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
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • 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
  • Kazakhstan Potash Corporation Limited
  • 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
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (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
  • Jurie Advokat AB (Sweden)
  • 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: June 2012

BELGIAN UPDATE – Amended Procedure for the Liquidation of Belgian Companies

Editors’ Note:  Peter Callens is a partner with Loyens & Loeff and a member of XBMA’s Legal Roundtable.  Mr. Callens is renowned for his national and international corporate practice, with a focus on M&A and transactions in various sectors of industry. This article was co-authored by Robrecht Coppens, senior associate with Loyens & Loeff, who specialises in corporate law, with a particular emphasis on takeovers and M&A.

Highlights:

  • On 19 March 2012 the King ratified a new act modifying the Belgian Companies’ Code with respect to the procedure for the liquidation of Belgian companies. The Act comes into force on 17 May 2012.
  • The purpose of the Act is twofold: on the one hand, a series of procedural amendments for company liquidations which resolve certain difficulties and practical problems and, on the other hand, the introduction of a procedure for winding-up (dissolution) and liquidation of companies in one and the same notarial deed.

Introduction

In Belgium there are two ways of terminating a company: bankruptcy or winding-up. Under Belgian law, any company which (i) is in an on-going situation where it is unable to meet its debts (cessation of payments) and (ii) has lost the trust of its creditors (creditworthiness) is in a state of bankruptcy. Both conditions must be met.

The winding-up of a company can occur by a voluntary decision of an extra-ordinary general meeting (EGM), by a court decision upon a petition for judicial dissolution, or automatically by law (e.g. upon the expiry of a company’s term).

The liquidation of a company is the next step after a company’s winding-up. It implies that a liquidator (or several liquidators) sell the company’s assets, repay the debts and allocate any positive balance among the shareholders in compliance with the objectives prescribed by law or the company’s articles of association.

To give a complete picture, it should be noted that a company can be wound-up without being put into liquidation, as a result of certain reorganisation procedures under the Belgian Companies’ Code (the “BCC”), i.e. mergers and demergers. Such reorganisation procedures, however, fall outside the scope of the Act and, consequently, outside the scope of this contribution.

On 19 March 2012 a new act was ratified by the King modifying the BCC as regards the liquidation procedure for Belgian companies (the “Act”). The Act was recently published in the Belgian State Gazette on 7 May 2012 and is due to come into force on the tenth day after its publication, i.e. on 17 May 2012.

The Act

Since the ‘Act of 2 June 2006’, intended to improve the liquidation procedure, certain provisions in the law were not clear or feasible or were subject to misinterpretation. The first goal of the Act, therefore, has been to amend such provisions and to clarify the law on certain points. The Act also puts an end to differences of interpretation among legal scholars. We will not go into further detail on this as it does not materially affects the procedure.

The second goal of the Act has been to introduce a simplified liquidation procedure. As opposed to the incorporation of a company in Belgium, the standard procedure for winding-up and liquidation of a company is a relatively cumbersome and time consuming (and therefore costly) procedure. The reason for this is that the ‘Act of 2 June 2006’ placed the liquidation procedure under judicial control, i.e. at two moments in the procedure, a court decision must be obtained: the first, to have a liquidator appointment or approved and the second, to secure the court’s consent to the proposed distribution scheme.

This standard procedure was in reaction to previous abuses by some liquidators and exclusively benefited the company’s creditors. This is also the reason why such procedure should remain the standard procedure for most companies. For some companies, however, e.g. non-active or dormant companies, small or medium sized companies which are to be terminated due to the retirement or passing of the sole shareholder, etc. this lengthy procedure seems a bit disproportionate.

The Act, therefore, introduces the possibility of winding-up and liquidating a company in one and the same notarial deed subject to certain strict conditions but without the need for court intervention (the “Simplified Liquidation”). This practice already existed before the Act and was based on a circular letter of the Minister of Justice dated 14 November 2006. Because there was no legal basis for this practice in the BCC, a majority of notaries refused to follow this procedure. Some notaries did follow it, however, and this created a considerable degree of legal uncertainty. After six years, the legislator finally responded by implementing the Act.

