Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Monthly Archives: February 2012

SINGAPOREAN UPDATE – Proposed Changes to the Singapore Code on Takeovers and Mergers

Editors’ Note:   This paper was contributed by Rachel Eng, Managing Partner of WongPartnership and a member of XBMA’s Legal Roundtable. It was authored by Andrew Ang, Deputy Head of WongPartnership’s Corporate/Mergers & Acquisitions Practice. Ms. Eng and Mr. Ang are leading experts in both domestic and cross-border M&A in Singapore and other jurisdictions in Southeast Asia.

Highlights:

  • Changes have been proposed to the Singapore Code on Take-overs and Mergers (“Code”).
  • The main changes include updating the language of the Code to incorporate current practices on the takeover of real estate investment trusts and business trusts, setting out when collective shareholder action amounts to acting in concert, and dealing with joint offers and the acquisition of derivatives.

MAIN ARTICLE

The Securities Industry Council (“SIC”) is the body that administers and enforces the Code. In October 2011, it issued a consultation paper, “Consultation Paper on Revision of the Singapore Code on Take-overs and Mergers” (“Consultation Paper”), for public consultation.

The Consultation Paper proposed various changes to the Code. These fell into the following four general areas:

  • Expanding and clarifying the SIC’s powers to impose sanctions on offerors and their advisers;
  • Rationalising the language of the Code to deal with the takeover of real estate investment trusts and business trusts, both of which have structures unlike that of a company;
  • Codifying its practice statements on real estate investment trusts, trust schemes, and merger procedures by incorporating them into the body of the Code; and
  • Proposing new rules to deal with developments in mergers and acquisitions over the last few years.

The new rules that have been proposed are the subject of this update.

Lending, Borrowing  and Charging of Shares

In October 2008, the takeover of a Singapore listed company ran into problems when it transpired that the offeror had lent his shares to a third party that subsequently became insolvent and consequently failed to return equivalent shares to the offeror. The share lending was not disclosed by the offeror during the takeover bid. The takeover offer was subsequently aborted as the offeror was no longer able to fulfil its takeover obligations. To prevent a recurrence of such a situation, the SIC has proposed that the Code expressly stipulate that offerors must disclose if the offeree company shares that they hold have been charged as security, borrowed or lent.

Collective Shareholder Action

It is proposed that where shareholders have an agreement or understanding to requisition or threaten to requisition resolutions at a general meeting that have the purpose of seeking control of the board, they may be presumed to be acting in concert. Once the presumption arises, subsequent acquisitions of interests in shares by any member of the group could give rise to an obligation to make a general offer.

Joint Offerors

In some takeover offers, it is proposed that certain offeree company shareholders (other than management) are to retain an interest in the offeree company following the offer through the exchange of their offeree company shares for shares in the bid vehicle. In order to determine whether such arrangements would be regarded as a special deal under the Code, the SIC has proposed that they would not be considered as such if the offeror and the offeree company shareholder had come together to form a consortium on such terms and in such circumstances that each of them can be considered to be a joint offeror.

It has further proposed stipulating the following factors as being factors relevant to determining whether a person is a joint offeror:

  • The proportion of equity share capital of the bid vehicle the person will own after completion of the acquisition;
  • Whether the person will be able to exert a significant influence over the future management and direction of the bid vehicle;
  • The contribution the person is making to the consortium;
  • Whether the person will be able to influence significantly the conduct of the bid; and
  • Whether there are arrangements in place to enable the person to exit from his investment in the bid vehicle within a short time or at a time when other equity investors cannot.

Definition of “Associate”

Currently, one of the categories of persons listed as associate is a holder of 10% or more of the equity share capital of the offeror or offeree company. The SIC has proposed lowering the threshold to 5%.

Options and Derivatives

While as a matter of practice the SIC requires persons who acquire long options or derivatives which might cause them to cross the mandatory offer thresholds to consult it before entering into such transactions, the Code itself does not currently address the question. It has proposed that Code stipulate that all acquisitions of long options or derivatives (i.e. without offsetting the value of short positions) would normally be regarded as acquisitions of shares for the purposes of determining whether the specified thresholds for making an mandatory general offer have been crossed. In addition, it is also proposed that the Code require disclosure of dealings in long options and derivatives during the offer period by persons holding 5% or more in the offeree company’s issued share capital.

