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Q2 2022 U.S. Legal & Regulatory Developments

July 15, 2022 Download PDF

The following is our summary of significant U.S. legal and regulatory developments during the second quarter of 2022 of interest to Canadian companies and their advisors.

             1. A Guide to the SEC’s Proposed Climate Disclosure Requirements

As we reported in our first quarter memorandum, the United States Securities and Exchange Commission (the “SEC”) recently proposed significant new requirements to enhance and standardize climate-related disclosures.

Registrants would be required to detail climate-related risks, risk mitigation plans and goals and oversight processes; greenhouse gas emissions; and climate-related financial metrics, as part of a new climate-related disclosures section and separate footnote to financial statements in their annual report.

The proposed disclosure requirements would apply to U.S. domestic registrants and to foreign private issuers filing on Form 20-F, with a multi-year phase-in based on company filing status. The SEC has not at this time proposed that the requirements would apply to MJDS issuers filing on Form 40-F.

We now offer a more detailed guide to the proposal and its implementation timeline, which is available here:

For the SEC proposal, please see:

                 2.  Treasury Escalates Russia Sanctions, Including New Prohibition on the Provision of Certain Services

On May 8, 2022, the United States increased pressure on Russia to de-escalate its conflict in Ukraine through new sanctions targeting individuals and entities critical to Russia’s war efforts, as well as broad sanctions against the provision of accounting, trust and corporate formation, and management consulting services to Russia.

These latter sanctions were imposed through a new determination under Executive Order 14071, which prohibits the provision of “certain categories of services” from the United States or by U.S. persons wherever located. The determination became effective on June 7, 2022.

The Office of Foreign Assets Control (“OFAC”), in consultation with the State Department, identified the prohibited services to include the provision of accounting, trust and corporate formation, as well as management consulting activities. It issued guidance clarifying the scope of the prohibited services and noted that:

  • “Accounting services” includes any “services related to the measurement, processing, and transfer of financial data about economic entities;”
  • “Trust and corporate formation services” includes “services related to assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for other persons to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts;” and
  • “Management consulting services” includes “services related to strategic business advice; organizational and systems planning, evaluation, and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.”

OFAC issued guidance outlining two narrow exceptions from the scope of the determination:

  • First, any services provided to U.S.-owned or controlled entities located in the Russian Federation are not prohibited; and
  • Second, any services provided in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person are not prohibited. For purposes of the determination, OFAC anticipates defining “Russian person” as an individual who is a citizen or national of the Russian Federation, or an entity organized under the laws of the Russian Federation.

In parallel, OFAC published a determination pursuant to Executive Order 14024 that authorizes the imposition of sanctions against any person that operates the accounting, trust and corporate formation services, or management consulting sectors in Russia. This enables OFAC to add individuals or entities that provide such services in Russia to OFAC’s SDN List pursuant to Executive Order 14024. OFAC has not yet made any designations pursuant to this new authority.

U.S. companies and other entities engaged in accounting, trust and corporate formation, or management consulting services—whether or not such services are their primary business—should carefully assess the potential implications of these recent actions on their business in terms of the enforcement risks associated with providing such services to Russia. Non-U.S. companies conducting business with a nexus to the U.S. will have to make similar assessments, as well as consider the designation risks associated with provision of such services to Russia.

As U.S. and non-U.S. companies consider the evolving risks of conducting business in Russia, they should be aware that OFAC may make more determinations prohibiting additional categories of services from being exported to Russia under Executive Order 14071. In addition, we can expect that the imposition of sanctions will be authorized against persons operating in additional sectors of Russia’s economy under Executive Order 14024.

