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Can Executive Compensation Lead to More Corporate Diversity?

By Dalton BattinMarch 28th, 2022in Corporate, Legislative Developments, Rulemaking, Student Blog

BY: Isha Kumar, RBFL Student Editor

Firms often tie executive compensation to corporate social responsibility goals such as increased diversity, energy efficiency, employee wellbeing and product safety. [1] Recently, since 2020, large companies such as Nike, Starbucks and McDonald’s have begun to incentivize executives to achieve diversity hiring goals by increasing executive compensation if these goals are accomplished. [2]

In 2018, only a fifth of S&P 500 companies included a diversity metric in their compensation program, however, by May of 2021, this metric increased to a third of S&P 500 companies.[3] This was in large part due to the protests happening during the summer of 2020. The changing political climate led to prominent business leaders undertaking a pledge to fight racism, and work to recruit and promote minority employees.[4] In addition to the shifting political climate, companies may also be incentivized to tie executive compensation to diversity hiring because it is likely to increase company value. In the long-run, diversity and inclusion will lead to better financial performance and investment returns, therefore justifying the higher CEO pay.[5] 

In conjunction with companies employing their own stringent standards and goals related to diversity hiring, there are also various federal and state statutes regulating company diversity. Recently, NASDAQ set out a requirement that each NASDAQ-listed company have at least two diverse board members.[6]

In the coming years, public demand for an increase in diversity hiring initiatives is expected to only increase. It is likely that many smaller companies will follow the path of these larger corporations and link compensation to diversity initiatives. 

We will probably have to wait several years before we can observe the actual impacts of implementing the effects of such diversity compensation programs. Companies however should be wary that increasing diversity does not increase effectiveness in itself; simply committing to hiring more diverse employees is not enough, but it is a place to start. It is also important to be aware that only adding a certain number of diverse employees is unlikely to be representative of the amount of diversity that exists in the country. Therefore, while these efforts have the right intentions in mind, companies will have to do more for such initiatives to have meaningful effects.  

Sources:

[1] O'Kelly E. McWilliams III & Jennifer Budoff, Why And How To Link ESG Metrics With Exec Compensation, Law360 (July 1, 2021, 1:32 PM), https://www-law360-com.ezproxy.bu.edu/articles/1398378/why-and-how-to-link-esg-metrics-with-exec-compensation 

[2] Emily Glazer & Theo Francis, CEO Pay Increasingly Tied to Diversity Goals, Wall St. J., (June 2, 2021, 5:33 AM), https://www.wsj.com/articles/ceos-pledged-to-increase-diversity-now-boards-are-holding-them-to-it-11622626380  

[3] Allen Smith, More Companies Use DE&I as Executive Compensation Metric, SHRM, (Jul. 12, 2021), https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/dei-as-executive-compensation-metric.aspx [https://perma.cc/LB99-S49X]

[4] Amelia Lucas, Chipotle will link executive compensation to environmental and diversity goals, CNBC, (Mar. 4, 2021, 12:01 AM), https://www.cnbc.com/2021/03/04/chipotle-will-link-executive-compensation-to-environmental-and-diversity-goals.html [https://perma.cc/2QUG-3ZF7]

[5] Robin J. Ely & David A. Thomas, Getting Serious About Diversity: Enough Already with the Business Case , Harv. Bus. Rev. (Nov. 2020), https://hbr.org/2020/11/getting-serious-about-diversity-enough-already-with-the-business-case[https://perma.cc/2QET-AFLQ]

[6] Public Statement, Allison Herren Lee & Caroline A. Crenshaw, Commissioner, Statement on Nasdaq’s Diversity Proposals – A Positive First Step for Investors, SEC (Aug. 6, 2021), https://www.sec.gov/news/public-statement/statement-nasdaq-diversity-080621 [https://perma.cc/72MF-BMYW]

Evolving Taxation of Cryptocurrency Under the Biden Administration

By Dalton BattinMarch 28th, 2022in Currency, Regulatory Enforcement, Rulemaking, Tax

BY: Kaden Killpack, RBFL Student Editor

In the last decade, cryptocurrency investment and exchanges have skyrocketed. Popularity has surged because of the widespread use of the internet, transaction speed, and reliability. Cryptocurrency is bought, sold, mined, and traded over the internet through a network of thousands of computers. There is no centralized server that holds and regulates the cryptocurrency information, called blockchain. This means that a person can access their cryptocurrency and complete transactions from anywhere. These transactions are also reliable because the blockchain is stored on thousands of computers throughout the world. Any error or fraudulent activity that occurs on a computer is simply corrected by the thousands of other networked computers to correct the discrepancy through a process of cross-referencing. Furthermore, most of these transactions can be completed very quickly and conveniently. With all these benefits it is easy understand the increasing demand for cryptocurrency.

This substantial growth of cryptocurrency has shed light on the shortcomings of federal taxation. Despite a robust federal tax system, cryptocurrency taxation and regulation is inadequate to match the relentless growth. It is estimated that in the next decade the failure to effectively tax cryptocurrency will result in seven trillion dollars of lost tax revenue. It was not until 2014 that the IRS provided its first guidance to inform taxpayers on how to deal with cryptocurrency transactions. Still, in 2021, many taxpayers are not aware that cryptocurrency is taxed as property receiving capital gain treatment, nor are they aware of their responsibility to keep detailed and accurate records of their cryptocurrency transactions that are essential for accurate taxation.

In an effort to increase regulation of cryptocurrency and thus increase tax revenue and decrease the tax gap, or the difference between what tax is owed and what is actually paid, the Biden Administration has made several proposals. While some of these proposals are made with the intent to deliberately affect taxation of cryptocurrency, others affect cryptocurrency through their influence on capital gains tax, the current method used to tax cryptocurrency, which affect many other types of transactions as well. Biden Administration proposals that will modify taxation and regulation of cryptocurrency include increased reporting information and requirements from both taxpayers as well as cryptocurrency exchange platforms, increased capital gains tax rate, especially for high-income taxpayers, use of software to record tax pertinent information on transactions, and taxes on unrealized gains.

