Executive Summary: Despite formal agreements for and increased emphasis on international cooperation, there are still significant areas of divergence in how different competition authorities review mergers. This article discusses recent examples of mergers requiring review in multiple jurisdictions and the key practical messages arising therefrom.
Execution of a global deal can involve a challenging web of merger control regimes, as demonstrated by several high profile cases reviewed by multiple competition authorities across the world over the past year.
The key authorities are often the European Commission (“EC”), the Federal Trade Commission (“FTC”) or Department of Justice (“DOJ”) in the US’ and the Anti-Monopoly Bureau of the Ministry of Commerce (“MOFCOM”) in China. However, authorities in other jurisdictions (for example, Brazil, Russia, India, South Africa, Japan, South Korea and Australia) may also play a significant role in investigating international deals and their reviews can have an impact on deal timetables.
LEGISLATIVE FRAMEWORK FOR INTERNATIONAL COOPERATION IN MERGER CONTROL
Cooperation on merger control between the EC and the US agencies is particularly well established. The 1991 US-EU Competition Laws Cooperation Agreement provides for cooperation and coordination of enforcement activities between the EC and the FTC/DOJ and the avoidance of conflicts by accommodating competing interests. The Best Practices on Cooperation in Merger Investigations agreed between the EU and the US in 2011 provide a practical framework for cooperation, indicating specific points in the review process where contact between the EC and the FTC/DOJ can be useful.
While international cooperation with MOFCOM in China is less developed than that between the EU and the US, it is growing. Cooperation between the EC and MOFCOM is based on the EU-China Competition Policy Dialogue reached in 2004, which provides for a structured dialogue to take place at least once a year between the EC and MOFCOM on the subject of competition policy and legislation. In 2011, the US and China signed a Memorandum of Understanding on Antitrust and Antimonopoly Cooperation. Guidance for Case Cooperation between MOFCOM and the DOJ and FTC on Concentration of Undertakings (Merger) Cases has also been agreed between the two jurisdictions.
While these agreements provide formal mechanisms for international cooperation, competition authorities also interact on an informal basis. Highlighting international convergence on merger control analysis and process as an important policy objective, the EU Competition Commissioner Joaquin Almunia recently stated that international competition authorities “must learn to work together” to develop a “common understanding of the principles that must guide merger control reviews.”
RECENT EXAMPLES OF MERGERS REQUIRING MULTIPLE NOTIFICATIONS
Despite increased emphasis on international cooperation, there are still significant areas of divergence in how different competition authorities review mergers. Practical differences in the review timetable were particularly evident in Glencore/Xstrata. Glencore’s acquisition of Xstrata, forming the world’s largest commodities trader and fourth-largest mining company, was cleared unconditionally in the US in July 2012, followed by conditional clearance in the EU in November 2012. Clearance was also obtained in Australia and South Africa. However, the parties were not able to close the deal until MOFCOM had cleared it in April 2013 – three months after all other merger clearances had been granted.
Substantive differences can also arise in relation to the remedies imposed, as in Marubeni Corporation/Gavilon Holdings LLC. The $5 billion acquisition of US-based grain trader Gavilon Holdings by Japanese trading house Marubeni was cleared unconditionally in the EU in August 2012 and the US in November 2012. By contrast, the MOFCOM approval was subject to conditions, and was not granted until several months later, in April 2013.
A more complementary alignment of decisions by the EC and MOFCOM was seen in relation to US healthcare company Baxter International’s acquisition of Swedish dialysis equipment manufacturer Gambro for $4 billion. The EC conditionally cleared the Baxter International Inc./Gambro AB transaction in July 2013, followed soon after by MOFCOM in August 2013. Both the EC and MOFCOM required Baxter to divest its global CRRT business, in addition to other structural and behavioural remedies imposed. The deal did not need to be notified in the US but was subject to review inter alia in Australia and New Zealand.