Simplified Liquidation

Based on the Act, Simplified Liquidation is now possible, provided that the following cumulative conditions are fulfilled:

  1. No liquidator is appointed;
  1. Based on a recent statement of assets and liabilities, the company has no liabilities at all at the time the company is wound-up;
  1. All shareholders are present or represented at the EGM at which the resolution for winding-up is adopted;
  1. The EGM unanimously approves the winding-up and immediate closing of the liquidation of the company;
  1. The remaining assets are allocated to the shareholders.

Pursuant to this procedure the company is wound-up and, assuming the company has no liabilities, there is no need for any further liquidation procedure, and thus no obligation to appoint a liquidator. Immediately following the decision to wind-up the company, the ‘liquidation’ of the company is closed. The remaining assets of the company will be distributed to the shareholders.

The second condition, however, is a somewhat problematic condition for two reasons. First, the legislator refers to ‘liabilities’ instead of ‘debts’. However, accounting entries such as ‘share capital’ and ‘reserves’ are also recorded on the liability side of financial statements. Supposedly, the legislator means ‘no debts’ instead of ‘no liabilities’. Secondly, liabilities which are not recorded in financial statements (e.g. deferred tax liabilities, pending litigation claims, future guarantee obligations, etc.) seem not to be included in the condition’s scope. The legislator does not specify how such future liabilities have to be treated.

One possible solution is an explicit statement in the notarial deed to the effect that not only the assets but also the future liabilities, if any, are distributed to the shareholders. As the legislator remains silent on this point, we assume that notarial practice will adopt this as a protection mechanism for future creditors.

Another potential problem could be the organisation by the directors of a so-called factual liquidation to anticipate and avoid the rather complicated and lengthy (standard) liquidation procedure and prepare the company to comply with the conditions for a Simplified Liquidation. The directors could be tempted to sell the assets and repay the debts before the winding-up, i.e. without complying with the standard BCC procedure. However, as directors are required at all times to act in the company’s best interest, in accordance with its corporate objects and in continuity, this could trigger directors’ liability as being contrary to the law.

It should be noted, however, that there is an important difference between directors’ liability and liquidators’ liability. Liquidators, unlike directors, are liable towards third parties and shareholders for the performance of their duties and for any shortcoming in their management.

Conclusion

The Simplified Procedure is a positive development which is in keeping with the tendency towards simplification and clarification of Belgian corporate law. However, it is likely that the time and cost savings of the Simplified Procedure will encourage many to arrange company liquidations to take advantage of those benefits and, in particular, avoid court supervision designed to safeguard the interests of creditors. It is to be hoped that the conditions of the Simplified Procedure will be properly applied and that abuse will not erode the protection of creditors interests nor make the standard procedure redundant.

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.

SINGAPOREAN UPDATE: Changes to the Singapore Code on Take-Overs and Mergers

Editors’ Note:  This paper was contributed by Rachel Eng, Managing Partner of WongPartnership and a member of XBMA’s Legal Roundtable.  The author, Andrew Ang, is deputy head of the Corporate/Mergers & Acquisitions Practice of WongPartnership.

Highlights:

  • The Singapore Code on Take-overs and Mergers was amended with effect from 9 April 2012.
  • The main changes include updating 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 Monetary Authority of Singapore (“MAS”) has amended the Singapore Code on Take-overs and Mergers (“Code”). The revised Code has taken effect as from 9 April 2012. The changes were first the subject of a consultation by the Securities Industry Council (“SIC”) in October 2011. We had reported on the consultation in an earlier update. Following the consultation, the SIC amended some of its proposed changes. The details of the finalised changes are set out in this update.

Executive Summary

The changes to the Code include the following:

  • An option or derivative transaction has been made subject to Rule 14 on mandatory offers. Persons who would cross the mandatory offer thresholds had such transactions involved the transfer of shares must consult the SIC beforehand.
  • Dealings in long options and derivatives over offeree company shares during the offer period by associates who hold 5% or more in the offeree company must be disclosed.
  • An offeror and its concert parties must disclose the number and percentage of their shareholdings which have been charged as security, borrowed, or lent.
  • The shareholding threshold for a shareholder to disclose dealings in the offeree company shares during the offer period has been lowered from 10% to 5%.
  • Shareholders of a company that is buying back its shares are provided with a class exemption from the requirement to make a mandatory offer as a result of the share buy-back subject to conditions.
  • The factors which the SIC would consider in determining whether to permit an offeree company shareholder to invest in the bid company to the exclusion of all other offeree company shareholders have been set out.
  • The circumstances where shareholders voting together on a board control-seeking resolution might be regarded as parties acting in concert have been set out.