Through executing these proposals, the Biden Administration hopes to achieve greater tax revenue, clearer guidance to taxpayers on what and how to report their cryptocurrency transactions, and reduction of tax evasion and tax avoidance. In theory, if these proposals are implemented as they are stated, the Biden Administration could see significant decreases in the tax gap, however, it important to note that implementation could also cause taxpayers, especially wealthy taxpayers, the modify their investment strategies to avoid these added tax regulations thereby decreasing the potential productivity of the proposals.

Sources:

Greg Iacurci, IRS crackdown: Biden administration says it can raise $700 billion by targeting tax cheats, Cnbc (May 20, 2021), https://www.cnbc.com/2021/05/20/biden-tax-plan-calls-for-crackdown-on-wealthy-who-hide-bulk-of-income.html.

Jake Frankenfeld, Cryptocurrency, Investopedia, (Aug. 9, 2021), https://www.investopedia.com/terms/c/cryptocurrency.asp.

Kendra Little, The Biden Administration Took a New Stance on Crypto. Here’s What Investors Should Know, Time, (July 13, 2021), https://time.com/nextadvisor/investing/cryptocurrency/us-treasury-crypto-stance/.

Kendall Little, Yes, Your Crypto is Taxable. Here’s How to Report Virutal Currency to the IRS, Time, (May 21, 2021), https://time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-tax-guide/.

Kushal Agarwal, Are There Taxes on Bitcoins?, Investopedia, (July 21, 2021), https://www.investopedia.com/articles/investing/040515/are-there-taxes-bitcoins.asp.

Luke Conway, Blockchain Explained, Investopedia, (May 31, 2021), https://www.investopedia.com/terms/b/blockchain.asp.

Tax Reporting for Cryptocurrency Exchanges: How to Overcome Challenges and Calculate Cost Basis, Sovos, 8 (2020).

Homeowner Rights and How the Government Steals Home Equity

By Michael WaalkesJune 14th, 2021in Tax

By: Celene Chen, RBFL Student Editor

When a homeowner stops paying their property taxes, the government is well within its rights to foreclose and sell the home to pay for the taxes it is owed. Of course, the proceeds of the sale should go to paying the property-taxes the homeowner owed. But what happens when the home sells for more than what the homeowner owed? Logically, one would expect the government to take what it is owed and return the rest of the sale price to the homeowner. One might even characterize a government taking more than it is owed as theft.

So why is it that eight states have laws that explicitly exclude homeowners from the profits of their homes’ sales in tax foreclosure?[1] In other words, eight states have laws endorsing government theft. These laws, commonly called surplus retention statutes, vary in degree of severity. Some of these states—Alabama, Indiana, Illinois, Oregon, Minnesota and Mississippi, to be exact—provide a “redemption period” after the home’s sale where, if the former owner pays all previous delinquent taxes and fees, interest, and, sometimes, the purchase price of the property, the home is returned to the owner.[2] However, homeowners shouldn’t even have to pay fees and wade through a bureaucratic process to access the home equity they rightfully own after the government’s taxes are paid. On the other hand, Arizona and Missouri don’t even provide a redemption period, meaning homeowners don’t even have a chance to buy back their homes.[3]

The loss of home equity in these states – or the amount of equity stolen from homeowners – is staggering. In Oregon, a county foreclosed on a home-owner who owed $14,216.91 in taxes and fees, and his home sold for $167,000.[4] He lost home equity of $152,783.09 to the county.

What can be done about this egregious practice of state theft? Michigan, until recently, had a statute that excluded homeowners from the surplus proceeds of tax foreclosure and did not provide a redemption period. But, on July 17, 2020, the Michigan Supreme Court found the statute violated the Michigan Constitution because it permitted unconstitutional takings.[5] The courts in the remaining eight states that have these surplus retention laws – laws allowing the government to keep the profits from the sale of a homeowner’s home – should look to their own state Constitutions and do the same.

But protecting homeowner rights can stretch beyond just these eight states. Massachusetts does not have a law excluding homeowners from the profits of their homes’ sales in tax foreclosure. However, Massachusetts does have a provision that allows a foreclosing governmental unit to use a “tax deed” to transfer title of the home to the government.[6] If the government forecloses using this process, it voids all claims made against the home. In other words, while the Massachusetts law gives homeowners rights to the profits, there is a large loophole that a foreclosing government unit can use to remove homeowner rights to profits.[7]

Government theft has no place in the U.S. taxation regime, and these laws and practices must be abolished to protect homeowners’ rights in their home equity.

[1] See e.g., Ala. Code § 40-10-28 (2020); Ariz. Rev. Stat. Ann. § 42-18267; Ind. Code Ann. §§ 6-1.1-25-4, 6-1.1-24-6.1 (West 2020); 35 Ill. Comp. Stat. Ann. 200/21-350, 200/21-370 (West 2020); Or. Rev. Stat. Ann. § 312.120 (West 2020); Minn. Stat. Ann. §§ 281.17, .02 (West 2020); Miss. Code. Ann. § 27-45-3 (West 2020); Mo. Ann. Stat. § 92.750 (West 2020).

[2] Ala. Code § 40-10-28 (2020) (providing redemption period of three years during which the county retains the excess in a county treasury account while also retaining interest on that excess); Id. §§ 40-10-193, -121, -122  (requiring payment of all taxes, interest, penalties, fees, purchase cost of the home and eight percent interest on both the purchase cost of the home and any excess bid up to 15 percent of the home’s market value); Ind. Code Ann. §§ 6-1.1-25-4, 6-1.1-24-6.1 (West 2020) (providing redemption period of one year after sale or 120 days after sale to qualified purchasing agency and requiring payment of minimum bid, ten percent of selling price, attorney’s fees and costs of giving notice, costs of title search, taxes and assessments paid by purchaser of home with an added interest rate of ten percent, and all costs to county to sale); 35 Ill. Comp. Stat. Ann. 200/21-350, 200/21-370 (West 2020) (providing redemption period of two years and requiring payment of all taxes, costs, interest, and a penalty interest of twelve percent for how long taxes were delinquent); Or. Rev. Stat. Ann. § 312.120 (West 2020) (providing redemption period of two years and requiring payment of all delinquent taxes and taxes after the property was sold, interest on those taxes, a five percent penalty on the total amount, and $50 or the title search fee); Minn. Stat. Ann. §§ 281.17, .02 (West 2020) (providing redemption period of three years and requiring payment of bid in cost for government to purchase, all delinquent taxes prior to and after sale, penalties, costs, and interest); Miss. Code. Ann. § 27-45-3 (West 2020) (providing redemption period of two years after day of sale and requiring payment of all delinquent taxes, a five percent penalty on delinquent taxes, costs to sale, all taxes since sale, and interest rate of 1.5 percent per month for both taxes and costs).

