Public companies are assessing whether their disclosure control and procedures should be modified to address environmental, social and governance (“ESG”) disclosures in light of the increasing level of focus by investors and the Securities and Exchange Commission (“SEC”) on ESG disclosure matters and the associated increase in the scope of ESG disclosures included by public companies both within – and outside of – SEC filings.

Background on ESG Disclosures

The SEC rules that implemented the Sarbanes-Oxley Act of 2002 require public companies to have disclosure controls and procedures, which are designed to ensure that the information required to be disclosed by a public company in its Exchange Act filings is recorded, processed, summarized, and reported in accordance with SEC rules.  Additionally, the SEC recommended that public companies establish disclosure committees as a component of their disclosure controls and procedures, and a significant majority of public companies have disclosure committees consistent with the SEC’s recommendation.

Disclosure committees may also be helpful to public companies as a means to support the Section 302 and 906 certifications required to be provided by the CEO and CFO on a quarterly basis under the Sarbanes-Oxley Act in connection with disclosures provided in periodic reports.

The amount of ESG disclosures included in SEC filings has significantly increased in recent years. This trend will no doubt continue once the SEC’s climate change rules expected to be proposed this year become effective.  Additionally, there has been a significant expansion in the scope of ESG disclosures being provided by many public companies (particularly large-cap companies) outside of SEC filings, including via corporate social responsibility or similar reports, and company website disclosures.

Given these developments, many public companies are assessing whether they have appropriate disclosure procedures in place to keep up with the expanding universe of ESG disclosures.  In this regard, while disclosure controls and procedures (as currently defined under the Exchange Act) technically do not apply to disclosures outside of Exchange Act filings, there may be benefits to subjecting significant ESG disclosures outside of SEC filings to a similar level of procedural rigor given the litigation and reputational risks that may arise from materially inaccurate ESG disclosures.

The Scope of Disclosures

In terms of assessing whether it is advisable to establish a new management-level committee (or sub-committee) to oversee ESG disclosures, public companies should evaluate the scope of their existing and anticipated ESG disclosures, particularly those outside of SEC filings.  Relevant considerations in this regard include the following:

(1) Whether the disclosure committee of a company is currently tasked with reviewing any ESG information outside of the scope of SEC filings (for example, it has become more common for disclosure committees to review corporate social responsibility reports); and 

(2) If the disclosure committee is tasked with reviewing certain ESG disclosures outside of SEC filings, are there appropriate subject matter experts well-versed in ESG matters who currently serve on the disclosure committee.

Key Considerations

Taking into account the points noted above, it is likely that many public companies will conclude that it would be beneficial to strengthen their procedures regarding ESG disclosures, and the formation of an ESG disclosure committee (potentially, as a subcommittee of the existing disclosure committee) may be advisable as part of this process.  Key considerations in this regard include the following …

– In terms of current market practice with respect to public companies having a management-level committee specifically tasked with reviewing ESG disclosures, practice is still evolving and not settled.  Among those companies that have taken this step, some public companies have a management-level ESG committee responsible for an array of ESG-related responsibilities, which include but are not limited to ESG disclosure responsibilities. Another approach some public companies follow is to have an ESG disclosure committee (focused only on disclosure matters) that is separate from their disclosure committee structure.  

Finally, some public companies provide for a review of certain types of ESG disclosures under their existing disclosure committee structure, which may be through the disclosure committee itself (e.g., if the disclosure committee reviews corporate social responsibility reports) or through an ESG subcommittee.

– Although the optimal approach for any public company will depend on its management structure and individualized considerations, there may be merit in implementing a management-level ESG disclosure committee even though this is not yet common practice.  There may also be a benefit in having a stand-alone ESG committee (or subcommittee) that focuses only on ESGdisclosure matters (as opposed to having a management-level ESG committee that focuses on a variety of ESG disclosure matters, including but not limited to ESG disclosure matters), given that the skill sets/responsibilities of individuals on a committee focused on ESG disclosure might differ from the skill sets of individuals on a committee with broader ESG responsibilities.

– Taking into account the fact that it is common for disclosure committees to have subcommittees (e.g., to review Form 8-K filings) and that an increasing amount of ESG disclosure will likely be included in the SEC filings of public companies on a going-forward basis, there may be merit in having an ESG disclosure subcommittee or disclosure function within the scope of a company’s disclosure committee structure.  In this regard, a key function of an ESG disclosure committee should be to consider the consistency between ESG disclosures outside of and within SEC filings as referenced above, and including an ESG disclosure function within a company’s disclosure committee framework might facilitate this process.

