The SEC’s new climate regulations have sparked legal and legislative challenges. Both the House and Senate are advancing measures to revoke these rules, reflecting a broader effort to counter what is seen by many as regulatory overreach by the SEC under Chair Gary Gensler’s leadership.  Senator Tim Scott (R-S.C.) and Representative Bill Huizenga (R-Mich.) introduced resolutions through the Congressional Review Act (CRA) to reject the SEC’s climate regulations.

The CRA allows Congress to examine and potentially overturn new federal rules by passing a joint resolution, which is then presented to the President for approval, potentially invalidating these.  Given the nearly even party split in Congress and unpredictable voting behaviors, these resolutions might succeed. However, President Biden is unlikely to endorse such a measure, whereas a President like Trump might support it.

Senator Scott and Representative Huizenga have openly criticized the SEC’s broad regulatory agenda, which they argue exceeds its authority, lacks public input, and has not been properly analyzed for costs and benefits.  Earlier in the year, Senator Scott led a group of Republican Senators in demanding transparency from the SEC about its climate regulations. They questioned the SEC’s statutory authority and its interactions with European regulators, which they believed undermined U.S. interests. The SEC’s reluctance to provide the requested documents has been a major source of dispute, especially concerning its involvement in global climate and wider social justice efforts.

Representative Huizenga conducted a 14-month inquiry into the SEC’s climate rulemaking process, including holding four hearings on climate disclosures (I testified at one). His subcommittee sought details from the SEC on the scope of its enforcement powers for a climate disclosure rule. However, the process was hindered by what Huizenga termed a lack of cooperation from the SEC, which provided an excessive number of documents without clarifying its stance, while also pushing through the 886-page final climate rules. 

In presenting the resolution in the House, Representative Huizenga criticized the SEC for yielding to the political left and ignoring the Supreme Court’s ruling in West Virginia vs. EPA, which emphasized the necessity for explicit congressional authorization for major regulatory actions. He also referenced a 2023 federal appellate court decision that overturned a new SEC rule on share buybacks, citing the SEC’s arbitrary and capricious actions and failure to comply with the Administrative Procedure Act, including inadequate responses to public comments and insufficient cost-benefit analysis.

Shortly after the SEC adopted its new climate rules, a federal appellate court issued a temporary stay. Although this suspension was lifted when the case was consolidated in a different appellate court, the SEC stayed the rules on its own due to the numerous challenges these face. Invoking the CRA to nullify the SEC’s climate rules signals Congressional determination to supervise regulatory bodies. The resolution is poised to become a central issue not only in the debate regarding the scope of the SEC’s statutory authority, but the broader debate over the government’s role in business regulation and environmental protection.

Larry Cunningham delivered the 2024 Weinberg Distinguished Lecture last week at the University of Delaware. His topic was: “Speaking Out on Hot Button Topics: How Boards Can Steer CEOs and Companies in Choppy Waters.”  Following are excerpts from the lecture, which reviews the data on this topic and the forces at work, discusses the board’s role and provides a sample CEO-Board framework and reviews the background debates over corporate purpose and Delaware’s preeminence in corporate law.  Please note the views expressed are Larry’s professional views, not necessarily those of Mayer Brown LLP or its clients.

Read the full text here.

As the business environment continues to evolve in complexity, so does the oversight role of boards. At the same time, investor, regulator, and other stakeholder expectations of board involvement in certain aspects of the business, including aspects traditionally within management’s sole purview, are changing in ways that may blur the lines of responsibility between the two. Ultimately, management’s job is to manage, whereas the board’s role is to oversee. Effective oversight relies upon maintaining clear lines of responsibility between the board and management.

Deloitte and the Society for Corporate Governance’s Board Practices Quarterly presents findings from a survey of members of the Society on the board’s leadership structure, independence, and involvement in a number of business matters, including activities related to corporate strategy, human capital, risk and risk management, and operations.

Read the report here.

Jennifer Zepralka joined our Washington D.C. office as a partner, and comes to us from the SEC, where she led the Office of Small Business Policy, working on major rulemakings.  Her insights will prove valuable to clients navigating an increasingly complex regulatory environment.  Jennifer brings a wealth of experience advising companies on compliance, corporate and federal securities law, and ongoing SEC reporting. Prior to joining Mayer Brown, Jennifer served two stints at the SEC, holding key roles in the Division of Corporation Finance, and also undertook corporate governance work as a partner in a global law firm.  She joins lawyers in our Public Companies & Corporate Governance practice and our Public Policy, Regulatory & Government Affairs practice. 

Read more about Jennifer here.  Jennifer will be a regular contributor to the blog.

On Thursday April 11 at 1 pm ET, Larry Cunningham will deliver the University of Delaware’s 2004 Weinberg Distinguished Lecture in Corporate Governance in Wilmington at the event space of Young Conaway Stargatt & Taylor.  The topic: Speaking Out on Hot Button Topics: How Boards Can Steer CEOs and Companies in Choppy Waters.  Free but registration is required, either in-person or livestream.

Register here.

Here’s the abstract of his talk: 
Corporate leaders face complex challenges in responding to public debates on contentious topics. They must balance competing pressures to speak or remain silent, while navigating the polarization of today’s discourse and the diverse and powerful interests of various constituents not only among shareholders but employees, consumers, and civil society groups. 

