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: December 2012

Danish Update – Specifics of the Danish Takeover Regime

Editors’ Note: Klaus Søgaard is a partner of Gorrissen Federspiel in Denmark.  Klaus Søgaard advises a broad range of Danish and foreign companies, primarily on transfer of undertakings, structured sales processes, public takeover bids on listed companies, mergers and demergers of listed companies and initial public offerings and rights issues.  This paper was co-authored by Mikael Philip Schmidt who is an associate of Gorrissen Federspiel.

Highlights:

  • While the Danish takeover regime is based on the EU Takeover Directive, it includes regulation specific to Denmark which should be considered prior to making investments in Danish companies with shares listed on a regulated market.
  • The Danish rules are specific on main areas such as in terms of what constitutes a controlling influence, passive increase in ownership, agreements on bonus to management of the target and rules for making payments from the funds of the target.
  • Control under Danish law is generally considered to exist when a shareholder holds a majority of the shares in a company or otherwise has the ability to control the company, including when a shareholder holds more than one-third of the voting rights in the company and the actual majority of the votes of the general meeting and thereby possesses actual controlling influence.
  • Under Danish law the obligation to issue a takeover offer is not triggered where a shareholder only passively obtains a controlling influence, i.a. by receipt of a gift or divestment by other major shareholders. Further, Danish law prohibits the offeror from entering into agreements for bonus or other benefits with management of target and requires that it is disclosed in the offer document if payments from the target company’s funds are expected to be made within twelve months of the takeover offer.
  • The Danish Financial Supervisory Authority has issued an updated guiding note on the application of the Danish takeover rules and is considering a revision of applicable law.

Main Article

Introduction

The Danish takeover regulation is based on Directive EC2004/25 (the “Takeover Directive”). The Takeover Directive provides for a low level of harmonization that sets out the general legal framework that the EU member states must implement but allows for significant national freedom in terms of implementation. As a result hereof material differences apply in the national takeover legislation of the EU member states including in respect of central areas such as what constitutes a change of control and thus when the obligation to launch a takeover offer is triggered. The Danish takeover regime is currently undergoing a review from the public authorities, and in the interim period the Danish Financial Supervisory Authority has issued a revised guiding note to the existing Danish Takeover Order to provide guidance on interpretation hereof. This article touches upon certain key elements specific to the existing Danish takeover regime which should be considered by potential investors prior to making investments in Danish companies with shares listed on a regulated market and certain considerations and potential changes in the undergoing review process.

Specifics of the Danish takeover regime

The Takeover Directive has been implemented in Danish law primarily through provisions in the Danish Securities Trading Act, Consolidated Act no. 855 of 17 August 2012, (the “Danish Securities Trading Act”) and Executive Order no. 211 of 10 March 2010, (the “Takeover Order”). The Danish implementation includes regulation specific to Denmark, including in terms of what constitutes a change of control, in respect of passive increase in ownership, agreements on bonus and benefits to management of the target and payments from the funds of the target.

Change of control under Danish law

The Takeover Directive provides that member states of the European Union must implement rules to assure that, where a person, as a result of his acquisition or the acquisition by persons acting in concert with him holds a specified percentage of securities of a company that gives control over the company, such person shall be obliged to issue a bid for shares of the minority in order to protect their interests. The percentage of voting rights and the methods of its calculation which confers control is determined by the individual member states and the Danish definition of control is quite complex compared to that of other EU member states as it is not simply tied to a specific percentage but requires that an assessment of influence is made for any shareholdings below 50%.

Pursuant to the Danish Securities Trading Act, control, or controlling influence, exists when the acquirer directly or indirectly holds more than half of the voting rights in a company, unless in special cases it can be clearly demonstrated that such holding does not constitute a controlling influence. A controlling influence also exists if an acquirer who owns 50% or less of the voting rights of a company has:

i.       the right to control more than half of the voting rights in accordance with an agreement with other investors;

ii.      the right to control the financial and operational affairs according to the articles of association or an agreement;

iii.     the right to appoint or dismiss a majority of the members of the supreme governing body and this body has a controlling influence in the company; or

iv.     more than one-third of the voting rights in the company and the actual majority of the votes of the general meeting or any other similar body and thereby possesses the actual controlling influence in the company.