Other changes made clarify certain powers of the SIC to take action in respect of breaches of the Code, as well as the application of the Code to real estate investment trusts and business trusts.

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 Code now expressly stipulates that offerors and their concert parties must disclose if the offeree company shares that they hold have been charged as security, borrowed, or lent. In addition, the following clarifications have been included (pursuant to feedback after the consultation):

  • When making disclosure, the offeror should specify both the number and the percentage of the shares in the offeree company held by the relevant person which have been charged as a security interest, borrowed, or lent.
  • If the offeror has borrowed shares which he has on-lent or sold, these should not be included when disclosing the number of shares held by him.
  • In determining the number of acceptances received during a general offer, shares borrowed by the offeror may not normally be counted towards fulfilling the acceptance condition. In addition, where the mandatory bid obligation was triggered as a result of share borrowing, the borrower should consult the SIC on how the borrowed shares should be treated for the purpose of the acceptance condition.

Collective Shareholder Action

The Code has been amended to provide greater clarity as to when the action of shareholders voting together on particular resolutions at one general meeting might be regarded as acting in concert. It now expressly makes clear that shareholders may be presumed to be acting in concert where they 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. 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 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. Where it was previously silent, the Code now makes clear that such arrangements would not be regarded as a special deal under the Code 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.

In order to determine whether a person is a joint offeror, the SIC will look to the following factors:

  • 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 Code has been amended to lower 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. Following the amendment, it now specifies that a person who acquires or writes an option or derivative which causes him to have a long economic exposure would normally be regarded as having acquired shares for the purposes of determining whether the specified thresholds for making a mandatory general offer have been crossed. He will have a long economic exposure if he would benefit economically if the price of the security goes up and will suffer economically if the price of the security goes down.

In addition, the acquisition or writing of an option or derivative will include situations where the option or derivative is acquired as part of a derivatives reference basket or index. The rule will not apply if, at the time of dealing, relevant securities to which the derivative is referenced represent less than 1% of the class in issue and less than 20% of the referenced securities by value. This is, however, only a guideline and is not determinative of whether the rule is excluded.

The Code will also 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. “Dealings in relation to derivatives” is defined widely to include taking, granting, acquisition, disposal, exercising (by either party), lapsing, closing out, conversion, or variation.

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 Code will now dispense 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.

INDIA UPDATE – The India Board Report 2011: Board Composition, Effectiveness and Best Practices

Editors’ Note:  This third edition of the India Board Report is contributed by Zia Mody, founding partner of AZB & Partners and a member of XBMA’s Legal Roundtable.  Ms. Mody has led many of India’s most significant corporate transactions, been recognized by Business Today as one of the Most Powerful Women in Indian Business and received the Economic Times Award for Corporate Excellence as Businesswoman of the Year. 

The India Board Report, jointly prepared by AZB & Partners, Hunt Partners, and PWC, comprehensively surveys hundreds of leading Indian companies and independent directors on the timely topics of Board Composition, Effectiveness and Best Practices.

Highlights: 

  • Along with the global economic and financial crisis, a string of frauds resulted in the introduction of stricter corporate governance mechanisms in India, with additional requirements, including in the pending Companies Bill, under consideration. While these changes were expected to plug new holes found in the existing regulations, there was also growing realization that the biggest challenge was effective implementation, and therefore most changes introduced at the time of this edition of the India Board Report had been voluntary. The survey findings highlight some of the limitations of regulatory compliance and the existing gaps in implementation.
  • Risk management is increasingly seen as a key governance agenda at Indian companies, but needs more attention at the board level. 31% of companies do not have their board’s involvement in systematically addressing corporate risk management. 61% of the directors felt that linking director compensation to risk and responsibility will have a high impact on improving board effectiveness.
  • A limited talent pool perceived as biggest impediment in changing board structure. The most desired change in board structure is increased diversity.
  • In the 2009 survey, 57% of the independent directors thought that SEBI corporate governance regulation Clause 49 was extremely useful and enhanced shareholder value. However, the percentage has reduced significantly in 2011 with only 38% of the respondents rating Clause 49 as extremely useful.
  • The top three board priorities indicated are ensuring overall corporate and statutory compliance (90%), monitoring business and operating performance (87%), and establishing and monitoring financial standards and internal controls (82%). Leadership development, succession planning, CSR and risk management continue to be low on the board priority list. Two-thirds of the independent directors believe that the roles and responsibilities of non-executive directors are not defined clearly.
  • More than 50% of the directors surveyed said that their boards hardly ever evaluate their own effectiveness. Among the boards that do conduct evaluations, the majority opt for self-assessment.
  • The survey reveals a wide divergence in compensation patterns.