[3] Ariz. Rev. Stat. Ann. § 42-18267 (providing that the owner’s failure to redeem before the deed is delivered to the state terminates any redemption rights); Mich. Comp. Laws Ann. § 211.78g (West 2020) (providing the redemption period ends on the March 31 after the judgment of foreclosure, the date when fee simple title of the property vests absolutely in the foreclosing governmental entity); Mo. Ann. Stat. § 92.750 (West 2020) (providing a failure to redeem before the sale bars the former owner from ever exercising a redemption right).

[4] Reinmiller v. Marion, No. 05-1926-PK, 2006 WL 2987707, at *2 (D. Or. Oct. 16, 2006) (once the redemption period expired, the county was within their rights to sell the property).

[5] Rafaeli. v. Oakland, No. 156849, 2020 WL 4037642 (Mich. July 17, 2020).

[6] Ralph D. Clifford, Massachusetts Has A Problem: The Unconstitutionality of the Tax Deed, 13 U. Mass. L. Rev. 274, 276 (2018) (“Most commonly, a Massachusetts municipality uses a “tax deed” that is executed by the tax collector and recorded on the land records. Using this document, the municipal officer transfers title to the land from the taxpayer to the town, subject to a right to redeem title if the taxpayer satisfies the tax debt and associated costs. If the tax debt is not paid, Massachusetts law uses strict foreclosure to extinguish the remaining title held by the taxpayer, known as the right of redemption.”).

[7] Id. at *276-277 (The municipality gains a windfall – “title to the land free and clear of all other claims being made against the property.”).

SEC Changes to Shareholder Proxy Rules RE Shareholder Proposals and Voting Advice and Implications for Corporate Governance

By Michael WaalkesJune 11th, 2021in Regulatory Enforcement, Securities Exchanges

By: Ashley Riley, RBFL Student Editor

This past Fall, the SEC finalized amendments to Exchange Act Rules regarding proxy voting advice and solicitation, as well as shareholder proposals. Amendments to section 14a-1(l) of the Exchange Act will explicitly define the services rendered by proxy advisors as “solicitation.” This will make it illegal to solicit proxy services without conforming to the SEC anti-fraud guidelines presented, giving the SEC broad discretion in defining what “solicitation” means in respect to proxy voting advice. The amendment to Rule 14a-(2)(b)(9) requires that in order to utilize the information and filing exemptions under Rules 14a-2(b)(1) and 14a-2(b)(3), proxy advisors are required to disclose any material conflicts of interest to their clients in advance of solicitation of their services. The final rule adopted a broader principles-based system regarding the dialogue between proxy advisors and registrant firms rather than the proposed rule’s hard requirement of a review opportunity for registrants to provide feedback and make changes on the proxy report before the final distribution of the advice.

Proxy advisory firms may need to adapt to the timing and disclosure obstacles that the amendments create by finding ways to become more efficient in their disclosures, or reworking timelines for research to dispersal. With the aim of the amendments being focused on rectifying the issue of false or misleading information in reports generated by proxy advisors, there may be ambiguity on what constitutes what constitutes “false” or “misleading” under the SEC standards, which could potentially lead to further delays and possibly even, what some have anticipated, “frivolous” litigation. Implications of these changes can have substantial cost and time effects on the proxy voting and shareholder proposal processes of large companies. Those resisting the amendments being made to the proxy advisory process (e.g., the Council of Institutional Investors) argue that the additional burdens placed on proxy advisors will significantly increase costs to both the proxy advisors as well as their clients, thus depleting the value of the service and information they are providing. The time and money that will go into researching, monitoring, and reporting every potential conflict of interest proxy advisors could have with a client would be extremely time consuming for advisors and potentially delay their reports. Further, the principles-based approach to registrant involvement might be additionally time consuming, and could compromise material that is intended to be confidential for specific clients. These types of delays could de-value the advice and other services that proxy advisors provide.

The amendments to the shareholder proposal process appear to alter the corporate governance landscape, in terms of stimulating discussion and decision making on social, environmental, and other “political” issues. The stricter threshold requirements have the potential to significantly alter shareholder boards rights and powers, by decreasing the number of shareholders that will have the ability to submit or resubmit proposals—seemingly disproportionally effecting smaller-scale shareholders. The changes made to the shareholder proposal thresholds can substantially impact participation of retail investors. Given the amount of resistance to the amendments from industry players and the seemingly minimal effects, the amendments would appear to not be worth the costs. The SEC does not specifically identify what the inadequacies in current disclosure practices to justify the amendment to proxy rules for voting advice, which makes the necessity of the amendment to proxy advising questionable.

Sources:

Exemptions from the Proxy Rules for Proxy Voting Advice, 17 C.F.R. § 240 (July 22, 2020).

Cydney Posner, SEC adopts amendments regarding proxy advisory firms, Cooley, (July 22, 2020) https://cooleypubco.com/2020/07/22/sec-amendments-proxy-advisory-firms/.

Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, 84 Fed. Reg. 66518 at 66529 (proposed Dec. 4, 2019) (to be codified at 17 C.F.R. pt. 240).

Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, 84 Fed. Reg. 66458 (proposed Dec. 4, 2019) (to be codified at 17 C.F.R. pt. 240).

Abe Friedman et. al., SEC Proposed Rule Amendments on Shareholder Proposals and Proxy Advisors: Implications for Issuers, Investors and Proxy Advisors, Harv. L. Sch. F. on Corp. Governance (Dec. 9, 2019).

