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)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

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

Monthly Archives: February 2014

FRENCH UPDATE – Activist Strategies and Defenses in France

Editors’ Note: Alain Maillot and Bertrand Cardi are partners of Darrois Villey Maillot Brochier and members of XBMA’s Legal Roundtable.  Bertrand Cardi, Benjamin Burman and Forrest Alogna, partners of Darrois Villey Maillot Brochier, authored the following article.  Darrois Villey Maillot Brochier is the leading firm in France in the practice of M&A and Takeovers.

Executive Summary:  Many of the fundamentals driving increased shareholder activism in the United States and elsewhere are also relevant in France.  The disclosure regime under French securities law should permit companies to identify activist investors, their concert parties and their economic exposure, however, French law and regulation potentially provide both sides in an activist campaign with significant tools.

For the attacking activist: French law provides a holder of as little as 0.5% of a company’s shares with the right to add matters to the agenda of a shareholder meeting and include proposed resolutions in the “proxy” materials circulated by the company to shareholders; directors may be removed and replaced by a simple majority of any shareholder meeting, even if the matter is not formally on the agenda; and French shareholders now have a “say-on-pay”. For the defending company, French law provides stringent disclosure requirements on stake-building, with significant penalties for failure to comply (and a company’s bylaws may provide for still more stringent disclosure thresholds); and importantly, French law’s expansive concept of a company’s intérêt social (a nexus of constituencies, which includes not only the company and its shareholders, but also employees, creditors, customers and suppliers and other stakeholders) provides a strong basis for a French board of directors and management to resist an activist’s purely short-term financial strategy when appropriate.

It is prudent for even French companies to plan for the eventuality of an activist attack.  This article surveys the major legal tools that are most relevant in engagements between French listed companies and activist investors.

Click here to read Activist Strategies and Defenses in France.

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

BRAZILIAN UPDATE – New Brazilian Anti-corruption Law and Regulations

Editors’ Note: This update comes from Francisco Antunes Maciel Müssnich (founding partner) from Barbosa, Müssnich & Aragão Advogados. Francisco Müssnich is a member of XBMA’s Legal Roundtable, and a leading expert on Brazilian corporate and M&A matters. This paper was jointly authored by Adriana Dantas and Eduardo Carvalhaes from Barbosa, Müssnich & Aragão Advogados.


  • New legislation establishes sanctions to legal entities involved in corrupt and other illegal acts. Among the sanctions are fines that range from 0,1% to 20% of the annual gross revenue and prohibition from receiving public benefits.
  • The law provides for the strict liability of the legal entities. The liability remains in case of mergers and acquisitions.
  • The adoption by the legal entities of an effective compliance program that comprises internal mechanisms and procedures of integrity, audit and incentive for the reporting of irregularities will be taken into consideration by Brazilian authorities when imposing sanctions.
  • Decrees to be enacted by the Federal, State, District and Municipal Governments shall establish how a compliance program will be evaluated and clarify the jurisdiction for enforcing the law. The Federal Decree is still pending.


On January 29, 2014, Federal Law 12,846 (“Anti-corruption Law”) entered into force. The Anti-corruption Law provides for the administrative and civil liability of legal entities involved in acts against the national or foreign public administration.

The Anti-Corruption Law seeks to fill a gap in Brazil’s legal system by addressing corruption and corruption-related practices with more effective legal mechanisms, such as severe sanctions assessed based on a strict liability concept.

The law expands on certain requirements imposed by the U.S. Foreign Corrupt Practices Act (“FCPA”), and companies doing business in Brazil should closely analyze the differences between the two laws.

The Anti-Corruption Law was designed to address corruption in business transactions carried out by Brazil-based entities, as well as foreign entities that operate through an office, branch or representation in Brazil. Corruption is defined as “to promise, offer or give, directly or indirectly, an undue advantage to a public official or to a third party related to him/her”. Notwithstanding the focus on corruption, the Anti-corruption law prohibits several “acts against national or foreign public administration”, such as:

  1. to hinder of investigations or inspections carried out by public entities;
  2. to thwart or defraud, by means of an adjustment, arrangement or any other method, the competitiveness of a public bidding procedure;
  3. to fraudulently obtain an undue advantage or benefit from an amendment to or extension of an administrative contract, without authorization under the law, or from the notice of public bidding or the related contractual instruments; and
  4. to manipulate or defraud the economic-financial balance of an administrative contract.

