Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. For questions call 1-877-256-2472 or contact us at [emailprotected], Shearman and Hogan Lovells Call Off Merger Talks, Early Reports: 2023 Am Law 200 Financials, Beyond Excess Capacity, Pooled Services and Automation Expedite Staff Layoffs, Dozens of Law Firms Grew Their Equity Partner Tier, Even as Profits and Demand Plummeted. Large asset managers are already having to comply with similar requirements in Europe (regardless of where their portfolio investments are located). First, while we should be mindful of the costs of new ESG disclosures, we must at the same time acknowledge the costs from the absence of a consensus ESG-focused disclosure system. Private equity fund investors are already and increasingly demanding climate-related information and commitments from the funds or their advisors. At an athletics meet in Melbourne early this year, he ran into John Wylie, the investment banker who chairs the Australian Sports Commission. 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.. Reflected in the PSLRAs clear exclusion of initial public offerings from its safe harbor is a sensible difference in how liability rules created by Congress differentiate between offering contexts. P.C. If we do not treat the de-SPAC transaction as the real IPO, our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards. During his prior service on the SECs Investor Advisory Committee, he chaired the Investor-as-Owner Subcommittee. He chairs the faculty committee on executive education and teaches contracts, corporations, corporate governance and financial regulations. [4] SPACs What You Need To Know, Investor.gov (Dec. 10, 2020). Public companies are already subject to more regulation, however, and if the requirements of the Sarbanes-Oxley Act did not drive a wave of going private transactions (and they did not), the marginal additions to disclosure required by this rule is highly unlikely to do so. Of course, as Commissioner Peirce does not do much to dispute, and as the proposing release makes clear, existing disclosures are spotty, inconsistent, incomplete and unverified under existing Commission rules. Striking down regulations adopted pursuant to clear and limited delegated authority would turn the doctrines purpose against itself, prevent Congress from assigning traditional fact-finding and implementation roles to agencies, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers. The proposed disclosures, including emission data, will help investors assess and price these risks and opportunities. With this subscription you will receive unlimited access to high quality, online, on-demand premium content from well-respected faculty in the legal industry. Statement (PDF) . [13] Nor is the safe harbor available unless forward-looking statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. It does not impose a carbon tax or create a cap-and-trade regime. Financial Disclosure Reports include information about the source, type, amount, or value of the incomes of Members, officers, certain employees of the U.S. House of Representatives and related offices, and candidates for the U.S. House of Representatives. Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. The resulting awareness of the need for detailed specification of disclosures led to the delegation reflected in the 1933 Act. Investors and owners commonly view forward-looking information as decision-useful and relevant. Those limits were even more acute in 1933 (or even in 1996 when the Commission was first statutorily tasked with considering efficiency in some of its rulemakings). Evidence regarding the clear and present financial materiality of transition risk is discussed below. In that section, companies are required to disclose a specified list of financial disclosure and documents set out in Schedule A, to obtain consents from any accountant, engineer, or appraiser or other professional identified in the disclosures, andin a separate sentenceto disclose such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate for the protection of investors.. Congress both expanded authorities and limited which and how specific types of companies and transactions are covered by its disclosure regime. Changes came as part of an omnibus criminal law Session Law 2021-138, Part XXI. To recap what is discussed above, EPAs authority is both materially broader and narrower than the Commissions, even as to the subpart of the Commissions rule addressing greenhouse gas emissions: In sum, EPA could not duplicate (or even approximate) the proposed investor-oriented rule, and the Commission could not duplicate (or even approximate) EPAs greenhouse gas disclosure rules. 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. Coates received his Bachelor of Arts with highest distinction from the University of Virginia and his law degree from New York University Law School. In other words, the delegation to the Commission was deliberate, was specifically intended to apply to required disclosures, and was sensible, reflecting an anticipation that the Congress itself could not reasonably work out in detail the kinds of choices necessary to develop and keep up to date an appropriate disclosure regime. First, I am not pro- or anti-SPAC. If the person charged with reviewing an employee's report finds a conflict, he should impose a remedy immediately. Those choices I do not here address. For example, the Commission could use the rulemaking process to reconsider and recalibrate the applicable definitions, or the staff could provide guidance explaining its views on how or if at all the PSLRA safe harbor should apply to de-SPACs. You can see John Rubin's blog on this here. And now, according to Reuters , Acting Corp Fin Director John Coates remarked during a conference on climate finance that the SEC "'should help lead' the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations." But how to craft the new rules? Business Law Today (June 25, 2020); Ellison Ward Merkel et al., Litigation Risk in the SPAC World, Quinn Emanuel Trial Laws. 