Concept Release on the U.S. Proxy System, Release No. 34–62495 (Jul. 14, 2010) [75 FR 42982 (July 22, 2010)] (‘‘Concept Release’’), at 42983-42984.

Letter from Paul Schott Stevens, President and CEO, Investment Company Institute, to Vanessa A. Countryman, Secretary, Securities and Exchange Commission (Mar. 2, 2020) (on file with the Harvard Law School Forum on Corporate Governance).

Tom Zanki, SEC’s Shareholder Voting Proposals Endure Heavy Criticism, Law 360 (Feb. 7, 2020, 10:12 PM), https://www.law360.com/articles/1242028/sec-s-shareholder-voting-proposals-endure-heavy-criticism.

David F. Larcker, et. al., The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry, Harv. L. Sch. F. on Corp. Governance (Jun. 14, 2018).

Memorandum from S.P. Kothari on Analysis of Data Provided by Broadridge Financial Solutions, Inc. to File S7-23-19, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Aug. 14, 2020)(on file on SEC website) https://www.sec.gov/comments/s7-23-19/s72319-7645492-222330.pdf.

 

Future Regulation of Sports Betting

By Michael WaalkesJune 9th, 2021in Regulatory Enforcement

By: Daniel Altshuller, RBFL Student Editor

On May 14, 2018 the Supreme Court found in Murphy v. National Collegiate Athletic Association that the Professional and Amateur Sports Protection Act (PASPA) was unconstitutional. PASPA was a Federal law that prohibited States from allowing sports betting. PASPA was unconstitutional because it violated the anti-commandeering doctrine which restricts Congress from controlling state legislatures “as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals.” Due to the Murphy v. National Collegiate Athletic Association decision, as of December 21, 2020, twenty-six states plus the District of Columbia have legalized sports betting. With the impending widespread legalization of sports betting, there are opportunities for sportsbook operators to generate high revenues, however sportsbook operators need to also be mindful of federal regulations such as the Bank Secrecy Act (BSA). The BSA, which is enforced and administered by the Financial Crimes Enforcement Network (FinCen) and the Office of the Comptroller of the Currency (OCC), is intended to help governments combat money laundering through increased regulations, and applies to all “financial institutions.” As it stands, the BSA only applies to sportsbook operators that have state licenses and have revenues over $1 million dollars. Even though all sportsbook operators facilitate wagers on sporting events, they have many important differences, and operate differently in different states. For example, some sportsbooks offer services exclusively online, only in person, or both online and in person. As well, some sportsbook operators offer their services in only one state, while other sportsbook operators offer services across many different states. Due to the different characteristics of sportsbook operators there has been much discussion over which sportsbook operators should be required to follow the BSA.

My Note mainly discusses three possible options that FinCen and the OCC should consider when deciding which sportsbook operators should be required to follow the BSA. The first option is to regulate all sportsbook operators regardless of their characteristics. This would allow for a more straight forward approach and give the most protection from money laundering activities. A second option that FinCen and the OCC could consider would be to allow all sportsbook operators to be exempt from the regulations of the BSA. This option would allow for more competition within the industry, more taxes collected by state governments, and extinguish any desire for sports bettors to use offshore sports betting services in states where sports betting is legal. Although, exempting sportsbook operators from following the BSA would leave the sportsbook operating sector vulnerable for money laundering. The third and most compelling option that my Note discusses is to require all sportsbook operators to follow the regulation of the BSA except for online-only sportsbook operators. My Note discusses this as the best option because it is logical, and an appropriate compromise between over regulation and under regulation. It is logical because online-only sportsbook operators are the most unlike traditional “financial institutions.” Furthermore, deposits into online-only sportsbook operators will likely have to pass through a financial institution that must comply with the Bank Secrecy Act, thereby making an online-only sportsbook operator’s compliance redundant. Lastly, this form of regulation will still accomplish the goal of outlawing offshore sportsbook operators, increasing taxes, and increasing competition while still maintaining a presence in regulating sportsbook operators.

Sources:

Shifting Viewpoints on ESG and Potential Mandatory Disclosures

By Michael WaalkesJune 7th, 2021in Corporate

By: Robert Gilligan, RBFL Student Editor

For a long time, people believed that a corporation deciding to pursue environmental, social, and corporate governance (ESG) initiatives was a decision that necessarily involved divergence from the corporate mission of garnering value for shareholders. However, in recent years, this thinking has undergone a dramatic shift. Today, investors, executives, and consumers alike view a corporation’s commitment to ESG issues as a sign of long-term well-being.

A series of reports published in 2005 found a correlation between ESG initiatives and financial valuation. These reports sparked a trend in the investor community, and it is now common practice for shareholders to look beyond traditional financial statements and evaluate companies based on their stewardship of stakeholder resources. As of 2018, ESG investing was estimated at over $20 trillion in AUM or about a quarter of all professionally managed assets around the world. This shift in investment strategy is also reflected in the exponential growth of Sustainable Sector and ESG Consideration funds. Sustainable Sector funds are portfolios focused on investing in companies associated with the growing "green" economy or focused on sustainability themes within an existing sector. Since 2009, the number of Sustainable Sector funds has grown from 100 to 303. ESG Consideration funds are conventional funds that say the “consider” ESG factors. There are now 564 ESG Consideration funds in operation, up from just 81 in 2018.

As the importance of ESG issues has grown in the eyes of investors, naturally corporate directors and executives have begun to acknowledge the need to integrate ESG initiatives into their governance and operations. In fact, a 2017 poll suggested that 85 percent of directors and executives believe that ESG issues should be formally addressed within their companies. We have also seen a significant uptick in ESG reporting, with 86 percent of the S&P 500 publishing corporate reports on sustainability. However, some investors complain that corporate disclosures are often merely boilerplate and are of limited value to investors seeking to evaluate companies’ ESG risks. These investors have called for the SEC to enhance its disclosure requirements and for the U.S. Congress to enact new laws to mandate more ESG disclosures.