FOREWORD:

Corporate governance is a subject that attracts a lot of media attention, especially just after a scandal. This usually prompts governments and regulators to appoint committees to review and change laws. After a while, the hype fades and it’s back to business as usual.

Regulation only ensures compliance. Unfortunately, compliance does not equal commitment to corporate governance. This has been one of the key findings of the third edition of our biennial India Board report – 2011. Clause 49 of SEBI’s listing agreement has been widely praised, in terms of the standards of corporate governance that it sets. However, only 38% of the respondents felt that it significantly contributed to improving governance!

There are other indications as well. More than half the respondents pointed out that their boards did not have a formal process to evaluate their effectiveness. Two-thirds of the independent directors surveyed said that the roles and responsibilities of non-executive directors were not defined clearly. Around 50% of them felt that the time spent by the board in completing the agenda of the meeting was inadequate.

This brings to mind several questions: How can there be improvement without measurement? Are independent directors appointed only to comply with regulations? do companies even define what is expected of the board, and the role of directors? Little wonder then, that companies complain about the lack of talented individuals to fill these positions.

The best governed companies have a real commitment to corporate governance, and not just paper compliance. This implies a proactive, voluntary approach to make best practices integral to their functioning. Companies need to clearly define performance metrics for boards and directors, and evaluate this on an ongoing basis. The role of independent directors needs to be clearly spelt out. If this clarity is achieved, then the competencies or qualifications of directors can be better defined, making the selection process more focused.

The third edition of the India Board report continues its focus on the functioning of corporate boards in India. As always, we seek to identify and compare trends in governance practices pursued by Indian companies. The report also highlights the implementation challenges faced The third edition of the India Board report continues its focus on the functioning of corporate boards in India. As always, we seek to identify and compare trends in governance practices pursued by Indian companies. The report also highlights the implementation challenges faced and presents the views of independent directors on ways to improve board performance and effectiveness.

Click here to read the full report

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.

CANADIAN UPDATE – Canadian Government Announces Further Changes to Foreign Investment Review Process

Contributed by: I. Berl Nadler, Partner, Davies Ward Phillips & Vineberg LLP; Member of XBMA’s Legal Roundtable (Toronto)

Editors’ Note:  This update was submitted by I. Berl Nadler, a partner at Davies Ward Phillips & Vineberg LLP and one of the leading Canadian corporate lawyers who has been involved in numerous high-profile financing transactions and acquisitions worldwide on behalf of multinational corporate clients.  The authors, John Bodrug, Mark Katz and Erika Douglas are partners in Davies Ward Phillips & Vineberg LLP’s Competition and Foreign Investment Review practice.

Please see the earlier article posted below.

MAIN ARTICLE

The Canadian government continues to propose changes to Canada’s foreign investment review regime under the Investment Canada Act (“ICA”). In its most recent announcement (available here) the government proposes to significantly increase the principal threshold used to determine whether foreign investments will be subject to review under the ICA. The government also published new guidelines on the mediation of disputes with foreign investors over the performance of undertakings and issued an annual report on the administration of the ICA which contains some interesting insights into the review process under this statute.

New Proposed Review Threshold

As described previously in our Flash of May 2, 2012, the Canadian government tabled proposed amendments to the ICA on April 26, 2012 as part of omnibus budget implementation legislation. Among other things, the proposed amendments would authorize the Minister of Industry to accept security from investors and to provide greater public disclosure of reasons and notices it issues pursuant to the ICA. The bill is currently being studied by the House Standing Committee on Finance.

On May 25, 2012, Canada’s Minister of Industry Christian Paradis announced that, in addition to the proposed changes described above, the Canadian government intends to significantly increase the financial threshold used to determine whether acquisitions of Canadian businesses by (or from) investors from World Trade Organization (“WTO”) member countries will be subject to review by Industry Canada under the ICA’s “net benefit to Canada” test. Although there are other thresholds applicable in certain circumstances, in practice, this “WTO Investor threshold” is the most frequently applied under the ICA.