The $11 billion merger between US Airways and American Airlines’ holding company AMR Corporation, which was closed in December 2013, was reviewed in both the EU and the US. While the deal was conditionally cleared by the EC in August 2013, the DOJ filed a lawsuit to block the merger the same month, and only reached a settlement with the parties on divestments in November 2013.
Thermo Fisher Scientific’s acquisition of Life Technologies for $13.6 billion has recently been cited as a “good example of international cooperation” by the EC. The EC conditionally cleared the deal on 26 November 2013. Unconditional clearances were obtained in Russia (8 October 2013), Canada (5 December 2013), Japan (19 December 2013) and Korea (7 January 2014). Conditional clearances — broadly in line with the commitments developed with the EC and the FTC — were also obtained in Australia (19 December 2013), New Zealand (19 December 2013) and China (14 January 2014). The final FTC clearance was issued on 31 January 2014.
The EC has highlighted the “mutual exchange of evidence, consisting mainly of internal documents of the Parties” as being central to its cooperation with international competition authorities in Thermo Fisher Scientific/Life Technologies. Similarly, the FTC has emphasised that it worked closely with staff at the EC and MOFCOM, among other authorities, “on the analysis of the proposed transaction and potential remedies” and acknowledged the “exemplary work done by all agencies, which led to compatible approaches on a global scale”. The continued development of this type of international cooperation between competition authorities would be to the benefit of the timely execution of global deals.
The key practical messages arising from these recent experiences of mergers requiring review in multiple jurisdictions are:
- a longer time frame may be involved where multiple notifications are required – in most cases, the process in China typically takes at least six to nine months;
- different approaches to the review by competition authorities are possible, as are divergent remedies;
- agreeing to give confidentiality waivers in order to facilitate the exchange of confidential information between competition authorities is likely to facilitate cooperation; and
in order to mitigate the uncertainty about timing and outcome of reviews, contractual protections can be used to share the risks inherent in obtaining international merger control approvals between the parties.
 Whether the FTC or the DOJ reviews a merger depends on the industry involved.
- On 28 February 2014, the State Council of the PRC issued Decision Regarding Revocation of and Amendments to Certain Administrative Regulations (国务院关于废止和修改部分行政法规的决定) (“Decision”) which came into force on 1 March 2014.
- The effect of the Decision has been to change the previous paid-up registered capital system for companies incorporated in China (including foreign investment enterprises) to a subscription-based capital system.
- For foreign investors in China, the new system will mean that they now have more flexibility in determining the capital structure of their investments in China.
- Among other things, the Decision has also removed the requirement for the annual examination of all PRC companies, replacing it with an annual report public inspection system.
RECENT CHANGES TO PRC COMPANY CORPORATION LEGISLATION
On 28 February 2014, the State Council of the PRC issued Decision Regarding Revocation of and Amendments to Certain Administrative Regulations (国务院关于废止和修改部分行政法规的决定) (“Decision”) which came into force on 1 March 2014.
The Decision revoked the following two regulations:
- Several Regulations Regarding Capital Contributions by Shareholders of Sino-foreign Equity Joint Ventures (中外合资经营企业合营各方出资的若干规定); and
- Supplemental Rules to Several Regulations Regarding Capital Contributions by Shareholders of Sino-foreign Equity Joint Venture (中外合资经营企业合营各方出资的若干规定〉的补充规定).
It also amended the following eight regulations:
- Company Registration Administration Rules (公司登记管理条例);
- Enterprise Legal Person Registration Administration Rules (企业法人登记管理条例);
- Detailed Regulations for Sino-foreign Equity Joint Ventures (中外合资经营企业法实施条例);
- Detailed Regulations for Sino-foreign Cooperative Joint Ventures (中外合作经营企业法实施细则);
- Detailed Regulations for Wholly Foreign Owned Enterprises (外资企业法实施细则);
- Registration Administration Rules for Partnership Enterprises (合伙企业登记管理办法);
- Regulations for Sole Proprietorship (个体工商户条例); and
- Registration Administration Rules for Farmer Special Cooperative Societies (农民专业合作社登记管理条例).
