Securities Law - International Bar Association [PDF]

Securities Law Newsletter of the International Bar Association Legal Practice Division

vol 15 no 2  august 2009

International Private Equity Transactions 2009: A symposium for leading private equity lawyers 16–17 November 2009London, United Kingdom A conference presented by the Private Equity Subcommittee of the IBA Corporate and M&A Law Committee and supported by the IBA European Regional Forum This event gathers leading private equity lawyers from around the globe to discuss the many challenges faced by private equity in the current economic climate. If you are concerned with private equity or M&A, this conference is not one to be missed. Sessions include: • Assessing the current state of the private equity marketplace • Legislative, judicial and regulatory responses to the current state of the private equity marketplace • Restructuring portfolio companies – a comparison of law and practice in various jurisdictions, including comparison of bankruptcy regimes • Developments in taxation of private equity • The lenders’ perspective: developments in senior and subordinated lending • Current trends in international deal structures • Public relations, labour relations and lobbying: managing external relationships • Sponsorless funds, purchase and sale of funds or portfolios, other organic changes at the fund level • General counsel’s forum: hear perspectives of, amongst others, The Blackstone Group, Permira, Bain Capital, Madison Dearborn Partners and Warburg Pincus • Keynote speaker: Robert L Friedman  Senior Managing Director and Chief Legal Officer, The Blackstone Group Who should attend? Law firm partners and associates, in-house counsel, academics, regulators, trade association representatives, private equity investors and any delegates interested in hearing the leading private equity lawyers address the current legal and policy issues in the private equity industry.

International Bar Association 10th Floor, 1 Stephen Street London W1T 1AT, United Kingdom Tel: +44 (0)20 7691 6868 Fax: +44 (0)20 7691 6544 E-mail: [email protected] Website: www.int-bar.org/conferences/conf290/

In this issue

Feature articles

Message from the Co-Chairs

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Committee Officers

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IBA Annual Conference Madrid 2009: Securities Law Committee sessions

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26th International Financial Law Conference Report on the morning sessions of 14 May 2009 – all about financial crisis Pit Reckinger 

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Bank failures and bailouts – the continuing evolution David Rockwell 

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Accounting and the credit crisis: what does it mean for harmonisation? David Rockwell 

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Directors in a time of crisis – the buck stops here Cecilia Carrara 14 The Rome I regulation: a quantum of solace? New solutions and open issues with respect to the conflict of law rules applicable to the assignment of receivables Cecilia Carrara

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Contributions to this Newsletter are always welcome and should be sent to Nigel Wilson at the following address: Vice-Chair and Newsletter Editor Nigel Wilson Davis Polk 99 Gresham Street, London EC2V 7NG Tel: +44 207 418 1086 Fax: +44 207 710 4986 [email protected]

International Bar Association 10th Floor, 1 Stephen Street London W1T 1AT, United Kingdom Tel: +44 (0)20 7691 6868  Fax: +44 (0)20 7691 6564  www.ibanet.org © International Bar Association 2009. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without the prior permission of the copyright holder. Application for permission should be made to the Head of Publications at the IBA address.

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When can companies delay disclosure of inside information? Leon Miller 

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Overview of firewall deregulations in Japan Masayuki Watanabe 

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Market abuse: European proposals on inside information Mark Slade 

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The abolition of ‘Swiss Finish’ and ‘Side Pockets’ under Swiss law Michel Abt and Frédérique Bensahel 28 New recommendations for good corporate governance in the boards of directors and managements of banks, savings banks and co-operative banks in Denmark Claus Molbech Bendtsen, Henning H Thomsen and Anders Quistgaard

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Principles regarding public disclosure of material events in Turkey A Cem Davutoğlu, Anıl Yılmaz and Duygu Tanışık  35 Country update on New Zealand: Changes to the Financial Reporting Act 1993 and Securities Commission review of financial statements David Quigg, John Horner and Asha Stewart 38 Coming soon: a national securities regulator? Guy David

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The quality of the marketplace – the OSC HudBay decision Robert Black and Dave Surat

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Securities Law Committee Activities

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Terms and Conditions for submission of articles 1. Articles for inclusion in the newsletter should be sent to the Newsletter Editor. 2. The article must be the original work of the author, must not have been previously published, and must not currently be under consideration by another journal. If it contains material which is someone else’s copyright, the unrestricted permission of the copyright owner must be obtained and evidence of this submitted with the article and the material should be clearly identified and acknowledged within the text. The article shall not, to the best of the author’s knowledge, contain anything which is libellous, illegal, or infringes anyone’s copyright or other rights. 3. Copyright shall be assigned to the IBA and the IBA will have the exclusive right to first publication, both to reproduce and/or distribute an article (including the abstract) ourselves throughout the world in printed, electronic or any other medium, and to authorise others (including Reproduction Rights Organisations such as the Copyright Licensing Agency and the Copyright Clearance Center) to do the same. Following first publication, such publishing rights shall be non-exclusive, except that publication in another journal will require permission from and acknowledgment of the IBA. Such permission may be obtained from the Head of Publications at [email protected]. 4. The rights of the author will be respected, the name of the author will always be clearly associated with the article and, except for necessary editorial changes, no substantial alteration to the article will be made without consulting the author.

This newsletter is intended to provide general information regarding recent developments in securities law. The views expressed are not necessarily those of the International Bar Association. securities law NEWSLETTER august 2009

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from the co-chairs

Excellence in the IBA

W

e are pleased to update you on the progress of the International Bar Association (IBA). The challenging economic and financing environment around the globe seems to have highlighted the relevance of the IBA. The Securities Law Committee, as well as the rest of the Legal Practice Division of the IBA, has seen continued growth in membership, strong turnout at conferences and more member activity than ever before. While we highlight some of those successes below, we want to first welcome you to this edition of the committee’s newsletter. We encourage you to spend some time with the newsletter, which not only has helpful reports from the working sessions at this year’s International Financial Law Conference (IFLC) in Rome, but also highlights some key recent legal developments in Canada, Japan, New Zealand, Switzerland, Turkey and the United Kingdom. We all owe a thank you to Nigel Wilson and the contributing authors for putting together the newsletter. The IFLC in Rome is a good place for your Co-Chairs to start our report card. It was a pleasure for us to see so many of you (as well as friends from the Banking Law Committee) at the conference this past May. A near record turnout of 250 delegates not only benefited from excellent and practical sessions, but also an important keynote address by Eddy Wymeersch, the chairman of the committee of European Securities Regulators (CESR). After explaining the main reasons behind the current financial crisis and taking questions from the audience, Chairman Wymeersch participated in a working session on the regulatory response to the financial crisis, helping to get the conference off to a bustling start. Making the most of Rome and drawing on strong support from the local host committee, evening receptions were held at exclusive Rome venues, providing superb settings for reacquainting with old friends and making new ones. The conference closed with a keynote dinner speech by Antonio Caprarica, a renowned Italian journalist. A special thank you is due to Niels WaltherRasmussen, for his hard work on behalf of the committee in organising the Rome conference.

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Philip Boeckman Cravath, Swaine & Moore LLP, London pboeckman@cravath.

Niels is already busy planning next year’s IFLC, which will be held 19-21 May. As announced in Rome, we will head to Warsaw for the 2010 conference. Warsaw should provide an ideal backdrop for catching up and discussing global developments affecting securities lawyers. If you have ideas you would like us to try and incorporate in to the conference, please let Niels or any of the committee officers know. While we have some plans of our own to make the IFLC even better, we especially appreciate your input and suggestions. Of course before Warsaw we hope to see you at this year’s IBA Annual Conference, from 4-9 October, in Madrid. The Legal Practice Division Chair, Hendrik Haag, has organised a showcase session on the ‘new world order of financial markets regulation’. Leading experts will discuss executive compensation, banking system reform and the state of the capital markets, among other topics. Hendrik has organised a task force on the reform of the financial markets, and the showcase session should provide an interactive format for you to help influence the direction of the task force. Our committee also has working sessions planned on the role of accountants and other participants in securities offerings, current issues and trends in the capital markets, and shareholder and bondholder litigation. In addition, the Financial Services Section (which includes our Committee) will host a session exploring whether derivatives and other financial products deserve the blame for the financial crisis. The traditional joint lunch for the Securities and Banking Law Committees will be held on Wednesday 7 October, at the scenic Golf House of the Club La Moraleja. Be sure to book your place as the lunch usually sells out. Further information will be forthcoming. Speaking of websites, good progress also continues to be made on the committee’s homepage (www.ibanet.org/legalpractice/ Issues_and_Trading_in_Securities.cfm). In addition to the latest committee news, you will find on the homepage helpful links to the websites of securities regulators and stock exchanges around the world, as well as other key websites (such as for TARP in the US) you may wish to refer to from time to time in your