The commitment of any of these acts subjects a legal entity to the imposition of severe sanctions. At the administrative level, companies are exposed to fines ranging from 0,1% to 20% of their gross annual revenue, and special public disclosure of the decision in means of communication widely distributed. In case a civil judicial proceeding is initiated, legal entities may be compelled to forfeit assets and rights obtained by means of corrupt practices, their business activities may be suspended, they may be prohibited from receiving incentives, subsidies, subventions, donations or loans from public entities, and they may even be compulsorily wind up. Besides, the Anti-corruption Law created the National Registry of Punished Companies (CNEP in the Portuguese acronym) which will consolidate all sanctions applied.

The Anti-Corruption Law also introduces new risks in merger and acquisitions transactions involving Brazilian companies. It provides for successor liability – liability for the payment of the fine and full compensation of the loss suffered by the public entity still remains after the merger or acquisition. Thus, anti-corruption due diligence will become an even more usual practice in Brazil. Since companies can be liable for the acts of third parties committed for the company’s benefit, anti-corruption due diligence on third parties must also become an important business practice.

Under the strict liability, the legal entity is liable for the performance of these acts in its interest or for its benefit and is subject to the imposition of a sanction, despite whether or not an employee acted in the scope of his employment, whether or not a third party committed the act, or whether or not the compliance program was effective.

The managers and administrators of the companies involved in corruption can also be held liable for their acts, but the liability regime applicable to natural persons is subject to the terms of the culpability of such persons (i.e. it is not a strict liability regime).

When determining the sanction, however, the existence and effectiveness of compliance programs will be evaluated by the sanctioning authority. The Federal Government must still establish standards for evaluating compliance programs. A Decree is currently under scrutiny of the Civil Chief and the Presidency, and is expected to be published soon.

The cooperation of the legal entity to investigate the infractions will also be taken into account in the imposition of sanctions. Therefore, the adoption of an effective compliance program that not just avoids illegal acts but that also includes procedures and mechanisms in support of an eventual investigation can reward the legal entity twice.

The evaluation of a compliance program is not the only important topic that is expected to be regulated by the Decrees. The Anti-corruption Law establishes that, at the administrative level, the highest authority of each public body and entity of will have the authority to investigate and decide the cases occurred. Brazil is divided in 26 States, 1 Federal District and more than 5,000 thousand Municipalities, each one of them with several bodies and entities. Several authorities are potentially capable of imposing sanctions and collecting its economic benefits, what create a risky environment. Therefore, to prevent possible public abuses, it is expected that the Federal Decree will determine the “highest authorities” at the Federal Union level and will provide guidance to the other spheres (States and Municipalities). The Federal Decree shall also provide for mechanisms of coordination between the several authorities responsible for the investigation.

Two States ran ahead and published their own State Decrees. Before the enactment of the Federal Decree, the States of São Paulo and Tocantins published, respectively, Decree 60,106/2014 and Decree 4,954/2013. In general, both States copied the relevant provisions of the Anti-corruption law and determined the “highest authority” that will decide the cases occurred and execute leniency agreements with the legal entities. São Paulo created its own State Registry of Punished Companies (CEEP in the Portuguese acronym) in addition to the nationwide CNEP, created by the Anti-corruption Law.

The Brazilian framework on anti-corruption law and enforcement is evolving, following trends and concepts adopted internationally. Severe sanctions, strict liability and several public bodies and entities responsible for investigating and deciding the acts committed, dramatically increase the risks of committing a corruption act. Consequently, companies doing business in Brazil should carefully measure corruption-related risk with a view not only to past and present perceptions, but also to the signs of change that already point to a much more responsive and strict enforcement environment in the near future.

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.

INDIAN UPDATE – “Options” to Foreign Investors

Editors’ Note: This 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.


