Congress wanted and authorized the Commission to require disclosure to protect investors despite these limits, based on its expert judgment about what its experience and qualitative evidence showed it, supplemented by whatever science can add. Changes came as part of an omnibus criminal law Session Law 2021-138, Part XXI. Empirical studies of financial markets and regulation have always had strong and inherent methodological limits, well-known and not seriously disputed, as well as data limitations. [12] Cede & Co. v. Technicolor Inc., 634 A.2d 345, 361 (Del. The financial effects of physical risks are large and growing. The purpose of the disclosure was also to protect markets and market pricing, and improve the resulting allocation of capital. Even if the safe harbor clearly applies, its procedural and substantive provisions do not protect against false or misleading statements made with actual knowledge that the statement was false or misleading. On balance, research on the Act's net . Litig., 238 F. Supp. [7] This, such observers assert, is the reason that sponsors, targets, and others involved in a de-SPAC feel comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses. John Coates is the John F. Cogan, Jr. The Commissions authority is plain in its organic statutes, legislative history, in long-standing precedent, in both court decisions and its own rules, and repeatedly accepted by Congress through amendments of the statutory bases for those rules. These include (for example) asbestos and other sources of tort liability, contract and other kinds of commercial litigation, and cybersecurity and other kinds of technology risks. The economic essence of an initial public offering is the introduction of a new company to the public. 12 January, 2022 By John Coates John Coates, interim chief executive of Local Authority Recycling Advisory Committee (LARAC), looks at the development of the sector in 2022 This area is reserved. Apr. Exxon Mobil plans to invest $100 billion in carbon capture infrastructure. 'What Are We Fixing? Image: Getty. Regulation -- the Investment Company Act is one of the most successful disclosure laws . Sixty percent of the Fortune 500 have announced climate targets, typically stated with reference to emissions data, including 17% with net-zero targets, yet 72% of investors lack confidence companies are serious about these targets. Further reducing concerns about whether the rule is within the Commissions expertise, the proposed rule aligns with ways that companies and investors have jointly and voluntarily agreed to provide climate-related information. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. Liability risk is an important feature of the conventional IPO process. With Such Low Win Rates, Should Law Firms Respond to So Many RFPs? Yet the Commission nonetheless has long protected investors in bank holding companies by requiring detailed disclosure beyond the financial statement for such companies, as noted in Annex A. In fact, its basic disclosure authorities (in Section 7 of the 1933 Act and Sections 12 and 13 of the 1934 Act) are augmented by additional specific authority to to prescribe the form or forms in which required information shall be set forth. If the Commission after fact-finding reasonably believes more detail is needed to protect investors about a concededly authorized topic, it is legally authorized to require more detail, as it has done through both rules and disclosure review since 1933. However, it is also commonly understood that it is the de-SPAC and not the initial offering by the SPAC that is the transaction in which a private operating company itself goes public, i.e., engages in its initial public offering. [7] See, e.g., Chris Bryant, Why Chamath Palihapitiya Loves SPACs So Much, Bloomberg Opinion (January 28, 2021) (citing Haystack, Alignment Summit Chats: SPACS (w/ Chamath Palihapitiya), YouTube (Dec. 2, 2020) (statement of Chamath Palihapitiya) (Because the SPAC is a merger of companies, youre all of a sudden allowed to talk about the future. Facebook gives people the power to. Finally, it is beyond argument that the Clean Air Act nowhere mentions the Commission much less modifies its disclosure authority. Coates asked some of his former colleagues in London's City financial district to give him some time, and some spit. EPA has authority over private companies, while the Commissions proposed rule covers only public companies. People often think of mandatory disclosure in a way that suggests that there is nothing more than an on/off switch between mandatory and voluntary disclosure. Aircraft manufacturers essentially have their own specialized program accounting, due to the unusually long and complex capital investment process they follow. As a result, the rule will minimize costs and maximize benefits of compliance. Other agencies will need to tackle the many tasks those greater ambitions involve. The proposed disclosures, including emission data, will help investors assess and price these risks and opportunities. New Corp Fin Director John Coates is fully on-board, making speeches and otherwise being vocal in his support of ESG centered disclosures. So, instead, like a cuckoo putting its eggs into anothers nest, critics have resorted to mischaracterizing the proposal, and inventing their own, fictional rulenot actually proposedto attack premise two, and claim the Commission lacks authority for their fictional new rule. As stressed by Justice Alito, when he was a Judge on the Third Circuit: Because the materiality standards for Rule 10b-5 [the Commissions primary anti-fraud rule] and SK-303 [an affirmative disclosure requirement for known trends and uncertainties, among other things] differ significantly, the demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b-5.. Congressional ratification has been repeated and affirmativenot mere inaction. If the Commission or staff pursue that route, however, it would be important to keep the practicalities of SPACs in mind, in addition to other aspects of SPAC structures, relative to conventional IPOs as well as to other forms of achieving dispersed ownership, such as direct listings. Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. . The rule proposes disclosures of information about financial risks and opportunities that are reasonably understood as appropriate for the protection of investors. John Jenkins, SPACs: Is the PSLRA Safe Harbor Driving the Boom?, Deal Lawyers.com (Feb. 3, 2021); Bruce A. Ericson, Ari M. Berman and Stephen B. Amdur, The SPAC Explosion: Beware the Litigation and Enforcement Risk, Harv. John Coates does not need much of an introduction. Financial Disclosures - Other White House Officials . That climate risks overall have been overstated by climate activists. Evidence that such targets are at least partly serious can be easily compiled from public sources, some cited in the proposing release: A list of massivefar beyond materialbets being won or lost with public investor capital driven by climate risk could be significantly longer without being exhaustive. That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs. 28, 2018) (refusing to dismiss claim that Musk controlled Tesla despite owning only 22% of the voting power due to actual domination and control). [17] But it also is clear that investors at the time of the initial SPAC filing cannot understand all aspects of the long-term value proposition of the offering, precisely because a SPAC does not have operations or a business plan beyond a search for a target. It would not affect the way that property insurers underwrite, pool or reserve against climate risksthat is for insurance regulators. As a result, depending on current capital market pricing, the rule could increase climate-impacting activities. Although climate change overall indisputably raises important policy questions, those remain for Congress. Consistent with the long tradition of disclosure requirements sketched above and in Annex A, the proposed rule specifies disclosure of climate-related financial risks to and opportunities for public companies. About John Coates. The Commission does, but has no investor-protection authority over climate impacts more generally, such as those on communities or habitats, beyond impacts that are important to investors decision-making. In addition to being limited and calibrated to U.S. public companies, the rule does not require disclosure related to non-investor impacts. 2020) (breach of duty of candor due to failure to disclose conflict of interest in merger); Chester County Emp.s Ret. John C. Coates and R. Glenn Hubbard, Competition in the . EPA, for example, exempts from reporting emission sources below source-specific thresholds. By seeking to address those considerations adequately and transparently, the SEC can and should play a leading role in the development of a baseline global framework that each jurisdiction can build upon to address its individual needs. A company in possession of multiple sets of projections that are based on reasonable assumptions, reflecting different scenarios of how the companys future may unfold, would be on shaky ground if it only disclosed favorable projections and omitted disclosure of equally reliable but unfavorable projections, regardless of the liability framework later used by courts to assess the disclosures. As noted above, subsequent to the initial passage of the securities laws, but after the passage of the initial Clean Air Act and in the same year EPA was created (1970), Congress directed the Commission (along with all other agencies of the federal government) to consider environmental protection in its rulemakings. The U.S. Supreme Court has repeatedly and recently emphasized that the fundamental purpose of the 1934 Act [was] to substitute a philosophy of full disclosure for the philosophy of caveat emptor . Part of the difficulty is in the fact that ESG is at the same time very broad, touching every company in some manner, but also quite specific in that the ESG issues companies face can vary significantly based on their industry, geographic location and other factors. As we address these questions, we should keep in mind some additional points. What lessons can we learn from earlier examples of evolving risks? The proposed rule would not require national banks to consider climate-risks in lending activitiesthat is for banking regulators. In the budget rider, Congress made no mention of any other agency, nor can the text of that law be reasonably interpreted to displace any agencys authority. Those authorities are general in nature, not limited to specific topics. If those emissions targets are serious, they will matter to investors by leading to major changes in corporate strategy and investment policy, and in the financial risks and returns companies will generate for investors. Regardless, as long as the disclosures are fairly designed for the protection of investors, a factual assessment of the kind