularly works with clients on crisis preparedness and response, including in the context of shareholder activism and cyber and data security breaches. She regularly helps clients create consistent, effective, and meaningful stakeholder communications. Sarah is also an experienced securities lawyer with a background in executive compensation. Related Content For an overview of issues related to ESG and corporate responsibility, see > ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) RESOURCE KIT For a discussion of remarks by SEC chair Allison Lee on ESG issues, see > ACTING SEC CHAIR LEE’S SPEECH ON ADDITIONAL CLIMATE AND ESG INITIATIVES For a look at what public companies should be considering with regard to ESG disclosures, see > KEY ESG DISCLOSURE CONSIDERATIONS FOR PUBLIC COMPANIES 1 . https://www.responsible-investor.com/articles/competence-greenwashing-could-be-the-next-risk-for-the-esg-industry 2 . Efforts to measure ESG include the EU Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation, which are designed to help businesses identify to what degree activities can be considered environmentally sustainable, and are becoming effective this year and early next year. Other efforts include the measures released by the World Economic Forum, and the efforts of the International Federation of Accountants and IFRS Foundation to create an international Sustainability Standards Board and promulgate a single global set of standards on climate-change risk by mid-2022. In September 2020, the Carbon Disclosure Project, the Climate Disclosure Standard Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Board announced that they would collaborate on working together to harmonize sustainability standards. In June 2021, nearly 500 investors managing over $41 trillion in assets released a statement urging world governments to establish mandatory climate-related financial reporting; the statement was released ahead of the G7 Summit and COP26 to encourage further participation and collaboration. In the United States, the SEC has been signaling all year that companies can expect the Commission to use current rules to review companies’ ESG disclosures and practices and to promulgate new ESG rules in the not too distant future. In April 2021, the Commission’s Division of Examinations released a risk alert and review of ESG investing indicating that the staff had “observed some instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks.” While the staff did not use term greenwashing, the implication was clear. 3 . See “A Few Things Directors Should Know About the SEC” and Individual Accountability for Corporate Wrongdoing. 4 . In other articles, I discuss the concept of sacred cows in the context of corporate cultures. Sacred cows are people, products, practices, or principles that an organization will go to any lengths to protect. ESG professionals, if we are going to be gatekeepers of effective ESG practices, must also commit to calling out the material risks created by sacred cows.Fall 2021Corporate and M&APractice Insightshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/how-esg-and-social-movements-are-affecting-corporate-governanceTue, 26 Oct 2021 20:30:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:ba204875-3afb-4583-8d96-4d6db6b9b58dsheikaBy: Ellen Holloman and Hyungjoo Han , CADWALADER, WICKERSHAM & TAFT LLP This article provides guidance on the recent trends in Environmental, Social, and Governance (ESG), the #MeToo movement (#MeToo), and Black Lives Matter (BLM) impacting corporate governance and the workplace. In the aftermath of the recent police killings of George Floyd, Breonna Taylor, and Jacob Blake, as well as many others, there has been increasing pressure on corporations to take tangible action to address racial injustice in America. NUMEROUS COMPANIES AND ORGANIZATIONS HAVE responded to these pressures by publicly denouncing racism and discrimination, supporting black-owned businesses, and donating to causes devoted to combating racial injustice. For example, in June 2020, Bank of America pledged $1 billion to help communities address economic and racial inequality. Similarly, Goldman Sachs launched a $10 million Fund for Racial Equity to support the vital work of leading organizations addressing racial injustice, structural inequity, and economic disparity. While the novel coronavirus (COVID-19) pandemic and the events surrounding the BLM movement have intensified discussions about the importance of addressing social injustice, corporate America already was at an inflection point with respect to its role in society, facing pressures from investors, consumers, and regulators to consider a broader range of stakeholders. What Is ESG? ESG refers to a broad set of considerations that may impact a company’s performance and its ability to execute its business strategy and create long-term value. Socially conscious stakeholders use ESG to measure the sustainability and societal impact of a company and its business activities. While ESG factors can affect a company’s bottom line directly, they can also affect a company’s reputation, and investors and business leaders are increasingly applying these nonfinancial factors in their analysis to identify the material risks and growth opportunities of a company. Companies’ ESG Efforts Industry leaders have pushed hard to advance ESG initiatives. For example, in his 2019 Letter to CEOs, BlackRock, Inc.’s Chairman and Chief Executive Officer, Larry Fink, encouraged companies to develop “a clear embedment of your company’s purpose in your business model and corporate strategy.” According to Fink, “Purpose is not the sole pursuit of profits but the animating force for achieving them” and “profits and purpose are inextricably linked.” Thus, companies that fulfill their purpose and responsibilities to stakeholders—including prioritizing board diversity, compensation that promotes stability, and environmental sustainability—reap rewards over the long term. Likewise, in August 2019, the Business Roundtable issued a Statement on the Purpose of Corporation (Statement) signed by 181 CEOs, expressing “a fundamental commitment to all of our stakeholders,” including employees, suppliers, and customers, and not just shareholders. Specifically, the Statement expressed a commitment to delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, and supporting the communities by embracing sustainable practices across businesses. In line with these goals, following an overwhelming majority vote of 99% of voting shareholders, on February 1, 2021, Veeva Systems, a computer software company, became the first publicly traded company and largest ever to convert to a public benefit corporation (i.e., a for-profit corporation that must consider the interests of various stakeholders, including employees, partners, customers, and shareholders). The company is also revising its certificate of incorporation to include a public benefit purpose. In response to increasing pressure from different stakeholder groups—including investors, consumers, and governments—for more transparency about their environmental, economic, and social impacts, more companies are also making disclosures in their annual report or in a standalone sustainability report (also referred to as an ESG or corporate social responsibility report). Nasdaq’s ESG Standards for Companies Moreover, various institutions are creating standards and metrics to help integrate ESG into the investment process. For example, in May 2019, Nasdaq launched its new ESG reporting guide for public and private companies. Although Nasdaq does not require its listed companies to issue ESG reporting, it may track the participation of listed companies to better support their efforts. Nasdaq’s ESG Reporting Guide includes 10 metrics for each of environmental, social, and corporate governance: Biden Administration ESG Efforts The demand for consideration of ESG is not limited to the private sector. As part of his campaign, then-presidential candidate Joseph R. Biden set forth “The Biden Agenda for Women,” which promised to pursue “an aggressive and comprehensive plan to further women’s economic and physical security and ensure that women can fully exercise their civil rights. NASDAQ'S ESG METRICS FOR COMPANIES Environmental (E) Social (S) Corporate Governance (G) E1. GHG Emissions S1. CEO Pay Ratio G1. Board Diversity E2. Emissions Intensity S2. Gender Pay Ratio G2. Board Independence E3. Energy Usage S3. Employee Turnover G3. Incentivized Pay E4. Energy Intensity S4. Gender Diversity G4. Collective Bargaining E5. Energy Mix S5. Temporary Worker Ratio G5. Supplier Code of Conduct E6. Water Usage S6. Non-Discrimination G6. Ethics & Anti-Corruption E7. Environmental Operations S7. Injury Rate G7. Data Privacy E8. Climate Oversight / Board S8. Global Health & Safety G8. ESG Reporting E9. Climate Oversight / Management S9. Child & Forced Labor G9. Disclosure Practices E10. Climate Risk Mitigation S10. Human G10. External Assurance Source: ESG Reporting Guide 2.0 1 As part of this Agenda, the Biden campaign promised to: Improve economic security by fighting for equal pay and expanding access to education and training Expand access to high-quality, affordable healthcare for all women Expand access to important workplace benefits and protections End violence against women Shortly after President Biden took office in January 2021, he announced the creation of a new Gender Policy Council within the White House—a reformulation of the Obama Administration’s White House Council on Women and Girls, which the Trump Administration had dismantled. The Gender Policy Council intends to have high-level representation in all offices in the federal government and to collaborate directly with every agency to address issues impacting the lives of Americans, and particularly the lives of women. Entities’ and Individuals’ Opposition to ESG Efforts Not everyone has been supportive of these ESG efforts. In response to the Business Roundtable’s Statement, the Council of Institutional Investors, which represents many of the same companies as the Business Roundtable and many of the nation’s largest pension funds, issued a response stating that “[a]ccountability to everyone means accountability to no one” and that “[i]t is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.” Similarly, in a letter dated February 12, 2021, a group of Senate Republicans on the Senate Banking Committee called on the Securities and Exchange Commission (SEC) to reject Nasdaq’s recent proposal to require the companies listed on its stock exchange to include women, racial minorities, and LGBT individuals on their boards or explain in a public disclosure why they are not doing so. The letter, written by Senator Pat Toomey of Pennsylvania, expressed that while “[w]e commend individual firms for the proactive efforts they have already made in recruiting, promoting, and maintaining diverse talent . . . it is not the role of Nasdaq . . . to act as an arbiter of social policy or force a prescriptive one-size-fits-all solution upon markets and investors.” Notwithstanding the opposition and resistance to the consideration of environmental, social, and corporate governance factors by some stakeholders, recent events and industry practices indicate a trend toward greater focus on ESG as factors that different stakeholders will consider in evaluating the effectiveness, profitability, and sustainability of a company’s corporate governance framework. Board, Management, and Workforce Diversity In the aftermath of #MeToo and the BLM movement, there has been a greater push toward gender and racial diversity, not just at the board and management levels, but also in the workforce. Further, where companies fail to meet the expectations set by their stakeholders, they may face serious repercussions. Investment Firms’ Diversity Initiatives In September 2020, BlackRock Inc., the world’s largest asset manager, revealed in its Investment Stewardship Annual Report that it had voted against board directors more than 1,500 times for insufficient diversity. While observing that there have been “significant improvements in gender diversity in the Russell 1000 and the STOXX 600,” BlackRock expressed that it is “increasingly looking to companies to consider the ethnic diversity of their boards, as we are convinced tone from the top matters as companies seek to become more diverse and inclusive.” As a follow up, in December 2020, BlackRock announced in its 2021 Stewardship Expectations plans to push companies for greater ethnic and gender diversity for their boards and workforces and reiterated that it will vote against directors who fail to act. In addition, the asset manager asked U.S. companies to disclose the racial, ethnic, and gender makeup of their employees—known as EEO-1 data—as well as measures they are taking to advance diversity and inclusion. In January 2021, State Street Global Advisors expressed that its “main stewardship priorities for 2021 will be systemic risks associated with climate change and a lack of racial and ethnic diversity.” In a letter to board members, the president and CEO of State Street Global Advisors observed that “[r]esearch has shown the positive impacts diverse groups can have on improved decision making, risk oversight, and innovation, as well as how management teams with a critical mass of racial, ethnic, and gender diversity are more likely to generate above-average profitability.” Building on the firm’s previous guidance from August 2020, State Street announced in a letter to board members in early 2021 the following proxy voting practices to ensure companies are forthcoming about the racial and ethnic composition of their boards and workforces: Racial and ethnic composition of boards. State Street intends to vote in 2021 “against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards.” EEO-1 Survey. State Street intends to vote in 2022 “against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 Survey responses.” Underrepresented community on the board. State Street intends to vote in 2022 “against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least one director from an underrepresented community on their boards.” Following a similar approach, Goldman Sachs CEO David Solomon announced that Goldman Sachs will help take public only those companies in the United States and Europe that have at least one diverse board member. In 2021, Goldman Sachs raised this target to two diverse candidates for each IPO client. According to Solomon, this decision “is rooted first and foremost in our conviction that companies with diverse leadership perform better,” including as evidenced by the fact that since 2016, U.S. companies that have gone public with at least one female board director outperformed companies that do not, one year post-IPO. On February 17, 2021, global investment firm The Carlyle Group announced that it secured the largest ESG-linked private equity credit facility in the United States and the first to focus exclusively on advancing board diversity. The revolving credit facility directly ties the price of debt to the firm’s previously set goal of having 30% diverse directors on the boards of Carlyle-controlled companies within two years of ownership. This effort was driven by Carlyle’s research, which showed that “the average earnings growth of Carlyle portfolio companies with two or more diverse board members has been approximately 12% greater per year than companies that lack diversity, underscoring the correlation of board diversity with strong financial decisions and performance.” EEO-1 Reports While the diversity of management and the board is more readily visible to the public, the diversity of a company’s workforce often is less evident. The most common method by which companies report and disclose racial and gender diversity in the workforce is through the employment information report, also known as EEO-1 or Standard Form 100, that is filed annually with the Equal Employment Opportunity Commission. Covered federal contractors as well as any employer with 100 or more employees must file the EEO-1. While a company is not required to publicly disclose its EEO-1 data, as discussed above, institutional investors are increasingly demanding disclosure of this data in companies’ ESG reporting. Corporate Culture CEO Afsaneh Beschloss of The Rock Creek Group expressed at an industry conference in September 2019 that shareholders “are important and will always be incredibly important, but their highest returns will come if a company is good in its management, if a company is sustainable and has good governance.” In the post #MeToo era, corporate culture, or the set of values and behaviors that help define a company, is more important now than ever. Companies are facing challenges over how to recruit and retain a talented workforce, and having an appealing culture is one way to do both. The subject of corporate culture is equally important to stakeholders, who are starting to look closely at what companies preach in their corporate cultures, including their commitments to ethics and sustainability. As studies have shown, companies with strong corporate cultures tend to perform better than those without. According to industry leaders, one of the biggest challenges in establishing and maintaining a positive corporate culture is when leadership does not have an interest in culture as an asset and does not understand that a company’s culture is set from the top. In 2018, BlackRock highlighted human capital as an investment issue in its Investment Stewardship Annual Report. The report provided that for a majority of companies today, “value is driven by employees, collectively known as human capital, rather than physical capital such as machinery,” and that companies ultimately depend on their employees to effectively execute the corporate strategy and operate at high standards. That same year, pension fund giant CalPERS revised its Corporate Governance & Sustainability Principles, adding a policy highlighting the board’s role “in setting a high-performance corporate culture,” which includes: Having a respectful treatment of employees Providing a workplace free from sexual harassment and other forms of harassment Fostering trust between employees and management Promoting ownership and accountability for an ethical corporation In addition, CalPERS urged every public company board to “develop and disclose its efforts toward establishing effective corporate culture, including its anti-harassment policy, and the mechanisms through which the board learns about employee complaints, how the claims are addressed, and the actions taken.” Among other things, CalPERS’s revised corporate governance principles include disclosing sexual harassment (and other) settlements involving executives or board members and clawback of executive compensation as a result of sexual misconduct. In April 2021, CalPERS issued its Executive Compensation Analysis Framework, providing that companies should develop and disclose policies to recoup compensation made to executives during periods of fraudulent activity, inadequate oversight, misconduct including harassment of any kind such as sexual harassment, or gross negligence, which impacted or is reasonably expected to impact financial results or cause reputational harm. Corporate Compliance ESG disclosures, like other corporate disclosures, are subject to regulatory compliance. As such, companies must be careful to ensure their disclosures are accurate and complete. In addition, companies are struggling to deal with multiple reporting frameworks and inconsistencies across each regulation. Indeed, there are numerous ESG indexes (1,000+) that investors can use to assess how a company has addressed ESG. As discussed above, companies can be held to any number of these indexes depending on the preferences and standards established by different stakeholders, prompting many companies to comply with multiple ESG regulations. Assessing ESG Risks Companies should create or implement a set of standards to properly assess their ESG risks. For example, the Organization for Economic Co-operation and Development has published the Due Diligence Guidance for Responsible Business Conduct, which provides a framework for companies and stakeholders to understand and implement due diligence for responsible business conduct. Similarly, the Corporate Human Rights Benchmark ranks large companies based on their sustainability disclosures and provides a list of what those disclosures are. In addition, the Sustainability Accounting Standards Board provides industry-specific sustainability standards for 77 different industries. Disclosure of ESG Reporting In addition to assessing ESG risks, companies must also ensure that they fully and accurately disclose information in their ESG reporting and that such disclosures are consistent with information disclosed in other non-ESG-related disclosures. Companies that fail to do so may face potential liability for making misleading or deceptive statements. Indeed, the Federal Trade Commission (FTC) has been active in assessing ESG-related disclosures issued by companies for any discrepancies that may be viewed as “deceptive acts or practices” in violation of Section 5 of the Federal Trade Commission Act. In addition, companies may also be subject to liability under state consumer protection statutes for making misleading statements. Climate and ESG Task Force On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. Per the SEC’s announcement, “the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct,” “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules,” “analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies,” “evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues,” and “provide expertise and insight to teams working on ESG-related matters.” Data Privacy and Cybersecurity The focus on ESG also includes corporations being held accountable for how they handle sensitive data. Across the board, companies are considering data protection as a strategic initiative and are investing in expanding their technology to stay competitive. Moreover, as interest in ESG investing continues to grow, more companies are amassing new types of personal information from employees and consumers, and adherence to cybersecurity and data privacy best practices to protect sensitive and private information is more vital than ever. Facebook and Cambridge Analytica A good example of the importance of maintaining good cybersecurity and data privacy practices is the 2018 scandal involving Facebook Inc. after it acknowledged that Cambridge Analytica LLC, a British consulting firm, improperly obtained the personal data of approximately 87 million Facebook users. In response to this scandal, Facebook spent billions of dollars on its technical infrastructure to improve data handling and safety. Moreover, in 2019, Facebook entered into a settlement agreement with the Federal Trade Commission, under which Facebook agreed to pay $5 billion in penalties and submit to new restrictions on its business practices to improve the company’s consumer data protection and privacy practices. Building on Facebook’s 2012 settlement with the FTC, which prohibited the company from making misrepresentations about the privacy or security of consumers’ personal information and the extent to which Facebook shares personal information with third parties, the 2019 settlement requires Facebook to establish “a comprehensive data security program” and exercise more oversight over third-party applications and developers. Aside from the monetary repercussions, Facebook sustained significant reputational damage among consumers and investors who expressed serious concerns regarding the report. Moreover, in response to the scandal, Facebook was removed from the S&P 500 ESG Index after the index providers deemed the company had fallen short of meeting their criteria. Global Reporting Initiative (GRI) There has been a rise of privacy-related disclosures in sustainability reporting by companies. In 2000, the Global Reporting Initiative (GRI) launched the first global standards for sustainability reporting. Today, GRI’s sustainability reporting framework is the most widely used by for-profit and not-for-profit companies as well as governments throughout the world. Under the GRI’s October 2016 reporting frameworks, known as the GRI Standards, Standard 418 sets out reporting requirements on the topic of customer privacy, including losses of customer data and breaches of customer privacy. While privacy-related disclosures are intended to provide an evaluation of the success of data privacy policy and protection measures, such disclosures may also expose companies to potential liability under state and federal laws. As discussed above, companies should ensure that what they disclose in ESG reporting is not different from what they have disclosed in other privacy-related documents. Environmental Sustainability Issues impacting climate change, including water scarcity, extreme temperatures, and carbon emissions, have elevated environmental considerations as a core component of ESG. According to S&P Global, while ESG factors are the fundamental framework for measuring a company’s sustainability, the environmental portion of ESG considers the company’s use of natural resources and the effect of its operations on the environment, both in its direct operations and across its supply chains. Climate change is expected to increase the frequency of climatic events like hurricanes, floods, heat waves, and wildfires, which can impose significant financial implications, especially for those companies that fail to take appropriate action to mitigate their contribution to climate change and to adequately plan for the likely impacts of climate change by investing in more sustainable business practices. Taxonomy Regulation In June 2020, the European Union became the first supranational regulator to establish a common set of standards for determining whether an economic activity is environmentally sustainable or not. The so-called Taxonomy Regulation provides that certain environmental objectives should be considered when evaluating the sustainability of an economic activity, including: Climate change mitigation Climate change adaptation Sustainable use and protection of water and marine resources Transition to a circular economy, including waste prevention, and increasing the update of secondary raw materials Pollution prevention and control Protection and restoration of biodiversity and ecosystems The agreement provides that an economic activity should contribute toward one or more of the objectives and not significantly harm any of them. It is important to note that the Taxonomy Regulation does not require stakeholders to invest in taxonomy-eligible activities; instead, it provides the toolkit for assessing whether a financial product or business is environmentally sustainable. In his 2021 letter to CEOs, BlackRock’s Chairman and CEO, Larry Fink, asked companies to “disclose a plan for how their business model will be compatible with a net zero economy—that is, one where global warming is limited to well below 2°C, consistent with a global aspiration of net zero greenhouse gas emissions by 2050” and to disclose how this plan is incorporated into the company’s long-term strategy and reviewed by its board of directors. This was building on a previous ask by BlackRock in 2020 that all companies report in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board, which covers a broader set of material sustainability factors. ESG Best Practices Companies should follow best practices outlined below for ESG compliance. Implement Policies and Training Procedures It is important for the board and management to set a tone from the top that any form of discrimination or harassment is not acceptable, and that the company will investigate promptly, and take appropriate actions, with respect to inappropriate behavior. Companies need to reassess whether the legal and HR personnel are properly equipped to handle and track incoming complaints and sufficiently empowered to investigate. Enforce Compliance with Policies and Procedures Companies should provide mechanisms by which employees can report instances of discrimination or harassment in the workplace. Certain companies have created confidential reporting channels to the board of directors for allegations against senior management. Companies may also consider revising their clawback policies to include reputational and economic harm that might arise from violations of company policies concerning workplace conduct. Refresh Board Membership Companies should consider refreshing their board membership every few years. Ensure Compliance with Reporting and Disclosure Obligations To help encourage corporations to share relevant details about their environmental and social efforts, the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce released a report in 2019 on best practices for corporations to use as a guide when compiling their ESG disclosures. The following briefly summarizes those eight best practices: Risk and opportunities. The company’s ESG disclosure should address the company’s risks, opportunities, and approach to risk management that may affect the company’s long-term operational and financial performance and discuss how the company plans to create value using the ESG matters contained in the report. Audience. The company should customize the content and tone of its reports for the intended audience, whether they are investors or other stakeholders. Communication with relevant departments. Company departments should coordinate to ensure they collect all “relevant” information (a determination ultimately made by the legal department) and provide diverse perspectives. Clearly define terms . The company should make sure its ESG reports are written clearly and plainly, with defined terms. Discretion in how to report and discuss ESG information. Notwithstanding the need for standards (as discussed above), the company should maintain the discretion to determine what factors and metrics make sense for their ESG reports based on their industry, operations, and needs of their stakeholders. Explain metrics and topics. The company should explain the basis for, and importance of, the metrics and topics disclosed. Easy to find ESG information. The company should make sure that its ESG information is easy to find, via the web or otherwise. Internal review and audit process. Consistent with the goal of transparency, the company should consider describing external verification and/or its internal review and audit process regarding the ESG information. Ellen Holloman is a partner in Cadwalader’s Global Litigation Group. She focuses her practice on representing financial institutions, corporations, and individuals in civil litigation and at trial, and in related regulatory enforcement proceedings and corporate internal investigations. She has extensive experience in securities litigation, including derivative and class action litigation, in contract and post-acquisition disputes, and in employment-related claims, including for enforcement of non-compete, non-disclosure, and confidentiality agreements, and in #MeToo situations. Ellen regularly advises companies, boards, special committees, and investors in connection with corporate governance matters, including takeover defense and activist contests. She also frequently handles litigation arising from bankruptcy and financial restructuring matters and has represented secured and unsecured creditors and debtors in Chapter 11 bankruptcy cases and out-of-court restructurings across a wide range of industries, including financial services, energy, shipping, licensing, and apparel. Ellen’s practice routinely involves matters with complex cross-border intersections, including obtaining large scale overseas discovery under the Hague Convention and other agreements and conducting investigations in response to inquiries under the Foreign Corrupt Practices Act. She also has advised clients on constitutional law matters, particularly First and Eighth Amendment jurisprudence. In addition to her civil litigation and trial practice, Ellen has significant experience with white-collar criminal defense matters and has represented clients responding to regulatory inquires, requests, and enforcement proceedings initiated by the U.S. Department of Justice, SEC, Federal Trade Commission, Federal Reserve, Federal Energy Regulatory Commission, Consumer Financial Protection Bureau, National Association of Securities Dealers, FINRA, Internal Revenue Service, the Office of the New York State Attorney General, New York Stock Exchange, European Commission, and the UK Serious Frauds Office, among others. Hyungjoo Han currently serves as a law clerk to the Hon. John P. Cronan of the U.S. District Court for the Southern District of New York. She previously was a litigation associate in Cadwalader’s New York office, where she represented clients in complex commercial, securities, and criminal matters in state and federal courts, and served as chair of Cadwalader’s Asian Pacific American Attorney Resource Group. