UK UPDATE – Understanding and Dealing with Hedge Funds and Shareholder Activism Across Europe: The Impact of the Financial Crisis
Executive summary:
The attached guide takes a pan-European look at trends and developments through the 2008 financial crisis and in the period since, focusing on:
- the position of hedge funds: their behaviour, performance and strategies in that period, as well as the changed regulatory landscape they now face, and
- activist behaviour by both hedge funds and other investors during that period.
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CHINESE UPDATE – China to Amend Civil Procedural Law
Highlights:
The Draft Amendment contains substantial changes to the Civil Procedural Law, with an aim to solve many practical problems in civil trials from small claims to enforcement. One of the fundamental legislative purposes of the current amendment is to provide more rights to Chinese citizens in civil trials, and to make the country’s civil trial system more transparent. It is also observed that the proposed amendment published for public comments has drawn heated public debates on many issues from both the general public and legal professionals.
Main Article
In recent years, China has continuously reformed its legal system, and has gained significant experience in judicial practices. However, China continues to meet new challenges to be addressed by new or amended laws. Against this background, the Draft Amendment to the Civil Procedural Law of the PRC (the “Draft Amendment”) was published for public comments on October 29, 2011. When the final amendment is promulgated, it will be the first time that the PRC Civil Procedural Law is substantively amended since its enactment in 1991, and it will have a major impact on how civil disputes will be handled in China. We list below some of the most important changes and supplements introduced by the Draft Amendment.
Pre-trial Mediation in Civil Procedure
Mediation is an important form of judicial practice in China. A Court will often attempt to mediate during the trial of a civil case, because it is a traditional and efficient way to resolve disputes between the parties while maintaining their future relationships. If a settlement is reached, the court can render a judgment based upon the settlement agreement (a consent judgment), which is directly enforceable.
China has a long-established system of “the People’s Conciliation Committee,” whose main function is to receive requests from parties to mediate a dispute before trial. A settlement reached under the guidance of a conciliation committee is not directly enforceable. In recent years, as China’s economy is continuing to grow, caseloads in court are becoming increasingly heavy. The Draft Amendment attempts to resolve this problem by creating a new mechanism for formal pre-trial mediation. Before the trial begins, the court may try to settle disputes that have not been handled or resolved by the People’s Conciliation Committee. If successful, the court can directly issue a settlement agreement that is enforceable. A trial is no longer necessary, thereby saving judicial resources.
Public Interest Litigation
The PRC Tort Liability Law enacted in 2010 grants Chinese citizens the statutory right to sue companies for tort damages. However, for most claims that involve environmental pollution and food safety, individuals who act as the plaintiffs are in a weak position against large corporate defendants. To better protect the interests of individual victims and to prevent further injury to the general public, the Draft Amendment proposes to grant relevant institutions and social organizations a legal standing to file lawsuits where public interests are at stake. The Draft Amendment limits public interest litigation to cases involving environmental pollution and consumer rights.
Access to Court Records
China is primarily a “civil law” jurisdiction, with a system that uses statutes as the major source of law and does not officially recognize the authority of precedents as in the common law system. Nonetheless, the capability to make a reference to decided cases similar in facts and legal principles can provide significant guidance for winning an argument before a court in practice. Thus far a problem has been that court records are not open to the public but are only available to the parties for their own cases. To solve this problem, the Draft Amendment proposes that all the final judgments and rulings be made accessible to the public. Understandably, more transparency will improve the quality of trials, and judgments and will provide parties with more opportunities to cite cases as a reference when arguing in court.
Enforcement
One of the most-cited challenges to the civil litigation system in China is the difficulty to enforce a judgment. In practice, judgment creditors will gather and provide to the court relevant information on the locations of judgment debtors’ properties, while on the other hand it is relatively easy for a debtor to evade enforcement measures. To better protect judgment creditors, the Draft Amendment increases the maximum financial penalty for bad-faith evasion of enforcement up to RMB 100,000 for an individual and up to RMB 1 million for an entity. The Draft Amendment also proposes to introduce detention measures as a form of penalty and suggests that a party that intentionally evades the enforcement of an effective judgment or arbitration award could face criminal liability.
In addition, the Draft Amendment proposes to introduce a new procedure of “pre-judgment enforcement” by plaintiffs. Besides property preservation, a plaintiff can also apply for a pre-judgment injunction to require a defendant to do or refrain from doing specific acts.