With the onset of the Biden administration, and the President’s nomination of Gary Gensler to chair the Securities and Exchange Commission, many commentators believe the establishment of standardized ESG reporting metrics is likely. Notably, President Biden has pledged to require public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains. Moreover, Gary Gensler is widely expected to bring significant change to the SEC, including the implementation of rules based ESG disclosure requirements. Thus, ESG’s meteoric rise as an indicator of corporate value appears to have landed it a position amongst the Securities and Exchange Commission’s mandatory disclosures.

Jessica Strine et al., The Age of ESG, Harvard Law School Forum on Corporate Governance (March 9, 2020) https://corpgov.law.harvard.edu/2020/03/09/the-age-of-esg/.

Jon Hale, The ESG Fund Universe is rapidly Expanding (Mar. 9, 2020) https://www.morningstar.com/articles/972860/the-esg-fund-universe-is-rapidly-expanding

George Kell, The Remarkable Rise of ESG, Forbes (July 11, 2018), https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/?sh=3525c7561695.

Bryan Williamson et al., Biden’s “Money Cop” to Shine a Light on ESG, Harvard Law School Forum on Corporate Governance (Mar. 2, 2021) https://corpgov.law.harvard.edu/2021/03/02/bidens-money-cop-to-shine-a-light-on-esg-disclosure/#more-136490.

COVID-19 and M&A Breaches

By Michael WaalkesJune 4th, 2021in Judicial Decisions

By: Daniel Fradin, RBFL Student Editor

In late 2019, the COVID-19 pandemic originated in China and began a relentless spread around the world. By March 2020, large portions of the world economy began to shut down to weather the public safety dangers of the virus. Some of the most drastic effects of the virus were felt by the travel and hospitality industries, with demand for airline flights and hotel bookings decreasing to almost nil. The pandemic also threw a wrench in several high-profile mergers and acquisitions as acquirers sought to back out of previously agreed-upon deals either because of the genuine effects of the virus on the target’s business, or to take advantage of the crisis and free up capital.

Most prominent of the deals destabilized by COVID-19 was the LVMH-Tiffany Merger. LVMH contended that Tiffany had been mismanaged over the first half of 2020, refusing to close on the agreement. Tiffany responded by suing LVMH for breach of contract. LVMH countersued, arguing Tiffany was in breach and the sale had been terminated because the pandemic was a material adverse effect not carved out by the sale agreement. LVMH also argued that Tiffany breached its ordinary course of business covenant by mismanaging the company in 2020. The LVMH-Tiffany deal, although resolved out of court, was among the highest profile of the various deal litigations that occurred in the wake of COVID-19, and was emblematic of the legal maneuvers acquirers have used to wrestle themselves out of closings.

However, AB Stable VIII LLC v. Maps Hotels and Resorts One LLC proceeded to trial in November 2020 in the Delaware Chancery Court. Like the LVMH-Tiffany deal, the seller sued the buyer for failing to close, and the buyer countersued alleging, inter alia, that the pandemic was an unexcused material adverse effect, and that the seller had breached its ordinary course covenant. However, unlike LVMH and Tiffany, the business being acquired in Stable was in one of the industries most drastically affected by the COVID-19 pandemic: the buyer was acquiring fifteen luxury hotels from the seller.

On the issue of material adverse effect, without deciding whether the pandemic was indeed a material and adverse effect on the seller’s business, the court found that an exclusion for “natural disasters and calamities” effectively allocated the risk of pandemic to the buyer. The virus was a naturally-occurring phenomenon that clearly fit into the definition of “natural disaster.” On the issue of the ordinary course covenant, the court deferred substantially to the plain language of the sale agreement, finding that the measure of the “ordinary course of business” was consistency with “past practice.” Because the seller had drastically altered the operations of its hotels, including fully closing two of them, its business deviated from the ordinary course, and gave the buyer the right to terminate.

The Chancery Court’s decision, while clearly attributable to the plain language of the Sale Agreement, led to an apparently irrational outcome as the seller here changed its business practices for the buyer’s benefit. Indeed, the seller’s changes to its hotel business may well have saved the buyer a substantial amount of money. But no good deed goes unpunished – the plain language of the Sale Agreement would have had the hotels operate as if the pandemic did not exist, no matter the cost. This prompts a poignant question for sellers: how can a party execute a Sale Agreement by its terms in good faith if the terms themselves are irrational? As is often the case in M&A, it is preferable to “see permission, not forgiveness” and obtain consent from the counterparty before embarking on substantial changes to one’s business.

Sources:

AB Stable VII LLC v. Maps Hotels and Resorts One LLC et al, C.A. No. 2020-0310-JTL, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020).

Pamela N. Danziger, What’s Ahead For Tiffany Once LVMH Takes Over? Forbes (Nov. 15, 2020 5:00 AM), https://www.forbes.com/sites/pamdanziger/2020/11/15/whats-ahead-for-tiffany-once-lvmh-takes-over/?sh=633c1ce63c90

 

Barbara Borden, et al., Delaware Puts The Conduct Of Business Covenant On Center Stage In COVID-Related M&A Dispute, Cooley (Dec. 15, 2020), https://cooleyma.com/2020/12/15/delaware-puts-the-conduct-of-business-covenant-on-center-stage-in-covid-related-ma-dispute/

 

Angelo Bovino, et al., Delaware Court Of Chancery Permits Buyer To Terminate Merger Due To Target's Failure To Operate In The Ordinary Course; But Finds No MAE Due To COVID-19, Paul Weiss (Dec. 7, 2020), https://www.paulweiss.com/practices/transactional/mergers-acquisitions/publications/delaware-court-of-chancery-permits-buyer-to-terminate-merger-due-to-target-s-failure-to-operate-in-the-ordinary-course-but-finds-no-mae-due-to-covid-19?id=38871

CFIUS and the Mandatory Disclosure Requirement for Foreign Investments in Critical Technologies

By Michael WaalkesJune 2nd, 2021in Regulatory Enforcement

By: Owen Marks, RBFL Student Editor

Since its creation by President Ford in 1975, the Committee on Foreign Investment in the United States (“CFIUS”) has toed the line between fostering economic growth and ensuring that U.S. national security priorities remain unthreatened by foreign investment. With the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), Congress gave CFIUS the ability to require mandatory declarations from foreign investors seeking to invest in firms with certain critical technologies. Before FIRRMA’s enactment, such declarations had generally been made on a purely voluntary basis. Congress added this requirement largely in response to perceived risks from primarily Chinese investors and the fear that investments that granted access to critical technologies threatened the U.S. military’s technological superiority along with U.S. consumer protection initiatives.

