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

Regions

GLOBAL STATISTICAL UPDATE – XBMA Quarterly Review for Second Quarter 2018

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 XBMA Review has utilized generally 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:

  • The global M&A environment continued to show historic strength in 2018, as global deal volume reached nearly US$1.3 trillion for the second quarter and US$2.5 trillion for the first half of the year.
  • Global M&A activity has enjoyed a steady climb over the last several quarters and has increased sharply since Q3 2017, with global deal volume exceeding US$1.0 trillion in each of the ensuing three quarters. Q1 and Q2 2018 were two of the most active quarters for global M&A ever.
  • Cross-border transactions have continued to comprise a significant portion of global deal volume, accounting for 41% of overall M&A in Q2 2018. Cross-border M&A activity has already exceeded US$1.0 trillion for the first half of 2018.
  • In emerging markets, inbound M&A volume into the BRIC countries reached US$63 billion in aggregate in Q2 2018. Most notably, the volume of inbound M&A activity increased significantly in China and India during Q2 2018 as compared to prior quarters.
  • Q2 was highlighted by a number of headline-grabbing mega-deals across sectors, including T‑Mobile’s combination with Sprint. The volume of transactions with values of more than US$500 million is on pace to increase approximately 65% in 2018 compared to 2017.
  • The blistering pace of global M&A activity in 2018 continues to be driven by the impact and the anticipation of disruptive technologies across industries, and in the media and entertainment, telecommunications and healthcare sectors, in particular.

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, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CHINESE UPDATE – The Future of Automotive JVs under the New Policy of Opening Up the Automotive Industry in China

Contributed by: Adam Li (Li Qi), Jun He Law Offices (Shanghai)

Editors’ Note: Contributed by Adam Li, a partner at JunHe and a member of XBMA’s Legal Roundtable. Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies. This article was authored by Mr. Michael Weng, and Mr. Daniel He, both partners at JunHe. Mr. Weng has broad experience dealing with complicated foreign direct investment and cross-border M&A transactions, and Mr. He is specialized in merger and acquisition projects, joint venture transactions, and strategic investment projects in various industries.

Summary

There are numerous examples of Automotive JVs that have been operating successfully and profitably in China for more than a decade. With the imminent removal of the shareholding cap on foreign investment in automotive manufacturing, there will be opportunities for Chinese and foreign parties to alter their equity holdings, including being able to buy out the JV partner or exit in part or completely. It is our assessment that Chinese and foreign parties are unlikely to immediately implement any major changes. Rather, we expect them to maintain the status quo for a considerable period of time, until larger commercial incentives trigger a withdrawal of one of the joint venture partners.

 

Main Article

At the recent Boao Forum for Asia Annual Conference 2018, the Chinese President Mr. Xi Jinping announced that “China will remain unchanged in its adherence to reforming and opening up, and will continue to launch new major measures to pursue further opening up.”  Since then, both the National Development and Reform Commission (“NDRC”) and the Ministry of Industry and Information Technology in their respective Answers to Reporters’ Questions have committed to gradually opening up automotive manufacturing to foreign investment before 2022 by removing the shareholding limit for foreign investors and also the restriction on foreign investors being allowed to invest in no more than two automotive joint ventures. The reforms and their implications for the future are of great relevance to the many long-standing, active Sino-foreign automotive joint ventures (“Automotive JVs”). In this article, we will discuss several possible development paths for Automotive JVs, and some of the issues arising from the reforms.

 

I.       Possible Development Paths for Automotive JVs

 

1.   Chinese Partner Acquires All or Part of the Equity Held by Foreign Investor

Thanks to the massive growth in demand in the Chinese automotive market, many of the Automotive JVs have been highly profitable. The Chinese partners of those Automotive JVs have primarily been very large central or local state-owned enterprises (“SOEs”) with solid foundations and extensive connections, enabling them to make a vital contribution to Automotive JVs’ swift localization and expansion within the Chinese market. It may be that these Chinese partners will hope to acquire the equity interest held by their Automotive JV foreign partners in order to further strengthen their control within the Automotive JV and to improve their profit earnings. However, Automotive JVs are still largely reliant upon their foreign partners for business resources including branding, new ideas, technology and equipment, and the auto groups to which the foreign partners belong are unlikely to willingly give up the substantial revenue and profits generated by the Automotive JVs. Hence, it will likely prove difficult, at least in the short run, for the Chinese partners of any successful Automotive JV to disrupt the structural balance by acquiring all or part of their foreign partner’s equity.

