Litigation
Immediately upon adoption, the Climate Final Rules were subject to court challenge. Ten states, led by West Virginia, filed a challenge to the new rules on March 6, the date that the rules were adopted by a 3-2 vote of the SEC commissioners. Since then, additional challenges have been filed with respect to the new rules, with some petitioners claiming that the rules go to far, while others claim that the new rules do not go far enough. In all, 25 states have joined lawsuits against the implementation of the new rules. All of the cases against the new rules have now been consolidated into the U.S. Court of Appeals for the Eighth Circuit, and the SEC has indicated that it will vigorously defend the new rules as adopted.
Some legal commentators have questioned whether the Climate Final Rules are subject to challenge under the relatively recent Supreme Court opinion of West Virginia v. EPA that was issued on June 30, 2022 relating to the Clean Air Act. In that case, the Supreme Court curtailed the authority of the EPA to issue climate change regulations by clarifying the Major Questions Doctrine. The six-member majority of the Supreme Court found that the EPA did not have the authority to issue climate change regulations without express congressional authorization. As the opinion concerned the scope of agency authority, some have taken the view that the Climate Final Rules, as implemented, will not survive Supreme Court scrutiny.
Observations
- As adopted, the Climate Final Rules will have a significant impact on many companies in the infrastructure sector, and in particular companies in the energy industry. The rules require extensive disclosure, and with that will come additional costs and potential liabilities.
- The SEC ultimately scaled back the extent of the disclosure required by the rules (e.g. removal of Scope 3 emissions disclosure) as well as the issuers that are subject to the rules (e.g. scaled back application to SRCs and EGCs). Since many large companies are otherwise required or are prepared to voluntarily make climate related disclosures, will that dampen some of the opposition to the new rules?
- Will the costs (and potential liability) associated with the new required disclosures result in more companies, and in particular companies with the largest GHG “footprints”, deciding to “go dark” (cease being public companies)? Will public companies divest GHG intensive operations to private owners? Is this desirable from an overall disclosure perspective?
C. The Corporate Transparency Act
Overview
On January 1, 2024 the Corporate Transparency Act (CTA) came into effect. The CTA was passed as part of the National Defense Authorization Act for fiscal year 2021, and requires corporations, limited liability companies, limited partnerships and other legal entities to make beneficial ownership disclosures to the Financial Crimes Enforcement Network (FinCEN), part of the US Department of the Treasury. The purpose of the CTA is to increase transparency and strengthen anti-money laundering enforcement, but as described below the CTA casts a broad net and imposes compliance obligations on a wide variety of entities.
Discussion
The CTA generally applies to all forms of legal entities; however, there are numerous exemptions from it reporting requirements, including for public companies, Exchange Act registrants, investment advisors, broker-dealers, insurance companies, tax exempt entities and large operating companies, among others. As a first step toward evaluating their compliance obligations, companies should determine whether they qualify for an applicable exemption.
If the CTA is applicable, reporting entities are required to report (1) the entity’s name as well as any fictious or d/b/a names, business address, jurisdiction and tax id number; (2) each of the “beneficial owners” of the entity, including name, date of birth, address and photo identification; and (3) each of the “company applicants”, including name, date of birth address, and photo identification. Under the CTA, the term “beneficial owner” has a distinct definition from that under the U.S. federal securities laws and includes both control persons and 25% owners.
- A “control person” is generally defined as any individual who, directly or indirectly, exercises substantial control over the entity, and includes both senior officers and executives of the entity, as well as any other person who is able to make important decisions on behalf of the entity (including the power to appoint senior officers or executives, or a majority of the board of directors).
- A “25% owner” includes any individual who, directly or indirectly owns or controls at least 25% of the ownership interests of an entity, and includes all forms of equity – for example, stock, membership interests, limited partnership interests etc.
A “company applicant” is an individual who makes the filing with FinCEN on behalf of the entity, and the individual who is primarily responsible for directing that filing if more than one person is involved. This may be an individual at a third party service provider, such as a law firm.
Entities that are subject to reporting obligations under the CTA are required to make their filings on the following timeline: (1) entities formed (or registered) prior to January 1, 2024 are required to file by January 1, 2025; (2) entities formed (or registered) on or after January 1, 2024 and before January 1, 2025 are required to file within 90 days of their formation (or registration); and (3) entities formed (or registered) on or after January 1, 2025 are required to file within 30 days of their formation (or registration).
The FinCEN database will generally be available to law enforcement agencies as well as certain U.S. Treasury officials and employees.
