Debevoise Digest: March SEC Synopsis

March 2024

SEC Issues Long-Awaited Climate Change Disclosure Rule

On March 6, 2024, the SEC adopted a long-awaited final rule that will require registrants, including foreign private issuers (“FPIs”), to disclose extensive climate-related information in their registration statements and periodic reports. The final rule is intended to facilitate the disclosure of “complete and decision-useful information about the impacts of climate-related risks on registrants” and to improve “the consistency, comparability, and reliability of climate-related information for investors.” The final rule constitutes one of the most significant changes ever to SEC disclosure requirements and is expected to face legal challenges on both administrative and constitutional grounds. In fact, on the same day the SEC voted to approve the final rule, a coalition of 10 states led by West Virginia filed a petition for review of the final rule in the United States Court of Appeals for the Eleventh Circuit.

The SEC delayed the finalization of the proposed rule past the original expected date of October 2022, after receiving over 22,500 comment letters. Key requirements of the rule include:

  • Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions. Large accelerated filers (“LAFs”) and accelerated filers (“AFs”) that are not smaller reporting companies (“SRCs”) or emerging growth companies (“EGCs”) are required to disclose, if material, their Scope 1 GHG emissions (direct emissions from operations that are owned or controlled by the registrant) and Scope 2 GHG emissions (indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the registrant) on a phased-in basis. Following a separate phase-in period, LAFs and AFs (other than SRCs and EGCs), including FPIs, must also obtain and include with their filings an attestation report from an independent attestation service provider covering the registrant’s Scope 1 and Scope 2 GHG emissions.
  • Scope 3 GHG emissions. In a significant departure from the Proposed Rule and in response to “concerns about the current availability and reliability of the underlying data for Scope 3 emissions,” registrants are not required to disclose Scope 3 GHG emissions (all other indirect GHG emissions that occur in the upstream or downstream activities in the registrant’s value chain).
  • Financial statement disclosure (Regulation S-X amendments). Registrants must disclose information on the impact of climate-related risks on their business and in a footnote to their consolidated financial statements. This includes a qualitative description of how the development of estimates and assumptions used in producing financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions and disclosure, for the fiscal years presented, of the separate aggregate amounts of (i) expenditures expensed, (ii) capitalized costs and (iii) losses related to each of (a) severe weather events and other natural conditions, subject to applicable one percent and de minimis disclosure thresholds and (b) carbon offsets and renewable energy credits or certificates if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals.
  • Other requirements including:
    • Qualitative disclosure regarding the impacts of climate-related risks;
    • Risk-management disclosure;
    • Corporate governance disclosure; and
    • Registrant climate policy-specific disclosures.

The final rule includes phase-in dates for compliance. The initial compliance phase-in is based on filer status, with additional phase-ins for disclosure of material expenditures and GHG reporting, as well as for the attestation requirement and the level of assurance required in the attestation report.

For more information, see Debevoise Insights.


Stockholder Agreement Terms Invalidated in Delaware

It has been common market practice for private equity sponsors and other controlling stockholders to retain governance rights over a controlled company after an initial public offering (“IPO”), often through a stockholder agreement with the IPO issuer. Within the last year, a number of lawsuits have been filed in Delaware challenging the legitimacy of elements of such arrangements. In the first decision to address the merits of a plaintiff’s challenge (W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (Feb. 22, 2024)), the Delaware Court of Chancery found multiple provisions of a stockholder agreement entered into at the time of a company’s IPO to be facially invalid on the ground that the provisions operated to deprive the company’s board of directors of a significant portion of its authority in contravention of Sections 141(a) and 141(c) of the Delaware General Corporation Law (the “DGCL”).

The court commented that “[w]hen market practice meets a statute, the statute prevails.” The court also noted that governance rights that would be impermissible in a stockholder agreement may be acceptable if included in the company’s certificate of incorporation.

With two other similar cases pending, and this decision subject to appeal, the Moelis decision may not be the final word on the topic of stockholders agreements and consent and board rights. Public companies operating under a stockholder agreement may wish to wait to see how the other pending cases develop before taking any action in response to the court’s decision. Additionally, the rationale of the decision would apply to a stockholders agreement for any Delaware corporation, even a private company.

  • The decision emphasizes that pre-approval rights that would be impermissible in a stockholder agreement may be acceptable if included in a company’s certificate of incorporation. Therefore, pre-IPO companies should consider putting stockholder rights that restrict board action in the company’s certificate of incorporation, either directly or in a certificate of designations governing a series of preferred stock, a so-called “golden share.” While the court noted that some restrictions on board action may be invalid even if in the certificate of incorporation—for example, a provision that purports to override a mandatory provision of the DGCL—the court stated that defendant corporation “could have accomplished the vast majority” of its rights through the company’s charter.
  • The court analyzed the pre-approval conditions collectively, rather than individually, and Moelis had a significant number of pre-approval rights. Further court decisions may provide guidance as to the validity of individual pre-approval or consent, and it is possible that some individual requirements may be more readily defensible as implicating commercial, rather than governance, concerns. Accordingly, public companies operating under stockholder agreements with more limited pre-approval requirements may wish to wait to see how the cases develop before taking remedial action. Nevertheless, public companies with these kinds of stockholder agreements may be inviting targets for stockholder litigation in the wake of the Moelis decision. In addition, although the court proposed a solution in the form of the “golden share,” replacing a potentially invalid stockholder agreement with a preferred stock instrument containing comparable terms will implicate important governance and fiduciary duty considerations that will need to be reviewed carefully.