However, for an Automotive JV that is struggling and not profitable, it is possible that the Chinese partner may be able to acquire their foreign partner’s equity. Indeed, it may well be that a foreign partner in such unsuccessful Automotive JV has already been contemplating an exit. The gradual removal of restrictions on foreign investment in automotive manufacturing presents the opportunity for foreign partners to leave an unsuccessful Automotive JV and set up their own entity. However, before making such a decision, a foreign partner should first make a full assessment of its ability to operate the business independently.  Success in the Chinese market requires not only branding, technology and management expertise, but also access to and control of sales channels and an in-depth understanding of local consumers and markets.

 

2.  Foreign Partner Acquires All or Part of the Equity Held by Chinese Partner

Removing the shareholding cap of foreign investments in automotive manufacturing has eliminated the legal barrier preventing foreign partners from acquiring the equity held by their Chinese partners, but is of course dependent upon the willingness of both sides to pursue this option. It seems highly unlikely that a Chinese partner would be inclined to relinquish its equity interest in a profitable Automotive JV. Moreover, from a strategic perspective, a Chinese partner aiming to build up its own brands may use the leverage of its involvement in an Automotive JV, which brings with it indirect support in the expansion and influence of the Chinese partner’s own independent brands, by having access to the Automotive JV’s upgraded products and technologies, and skills development. In addition, with only very limited licenses to manufacture traditional fuel vehicles, it is highly unlikely that any newly established automotive manufacturer would be able to attain the necessary regulatory approval. Ultimately, the Chinese partner is highly unlikely to hand over control of the Automotive JV with the required manufacturing license. For an under-performing Automotive JV, while the acquisition of a Chinese partner’s equity may not bring immediate financial benefits, the foreign partner could use the existing manufacturing approval, production lines and personnel to start production right away. Provided the acquisition price of the Chinese partner’s equity is reasonable, this could be an effective shortcut for a foreign brand seeking to obtain production capacity and operate independently.

 

3.  Maintain the Status Quo

After the NDRC released its information on easing restrictions on foreign investment in automotive manufacturing, some of the foreign partners of existing Automotive JVs were quick to confirm their intention to continue to support the development of their respective current joint ventures in China. It is our assessment that both the Chinese and foreign parties should take a pragmatic approach to the new policy and, at least in the short-term, focus on maintaining the current structure. It seems unlikely — at least until the expiry of the operation term of the existing joint venture contract — that the Chinese and foreign parties of most of Automotive JVs automakers will initiate a change in the balance of ownership by seeking to acquire all or part of the equity held by their partner.

 

II.      Key Factors Influencing the Possible Development Path

Once the shareholding limits for foreign investors in automotive manufacturing have been phased out, a variety of factors will determine whether foreign automakers choose to remain with their Chinese partners or to make their own way. Some of the key factors for consideration are listed below.

 

1.  Continuing Product Upgrade

At present, many of the Automotive JVs’ products are based upon foreign brands’ original overseas car models. The production of core components, such as vehicle engines and gearboxes, is primarily based upon foreign partner’s technology. Therefore, the prosperity of the Chinese automobile market driven by the Automotive JVs is essentially attributable to foreign automakers’ products. The continuing survival and success of Automotive JVs is at least in part dependent upon foreign partners providing access to upgraded products and technologies. The growing sophistication of Chinese consumers and the emergence of local automotive brands builders means that Automotive JVs are facing an ever more demanding and competitive market. Only those Automotive JVs that continuously innovate will survive. The removal of the shareholder cap means that a foreign automaker with strong product R&D and upgrade capabilities and whose Chinese partners lack product input capabilities may be able to use their relative strength to persuade their Chinese partner to transfer some of their equity. If a foreign automaker is able to obtain continuing regulatory approval to manufacture on their own (as mentioned above, the possibility of obtaining new licenses is very slim), it may be possible for the foreign automaker to set aside the existing Automotive JV in order to establish a separate company, manufacturing and selling their own automobiles in a wholly-owned company.

