The new Dutch Corporate Governance Code, issued December 8, 2016, provides an interesting analog to The New Paradigm, A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, issued September 2, 2016, by the International Business Council of the World Economic Forum. The new Dutch Code is applicable to the typical two-tier Dutch company with a management board and a supervisory board. The similarities between the Dutch Code and the New Paradigm demonstrate that the principles of The New Paradigm, which are to a large extent based on the U.S. and U.K. corporate governance structure with single-tier boards, are relevant and readily adaptable to the European two-tier board structure.
Both the New Paradigm and the Dutch Code fundamentally envision a company as a long-term alliance between its shareholders and other stakeholders. They are both based on the notions that a company should and will be effectively managed for long-term growth and increased value, pursue thoughtful ESG and CSR policies, be transparent, be appropriately responsive to shareholder interests and engage with shareholders and other stakeholders.
Like The New Paradigm, the Dutch Code is fundamentally designed to promote long-term growth and value creation. The management board is tasked with achieving this goal and the supervisory board is tasked with monitoring the management board’s efforts to achieve it.
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Executive Summary: Recent amendments to the UK’s City Code on Takeovers and Mergers, the main rules governing takeovers in the UK, are discussed below. The most significant changes resulting from these amendments are: (i) it will allow offerors to engage in early and have increased involvement with the offeree’s pension trustees in an offer; and (ii) all UK, Channel Islands and Isle of Man incorporated public companies trading on an multilateral trading facility in the UK, will be subject to the code, regardless of residence of central management and control.
The Code Committee of the Takeover Panel has published Response Statements setting out amendments to the Takeover Code (“Code”) following its consultation on extending certain rights of employee representatives to the trustees of offeree company pension schemes and the rules for determining the companies that are subject to the Code.
In summary, the most significant changes as a result of the amendments are: (i) it will allow offerors to engage in early and have increased involvement with the offeree’s pension trustees in an offer; and (ii) all UK, Channel Islands and Isle of Man incorporated public companies trading on an multilateral trading facility in the UK, will be subject to the code, regardless of residence of central management and control.
(i) Response Statement on Code amendments for pension scheme trustees
The Code Committee published its consultation paper Pension Scheme Trust Issues (PCP 2012/2) on 5 July 2012 which proposed amendments to the Code relating to certain employee representative rights being extended to apply also to trustees of the offeree company’s pension scheme.
On 22 April 2013, the Code Committee announced its response statement (RS 2012/2) to the consultation paper which subject to certain modifications, approved amendments to the Code to give pension scheme trustees similar rights to those of employee representatives, with effect from 20 May 2013. Key changes include:
(i) a new definition of “Pension Scheme” to limit those schemes in respect of which the offeror must state its intentions in the offer document. The definition defines such schemes as being a funded scheme which is sponsored by the offeree, provides pension benefits, some or all of which are on a defined benefit basis and has trustees (or managers).
(ii) an amendment to new Rule 24.2(a)(iii) to specify that the statement of the offeror’s intentions need relate only to certain specified matters such as employer contributions; accrual of benefits for existing members of the scheme; and the admission of new members to the scheme.
(iii) the decision not to implement the proposed requirements for (a) the offeree board to include in its circular its views on the effect of the offer on the offeree’s pension scheme and (b) disclosure of any agreement between offeror and the trustees relating to future funding (although where the agreement is a material contract, it will still need to be disclosed as such).
(iv) greater access to information. The offeror and offeree will be required to make the same documentation available to the company trustees as they are required to make available to the employee representatives, including the announcement starting the offer period; the offer document; the announcement of a firm intention to make an offer; and the offeree’s board circulars in response to any revised offer document. Trustees will be able to provide the offeree’s company with an opinion on the effect of the offer on the pension scheme. This opinion must either be attached to the circular on the offer to shareholders or published on the website and the publication announced on the RIS.
Following discussions with the UK Pensions Regulator, the Takeover panel has confirmed that there will be no obligation under the Code for the offeror or offeree to send offer-related documentation to the Pensions Regulator, nor will there be any obligation on the Panel to notify the Pensions Regulator of takeover offers. Any decision to seek clearance from the Pensions Regulator will be a matter for the offeror.
The objective of the amendments is to encourage an open debate by ensuring the offeror, the offeree and the offeree’s pension trustees can discuss their views during the early stages of the offer, enabling any issues to be considered by the offeror’s shareholders.
(ii) Companies subject to the Code
The Code Committee published its consultation paper (PCP 2012/3) on the 5 July 2012. The consultation paper proposed:
- the removal of section 3(a)(ii) of the Introduction to the Code the ‘residency test’
- the amendment to section 3(a)(ii)(A) and (D) of the Introduction Code known as the ten year rule in relation to certain private companies, including the proposal to apply the Code to private companies that have filed a prospectus for the issue of securities during the ten year period.
The Code automatically applies to companies trading on the regulated markets. The residency test is used to determine whether traded companies on non regulated markets are within the jurisdiction of the Code. If the company has shares admitted to AIM, but the place of central management and control is outside of the UK, the Code will not apply to that company.