For more information, see Debevoise Insights.


Corporate Transparency Act Ruled Unconstitutional, but Scope of Judgment Is Limited

On March 1, 2024, the U.S. District Court for the Northern District of Alabama held the Corporate Transparency Act (the “CTA”) unconstitutional. The relief granted by the court is limited to enjoining the federal government from enforcing the CTA against the plaintiffs in the case, the National Small Business Association (“NSBA”) and Isaac Winkles, an NSBA member (together, the “plaintiffs”). The judgment, thus, leaves the CTA intact against other parties and is highly likely to be appealed. However, the court’s decision likely paves the way for further challenges to the CTA.

The CTA was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 and, generally, requires the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to implement a beneficial ownership reporting regime, requiring companies to disclose information about their beneficial owners, senior officers and other control persons to the federal government.

The court’s decision is a blow to the CTA but, at least for now, its implications appear limited.

  • First, the court’s final judgment enjoins the federal government from enforcing the CTA against the plaintiffs, but it does not extend beyond them. (State laws that mimic the federal CTA, such as the one enacted recently by New York State, are not affected by the court’s decision.)
  • Second, and relatedly, in responding to the case, FinCEN did not extend the judgment to the reporting regime as a whole, limiting its reach to the plaintiffs and keeping the CTA website online and operational.
  • Third, the government is highly likely to appeal the court’s decision and request a stay during the appeal. FinCEN implies an appeal is coming in its response to the court’s order.

All of this being said, this lawsuit is likely to spawn similar litigation, and the success of the plaintiffs may motivate others to try to achieve more broad relief under the same theories.

For more information, see Debevoise Insights.


EU Green Bonds Regulation

The European Union’s Green Bonds Regulation (Regulation (EU) 2023/2631, the “Regulation”) entered into force in November 2023 and will apply from December 21, 2024. The Regulation is a voluntary standard for issuers of bonds that wish to use the designation “European Green Bond” or “EuGB” for bonds that are made available to investors in the European Union. The Regulation sets out eligibility criteria for investing the proceeds of bonds in environmentally sustainable projects, standards for pre-issue and post-issue sustainability reporting, a new framework for external review of those reports, and supervision of the reviewers.

The Regulation covers financial issuers (which may “on-lend” the proceeds of their bonds to finance other companies’ projects) as well as issuers raising finance for commercial projects. The proceeds of EU Green Bonds are primarily expected to be invested in economic activities that are aligned to the EU Taxonomy Regulation (the “Taxonomy Regulation”), either directly (through the financing of “real economy” assets and expenditure) or indirectly (through the creation of equity or debt instruments that finance) in Taxonomy Regulation-aligned economic activities.

The Regulation introduces standard forms of disclosure and reporting for European Green Bond issues, requiring disclosure of methodologies and key assumptions used when preparing reports and external review of the information on the use of proceeds of the European Green Bond, in order to facilitate comparability of European Green Bonds issues. The Regulation includes specific provisions for European Green Bonds issued by sovereigns, regional or local authorities and EEA supra-nationals and introduces a separate regime for bonds issued by securitisation vehicles.

For more information, see Debevoise Insights.


SEC Rule-Making Agenda

The SEC’s Fall 2023 Regulatory Agenda was posted in December 2023. A summary of key pending rule changes is included below. We expect the spring 2024 agenda to be released by June 2024. For more information, see the full regulatory agenda here.

Title

Stage of Rulemaking

Expected Release Date

Financial Data Transparency Act Joint Rulemaking

Proposed Rule Stage

April 2024

Human Capital Management Disclosure

Incentive-Based Compensation Arrangements

Regulation D and Form D Improvements

Revisions to the Definition of Securities Held of Record

Cybersecurity Risk Management Rules for Broker-Dealers, Clearing Agencies, MSBSPs, the MSRB, National Securities Associations, National Securities Exchanges, SBSDRs, SBS Dealers, and Transfer Agents

Final Rule Stage

 

April 2024

 

Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies

Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices

Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting

Registration for Index-Linked Annuities; Amendments to Form N-4 for Index-Linked and Variable Annuities

Proposed Rule Stage

June 2024

Corporate Board Diversity

Proposed Rule Stage

October 2024

 

Rule 144 Holding Period

Covered Clearing Agency Resiliency and Recovery and Wind-Down Plans

Final Rule Stage

 

October 2024

 

Electronic Submission of Certain Materials Under the Securities Exchange Act of 1934; Amendments Regarding FOCUS Report


This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.