The combined effect of the above revocation and amendments on companies incorporated in China, including foreign investment enterprises (“FIE”), is summarised below.
Changes to Companies’ Capital Systems
|Subscription-based capital system||The paid-up registered capital system has been changed to a subscription-based capital system. The major changes in respect of this are as follows:
investors have greater flexibility
|Due to the above changes and amendments, foreign investors in China now have more flexibility in determining the capital structure of their investments in China. The terms regarding total investment, registered capital, subscribed amounts of capital, the mechanism of contribution, contribution timeline, shareholding transfer mechanism, etc. can be commercially agreed by and among the investors and set out in the articles of association of the FIE. One point that should be noted is that the requirement as to the leverage ratio between the total investment and registered capital of an FIE still applies.|
Other Changes to the Company Law Rules
|Annual examination requirement removed||The amendments have also removed the requirement for the annual examination of all PRC companies, replacing it with an annual report public inspection system. All PRC companies are required to file an annual report of the immediately preceding year between 1 January and 30 June to their respective registration authorities. The report will be made publicly available for inspection online by the general public. The detailed requirements and rules for such filings are still under development by the State Council.|
|Electronic searches and licences||Finally, the Decision also makes the following administrative changes:
Executive Summary: Québec’s Task Force on the Protection of Québec Businesses has proposed that companies adopt new measures against unsolicited take-overs, including aggressive measures such as:
- a variable voting right which would be determined by the length of time a shareholder holds shares of a corporation,
- enabling boards of target companies to fully exercise their fiduciary duties, and
- various tax measures to promote the purchase and holding of shares of a company by its employees and its controlling shareholders.
On June 7, 2013, Québec’s Minister of Finance and the Economy, Nicolas Marceau, announced the creation of the Task Force on the Protection of Québec Businesses. The mandate of the Task Force was to study measures that would help Québec companies better protect themselves against unsolicited take-over bids, and to maintain and develop corporate headquarters in Québec. The Task Force was formed in part as a result of events that occurred during the summer of 2012 when Lowes, a U.S. company, attempted to seize control of RONA, one of Québec’s flagship public companies.
On February 20, 2014, the Task Force released its report to the public, after several months of work. In its report, the Task Force concludes that there is a need to adopt new measures against unsolicited take-overs. To this end, the Task Force makes a series of nine recommendations, many of which are bold and the first of their kind in Canada.
The Report’s Recommendations
The report proposes amendments to the Business Corporations Act (Québec) and the Securities Act (Québec). It further proposes a reform of the Bureau de décision et de révision, the Québec tribunal that specializes in securities, as well as various tax measures to encourage the purchase and holding of shares of a company by its employees and controlling shareholders.
Recommendations Concerning the Business Corporations Act (Québec)
The Task Force recommends certain amendments that are inspired by measures adopted in certain jurisdictions in the United States and Europe.
Among the recommendations proposed is the adoption of a variable voting right which would be determined by the length of time a shareholder holds shares of a corporation. To this end, the Task Force recommends that a corporation be permitted to provide additional voting rights for voting shares held by any beneficial shareholder for at least two years. This measure may however be removed from the articles of incorporation of the company by a special resolution (two-thirds of the votes cast).
The Task Force also seeks to permit a corporation to adopt restrictive provisions which would prohibit certain transactions when it is the subject of a take-over bid that is not approved by its board of directors. More specifically, the following measures are proposed:
- A five-year ban on certain transactions such as mergers or other combinations of assets with those of the bidder, or a major sale of assets representing 15% or more of the target corporation’s assets;
- The obligation on the bidder to return to the corporation profits realized in the 24 months following the take-over on the resale of securities of the corporation acquired during the 12 months preceding the launch of the bid;
- The inability to terminate the mandate of a director before the end of his/her term; and
- The inability for a bidder to exercise the voting rights attached to the shares it holds after the commencement of the offer, which may not be waived unless the other shareholders (excluding directors and officers who are shareholders) pass a special resolution (two-thirds of the votes cast) restoring the voting rights to the offeror of a take-over and its related parties.