Share Buy-backs

When a company buys back its shares, any resulting increase in the percentage of voting rights held by a shareholder and persons acting in concert with him is treated as an acquisition for the purpose of triggering the obligation to make a mandatory general offer. Currently, however, parties may apply for an exemption from the SIC provided they can demonstrate that the share buy-back meets certain specified conditions. As the grant of such exemptions have been routine and straightforward, the SIC has proposed streamlining the process by dispensing with the requirement for parties to seek an exemption so long as they comply with these conditions.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

MEXICAN UPDATE – Public Private Partnerships Act

Editors’ Note:   Contributed by Manuel Galicia Romero, a founding partner of Galicia Abogados and a member of XBMA’s Legal Roundtable. Mr. Galicia, who was involved in the negotiation of the North American Free Trade Agreement (NAFTA), is a leading expert in international transactions in Mexico. Authored by Juan Pablo Cervantes, a member of Galicia Abogados and an international business lawyer actively involved in the promotion of trade and investment between Mexico and numerous countries, particularly from Asia.

Highlights: 

  • On January 16, 2012, the Public Private Partnerships Act (“PPP Act”) was published and amendments were made to several related laws (the Law of Acquisitions, Law of Public Works, Expropriation Law, and National Assets Law) with the intention to consolidate a market practice that has been carried out without a clear legal framework.
  • The PPP Act intends to provide the Federal Public Administration and the private sector with a new framework for the development of long term infrastructure projects that have a high social impact, in which the infrastructure is provided, in whole or in part, by the private sector.
  • As a general rule, PPP projects are awarded to whoever presents the best proposal in technical and financial terms in the corresponding public bid.
  • The PPP Act does not establish limitations related to the nationality of the bidders, allowing the specific laws that govern the subject matter of the project in question to establish the applicable restrictions for foreigners.

MAIN ARTICLE

This last January 16, 2012, President Calderón published in the Federal Official Gazette (“DOF”) the Public Private Partnerships Act (“PPP Act”) and amended several provisions of the Law of Acquisitions, Leases, and Services for the Public Sector (“Law of Acquisitions”), the Public Works and Related Services Law (“Law of Public Works”), the Expropriation Law, and the General Law of National Assets (“National Assets Law”).

The PPP Act (along with the amendments made on the previously mentioned laws) consolidates a market practice that has been carried out without a clear legal framework. Prior to the PPP Act, projects that involved the construction of infrastructure and the provision of services between the Public Administration and the private sector were regulated, due to the absence of a specific law, by the Law of Acquisitions, the Law of Public Works, and the Federal Budget and Fiscal Responsibility Law, amongst others.

In general terms, the PPP Act intends to provide the Federal Public Administration and the private sector with a new framework for the development of long term infrastructure projects that have a high social impact, in which the infrastructure is provided, in whole or in part, by the private sector.

The following is a summary of the most relevant aspects of the PPP Act.

  1. Scope of application

The PPP Act is a public interest law applicable to Public Private Partnerships (“PPPs”) entered into by: (i) the Federal Public Administration, (ii) federal public trusts not considered government owned or controlled, (iii) entities governed by federal public law with constitutional autonomy, and (iv) the federal states of Mexico, municipalities, and the public entities of any the aforementioned which use federal resources for the development of projects (each of them, a “Contracting Entity”). PPP projects must be executed by companies incorporated with the exclusive corporate purpose of executing the respective project, in the understanding that these projects may be awarded to an individual or company (individually, or by means of a consortium), either national or foreign, which in turn shall create the special purpose company or trust for the development of the project with the corporate statutory limitations established in the bid documents of each project of the applicable project or public bid.