International Bar Association Legal Practice Division

com

Pere Kirchner Cuatrecasas, Gonçalves Pereira, Madrid p.kirchner@cuatrecasas. com

from the co-chairs

practice. Our contact details, as well as those for the other Committee Officers, may also be found on the homepage. Please visit the page – it helps our Google ranking! You will also find on the homepage comment letters submitted this year by the committee on proposed changes to the EU’s Prospectus and Market Abuse Directives (see page 44 for further details). These comment letters have provided a good forum to discuss and debate amongst ourselves the best approach under the PD and the MAD, and an opportunity to guide the Commission and aid the development of a harmonised marketplace in Europe. Andreas Meyer deserves special recognition for spearheading our work on the comment letters. Please check out the letters and let us know if you think that there are other regulatory proposals we should tackle. Other work currently underway by your committee includes additional member

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The benefits of the LL.M in International Legal Practice You choose what to study • Tailor what you study to your career path and/or practice area • All modules are practice-led with contributions from leading global law firms You choose how to study • Study your LL.M at a time and place that suits you • We supply an extensive suite of user-friendly, practical course material including electronic learning aids You choose your pace of learning • Modular course design enables you to determine your own pace of learning • Modules start in January and July each year For further information, and to register please e-mail: [email protected]

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outreach efforts, expanded programmes for young lawyers, and special projects to increase the relevance of the committee and the IBA to regulators and practitioners in the capital markets. We want to make the IBA as useful to you as possible, so we welcome your suggestions and feedback on activities you would like us to undertake and other improvements we can make. Hopefully the foregoing has provided a helpful snapshot for you of the progress and excellence afoot at the IBA. We appreciate your continued support and involvement, as the value for each member of the non-profit IBA depends on what each member puts into it. We look forward to working further with you.

committee officers

Committee officers Co-Chairs Philip Boeckman Cravath, Swaine & Moore LLP CityPoint, One Ropemaker Street London EC2Y 9HR United Kingdom Tel: +44 207 453 1020 Fax: +44 207 860 1150 [email protected] Pere Kirchner Cuatrecasas Gonçalves Pereira Velázquez 63 28001 Madrid, Spain Tel: +34 915 247 156 Fax: +34 915 247 154 [email protected] Senior Vice-Chairs Christian Cascante Gleiss Lutz Maybachstrasse 6 70469 Stuttgart, Germany Tel: +49 711 8997 151 Fax: +49 711 855 096 [email protected] Jonathan Ross Bell Gully Vero Centre, 48 Shortland Street PO Box 4199 Auckland 1140, New Zealand Tel: +64 9 916 8811 Fax: + 64 9 916 8801 [email protected] Vice-Chair and Newsletter Editor Nigel Wilson Davis Polk 99 Gresham Street London EC2V 7NG United Kingdom Tel: +44 207 418 1086 Fax: +44 207 710 4986 [email protected] Vice-Chair and Publications Officer Florian Gibitz Haarmann Heugel RAE OEG ARES Tower, Donau City Str 11 A-1220 Vienna, Austria Tel: +43 1 2 60 50 305 Fax: +43 1 2 60 50 308 [email protected] Vice-Chairs and Programme Officers Cecilia Carrara Macchi di Cellere Gangemi Via G Cuboni 12 00197 Rome, Italy Tel: +39 06 362 141 Fax: +39 06 3608 4491 [email protected]

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David Rockwell Sullivan & Cromwell LLP 1 New Fetter Lane EC4A 1AN London, England Tel: +44 20 7959 8900 Fax: +44 20 7959 8950 [email protected] Secretary Linda Hesse Jones Day 120 rue du Faubourg Saint Honoré 75008 Paris, France Tel: +33 1 56 59 39 39 Fax: +33 1 56 59 39 38 [email protected] Membership Officer Derk Lemstra Stibbe London Exchange House Primrose Street London EC2A 2ST Tel: +44 207 466 6301 Fax: +44 207 466 6311 [email protected] Conference Coordinator Niels Walther-Rasmussen Kromann Reumert Sundkrogsgade 5 DK-2100 Copenhagen, Denmark Tel: +45 70 12 12 11 Fax: +45 70 12 13 11 [email protected] Website Officer Pit Reckinger Elvinger Hoss & Peussen 2 Place Winston Churchill BP 425, 2014 Luxembourg Luxembourg Tel: +352 44 66 440 Fax: +352 44 22 55 [email protected] Corporate Counsel Forum Liaison Officer Thomas Bischof UBS AG Postfach 8098 Zürich, Switzerland Tel: +41 44 234 11 11 Fax: +41 44 234 63 63 [email protected] Regional Representative (Asia General) Ashley Alder Herbert Smith 23rd Floor Gloucester Tower 15 Queen’s Road Central, Hong Kong Tel: +852 2101 4001 Fax: +852 2845 9099 [email protected]

International Bar Association Legal Practice Division

committee officers

Regional Representative (Japan) Masayuki Watanabe Anderson Mori & Tomotsune Izumi Garden Tower 6-1, Roppongi 1-chome Minato-ku, Tokyo 106-6036, Japan Tel: +813-6888-1100 Fax: +813-6888-3100 [email protected] Regional Representative (Latin America) Cecilia Maria Mairal Marval O’Farrell & Mairal Avenue Leandro North Alem 928 Floor 7 Buenos Aires 1001, Argentina Tel: +54 11 4310 01 00 Fax: +54 11 43 10 02 00 [email protected] Regional Representative (North America) Philip Moore McCarthy Tétrault LLP Suite 4700, TD Bank Tower Toronto Dominion Centre Toronto, Ontario Canada, M5K 1E6 Tel: +1 416 601 7916 Fax: +1 416 868 0673 [email protected] Chair, Mergers and Acquisitions Subcommittee Ricardo Veirano Veirano Advogados Av Presidente Wilson 231 23 Andar CEP 20030 - 021 Rio De Janeiro, Brazil Tel: +55 21 3824 47 47 Fax: +55 21 22 62 42 47 Vice-Chair, Mergers and Acquisitions Subcommittee Tim Lewis Macfarlanes 10 Norwich Street London EC4A 1BD England Tel: +44 20 7831 9222 Fax: +44 20 7831 9607 [email protected] Chair, Public Company Practice and Regulation Nick Eastwell Linklaters One Silk Street London EC2Y 8HQ England Tel: +44 20 7456 4660 Fax: +44 20 7456 2222 [email protected] Vice-Chair, Public Company Practice and Regulation Dean Naumowicz Norton Rose LLP 3 More London Riverside London SE1 2AQ, England [email protected]

Chair, Regulation of Market Participants, Brokers, Banks and Exchanges Subcommittee Gregory Astrachan Willkie Farr & Gallagher LLP 787 Seventh Avenue New York, NY 10019 United States Tel: +1 212 728 8608 Fax: +1 212 728 9608 [email protected] Vice-Chair, Regulation of Market Participants, Brokers, Banks and Exchanges Subcommittee Thomas Bischof UBS AG Postfach 8098 Zürich Switzerland Tel: +41 44 234 20 76 Fax: +41 44 234 63 63 [email protected] Chair, Regulatory Affairs Subcommittee Andreas Meyer Deutsche Bank AG Theodore-Heuss-Allee 70 Frankfurt am Main Germany 60486 Tel: +49 (69) 910 33935 [email protected] Vice-Chair, Regulatory Affairs Subcommittee Kartik Ganapathy Nishith Desai Associates Prestige Loka, G01, 7/1 Brunton Road Bangalore 560 025, India Tel: +91 80 6693 5016 Fax: +91 80 6693 5001 [email protected] Chair, Underwriting and Distribution Subcommittee Vincent Pisano Paul, Hastings, Janofsky & Walker LLP Park Avenue Tower 75 E 55th Street, First Floor New York NY 10022 United States Tel: +1 212 318 6490 Fax: +1 212 230 5144 [email protected] Vice-Chairs, Underwriting and Distribution Subcommittee Cyril Shroff Amarchand & Mangaldas & Suresh Peninsula Chambers Park Lower Road Mumbai 400013, India [email protected]