Actual controlling influence pursuant to number (iv) above is of specific interest due to the broad scope of the provision. It is a requirement that at least one third of the shares are held by the relevant shareholder and that the ownership structure entails that the shareholder has the actual majority of votes of the general meeting. A number of elements will be relevant in making the assessment of whether the shareholding constitutes controlling influence, including the distribution of voting rights among shareholders, voting rights represented at previous general meetings of the company, any agreements between other shareholders, and the ability to influence the election of board members.

Control through passivity

The flexible structure of the Takeover Directive provides that the member states may derogate from the directive’s provisions in order to maintain exceptions from the mandatory bid rules. This has been done in Denmark in respect of shareholders passively obtaining control and the ability of the Danish Financial Supervisory Authority to grant exemptions. Pursuant to rules in the Takeover Order and administrative practice from the authorities, it is a requirement that an active transfer of shares is the factor that triggers passing of relevant ownership and control thresholds. Otherwise the obligation to issue a mandatory offer will not apply.

This implies that where control is obtained through inheritance, gift, or through debt recovery proceedings or similar it will not trigger obligations to issue an offer. The same applies where the passing of the relevant threshold is not the result of an action from the relevant shareholder. This can be the case where the shareholder’s holding of shares becomes a controlling stake as a result of the issuer decreasing its share capital or cancelling restrictions on voting rights  in the articles of association. An additional example of passively obtaining control is through other shareholders’ sale of their holdings. Where two shareholders each holding a number of shares that could potentially constitute controlling influence (above 1/3 of the shares) but only the largest of the two shareholders is controlling and the largest shareholder divest his shareholding in minority portions the sole remaining large shareholder will not be obligated to issue an offer even though he has technically obtained control over the company in connection with the divestment by the other large shareholder.

A further derogation from the obligation to issue a takeover offer is provided in the form of the ability of the Danish Financial Supervisory Authority to grant exemption from the rules for mandatory bids, including the obligation to issue a takeover offer and specific rules such as in terms of the length of the offer period and amendments to the offer document. Exemptions from the obligation to launch a takeover offer may be granted in various cases. This includes situations where a company is in distress and under threat of bankruptcy and where it is considered in  the interest of the minority shareholders in a reorganization of the capital structure to safeguard their investment.

Bonus and benefits to management and payments from the target company’s funds

Two other specifics of the Danish takeover regime pursuant to the Takeover Order were originally introduced in order to limit perceived negative effects of private equity funds’ acquisitions of equity stakes in the Danish market and apply to both mandatory and voluntary takeovers offers.

Pursuant to the Takeover Order the offeror or persons acting in concert with the offeror and the board of directors of the target may not enter into agreements or change existing agreements on bonuses and similar benefits to the board of directors or executive management of target from the time when negotiations are initiated and until the negotiations are stopped or a takeover bid is implemented. It should be noted that the obligation not to offer such bonus and benefits apply  from the time that negotiations are started which may be prior to the time the takeover bid is launched. The aim of the rule is to avoid conflicts of interest between the board of directors and executive management of target and the shareholders of the target entity.

Further, to ensure disclosure of an offeror’s intention to leverage the target and distribute available funds, the Takeover Order provides that the offer document must state any intentions to make payments from the target company’s funds within a period of twelve months from the implementation of the takeover bid.

Revision of the Danish Takeover regime

Recent cases have sparked discussions among legal experts and authorities on the need for clarification of certain of the Danish rules in respect of takeovers and the potential need for a general revision of the Danish Takeover Order. This has recently resulted in the publication of an updated guiding note from the Danish Financial Supervisory Authority on the Takeover Order, guiding note no. 9475/2012.