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: Labor & Employment > Discrimination, Harassment, and Retaliation > Practice Notes Related Content For a collection of Practical Guidance resources addressing ESG issues, see > ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) RESOURCE KIT For guidance on EEO-1 self-identification requirements, see > EEO-1 SELF-IDENTIFICATION REQUIREMENT: KEY COMPLIANCE GUIDANCE For state laws on harassment and discrimination protections in non-disclosure (i.e., confidentiality), settlement, arbitration, and no-rehire agreements that have arisen out of #MeToo, see > SEXUAL HARASSMENT AND DISCRIMINATION PROTECTIONS IN EMPLOYMENT-RELATED AGREEMENTS STATE LAW SURVEY For analysis on compensation clawbacks, see > CLAWBACKS OF BONUSES AND COMMISSIONS: WAGE AND HOUR CONSIDERATIONS For a summary of Practical Guidance content addressing workplace harassment, see > WORKPLACE HARASSMENT RESOURCE KIT For assistance on setting up and administering a whistleblowing hotline for employees to report legal violations or violations of public policy, see > WHISTLEBLOWING HOTLINE CREATION AND ADMINISTRATION CHECKLIST For practical guidance in drafting a complaint procedure for use by an employee who feels that he or she has been harassed, discriminated, or retaliated against, see > COMPLAINT PROCEDURE For coverage of federal Equal Employment Opportunity Commission requirements, see > EEOC RECORDKEEPING SCHEDULE CHART For model state settlement agreements, arbitration agreements, and other employment-related agreements, see > EMPLOYMENT CONTRACTS STATE EXPERT FORMS CHART For an overview of workplace diversity and social and racial justice, see > WORKPLACE DIVERSITY, LGBTQ, AND RACIAL AND SOCIAL JUSTICE RESOURCE KIT 1 . Nasdaq, ESG Reporting Guide 2.0, A Support Resource for Companies. May 2019. Page 13.Fall 2021Practice TrendsLabor & Employmenthttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/recent-trends-and-developments-in-corporate-environmental-social-governanceTue, 26 Oct 2021 12:19:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:d54970bb-1202-4493-8087-7ec589b29f95sheikaBy: Sara K. Orr and Sofia Dolores Martos, Kirkland & Ellis LLP This article provides an introduction to the concept of corporate environmental social governance (ESG); generally describes the disclosure frameworks adopted by companies in connection with ESG reporting; and addresses recent trends and developments in the United States related to ESG disclosure, including expected regulation of ESG disclosure by the U.S. Securities and Exchange Commission (SEC). OVER THE PAST YEAR, INTEREST IN ESG AND CORPORATE disclosure around ESG issues has skyrocketed. Driven by consumer, investor, and other stakeholders’ demands, companies in the United States increasingly disclose information about their ESG performance in a voluntary fashion. The trend generally encourages transparent business practices in the area of environmental protection, social responsibility, and corporate governance. However, voluntary disclosures can also trigger legal and reputational risks. Moreover, the SEC and other U.S. government agencies are keenly focused on ESG disclosures (particularly around climate risks and human capital management), with enforcement priorities announced around ESG statements and proposed rules for corporate ESG disclosure expected in late 2021. Corporate ESG statements will continue to garner regulatory scrutiny and are anticipated to become the target of enhanced regulation. The risk of litigation by investors, regulators, and consumer plaintiffs over voluntary ESG disclosures has also increased in recent years but is beyond the scope of this article. What is ESG? Many names and terms have been used to describe ESG or corporate sustainability. While there is no universally agreed upon definition, market practice has now crystallized around the term ESG. The E stands for environment, which includes myriad ways that a business can impact the natural environment through its consumption of resources or output of waste, or ways that the natural environment can impact a business through the availability of energy or natural resources, climate change, or natural disasters. The S stands for social, which includes social capital issues (e.g., data security, human rights, and customer welfare) and human capital issues (e.g., labor practices, employee health and safety, and diversity, equity, and inclusion (DEI)). The G stands for governance, including business ethics (such as board oversight of ESG, executive compensation, and shareholder rights), supply chain management, and other risk management and compliance issues. This article will use the terms ESG and disclosure to mean a company’s communications that are intended to publicly convey information about its behavior, processes, and other aspects of its operations related to its environmental compliance, social performance, and corporate governance. While ESG issues continue to be governed by a mix of hard and soft laws and practices, there is intense focus on corporate ESG disclosure by a variety of stakeholders. This shift is due, in part, to the COVID-19 pandemic and social justice movements of 2020 following the death of George Floyd. Additionally, since 2018, major institutional investors such as Blackrock and Vanguard have demanded ESG information and have prompted a seismic shift in expectations regarding corporate disclosures. To meet investor and consumer appetite for information on ESG performance issues, companies have increased their ESG disclosure. For example, a recent study 1 found that 95% of S&P 500 companies now make detailed ESG information publicly available. Many companies post annual ESG reports on their corporate websites to provide their customers, investors, and others with information about their environmental and social performance. Companies also engage in social media campaigns and other marketing to promote their positive environmental and social activities. Given these underlying trends, including evolving investor expectations and litigation risks, it is important for counsel to anticipate potential risks and proactively engage with C‑suite and board members on ESGrelated issues, including disclosure decisions. What Reporting Frameworks and Standards Guide the Disclosure of Corporate ESG Issues? Approaches to ESG reporting vary and there is a lack of consistency across companies or industries as to what and how ESG information is disclosed. While some countries, states, and regions have made certain categories of ESG reporting mandatory (like the European Union and China), there are currently no broad regulatory mandates in the United States requiring comprehensive ESG disclosure. In the United States, publicly listed companies are required to disclose information about their use of conflict minerals, and, to the extent material, human capital management and climate change risks, but no comprehensive ESG disclosure regulations currently exist. Nevertheless, most companies voluntarily disclose ESG information in their 10-Ks, proxy statements, and graphically enhanced sustainability reports most often posted on their websites. Accordingly, there are a variety of approaches and frameworks that a company may elect to follow to guide its voluntary ESG disclosure. It is up to each company to select the ESG reporting framework that best meets its needs, often by benchmarking against peers and competitors and based on its industry sector. Hundreds of reporting frameworks, standards, certifications, and other metrics, including industry-specific guidelines, currently exist. Among these, key standards for voluntary reporting that have been used by companies in recent years include: Guidelines issued by the Global Reporting Initiative 2 Standards issued by the Sustainability Accounting Standards Board (SASB) 3 The framework of the International Integrated Reporting Council 4 Market confusion over the plethora of reporting frameworks, standards, certifications, and other metrics has led to growing demands for consistent and consolidated ESG frameworks. While there have been a number of recent initiatives aimed at unifying the ESG reporting ecosystem, the International Financial Reporting Standards (IFRS) Foundation’s initiative to create an international Sustainability Standards Board (SSB) is gaining precedence. The IFRS Foundation already oversees the International Accounting Standards Board, which writes accounting rules used in more than 140 countries, and the SSB would be a parallel board. The IFRS Foundation aims to establish the SSB ahead of the COP26 U.N. climate change conference in Glasgow in November 2021. Among those that have responded positively to this initiative are the International Monetary Fund, the United Nations, and global financial regulatory bodies like the International Organization of Securities Commissions and the Financial Stability Board. SEC officials have also signaled support for the IFRS Foundation’s efforts to establish the SSB, which may indicate a willingness to explore the adoption of this framework for U.S. corporate ESG reporting. This effort to unify corporate ESG reporting frameworks is promising as it will help narrow the universe of potential frameworks and assist companies and stakeholders with ease of use, comparison, and analysis. Other substantive disclosure frameworks have risen to prominence in a complementary role to comprehensive ESG reporting guidelines. One example is the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, 5 which have gained prominence as a business-focused tool used in conjunction with other reporting standards to guide the disclosure of climate-related risks. It is possible that the SEC may require U.S.-listed companies to utilize this framework for enhanced, consistent reporting on climate risks, though no such rule has yet been proposed as of the publication date of this article. Additionally, many companies have adopted other types of voluntary ESG goals and initiatives, including climate commitments (e.g., net zero pledges). One prominent framework is the United Nations 2030 Sustainable Development Goals (SDGs), an ambitious set of goals adopted in 2015 that aims to combat and reverse the world’s systemic challenges. The SDGs provide a shared framework for addressing sustainability issues across organizations, industries, and geographies and can help companies establish sustainability priorities and set quantifiable goals. Notably, the United Nations’ Principles for Responsible Investment (PRI), to which many of the world’s largest fund managers have signed on, are informed by the SDGs. Commitments to climate action, the SDGs, the PRI, or other pledges are often incorporated in, and even shape, ESG disclosures. ESG disclosures are often made at a much more frequent pace than other types of disclosures. While some companies continue to prepare stand-alone annual ESG reports following one of the above or other guidelines, many also engage in online, real-time ESG disclosure (such as through posts on social media announcing commitments to DEI initiatives, sharing data on board-level diversity, or announcing a commitment to a certain climate target). At the same time, governments are also making use of new technologies and automating the way data is shared with the public regarding companies’ environmental, health, and safety compliance (including information about environmental performance provided via searchable, electronic databases). For example, the U.S. Environmental Protection Agency (EPA) and state environmental agencies maintain multiple databases that provide enforcement and compliance information by facility or company name, such as the EPA’s Enforcement and Compliance History Online database. Other environmental-media specific databases like AirData, which provides summaries of pollution data from two EPA databases, and similar databases also provide easily accessible information to the public via online tools. Without a consensus on the metrics to be used when disclosing ESG information, this drive towards increased transparency also means increased legal and reputational risks. As companies disclose more information more often, these data are increasingly available for plaintiff and regulatory scrutiny. Accordingly, ESG statements should undergo the same rigorous review as other traditional disclosures to avoid potential litigation or liability, as well as the negative public relations or investor relations risks that exist whether or not ESG disclosure is included in a formal SEC filing. Recent Corporate ESG Trends The corporate ESG space is rapidly evolving and, going forward, it will be important for reporting companies and their counsel to respond to company-specific investor concerns and keep apprised of global trends in ESG issues important to the investment and regulatory communities. Two material trends are discussed below. First, while climate change remains a major focus of ESG actions and activism, companies and stakeholders have also turned their attention to a wider range of social and governance issues. Second, the Biden Administration has moved the SEC closer to mandating certain ESG disclosure, and SEC enforcement actions examining ESG disclosures are on the rise. Expanded Scope of ESG Over the course of the last decade, the rise of ESG has been driven largely by attention to climate change and other environmental matters. While climate change remains a core focus of ESG initiatives, companies and their stakeholders have increased their attention to other social and governance aspects of corporate sustainability in recent years, such as diversity and equity. Climate An increased focus on climate-related issues dominated 2021, with several groundbreaking developments. President Biden has made climate change a central focus of his administration, as evidenced by his decisions to rejoin the Paris Climate Agreement, host the Leaders Summit on Climate in April 2021, and announce new emissions targets. In addition, President Biden has issued executive orders addressing climate change, such as the Executive Order on Climate-Related Financial Risks issued in May 2021, 6 which directs the federal government to conduct assessments and prepare reports to address climate-related financial risk in their policies and programs, and the Executive Order on Strengthening American Leadership in Clean Cars and Trucks issued in August 2021, 7 which sets a new target to make half of all new vehicles sold in 2030 zero-emissions vehicles. In August 2021, the Intergovernmental Panel on Climate Change issued a report providing a review of the science of climate change, concluding that evidence suggests that human influence has already led to global warming, and issuing warnings regarding future scenarios that are likely unless emissions are drastically cut. The report was released in the same month that extreme weather events rocked the United States, such as wildfires in California and Hurricane Ida in Louisiana and the Northeast, which may amplify its message. Shareholder activism related to climate issues and other ESG issues continues to expand. Shareholder proposals related to environmental matters increased in the 2021 proxy season, and a majority of these were climate-related. Among the shareholder proposals that went to a vote, average shareholder support for environmental proposals was higher in 2021 than in 2020. Another major activist development in 2021 related to board seats. Engine No. 1, an activist hedge fund, nominated four independent directors ahead of Exxon’s annual shareholder meeting in May, challenging Exxon’s slate on the basis of its positions on fossil fuels and climate change. With the support of large pension funds and other institutional investors, Engine No. 1 secured three seats on Exxon’s board. The outcome signaled that companies should ensure that they reckon with stakeholder demands regarding climate change. Diversity and Equity Other ESG issues that garnered increasing attention in the last year are diversity and equity. Notably, in 2020, many companies announced widespread support for issues raised by the Black Lives Matter movement in a variety of ways, including by pledging funding for racial justice and developing diversity initiatives. The Biden Administration also signaled that racial equity would be a core focus when, as his first executive order on his first day in office, President Biden issued the Executive Order on Advancing Racial Equity and Support for Underserved Communities Through the Federal Government. 8 Since then, a number of Biden initiatives have emphasized attention to racial equity and diversity. Also in 2021, the SEC approved a Nasdaq proposed rule on diversity, which includes certain requirements regarding board diversity for Nasdaq-listed companies and also requires such companies to provide standardized disclosures related to board diversity. With respect to activism related to diversity and equity, momentum in this area has grown in 2021, which witnessed a record number of related shareholder proposals submitted in the United States. Proposals covered topics such as workforce diversity disclosures, such as EEO-1 report disclosures, as well as gender and pay equity. Average shareholder support for such proposals roughly doubled that of 2020, with workforce diversity and EEO-1 reporting proposals garnering an average majority support for the first time. U.S. ESG Regulatory and Enforcement Developments As investors have begun to demand more fulsome climate and ESG disclosures, the Biden Administration has indicated that climate change and ESG are at the forefront of federal regulatory agendas. For example, the Commodity Futures Trading Commission and the EPA have announced new climate-related initiatives in recent months, and the Department of Labor and the Office of the Comptroller of the Currency have halted initiatives from the Trump Administration that many understood as an effort to curtail engagement with ESG and sustainable finance. The SEC has taken a leading role in assessing what ESG-related corporate disclosures may be needed and how such disclosures should be made. In February 2021, then-Acting SEC Chair Allison Herren Lee directed the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. In March 2021, the SEC requested public input on climate change disclosures in a public statement that did not propose a rule, but instead posed 15 questions for consideration, each with a number of sub-questions. Among the questions asked by the SEC were the following: How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to registrants as to what is expected of them? What are the advantages and disadvantages of rules that incorporate or draw on existing frameworks, such as, for example, those developed by the TCFD, the SASB, and the Climate Disclosure Standards Board? What is the best approach for requiring climate-related disclosures? Should climate-related requirements be one component of a broader ESG disclosure framework? The comment period closed in June, and more than 550 unique comment letters were submitted in response. A proposed rule is expected in late 2021. SEC Chair Gary Gensler has also expressed interest in rulemaking relating to human capital disclosure, including information on workforce turnover, skills and development training, compensation, benefits, workforce demographics (including diversity), and health and safety. These statements are supported by the SEC’s June 2021 announcement of its annual regulatory agenda, which specified that the SEC will propose rules related to a number of ESG-related disclosure topics, including climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk, in 2021. The SEC has also signaled that it will increase its enforcement scrutiny of ESG disclosures. In March 2021, the SEC announced the creation of a Climate and ESG Enforcement Task Force to focus on identifying material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies. Additionally, The SEC Division of Examinations’ 2021 examination priorities reflect an increased focus on climate-related risks and investment adviser disclosures and practices relating to ESG products and services. In April 2021, the Division also published a risk alert that addressed examination priorities, compliance deficiencies, and effective compliance practices concerning ESG-related investment products, including private funds. With respect to compliance deficiencies, the risk alert highlighted staff observations of instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks; a lack of policies and procedures related to ESG investing; weak or unclear documentation of ESG-related investment decisions; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures or to prevent violations of law, or that were not implemented. Attention to such issues is evident in the SEC’s recent investigation of Deutsche Bank’s asset manager, DWS, first reported in August 2021. The investigation followed public accusations by DWS’s former head of sustainability that the investment firm overstated how it used sustainable investing criteria to manage investments. Such investigations may become increasingly common under the leadership of Chair Gensler, who has called attention to the wide range of terms used by asset managers to describe ESG and what ESG criteria they use in relation to sustainable investing. It is possible that additional regulatory attention, including enforcement priorities, may be broadened to encompass other issuers, such as public companies. Accordingly, it is important for lawyers to monitor these developments in order to best advise issuers on liability exposure associated with both SEC filings and any other types of public disclosure. Advising Clients on ESG-Related Disclosure The U.S. government appears to be moving quickly to align itself with ESG market trends, and corporations should expect further regulatory and legislative activity around ESG and climate change, in particular, in the months ahead. As a practical matter, it is important for companies to manage the exposure and risk associated with increased disclosure of ESG issues, regardless of context or whether the disclosure was voluntary. Teamwork among business managers, ESG experts, and attorneys is critical to proactively address any potential risks. Attorneys can assist companies with the following risk-management strategies: Identifying internal and external stakeholders Recommending reporting frameworks Evaluating the materiality of ESG issues In light of the SEC focus on how ESG statements are made, it is critical that attorneys advise clients on setting up adequate processes and procedures for maintaining accurate backup data for public ESG statements and internal controls over ESG disclosure. If a company elects to commit to a voluntary initiative or set climate goals, attorneys can also assist with identifying the appropriate frameworks and reporting cadence, as well as advise on standardization of ESG disclosures across company communications. Moreover, attorneys can help counsel the company on handling sensitive ESG issues: Address the issue directly. If an attorney is aware of potential legal or reputational risks related to an ESG issue, he or she can recommend that its sustainability report or social media postings appropriately address (or refrain from making statements about) the issue. Review drafts of ESG reports and filings. Consider taking a central role in ensuring the accuracy and consistency of reports and filings with the company’s environmental and social performance data. One way to accomplish this is through comparison of environmental regulatory data or diversity data in a sustainability or ESG report with that which is reported to federal and state agencies (often made available to the public via websites or through Freedom of Information Act requests). Help direct the company’s shareholder engagement related to ESG issues. Attorneys can also guide companies as they navigate growing shareholder and NGO activist pressures to increase the volume of ESG disclosure. Keep current with the fast-developing ESG space. Attorneys can assist with assessment of new regulatory requirements and advise companies on how best to address them (whether through public comment letters, industry initiatives and/or planning for potential mandated disclosure frameworks). Sara K. Orr is a partner in the Chicago office of Kirkland & Ellis LLP. Sara advises clients around the world on ESG issues. She has almost two decades of experience working with private equity, public company, and financial institutional clients on hundreds of complex environmental matters and is a thought leader on sustainability and ESG issues. Her practice specifically focuses on sustainable finance, corporate sustainability programs, ESG reporting and disclosure, ESG due diligence, Equator Principles and IFC Performance Standards on Environmental and Social Sustainability, innovative climate solutions, and other ESG risks and opportunities. Sofia Dolores Martos is a partner in the New York office of Kirkland & Ellis LLP. Sofia builds upon over a decade of experience in U.S. securities law to advise clients on a wide spectrum of ESG matters. She advises public and private companies on recent and emerging ESG regulatory developments, such as anticipated SEC proposed rules related to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk. She also counsels clients on ESG disclosures in sustainability reports, proxy statements, and annual reports, which includes advising on regulatory requirements, international disclosure trends, and industry best practices. Sofia focuses largely on social and governance issues. Her governance work involves assessments of ESG programs through benchmarking and gap analysis to identify areas for improvement and ways to mitigate legal and reputational risks, as well as strategies for integrating ESG into clients’ business and governance practices through board trainings, company policies, and tabletop exercises. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: Capital Markets & Corporate Governance > Corporate Governance and Compliance Requirements for Public Companies > Practice Notes Related Content For information on ESG disclosures by U.S. reporting companies, see > MARKET TRENDS 2019/20: PROXY ENHANCEMENTS For a collection of resources addressing ESG issues, see > ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) RESOURCE KIT For an analysis of conflict minerals disclosures, see > CONFLICT MINERALS RULE COMPLIANCE For a checklist that presents the initial steps a company should consider in preparing to comply with the Conflict Minerals Rule, see > CONFLICT MINERALS RULE COMPLIANCE CHECKLIST For a list of the disclosure requirements for public companies under the Conflict Minerals Rule, see > CONFLICT MINERALS DISCLOSURE CHECKLIST For an examination of new rules proposed by Nasdaq regarding diversity on boards of directors, see > SEC APPROVES NASDAQ BOARD OF DIRECTOR DIVERSITY LISTING STANDARDS: CLIENT ALERT DIGEST For a sample memorandum addressing shareholder activism related to ESG issues, see > SHAREHOLDER ENGAGEMENT STRATEGIES FOR ENVIRONMENTAL, SOCIAL, AND POLITICAL ISSUES BOARD MEMORANDUM 1 . https://www.thecaq.org/sp-500-and-esg-reporting/ . 2 . https://www.globalreporting.org/standards/ . 3. https://www.sasb.org/ . 4. http://integratedreporting.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf . 5. https://www.fsb-tcfd.org/about/ . 6. 86 Fed. Reg. 27,967 (May 25, 2021). 7. 86 Fed. Reg. 43,583 (Aug. 10, 2021). 8 . 86 Fed. Reg. 7,009 (Jan. 25, 2021).Fall 2021featuredCapital Markets & Corporate Governancehttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/libor-floor-provisions-market-trends-2020-21Thu, 19 Aug 2021 01:46:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:00bc96fc-93b5-45d0-8245-fb8a2eb0401csheikaThis practice note discusses LIBOR floor provisions, including current market trends in publicly filed credit agreements and commitment letters from the second half of 2020 and first half of 2021. Lenders tended to increase LIBOR floor percentages in 2020 during the height of COVID-19 in response to the dropping LIBOR benchmark rate. With a stabilizing market in 2021 and the end of LIBOR as a benchmark rate in sight, lenders have not focused on LIBOR floors in recent transactions and LIBOR floor rates have fallen back closer to the norm of 0% in the first half of 2021. The following analysis is based on 123 publicly filed credit agreements that included a LIBOR floor from the second and third quarters of 2020 and 186 publicly filed credit agreements that included a LIBOR floor from the fourth quarter of 2020 and the first quarter of 2021. The data analyzed in this practice note was obtained using Market Standards, the searchable database from Practical Guidance of publicly filed credit agreements and commitment letters that enables users to search, compare, and analyze over 2300 credit agreements using approximately 90 detailed deal points and over 370 commitment letters using approximately 70 deal points to filter search results. For more information on Market Standards, click here . For more information on recent trends concerning LIBOR floors, see Interest Rate Provisions in Credit Agreements , SOFR Loan Documentation: 8 Things for Borrowers to Think About , The Client Asks: What Happens When LIBOR Ends? , and LIBOR Replacement Resource Kit . LIBOR Floor Provisions Countries sometimes attempt to stimulate their economies by reducing benchmark interest rates, including LIBOR. Benchmark rates have at times been reduced to zero or even been negative. Due to the potential for benchmark rates to be reduced, lenders often include a benchmark floor in their credit agreements, which commonly was 0% prior to COVID-19. During the height of COVID-19 in the second and third quarters of 2020, the U.S. Federal Reserve lowered benchmark rates to near zero. Many lenders began to counteract such decline in benchmark rates by increasing the LIBOR floor in their transactions to percentages greater than zero, typically in the range of 0.5% to 1.25%. Due to optimism that the economy is recovering and as the LIBOR cessation date is approaching at the end of 2021, banks have become less focused on increasing LIBOR floors. In the last quarter of 2020 and into 2021, the number of transactions with a LIBOR floor above 0% has steadily declined. Out of 123 credit agreements surveyed from the second and third quarters of 2020 that included LIBOR floors, 64 deals (52%) included a LIBOR floor greater than 0%, and 59 deals (48%) included a 0% LIBOR floor. Visualization of LIBOR Floors Q2 2020 and Q3 2020 Source: Market Standards , date range 4/1/2020 to 9/30/2020 Of those 64 deals with a LIBOR floor greater than 0%, 57 deals had a LIBOR floor between 0.1% and 1%. Seven deals had a LIBOR floor greater than 1% ranging from 1.5% to 2%. Out of 186 credit agreements surveyed from the fourth quarter of 2020 and the first quarter of 2021 that included a LIBOR floor, 50 (27%) deals included a LIBOR floor greater than 0% ranging from 0.25% to 1%. The remaining 136 (73%) deals had a LIBOR floor of 0%. Visualization of LIBOR Floors Q4 2020 and Q1 2021 Source: Market Standards , date range 10/1/2020 to 3/31/2021 Examples of Publicly Filed Credit Agreements in Lexis Market Standards Camping World Holdings, Inc. Agreement Date June 3, 2021 Agreement Credit Agreement Company CWGS Group, LLC Administrative Agent Goldman Sachs Bank USA Facility Size/Type $1.1 billion initial term loan commitment $65 million initial revolving commitment Industry Retail—Auto Dealers and Gasoline Stations Applicable Interest Rate Margin Ranges from 2.25% to 2.50% for Eurocurrency loans depending on borrower's total net leverage ratio Ranges from 1.25% to 1.50% for ABR loans depending on borrower's total net leverage ratio LIBOR Floor The LIBO Screen Rate will be deemed to be 0%, if such rate would otherwise be determined to be less than 0% Solely with respect to the initial term loans, the LIBO Screen Rate will be deemed to be 0.75%, if such rate would otherwise be less than 0.75% Stitch Fix, Inc. Agreement Date June 2, 2021 Agreement Amended and Restated Credit Agreement Company Stitch Fix, Inc. Administrative Agent Silicon Valley Bank Facility Size/Type $100 million revolving commitment Industry Retail—Catalog and Mail-Order Applicable Interest Rate Margin 25% for Eurodollar loans 1.25% for ABR loans LIBOR Floor Eurodollar base rate shall not be less than 0% MSA Safety Inc. Agreement Date May 24, 2021 Agreement Fourth Amended and Restated Credit Agreement Company MSA Safety Incorporated, et al. Administrative Agent PNC Bank, National Association Facility Size/Type $900 million revolving credit facility Industry Orthopedic, Prosthetic and Surgical Appliances, and Supplies Applicable Interest Rate Margin Ranges from 0.875% to 1.750% for LIBOR rate loans depending on borrower's net leverage ratio Ranges from 0.000% to 0.750% for base rate loans depending on borrower's net leverage ratio LIBOR Floor Benchmark rate floor applicable to the LIBOR rate, if not otherwise specified, is 0% Chipotle Mexican Grill, Inc. Agreement Date April 13, 2021 Agreement Revolving Credit Agreement Company Chipotle Mexican Grill, Inc. Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $500 million revolving commitment Industry Retail—Eating Places Applicable Interest Rate Margin Ranges from 1.375% to 2.125% for Eurodollar loans depending on borrower's total leverage ratio Ranges from 0.375% to 1.125% for ABR loans depending on borrower's total leverage ratio LIBOR Floor If the LIBO Screen Rate is less than 0%, then such rate shall be deemed to be 0% for purposes of the credit agreement Petiq, LLC Agreement Date April 13, 2021 Agreement Term Credit and Guaranty Agreement Company Petiq, LLC Administrative Agent Jefferies Finance LLC Facility Size/Type $500 million revolving commitment Industry Wholesale—Drugs, Drug Proprietaries, and Druggists' Sundries Applicable Interest Rate Margin 25% for Eurodollar rate loans 3.25% for base rate loans LIBOR Floor Adjusted Eurodollar rate shall at no time be less than 0.50% American Electric Power Company, Inc. Agreement Date March 31, 2021 Agreement Credit Agreement Company American Electric Power Company, Inc. Administrative Agent Wells Fargo Bank, National Association Facility Size/Type $1 billion revolving commitment Industry Electric Services Applicable Interest Rate Margin Ranges from 1.000% to 1.750% for Eurodollar rate advances depending on borrower's credit rating level Ranges from 0.000% to 0.750% for base rate advances depending on borrower's credit rating level LIBOR Floor If the Eurodollar rate is less than 0%, it shall be deemed to be 0% for purposes of the credit agreement Community Healthcare Trust Inc. Agreement Date March 19, 2021 Agreement Third Amended and Restated Credit Agreement Company Community Healthcare Trust Incorporated Administrative Agent Truist Bank Facility Size/Type $400 million revolving and term commitments Industry Real Estate Investment Trusts Applicable Interest Rate Margin Eurodollar Rate : Ranges from 0.775% to 1.45% for revolving Eurodollar rate loans depending on borrower's credit ratings Ranges from 1.15% to 1.70% for A-2 term Eurodollar rate loans depending on borrower's credit ratings Ranges from 1.35% to 1.90% for A-3/A-4 term Eurodollar rate loans depending on borrower's credit ratings Base Rate : Ranges from 0.00% to 0.45% for revolving base rate loans depending on borrower's credit ratings Ranges from 0.15% to 0.70% for A-2 term base rate loans depending on borrower's credit ratings Ranges from 0.35% to 0.90% for A-3/A-4 term base rate loans depending on borrower's credit ratings LIBOR Floor If the LIBOR rate is less than 0%, such rate is deemed to be 0% Brightsphere Investment Group Inc. Agreement Date February 23, 2021 Agreement Amended and Restated Revolving Credit Agreement Company Acadian Asset Management LLC, as assignee of Brightsphere Investment Group Inc. Administrative Agent Citibank, N.A. Facility Size/Type $125 million revolving commitment Industry Investment Advice Applicable Interest Rate Margin Ranges from 1.50% to 2.00% for Eurodollar loans Ranges from 0.50% to 1.00% for ABR loans LIBOR Floor If the LIBO Screen Rate is less than zero, such rate shall be deemed to be 0% for purposes of the credit agreement PPG Industries, Inc. Agreement Date February 19, 2021 Agreement Term Loan Credit Agreement Company PPG Industries, Inc. Administrative Agent PNB Paribas Facility Size/Type $2 billion term loan commitment Industry Paints, Varnishes, Lacquers, Enamels, and Allied Products Applicable Interest Rate Margin Ranges from 0.750% to 1.250% for Eurocurrency rate loans depending on borrower's credit ratings Ranges from 0.000% to 0.250% for base rate loans depending on borrower's credit ratings LIBOR Floor If the LIBO rate is less than 0%, such rate shall be deemed to be 0% for purposes of the credit agreement Credit Acceptance Corp. Agreement Date January 29, 2021 Agreement Loan and Security Agreement Company Credit Acceptance Funding LLC 2021-1 Administrative Agent Fifth Third Bank Facility Size/Type $100 million term commitment Industry Personal Credit Institutions Applicable Interest Rate Margin 0% for prime rate or Fed funds rate loans N/A for benchmark rate loans calculated using the LIBOR rate LIBOR Floor In the event that the LIBOR rate is less than 0%, such rate shall be deemed to be 0% for purposes of the credit agreement Express, LLC Agreement Date January 13, 2021 Agreement Asset-Based Term Loan Agreement Company Express, LLC Administrative Agent Wells Fargo Bank, National Association Facility Size/Type $90 million term loan commitment $50 million delayed draw term loan commitment Industry Retail—Apparel & Accessory Stores Applicable Interest Rate Margin Ranges from 7.00% to 8.25% for LIBO rate loans depending on borrower's level of EBITDA Ranges from 6.00% to 7.25% for base rate loans depending on borrower's level of EBITDA LIBOR Floor If at any time the published LIBO rate is below 0%, then the LIBO rate determined for the credit agreement shall be deemed to be 0% AssetMark Financial Holdings, Inc. Agreement Date December 30, 2020 Agreement Credit Agreement Company AssetMark Financial Holdings, Inc. Administrative Agent Bank of Montreal Facility Size/Type $250 million revolving commitment Industry Investment Advice Applicable Interest Rate Margin Ranges from 2.000% to 3.625% for Eurodollar loans depending on borrower's total leverage ratio for the applicable pricing date Ranges from 1.000% to 2.625% for base rate loans depending on borrower's total leverage ratio for the applicable pricing date LIBOR Floor If LIBOR as determined is less than 0%, LIBOR will be deemed to be 0% for purposes of the credit agreement Matrix Service Company Agreement Date November 2, 2020 Agreement Fifth Amended and Restated Credit Agreement Company Matrix Service Company Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $200 million revolving commitment Industry Construction—Special Trade Contractors Applicable Interest Rate Margin Ranges from 2.00% to 3.00% for Eurocurrency, EURIBOR, and CDOR loans depending on borrower's leverage ratio Ranges from 1.00% to 2.00% for ABR loans depending on borrower's leverage ratio Ranges from 2.50% to 3.50% for Canadian prime rate loans depending on borrower's leverage ratio LIBOR Floor If any screen rate (including the LIBO rate) is less than 0%, such rate shall be deemed to be 0% for purposes of the credit agreement DoubleVerify Holdings, Inc. Agreement Date October 1, 2020 Agreement Amendment and Restatement Agreement Company DoubleVerify Inc. Administrative Agent Capital One, N.A. Facility Size/Type $150 million revolving commitment Industry Services—Computer Programming Applicable Interest Rate Margin Ranges from 2.00% to 2.75% for Eurodollar loans depending on borrower's total net leverage ratio Ranges from 1.00% to 1.75% for ABR loans depending on borrower's total net leverage ratio LIBOR Floor Eurodollar base rate shall not be deemed to be less than 0.75% Purple Innovation, LLC Agreement Date September 3, 2020 Agreement Credit Agreement Company Purple Innovation, LLC Administrative Agent KeyBank National Association Facility Size/Type $55 million revolving commitment $45 million term loan commitment Industry Household Furniture Applicable Interest Rate Margin Ranges from 3.00% to 3.75% for Eurodollar rate loans depending on borrower's consolidated net leverage ratio Ranges from 2.00% to 2.75% for base rate loans depending on borrower's consolidated net leverage ratio LIBOR Floor Adjusted Eurodollar rate is the greater of 0.50%, and LIBOR If benchmark replacement for adjusted Eurodollar rate is less than 0.50%, then such rate will be deemed to be 0.50% for purposes of the credit agreement Pyxus International, Inc. Agreement Date August 24, 2020 Agreement Exit Term Loan Credit Agreement Company Pyxus Holdings, Inc.; Pyxus International, Inc.; Pyxus Parent, Inc. Administrative Agent Alter Domus (US) LLC Facility Size/Type $213.42 million term commitment Industry Wholesale—Farm Product Applicable Interest Rate Margin 00% for LIBO rate loans 00% for prime rate loans 0.50% for Fed funds rate loans LIBOR Floor In no event shall the LIBO rate be less than 1.5% Doordash, Inc. Agreement Date August 7, 2020 Agreement Amended and Restated Agreement Company Doordash, Inc. Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $300 million original revolving commitment $100 million incremental revolving commitment Industry Services—Business Services, Not Elsewhere Classified Applicable Interest Rate Margin 00% for Eurodollar loans 0.00% for ABR loans LIBOR Floor If the LIBO Screen Rate as determined is less than 0%, the Screen Rate shall for all purposes of the credit agreement be 0% Waste Management, Inc. Agreement Date July 28, 2020 Agreement Credit Agreement Company Waste Management, Inc. Administrative Agent Mizuho Bank, Ltd. Facility Size/Type $3 billion revolving commitment Industry Refuse Systems Applicable Interest Rate Margin Ranges from 1.00% to 1.30% for Eurocurrency rate loans depending on borrower's credit ratings Ranges from 0.000% to 0.300% for base rate loans depending on borrower's credit ratings LIBOR Floor If the Eurocurrency rate is less than 0%, then such rate shall be deemed 0% for purposes of the credit agreement Axogen, Inc. Agreement Date June 30, 2020 Agreement Term Loan Agreement Company Axogen, Inc. Administrative Agent Argo SA LLC Facility Size/Type $75 million term loan commitment Industry Electromedical and Electrotherapeutic Apparatus Applicable Interest Rate Margin 7.5% for LIBOR rate loans LIBOR Floor LIBOR floor is 2.0% Carnival Corporation Agreement Date June 30, 2020 Agreement Term Loan Agreement Company Carnival Corporation Carnival Finance LLC Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $1.86 billion term loan facility Industry Water Transportation Applicable Interest Rate Margin 50% for base rate loans 50% for LIBOR rate loans 7.50% for EURIBOR rate loans LIBOR Floor If the LIBO Screen Rate is less than 0%, then such rate shall be deemed to be 0% for purposes of the credit agreement Examples of Publicly Filed Commitment Letters in Lexis Market Standards Oasis Petroleum Inc. Commitment Date May 3, 2021 Agreement Commitment Letter Company Oasis Petroleum Inc. Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $500 million bridge commitment Industry Crude Petroleum and Natural Gas Applicable Interest Rate Margin 6.50% increasing by 0.50% at the end of each three month period after closing for Eurodollar rate loans LIBOR Floor If the LIBO Screen Rate is less than 1.0%, such rate shall be deemed to be 1.0% for purposes of calculating such rate Skyworks Solutions, Inc. Commitment Date April 22, 2021 Agreement Project Mansfield US$2,500,000,000 Bridge Facility Commitment Letter Company Skyworks Solutions, Inc. Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $2.5 billion bridge facility commitment Industry Semiconductors and Related Devices Applicable Interest Rate Margin Ranges from 1.125% to 2.000% for LIBO rate loans depending on borrower's credit ratings Ranges from 0.125% to 1.000% for base rate loans depending on borrower's credit ratings LIBOR Floor If the LIBO Screen Rate is less than 0%, such rate shall be deemed to be 0% Synnex Corporation Commitment Date March 22, 2021 Agreement Project Spire Bridge Commitment Letter Company Synnex Corporation Administrative Agent Citibank, N.A.; Citicorp USA, Inc.; Citicorp North America, Inc.; Citigroup Global Markets Inc. Facility Size/Type $1.5 billion senior unsecured term bridge facility commitment $2.5 billion senior unsecured term bridge facility commitment $3.5 billion senior unsecured revolving credit facility commitment Industry Wholesale—Computers, Peripherals, and Software Applicable Interest Rate Margin Ranges from 1.125% to 1.750% for LIBOR loans depending on borrower's credit ratings Bridge unused fee ranges from 0.125% to 0.300% depending on borrower's credit ratings For ABR loans, margin is 1.00% less than margin for LIBOR loans but in any event not less than 0% LIBOR Floor Adjusted LIBOR is the greater of 0% and LIBOR as determined Perspecta Inc. Commitment Date February 18, 2021 Agreement Project Jagman Amended and Restated Commitment Letter Company Peraton Corp.; Peraton Inc. Administrative Agent JPMorgan Chase Bank, N.A.; Alter Domus (US) LLC Facility Size/Type $3,775,000 senior secured incremental term loan facility commitment $200 million incremental revolving commitment $1,340,000 incremental senior secured second lien term loan facility commitment Industry Services—Computer Processing and Data Preparation and Processing Applicable Interest Rate Margin For first lien incremental term facility, 4.25% for LIBOR loans and 3.25% for base rate loans with two 0.25% step downs depending on borrower's first lien leverage ratio Margin for incremental revolving facility is the same as for the existing revolving facility For second lien incremental term facility, 8.00% for LIBOR loans and 7.00% for base rate loans LIBOR Floor LIBOR for purposes of calculating interest on any loan under the second lien term facility shall be deemed to be not less than 0.75% Vielo Bio, Inc. Commitment Date January 31, 2021 Agreement Project Venus Commitment Letter Company Horizon Therapeutics USA Inc. Administrative Agent Citibank, N.A. Facility Size/Type $1.3 billion incremental term loan commitment Industry Pharmaceutical Preparations Applicable Interest Rate Margin 25% for LIBO rate loans 25% for alternate base rate loans Rates step down 0.25% depending on borrower's total net leverage ratio LIBOR Floor In no event shall the LIBO rate applicable to the term loan facility be less than 0.50% Seacor Holdings Inc. Commitment Date December 4, 2020 Agreement Project Safari Commitment Letter Company Safari Parent, Inc. Administrative Agent HPS Investment Partners, LLC Ally Bank Facility Size/Type $395.60 million first lien term loan facility commitment $169.40 million first lien delayed draw facility commitment $100 million senior secured asset-based facility commitment Industry Deep Sea Foreign Transportation of Freight Establishments Applicable Interest Rate Margin For term loan facility: 6.75% for LIBOR rate loans, and 5.75% for ABR loans, with two step down adjustments of 0.25% each depending on borrower's total net leverage ratio For ABL loans: ○ Ranges from 2.00% to 2.50% for Eurodollar loans excluding supplemental amount and from 4.00% to 4.50% for supplemental amount, depending on average excess availability ○ Ranges from 1.00% to 1.50% for ABR loans excluding supplemental amount and from 3.00% to 3.50% for supplemental amount, depending on average excess availability LIBOR Floor Adjusted LIBOR in no event shall be less than 1.0% Tuesday Morning Corp. Commitment Date November 2, 2020 Agreement Commitment Letter Company Tuesday Morning, Inc. Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $110 million senior secured revolving credit facility commitment Industry Retail—Variety Stores Applicable Interest Rate Margin For the first 12 months after closing, 2.75% for Eurodollar rate loans and 1.75% for CB floating rate loans After the first 12 months, ranges from 2.25% to 2.75% for Eurodollar loans depending on excess availability After the first 12 months, ranges from 1.25% to 1.75% for CB floating rate loans depending on excess availability LIBOR Floor The adjusted LIBO rate shall have a floor of 0.50% at all times Modivcare Inc. Commitment Date September 28, 2020 Agreement Commitment Letter Company The Providence Service Corporation Administrative Agent Jefferies Finance LLC Facility Size/Type $30 million senior secured first lien revolving facility commitment $600 million senior unsecured bridge loan facility commitment Industry Transportation Services Applicable Interest Rate Margin For revolving credit loans, 4.00% for LIBOR loans and 3.00% for base rate loans For bridge loans, 5.25% for LIBOR loans with increases of 0.50% each three-month period after closing LIBOR Floor Three-month LIBOR shall in no event be less than 1.0% Roper Technologies, Inc. Commitment Date August 12, 2020 Agreement Bridge Facility Commitment Letter Company Roper Technologies, Inc. Administrative Agent Bank of America, N.A. Facility Size/Type $4 billion 364-day senior unsecured bridge facility commitment ($2.5 million tranche A and $1.5 million tranche B) Industry Industrial Instruments Applicable Interest Rate Margin Ranges from 1.00% to 1.75% for LIBOR loans depending on borrower's credit ratings Ranges from 0.00% to 0.75% for alternate base rate loans depending on borrower's credit ratings LIBOR Floor If the LIBOR rate (or the base rate) is less than 0%, such rate shall be deemed 0% for purposes of the bridge facility California Resources Corporation Commitment Date July 15, 2020 Agreement Senior Secured Superpriority Debtor-In-Possession Revolving Credit Facility Commitment Letter Company California Resources Corporation Administrative Agent JPMorgan Chase Bank, N.A. Facility Size/Type $483,010,655.62 senior secured superpriority debtor-in-possession revolving credit facility commitment Industry Crude Petroleum and Natural Gas Applicable Interest Rate Margin 50% for LIBOR loans 3.50% for base rate loans LIBOR Floor 1.00% LIBOR floor To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: Practical Guidance, Finance Related Content LIBOR Transition to SOFR in Credit Agreements SOFR Loan Documentation: 8 Things for Borrowers to Think About The Client Asks: What Happens When LIBOR Ends? LIBOR Replacement Resource Kit Market Trends 2019/20: LIBOR Succession Clauses Market Trends 2020: COVID-19 Ramifications in Loan Documents LIBOR Replacement Clause (Hardwired) LIBOR Replacement Clause (Amendment) View this content in Practical Guidance, Finance If you do not subscribe to Practical Guidance, review this information for an overview of Market Standards, FinanceMarket StandardsSummer 2021https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/best-practices-for-prevention-and-defense-of-negligent-hiring-retention-and-supervision-claimsFri, 11 Jun 2021 22:28:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:23e10415-4116-4a99-8ffe-5ba6fc213469sheikaBy: Darryl G. McCallum, Shawe Rosenthal, LLP This article addresses the potential for negligence liability that employers face when they hire and/or retain employees who end up causing injury to third parties or other employees. UNDER MOST STATES’ LAWS, AN EMPLOYER HAS AN obligation to use reasonable care in selecting and retaining employees. An employer violates this duty when it hires or retains an employee that it knows or should know is unfit or incompetent to perform the work required. Avoiding Liability for Negligent Hiring or Retention It is important to advise employers to perform reasonable investigations of their employees upon hiring to ensure that each employee’s past does not indicate a tendency that would render the employee unsuitable for his or her position. The nature and responsibilities of the position, the thoroughness of the investigation, and the extent of prior conduct indicating relevant tendencies will often determine the employer’s liability when an employee harms a third party. Employers must be mindful that certain positions will require more thorough investigations based on the level of responsibility and potential for injury. Keeping in mind the employee’s level of responsibility and potential to injure others while performing his or her duties, the employer should take reasonable precautions to investigate an applicant’s background. In cases about negligent hiring or retention, courts evaluate the adequacy of an employer’s investigations based on several factors, such as: The risks associated with the position The extent of the employer’s investigative measures The discoverability of the employee’s past conduct or history that would indicate a tendency that would render the employee unsuitable for the position You should advise an employer to be detailed and accurate in documenting its investigative practices and policies to demonstrate a record of consistently using reliable and adequate information in its hiring and retention decisions. Prompt and consistent investigation of and discipline for employee misconduct can also help shield employers from liability for negligent hiring and retention. By taking prompt and consistent measures, the employer demonstrates its concern for hiring and retaining only qualified and competent employees. 1 Should an employer face a negligent hiring or retention claim, it could point to the record of its history of taking employee misconduct seriously and not retaining employees negligently. #MeToo Movement The #MeToo movement in social media based on highly publicized incidents of sexual harassment highlights the importance of a prompt and effective employer response in order to avoid liability not only for sexual harassment claims, but also for negligent hiring, retention, and supervision claims. For instance, in Clehm v. BAE Systems Ordinance Systems 2 the court held on summary judgment that a company that took prompt action in immediately launching an investigation and eventually terminating a male employee for harassing a female employee could not be held liable for negligent hiring and retention by a second female employee who claimed that the male employee also sexually assaulted her. Unlike her colleague, the second female employee “did not take advantage of BAE’s harassment reporting procedures, of which she was well aware . . . .” 3 Having failed to report the alleged sexual assaults to a supervisor, member of management, human resources, or through the company’s ethics help line, the employee could not show that the company had actual or constructive knowledge of the alleged harasser’s misconduct, and thus her negligence claims failed as a matter of law. 4 Elements of a Negligent Hiring Claim Negligent hiring claims generally require the plaintiff to prove the following: The employer did not exercise reasonable care in hiring the employee. The employee had dangerous tendencies or was incompetent for the job in question. The employee’s dangerous tendencies or incompetence would have been apparent to the employer had it exercised reasonable care. As a result of the employer’s failure to exercise reasonable care, the employee or customer suffered injury. 5 In short, courts hold employers liable for negligent hiring if they fail to conduct a reasonable level of pre-employment screening and consequently overlook evidence of an employee’s dangerous tendencies, so you must advise employers to always conduct good pre-employment screening. As a general rule, employers have a duty to exercise reasonable care “to select employees competent and fit for the work assigned to them and to refrain from retaining the services of an unfit employee,” which extends to “members of the public who would reasonably be expected to come into contact” with the employee. 6 The measure of reasonable care is what a person of ordinary prudence would do in view of the nature of the employment and the consequences of employing an incompetent or dangerous individual. Negligent Retention A claim of negligent retention requires essentially the same elements as a negligent hiring claim. The difference is the point at which the employer knew or should have known of an employee’s dangerous tendencies. The elements of a negligent retention claim include all of the following: An employment relationship Incompetence of the employee Actual or constructive knowledge of the incompetence by the employer An act or omission by the employee which caused the plaintiff’s injuries Proximate causation (i.e., the employer’s negligent retention of the employee was the proximate cause of the plaintiff’s injuries) 7 Negligent retention claims tend to focus on whether the employer knew or should have known that the employee was unfit for duty. Factors courts consider include the employee’s overall work record, any prior complaints the employer had received about the employee, whether any prior improper behavior by the employee was job-related, and whether any managers or supervisors witnessed any prior improper behavior by the employee. Moreover, in certain jurisdictions, such as Virginia, a plaintiff must allege serious and significant physical injury resulting from the employee’s actions in order to maintain a claim of negligent retention. A plaintiff who alleged emotional harm and physical symptoms such as headaches and nausea resulting from an employee’s alleged sexual harassment could not state a claim for negligent retention. 8 In Anicich v. Home Depot U.S.A., Inc, 9 the U.S. Court of Appeals for the Seventh Circuit reversed the dismissal of a complaint alleging negligent hiring, supervision, and retention of a manager whose sexual assault resulted in the death of an employee. The suit was brought by the estate of the deceased employee against Home Depot, and the complaint alleged that Home Depot employed a manager with a known history of sexually harassing, verbally abusing, and physically intimidating his female subordinates. In this instance, the manager allegedly verbally abused a female employee, threw things at her, and monitored her both during and outside her work hours. 10 On one occasion, he required the employee to accompany him to an out-of-state family wedding, threatening to cut her hours or fire her if she refused. While on the trip, the manager allegedly killed the employee and raped the employee’s corpse after the wedding (the manager was eventually convicted of murder and sexual assault and sentenced to life imprisonment). 11 The Court of Appeals found that, based on the allegations in the complaint, the manager’s harassing, controlling, and aggressive behavior toward his female subordinates demonstrated that he was particularly unfit for his job and thus that the injury to the employee was foreseeable. 12 The employer argued that the violent attack on the employee was a radical break from the manager’s prior behavior, and thus that no reasonable employer could have foreseen that such violence would occur. The Court of Appeals found, however, that the magnitude of the harm inflicted upon the employee did not by itself render the harm unforeseeable. 13 The issue of foreseeability was a question of fact, and, the Court reasoned, a reasonable jury could have found, based on the history of the manager’s harassing behavior, that it was foreseeable that he would take “the small further step to violence.” 14 Negligent Supervision A claim of negligent supervision requires essentially the same elements as a claim of negligent retention (or negligent hiring). 15 These claims often arise where an employee injures a customer or other third party on the employer’s premises or using a vehicle or other property belonging to the employer. When the injury is to another of the employer’s employees, state workers’ compensation laws will normally bar a negligence claim. For more information, see the following section. Workers’ Compensation Defense to Negligence Claims Brought by Employees When representing an employer faced with a negligent hiring, retention, or supervision claim by an employee, you should always consider raising workers’ compensation as a defense. 16 Where fellow employees (as opposed to customers or other third parties) bring negligence-based claims against the employer, it can assert a defense that workers’ compensation is the plaintiff’s exclusive remedy and precludes common law claims. An employer’s exclusive liability to an employee—and an employee’s exclusive remedy as against the employer—for negligence arises out of the workers’ compensation laws. 17 This is so even in the context of a claim of negligence premised on alleged sexual harassment or sexual assaults. However, if plaintiffs can show that their injuries resulted from the employer’s deliberate attempt to injure them, then workers’ compensation will not bar their claim. 18 The conduct must be more than “gross, wanton, wil[l]ful or reckless negligence” to escape workers’ compensation exclusivity. 19 In some jurisdictions, the nature of the injury (whether physical or nonphysical) will determine whether the injury is subject to the exclusivity provisions of workers’ compensation laws. For instance, in Reiber v. Mathew, 20 the U.S. District Court for the Northern District of Indiana denied a defendant employer’s motion to dismiss claims of negligent hiring and supervision. In that case, an employee alleged that she was forced to resign from her employment at a healthcare facility because of a doctor’s relentless sexual harassment. The alleged harassment included repeated and unwanted verbal and physical sexual advances toward the employee by the doctor. 21 The incidents alleged in the complaint occurred in the course of the plaintiff’s employment, arose out of her employment, and resulted in an unexpected (i.e., accidental) injury; thus, such an injury would normally be subject to the exclusivity provisions of the workers’ compensation law. 22 However, the court reasoned, the alleged injury sustained by the plaintiff was non-physical in nature. 23 While non-physical injuries may be subject to workers’ compensation exclusivity in some instances, the court reasoned that to be subject to workers’ compensation exclusivity, a disability or impairment must be “more than a refusal, or even emotional inability, to continue to work in a discriminatory and hostile environment . . . .” 24 The court noted that while the employee felt she could no longer work for the defendant, she remained fit for employment elsewhere and had in fact applied for numerous similar positions after leaving the employer. 25 Liability to Third Parties for Negligence Unlike an employee, whose injuries are normally covered by workers’ compensation, an injured third party may be able to recover from the employer all damages that its employee’s conduct caused. If an employer does not look deeply enough into an employee’s background prior to hiring the employee, it could face liability to third parties who are injured by that employee’s conduct. This does not mean that employers should use all means available to investigate job applicants. You must coach employers to walk a fine line when they screen job applicants, because an employer may face liability to applicants if it screens them based on certain impermissible factors, such as mental impairments or arrest (as opposed to conviction) records. Where an employee is expected to come into contact with the public, the employer must make some reasonable inquiry before hiring or retaining the employee to ascertain his fitness, or the employer must otherwise have some basis for believing that he or she can rely on the employee. The nature and extent of the inquiry that is needed will naturally vary with the circumstances. 26 In Cramer v. Hous. Opportunities Comm’n of Montgomery Cty., a tenant of a housing project who was raped by an employee of the county housing commission sued the commission, alleging it was negligent in hiring the employee as a housing inspector. The court held that the tenant was clearly a person to whom the housing commission owed a duty of reasonable care in the hiring of a housing inspector. Yet the commission hired the housing inspector despite the fact that he did not complete portions of his application, including the part of the application that asked whether he had ever been dismissed or asked to resign from any previous job. The commission made no attempt to contact any of the employee’s prior employers or personal references, or to verify any of the information included in the application. As it turns out, the employee had earlier been convicted of robbery and assault, and at the time of his hiring, he was under indictment for rape and related offenses. In holding that a jury was entitled to consider whether there was a causal connection between the commission’s negligence and the tenant’s injury, the court stated: [W]here the work involves a serious risk of harm if the employee is unfit . . . there is no presumption of competence and there may well exist a duty to conduct a criminal record investigation. Other factors must be considered, including the availability of such information; the cost, inconvenience, and delay in obtaining it; whether other sources, including a previous employment record in the same field, are sufficient to justify a finding of fitness; and whether unanswered questions, negative indicators, or other “red flags” have surfaced during routine investigation. No single factor is dispositive, and the trier of fact must consider all the circumstances to determine whether the failure to obtain a criminal history record constitutes a breach of duty in a given case. 27 Thus, an employer that does not make use of the methods available to it in checking into the background of an employee prior to making a hiring decision could face liability for negligence, as did the employer in Cramer. In Denton v. Universal Can-Am, Ltd., 28 a company was found liable for negligent hiring and retention based on a car accident caused by one of its truck drivers who had been convicted of nine traffic-related offenses in the seven years prior to his applying for a truck driver position with the company. Furthermore, the employer “retained [the truck driver] after he continued to violate its policies and specifically neglected to monitor [his] commercial driver’s license or motor vehicle record after he was hired. That failure resulted in [the truck driver] driving a truck on a suspended license when he hit [the victim].” 