A coalition of business groups has filed a lawsuit seeking to overturn a law signed by California’s Governor Gavin Newsom last October that requires thousands of companies, both public and privatedoing business in California, to publicly report on their ESG practices, including greenhouse gas emissions throughout their supply chain.
The lawsuit was filed in the U.S. District Court for the Central District of California by the United States Chamber of Commerce, California Chamber of Commerce, American Farm Bureau Federation, Central Valley Business Federation, Los Angeles County Business Federation, and Western Growers Association.
The lawsuit argues that California is attempting to act as a national emissions regulator by requiring all businesses that operate in California, not just California domiciled businesses, to comply if they want to do business in the state.
Tom Quaadman, executive director of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, said the suit was filed against California for violating the First Amendment, which bars California from compelling a business to engage in subjective speech, and the federal Clean Air Act, which preempts a state’s ability to regulate emissions in other states — as California seeks to do by mandating reporting on out-of-state emissions.
California’s law far exceeds the SEC’s proposed guidelines on ESG reporting and was signed at a time when the SEC has delayed its own decision on ESG considering thousands of comment letters and legal challenges. After a series of delays over the past two years, the SEC currently is slated to decide on proposed rules in Q2 2024.
Unlike the SEC’s proposed version, which would require US SEC registrants to report on direct and indirect emissions, California’s law goes a step further requiring both public and private companies that operate in the state, and which have total revenues above $1 billion, to report direct and indirect emissions.
The law requires the California State Air Resources Board to develop and adopt regulations by January 1, 2025 that would require companies to report on Scope 1 and Scope 2 emissions beginning 2026 and to report on Scope 3 Greenhouse Gas Emissions beginning 2027.
Initial estimates are that more than 5,300 companies that operate in California will be controlled by the law. The words “operate in California” mean that the law will extend far beyond California’s borders and include companies based throughout the 50 states and the District of Columbia. Additionally, the Scope 3 emission disclosure requirements would expand well beyond the 5,300 affected companies, as every business in a company’s supply chain, no matter how small, or where it’s located, would be affected by the law.
“The laws also require companies to subjectively report their worldwide climate-related financial risks and proposed mitigation strategies,” said the US Chamber. “The laws apply to companies across the U.S. and worldwide on the basis of even minimal operations in the state of California, thus attempting to impose essentially a national standard.”
California’s law defines the various scope emissions as follows:
· Scope 1 emissions refer to all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
· Scope 2 emissions refer to indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
· Scope 3 emissions refer to indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.
The California law requires companies to obtain “an assurance engagement, performed by an independent third-party assurance provider, of their public disclosure.”
Earnout provisions played a larger role in corporate M&A deals last year, helping to close the gap between what a seller believed their company was worth and what the buyer was willing to pay.
According to the Wall Street Journal, corporate M&As plunged to their lowest level in a decade, as companies couldn’t agree on a price. Sellers saw rising stock market valuations as a reason to demand more, while buyers, faced with higher acquisition costs because of rising interest rates and skepticism about an uncertain economy, lowered projected valuations.
Earnouts bridged the gap, with the Journal reporting that during the first three quarters of 2023, nearly one-third of private deals included an earnout, “up from 21% during the same period” in 2022.
An earnout provision makes a portion of the purchase price contingent on the seller meeting certain post-closing targets. For the buyer, an earnout provision protects them from overpaying at the time of the deal, and bases compensation on actual future performance. The performance targets could be revenue, profit, or in the case of life sciences, regulatory approval of a drug.
Dealogic has reported that in 2023 the total value of global M&As declined 15% over the prior year, to just over $3 trillion.
The IRS has set a March 22 deadline for businesses to voluntary return monies they received after filing for pandemic-era Employee Retention Credits (ERC), if those claims were applied for in error. The agency also has set that deadline for claimants to withdraw claims that have yet to be paid, if the claimant now realizes that their claim is ineligible.
Under the voluntary disclosure program, businesses are required to pay back 80% of monies received, with the IRS forgiving 20%. The latter amount reflects what the business may have paid to ERC promoters, who the IRS says were responsible for the deluge of claims that the IRS received since it implemented the program.
When introduced in March 2020 as part of the CARES Act, the ERC program was meant to assist businesses that continued to pay for employees during the pandemic when their businesses were either fully or partially shut down due to government order.
However, said IRS Commissioner Danny Werful, “Many businesses were wildly misled about the qualifications, and the IRS is taking a special step to highlight common problems being seen about these claims.”
The IRS says the withdrawal option lets certain employers withdraw their ERC submission and avoid future repayment, interest, and penalties.
In September 2023, the IRS imposed a temporary moratorium on ERC claim processing through the end of December due to a flood of claims, which it says were predominantly generated by ERC promoters. The agency began accepting new claims at the start of 2024 and again is being inundated with thousands of claims weekly.
To combat fraud, Accounting Today (AT) reports that the IRS Criminal Investigation unit has initiated 374 investigations involving almost $3 billion of potentially fraudulent ERC claims for tax years 2020 through 2023. Eighteen of those investigations resulted in federal charges. “Of those 18 cases, 11 investigations have resulted in convictions, six have been sentenced, and the average sentence has been 24 months,” reported AT.
The IRS has reported that 3.6 million ERC claims had already been processed for about $230 billion when the September 2023 moratorium temporarily halted the program. The program’s original cost had been estimated at approximately $78 billion, with some analysts reporting that actual costs may rise closer to $550 billion.
For information on the ERC withdrawal and voluntary disclosure programs please see:
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