Conclusions
The above features are only some of the highlights of the Draft Amendment. Other interesting amendments are also important, including new rules on evidence production, on making small-claim judgments final at the trial court level, and on requiring courts to provide written reasons for refusal to hear a case. It remains to be seen which parts of the Draft Amendment will eventually become law, but this initiative has already drawn much publicity and heated public discussions on some topics.
Global Technology M&A Update – Technology M&A Surges In Difficult Environment
Five disruptive technology megatrends drove the value of global technology mergers and acquisitions (M&A) up 41% in 2011, while volume increased by 13% — even as the value of global M&A in all industries fell slightly amid economic uncertainty, according to Ernst & Young’s Global technology M&A update, October — December 2011 and year in review.
According to the report, the year’s most notable deal drivers were five technology megatrends: smart mobility, cloud computing, social networking, ‘big data’ analytics and a growing sense of blur, as industry sectors blur together and the technology industry itself disrupts other industries — challenging whether certain companies are pure technology companies or have entered the industries they are disrupting.
In addition, an increasing need for information security is being driven by all five megatrends. These disruptive innovations are remaking the technology industry while enabling transformative change in other industries as well.
2011 technology M&A highlights
- Megatrends, mega deals: thirty-four deals rose above $1 billion in 2011 — including two above $10 billion — compared with 26 in 2010 and 19 in 2009.
- The “social-mobile-cloud” phenomenon dominated deal-driving trends in 2011. We call this a phenomenon because the trends reinforced and accelerated each other over the course of the year.
- Business intelligence and analytics emerged as a major deal-driver in 2011, powered in part by the social-mobile-cloud phenomenon.
- Aggregate deal value (for deals with disclosed values) reached $168 billion (up from $119 billion in 2010).
- Private equity (PE) deal values soared 67% to $33 billion.
- Full-year deal volume was up 13% to 3,006 deals.
- Average value per deal (for deals with disclosed value) was $167 million, up 27% over 2010 and the highest annual average deal value in the five-year history of the report.
Fourth quarter 2011 technology M&A highlights
- Deal-making growth slowed in the last quarter, showing that technology is not fully immune to the global macroeconomic uncertainty.
- At 676 deals, deal volume declined for the third consecutive quarter. It’s down 4% YOY, 11% sequentially and 15% since peaking in the first quarter of 2011 at 794 deals.
- Aggregate announced deal value was $32.2 billion in 4Q11, up 7% YOY but down 43% from $56.4 billion in 3Q11.
- Cloud computing, smart mobility and social networking continued to dominate deal-driving trends in 4Q11.
- Business intelligence and analytics increased again across a spectrum of industry-specific uses, though with a strong concentration in online advertising and marketing.
Deal-driving trends, big and small
Established companies made major consolidation plays and placed big bets on the five megatrends in 2011. Software as a service (SaaS) deals rose to prominence in the fourth quarter: two SaaS deals topped $1 billion — the first time any SaaS deal topped that mark.
At the same time, a multitude of smaller deals demonstrated the strategic importance of certain technologies, especially social networking and information security, but also health care information technology (HIT), online and mobile games and advertising and marketing technologies. There were 100 — 150 deals in each of these areas in 2011, including many deals that overlapped several of them.
Consolidation and restructuring
Semiconductor consolidation also drove big-ticket deals. Five of the year’s top 10 M&A transactions, worth a combined $21.2 billion, involved established semiconductor companies as both the buyer and target. Restructuring deals were announced in many other sectors, especially the communications equipment and computers, peripherals and electronics sectors.
Cross-border growth
For the year, cross-border deals grew in aggregate value at about the same rate as in-border deals; they increased faster in deal volume, at 19% compared with 10% for in-border. The year seemed on track for even greater cross-border growth until macroeconomic uncertainty returned in the second half of the year, appearing to damp down deal flow across borders more than in-country. Our report includes region-specific snapshots for the Americas, Asia-Pacific and EMEA (Europe, the Middle East and Africa) regions.
2012 outlook mixed, but strong in the long run
The disruptive megatrends of ‘social-mobile-cloud’ and ‘big data’ analytics have helped fuel a significant rise in global technology M&A activity since 2009, despite a slight pullback due to macroeconomic pressures in late 2011,” says Joe Steger, Global Technology Industry Transaction Advisory Services Leader at Ernst & Young. “The same pressures suggest we might be in for slow growth in 2012 — but the long-term outlook for technology M&A remains strong due to ongoing disruptive technology innovation.