The updated guiding note provides clarification, inter alia, in terms of (i) timing of publication of the result of the takeover offer, (ii) that obtaining control through the issuance of new shares, and  not only acquisition of existing shares, may result in the subscriber obtaining control and (iii) that internal transfer of shareholdings within a shareholder’s group of 100% owned entities will not result in the obligation to launch a takeover offer.

The guiding note has been followed by preparatory steps by  the Danish Financial Supervisory Authority on  amendments  to the Takeover Order. This is the result of the interest in recent years from foreign investors to invest in Danish shares which has accentuated the differences between the Danish rules and the rules of other countries. Further, the specific Danish rules on shareholders passively obtaining control have led to situations where control has been obtained but where it has been unclear whether a takeover offer should be issued. Amongst a number of proposals, the Danish Financial Supervisory Authority have indicated they will consider whether the Danish rules should be amended which could inter alia include setting a fixed threshold percentage for controlling influence, the length of the offer period where approval from competition authorities are requires, the handling of rumours in the market where the authorities in other EU member states may demand that a potential offeror either put forward an offer or informs the market that no offer will be made (“Put Up or Shut Up”). Likewise in other EU member states an offeror is prohibited from putting forward a new takeover offer if the first offer cannot be completed (“Cool Of period”), and the Danish Financial Supervisory Authority will consider the need for similar rules in Denmark.

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.

CHINESE UPDATE – Foreign Investors able to make Capital Contributions with Equity

Editors’ Note:  This article is authoredby Ms. Fang He and Ms. Yang Liu of Jun He Law Offices.  Ms. He, a partner at Jun He, has more than 10 years of experience practicing PRC law, specializing in FDI and cross-border M&A.  Ms. Liu, an associate at Jun He, has more than 3 years of experience practicing PRC law, specializing in FDI and M&A.

Highlights:

The Ministry of Commerce of the PRC promulgated a new regulation allowing foreign investors to use equity held in a PRC company to invest in the capital of other PRC companies.

Main Article:

On September 21, 2012, the Ministry ofCommerce of the PRC (“MOFCOM”) released the Interim Measures for the Administration of Capital Contribution in the Form of Equity Involving Foreign-Invested Enterprises” (the “Measures”),which came into effect on October 22, 2012.  Pursuant to the Measures, a foreign investor that holds equity interests or shares (“PRC Equity”) in a foreign-invested company will be allowed to contribute PRC Equity to the capital of newly-established companies in the PRC or of existing PRC companies (each an “Invested Company”).

Contributions of such PRC Equity are subject to the following requirements:

  1. approval of the competent provincial branch of MOFCOM;
  2. such PRC Equity being unencumbered and freely transferable;
  3. a legal opinion issued by a PRC law firm confirming such capital contribution complies with the Measures, especially with respect to any circumstances restricting such capital contribution and any potential violations of PRC foreign investment policy;
  4. valuation of such PRC Equity by a PRC evaluation agency; and
  5. the total amount of the capital contribution in the form of PRC Equity and other non-monetary contributions not exceeding seventy per cent (70%) of the registered capital of the Invested Company.

Comments

With the issuance of the Measures, foreign investors have more flexibility to restructure their businesses in China, and can enjoy the same treatment as the Chinese investors who have been able to contribute equity interests or shares in a Chinese company to the capital of other PRC companies for more than two years.

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 Clarifies Policy on Foreign Investments by State-Owned Enterprises

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

Highlights:

  • Revised guidelines for investments by foreign state-owned enterprises (SOEs) that are subject to a net benefit review under the Investment Canada Act (ICA) were contemporaneously announced with the approval of investments by CNOOC Limited, a Chinese SOE, to acquire Nexen Inc., and by Petronas, a Malaysian SOE, to acquire Progress Energy Resources Corp.
  • The government has imposed a strict limit on any future attempts by foreign SOEs to acquire controlling interests in the Canadian oil sands, while also signalling that the same principle could be applied to limit aggregate SOE investment in other sectors.
  • The proposal to retain the current C$330 million asset value review threshold for SOE investments, even when the general review threshold increases to a $1 billion enterprise value threshold, may result in relatively more SOE investments continuing to be subject to ICA reviews, although in a particular case an entity’s asset value may be considerably lower than its enterprise value.
  • The government plans to propose amendments to enable the Minister to extend the time available to conduct national security reviews of proposed foreign investments, although such extensions would be used only in exceptional circumstances.