29 Based on these facts, the court upheld a jury’s $54 million verdict against the company in favor of the victim, who suffered from debilitating injuries as a result of the accident.30 The duty of an employer to control its employees and prevent harm to third parties is not absolute, however. For instance, in Pagayon v. Exxon Mobil Corp. , 31 an employee got into a fistfight with another employee as well as the second employee’s father, resulting in the death of the father. The father’s family sued, alleging that the employer was negligent in supervising the first employee, and that it failed to take steps to prevent the fight from occurring. While the second employee, whose father was killed in the altercation, had previously complained about two minor incidents of alleged harassment by the first employee, the court held that the two incidents about which the second employee complained were insufficient to make it foreseeable that the first employee would become violent. 32 The two alleged incidents involved (1) a lighthearted question about whether the second employee was involved in a sexual relationship with another employee and (2) an allegation that the employee wrongfully and intentionally put an “out of order” sign on the men’s bathroom. The court noted that these two complaints “cannot even arguably have given Exxon reason to think employee friction might injure store patrons.” 33 The court further reasoned that “[t]o require every employer to intervene in all such circumstances and hold it liable for any result, however unlikely, would impose too great a burden on the employment relationship.” 34 Thus, unlike the Anicich v. Home Depot case discussed above, in which the employer was allegedly aware of prior verbal and physical outbursts by the alleged harasser toward female employees, the facts in Pagayon did not, according to the court, demonstrate that the employee’s violent behavior, which resulted in the death of another employee’s father, was foreseeable. In Ledet v. Mills Van Lines, Inc., 35 a Massachusetts appellate court held that even though a moving company had been negligent in failing to conduct a criminal background check on an employee who subsequently sexually assaulted a third party, the company could not be held liable for the assault. In Ledet, the employer failed to conduct a criminal background check on an employee at the time of hire, in violation of its own policies. In fact, the employee had an extensive criminal record, including more than 20 arrests, 10 felony convictions, and five incarcerations in three states, including for crimes such as inciting violence, threatening domestic violence, burglary, and aggravated theft. 36 The employer hired the employee as a rider-helper on the employer’s moving trucks. While off duty during one of his moving trips, the employee assaulted a woman he saw on the street (who was not a customer of the moving company). The employee ended up pleading guilty to kidnapping and assault and was sentenced to 10–13 years in prison. The victim of the assault sued the employer for negligence, claiming that the employer’s failure to conduct a criminal background check on the employee was the proximate cause of her injuries. However, the court granted summary judgment to the employer. The court found that the employee’s criminal assault of the plaintiff was not a foreseeable consequence of its negligence in hiring him as a helper. While the employee was driving a moving truck when he saw the plaintiff, the truck was held not to be the instrumentality that led to the assault. The employee, who was off duty at the time, got out of the truck and assaulted the plaintiff, who was walking on the street. Accordingly, the court ruled, his employment did not furnish the means by which he committed a criminal act. 37 However, the result in this case might have been different had the plaintiff been a customer of the moving company, or if the employee had been on duty or had lured or dragged the plaintiff into the truck to assault her. Under such circumstances, it would have been easier for the plaintiff to establish that the employment furnished the means by which the employee criminally assaulted her. Cases Involving Individuals Who Have Frequent Contact with Minors Additionally, once an employee is hired, it is important for an employer to promptly investigate and respond to any allegations of inappropriate conduct by an employee toward their fellow employees, customers, or clients. This is especially true in the case of schoolteachers, or any other individuals who have frequent contact with minors. Two cases in Minnesota involving illicit sexual contact between a teacher and a minor student illustrate this point. In the first case, Jane Doe 175 v. Columbia Heights Sch. Dist. , 38 the parents of a ninth-grade female student who was allegedly sexually abused by a football coach brought a lawsuit on the student’s behalf against the school district, alleging negligence and negligent supervision. The Minnesota Court of Appeals affirmed the lower court’s grant of summary judgment in favor of the school district. In so doing, the court noted that there was insufficient evidence that the school district was on notice of the football coach’s behavior toward the student, such that the alleged abuse of the student was reasonably foreseeable. The court noted that for purposes of a negligence claim, “there is no general duty to protect another from harm, but a duty to protect arises if there is a special relationship between the parties and the risk is foreseeable.” 39 In determining whether the danger is foreseeable, “‘courts look at whether the specific danger was objectively reasonable to expect, not simply whether it was within the realm of any conceivable possibility.’” 40 While the plaintiff in Jane Doe 175 noted that there were “red flags” that should have put the school district on notice of the coach’s behavior, the court found that the incidents cited by the plaintiff, including (1) one instance where she yelled “I love you” to the coach during a football practice, (2) one instance where she and the coach were seen talking in the school parking lot, (3) one instance where she used an office computer in the team’s weight room office, and (4) one instance where the coach was accompanied by a young girl in the weight room on a Saturday, were insufficient to raise a genuine issue as to whether the alleged sexual abuse was foreseeable. 41 Significantly, the school had a policy in its employee handbook that explicitly stated that dating and sexual relationships between teachers and students were prohibited and directed employees to employ safeguards against any such improper relationships. 42 In a later case, the U.S. District Court for the District of Minnesota distinguished the holding in Jane Doe 175 , finding that summary judgment for a boarding school was inappropriate where three students alleged sexual abuse by a former teacher, bringing claims against the school for negligence, negligent supervision, and negligent retention. 43 In Doe YZ , unlike in Jane Doe 145 , the court found that several high-level employees at the school “received specific reports concerning [the former teacher’s] inappropriate sexual contact with students, many of which occurred prior to the abuse of these Plaintiffs.” 44 The inappropriate behavior that had previously been reported included the teacher’s holding naked dance parties, patting students’ buttocks, and having explicit sexual discussions with students. The court found that these behaviors “are objectively reasonable indicators of a potentially inappropriate relationship with students.” 45 Thus, based on these two cases, it is apparent that whether an employer will be held liable for negligence based on an employee’s misconduct toward third parties depends on whether there were red flags that should have put the employer on notice of the inappropriate behavior. Unlike the behavior in Doe YZ , the football coach’s behavior in Jane Doe 175 would not have led a reasonable person to believe that there could be inappropriate sexual contact happening between the coach and a female student. Employers should have policies in place that require the immediate reporting of any inappropriate behavior by employees in the workplace, especially in the area of sexual misconduct, so that they can promptly investigate such incidents and take appropriate remedial measures. Liability of Employers that Perform Background Checks While the employer has a duty to investigate potential hires thoroughly, it may face liability for digging too deep in certain areas. There are many steps an employer may take to check into an applicant’s background. Depending on the nature of the position in question, you should advise an employer to take some or all of the following steps for conducting appropriate background investigations. As discussed below, if the employer uses a third party to conduct some or all of these types of background investigations, the Fair Credit Reporting Act (FCRA), which covers a wide range of background checks in addition to credit checks, may apply. Criminal Conviction Record You should advise employers that the rules for using arrest history and actual convictions to screen job applicants are different. An employer may consider an applicant’s criminal conviction record in its hiring decision provided it is job-related and consistent with business necessity. With regard to convictions, the federal Equal Employment Opportunity Commission (EEOC) emphasizes in its Enforcement Guidance on Consideration of Arrest and Conviction Records in Employment Decisions under Title VII of the Civil Rights Act of 1964 (No. 915.002, Apr. 25, 2012) that employers must consider (1) the nature of the crime, (2) the time elapsed since the conviction, and (3) the nature of the job. The EEOC’s Guidance further suggests that employers should conduct an “individualized assessment” of each applicant to determine if the policy as applied is job-related and consistent with business necessity. It states that “individualized assessment” generally means that an employer informs the individual that he or she may be excluded because of past criminal conduct; provides an opportunity to the individual to demonstrate that the exclusion does not properly apply to him or her; and considers whether the individual’s additional information shows that the policy as applied is not job-related and consistent with business necessity. The individual’s showing may include information that he or she was not correctly identified in the criminal record, or that the record is otherwise inaccurate. 46 In Texas v. EEOC , 47 a lawsuit that the EEOC originally brought challenging the state’s ban on hiring felons in certain state agencies, the state questioned the EEOC’s authority to issue its 2012 Enforcement Guidance on Consideration of Arrest and Conviction Records. The U.S. Court of Appeals for the Fifth Circuit agreed with Texas that the Guidance was a substantive rulemaking that is subject to legally required notice and opportunity for public comment under the Administrative Procedures Act, with which the EEOC had not complied. 48 The Fifth Circuit barred the EEOC from enforcing its Guidance against Texas. 49 While this ruling prohibits the EEOC from enforcing its guidance against the State of Texas, it does not impact the analysis above about the need for employers to make an individualized assessment regarding the use of criminal conviction records in hiring decisions. Unless and until other courts take the same position as the Fifth Circuit, employers would be wise to continue observing the EEOC’s Guidance, especially because the principles embodied in the Guidance are derived from prior court decisions. Arrest Record In contrast, you should advise employers not to collect or use arrest history to screen job applicants. The EEOC has expressed concern regarding the potentially discriminatory impact of criminal background checks on certain minority populations. It asserts in its Guidance that it is never appropriate for employers to use arrest records to screen applicants because doing so may have a disparate impact on African Americans and other minorities. 50 An employer may require a job applicant to sign a release allowing the employer to access the applicant’s criminal record information for purposes of determining the applicant’s fitness for employment. Note, however, that some state and local laws prohibit an employer from conducting a criminal background check until the end of the first employment interview or even until after the employer makes a conditional offer of employment. Consult the laws in your jurisdiction before advising employers on this issue. Driving Record Advise employers to review the driving records of applicants for positions that require employees to use a company vehicle or include a significant amount of driving as a job responsibility. Employers should check these applicants’ driving records before making a job offer, and then periodically throughout employment. When checking an applicant’s driving record, employers should confirm that he or she has a valid driver’s license and review any driving violations, particularly those involving reckless driving and driving under the influence of alcohol. While the Americans with Disabilities Act (ADA) treats alcoholism as a disability, the law does not protect the current use of alcohol or illegal drugs. 51 Thus, employers have successfully defended against ADA claims where the employer took an adverse action against an employee whose license was suspended because of his or her alcohol or drug use. 52 Consumer Reports You should advise employers that the FCRA imposes significant compliance requirements on employers who use consumer reports in making employment-related hiring, promotion, and termination decisions. 53 Failure to follow the FCRA’s requirements could result in liability for civil fines or damages and even criminal prosecution. The FCRA defines the term “consumer report” broadly as any written, oral, or other communication from a consumer reporting agency bearing upon the consumer’s credit worthiness, credit standing, credit capacity, character, reputation, personal characteristics, or mode of living. 54 It includes, among other things, motor vehicle, criminal, medical, and credit history records that an employer uses “in whole or in part” to assess an individual’s qualifications for employment. The FCRA applies only to consumer reports that a consumer reporting agency generates. Generally, the FCRA does not apply to an employer’s activities to conduct its own reference checks by contacting former employers or checking public records or documents. The following guidelines summarize some of the principal requirements the FCRA imposes when an employer uses a consumer report in making employment decisions. Advise an employer that before it obtains a consumer report for the purpose of screening potential employees or using one to make promotion, demotion, or discharge decisions about existing employees, it must first: Have an employment purpose for obtaining the consumer report (that is, the employer intends to use the report to evaluate a consumer for employment, promotion, reassignment, or retention). 55 Give the affected individual written notice of the employer’s intention to obtain a consumer report in a document that consists solely of this notice. 56 Obtain from the affected individual written permission to procure a consumer report on that individual. 57 Certify to the consumer reporting agency that provided the consumer report that the employer has complied with all applicable FCRA provisions. 58 Taking Adverse Action Based on a Consumer Report You should advise an employer that has decided to take an adverse action (such as declining to hire, promote, or retain an employee) based wholly or in part on information in a consumer report that, before taking the action, the employer must provide the affected individual a pre-adverse action disclosure. This disclosure consists of both: A copy of the consumer report the employer relied upon A copy of A Summary of Your Rights Under the Fair Credit Reporting Act (FCRA Summary of Employee Rights) 59 As of September 21, 2018, employers must begin using an updated copy of the summary of rights that includes notice to consumers that they may obtain a security freeze or place a fraud alert on their credit files. 60 After the employer takes the adverse action, you should make sure that it provides written notice to the affected individual of all of the following: That the employer has taken the adverse action (e.g., declined to hire, retain, or promote the individual) The name, address, and phone number—the toll-free number, if there is one—of the consumer reporting agency that provided the consumer report That the consumer reporting agency that provided the report did not take the adverse action and cannot provide the individual with the specific reasons the adverse action was taken That the individual has the right to receive a free copy of the consumer report in question from the consumer reporting agency that provided it to the employer if he or she requests it within 60 days from the date of the notice That the individual has the right to dispute incomplete or inaccurate information in the report with the consumer reporting agency 61 Oral and electronic notice are both acceptable alternatives, but you should encourage the employer to provide written notice instead because it constitutes documentation. Credit Checks Whether an employer may use credit scores to disqualify applicants for employment will depend on state and local law. For instance, Maryland’s Job Applicant Fairness Act prohibits employers from using an applicant’s or employee’s credit report or credit history to deny employment, terminate employment, or make decisions about compensation or other terms of employment, with certain limited exceptions. 62 You must check the laws in your jurisdiction before advising an employer about using credit scores in hiring and other employment-related decisions. You should advise employers in every U.S. jurisdiction that under the FCRA, if an employer relied on a credit score, in whole or in part, to make an adverse employment decision, then the employer must provide the affected individual with written or electronic disclosure of all of the following: The credit score that it used The range of possible credit scores under the credit scoring model used The date that the credit score was created The name of the entity that provided the credit score A list of the key factors, in order of importance, that affected the individual’s credit score 63 Access to Applicants’ Social Media Accounts You must determine whether your jurisdiction has any laws restricting employers’ access to prospective employees’ social media accounts. While it is common for employers to search the Internet for publicly available social media information about prospective employees, many states are now banning employers from requiring job applicants to disclose their social media passwords. For instance, all Maryland employers are prohibited from requiring employees or applicants to turn over passwords needed to access private websites, including social media sites. Specifically, the Internet and Electronic Account Privacy Protection Act bars employers from requiring or even requesting that an applicant or employee divulge his or her “user name, password, or other means for accessing a personal account or service through an electronic communication device.” 64 Several other states, including New Jersey, Illinois, Arkansas, California, Colorado, Louisiana, Michigan, New Mexico, Nevada, Oregon, Utah, and Washington, have enacted similar laws. Thus, while obtaining social media information about prospective employees may be helpful in the screening process, you should caution employers against requiring applicants to disclose social media passwords. Can Failure to Monitor an Employee’s Computer Use Result in Liability for the Employer? At least one court has said yes to this question. In Doe v. XYC Corp., 65 a mother brought a negligence action against her husband’s employer on behalf of her minor daughter, seeking to hold the employer liable for her husband’s use of a work computer to post nude photographs of the daughter to a child pornography site. A New Jersey appellate court found that the employer was on notice (based on its own investigation and reports from other employees) that the employee was viewing child pornography on his work computer, and the employer breached its duty to exercise reasonable care to report and/or take effective action to stop the employee’s unlawful activity. Thus, the employer could be held liable for the husband’s inappropriate use of his work computer. You should advise employers to exercise caution in this area, as the law in most jurisdictions is unsettled. A claim like that in Doe would present a question of first impression in many courts. Employers Must Take Appropriate Action Advise employers that to avoid negligent retention and negligent supervision claims they should promptly investigate and take appropriate action to address an employee’s alleged improper activity as soon as they learn of it. Proactive steps that employers should take include: Providing clear examples in the employee handbook of harassment and other conduct that is inappropriate Implementing a substance abuse policy and testing program Providing a clear and detailed complaint procedure in the handbook that allows employees to bypass their management chains Promptly investigating any reports of workplace harassment, violence, or threats of violence Providing appropriate training to all employees regarding harassment, workplace violence, and the company’s substance abuse policy When an employer has to address any behavior by an employee that could negatively impact coworkers, customers, or other third parties, you can recommend actions including: Disciplining the employee Removing the employee from a position in which he or she could potentially harm other employees or members of the public Increasing supervision of the employee Discharging the employee Advise employers to document the findings of any investigation into alleged employee misconduct and retain a record of the evidence management relied on to support its decision to act or not to act against the employee. Advise employers that to avoid negligent retention and negligent supervision claims they should promptly investigate and take appropriate action to address an employee’s alleged improper activity as soon as they learn of it. Impact of Marijuana Legalization Laws on Negligent Hiring and Retention Claims There has been a wave of legislation throughout the United States legalizing the use of small doses of marijuana or marijuana-derived substances for medicinal or recreational use. While marijuana is still classified as a Schedule I illegal drug under federal law, most states and the District of Columbia have legalized the possession and use of marijuana for medical and/or recreational purposes. This can create a dilemma for employers in maintaining a safe workplace and avoiding liability for negligent hiring or retention. This is especially true in states where the law specifically protects users of medical marijuana from discrimination. For instance, in a Delaware case decided in December 2018, Chance v. Kraft Heinz Foods Co., 66 an employee was operating a shuttle wagon on railroad tracks when the wagon derailed. The employer requested that the employee undergo a drug test, which revealed the presence of marijuana. The employee informed the medical review officer he had a valid medical marijuana card, but the employer terminated the employee nonetheless. The court considered whether the Delaware Medical Marijuana Law (DMMA), which protects medical marijuana users from discrimination, gave an employee the ability to bring a lawsuit even though the DMMA was silent on this point. The court noted that Delaware was one of only nine states whose medical marijuana law expressly prohibits the failure to hire, discipline, or discharge an employee who uses medical marijuana outside of work and tests positive on a drug test. The court concluded that because the DMMA has a specific anti-discrimination provision, the Delaware legislature must have intended to permit the employee to sue under the DMMA. 67 As of March 30, 2021, the number of states with laws specifically protecting medical marijuana users from discrimination has increased to 16. In addition to Delaware, these states include Connecticut, Rhode Island, Arizona, Illinois, Maine, Nevada, New York, Minnesota, Arkansas, New Jersey, New Mexico, Oklahoma, Pennsylvania, South Dakota, and West Virginia. 68 Thus, while employers may still use drug tests to screen out employees who may cause harm to themselves and others through their use of marijuana and other drugs, employers in states where marijuana use has been legalized must be careful not to run afoul of state law in making employment decisions based on a positive drug test. The legalization of marijuana in some states for medicinal and/or recreational purposes has made maintaining a zero-tolerance policy more difficult. In those states that prohibit adverse action against employees who are authorized to use marijuana outside of work and test positive on a drug test, the employer will need additional evidence before taking adverse action against an employee. To maintain a safe workplace, a prudent employer would take adverse action against an employee if it appeared that the employee was indeed impaired on the job by his or her marijuana use. For instance, in Whitmire v. Wal-Mart Stores, Inc., 69 the U.S. District Court for the District of Arizona, interpreting Arizona’s Medical Marijuana Act, held that an employer could not rely on a positive drug screen alone to establish that an employee was impaired by marijuana on the job. In Whitmire , the employee suffered a workplace injury and was subsequently required to submit to a drug test, per standard company policy. At the time she took the drug test, the employee informed the drug clinic that she used medical marijuana. She subsequently provided a copy of her medical marijuana card to her employer. After the drug test came back positive for marijuana, the company suspended and ultimately terminated the employee. The employer’s personnel coordinator stated that the company terminated the employee because the coordinator believed that the positive drug test demonstrated that the employee was impaired on the job. The court concluded, however, that the employer had the burden of establishing that the level of metabolites present in the employee’s drug screen demonstrates that marijuana was present in her system “in a sufficient concentration to cause impairment.” 70 The court found that the employer could not meet that burden because the personnel coordinator was admittedly not qualified to opine as to whether the positive drug test result meant that the employee was actually impaired while on the job. The court ruled that the employer would have had to present expert testimony regarding the significance of the drug test results and the personnel coordinator was not an expert witness. This ruling means that the employer could not simply rely on a positive test result to demonstrate that the employee was impaired at work. Notably absent from the evidence in this case was any testimony that demonstrated that the employee showed observable symptoms of being drug-impaired while at work. The employer in Whitmire simply attempted to rely on the personnel coordinator’s opinion as to impairment based on the drug test result itself, which the court held was insufficient absent expert testimony that would establish that the employee was impaired based on the test result. Interestingly, at this time, there does not appear to be any test developed that would definitively show impairment, rather than just the presence of marijuana in the system. In fact, according to the National Drug & Alcohol Screening Association, “[l]eading toxicologists worldwide generally agree that impairment testing for marijuana could potentially be decades away.” 71 In addition, “[u]nlike blood-alcohol tests, which quantify the amount of alcohol present and translate it with scientific precision into predicted levels of impairment and risk, no such test exists for marijuana impairment.” 72 Thus, employers in states that protect medical marijuana users from discrimination need to walk a fine line in attempting to navigate this legal landscape. Drug testing remains an important tool in maintaining a safe work environment and avoiding negligent hiring or retention lawsuits. However, legal protections for employees and applicants who use medical marijuana create potential liability for employers who attempt to rely solely on a positive drug test in making a termination decision. Darryl G. McCallum is a partner at Shawe & Rosenthal LLP. He concentrates his practice in employment law matters, including the defense of race, sex, and other discrimination suits; sexual harassment claims; and claims involving wrongful discharge. He routinely advises employers on human resources issues. Immediately prior to joining Shawe & Rosenthal, Mr. McCallum was an associate litigation counsel with the Law and Public Policy Department of MCI in Washington, D.C. While at MCI, he provided advice to management on various employment law issues, and litigated employment matters before federal and state courts and enforcement agencies. After law school, Mr. McCallum served as a judicial clerk for the Honorable Robert N. Wilentz, former Chief Justice of the New Jersey Supreme Court. He then spent six years in the litigation group at Shaw Pittman in Washington, D.C., where he concentrated his practice in employment matters, appearing before courts in Maryland, the District of Columbia, and Virginia. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: BEST PRACTICES FOR PREVENTION AND DEFENSE OF NEGLIGENT HIRING, RETENTION AND SUPERVISION CLAIMS IN PRACTICAL GUIDANCE Related Content For a list of best practices and considerations under the Americans with Disabilities Act for private employers conducting employee drug and alcohol testing, see > DRUG AND ALCOHOL TESTING OF EMPLOYEES CHECKLIST (ADA) For a discussion of key workers’ compensation issues that confront private employers, see > WORKERS' COMPENSATION FOR PRIVATE EMPLOYERS For a reference guide to state and local laws governing employer inquiries into a job applicant’s criminal history during the application and hiring process, see > BAN THE BOX STATE AND LOCAL LAW SURVEY For a presentation to educate employers about the risks that accompany employee social media use and how to manage those risks, see > SOCIAL MEDIA ISSUES FOR EMPLOYERS: TRAINING PRESENTATION For an overview of the requirements that employers need to know in order to comply with the Americans with Disabilities Act, see > AMERICANS WITH DISABILITIES ACT: GUIDANCE FOR EMPLOYERS For a survey that addresses the basic provisions of medical and recreational marijuana laws and the effect they have on private employers and their employees, see > MEDICAL AND RECREATIONAL MARIJUANA STATE LAW SURVEY 1 . See Foster v. Univ. of Md.-Eastern Shore, 787 F.3d 243, 255 (4th Cir. 2015) (prompt investigation of complaint and remedial actions taken in response supported conclusion that employer’s response to harassment was effective and that employer was not negligent). 2. Clehm v. BAE Systems Ordnance Systems, 291 F. Supp. 3d 775, 794-95 (W.D. Va. 2017). 3. Clehm, 291 F. Supp. 3d at 788. 4. Clehm, 291 F. Supp. 3d at 795. 5. Bryant v. Better Bus. Bureau of Greater Md., Inc., 923 F. Supp. 720, 751 (D. Md. 1996); Southeast Apts. Mgt., Inc. v. Jackman, 257 Va. 256, 260–61 (1999) (internal citations omitted). 6. Perry v. Asphalt & Concrete Servs., Inc., 447 Md. 31, 52 (2016). 7. Mills v. Deehr, 2004 Ohio App. LEXIS 2148, at *13 (May 11, 2004). 8. Ingleson v. Burlington Medical Supplies, Inc., 141 F. Supp. 3d 579, 584–86 (E.D. Va. 2015); but see Courtney v. Ross Stores, Inc., 45 Va. Cir. 429, 431 (1998) (refusing to dismiss negligent retention claim where (1) a retail store employer was aware of racist conduct of an employee toward African-Americans and (2) after obtaining this knowledge, the employer permitted the employee to continue in his position working with customers who claimed that the employee subjected them to “verbal abuse stemming from racial animosity”). 9. Anicich v. Home Depot U.S.A., Inc., 852 F.3d 643 (7th Cir. 2017). 10. Anicich , 852 F.3d at 646. 11. Anicich , 852 F.3d at 648 n. 2. 12. Anicich , 852 F.3d at 654. 13. Anicich , 852 F.3d at 654-55. 14. Anicich , 852 F.3d at 655. 15. See Cloaninger v. McDevitt, 555 F.3d 324, 337 (4th Cir. 2009); Harmon v. GZK, Inc., 2002 Ohio App. LEXIS 480, at *41–42 (Feb. 8, 2002) (collecting cases). 16. See, e.g. , Ferris v. Delta Airlines, Inc., 277 F.3d 128, 138 (2d Cir. 2001) (workers’ compensation law bars negligent supervision claim based on sexual assault by coworker). 17. See Wood v. Aetna Cas. and Sur. Co., 273 A.2d 125, 130–31 (Md. 1971) (explaining exclusivity of remedies for tort of negligence). 