LPD Administrator Lisa Campbell [email protected]

securities law NEWSLETTER august 2009

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IBA Annual Conference – Madrid, 4–9 October 2009: Securities Law committee sessions

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Are financial products to blame? Financial insurance products, credit default swaps, financial guarantees and other deriviatives This joint session of all the committees in the Financial Services Section and the Capital Markets Forum will look at the plethora of financial products, their regulation and their uses in today’s globalised financial world. They have facilitated some complex structures and been used in a wide variety of ways, but has this always been helpful, and what happens when insolvency strikes? The panellists will look at this topic from their different areas of specialisation (banking, capital markets, insurance, investment funds and securities). Contributions from the audience will be welcome. MONDAY 1000 – 1300

After the crisis – a new world order for the financial industry? Presented by the Legal Practice Division While the financial crisis besieging the world does not yet seem to have reached its peak, the global debate about what went wrong and what needs to be changed for the future is already under way. A great variety of national and international government and interest groups have started a discussion on preventive action to make the financial system more reliable and resilient to future stress situations. The measures being deliberated range from the global harmonisation of supervisory standards, changes in accounting rules and enhanced capital and liquidity requirements, to tighter regulation of market players and increased transparency. Supported by the Financial Services Section and the Human Resources Section, as well as the IBA Financial Crisis Task Force, the LPD Showcase will focus on some aspects of this discussion and will test their viability from practical and legal perspectives. These aspects include: • Rules- and enforcement-based supervision v principles-based prudential supervision: it has been suggested that rules-based supervision is ineffective in that it cannot prevent loop-holes and enforcement may come too late. But did banks in countries with prudential supervision really fare better? Does prudential supervision create legal uncertainty that will constrain the industry? What proficiency would staff of regulators need to exercise prudence? • What will happen to the rating agencies? Will ratings continue to have a vital role in the practical application of supervisory standards? Are there alternatives? • Was that it for the CDO/CDS market? What will happen to monoline insurance? How should the blatant intransparency of financial products that are stripped of the credibility of their rating be dealt with? Are there better methods of risk transfer? • How to fight short term-ism in bankers’ minds? Has the industry become victim to a ruthless crowd of bonus driven freelancers? How should incentive schemes be redesigned to enhance a sense of responsibility for the long-term success of a financial institution? While some of this may sound very technical to someone not familiar with the jargon of bank regulation, the concept of the Showcase is to give further insight to anyone following the public (political) debate. It will set the stage for a number of sessions addressing many different aspects of the current financial crisis in more detail. MONDAY 1500 – 1800

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International Bar Association Legal Practice Division

IBA Annual Conference – Madrid, 4–9 October 2009: Securities Law committee sessions

Securities Law Co-Chairs Philip J Boeckman  Cravath, Swaine & Moore LLP, London, England Pere Kirchner  Cuatrecasas Gonçalves Pereira, Madrid, Spain

Evolution or revolution: the changing role of participants in securities offerings This session will focus on the role of participants in securities offerings, focusing on the responsibilities of company management, board members, bankers, lawyers, accountants and others. The diverse panel will discuss different practices across jurisdictions and how best to reconcile varied expectations in global offerings and among different product types. The effects of the credit crunch will be scrutinised, and the panel will discuss ways in which lawyers can better engage with other transaction participants to improve the quality of disclosure and the capital markets generally. The role of accountants, comfort letters and accountants’ due diligence will be discussed in detail, given the importance of financial disclosure in securities offerings. TUESDAY 1000 – 1300

Class of 2008: the contentious herds of stakeholders taking action in the aftermath of the financial crisis Joint session with the Banking Law Committee. One of the consequences of the financial crisis in 2008 was an increase in class litigation with respect to financial disputes. Class actions attracted enormous attention, both in practice by the contentious herds of disappointed stakeholders, and iure condendo by many legislators in those jurisdictions where such a procedural tool is not yet in place. Which class actions were initiated in the context of the financial crisis? What were their consequences? More generally, what are the implications of admitting class actions for small investors/stakeholders? What are the risks of abuse? Are there better alternatives, particularly when cross-border activity is involved? Can we speak of international standards in the field yet? Also, does class litigation affect the financial market and the way of operating of the financial players? The speakers, based on their experience and in light of their different professional and geographical backgrounds, and drawing on their experience of 2008, will give an overview of the situation and address the pros and cons of class litigation in the financial sector. In particular, they will focus on some of the most relevant aspects of collective redress procedures, such as the issue of class certification, as well as recognition and enforcement in cross-border litigation. TUESDAY 1500 – 1800

Consequences of the financial crisis for securities lawyers: how the securities practice may be changing Looking back over the last 12 months, capital market lawyers from the United States, Europe and Asia will discuss the impact of the financial crisis on the practice of securities law. The session will have an informal and interactive format and will include private practitioners and in-house lawyers from financial institutions. What has changed or is likely to change in the role of securities lawyers? What has changed in their practices, but also what opportunities have arisen? What challenges and issues are present for securities offerings in connection with recapitalisations and restructurings, including for financial institutions? Are there lessons learned from the financial crisis that should affect how securities lawyers practice? THURSDAY 1500 – 1800

securities law NEWSLETTER august 2009

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26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

All about financial crisis Report on the morning sessions of 14 May 2009

M

r Eddy Wymeersch is Chairman of CESR and Chairman of the European Regional Committee of IOSCO. Mr Wymeersch was no doubt best placed to introduce the conference on a wide subject entitled ‘Financial Crisis: lessons from the present and for the future’. In a brilliant speech, he presented in simple words the causes of the financial crisis, the main actions which had been implemented so far and, based on the Larosière report, the possible changes in the future regulatory environment for the financial sector. Mr Wymeersch insisted that there was not one but a plurality of causes for the financial crisis. Those include too easily available credit, weaknesses in governance and risk management, greed (not only from managers but also from investors), weaknesses in supervision, a lack of coherent macro-and micro-economic analysis etc. He outlined the roles played by the various actors of the financial sector being banks, credit rating agencies and supervisors and ‘timidly’ referred to the role of the lawyers... He then presented the initial actions that had been taken as a reaction to the financial crisis. Precise issues were analysed such as short selling, accounting rules, management remuneration and institutional issues. For short selling Mr Wymeersch admitted that the ban on short selling introduced in September 2008 may not have been fully satisfactory but immediate action was required at the time. Even today it is unclear just how negative an effect short selling really has. He announced the most recent measures CESR had agreed upon the day before the IBA Conference started. Among others there will be an enhanced disclosure which is meant to increase transparency. As to the future Mr Wymeersch presented the conclusions of the Larosière report1 on what could be the future reinforced supervision model within the European Union. In his conclusion Mr Wymeersch insisted that major changes were needed to avoid systemic developments that could lead to a meltdown: ‘We have reached the outer limits of what the

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system could do’. Finally he mentioned that CESR would encourage closer collaboration with the IBA, an invitation which was warmly welcomed by the Co-Chairs to the morning session. Questions from the floor concentrated on disclosure requirements and the risk of overregulation. On ‘disclosure’, Derk Lemstra from Stibbe, London, wondered to what extent increasing disclosure at national levels would have an effect on increasing quality, or whether it would rather only increase quantity. In his answer Mr Wymeersch insisted that disclosure must be the same in every country; that disclosure must not necessarily be more but must be better. He encouraged systems which are now implemented for investment funds giving investors simplified prospectuses with essential information. He also insisted that giving information is important but what is equally important is to increase the responsibility of intermediaries and the role which MiFID is playing in that respect. On ‘over-regulation’, David Rockwell from Sullivan & Cromwell, London, mentioned that at a time when the United States started to further regulate in their markets (eg, Sarbanes Oxley Act), a number of market participants had turned to London which was a lesser regulated market. Could the effect of the current reactions from the European authorities to more regulation not be adverse to the EU markets? Mr Wymeersch insisted that there must be a worldwide dialogue achieving an agreement on the level of regulation and there must be confidence that regulations will become the same in the various jurisdictions. Following this first highly interesting presentation, a number of practioners went into detail on several aspects of the regulatory response to the crisis. Nick Eastwell, partner at Linklaters, London, started by presenting the European Union position. He insisted that the objective of disclosure must change. In respect of securities offerings the focus must be put on investor protection rather than underwriters protection. He insisted that the Larosière report calls for more strongly coordinated