– A straightforward and potentially effective approach would be to have an ESG disclosure committee be a subcommittee of the disclosure committee.  However, if there is a broad array of ESG disclosures that the ESG disclosure committee will be reviewing that go beyond the desired scope of responsibilities of the disclosure committee, a public company may also consider having the ESG disclosure committee report to the disclosure committee with respect to certain types of ESG disclosures (e.g., ESG disclosures in SEC filings, etc.), while also having the ESG disclosure committee report to and assist senior management with respect to ESG disclosures more broadly (i.e., have a dual reporting structure).

– In terms of the composition of an ESG disclosure committee, a company may want an ESG disclosure committee (or subcommittee) to include certain members of the disclosure committee (i.e., such that there would be some overlap between the disclosure committee and the ESG disclosure committee).  Depending on who currently serves on a company’s disclosure committee, this might mean that the ESG disclosure committee would include some combination of positions such as the general counsel or other in-house legal counsel, the CAO or controller, the head of investor relations, the head of SEC/financial reporting, and/or the head of internal audit.  

However, it may also be helpful for this committee to include ESG subject matter experts who might not traditionally serve on a disclosure committee, such as (depending on how these positions are titled) the chief sustainability/global responsibility officer, the head of HR, and/or the head of diversity/equity/inclusion.  A public company will also want to endeavor to structure an ESG disclosure committee (or subcommittee) so that it is large enough to include the necessary subject matter experts but not so large as to hinder the effective functioning of the committee.

– Practice differs as to how frequently ESG disclosure committees meet, and the frequency may be driven in part by the breadth of ESG disclosures to be reviewed, but one potential approach is to have such a committee meet not less than quarterly, which tracks a typical cadence for the frequency of disclosure committee meetings.

Ultimately, the determination of whether and how a public company should form an ESG disclosure committee (or subcommittee) will be driven by company-specific considerations, including the existing internal management structure of the company.  Nevertheless, while varying approaches may fit the needs of different public companies, this is a subject that will be an area of focus for many public companies in the current environment.

Kevin H. Douglas is a member at Bass, Berry & Sims in the firm’s Nashville office and currently serves as the chair of the firm’s corporate & securities practice. He has significant experience representing public companies on a wide array of corporate and securities laws related matters. This article was originally published on the Bass, Berry & Sims Securities Law Exchange blog

From Nike’s recent acquisition of virtual brand RTFKT and LVMH’s back-to-back deals to acquire stakes in Phoebe Philo’s soon-to-launch eponymous label and the late Virgil Abloh’s brand Off-White (and that same month, Etro announced that it entered into a binding agreement in which LVMH-affiliated L Catterton Europe will acquire a majority stake) to the formal close of a nearly $9 billion eyewear-centric deal between EssilorLuxottica and GrandVision, and the subsequent resolution of the parties’ deal-related legal battle, 2021 was filled with headline-making mergers and acquisitions, funding rounds (including in the resale space), and legal actions in connection with a number of those acquisitions, at least some of which were complicated – or at least, more nuanced – thanks to the enduring impact of the COVID-19 pandemic.

Here is a look at some of the most noteworthy deals that took place in 2021 and a couple of related legal battles that came with them …

Nike, Inc. Acquires RTFKT

In yet another major step into the metaverse, NIKE, Inc. announced on December 13 that it will acquire RTFKT, “a leading brand that leverages cutting edge innovation to deliver next generation collectibles that merge culture and gaming.” Nike President and CEO John Donahoe said in a statement that the acquisition of the almost two-year old RTFKT (pronounced “artifact”) is “another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture,” and one that will help to “extend Nike’s digital footprint and capabilities.”

Etsy Buys Second-Hand Shopping App Depop for $1.62 Billion 

In a quest to target Gen-Z consumers (i.e., those born between the late 1990s and the early 2010s), who are driving both social shopping and largescale pushes in sustainability, Etsy announced in June that it would acquire burgeoning British shopping app Depop for $1.62 billion. Since its founding in 2011, London-based Depop has made its name in the pre-owned fashion space, garnering some 30 million registered users across 150 countries who can buy and sell apparel and accessories by way of its consumer-to-consumer e-commerce marketplace. 

The acquisition of Depop  which makes use of a social shopping element that positions it as a “mix of eBay and Instagram”  gives Etsy access to a sweeping pool of younger consumers, with the Brooklyn, New York-headquartered e-commerce marketplace asserting in a statement at the time that more than 90 percent of its users are under age 26.