The code applies to offers of companies listed on a UK regulated market (i.e. the London Stock Exchange) whose registered offices are in the United Kingdom, the Channel Islands or the Isle of Man (the Relevant Territories).
On 15 May 2013, the Takeover Panel published its response statement (RS 2012/3) following consultation on proposed amendments to the Code for determining which companies are subject to the Code.
The Code Committee supported the proposal that the ‘residency test’ should be abolished for UK, Channel Island and Isle of Man registered companies who have securities admitted to trade on a multilateral trading facility in the UK with effect from 30 September 2013.
However, the Code Committee acknowledged that the ‘residency test’ shall remain for public and private companies which have their registered offices in UK, the Channel Islands and the Isle of Man if it is:
- a non traded public company
- a public company who’s securities are admitted to trading on any market which is not a regulated market (either in the UK or in another EEA member state), an multilateral trading facility in the UK, or a stock exchange in the Channel Isles and Isle of Man
- A private company who have had securities admitted to trading within the previous 10 years (the ten year rule).
The Code Committee also supported, subject to minor changes, the proposed amendments to section 3(a)(ii)(A) to (D). The amendments will affect private companies by:
- Simplifying the ten year test; the company must satisfy that the company’s securities have been admitted to trading on a regulated market or a multilateral trading facility in the UK or any stock exchange in the Channels Islands or Isle of Man at any time during the ten year period
- The company have actually filed a prospectus for the offer, admission to trading or issue of securities (as opposed to the current test of whether a prospectus is required).
Although respondents suggested the time period could also be reduced to five years, perhaps even three years, the Code Committee said this was outside the scope of the consultation.
The Takeover Panel acknowledged that there will not be a need for transitional arrangements or an extended transitional period, the effective date of 30 September 2013 the Takeover Panel believes give companies enough time to remedy any issues arising from the changes. Such companies, who will now become subject to the Code, should review their articles of association to ensure they do not contain conflicting provisions with the Code.
Furthermore, the amendments may now affect shareholders in companies who come to fall within the jurisdiction of the Code. It is important to identify whether a shareholder my trigger a Rule 9 mandatory bid on exercise of convertible securities, warrants or options, in such cases the company should approach the Takeover Panel to seek dispensation from Rule 9.
- The European Commission has signed a Memorandum of Understanding with the Chinese National Development and Reform Commission and the Chinese State Administration of Industry and Commerce.
- These anti-trust authorities seek to increase cooperation and information exchange by facilitating greater technical cooperation regarding cartels, restrictive agreements and abuses of market dominance.
- In recent years, the European Commission has engaged a variety of jurisdictions outside of the EU, such as an MOU with Russia in March of 2011 and other bi-lateral arrangements with other non-EU countries.
- The article also discusses several elements of cooperation agreements on competition. The European Commission’s appetite for formal cooperation agreements and its engagement with broader international competition issues demonstrates a commitment to promote the international harmonization of competition policy and improved coordination of completion law enforcement.
In cross-border acquisitions, more than one country’s tax rules will apply. English law is frequently chosen to govern such transactions. This article highlights a number of the main tax issues arising in cross-border share and asset purchases, and discusses how some of these issues can be eliminated or mitigated through efficient structuring or specifically addressed in the sale and purchase agreement.
A cross-border private acquisition is an acquisition of one or more private businesses comprising companies and/ or assets, where the purchaser, the seller and the target companies/assets are not all in the same jurisdiction. The cross-border element of these transactions inevitably means that more than one country’s tax rules will be in play in the same transaction. English law is frequently chosen to govern these transactions and it is usually commercially desirable to have one set of contractual provisions applying across the board.
In this article, we highlight a number of the main issues that do not arise on solely UK acquisitions. Some of these can be eliminated or mitigated through efficient structuring and some may need to be dealt with specifically in the sale and purchase agreement.
ISSUES COMMON TO SHARE AND ASSET PURCHASES
Withholdings required from the purchase price
If a withholding for or on account of tax is required from the purchase price, it would go directly to value by affecting the amount receivable by the seller or, if a gross up is included in the agreement, payable by the purchaser.
Who should bear the cost or risk of a withholding? Where it is clear that a withholding is required, the question is made easier as the cost is known, so it can easily be factored into price.
The more difficult question is who should bear the risk where it is not certain that a withholding is required as it is harder to factor that risk into price. On one hand, withholding is a requirement on the purchaser and the purchaser will at the time of payment need to decide whether to withhold. And, if there is no gross up, there is not much commercial pressure on a purchaser to be robust in taking a view that a withholding is not required. On the other hand, in most circumstances withholdings relate to the location of the assets being sold and the tax position of the seller.
Should the parties seek confirmation from the appropriate tax authorities that no withholding is required or would that raise an unnecessary red flag? If the seller takes the risk, should there be conduct rights and/or an indemnity against the purchaser’s costs of being pursued by a tax authority after completion in respect of a withholding that the tax authority asserts should have been, but was not, made?