International Bar Association Legal Practice Division

Pit Reckinger Elvinger Hoss et Prussen, Luxembourg [email protected]

26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

supervision. In general the right regulatory response to the crisis will be to insist on coordination and consistency within the European Union applying the same definitions and the same standards across all 27 countries. Gregory Astrachan, partner at Willkie Farr & Gallagher, New York, presented the United States’ view. Prior to the crisis, he indicated that the United States’ tendency to regulation (eg, Sarbanes Oxley Act) was severely criticised from both outside and within the United States, and the London model was envied. Today this has changed and there is a general call for greater and more specific regulation, as in the European Union. The United States is moving towards a single regulator with a systemic control role in the form of a multi-agency systemic risk counsel including representatives of today’s authorities. Rowan Russel, partner at Mallesons Stephen Jaques, London, analysed issues around short selling. He insisted that short selling is to play a legitimate role in the financial markets. The initial regulatory response consisting of bans of short selling and disclosure rules which were applied in a different manner across various jurisdiction has clearly been shown to be unsatisfactory. Going forward, rather than introducing a ban on short selling, short selling must be regulated. Disclosure will be necessary and the idea presented by CESR on stricter regulation on settlement (introducing fines in case of settlement failures) should be welcomed. Tarja Wist, partner at Waselius &, Wist, Helsinki, analysed the treatment by the regulatory authorities of derivatives and in particular credit default swaps as part of the financial crisis. She also pleaded for a consistent regulatory approach to CDSs. She further analysed the issue of the central clearing counterparty in the EU for CDSs. At the end of the session, Pere Kirchner, partner at Cuatrecasas, Madrid, highlighted a further aspect to the discussion. In addition to having a new regulatory and supervisory framework, there are other issues which must be taken care of to help companies to survive the crisis such as those that affect not only the ‘financial economy’ but also the ‘real economy’. He suggested various measures, for example for the regulation on public takeovers to include an exemption from having to launch a compulsory takeover bid when, as a result of a merger whose aim is industrial – and not merely taking control

of a public company, a shareholder reaches the thresholds which would normally trigger such public takeover requirements. Similar exemptions could apply in case of conversion of debt to equity. The conclusion to these consistent presentations is that there has been a swift regulatory response to the financial crisis specifically in respect of certain financial instruments and techniques such as short selling and derivatives. The immediate regulatory response may not always have been the most appropriate one. Speakers agreed that stronger regulation is the right response provided that it is consistent throughout various jurisdictions. There was also a consensus as to the requirement to create a new regulator which shall federate existing authorities in the United States and the European Union and whose role shall be to monitor the systemic risk in the markets concerned. The panel which followed, ‘Know your counterparty - learning the lessons from the credit crunch’, was a wonderful practical session. In 11 lessons the panel, chaired by Stephen Powell, partner at Slaughter and May, London, and Paul Zumbro, partner at Cravath Swaine & Moore, New York, recalled what should have been, what are and what shall be the basic principles to be observed when negotiating a loan agreement. Paul Zumbro recalled the importance of determining whether as a contractual counterpart one may request specific performance and against whom. Solutions vary from country to country. He stressed, on the basis of practical examples, the importance of knowing who your counterparty is. Alberto Núñez-Lagos, partner at Uria & Menéndez, Madrid, focused on the restructuring of private equity investments. He demonstrated that the downturn in businesses changes the interests which the various parties (sponsors, senior lenders, mezzanine lenders) may have in their private equity investments. He also demonstrated that by having security over an investment one does not necessarily have control over it. Tobias Linde, partner at Gorissen Federspiel Kierkegaard, Copenhagen, analysed specific clauses in loan agreements. He stressed the importance of specific default clauses (cessation of business, transfer of substantial assets, withdrawal of licence, etc) and recalled the most obvious (but sadly often forgotten) point that while taking security securities law NEWSLETTER august 2009

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26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

one has to ensure that it is properly perfected. Finally, Stephen Powell insisted on the need for a detailed review of the boiler plate clauses of an agreement. In scenarios of a financial crisis these clauses become far more important than lawyers may have considered at the time of drafting the contract. He also insisted that one has to think across products and think about netting and set off.

This panel was particularly enjoyable because it stated the obvious which ‘obviously’ certain people had missed out in the year before the financial crisis! Notes 1 The full report can be found on http: //ec.europa.eu/ internal_market/finances/docs/de_larosiere_report_en. pdf.

Bank failures and bailouts – the continuing evolution 14 May 2009 Co-Chairs: Jeffrey Oakes, Davis Polk & Wardwell, London Giuseppe Schiavello, Macchi de Cellere Gangemi, Rome Speakers: Joanne Kellermann, De Nederlandsche Bank NV, Amsterdam Tim Pharoah, Slaughter and May, London Lorenzo Lampiano, Unicredito Group, Milan Joanne Kellermann began by noting the relatively underdeveloped state of the legal regime governing failing banks in The Netherlands and other EU countries. She noted the inadequate nature of existing legal instruments and the need for additional ones, especially those permitting earlier intervention. To date there have been three main types of crisis measures: bank support (capital injections and debt guarantees); systemic support (asset purchases and guarantees); and individual institutional support (capital injections and, to a lesser extent, guarantees). These measures have rolled out in four phases: stand alone support (September 2008); comprehensive packages (October 2008); more standalone support (November/ December 2008); and comprehensive packages on the asset side (2009). Ms Kellermann then related the application of these to a Fortis case study, and the measures implemented by the De Nederlandsche Bank 12 

both for Fortis and for other Dutch financial institutions. Ms Kellermann closed by identifying key policy issues and dilemmas, including the issue of institutions being too big too fail, moral hazard, the stock market effect of governmental support, and the effects on such support on shareholder rights. Among the lessons learned from crises to date, she identified: • the need to maintain stability as a primary objective; • the need for new regulatory instruments to permit early and effective intervention; and • the need to achieve a balance between shareholder rights and the governmental interest. Finally she observed that for the last ten years Europe has been moving towards ‘harmonisation’ of its financial markets while the financial crisis has substantially undone that effort, at least as it relates to its banking institutions. Tim Pharoah identified the inherent tension between two principal objectives of government support measures, namely to protect the funding provided by the government/taxpayer (and by depositors) to the institutions while avoiding the need for the government to manage them itself. He then surveyed the support measures put in place by the UK Government, and their gradual transition from short-term to longerterm measures, focusing on measures put in place for specific UK financial institutions and their effects on shareholder rights. He

International Bar Association Legal Practice Division

David Rockwell Sullivan & Cromwell, London rockwelld@sullcrom. com

26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

closed with a review of anticipated future developments in the UK financial system support, noting that work-out and exit from the large stakes the UK Government has acquired in certain of its banks will likely take much longer than initially expected, and that executive remuneration remains at the center of debate. Finally, Lorenzo Lampiano provided a number of interesting insights into the decisions that must be made by a financial institution determining whether to apply for governmental support and, if so, in what jurisdiction and of what type. In particular, he noted the need for careful review of available support programs, especially the conditions attached to them, in light of the financial institutions’ business activities and the objectives of the relevant government

David Rockwell Sullivan & Cromwell, London rockwelld@sullcrom. com

offering the support being considered. The main parameters of a financial institution’s evaluations include: the regulatory treatment of the support for capital purposes; the coupon and yield on any instruments issued; remuneration limitations; and corporate governance effects and effects on lending activities. In the closing discussion, participants noted, among other things, that reducing the administrative burdens on financial institutions is not on the top of the regulatory agenda, and that there is an increasing realisation among regulators that banks are not like regular companies. These observations have important implications for corporate law purposes (eg, shareholder rights) as well as for purposes of competition law.