 

2.  The Trend toward New Energy Vehicles

The growth in purchases of traditional fuel vehicles has slowed down in recent years. In the meantime, sales of new energy vehicles are increasing, attributable at least to some extent to Chinese government efforts to promote these upgraded, clean energy automobiles. Nowadays the vast majority of Automotive JVs’ production is traditional fuel vehicles. However, this is likely to change, with declined growth in demand for fuel vehicles, the implementation of government policy incentives for new energy vehicles, and preemptive dominance of the new energy car market by the Chinese traditional and new automakers. Given that the first shareholding cap to be eliminated will be on new energy car manufacturers, in 2018, foreign automakers will need to decide how they intend to manufacture new energy vehicles in China, whether by taking advantage of a current Automotive JV to apply for cross-category production of new energy vehicles, or by establishing a new wholly-owned subsidiary to undertake this task. The Measures for the Parallel Administration of the Average Fuel Consumption and New Energy Vehicle Points of Passenger Vehicle Enterprises (“Points Administration Policy”) that have been implemented since April 1, 2018, require foreign automakers to take into account the impact on the production of fuel vehicles by the existing JV automaker in their overall production plans. Starting from 2019, according to the Points Administration Policy, there will be a points system under which Automotive JVs will be subject to production limits for fuel vehicles. When this limit is reached, they will be required to produce a certain proportion of new energy vehicles in order to be permitted to continue the production of fuel vehicles. Points will be accrued for the manufacture of new energy vehicles by Automotive JVs and additionally will be available for purchase, through an official platform, from third parties with surplus points. As it stands, the simplest way for foreign automakers to satisfy the new energy vehicle points requirements and to continue production of fuel vehicles is to maintain their current Automotive JV, while introducing new energy vehicle models.

 

Influences of the Tariff Cut

On May 22, 2018, the Customs Tariff Commission of the State Council issued an announcement stating that, effective from July 1, 2018, there will be a reduction of tariffs on imported vehicles and car parts. Tariff rates on vehicles will be reduced from their current levels of 20% and 25%, down to 15%. Even after the adjustment, tariffs will remain higher than in developed countries such as Europe, the United States and Japan. Moreover, the final price of imported cars will also be subject to VAT, consumption tax, dealer profits, and other factors. While the tariff cuts may initially have a short-term stimulating effect on sales of imported vehicles, their impact is not forecasted to be significant in the long run. In an environment where foreign investment restrictions are gradually being lifted, foreign automakers seeking to become more competitive will need to take into consideration the relative costs and factors – economic and non-economic – of establishing or acquiring a wholly-owned local automaker compared with the option of exporting vehicles to China under a lower tariff regime.

 

3.  Difficulties in Going Solo

One of the Chinese government’s original intentions in formulating the automotive joint venture policy was a “market-for-technology” strategy. In return for providing their technology, foreign automakers have gained Chinese market share through their partnerships with China’s central and local SOEs and large-scale private enterprises. In addition, the foreign automakers have obtained special support and benefits in aspects such as regulatory approvals, land acquisition and factory construction, fiscal subsidy and tax preferential treatment, and so on, without which their foreign automotive products might not even have been brought into China. If, after removal of the foreign shareholding cap, a foreign automaker chooses to operate completely independently and without the support of Chinese partners, there is no certainty that they will continue to enjoy such special benefits. Specifically, approvals for new energy vehicle manufacturing are currently on hold and there are unlikely to be many more licenses issued to manufacture traditional fuel vehicles. While it is anticipated that the approval process for new energy vehicles will recommence soon, it seems likely that entry thresholds will rise substantially. Against this background, it may be unwise for foreign automakers to abandon their current joint ventures and start over on their own. Building an automobile sales and after-sales network is a costly and time-consuming process, further complicated by the range of differing local business environments around China. Without Chinese partners to help navigate local markets, foreign automakers will likely face barriers to a quick set-up and roll out of sales and after-sales networks, particularly on dealing with the existing dealers of the JV Automakers and balancing their relationships and interests.