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. I fear, though, that participants may not have thought through all the legal implications of these statements under the circumstances of these transactions. I will work tirelessly to execute our rules and make sound recommendations that will help the SEC realize its mission.. How should the SEC, its staff, and private actors weigh the capital-formation costs and benefits of disclosures, procedures, and liability rules? John Coates does not need much of an introduction. 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 But it is also clear that companies are not doing so consistently, comparably, or reliably. In short, disclosure authority extends beyond what would constitute fraud at common law, and has long been used by the Commission to specify disclosure of what would not necessarily be material for that purpose. Getting The Talent Balance Right: From Layoffs to Laterals to Mergers, How Can Firms Staff for Success? Again, this language is not limited to what is necessary to protect investors, but gives the Commission discretion to specify what information is appropriate to protect investors and markets, based on its fact-finding and expert application of the statutes goals to evolving investor needs. 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. Said plainly, many investors in the SPACs own initial offering are not the investors in the ultimate public companys ongoing business operations. Circuit concluded in 1979 that based on the record before it at that time, the Commission was not required to adopt environmental disclosure obligations beyond what it had already adopted, the Court also concluded that it was authorized to and could do so, if the Commission itself came to an expert judgment that doing so was in service of its statutory missions of protecting investors and promoting the public interest. But we do have a provision that permits the Commission to set up rules and regulations which will have the effect of law. Both appointments are effective June 21, 2021. The Commission has neither approved nor disapproved its content. John Coates had copped further backlash for his comments towards . If an officeholder has filed their annual financial disclosure statement, then a pdf of the filing will be posted. If that risk drives choices about what information to present and how, it should not in my view be different in the de-SPAC process without clear and compelling reasons for and limits and conditions on any such difference. Funding, governance and public accountability are all critical elements of a reliable, trusted disclosure system. The specific reliance throughout the statutes on disclosure as an instrument. In sum, the text and context of the 1933 Act itself gives the Commission broad authority to require disclosures about financial risks and opportunities beyond the inevitably incomplete initial lists of information and documents included in the statute. John Coates is author of the financial bestseller The Hour Between Dog and Wolf: How Risk-Taking Transforms Us, Body and Mind. That does not make those rules unduly burdensome or costly. Posted by John C. Coates (Harvard Law School), on, Harvard Law School Forum on Corporate Governance, on Proposal on Climate-Related Disclosures Falls Within the SECs Authority, The Illusory Promise of Stakeholder Governance, by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum, Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy A Reply to Professor Rock, Stakeholder Capitalism in the Time of COVID, Corporate Purpose and Corporate Competition, Congress created and in plain words authorized the Commission to protect investors by specifying public company disclosures of information about financial risks and. 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. John Coates, acting director of the SEC's Division of Corporation Finance, similarly stated in a recent speech that the "SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner," noting in particular the task of adapting existing rules and That ESG no longer needs to be explained illustrates how important these issues have become to todays investors, public companies and capital markets. Finally, companies generally are mandated to make disclosures as needed to prevent other disclosures from being materially misleading. It cannot fairly be argued that losing production or even permanent asset impairments due to weather damage are not financial risks for companies with property, plant and equipment in flood plains or otherwise exposed to climate-related weather events. 