Accounting and the credit crisis: what does it mean for harmonization? 15 May 2009

Co-Chairs: Timothy E Powers, Haynes & Boone LLP, Dallas David Rockwell, Sullivan & Cromwell LLP, London Speakers: Guido Fladt, PriceWaterhouseCoopers, Frankfurt Kenneth D Marshall, Ernst & Young, New York Timothy Powers began by providing an overview of recent developments in the credit crisis and the role of accounting issues in it. David Rockwell then noted the increasing importance of accounting issues to financial legal practice, focusing on three important recent developments in the area, namely: • the October 2008 adoption by the IASB of new IFRS rules permitting the reclassification of certain financial instruments away from fair value through profit and loss; • the April 2009 adoption by the FASB of new US GAAP rules relating to the valuation of

financial instruments for which there is no active market, and other-than-temporar y impairment; and • the prospects for the future adoption by the SEC of IFRS for use by US domestic issues. Guido Fladt then surveyed the IASB’s reaction to the credit crisis, noting its initiatives in the areas of off-balance sheet accounting, fair value accounting and disclosure. He particularly noted the costs of adopting hurried solutions to the conceptual clarity of IFRS. Mr Fladt then surveyed the hierarchy of fair value-related conceptual issues discussed by the Financial Crisis Advisory Group, and evaluated various claims made that fairvalue accounting shares responsibility for the credit crisis. Finally, he addressed recent political developments that could be seen as weakening the independence of accounting standard settings at both the IASB and the FASB, and recent developments that perhaps call into question the prospects for the SEC’s roadmap for the adoption of IFRS for use by US domestic issuers. securities law NEWSLETTER august 2009

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26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

Ken Marshall picked up on the discussion of the SEC’s roadmap, giving its history, summarising recent commentary by the new SEC Chairman that may affect it, and surveying the range of comments provided to the SEC’s proposal. He also gave an overview of the multiyear convergence program of the IASB and the FASB, and the prospects for its continuance. Finally, Mr Marshall gave the audience a primer on the new US GAAP rules relating to fair value accounting, enabling them to consider the new rules in context and to evaluate their impacts in various examples.

In the ensuing discussion, panel participants addressed the question of a ‘level playing field’ between IFRS and US GAAP, particularly as it relates to the conduct of ‘stress tests’ of financial institutions. Participants also discussed recent suggestions by various politicians that the accounting rules should be adapted to serve objectives other than transparent reporting to investors. It was generally agreed that any such adaptations would be unlikely to produce benefits in excess of its disadvantages.

Directors in a time of crisis – the buck stops here

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n the basis of an imaginary case study, the panel for this session, chaired by Gwendoline Godfrey and Jan William Hoevers, discussed the issues that corporate directors are likely to face in situations involving group companies where one of the companies of the group, typically the controlling company, goes bust. The session was based on a case study revolving on the following scenario: a multinational group is formed by a controlling company in United States and several controlled companies in other jurisdictions. Several questions were then elaborated with regard to the situation where the controlling company enters into financial distress and eventually enters into insolvency proceedings. Indeed, a single entity of the group may be per se healthy, but the insolvency of its mother company may have an impact in many ways on its situation, eg, the controlled entity may have to refinance debt at a time when this is difficult due to ‘external’ circumstances. The following is a selected list of issues that were debated: • What should the board of directors of such a ‘victim’ of the credit crisis do? • Is it proper for the same firm to advise both the parent company and the subsidiaries? • Do executives require independent advice? • Which kind of concerns need to be taken into consideration in respect of the legal regime of directors’ liability of each jurisdiction? There may be differing considerations in different

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jurisdictions also on the issue of whether the parent company may or may not act in the interest of the individual company rather than the interest of the group. • There may also be different standards to be taken into consideration for each group company from the insolvency viewpoint (eg, different insolvency tests). • Local legislation would also affect treatment of shareholders’ loans and guarantees. • If the controlling company is bankrupt already, what should the directors of the controlled company do? Should they seek for independent financial advice? When should they file for insolvency of their own local subsidiary? • Is there a risk that bankers are considered managing the subsidiaries? This may be the case in some jurisdictions, either because of the theor y of shadow-directorship or otherwise (ie, de facto control). • Are there circumstances where it makes sense to relocate the COMI? There was also some discussion on the implications related to the filing of the financials after the legal deadline. One of the reasons for the delay is often that, in a situation of financial crisis, the auditors may not be willing to certify the existence of a going concern. What can be done in these cases? The session was animated with a lively debate which included many interventions from the floor.

International Bar Association Legal Practice Division

Cecilia Carrara Macchi di Cellere Gangemi, Rome [email protected]

26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

Cecilia Carrara Macchi di Cellere Gangemi, Rome [email protected]

The Rome I Regulation: a quantum of solace? New solutions and open issues with respect to the conflict of law rules applicable to the assignment of receivables

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any financing transactions based on receivables, such as securitisations and factoring agreements, are international by nature and conflict of law rules thus play an essential role. But also simpler forms of assignment of receivables such as an assignment of the position of a bank account, of pledges and other kinds of securities, may present conflict of law issues. Until now the Rome Convention, in Article 12, failed to clarify which law should apply to third-party effects and to creditor ranking issues. As a consequence, there have been contradictory court decisions throughout the EU Member States resulting in legal uncertainty. On 17 June 2008 the Rome I Regulation – intended to substitute the Rome Convention – was finally adopted. Article 14, which regulates the applicable law to assignment in general, now addresses certain issues but also leaves some questions unanswered. Article 14 provides as follows: 1. The relationship between assignor and assignee under a voluntary assignment or contractual subrogation of a claim against another person (the debtor) shall be governed by the law that applies to the contract between the assignor and assignee under this Regulation. 2. The law governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor’s obligations have been discharged. 3. The concept of assignment in this Article includes the outright transfers of claims,

transfers of claims by way of security and pledges or other security rights over claims. The ongoing discussions with regard to the effects of assignments of receivables vis-à-vis third parties continue, and will probably have to be ended by the European Court of Justice. It is also foreseen that the current solution adopted under Article 14 will be subject to review in 2010; to this effect a report on the question of the effectiveness of an assignment or subrogation of a claim against third parties shall be submitted to the Commission by 17 June 2010. In everyday legal practice, the Rome I Regulation will also affect legal opinions as to the choice of law. The newly introduced definition of ‘overriding mandatory provisions’ will result in interesting discussions among practitioners as to its scope and interpretation. The speakers, based on their prominent academic and practical experience in the field of international financing transactions, commented upon the possible interpretations of Article 14, on its gaps as well as on possible solutions thereto. Professor Verhagen opened the session by describing the solutions offered by the Rome I Regulation on the law applicable to the assignment of receivables. Professor Verhagen explained that the interpretation of Article 12 of the Rome Convention was uncertain, in particular because it did not cover property aspects of the assignment, especially in those jurisdictions that make a distinction between obligatory and property aspects. In his opinion, Article 14 now clearly addresses this issue, by referring all assignment related issues to the law applicable to the assigned claim. However

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26TH INTERNATIONAL FINANCIAL LAW CONFERENCE 13–15 MAY 2009

this interpretation is controversial. Professor Verhagen further argued that an even better solution would be to allow party autonomy in this area. A good compromise solution could also consist in making the law of the assigned claim applicable, combined with a limited choice of law possibility for the law of the assignor’s residence. Professor Maffei stressed that the issue of applicable law to assignments is a key-matter for the banking industry and explained the French point of view on the matter. Perfection vis-à-vis third parties was always a fundamental concern in legal systems based on the Napoleonic Code. There are still formal rigidities for perfections of assignments. This is why France and other countries have favoured another solution within the new drafting of the Rome I Regulation, clearly referring the transfer of receivables by way of assignment to the law of the assignor’s residence. This was also the solution initially favoured by the Commission as well as the one adopted in the UNCITRAL Convention on the Assignment of Receivables. From an international point of view, instead of pursuing different choice of law rules, another possible approach would be that of concentrating on possible substantive law uniform rules, which would also be a favourable approach for the banking community.

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Ferdinando Emanuele explained the Italian point of view, reporting that there is no case law on the specific issue. Ferdinando Emanuele also pointed out that two solutions would be possibly applicable, distinguishing between factoring agreements and assignment of receivables in general. This is due to the fact that under Italian law factoring is regulated in a special law and under Article 4 of the Rome I Regulation it is likely that the factoring agreement would be governed by the law of the State of residence of the factor. Stefan Tiefenthaler focussed on how to approach the issue in legal opinions. He insisted that since interpretations of Article 14 are still very controversial and there is no clear-cut solution, legal opinions on the matter would still need to be qualified. More generally, from a German and Austrian point of view he demonstrated some reluctance to the interpretation favouring the solution of referring the assignment to the law of the assigned claim. He also stressed that the issue of the applicable law to the assignment of receivables and in particular its effects visà-vis third parties in most cases becomes of great relevance in case of insolvency of the assignor or of one of the assignees in case of subsequent assignments. The speakers generally agreed that it should be a priority to make uniform European rules on assignment of receivables

International Bar Association Legal Practice Division

feature articles

Leon Miller Nabarro LLP, London [email protected]

When can companies delay disclosure of inside information?