Larry will explain that corporate leaders should not follow a fixed or ideological rule on whether to take public positions, but rather a pragmatic approach that evaluates the specific context and circumstances of each situation.

The talk will use the history and law of corporate governance, as well as practical experience, to illustrate that the best strategy for each board and CEO will vary depending on the unique features of their corporation and its leadership, its shareholder base, its workforce, the markets it serves, and how these factors relate to given public debates.

The SEC today paused implementation of the climate rules the agency rolled out less than one month ago, in the face of significant legal challenges in numerous federal lawsuits.  The rules would impose substantial disclosure mandates on companies, including concerning the costs of extreme weather events, corporate strategies for addressing climate change, corporate governance procedures and, for many companies, greenhouse gas emissions.

The SEC proposed the rules two years ago and received voluminous comment letters, including many critical ones questioning the proposal’s legality. In response, while the SEC withdrew proposals to require disclosure of emissions across a company’s value chain and added some materiality qualifications, the final rules would continue to impose costly, expansive and controversial duties. The plaintiffs in the cases, including SEC registrants, say the final rules are beyond the SEC’s statutory authority, that some would compel speech on controversial topics in violation of the First Amendment, and that the SEC failed to comply with certain provisions of the Administrative Procedure Act. 

The first federal court to assess one of the lawsuits ordered the final rules stayed, but lifted that suspension when transferring the case to another circuit where all the cases are being heard on a consolidated basis.  The plaintiffs that won the earlier stay were joined by plaintiffs from the other cases in requesting a renewal of the stay.  In light of that action, the SEC announced its unilateral decision to suspend its rules. It explained its decision as appropriate amid a pending case to assure an orderly judicial and regulatory process.  The agency took pains to say it continues to believe the rules are valid, to negate any suggestion that it acknowledges the seriousness of the legal challenges.

Read our client alert on the SEC Final Rule here.

Weinberg Center for Corporate Governance 

2024 Weinberg Center Distinguished Speaker Larry A. Cunningham

Webinar | April 11, 2024

1:00 p.m. – 1:50 p.m. EST

Register here.

Corporate leaders face complex challenges in responding to public debates on contentious topics. They must balance competing pressures to speak or remain silent, while navigating the polarization of today’s discourse and the diverse and powerful interests of various constituents not only among shareholders but employees, consumers, and civil society groups. In this talk, Larry Cunningham will suggest that corporate leaders should not follow a fixed or ideological rule on whether to take public positions, but rather a pragmatic approach that evaluates the specific context and circumstances of each situation. The talk will use the history and law of corporate governance, as well as practical experience, to illustrate that the best strategy for each board and CEO will vary depending on the unique features of their corporation and its leadership, its shareholder base, its workforce, the markets it serves, and how these factors relate to given public debates.

On January 29, 2024, in Cantor Fitzgerald, L.P. v. Ainslie, the Delaware Supreme Court reversed a Chancery Court holding that a forfeiture-for-competition provision in a limited partnership agreement was unenforceable as an unreasonable restraint of trade. Applying the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), the Supreme Court held that (i) the forfeiture-for-competition provision was not a liquidated damages provision or a noncompete covenant subject to scrutiny for reasonableness; and (ii) in light of public policy considerations regarding freedom of contract and enforceability of partnership agreements, and absent extraordinary circumstances, such forfeiture-for-competition provisions should be enforced.

Read our Legal Update.

Climate disclosure regulations are among the most significant and complex challenges faced by companies and boards, with a variety of requirements emanating from numerous governmental authorities and non-governmental organizations (NGOs) in recent years. Mayer Brown lawyers from around the world produced a White Paper on Global Climate Change Disclosure Initiatives and Board Corporate Governance Considerations, which can be found here, offering a thumbnail sketch of key features and differences of a dozen authorities, followed by considerations for boards concerning disclosure practices, as well as governance and risk management. We also suggest some practical steps that might be taken in order to prepare for whatever the future holds.

The White Paper includes a quick reference chart on certain key climate-related disclosure requirements applicable (a) across 8 countries/jurisdictions and (b) under the IFRS Sustainability Reporting Standards of the International Sustainability Standards Board (ISSB).  The chart touches on the following information: (i) whether compliance with the disclosure rules is mandatory, (ii) timing considerations, (iii) scope of the disclosure rules, (iv) nature of the disclosure rules, (v) how “materiality” is approached, (vi) corporate governance requirements, (vii) audit or assurance requirements, and (viii) penalties for noncompliance. 

Read the chart here.

All across the world, climate disclosure regulations are among the most significant and complex challenges faced by companies and boards, with a variety of requirements emanating this past year from numerous governmental authorities and non-governmental organizations.

At Mayer Brown, I had the honor of leading a group of 21 partners from across 14 of the firm’s offices in 8 countries to produce a white paper discussing key features and differences of a dozen authorities. We identify considerations for boards concerning disclosure practices, as well as governance and risk management. We also suggest some practical steps that might be taken in order to prepare for the year ahead.  An appendix presents the jurisdictional comparisons in summary form.

Download our white paper here.