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: April 2015

GLOBAL STATISTICAL UPDATE – XBMA Quarterly Review for First Quarter 2015

Editors’ Note: The XBMA Review is published on a quarterly basis in order to facilitate a deeper understanding of trends and developments. In order to facilitate meaningful comparisons, the Review has utilized consistent metrics and sources of data since inception. We welcome feedback and suggestions for improving the XBMA Review or for interpreting the data.

Executive Summary/Highlights:

  • Global M&A volume in Q1 was US$854 billion, the highest Q1 volume in recent years, carrying momentum from a strong 2014 into 2015.  If deal activity continues at its current pace, global M&A activity in 2015 will at least match last year’s strong volume of approximately US$3.5 trillion.
  • The surge in M&A activity over the last several quarters is being driven by large corporate cash balances (carried at virtually zero return) and high stock prices that together provide strong acquisition currency, attractive financing for most corporate borrowers, a strong U.S. and strengthening global economy, and continued industry consolidation, notwithstanding continued regional tensions in central Europe and the Middle East and lingering concerns about growth in some economies.
  • The United States is off to a fast start in 2015, accounting for approximately 50% of global deal activity in Q1.   Q1 deal activity was headlined by a number of U.S. megadeals, including Heinz’s US$55 billion acquisition of Kraft and AbbVie’s US$20 billion acquisition of Pharmacyclics.
  • At its current pace, cross-border M&A activity will account for 31% of global deal volume in 2015.  Cross-border M&A activity is on pace to reach close to the same level as 2014, which itself was a significant increase over prior years, as companies continue to seize opportunities for growth and expansion in overseas markets.
  • The United States, Europe, and China accounted for 90% of Q1 deal activity, compared to a recent average of 75%.

Click here to see the Review

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: Cyril Shroff is a member of XBMA’s Legal Roundtable and one of the deans of the Indian corporate bar and a leading authority on Indian M&A, with extensive experience handling many of the largest and most complex domestic and cross-border M&A, takeover, banking and project finance transactions in India.

Executive summary: The following article discusses the introduction of the 2015 Regulations to overhaul the legal regime to address challenges posed by the 1992 Regulations. Such challenges included limited scope of definition of ‘insider’ or ‘connected person’, no clear guidance on due diligence in listed company transactions and over regulation by prescribing detailed disclosure requirements and internal compliance processes to be followed by listed companies.  This article provides a background of insider trading related concepts in India, and the practical challenges that companies doing business in India may encounter pursuant to the 2015 Regulations becoming effective.

Main Article:


    Across jurisdictions, insider trading has garnered a lot of attention within the realm of market conduct, not only as a scholarly analysis of (occasionally conflicting) economic theories but also as a distinctive type of market conduct, which has necessitated continuously evolving jurisprudence and critical regulatory scrutiny. The very essence of the prohibition on insider trading has been the impetus to maintain a level playing field in the marketplace and the dynamic nature of the legal framework has, therefore had the underlying objective of casting a wider net, in light of complex securities market products and increased access to information in this age of technology.

    With an aim to ensure information symmetry and integrity of price discovery mechanism in the securities market, the insider trading regime in India was first crystallised by the Securities and Exchange Board of India (“SEBI”), the securities market regulator, in the form of SEBI (Prohibition of Insider Trading) Regulations, 1992 (“1992 Regulations”). This was followed by significant amendments in the years 2002 and 2008 to address the evolving needs of the market and to plug certain loopholes. Subsequently, a High Level Committee under the Chairmanship of Justice N. K. Sodhi (“Sodhi Committee”) was constituted to review and strengthen the existing framework, which released its recommendations vide a report dated December 7, 2013 along with draft of the proposed regulations. This report formed the basis for introduction of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“2015 Regulations”) which will take effect from May 14, 2015. The 2015 Regulations, coupled with the provisions introduced by the Companies Act, 2013 (“Companies Act”) on insider trading and the amendments to the SEBI Act, 1992 (“SEBI Act”) conferring enhanced enforcement powers on SEBI, will now determine the extent and implementation of insider trading liability to business dealings in India.