  • A recent notification of the Securities and Exchange Board of India expressly permitted put and call options in relation to shares of public limited companies, both listed and unlisted.
  • The Reserve Bank of India has clarified that foreign investors can have “optionality” attached to Equity Securities (defined below) so long as such option / right does not assure them of a fixed exit price, provided that other conditions described below are met.
  • With regard to equity shares, such option / right may be exercised: (i) in case of a listed company, at a price not more than the prevailing market price; and (ii) in case of unlisted companies, at a price not exceeding that arrived on the basis of Return on Equity (“RoE”) as per the latest au­dited balance sheet.  The shift of the exit price from a discounted free cash flow method of valuation to a return on equity based valuation could have a negative impact on foreign investors.
  • In case of compulsorily convertible preference shares and compulsorily convertible debentures, the pricing for an exit by way of a put option can be arrived at as per any internationally accepted pricing methods as certified by a chartered accountant or SEBI registered merchant banker.

Main Article:


The use of put and call options are commonplace in investment transactions and are one of the means for achieving a potential exit from an investment. Until recently, the Securities Contracts (Regulation) Act,1956[1], did not permit the use of put and call options in investment trans­actions involving public limited companies. This was because private contracts with put and call options were in the nature of derivative contracts which were not in compliance with the SCRA.

The Reserve Bank of India (‘RBI’), India’s apex bank, was also not in favour of the use of put and call options in investment transactions. From an RBI perspective[2], though not expressly prohibited under the foreign exchange regulations, RBI viewed “put” option rights in favour of non residents with a guaranteed exit price as debt masquerading as equity and thought that they should therefore be viewed and treated as external commercial borrowings.

Liberalisation by SEBI

On October 3, 2013, the Securities and Exchange Board of India, (‘SEBI’), India’s capital markets regulator, had issued a notification which inter alia expressly permitted put and call options in relation to shares of public limited companies (both listed and unlisted). This SEBI notification is a good step forward in clarifying SEBI’s position on put and call option contracts, given the uncertainties created previously.

The SEBI notification, however, has some riders attached to it. It has been stipulated that the selling party of a put option must hold the title and ownership of the underlying securities for a minimum of 1 year from the date of entering into the contract. SEBI has also required that the consideration paid on the exercise of any option must be in compliance with the relevant guidelines for pricing as are stipulated by SEBI and RBI, and the contract must also compulso­rily be settled by way of actual delivery. Effectively, the pricing of the “put” option (for transfer from foreign investors to Indian residents) for unlisted companies was linked to the RBI pre­scribed price, which price was a ceiling calculated in accordance with the discounted free cash flow method of valuation (‘DCF’). For listed companies, the price was capped at the preferential allotment price calculated in accordance with the SEBI (Issue of Capital and Disclosure Require­ments) Regulations, 2013, which is essentially the higher of the average weekly high and low clos­ing prices quoted on the stock exchange during the preceding 26 weeks or 2 weeks.

While SEBI took steps to remove some of the uncertainties around “put” / “call” options on securities of public limited companies, the position of RBI still remained unclear in relation to foreign investors. Recently, RBI has released its notification dated November 12, 2013 published in the Official Gazette on December 30, 2013 and circular dated January 9, 2014 on this subject matter (collectively, ‘RBI Circulars’).

RBI’s stand under the RBI Circulars

The RBI Circulars do not consider any equity shares, convertible preference shares or convertible debentures (‘Equity Securities’) carrying “optionality” rights and which assure returns, as eli­gible instruments in the hands of a foreign investor from a foreign direct investment standpoint. Thus, any foreign investment made in any Equity Security cannot carry “optionality” and as­sured returns. Equity Securities carrying “optionality” but no assured returns are valid and eligi­ble but transfer of such instruments are subject to certain conditions set out in the RBI Circulars.

What is meant by “optionality”?

The term “optionality” is not defined under the RBI Circulars. What kind of rights under the shareholders agreement constitutes “optionality” is a matter of interpretation. Based on pre­vious concerns raised by RBI in the context of “put” options, one may infer that “optionality” should include only those rights which grants the foreign investor a right to cause the company or the other shareholders to purchase (or cause the purchase) of Equity Securities held by such foreign investor. In other words an optionality clause should be one which obliges the buyback or purchase of Equity Securities from the foreign investors.

 “Options” which are “disallowed”

The RBI Circulars have provided that Equity Securities which: (a) contain an optionality clause; and (b) which provides a foreign investor with a right to exit at an assured price, will not be regarded as an eligible security and cannot be subscribed to by foreign investors. The guiding principle that RBI has set forth, is that foreign investors should not be guaranteed any assured exit price at the time of making the investment.

