Reprinted from the April 2023 edition of Business Law Today. Further duplication without permission is prohibited.

By Susan A. Maslow

In the late 2010s and early 2020s, ESG—a wide-capturing acronym standing for “environmental, social and governance”—roared into action, emerging both domestically and abroad as one of the defining trends in investing, regulation, finance, and corporate governance.

ESG’s proponents have long sought a unified framework through which to describe interrelated standards of environmental sustainability and human rights, and bring them into greater alignment with the private sector’s traditional profit-seeking goals. This change in approach arguably gained in prominence after the Business Roundtable’s 2019 declaration on the purpose of the corporation, endorsing a vision of corporations being led for the benefit of all stakeholders, not just shareholders. Though many question the sincerity and commitment of the Roundtable, the ESG movement was super-charged, and it achieved mainstream status during the 2020 protests for racial justice, which spurred companies to integrate new goals for diversity, equity, inclusion, and racial justice into their broader ESG policies. Over the course of the last eighteen months, public company boards have been sued for breaches of fiduciary duty based on alleged failures to react to ESG factor “red flags.”

On January 1, 2021, Congress enacted the Federal Corporate Transparency Act (the “CTA”), pursuant to which a secure database will be established to assist law enforcement agencies in combatting money laundering, financing of terrorism, and other illegal activities. The objective of the CTA is to prevent bad actors from using shell companies to obscure the provenance of their ill-gotten gains.

The database will be administered by the Financial Crimes Enforcement Network (“FinCEN”), an agency of the U.S. Department of Treasury. Companies will be required to provide information relating to their beneficial owners (generally, individuals owning 25% or more) and persons who are in control (generally, individuals holding significant decision-making authority). There are exceptions, such as publicly traded companies, companies with annual gross receipts exceeding $5 million that have more than 20 full-time U.S. employees and a physical office in the United States, and companies already subject to Federal government oversight (e.g., banks).

The European Commission published the long-awaited Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence (the “EU Directive”) on February 23, 2022. It has been suggested that text found in the EU Directive “risks making the law ineffective” by implying that companies can fulfil their obligations by simply adding clauses in their contracts with suppliers and verifying compliance with “suitable industry initiatives or independent third-party verification”. The criticism is that the “contractual assurances” and verification required by Items 2(b) and 4 of Article 7, and Items 3(c) and 5 of Article 8 allow companies to shift their responsibilities on to their suppliers and to knowingly get away with harm by conducting ineffective audits or participating in voluntary industry schemes that have failed in the past.

The argument that companies can find an easy safe harbor within the EU Directive is misguided. Such condemnation places undue emphasis on the first two elements to achieve the negation of civil liability under Article 22 and ignores the third factor. A company must prove not only that (i) it used appropriate contract clauses (under to-be-provided Commission guidance), and (ii) it verified compliance, but must also prove (iii) it was reasonable to expect the action taken, including the verification process, “would be adequate to prevent, mitigate, bring to an end or minimize the extent of the adverse impact.” The last element is unfairly discounted by those that fear delivery of a safe harbor to industry influences. In addition, due account is not given to Article 22’s additional text that insists company efforts (or absence of efforts) to remediate any discovered damage and the extent of pre-harm support and collaboration to address adverse impacts in its value chains (or absence of support and collaboration) is also to be considered in determining liability.

Articles 4 to 11, 25 and 26 of the EU Directive impose due diligence obligations on subject companies and address the duty of care required of their directors in setting up and overseeing due diligence. The EU Directive has numerous “Whereas” clauses expressing a desire to incorporate the UNGPs and OECD Guidelines which require shared responsibility between buyers and suppliers. It should not be read as suggesting companies avoid liability by simply demanding conventional representations and warranties from a first-tier supplier without shared responsibility for thorough retrospective and prospective investigations to identify, prevent and end adverse impact. Any company that believes “contract assurances” without a detailed and regularly reviewed corporate strategy to address human rights, climate change and environmental consequences using contracts as one of multiple tools is destined to be found liable for damages.

Perhaps Article 22 with respect to a company’s potential civil liability could be clearer with respect to this point if it included a reference to Articles 4,5 and 6 in lieu of the existing limited reference to the obligations laid down in Articles 7(Preventing potential adverse impacts) and Article 8 (Bringing actual adverse impacts to an end). But Article 12 (Model contract clauses) of the EU Directive includes a promise that the Commission will provide guidance for model contract clauses and Article 13 (Guidelines) states the Commission, in consultation with Member states, stakeholders, the European Union Agency for Fundamental Rights, the European Environment Agency, and appropriate international bodies may issue guidelines for specific sectors or specific adverse impacts. The to-be-developed model contract clauses should reflect the characteristics and obligations found in Version 2 of the Model Contract Clauses (the “MCCs”) drafted by the American Bar Association Business Law Section’s Working Group found here Center for Human Rights. The MCCs include provisions which require:
● a joint responsibility by buyer and seller to engage in human rights due diligence, in line with the UNGPs and the OECD Guidance;
● a commitment by buyer to engage in responsible purchasing practices that will support supplier’s obligations to avoid adverse human rights impacts; and
● in the event of an adverse impact, a joint commitment that: (a) the parties will prioritize victim-centered human rights remediation above conventional contract remedies (that compensate the non-breaching party, not victims); and (b) each party’s participation in remediation shall be proportionate to each party’s causation of or contribution to the adverse impact.

The EU Directive and the right contract clauses and due diligence guidance can change the way supply chains in global markets have worked for centuries. Finally, a real tool to address modern slavery and the environmental destruction of entire communities.