Shortly after Congress established the mandatory declaration requirement, the Treasury Department promulgated a metric for determining whether or not an investor had to file the declaration with CFIUS. This rule would require a filing if an investment was with a U.S. firm that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies in connection with any of 27 industries identified by reference to the North American Industry Classification System (NAICS).” Some critics of this rule noted that the wide range of investments that could possibly fall into these categories created an opportunity for false-positives, or investments that were otherwise acceptable under CFIUS’s review were it not for the mandatory declaration.

In October of 2020, the Treasury Department implemented a new Final Rule which deviates from the NAICS code analysis previously applied. Rather than relying on the NAICS classification methodology, the Final Rule asks potential investors to examine the pre-existing export-control mechanisms that govern their prospective transaction. This change was met with a mixed reception, with arguments that the expansive nature of the Final Rule conflicts with Congress’s wish that CFIUS refrain from dictating economic investment clashing with others claiming that the process promote clarity for investors already familiar with their export-controls.

Since the adoption of the mandatory disclosure requirement, filings with CFIUS from potential investors have exploded in number, with 94 deals through that process in 2019 alone. However, not all of the filings have been driven by the implementation of the Final Rule. Under the Biden administration, CFIUS is positioned to take an active and aggressive role. The potential for a CFIUS regulatory takedown has driven some investors to make preliminary filings and seek out approval before finalizing transactions. The Biden administration has also signaled that it will wield CFIUS against smaller transactions that might give too much access to critical technologies with less than a controlling share in the target firm. The White House has also advised that large transactions are still possible targets and, for example, will continue the review of TikTok that began under the Trump administration. In the midst of these changes in CFIUS’ policy and aims, it is clear that the coming years will see an aggressive pursuit of Congress’s dual objectives of both encouraging foreign investment and protecting national security interests.

Sources

31 C.F.R. § 800 (2020)

85 Fed. Reg. 30,893, 30,894 (May 21, 2020)

Provisions Pertaining to Certain Investments in the States by Foreign Persons, 85 Fed. Reg. 57,124 (Sept. 15, 2020) (codified at 31 C.F.R. § 800).

Exec. Order No. 11,858, 40 Fed. Reg. 20,263 (May 7, 1975)

H.R. Rep. No. 115-784, pt. 1 (2018)

H.R. 5841, 115th Cong. (2018)

Jeffery Gerrish et al., Treasury Department Issues Final Rule for Mandatory CFIUS Filing Requirements Based on ‘Critical Technology, Skadden (Sept. 22, 2020),  https://www.skadden.com/insights/publications/2020/09/treasury-department-issues-final-rule

 

James K. Jackson, Cong. Research Serv., The Committee on Foreign Investment in the United States (2020).

Katy Stech Ferek, U.S. Panel Expands Review of Business Deals with Foreign Money, Wall St. J. (July 30, 2020) https://www.wsj.com/articles/u-s-panel-expands-review-of-business-deals-with-foreign-money-11596146350.

In Response to OCC Guidance, Some Banks are Already Making Moves Towards Providing Cryptocurrency Services

By Michael WaalkesMay 31st, 2021in Regulatory Enforcement

By: Lily Ramin, RBFL Student Editor

In recent years, cryptocurrency has grown exponentially.[1] Still, until recently, due in part to a lack of regulatory guidance, banks had been uncertain about their ability to engage with cryptocurrency legally. However, in 2020, the Office of the Comptroller of the Currency (OCC) published two interpretative letters, essentially giving banks the green light to provide cryptocurrency services, as long as banks manage the risks and abide by all relevant laws.

More specifically, the July 22, 2020 interpretative letter (the July Letter) clarified that national banks and federal savings associations have the authority to provide cryptocurrency custody services, such as holding unique cryptographic keys for customers.[2] The letter also confirmed that national banks “may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as [banks] effectively manage the risks” which include hacking, theft, and fraud, “and comply with applicable law” including the Bank Secrecy Act and anti-money laundering rules.[3] The September 21, 2020 interpretive letter provided further clarity, stating that banks may also provide custody services for “stablecoins” that are backed one to one by a single fiat currency.[4]

The OCC guidance sent banks the message that they should either modernize and embrace cryptocurrency or risk missing out on a massive opportunity.[5] Although the guidance was not a significant policy change, the recognition of cryptocurrency by a federal regulator helped legitimize the asset class and made banks feel more comfortable engaging with the asset class despite its risks and volatility.

Some banks have already made major moves in step with the OCC’s guidance. In February, BNY Mellon created a new digital assets unit and announced its plans to provide cryptocurrency custody and investment services later this year.[6] Explaining the move, Roman Regelman, CEO of Asset Servicing and Head of Digital at BNY Mellon, said that “growing client demand for digital assets, maturity of advanced solutions, and improving regulatory clarity present a tremendous opportunity for us to extend our current service offerings to this emerging field.” Also, notably, Coin Desk has reported that J.P. Morgan, Citi, and Goldman Sachs are “said to be working on custody solutions for digital assets and crypto.”[7]

The OCC’s guidance sent a bold, crypto-friendly message to banks. It encouraged them to embrace financial technology advancements and consider providing cryptocurrency services. That message sparked conversation on Capitol Hill. Two congressmen on the Congressional Blockchain Caucus provided their perspectives.[8] Republican Congressman Tom Emmer called the July Letter a “‘big step forward’ for financial innovation.”[9] Somewhat similarly, Democrat Congressman Darren Soto referred to the letter as “‘an important step’ to better integrate cryptocurrencies into the U.S. financial system, though he cautioned that “the federal government is still behind in incorporating” cryptocurrency.”[10] A few months later, Maxine Waters, Chairwoman of the House Committee on Financial Services, recommended that President Biden rescind the OCC’s cryptocurrency related guidance.[11] President Biden’s likely pick for Comptroller of the Currency, Michael Barr, previously served on cryptocurrency firm Ripple’s advisory board.[12] If confirmed, given Barr’s cryptocurrency background, he could likely support policies that adopt the crypto-friendly stance of the OCC’s July and September interpretive letters.[13]

[1] Top 100 Cryptocurrencies by Market Capitalization, CoinMarketCap, https://coinmarketcap.com/ [https://perma.cc/E8W4-9WH8] (last visited March 5, 2021).

