- SAFE recently released a Circular easing foreign exchange control in the following major aspects: foreign exchange account opening and fund remittance, reinvestment by FIEs in China, investment by foreign investors’ domestic vehicles, outbound foreign exchange payment and outbound investment by domestic entities, which cover a wide range of major FDI and M&A activities relating to China.
- Foreign investors and other parties involved in China-related FDI and M&A transactions will benefit from the simplified procedures, reduced uncertainty, and shortened timeframe to handle foreign exchange matters.
- While the quota-based control is still there, under the Circular, foreign exchange control will be primarily exercised through a sophisticated registration and reporting system, under which banks will play an important role in facilitating the transactions by verifying the underlying documents and reporting to SAFE through such system.
China’s foreign exchange regulator, the State Administration of Foreign Exchange (“SAFE”), recently released The Circular on Further Improvement and Amendment of Foreign Exchange Control Polices on Direct Investment (the “Circular”), effective from December 17, 2012.
The Circular represents a significant step forward of SAFE to ease foreign exchange control over foreign direct investment (“FDI”) and M&A in China, and is reportedly aimed at attracting more foreign investment.
By way of background, most FDI activities and cross border M&A transactions require approval from SAFE based on application documents proving that the underlying transaction is lawful and genuine, and it typically takes one to five weeks to obtain such approval. In terms of M&A transactions, SAFE’s control has been extremely strict and its approval is currently required for (a) opening of foreign currency account with a Chinese bank, which has to be a special purpose account set up for each individual transaction and usually bears a ceiling set for the amount of funds that may be received by the account, (b) remittance of foreign currency into that account, and (c) conversion of funds into the local currency (i.e. Renminbi) for payment to the domestic seller.
The Circular contemplates the following major amendments:
(1) Account Opening and Fund Remittance. SAFE approval is no longer required for opening the special purpose account required for an M&A transaction. The domestic seller may directly open accounts with its bank. SAFE approval is no longer required for remittance of funds into such account.
(2) Reinvestment by FIE in China. A foreign invested enterprise (“FIE”) in China may re-invest in other domestic entities (including its subsidiary) by utilizing the proceeds obtained from capital reserve, retained profit, conversion of debt, and other legal means, without SAFE approval.
(3) Investment by Foreign Investor’s Domestic Vehicles. For foreign invested holding companies (which is a special type of company established by many MNCs to umbrella their investment in China), foreign invested venture capital and foreign invested private equity firms in China, there will be generally no foreign exchange registration required for their subsidiaries in China, and SAFE approval is no longer required for infusion of capital into, and repatriation of investment from, such subsidiaries.
(4) Outbound Foreign Exchange Payment. The Circular abolishes SAFE’s approval required for repatriation of proceeds obtained by foreign investor from liquidation and capital decrease of FIEs. Where a domestic buyer acquires equity interests/shares held by a foreign investor in an FIE, the buyer may directly purchase foreign currency from bank and remit the same to the foreign investor, without having to obtain SAFE approval. In addition, domestic entities may lend funds to overseas borrowers (subject to certain limitations).
(5) Outbound Investment. Where a domestic company makes outbound investment, no SAFE approval will be required for remitting the pre-investment expenses up to 15% of the total investment amount (while the remittance of the remaining investment amount is still subject to SAFE approval).
The Circular abolishes a number of items for which SAFE approval was required, and is a significant milestone in the context of the overall foreign exchange control reform implemented by the Chinese government.
Foreign investors and other parties involved in China-related M&A transactions will benefit from the simplified procedures, reduced uncertainty, and shortened timeframe to handle foreign exchange matters.
Under the Circular, the foreign exchange control on FDI and M&A will still be primarily exercised through a pre-determined quota (which is assigned to each individual FIE or transaction) and a sophisticated registration and reporting system of SAFE connected with the system of banks. Banks will take an important role in facilitating the transactions by verifying the underlying documents and reporting to SAFE through such system. We still expect to see how the banks will implement the Circular, and it is anticipated that there will be a transition period for the new system starts to work.
- Under Danish law, a majority shareholder owning at least 70% of the shares in a distressed bank is entitled to acquire the remaining shares by way of compulsory redemption subject to certain conditions.
- In a recent case the Danish Supreme Court has decided that treasury shares must be included when calculating the total number of shares issued by the company thus increasing the shareholding required for a compulsory redemption and making it more difficult for a majority shareholder to carry out the compulsory redemption.
- The case shows how the Danish courts are reluctant to impose restrictions on the rights of minority shareholders.
This article presents a recent landmark court case decided by the Danish Supreme Court regarding the interpretation of the Danish provisions on compulsory redemption of shares issued by a bank in distress. The article presents the implications of the decision by the Danish Supreme Court with respect to the possibilities of carrying out such compulsory redemptions. Further, the article examines the implications of the decisions on compulsory redemptions outside of the scope of the Danish financial legislation.
