Chevron and Carry On July 2024 – The End of Chevron: Considerations for Private Equity, Banks and Investors | Cadwalader, Wickersham & Taft LLP

It’s been less than two weeks since the U.S. Supreme Court issued its ruling Chevron decision, but the myriad implications of the ruling left many of us feeling like much more time had passed as we stretched each day, considering the implications in virtually every area of ​​business. Funding is no different, and we want to share with you our early impressions and analysis for the near future.

The story begins in 1984, when the Supreme Court established rules for challenging a federal agency’s interpretation of ambiguous statutory provisions in what became a landmark case: Chevron USA vs. National Resources Defense Council (“Chevron“). (For an overview, check out Mercedes Tunstall’s excellent article here.)

The doctrine has long been a subject of curiosity, discussion, and heated debate about the role of administrative agencies in American life. Courts could not look over the shoulder of an administrative agency as long as that agency interpreted an ambiguous provision. The doctrine was generally viewed as welcome by those who liked stable administrative law and less so by those who believed that the government should be able to be sued when it acted under an ambiguous statute.

The Supreme Court overturned the ruling by a majority of 6 to 3. Chevron June 28^t won’t lead to sudden and radical changes, but it could open the door to legal challenges over time and a more complex regulatory environment, at least initially. Here are six key regulatory areas where we could see significant changes and potential legal action:

1. ESG regulation

The first issue is current — as seen in oral arguments before the court that began this week in the U.S. Court of Appeals for the Fifth Circuit. In 2022, the Labor Department created a rule that allowed pension fund managers to consider ESG factors as a “tiebreaker” when considering two or more investments that equally advance the financial interests of the pension fund. Various state attorneys general sued the Labor Department, arguing that the ESG rule violated the plan’s fiduciary duty to beneficiaries to maximize investment gains. The case was dismissed in district court, but a district court judge relied heavily on Chevron deference in deciding the Department of Labor. The parties to the lawsuit have amended their documents in light of the repeal Chevronand it is not certain who will win, as the Department of Labor maintains that the provision can apply even without Chevron respect.

2. Securities Regulation

The Securities and Exchange Commission (SEC) often interprets and enforces the complex securities laws that govern the private equity industry. Without Chevron respect, private equity funds may face more challenges in assessing compliance and the soundness of their funds and structure. On the other hand, private equity funds may challenge the SEC’s interpretations of certain rules, such as the disclosure requirements under the Investment Advisers Act of 1940. For example, by arguing that some disclosure requirements are unduly burdensome and not clearly supported by statutory language, funds have sought to reduce compliance costs and streamline their operations—we have already seen litigation in this area before the collapse Chevron. Check out Leah Edelboim’s latest analysis here.

3. Taxation

The Internal Revenue Service (“IRS”) plays a key role in interpreting the tax laws that apply to private equity funds, particularly with respect to capital gains interest and the treatment of capital gains, but also the tax liabilities of investors. Chevron respect, IRS interpretations may be more likely to be challenged. If there are conflicting court rulings on tax matters, this can increase the complexity of the tax analysis for private funds and their investors.

4. Environmental regulations

The Environmental Protection Agency (“EPA”) issues regulations that impact a wide range of industries in which private equity funds invest. Chevron could lead to more frequent legal challenges to EPA regulations, creating uncertainty around compliance and valuation of portfolio companies in environmentally exposed private equity funds. However, funds can challenge EPA interpretations that impose strict environmental regulations on portfolio companies, which could unlock additional value for such companies. By arguing that some regulations exceed statutory authority or lack clear legislative support, funds may seek to reduce compliance costs for their investments in sectors such as energy, manufacturing and real estate.

5. Labor and employment law liability

The National Labor Relations Board (“NLRB”) is responsible for interpreting and enforcing employment laws that apply to many privately owned companies. Chevron respect, NLRB decisions could face more legal challenges, affecting labor regulations for portfolio companies. Private equity funds could challenge NLRB interpretations that expand the definition of joint employers, which could hold funds liable for labor practices at portfolio companies. Arguing that the statutory language does not support such broad interpretations, funds could seek to limit their liability.

6. Antitrust regulations

The Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) oversee the antitrust laws governing mergers and acquisitions, including those involving multiple portfolio companies. If courts no longer defer to these agencies’ interpretations, it is possible that some parties will challenge FTC or DOJ interpretations of the antitrust laws that apply stringent scrutiny to mergers and acquisitions. To the extent that certain interpretations are overly restrictive and not clearly supported by statutory text, funds could seek to facilitate smoother approval processes for their transactions.

Application

In addition to the above, there are many other potential changes that will affect funds, banks and investors – for example, we haven’t even mentioned the impact of the repeal Chevron on the Consumer Financial Protection Bureau or the final phase of Basel III, which deserve their own discussion articles. Finally, sometimes you may like a rule protected by Chevron respect, other times not. Therefore, there are no clear winners or losers in invalidating Chevronthe rules of the game have simply changed. Funds, banks and investors now have a greater ability to challenge certain agency decisions — but other parties can also sue, with potentially conflicting interests, such as environmental groups, labor unions or state attorneys general of different political persuasions. In either case, courts are likely to give a lot of weight to long-standing principles, with or without Chevron respect, so the pace of any change will likely be gradual.