commonly delegated by Congress to regulatory agencies, they would fall within the clear limiting principle of that law. Investors need to know about sponsors and their financial arrangements, the procedural protections of the SPAC structure, and what kinds of returns the SPAC is likely to generate for investors absent a de-SPAC transaction or for those who choose to exit before the de-SPAC is completed. For example, it does not call for disclosure of a companys climate-related impacts on employees or customers or communities, except to the extent those impacts result in overall financial or business risks or opportunities (which do impact investors). It has never been EPAs job. 12711-VCS, 2018 WL 1560293 (Del.Ch. What about the Private Securities Litigation Reform Act? STAY CONNECTED If comprehensive, economy-wide disclosure of climate impacts of all types of business is to be required by regulation, doing so will require more than the Commissions authority. ESG problems are global problems that need global solutions for our global markets. The complete publication, including footnotes and annex, is available here. The proposed rule is a rule that specifies details of disclosure requirements. That legal questionwhether the proposed disclosures could reasonably be viewed in good faith by the Commission as beneficial for investor protectionis easy to answer in the affirmative, based on the record before the Commission when it voted to propose them. Because the rule is an investor-oriented disclosure rule, it is within the Commissions expertise. Congressional support for the Commissions clear (but statutorily limited) disclosure authority is shown by the fact that over time, in the face of repeated Congressional amendments and annual budget laws (in which Congress can and has inserted riders further limiting Commission discretion), the Commissions requirements ranged far beyond the limited lists of information in the 1933 and 1934 Acts themselves. The Constitution, and Congress, have given the Commissionand not the courtsauthority to make those judgments. Moreover, is it appropriate that the choice of how to go public may determine or be determined by liability rules? Our existing system contains some mandatory ESG disclosure requirements (e.g., disclosure of how a companys board considers diversity in identifying director nominees). But to develop and apply a disclosure rule of the kind proposed here does not require the same level of climate expertise as held by EPA (or, for climate changes impact on weather, the National Oceanic and Atmospheric Administration), and those agencies lack the expertise in finance, accounting and investment that is also necessary for any investor-oriented disclosure rule that addresses climate-related financial risk. But it remains true that IPOs are understood as a distinct and challenging moment for disclosure. A draft of what would become the 1933 Act in the Senate included disclosure items directly in the statute, and did not contain the equivalent language later adopted in Section 7, which directs the Commission to go beyond that list (which is separate from the Commissions general rulemaking authority in Section 19). 2018) (CFO's statement about corporation's large deferred service, healthy product backlog, and consistent quarterly linearity, which was a statement made with another statement as to expected earnings for an upcoming quarter, were non-forward-looking statements and were not protected by the PSLRA's safe-harbor; statement included facts regarding the present state of the corporation, not assumptions); NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc., No. Professor of Law and Economics Harvard Law School 1875 Cambridge Street Cambridge, MA 02138, United States phone: 617-496-4420 e-mail: jcoates@law.harvard.edu *Corresponding Author Electronic copy available at : http ://ssrn.com /abstract = 2375396 COST-BENEFIT ANALYSIS OF FINANCIAL REGULATION: CASE STUDIES AND IMPLICATIONS Yet no one has ever successfully argued that the Commission should not develop, adapt or apply disclosure rules to banks, mining companies, asset-backed issuers, airlines or defense contractors, despite the specialized knowledge that a full understanding of those companies would require, and despite the fact that the Commission does not have full-time staff who are themselves experts of the same kind that other regulators may have, or which companies hire to provide them with advice about such topics. First, and most directly, all involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. Anyone who argues that the Commission should leave the job of climate disclosure to the EPA has to have an answer to how the EPA could possibly protect US investors with information about the large amount of activities of US public companies that are located beyond the reach of the EPAs jurisdiction. But it is also clear that companies are not doing so consistently, comparably, or reliably. During my tenure as Acting Director of Corporation Finance, I experienced firsthand the unwavering commitment of the SEC staff, and I look forward to serving in a new role as the Commissions General Counsel., STAY CONNECTED I will work tirelessly to execute our rules and make sound recommendations that will help the SEC realize its mission.. [5] Initial investors also commonly obtain warrants to buy additional stock as at a fixed price, and sponsors of the SPAC obtain a promote greater equity than their cash contribution or commitment would otherwise imply and their promote is at risk. John Coates is the co-CEO of U.K. company Bet365, one of the world's largest online gambling businesses. They sometimes specifically point to the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements, and suggest or assert that the safe harbor applies in the context of de-SPAC transactions but not in conventional IPOs. As companies continue to disclose more in sustainability reports, they should already be evaluating those disclosures in light of existing anti-fraud obligations. 