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hapter 2 of the Disclosure Rules and Transparency Rules sourcebook (DTRs) governs the disclosure and control of inside information by issuers whose securities are admitted to trading on a regulated market in the United Kingdom. The timely disclosure of inside information is the bedrock that promotes the orderly and efficient working of the market. It enables investors to make informed investment decisions by providing them with information about how issuers are performing and it contributes to the prevention of insider trading which would otherwise undermine investors’ willingness to invest in listed securities. The DTRs implement certain parts of the Market Abuse Directive and the Transparency Directive which aim to ensure across the EU the prompt and fair disclosure of information to the public and enhance market integrity. Chapter 2 of the DTRs echoes the requirement under listing principle 4 for a listed company to communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuation of a false market in such listed securities. These rules and principles in turn supplement the market abuse regime under section 118 FSMA and the market manipulation offences under section 397 FSMA. In light of the recent economic downturn, issuers need to understand more than ever the parameters within which disclosure of inside information can be delayed. The DTRs say that an issuer must make a public announcement as soon as possible of any inside information which directly concerns the issuer except where the disclosure can be delayed so as not to prejudice its legitimate interests. This is provided that: • any such omission would not be likely to mislead the public; • any persons receiving the information owe a duty of confidentiality to the issuer; and • the issuer is able to ensure the confidentiality of that information. The key question for the issuer is whether its ‘legitimate interests will be prejudiced’

by the disclosure. The issuer must in the first instance decide whether or not it has a legitimate interest that would be prejudiced by disclosure. The DTRs offer some guidance on what constitutes ‘legitimate interests’ and includes a non-exhaustive list of circumstances. These include where negotiations are in course and the likely outcome or normal pattern of those negotiations would be likely to be affected by public disclosure. This is particularly the case when the financial viability of the issuer is in grave and imminent danger and disclosure of the negotiations would undermine the conclusion of those negotiations designed to ensure the long term financial recovery of the issuer. An issuer is not, however, permitted to delay disclosure of the fact that it is in financial difficulties or of its worsening financial condition. The recent economic downturn has forced many public companies to make disclosures to the market about deteriorating financial positions. These have included for example disclosures concerning lower than previously anticipated revenues, breach of banking covenants, withdrawal of credit insurance, and loss of major suppliers or customers as a result of their insolvency. The release of negative news to the market inevitably leads to an adverse impact on share prices and often compounds further the current difficulties faced by the issuer, leading to a further loss of confidence by its stakeholders. This gives rise to the argument that market confidence and financial stability should in certain circumstances be prioritised over an absolute commitment to market transparency. One example of this is the recent liquidity support that banks have received from the Bank of England. Issuers have made the case that disclosure of the fact that they are receiving liquidity support from the Bank of England should not be immediately disclosed as to do so would only further reduce liquidity and threaten their solvency. The FSA concluded, following the publication in July 2008 of a consultation paper on the proposed amendments to the DTRs, that these issuers may have a legitimate interest in delaying securities law NEWSLETTER august 2009

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the disclosure of information concerning the provision of such support provided that they can preserve the confidentiality of such information and the delay will not mislead the public. As a result, the FSA has added a new rule to the DTRs which came into effect on 6 December 2008. This rule provides that the receipt of liquidity support from the Bank of England or another central bank is another example of a ‘legitimate interest’ that issuers may rely upon in order to delay disclosure of inside information. The rule effectively applies only to banks and other authorised financial institutions, as only they are eligible for liquidity support from the Bank of England. Consequently, the impact on the DTRs is in reality fairly limited. Of interest is the fact that respondents to the FSA’s consultation paper argued that the scope of the new rule should be widened so that all issuers (ie, not just banks) should be permitted to delay disclosure of inside information relating to any material issue affecting them if immediate disclosure would harm their business and that this should include information other than purely financial information. In response, the FSA reiterated the dichotomy between ‘cause’ and ‘effect’ and said that issuers should be careful to distinguish between an event which gives rise to inside information (eg, the loss of an important contract) that requires disclosure and subsequent events (eg, attempts to renegotiate the contract), that may be covered by the exemption from immediate disclosure. This guidance reflects the UKLA’s long standing approach that keeping the

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market properly informed is key and that price sensitive negative news (the ‘cause’) and the steps taken to address that problem (the ‘effect’) should be treated as two separate reportable events. The FSA also explained that simply because an issuer is in negotiations with a third party that may enable the issuer to improve its financial condition, this does not allow the issuer to delay disclosure of the underlying fact that it is in financial difficulty. Permission to delay disclosure of a transaction until it has been agreed applies narrowly to disclosure of the facts of a deal or proposal or negotiation. The FSA’s view is that this is consistent with the aim of the Market Abuse Directive and that circumstances have not changed in a way that undermines the approach that it adopted at the time the United Kingdom implemented the Directive. As a result the FSA does not propose to make changes to its wider regime as some respondents to its consultation paper advocated. Issuers should therefore ensure that they have internal procedures in place to enable them to identify matters which may constitute inside information at an early stage. In a newsletter published in January 2009, the FSA notes that in the current difficult economic climate, many companies will be monitoring their cash flow, compliance with covenants and their headroom against bank or other finance facilities on a regular basis. Directors need to bear in mind more than ever their obligation to inform the market about any inside information and will need to assess whether there are grounds for delaying disclosure.

International Bar Association Legal Practice Division

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Masayuki Watanabe Anderson Mori & Tomotsune, Tokyo [email protected]

Overview of firewall deregulations in Japan

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his article provides an overview of the firewall deregulations among the banking, securities and insurance business in Japan pursuant to ‘the Law for Amendment to the Financial Instruments and Exchange Law’ (Law No 65 of 2008, the ‘Amendment Law’), which was enacted by the Diet on 6 June 2008, and promulgated on 13 June 2008. Firewall deregulations consist of: (i) deregulations of interlocking of directors and employees between securities firms and group financial institutions (eg, banks); and (ii) deregulations of restrictions on sharing of confidential information from customers between securities firms and their group financial institutions. As alternatives to firewall deregulations, financial institutions (eg, securities firms, banks, insurance companies) are required to establish frameworks to manage conflicts of interest. As this article focuses on firewall deregulations, we leave the discussion on the establishment of a system to manage conflicts of interest until another opportunity. Provisions concerning firewall deregulations and establishment of a system to manage conflicts of interest will come into effect on 1 June 2009. I. Background As Japanese banking and securities regulations were patterned after the US GlassSteagall Act of 1933, which sternly restricted banks from engaging in securities business, Japanese banks were, in principle, prohibited from engaging in securities business pursuant to Article 65 of the Securities and Exchange Law (this article is now Article 33 of the Financial Instruments and Exchange law (FIEL)). In 1993, however, banks and securities firms were able to enter other businesses through their subsidiaries. Instead of this development leading to the relaxation of regulations, further firewall regulations between banks and securities firms were issued and implemented to prevent adverse effects arising from conflict of interest and abuse of

the dominant bargaining position of banks. Thereafter, in the United States, the GrammLeach-Bliley Act, which relaxed firewall regulations between banks and securities firms, was enacted in 1999. In contrast, in Japan, firewall regulations between banks and securities firms were not relaxed drastically. Under these circumstances, there have been criticisms that current Japanese firewall regulations are excessive in light of their aim to prevent conflict of interest and abuse of the dominant bargaining position of banks, and that such excessive regulations will harm the international competitiveness of Japanese financial markets in light of the existing regulatory framework. Please refer to the Exhibit, which sets out a comparison of the firewall regulations and management of conflicts of interest of Japan, the United States and the United Kingdom. II. Deregulation of restrictions on sharing of confidential information of customers of securities firms and group financial institutions 1. Current regulations Securities firms are prohibited from providing any confidential customer information to, and receiving such information from, parent companies and subsidiaries in principle. In case such firms wish to provide or receive confidential information, prior written consent (so called ‘opt-in’ consent) of the relevant customers is required to be obtained (Article 44-3, paragraph 1 of the FIEL, Article 153, item 7 of the Cabinet Office Ordinance concerning Financial Instruments Business, etc. ‘Cabinet Office Ordinance’). With regard to ‘internal management business’, confidential information (of both individual customers and corporate customers) may be shared by and among securities firms and their group companies if the securities company obtains prior approval from the authorities (Article 44-3, paragraph 1 of the FIEL). The term ‘internal management business’ includes businesses securities law NEWSLETTER august 2009