What is meant by “assured return”?

The term “assured return” is also not defined under the RBI Circulars. It is not clear whether put options with an agreed return that are subject to, and capped at the price arrived at based on applicable pricing guidelines, particularly where there are no agreed mechanisms to ensure that the agreed price is effectively safeguarded, will constitute “assured return” within the mean­ing of the RBI Circulars. Arguably, a “price assured” which is, subject to it being in compliance with the pricing requirements under the law ought to be treated as a return which is contingent, rather than assured. However, RBI will perhaps need to be convinced with respect to this aspect.

“Options” which are “allowed”

RBI has clarified that foreign investors can have “optionality” attached to Equity Securities so long as such option / right does not assure them of a fixed exit price. In other words, “put” options are possible going forward, so long as such “put” right does not result in an Indian resident pro­viding an assured return to foreign investors. This is however, subject to the following conditions:

i.    Such Equity Securities will be locked in for a minimum period of one year, unless a higher lock-in is prescribed by the exchange control regulations (e.g. certain sectors such as defence and construction development have a minimum lock-in requirement of three years)[3]; and

ii.   Such exit will be subject to pricing guidelines discussed below.

Pricing of equity shares at the time of exit

In terms of the RBI Circulars, such option / right may be exercised: (i) in case of a listed company, at a price not more than the prevailing market price; and (ii) in case of unlisted companies, at a price not exceeding that arrived on the basis of Return on Equity (“RoE”) as per the latest au­dited balance sheet. RoE has been defined to mean profit after tax divided by the net worth, and net worth includes free reserves and paid up capital.

It should be noted that this RoE based valuation will apply only for exit by exercising the “op­tionality” clause.

The shift of the exit price from DCF to RoE based valuation could have a negative impact on foreign investors. The minimum price at which a foreign direct investment can currently be made in unlisted equity shares is determined on the basis of DCF valuation of the equity shares. The DCF valuation takes into account the future performance of the company based on specified variables. A RoE valuation is an indicator of the financial performance of a company during a specified period, and may not convey the actual fair value of the equity shares of the com­pany. While RBI had in its recently issued FAQs on ‘Foreign Investments in India’[4] clarified that the foreign investor can exit at a price which gives an annualized return equal to or less than the RoE as per the latest audited balance sheet, it remains to be seen how the foreign investors will get their return under the RoE based valuation in sectors with a long gestation period like insurance, infrastructure, real estate, etc., or where at the time of exit, the company is a loss making company.

Arguably, the RoE based valuation should not apply in the context of events of default by a resident pursuant to which a non-resident has the right to exit the company, and requires the resident to buy its shares. However, further clarity is awaited on this.

Pricing of compulsorily convertible preference shares and compulsorily convertible debentures at the time of exit

In case of compulsorily convertible preference shares and compulsorily convertible debentures, the pricing for an exit by way of a put option can be arrived at as per any internationally accepted pricing methods as certified by a chartered accountant or SEBI registered merchant banker. The underlying rationale for making this distinction is also unclear since a convertible instrument derives its value from the underlying security i.e. the equity share of a company, the transfer of which (as per the RBI Circulars) needs to comply with a valuation based on RoE method.

What happens to existing contracts?

RBI has further stipulated that all existing contracts will have to comply with the above lock in and pricing conditions to qualify as compliant with exchange control laws. Accordingly, it will need to be assessed whether existing contracts need to be amended or not in order for these contracts to be enforceable. Further, it needs to be assessed if any “put” options with an assured return (issued before the date of the RBI Circulars) can be regarded as eligible securities under the exchange control regulations. In this context determination of what will tantamount to “as­sured return” is important.


While recognition of options by the SEBI and RBI is a welcome move for foreign investors, there are several areas that will need careful consideration, particularly in the context of the pricing regime proposed for exits that will occur pursuant to exercise of option rights by the foreign investor.

[1] As per Section 18A of the Securities Contracts (Regulation) Act, 1956, derivate contracts are permissible only if entered into on stock exchanges and settled on the clearing house of the recognized stock exchange.