 

*     *     *     *     *

 

In the decades since Automotive JVs were first established, there have been numerous reforms to the legal environment as well as changes in the range of products offered, fluctuating market conditions, the introduction of new domestic brands, increases in labor and other production costs, a shifting international business environment, and the emergence of new energy cars. As is so often the case in China, the only constant is change itself.

 

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.

 

Spotlight on Boards

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

June 1, 2018

Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy;
  • Be aware that sustainability has become a major, mainstream governance topic that encompasses a wide range of issues, such as climate change and other environmental risks, systemic financial stability, labor standards, and consumer and product safety;
  • Recognize the current focus of investors on “purpose” and an expanded notion of stakeholder interests that includes employees, customers, communities, and the economy and society as a whole;
  • Set the “tone at the top” to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals;
  • Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan;
  • Have a lead independent director or a non-executive chair of the board who can facilitate the functioning of the board and assist management in engaging with investors;
  • Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
  • Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;
  • Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
  • Oversee and understand the corporation’s risk management and compliance efforts and how risk is taken into account in the corporation’s business decision-making; respond to red flags if and when they arise;
  • Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate corporate governance proposals, and anticipate possible activist attacks in order to be able to address them more effectively;
  • Be open to management inviting an activist to meet with the board to present the activist’s opinion of the strategy and management of the company;
  • Evaluate the board’s and committees’ performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;
  • Review corporate governance guidelines and committee charters and tailor them to promote effective board and committee functioning;
  • Be prepared to deal with crises; and
  • Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

  • Have a sufficient number of directors to staff the requisite standing and special committees and to meet investor expectations for experience, expertise, diversity, and periodic refreshment;
  • Compensate directors commensurate with the time and effort that they are required to devote and the responsibility that they assume;
  • Have directors who have knowledge of, and experience with, the company’s businesses, even if this results in the board having more than one director who is not “independent”;
  • Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings and engaging with investors;
  • Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;
  • Provide the directors with regular tutorials by internal and external experts as part of expanded director education and to assure that in complicated, multi-industry and new-technology companies the directors have the information and expertise they need to evaluate strategy; and
  • Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that facilitates frank and vigorous discussion and enhances the board’s role as strategic partner, evaluator, and monitor.

Martin Lipton

 

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.

 

IRISH UPDATE – Recent Trends in Corporate Migrations

Editor’s Note:  Brian O’Gorman specialises in corporate finance with a particular emphasis on mergers and acquisitions, public takeovers, equity capital markets and private equity.  Suzanne Kearney is a professional support lawyer at Arthur Cox.

Over the past decade a global trend of optimising holding company structures has developed amongst publicly traded multinational corporations. The strategic relocation of a holding company is, more often than not, conducted in tandem with a merger or other significant M&A transaction.

Ireland, alongside other jurisdictions such as the United Kingdom and Switzerland, has emerged as an attractive location, particularly for corporations seeking to expand into Europe.

INNOVATIVE STRUCTURES

There are often complex corporate, commercial, regu­latory, operational and tax structuring implications associated with the re-organisation of a global business to a new jurisdiction. The legal mechanisms employed in implementing such relocations will be driven by a range of diverse factors. In this note we explore some of the more interesting structures employed in recent transactions.

COURT SANCTIONED SCHEME OF ARRANGEMENT

The migration of public limited companies incorporated in a common law jurisdiction into Ireland in conjunction with a merger of other significant M&A transaction is often carried out by way of a court sanctioned scheme of arrangement (“Scheme”).