Main Article:

On December 7, 2012, the Canadian government released a policy statement and revised guidelines for investments by foreign state-owned enterprises (SOEs) that are subject to a net benefit review under the Investment Canada Act (ICA).

The government also announced that the Minister of Industry had approved investments by CNOOC Limited, a Chinese SOE, to acquire Nexen Inc., and by Petronas, a Malaysian SOE, to acquire Progress Energy Resources Corp. However, details of undertakings provided by CNOOC Limited and Petronas to obtain these approvals were not announced.

Background: Investment Canada Act Reviews

A direct acquisition by a non-Canadian of control of a Canadian business that surpasses a prescribed financial threshold (currently assets with a book value of more than C$330 million) cannot be completed until and unless the foreign investor satisfies the Minister of Industry that the transaction is likely to be of net benefit to Canada. Traditionally, foreign investors have satisfied the net benefit requirement by providing undertakings that address factors such as employment, capital expenditures, research and development, and participation of Canadians in the management of the Canadian and global operations of the acquired business.

In the case of investments by SOEs, pursuant to guidelines issued in 2007, the Minister has also considered the corporate governance and reporting structure of the SOE to assess whether Canadian standards of transparency and independence of board members and auditors, for example, are maintained. The Minister has also assessed whether post-acquisition the Canadian business will continue to operate on a commercial basis. The guidelines suggested that the listing of shares of the acquiring company, or the Canadian business being acquired, on a Canadian stock exchange is an example of how an SOE could enhance an ICA application in this regard, as the Canadian business would be subject to the requirements for public companies in respect of governance, audits, disclosure and financial reporting.

The ICA has a separate review mechanism, introduced in 2009, for investments that raise national security concerns. Such reviews can be initiated with respect to a wide range of investments, including investments that are below the general net benefit review thresholds.

SOE Policy Statement and Guidelines

The policy statement and revised SOE guidelines released on December 7, 2012 establish the following framework for reviewing proposed investments in Canadian businesses by foreign SOEs:

  • Foreign investors will continue to have the burden of proof to satisfy the Minister that a particular investment is likely to be of net benefit to Canada.
  • SOE investments will continue to be evaluated on a case-by-case basis, but investments by foreign SOEs to acquire control of a Canadian oil sands business will be found to be of net benefit only in exceptional circumstances – non-controlling minority interests in Canadian businesses proposed by foreign SOEs will continue to be welcome.
  • In assessing the net benefit of an SOE investment, the Minister will examine:
    • the extent to which a foreign state is likely to exercise control or influence over the entity acquiring the Canadian business – an important revision to the SOE guidelines is the expansion of the definition of an SOE to include, in addition to entities that are owned or controlled by a foreign government, entities that are merely influenced, directly or indirectly, by a foreign government;
    • the degree of control or influence an SOE would likely exert on the Canadian business that is being acquired and on the industry in which the Canadian business operates. Where, due to a high concentration of ownership, a small number of acquisitions of control by SOEs could undermine the private sector orientation of an industry, and consequently subject an industrial sector to an inordinate amount of foreign state influence, the government will act to safeguard Canadian interests;
    • the corporate governance and reporting structure of the foreign SOE, including whether it adheres to Canadian standards of corporate governance and to Canadian laws and practices, including free market principles;
    • whether the Canadian business to be acquired by the foreign SOE is likely to operate on a commercial basis, including with regard to where products will be exported or processed, the participation of Canadians in its operations in Canada and elsewhere, the impact of the investment on productivity and industrial efficiency in Canada, support of ongoing innovation, research and development in Canada, and appropriate levels of capital expenditures to maintain the Canadian business in a globally competitive position; and
    • specific undertakings offered by the foreign SOE to address the above-noted issues, including, for instance, the appointment of Canadians as independent directors of the Canadian business, the employment of Canadians in senior management positions, the incorporation of the business in Canada and the listing of shares of the acquiring company or the Canadian business being acquired on a Canadian stock exchange.
  • While the government will be progressively increasing the review threshold under the ICA to C$1 billion in enterprise value, investments by SOEs will continue to be subject to the existing review threshold of C$330 million in asset value, adjusted annually to reflect the change in nominal gross domestic product in the previous year.