    The introduction of the 2015 Regulations is certainly a laudable effort by SEBI in overhauling the legal regime to address challenges posed by the 1992 Regulations. Such challenges included limited scope of definition of ‘insider’ or ‘connected person’, no clear guidance on due diligence in listed company transactions and over regulation by prescribing detailed disclosure requirements and internal compliance processes to be followed by listed companies.

    This article aims to trace the development of some insider trading related concepts in India, and the practical challenges that companies doing business in India may encounter pursuant to the 2015 Regulations becoming effective.


    Securities market laws in India often find their jurisprudential basis in off-shore jurisdictions especially the United States (“U.S.”), where prohibition of insider trading emerged as a central feature of securities laws since the 1960s.

    The “classical theory” of insider trading, based on the anti-fraud provisions, i.e. Section 10(b) of the Securities Exchange Act[1] and Rule 10b-5 of the Securities Exchange Commission Rules[2], makes it unlawful for ‘corporate insiders’ to trade in securities on the basis of material non-public information in breach of the fiduciary obligations owed to the company and its shareholders. A complementary theory to the classical theory which aims to cover ‘corporate outsiders’, known as the “misappropriation theory”, deals with misappropriation of confidential information by corporate outsiders for securities trading purposes, in breach of a duty of trust and confidence owed to the source of the information and with expectation of a personal benefit.

    Interestingly, recent caselaws[3] in the U.S. are indicative of efforts to go beyond these theories and de-link the insider trading offence from breach of fiduciary or similar duty owed to the company. The basis for insider trading, instead, has been deemed to lie in “affirmative misrepresentation” which gets triggered upon misappropriation of confidential information by corporate outsiders, resulting from a breach of private contracts or confidentiality agreements, irrespective of the existence of a fiduciary or similar relationship.

    On the other hand, the insider trading laws in other jurisdictions such as United Kingdom (“U.K.”), Australia and Hong Kong are broader and already cover scenarios that do not necessarily require existence of a fiduciary or fiduciary like relationship to levy an insider trading allegation. The other elements required to determine culpability may, however, vary in these jurisdictions depending upon factors such as inter alia: (i) knowledge of the information recipient that the information is material and price sensitive; (ii) the ambit of material non public information or unpublished price sensitive information (“UPSI”); (iii) derivative liability of information provider vis-a-vis trader; (iv) profit motive; and (v) exonerating circumstances.

    In India, the insider trading jurisprudence places significant reliance on these jurisdictions and the 2015 Regulations, in principle, cover corporate insiders under the broad head of ‘connected persons’ and corporate outsiders get roped in by virtue of the residual clause in definition of an ‘insider’ which covers all persons in possession of or having access to UPSI. The distinction between these two categories, as they exist in India, is that the burden of rebutting the presumption of possession of UPSI lies on the corporate insiders, whereas, for corporate outsiders who are not deemed to be connected to the company, the onus of furnishing proof remains with the regulator.


    The press release accompanying the 2015 Regulations states that the primary objective for the introduction of the new regulations has been to strengthen the legal and enforcement framework, align Indian regime with international practices, provide clarity with respect to the definitions and concepts, and facilitate legitimate business transactions.

    One of the most noticeable and distinguishing feature of the 2015 Regulations is the inclusion of specific ‘notes’ in some of the provisions, which set out the legislative intent and rationale behind the formulation of the particular legal requirement. Whilst the Sodhi Committee report specifically noted that the ‘notes’ are an integral and operative part of the regulations, this clarification does not form a part of the 2015 Regulations, which may impact the enforceability and reliability of these additions. A case in point is the definition of “trading” in securities which includes dealing and agreeing to deal, in addition to subscription, purchase and sale of securities. The relevant note however extends the scope of the definition to cover pledging of securities. Such inclusion, being outside the purview of the legislation, not only expands the scope of the legislated definition beyond the interpretative limits, it also leads to adversely impacting standard financing transactions in India where promoters are usually expected to pledge their shares to lenders of listed companies. Therefore, to the extent ‘interpretative notes’ undermine or broaden the plain meaning of the 2015 Regulations, it will be interesting to see how courts will resolve any conflicting interplay between the notes and the regulations.

