With a flourish of his pen on the 21st of July 2010, U.S.
President Barack Obama signed and brought on to the U.S. statute
books the Dodd-Frank Wall Street Financial Reform and Consumer
Protection Act (the "Reform Act"). The general scope and
principles encapsulated in the Reform Act are fairly well known,
but what may not be noticed is the addition of a requirement tucked
away in the miscellaneous provisions section at the end of the
Reform Act for certain companies engaged in the oil, gas and
minerals industry to disclose particular payments they make to all
governments internationally. The broad coverage of these relatively
unknown provisions means there is a high chance that companies
(particularly those outside of the U.S.) may be caught by such a
requirement and fail to comply for lack of awareness.
The Requirement: Disclosure of Payments By Resource Extraction Issuers
Section 1504 of the Reform Act amends section 13 of the
Securities Exchange Act of 1934 (the "'34 Act") by
adding a new subsection (q). This subsection requires that no later
than 270 days after the enactment of the Reform Act, the U.S.
Securities and Exchanges Commission (the "SEC") shall
issue final rules requiring all resource extraction issuers to
include in their annual reports to the SEC information relating to
any payment made by the issuer, subsidiary of the issuer or any
entity controlled by the issuer to any government (U.S. and
foreign) for the purpose of the commercial development of oil,
natural gas and minerals.
Background to The Requirement: How Did Such A Requirement End Up In The Reform Act
One may wonder how such a requirement, which clearly does not
sit within the sphere of financial reform or consumer protection,
ended up in the Reform Act. The "Disclosure of Payments by
Resource Extraction Issuers" provision was originally proposed
to the U.S. Senate as a separate bill, the "Energy Security
Through Transparency Act of 2009," by Senators Richard Lugar
and Benjamin Cardin. Both stated at the outset that their motives
for introducing this extractive industries transparency initiative
included (i) promoting political stability in foreign governments,
(ii) providing additional investor information and (iii) preventing
the so-called "resource curse" from corrupting
governments in resource-rich, but underdeveloped, countries.
The proposed bill never made it out of the Senate Committee on
Banking, Housing, and Urban Affairs, but, later, it was again
proposed by Senator Lugar, but never adopted, as an amendment to
the Senate's Financial Stability Act (this Act being the Senate
bill that ultimately served as the starting point for a compromise
with the House of Representatives that resulted in the Dodd-Frank
Act). Although details remain unclear, late in the conference
committee proceedings, Senator Patrick Leahy, with urging from a
number of senators, including Lugar and Cardin, successfully
inserted the provision into the Reform Act.
Scope of Application: The Concept of Resource Extraction Issuers
The requirement applies to any company that (i) is required to
file an annual report with the SEC and (ii) engages in the
commercial development of oil, natural gas or minerals (such
company being a "resource extraction issuer" under the
Reform Act). The latter criterion will be determined by the SEC,
and is stated in the Reform Act to include "exploration,
extraction, processing, export, and other significant actions
relating to oil, natural gas, or minerals, or the acquisition of a
license for any such activity."
With regard to the former criterion of filing an annual report,
companies covered would include, in general terms:
- any issuer (either U.S. or foreign) that has a class of securities listed on a U.S. securities exchange,
- any U.S. issuer who has U.S.$10 million or more in assets on the last day of its most recent fiscal year, if any class of its securities is held by 500 or more persons, regardless of whether this issuer has any exchange listing, and
- any foreign issuer who has U.S.$10 million or more in assets on the last day of its most recent fiscal year, if any class of its securities is held by 500 or more persons worldwide, 300 or more of whom are resident in the U.S., regardless of whether this issuer has any exchange listing in the U.S. (subject to limited exemption under 12g3-2(b) of the '34 Act, which applies to a foreign issuer that has sponsored an American Depository Receipt program with respect to its outstanding shares but has not obtained a U.S. exchange listing).