Cash Continues to Flow into Resale 

2021 was filled with further examples of investors eyeing the secondary market. Just this month, Rebag revealed a $33 million Series E round. This fall, Vestiaire raised $209 million, bringing its valuation to $1.7 billion dollars; Tradesy raised $67 million in a Series D, and men’s fashion and streetwear-centric marketplace Grailed announced a $60 million Series B funding round led by fellow resale player GOAT Group and with participation from Groupe Artémis, along with existing investors Thrive Capital and Index Ventures. Also raising cash this year: StockX, Vinted, Reflaunt, and GOAT, among others. You can find a running list of secondary market deals here

LVMH Takes Stakes in Off-White, Phoebe Philo’s New Label 

LVMH made headlines this summer when it announced back-to-back deals with the late Virgil Abloh’s brand Off-White and former Celine creative director Phoebe Philo’s brand new project. In connection with Philo’s July announcement that she is launching her own label, LVMH revealed that it had taken a minority stake. The size of LVMH’s minority position and the terms of the deal have not been disclosed. Days later, LVMH announced  that it would buy a majority stake in Off-White, and also enter into a new “arrangement” with Abloh to “jointly pursue new projects across luxury categories.” 

Also in July, Etro announced on July 18 that it entered into a binding agreement to partner with L Catterton. Under the terms of the agreement, LVMH-affiliated L Catterton Europe will acquire a majority stake in Etro, while the Etro family will retain a significant minority. 

Ferrari Owner Exor Takes 24% Stake in Louboutin

In March, Exor N.V. made good on one of the names that had been floated as a key target of luxury-level M&A interest for 2021: Christian Louboutin. The Ferrari-owner announced that it would take a 24 percent stake in the independently-owned Louboutin in exchange for 541 million euros ($640 million), a deal that values the 30-year old Paris-based footwear brand at $2.3 billion euros ($2.73 billion) and sets it up for expansion, particularly in China. 

Exor’s management has since revealed that a rumored deal with Armani is not on the table. Luxury is, nonetheless, among the three sectors that the Netherlands-incorporated investment group run by Italy’s Agnelli family will focus on going forward. 

Prada, Zegna Take Stakes in Cashmere Supplier

Prada revealed in June that it had partnered with fellow Italian fashion company Zegna Group to acquire a controlling stake in Italian cashmere producer Filati Biagioli Modesto in furtherance of a quest to “secure a domestic supply chain and luxury-goods manufacturing expertise.” The two big-name fashion entities each took a 40 percent stake in the Montale-based supplier, which is known for its Italian cashmere and “noble yarns.” 

The acquisition is one of the latest deal in a trend that has seen some luxury goods brands bring an array of suppliers and services under their own roofs – or at least amass sizable stakes in the companies – in an effort to exert increased control over the manufacturing of their offerings. Over the past decade, in particular, fashion’s most esteemed luxury names have been busy buying up different aspects of their supply chains in part to ensure closer ties to a supply of raw materials. 

OTB Acquires Jil Sander, Plans for Italian Luxury Hub

In April, Renzo Rosso’s OTB finalized its acquisition of Jil Sander from Japanese retailer Onward Holdings, the terms of which were never disclosed. The German fashion brand joins OTB’s growing roster of brands, including Diesel, Maison Margiela, Marni, Viktor & Rolf, Amiri, Paula Cademartori, Staff International and Brave Kid. Speaking about the close of the deal, OTB Group CEO Ubaldo Minelli says that the Breganze, Italy-based fashion group is looking to “accelerate its long-time project to create an Italian luxury hub … not only looking at acquiring fashion brands, but also at possibly buying firms in the production and distribution sectors.” 

And as indicated by OTB’s recent launch of a new business unit that will be entirely dedicated to the development of virtual products, projects and experiences, that hub will seemingly include efforts in the metaverse

EssilorLuxottica, GrandVision Finalize Merger Amid Legal Battle

On the heels of getting approval from the European Commission early this year following an “in-depth” competition investigation, EssilorLuxottica completed its acquisition of a 76.72 percent ownership interest in multi-national optical retailer GrandVision in exchange for 7.3 billion euros ($8.7 billion) in July. 

The deal was finalized just over two years after it was first announced that the two entities had entered into an agreement. Hardly a friction-less transaction, EssilorLuxottica made headlines in July 2020 when it sued GrandVision in order to obtain information related to the latter’s efforts in connection with the COVID pandemic, namely, “the way GrandVision has managed the course of its business during the COVID-19 crisis, as well as the extent to which GrandVision has breached its obligations under the [merger] agreement.” In the since-dismissed case that it filed with a district court in the Netherlands, EssilorLuxottica argued that “despite repeated requests, GrandVision has not provided this information on a voluntary basis, leaving EssilorLuxottica with no other option but to resort to legal proceedings.” 

In June, a month before the deal was finalized, a Dutch arbitration tribunal determined that GrandVision failed to make good on its obligations under the parties’ takeover agreement, including by suspending payments to store owners and suppliers. While the ruling enabled EssilorLuxottica to get out of the deal, the company stated in its July 20 Interim Financial Report that “given the strategic rationale, [it] decided to pursue and close the transaction on July 1, 2021.” 

Reports at the time suggested that EssilorLuxottica was preparing to file suit against GrandVision for damages, no such suit appears to have come into fruition.