RUSSIAN UPDATE – Overview of the Key Amendments to the Russian Civil Code
Highlights
- On April 2, 2012, the Russian President introduced draft amendments to the Civil Code geared towards granting greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- New limited property rights will emerge addressing permanent landownership and development of land plots.
MAIN ARTICLE
On April 2, 2012 the President introduced to the State Duma draft amendments to the Civil Code (the Draft) prepared jointly by representatives of both the legal and business communities.
The Draft is primarily geared to improve regulations and the business environment in Russia. It should be furthered by the proposed modifications and enhancements with regard to legal entities, transactions, agreements, and other provisions.
The following should be noted as key changes.
1. CORPORATE LAW
First, the new regulation will grant greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Public and private companies
A new classification of business entities will be introduced, so that they will fall into the categories of either public or private companies.
As opposed to members of public companies (joint stock companies, or “JSCs”, with shares traded in regulated markets), members of private companies may freely determine the management structure. For example, they may forego a governing body and change the way general members meetings are convened, prepared, and held.
- JSC – a unified form
The form of a JSC as a closed joint stock company (“CJSCs”) will cease to exist. Before July 1, 2013 CJSCs may, at their own discretion, either (1) change their company type to an LLC or production cooperative; or (2) retain their JSC status (this will not require any extra steps to be taken as the JSC will be the standard form “by default”).
- A Shareholders’ agreement may be entered into not only between a company’s shareholders but also between shareholders, company creditors, and any third parties.
- Reorganisation scheme will be made available in various forms, including involvement of more than two corporate entities of any form of incorporation.
Second, rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- Registered capital will from now on have to be paid for by cash only.
- Registration with the Uniform State Register of Legal Entities
Interested parties will be entitled to file their objections to amendments entered in the Uniform State Register of Legal Entities, and the registration authority will be bound to consider such objections and render its decision thereon.
- Shareholders agreement
Parties to a shareholders’ agreement will be obligated to notify the company as to its execution. If they fail to notify, they will be obliged to indemnify against any damages incurred by other company members.
Furthermore, information about shareholders’ agreements for public will be subject to mandatory disclosure.
Finally, resolutions of corporate governing bodies or transactions involving parties to shareholders’ agreements may be invalidated if such resolutions / terms of transactions contradict the shareholders’ agreement.
- Affiliation and control
Now the Russian Civil Code will define specific indicia of affiliation and control and the concept of controlling and controlled persons.
Furthermore, even if formal grounds are missing, a court may confirm actual affiliation upon an analysis of factual circumstances.
Liability of controlling entities will be strengthened. In certain cases, they will be liable jointly and severally together with controlled entities and responsible for any losses incurred by the latter and their members.
- Management liability
Management as well as those who have an actual possibility to give instructions to the company’s management will be liable for any losses incurred by the company through wrongful, unreasonable or unscrupulous acts. Those who actually determine a legal entity’s conduct, without having formal grounds for control, will be also liable.
2. TRANSACTIONS AND OBLIGATIONS
First, regulation as to invalidity of transactions will be clarified.
- Limitations on grounds for invalidation of voidable transactions
Only a voidable transaction which infringes upon the rights and interests of the contesting party may be invalidated. If a party approved a transaction or expressed its intention to uphold it, that party will not be able to later contest it.
- A presumption of voidability will be established in respect of: (1) resolutions passed by meetings; (2) transactions executed in breach of a law; (3) transactions executed without the required consent of a third party, corporate authority, government authority, local authority.
- The following matters will be regulated comprehensively: (1) invalidation of resolutions passed by meetings; (2) transactions void ab initio in respect of property whose disposal is restricted or limited; (3) invalidity of transactions executed in error.
- New opportunities
Business entities may independently determine the effect of the invalidity of voidable transactions.
A party to a transaction executed ultra vires may withdraw from such a transaction.
Second, parties will have more liberty in determining terms of their transactions, the principles of optionality and freedom of contract will have a broader application.
- Conditioned performance of obligations
Despite the restriction of entering into conditional transactions that depend exclusively or primarily on one of the parties, the performance of obligations, exercise, change or termination of rights under a contractual obligation may nonetheless be made conditional in any manner.