[2] Office of the Comptroller of the Currency, Interpretive Letter No. 1170 1 (July 22, 2020), https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf [https://perma.cc/56NJ-PQNU].

[3] Id.

[4] Office of the Comptroller of the Currency, Interpretive Letter No. 1172 1, 3 (Sept. 21, 2020), https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf [https://perma.cc/2XK3-7KFU].

[5] Steven D. Lofchie, OCC Allows National Banks to Provide Digital Asset Custody Services, Mondaq (July 28, 2020), https://www.mondaq.com/unitedstates/fin-tech/969788/occ-allows-national-banks-to-provide-digital-asset-custody-services.

[6] Press Release, BNY Mellon, BNY Mellon Forms New Digital Assets Unit to Build Industry’s First Multi-Asset Digital Platform, BNY Mellon (Feb. 11, 2021), https://www.bnymellon.com/us/en/about-us/newsroom/press-release/bny-mellon-forms-new-digital-assets-unit-to-build-industrypercent27s-first-multi-asset-digital-platform-130169.html [https://perma.cc/56ZP-KG3M].

[7] Ian Allison, BNY Mellon Announces Crypto Custody and Spies Integrated Services, CoinDesk (Feb. 11, 2021, 7:23 AM), https://www.coindesk.com/bny-mellon-announces-crypto-custody-and-spies-integrated-services [https://perma.cc/DX4G-ZEAQ].

[8] Nikhilesh De & Ian Allison, Banks Won’t Rush to Hold Crypto—But OCC’s Regulatory Approval Makes it Harder to Ignore, CoinDesk (July 27, 2020, 2:34 PM), https://www.coindesk.com/banks-wont-rush-to-hold-crypto-but-occs-regulatory-approval-makes-it-harder-to-ignore [https://perma.cc/J4WU-LUSD] (explaining that the July Letter “is rapidly expanding crypto awareness on Capitol Hill”).

[9] Id.

[10] Id.

[11] Letter from Maxine Waters, Chairwoman of the House Comm. on Fin. Servs., to Joe Biden, President-elect (Dec. 4, 2020), https://financialservices.house.gov/uploadedfiles/120420_cmw_ltr_to_biden.pdf [https://perma.cc/G5WE-A6HC].

[12] Evan Weinberger & Andrew Ramonas, Progressives Fret Over Biden’s Pick to Oversee National Banks, Bloomberg L. (Feb. 5, 2021, 12:08 PM), https://news.bloomberglaw.com/banking-law/progressives-fret-over-bidens-pick-to-oversee-national-banks.

[13]John Adams, Biden’s OCC Expected to Chart New Course for Fintechs, Crypto, AML, American Banker (Jan. 27, 2021, 3:17 PM), https://www.americanbanker.com/news/bidens-occ-expected-to-chart-new-course-for-fintechs-crypto-aml.

The Federal Reserve’s Role in Developing Real-Time Payment Services in the United States

By Michael WaalkesMay 28th, 2021in Technology

By: Justin Moore, RBFL Student Editor

Real time payment systems provide a valuable method of payment that enables businesses and consumers to make and received payments within seconds.[1] With widespread adoption of a real-time payment system among banks, recipients of payments will be able to access their funds almost immediately after the sender initiates payment. More than twenty countries already use real-time payment services, including the U.K., Singapore, and Australia.[2] Meanwhile, banks in the United States still rely on the deferred net settlement (“DNS”) system, where banks settle by “netting out” the dollars coming to and from their account holders at a given time, usually at the end of the business day.[3] Using DNS, account recipients generally have to wait over a day to access transfers in cash or tolerate transaction limits set forth by banks to avoid settlement risk.[4]

To catch up with other countries, the Federal Reserve Board (the “Fed”) announced that the Federal Reserve Banks will develop a round-the-clock real-time payment system: the FedNow Service.[5] The Service–which the Fed expects to be available to banks in 2023 or 2024–aims to provide individuals and businesses with more flexibility to manage their money and make time-sensitive payments.[6] If FedNow launches, it would co-exist with RTP, a U.S. real-time payment service developed by The Clearing House (“TCH”)–a private company consisting of some of the world’s largest banks.[7]

To date, there have been no legal challenges to the Fed’s legal authority to create a real-time payment service[8] and no cognizable claim against the Fed’s authority seems likely to prevail.[9] Most of the controversy surrounding FedNow focuses on whether the Fed or private actors–such as TCH–should lead the charge in bringing real-time payment services to the United States.

TCH’s rollout of RTP has been slow-moving,[10] especially before the announcement of FedNow,[11] and its reliance on the private sector alone has left the United States without any real-time payment services as other advanced countries have rolled out real-time payment services to their banks with the help of their central banks.[12] The lack of a widely adopted real-time payment service has left middle and low income individuals in need of immediate cash to resort to risky, expensive alternatives, such as payday lending or check-cashing services.[13] Additionally, small businesses – especially during times of crisis – need to quickly manage cash to address unexpected costs.[14] Implementing a Fed-operated service would speed up the rollout of real-time payment services to banks across the country. FedNow’s use the ISO 20022 messaging and other globally accepted standards, for example, will encourage future private real-time payment services–which would want their services to be interoperable with FedNow–to adopt similar standards, making real-time payments more connected across the country.[15] Moreover, relying on only one service runs the risk of having a single point of failure in the instant payment infrastructure.[16] In other words, if RTP were to crash, then no one in the United States would have access to any instant-payment service.