SOEs and National Security

In conjunction with the new SOE guidance, the government announced that it will propose amendments to enable the Minister to extend the time available to conduct national security reviews of proposed foreign investments, although such extensions would be used only in exceptional circumstances. Prime Minister Stephen Harper stated in response to questions from reporters that, while national security issues were considered in respect of the CNOOC and Petronas transactions, neither transaction raised national security concerns.

However, SOE investors in particular should consider whether a proposed acquisition could conceivably raise any national security issues and, if so, whether they could be addressed by undertakings. For example, we are aware of a proposed acquisition of a Canadian software company (apparently well below the ICA net benefit review threshold) by a foreign investor with links to Chinese SOEs that was abandoned earlier this year because of a letter received from the Investment Review Division of Industry Canada relating to national security considerations.

Implications

Key implications of these developments include:

  • The current government is clearly reluctant to change its policies on ICA review in the midst of an ICA review of a particular transaction. The government recognizes the importance to investors of providing some degree of predictability.
  • The government has imposed a strict limit on any future attempts by foreign SOEs to acquire controlling interests in the Canadian oil sands, while also signalling that the same principle could be applied to limit aggregate SOE investment in other sectors. In particular, the Minister may find that a proposed SOE investment is not likely to be of net benefit to Canada if it would result in such a degree of aggregate state control that the sector may cease to be driven by a private sector commercial orientation. It remains to be seen what aggregate SOE control thresholds might trigger such a concern
  • Acquisitions by SOEs of less than a controlling interest in an entity active in the oil sands (or other sectors) will not likely raise the same level of concern, if they even require an ICA review. (One example of such a reviewable investment might be an acquisition of an entity that in turn controls only a minority stake in an oil sands developer.)
  • The proposal to retain the current C$330 million asset value review threshold for SOE investments, even when the general review threshold increases to a $1 billion enterprise value threshold, may result in relatively more SOE investments continuing to be subject to ICA reviews, although in a particular case an entity’s asset value may be considerably lower than its enterprise value.
  • The new broader definition of an SOE in the government’s guidelines may create significant uncertainty as to when the lower review threshold and the new SOE policy framework will apply.
  • It does not appear that the government will saddle the review of a particular SOE investment with a requirement that the controlling State provide reciprocal investment rights for Canadian firms seeking to invest in that country.
  • Each SOE investment subject to ICA review will be considered on its own merits. ICA reviews of particular proposed SOE transactions may still attract significant media and political attention and controversy. National or regional issues, such as those that appear to have led to the withholding of ICA approval for BHP Billiton’s proposed acquisition of Potash Corporation in 2010, can still arise for a given transaction, whether or not an SOE is involved. Accordingly, careful planning with both legal counsel and government relations advisors is required for any ICA review of an SOE transaction.

The official media release of the Government of Canada, with links to the relevant statements and guidelines on the review of foreign SOE transactions under the ICA, is available online at http://news.gc.ca/web/article-eng.do?nid=711489

See here for background on the CNOOC and Petronas transactions.

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.

EU UPDATE: Corporate Governance Update: Gender Diversity on Public Company Boards

Editor’s Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions.  This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.