Under section 144 of the Danish Financial Services Act, a majority shareholder owning at least 70% of the shares in a distressed bank is entitled to acquire the remaining shares by way of compulsory redemption subject to certain conditions.
In a case brought before the Danish Supreme Court, a majority shareholder owned more than 70% of the shares when excluding treasury shares from the total number of shares issued by the company. However, if including the treasury shares, said ownership amounted to less than 70%.
The wording of the provision did not state whether to include treasury shares or not. However, since treasury shares can be cancelled pursuant to a shareholders resolution, it was generally assumed prior to the court case, that treasury shares should not be included in the calculation.
However, the Danish Supreme Court decided that section 144 should be interpreted to require that treasury shares be included when calculating the total number of shares issued by the company.
The Danish Supreme Court emphasized that section 144 of the Danish Financial Services Act constitutes a intensive intervention in the rights of minority shareholders. Accordingly, any deviation from the wording of section 144 is only lawful if firmly supported by other sources of law.
Since the wording of section 144 did not exclude treasury shares and since no other sources of law firmly supported such alternate reading, the compulsory redemption was deemed unlawful. However, no monetary compensation was awarded, since no financial loss had been suffered.
Danish Provisions on Compulsory Redemption
Pursuant to section 70 of the Danish Companies Act of 2009 as amended, any shareholder holding more than 90% of the shares in a limited liability company and a corresponding share of the votes may demand that the other shareholders have their shares redeemed by that shareholder. This provision was first introduced by the Danish Act on Public Limited Companies of 1973.
A special provision applies according to section 144 of the Danish Financial Business Act with respect to banks that do not meet the capital requirement of section 127 of said act. In such cases, the Danish FSA may set a time limit for the re-capitalization of the bank. Following such decision by the Danish FSA, the board of directors of the bank may with a simple majority, upon the request of a shareholder owning 70% or more of the bank’s shares, decide to redeem the shares of the minority shareholders in the bank. This provision was first introduced as part of the Danish Banks and Savings Banks Act in 1998.
When the above provisions were introduced, it did not appear from their wording or the preparatory works, whether treasury shares should be included when calculating the total number of shares issued.
It has generally been assumed that treasury shares should not be included when calculating the total number of shares, since the general meeting of the company may decide to cancel such. Further, when the Danish Companies Act of 2009 replaced the Danish Act on Public Limited Companies of 1973, the preparatory works assumed that treasury shares should not be included when calculating the total number of shares issued by the company for the purposes of the compulsory redemption provisions in accordance with the general assumptions.
The Compulsory Redemption Court Case
The case was initially brought before the Eastern High Court of Denmark as a class action law suit by a group of minority shareholders, who argued that the compulsory redemption had not been lawful and that the price paid for the shares by the majority shareholder in connection with the compulsory redemption had not been correct.
The Eastern High Court and later the Supreme Court therefore had to consider the following matters:
- Was the bank in distress to the effect that the compulsory redemption provisions of the Danish Financial Business Act could be used?
- In the affirmative, did the majority shareholder meet the ownership requirement for carrying out a compulsory redemption of the minority shareholders, i.e. did the majority shareholder own 70% or more of the shares issued by the bank?
- Was the price paid to the minority shareholders fair?
The courts found that the bank had serious financial difficulties and unless the compulsory redemption was carried out, the bank would not have been able to continue its operations unless the compulsory redemption had been carried out. Accordingly, the bank was to be considered in distress for the purposes of section 144 of the Financial Business Act, allowing for the use of the compulsory redemption regime if the majority shareholder met the 70% ownership requirement.
When calculating the ownership, the minority shareholders took the view that treasury shares should be included when calculating the total number of shares issued by the company. Accordingly, the ownership should be calculated as follows:
When using this calculation method, the majority shareholder would only own 67.33% of the shares, meaning that the requirements for carrying out a compulsory redemption were not met.
The majority shareholder argued that treasury shares should be disregarded, and that the ownership therefore should be calculated as follows:
This calculation method resulted in a 73.36% ownership.
The Eastern High Court and the majority of the members of the Supreme Court noted that it did not appear from the preparatory works to the Public Companies Act of 1973 or to the Financial Business Act, whether treasury shares should be included. The fact that the Companies Act of 2009 assumed that treasury shares – also pursuant to existing legislation – should be excluded did not carry any weight in this connection, since section 144 of the Financial Business Act was introduced prior to the Companies Act. Further, it was noted that no case law or administrative practice existed of relevance to the question at hand.
As a result, the case would have to be decided based on the wording of the provision, which did not exclude treasury shares. It was also considered that the involuntary share transfer which is part of a compulsory redemption constitutes an intensive intervention in the rights of the minority shareholders. Accordingly, any such obligation on the part of the minority shareholders must be firmly supported. The exclusion of the treasury shares would have made it easier for a majority shareholder to carry out a compulsory redemption than provided for by the wording of the provision in question and due to the lack of other sources of law providing for such easier access, the provision would have to be interpreted in favour of the minority.