Pursuant to the current threshold, direct acquisitions of Canadian businesses by (or from) WTO Investors are subject to “net benefit review” if the book value of the Canadian business’s assets exceeds $330 million based on the business’s most recent audited annual financial statements. (The threshold fluctuates annually based on a prescribed formula. The $330-million threshold applies to transactions that occur in 2012.)

The Canadian government proposes to change this WTO investor threshold in two ways:

  • first, by basing the threshold on a new measure – “enterprise value” – rather than the book value of the Canadian business’s assets; and
  • second, by progressively raising the threshold to $1 billion over four years once the new threshold comes into force (the threshold will initially be $600 million for two years, then rise to $800 million for the following two years, after which it will finally jump to $1 billion, with subsequent increases indexed to reflect changes in Canada’s gross domestic product).

The Canadian government proposed similar changes in 2009 and issued draft regulations to that effect for comment. However, the draft regulations were never finalized, apparently because of difficulties in defining the new “enterprise value” basis for the threshold. According to the Minister, the government now intends to issue new regulations which will reflect comments received during the 2009 consultation process. No date for issuance of the revised regulations has been announced.

The Minister’s announcement of a new threshold reflects the Canadian government’s continuing objective of focusing the ICA’s net benefit review process on only the most significant transactions involving foreign investments in Canada. This policy, in turn, has its roots in the 2008 report of the Competition Policy Review Panel, which recommended increasing the thresholds for “net benefit” review and basing the thresholds on enterprise value instead of asset value. The “enterprise value” threshold is likely to be based on very different criteria than the current “book value” threshold, and the new thresholds are likely to significantly reduce the number of transactions subject to net benefit review by Industry Canada.

Mediation Guideline

For reviewable transactions, foreign investors are typically required to provide binding undertakings to the Canadian government covering various aspects of the operations of the Canadian business being acquired, in order to demonstrate a likely “net benefit” to Canada arising from the investment.

As a result of its recent experience in the U.S. Steel case the Canadian government has been seeking to improve its ability to deal with cases involving alleged non-performance of such undertakings. For example, as noted above, the government wants to amend the ICA so that investors can provide it with “security bonds” in the event of disputes over performance. In the same vein, Minister Paradis has now announced the issuance of an Industry Canada guideline that provides for the mediation of disputes where the Minister believes that a foreign investor has failed to comply with its undertakings. The objective is to establish a mechanism whereby disputes can be resolved without resorting to costly and protracted litigation (as was the experience with U.S. Steel).

According to this guideline, where both parties agree, the Minister and the foreign investor may enter into an agreement to use third-party mediation to resolve a dispute over the performance of undertakings. The terms of such an agreement would include provisions on the appointment of a mediator, confidentiality, the duration and termination of the mediation process and cost sharing. The guideline also points out that the Minister will remain free to accept new undertakings from an investor at any time, regardless of whether the mediation process is utilized. (Indeed, this is how the government’s dispute with U.S. Steel was ultimately resolved.)

ICA Fiscal 2009-2010 Annual Report

Finally, in conjunction with the Minister’s announcement, Industry Canada issued the first annual report on the administration and enforcement of the ICA since 1992-1993. As a result of amendments to the ICA in 2009, Industry Canada is now required to issue these annual reports in order to provide greater transparency into the operation of Canada’s foreign investment review process.

The just-issued report (available here) relates to the government’s 2009-2010 fiscal year and is out of date in several areas for that reason. Nonetheless, the report contains some interesting statistics and other pertinent information relating to the ICA review process.

For example, the report discloses that, in the period between June 30, 1985 and March 31, 2010, the Minister issued 12 initial notices stating that he was not satisfied that proposed investments were likely to be of net benefit to Canada. Although not a large number when viewed in context, it is interesting to see just how many times the government has taken at least this initial step towards rejecting a foreign investment. The report also discloses that, in addition to the well-known instance in which the proposed acquisition of MacDonald, Dettwiler and Associates Ltd. was rejected (the first such denial of approval outside of the cultural sphere), there have also been two cases in which foreign investors abandoned proposed acquisitions after having received initial notices from the Minister.