The PPP framework is optional and may be used in activities in which the specific legislation allows the free participation of the private sector through permits, authorizations, or concessions. This framework may not be used in activities related to the exploration, exploitation, refining, transportation, storage, or distribution of oil, gas and its derivatives.

The PPP Act is not an exception to public bids, but an additional set of legal provisions that apply in addition to the acquisition requisites applicable to each project and sector. Likewise, the PPP Act is not an exception for obtaining authorizations, permits or concessions that are required in the project at hand.

  1. Authorizations for commencement of projects

The PPP Act establishes that PPP projects are subject to several analyses and governmental authorizations, such as:

(i) Feasibility Analysis. A previous analysis in order to confirm (a) the technical and legal feasibility of the projects, (b) the convenience of carrying them out under the PPP framework, (c)  the public benefit of the project, (d) its environmental impact, and (e) the satisfactory results of a cost-benefit analysis, among others (the “Feasibility Analysis”). The Contracting Entities will be able to contract from third parties the execution of the Feasibility Analysis, without such contracting being a cause of disqualification for participating in the public bid;

(ii) Finance Ministry Registration. The registration for statistical purposes of the information regarding the PPP projects by the Ministry of Finance and Public Credit (the “Finance Ministry”);

(iii) Finance Ministry Reports. The report of the Finance Ministry in its Quarterly Reports about the Economical Situation, the Public Finances and the Public Debt, that are presented to Federal Congress, where the projects are to be described, and which will include information regarding the amounts disbursed by them, their financial projections and corresponding estimations, advances in their execution, calendar and amount of the compromised payments;

(iv) Budget. The forecast made by the Finance Ministry in the draft of the Federal Expense Budget of the multiannual expense commitments that are to be expected from the PPP projects for the approval of the corresponding expenditures, and

(v) Intersecretarial Commission. The aforementioned also includes the analysis and authorization by the Intersecretarial Commission of Public Expenditure, Financing and Divestment of the relevant PPP projects for purposes of prioritization and inclusion of these in the draft of Federal Expenses Budget, as well as its order of execution.

  1. Unsolicited proposals

It is important to highlight that the PPP Act establishes a new legal concept. Those interested in developing a new project under the PPP framework now have the right to propose such project to the Contracting Entity without excluding itself from participating in the bidding process in case the entity decides to issue such public bid based on the proposed project. Furthermore, the Contracting Entities are even allowed to determine the types of projects, sectors, geographical scopes and other elements that they are willing to analyze.

On this regard, the interested party must submit to the Contracting Entity a preliminary feasibility study (practically in the same terms as the Feasibility Analysis), for its evaluation. The Contracting Entity will have a term of three months, renewable for the same term, to issue its opinion about the feasibility of the project and its admissibility.

If the proposal of the PPP project is admissible, the Contracting Entity shall issue summons for the respective public bid and will reimburse the proposing party for incurred and justified expenses related to the preliminary studies it executed in case such proposing party is not granted the award. All rights related to the studies presented to the Contracting Entity (including, without limitation, copyrights and industrial property rights) will be transferred to the Contracting Entity.

Under no circumstance may an unsolicited proposal be awarded through a direct award; these are always to be awarded by means of a public, competitive bidding. The proposing party will always have a bonus in the evaluation of its proposal in the public bid that shall not exceed the equivalent to 10% of the applicable criteria for the awarding of the project. However, if only the proposing party participates in the public bid, the project may be awarded to it.

If the public bid is considered vacant and the Contracting Entity decides not to acquire the rights over the feasibility studies, the expenses incurred by the proposing party will not be reimbursed and its studies shall be returned. However, if the project was admitted but the Contracting Entity did not carry out the public bid, the Contracting Entity may acquire the studies once it has reimbursed the expenses incurred by the proposing party.

  1. Awarding of theprojects

As a general rule, PPP projects are awarded to whoever presents the best proposal in technical and financial terms in the corresponding public bid.

In order to incentivize the participation in public bids, the PPP Act does not establish limitations related to the nationality of the bidders, allowing the specific laws that govern the subject matter of the project in question to establish the applicable restrictions for foreigners.