Coty Escapes Class Action Claims Over $12.5 Billion Buys

And finally, Coty and a handful of its highly-ranking officers and directors managed to escape the proposed class action lawsuit that was waged against them last year for allegedly running afoul of U.S. federal securities laws in connection with the P&G Specialty Beauty Business and Kylie Cosmetics acquisitions.  In the complaint that she filed against the NYSE-traded beauty giant in a New York federal court in September 2020, Coty shareholder Crystal Garrett-Evans argued that the defendants engaged in “a fraudulent scheme and course of business that operated [to deceive] purchasers of Coty shares by disseminating materially false and/or misleading statements and/or concealing material adverse facts … about Coty’s business, operations, and prospects.”

Among the things that Coty allegedly misrepresented and/or failed to disclose? Its allegedly “inadequate processes and procedures in place to assess and properly value” its 2016 and 2019 acquisitions of P&G Specialty Beauty Business and Kylie Cosmetics.” As a result, “Coty overpaid for [them].” More than that, Garrett-Evans claimed in the suit – which was filed a several months after Forbes reported that Jenner and her team had been “inflating the size and success of her [Kylie Cosmetics] business for years” – that the defendants were either “aware or severely reckless in not knowing that Coty did not have adequate processes and procedures in place to assess and properly value acquisitions.”

In January 2021, after being appointed lead plaintiff (because she had the largest damages claim), Coty shareholder Susan Nock filed an amended complaint, shifting the focus away from Coty’s acquisition of Kylie Cosmetics entirely (the amended complaint was devoid of any mention of Jenner’s brand), and centering her claims exclusively on its October 2016 purchase of the P&G Specialty Beauty Business for $12.5 billion, or what Reuters characterized at the time as “the biggest cosmetics merger in recent history.”

This spring, the defendants sought to get the amended complaint tossed out in its entirety, arguing in a March 2021 motion to dismiss that the plaintiffs failed to allege actionable omissions and scienter (i.e., intent or knowledge of wrongdoing), and in an opinion and order dated August 3, Judge Louis Stanton of the U.S. District Court for the Southern District of New York agreed.

On the Horizon

In 2022, more special purpose acquisition corporation (“SPAC”) listings may be in the works for fashion brands, following Zegna’s NYSE debut this week. Net-a-Porter owner Richemont revealed that it has made “progress” in a heavily-reported deal with Farfetch. Our sources tell us that Prada is looking to build out a bigger group, as is Versace and Michael Kors’ parent Capri Holdings, which is actively on the hunt to build up its arsenal of brands.

The newly-rebranded Zegna Group is making its stock market debut on Monday. The Italian luxury goods group will become a New York Stock Exchange-traded company (ticker: ZGN) by merging with Investindustrial Acquisition Corp., a special purpose acquisition corporation (“SPAC”), in furtherance of a deal that will give it an estimated $3.2 billion valuation. The new cash sets the stage for further expansion of the almost 112-year-old Zegna’s key brands, its marquee Zegna label and suiting company Thom Browne, which it acquired in 2018, with CEO Gildo Zegna telling Italian media that while the group “would consider acquisitions should the opportunity arise,” it currently has “so much scope to grow organically” that it is in no rush to buy.

Zegna is the latest Italian company to bolster itself in a fiercely competitive and increasingly-less-independent fashion industry; formerly independently-owned Versace sold to Michael Kors-owner Capri in 2018, Missoni sold off a 41.2 percent stake to Italian investment fund FSI Mid-Market Growth Equity Fund in 2018, the outstanding 33 percent in Pucci was acquired by LVMH, L Catterton Europe revealed this year that it would acquire a majority stake in Etro, Tod’s let go of a bigger stake to LVMH this spring, and Armani has reportedly been eyeing a deal with a big group; although, no such Armani, Exor transaction has come into play

The other trend here is, of course, the rise of the SPAC, which as surged in popularity in recent years as an alternative to the traditional initial public offering (“IPO”), which is a notoriously costly and time-consuming transaction. “From a target company perspective, merging with a SPAC is viewed as a quicker, more efficient and cost-effective route to going public than a more traditional IPO and deal values can be higher,” according to Paul Hastings LLP’s Roger Barron and David Prowse. Meanwhile, from an investor’s point of view, “SPACs offer the opportunity to invest in a private-equity style transaction with the liquidity and regulatory comfort offered by the capital markets.” 

By removing some of the “negotiations with banks and investors,” and the “filing of complex documents with federal regulators,” Proskauer Rose LLP’s Corey Rogoff and Julia Alonzo claim that SPACs typically operate on “a much quicker timeline, and involve fewer parties.” They note that “in this environment, it is not surprising that investors have looked to other means to shepherd more ‘unicorns’ into the market.” And investors are, in fact, looking to other means: more than half of the companies that publicly listed in 2020 did so by way of a SPAC – or a “blank check” company that “has no commercial operations,” per CNBC. These types of firms “make no products and do not sell anything,” as their primary purpose is to take private companies public by way of a merger. 