The report also provides more details on how the Minister applies the net benefit test in practice. According to the report, each case will be decided on its own merits and the relative importance of the different criteria and factors involved will vary from transaction to transaction. As a general matter, however, the Minister will first establish a baseline against which he can compare a proposed transaction by looking at the Canadian target and considering its likely prospects in the absence of the proposed foreign acquisition, taking into account the business’s strengths, areas for improvements and key challenges. The Minister will then consider the foreign investor’s plans for the Canadian business, any undertakings provided by the investor and “what the foreign investor brings to the investment”, such as capital or expertise that is not otherwise accessible to the Canadian business. Based on the foregoing, the Minister will weigh the positive and negative effects of the proposed investment and decide whether it is likely to be of net benefit to Canada. Finally, the report clarifies that where there are competing foreign investors bidding to acquire a Canadian business, the Minister will not compare the proposed investments against each other to determine their relative benefits to Canada. Instead, the Minister will apply the net benefit test to each application on its own merits and, in appropriate cases, will provide approval to more than one prospective acquirer provided they each meet this test. The Minister’s objective in adopting this approach is to leave the ultimate decision of who the business is sold to in the hands of the vendors rather than have the government try to weigh which offer may be preferable.

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.

CANADIAN UPDATE – Canadian Government Proposes Important Changes to the Investment Canada Act and Foreign Ownership Restrictions in the Telecommunications Act

Editors’ Note:  This update was submitted by I. Berl Nadler, a partner at Davies Ward Phillips & Vineberg LLP and one of the leading Canadian corporate lawyers who has been involved in numerous high-profile financing transactions and acquisitions worldwide on behalf of multinational corporate clients.  The authors, George N. Addy, John D. Bodrug, Mark Katz, Hillel Rosen, Richard Elliott and Anita Banicevic are partners in Davies Ward Phillips & Vineberg LLP’s Competition and Foreign Investment Review practice.

Highlights: 

  • The Canadian government proposed amendments to the Investment Canada Act (the “ICA”) that would authorize the Minister of Industry (or Minister of Canadian Heritage, in respect of cultural businesses) to accept a security payment from investors in respect of any possible penalties that a court might order if the investor is subsequently held to be in breach of its undertakings to the government. Second, the Minister would be authorized to publicly disclose certain information at various stages in the ICA review process.
  • The Canadian government also proposed changes to the Telecommunications Act permitting non-Canadians to acquire control of Canadian telecommunications carriers that account for less than a 10% share of overall Canadian telecommunications services revenues.
  • The proposed amendments offer foreign investors the opportunity to obtain an initial “toe-hold” in the Canadian telecom sector, with the possibility of expanding over time (other than through acquisition).  Significantly, however, a similar opening has not been made for the Canadian broadcasting sector, where foreign investors will continue to be prohibited from acquiring de jure or de facto control over broadcast undertakings.

MAIN ARTICLE

On April 26, 2012, the Canadian government introduced Bill C-38 (known as the Jobs, Growth and Long-term Prosperity Act), an omnibus bill that includes proposed amendments to the Investment Canada Act (the “ICA”) and the Telecommunications Act. Highlights of these proposed amendments are described below.

1. Proposed Amendments to the ICA

The proposed amendments to the ICA would introduce two principal changes to the review process under that legislation. First, the Minister of Industry (or Minister of Canadian Heritage, in respect of cultural businesses) would be authorized to accept a security payment from investors in respect of any possible penalties that a court might order if the investor is subsequently held to be in breach of its undertakings to the government. Second, the Minister would be authorized to publicly disclose certain information at various stages in the ICA review process.

Security Payments

The acquisition by a “non-Canadian” of control of a business carried on in Canada may be subject to review under the ICA to determine if it is likely to be of “net benefit to Canada” based on certain statutory criteria. In order to demonstrate “net benefit”, and thus secure ministerial approval for an acquisition, foreign investors are typically required to provide binding undertakings to the Canadian government covering various aspects of the operations of the Canadian business being acquired.

Recently, the Canadian government settled protracted litigation with U.S. Steel over the enforcement of undertakings provided in connection with U.S. Steel’s 2007 acquisition of a Canadian steel company (see our Flash of December 13, 2011). Some critics of the ICA focused on this matter as evidence that the legislation lacks sufficiently robust enforcement mechanisms.