18. See, e.g. , Peay v. U.S. Silica Co., 437 S.E.2d 64, 65–66 (S.C. 1993) (holding injuries inflicted by employer that acted with deliberate or specific attempt to injure employee exempted from exclusivity provision of South Carolina Workers’ Compensation Act). 19. Johnson v. Mountaire Farms of Delmarva, Inc., 503 A.2d 708, 711–12 (Md. 1986) (holding that workers’ compensation is the exclusive remedy even where the employer’s negligence resulted in employee’s death, where facts alleged did not show that employer had a desire to bring about the consequences of the acts or that the acts were premeditated with the specific intent to injure the employee). 20. Reiber v. Mathew, 271 F. Supp. 3d 968 (N.D. Ind. 2017). 21. Reiber , 271 F. Supp. 3d at 970-71. 22. Reiber , 271 F. Supp. 3d at 976–77. 23. Reiber , 271 F. Supp. 3d at 980. 24. Reiber , 271 F. Supp. 3d at 982. 25. Reiber , 271 F. Supp. 3d at 983. 26. Cramer v. Hous. Opportunities Comm’n of Montgomery Cty., 501 A.2d 35, 38 (Md. 1985) (internal citation omitted). 27. Cramer , 501 A.2d at 40. 28. Denton v. Universal Can-Am, Ltd., 2019 Ill. App. LEXIS 783, at *2, *17–18 (2019). 29. Denton , 2019 Ill. App. LEXIS 783, at *21. 30. Denton , 2019 Ill. App. LEXIS 783, at *29. 31. Pagayon v. Exxon Mobil Corp., 536 S.W.3d 499 (Tex. 2017). 32. Pagayon , 536 S.W.3d at 506. 33. Pagayon , 536 S.W.3d 499. 34. Pagayon , 536 S.W.3d at 507. 35. Ledet v. Mills Van Lines, Inc., 150 N.E.3d 782 (Mass. App. Ct. 2020). 36. Ledet , 150 N.E.3d at 784. 37. Ledet , 150 N.E.3d at 787–88. 38. Jane Doe 175 v. Columbia Heights Sch. Dist., 873 N.W.2d 352 (Minn. Ct. App. 2016). 39. Jane Doe 175, 873 N.W.2d at 359. 40. Jane Doe 175, 873 N.W.2d at 360 (internal citation omitted). 41. Jane Doe 175, 873 N.W.2d 360–61. 42. Jane Doe 175, 873 N.W.2d at 354. 43. See Doe YZ v. Shattuck Saint Mary’s Sch., 214 F. Supp. 3d 763 (D. Minn. 2016). 44. Doe YZ , 214 F. Supp. 3d at 786. 45. Doe YZ , 214 F. Supp. 3d at 788. 46. See Enforcement Guidance on Consideration of Arrest and Conviction Records in Employment Decisions under Title VII of the Civil Rights Act of 1964 (No. 915.002, Apr. 25, 2012). 47. Texas v. EEOC, 933 F.3d 433 (5th Cir. 2019). 48. Texas , 933 F.3d at 451. 49. Texas , 933 F.3d at 452. 50. See Metro. Dade Cty. v. Martino, 710 So. 2d 20, 21 (Fla. 3d DCA 1998) (holding employer could not be held liable for negligent hiring and/or supervision for not inquiring into arrest record of employee who committed armed robbery while on the job, because employer could not legally obtain from employee information about arrests not resulting in convictions). 51. 42 U.S.C.S. § 12114(a). 52. See Budde v. Kane Cty. Forest Pres., 597 F.3d 860, 863 (7th Cir. 2010) (rejecting a plaintiff’s ADA claim alleging discrimination based on his alcoholism and a drunk-driving incident in part because the plaintiff’s “inability to operate a vehicle [due to a suspended license] is not the result of his disability; it is a consequence of choosing to drive his car after consuming four or five glasses of wine”). 53. 15 U.S.C.S. § 1681 et seq. 54. See 15 U.S.C.S. § 1681a(d). 55. See 15 U.S.C.S. § 1681b(b)(2)(A)(i). 56. See 15 U.S.C.S. § 1681b(b)(2)(A)(i). 57. See 15 U.S.C.S. § 1681b(b)(2)(A)(ii). (Federal Trade Commission opinion letters indicate that an employer may combine the written notice and permission described in the above paragraphs on a single form, but nothing else may be included on this form. See, e.g., FTC Advisory Opinion to Hauxwell (June 12, 1998).) 58. See 15 U.S.C.S. § 1681b(b)(1); 15 U.S.C.S. § 1681d(d)(1). 59. 15 U.S.C.S. § 1681b(b)(3)(A). 60. See A Summary of Your Rights Under the Fair Credit Reporting Act (FCRA Summary of Employee Rights). 61. See A Summary of Your Rights Under the Fair Credit Reporting Act (FCRA Summary of Employee Rights)). 15 U.S.C.S. § 1681m(a). 62. Md. Code Ann., Lab. & Empl. § 3-711. 63. 15 U.S.C.S. § 1681g(f)(1)(A)-(E). 64. See Md. Code Ann., Lab. & Empl. § 3-712. 65. Doe v. XYC Corp., 887 A.2d 1156 (N.J. App. Div. 2005). 66. Chance v. Kraft Heinz Foods Co., 2018 Del. Super. LEXIS 1773, at *3 (Dec. 17, 2018). 67. Chance, 2018 Del. Super. LEXIS 1773, at *17–18. 68. See A.R.S. § 36-2813; Conn. Gen. Stat. § 21a-408p(b); Del. Code Ann. tit. 16, § 4905A; 410 Ill. Comp. Stat. 130/40; Me. Rev. Stat. tit. 22, § 2423-E; Minn. Stat. § 152.32; Nev. Rev. Stat. § 453A.800; 35 Pa. Stat. Ann. § 10231.2103; R.I. Gen. Laws § 21-28.6-4; AR Const. Amend. 98, § 23; N.J. Stat. § 24:6I-2et seq.; N.M. Stat. Ann. §26-2B-9; 63 Okla. Stat. §427.8; 35 P.S. §  10231.2103; S.D. Initiated Measure 26; W.V. Code §16-A-15-4. 69. Whitmire v. Wal-Mart Stores, Inc., 359 F. Supp. 3d 761 (D. Ariz. 2019). 70. Whitmire , 359 F. Supp. 3d at 789. 71. National Drug & Alcohol Screening Association, Marijuana & Workplace Policies. 72. Brinson v. Hosp. Housekeeping Servs., LLC, 263 So. 3d 106, 114 (Fla. App. 2018) (Makar, J., dissenting).Labor & EmploymentPractice TipsSummer 2021https://www.lexisnexis.com/authorcenter/the-journal/m/lpa-image/35Fri, 11 Jun 2021 15:37:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:6424c13c-1f84-4454-902f-28ecb0916529Alainna NicholsSummer 2021https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/u-s-supreme-court-securities-litigation-decisionsFri, 11 Jun 2021 11:59:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:124f7f3a-68b7-46fe-b52e-95eeb5fa3ad1sheikaBy: Susan L. Saltzstein, Mollie Kornreich, and Kyle J. Schwartz Skadden, Arps, Slate, Meagher & Flom LLP This article highlights a selection of U.S. Supreme Court decisions that touch on key aspects of the securities laws, including (1) liability for statements of opinion and belief; (2) the scope of liability under the Securities Exchange Act of 1934, as amended (Exchange Act); (3) disgorgement in Securities and Exchange Commission (SEC) enforcement actions; (4) issues relating to the Securities Litigation Uniform Standards Act of 1998; (5) limitation periods; and (6) the scope of liability under the Securities Act of 1933, as amended (Securities Act). THE U.S. SUPREME COURT HAS SHAPED THE CONTOURS of litigation under the Securities Act and the Exchange Act and has been particularly attentive to issues arising under these statutes in recent years. This article discusses critical decisions on issues such as materiality, scienter, loss causation, reliance, extraterritoriality, and insider trading. Liability for Statements of Opinion and Belief The Supreme Court addressed what may constitute a false or misleading opinion for purposes of liability under Section 11 of the Securities Act in Omnicare, Inc. v. Laborers Distr. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015). Section 11 provides investors with a private right of action for false statements of material fact in a registration statement, or omission of a material fact necessary to render material in the registration statement not misleading. 1 At issue in Omnicare were two sentences in the issuer’s registration statement—each of which began, “We believe”— that expressed the company’s view of its compliance with legal requirements. 2 The Court, in an opinion by Justice Elena Kagan, declined to hold that an incorrect statement of opinion was necessarily false for purposes of Section 11 liability. Liability, however, may arise “if the speaker did not hold the belief she professed” or if the statement contained “embedded statements of fact” that were untrue. 3 The Court also explained that a reasonable investor may, under certain circumstances, “understand an opinion statement to convey facts about how the speaker has formed the opinion,” and if contrary real facts are omitted, the opinion could be misleading. 4 An opinion, however, is not necessarily misleading when an issuer does not disclose “some fact cutting the other way” because reasonable investors “understand that opinions sometimes rest on a weighing of competing facts.” 5 An investor must identify particular and material facts underlying the opinion, the omission of which renders the opinion “misleading to a reasonable person reading the statement fairly and in context.” 6 That, the Court recognized, “is no small task for an investor.” 7 Remanding the case for consideration under the misleadingby-omission standard, the Court emphasized that the lower court should address whether the alleged omission would have been material to a reasonable investor, and whether it rendered Omnicare’s stated opinions misleading because the company “lacked the basis for making those statements that a reasonable investor would expect.” 8 This analysis had to consider the opinion statements’ context. Because the statements at issue involved the company’s view of its compliance with legal requirements, the Court directed the lower court to “take account of whatever facts [the company] did provide about legal compliance, as well as any other hedges, disclaimers, or qualifications it included in its registration statement.” 9 In the years since Omnicare was decided, courts have applied its standard to allegedly misleading statements or omissions outside the Section 11 context. The Second and Ninth Circuits, for example, have applied the Omnicare standard in cases involving Section 10(b) of the Exchange Act. 10 Scope of Liability under the Exchange Act Who May Be Liable for a Misstatement or Omission Over the past few decades, the Court’s jurisprudence has significantly evolved on the issue of who private plaintiffs may hold liable for a material misstatement or omission under Section 10(b) of the Exchange Act. 11 Two key decisions in this area—Cent. Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), and Stoneridge Inv. Partners, LLC v. ScientificAtlanta, Inc., 552 U.S. 148 (2008)—concern aiding and abetting claims. In Central Bank, the Court held that there is no private right of action for aiding and abetting under Section 10(b). 12 The Central Bank decision caused some, including then-SEC Chair Arthur Levitt, to lobby Congress to create an express cause of action for aiding and abetting in the Exchange Act. 13 Congress did not do so; instead, in the Private Securities Litigation Reform Act of 1995 (PSLRA), it directed the SEC to prosecute aiders and abettors. 14 Accordingly, in Stoneridge , the Court reaffirmed its Central Bank holding that liability under Section 10(b) “does not extend to aiders and abettors.” 15 The Court reiterated that, to be actionable, “[t]he conduct of a secondary actor must satisfy each of the elements or preconditions for liability.” 16 The Court built upon its decisions in Central Bank and Stoneridge in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), where it rejected plaintiff’s attempt to impose Section 10(b) liability upon registrants’ advisors and service providers. The Court held that “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” 17 “Without control,” the Court explained, “a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.” 18 The Court analogized to the relationship between a speechwriter and a speaker, noting that the speaker, not the speechwriter, is the one who takes the credit or blame for what is ultimately said. 19 Eight years after the Court’s decision in Janus , which reaffirmed the somewhat narrow scope of liability under Section 10(b) and Rule 10b-5 first set out in Central Bank and Stoneridge , the Court arguably took a step in the opposite direction in Lorenzo v. SEC, 139 S. Ct. 1094 (2019). Rule 10b-5 makes it unlawful: “(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact . . . or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit . . . in connection with the purchase or sale of any security.” 20 In Lorenzo , the Court held, in an opinion authored by Justice Stephen Breyer, that a person who did not “make” a false statement under Rule 10b-5(b) may still be liable under Rule 10b-5(a) or (c) for “disseminat[ing] false or misleading statements to potential investors with the intent to defraud.” 21 Plaintiffs may now argue that Lorenzo expands potential liability under Rule 10b-5(a) and (c) for a defendant who disseminates purported misstatements by third parties. Justice Clarence Thomas—who authored the Court’s opinion in Janus—penned a vigorous dissent, contending that the majority’s opinion in Lorenzo rendered Janus “a dead letter.” 22 Justice Breyer—who dissented in Janus—rejected this argument, maintaining that “Janus would remain relevant (and preclude liability) where an individual neither makes nor disseminates false information—provided, of course, that the individual is not involved in some other form of fraud.” 23 Materiality In TSC Indus. v. Northway, 426 U.S. 438 (1976), which involved claims under Section 14(a) of the Exchange Act 24 for an allegedly incomplete and materially misleading proxy statement, the Court defined materiality by stating that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” 25 The Court later, in Basic Inc. v. Levinson, 485 U.S. 224 (1988), expressly adopted this definition of materiality for Section 10(b) and Rule 10b-5 as well. 26 Decades later, the Court referenced this definition again in Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011), when considering whether reports of adverse drug reactions were material and whether a drug company’s failure to disclose them was actionable under the Exchange Act. Defendants argued that the complaint was deficient because it did not “allege that Matrixx knew of a statistically significant number of adverse events requiring disclosure.” 27 The Court declined to draw a bright-line rule for materiality in this context, holding that plaintiffs had “alleged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material.” 28 The Court considered the interplay between the materiality requirement and Rule 23’s prerequisites for class certification in Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Specifically, the Court considered “whether district courts must require plaintiffs to prove, and must allow defendants to present evidence rebutting, the element of materiality before certifying a class action under § 10(b) and Rule 10b-5.” 29 The focus of the Court’s inquiry was Rule 23(b) (3)’s requirement that “questions of law or fact common to class members predominate over any questions affecting only individual members.” 30 The Court held that “proof of materiality is not required to establish that a proposed class is ‘sufficiently cohesive to warrant adjudication by representation’—the focus of the predominance inquiry under Rule 23(b)(3).” 31 Responding to policy arguments that the Court’s decision would unduly pressure defendants to settle rather than incur the costs of defending a class action, the Court noted that Congress sought to address so-called in terrorem settlements in the PSLRA but chose not to “decree that securities-fraud plaintiffs prove each element of their claim before obtaining class certification.” 32 Scienter The Supreme Court has long held that liability under Section 10(b) of the Exchange Act (and Rule 10b-5) requires a plaintiff to prove that the defendant acted with scienter, not mere negligence. 33 The SEC must also establish scienter as an element of a civil enforcement action to enjoin violations of Section 10(b) of the Exchange Act and Rule 10b 5. 34 The Court elaborated on the standard for pleading scienter in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), which followed enactment of the PSLRA. “Exacting pleading requirements [were] among the control measures Congress included in the PSLRA,” which was designed to curb “abusive litigation by private parties.” 35 But although the PSLRA requires plaintiffs to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,” 36 Congress “left the key term ‘strong inference’ undefined, and Courts of Appeals [were] divided on its meaning.” 37 The Supreme Court held in Tellabs that “an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” 38 This standard requires district courts to “take into account plausible opposing inferences” and consider how likely it is “that one conclusion, as compared to others, follows from the underlying facts.” 39 The inquiry is “inherently comparative” and “cannot be decided in a vacuum.” 40 The Court cautioned that “[a] complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” 41 Tellabs therefore clarified that the PSLRA heightens plaintiffs’ pleading burden by requiring them to allege in their complaints particular facts sufficient to establish a cogent inference of scienter. When a complaint’s allegations insufficiently plead a defendant’s intent, the defendant may have a strong motion to dismiss. “In Connection with” a Purchase or Sale Section 10(b) may give rise to liability for misconduct “in connection with the purchase or sale of any security.” In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the Supreme Court held that only actual purchasers or sellers of securities could maintain a private action under Section 10(b) and Rule 10b-5—not, for example, potential purchasers of shares who decided not to invest because of a misrepresentation or omission. The Court relied, in part, on various “policy considerations” in reaching its decision, including potential problems that could arise if investors who neither bought nor sold could claim that they would have traded absent the alleged fraud. The Court later examined the scope of the “in connection with” requirement in SEC v. Zandford, 535 U.S. 813 (2002). The Court held that a complaint alleging that a stockbroker “[sold] his customer’s securities and us[ed] the proceeds for his own benefit without the customer’s knowledge or consent” sufficiently alleged conduct “in connection with the purchase or sale of any security” within the meaning of Section 10(b). 42 The Court explained that although not every fraud involving securities constitutes a Section 10(b) violation, a “scheme in which the securities transactions and breaches of fiduciary duty coincide” may give rise to liability under the statute. 43 Reliance In Basic Inc. v. Levinson, the Supreme Court held that a plaintiff could satisfy Section 10(b)’s reliance requirement through a rebuttable presumption that a company’s stock price in an efficient market reflects all material public information, and any investor trading in that market presumptively relies on any material misstatements in that information. Reliance based on this “fraud-on-the-market” theory may only be presumed where a plaintiff demonstrates all of the following: The defendant made public, material misrepresentations. The shares were traded on an efficient market. The plaintiff traded after the misrepresentations were made but before the truth was revealed. 44 Nevertheless, Basic provided plaintiffs with an invaluable mechanism for satisfying Section 10(b)’s reliance requirement, particularly as it could be applied on a classwide basis Decades later, in 2014, the Supreme Court addressed the continued applicability and scope of this presumption in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) ( Halliburton II) . Though it declined to modify the presumption, the Court emphasized that, “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.” 45 And, critically, the Court held that “defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.” 46 Because reliance in the absence of the presumption would need to be proven by investors on an individualized basis, this opportunity provides a useful tool to potentially defeat certification of an investor class. The Supreme Court will have the opportunity to consider Basic’s reach once again in the next term. On August 21, 2020, a petition for a writ of certiorari was filed asking the Court to consider (1) “Whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality,” and (2) “Whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.” Petition for a Writ of Certiorari at I, Ark. Teacher Ret. Sys., No. 20-222 (U.S. Aug. 21, 2020). The Court granted the petition on December 11, 2020. Loss Causation In Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005), the Supreme Court considered what a Section 10(b) plaintiff must plead and prove to establish that a defendant’s misstatements and omissions caused plaintiff’s losses. It held that a disparity between the price plaintiff paid for its shares and the shares’ true value at the time of purchase is insufficient to prove loss causation; an investor does not necessarily suffer loss by purchasing at an inflated rate, the Court reasoned, since upon purchase, the investor possesses a share of equivalent value—and could, for example, sell before the market corrects the price. And a subsequent drop in price may be attributable to changed economic circumstances, changed investor expectations, or a variety of factors. A plaintiff must therefore establish a causal connection between the alleged fraud and the loss. The Court subsequently addressed whether a plaintiff is required to prove loss causation at the class certification stage in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) ( Halliburton I ). The Court reasoned that loss causation “has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory,” and the Court of Appeals therefore erred by requiring plaintiffs to establish loss causation as a condition of class certification on that ground. 47 Extraterritoriality Prior to 2010, lower courts’ application of Section 10(b) to extraterritorial cases was often inconsistent. The Supreme Court took up the issue in Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), in which Australian purchasers of stock in the National Bank of Australia—which is traded on the Australian stock exchange—sought to bring Section 10(b) claims in the United States based on misconduct that allegedly occurred in Florida. The Court held that the plaintiffs failed to state a claim because Section 10(b) only applies to securities listed on U.S. exchanges, or transactions that occur within the United States. 48 The Court’s decision in Morrison sharply curtailed plaintiffs’ ability to sue foreign issuers in the United States for losses incurred on transactions in foreign securities. Insider Trading In its landmark insider trading decision Chiarella v. United States, 445 U.S. 222 (1980), the Supreme Court laid out what it has since referred to as a traditional or classical theory of insider trading liability. Under this theory, Section 10(b) and Rule 10b-5 are violated “when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.” 49 “Trading on such information qualifies as a ‘deceptive device’ under § 10(b) . . . because ‘a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation.’” 50 Further developing its insider trading jurisprudence, the Court addressed liability under Section 10(b) for those who receive “tips” of misappropriated, inside information in Dirks v. SEC, 463 U.S. 646 (1983). The Court held that “a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.” 51 Whether the insider’s disclosure is a breach of duty depends largely on whether the disclosure is for personal advantage. The test is whether the insider personally benefits from the tip, either directly or indirectly. “Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.” 52 Subsequently, in United States v. O’Hagan , the Court held that Section 10(b) alternately allows the government to establish insider trading liability through a so-called “misappropriation theory.” Under this standard, “a person commits fraud ‘in connection with’ a securities transaction . . . when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” 53 The Court revisited the requirement that a tipper must personally benefit from making a tip for the conduct to fall within the scope of Section 10(b) and Rule 10b-5 in Salman v. United States, 137 S. Ct. 420 (2016). The defendant in Salman “received lucrative trading tips from an extended family member, who had received the information from [the defendant’s] brother-in-law.” 54 The Court held that “Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative.’” 55 Citing Dirks , the Court explained that “when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift . . . In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” 56 The aforementioned cases concern insider trading under Section 10(b) of the Exchange Act, codified at Title 15 of the U.S. Code. In a recent Second Circuit case, United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), the government sought to prosecute insider trading under Section 1348 of Title 18, which “was added to the criminal code by the SarbanesOxley Act of 2002 in large part to overcome the ‘technical legal requirements’ of the Title 15 fraud provisions.” 57 The Second Circuit held in Blaszczak that the personal-benefit test announced in Dirks “does not apply to the wire fraud and Title 18 securities fraud statutes,” potentially expanding the scope of criminal liability to insider trading cases where there is no evidence of direct or indirect personal benefit to the tipper. 58 On September 4, 2020, a petition for a writ of certiorari was filed asking the Supreme Court to consider, among other things, “Whether [the] Court’s holding in Dirks v. SEC, requiring proof of ‘personal benefit’ to establish insider-trading fraud, applies to Title 18 statutes that proscribe fraud in language virtually identical to the Title 15 anti-fraud provisions at issue in Dirks .” Petition for a Writ of Certiorari at i, Olan v. United States, No. 20-306 (U.S. Sept. 4, 2020). Disgorgement in SEC Enforcement Actions The Supreme Court has also recently addressed the remedies available in SEC enforcement actions. In a highly anticipated decision, Liu v. SEC, 140 S. Ct. 1936 (2020), the Court rejected the argument that the SEC lacked authority to seek disgorgement in a civil action. It held, however, that because such disgorgement is an equitable remedy rather than a punitive sanction, it is limited to net profits after legitimate business expenses are deducted. 59 The Court declined to reach the additional argument that the disgorgement award at issue was improper because, among other things, it failed to return funds to the victims, leaving that to the analysis on remand. 60 SLUSA The Securities Litigation Uniform Standards Act of 1998 (SLUSA) has raised a variety of issues that have percolated up to the Supreme Court. SLUSA precludes certain state law class actions involving “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” 61 SLUSA defines “covered security” to include only securities traded on a national exchange or issued by investment companies. 62 In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006), the Court held that SLUSA precludes covered state law claims where the alleged fraud dissuades a potential buyer from purchasing a security or prevents an investor from selling. The Court reasoned that “[t]he requisite showing . . . is deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller.” 63 In reaching its decision, the Court noted that a narrow reading of SLUSA would be contrary to its purpose, which was to prevent certain state securities class actions from frustrating the objectives of various restrictions imposed on federal securities class actions. 64 Class actions brought by holders (as opposed to purchasers or sellers) “pose a special risk of vexatious litigation,” and it would be “odd” if SLUSA did not preempt “that particularly troublesome subset of class actions.” 65 The Court subsequently considered whether SLUSA precludes state law class actions involving uncovered securities (e.g., certificates of deposit that are not traded on any national exchange) that were falsely represented as being backed by covered securities in Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (2014). The Court held that SLUSA does not apply in such circumstances, explaining that “[a] fraudulent misrepresentation or omission is not made ‘in connection with’ such a ‘purchase or sale of a covered security’ unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.’” 66 Because the plaintiffs did not “allege that the defendants’ misrepresentations led anyone to buy or to sell (or to maintain positions in) covered securities,” SLUSA did not apply. 67 In Cyan, Inc. v. Beaver Cty. Emples. Ret. Fund, 138 S. Ct. 1061 (2018), the Court held that SLUSA does not preclude state courts from hearing Securities Act claims because, “[b] y its terms,” SLUSA “does nothing to deprive state courts of their jurisdiction to decide class actions brought under the [Securities] Act.” 68 In the wake of Cyan , plaintiffs seeking to represent nationwide classes in Securities Act cases often file competing complaints in state and federal courts throughout the country. Defendants are grappling with the procedural challenges posed by this new landscape, which renders it more difficult to consolidate claims arising out of the same alleged conduct in a single forum. Limitations Periods The Supreme Court has also addressed certain statute of limitations issues that arise in securities cases. In Merck & Co. v. Reynolds, 559 U.S. 633 (2010), the Court addressed potential tolling of Section 10(b) claims and held that “the limitations period does not begin to run until the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered ‘the facts constituting the violation,’ including scienter—irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.” 69 In addition, in Credit Suisse Sec. (USA) LLC v. Simmonds, 566 U.S. 221 (2012), the Court addressed the two-year limitations period to bring suit under Section 16(b) of the Exchange Act, which imposes reporting requirements and trading restrictions on corporate insiders. 70 The Court rejected the argument that the limitations period is tolled until the insider files the requisite public report; instead, the “2-year clock starts from ‘the date [the] profit was realized.’” 71 But the Court was divided four to four (Chief Justice John Roberts took no part in the consideration or decision of the case) as to whether Section 16(b) establishes a period of repose that is not subject to equitable tolling. 72 The justices agreed, however, that even assuming the statute of limitations were subject to equitable tolling, such tolling would not continue beyond the time when a plaintiff becomes aware, or should have become aware, of facts underlying the disgorgement claim. 73 Scope of Liability under Section 12 of the Securities Act The Supreme Court has also clarified who may be liable for claims under Section 12 of the Securities Act 74 . In Pinter v. Dahl, 486 U.S. 622 (1988), the Court held that Section 12(a)(1), which imposes liability on anyone who offers or sells a security in violation of the registration requirements in Section 5 of the Securities Act, extends to the owner who passes title and to anyone who successfully solicits a purchase “motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” 75 As a result of this decision, Section 12(a)(1) liability may extend to underwriters, broker-dealers, selling agents, and others, even if they never had title to the security. Subsequently, in Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the Court limited the scope of Section 12(a)(2) of the Securities Act, which creates liability when someone offers or sells a security “by means of a prospectus or oral communication” containing a material misstatement or omission. 76 In Gustafson , the Court held that the word “prospectus” as used in this provision “is a term of art referring to a document that describes a public offering of securities by an issuer or controlling shareholder.” 77 Accordingly, private contracts of sale—not held out to the public—are not covered. 78 Susan L. Saltzstein, a partner in Skadden’s New York office, is codeputy of Skadden’s nationwide Securities Litigation Group. Her sophisticated litigation practice focuses on the representation of U.S. and global financial institutions, corporations and individual clients embroiled in complex securities, and corporate and commercial litigation in federal and state courts. Her experience extends to class and derivative actions, investigations, and corporate control contests. Bet-the-company litigation is one of the mainstays of her renowned practice. Mollie Kornreich, an associate in Skadden’s New York office, represents clients in complex commercial disputes at the trial and appellate levels and advises on related issues. She has represented plaintiffs and defendants across industries in a wide range of matters involving securities, breach of contract, False Claims Act, antitrust, intellectual property, and a variety of other claims. Kyle J. Schwartz is a Complex Litigation and Trials associate in Skadden’s New York office. He is licensed to practice in New York and the District of Columbia. Previously, he served as a law clerk to the Hon. Thomas P. Griesa of the U.S. District Court for the Southern District of New York. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: U.S. SUPREME COURT SECURITIES LITIGATION DECISIONS IN PRACTICAL GUIDANCE. Related Content For an overview of the liability provisions under the Securities Act of 1933 and the Securities Exchange Act of 1934, see > SECURITIES ACT AND EXCHANGE ACT LIABILITY PROVISIONS For a discussion on the key provisions of the Private Securities Litigation Reform Act of 1995, see > SECURITIES LITIGATION UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT (PSLRA) For an analysis of materiality in a claim for securities fraud, see > MATERIALITY IN SECURITIES FRAUD ACTIONS For guidance on which factors to consider in determining whether information is material under federal securities laws, see > MATERIALITY DETERMINATION FOR DISCLOSURE CHECKLIST For an examination of insider trading, see > INSIDER TRADING CLAIMS: DEFENSES For information on defending against scienter-based claims insecurities fraud actions, see > SCIENTER DEFENSES IN SECURITIES FRAUD ACTIONS 1 . See 15 U.S.C. S.