These protective mechanisms could also be removed from the articles of a corporation by a special resolution (two-thirds of the votes cast).
The Task Force further seeks to apply the measures described above to certain non-corporate entities created under Québec law that may be subject to hostile bids, such as trusts.
Recommendations for Securities Regulators
The Task Force supports the proposal of the Autorité des marchés financiers, which aims to enable boards of companies that are the subject of unsolicited take-over bids to fully exercise their fiduciary duties. This is a topic more fully discussed in a previous publication.
The Task Force further recommends transforming the Bureau de décision et de révision, into a tribunal composed of judges of the Court of Québec, in accordance with the model provided by the Tribunal des professions.
Recommendations Relating to the Development and Sustainability of Corporate Headquarters
The Task Force recommends various tax measures to promote the purchase and holding of shares of a company by its employees and its controlling shareholders:
- By deferring the taxation of employees and shareholders of listed companies to the time of sale of the shares rather than the time of acquisition thereof;
- By providing more favourable tax treatment to gains on stock options than elsewhere in Canada;
- By allowing owners and significant shareholders of a company to defer the taxation of gains on the transfer of ownership of the company to another generation;
- By allowing family trusts to defer the realization of the gains attributed to their significant participation in a company to the time of sale, rather than every 21 years, as long as the company remains active.
Finally, the Task Force proposes to examine legislative and regulatory changes needed to promote the financial and operational participation of Québec investment funds to facilitate the transfer of Québec companies in favour of Québec successors.
The Impact of These Recommendations on the Québec Economy
In its report, the Task Force acknowledges that an overly protective legislative approach could lead to a certain level of complacency among public companies, and a diminished level of interest in the financial markets which could contribute to a decrease in value of Québec public companies. The Task Force also commissioned a study by an economist, which concluded that, on an overall basis, protective measures could negatively affect the value of shares. The Task Force states that, in its opinion, these potential consequences are less significant than the negative effects that may result from the loss of corporate headquarters in Québec.
The Reaction of the Minister of Finance and the Economy
Québec’s Minister of Finance and the Economy received the recommendations of the Task Force very favourably. He announced that he would seek to propose legislative changes to implement the measures providing adequate defences to those companies wishing to adopt them. However, on March 5, 2014, Pauline Marois, the Prime Minister of Quebec, called a provincial election for April 7, 2014. Accordingly, no legislation will be tabled to implement the proposed changes until the outcome of that election is determined.
The proposed measures will undoubtedly be the subject of significant debate within the business community, both inside and outside Québec.
Several influential members of Québec’s business community have expressed similar concerns to those set forth in the Task Force report and will likely welcome the conclusions and recommendations of the report. However, several other prominent members of the business community have expressed concerns about the negative effects of the proposed defensive measures. It was further observed that the loss of corporate headquarters can result as easily from negotiated transactions as from unsolicited offers. It was also noted that several major Québec-based companies have a class of shares with multiple votes, which limits the risk of unsolicited offers.
While any legislation to implement the proposed changes will now have to wait until after the provincial election on April 7, Davies will continue to monitor the situation closely and will notify of any developments in this area.
For the past several months, the Panamanian government has engaged in an extensive period of consultations with local and foreign experts, practitioners, professionals and regulators, in a concerted effort to ensure that the jurisdiction continues to embody the highest international standards in terms of functionality and transparency (while preserving confidentiality). To that effect, the Panamanian legislature enacted Law 47 of 2013 (the “Bearer Shares Law”), which creates a regulatory framework for the continued and lawful use of bearer shares in Panama.
Implications for M&A activity
Today, Panama’s robust regulatory framework provides domestic and international investors alike with unparalleled investment opportunities in the region: a dollarised economy, no exchange controls or restrictions on the movement of capital, readily accessible credit and increasingly sophisticated and liquid capital markets. In order to attract the best and brightest, Panama continues to enact pro-business legislation, based on successful models culled from other parts of the world. Given the country’s diminutive size and limited domestic consumer market, the country has turned to globalisation as a central driver of its long-term economic growth (the Bearer Shares Law being the latest iteration of this commitment).