Highlights:

  • Recent efforts to impose quotas for women directors for companies in the European Union has provoked controversy not only as to the optimal gender balance of boardrooms but also as to whether a quota system is a fair or effective way to achieve the underlying objective of women’s full and equal participation in corporate affairs.  Such European-level quotas have faced resistance by many EU member states as well as by the general European business community, as distinct from support for gender diversity on company boards from both member states and the business community.
  • A study of the aftermath of a Norwegian law implementing quotas for women directors on public company boards within a relatively short timeframe showed a resulting significant drop in stock price at the announcement of the law, and that the quota “led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance.”
  • By contrast, a 2012 worldwide study of the nearly 2,400 companies in the MSCI ACWI by the Credit Suisse Research Institute showed that from December 2005 to December 2011, large-cap companies with women directors outperformed peers with no women directors by 26 percent and small-to midcap companies with women on the board outperformed their peers with all-male boards by 17 percent in that period.  These companies also experienced higher returns on equity, lower leverage, better growth, and higher price/book value multiples.
  • As in Europe, the United States has organizations that are committed to increasing the number of women on corporate boards. Many positions on U.S. public company boards are filled by search firms.  Voluntary gender diversity efforts, which takes into account the individual circumstances of each company, should be the best way to achieve these benefits without the downsides of mandated quotas and artificial timeframes.

Main Article:

The issue of gender diversity in the corporate boardroom has risen to new prominence in the wake of recent efforts to impose quotas for women directors for companies in the European Union. The EU’s recent initiative has provoked controversy not only as to the optimal gender balance of boardrooms but also as to whether a quota system is a fair or effective way to achieve the underlying objective of women’s full and equal participation in corporate affairs. In the United States, the relative dearth of women directors on public company boards, and the potential effect on company performance of increased gender diversity, has been a topic of interest in the corporate governance sphere for many years.

The meaningful participation of women at all levels of the corporate hierarchy is an important goal. From a practical perspective, however, we believe that aspects of the European experience demonstrate the downsides of using a quota system to obligate this result. Individual public companies, and the U.S. corporate culture generally, would, in our view, be best served by corporate boards’ taking a dedicated, thoughtful and individualized approach to the nomination, election and full integration of women directors. This approach seems likely to yield the most successful substantive result in the short and long term, producing benefits both for corporate performance and the common weal.

EU Quota Initiative

The most recent effort to increase the number of women directors in Europe has been spearheaded by Viviane Reding, the European Union Justice Commissioner and Vice-President of the European Commission. Reding strongly supported a law imposing sanctions on companies that do not have boards composed of at least 40 percent women. The proposed law reportedly would have required Europe’s listed companies to meet the quota by 2020; companies with more than 250 employees or 50 million euros in revenue that did not comply would have faced administrative fines or be barred from state aid and contracts. However, the proposal appears to have generated fatal resistance from EU member states. On September 14, officials of nine countries—including the United Kingdom, which led the effort—signed a letter addressed to Reding and Jose Manuel Barroso, President of the European Commission, indicating their strong opposition to any European-level adoption of binding provisions regarding the number of women on company boards. The signatories have sufficient power to block the proposal under the voting process of the European Union, and other countries, including Sweden and Germany, have also indicated their opposition to such a law.

The opposition letter affirmed the signatories’ support for women in executive positions and as public company directors, stating that

“[t]he myriad barriers women encounter throughout their career are unacceptable from a gender equality point of view [and]…are among the factors preventing the optimal use of the skilled workforce potential.”

The signatories noted that “[m]any of us are considering or have implemented various and differing national measures…to facilitate raising the proportion of women in boardrooms” but contended that “[t]hese efforts must be granted more time in order to establish whether they can achieve fair female participation in economic decision-making on Europe’s company boards.” Therefore, the signatories concluded:

“[A]ny targeted measures in this area should be devised and implemented at [the] national level. Therefore, we do not support the adoption of legally binding provisions for women on company boards at the European level.”

The proposed law is due to be published in draft form next month. A European diplomat reportedly said that many of the countries opposing the proposed law do not necessarily want to scuttle it completely but do want to ensure that national governments retain influence or control over enforcement of quotas. In any event, the proposed legislation has a long road before it would be approved and have the effect of law: All 27 EU commissioners must agree on the proposed law before a draft is published, and the law then must be approved by national governments as well as the European Parliament.