Once the evaluation of the proposals is made, the project will be awarded to the bidder that presented the most solvent proposal from a legal, technical and financing standpoint, according to the requirements in observance of the bid documents. In case of a tie between two bidders, the award will be given to the party that presents the proposal with the best financial terms, and if the tie persists, the award will be granted to the party that offers more employment as well as utilization of national goods and services.[1]

As an exception, PPP projects may be awarded through a bidding process in which at least three parties are invited or by direct award (which will not be valid in the case of unsolicited proposals).

  1. Acquisition and expropriation of assets necessary for the development of the project

The responsibility to obtain the property, assets and necessary rights for the execution of PPP projects may lie on the Contracting Entity, the private party, or both, as stated under the relevant agreement.

If this responsibility corresponds to the Contracting Entity, it may acquire the property, rights and other assets through conventional means or by expropriation, with the limitations established in the PPP Act.

If the responsibility to obtain the real estate, assets and necessary rights for the development of the project falls upon the private party, obtaining them will be left to the negotiation of all relevant parties. On such scenario and for the purposes of calculating the amounts invested in the project, the acquisitions will be ruled by the terms and conditions agreed upon in the PPP contract, regardless of the amounts that the private party has disbursed in order to obtain the real estate, assets and necessary rights for the development of the project.

As for the expropriation, the PPP Act grants the status of public interest to the acquisition of real estate, assets and rights for the development of the PPP project. For such purposes, the opinion of the Contracting Entity regarding the technical feasibility and social benefit of the respective project will be sufficient.

The PPP Act (as well as the amendments to the Expropriation Law and the National Assets Law) introduces some new innovative aspects regarding expropriations and conventional acquisitions, such as the following:

(i)                  The compensation amount is allowed to be determined not only by the Institute for the Administration and Appraisal of National Assets, but in addition, by credit institutions, commercial notaries or authorized professionals. Likewise, the corresponding appraisal can take into account the future value of the real estate that results from the development of the project in the relevant area;

(ii)                During the negotiations, the relevant authority may advance, against the possession of the real estate, asset or right it requires, payments up to an amount of 50% of the price and once in possession, will be able to cover additional advanced payments with charge to the price;

(iii)              When only part of a real estate is expropriated and the remaining surface is no longer financially feasible for the owner, the owner may request the relevant authority to acquire such additional surface;

(iv)              If the real estate that is expropriated has a lien, the corresponding entity may consign before the relevant authority the required compensation in order to have the authority determine the amounts that correspond to the owners of such affected rights, i.e., the amount for paying the corresponding lien will be deducted from the owner’s compensation, and

(v)                These measures will not have to be formalized in a public instrument.

  1. Authorizations for the execution of the project

In the context of a PPP project, if the private party requires authorizations, permits or concessions in order to provide services or use public assets, such requests shall be granted in observance of the relevant provisions that regulate them but with the following restrictions:

(i) They will be granted through the same bidding process in which the respective contract was awarded;

(ii) The term of the authorizations will be (a) if the maximum initial term established by the specific law is equal to or less than 40 years, this last term shall apply, (b) if the maximum initial term in observance to the specific law is more than 40 years, the longer term shall apply, and (c) in any case, the maximum term, including extensions, cannot exceed the maximum term established by the applicable law;

(iii) Regarding federal authorizations (except for the ones foreseen in the General Law of Ecological Equilibrium and Protection of the Environment), if the competent authority does not answer the request within 60 days term starting from the day of its filing, it will be understood that the authorization has been granted (afirmativa ficta), and

(iv) Public agencies and entities of the Federal Public Administration will give priority in the evaluation and processing of authorizations in environmental matters, human settlements, urban development, construction, land use and other applicable matters subject to federal jurisdiction.

Another relevant characteristic of the PPP Act is that in case the rights of the developer under the respective contract are assigned, given as collateral or affected in any way, the developer has the right to assign, give as collateral or affect its rights under the applicable governmental authorization, prior approval from the authority that granted them.