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. Economic analysis and expert fact-finding and assessments may inform choices about how detailed and what the details should be, and the Commission needs to follow its own economic analysis guidance in arriving at its conclusions, as well as comply with administrative law. The caption to Section 7Information required in registration statementcontains no qualifiers on information. The authorizing language in Section 7(a)(1) is limited by Section 7(a)(2), but only for a designated class of emerging growth companies, and not as to content. As a result, depending on current capital market pricing, the rule could increase climate-impacting activities. To make their case, they distort the proposed rule beyond any fair reading, into a new, fictional rule that addresses environmental concerns rather than investor concerns. ': ABA Rejects Proposal to Make Law School Admissions Tests Optional, 'A Very Virginia Spin': Businesses Must Establish Internal Appeals Process Under New State Consumer Data Privacy Laws, Read the Document: DOJ Urges Court to Deny Trump Immunity in Jan. 6 Appeal, Paul Clement Says Tribalism at Law Schools Hurts Judicial Legitimacy, Law.com Editors and Analysts Offer Top Trends to Watch for 2023. Specifically, Section 7 gives the Commission unambiguous authority to specify the contents of disclosure documents used to register securities for sale to the public. John C. Coates and R. Glenn Hubbard, Competition in the . L. Sch. Ch. 22, 2019) (enjoining two cross-conditioned mergers due to disclosure inadequacies concerning special procedures used to mitigate conflict of interest). The SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner. An effective ESG disclosure system does not imply a rigid and soon-to-be outdated set of limited disclosures. Congress also recognized that full and fair disclosure would enhance investor confidence. A consortium of public energy companies is raising $1 billion for emissions reductions technology. The creation of an entire new agency (the Commission) to implement and enforce the laws. 11, 2019) (refusing to apply deferential review where special conflict of interest procedures were not applied ab initio); FrontFour Capital Group LLC v. Taube, No. No court has ever found that this long line of exercises of the basic authorities on which the current rule relies were beyond the Commissions authority. 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. Gain access to some of the most knowledgeable and experienced attorneys with our 2 bundle options! The question of whether the proposed disclosures would in fact be an all-in good idea, cost-justified, appropriately considering efficiency, competition and capital formation is not a legal question. The context of this authorizing language reinforces these conclusions. The Commissions authority, to reiterate, includes discretion to promulgate rules governing corporate disclosure. [5] For studies of SPACs, see, e.g., Michael Klausner, Michael Ohlrogge and Emily Ruan, A Sober Look at SPACs, Yale J. Reg. If the American people, through their representatives, wish to remediate climate change, or fulfill climate-related treaty obligations, this rule will not do those jobs. In addressing this research, it is insufficient for critics to gesture generically at the fact that correlation is not necessarily causation, or that no single such study can definitively prove a causal effect of climate on financial returns. When the only dissenting Commissioners primary basis for dissenting is that the Commission has already addressed the topic in prior rulemakings upheld by courts, courts have no basis for using one discretionary canon to apply personal policy judgments on a topic within the Commissions conventional and textually clear statutory authority. Graphic Packaging is spending $600 million on the first paperboard line in the U.S. in decades, in part to lower carbon emissions. Congress expected the Commission to use expert judgment to update disclosure over time, as new or newly identified risks emerge. They will go unresolved by this proposed rule. John Coates bowed out as Australian Olympic Committee president at the Darling Harbour Sofitel in Sydney. About John Coates. Companies either do or do not engage in activities that result in the emission of greenhouse gases. As we address these questions, we should keep in mind some additional points. If a major shift in owners is in fact occurring in most or all SPACs as they progress through a de-SPAC, it is the de-SPAC as much as any other element of the process on which we should focus the full panoply of federal securities law protections including those that apply to traditional IPOs. The Commission is charged with protecting investors generally, and even if a subset of investors believe that they do not (or do) want or need particular information, their views should not necessarily control the Commission in the exercise of its expert judgment. It would not affect the way that property insurers underwrite, pool or reserve against climate risksthat is for insurance regulators. Although climate change overall indisputably raises important policy questions, those remain for Congress. . Rather, it calls for specific disclosures that investors in US public companies need to evaluate and price climate-related financial risks and opportunities. Companies objectively do or do not have strategies that reflect transition risk or physical risks of climate change. Overturning this rule as unauthorized on that basis would wipe out most of the Commissions disclosure rulebook. It is not clear that claims about the