    Set out below are some key conceptual changes introduced by the 2015 Regulations and the analysis of the expected impact these may have on dealings in the Indian securities markets:

    1. UPSI – now a misnomer?

      In relation to unpublished price sensitive information, the 1992 Regulations interpreted the term ‘unpublished’ literally and prescribed that only information published by the company would be outside the purview of UPSI. However, under the new regime, there is no longer a specific requirement for the company itself to publish or authenticate the information and this renders the continuous usage of the term “UPSI” in the 2015 Regulations a misnomer.

      The 2015 Regulations recognize two specific categories of information that are potentially available in relation to a company and its securities: (i) generally available; and (ii) UPSI. The term UPSI has been defined to mean any information relating to a company or its securities, directly or indirectly, that is not generally available, and which upon becoming generally available is likely to materially impact the price of securities. The phrase generally available information has been defined to mean information that is accessible to the public on a non-discriminatory basis. The note to the definition states that information published on the stock exchanges’ websites would ordinarily be considered as generally available information.

      To assess the practical implication of the new definition, it is important to delve into the legislative and judicial developments which shaped the understanding of UPSI in the previous regime. Prior to 2002, ‘unpublished price sensitive information’ was defined as ‘any information which relates to…a company, and is not generally known or published by such company for general information…’. Consequently, in the case of HLL v. SEBI (July 1998), it was observed by the Appellate Authority that for information to be ‘generally known’ it was not required for such information to be authenticated or confirmed by the company. However, subsequently, in 2002, the definition of ‘unpublished’ was amended in the 1992 Regulations to mean ‘information which is not published by the company or its agents..’, with the specific intent to exclude information which is ‘generally available’, such as speculative reports, etc., and which had not been authenticated by the company, from the scope of ‘unpublished price sensitive information. However, the 2015 Regulations now seem to revert to the pre-2002 position by creating a carve-out for generally available information.

      Interestingly, the term ‘non-discriminatory’ has not been defined in the 2015 Regulations, and therefore the extent to which such information should be disseminated in the public domain, for it to be considered as available on a non-discriminatory basis, remains uncertain. Given the geographical spread of India and the various tools of communication available across different investor classes, terms such as ‘non discriminatory’ and issues concerning whether information available in research reports or in newspapers with limited circulation, will be considered to fall within this definition, remain open to interpretation. While several jurisdictions such as Australia, Singapore and Malaysia use the phrase ‘generally available’ to refer to non-public information in the context of insider trading laws, unlike India, none of these jurisdictions qualify such information with ‘non-discriminatory’ accessibility. Whilst the meaning and scope of the phrase ‘generally available information’ is interpreted by their courts and applied depending upon the facts and circumstances of each case, it will be interesting to see the parameters developed by SEBI to consider information as ‘generally available’ or ‘available on a non-discriminatory basis’.

    2. Communication for PIPE deals & Impact on M & A in India

      The 2015 Regulations prohibit communication to any person of UPSI in relation to a company or securities, listed or proposed to be listed. However, an exception has been carved out for communications for all legitimate purposes, performance of duties or discharge of legal obligations. The relevant note states that the rationale for this carve-out is to ensure that organisations develop practices based on ‘need to know’ principle for treatment of information in their possession. Although intended to provide greater flexibility in communication while conducting business such as evaluation of a deal, or communication with promoters etc, it may be difficult to draw the contours of what would constitute such legitimate purpose, in the absence of guidance from SEBI.

      In this regard, the 1992 Regulations only exempted communication of UPSI required in the ordinary course of business or profession or employment. The wider exception in 2015 Regulations is based on international experience, where regulators have acknowledged and recognised that UPSI may in certain circumstances have to be shared selectively, including with major shareholders and other persons requiring such information to fulfil their duty.

      Specifically in the context of deal making, the 2015 Regulations permit sharing of UPSI in connection with potential transactions, subject to compliance with certain prescribed conditions set out below.