A Scheme is a statutory procedure whereby a company can (with court approval) make a compromise or arrangement with its shareholders (or a class of its shareholders). A Scheme has a wide scope for implementation, and lends itself to two separate methods for effecting a takeover of an existing (foreign) parent company by a new (Irish) parent company:

Cancellation Scheme: involves the shareholders of the existing (non-Irish) target agreeing to all of their shares in the target being cancelled in return for an agreed cash consideration per share being paid by the acquiring (Irish) company to such shareholders. The acquiring company agrees to pay the cash consideration on the basis that the target will use the reserve created by the cancellation of its existing shares to issue an identical number of new shares to the acquiring company.

Transfer Scheme: involves the shareholders of the target company agreeing to transfer all of their shares in the target to the acquiring company in return for an agreed cash purchase price per share being paid to such shareholders.

Structures involving a Scheme have been favoured by companies from the UK, Cayman, Bermudian and other common jurisdictions with legislation which caters for the use of a Scheme. This structure, however, is not available to entities who originate in a civil law jurisdiction, and, as a result, European companies have typically used a variety of other structures in connection with a migration to Ireland.

PaddyPower (Ireland) and Betfair (UK) ‘merged’ pursuant to a Scheme sanctioned by the High Court of England and Wales under UK company legislation, creating a new Irish holding company with headquarters in Ireland, having its main listing on the London Stock Exchange, with a secondary listing on the Irish Stock Exchange.

CROSS BORDER MERGERS

The EU Cross-Border Merger (“CBM”) regime facilitates mergers between Irish companies and EU incorporated companies (and companies incorporated in EEA States that have implemented the EU CBM Directive). The CBM regime permitted true “mergers” for the first time under Irish law, providing a new mechanism for Irish companies to receive a transfer of assets and liabilities from companies in other European/EEA jurisdictions.

European limited companies that are capable of merger under national law can merge into Irish registered companies as a CBM, with the merging company dissolved without going into liquidation on completion of the merger. Shareholder approval is required, followed by court applications by the merging companies in their respective jurisdictions. A CBM into Ireland takes effect pursuant to an order of the Irish High Court. In a CBM all of the assets and liabilities, together with the rights and obligations (including commercial contracts, employees, legal proceedings) of the merging company transfer to the Irish surviving company by operation of law.

A key advantage of a CBM is that it provides a harmonised, streamlined and often familiar procedure for European companies, eliminating the need for individual transfer documents typical under the traditional business sale and purchase model.

Flamel Technologies SA (France), completed CBM into its wholly-owned Irish subsidiary, Avadel Pharmaceuticals plc, with Avadel surviving the merger as the public holding company.

In the UK, the merger of Technip and FMC Technologies into UK incorporated TechnipFMC was achieved by CBM.

In 2017 the High Court of England and Wales authorised the first “reverse cross border merger” whereby a UK parent company, Formenta Limited, was absorbed by its Italian subsidiary.

MERGER INVOLVING NON-EU ENTITY

Only entities incorporated in EU/EEA member states can avail of the CBM regime (see above), however “mergers” by non-EU entities into Irish companies have been structured as a merger agreement pursuant to which the non-EU entity contractually agrees to merge into a newly incorporated Irish public limited company, which becomes the surviving entity post-merger. As such a merger is not governed by legislation, it is not subject to a court order, but approval of the merger agreement by the shareholders is required.

This structure has been used in connection with the merger of a Swiss public limited company into an Irish public limited company as the surviving entity. Following Brexit, this structure may prove useful in connection with the merger of UK companies into Ireland, as it is unlikely to be able to avail of the CBM regime.

Pentair Ltd. (Switzerland), a public limited company entered into a Merger Agreement with its Irish subsidiary Pentair plc., thereby changing its organisation jurisdiction from Switzerland to Ireland. The surviving entity Pentair-Ireland remained subject to U.S. Securities and Exchange Commission reporting requirements and the applicable corporate governance rules of the NYSE.