The coverage is therefore potentially very broad, particularly
in light of limb (iii) above, and no oil and gas or mineral company
should assume that they will not be caught because they are not
listed on a U.S. securities exchange.
Nature of Obligations: Disclosure of Payments Made to Government
The provision requires disclosure of any payment made by the
resource extraction issuer, its subsidiaries and any entity
controlled by it to any government for the purpose of the
commercial development of oil, natural gas and minerals (which, as
explained above, is broadly defined and can include acquisitions of
interests in oil, natural gas and mineral projects). Until the SEC
promulgates final rules regarding the provision, affected companies
will have difficulty interpreting their future disclosure
requirements regarding payments to government entities. Despite
that, section 1504 states clearly that such disclosure will include
(i) the type and total amount of such payments made for each
project of the resource extraction issuer relating to the
commercial development of oil, natural gas or minerals and (ii) the
type and total amount of such payments made to each
government.
The term "payment" is defined as a payment (i) that is
not de minimis and (ii) is made to further the commercial
development of oil, natural gas or minerals. With regard to the
first criterion, until the SEC provides additional guidance through
its rulemaking process concerning this provision, it is unclear
what amount of money, or value of material goods, will be
considered de minimis. It should be noted, however, that unlike the
Foreign Corrupt Practices Act ("FCPA"), which was enacted
in 1977, the Reform Act requires that all payments to governmental
entities be disclosed, not only those that are illegal. Thus, going
forward, all companies that may reasonably fall within the
SEC's definition of "resource extraction issuer"
should be diligent in tracking payments to governmental
entities.
As to the types of such payments, these should include, but are not
limited to, taxes, royalties, fees (including license fees),
production entitlements, bonuses and other material benefits that
the SEC (consistent with the guidelines of the Extractive
Industries Transparency Initiative (the "EITI") to the
extent practicable) determines are part of the commonly recognized
revenue stream for the commercial development of oil, natural gas
and minerals. The EITI is a global, voluntary framework through
which governments and extractive industries companies disclose
their reciprocal payments, and promotes revenue transparency.
Consequences of Non-Compliance
The Reform Act does not impose specific sanctions for
non-compliance with the disclosure obligations of section 1504.
However, U.S. securities laws already provide for a variety of
remedies for non-compliance with disclosure obligations under
'34 Act. Because the new disclosure obligations of section 1504
amend section 13 of the '34 Act to add a new subsection (q),
these remedies would be available to the SEC if an issuer failed to
disclose required payments or made inaccurate disclosures.
Specifically, the SEC has the power under section 21 of the '34
Act to issue cease-and-desist orders and seek injunctive relief or
monetary penalties against any person violating the new disclosure
obligations under the new subsection 13(q) the '34 Act. Even
unintentional violations of the disclosure requirements would
therefore be subject to a penalty of up to US$65,000 per violation
or the gross amount of pecuniary gain derived from the violation,
whichever is greater. In the case of fraudulent disclosures or a
deliberate disregard of disclosure obligations, the penalty could
be as high as US$650,000 per violation or the gross amount of
pecuniary gain derived from the violation, whichever is
greater.
Additionally, because the Reform Act contemplates that the payment
disclosures will be made publicly, false or incomplete disclosures
could expose U.S.-listed issuers to private securities fraud suits
under Rule 10b-5. Private securities fraud suits under Rule 10b-5
involving the purchase-and-sale of non-U.S. listed securities are
now prohibited following the U.S. Supreme Court's recent
holding in Morrison v. National Australian Bank, although
lower courts have yet to interpret the decision.
Effective Date
Resource extraction issuers will not be required to make
disclosure in this regard until the SEC promulgates relevant final
rules under section 1504 of the Reform Act. With respect to each
resource extraction issuer, the final rules issued by the SEC will
take effect on the date on which the resource extraction issuer is
required to submit an annual report relating to the fiscal year of
the resource extraction issuer that ends not earlier than 1 year
after the date on which the SEC issues the final rules.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.