Impact of Quota Legislation

Several European countries have implemented quotas at the national level for women directors on public company boards, including Norway, France, Italy, Spain, and the Netherlands. In 2003, Norway passed a law requiring that at least 40 percent of public company board seats be allocated to women. Covered companies were given five years to comply with the law, and the proportion of women directors rose from 9 percent at the time of implementation to the current average of just over 40 percent.

It is important to separate the effect of quota legislation from the effect of gender diversity on company boards. While the latter has been shown to be beneficial to corporate performance, there are indications that the former is a suboptimal way to achieve those benefits. A study of the aftermath of the Norwegian law showed that not only did the quota requirement cause a significant drop in stock price at the announcement of the law, but the quota then “led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance.” This may be due in part to the fact that the quota requirement contained a relatively short timeframe in which Norwegian companies had to find and elect female directors, resulting in a drop in the average quality of board members.

Effect of Women Directors

By contrast to the results of the Norway study, a 2012 worldwide study of the nearly 2,400 companies in the MSCI ACWI by the Credit Suisse Research Institute showed that from December 2005 to December 2011, large-cap companies with women directors outperformed peers with no women directors by 26 percent and small- to midcap companies with women on the board outperformed their peers with all-male boards by 17 percent in that period. The study also found that companies with one or more female board members experienced higher returns on equity, lower leverage, better growth, and higher price/book value multiples. Some directors have opined that the significant increase in participation by women “professionalized” boards by contributing to a more pleasant, formal atmosphere at meetings, and some commentators view the policy as having “paved the way for women to influence corporate decision making.”

While other studies have reached mixed conclusions regarding the role of women in the boardroom, there are many possible reasons why the full participation of women on company boards could contribute to stronger performance. The Credit Suisse report identifies seven of these, described in detail in the report itself. First, the appointment of women directors may be an indication that a company is already fundamentally sound and looking to improve from a position of strength. Second, there is evidence that greater diversity on a team can enhance the performance of both the majority and minority groups, improving average outcomes overall. Third, gender diversity can improve the overall level of leadership skills, as studies have shown that women excel in defining responsibilities clearly and mentoring and coaching employees. Fourth, deliberately expanding director candidate searches to include women provides access to a significantly wider pool of available talent. Fifth, a gender-mixed board may have a better understanding of the consumer preferences of households, particularly in sectors where women make many of the spending decisions. Sixth, academic research has demonstrated that having women on a corporate board improves performance on corporate and social governance metrics for companies with weak governance. Seventh, women have been shown to be generally more risk-averse than men, which may explain in part why companies with women directors in the Credit Suisse study were less leveraged on average than their peers; the study notes further that “lower relative debt levels have been a useful determinant of equity market outperformance over the last four years.”

Strikingly, the Credit Suisse study showed that almost all of the share price outperformance of companies with women directors came after 2008, during the financial crisis period and its aftermath. These companies exhibited less volatility in a falling market and delivered higher returns during this period, suggesting that women directors contribute to a stronger defensive profile, including better risk management and downside control. One recent study of Israeli companies concluded that boards with three or more women directors were roughly twice as likely to request further information and to take an initiative, leading to higher return on equity and net profit margins compared to peer companies. Moreover, both men and women directors were more active when at least three women directors were in board meetings, and women were more likely than their male counterparts to take actions on supervisory issues.

In addition to enhanced corporate performance, there are other reasons to favor the full participation of women in boardrooms: the values of societal fairness, gender equality, and corporate meritocracy, for example, or the desire to create a positive culture of valuing the contributions of each individual. While quotas provide a relatively quick fix to the problem of gender imbalance in the boardroom—and some politicians and commentators have expressed frustration with the rate of voluntary action absent legal requirements—they do so in an artificial manner that could create resentment and board dysfunction. Moreover, forcing quotas of women directors prioritizes gender diversity over all else, potentially at the expense not only of director quality but also of other types of diversity that may be valuable to corporate performance.