SOCIETAS EUROPAEA

For public companies incorporated in the EU a corporate migration may be achieved by using a Societas Europaea. The Societas Europaea or “SE” is a European public limited company formed under EU legislation. The SE was initially developed as a new “pan-European” form of company with the objective of enabling companies to operate on a cross border basis under a unified framework, without the obstacles posed by disparities in domestic company law in each member state.

One of the key advantages of an SE is its ability to relocate by moving its registered office to another EU member state without requiring dissolution or the creation of a new legal entity.

It was hoped that SEs would provide a cost efficient mechanism facilitating the restructuring of European businesses by reducing the administrative burden and legal costs associated with establishing in a new jurisdiction. Despite the perceived advantages of this supra-national structure, outside of Germany (where the SE has been more widely availed of, including amongst groups such as Allianz, Porsche, BASF), uptake across Europe has generally been low. The reasons for this may be due to the complexities in creating an SE, which cannot be incorporated on a stand-alone basis, but must be formed from a pre-existing limited liability entity (by merger, as a holding company or subsidiary, or by the conversion from an existing public limited company). Establishing an SE involves an employee consultation process, which at best can take up to several months to complete.

The SE remains an option for European companies considering a relocation within the EU. However, it is likely to be more attractive to those entities which are already registered as an SE and would therefore only be required to undergo the process of transferring its registered office. Other forms of existing companies, would be obliged to follow a two stage process; first, registration as a “Societas Europaea,” followed by a relocation of its registration to Ireland.

James Hardie Industries migrated its parent holding company to Ireland using a Societas Europaea structure.

EXCHANGE (TENDER) OFFER

Another possible structure for effecting a cross border migration is through an exchange offer whereby an Irish public limited company offers to acquire all of the issued securities of the non-Irish target in exchange for issue of new securities in the Irish plc, resulting in the Irish plc becoming the new parent company of the group.

An exchange offer made to shareholders of the non-Irish target will be subject to the form, content and timing restrictions of any local law takeover regime (where applicable).

Exchange offers have to date proved less popular, perhaps due to the 90% acceptance level required to secure full implementation of the merger/ acquisition.

The exchange offer structure was used in the re-domiciliation of Strongbridge (formerly Cortendo AB) from Sweden to Ireland, whereby a newly incorporated Irish plc acquired all of the issued shares of the original Swedish parent company. A prospectus which set out the terms of the exchange offer (approved by the Central Bank of Ireland, the Irish competent authority) was made available to all eligible shareholders of Cortendo AB. The exchange offer was conditional on its acceptance by 90% shareholders in the Cotendo AB. Following completion of the transaction, the original Swedish parent company became a subsidiary of the new Irish ultimate parent company.

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.

DANISH UPDATE – New Danish Capital Markets Act

Editors’ Note: Mattias Vilhelm Warnøe Nielsen is a Partner at Moalem Weitemeyer Bendtsen Advokatpartnerselskab in Denmark where he is Head of Venture Capital and Startup Companies. Mattias is a highly regarded specialist and advises Danish startup companies on fundraising through private investors and seed investments. Mattias also advises Danish and multinational corporations on mergers and acquisitions. Andreas is a Junior Associate at Moalem Weitemeyer Bendtsen Advokatpartnerselskab where he primarily advises Danish and multinational corporations, both publicly traded and private, on mergers and acquisitions. Andreas also advises both Danish and multinational corporations on litigation, arbitration and bankruptcy proceedings.

1. Highlights:

   a) Prospectuses

         The Danish Securities Trading Act (Past)

         The obligation to prepare and make public a prospectus when offering securities to the public applies if the value of the offering to the public is equal to or above EUR 1,000,000. Only prospectuses prepared for offerings to the public with a value equal to or above EUR 5,000,000 are recognizable in other EU member states.

