Delaware’s Voluntary Sustainability
Posted by John Zeberkiewicz, Richards,
Layton & Finger, P.A., on Sunday, July 15, 2018
John Mark Zeberkiewicz is a Director at Richards, Layton &
Finger, P.A. This post is based on a Richards, Layton & Finger
publication by Mr. Zeberkiewicz and
Stephanie Norman, and is part of the Delaware
law series; links to other posts in the series are available here.
Related research from the Program on Corporate Governance
Responsible Firms by Alan Ferrell, Hao Liang, and Luc
Renneboog (discussed on the Forum
On June 27, 2018, Delaware Governor John Carney
signed legislation enacting the Delaware Certification of Adoption of
Transparency and Sustainability Standards Act (the “Act”), which will become
effective on October 1, 2018. The Act, which is the first of its kind,
represents Delaware’s initiative to support sustainability practices by
providing Delaware-governed entities a platform for demonstrating their
commitment to corporate and social responsibility and sustainability. It
reflects Delaware’s recognition that sustainability and responsibility are not
merely buzzwords that companies deploy to appeal to a broader range of
consumers. Rather, those terms embody business practices and systems that are
designed to foster innovation and long-term growth while promoting business
practices intended to provide societal benefits.
long been a jurisdiction of choice for corporate and alternative
entity formation and a leader in corporate and alternative entity law.
In recognition of the increasing calls from investors, customers and
clients for greater transparency in sustainability practices, the Act
provides Delaware entities a verifiable means of demonstrating to
their constituents that they are committed to sustainability.
The Act is entirely
voluntary, applying only to those Delaware-law governed entities that seek to
become certified as reporting entities. Recognizing that there is no single
blueprint for best practices in sustainability among (or even within) various
industries, the Act is broadly enabling, effectively permitting entities to
craft a sustainability regime that is flexible and meets their specific needs.
The few mandatory features of the Act involve the requirement that the entity’s
governing body approve its standards and assessment measures as well as the
requirement that those standards and measures be made publicly available.
Operation of the Act
One of the key insights
of the Act is that sustainability practices should be addressed at the highest
levels of the organization. Accordingly, for an entity to seek certification as
a “reporting entity” subject to the terms of the Act, the “governing body,”
which is defined generally to mean the board of directors or equivalent
governing body, must adopt resolutions creating “standards” (i.e., the
principles, guidelines or standards adopted by the entity to assess and report
the impact of its activities on society and the environment) and “assessment
measures” (i.e., the means by which the entity measures its performance in
meeting its standards). The Act enables an entity to select its own standards,
tailoring them to the specific needs of its industry or business. In designing
its standards, the governing body may rely upon various sources, including
third-party experts and advisors as well as input from investors, clients and
customers. The Delaware Secretary of State does not evaluate or pass judgment on
the substantive nature of an entity’s standards or assessment measures.
participate in the regime contemplated by the Act can obtain a certification of
adoption of transparency and sustainability standards from the Delaware
Secretary of State. Obtaining the certificate involves the creation of a
standards statement (which includes the standards and assessment measures), the
payment of relatively nominal fees to the Delaware Secretary of State, and the
entity’s becoming and remaining a reporting entity. That an entity is a
reporting entity allows it to disclose its participation in Delaware’s
sustainability reporting regime.
Any entity that wishes
to continue as a reporting entity must annually file a renewal statement. The
renewal statement requires disclosure with respect to changes to the entity’s
standards and assessment measures. The entity must also include in its renewal
statement an acknowledgement that its most recent sustainability reports are
publicly available on its website, and must provide a link to that site. If the
entity fails to file a renewal statement (and thus becomes a non-reporting
entity), it may have its status as a reporting entity restored through the
filing of a restoration statement, which requires disclosure and acknowledgments
similar to those in the renewal statement.
Significant Features of the Act
As indicated above, the
Act is principally a disclosure regime requiring entities to provide reports
with respect to their standards and metrics. Nevertheless, the Act specifically
provides that reporting entities are not required to include any privileged
information, trade secrets or competitively sensitive information in their
reports. Any determination regarding whether information that might otherwise be
made publicly available under the Act is privileged or competitively sensitive,
or whether it involves trade secrets, must be made in good faith.
The Act does not give
any party the right to bring claims for an entity’s decision to become or remain
(or not to become or remain) a reporting entity. Moreover, the Act does not
create any specific fines or penalties for a reporting entity’s failure to
comply with its own standards. But, as the Act requires reports and filings made
thereunder to be acknowledged on behalf of an entity by an authorized
person—which involves making the statement to the best of the person’s actual
knowledge after due inquiry—any person who files false statements under the Act
may be liable for perjury.
Delaware entities that
are seeking to demonstrate their commitment to principles of corporate
responsibility and sustainability should consider seeking and obtaining
certification from the Delaware Secretary of State under the Act as to their
transparency in sustainability reporting. Compliance with the formal
requirements will help signal to investors, clients and customers that they are
serious about sustainability practices—and are addressing the matter at the
highest levels of their organization.
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