For the full text of our memorandum, please see:

For the text of Executive Order 14071, please see:

For the text of the OFAC’s determination under Executive Order 14071, please see:

For the text of Executive Order 14024, please see:

For the text of OFAC’s determination under Executive Order 14024, please see:

For other recent memoranda on actions taken against Russia, please see:

           3. SEC Proposes Amendments to Form ADV Regarding Investment Advisers’ ESG Practices

On May 25, 2022, the SEC proposed amendments to Form ADV which would require investment advisers, including private fund advisers, to provide additional information regarding their incorporation of environmental, social and governance (“ESG”) factors in their investment strategies. According to the proposing release, the proposed amendments are designed to promote consistent, comparable and decision-useful information for investors.

While the proposed amendments do not define “ESG” or similar terms, they do seek to categorize certain types of ESG strategies broadly and would require advisers to provide specific disclosures based on the ESG strategies they pursue. In addition, the proposing release provides staff observations and offers guidance to advisers regarding compliance practices relating to ESG investing.

If adopted, advisers would have one year after the effective date of the amendments to Form ADV (60 days after the date of publication in the Federal Register) to comply with the ESG disclosure requirements. Comments on the proposed amendments are due on August 16, 2022.

For the full text of our memorandum, please see:

For the SEC’s proposed amendments, please see:

               4. SEC Highlights Investment Adviser MNPI Compliance Issues

On April 26, 2022, the SEC’s Division of Examinations (“EXAMS”) published a Risk Alert (available here) highlighting deficiencies observed by staff in their examinations of investment advisers associated with their policies, procedures and controls around the creation, receipt and use of potential material non-public information (“MNPI”). Section 204A of the Investment Advisers Act of 1940 (the “Advisers Act”) requires all investment advisers, registered and unregistered, to establish, maintain and enforce written policies and procedures that are reasonably designed, taking into consideration the nature of the adviser’s business, to prevent the misuse of MNPI by the adviser or any person associated with the adviser. Rule 204A-1 thereunder (the “Code of Ethics Rule”) requires investment advisers that are registered or required to be registered under the Advisers Act to adopt a code of ethics that, among other things, includes standards of business conduct and requires certain personnel of an investment adviser to report, and the adviser to review, their personal securities transactions and holdings periodically and to obtain pre-approval of certain investments. Deficiencies related to Section 204A and the Code of Ethics Rule have been among the deficiencies most commonly observed by EXAMS.  

Although the Risk Alert identifies several categories of potential MNPI that may warrant additional scrutiny (including information associated with “expert networks,” “value-add investors” and “alternative data”), investment advisers should be reminded to consider carefully the particular MNPI risks presented by “the nature of such investment adviser’s business” to ensure that policies and procedures are tailored to address those risks. Finally, the Risk Alert should serve as a further reminder of the importance of adhering consistently to policies and procedures and maintaining appropriate documentation to demonstrate compliance with such policies and procedures.

For the full text of our memorandum, please see:

For the SEC’s Risk Alert, please see:

           5. Ninth Circuit Enforces Exclusive Forum Provision Favoring State Court for Derivative Claims Despite Plaintiff’s Assertion of a Federal Securities Claim

On May 13, 2022, the Ninth Circuit affirmed the dismissal of a shareholder derivative lawsuit asserting both state and federal claims against Gap Inc.’s directors and officers for their alleged failure to uphold their commitments to diversity and inclusion. The district court dismissed the lawsuit because the company’s bylaws require derivative lawsuits to be filed exclusively in the Delaware Court of Chancery. The appellate court affirmed, notwithstanding the fact that the dismissal left plaintiff with no forum in which to assert her derivative claims arising under the Securities Exchange Act of 1934 (the “Exchange Act”), over which federal courts have exclusive jurisdiction. The decision creates a circuit split with the Seventh Circuit, which earlier this year refused to enforce an exclusive forum provision in substantially similar circumstances. Although other circuit courts have not yet weighed in on this issue, the circuit split between the Seventh and Ninth Circuits raises the possibility of Supreme Court review.        