The Bill C-38 amendments regarding security payments appear to be the government’s response to these criticisms. Pursuant to the proposed legislation, the Minister would be authorized to “accept” security from investors towards the payment of a potential court-imposed penalty arising from, among other things, the investor’s failure to comply with its undertakings at some point in the future. The purpose of this amendment is to improve the government’s ultimate ability to enforce undertakings provided by foreign investors.

Although Industry Canada has indicated that these amendments would simply authorize the Minister to “accept security, when offered by an investor”, the concern is that the Minister may now require that investors “offer” security payments as a matter of course when providing undertakings as part of the ICA review process. Such a practice would threaten to make the negotiation of undertakings more difficult, with disputes likely to occur over the appropriateness and quantum of such payments.

Disclosure

Another criticism that has been leveled against the ICA is an alleged lack of transparency in the Minister’s decision-making process. Bill C-38 is also intended to address this criticism by expressly authorizing the Minister to make public disclosure in the following circumstances (among others):

  • when the Minister sends a preliminary notice to an investor indicating that the Minister is not satisfied that the investment is likely to be of net benefit to Canada (and advising the investor of its right to make representations and submit undertakings); and
  • when the Minister accepts security posted by an investor in conjunction with undertakings (as described above).

In the case of a preliminary notice, the Minister will also be able to publicly disclose the reasons for the initial conclusion that the transaction is not likely to be of net benefit to Canada (although not if the investor satisfies the Minister that disclosure of certain information would be prejudicial to its interests).

The ICA already permits the Minister to disclose final notices sent to an investor indicating whether the Minister is or is not satisfied that the investment is likely to be of net benefit to Canada, along with any reasons for the finding. The Minister is also permitted to disclose undertakings provided by an investor to the government. In practice, though, the Minister rarely makes such disclosures. Even if Bill C-38 is enacted, it remains to be seen how often and to what extent the Minister will be prepared to disclose the reasons for tentatively finding that an acquisition is unlikely to be of net benefit to Canada. Based on precedent, it is also unlikely that this issue will arise very often because there have been very few cases in which the Minister has issued unfavourable provisional decisions.

2. Proposed Amendments to Telecommunications Act Foreign Ownership Restrictions

Bill C-38 also proposes to amend the foreign ownership restrictions that constrain the ability of non-Canadians to control telecommunications companies (“carriers”) operating in Canada.

The Telecommunications Act currently imposes a cap of 46.67% on foreign ownership of the voting shares of Canadian telecommunications carriers and also prohibits foreign “control in fact” of such carriers. For some time now, the Canadian government has indicated its intention to permit greater foreign participation in the Canadian telecom sector. Most notably, the government overruled a 2009 decision of the CRTC which would have prevented a new entrant with foreign investment ties from offering wireless services in Canada (see our Perspective of February 9, 2011). The government’s decision to overrule the CRTC was challenged but ultimately upheld by the Federal Court of Appeal (with the Supreme Court of Canada recently denying further leave to appeal in the matter).

Bill C-38 proposes to advance the government’s objective further by permitting non-Canadians to acquire control of Canadian telecommunications carriers that account for less than a 10% share of overall Canadian telecommunications services revenues, as determined by the CRTC. (The government first made this intention public in an announcement by Canada’s Minister of Industry Christian Paradis, on March 14, 2012 (click here to see the full announcement.)

The Bill C-38 amendments also provide that foreign-controlled carriers that subsequently increase their revenues above the 10% threshold will continue to be exempt from foreign ownership restrictions provided that the growth in revenues is not the result of either (i) the acquisition of control of another Canadian carrier or (ii) the acquisition of the assets of another Canadian carrier used to provide telecommunications services. To monitor this aspect of Bill C-38, the CRTC will have to be notified when any carrier operating pursuant to the 10% exception acquires control of another Canadian carrier or acquires assets used by another Canadian carrier to provide telecommunications services.

The proposed amendments in Bill C-38 offer foreign investors the opportunity to obtain an initial “toe-hold” in the Canadian telecom sector, with the possibility of expanding over time (other than through acquisition). Significantly, however, a similar opening has not been made for the Canadian broadcasting sector, where foreign investors will continue to be prohibited from acquiring de jure or de facto control over broadcast undertakings.

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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