Observations
Given the level of private investment in the infrastructure in the U.S., including by private equity funds, infrastructure funds, foreign pension funds and sovereign wealth funds, compliance with the reporting obligations of the CTA may raise concerns with investors both from a disclosure perspective and from an information gathering perspective. As an initial step, investors should be reviewing their entities to determine whether they have a reporting obligation and if so ensuring that they have a process in place to make timely filings.
D. West Palm Beach Firefighters' Pension Fund V. Moelis & Co.
Overview
In Moelis, the Delaware Chancery Court considered whether certain provisions of a stockholders agreement were in violation of the Delaware General Corporation Law (DGCL), and in particular Sections 141(a) and 141(c) thereof, because of the restrictions they place on the authority and duties of the directors of a Delaware corporation. The Court ultimately found that a number of the provisions included in the stockholders agreement were invalid, because they impermissibly restricted the statutory authority of the directors.
In the current M&A environment, this case is particularly notable because of the increased prevalence of structured equity investments. Given the slowdown in M&A in 2023, structured equity investments, such as preferred equity investments, joint ventures and acquisitions of minority equity stakes, have become more common, as dislocation in pricing resulting in part from increased interest rates has made it more difficult for buyers and sellers to reach agreement on terms for sale transactions. Governance rights are often a key feature of structured equity investments, and investors need to be sure that the rights that they negotiate will ultimately be enforceable in court.
Discussion
The case relates to a stockholders agreement entered into in connection with the initial public offering of Moelis & Company. The stockholders agreement, which was disclosed to the company’s investors, provided the company’s founder and CEO with significant governance rights including: (1) approval rights with respect to a series of matters relating to the operation of the business, including amending the company’s organizational documents, appointing or removing senior officers of the company, approval of the company’s budget and business plan, the company’s entry into a business combination transaction or sale of the business, and incurring debt, among others; (2) approval rights with respect to the size of the board and the appointment of the company’s directors, with the founder’s designees to constitute a majority of the board; and (3) the right to proportionate representation on all committees of the board. These provisions were challenged by a stockholder who claimed that these provisions effectively limited the power and authority of the directors to exercise their judgment as required by the DGCL.
The Court employed a two-step analysis, first considering whether the restrictions in the stockholders agreement constituted an internal governance arrangement or a commercial arrangement. In the first step of the analysis, the Court reviewed the restrictions in the context of several factors, such as whether the restrictions were part of a larger corporate transaction and exchange of consideration or were for the purpose of restricting governance as an end in itself, and ultimately determined that the restrictions were in fact an internal governance arrangement. After making this finding, the Court then considered whether the restrictions (i) have the effect of removing from the directors in a very substantial way their duty to use their own best judgment on management matters, or (ii) tend to limit in a substantial way the freedom of director decisions on matters of management policy.
The Court found that most of the provisions of the stockholders agreement were invalid under Section 141(a) of the DGCL, including the prior approval rights with respect to company’s business matters, and certain aspects of the board and committee approval rights. The Court went further to note that even the provisions that were not deemed to be invalid on their face could still be subject to challenge if they were to be applied inequitably.
Observations
Moelis serves as a reminder that even negotiated provisions that are agreed to in a stockholders agreement of a Delaware corporation could later be subject to challenge under the DGCL. The case highlights that parties need to be mindful that restrictive provisions could be subject to challenge not only based on technical requirements – for example, whether a restriction appears in the certificate of incorporation or in a stockholders agreement – but also on equitable grounds – whether the restrictions as applied are inequitable.
E. Antitrust Matters – Updated Merger Guidelines and Proposed HSR Rules
Overview
On December 18, 2023, the FTC and DOJ issued updated Merger Guidelines that reflect a change in approach from the agencies’ prior guidelines, which had generally focused on whether the merger would result in raised prices or reduced output, quality or innovation. The updated guidelines consider a broader array of potential harms, including some not included in the prior merger guidelines. In June of 2023, the FTC published proposed rules (“Proposed HSR Rules”) that reflect extensive changes to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), which, if adopted as proposed, would require significant additional disclosure in connection with the HSR clearance process, increasing the time and expense required for these filings. Taken together, these changes indicate that M&A transactions are likely to be subject to an increased level of scrutiny, which will in turn increase the time, expense and risk associated with these transactions.
Discussion
Updated Merger Guidelines
The updated Merger Guidelines include 11 guidelines, which are listed below, together with highlights from the agencies’ explanatory notes, which indicate the breadth of the considerations involved, but not the full range of considerations:
1. Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market.