      • Mandated disclosures: In relation to a transaction that would not entail an obligation to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“Takeover Regulations”), any UPSI shared with the prospective acquirer is required to be made generally available two trading days prior to the proposed transaction being effected, in a form determined by the board of directors (“Mandated UPSI Disclosure”). In SEBI’s view (a) the Mandated UPSI Disclosure will ensure ruling out of any information asymmetry before any transaction that has involved sharing of UPSI on a selective basis; and (b) non-applicability of this requirement to an open offer under the Takeover Regulations is acceptable as the open offer process itself requires disclosure of such UPSI.[4] However, it is not clear if SEBI has considered whether the Mandated UPSI Disclosure will lead to speculative trading and if so, this is an acceptable consequence. From deal making perspective, such Mandated UPSI Disclosure is bound to impact the stock price, which consequently will also impact the commercials of the underlying transaction, as under Indian law, the floor price for acquisition of shares of listed companies is linked to the trading price over a specific look back period from the date of signing.
      • Involvement of the Board: The 2015 Regulations cast an obligation on the board of directors to (i) form an informed opinion that the transaction is in the ‘best interests’ of the company (“Upfront Board Approval”); and (ii) ensure that confidentiality and non-disclosure contracts are duly executed between the parties and that such parties keep the information received as confidential and do not indulge in insider trading. It is pertinent to note that the 1992 Regulations provided an unconditional white wash for disclosing UPSI to an acquirer if an open offer was made and the requirement of seeking the Upfront Board Approval has been introduced for the first time by the 2015 Regulations.
      • Impact on deal making: The requirement of seeking an Upfront Board Approval significantly impacts the dynamics of deal making in India as usually the management of companies are empowered to negotiate and take all steps necessary (including disclosure of information to counter parties as part of due diligence) to finalise the terms of the transaction, including transaction documents. The board of directors then, in a meeting held usually a day or two in advance of the execution, reviews the finalised terms and the agreed drafts of the transaction documents for a final sign off and for granting its approval for execution. Therefore, the Upfront Board Approval will modify the usual process of deal making and is not just a procedural hurdle, given that at this stage, it is unclear how the board of directors will form an ‘informed opinion’ on the proposed transaction, without having had the management negotiate the terms of the transaction and finalise the transaction documents, which in turn will depend upon the management having allowed the counter party to undertake due diligence.
      • Secondary market transactions: The requirement of the Upfront Board Approval may become a road block especially for secondary market transactions where the acquirer chooses to undertake due diligence. This is because not only will such a transaction require approval of the board of directors of the company (which ordinarily is not required) but the board approval may also not be forthcoming unless strong commercial/ strategic rationale is set out by the acquirer to convince the board of directors of the transaction being in the interest of the company even when there is no direct/ obvious benefit from such a secondary transaction.
      • Independent Directors: The challenges of seeking the Upfront Board Approval are compounded by the liability attached to the responsibilities of directors under Indian law. It is not clear what standards SEBI will adopt to verify if the decisions of the board of directors stand the test of ‘informed opinion’ and whether SEBI will sit in judgment over the commercial wisdom of the board of directors.

    The Chinese wall arrangements implemented by companies continue to be recognized as a defence to an insider trading charge under the new regime. Interestingly, the 2015 Regulations provide a broad defence mechanism whereby an “insider may prove his innocence by demonstrating the circumstances”. Some instances of such circumstances have been expressly provided in the 2015 Regulations and include the following situations:

    1. Information Parity

      The parity of information defense is available for inter-se transfers between promoters off the exchange, when such promoters are in possession of same UPSI. Whilst the Sodhi Committee report had provided parity of information as a valid defense generally, this has been significantly curtailed in the 2015 Regulations and limited to off-market deals between promoters only.

    2. Trading plan

      The 2015 Regulations permit trading undertaken on the basis of a trading plan formulated for a one year period, commencing from the expiry of a six month period post the public disclosure of such plan. This concept is followed in several jurisdictions including U.S. and U.K. to allow large stockholders, directors, officers and other insiders who regularly possess material non public information but who nonetheless wish to buy or sell stock to establish an affirmative defence to an illegal insider trading charge by adopting a written plan to buy or sell, at a time when they are not in possession of such information.