Such momentum, as indicated by the Zegna SPAC among others, is expected to carry through 2022, thereby, raising questions about the nature of SPACs, and what the legal risks associated with the growingly-popular “alternative IPO” approach are.  

Zegna & the Lifecycle of a SPAC

“A publicly traded company created for the sole purpose of acquiring or merging with an existing operating company,” a SPAC often provides its target company with “an alternate route to a traditional IPO,” according to a note from Skadden Arps Slate Meagher & Flom LLP, which states that while SPACs can – and have – listed on various stock exchanges around the world, “most SPACs list in the U.S., with 298 American-listed SPACs holding approximately $92 billion in cash in trusts looking for potential business combination partners as of January 31, 2021.” 

SPACs – or better yet, the ultimate merger between the SPAC and its target company – is different from a traditional IPO on a number of fronts. For one thing, a SPAC – which does actually take part in a traditional IPO at the outset in order to raise funds – raises capital from public investors for the “purpose of identifying a target [company],” per Skadden. “Although at the time of a SPAC’s IPO, the acquisition target is not known,” and thus, “investors rely on the skills of sponsors” – such as Bernard Arnault, who launched his second SPAC earlier this month with former UniCredit head Jean Pierre Mustier or former Gap Inc. CEO Art Peck, who launched a $200 million SPAC early this year – “to identify the right target and create value for their investment through the business combination.” 

Through that business combination, the target company (once it is identified, and depending on the specific stock exchange rules, voted on by SPAC shareholders) merges with the SPAC. The life cycle of a SPAC ultimately “culminates in a de-SPAC transaction, at which point the SPAC transforms from a cash box vehicle run by the sponsors into a U.S. public company led by existing management of the target with the continued participation by the sponsors,” per Skadden, which states that “once a SPAC has identified a business combination partner, it can – and often does – raise additional capital through a private investment in public equity (‘PIPE’) process.”

At that point, the sponsors would then start the process again if they wanted to merge with another private company, as SPACs are essentially one-off transaction entities, hence, the IV in CCIV. The name of the Lucid Motors-focused SPAC – which closed this summer and has since come under Securities Exchange Commission scrutiny – is Churchill Capital IV, as the Lucid de-SPAC transaction was Churchill Capital’s fourth SPAC-specific deal. 

The Legal Issues

“With their limited downside and huge upside potential for companies and investors alike, SPACs are increasingly becoming a mainstream source of acquisition capital,” Carpenter Wellington PLLC asserted in a recent note, thereby, “bringing innovation to the capital markets, and attracting a diverse array of market participants.” These burgeoning new deals are not without potential legal complications, though. In fact, Rogoff and Alonzo assert that “SPACs bear many of the same risks that plague newly public companies.” Among them are potential challenges that result from “failing to act in the best interests of shareholders due to conflicts of interest” between directors and officers of the target company, and PIPE financers or the SPAC’s sponsor; and failing to disclose “material information.” 

In terms of potential conflicts, the U.S. Securities and Exchange Commission (“SEC”) stated in a December 2020 Guidance that “the economic interests of the entity or management team that forms the SPAC (i.e., the ‘sponsors’) and the directors, officers and affiliates of a SPAC often differ from the economic interests of public shareholders, which may lead to conflicts of interests as they evaluate and decide whether to recommend business combination transactions to shareholders.” With that in mind, the SEC asserted that “clear disclosures regarding these potential conflicts of interest and the nature of the sponsors’, directors’, officers’ and affiliates’ economic interests in the SPAC is particularly important because these parties are generally responsible for negotiating the SPAC’s business combination transaction.” 

When preparing disclosures, the government agency encourages a SPAC to “carefully consider its obligations under the federal securities laws as they relate to conflicts of interest, potentially differing economic interests of the SPAC sponsors, directors, officers and affiliates and the interests of other shareholders and other compensation-related matters” in order to avoid potential Securities Exchange Act of 1934 liability. 

In an IPO scenario, the SEC says relevant questions that SPAC sponsors should ask when considering disclosures, include (but certainly are not limited to): “Have you clearly described the sponsors’, directors’ and officers’ potential conflicts of interest?  Have you described whether any conflicts relating to other business activities include fiduciary or contractual obligations to other entities; how these activities may affect the sponsors’, directors’ and officers’ ability to evaluate and present a potential business combination opportunity to the SPAC and its shareholders; and how any potential conflicts will be addressed? Is it possible that you will pursue a business combination with a target in which your sponsors, directors, officers or their affiliates have an interest?  If so, have you disclosed how you will consider potential conflicts of interest?” 