         The Danish Capital Markets Act (Present)

         The obligation to prepare and make public a prospectus when offering securities to the public applies if the value of the offering to the public is equal to or above EUR 5,000,000. All prospectuses are recognizable in other EU member states.

         Summary of Amendment: The Danish Capital Markets Act repeals the obligation to prepare and make public a prospectus when offering securities to the public at a value between EUR 1,000,000 and 5,000,000 (i.e. small prospectuses), see item 3 below.

 

   b) Public Announcement of Own Shares

         The Danish Securities Trading Act (Past)

         Issuers are obligated to make public their ownership of own shares in the event that such ownership reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3 or 90% of the voting rights or share capital.

         The Danish Capital Markets Act (Present)

         Issuers are obligated to make public their ownership of own shares in the event that such ownership reaches, exceeds or falls below 5% or 10% of the voting rights or share capital.

         Summary of Amendment: The Danish Capital Markets Act repeals the higher thresholds for the issuer’s obligation to make public their ownership. Thus, the obligation solely applies when the issuer’s ownership of own shares reaches, exceeds or falls below 5% or 10% of the voting rights or the share capital, see item 4 below.

 

   c) Equal Treatment of Shareholders

         The Danish Securities Trading Act (Past)

         An offeror making a takeover bid, whether mandatory or voluntary, shall treat all shareholders within the same share class equally.

         The Danish Capital Markets Act (Present)

         An offeror making a voluntary takeover bid with the objective of acquiring control over the issuer shall treat all shareholders equally, regardless of any division of share classes. For mandatory and other voluntary takeover bids, the offeror shall treat all shareholders within the same share class equally.

         Summary of Amendment: The Danish Capital Markets Act introduces a specific requirement of equal treatment of all shareholders in the issuer, regardless of share classes, in the event that the offeror makes a voluntary takeover to the shareholders in the issuer with the objective of acquiring control of the issuer, see item 5 below.

 

2. Introduction

The Danish Capital Markets Act, including certain executive orders, entered into force on 3 January 2018, replacing the former Danish Securities Trading Act and amending certain material aspects of the capital markets regulation in Denmark. Apart from certain amendments to the provisions of the Danish Securities Trading Act, the Danish Capital Markets Act contains provisions similar to those of the Danish Securities Trading Act with some language changes. This XBMA contribution highlights the material changes as a result of the Danish Capital Markets Act.

 

3. Prospectuses

The provisions in the Danish Securities Trading Act regarding the obligation to prepare and make public a prospectus for offerings to the public of a value between EUR 1,000,000 and EUR 5,000,000 have been repealed with the Danish Capital Markets Act which entered into force 3 January 2018.

The Danish Securities Trading Act contained both an obligation to prepare prospectuses for offerings between 1,000,000 and EUR 5,000,000 (i.e. small prospectuses) and an obligation to prepare prospectuses for offerings of or above EUR 5,000,000 (i.e. large prospectuses). The reason for the two different provisions was that the small prospectuses were subject only to Danish national regulation and did not enjoy the so-called EU passport for prospectuses (recognition in other EU member states than Denmark), as the small prospectuses were not prepared in accordance with the regulation as implemented from the Prospectus Directive (2003/71/EC).

As of 3 January 2018, issuers or offerors are only obliged to prepare and make public a prospectus when making offerings to the public of a value of EUR 5,000,000 or above. These are recognizable throughout all EU member states.

The threshold of EUR 5,000,000 is calculated on offerings made by the entity in question over a period of 12 months and on the basis of the market value of the securities in question and the costs associated with the offering to be paid by the investors, including e.g. levies. If the offering is made in DKK, the EUR 5,000,000 threshold is calculated based on the Danish National Bank’s public currency rate at the time of the commencement of the offering.

The Danish Capital Markets Act does not alter the obligation to prepare and make public a prospectus when securities are listed, and no threshold regarding value etc. applies to such obligation.

On 14 June 2017, the European Parliament and the Council adopted a new Prospectus Regulation (EU/2017/1129) that enters into force 21 July 2019. Certain exemptions to the obligation to prepare and make public a prospectus for public offerings entered into force on 20 July 2019, however; these specific exemptions are not the subject of this XBMA contribution.