  1. PPP contracts

The following are some relevant aspects of the PPP contracts under the PPP Act:

(i)                  Unlike the concessions in which the private party obtains the benefits directly from the final user, the PPP contracts establish that the Contracting Entity must pay a periodical consideration in favor of the developer for the execution of the project;

(ii)                By virtue of these agreements, the developer is obliged to provide determined services and in due case, the construction of the necessary infrastructure to provide them;

(iii)              The respective contracts must establish the system for the distribution of technical, execution, and financial risks to force majeure risks and of any other nature between the parties;

(iv)              The characteristics, specifications, technical standards, performance and quality levels for the construction as well as the services of the project must be defined;

(v)                The term of the contracts, including extensions, shall not exceed a period of 40 years (unless the applicable law to the required governmental authorizations under the project establish a longer initial period);

(vi)              The contracts must specify the resources for the execution of the works and the rendering of services to be provided by the developer (although depending on the case, the government may contribute resources to the project);

(vii)            The PPP contracts must establish the terms and conditions under which the private party will be able to agree with its lenders that in case of default in accordance to the respective contracts, the lenders will be able to execute temporary step-in rights, prior authorization from the Contracting Entity;

(viii)          Prior authorization of the Contracting Entity, the developer will have the right to subcontract the execution of works or the provision of services. However, the developer will be the only responsible party before the Contracting Entity;

(ix)              The developer’s rights derived from the PPP contracts may be transferred or granted as collateral with the prior authorization from the Contracting Entity;

(x)                The developer’s equity interests may also be transferred or granted as collateral with prior authorization from the Contracting Entity;

(xi)                  The infrastructure works may include facilities for the execution of complementary or commercial activities different from the principal service, i.e., the construction of commercial premises that can be leased in addition to the main project;

(xii)            In case that the developer transferred, granted as collateral, or in any way affected its rights derived from the PPP agreement and its lenders foreclose such collateral, the lenders will only have rights regarding the financial revenues generated by the project. Likewise, it is anticipated that the holders of collateral or encumbrances, prior authorization from the Contracting Entity, may hire by themselves a supervisor for the execution of the works or provision of the services, and

(xiii)          The developer may request the extension of the term of the contract and indemnification payments when its performance has been delayed by causes attributable to the Contracting Entity.

  1. Step-in rights of the project

In accordance to the PPP Act, the Contracting Entity is allowed to intervene at any stage of the development of the project when it considers that the developer is in default, for causes attributable to it, and adversely jeopardizes the development of the project.

For such purposes, the Contracting Entity shall notify the developer the cause that leads to the intervention and state a cure period. If the default persists after the cure period, the Contracting Entity will proceed to execute its step-in rights, or if applicable, depending on the respective contract, to the early termination of the contract.

The intervention will have the duration that the Contracting Entity determines, but it may not exceed, including extensions, a period of three years. If the intervention term has ended and the developer is not in conditions to continue with its obligations under the contract, the Contracting Entity will proceed to the rescission of the contract and the revocation of authorizations for the development of the project.

  1. Amendment of PPP contracts

The PPP Act establishes limited provisions under which the amendment of the contracts is permitted. The contracts can only be amended under the following circumstances: (i) improve the characteristics of the infrastructure, which may include additional works, (ii) increase the services or their level of execution, (iii) attend to certain aspects regarding the protection of the environment, (iv) adjust the scope of the projects for unforeseeable causes at the time the project was awarded, and (v) restore the financial equilibrium of the project.

However, for the purposes of the provisions mentioned in (i), (ii), and (iv) above, if the amendments do not require additional compensation, nor they imply a decrease in the developer’s obligations, such changes can be agreed upon at any time. However, if the amendments do require an additional compensation or imply a decrease in the developer’s obligations, the following conditions must be complied with: (a) have the opinion of independent experts that certify the necessity and benefit of such amendments, (b) that during the first two years the equivalent amount of the overall amendments must not exceed 20% of the cost that was agreed upon for the infrastructure and the payment for services during the first year, (c) after the first two years, if the amount of the overall amendments exceeds 20% of the agreed cost for the infrastructure and the payment for services during the first year, such amendments must be expressly approved in writing by the chairperson of the Contracting Entity.