Later on, when a SPAC prepares to present a business combination transaction to shareholders, it should ask (and address), “Have you provided detailed information about how you evaluated and decided to propose the identified transaction?  Have you explained how and why you selected the target company? Who initiated contact? Why did you select this target over other alternative candidates?  Have you explained the material terms of the transaction? How did you determine the nature and amount of consideration the SPAC will pay to acquire the private operating company? Have you clearly described the negotiations regarding the nature and amount of consideration?” 

Moreover, “What material factors did the board of directors consider in its determination to approve the identified transaction?  How did the board of directors evaluate the interests of sponsors, directors, officers and affiliates?” 

Based on SEC Guidance to date, the government agency “appears to be focused on disclosures, and specifically on potential conflicts of interest,” per Rogoff and Alonzo, making those particularly relevant considerations for sponsors, and SPAC targets. At the same time, given that the popularity of SPACs as a common mechanism for companies (particularly high-growth companies) to access the public markets, is still relatively newfound, they have “not yet faced a breadth of legal challenges” that will likely involve SPAC sponsors, as well as the directors and officers of the acquisition target, and the public entity that is born from the de-SPAC transaction. 

As such, while special purpose acquisition corporations, including the new Zegna SPAC, may prove to be a budding fashion trend in some sense, they are not without a slew of budding legal issues that will continue to develop throughout the year to come.

There is now widespread consensus that limiting the global temperature increase to 1.5℃ requires fundamental changes in sectors like energy, food, transport, construction, finance, and fashion towards more environmentally friendly production and consumption. This could include, for example, shifting towards a 100 percent renewable energy system, replacing fossil fuel-powered vehicles with electric ones, or cracking down on how companies (and their CEOs) handle the enduring issue of unsold products. 

Government action is seen as crucial to helping support and coordinate this transition – but one key barrier has been lobbying by powerful corporate interests, who are concerned that government intervention might increase their costs and perhaps even eliminate their industries altogether. The millions spent on lobbying against climate policies by the oil and gas industry is a prime example.

Yet, as the world warms, growing numbers of CEOs are pushing for more ambitious policy interventions to tackle the climate emergency. To investigate why the corporate lobby might be changing its stance, we looked at business involvement in the development of the UN sustainable development goals between 2012 and 2015.

Several high-profile multinational companies were involved in developing the goals, including Unilever, Nestlé, GSK, Aviva and Pearson. Many advocated strongly for which specific goals should be achieved, and what role governments should play in achieving them. We reviewed 25 documents communicating corporations’ views, and observed nine meetings between business leaders and policymakers. We also conducted 57 interviews with 45 CEOs and senior executives representing 30 companies involved in this process.

We found that many companies were making strong calls for ambitious government intervention towards fighting climate change, through a mix of public investment, financial incentives and regulation. For example, many were calling for governments to introduce carbon taxation (taxing greenhouse gas emissions to help low carbon alternatives become cheaper) and to move towards banning certain high-carbon activities, such as putting a date on when petrol cars or gas boilers can no longer be sold. Many companies also pushed for government subsidies for fossil fuels to be ended and given to renewable energy projects instead.

Corporate goals

Conventional wisdom tells us that corporate lobbying tends to be focused on weakening government intervention. However, the leaders we spoke to justified their lobbying for increased government intervention by arguing that the world sorely needed sustainability transitions across multiple industries.

Many leaders felt they had a responsibility to use their influence to encourage these transitions. This included calling for more ambitious intervention from governments, even if that added costs in the short term. Others argued that businesses require a thriving, stable society to operate, and cannot survive in a failing world. And in some cases, increased public investment, incentives and regulation could grow markets, encouraging companies to align environmental responsibility with commercial incentives.

Renewable energy subsidies, for instance, helped grow the market for solar panels on roofs; regulations banning the sale of petrol cars increase the market for electric cars; and taxing carbon could help grow the market for low-carbon alternatives like LED lighting.

Life Experiences

So, why don’t all companies devote time and energy to lobbying for more government action? When pressed on this point, many CEOs took the conversation in a different direction, citing personal life experiences as a cause of their lobbying. These included being personally exposed to climate-related suffering, having been the target of NGO campaigning, and being challenged to engage by others: from other CEOs and non-executive directors, senior political figures and public intellectuals to their own children. Often these experiences were linked to participation in climate networks, such as the UN Global Compact – a non-binding pledge encouraging businesses to commit to sustainability. We call this action in response to being challenged by others “the echo of conscience.”

As the public continues to hold corporate leaders to higher and higher standards, our work suggests how we can encourage more CEOs to push governments towards radical climate action. People involved in working towards sustainability transitions must enlist CEOs to positively influence one another’s decisions through sustainability-focused CEO networks. 