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concerning: (i) management of compliance; (ii) management of risks; (iii) internal audit and internal inspection; (iv) financial affairs; (v) accounting; (vi) taxation; and (v) maintenance and management of IT (Article 151, paragraph 4 of the Cabinet Office Ordinance). One of the conditions for the approval by the authorities is development of measures to prevent leakage of customers’ confidential information from divisions conducting internal management businesses (Article 152, item 3 of the Cabinet Office Ordinance). 2. Amended regulations (i) Opt-out system (corporate customers only) If a securities firm or its parent companies or subsidiaries have provided their corporate customers with appropriate opportunity to request to opt-out of having any confidential information of the relevant corporate customers shared with such parent companies, subsidiaries or securities companies, the relevant confidential information may be shared until such request to opt-out is made by the relevant corporate customers (Article 153, paragraph 2 of the Cabinet Office Ordinance, so called ‘opt-out’ consent). With regard to individual customers, the opt-in system will be maintained. According to the Comprehensive Guidelines for the Supervision of Financial Instrument Firms, etc (‘Guidelines’), an optout system requires the following conditions (Section IV-3-1-4 (1) of the Draft Guidelines): (a) Prior notification shall be made to the customers. Such notification shall include the extent of sharing confidential information between the parent company and subsidiaries, the purpose and measure of information sharing; the method of information management after sharing such infor mation; and the opt-out method(s); (b) In addition to the notification provided at the time of signing the agreement, announcement of the opt-out right through displays at business premises and/ or on the website is required; (c) For long-term contracts, corporate customers must be notified again about such opting-out at the frequency of about once a year; 20 

(d) After notifying the corporate customer of the opportunity to opt-out, the securities firm (and/or its group company sharing the corporate customer’s information) must allow the corporate customers concerned sufficient time to exercise the right to opt-out; and (e) Where a securities firm (or its parent or subsidiary corporation) has corporate customers whose confidential information will be provided to, or received from, the parent or subsidiary corporation (or a securities firm), only when such corporate customers have opted-in without being granted the opportunity to opt-out that the securities firm (the parent or subsidiary corporation) is required to ensure that each customer easily recognises whether it falls within the category of a customer that will be granted the opportunity to opt-out from the displays at branches or the display on the website display. (ii) Internal management business (both individual and corporate customers) Subject to the implementation of measures to prevent leakage of confidential information from internal management divisions to other divisions, the sharing of confidential information will be permitted without any approval from the authority (Article 153, paragraph 1, item 7 (ix) and item 9 of the Cabinet Office Ordinance). III. Deregulation of interlocking of executives and employees between securities firms and group financial companies 1. Interlocking of directors and other officers (i) Current regulations Under current regulations, the interlocking of the directors, accounting advisors (kaikei san-yo) auditors, executive officers (shikkoyaku) or employees of securities firms with the directors (in case of Japanese branch of a foreign bank, the representative of Japan), auditors, executive officers or employees of group banks is expressly prohibited (Article 31-4 of the FIEL).

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(ii) Amendment Law Under the Amendment Law, the aforementioned prohibition against interlocking will be lifted. Instead, such securities firm shall notify the authority of such assumption of offices and/or of resignations from such posts without delay (Article 31-4, paragraph 2 of the FIEL). Please note, however, that even after the relevant amendment, no directors who engage in the ordinary business of a bank (any foreign bank branch managers who serve as Japanese representatives) or executive officers may engage in the ordinary business of other companies without permission from the authority pursuant to the Banking Law (Article 7 of the Banking Law). 2. Interlocking of employees (i) Current regulations Under current regulations, although there is no express prohibition in the regulations (unlike the prohibition applicable to executives of securities firms as explained (i) above), the interlocking of employees between a securities firm and its group financial institutions is, in principle, prohibited. This is because, as a securities firm is prohibited from offering and receiving any confidential customer information from parent companies and subsidiaries without obtaining prior written consent (see II.1 above), the interlocking of employees

between a securities firm and its group companies is virtually impossible. In other words, the possibility of sharing customers’ confidential information between a securities company and its parent or subsidiary company is the condition for the interlocking of their employees. With regard to internal management business, as customers’ confidential information may be shared by and among the securities firms and their group companies if the securities firm obtains the approval of the exemption of preventive measures for wrongdoings from the authorities (see II.1 above), interlocking of employees is permitted in divisions conducting internal management business (eg, compliance division or risk management division). Such interlocking of employees is also known as ‘double hatting’ or ‘multiple hatting’. (ii) Amendment Law According to the answers to the public comments for the draft Guidelines announced on 30 January 2009, the FSA answered that possibility of sharing customers’ confidential information between a securities company and its parent or subsidiary company is not the premise for the interlocking of their employees. Therefore, the interlocking of employees may become possible not only in internal management divisions but also in front divisions, operation divisions and human resource divisions (see Table 1).

Table 1 securities law NEWSLETTER august 2009

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Table 2

Employees in internal management divisions may become interlocking without a need to obtain any approval. Under the Amendment Law, as sharing of confidential information will be permitted without any approval (see II.2 (ii) above), the doublehatting employees of a securities company and its parent or subsidiary company of the internal management divisions may use the customers’ confidential information without any approval. Please note, however, that the interlocking of employees between internal management divisions and front divisions and other divisions using confidential information for these businesses will still be prohibited (Section IV-3-1-4 (3) (iii) of the Guideline). As mentioned above, the interlocking of employees of front divisions between a securities firm and its group financial institutions will become possible. Nonetheless, the double-hatting employees of front divisions may not access to all customers’ confidential information of both entities in which they belong. They may access the confidential customers’ information shared between a securities company and its group company (ie, non-opt-out corporate customers’ confidential information and opt-in customers’ confidential information) (‘Shared Confidential Information’). However, they may only access the confidential customers’ information and not share it between a securities company or that of its group company (ie, opt-out corporate customers’ confidential information and non22 

opt-in customers’ confidential information) (‘Non-Shared Confidential Information’) (Section IV-3-1-4(2)(vi) of the Guideline). A securities company or its group companies shall determine in advance to which NonShared Confidential Information an interlocking employee may access (see Table 2). There is another restriction for interlocking of employees of front divisions. An employee is prohibited from registering as a sales representative (gaimuin), which is required for sales of securities, if he/she is registered as a sales representative of another securities firm or a bank or an insurance company registered as a registered financial institution (touroku kinyukikan) conducting certain securities business (Article 64-2, paragraph 1, item 3 of the FIEL). Therefore, an interlocking employee may conduct securities business requiring a registration for a sales representative only for a securities company or its group company. IV. Conclusions We welcome the relaxation of firewall regulations. In particular, deregulation of the interlocking of executives and employees between securities firm and its group companies would seem to be the first step towards ‘universal banking’ as can be seen among the financial institutions in EU countries. These deregulations will, in the long run, contribute to the international competitiveness of Japanese financial markets.

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With regard to sharing confidential information of corporate customers, Japanese regulations are still strict even after the implementation of the opt-out system. We understand that there is no regulation for sharing corporate customers’ confidential information between a securities company

and its group company in the United States and United Kingdom. We strongly hope the FSA will review the opt-out system in the near future and will make further deregulations.