[2] The Department of Industrial Policy and Promotion (“DIPP”), on September 30, 2011, had announced that all investments in securities with ‘in-built’ options will be considered as external commercial borrowings. However, industry uproar resulted in reversing of this position.

[3] The lock-in will apply from the date of allotment of such Equity Securities and accordingly, in case of multi-tranche investments, each tranche of investment would be locked in from the date of its respective allotment.

[4] FAQs on Foreign Investments in India issued by RBI as updated till January 28, 2014.

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.

SPANISH UPDATE – New Opportunities For Foreign Investors In The Real Estate Sector

Editors’ Note: This paper was contributed by Juan Miguel Goenechea, a partner at Uría Menéndez in Madrid and a member of XBMA’s Legal Roundtable.  As one of Spain’s leading M&A experts, Mr. Goenechea has broad expertise in corporate, banking, finance and securities transactions at the top end of the market. This paper was authored by Uría Menéndez senior associates Pedro Ravina and Diego Montoya.


  • The newly-created Spanish “bad bank” (SAREB) has been transferred a EUR 50.8 billion pool of loans and real estate assets from Spanish credit entities that were totally or partially nationalized, as well as the legal mandate to liquidate the entire portfolio in 15 years.
  • A legal framework has been enacted to facilitate the divestment process. In particular, a new type of investment vehicle with a privileged tax regime has been implemented to attract investment by non-Spanish resident investors. The vehicle is taxed at a 1% CIT rate and income obtained by non-resident investors (including residents in tax havens) will be tax exempt in Spain.
  • SAREB already announced divestitures in 2013 and the pipeline for new projects is extensive and appears to have attracted the attention of the largest international real estate firms as a result of the significant price discounts and the efficiency of the investment structure.
  • Amid the generally improved outlook of the Spanish economy and the increased stability in the Eurozone, the Spanish real estate market appears to be taking off after multiple years of significantly reduced activity.

Main Article:


In the context of the EUR 100 billion external financial assistance requested by the Spanish Government with the aim of facilitating the restructuring and recapitalization of the Spanish banking sector, a memorandum of understanding (MOU) was agreed in July 2012 by and between the Spanish Government and certain European Union authorities (with the participation of the International Monetary Fund) by virtue of which specific political and financial-related conditions were imposed on Spain.

Key elements of the roadmap provided under the MOU included: (i) the identification of the individual capital needs by each of the Spanish banks by means of a “bottom-up” stress test (as well as a determination of which banks would need public support to complete the necessary recapitalization); and (ii) the segregation of the impaired assets of banks under public control or receiving public assistance and their transfer to a “bad bank”.

As a result of the stress test undertaken by Oliver Wyman and released in September 2012, the Spanish banking sector was divided into four groups: group 1 (comprising banks already nationalized, such as Bankia); group 2 (banks with capital needs that would likely lead to the bank requiring public assistance); group 3 (with lower capital needs and no expectation of public intervention); and group 4 (without further capital needs).

In November 2012, legislation enacted in consultation with the European Commission, the European Central Bank, the European Stability Mechanism and the International Monetary Fund provided for the creation of the Spanish “bad bank” (denominated the Sociedad de Gestion de Activos Procedentes de la Restructuracion Bancaria, or SAREB) and the establishment of a specific legal and tax framework applicable to the bank.

Creation and main features of SAREB

SAREB is a for-profit corporation which overarching objective is the management and, ultimately, the divestiture of the assets received from the contributing banks within a period of no more than 15 years.

The contributing banks are those financial institutions included under groups 1 and 2.  Assets transferred to SAREB between December 2012 and February 2013 were primarily: (i) foreclosed real estate assets with a net book value exceeding EUR 100,000; (ii) (not necessarily non-performing) loans to real estate developers with a net book value exceeding EUR 250,000; and (iii) controlling shareholdings in real estate companies. Assets for an aggregate value of approximately EUR 50.8 billion have been transferred to SAREB, which price reflects an average haircut over gross book value of approximately 63% for foreclosed assets and 45% for loans. As consideration, SAREB issued state-guaranteed senior debt securities in favor of the participating banks. The securities have been structured to meet all requirements to be accepted as collateral for purposes of European Central Bank financing.