Noelle Lee v. Robert Fisher, et al

In September 2020, Gap shareholder Noelle Lee filed a derivative lawsuit against Gap and its directors and officers, alleging that they failed to create meaningful diversity within company leadership roles and made false statements in Gap’s proxy statements about the level of diversity the company had achieved. The company’s bylaws contain a forum selection clause requiring “any derivative action or proceeding brought on behalf of the Corporation” to be filed in the Delaware Court of Chancery. The plaintiff asserted both state law fiduciary duty claims and a federal securities claim alleging a violation of Section 14(a) of the Exchange Act, which prohibits misleading statements in proxy materials. Because federal courts have exclusive jurisdiction over claims arising under the Exchange Act, the plaintiff filed her lawsuit in federal court in the Northern District of California, notwithstanding the company’s exclusive forum provision directing derivative lawsuits to be filed in Delaware state court. The district court dismissed the complaint on forum non conveniens grounds, holding that the shareholder was bound by the company’s forum selection clause with respect to all of her claims.

The plaintiff appealed. She argued that the forum selection clause should not be honored because its enforcement would contravene a strong public policy favoring the federal forum where the lawsuit was filed. The plaintiff identified four pieces of “evidence” allegedly supporting her position: (1) the Exchange Act’s anti-waiver provision, which voids any provision that waives compliance with the Exchange Act; (2) a federal court’s obligation to hear cases over which it has subject matter jurisdiction; (3) the Exchange Act’s exclusive federal jurisdiction provision; and (4) Delaware state case law suggesting that an exclusive forum provision that prevented a shareholder from asserting a Section 14(a) claim would be inconsistent with the anti-waiver provision of the Exchange Act.

The Ninth Circuit unanimously rejected the appeal. First, the court relied on Ninth Circuit precedent holding that “the strong federal policy in favor of enforcing forum-selection clauses supersedes anti-waiver provisions in federal statutes, regardless whether the clause points to a state court, a foreign court, or another federal court.” The court rejected the plaintiff’s argument about a federal court’s obligation to hear cases within its jurisdiction for substantially similar reasons.  

Second, the court held that the Exchange Act’s exclusive federal jurisdiction provision does not create a strong public policy favoring the federal forum. The court explained that the federal jurisdiction provision simply “forbids non-federal courts from adjudicating Section 14(a) claims,” and that the Gap’s exclusive forum provision would not force the Delaware Court of Chancery to adjudicate the federal claim. Thus, as the Ninth Circuit reasoned, “enforcement of the forum-selection clause does not violate any express statutory policy of the Exchange Act’s exclusive federal jurisdiction provision.” The court also noted that the Exchange Act’s exclusivity provision is waivable, though there was no indication it had been waived in this case.

Finally, the Ninth Circuit held that the plaintiff had failed to identify any Delaware statute or case law “clearly stating that she could not get any relief in the Delaware Court of Chancery.” In her reply brief, the plaintiff pointed to the Seventh Circuit’s recent holding that an identical forum-selection clause was unenforceable. A divided Seventh Circuit panel held that section 115 of the Delaware General Corporation Law (the “DGCL”)—which permits exclusive forum provisions for derivative lawsuits that are “consistent with applicable jurisdictional requirements”—would prohibit the use of a forum bylaw that would entirely foreclose a derivative action under Section 14(a) of the Exchange Act, and also that such a bylaw would violate the Exchange Act’s anti-waiver provision. The Ninth Circuit did not consider the plaintiff’s section 115 argument because it was raised for the first time in reply, and further held that the anti-waiver provision argument was foreclosed by binding Ninth Circuit precedent, as discussed above.  


The Ninth Circuit’s decision in Noelle Lee v. Robert Fisher, et al is an encouraging development for directors and officers of companies with exclusive forum provisions in their charters and bylaws, and particularly for Delaware corporations with provisions requiring that derivative lawsuits be brought in the Delaware Court of Chancery. Shareholders have increasingly sought a perceived advantage by litigating in federal courts rather than the Delaware courts that are more familiar with these issues. The decision in Lee suggests that defendants may be successful in seeking to dismiss derivative lawsuits filed in federal court based on exclusive forum provisions even if, as in Lee, plaintiffs are left without a forum in which to assert federal securities claims derivatively. The Lee decision is unlikely to be the final word on the matter, however, both because it declined to address the plaintiff’s statutory argument under the DGCL (given her belated invocation of that issue) and because there is now a split between the Ninth and Seventh Circuits about the application of the Exchange Act’s anti-waiver provision in these circumstances.