- Irrevocable power of attorney may be used in business relations.
- Creditor agreements
Creditors will be able to enter into agreements regarding their demands for a debtor to perform its obligations and the priority of such demands.
- Managing pledged assets
Several creditors will be able to appoint a representative – a manager of pledged assets (by analogy with securities trustee known in foreign law systems) exercising the pledge rights on their behalf and to their benefit.
- Good faith acquisition of right of pledge and pledged assets
If assets are pledged by an unauthorised person, the good faith acquisition of a right of the pledge will be possible.
Onerous acquisition of pledged assets by a party, which was not aware of and was not obliged to be aware of the pledge, will be considered a good faith acquisition of the pledged assets and in such a case the pledge will be released.
- Late fee
The court’s powers to reduce the amounts of late fee penalties will be limited in business relations.
- Representations
Parties will be able to recover losses caused by false representations made prior to or following execution of an agreement.
- Indemnity
In business relations parties will be able to provide for one of the parties’ right to demand indemnification from the other party for pecuniary losses incurred in connection with performance, amendment or termination of obligations, including misconduct by third parties. Indemnity—a concept that is quite common and widely applicable in large and complex structured deals abroad—would be permitted under Russian law.
- New types of agreements
New contractual structures will be introduced: (1) a framework agreement (agreement with open terms); (2) option agreement (agreement with unconditional right to enter into a specific agreement); (3) subscription agreement (agreement with performance on demand); (4) escrow agreement.
Third, measures to protect parties’ rights will be improved.
- Pre-contractual liability will be stipulated as liability for bad faith negotiations or termination of negotiations in respect of an agreement to be executed.
- The amount of losses must be set by the court even if they cannot be credibly determined.
3. PROPERTY LAW
First, the existing system of property rights will undergo a serious change.
Second, new limited property rights will emerge: (1) permanent landownership; (2) development of land plots; (3) personal usufruct; (4) preferential acquisition of immovable property; (4) pecuniary benefit; (5) limited title of owner of a building to the land plot under such building.
This review covers only some of the changes being introduced to the Civil Code. Generally, the Draft offers a comprehensive revision of the Civil Code. It combines both innovatory and conservative proposals. Generally, the changes covered by this review are progressive in nature. Many of them meet the needs of Russian business practice and create an environment for their long-term improvement. These amendments will be conducive to better corporate governance, increased transparency and a clampdown on abuse in corporate relations, practices to preserve validity of transactions, and growth in business activity in general.
GLOBAL STATISTICAL UPDATE – XBMA Quarterly Review for First Quarter 2012
Executive Summary/Highlights:
- Global M&A volume in Q1 2012 was US$481 billion (US$1.9 trillion on an annualized basis), down 16% from Q4 2011.
- Many ingredients of an M&A resurgence are present, including would-be strategic and private equity acquirers’ considerable cash stockpiles and improving balance sheets, a historically low cost of debt financing for investment grade borrowers, rebounding equity markets, pent-up demand for resources, and attractive divestiture targets. However, continued stock market uncertainty, European economic woes, and antitrust, banking, and other regulatory pressures in the United States, Europe, and China continue to slow the pace of deals.
- M&A volume in Asia and North America declined in Q1, but European M&A notched gains for the second consecutive quarter. Europe contributed 29% of global M&A volume in Q1, eclipsing the United States (27%). Europe and the United States continued to drive global M&A volume, although to a lesser extent than in 2011, underscoring the important role of M&A in emerging markets.
- Cross-border deals accounted for 36% of global M&A volume in Q1, apace with 2010 and 2011 levels.
- Cross-border transactions have increased steadily since 2009, particularly in the Energy & Power, Materials, and High Technology sectors. The race to control natural resources continued to drive significant global M&A volume, with the Energy & Power sector producing nearly US$440 billion of global M&A and US$175 billion of cross-border M&A over the past 12 months. The Materials sector bucked broader M&A trends and produced more M&A volume in Q1 than in any of the previous three quarters. Deal volume in the Financial and Healthcare sectors, however, fell for the third consecutive quarter.
- Distressed deal volume has hit recent historic lows as the global economy continues to improve.
- “Mega deals” were notably absent in Q1, with just one deal exceeding US$10 billion in value.