application of securities law liability provisions to de-SPACs provide targets or anyone else with a reason to prefer SPACs over traditional IPOs. Some claim that the statutory limits on the Commissions disclosure authority have no real meaningbecause one can pretend that anything is for protection of investors, no real limiting principle exists in the 1933 and 1934 Acts on the Commissions authority, so either it impermissibly delegates or further limits need to be invented to make the statutes constitutional. It is also not a rule the EPA or any other regulatory agency has adopted or could legally adopt. The rule as proposed would provide a framework for companies to inform investors about all of the effectsprofitable and loss-causingthat climate risks may have on a company. That is because it is true that the Commissions authority does not run so far as to require disclosures for any reason, or for reasons not specified in its organic statutes. Should the SEC reconsider the concept of underwriter in these new transactional paths? Courts have rejected attempts to deny application of the securities laws and the philosophy of full disclosure in cases involving the sale of a whole company, if effected through the sale of securities, or where conduct may violate both corporate law and the Commissions disclosure laws. Throughout I describe rather than argue for what the law should be. More than thirty years later, EPA had not applied its authority to require emissions disclosures to greenhouse gas emissions. Where and how can disclosures be aligned with information companies already use to make decisions. He has been the . It is not a rule requiring or limiting opinions or controversial speech, and raises no First Amendment concerns. Again, this difference is in keeping with the Commissions focus on investors. from Harvard University. Exxon Mobil plans to invest $100 billion in carbon capture infrastructure. About 1,020 U.S. companies voluntarily disclosed their Scope 3 emissions last year.. In their second stage, SPACs complete a business combination transaction, in which the SPAC, the target (i.e., the private company to be acquired), or a new shell holdco issues equity to target owners, and sometimes to other investors. Despite all of this, it may still be thought that the PSLRA offers something for SPACs not available to conventional IPOs. Regulation -- the Investment Company Act is one of the most successful disclosure laws . The fact that those areas are themselves specialized, with their own experts with far more knowledge than exists at the Commission, does not mean the Commission cannot adequately apply its disclosure regime to those risks. To be effective, he said, new SEC rules "must produce results that are useful, consistent, and comparable." STAY CONNECTED Importantly, supporting letters came from many public companies (e.g., Adobe; Bank of America; BNP Paribas; Chevron; Dow Credit Suisse; Etsy; Microsoft; Paypal; Salesforce.com). A SPAC is a shell company with no operations. 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 . 2020) (breach of duty of candor due to failure to disclose conflict of interest in merger); Chester County Emp.s Ret. Professor Coates served as General Counsel and as Acting Director for the Division of Corporation Finance for the SEC. A comprehensive reporting regime would apply to all companies, worldwide, regardless of ownership, and would encompass impacts generally, rather than solely physical risks and transition risks to investors in US public companies. What is the upshot of this? Often these requirements have been specific and prescriptive in nature. But for investors in that company, they reasonably could be, because the transition risks (in the form of higher energy costs or potential need for capital expenditures to mitigate their impacts) could be large for that company, depending on its size, capital, liquidity and financial resources. . Not long after Denise Coates convinced her family to bet big on internet gambling, the first . It does not regulate climate activity itself (e.g., greenhouse gas emissions) and would have modest effects on the economy as a whole. The proposed rule would not require national banks to consider climate-risks in lending activitiesthat is for banking regulators. 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. Not surprisingly, disclosure about these risks did not initially show up in SEC filings, but there too they went from invisible to increasingly disclosed. The complete publication, including footnotes and annex, is available here. 5 C.F.R. In this regard, the work of the IFRS Foundation to establish a sustainability standards board appears promising. Facebook gives people the power to. Congress provided a safe harbor for forward-looking statements made by established, publicly traded, reporting companies. EPA, for example, exempts from reporting emission sources below source-specific thresholds. I think it is only about 30 pages, while the British Companies Act is over 300 pages. [16] Debate in Senate to Override President's Veto, 141 Cong. It is true that many companies are spending money to do thisfurther evidence of the importance of the information. Companies either do or do not have property, plant and equipment in flood plains. During the hearings, it was explicitly noted by a former FTC Commissioner and an advisor to President Roosevelt that: We are trying not to have this bill be too long.