08 Oct Delaware Adopts Sustainability Certification Act
The Delaware Certification of Adoption of Sustainability and Transparency Standards Act (the “Act”), which went into effect on October 1, 2018, reflects the intent of Delaware lawmakers to support business entities formed and organized under Delaware law (i.e., corporations, limited liability companies etc.) in their global sustainability efforts by providing them with a new method for signaling their commitment to global sustainability. The background statement for the legislation explained:
“The Certification of Adoption of Sustainability and Transparency Standards Act (the “Act”) establishes a voluntary disclosure regime to foster dialogue around sustainability and responsibility among participating Delaware business entities and their various stakeholders. Because issues relating to sustainability and responsibility are fact-specific and fact-intensive and may vary greatly depending on, among other things, the size of the entity, the nature of its business and operations, and the industry in which it operates, the Act does not prescribe specific standards, measures of performance or criteria for evaluating performance. Rather, consistent with the enabling approach of Delaware business laws generally, the Act requires the governing body of each entity seeking certification under the Act to adopt principles, guidelines and standards to guide its business activities in a sustainable and responsible manner, as well as metrics for assessing whether it has met its objectives.”
The Act allows the Delaware Secretary of State to issue a certificate of adoption of transparency and sustainability standards to any Delaware entity that executes, acknowledges and delivers to the Secretary of State a “standards statement” and complies with certain other requirements includes payment of fees and maintenance of good standing. In order to be able to file a standards statement, the governing body of the entity (i.e., the board of directors or equivalent governing body, person or entity having the power to manage and direct the business and affairs of the entity) must adopt resolutions setting forth the entity’s “standards” and “assessment measures”. The Act defines “standards” to mean, with respect to an entity, the principles, guidelines or standards adopted by the entity to assess and report the impacts of its activities on society and the environment, which principles, guidelines or standards shall be based on or derived from third-party criteria. The term “assessment measures” is defined to mean, with respect to any entity, the policies, procedures or practices adopted by such entity to adduce objective factual information to assess the entity’s performance in meeting its standards, including any procedures for internal or external verification of such information.
As for the standards statement that must be filed with the Secretary of State, it must:
- Acknowledge that the governing body of the entity has adopted resolutions setting forth the entity’s standards and assessment measures;
- Identify an internet link on the principal website maintained by or on behalf of the entity at which the standards and assessment measures, the third-party criteria used to develop the standards, a description of the process by which such standards were identified, developed and approved and any report filed or to be filed by the entity are and will be readily available at no cost and without the requirement of the provision of any information, and will remain available for so long as the entity remains a reporting entity (the “website”);
- Acknowledge that the entity has agreed to acknowledge and deliver to the Secretary of State, within 30 days after a request therefor by the Secretary of State, its most recent report;
- Acknowledge that the entity has committed to: using the assessment measures to assess the entity’s performance in meeting its standards; reviewing and assessing its standards and assessment measures from time to time, and making such changes thereto as the governing body in good faith determines are necessary or advisable in furtherance of meeting the entity’s standards; and preparing and making readily available to the public at no cost and without the requirement of the provision of any information (by posting on the website at the identified internet link) a copy of its report within 90 days of the end of each reporting period;
- Set forth the address within Delaware to which the Secretary of State shall mail any notices; and
- Be acknowledged by an authorized person.
Any entity seeking a certificate of adoption of transparency and sustainability standards from the Delaware Secretary of State does so to secure authorization and permission under the Act to disclose, publicly or privately, that it is a reporting entity; however, a key requirement is the preparation of a report with respect to each reporting period that contains the following:
- A summary of the standards and assessment measures in effect during the applicable reporting period, which summary shall include the third-party criteria and any other source used to develop the entity’s standards and assessment measures and the process by which they were identified, developed and approved by the entity;
- A summary of the actions or activities by which the entity has sought to meet the standards during the applicable reporting period, including engagement with and disclosure to stakeholders, if any;
- The most recent available objective and factual information developed pursuant to the assessment measures, if any, with respect to the entity’s performance in meeting its standards during the reporting period, and an assessment by the governing body whether the entity has been successful in meeting the standards. And in the case of any failure to meet such standards, a summary of any additional efforts the governing body has determined the entity will undertake to improve its performance in respect thereof, or its determination not to undertake such additional efforts;
- The identity of any provider assisting the entity in measuring, managing or reporting the impact of the entity’s business and operations in light of its standards; or a statement that the entity has not engaged the services of any provider for such purposes;
- A summary of any changes to the standards, assessment measures or reporting period, the process by which such changes were identified, developed and approved by the entity, and the third-party criteria used to develop any changes to the standards; and
- A summary of the actions or activities planned for the next succeeding reporting period with respect to measuring, managing and reporting with respect to the standards if such actions and activities are materially different from those described for the applicable reporting period.
Notwithstanding the foregoing, no entity is required to include in any report any information that such entity determines in good faith is subject to an attorney-client or other applicable privilege or would result in the disclosure of trade secrets or other competitively sensitive information.
Entities interested in taking advantage of the new statute will obviously be concerned about the risk associated with making public declarations regarding matters that are often difficult to measure objectively and which often are subject to circumstances that are beyond the reasonable control of the entities. Importantly, the Act makes it clear that neither the failure by an entity to satisfy any of its standards, nor the selection of specific assessment measures, nor any other action taken by or on behalf of the entity pursuant to the Act or any omission to take any action required by the Act to seek, obtain or maintain status as a reporting entity, shall, in and of itself, create any right of action on the part of any person or entity or otherwise give rise to any claim for breach of any fiduciary or similar duty owed to any person or entity.
While the Act is an interesting and innovative development with respect to the convergence of sustainability and corporate governance, compliance will hardly be a simple matter and Delaware entities will need to consider what standards and assessment measures are most appropriate for their businesses and stakeholders; invest time and efforts in conducting a rigorous review of the entity’s performance vis-à-vis the selected standards, presumably with the input of an experienced outside provider; prepare a detailed report covering at least the matters prescribed by the Act; develop and implement plans for remediating any failure to meet the standards applicable to the entity; and continuously develop strategies and plans for each reporting period to ensure that the standards are met. Responsibility for all of this will fall on the members of the governing body of the entity, particularly those members of any committees created by the governing body to focus on sustainability and reporting issues.
 6 Del. C. § 5000E.
 6 Del. C. § 5002E.
 6 Del. C. § 5001E(14). The term ”third-party criteria” means any principles, guidelines or standards developed and maintained by a third party (including a provider) that are used to assist businesses or other enterprises in measuring, managing or reporting the social and environmental impact of businesses or other entities. The term “third party” means, with respect to any entity, any person or entity other than any person or entity that controls, is controlled by or under common control with such entity, including any governmental or nongovernmental organization that provides services, standards, or criteria with respect to measuring, managing or reporting the social and environmental impact of businesses or other enterprises. 6 Del. C. § 5001E(16)-(17).
 6 Del. C. § 5001E(2).
 6 Del. C. § 5003E.
 “Reporting period” means a period of 1 year, the initial such period to begin not more than 1 year following the filing of the standards statement, and subsequent reporting periods to begin on the day following the last date of the prior reporting period, unless a governing body elects to shorten the duration of a reporting period that has not begun in order to change the start date for subsequent reporting periods.
 6 Del. C. § 5001E(11).
 6 Del. C. § 5006E. The Act includes procedures for annual renewal of reporting entity status and restoration of reporting entity status in the event an entity that has previously been reporting fails to file a renewal statement in a timely manner. 6 Del. C. §§ 5004E-5005E.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.