Business Community View

The European business community, while expressing support for increasing the number of women directors, generally opposes European-level quotas as means of doing so. BusinessEurope, the largest organization of employers in the European Union, issued a position paper this past May outlining views similar to those expressed in the UK-led opposition letter described above. The paper supports a voluntary approach to increasing diversity, both in terms of gender and in terms of talent, skills and experience. BusinessEurope opposes mandatory European-level initiatives and, in particular, one-size-fits-all quotas “which disregard the highly diverse conditions in different sectors/companies and do not take into account the way corporate boards function and are renewed.”

It appears that companies are willing to take voluntary measures to increase the number of women directors on their boards. They are aided in their efforts by organizations such as the Professional Boards Forum, which helps chairmen in Norway and the United Kingdom find qualified women to fill independent director positions, and the 30 Percent Club, a group of chairmen of U.K. companies who are working toward a goal of 30 percent female representation on U.K. boards. The 30 Percent Club’s mission statement highlights the view that meaningful participation by women cannot be mandated by top-down quotas but instead must be the result of concerted, long-term efforts to encourage women to succeed in corporate careers. The organization issued the following statement last month, as controversy over the potential EU quota legislation was brewing:

“[T]he only way to achieve better gender balance at all levels in the UK’s leading companies is to ensure the pipeline of female talent is developed from an early stage. In light of recent commentary on the lack of progress at the Executive Board level, the group argues that a concerted effort to develop the pipeline of female talent…will help achieve better gender diversity in senior roles at UK companies.”

The 30 Percent Club is no doubt correct that improvement in the number and quality of corporate positions held by women will “trickle up” into the boardroom; the full integration of women into the boardroom and executive suites of major public companies is a goal with both long- and short-term components.

U.S. Boards’ Gender Diversity

According to GMI Ratings’ 2012 Women on Boards Survey, the United States currently ranks 11th out of 45 countries in terms of gender diversity on public company boards, with an average of 12.6 percent women on S&P 1500 boards. Because there are fewer women on the boards of smaller companies, only 11.6 percent of Russell 3000 directors are women. In addition to these data points, a GMI study from July 2012 also found significant differences among states and regions, largely driven by the concentration of specific industries in certain areas. The percentage of women on U.S. boards increased by only 0.5 percent in the period 2009 to 2011.

The United States has not yet seen a strong movement toward quotas or other legal requirements in terms of gender diversity on boards. U.S. Securities and Exchange Commissioner Elisse B. Walter, speaking last week at the Third SAIS Global Conference on Women in the Boardroom, argued in favor of action at the shareholder level. She pointed out that strong disclosure standards help provide investors the information they need in order to exercise their “voice” to encourage companies to increase the diversity of their boards. Commissioner Walter cited evidence that the SEC’s rule on disclosure of director qualifications that first applied in 2010 is leading to more detailed discussions regarding the composition of boards, and as a result, investors are more engaged in the issue.

As in Europe, the United States has organizations that are committed to increasing the number of women on corporate boards. DirectWomen, for example, is a program designed specifically “to identify, develop, and support…accomplished women attorneys to provide qualified directors needed by the boards of U.S. companies, while promoting the independence and diversity required for good corporate governance.” Through strategies designed to help women advance in their careers and come to the attention of executive search firms and other corporate leaders, DirectWomen and groups like it are effecting meaningful change at the individual company level.

Many positions on U.S. public company boards are filled by search firms and companies can provide these firms with specific requests as they seek additional diversity on their boards. These firms are working hard to develop a larger group of qualified women candidates who are actively seeking board positions. In our experience, these search firms are very successful at helping public companies increase gender diversity on public company boards.

The Credit Suisse Research Institute report indicates that increasing the number of women board members can result in an improvement in the quality of directors and many other positive effects for companies. Doing so through voluntary action, which takes into account the individual circumstances of each company, should be the best way to achieve these benefits without the downsides of mandated quotas and artificial timeframes. As the issue of gender diversity in the boardroom gains prominence, as the benefits to having women directors become better understood, and as resources such as director databases increase in utility, it seems likely that U.S. companies will pursue the goal of greater gender diversity with increasingly successful results in the boardroom and for investors.

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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