In order to fund operational needs, SAREB has raised equity for an aggregate amount of EUR 4.8 billion (25% share capital and 75% subordinated debt). A public-controlled fund for the restructuring of the Spanish financial sector (FROB) is the major shareholder with 45% of the equity holdings, while the remaining equity (55%) is held by a number of Spanish and foreign financial institutions (including Spanish banks under groups 3 and 4), insurance companies, and leading industrial corporations.

Divestment alternatives: Banking Assets Funds

Although SAREB may decide to refinance or further develop some of the assets received in order to maximize their value, the ultimate objective is the profitable liquidation of the entire pool of assets within the 15-year statutory deadline, either through the full collection of the principal of the loan (where feasible) or, most likely, by transferring the asset.

While the discounted price at which SAREB acquired the assets is itself an incentive for transfers, an ad hoc structure was created by law to facilitate the acquisition by foreign institutional investors of SAREB assets in tax-advantageous conditions.

In short, SAREB is able to divest the assets by incorporating insolvency-remote vehicles (denominated Banking Assets Funds, or BAFs) that provide structural flexibility and a favorable tax regime for investors and the BAFs themselves, subject to the condition that either SAREB or the FROB retain a stake.

BAFs can therefore be featured as joint ventures between investors and SAREB, and can be used to repackage different types of assets. Furthermore, BAFs’ liabilities can include loans, debt securities, quasi-equity instruments, several types of credit enhancement instruments or a combination of several. As a result, investors will have the flexibility to invest or co-invest in one or multiple tranches of BAFs whose assets were previously cherry-picked by investors (or “put on sale” by SAREB). Although the representation and management of the BAFs is legally reserved to regulated Spanish entities (securitization funds management companies), there is an expectation that, and experience has already shown, the leading role when it comes to material decisions (e.g., the sale of an asset allocated in a BAF) will be placed in the hands of investors or an asset manager appointed by them.

Nevertheless, in general, the main benefit of investing in SAREB assets through a stake in a BAF, as opposed to a direct acquisition of the relevant assets by the institutional investor or a subsidiary of the same, is tax-related. While the BAF itself enjoys a privilege treatment (for instance, a 1% corporate income tax rate as opposed to 30% for regular Spanish corporation), the key element of the scheme is the privileged tax regime applicable to the BAF’s stakeholders, particularly non-resident holders: non-resident entities without a permanent establishment in Spain investing in BAFs, including those domiciled in tax havens, will benefit from a full Non-Resident Income Tax exemption on income (interest, distributions) and gains (transfers) deriving from their BAFs’ stakes. Thus, from a tax standpoint, investment in real estate assets using a BAF would be the optimal option in contrast to using a regular corporation for the same objective (which would imply 30% CIT and, if not properly structured, Spanish taxation on income received from the vehicle).The privileged tax regime will only apply as long as SAREB or the FROB remains exposed to the BAF with, in principle, a stake of at least 5%.

Although the resulting outcome of the BAF joint structure is that SAREB will only partially dispose of the assets (as it would still have indirect exposure to them through its stake in the BAF), these assets will now be managed by specialist investors and SAREB will likely benefit from some portion of the upside upon exit.

Debut transactions and prospects

Following the completion of the process to group all assets transferred from the contributing banks and a comprehensive internal commercial and legal due diligence, SAREB has started to test the waters with a number of projects involving diverse types of assets.

Transparency and competitiveness have been key elements in all divestment processes. SAREB has proactively put specific groups of assets “in play” (perhaps after perceiving specific interest in the marketplace) and, with the assistance of corporate and real estate advisors, have organized auctions general open to bidders. The improved outlook of the Spanish economy, the increased stability in the Eurozone and the attractive features of the potential transactions (both in terms of price and tax-efficiency) have incentivized some of the largest international private equity and real estate investment houses to submit bids in these auctions.

Bull Project, whose EUR 100 million portfolio included real estate developments located in eight different Spanish regions, was the first auction completed last August. The selected buyer was H.I.G. Capital (through its affiliate Bayside Capital) and the transaction was structured through a BAF which will be held by H.I.G (with a 51% stake) and SAREB (with a 49% stake). Prestigious funds such Lone Star, Apollo, Colony, Centerbridge and Cerberus were reportedly among the other bidders in the auction.