In the discussion of this guideline, the agencies note that merger that creates a firm with a market share over 30% is presumed to substantially lessen competition and tend to create a monopoly if it also involves an increase in HHI of more than 100 points (where the change in HHI from the merger of two firms is equal to two times the product of the market share of those firms (e.g. a merger between a firm with a 20% market share and a 5% market share would result in an HHI increase of 200 [2 x 20 x 5])). In practice, this means that any horizontal merger leading to a combined market share of 30% or more will be subject to this presumption. This reflects a lower threshold than prior guidelines.
2. Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.
This guideline includes considerations beyond market share, such as whether competition between the firms results in lower prices, new or better products and services, or higher wages, among other things.
3. Mergers Can Violate the Law When They Increase the Risk of Coordination.
This guideline includes considerations such as whether the risk of tacit coordination is increased, and whether the transaction will eliminate a disruptive competitor.
4. Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market.
This guideline includes consideration as to whether one or both of the parties would have had a reasonable probability of entering a concentrated market in the absence of the transaction.
5. Mergers Can Violate the Law When They Create a Firm that May Limit Access to Products or Services That Its Rivals Use to Compete.
This guideline includes consideration as to whether the threat of limited access could deter a potential rival from investing. In addition, this guideline considers the possibility that a vertical acquisition will give the merged company the ability and incentive to foreclose rivals.
6. Mergers Can Violate the Law When They Entrench or Extend a Dominant Position.
This guideline includes consideration as to whether a party with a dominant market position is acquiring a nascent competitive threat.
7. When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly.
This guideline includes consideration as to whether there is an overall trend toward consolidation in an industry, and if so to examine individual transactions in that broader context.
8. When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.
This guideline includes consideration as to whether a party is a serial acquirer, and if so, undertaking an examination of the impact of the acquisitions on a cumulative basis, even if each transaction, on its own, may not reduce competition or even trigger an HSR filing.
9. When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform.
This guideline includes consideration of conflicts of interest that may occur when a firm sells products on its own platform in competition with competitors’ products also being sold on that firm’s platform.
10. When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers.
This guideline includes consideration of the impacts of a transaction on a variety of upstream suppliers to a firm.
11. When as Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact of Competition.
This guideline includes consideration as to whether the owner of a minority interest can discourage the target firm from competing with that owner, or whether that owner becomes less incentivized to compete with the target firm.
While the updated merger guidelines are not the law, they provide an indication of the antitrust agencies’ enforcement-oriented approach to reviewing M&A transactions. It should be noted however that parties who are prepared to defend their transactions in court may challenge an enforcement action based the antitrust theories set forth in these guidelines, and in the past have often been successful in these challenges.
Proposed HSR Rules
The Proposed HSR Rules reflect a significant expansion of the information and documentation that must be submitted in connection with an HSR filing. Key elements of the proposed rules are as follows:
- Additional narrative disclosure regarding the transaction will be required, regardless of whether there is an identified product overlap. Filings would be required to include discussion of the rationale for the transaction, existing business relationships between the parties and analysis of competition.
- Additional transaction documents will be required to be submitted including: (i) transaction related documents prepared at the deal team level (and not just those prepared for officers and directors); (ii) drafts of documents, and not just final versions; (iii) transaction schedules and other ancillary documents and agreements related to the transaction.
- Additional information regarding the parties’ investors and financing providers will be required.
- Where there is any competitive overlap between the parties’ businesses, information regarding the companies’ prior acquisitions (including those that were not subject to HSR reporting), strategic and business plans will be required.
There are numerous additional reporting requirements proposed beyond the key items noted above. To give a sense of the increased burden the Proposed HSR Rules would impose, note that the FTC estimates that the time required to prepare a filing under the Proposed HSR Rules would increase from 37 hours under the current rules to 144 hours. Many practitioners have indicated that it may take significantly longer. If the Proposed HSR Rules are adopted in a form similar to those proposed, companies that are active participants in M&A will need to develop new procedures regarding document creation, document retention, as well as transaction execution, as well as factoring in the time, expense and risk into their transaction planning.
Observations
While the potential impacts of the updated merger guidelines and proposed HSR rules are not unique to the infrastructure sector, they certainly could have a significant impact on infrastructure transactions. If the antitrust enforcement agencies focus on a broader range of competitive harms that may result from M&A transactions, and move away from a primary focus on consumer harming impacts, this could bring scrutiny to a much broader range of infrastructure transactions. When added to the already substantial regulatory approval burden that may infrastructure transactions face, this would likely serve to increase the time, expense and uncertainty the parties to these transactions already face, and may cause some investors to reconsider their strategies with respect to M&A in favor of organic growth. Ultimately, it remains to be seen how these increased risks and expenses will be allocated between the parties to these transactions.