Model Contract Clauses to Protect Workers in International Supply Chains, Version 2.0

A working group formed under the American Bar Association (ABA) Business Law Section has announced a revised set of model contract clauses for international supply chains. The 2021 Report and Model Contract Clauses, Version 2.0 (MCCs 2.0) from the Working Group to Draft Human Rights Protections in International Supply Contracts are now finalized and can be found on the ABA Center for Human Rights site.  The MCCs 2.0 are one of several initiatives within the Business Law Section’s implementation of the ABA Model Principles on Labor Trafficking and Child Labor. The MCCs 2.0 are offered as a practical, contractual tool to assist inside and outside corporate counsel in efforts to reflect their clients’ commitment to stated human rights policies and desire to abide by international human rights soft and evolving hard law. Given the likely European Union and United Kingdom implementation of mandatory human rights due diligence, the mounting number of Withhold Release Orders in US ports, and growing investor concern with respect to environmental, social and governance (ESG) liability, the Model Contract Clauses should be of interest to all companies with complex supply chains and those that provide such companies legal services. Designed as a modular, practical tool for corporate counsel, the 2021 MCCs 2.0 are the first model contract clauses to implement “human rights due diligence” obligations in supply contracts. They attempt to integrate the principles contained in the UN Guiding Principles on Business and Human Rights (the “UNGPs”) and the OECD Due Diligence Guidance for Responsible Business Conduct into international contracts. The MCCs translate these principles into contractual obligations that require buyer and supplier to cooperate in protecting human rights and make both parties responsible for the human rights impact of their business relationship.

In 2021, entities formed in Pennsylvania and entities formed in other states that have registered to do business in Pennsylvania must file a Decennial Report with the Department of State. This requirement applies to business corporations, non-profit corporations, limited liability companies, limited partnerships, and limited liability partnerships. If a report is not filed, the entity will no longer have exclusive use of its company name or trade name and the name will become available for others to use it. While an entity can file after the December 31, 2021 deadline, a third party registering with the name during the gap period will have rights to the name, and the original entity will not be permitted to reinstate its exclusive rights to the name.

Earlier this year, the Department of State mailed notices to the registered address for each entity regarding its name, however, you should not rely on receiving such a notice to determine whether or not you have to file. All entities are required to file unless they made new or amended filings between January 1, 2012 and December 31, 2021.

The required forms can be found on the Department of State website at https://www.dos.pa.gov/BusinessCharities/Business/Resources/Pages/Decennial-Filing.aspx. There is a filing fee of $70, and the filing deadline is December 31, 2021.

If you are not sure whether you need to file this report for your entity, or if you have any questions regarding this requirement, feel free to contact us. We caution you not to rely upon the Pennsylvania Department of State’s website search feature to tell you whether or not your entity is required to file the decennial report.

On January 7th, the Treasury Department announced that the Paycheck Protection Program, a unique program that kept many businesses afloat during the initial months of the pandemic, will re-open the week of January 11 for a second round of loans for new borrowers and certain existing PPP borrowers. To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans beginning on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter.The PPP fund provides forgivable loans to businesses, providing they maintain their payroll.

These challenging times present particular challenges to small business.  Notwithstanding efforts to stimulate the economy, the fact remains that many businesses simply can’t function at a sustainable level without open doors and customers who require inventory, raw materials or products to sell.  Empirical data supports a substantial downturn in gross domestic production such that the federal government has declined to publish economic forecast data for the summer of 2020.  Millions have been separated from employment – either temporarily or permanently.  Every business and every businessperson has felt the economic effect of the pandemic.

While small business may never be the same, it is not dead.  We all know the United States economy is driven by small to medium employers no matter the media focus on big industry.  There will no doubt be consolidation in nearly every sector of the economy from construction to retail.  History has proven that, for the savvy businessperson, trying times like these bring opportunity.  Taking advantage of opportunity requires strong, focused and forward thinking business relationships.  

On June 3rd, the U.S. Senate passed the “Paycheck Protection Program Flexibility Act” (the “Flexibility Act”) which had been previously passed by the House of Representatives on May 28, 2020. It is expected that President Trump will sign the legislation today, June 4th.  The Flexibility Act provides a number of modifications to the Paycheck Protection Program (“PPP”) provisions of the CARES Act, which will significantly increase the forgivable loan amounts of PPP borrowers.  Arguably, the Flexibility Act turns the PPP into more of a small business subsidy/assistance program, rather than a true paycheck protection program.

The Flexibility Act includes the following changes to the PPP:

Much has been made and reported about the federal government’s effort to sustain the economy and assist working families through programs such as enhanced unemployment benefits and the Payroll Protection Plan.  AMM has assisted many small business owners in negotiating the application process and anticipating both documentary requirements and potential financial consequences of the available programs.  State and local governments have also offered programs to the business community.  Bucks County has now announced the creation of a new grant funding opportunity: the “Bucks Back to Work Small Business Grant” program.  Availability is limited, however, and the application window is small so qualifying business owners must act quickly to obtain a share of the grant fund.      

May 14, 2020

Yesterday the Small Business Administration (SBA) issued updates to its Frequently Asked Questions (FAQs) guidance on the Paycheck Protection Plan (PPP) Loans, and added Questions/Answers (Q&A) 45 and 46, with the latter Q&A being directly related to the certification issues, and to the corresponding May 14th deadline for the return of funds as a “safe harbor” from civil and criminal penalties relating to the certification of need.

As previously reported, the PPP applications required borrowers to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Until its issuance of this Q&A, the SBA’s guidance suggested that it would seek to impose civil and criminal penalties relating to the certification as a first resort, if it determined that the loan was unnecessary.  In doing so, the SBA induced a sense of fear; and then further induced a sense of urgency by offering the safe harbor from such penalties, allowing borrowers to return the funds on or before May 7th to avoid such penalties.  Such deadline was further extended to May 14th.