§ 77k(a). 2. Omnicare, Inc ., 575 U.S. at 179–80. 3. Omnicare, Inc. , 575 U.S. at 185–86. 4. Omnicare, Inc. , 575 U.S. at 188. 5. Omnicare, Inc ., 575 U.S. at 189–90. 6. Omnicare, Inc. , 575 U.S. at 194. 7. Id . 8. Omnicare, Inc. , 575 U.S. at 196. 9. Id. 10. See, e.g. , Abramson v. Newlink Genetics Corp., 965 F.3d 165, 175 (2d Cir. 2020); Shreiber v. Synacor, Inc., 2020 U.S. App. LEXIS 33535 (2d Cir. Oct. 22, 2020); Fogel v. Vega, 759 F. App’x 18, 24 (2d Cir. 2018); and City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 610 (9th Cir. 2017). 11. 15 U.S.C.S. § 78j(b). 12. See Cent. Bank, N.A., 511 U.S. at 191 (“Because the text of § 10(b) does not prohibit aiding and abetting, we hold that a private plaintiff may not maintain an aiding and abetting suit under § 10(b).”). 13. See Stoneridge , 552 U.S. at 158. 14. See id . (citing 15 U.S.C.S. § 78t(e)). 15. Stoneridge , 552 U.S. at 158. 16. Id . 17. Janus Capital Group, Inc. , 564 U.S. at 142. 18. Id . 19. See Janus Capital Group, Inc. , 564 U.S. at 143. 20. 17 C.F.R. § 240.10b-5. 21. Lorenzo , 139 S. Ct. at 1099; see also Lorenzo , 139 S. Ct. at 1100–01. 22. See Lorenzo , 139 S. Ct. at 1110 (Thomas, J., dissenting). 23. Lorenzo , 139 S. Ct. at 1103. 24. 15 U.S.C.S. § 78n. 25. TSC Indus ., 426 U.S. at 449. 26. See Basic , 485 U.S. at 231–32. 27. Matrixx Initiatives, Inc., 563 U.S. at 30. 28. See Matrixx Initiatives, Inc. , 563 U.S. at 30. 29. Amgen Inc. , 568 U.S. at 465. 30. Fed. R. Civ. P. 23(b)(3). 31. Amgen Inc. , 568 U.S. at 469. 32. Amgen Inc. , 568 U.S. at 476. 33. See, e.g. , Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201 (1976). 34. See Aaron v. SEC, 446 U.S. 680, 701–02 (1980). 35. Tellabs , 551 U.S. at 313. 36. 15 U.S.C.S. § 78u-4(b)(2) (emphasis added). 37. Tellabs , 551 U.S. at 314. 38. Id. 39. Tellabs , 551 U.S. at 323. 40. Id. 41. Tellabs , 551 U.S. at 324. 42. SEC , 535 U.S. at 815, 818. 43. SEC , 535 U.S. at 820, 825. 44. See Basic , 485 U.S. at 248 n.27. 45. Halliburton II , 573 U.S. at 269 (quoting Basic, 485 U.S. at 248 ). 46. Halliburton II , 573 U.S. at 284. 47. Halliburton I , 563 U.S. at 813. 48. See Morrison , 561 U.S. at 273 (“Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”). 49. United States v. O’Hagan, 521 U.S. 642, 651–52 (1997). 50. O’Hagan , 521 U.S. at 652 (citing Chiarella , 445 U.S. at 228). 51. Dirks , 463 U.S. at 660. 52. Dirks , 463 U.S. at 662. 53. O’Hagan , 521 U.S. at 652. 54. Salman , 137 S. Ct. at 423–24. 55. Salman , 137 S. Ct. at 427. 56. Salman , 137 S. Ct. at 428. 57. Blaszczak , 947 F.3d at 36. 58. Blaszczak , 947 F.3d at 37. 59. See Liu , 140 S. Ct. at 1949–50. 60. See Liu , 140 S. Ct. at 1947–49. 61. 15 U.S.C.S. § 78bb(f)(1)(A). 62. See Chadbourne & Parke LLP v. Troice, 571 U.S. 377, 380–81 (2014) (citing 15 U.S.C.S. §§ 78bb(f) (5)(E), 77r(b)(1)–(2)). 63. Merrill Lynch , 547 U.S. at 85. 64. See Merrill Lynch , 547 U.S. at 86. 65. Id . 66. Chadbourne & Parke LLP , 571 U.S. at 387. 67. Chadbourne & Parke LLP, 571 U.S. at 381. 68. Cyan , 138 S. Ct. at 1069. 69. Merck & Co. , 559 U.S. at 653. 70. See 15 U.S.C.S. § 78p(a), (b). 71. Simmonds , 566 U.S. at 226 (quoting 15 U.S.C.S.§ 78p(b)). 72 . See Simmonds , 566 U.S. at 229–30. 73. Simmonds , 566 U.S. at 227. 74. 15 U.S.C.S. § 77l. 75. Pinter , 486 U.S. at 647. 76. 15 U.S.C.S. § 77l(a)(2). 77. Gustafson , 513 U.S. at 584. 78. See id .Capital Markets & Corporate GovernanceSummer 2021Litigation Updateshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/subchapter-v-bankruptcy-cases-recent-developmentsFri, 11 Jun 2021 05:47:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:656c4d5f-c7c6-49ce-98d2-d4fb51cd2261sheikaBy: Mark Haut, Practical Guidance This article provides an update on several developments that have occurred since the Small Business Reorganization Act of 2019 (SBRA) became effective on February 19, 2020. The SBRA created a new bankruptcy option under Chapter 11, known as Subchapter V, which allows small business debtors to address their outstanding liabilities in a fast and efficient, modified Chapter 11 proceeding. The goal of the SBRA is to improve the reorganization process for small business Chapter 11 debtors. THE SBRA BECAME EFFECTIVE JUST IN TIME TO ASSIST small business debtors in dealing with the COVID-19 pandemic. Since the SBRA effective date, new legislation has been enacted that temporarily amends Subchapter V. These amendments are intended to address the economic effect of the pandemic. This article provides an overview of Subchapter V and a summary of these legislative changes and the new body of case law interpreting Subchapter V. Subchapter V Overview The SBRA added Subchapter V to Chapter 11 of the Bankruptcy Code. The SBRA does not repeal existing Chapter 11 provisions regarding small business debtors, but instead creates an alternative procedure that small business debtors may elect to use (if eligible). Small business debtors now have the option of filing a Chapter 11 petition and proceeding under Subchapter V. The SBRA’s addition of Subchapter V, among other things, (1) provides for the appointment of a trustee to assist the Subchapter V debtor that remains in possession, (2) requires the debtor to pay its disposable income to unsecured creditors over three to five years, (3) protects secured creditors with the same cramdown protections as in traditional Chapter 11, and (4) allows the debtor to keep its business. CLICK HERE TO READ THE FULL ARTICLE IF YOU ARE A PRACTICAL GUIDANCE SUBSCRIBERFEATURESPECIALBankruptcyPractice NotesSummer 2021https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/the-courts-have-spoken-lessons-of-the-covid-19-force-majeure-casesFri, 11 Jun 2021 02:58:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:c71283d2-8fd0-4630-9d2d-2579c7d1b27fsheikaBy: Timothy Murray, Murray, Hogue and Lannis The majestic New York State Supreme Court Building in Lower Manhattan has stood in regal watch over the tumult of the past century, a silent witness to every shade of humanity—from the disgraced movie mogul Harvey Weinstein, who was convicted there in 2020, to the revered jurist Benjamin Cardozo, who attended its dedication in 1927. IT HAS BEEN A CRITICAL PLAYER IN COUNTLESS FILMS and television programs featuring characters that, just as in real life, span the spectrum of vice and virtue—from the mobster Barzini, who was shot on its steps in The Godfather, to Santa Claus himself, who stood trial there in the original Miracle on 34th Street. Courtroom 228 was the scene of the trial in the great morality play 12 Angry Men. Lately, the grand old building is the epicenter of one of the greatest sagas in modern commercial jurisprudence, the COVID-19 force majeure cases—an avalanche of disputes over whether contractual performance should be excused due to the pandemic. Except this time, there are no villains or heroes, no morality plays, just tales of hapless folks trying “to negotiate a resolution that is painful but practical to insure that ‘on the other side’ there will be something left.” 1 Up in courtroom 432, Justice Arlene Bluth of the Supreme Court of New York County has become the unwitting face of the COVID-19 force majeure cases. She has handed down a staggering string of well-reasoned COVID force majeure, frustration of purpose, and impossibility decisions involving commercial real estate—always empathizing with tenants unable to pay the rent because of pandemic-spawned market downturns but equally mindful that the landlord has its own obligations. 2 When the parties themselves have not bothered to allocate the risk of a supervening event in their contract, the tenant is asking too much when it expects Justice Bluth to rewrite the contract because business is bad. 3 In one case she cautioned a tenant raising the defense of frustration of purpose: “[I]magine a landlord who enters into a long-term lease, such as the one here, and then realizes a few years into the lease that the market rate for the leased premises far exceeds what the tenant is paying. Would that landlord be permitted to invoke the frustration of purpose doctrine? Of course not.” 4 The same logic must prevail when the tenant suffers the market downturn, she said. Justice Bluth’s empathy evaporates when a party invokes the pandemic as a pretext to avoid its contractual obligations. In one case, she held that COVID-19 was not a valid excuse for failure to make payments under a settlement agreement since the failure predated the pandemic by almost a year. Her words were the judicial equivalent of an icy glare: “This Court can look at a calendar.” 5 When another tenant “use[d] the pandemic as an excuse,” she said it was “an affront to the actual suffering of the many restaurants and businesses which were no longer able to pay their rent because of the pandemic.” 6 Not all jurists bring such pointed clarity to these issues, but what the courts say in the COVID-19 force majeure cases is important. Courts tell us how to draft, and how to litigate in the COVID-19 force majeure landscape. The attorney who does not care what the courts say is like the pilot who refuses to learn about changes to the aircraft’s flight and navigation instruments—would you ride on that pilot’s plane? For a much fuller discussion of these issues, see Corbin on Contracts: Force Majeure and Impossibility of Performance Resulting from COVID-19 (revised 2021 ed., pending publication at the time this article is being written). In this short article, I highlight some of the most important lessons of the COVID-19 force majeure cases. Promises Generally Are Not Excused for Supervening Events The first thing that every client who wants to declare force majeure due to COVID-19 needs to hear is that being excused of contractual obligations due to a force majeure event is the exception to the rule. That is not a feckless platitude—case after case attests that it is exceedingly difficult to be excused of contractual obligations, even in the worst pandemic in a century. “Generally, once a party to a contract has made a promise, that party must perform or respond in damages for its failure, even when unforeseen circumstances make performance burdensome . . . .” 7 This means that force majeure should not be lightly invoked as a bargaining chip where it may not be applicable. If you declare force majeure on behalf of a client and it turns out that you were wrong, your client likely committed an anticipatory repudiation—a breach of contract that could subject your client to liability for damages and discharge the other party of its contractual obligations. 8 Courts Honor Parties’ Allocation of the Risk of Supervening Events To figure out if parties should be excused of their obligations due to a supervening event such as the pandemic, it is a mistake to start by looking to extra-contractual theories such as impossibility 9 and frustration of purpose. 10 You must start—and usually end—with the contract itself: did the parties somehow allocate the risk of the supervening event in their document? “[P]arties have broad discretion to allocate risks between them in a contract. . . . Only where there has been no contractual allocation of a risk should a court determine the allocation based on common law theories, such as impossibility and frustration of purpose.” 11 Sometimes, The Contract Explicitly Says Whether a Party May Be Excused Some contracts squarely address the force majeure event. When a student sued a study abroad program for switching to online and distance learning classes due to the COVID-19 pandemic, the court dismissed the action because the contract specifically excused defendant of responsibility for loss “occasioned by or resulting from . . . force majeure, acts of government [ . . . ] epidemics or the threat thereof, [and] disease . . . .” Further, plaintiff agreed to “assume all risk of any such problems which could result from . . . perceived or actual epidemics” that could “delay, disrupt, interrupt or cancel programs.” 12 In another case, Phillips, an art auction house, contracted with JN to take a painting on consignment and auction it in May 2020. The contract’s force majeure clause allowed Phillips to terminate for, inter alia, a “natural disaster.” When Phillips terminated the agreement due to the pandemic, JN sued for breach, but the court dismissed the action, explaining: “It cannot be seriously disputed that the COVID-19 pandemic is a natural disaster.” 13 On the other hand, many contracts explicitly refuse to excuse parties of certain obligations due to supervening events. In one commercial lease, both the pandemic and the government shutdowns that followed were construed as force majeure events, but the court refused to excuse the tenant of its rent obligations because the lease also said that force majeure events do not excuse the tenant from paying rent. Since the contract allocated the risks, the court refused to consider the common law theories of impossibility and frustration of purpose. 14 Similarly, a restaurant was not excused of its rent obligations even during a COVID-ordered shutdown since the lease said that tenant’s obligation to pay rent “shall in no wise be . . . excused because Owner is unable to fulfill any of its obligations under this lease . . . by reason of . . . government preemption or restrictions . . . .” 15 The same was true in the cases involving a gym 16 and a funeral home. 17 Sometimes the decisions are difficult to reconcile. In In re CEC Entertainment , 18 CEC, an operator of Chuck E. Cheese venues, filed a motion to abate rent payments for leases affected by COVID-19 government restrictions that curtailed the restaurants’ operations by prohibiting arcade games and limiting patron capacity. In one of those leases, a force majeure provision excused performance that was “prevented or delayed” by “unusual governmental restriction,” but not for “inability to pay any sum of money due hereunder or the failure to perform any other obligation due to the lack of money . . . .” The court held that the tenant was not excused of its obligation to pay rent despite the government restrictions. But in In re Hitz Rest. Grp., 19 a force majeure provision excused a restaurant tenant’s performance that was “prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government.” It also said that “[l]ack of money shall not be grounds for Force Majeure.” Unlike the CEC case, the court held that the force majeure clause was triggered by governor’s order suspending on-premises consumption at restaurants. The court rejected the landlord’s argument that the tenant’s excuse was merely “lack of money” (which would not be an adequate excuse). “Governor Pritzker’s executive order shutting down all ‘on-premises’ consumption of food and beverages in Illinois restaurants is the proximate cause of [tenant’s] inability to generate revenue and pay rent.” Courts Interpret Contracts to Mean What They Say CB Theater sought to be excused of its lease payment obligations during the time that theaters in Florida were under COVID-19 shutdown orders. Article 59 of the lease stated: If either party to this Lease, as the result of any . . . (iv) acts of God, governmental action . . . or (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease), fails punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event. The court held that Article 59 excused CB Theater from operating during the shutdown. Importantly, the parenthetical “other than failure to timely pay monies” did not apply to the excuse regarding “acts of governmental action” since it “is part of romanette (v) - the ‘other conditions’ phrase.” 20 In another case, MS Bank had an account with CBW Bank, and their agreement included this force majeure clause: “If a party is prevented, hindered, or unavoidably delayed from or in performing any of its obligations under this Agreement by an event beyond its reasonable control, such as compliance with a law or governmental order . . . , that party shall not be obliged to perform its obligations . . . .” The agreement also allowed CBW to terminate the agreement on 30 days’ notice, which is what CBW did. MS sought to enjoin termination, arguing that the COVID-19 pandemic made it difficult to find a replacement bank to perform the services it required. The court held that MS failed to point to any “obligation,” per the force majeure clause, that it was unable to perform. The court refused to expand what the parties themselves had agreed to. 21 Since the goal of contract law is to give effect to the parties’ intentions, 22 courts look to the entire contract, not just the force majeure clause, to figure out if the parties intended to allocate the risk of a supervening event. In one case, the parties entered into a court approved settlement that said Zapata “shall” pay Pinero $200,000.00 by April 1, 2020, with a built-in grace period allowing Zapata to pay by May 1, 2020, and to obtain refinancing on the properties by June 1, 2020. Failure to meet either obligation meant that Zapata would relinquish her interest in the properties to Pinero. Zapata claimed that the COVID-19 pandemic made timely performance impossible, and the trial court granted extensions. The appellate court reversed and held that the trial court improperly voided and rewrote the agreement. The contract set firm due dates with a single one-month extension without spelling out relief for force majeure events. 23 Conditions Precedent Are Not Lightly Inferred In Shin v. Young Yoon , 24 defendants moved to delay payments on a stipulated judgment for one year, claiming that economic hardship arising from COVID-19 made it impossible because they were not able to sell a certain hotel necessary to meet their obligation. The stipulated judgment stated that the sale of the hotel would fund a significant portion of their payments. The court refused to delay defendants’ payments, explaining that the sale of the hotel was not a condition precedent to defendants’ obligation to pay. Merely mentioning an intent to sell the hotel did not make it a condition precedent (a condition precedent is not lightly inferred), and defendants did not treat it as a condition precedent—they made some payments despite the failure to sell the hotel. Clarity in Drafting Is Crucial No judge has ever complained that a contract is too clear. In Gibson v. Lynn Univ., Inc., 25 a student sued the university after it transitioned to remote learning due to the COVID-19 pandemic. The university filed a motion to dismiss, citing the force majeure clause in its University Policies that provided as follows: “There will be no refund of tuition, [or] fees ... in the event the operation of the University is suspended at any time as a result of an act of God, strike, riot, disruption or for any other reasons beyond the control of the University.” But the plaintiff pointed to a disclaimer stating that the University Policies “do[] not create an express or implied contract.” Since it was not clear whether the University Policies were contractual in nature, the court denied the motion. In Rudolph v. United Airlines Holdings, 26 plaintiffs sued United Airlines seeking a refund (not just a credit) for fares after cancellation of flights in the wake of COVID-19. The conditions of carriage spelled out more than one type of involuntary cancellation: (1) “Force majeure” (where the passenger was not entitled to a refund): “Any condition beyond [the airline’s] control including, but not limited to . . . acts of God . . . .” (2) “Irregular operation” (where the passenger was entitled to a refund): This included cancellations “necessary or advisable by reason of . . . conditions beyond [United’s] control, (including, but not limited to acts of God, force majeure events . . . .).” The court denied, in part, United’s motion to dismiss because the agreement was ambiguous: irregular operation directly overlapped with force majeure—irregular operation included force majeure as part of its definition. The court explained: “Certainly, there must be some point where a Force Majeure Event ends, and . . . [an] Irregular Operation begins. And to the extent that boundary is unclear, the [conditions of carriage], drafted entirely by United, must be construed in Plaintiffs’ favor.ˮ Subjective Inability to Perform (e.g., Financial Hardship) Does Not Excuse Performance In case after case, businesses—often commercial tenants that service the public—have been economically devastated by COVID-19 market downturns. Contracts typically do not provide relief for the tenant when that happens, and where the contract has not allocated the risk, extra-contractual theories provide no defense for market downturns caused by the pandemic. Typical is RPH Hotels 51st St. Owner, LLC v. HJ Parking LLC, 27 where a parking garage in the heart of Times Square sought to be excused of the default judgment entered against it stemming from its failure to pay rent during the COVID-19 pandemic. Justice Arlene Bluth wrote: “If a business that was permitted to operate throughout the pandemic (as opposed to others, such as gyms, that were forced to close for months) can assert a frustration of purpose or impossibility defense, then nearly every struggling commercial tenant could seek relief from their leases.” Suffering is widespread in the pandemic, she wrote, but “[t]he solution is not for this Court to ignore an otherwise-valid contract to the severe detriment of one party.” In another case, Justice Bluth explained that “both the landlord and the tenant have undoubtedly faced significant hardship” due to the pandemic, but the parties did not agree to place the risk of the pandemic on the landlord. “The Court declines to step in and unilaterally modify the parties’ contract and tell the landlord that it should not be able to enforce the agreement it signed with a tenant.” 28 There have been a plethora of such decisions in the past few months. 29 Performance Is Excused Only if the Non-Occurrence of the Supervening Event Was a Basic Assumption of the Parties Both Parties Must Share the Basic Assumption In deciding whether a supervening event excuses a party’s performance, “the central inquiry is whether the non-occurrence of the circumstance was a ‘basic assumption on which the contract was made.’” 30 In one case, Martorella agreed to purchase property and made a deposit that the agreement said he would lose if he failed to close. The contract said that Martorella “acknowledges that this Agreement contains no contingencies affecting [his] obligation to perform” (e.g., no financing contingency). Martorella did not tell the seller that he relied on his wife to help obtain financing. Before closing, Martorella’s wife contracted COVID-19 and became seriously ill, but the seller refused to delay the closing despite Martorella’s claims of impossibility. Martorella filed an action, which the court dismissed because Martorella had expressly assumed the risk of making the payment—there were no contingencies—and the health of Martorella’s wife was not a basic assumption on which the contract was made. 31 Generic Leases Versus Leases Restricted to a Single Use UMNV leased commercial space to Caffé Nero on condition that the premises could only be used to operate a “Caffé Nero themed café” and for no other purpose. When the governor banned restaurants from serving on-premises food or beverages due to COVID-19, Caffé Nero temporarily shut down its premises and stopped paying rent. UMNV terminated the lease and sued, inter alia, for back rent and for damages for the 12 years remaining on the lease. The court granted partial summary judgment in favor of Caffé Nero, concluding that Caffé Nero’s performance under the lease was temporarily excused due to frustration of purpose during the shutdown. Critical to the court’s holding was that “[t]he Lease provides that Caffé Nero could use the leased premises only to operate a café with a sit-down restaurant menu ‘and for no other purpose.’” A basic assumption of the lease was the non-occurrence of a government shutdown of restaurants. 32 Justice Bluth provided an astute analysis in 1140 Broadway LLC v. Bold Food, LLC. 33 A company that managed restaurants stopped paying rent when the COVID-19 shutdowns of the restaurants it serviced severely hurt its business. The landlord sued, and the court rejected the tenant’s frustration of purpose defense. The tenant’s problem was subjective: tenant had not been ordered to shut down, but it happened to use the space it leased for a particular business that was severely hurt by the pandemic. Justice Bluth wrote: “This was a generic office lease,” and it “is not a case . . . where a tenant rented a unique space for a specific purpose that can no longer serve that function.” A decision that merits some attention is SVAP v. Coon Rapids, 34 where a landlord sued a gym for failing to pay rent when it was shut down due to COVID-19. The lease mandated that “Tenant shall use the Premises for only the operation of a fitness center and workout facility,” so the shutdown prevented the tenant from using the space for the sole purpose that the contract allowed, but the court refused to excuse the tenant from its contractual obligations based on frustration of purpose. The court’s rationale to support this conclusion is not satisfying. It held that the possibility of closure was an “implied risk” that the tenant assumed, and it pointed to a generic lease provision requiring the tenant to “comply with any and all requirements of any public authority, and with the terms of any . . . law, statute or local ordinance or regulation applicable to Tenant for its use, safety, cleanliness or occupation of the Premises.” (The court italicized “any and all.”) No one questions a tenant’s obligation to comply with the law. But the fact that the tenant agreed—in a standard, non-specific, all-encompassing, boilerplate lease provision—to generally comply with all laws relating to its tenancy does not tell us whether the parties should “have foreseen as a real possibility” 35 the outright closure of gyms because of the worst pandemic in a century. It strains credulity to suggest that this garden variety provision—to quote another court—“allocate[d] to [tenant] the unforeseen risk that a global pandemic could lead to government orders that bar [tenant] from operating . . . on the leased premises.” 36 The court also noted that the lease “allows Tenant to seek Landlord’s consent to operate the Premises for some other purpose” and suggested that the tenant should have sought the landlord’s consent to do just that. This is a thin reed on which to rest the holding because parties always may modify their agreement and change its purpose regardless of whether the contract says so. That mere possibility does not alter the deal that the parties actually struck—in this case, the parties never agreed that the tenant would change its business to something other than a gym. Besides, it is wholly unrealistic to assume that the operator of a gym can, or should, simply wake up one day and launch an entirely new line of business. The court also said that tenant should have attempted “innovative measures” to generate income (e.g., virtual training, loans, fundraisers, and reallocation of funds between affiliated locations). But the tenant bargained to lease space to operate a gym—not to host a Zoom studio, launch a GoFundMe campaign, or sell cookies door-to-door to raise money. 37 In short, the facts suggest that, contrary to the court’s holding, the non-occurrence of a shutdown of gyms was a basic assumption of this lease. Takeaways from the COVID-19 Force Majeure Cases Contract disputes are often won and lost in the drafting phase. The pandemic presents a golden opportunity to rethink force majeure provisions going forward. In early 2020, it was unthinkable to many businesses that they would be shut down and otherwise restricted for extended periods of time. Many are intent on avoiding anything similar. The climate for negotiating deals has changed. “Tenants are getting anywhere from 10 to 75 percent off their contractual minimum rent rates. In addition, many landlords are agreeing to percentage rent deals, which prior to COVID-19 were unusual and rare.” 38 But “some landlords are requesting a landlord right of termination, which would allow the landlord to terminate the lease upon a certain number of days’ notice to the tenant.” 39 In drafting, keep the following in mind: Spell out in the contract all occurrences that would make the bargain intolerable to your client (e.g., the loss of a sole source of supply). If your client’s performance depends on something happening, call that event a condition precedent to your client’s obligations. If the force majeure clause lists contingencies, the canon expressio unius est exclusio alterius would exclude any item not specifically listed, so add a catch-all that is not limited to the same type of events as the listed items. Example: “. . . or any other events or circumstances not within the reasonable control of the party affected, whether similar or dissimilar to any of the foregoing.” Many courts hold that “[w]hen parties specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.” 40 When the event is not specifically listed but a party seeks to rely on the catch-all provision of a force majeure provision (e.g., “any other cause not enumerated herein but which is beyond the reasonable control of the party whose performance is affected”)—the event that purportedly falls within the catch-all must be unforeseeable. 41 Mention, inter alia, government action, calamity, natural disaster, viral outbreaks, and perceived or actual epidemics and pandemics. Describe with clarity whether, and to what extent, a full or partial government shutdown of the business excuses performance obligations, and whether such shutdown overrides lack of money. Spell out the necessity of providing prompt notice of the event and the duty to keep the non-affected party apprised. Spell out how and when the non-affected party may treat the contract as ended after the other party has declared force majeure. Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, writes the biannual supplements to Corbin on Contracts, is author of Volume 1, Corbin on Contracts (rev. ed. 2018), and is co-author of the Corbin on Contracts Desk Edition (2017). To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: THE COURTS HAVE SPOKEN: THE LESSONS OF THE COVID-19 FORCE MAJEURE CASES IN PRACTICAL GUIDANCE. Related Content For an analysis of critical lessons that every lawyer should learn when tackling force majeure clauses during the COVID-19 pandemic, see > SEVEN CASE LAW LESSONS REAGARDING FORCE MAJEURE AND COVID-19 For detailed advice on determining the applicability of the coronavirus with respect to force majeure clauses in commercial contracts, see > CORONAVIRUS AND FORCE MAJEURE CHECKLIST For a discussion of force majeure clauses and issues to consider when drafting such clauses, see > FORCE MAJEURE CLAUSE DRAFTING For a selection of sample force majeure clauses, see > FORCE MAJEURE CLAUSES For assistance in avoiding the misuse of force majeure clauses, see > DRAFTING ADVICE: AVOIDING DISASTROUS FORCE MAJEURE CLAUSES For an examination of issues relating to how COVID-19 may impact performance obligations with respect to commercial contracts, see > CORONAVIRUS (COVID-19) RESOURCE KIT: FORCE MAJEURE, CONTRACT PERFORMANCE, AND DISPUTE RESOLUTION For an overview of the affirmative defenses that a party to a contract can rely on to justifiably avoid performance, see > EXCUSES FOR NONPERFORMANCE: CONDITIONS FOLLOWING CONRACT FORMATION For more information on the obligation of a party to mitigate damages in the event of a breach of a sale of goods agreement governed by the Uniform Commercial Code, see > MITIGATION OF DAMAGES IN SALE OF GOODS CONTRACTS For a checklist that outlines what counsel should consider when drafting or reviewing a commercial contract, see > COMMERCIAL CONTRACT DRAFTING AND REVIEW CHECKLIST For practical guidance on drafting term clauses, recitals, and definitions in commercial contracts, see > TERM, RECIRALS, AND DEFINITIONS 1 . In re Cinemex United States Real Estate Holdings, 2021 Bankr. LEXIS 200, *18 (S.D. Fla. Jan. 26, 2021). 2. E.g. , ITS Soho LLC v. 598 Broadway Realty Assoc. Inc., 2020 N.Y. Misc. LEXIS 10856, *8 (N.Y. Sup. Ct. Dec. 22, 2020). 3. 1140 Broadway LLC v. Bold Food, LLC, 2020 N.Y. Misc. LEXIS 10358, *5-6 (N.Y. Sup. Ct. Dec. 3, 2020). 4. 150 Amsterdam Ave. Holdings Llc v. Tmo Parent Llc, 2021 N.Y. Misc. LEXIS 2028, (N.Y. Sup. Ct. Apr. 21, 2021). 