Delaware’s Voluntary Sustainability Certification Law

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 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 includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

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.

Delaware has 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.

Basic 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.

Entities that 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.

Other 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.

Conclusion

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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