For the full text of our memorandum, please see:

For the Ninth Circuit’s opinion in Noelle Lee v. Robert Fisher, et al, please see:

             6. Recent Antitrust Division Statements Suggest Close Attention to Deals Involving Private Equity

Federal antitrust agencies are increasingly focused on issues of particular relevance to private equity funds. In a memo last September, the Federal Trade Commission Chair asserted that “the growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations.” More recently, Jonathan Kanter, the assistant attorney general in charge of the Antitrust Division of the U.S. Department of Justice (“DOJ”), has spoken about potential competitive issues in private equity deals, including roll ups, the involvement of private equity in divestiture remedies, and enforcement of the law concerning interlocking directorates. In a recent interview with the Financial Times he said that private equity deals are “top of mind” for him and his staff.

Roll Ups—In the interview, Mr. Kanter stated that a roll up strategy is a “business model [that] is often very much at odds with” antitrust laws “and very much at odds with the competition we’re trying to protect.” As a result, he said, if the DOJ is “going to be effective, we cannot just look at each individual deal in a vacuum detached from the private equity firm.” In line with these statements, funds can expect that they or their portfolio companies will increasingly be asked wide-ranging questions about strategies in certain merger reviews. More broadly, in light of Mr. Kanter’s statements and the DOJ and FTC’s recently issued call for comments on the agencies’ merger guidelines (which asks whether “the guidelines’ approach to private equity acquisitions [is] adequate”), it would not be surprising to see private equity roll ups addressed in future merger guidelines.  

Acquisition of divestiture assets—Mr. Kanter has expressed skepticism about divestitures as remedies in merger matters. In April, 2022, he expressed concern that “divestitures may not fully preserve competition across all its dimensions in dynamic markets.” He went on to single out private equity purchasers, saying that “too often partial divestitures ship assets to buyers like private equity firms who are incapable or uninterested in using them to their full potential.” He continued this theme in the Financial Times interview, saying: “Very often settlement divestitures [involve] private equity firms [often] motivated by either reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll up.” Those involved in deals where a private equity fund is part of a potential remedy should take Mr. Kanter’s assertions into account when advocating for the remedy.

Interlocking directorates—Section 8 of the Clayton Antitrust Act of 1914 prohibits a person from simultaneously serving on the board of two competing corporations unless the criteria for the de minimis exceptions are met. Historically, when the DOJ became aware of a potential Section 8 issue (typically during review of a proposed transaction), the matter was often resolved by the director resigning from a board. In certain instances, the DOJ issued a public statement about the matter. However, recent statements by Mr. Kanter suggest that future Section 8 violations may be treated differently. In April, he suggested that the DOJ would “not hesitate to bring Section 8 cases to breakup interlocking directorates.” He reiterated the Antitrust Division’s attention to interlocking directorates in the Financial Times interview, saying “we’re going to enforce” Section 8. These statements—along with Mr. Kanter’s other statements about his willingness to litigate—suggest that Section 8 issues may be more onerous to resolve going forward. It may be that the DOJ will now insist on a consent decree, which would require a court filing, a period for public comment and eventual approval by a judge. Private equity funds should pay particular attention to potential Section 8 issues when structuring deals, and should periodically evaluate their portfolios for these issues as companies’ businesses evolve. Indeed, companies that are not initially competitors may become competitors as product and service lines change.

For the full text of our memorandum, please see:

For Mr. Kanter’s Financial Times interview, please see:

For a transcript of Mr. Kanter’s April, 2022 speech, please see:

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