  1. Early termination of PPP contracts

In addition to the termination causes stated under PPP contracts, the PPP Act establishes the following causes: (i) cancelation, abandonment or delay in the execution of the works, (ii) the lack of provision of the contracted services, the provision of the services in terms different to the ones agreed upon or the suspension of the services for more than 7 days, and (iii) the revocation of required authorizations for execution of the project.

Therefore, the PPP Act differs from the Law of Acquisitions; the PPP Act does not allow the Contracting Entity to unilaterally terminate the PPP contract due to reasons of public interest or due to the lack of need of such service, therefore effectively mitigating the risk for the developer of early termination of the agreement due to causes unrelated to its performance.

In case of early termination of the respective contract, the Contracting Entity shall have the option to purchase the assets owned by the private party which were used for the provision of the contracted services, in the understanding that public assets and those necessary for the provision of the services shall be transferred to the control and administration of the Federation.

  1. Dispute resolution

In observance of the PPP Act, the differences between parties of technical or financial nature will first settled by mutual consent.  If the dispute persists, an expert committee of three members shall be appointed, where each party shall appoint one expert and these in turn shall choose a third one.

Regarding disputes over the PPP contracts, the parties may agree to submit themselves to a conciliation process before the Ministry of Civil Service or agree upon arbitral proceedings.


[1] In the evaluation of an unrequested project proposal, the proposing party will have a bonus. Please refer to Section 3 above.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

UK UPDATE – Challenges And Opportunities Of The Increasingly Regulated World: The View From London

Editors’ Note:  Contributed by Nigel Boardman, a partner at Slaughter and May and a founding director of XBMA.  Mr. Boardman is one of the leading M&A lawyers in the UK with broad experience in a wide range of cross-border transactions.  The paper was authored Slaughter & May partners Ruth Fox, Jan Putnis and Ben Kingsley.  Ms. Fox heads the Financial Regulation Group, which she was instrumental in establishing.  Her practice covers a wide range of commercial transactions.  Mr. Putnis’ practice focuses on financial regulation, with particular emphasis on corporate and commercial transactions. Mr. Kingsley advises a broad range of financial institutions and non-financial firms on regulatory matters.

Executive summary:  The linked memorandum identifies the issues facing financial institutions that do not have sufficiently positive and proactive relationships with their regulators to influence the ways in which new regulatory principles and rules will be applied to them, explains how some of the traditional responses of financial institutions to regulatory change are now outdated, and proposes a new approach to engaging with regulation within financial institutions that can bring significant risk mitigation benefits and business opportunities, for small as well as for large financial institutions.

Click here to read the Memorandum

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Debenture financing for infrastructure projects, R&D and innovation – Reduced income tax

Editor’s Note:  This update comes from Francisco Antunes Maciel Müssnich (founding partner) from Barbosa, Müssnich & Aragão Advogados.  Francisco Müssnich is a member of XBMA’s Legal Roundtable, and a leading expert on Brazilian corporate and M&A matters.  This paper was jointly authored by the firm’s Capital Markets and Tax teams.

Highlights: 

  • New legislation reduces the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are deemed “priorities” by the federal government.
  • Legal entities domiciled in Brazil are subject to a 15% tax rate on income earned from Infrastructure Debentures that are issued by December 15, 2015 and meet other conditions.
  • With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s needed infrastructure.

MAIN ARTICLE

In June of last year, Federal Law 12,431 introduced new rules on debentures to encourage the private sector to help finance longer term infrastructure projects.

One of the important changes made by the new legislation was to reduce the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are considered to be “priorities” by the federal government (“Infrastructure Debentures”).

Under Law 12,431/2011, the income tax rate for income from Infrastructure Debentures received by individuals resident in Brazil is zero, effectively making it tax-free, while income from Infrastructure Debentures earned by legal entities domiciled in Brazil is subject to income tax at a rate of only 15%, withheld at source.