22, 2019) (enjoining two cross-conditioned mergers due to disclosure inadequacies concerning special procedures used to mitigate conflict of interest). All Rights Reserved. Rep. No. Recognizing innovation in the legal technology sector for working on precedent-setting, game-changing projects and initiatives. The SEC is well equipped to lead and facilitate a discussion on when and how ESG risks and data must be disclosed, and how to create and maintain an effective ESG-disclosure system that would promote the disclosure of decision-useful, reliable and, where appropriate, globally comparable ESG information. Should the SEC reconsider the concept of underwriter in these new transactional paths? These investors included individuals and institutions. [2] See Ben Scent, Wall Streets $100 Billion SPAC Boom Upends the League Table, Bloomberg Law (Apr. E.g., Jeff Montgomery, SPAC Investor Sues in Chancery Over MultiPlans Stock Drop, Law360 (Mar. Third and finally, one of the more interesting and challenging aspects of recent SPAC transactions is that the investors in the SPACs first public capital raise often redeem or sell their shares around the time of the business combination. The proposal is both narrower and broader than the critics fictional rule because it calls for and is limited to investor-focused information from public companiestraditional and long-standing hallmarks of U.S. securities laws and regulations. The financial disclosure that John Coates filed also offered a rare public peek into the costs of corporate compliance monitors. It is against this backdrop that I think about the regulation of ESG disclosures. Dynamically explore and compare data on law firms, companies, individual lawyers, and industry trends. After the de-SPAC, the entity carries on its operations as a public company. Join National Law Journal now! But the Commissions authorities go further, precisely because Congress recognized that investors need information beyond the moment of initial offer and sale, which are addressed by the 1933 Act. So, my background is, my introduction alluded to it, is the corporate and financial market side and I was blissfully ignorant of and happy to ignore everything that What is the right balance between principles and metrics? Many contain materiality qualifiers, but many do not. Imposing further limiting principles may for some be appealing from a policy standpoint, but doing so has no basis whatsoever in the statutes text.. EPA is charged by Congress to have a concern for the environment, not for investors. No one at the time of NRDC v. SEC in 1979 argued that the creation of EPA in 1970 had overridden NEPA, or limited the 1933 or 1934 Acts, as the Commission itself would have done (because, recall, it was being sued in the 1970s for not doing enough to require environmental disclosure). As detailed above, the proposed rule could not fairly be viewed as embodying climate change policy generally. Claims that disclosure would incentivize companies only to reduce or mitigate climate change impacts are not well considered. That request elicited massive amounts of public input on potential climate-related disclosure, and gave anyone skeptical about the project ample notice that it was on the Commissions agenda, and ample time to adduce evidence against it. Volkswagen announced $180 billion of investments in electronic vehicles. The specific reliance throughout the statutes on disclosure as an instrument. What is the upshot of this? For EPA, those emissions may not be a priority. He received his law degree from New York University Law School and his Bachelor of Arts with highest distinction from the University of Virginia. Anyone who sees a role for law to require disclosure of comprehensive information about the sources of greenhouse gas emissions will not be satisfied by this rule. It means thoughtful engagement by trusted specialists seeking consensus among investors and companies about useful, reliable and comparable disclosures under standards flexible enough to remain relevant. From an environmental policy perspective, prioritizing based on environmental impact might make sense. Rather, they are faced with numerous, conflicting and frequently redundant requests for different information about the same topics. The financial disclosure that John Coates filed also offered a rare public peek into the costs of corporate compliance monitors. John Coates has few regrets on his way out the AOC door Even as he steps down from 32 years in the top job, the knowledge and contacts of Australia's Olympic supremo will be tapped for years to. Starting with the costs, critics of ESG disclosure requirements often point to the costs associated with preparing the disclosures. [11] See, e.g., Beck v. Dobrowski, 559 F.3d 680, 682 (7th Cir. But companies will not be limited by the rule itself in how they and their investors respond to climate change.
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