5. Firmenich Inc. v. TPR Holdings LLC, 2020 N.Y. Misc. LEXIS 9376 (N.Y. Sup. Ct. Sept. 18, 2020). Courts do not grant relief when the pandemic is used as a pretext for failing to perform a contract. See, e.g. , Future St. Ltd. v. Big Belly Solar, LLC, 2020 U.S. Dist. LEXIS 136999 (D. Mass. July 31, 2020) (Future Street’s failure to meet minimum purchase requirements under distributor contract not caused by COVID-19 as certain payments owed to distributor preceded the pandemic); CP Assoc. LLC v. Concourse Plaza Family Dental LLC, 2020 N.Y. Misc. LEXIS 9620 (N.Y. Sup. Ct. Nov. 20, 2020) (dentist stopped paying rent almost six months before the pandemic and never stopped seeing patients); Medallion Bank v. Makridis, 2021 N.Y. Misc. LEXIS 34 (N.Y. Sup. Ct. Jan. 6, 2021) (“Plaintiff alleges that the default [in repaying loan] occurred in June 2019, long before the ongoing pandemic ravaged the United States.”); 111 Fulton St. Invs., LLC v. Fulton Quality Foods LLC, 2021 N.Y. Misc. LEXIS 471 (N.Y. Sup. Ct. Feb. 5, 2021) (restaurant’s initial failure to pay rent predated the pandemic); La Simple Co v. Slp Enters., 2021 U.S. Dist. LEXIS 81209, *21 (D. Mass. April 27, 2021) (“the record reflects that La Simple was failing to satisfy its obligations under the Distribution Agreement even before the pandemic . . . ”) 6. CP Assoc. LLC, 2020 N.Y. Misc. LEXIS 9620, *3. 7. BKNY 1, Inc. v. 132 Capulet Holdings, LLC, 2020 N.Y. Misc. LEXIS 9898, *4 (N.Y. Sup. Ct. Sept. 23, 2020) (citation omitted). 8. “If . . . a failure of performance is accompanied by an anticipatory repudiation of the remainder of the performance that is not yet due, the entire contract may be treated as a present and total breach that discharges the aggrieved party from any further duty under the contract.” John E. Murray & Timothy Murray, 1 Corbin on Contracts Desk Edition § 53.07 (2019). 9. Generally defined at common law as death or destruction of the subject matter (some states treat it as interchangeable with impracticability). Its modern revamp is impracticability: performance is made excessively burdensome by a supervening event that (1) the party to be excused did not cause and did not assume the risk of occurring; (2) was inconsistent with a basic assumption of the parties; and (3) was unforeseeable (but not inconceivable—i.e., a reasonable party would not have guarded against it in the contract). See Restatement (Second) of Contracts § 261; U.C.C. § 2-615; CISG Art. 79. 10. The supervening event makes one party’s performance worthless to the other—but performance is still possible ( e.g. , the famous coronation cases). Restatement (Second) of Contracts § 265. 11. 1600 Walnut Corp. v. Cole Haan Co., 2021 U.S. Dist. LEXIS 60156, *5-6 (E.D. Pa. March 29, 2021). 12. Zhao v. CIEE, Inc., 2020 U.S. Dist. LEXIS 158148 (D. Maine. Aug. 31, 2020). 13. JN Contemporary Art LLC v. Phillips Auctioneers LLC, 2020 U.S. Dist. LEXIS 237085 (S.D.N.Y. Dec. 16, 2020). See AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 Del. Ch. LEXIS 353 (Nov. 30, 2020): “The COVID-19 pandemic fits within the plain meaning of the term ‘calamity.’” Moreover, “[t]he COVID-19 pandemic arguably fits [the definition of natural disaster] as well. It is a terrible event that emerged naturally in December 2019, grew exponentially, and resulted in serious economic damage and many deaths.” 14. 1600 Walnut Corp. , 2021 U.S. Dist. LEXIS 60156. 15. BKNY 1, Inc. v. 132 Capulet Holdings, LLC, 2020 N.Y. Misc. LEXIS 9898 (N.Y. Sup. Ct. Sept. 23, 2020). 16. Cab Bedford LLC v. Equinox Bedford Ave, Inc., 2020 N.Y. Misc. LEXIS 10861 (N.Y. Sup. Ct. Dec. 22, 2020). 17. 98-48 Queens Blvd LLC v. Parkside Mem. Chapels, Inc., 2021 N.Y. Misc. LEXIS 265 (N.Y. Sup. Ct. Jan. 26, 2021). 18. In re CEC Entm’t, 625 B.R. (Bankr. S.D. Tex. 2020). 19. In re Hitz Rest. Grp., 616 B.R. 374 (Bankr. N.D. Ill. 2020). 20. In re Cinemex, 2021 Bankr. LEXIS 200. 21. MS v. CBW Bank, 2020 U.S. Dist. LEXIS 174257 (D. Kan. Sept. 23, 2020). 22. Moreno v. Aranas, 2021 U.S. Dist. LEXIS 16369 (D. Nev. Jan. 11, 2021). 23. Pinero v. Zapata, 306 So. 3d 1117 (Fla. App. 2020). 24. Shin v. Young Yoon, 2020 U.S. Dist. LEXIS 189519 (E.D. Cal. Oct. 13, 2020). 25. Gibson v. Lynn Univ., Inc., 2020 U.S. Dist. LEXIS 222214 (S.D. Fla. Nov. 29, 2020). 26. Rudolph v. United Airlines Holdings, 2021 U.S. Dist. LEXIS 27795 (N.D. Ill. Feb. 12, 2021). 27. RPH Hotels 51st St. Owner, LLC v. HJ Parking LLC, 2021 N.Y. Misc. LEXIS 373 (N.Y. Sup. Ct. Jan. 28, 2021). 28. 1140 Broadway LLC , 2020 N.Y. Misc. LEXIS 10358. 29. 35 E. 75th St. Corp. v. Christian Louboutin L.L.C., 2020 N.Y. Misc. LEXIS 10423 (N.Y. Sup. Ct. Dec. 9, 2020) (“[U]nforeseen economic forces, even the horrendous effects of a deadly virus, do not automatically permit the Court to simply rip up a contract signed between two sophisticated parties.”); Siegal v. GEICO Cas. Co., 2021 U.S. Dist. LEXIS 40759, *10 (N.D. Ill. March 4, 2021) (“rapid and unexpected market changes are endemic to our economy. Standing alone, they cannot constitute a frustrating event sufficient to excuse a party from performing on a contract.”); Cai Rail v. Badger Mining Corp., 2021 U.S. Dist. LEXIS 32564 (S.D.N.Y. Feb. 22, 2021) (even dramatic unprofitability due to COVID-19 does not excuse performance); MEPT 757 Third Ave. LLC v. Grant, 2021 N.Y. Misc. LEXIS 797 (N.Y. Sup. Ct. Mar. 1, 2021) (“there is nothing in existing case law that would permit a Tenant (or a guarantor) to walk away from a contract on the ground that its business model is no longer as profitable as it used to be.”). See also Tabor v. 148 Duane LLC, 2021 N.Y. Misc. LEXIS 1386 (N.Y. Sup. Ct. Mar. 29, 2021); Gap Inc. v. Ponte Gadea N.Y. Llc, 2021 U.S. Dist. LEXIS 42964 (S.D.N.Y. March 8, 2021); Lantino v. Clay LLC, 2020 U.S. Dist. LEXIS 81474 (S.D. N.Y. May 8, 2020); Belk v. Le Chaperon Rouge Co., 2020 U.S. Dist. LEXIS 117985 (N.D. Ohio July 6, 2020); East 16th St. Owner LLC v. Union 16 Parking LLC, 2021 N.Y. Misc. LEXIS 192 (N.Y. Sup. Ct. Jan. 15, 2021); 1515 Broadway Owner LLC v. Astor Parking LLC, 2021 N.Y. Misc. LEXIS 895 (N.Y. Sup. Ct. Feb. 25, 2021); Swiftships LLC v. SBN V. FNBC, 2021 U.S. Dist. LEXIS 62112, *6 (E.D. La. March 31, 2021); Fives 160th, L.L.C. v. Qing Zhao, 2021 N.Y. Misc. LEXIS 1567, *4 (N.Y. Sup. Ct. Apr. 6, 2021); Green 485 Owner LLC v. Quick Park 485 Garage LLC, 2021 N.Y. Misc. LEXIS 807 (N.Y. Co. Sup. Ct. Feb. 25, 2021). 30. Restatement (Second) of Contracts, Chapter 11, Introductory Note. 31. Martorella v. Rapp, 28 LCR 306 (Mass. Land Ct. 2020). See also In re Condado Plaza Acquisition LLC, 620 B.R. 820 (Bankr., S.D.N.Y. 2020) (Condado, under contract to buy a hotel that had closed due to COVID-19, argued that it had no duty to close on the transaction since the seller could not deliver a viable and operational hotel, which Condado claimed was the “very foundation” of the contract. The court rejected this argument. In dicta, it pointed out that the agreement “expressly disclaimed any obligation to maintain operations at the hotel.”). 32. UMNV 205-207 Newbury, LLC v. Caffé Nero Ams., 2021 Mass. Super. LEXIS 12 (Feb. 8, 2021) (the decision also contains an unsatisfying interpretation of a force majeure clause). 33. 1140 Broadway LLC , 2020 N.Y. Misc. LEXIS 10358. 34. SVAP v. Coon Rapids, 2020 Minn. Dist. LEXIS 361 (Dec. 18, 2020). 35. Salimi v. Salimi, 2021 Mass. LCR LEXIS 45 (Mass. Land Ct. Apr. 13, 2021). 36. Umnv. 205-207 Newbury , 2021 Mass. Super. LEXIS 12, *13-14. 37. In In re Hitz Rest. Grp., 616 B.R. 374, the court correctly held that there was no requirement that tenant seek a loan to be excused of obligations. 38. Jennifer Meyerowitz, Lease Negotiation During COVID-19, 40-3 ABIJ 16, 16 (2021). 39. Id . at 17. 40. TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 183 (Tex. App. 2018). Not all courts agree: Gulf Oil Corp. v. Fed. Energy Regulatory Comm’n, 706 F.2d 444, 454 (3rd Cir. 1983) (listed events must be unforeseeable). See also Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099 (C.D. Cal. 2001). 41. TEC Olmos, 555 S.W.3d at 183.Commercial TransactionsSummer 2021Litigation Updateshttps://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/receivership-in-real-estate-transactionsThu, 10 Jun 2021 15:58:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:5d71327b-2b6c-4a38-bd5c-de841c93f8dcsheikaBy: Richard P. Ormond, Buchalter PC This article provides an overview of receivership in real estate transactions. It discusses the legal basis for receivership, the role and powers of a receiver, the process of appointing a receiver, and the benefits of receivership over potential alternatives. It also includes guidance for lenders and secured creditors when seeking the appointment of a receiver and reviewing an appointment order. Overview What Is a Receiver? A receiver is a court-appointed officer who acts as a neutral to manage assets (real property or personal property) or even manage businesses as going concerns when they are the subject of a legal dispute. A receiver can also be appointed to act as a liquidator of such assets or businesses. A receiver’s primary role is to efficiently preserve assets in trust for all creditors. Receivership is a legal remedy that exists in federal and state courts and provides an aggrieved party the option of placing an asset or business into legal custody, meaning that the court dispossesses the party in control of that asset or business and puts it into the hands of a court-appointed agent—the receiver. Technically, the receiver is an officer of the court whose authority is derived through the equitable powers of that court. In federal court, the appointment of a receiver is authorized by Fed. R. Civ. P. 66; in state court, it is authorized under both common law and statute. Receivers are, by the nature of their appointment orders, fiduciaries of the court much like a trustee in a bankruptcy context. As a result, actions taken by the receiver are seen as actions by the court. In essence, the receiver is the arm of the court, taking action that a judge himself or herself cannot take without stepping down from the bench. In addition, the receiver is the eyes and ears of the court, and the receiver (and its agents) are neutral, transparent, and fully report all of their actions and decisions to the appointing court. Further, the receiver’s role as a court officer provides court oversight of the receiver’s actions and business decisions and provides a forum in which interested parties can challenge or support a receiver’s decision or action. Why Appoint a Receiver? In many circumstances, there are clear advantages to seeking the appointment of a receiver—usually, a situation in which a receiver will be able to preserve a disputed asset or business and maximize its value in the marketplace. For example, it is very common to seek a receiver on behalf of an unpaid lender whose borrower is in default and there is valuable collateral to preserve while litigating the dispute. While receivership may be considered an extreme remedy under the law, in the fractured world of litigation and business, many circumstances do arise where a court will simply remove management (or an owner-operator) and replace it with a receiver. Receivers can be a helpful tool, by supplanting bad managers with a transparent neutral agent of the court. The receiver is often appointed to look after the best interest of creditors and other aggrieved third parties, not just equity holders. It is also an effective legal remedy if you are a significant creditor or claimant and the circumstances warrant divesting an operator or owner from their business operations. Once appointed, receivers have broad equitable powers and can operate a business, sell assets, or unwind a business, simply depending on what is best for all of the parties involved. An experienced receiver will be able, through a well-crafted court order, to stabilize the day-to-day operations of a business, provide transparency to lenders, identify specialized third-party asset managers to operate any on-site facilities, manage in-flow and outflow of monies or goods, identify claimants, or resolve or reduce those claims. The neutrality and transparency of the receiver alone provide a tremendous advantage to the court, lenders, and creditors, and allow the parties to accurately evaluate how best to restructure or dispose of collateral and estate property. A receiver also has other advantages including what is known as quasi-judicial immunity, meaning that a receiver typically cannot be sued for undertaking his or her duties under court supervision or court order. For example, if a receiver sells real property, the sale will be consummated by the entry of a court order selling those properties “as is, where is” with no representations or warranties—all blessed by that court. This eliminates the risk of third-party claims against the receiver or the assets in the estate subject to that sale. Conversely, if a foreclosing party (or its agent) were to sell the property, the selling party would bear the burden of the liability, consumer protection regulations, and many more representations and warranties related to the sale. As an inherent feature, the appointment of a receiver provides insulation to lenders and creditors from claims and liabilities arising from certain responsibilities. Those responsibilities are, instead, shifted to the court through the receiver, who can present equitable solutions to the court. From the sale of inventory to the more complex task of resolving creditor claims, the receiver can be granted the authority to resolve issues and eliminate hurdles prior to a disposition of the disputed property. This saves the litigants the burden of liability, known or unknown, that may arise. A receiver’s appointment can be short or may last many years, all depending on the circumstances warranted by each case and how best to maximize the estate’s assets’ values. Creditor Considerations When a business is put into receivership, it certainly should raise concern for its creditors, suppliers, and customers. Seeking legal guidance is always helpful and direct communication with the receiver (or its agents) is key. Receivers, by law, are required to be transparent and file reports with the appointing court, but it is a legal process and not always easy for parties to navigate. When a party is in receivership, the receiver is usually the best source of information about the status of claims, receivables, payments, and operations. Knowing the nature of the receivership is critical. Is it a liquidating receiver, there to simply sell off assets and wind down the operations? Or is it a restructure, where the receiver will sort through claims and streamline operations? Or is it something else entirely, such as babysitting a business while warring partners work out their differences? Each has different implications for outside parties and litigants. Finally, receivers are also used in creative ways to effectuate workouts and turnarounds as an alternative to bankruptcy. In most instances, a receivership is less costly than a Chapter 11 bankruptcy, and it is more flexible, as it is not overburdened by the highly complex Bankruptcy Code. Receivership is an established alternative to bankruptcy when implemented smartly. Legal Basis for Receivership The appointment of a receiver is an equitable procedure that a court uses when it believes that a party to an action is not in a position (or, in some circumstances, refuses) to comply with the desires of the court. Appointment of a receiver is also a provisional remedy that allows courts to preserve and/or maintain assets, so that waste does not occur and the value of an asset in dispute can be preserved pending final adjudication. This concept of waste in recent times has given receivers broad authority to maximize the value of businesses, receivables, and other assets through effective management and sale. Article III, Section 2 As a matter of constitutional law, the United States traces its equitable courts to U.S. Const. Art. III, § 2, which established the judicial power of the federal government to all cases “at law and in equity.” The U.S. Supreme Court, in Heckers v. Fowler, 69 U.S. 123, 128–29 (1864), held that the administration of insolvent enterprises, investigations into the reasonableness of public utility rates, and the performance of other judicial functions often require the special services of masters in chancery, referees, auditors, and other special aids. In Heckers , the Court held the practice of referring pending actions to a referee to be coequal with the organization of the federal courts under Article III. The leading case of Ex parte Peterson, 253 U.S. 300 (1920), centered on a U.S. district court’s appointment of an auditor with power to compel the attendance of witnesses and the production of testimony. In Peterson , the district court authorized the auditor to conduct a preliminary investigation of facts and file a report on them to simplify the issues for the jury. This action was neither authorized nor prohibited by statute, but rather emanated from the court’s equitable powers. In sustaining the action of the district judge, Justice Louis Brandeis, speaking for the Court, declared: Courts have (at least in the absence of legislation to the contrary) inherent power to provide themselves with appropriate instruments required for the performance of their duties. . . . This power includes authority to appoint persons unconnected with the court to aid judges in the performance of specific judicial duties, as they may arise in the progress of a cause. 1 Federal courts sitting in equity have exercised the power to appoint auditors (or neutrals) from their very beginning, and here it was held that this power is the same whether the court sits in law or equity. Rule 66 In federal courts, Rule 66 of the Federal Rules of Civil Procedure authorizes the appointment of receivers by federal court judges with the following language: The practice in the administration of estates by receivers or by other similar officers appointed by the court shall be in accordance with the practice heretofore followed in the courts of the United States or as provided in rules promulgated by the district courts. 2 The federal system, unlike many states, relies primarily on decisional law—the reported usages of equity—rather than on statutes to delineate when and under which circumstances receivers may be appointed. “[T]he district court has broad powers and wide discretion to determine the appropriate relief in an equity receivership.” 3 The basis for broad deference to the district court’s supervisory role reflects the reality that most receiverships involve multiple parties and complex transactions. 4 Additionally, some districts have interpreted these powers to be extremely wide in breadth. The Ninth Circuit in SEC v. Hardy acknowledged that a primary purpose of equity receiverships is to promote orderly and efficient administration of the estate by the district court for the benefit of creditors. 5 According to the Hardy decision: A district judge supervising an equity receivership faces a myriad of complicated problems in dealing with the various parties and issues involved in administering the receivership. Reasonable administrative procedures, crafted to deal with the complex circumstances of each case, will be upheld. A district judge simply cannot effectively and successfully supervise a receivership and protect the interests of its beneficiaries absent broad discretionary power. We would be remiss were we to interfere with a district court’s supervision of an equity receivership absent a clear abuse of discretion. 6 State Law and Authority Many states also have specific statutory schemes devoted to the appointment of receivers. For instance, in California, applicable provisions of the Code of Civil Procedure, commencing at Cal. Code Civ. Proc. § 564, govern the appointment of receivers. 7 Most states confer considerably broad power to the receiver to operate a business, sell real and personal property, and, in some instances, even seek to restructure debt or liquidate the assets of a business. Receivers can also collect and enforce accounts receivable, obtain and sell trademarks and domain names, and transfer liquor licenses, among other broad powers, all for the benefit of creditors and claimants. Secured Lenders and Receivers Receiverships, in general, tend to become more prominent in distressed economic times. When used properly, a receivership can be a flexible and creative avenue to assist in the restructuring or turnaround of a business, real property, or other asset. Protecting Collateral A common situation in which a receiver is appointed is one where a secured lender seeks to harbor or preserve its real property collateral. It may be as simple as having a receiver manage a rental property and continue to collect rents until the dispute relating to the real property is adjudicated, or it may result in a more complicated situation where a receiver is asked to take over the day-to-day operations of an ongoing business in order to preserve or ultimately liquidate that business. Protection from Liability In the context of real property, a receiver can insulate a financial institution from many claims and hardships that the financial institution would inherit by foreclosing or otherwise taking title to real property and assuming the burdens and liabilities of ownership. To this end, financial institutions and special servicers may seek the appointment of receivers to remediate and rehabilitate assets and, rather than following the traditional route of foreclosure, obtain a court order for the receiver to sell the real property assets out of the receivership estate and turn over proceeds to the appropriate parties. Importantly, particularly from a lender’s perspective, the legal liability of actions that a receiver takes, such as the remediation of an environmental hazard or the eviction of tenants, falls not on the lender that sought the receiver’s appointment, nor on the party being dispossessed of their business or assets. Rather, the liability belongs to the receiver, which benefits from quasi-judicial immunity Receivership and Workouts A lender typically wants to take immediate action to protect and maintain the value of its real property collateral. As a mechanism for maintaining the status quo during workout negotiations, the appointment of a receiver serves to protect the value of the collateral while at the same time giving the parties the time to discuss and negotiate a potential workout. Absent the protections that the receiver affords, the parties may be unwilling to devote substantial resources to discussing a workout due to the fear that the property could be losing value during the workout negotiations. Costs of Receivership Before seeking the appointment of a receiver, lenders should consider a variety of factors to determine if it is a viable option. One of the principal concerns lenders have when considering the appointment of a receiver is the cost involved. In the typical receivership, the receivership estate is responsible for all fees and costs, including administrative costs, the receiver’s fees, and the fees of other professionals that the receiver retains, if necessary. The receivership estate is usually funded from one or more of the following sources: Income that the receivership property generates (i.e., rents) Proceeds from the receiver’s sales of estate assets Advances that the lender makes to the receiver during the pendency of the action The costs of the receivership could result in a net reduction of the lender’s recovery. Depending on the real property, though, incurring these costs may be in the lender’s best interest, especially when the receiver can maximize the value of the property, whether by completing construction, finalizing entitlements, or taking other action that increases the property value. In these situations, the potential recovery outweighs the costs of the receiver. Benefits of Receivership and Consideration of Alternatives Taking title to the real property, whether through a deed in lieu, foreclosure, or other form of transfer, guarantees that all costs, liabilities, and problems associated with that property will absolutely become the burden of the lender. Even if the lender identifies new management, that management will not share in the insulation that the receiver enjoys. And management will likely be equivalent in cost. For example, if the receiver sells units at the property, those sales will be consummated by the entry of a court order selling the units “as is, where is,” with no representations or warranties—a proverbial get out of jail free card for lenders that never touch or take title. Conversely, if the lender (or its agent) sells the property, construction liability, consumer protection regulations, department of real estate requirements, and many more representations and warranties will become the burden of that lender. Lenders and servicers do not want to take title to assets or real property collateral if it can be avoided. Since most real property is an operating and going concern, maintenance, management, and day-to-day operations—and, of course, all of the liabilities that come with such responsibilities—will be in the hands of the lender (or its designee) if it takes title through foreclosure or a deed in lieu. Further, the operational costs will fall squarely on the lender rather than being funded by a protective advance, receivership certificate, or other protected means of advancing secured funds in a receivership. This creates lawsuit exposure for the lender, which is now on title forever. While the applicable law is complex, it is unequivocal that the lender will be seen as a deep pocket in any known or unknown future litigation. Any action that a lender can take to protect itself and insulate itself from claims has an enormous value. Powers of a Receiver In many instances involving real property, there are multi-unit structures, open escrows, operational concerns, remaining construction, affiliated management, and other problems particular to the property at issue. When considering the appointment of a receiver, it is helpful to establish a clear roadmap of what the parties expect from the receiver and what benefit the receivership will provide. From the simple completion of construction to the more complex resolution of claims, the court can grant the receiver the authority to work out issues prior to a disposition of the real property (whether by sale, foreclosure, or some other means). Seeking the appointment of a receiver provides numerous benefits for the lender while avoiding a host of potential problems. A receiver can: Limit exposure and liability to the lender by providing a shield against claims and by keeping the lender off of title Provide the receiver the ability to sell real property “as is, where is,” thus limiting exposure to the lender/servicer and the receiver With court guidance, manage complex construction issues and make claims on completion bonds or other sureties Address problems with homeowners’ associations, entitlement concerns, and other state or federal regulatory requirements Renew, obtain, or forfeit governmental licenses and permits Acquire, confirm, and/or reinstate insurance (including wrap-up policies) Bring interested third parties, including governmental agencies, before the court, if needed to effectuate the receiver’s mandate Provide experienced day-to-day management for the real property Provide expertise in hospitality, operations, construction, property management, and other skills (depending on the business needs and property needs) Allow for funding to complete projects through receiver certificates Provide lenders with transparency into ongoing operations Encourage a borrower’s continued cooperation, motivating the borrower to see the project through and avoid insolvency Assess and, in many instances, reduce exposure to mechanics’ liens Provide for equitable powers of the court usually beyond those of a bankruptcy court Secure and maximize the value of the asset Importantly, the receiver can accomplish these aims without disrupting the ongoing operation of the property or waiving the lender’s rights against borrowers or guarantors (or vice versa). With respect to complex debt structures (senior and mezzanine debt), the court can craft a receivership order to work within the existing terms of the intercreditor agreement, expand the terms of the intercreditor agreement, or even, if necessary, modify the terms of the intercreditor agreement in a manner that will best protect and preserve the asset. Further, a claimant (such as the lender) can make its case to the court if, at any time, it disagrees with the actions of the receiver. A well-crafted order can also give the lender options when it finds that maintenance of a receiver is no longer cost effective or is diminishing the value of collateral. For example, a primary tenant may vacate a property in receivership, reducing the revenue that the asset generates, or a party to the dispute may file bankruptcy, restricting the receiver’s ability to manage or monetize the collateral. By placing triggers such as these in the order, the court allows the lender to maintain a modicum of control to steer the fate of the receiver and the receivership estate. While not absolute, as part of a court order, they will provide further assurances to the lenders. Important Factors in Considering a Receiver The lender must carefully craft its preparation of a lawsuit and application to appoint a receiver. Each case is different, and the complaint and appointment order must be tailored to each situation. Some of the factors to be mindful of include: Are the borrower and tenants cooperative? Are the borrower and commercial tenants solvent or operating? If applicable, is the general contractor cooperative? Is there an equipment lease in place? Is the borrower an individual or legal entity? Is there a guaranty? Where is the property located? (A foreclosure action must be filed in the district in which the property lies; the court’s jurisdiction must be in rem .) Are there any code violations, state regulatory concerns, or other administrative or legal problems? What funds are available in the estate? Are there construction defect claims? Are there mechanics’ liens? Are there other secured lenders? Are they priority or subordinate claims? Are there tax liabilities (recorded and unrecorded)? Proposed Order Provisions The appointment order is the most important pleading because it is the document that creates the parameters in which the receiver may operate. If an important provision is missing from the order, a receiver may be limited in its ability to carry out his or her duties properly. (Note that as a case progresses, it may be necessary from time to time to amend the receiver’s confirming order.) The order should anticipate the powers and instructions that the receiver may require. It is beneficial to have the proposed receiver review the order before it is filed. Also, the proposed order should account for issues such as filing of taxes, authority to open cabinets, authority to change mailing address, and other minute details. A receiver’s powers are, in essence, much broader than those of a bankruptcy court or a bankruptcy trustee. An order appointing a receiver may contain provisions authorizing the receiver to: Operate and/or liquidate a business Enter into contracts or leases (a receiver has general authority to enter into leases for up to one year in length, including any option periods, or minor contracts without specific court authorization) Redirect mail Use a locksmith to enter the receivership premises Bring unlawful detainer actions (or possibly to engage in other litigation) Investigate, report about, and maintain adequate insurance coverage regarding the receivership estate Use the tax identification number(s) previously used in connection with the operation of the receivership business or property Borrow funds Sell real or personal property of the estate Apply at any time for further instructions Open bank accounts Collect rents, income, profits, etc. Compromise debts Avoid liens A receiver’s ability to hire employees and professionals is critical in many receiverships, and the employment of such professionals should be explicit in the receiver’s appointment order. Note that, typically, a receiver cannot employ an attorney without a specific court order authorizing such employment. Most courts require that an application to employ an attorney be in writing and state the necessity for the employment, the name of the attorney, and that the attorney is not the attorney for, is not associated with, and is not employed by an attorney for any party to the action. The order may state that all obligations and liabilities that the receiver incurs are incurred solely in his or her official capacity and are to be satisfied by receivership funds only. It should also include a provision regarding payment of the receiver’s fees and costs, as well as the fees and costs of other professionals that the receiver employs. The typical provision specifies that these fees and costs may be paid from the receivership estate each month upon service of the receiver’s monthly report, subject to future court confirmation. Copies of the detailed bills of the receiver and other professionals should be included in the receiver’s monthly reports. Note that the court orders typically give the parties a specified time period (usually 5–14 days) in which to object before the receiver may pay such fees and costs. If there is an objection in such an instance, the court will intervene (upon request) to resolve the objections. The order, similar to a broad injunction, should be recorded in every county where receivership estate real property is located. Conclusion Receivership law provides imaginative, equitable, and practical solutions to complex problems, giving courts and litigants flexibility in reaching a commonsense remedy during the course of a lawsuit or judgment enforcement. From protecting assets to running a business, a receiver can protect, harbor, and preserve value of assets that form the basis of a civil dispute, and provide transparency in a situation where the parties are not in a position to fully trust each other. It is one of the mainstays of common law and sets the common law system apart from other judicial systems that do not have these powers of equity, thus limiting their ability to fashion remedies. Richard P. Ormond has over 20 years experience that includes business law, real estate, banking, receivership, cannabis regulations, commercial litigation, and restructuring. He has tried numerous cases in state, federal, and bankruptcy courts, and has arbitrated dozens of matters. Mr. Ormond is recognized as one of the nation’s leading experts concerning receivership law and cannabis regulations, banking, and financing. Mr. Ormond serves as the chair of the California Receivers Forum and he is the former chair of the Remedies Division of the Los Angeles County Bar Association. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: RECEIVERSHIP IN REAL ESTATE TRANSACTIONS IN PRACTICAL GUIDANCE. Related Content For more information on real estate foreclosures in general, see > FORECLOSURE OF REAL PROPERTY For a description of the workout process for a commercial real estate loan, see > WORKOUTS OF COMMERCIAL REAL ESTATE For a discussion on defaults and remedies in commercial real estate financing transactions, see > COMMERCIAL REAL ESTATE DEFAULTS AND REMEDIES For an overview of out-of-court restructuring options, see > OUT-OF-COURT RESTRUCTURING AND LIQUIDATION ALTERNATIVES RESOURCE KIT For guidance on representing a lender in a restructuring, see > REPRESENTING THE LENDER IN A WORKOUT CHECKLIST 1 . Peterson , 253 U.S. at 312. 2. Fed. R. Civ. P. 66. 3. See SEC v. Hardy, 803 F.2d 1034, 1037–38 (9th Cir. 1986); accord, SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 606 (9th Cir. 1978). 4. See Hardy , 803 F.2d at 1037. 5. Hardy , 803 F.2d at 1038. See also SEC v. Wencke (Wencke II), 783 F.2d 829, 837 n.9 (9th Cir. 1986); First Empire Bank New York v. FDIC, 572 F.2d 1361, 1368 (9th Cir. 1928), cert. denied, 439 U.S. 919 (1978). 6. See Hardy , 803 F.2d at 1038. 7. See Cal. Code Civ. Proc § 564 et seq.Real EstatePractice NotesSummer 2021https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/cannabis-legalization-and-the-insurance-industryThu, 10 Jun 2021 15:27:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:1d4cdc3d-5b39-45d5-b9aa-73448d51de28Alainna NicholsBy: Christy Thiems , American Property Casualty Insurance Association This article discusses the impact of cannabis legalization on the insurance industry. Disparate state laws on both medical and recreational use, federal issues such as classification/scheduling of cannabis and the evolving nature of federal enforcement of drug laws, and the conflicting interplay between state and federal cannabis laws are discussed, as well as the coverage requirements for the cannabis industry’s legitimate and complex business needs and insurance-specific concerns raised by developments such as increased accident frequency and coverage mandates. WORKERS’ COMPENSATION INSURANCE ISSUES, SUCH as coverage for medical cannabis in work-related injury and illness claims, treatment concerns, and cannabis in the workplace are included with a review of drug-testing and impairment issues in the workplace and elsewhere and the wide-ranging impact that barriers to research continue to have on the cannabis industry’s nascent insurance protections. In 2018, nearly 1,000 cannabis-related bills were introduced into state legislatures across the country. By 2019, 23 states had considered recreational cannabis legislation and 15 states had considered medical cannabis bills. As of Q1 2021, 36 states and the District of Columbia had approved the broad medical use of cannabis and 15 states and the District of Columbia had legalized recreational cannabis use. The federal government continues to classify cannabis as an illicit drug. CLICK HERE TO READ THE FULL ARTICLE IF YOU ARE A PRACTICAL GUIDANCE SUBSCRIBERFEATURESPECIALPractice TrendsInsuranceSummer 2021https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/market-trends-2020-21-shareholder-proposalsThu, 10 Jun 2021 14:28:00 GMTfece22ea-7d63-4b19-bce2-c58691c9b64e:c77fe59b-81de-4e26-9612-f28eed3dacf0sheikaBy: Trevor S. Norwitz, Sabastian V. Niles, and Justin C. Nowell, Wachtell, Lipton, Rosen & Katz This article discusses recent market trends related to shareholder proposals, a popular and effective mechanism enabling shareholders to recommend or require that a company and/or its board of directors take a specified action. CURRENTLY, TO BE ELIGIBLE TO SUBMIT A PROPOSAL FOR consideration at a meeting of the company’s shareholders and to have such proposal included in the company’s proxy statement and proxy card under federal law, a shareholder must have held company shares with a market value of at least $2,000 (or at least 1% of the company’s securities entitled to vote on the proposal at the shareholder meeting) for at least one year and comply with additional substantive and procedural rules set forth in Rule 14a‑8 1 under the Securities Exchange Act of 1934, as amended. In September 2020, the Securities and Exchange Commission (SEC) voted to adopt amendments to modernize its shareholder proposal rule. The final rule, among other things, amends the current ownership requirements to incorporate a tiered approach that provides three options to submit a shareholder proposal under Rule 14a-8. 2 A shareholder will now be required to demonstrate continuous ownership of at least: $2,000 of the issuer’s securities for three years $15,000 of the issuer’s securities for two years $25,000 of the issuer’s securities for one year The amendments reflect ongoing criticism that the dollar threshold in Rule 14a‑8, 3 which was adopted decades ago in 1998, was too low to ensure shareholders have meaningful, long-term interests in the companies in which they invest. 4 In addition to the updated ownership requirements, the amendments limit the ability of shareholders to submit multiple proposals at a single meeting and impose additional restrictions on the resubmission of proposals. The amendments clarify the existing one-proposal-per shareholder rule to preclude a single person from submitting one proposal in his or her own name and another proposal as a representative, or multiple proposals as a representative of different shareholders. These changes further support the direct engagement of the proposing shareholder and attempt to limit circumvention of the SEC’s eligibility requirements. The amendments also revise the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings from 3% if voted on once within the preceding five calendar years, 6% if voted on twice in such period, or 10% if voted on three or more times in such period, to the following thresholds: 5% for matters previously voted on once in the last five calendar years 15% for matters previously voted on twice in the last five calendar years 25% for matters previously voted on three or more times in the last five calendar years The amendments will be applicable for all shareholder meetings to be held on or after January 1, 2022, although transition rules will permit a shareholder that has held $2,000 of an issuer’s securities for one year as of the effective date of the amendments, and continuously maintains ownership of at least $2,000 of the issuer’s securities, to qualify to submit a proposal for a meeting to be held before January 1, 2023. Under Rule 14a‑8, 5 a company may seek to exclude certain shareholder proposals for a variety of reasons, such as relevance, violation of laws or proxy rules, interference with management functions, or conflicts with the company’s proposals. In September 2019, the Division of Corporation Finance of the SEC announced that beginning with the 2019-2020 proxy season, SEC staff may determine to respond orally, instead of in writing, to some no-action requests from companies seeking to exclude Rule 14a‑8 6 shareholder proposals. The SEC added that should it decline to take a view on an exclusion request, such silence should not be interpreted “as indicating that the proposal must be included.” It remains to be seen how the SEC’s revised approach will impact companies’ engagement with proponents, and whether companies will increasingly negotiate with proponents for a withdrawal of a shareholder proposal as opposed to historically seeking written no-action relief from the SEC. However, the SEC’s publicly available shareholder proposal no-action response chart has fostered some confidence in the revised approach and enhanced visibility around the SEC staff’s responses to no-action requests. Alternatively, albeit infrequently used, a shareholder may also submit a proposal under state law, without regard to the requirements of Rule 14a-8, 7 but must bear the cost of preparing and mailing its own proxy statement to the company’s shareholders. The total number of shareholder proposals submitted to U.S. public companies rose in 2020 despite trending downwards in recent years (from 819 in 2017, to 809 in 2018, to 807 in 2019, and up to 858 in 2020), according to the Institutional Shareholder Services (ISS) Voting Analytics database and other privately sourced data. (All 2020 data herein is as of December 31, 2020.) There have been 511 proposals so far in 2021, as of March 31, 2021. The average investor support for shareholder proposals has fluctuated in recent years, from 24.8% in 2018 to 25.2% in 2019 and down to 24.34% in 2020. The average investor support for shareholder proposals is 23.82% for 2021, as of March 29, 2021. Nonetheless, 2020 was a notable year for climate-related shareholder proposals, with a record number of proposals receiving majority shareholder support, and this trend is likely to continue in 2021. Looking ahead, shareholder proposals will likely continue to mirror growing shareholder scrutiny toward sustainability practices and climate-related risk disclosures, as well as human capital management and other environmental, social, and governance (ESG)-related matters. In particular, it is expected that: Environmental and social proposals will continue to grow as shareholders increasingly focus on issues such as executive compensation, human capital management, and oversight and planning in connection with climate-related risks. Social concerns arising out of the COVID-19 pandemic, notably worker health and safety (e.g., adoption of paid sick leave policies) and social impact and purpose, will likely remain popular in the 2021 proxy season. Shareholder proposals will continue to focus on traditional corporate governance matters, with the most common proposals relating to the appointment of an independent board chair, disclosure of political contributions, board diversity, and director overboarding. Specific compensation-related proposals will reappear in light of the COVID-19 pandemic and renewed focus on pay disparities within a company’s workforce. Shareholder support for workforce and board diversity— gender, racial, and ethnic diversity on boards in particular— will continue to increase. While less common, shareholder proposals may continue to address economic/business issues and be put forward by economic-oriented activists/hedge funds. 2020 Proxy Season 2019 Proxy Season 2018 Proxy Season Governance Board Diversity Board diversity, notably gender, racial, and ethnic diversity, remains a key concern of shareholders, with focus expanding beyond board diversity to include management diversity and diversity in the workforce. It is likely that these trends will continue to accelerate in the coming years as shareholders and regulators continue to scrutinize diversity at all levels. A number of the largest institutional shareholders, including BlackRock, State Street, and Vanguard, have publicly called on companies to improve gender, racial, and ethnic diversity on boards. Out of the 67 shareholder proposals regarding board and workforce diversity that were filed in 2019, four proposals received majority support. While only 52 shareholder proposals were filed in the 2020 proxy season (of which four proposals received majority support), the proposals pushed companies for greater disclosure of board and workforce diversity and inclusion policies and programs, as well as the gender, racial, and ethnic composition of their workforce according to Equal Employment Opportunity Commission-defined job categories. Shareholder voting policies continue to support increased board diversity and inclusion: BlackRock’s voting policies state that BlackRock will vote against nominating and governance committee members of companies that fail to improve diversity where there are fewer than two women directors on the board. Vanguard will also vote for shareholder proposals that seek disclosure related to director diversity, company diversity policies, and skills matrices (which have become an increasingly common feature of proxy statements). Proxy advisor ISS will also generally recommend voting against the chair of the nominating committee and other directors, on a case-by-case basis, if there are no women serving on the board as of the previous annual meeting. There is an increasing expectation by investors for companies to have clear and concise disclosure on their board and workforce diversity (e.g., EEO-1 data). Regulators have also weighed in on board diversity, with a number of states, including New Jersey, Michigan, and Pennsylvania, following California’s lead to mandate women directors for companies headquartered in those states. Other states, such as Illinois, Maryland, and New York, have introduced laws that require disclosure of board and/or management diversity. Shareholder Proposals on Board Diversity (2018-2020) Separate Chair and Chief Executive Officer (CEO) Shareholder proposals regarding the separation of the chair and CEO positions saw an uptick in support in 2020 as changes in the voting policies of institutional investors such as State Street led to growing scrutiny of the robustness of the roles of lead independent directors. This past year saw 46 shareholder proposals calling for an independent chair, down from the 60 proposals filed in 2019, but on par with the 47 proposals filed in 2018. However, support for such proposals rose to 34.9% in 2020, compared to 29.8% in 2019 and 31.9% in 2018. Twenty-seven proposals have been filed in 2021, as of March 31, 2021 with support for such proposals at 31.60%. While companies in the past have successfully argued that the separation of the chair and CEO roles is a strategic decision that should be left to the discretion of boards, institutional investors have continued to express a growing preference for a robust lead independent director and have, in some cases, lent support to calls for a separation of chair and CEO roles, particularly where there are other governance concerns or contingencies. For example, in 2020, Rayonier Advanced Materials, Inc. agreed to separate its chair and CEO roles as part of its settlement with venture capital firm Pangaea Ventures, L.P. and activist investor Ortelius Advisors, L.P. Similarly, in 2019, Boeing stripped CEO Dennis Muilenburg of his chair title following the Boeing 737 Max groundings that raised concerns regarding corporate culture—in particular, whether the quality and safety of Boeing’s products were given sufficiently high priority and whether the Boeing Board of Directors exercised sufficient oversight of management to mitigate business strategy risks. Following its 2020 annual meeting, Boeing formally implemented a policy requiring an independent chair whenever possible. Proxy advisory firms have been traditionally vocal in recommending a separation of the chair and CEO roles. INDEPENDENT CHAIR PROPOSALS SUBMITTED TO A VOTE (Excludes Withdrawn or Omitted Proposals # of Proposals Voted On Average % Support Proposals Passed 2020 2019 2018 2020 2019 2018 2020 2019 2018 46 60 47 34.89% 29.85% 31.91% 2 0 1 Shareholder Proposals by Category Shareholder Off-Cycle Action Rights Proposals regarding shareholders’ right to call a special meeting or to act by written consent are also relatively common. A significant majority of companies already grant shareholders the right to call special meetings, so most new shareholder proposals on the topic call for a reduction in the ownership threshold of existing special meeting rights. While institutional shareholders will generally vote in favor of amendments to the governance documents to enhance shareholder enfranchisement via the right to call a special meeting or to act by written consent, many have also indicated a need to balance the need to expand shareholder enfranchisement with the need to prevent a minority of shareholders from dominating key decision-making. As such, many key institutional investors will not vote in favor of recommendations to lower the ownership threshold required to access such rights. Other Governance Topics Traditional governance proposals that focused on removing takeover defenses and increasing board accountability, such as elimination of supermajority voting, board declassification, and majority voting for director elections, have become less common as most large-cap companies have already adopted these measures. However, such proposals continue to receive significant shareholder support: in 2020, nine proposals to eliminate supermajority voting were passed, six amendments to declassify the board were passed, and three proposals adopting majority voting were passed. Compensation Continuing on trends in recent years, shareholders continue to scrutinize say-on-pay proposals, which provide investors an alternative mechanism to express their approval or disapproval of a company’s executive compensation program. In 2020, average support for say-on-pay proposals remained strong, with 97.9% of companies receiving 50% or more support, a slight increase compared to 97.55% of companies receiving 50% or more support in 2019 and 2018. In light of the COVID-19 pandemic, compensation issues may come to the fore, particularly as they relate to pay disparities within companies, compensation mix, and performance targets. Additionally, due to investors’ heightened focus on climate change and other ESG issues, shareholder proponents submitted eight proposals relating to the linking of executive pay to sustainability or climate metrics. More of these proposals may be on the horizon. Environmental and Social Climate-focused proposals have attracted significant attention, with 10 shareholder proposals on the ballot related specifically to aligning a company’s strategy with emission reduction targets going to a vote in 2020. These proposals received an average support level of 38.5%, up sharply from 27.2% in 2019. Many of the shareholder proposals focus on how companies plan to address climate-related risks and disclosures. Other climate-related shareholder proposals request reporting on energy efficiency and renewable energy as well as environmental management. Notwithstanding the impact of the COVID-19 pandemic, it is likely that climate and sustainability-related proposals will continue to grow as key institutional shareholders, notably BlackRock, State Street, and Vanguard, continue to call for greater disclosure of climate-related risks and business strategies to adapt to a low-carbon economy. Other topics in the broad environmental and social category include climate change and climate regulation; environmental health and safety; political, lobbying, and charitable disclosure; human rights; diversity, gender, and discrimination topics; and other miscellaneous social topics. Specifically, diversity-focused proposals continue to gain traction, with focus shifting beyond the boardroom into management and the workforce, reflecting growing concerns regarding human capital management. The New York City Comptroller’s Office has been particularly active in pushing for greater diversity: in 2020, the Comptroller’s Officer submitted shareholder proposals at 17 companies that it viewed as not implementing its request to include consideration of qualified women and ethnically diverse candidates. Thirteen of those proposals were withdrawn after the target companies adopted policies requiring consideration of diversity in director and CEO searches; among the four remaining companies, two proposals received majority support. In addition to climate change, sustainability, and diversity-related proposals, shareholder proposals relating to political expenditures and lobbying remain in the top spot in terms of filings and are generally difficult to omit, with 95 filings submitted in 2020, slightly down from 102 submissions in 2019. However, shareholder support for proposals relating to political expenditures and lobbying is generally quite low, with only seven proposals out of 95 voted on in 2020 receiving majority support. Looking ahead, it is likely that environmental and social issues will continue to increase as the COVID-19 pandemic has exacerbated a number of social issues, including issues related to lobbying and political contribution disclosures, board composition, and human capital management. Proponents The most prolific proponents of shareholder proposals are individual investors: John Chevedden, James McRitchie, Myra Young, and William and Kenneth Steiner. Chevedden alone accounts for approximately 17% of all shareholder proposals submitted in the 2020 season. Individuals of this ilk are sometimes referred to as gadfly investors as their interests are generally not as typical investors but to instigate and bring about change. As part of its Boardroom Accountability Project, the New York City Comptroller has also become an active filer of shareholder proposals relating to diversity and the adoption of the Rooney Rule, a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions, and for director and CEO searches. Other proponents of shareholder proposals include: Public pension funds, which focus their proposals mainly on governance issues related to board diversity and social proposals relating to employee diversity, political contribution disclosure, and environmental issues Labor unions, which primarily focus on governance and compensation-related issues Asset management or advisory institutions, which primarily focus on environmental and social issues Legal and Regulatory Trends The 2020 proxy season was overshadowed by the COVID-19 pandemic, whose impact will likely continue to be felt during the 2021 proxy season. Among the key trends is a growing focus among shareholders on ESG issues, particularly with respect to climate change, social justice, and human capital management. From the deaths of George Floyd and Breonna Taylor to the inauguration of a new presidential administration, the 2021 proxy season is ripe for ESG issues. While such issues are yet to be fully reflected in regulatory shifts, the SEC, for example, has indicated that it intends to provide recommendations on ESG and related disclosures. The SEC’s Investor Advisory Committee has already recommended that the SEC “begin in earnest an effort to update the reporting requirements of Issuers to include material, decision-useful, ESG factors.” Additionally, in March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement that will develop initiatives to proactively identify ESG-related misconduct and launched a new webpage to bring together all of the SEC’s actions and information on ESG. The Biden administration has also prioritized climate considerations as an essential element of its U.S. foreign policy and national security, including via re-entry into the Paris Agreement. Although the SEC has not yet indicated that it plans to move beyond its current materiality standards with respect to mandated public disclosures, the demand from shareholders for standardized ESG data and reporting is likely to continue and may result in a further uptick in environmental and social shareholder proposals. It is also notable that proxy advisory firm ISS launched its Climate Voting Policy in March 2020, which, together with its Sustainability Voting Policy, will continue to lend support for ESG-related shareholder proposals. In the vein of ESG, organizations, including the Shareholder Commons, an independent non-profit organization that leverages existing platforms and addresses systemic issues and structures that hinder a just and sustainable economy, have begun to put forth shareholder proposals requesting that companies reincorporate as public benefit corporations (PBCs). The core principle of these shareholder proposals is that long-term investors will benefit if the corporate governance structure of companies is altered to address the needs of society and not just the financial interests of shareholders. Although a meaningful shift to PBCs has not occurred, it is expected that companies will increasingly integrate ESG throughout their businesses to help address the wide-ranging interests of their broader stakeholders (e.g., customers, employees, suppliers). Amid the COVID-19 pandemic, businesses that availed themselves of federal aid may also see scrutiny over compliance of their terms. In particular, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) imposes, among other things, limitations on executive compensation, mass layoffs of employees, dividends, and share buybacks. Even companies that did not seek CARES Act relief may face increased shareholder scrutiny with respect to compensation and workforce-related matters. Shareholder proposals seeking disclosure on pay disparities and workforce retention may become more common in the coming proxy season. It is also notable that the SEC has continued to revise the proxy rules, with the latest proposed changes setting heightened restrictions on shareholders seeking to include their proposals on the company’s proxy statement. The proposal increases the dollar threshold, and the holding period required to submit a proposal could make it more difficult for smaller shareholders, and potentially gadfly investors, to submit proposals. In addition, the SEC’s announcement that should it decline to take a view on an exclusion request, such silence should not be interpreted “as indicating that the proposal must be included,” may encourage more companies to exclude shareholder proposals. A company looking to submit a no-action letter with respect to a shareholder proposal should also look back to the October 2019 guidance issued by the Division of Corporation Finance in which the SEC noted that its decision whether or not to exclude a shareholder proposal under the ordinary business exception of Rule 14a-8(i)(7)8 is guided by consideration of the significance of the subject matter and whether the proposal seeks to micromanage the company. In drafting a no-action letter, a company may wish to eschew a one-size-fits-all or an overly technical approach in justifying why no-action relief is justified, and tailor its disclosures on company-specific facts and circumstances. Market Outlook Overall, while the aggregate number of shareholder proposals will likely remain stable going forward, environmental and social proposals will increasingly be featured alongside more traditional governance proposals. In particular, companies should expect a higher number of proposed resolutions on climate change, requests for lobbying and political expenditure disclosure, and human capital management. Climate-related and diversity proposals will likely see increasing support, and companies should be attentive to changes in their investors’ voting policies and practices to best prepare and predict the outcome of proposals that go to a vote. As in past years, boards that are seen as insufficiently responsive to shareholder votes may suffer from a negative ISS or Glass Lewis recommendation. It is also important to note that while the legal duties of care owed by boards have not changed, the long-term impacts of COVID-19 remain unknown, and large institutional investors will continue to hold companies to high expectations with respect to corporate governance and stewardship. Approaches to Proxy Season Heading into the next proxy season, companies should refresh and update their stakeholder and shareholder outreach plans to ensure a clear narrative that articulates the company’s purpose and strategy for delivering sustainable long-term value to stakeholders. Companies should develop a keen understanding of stakeholder and shareholder perspectives on the company and foster long-term relationships with major shareholders, including by appropriately handling shareholder requests to discuss ESG matters, its business portfolio, capital allocation and operating strategy, and response to COVID-19, and be open to providing greater transparency into the board’s practices, oversight of management, and company priorities. Companies should also integrate business relevant environmental and social governance considerations, including feedback from stakeholder and shareholder engagement, into long-term strategies and crisis management and be prepared to respond to increasing investor attention on these topics. Boards should evaluate every shareholder proposal thoughtfully and resist changes that the board believes will not be constructive, while addressing any modifications that in the board’s judgment will result in transparent, good governance, and promote decisions in the best interests of their stakeholders. Trevor S. Norwitz is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses primarily on mergers and acquisitions and corporate governance matters. He has advised public and private entities across many industries in connection with mergers, acquisitions, divestitures, hostile takeover bids and defenses, proxy contests, joint ventures, financing transactions, and corporate governance and crisis management situations. Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz, where he focuses on rapid response shareholder activism and preparedness; takeover defense and corporate governance; risk oversight, including cybersecurity and crisis situations; U.S. and cross-border mergers, acquisitions, buyouts, investments, divestitures, and strategic partnerships; and other corporate and securities law matters and special situations. Sabastian advises worldwide and across industries, including technology, financial institutions, media, energy and natural resources, healthcare and pharmaceuticals, construction and manufacturing, real estate/ REITS, and consumer goods and retail. Justin C. Nowell is an associate at Wachtell, Lipton, Rosen & Katz, where he focuses on advising companies on corporate governance, mergers and acquisitions, shareholder activism and preparedness, takeover defense, ESG, financing transactions, and related matters impacting their business and key stakeholders. Justin advises worldwide and across industries, including technology, financial institutions, media, energy and natural resources, healthcare and pharmaceuticals, construction and manufacturing, real estate/REITS, and consumer goods and retail. To find this article in Lexis Practical Guidance, follow this research path: RESEARCH PATH: Market Trends 2020/21: Shareholder Proposals in Practical Guidance. Related Content For guidance relating to the rules and procedures governing the drafting, solicitation, and distribution of the proxy statement and annual report, see > PROXY STATEMENT AND ANNUAL REPORT: DRAFTING, SOLICITATION, AND DISTRIBUTION For guidance relating to the rules and procedures governing the drafting, solicitation, and distribution of the proxy statement and annual report, see > RULE 14A-8 SHAREHOLDER PROPOSAL TIMELINE For an overview of proxy statements and annual meetings, see > PROXY STATEMENT AND ANNUAL MEETING RESOURCE KIT For a discussion on the perceived strengths and weaknesses of some common board leadership structures, see > CEOS, CHAIRS AND LEAD DIRECTORS: WHO LEADS THE BOARD? For a model proxy disclosure relating to the issue of separation of the CEO and chair positions, see > MODEL PROXY DISCLOSURE: SPLIT CEO AND CHAIR For additional information on proxy advisory firms and their role, see > PROXY CONTEST PREPARATION For an analysis of the say-on-pay vote requirement applicable to U.S. publicly held companies, see > DODD-FRANK'S SAY-ON-PAY PROVISIONS COMPLIANCE For an outline to assist in determining whether a golden parachute disclosure is required in an SEC filing and what the disclosure is required to cover, see > DISCLOSURE AND SHAREHOLDER VOTE FOR GOLDEN PARACHUTE COMPENSATION GUIDE 1 . 17 C.F.R. § 240.14a-8. 2. Id . 3. Id . 4. See, e.g. , Comment Letter of The Business Roundtable, File No. S7-23-19 (Feb. 3, 2020). 5. 17 C.F.R. § 240.14a-8. 6. Id. 7. Id.Market TrendsCapital Markets & Corporate GovernanceSummer 2021