In order to benefit from these favourable tax rates, the Infrastructure Debentures must be issued by SPCs created to implement “projects for investment in infrastructure or for intensive economic production in research, development and innovation considered to be priorities under regulations issued by the federal government.” In addition, the Infrastructure Debentures must be issued by December 15, 2015, and meet all of the following conditions:

i) the debentures must pay interest at a rate fixed in advance and linked to a price index or reference rate. Post-fixed interest rates are prohibited;

ii) they must have an average weighted term to maturity of more than four years;

iii) they cannot be repurchased by the issuer within the first two years following the issued date, and early redemption and prepayment are prohibited;

iv) the purchaser must not have assumed a commitment to resell the debentures;

v) if interest will be paid periodically under the debentures, the interval between payments must be at least 180 days; and

vi) there must be proof that the debenture was traded on regulated securities markets.

Decree 7603, which was published on November 10, 2011, defines the type of project that will be considered a “priority” by the Brazilian government. According to the Decree, a project will be a “priority” project if it is directed to construction, expansion, maintenance, restoration, adaptation or modernization of facilities in the following sectors:

i)             logistics and transportation,

ii)           urban mobility,

iii)          energy,

iv)         telecommunications and broadcasting,

v)           basic santitation, and

vi)         irrigation.

The priority list is not exhaustive, and in some cases projects in other sectors can be treated as priority.

The Ministries responsible for the various sectors will issue rules setting out the requirements for approval of priority projects, and the mechanisms for overseeing implementation of approved projects.

Each project must be submitted to the appropriate Ministry, together with the supporting documentation listed in the Decree and any other documents the responsible Ministry may require. The various Ministries have discretionary powers to determine if a submitted project meets the requirements to be considered a priority. Projects are approved individually, by publication of the Ministry’s decision in the official gazette.

Decree 7603/2011 provides that any SPC may manage a priority project, as long as it is incorporated specifically for that purpose. Infrastructure Debentures issued by SPCs can be distributed publicly if the SPC obtains issuer registration from the Brazilian Securities Commission, the CVM, although the registration requirement can be waived if the debentures will be placed under a “restricted efforts” offering.

SPCs that fail to implement approved projects are subject to a fine of 20% of the total value of the debenture issue. In order to facilitate inspection and control of SPCs’ compliance with their legal obligations, SPCs are required to:

(i) provide a list of the legal entities that hold interests in the SPC to the responsible Ministry, and keep the list up-to-date;

(ii) in the case of public offerings of Infrastructure Debentures, ensure that the offering documents highlight the number and date of the Ministry’s approval of the priority project, and the commitment to allocate the funds obtained through the offering to the approved priority project; and

(iii) keep all documentation related to the use of the funds available for inspection, for at least five years after the maturity date of the Infrastructure Debentures.

Lastly, the CVM is required to maintain a list of Infrastructure Debentures offerings on its website, showing the amount of each debenture issue and the related priority project.

In addition to the Infrastructure Debentures, Brazil has created other mechanisms to stimulate private investment in large infrastructure projects over the next years, such FIP-IEs, which are private equity infrastructure funds, and the special type of investment fund provided for under Law 12,431/2011, which is designed to acquire Infrastructure Debentures.

With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s infrastructure, and consequently reducing the demands on public resources.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

RUSSIAN UPDATE – Changes to the Rules Governing Foreign Investment in Russian Strategic Companies

Editors’ Note:  This paper was submitted by Andrey Goltsblat and co-authored by Goltsblat BLP partner Anton Sitnikov and head of group Evgeny Danilov. Mr. Goltsblat is a member of the XBMA Legal Roundtable and a leading expert on Russian M&A, having completed more than US$25 billion of transactions in the last two years. Anton Sitnikov heads up the corporate practice of Goltsblat BLP, with expertise in M&A, private equity, capital markets, restructuring, and complex cross-border transactions with particular focus on the oil and gas sector, mining, the food industry, the services sector, banking & finance, telecoms, industrial manufacturing, and various other sectors.