      The Indian regime on this issue is relatively less flexible, on comparison with other jurisdictions, and viability of trading plans in India is likely to be significantly impacted due to the onerous requirements set out in the 2015 Regulations, which inter alia include:

      1. the trading plan, once approved, cannot be revoked or amended, and would have to be mandatorily followed;
      2. the insider cannot deviate from it or undertake additional trades on account of corporate actions or even if market conditions or prospects of a company undergo significant change;
      3. the trading plan will have to be disclosed to the compliance officer of each of the companies in whose securities the person seeks to trade, for approval and regular monitoring of implementation if approved; and
      4. once approved, the compliance officer will notify the trading plan to the exchanges and such public disclosure may impact the trading of such securities leading to artificial movement in price and volume.

      In addition to the above, the trading plan will come into force only once the UPSI in possession of the insider at the time of formulation of the trading plan becomes generally available. This requirement therefore renders the trading plan concept implausible for perpetual insiders who are always in possession of UPSI. The regulations also provide that these plans would not grant absolute immunity to the insiders and they will still be open to proceedings for market abuse, resulting in no real incremental benefit or exemption to the user of a trading plan.

    3. Other Safe Harbors- Is the Mens Rea defence back?

      Due to the broad ended and inclusive nature of the provision, the 2015 Regulations arguably provide for a blue sky defence and permit an insider to prove his innocence by demonstrating the attendant circumstances surrounding the trade. Several jurisdictions such as Singapore, Malaysia, Australia determine the culpability of a person on the basis of his knowledge of the nature of the information in his possession. In this regard, the relevant note in the 2015 Regulations states that trades undertaken by a person in possession of UPSI would be presumed to have been motivated by the knowledge and awareness of such information in possession. Although this would be sufficient to bring a charge of insider trading, it would be open to the insider to prove his innocence by demonstrating the extenuating circumstances. Similarly, other  exonerating circumstances like undertaking trades contrary to the nature of the UPSI, although discussed in Sodhi Committee report but not specifically mentioned in the 2015 Regulations, may still be available to an insider to justify his conduct.

      In view of the above, it will also be interesting to evaluate if the corporate purpose defence, based on the decision of Securities Appellate Tribunal in Rakesh Agrawal vs. SEBI (November 2003) wherein it was held that genuine transactions undertaken to achieve a legitimate corporate purpose are valid, continues to remain available.

  5. ENFORCEMENT- What to expect in the coming years?

    In terms of the 2015 Regulations read with the SEBI Act, SEBI is empowered with the enforcement of these regulations. As under the old regime, SEBI can continue to utilize the following enforcement mechanisms to deal with instances of insider trading:

    1. SEBI Board orders under the SEBI Act;
    2. Enquiry proceedings under the SEBI (Intermediaries) Regulation, 2008;
    3. Adjudication proceedings under the SEBI Act;
    4. Criminal prosecution under the SEBI Act and the Companies Act.

    Given the gravity of insider trading offences, the consent mechanism is not available in these cases. Also, going forward, the investigation and enforcement of the insider trading cases by SEBI is expected to significantly intensify in view of the powers conferred upon SEBI in terms of the amendments to the SEBI Act. The key powers include search and seizure of records, including call records, as well as the power to call for any information that may be relevant from any person. Historically, regulatory action and prosecution in most of the insider trading cases has relied upon circumstantial evidence but with these brand new powers, SEBI will be able to speed up the investigations and proceedings and discharge its onus of proof effectively.


    The 2015 Regulations, with an objective to further strengthen the regulatory framework and facilitate transactions (both from the perspective of perpetual insiders and acquisitions), are certainly a big step towards making the markets more business friendly.

    However, the 2015 Regulations, in their present form, do appear to go beyond the scope and objective it initially set out to achieve and is likely to have a number of unintended consequences that have been discussed in the preceding paragraphs. For instance, it remains to be evaluated what best practices the Indian securities market will adopt in light of the international concepts and practices (viz. trading plan etc.) incorporated in the Indian regulations. Further, the manner in which certain provisions have been drafted, read with interpretive notes that have now been introduced as legislative guides, are fraught with the risk of causing a fair amount of collateral impact on public M&A in India. This will require some careful and complex legal manoeuvring around the regulations to facilitate transactions with minimal impact commercially.

    It will also be important to reconcile the provisions of the 2015 Regulations with the Companies Act, which, in its current form, penalises insider trading in the context of unlisted private and public companies, in order to ensure standards are consistently applied across companies. Notwithstanding the above, the introduction of the 2015 Regulations, coupled with the enhanced enforcement powers of SEBI are a recipe for interesting times ahead, in terms of evolving market practice, as well as jurisprudence in India.