Allocation of consideration
In a cross-border transaction, more than one tax authority is likely to have a vested interest in how the purchase price is allocated between the target assets and/or shares. Not only might such authority disagree with the parties’ allocation, it might also disagree with the opinion of other tax authorities. This makes the issue of allocation more complicated than on a purely UK transaction and so the parties will need to ensure that they have robust defensible positions so that they obtain the tax value they expect from the transaction.
Indemnity and warranty payments
In a UK transaction, ESC D33 provides comfort that where payment is made by a seller of an asset to a purchaser under a warranty or indemnity included under the terms of sale, the consideration for the sale will be adjusted and that payment will not be treated as a capital sum derived from the asset. Most jurisdictions take an equivalent approach, but not all may.
Other jurisdictions may take different approaches on related matters. On a recent Brazilian transaction the target company would have obtained tax relief for the settlement of certain tax liabilities covered by the tax covenant (whilst this may be the case in the UK for employer’s NICs, it is not generally so) and the purchaser was expecting tax depreciation in respect of a significant part of the purchase price. As payments under the tax covenant would have constituted reductions in consideration, the purchaser would have suffered a significant loss of tax depreciation on those payments being made. Here, the combination of a payment under the tax covenant (which would ordinarily have been calculated taking into account the tax relief available on settlement of the tax liability) and a gross up for tax on receipt would not, due to the reduced tax depreciation, have put the purchaser back in the position it would have been in had the relevant tax liability not arisen. That would have been unacceptable from the purchaser’s perspective. The parties could have used a gross up that, as well as covering tax on receipt, covered the loss of tax depreciation. In the circumstances, however, the parties decided it was preferable for both sides to ignore the tax relief available on settlement of the tax liability in calculating the amount due under the tax covenant, the benefit of which would roughly equate to the lost tax depreciation, and to use a gross up for tax on receipt only.
Any stamp duties or other transfer taxes arising on the transaction should be identified at an early stage. It might be that on a global purchase some of those could be mitigated by, for example, having a local transfer agreement for a particular jurisdiction.
Could anything done by the seller affect the transfer taxes payable? In Italy there is currently a concern that a pre-sale business hive-out to another group company followed by a sale of the transferee to a third party might be recharacterised as a direct sale of the business to the third party, resulting in significant transfer taxes for which the parties involved could be jointly liable.
Transitional services may be required by the purchaser. In a cross-border deal, care should be taken to ensure that there is no unnecessary tax leakage in providing or paying for those services, particularly due to withholding tax on cross-border payments and different VAT requirements in the relevant jurisdictions.
ISSUES ON SHARE PURCHASES
On acquiring companies, a purchaser may request a tax covenant to protect it against unexpected tax liabilities of those target companies. A UK-style tax covenant can generally be tweaked to cover non-UK jurisdictions in which the target companies are liable for their own tax liabilities; however, special attention must be given to jurisdictions in which target companies are taxed on a consolidated group basis and part of the consolidated group is purchased.
As a matter of local law, are those target companies responsible for tax relating to their own actions or income, profits and gains? If not, subject to the next point, is a tax covenant actually required?
Are there any “re-charges” in respect of that tax for which the target companies could be liable and are those target companies in any way liable for the consolidated group’s tax? If so, a tax covenant would need to be tailored accordingly.
Do exit charges arise on leaving the consolidated group? Who benefits from pre-completion reliefs and is there a requirement for payments to be made in respect of them? Care must be taken to ensure that local tax law does not cut across the intention behind the contractual tax protection.
Change of control
When companies are acquired, there is likely to be a change of control both at the level of acquisition and for subsidiaries below. This can lead to tax being triggered in the acquired group (such as, in some circumstances, German real estate tax) as well as deferred tax assets being put at (increased) risk. It might be possible to mitigate some of those effects through careful structuring.
We note above that it is usually commercially desirable to have one set of contractual provisions applying across the board. That is true in relation to ongoing compliance matters, although there may be certain bespoke provisions needed in relation to particular jurisdictions. Further, if the seller is exiting a particular jurisdiction, it might make sense for the purchaser (or target company) to prepare pre-sale tax returns with the seller having a right of review, as opposed to the other way around.
ISSUES ON ASSET PURCHASES
In a UK share purchase it is common for a purchaser to seek protection in respect of certain of the target company’s tax liabilities, but, on an asset sale, protection is not generally sought for any tax relating to the business’s pre-completion profits. That is because, as a matter of English law, such tax liabilities do not transfer to a purchaser. That might not be the case in other jurisdictions and, in such cases, bespoke protection for succession taxes may be advisable.
Do the parties expect the asset transfer to constitute a transfer of a going concern and so be outside the scope of VAT? Whilst VAT law in all EC countries should derive from the same starting point (Articles 19 and 29 of the Principal VAT Directive (Directive 2006/112/EC)), each such country may require the fulfilment of different conditions in order for relief to be available — the sale contract would need to cover those conditions.
Whilst the above is by no means an exhaustive list of the issues on cross-border acquisitions, it gives a flavour of some that can arise. Each transaction tends to involve bespoke issues which will need to be addressed.
UK UPDATE – Understanding and Dealing with Hedge Funds and Shareholder Activism Across Europe: The Impact of the Financial Crisis
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.