As of July 2013, SAREB had sold 1,800 retail residential assets through the participating banks’ branch network. That figure increased to around 6,400 real estate assets as of November 2013. In addition, a portfolio of stakes in syndicated loans granted to Spanish listed real estate companies (Metrovacesa and Colonial, for approximately EUR 1.2 billion) have also been transferred to an undisclosed investor and Burlington, respectively. Other transactions in SAREB’s pipeline (including urban and rural land, luxury homes, shopping malls, office projects and additional stakes in loans to Spanish listed real estate companies), are expected to be announced before the end of the year or in the first quarter of 2014.

The general perception that the Spanish economy and real estate market have bottomed out and that prices now reflect the fair market value of the real estate assets is also contributing to a significant activation of the Spanish real estate M&A sector after several years of dramatic downturn. Some of the 2012 and 2013 deals included the acquisitions by TPG, Cerberus and a consortium of Kennedy Wilson and Varde of the Caixabank, Bankia and Catalunya Bank’s real estate portfolio management companies, respectively (and Grupo Santander and Banco Popular are also in the process of selling their recovery units). In all the cases of these sales of servicing companies by healthy banks, the managed assets are not transferred, but retained by the transferor. Other recent highlights include the purchase of Aktua (the former customer collection company within the Santander group) by Centerbridge, the approximately EUR 200 million sale by the Madrid regional government of a group of 3,000 subsidized apartments to a Goldman Sachs affiliate, and the pool of 1,860 rent-controlled properties sold by the City of Madrid to Blackstone for EUR 125 million.

Furthermore, all signs seem to indicate that the Spanish real estate market will continue to provide attractive opportunities for international funds in future months. SAREB projects will continue to fuel the activity, as SAREB’s business plan contemplates the divestiture of half of its portfolio during its first five years of existence. Additionally, most of the Spanish banks within groups 3 and 4 created their own “bad banks” in late 2012, into which they transferred all foreclosed assets as well as those acquired through debt-to-asset transactions. As the banks try to refocus on their core business, most of these “bad banks” (some of which became major Spanish real estate companies in terms of volume of assets) are up for sale, attracting the attention of the international investors.

For investors in distressed assets, undertaking appropriate servicing actions is a key element in their long-term plans to recover value on acquired bad debts. The offsetting up of local teams and the acquisition of Spanish collection platforms and real estate management companies by the largest international funds suggests that the investors are here to stay (at least for a while).

Nevertheless, there is no hope, or fear, of a new construction “boom” in Spain, as the main indicators on new construction, construction employment and cement consumption have remained weak. Conversely, experts consider that Spain is living in a period of price correction and reordering of the real estate existing stock which will produce attractive yields to those who are able to anticipate and invest at these valuation levels.

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.


Editors’ Note:  XBMA’s Review is published on a quarterly basis using consistent metrics and sources of data in order to facilitate a deeper understanding of trends and developments. We welcome feedback and suggestions for improving the Review or for interpreting the data.

Executive Summary/Highlights:

  • While total global M&A volume has been relatively consistent over the last four years, hovering around US$ 2.5 trillion per annum, the deal activity making up the $2.5 trillion has varied considerably over this period, reflecting a few trends:
    • Private equity-backed M&A has been gaining steam steadily, growing from 6.3% of global M&A in 2009 to 15.6% of global M&A in 2013;
    • Growth of M&A involving emerging economies has outpaced their GDP growth, with Chinese domestic M&A showing increasing strength, but inbound and outbound M&A involving emerging economies ebbs and flows based on various exogenous factors;
    • European M&A has been mixed over the last four years, exceeding $200 billion only once since 2009, and ending 2013 down 16.5% from 2009 levels; and
    • U.S. share of global M&A continues to grow disproportionately as the re-covery proceeds, on both the domestic and cross-border fronts.
  • Global M&A volume for the first three quarters of 2013 was slightly higher than for the same period in 2012, but volume in Q4 2013 was slightly down, probably because it did not benefit from the same rush of deal-making as was seen following the U.S. elections in Q4 2012.
  • While cross-border M&A volume in 2013 was down a little from 2012, after a relatively quiet three quarters, emerging-market acquirers went on a holiday shopping spree, as six of the top 10 deals for 2013 involved an emerging-market acquirer and developed-market target and were announced in Q4 2013.

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