[1]     Section 10(b) of the Securities Exchange Act prohibits the use of any deceptive device in connection with the purchase or sale of securities

[2]     Rule 10b-5 prohibits both affirmative misrepresentations and nondisclosure of material information in connection with the purchase or sale of any security.

[3]     SEC v. Cuban 634 F. Supp. 2d 713 (N.D. Tex. 2009); SEC v. Dorozhko 574F.3d 42 (2d Cir. 2009).

[4]     Note to Regulation 3(3)(i) of the 2015 Regulations: In an open offer under the takeover regulations, not only would the same price be made available to all shareholders of the company but also all information necessary to enable an informed divestment or retention decision by the public shareholders is required be to made available to all shareholders in the letter of offer under those regulations.

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.

Korean Update – M&A in Korea – A Year in Review and Outlook (2015)

Editors’ Note: Joon B. Kim is a partner at Kim & Chang. Mr. Kim is an expert in inbound and outbound mergers and acquisitions of public and private companies as well as disputes and investigations relating to foreign direct investment and antitrust issues involving multinational corporations.


Korea had the strongest and most active M&A market in 2014 during the past five years with a 47% increase in announced deal volume from USD 64.8 billion in 2013 to USD 95 billion in 2014 (based on Bloomberg statistics), and Kim & Chang had the privilege of advising on transactions accounting for approximately USD 38 billion, amounting to 40%, of such total for 2014.  Inbound investments into Korea were particularly active as offshore private equity funds sought to capitalize on the buyout opportunities arising from the Korean government’s efforts to restructure and ease the debt burden of selected, highly leveraged Korean conglomerates (chaebol in Korean), which resulted in many assets and businesses, including core businesses, of such conglomerates being divested and sold in 2014.  The market also witnessed increased voluntary restructuring efforts by financially sound conglomerates to strengthen and focus on their core businesses (e.g., proposed sales of non-core businesses by POSCO and KT Corporation, and the recently announced Samsung-Hanwha deal), and we expect such financial restructuring and voluntary restructuring efforts by Korean conglomerates, combined with upcoming exits of maturing private equity investments, small to mid-cap cash-out transactions by controlling shareholders and private equity or venture minority investments, to continue to support a healthy and dynamic Korean M&A market in 2015.  Another key recent trend is the rising competition and sophistication of domestic private equity funds, which are contributing to the vigor and enthusiasm for Korean assets as investment commitment in such domestic funds exceeded KRW 50 trillion (approximately USD 46 billion) for the first time in history in 2014, and the domestic funds are now actively searching and competing for investment opportunities in Korea alongside traditional offshore private equity heavyweights.

To briefly recap the past year and to stay abreast of key issues of interest in Korean M&A, we share below our observations on some of the material recent developments and issues widely discussed in Korean M&A circles.

M&A Regulatory Landscape.  Understanding the value and contribution of healthy M&A activities to the overall economy, the Korean government continued its efforts in 2014 to promote an M&A friendly regulatory environment.  In particular, the Korean government sought to alleviate regulatory hurdles restricting investments and the growth of private equity by proposing numerous deregulatory legislations, including the following which are now subject to the deliberation and vote of the National Assembly:

  • Amendment of the Korean Commercial Code to permit and facilitate previously prohibited transaction structures, including triangular spin-off and triangular share exchange, and allow the board of directors of companies to definitively approve certain business and asset transfers without shareholder approval;
  • amendment of the Financial Investment Services and Capital Markets Act to abolish the prior approval requirement for establishing local private equity funds thereunder and adopt an after-the-fact notice scheme to allow such funds to promptly commence operations upon establishment, and expand the scope of permitted investment targets and structures of such local private equity funds; and
  • amendment of the Monopoly Regulation and Fair Trade Law to exempt establishments of such local private equity funds and special purpose vehicles and certain other corporate events from merger filing requirements.