In the context of M&A and Panamanian companies with bearer shares, the Bearer Shares Law introduces a new party into the mix: the authorized custodian. Prior to the Bearer Shares Law, the parties (i.e., buyer/seller or acquirer/target) could transact privately, with the notable exception that any merger with a Panamanian entity requires the parties to register the merger agreement with the Panamanian Public Registry. As a result of the Bearer Shares Law, the authorized custodian becomes an important component of any M&A transaction involving a Panamanian company with bearer shares, given that the authorized custodian must be notified of the transaction and the new counterparty (i.e., the party that did not have a preexisting relationship with the authorized custodian) may be required to provide the authorized custodian with certain information/documentation as described below. From a best practices standpoint, the parties should coordinate with the authorized custodian(s) beforehand, and include the above referenced requisite information/documentation as part of the closing deliverables within the transaction documents.
Aspects of the Bearer Shares Law
This law has several interesting and innovative features that are worth highlighting:
- Timing: The Bearer Shares Law shall come into effect two (2) years after this law’s enactment (i.e., August 7, 2015 or the “Implementation Date”). As such, the provisions of the Bearer Shares Law shall not become binding and enforceable until such time as this law comes into effect. Furthermore, holders of bearer share certificates validly issued and outstanding prior to the Implementation Date shall have an additional three (3) year period following the Implementation Date to deliver any and all such bearer shares into custody or alternatively, reissue them into registered form. Bearer shares validly issued on or after the Implementation Date may not avail themselves of this additional three (3) year grace period, and must be delivered to an authorized custodian.
- Delivering Bearer Share Certificates into Custody: Holders of bearer share certificates that were validly issued and outstanding prior to the Implementation Date shall be given an additional three (3) year grace period to deliver any and all such bearer shares into the custody of an authorized custodian. Any and all bearer shares that are validly issued on or after the Implementation Date must be delivered into the custody of an authorized custodian within twenty (20) calendar days of the issuance of said bear shares. For the avoidance of doubt, in the event any bearer share certificates that were validly issued and outstanding prior to the Implementation Date were to be redeemed or cancelled after the Implementation Date, any new bearer share certificate(s) that is/are issued representing said redeemed/cancelled shares shall be deemed as having been issued after the Implementation Date, and thus, the three (3) year grace period would not be applicable to said bearer share certificate(s).
For the purposes of the Bearer Shares Law, delivery into the custody of an authorized custodian shall be deemed perfected upon (i) the delivery of the original bearer share certificate to the authorized custodian, and (ii) the delivery of any and all applicable information required under the Bearer Shares Law, which should be sufficient to identify the beneficial owner(s) of the bearer share certificate (ie, affidavit of share ownership). The beneficial owner(s) of any and all bearer shares that fails to comply with his/her duties in a timely manner may definitely lose his/her rights to exercise any and all political and economic rights associated to these bearer shares.
- Authorized Custodian: An authorized custodian is a duly authorized person or entity that may exercise custody over duly issued and outstanding bearer shares. Authorized custodians are divided into two categories: local authorized custodians or foreign authorized custodians. The following persons and/or entities may act as authorized custodians:
- Local Authorized Custodians:
- Duly licensed attorneys and/or resident agents (registered with the Fourth Chamber of the Supreme Court of Panama);
- Banks having a general banking license and trust companies, both of which must be regulated and subject to the supervision of the Panamanian Superintendence of Banks; or
- Brokerage houses (Casas de Valores) and clearing houses (Central de Valores), both of which must be regulated and subject to the supervision of the Panamanian Superintendence of the Securities Markets.