We must create opportunities for CEOs to have first-hand experiences of the problems caused by their industry’s impact on climate – as well as opportunities for CEOs to be personally challenged by respected figures and people they care about, especially their children. Finally, we need to encourage corporate HR departments to focus on these elements in leadership selection and development, to make sure those who lead the world’s companies are also leading the world towards a brighter future.

Matt Gitsham is a Professor of Sustainable Development and Human Rights at Hult International Business School. 

Ajit Nayak is an Associate Professor in Strategy at the University of Southampton. 

Jonathan Gosling is an Emeritus Professor of Leadership Studies at the University of Exeter. (This article was initially published by the Conversation.)

THE FASHION LAW EXCLUSIVE – The RealReal will pay $11.5 million and make reforms to its corporate governance, including in connection with its authentication practices, whistle-blower policy, and oversight policy for “retail sales practices and customer relationships” in order to settle two ongoing shareholder lawsuits, assuming the two sets of plaintiffs get the green-light from the respective U.S. federal courts. As of this month, the plaintiffs in two separate matters filed against The RealReal have alerted courts in California and Delaware, respectively, that they have reached settlement agreements with the luxury reseller and its various directors and officers in developments that bring two headline-making cases closer to a final resolution following more than a year of litigation. 

In the first case, which was filed in the U.S. District Court for the Northern District of California in November 2019, lead plaintiff Michael Sanders accuses The RealReal, its founder and CEO Julie Wainwright, former Chief Financial Officer Matt Gustke, Chief Accounting Officer Steve Lo, board members like Stefan Larsson, and the company’s IPO underwriters, including Credit Suisse Securities, B of A Securities, and UBS Securities, among others, (the “defendants”) of running afoul of federal securities laws. 

Specifically, Sanders and fellow named plaintiffs Nubia Lorelle and Garth Wakeford allege that the defendants misled investors about the nature of The RealReal’s authentication process by making “false and misleading statements” in the offering documents issued in connection with its June 2019 IPO and in additional public statements made by the company thereafter. 

For instance, the plaintiffs have claimed that despite The RealReal’s claims in its 2019 IPO filings that its “highly trained experts build trust in our buyer base by thoroughly inspecting the quality and condition of, and authenticating, every item we receive,” The RealReal “authentication process fell far short of this description” because the “vast majority of items supposedly ‘authenticated’ by [the company] were actually reviewed only by … low-wage hourly employees, often with little or no experience in fashion or luxury products.”

The “false and misleading statements and omissions of material fact” that The RealReal and its management allegedly made about its “purported authentication process” served to “artificially inflate” the price of its shares, the plaintiffs argue, and then damage those same shareholders “when the artificial inflation dissipated” following multiple media reports about the “true” nature of The RealReal’s authentication process.

In the unopposed motion for preliminary approval of settlement that they filed on November 5, the plaintiffs alert the court of the proposed settlement, which includes an $11 million sum to be shared among class members and their counsel. The plaintiffs contend that the scope of the settlement and corresponding release of the claims against the plaintiffs “is reasonable,” and that preliminary approval “is warranted because the settlement is the product of serious, informed, and non-collusive negotiations among experienced counsel and a highly-qualified mediator.” 

Aside from arguing that the court should preliminarily approve the settlement, the plaintiffs are pushing the court to find that the action and the settlement class – i.e., all persons and entities who purchased The RealReal common stock from June 27, 2019 through November 20, 2019, and were damaged – are suitable for class certification. Ultimately, the plaintiffs have asked the court to schedule a settlement hearing “to determine whether the proposed settlement, proposed plan of allocation, and lead counsel’s motion for an award of attorneys’ fees and expenses and compensatory award to the plaintiffs should be approved.” 

A hearing on the matter is slated for March 24. 

The plaintiffs’ filing comes almost exactly three months after The RealReal reported its earnings for Q2, in connection with which it cited a $70.7 million net loss for the period, including “a charge of approximately $11 million that was recorded as an accrued legal settlement.” At the time, TRR did not reveal what case the settlement stemmed from; although, TFL noted at the time that it was likely tied to the Sanders case.

Derivative Action Against The RealReal

Not the only settlement on the horizon for The RealReal, also on November 5, plaintiffs Iwona Grzelak and Junior Aguirre filed an unopposed motion for preliminary approval of derivative settlement in the similar – but separate – consolidated cases that they filed last year, accusing the company’s board members and management of “intentionally or recklessly breaching their fiduciary duties” as directors and/or officers, and violating the U.S. Securities Exchange Act in the process. 

In the corresponding support brief that they filed on November 5, Grzelak and Aguirre summarize the allegations at the heart of their case, asserting that while The RealReal has promoted itself – both in its IPO documentation and in subsequent statements by its management team – as “the world’s largest online marketplace for authenticated, consigned luxury goods,” its authentication operations were “nowhere near as robust as the defendants professed, and most items purportedly ‘authenticated’ by [TRR] were merely reviewed by TRR’s copywriters, who had minimal training or experience in fashion and authentication.” 