Highlights: 

  • New amendments to the Federal Law on Foreign Investment in the Russian Federation and the Federal Law on Foreign Investment in Companies of Strategic Importance for National Defence and Security generally improve the environment for foreign investments in Russian strategic companies.
  • Transactions involving international financial institutions set up in accordance with international treaties of the Russian Federation or with which the Russian Federation has concluded international treaties with respect to Russian strategic companies will not be subject to prior approval under the Federal Law.

MAIN ARTICLE

Goltsblat BLP advises on adoption of Federal Law No. 322-FZ, dated 16 November 2011, “On Amendments to Article 6 of the Federal Law “On Foreign Investment in the Russian Federation” and the Federal Law “On Foreign Investment in Companies of Strategic Importance for National Defence and Security”[1], came into force on 18 December 2011.

In general, the new amendments listed below improve the environment for foreign investments in Russian strategic companies.

1. Transactions involving international financial institutions set up in accordance with international treaties of the Russian Federation or with which the Russian Federation has concluded international treaties with respect to Russian strategic companies will not be subject to prior approval under the Federal Law.

The list of such international financial institutions is to be approved by the Government of the Russian Federation.

2. The Federal Law will not apply to transactions in relation to Russian strategic companies concluded by organisations under the control of the Russian Federation or citizens of the Russian Federation that are, under the Russian legislation, tax residents of the Russian Federation (apart from Russian citizens with dual citizenship).

For the purpose of determining control, the provisions of parts 1 and 2, article 5 of the Federal Law are applied by analogy.

3. In relation to a Russian strategic company using subsoil sectors of federal significance, control by a non-government foreign investor or group of persons and prior approval of their transactions will begin not from 10 but 25 per cent of the total votes on the shares (ownership interests) in the authorised capital or the composition of the collegial management body or collegial executive body of such a company.

At the same time, with the given ownership interest (25% or more)  belonging to a non-government foreign investor or group of persons in the authorised capital of the company, the transaction will not be subject to prior approval if acquisition of shares (ownership interests) in the company does not entail an increase in the ownership interest  of this foreign investor of group of persons in the company.

The other criteria of control and the requirement for prior approval of transactions in relation to a company remain in place (that is, the possibility of determining the decisions of the company by voting at the General Meeting, by participating in the Board of Directors or other management bodies of the company, by concluding a management agreement with the company or similar agreements, and in the case of the right to appoint the sole executive body).

4. The four types of activity of strategic importance for national defence and security are specified in detail and now exclude:

– operation of radiation sources by companies in the civil sector of the economy for which this does not constitute their core business;
– licensable distribution and technical maintenance of encryption (cryptographic) means, provision of services in the sphere of information encryption by banks with no state participation.

5. When establishment of control or a transaction entails an audit of a Russian strategic company, the audit will be performed by the federal executive authority in the defence sphere (Ministry of Defence of the Russian Federation) and, as before, the federal executive security agency (Federal Security Service of the Russian Federation).

They are now allowed 30, rather than 20, days for sending the authorised body (the Federal Anti-monopoly Service) conclusions concerning emergence or absence of a threat to national defence and security.

6. Changes have been introduced into certain procedures and the timeframe for implementation of a decision taken by the Government Commission for control over foreign investment in the Russian Federation regarding approval of the transaction or control subject to an agreement being concluded with the applicant securing its fulfilment of certain obligations.

The agreement will now be concluded within 30 rather than 20 days of the competent authority receiving the Commission’s decision (with the possibility of a maximum 14-day extension on the basis of a request from the applicant).

If the Commission decides on approval of the transaction or control subject to conclusion of an agreement  and the applicant refuses to assume certain obligations or to conclude this agreement or if the agreement is not concluded by the set deadline, the decision on refusing to grant approval will be taken not by the Commission but by the competent authority (the Federal Anti-monopoly Service), which will then notify the Commission to this effect.


[1] The Federal Law “On Foreign Investment in Companies of Strategic Importance for National Defence and Security” is hereinafter referred to as the Federal Law.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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