Accordingly, the requirements for carrying out a compulsory redemption pursuant to section 144 of the Financial Business Act had not been met and the compulsory redemption was therefore unlawful.
It should be noted that the minority shareholders did not request to have their shares returned to them – which would also have been somewhat difficult given the fact that the bank following the compulsory redemption had been merged with a major Danish bank resulting in the cancellation of the shares.
Instead, the minority shareholders argued that the price paid in connection with the compulsory redemption had been too low.
The Supreme Court noted that the shares would probably have been worthless if the compulsory redemption had not been carried out. Further, the fact that the compulsory redemption had not been lawful did not entitle the shareholders to a higher price than they would have been entitled to if the redemption had been lawful.
Accordingly, the minority shareholders were awarded no monetary compensation and no changes were made to the transactions with their shares or the ensuing merger.
Protection of Minority Rights
It is sometimes argued that a pragmatic view should be taken when considering whether certain formal requirements have been met to the extent relevant legislation leaves room for interpretation. In the case at hand, the bank could possibly have cancelled its treasury shares or disposed of them, thus eliminating the issue resulting in the court case.
This approach, however, tends to collide with the views of the courts, who are generally very concerned with ensuring that no intensive interventions are made in the rights of minority shareholders and other rights relating to property rights, unless such interventions are firmly based on relevant sources of law, see for example the now famous decision by the Eastern High Court in the matter of the compulsory redemption of shareholders in the Danish telephone company TDC. Case law in other areas demonstrates that this view is also held in other aspects of Danish law outside of the area of company law.
Compulsory Redemption under the Danish Financial Business Act
The Supreme Court has rejected that the preparatory works to the Danish Companies Act of 2009 can be used to interpret the intentions of the compulsory redemption provisions of the Danish Financial Business Act introduced in 1998.
Accordingly, any future compulsory redemption will need to comply with the strict 70% ownership requirement set by the Supreme Court, which will possibly require a cancellation of treasury shares in order to meet said requirement.
Compulsory Redemption under the Danish Companies Act of 2009
The preparatory works to the Danish Companies Act assume that treasury shares should be excluded when calculating the total number of shares issued by a company for the purposes of the general compulsory redemption provisions requiring a 90% ownership. It appears from the preparatory works that this statement is based on an assumption that exclusion of treasury shares in this connection is a principle of Danish company law already applicable prior to the passing of the Danish Companies Act.
However, the Eastern High Court and the majority of the Supreme Court found that no such general principle applies.
It will remain to be seen whether this case will result in changes to the Financial Business Act or the Companies Act. Until such time, a cautious approach will likely be taken with respect to the exclusion of treasury shares in similar transactions.
- A key step in planning for an IPO is choosing the location in which to establish the holding company to list on a foreign exchange. Offshore holding companies are often used for Russian IPOs to increase investor comfort, avoid an extra layer of tax or tax compliance costs, avoid stamp duties in certain jurisdictions and take advantage of foreign legal regimes that are more attractive.
- Common locations in which to establish the new holding company include:
— the United Kingdom, which may offer benefits for FTSE eligible London IPOs but may have drawbacks from a taxation and regulatory perspective;
— low tax jurisdictions such as Cyprus or Luxembourg, which have a good network of double tax treaties; and
— “zero tax” offshore jurisdictions such as the British Virgin Islands (BVI), the Cayman Islands, Guernsey and Jersey.
The article explores the finer points of selecting offshore jurisdictions in further detail.
- The main downsides are the time and cost involved in complying with the laws and regulations of another jurisdiction, though generally these downsides are more than offset by the benefits that the new structure will bring.
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Executive Summary: From time to time all businesses experience unforeseen legal issues and disputes which may quickly escalate into a crisis if not dealt with properly and in good time. This article suggests eight points to consider when developing a strategy to deal with a potential crisis, and may be particularly useful for foreign investors in Russian joint ventures and other corporate transactions.
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- China overtook the U.S. as the world’s top destination for foreign direct investment (FDI) in the first half of 2012, receiving $59.1 billion in foreign direct investment versus $57.4 billion received by the U.S in the same period. By comparison, in 2011, China attracted $116 billion while the U.S. attracted $227 billion in FDI.
- In the first half of 2012, global foreign direct investment (FDI) inflows reached US$668 billion, down 8% compared with the same period of 2011. The $61 billion decline in FDI was mostly attributable to a decline of US$37 billion in inflows to the United States (-39% from the same period in 2011) and a $23 billion decline to BRIC countries.
- The declines were caused by steep falls in both greenfield investment projects (-40%) and cross-border M&A transactions (-60%).
- UNCTAD revised down its full year forecast, projecting that FDI flows will, at best, level-off in 2012 at slightly below US$1.6 trillion. The slow and bumpy recovery of the global economy, weak global demand and elevated risks related to regulatory policy changes continue to reinforce the wait-and-see attitude of many transnational companies toward investment abroad.