As a result, the two plaintiffs claim that “hundreds of counterfeit items supposedly processed by the [The RealReal’s] rigorous authentication procedures were sold to [its] customers,” and all the while, “between June 27, 2019, and November 20, 2019, the individual [officer and management] defendants breached their fiduciary duties by making and/or causing the company to make a series of materially false and misleading statements and omissions regarding [its] authentication processes, risk exposure and purported growth and success, and by failing to maintain internal controls.” 

Fast forward and following an attempt at mediation and three months of back-and-forth, the parties have reached an agreement on “the material terms of the settlement.” Now, before the U.S. District Court for the District of Delaware is a two-pronged settlement in furtherance of which TRR has agreed to “pay $500,000 to the plaintiffs’ counsel for their fees and expenses,” subject to court approval, and has agreed not to oppose “service awards” for the two plaintiffs to the tune of $1,500. Also at play are reforms, which “TRR, or its Board, as applicable, will implement … for no less than three years after the date upon which the court enters the final order and judgment.” 

Specifically tailored “to address, and mitigate risk of the recurrence of, the misconduct alleged in” the case at hand, the reforms require TRR to make corporate governance improvements, including by “incorporat[ing] semi-annual assessments of all authentication staff and certifications into the company’s existing training programs” by TRR’s Chief Operating Officer, who will “oversee TRR’s training for staff engaged in authenticating TRR’s products;” and adopting a new policy for board oversight over the company’s retail sales practices and customer relationships, including “semi-annual reporting to the Board by the COO or its designee concerning oversight over TRR’s retail sales practices and the Company’s customer relationships.”

Language from the plaintiffs’ filing re: whistle-blower policy reform

Beyond that, TRR will create a “management-level Risk and Compliance Committee to determine, implement, and assess TRR’s risk management policies and the operation of TRR’s risk management framework to identify TRR’s compliance risk exposure.” It will also make “amendments to [its] Whistleblower Policy and Procedures to specifically state that the company’s reporting channels may be used to ‘report concerns relating to business practices, ethical business or personal conduct, integrity, and professionalism.’”

The plaintiffs assert that the settlement reforms represent “a material and substantial improvement to TRR’s corporate governance and provide for new policies and procedures that will help to prevent a recurrence of the wrongdoing alleged” in the case at hand. 

In asking the court to preliminarily “approve the settlement, direct the issuance of the notice of the settlement, and schedule the settlement hearing to consider final approval of the settlement,” the plaintiffs contend that the settlement “meaningfully addresses the issues [that they] raised in the consolidated action and provides an excellent resolution for TRR by way of the reforms.”

TRR confirmed the settlement developments on Monday, stating that stipulations of settlement are subject to preliminary and final approval by the courts. The company and individual defendants also assert that they “are entering into this Settlement solely to eliminate the uncertainty, distraction, disruption, burden, risk, and expense of further litigation, and without admitting any wrongdoing or liability whatsoever.”

The RealReal’s Third Quarter Results

In addition to news on the settlement front, TRR reported its Q3 results this week, posting revenues of $118.84 million for the 3-month period that ran through September 2021, up 53% compared to Q3 2020 and up 46% compared to Q3 2019. The luxury reseller revealed that its gross merchandise value (i.e., the value of the luxury goods that it sold during the quarter) increased by 50% and 46% compared to the same periods in 2020 and 2019, respectively. Meanwhile, for the 757,000 orders it processed during Q3, the average value amounted to $486, a 9% boost on a year-over-year basis.

Legal settlement sums reflected in TRR’s Q3 operations statement

Reflecting on the state of the business, CEO and founder Julie Wainwright said in a statement on Monday, “We believe the operational and supply impacts to our business from COVID-19 are effectively behind us, and we are well-positioned for a strong holiday season. Additionally, we believe The RealReal’s unique business model is largely insulated from the supply chain shortages and certain of the inflationary impacts many retailers are experiencing.”

Wainwright further asserted, “Overall, our business is experiencing very positive trends and we believe these trends will continue through the end of the year and into 2022. While we are in the early innings of delivering operating expense leverage, we believe the company is starting to see the benefits of our previous investments, which will create leverage as we drive toward profitability in the coming quarters.”

The cases are Sanders, et al. v. The RealReal, Inc., et al. 5:19-cv-07737 (N.D. Cal), and Iwona Grzelak v. Julie Wainwright, et al, 1:20-cv-01212 (D. Del.). 

UPDATED (Nov. 10, 2021): Story has been updated to clarify that the stipulated settlement reforms refer to corporate governance and to make specific mention of a line in the stipulated settlement in which the defendants do not “any wrongdoing or liability whatsoever.”