In connection with the new Prospectus Regulation, the member states are authorized to increase the threshold for the obligation to prepare and make public a prospectus to offerings of a value on or above EUR 8,000,000. The Danish Parliament is currently treating an amendment to the Danish Capital Markets Act which will increase the Danish threshold from EUR 5,000,000 to EUR 8,000,000. If passed, the new threshold will apply from 21 July 2018.

Our opinion: As offerings in Denmark are usually smaller compared to offerings in other EU member states, the repeal of the requirement of small prospectuses and – if passed – the increase of the threshold for the requirement to larger prospectuses certainly lifts an administrative burden for offerors when making public offerings. This might mean that Denmark would become a more attractive forum for making public offerings, and in the future we might experience an increase in offerings.

 

4. Public Announcement of Own Shares

In accordance with the Danish Securities Trading Act, any shareholder in an issuer of listed shares was obligated to notify the Danish Financial Supervisory Agency (the FSA) and the issuer of the shareholder’s holding of shares in the issuer in the event that the holdings reached, exceeded or fell below 5%, 10%, 15%, 20%, 25%, 33%, 1/3, 50%, 66%, 2/3 or 90% of the voting rights or the share capital. The issuer should also notify the FSA in the event that the issuer’s holding of own shares reached, exceeded or fell below the aforementioned thresholds.

This provision has been implemented into the Danish Capital Markets Act. As of 3 January 2018, however, the issuer is only obligated to notify the FSA in the event that the issuer’s holding of own shares reaches, exceeds or falls below 5% and 10% of the voting rights and share capital. Other shareholders are still obligated to notify the issuer and the FSA regarding the holdings of shares in the issuer in the event that their holdings reach, exceed or fall below the old thresholds.

The issuer’s obligation has been amended in that the previous requirement, subject to the higher threshold, was a result of goldplating in Denmark, i.e. a national implementation of the Transparency Directive (2004/109/EC) in excess of the requirements in the directive.

Our opinion: As issuers most often do not hold a large bulk of own shares, the removal of the higher thresholds only has a practical value for a few issuers on the Danish capital markets. However, the amendments may prove to be an improvement of the administrative burden for such issuers. Moreover, should an issuer hold e.g. 20% of its own shares, such information will not be publically available in the future, unless the circumstances under which the issuer came to hold such shares have been disclosed in connection with the disclosure of inside information under the Market Abuse Regulation (EU/596/2014).

 

5. Equal Treatment of Shareholders

The Danish Securities Trading Act contained a requirement on offerors when making takeover bids to treat shareholders within the same share class equally.

The same requirement is adopted in the Danish Capital Markets Act, with exception, however, of a specific requirement on offerors making a voluntary takeover bid to the shareholders of a listed issuer with the objective of acquiring control over the issuer in question. In such event, the offeror shall treat all shareholders equally, irrespective of share classes and whether all or merely some of the share classes are listed on a regulated market place.

The requirement does not apply to a situation where the offeror makes a voluntary takeover bid without the objective of acquiring control over the issuer, nor does it apply to a situation where the offeror already has control over the issuer before making the takeover bid or where the offeror makes a mandatory takeover bid. In such events, the requirement of equal treatment of shareholders within the same share class applies.

Our opinion: There are certain scenarios in which this new requirement may be relevant, however, the most relevant scenario would be where an offeror makes a takeover bid for one share class with voting rights and intends to exclude another share class without voting rights from the takeover bid. In this event, and provided that control is the offeror’s objective, the offeror is forced to offer to purchase the other shareholders’ shares without voting rights on the same terms, including in relation to price etc., as the shareholders’ holding of shares with voting rights. As the shares with voting rights are more valuable to the offeror, we may see less favourable terms for purchasing shares during voluntary takeover bids in the future, seeing as an offeror shall compensate for the obligation of purchasing all shares on the same terms.

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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