- Foreign Authorized Custodians:
- Banks, trust companies and financial intermediaries that are duly licensed and regulated in member jurisdictions of the Financial Action Task Force on Money Laundering (FATF) or their associated members. In addition to complying with the provisions of the Bearer Shares Law and applicable law, please note that all foreign authorized custodians must be registered with the Panamanian Superintendence of Banks and designate a process/notification agent (agente de notificación). A process/notification agent (agente de notificación) is defined as an attorney, general license bank or trust company based in Panama that is duly authorized by a foreign authorized custodian to receive any and all notices and demands for and on its behalf related to said foreign authorized custodian’s responsibilities as per the Bearer Shares Law and applicable law.
- Responsibilities of an Authorized Custodian: An authorized custodian cannot automatically release a beneficial owner’s confidential information, and thus, fishing expeditions are not being authorized under the Bearer Shares Law. Instead, any request for information must be made in connection to an ongoing investigation by a competent authority into money laundering or in connection to a commitment established in an international agreement and/or convention to which Panama is a signatory.
Any and all foreign authorized custodians are required to deliver sufficient information to identify the beneficial owner(s) of any and all bearer share certificates to the resident agent of the Panamanian corporations that issued these bearer shares. This provision does not require the resident agent to make a specific request in order to be entitled to receive this information (ie, a foreign authorized custodian has the positive obligation of delivering this information to the resident agent upon becoming the custodian of any and all bearer share certificates). The Bearer Shares Law provides a limited carve out for foreign authorized custodians wanting to delay the delivery of such information until such time as the resident agent provides it with notice that a competent authority in Panama has duly requested such information. In order to avail itself of this carve out, a foreign authorized custodian must provide the Panamanian Treasury Department with a US$25,000.00 bond, which must be issued by an insurance company or a bank licensed to operate in Panama.
- Perfecting the Transfer of Bearer Shares that have already been Delivered into Custody: Bearer share certificates that have been delivered into the custody of an authorized custodian shall only be deemed transferred upon the beneficial owner(s) providing the authorized custodian with formal written notice of said transfer, and upon the new beneficial owner(s) providing the authorized custodian with a sworn statement containing specific information about the new beneficial owner(s). The above assumes that the bearer share certificates shall remain in the custody of the same authorized custodian. In the event the new beneficial owner(s) wish(es) to transfer the bearer share certificates to a new authorized custodian, additional steps would be required.
- Inheritance: An interesting new feature of the Bearer Shares Law is that beneficial owners may now engage in estate/succession planning through the authorized custodian of their bearer shares. The beneficial owner(s) of any and all bearer shares held in custody may designate in writing one or more beneficiaries. As such, upon receiving evidence of the beneficial owner(s) death, an authorized custodian may transfer any and all bearer share certificates to the duly designated beneficiaries, without having to wait for probate and/or a court order. The Bearer Shares Law states that the transfer of any and all bearer share certificates to the designated beneficiaries (ie, as designated by the beneficial owner(s) in writing, said written instrument having been delivered to the authorized custodian) shall be valid, irrespective of any other rights that may be asserted (whether these rights be testamentary or intestate).
- Pledging Bearer Shares: A pledgee in possession of bearer shares that were issued and outstanding prior to the Implementation Date and that are subject to a pledge must nevertheless (i) deliver the bearer share certificate into the custody of an authorized custodian, or (ii) if applicable, register as an authorized custodian. The authorized custodian of the pledged bearer shares shall act as a depository (depositario prendario) of such shares.
- Penalties: The failure to adhere to the provisions of the Bearer Shares Law shall be punishable as outlined in this law. The beneficial owner(s) failure to comply with the provisions of this law in a timely manner may result in him/her definitely losing his/her rights to exercise any and all political and economic rights associated to the bearer shares. Any authorized custodian that fails to comply with the provisions of this law in a timely manner may be subject to financial as well as regulatory penalties (eg, temporally lose the right to act as an authorized custodian for a period of three (3) years). Unauthorized breaches of confidentiality by an authorized custodian are stringently penalized pursuant to the Bearer Shares Law.