The Korean government appears to be committed to its deregulation efforts, and we expect the improved legal infrastructure to facilitate and support the continued growth of M&A, and particularly private equity investments, in Korea.  Nonetheless, navigating the regulatory requirements to consummate an M&A transaction in Korea is often a complex and delicate task, particularly in regulated or nationally sensitive industries, and potential investors are well advised to undertake a comprehensive analysis of potential regulatory obstacles early in their review of proposed investments in Korea.

Withholding Tax on Capital Gains.  Korean tax on Korean source income, particularly capital gains, earned by offshore funds has been a consistent topic of interest for offshore funds and the Korean tax authorities in 2014.  The issue of whether the Korean tax authorities would look through the offshore funds towards the ultimate investors of the funds in applying tax treaties to, and assessing tax on, Korean source capital gains remains unresolved as there remains a conflict between two positions respectively supported by statutory law and a line of Korean Supreme Court decisions.  First, the so-called Overseas Investment Vehicle (OIV) regime, which became effective as of July 1, 2012 for Korean source passive income (e.g., dividend, interest and royalty income) and as of January 1, 2014 for Korean source capital gains, supports looking through the offshore funds, typically limited partnerships, towards the limited partners of such funds as the beneficial owners of the Korean source capital gains and affording to such limited partners the benefit of any tax treaty in effect between Korea and their resident country.  This regime is consistent with the past practice of the Korean tax authorities, as well as the OECD’s position on taxation of offshore funds.  On the other hand, the Korean Supreme Court, in a series of decisions since 2012, have found offshore funds themselves to have distinct business purposes and be the beneficial owners of Korean source capital gains in relation to transactions consummated prior to the effective date of the OIV regime.  Currently, a request for authoritative ruling remains pending before the Ministry of Strategy and Finance, the Korean governmental body responsible for the interpretation of tax laws and treaties, to resolve this apparent inconsistency, and the Ministry is soon expected to provide official guidance on the operations of the OIV regime against the backdrop of the recent line of Korean Supreme Court decisions.

Acquisition Financing.  On January 22, 2015, the Seoul Central District Court rendered a notable decision regarding the alleged breach of fiduciary duty in connection with a leveraged buyout (LBO) transaction in the Hi-Mart case.  The lower court in Hi-Mart, with distinct factual circumstances under review, held that the directors of the target company should not be held criminally liable for breach of fiduciary duty in a “merger type” LBO (a structure whereby the acquirer would incorporate an SPC which would borrow funds for the acquisition, and thereafter merge the SPC with the target, thereby giving the creditor a direct recourse to the assets of the target) underscoring, among others, the financial soundness of the SPC, the assets of the target not being encumbered to secure the acquisition financing obligations of the SPC, and the merger being consummated in accordance with applicable laws.  The lower court’s reasoning and decision in Hi-Mart may provide meaningful guidance on structuring of future LBO transactions.  However, caution is still warranted to potential legal risks when structuring an LBO transaction of this type given that the Korean courts view the legality of an LBO transaction on a case-by-case basis and have, in fact, held LBO transactions in criminal violation of the directors’ fiduciary duty in many cases (again, the subject lower court’s holding in Hi-Mart was rendered upon detailed review of distinct set of facts) and Hi-Mart may still be appealed to the appellate court and potentially to the Supreme Court.

General Partner Liability.  Many private equity fund personnel have frequently inquired on the scope of fiduciary duties and liabilities of a director serving on the board of directors of a Korean portfolio company.  Underscoring the need for private equity funds to exercise caution in managing their Korean portfolio companies, a Korean court recently allowed creditors of a Korean company to provisionally seize the management fees and carried interest owed by a private equity fund to its general partner in connection with a damage claim brought against the general partner.  According to news reports, the creditors are claiming that the directors of the company breached their duties of loyalty and care and the private equity fund is liable as a controlling shareholder who actively participated in the management of its Korean portfolio company.  Although it remains to be seen whether the court will ultimately find the directors and the general partner to be liable, this development serves as a prominent reminder of the importance of understanding the scope of fiduciary duties of directors of Korean companies and the potential liability for not only the private equity fund personnel serving as directors but also the general partner of the private equity fund.