Especially amid a global pandemic, U.S. businesses and individuals see even more of a need for quick transfers of cash. Given RTP’s questionable rollout to smaller banks and individuals and businesses need to make quick, reliable transfers, a Fed-operated system could spark widespread adoption of real-time payment services in the U.S. and serve as a platform for future innovation in real-time payments.

[1] Service Details on Federal Reserve Actions to Support Interbank Settlement of Instant Payments, 85 Fed. Reg. 155 (Aug. 11, 2020) (“The FedNow Service will be available to banks in the United States and will enable individuals and businesses to send instant payments any time of day, any day of the year through their bank accounts.”).

[2] FIS, Flavors of Fast Report 30-42 (2019), https://empower1.fisglobal.com/rs/650-KGE-239/images/Report_Flavors_of_Fast_2019.pdf?mkt_tok=eyJpIjoiTkRobFpEQmtZbVU1TXpKaCIsInQiOiJNVlA3QWdVZjJsM1QyR2FPc25EQUZFand2QTRJNFh0aHVvVHgwMFlBYW5zQ245dE9vYkxnYnNIYXc3bThpTVZiU2JDTmRtMldwMFwvcENNdDdLNWdpcENsMVIweFBxVm5nYWJTcWJPdDhTYzYwdlBubkp1bnIxd0F0N1B0VnNFdkUifQ%3D%3D

[3] Id. (“At the end of each daily cycle, the three banks “net out” the total dollar amounts flowing to and from their respective accountholders on that retail platform, and then each make or receive a single payment on the books of the Federal Reserve to cover the day's transactions.”).

[4] Id.; Stefan Lembo Stolba, Here’s What You Need to Know About Zelle, Experian (Apr. 10, 2020), https://www.experian.com/blogs/ask-experian/heres-what-you-need-to-know-about-zelle-the-mobile-payment-app-that-rivals-venmo/ [https://perma.cc/DP5T-HTUF] (showing a table that contains the daily and monthly transfer limits a popular payment app, Zelle – Citizens Bank, for example, has a daily limit of $1,000 and a monthly limit of $5,000).

[5] Federal Reserve announces plan to develop a new round-the-clock real-time payment and settlement service to support faster payments, Bd. of Governors of the Fed. Reserve Sys. (Aug. 5, 2019, 1:30 PM), https://www.federalreserve.gov/newsevents/pressreleases/other20190805a.htm [https://perma.cc/AL7E-E2YZ] (“The Federal Reserve Board on Monday announced that the Federal Reserve Banks will develop a new round-the-clock real-time payment and settlement service, called the FedNow℠ Service.”).

[6] Id. (“The Board anticipates the FedNow Service will be available in 2023 or 2024.”); see The Fed. Reserve, Announcing the FedNowSM Pilot Program, FRBservices.org, https://www.frbservices.org/financial-services/fednow/announcing-the-fednow-pilot-program.html?utm_source=real_magnet&utm_medium=email&utm_campaign=The%20Nussle%20Report%20%2D%20October%2016%2C%202020 [https://perma.cc/2S2V-A79Z] (last visited Oct. 25, 2020) (discussing the Federal Reserve’s creation of a pilot program to allow financial institutions, service providers, and payment processors test out the FedNow service before launch.).

[7] Id. at 52.; Philip Rosenstein, Fed’s New Real-Time Payment System Targets Interoperability, Law360 (Aug. 6, 2020, 12:54 PM), https://www.law360.com/articles/1299085/fed-s-new-real-time-payment-system-targets-interoperability (“FedNow will exist alongside a private real-time network launched in 2017 by The Clearing House, a private company owned by some of the world's biggest banks. Known as RTP, or Real Time Payments . . . .”).

[8] Conti-Brown & David A. Wishnick, Private Markets, Public Options, and the Payment System, 37 Yale J. on Reg. 380, 410 (“To date, no courts have applied the substantive provisions of the MCA's constraints on Fed payment system operations.”).

[9] Id.

[10] See Conti-Brown, supra at note 402 (“While over fifty percent of bank accounts in the United States are held at banks that nominally participate in RTP, public reports suggest that nearly all transactions on the system in 2018 were test and demo transactions, and that ‘[a]doption through most of 2019 was rather tepid.’”) (quoting Steve Murphy, The Clearing House Is About to Triple the RTP Single Transaction Limit, Payments J. (Jan. 24, 2020)).

[11] Daniel Keyes, TCH's real-time payments growth puts it in competition with the Fed, Mastercard, and Visa, Business Insider (Sept. 14, 2020, 9:00 AM), https://www.businessinsider.com/the-clearing-house-builds-out-real-time-payments-reach-2020-9 (“Rapid expansion should be a major initiative for TCH because it’s racing against serious competitors in the fast payment space. . . . The US Federal Reserve is set to introduce [FedNow] in 2023 or 2024 . . . .”)

[12] FIS, supra note 2.

[13] Lael Brainard, Member, Fed. Reserve Bd. of Governors, FedNow Service Webinar: The Future of Retail Payment in the United States (Aug. 6, 2020) (“An instant payment infrastructure ensures the funds are available immediately, which could be especially important for households on fixed incomes or living paycheck to paycheck, when waiting days for the funds to be available to pay a bill can mean overdraft fees or late fees that can compound, or reliance on costly sources of credit.”).

[14] Daniel Keyes, Real-time Payments Are Seeing Rapid Uptake During the Pandemic, Business Insider (May 29, 2020, 10:39 AM), https://www.businessinsider.com/pandemic-may-popularize-real-time-payments-2020-5 (“Some firms need to pay suppliers in advance to get products during the pandemic, while consumers may have needed to quickly move their stimulus funds, Ledford said, per PaymentsSource.”)

[15] Id. (“To support these goals, the service will use the widely accepted ISO 20022 standard and adopt other industry best practices, that would remove barriers to interoperability, in order to avoid unnecessary and burdensome incompatibilities, to the extent the existing private-sector service also uses publicly available, widely accepted standards.”).

[16] Service Details on Federal Reserve Actions to Support Interbank Settlement of Instant Payments, 85 Fed. Red. 155 (Aug. 11, 2020) (“[L]imited competition . . . could create a single point of failure in the nation’s instant payments infrastructure.”).