VI. CORPORATE GOVERNANCE DEVELOPMENTS, PART TWO Presenters: David A. Zagore Squire Patton Boggs (US) LLP Sarah K. Rathke Squire Patton Boggs (US) LLP Dynda A. Thomas Squire Patton Boggs (US) LLP SEC Hot Topics Institute Cleveland, OH November 17, 2016
Conflict Minerals and International Supply Chain Risk and Legal Considerations
Disclaimer The information contained in this presentation contains general information and is provided for informational purposes only and should not be construed as legal advice on any subject matter. Recipients of this presentation should not act or refrain from acting on the basis of any content included in this presentation without seeking the appropriate legal advice on the particular facts and circumstances at issue from an attorney licensed in the recipient s state. Legal compliance is especially driven by each company s own facts and circumstances and general guidance, such as included in this presentation, will not necessarily be appropriate for your circumstances. squirepattonboggs.com 3
Legal Challenge Conflict Minerals Rule to be revised consistent with Court of Appeals decision Case reassigned to District Court Judge Jackson (October 5, 2016) In the meantime, April 2014 SEC Statement applies IPSA only required if elect to describe a product as DRC conflict-free No changes relating to IPSAs expected for 2016 calendar year Few experienced auditors (only 9 firms provided IPSAs for calendar year 2015) Lack of appetite for others to develop IPSA expertise squirepattonboggs.com 4
Other Actions and Reports GAO Annual Report to Congressional Committees Commerce Department List of Conflict Minerals Processing Facilities Note: per Section 1502, the Secretary of State can add minerals determined to be financing conflict in the covered countries Cobalt most likely addition But squirepattonboggs.com 5
Legislative Actions Elections Have Consequences House Bill to repeal 1502 Dodd Frank Financial CHOICE Act H.R. 5983 introduced September 9, 2016 and approved by House Financial Services Committee Argues that Section 1502 diverts the SEC from its statutory mission and forces it to put resources to activities that do not benefit capital markets or investors Language on Trump transition website, www.greatagain.gov, similar to the CHOICE Act House Bill to defund enforcement of the SEC s conflict minerals rule H.R. 5485 passed House of Representatives on July 7, 2016 Even if Section 1502 is repealed: Certain customers will continue to require diligence and disclosure about sourcing of 3TG EU regulation (when enacted) will impact suppliers in the US and elsewhere squirepattonboggs.com 6
EU Conflict Minerals Rule Understanding on framework reached after negotiations between European Commission, European Council and European Parliament June 15, 2016 Mandatory reporting OECD Guidelines for due diligence 3TG Importers into the EU (including smelters and refiners) (smaller importers exempt) Focus on all conflict-affected and high-risk areas Technical details under discussion Final regulation expected by early 2017 squirepattonboggs.com 7
Stakeholders Actions Customers From certain industries are insisting that suppliers quickly eliminate all non- compliant SORs from supply chain Shareholders/investors Using shareholders proposals to promote responsible sourcing Management meetings requested State Attorneys General (especially NY) a la climate change Books and records requests Securities fraud actions Activist Plaintiffs (especially in California) Books and records requests Consumer class action fraud claims squirepattonboggs.com 8
What s Around the Bend Likely to be more pressure to eradicate slavery/human trafficking and forced/child labor than conflict minerals Certain elements of conflict minerals programs will be useful Modern slavery and human trafficking template being promoted NGOs focus on responsible sourcing issues continues to grow Forced labor Child labor Palm oil Land tenure Industry groups issue focus continues to expand EICC -- Responsible Raw Materials Initiative USFIA Better Cotton Initiative AIAG Supply Chain Sustainability squirepattonboggs.com 9
M&A and Conflict Minerals Due diligence and analysis Representations and warranties Integration planning and implementation Reporting on newly acquired companies and business lines squirepattonboggs.com 10
What Dangers Lurk In Your Company s Supply Chain? Uncontrolled risk New product design and development issues Poor pre-contract practices International counterparties Forecasting issues New developments in the law
Risk
Risk Supply Chain Risk is defined as: Everyday and exceptional risks along the supply chain based on internal and external vulnerability.
What are your supply chain risks? Risk mapping Prioritization dedicate most resources to top 20% significant risks Disaster planning Protection through force majeure clauses Local conditions matter squirepattonboggs.com 14
Risk Catastrophic Mundane squirepattonboggs.com 15
Executive Oversight
Executive Oversight Executives are expected to know what is going on in their global supply chains at all levels, all the time. Executive oversight of the supply chain has become a corporate reality.
Executive Oversight of the Supply Chain Supply Chain Operations Increasing executive management of the supply chain Sustainability ERP competence Globalization Supply Chain Legal Shareholder actions Consumer class actions supply chain
FAILURE ALERT Executive Oversight: Apparel 2013 Fire in Bangladesh International brands Lack of oversight at the factories No executive oversight of the global supply chain 1100 deaths, 2500 injured Photograph: Andrew Biraj/Reuters
FAILURE ALERT Executive Oversight: Chocolate Alleged labor practices of cocoa suppliers Shareholder lawsuit alleging executive management knew Seeking books and records May precipitate further litigation
FAILURE ALERT Corporate Social Responsibility: Tech Lithium-ion batteries all use cobalt Substantial part of world s cobalt supply comes from war-torn regions in Africa Alleged child and forced labor Industry confusion NGO targets
FAILURE ALERT Executive Oversight: Retail Grocery store chain publicized their animal care policy Media reported that suppliers did not comply Consumer class action Negative publicity Legal costs
FAILURE ALERT Executive Oversight: Computers Christmas 1995 new line of PowerMacs planned Apple s forecasts too low insufficient components delivered by supply chain Multiple shareholder actions Apple floundered until introduction of ipod
Corporate Oversight of the Supply Chain Executives are ultimately responsible Higher competence and highly trained supply chain professionals needed for global operations Supply chain expertise now at Board of Directors level Relevant executive management KPIs it s not just about stock prices any more
Recalls
Recalls The process of retrieving defective goods from consumers and providing those consumers with compensation. Recalls often occur as a result of safety concerns over a manufacturing defect in a product that may harm its user.
Recalls Supply Chain Operations Average cost of a recall Establish recall process for fast response Insurance Supply Chain Legal Often highly regulated Post-sale legal duties Recall contract provisions
FAILURE ALERT Recalls: High Tech Antennagate Product issue with iphone 4 Apple offered free phone case to users Blogging frenzy and negative publicity Share price fell
FAILURE ALERT Recalls: Toys Lead paint identified on toys Small batteries in toys 21 million Chinese-made toys recalled Reputation damage Cost was millions of dollars across several toy makers and brands
Corporate Oversight: Recalls Plan in advance for what happens if a recall is required Determine what government agencies need to be involved Act fast Allocate responsibility for costs between supply chain partners Insurance
Any Questions? squirepattonboggs.com 31
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