Compliance.  The current Korean administration has emphasized its commitment to address the potentially corrupt ties between the government and the private sector in various industries.  In July 2014, Korean government agencies jointly formed the Anti-Corruption Task Force, which investigated nearly 500 cases of corruption linked to government institutions within two months of its establishment, implicating over 1,700 individuals.  Further, the most significant new anti-corruption legislation to-date, namely the “Act on Prevention of Improper Solicitation and Provision/Receipt of Money and Valuables”, which is more commonly known as the “Kim Young-ran Law”, is expected to be passed and voted into law by the National Assembly in February 2015.  If passed in the current form, the new law would, among others, (i) criminalize receipt of an amount or benefit of over KRW 1 million (approximately USD 920), even if not connected to the duties of the relevant public official, (ii) criminalize bribery of smaller amounts, if the aggregate value of benefits provided/received in a one-year period exceeds KRW 3 million (approximately USD 2,800), and (iii) expand the scope of the subject public officials to include individuals “deemed to perform a public function in society”, such as teachers at private schools and news reporters.  Given the heightened interest by the Korean government to eradicate corrupt practices and the impending new legislation, investors in Korean corporations are strongly urged to strengthen compliance due diligence, particularly in industries with higher risks of corruption.

Employment and Labor.  Employment and labor have long been a due diligence area of focus in Korean M&A due to the strong employment rights and protections provided under Korean law to the Korean workforce.  While a number of such issues may arise in any given Korean M&A transaction based on the particular facts and circumstances, below are three of such issues frequently encountered in recent transactions.

  • Ordinary Wage. In 2014, contingent liabilities of Korean companies arising from potential unpaid wage to their employees due to a retroactive and prospective increase in “ordinary wage” (a Korean labor term describing the base wage of an employee and used as a basis for calculating additional wage for statutory allowances, such as overtime and holiday work allowances) were extensively diligenced, and negotiated between transaction parties to allocate risks in numerous Korean M&A transactions.  The landmark Korean Supreme Court decision addressing this issue (rendered in December 2013), continues to heavily influence how parties analyze and assess risks as to unpaid wage arising from ordinary wage.  In short, the Korean Supreme Court held that certain allowances and bonuses customarily excluded in calculating the ordinary wage of employees must be included and added if paid on a “regular”, “uniformed” and “fixed” basis unless certain conditions (among others, where the payment of such unpaid wage would result in an excessive financial burden on the relevant company) justify barring employees’ unpaid wage claim arising therefrom based on the principle of good faith and trust.  Since the Supreme Court decision, numerous claims for unpaid wage based on the ordinary wage issue have been filed by employees (frequently led by labor unions), and lower courts have issued at times conflicting decisions in interpreting whether a certain allowance or bonus satisfies the requirement to qualify as ordinary wage or whether the requirements for the good faith and trust exception have been satisfied.  We expect this issue to remain hotly contested in Korea in 2015.
  • Additional Allowance for Holiday Work. Another unpaid wage issue that has received much attention in 2014 is whether employers are required to pay overtime work allowance, in addition to holiday work allowance (each of which would provide employees with an additional payment of 50% of ordinary wage), to their employees for hours worked during holidays.  Until recently, based on administrative guidelines previously issued by the Ministry of Employment and Labor, most Korean companies only paid holiday work allowance, in addition to ordinary wage, to employees for less than eight hours worked on any given holiday.  Employees recently started to bring lawsuits claiming entitlement to overtime work allowance in addition to holiday work allowance for such hours worked during holidays, and a majority of the lower courts have held in favor of employees and ruled that employees are entitled to receive an additional payment of a total of 100% of ordinary wage for each hour worked during a holiday.  The Korean Supreme Court is expected to weigh in on this issue soon, and practitioners and commentators expect the majority lower court decisions to be upheld.
  • Labor Unions. In addition to being a key diligence concern, labor unions of Korean companies have at times delayed or even derailed Korean M&A transactions by making excessive demands for employment guarantee, incentive payments (often referred to as M&A bonus) and other concessions in cases of change of control transactions.  Accordingly, investors should consider preparing a game plan at the initial outset of a Korean M&A transaction to understand the characteristics and concerns of the relevant labor union.

We hope you find our discussion above helpful as you consider Korean investment opportunities.  Please feel free to reach out to us if you have any Korea related issue of interest, and we would be happy to discuss and provide our input.

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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