Exhibit [Firewall Regulation in Japan, US and UK]

Bank’s ability to conduct securities business

Japan

US

UK

Prohibited in principle

Prohibited in principle

Permitted

Not regulated (with regard to the information regarding balance of credit, sharing confidential information is prohibited only when a customer disagrees (opt-out))

Prior written consent (opt-in)

Not regulated

Not regulated

(Current Law) not permitted  (Amendment Law) permitted

Permitted

Permitted

Establishment of framework of conflicts of interest (newly introduced)

Establishment of framework of conflicts of interest * This is not the comprehensive framework like UK and Japan

Establishment of framework of conflicts of interest

Prior written consent (opt-in) (status quo)

Individual customer

Sharing confidential information between securities firm and group bank

Corporate customer

Interlocking of executives and employees between securities firm and group bank

Management of conflicts of interest

[Using internal management business only] (Current Law) Permitted (on condition that obtaining prior approval from the authority)  (Amendment Law) Permitted without obtaining approval from the authority (Current Law) Prior written consent (opt-in)  (Amendment Law) Sharing confidential information is prohibited only when a customer disagrees (opt-out)

(Refer to ‘Clause-by-clause Interpretation of Amendment to the Financial Instruments and Exchange Law of 2008’) (P85 of Shojihoumu, 2008) securities law NEWSLETTER august 2009

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Market abuse: European proposals on inside information

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he recent crisis in the financial markets has drawn the market abuse regime into sharp focus. In March 2009, the Commission of the European Communities (the Commission) issued a communication entitled Driving European Recovery1 which noted the instability in the financial markets and, amongst other things, set out a blueprint for what the Commission described as ‘an ambitious new reform programme,’2 which has the overriding objective of delivering ‘responsible and reliable financial markets for the future’.3 To this end, the Commission stated that it intends to review the Market Abuse Directive4 (the MAD) and make proposals for change.5 The Commission also issued a high-level communication at the beginning of 2007 entitled Action Programme for Reducing Administrative Burdens in the European Union6 in which it set up a framework with the aim of streamlining and make less burdensome the way in which policy objectives are implemented. It is against this backdrop that the Commission recently set up a call for evidence7 (the Commission’s Paper) in connection with a review of the MAD focusing on two objectives: the effectiveness of the Market Abuse framework and simplification of regulatory burden. It was heavily influenced by an opinion of the European Securities Markets Expert Group (ESME) commissioned by the Commission on the operation of the MAD8 (the ESME Report). The Commission’s Paper considers three key areas: (i) the scope of the MAD; (ii) inside information; and (iii) market manipulation. This article focuses on the Commission’s discussions relating to inside information. The discussion of inside information in the Commission’s Paper relates to both the disclosure of inside information by issuers and the prohibition of insider trading (for both of which the MAD uses the same definition of inside information), each of which is critically considered below.

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Disclosure of inside information Whilst ESME considers that ‘the definition of “inside information” works well as a test for when a person in possession of such information should refrain from trading or encouraging trading in relevant financial instruments,’9 it regards its application to an issuer’s duty to make information public as a ‘fundamental flaw of the directive.’10 The principal tension in regulating disclosure by issuers lies between ensuring that market participants are informed of inside information at as early a stage as possible on the one hand and avoiding false markets and misleading impressions being created by that disclosure on the other. It is apparent that the current regime focuses more on the former than the latter. ESME notes that national regulators across Europe have ‘adopted inconsistent approaches to the matter – apparently in recognition of the fact that there is sometimes a greater public good to be served by some delay in disclosure and the greater certainty that follows.’11 Some examples which ESME cites include: • some companies are bringing matters to regulators quickly, others are delaying bringing matters to the attention of regulators; • the speed with which facts are considered as relevant and any necessary announcement is made varies from jurisdiction to jurisdiction; • regulators have been taking differing views on the meaning of ‘precise’ resulting in widespread differences in practice between jurisdictions; and • to some extent, the concept of inside information as it relates to abusive trading has come to be differentiated from inside i n f o r m a t i o n re l e v a n t f o r d i s c l o s u re obligation.12 Whilst the national regulators may be correct in their philosophy, it cannot be right that different standards apply across Europe. It is extremely confusing for market participants to have de facto different standards across the European Union, particularly as many individual traders trade across multiple (EU) jurisdictions. It is no wonder that some market participants are beginning to consider seriously whether a European equivalent of

International Bar Association Legal Practice Division

Mark Slade Macfarlanes LLP, London mark.slade@ macfarlanes.com

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the US Securities and Exchange Commission would be a solution. Perhaps that would be a little premature. For now, the Commission should focus on ensuring that information should not be disclosed in circumstances where the public good in not disclosing it outweighs the public good of disclosing it. The Commission’s paper considers three areas where the issues described above could be addressed: (i) the definition of inside information; (ii) the trigger for disclosing inside information; and (iii) circumstances in which the disclosure of inside information can be delayed. The definition of inside information Article 1(1) of the MAD defines inside information as: ‘information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments and which, if it were made public would be likely to have a significant effect on the price of those financial instruments or on the price of related financial instruments.’ The definition is the same as for insider trading and, accordingly, is somewhat broad. The ESME suggests that one possible solution would be to amend the MAD to draw a distinction between the definition of inside information for the purposes of insider trading and the definition of inside information for issuer disclosure by focusing on when information becomes of a sufficiently ‘precise nature’ through a distinction between what is precise for an insider and what is precise for the whole market. They consider that this could be done by way of a Level 2 directive.13 The difficulty with the ESME proposal is that ESME does not articulate how the line should be drawn. It would be difficult to specify this sufficiently clearly to avoid divergent applications across the Member States and further, it is difficult to envisage how the test would be appropriate in all scenarios. The Commission, in the Commission’s Paper, also mounts a spirited defence of the broad definition of inside information stating that: ‘The general obligation for issuers to disclose inside information, even if based on a somewhat broad definition of inside information has some important advantages. First, it offers a strong incentive for improving public availability

of information regarding the issuers and their financial instruments. It thus supports investors’ confidence and is beneficial to the liquidity and efficiency of financial markets. Secondly, it is also an effective means to reduce the possibilities of insider dealing.’14 Accordingly, the Commission provisionally concludes that there is no need to change the definition of inside information for disclosure purposes. Respondents to the Commission’s Paper to date have largely agreed with this conclusion. A wide definition of inside information is felt to be generally acceptable, so long as appropriate carve-outs (as discussed below) are afforded to issuers. One point, however, which the Commission would be well advised to clarify relates to the ‘reasonable investor’ test set out in Article 1(2) of Directive 2003/124 EC15 (the ‘Implementing Directive’) which provides that in applying the definition of inside information: ‘information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments or related derivative financial instruments shall mean information a reasonable investor would be likely to use as part of the basis of his investment decisions.’ In the United Kingdom, a recent decision of the FSA appears to have used this reasonable investor test in place of the price effect test16 when, previously, most practitioners took the view that either the reasonable investor test was simply a different way of expressing the price effect test or that the reasonable investor test was in addition to the price effect test. The trigger for disclosure of inside information and the circumstances in which the disclosure of inside information can be delayed The issue of when disclosure of inside information must be made and the circumstances in which disclosure of inside information can be delayed fall to be considered together as they are really two sides of the same coin. The legislative framework is set out in Articles 6(1) and 6(2) of the MAD, which provide that: ‘(1) Member States shall ensure that issuers of financial instruments inform the public as soon as possible of inside information which directly concerns securities law NEWSLETTER august 2009

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the said issuers… (2) an issuer may under his own responsibility delay the public disclosure of inside information as referred to in paragraph (1), such as not to prejudice his legitimate interests provided that such omission would not be likely to mislead the public and provided that the issuer is able to ensure the confidentiality of that information.’ If the argument made above in relation to the definition of inside information is right (that is, there is no need for substantive changes to be made and the definition can remain broad so long as sufficient carve-outs are afforded to issuers), then logically there can be no objection to the broad trigger in Article 6(1) again, so long as sufficient carveouts are available to issuers. Accordingly, the Commission ought to focus on Article 6(2) and the circumstances in which disclosure can be delayed. Amending the circumstances in which disclosure can be delayed should not prove financially burdensome for issuers; the Quoted Companies Alliance note that their corporate members do not incur significant costs in checking if disclosure can be delayed.17 The problem with the current provisions on delay is that they are extremely restrictive. The ESME would go further and considers that there is an inherent logical flaw in the Directive. In order to be able to delay the disclosure of inside information, the delay must not mislead the public. The ESME argues that ‘the definition of “inside information” per se implies that a reasonable investor would use it as a basis for her decisions: thus, any delay in the dissemination of inside information is almost by definition misleading.’ The Commission acknowledge this to some extent in their paper, stating that there is: ‘merit in reconsidering whether failure to comply with either of the two latter requirements [that the omission would not be likely to mislead the public and that the confidentiality of inside information is ensured] should automatically stop the issuer from using the deferred disclosure mechanism.’18 This implies that the Commission is considering disapplying the requirements in certain circumstances, ie, a modification to Article 6(2). Whilst this would represent some progress, a better approach would be to delete the requirements (or to at least delete the ‘not misleading’ requirement) as the quid pro quo for having very broad general 26 

disclosure obligations is that the carve-outs must also be sufficiently broad to make them workable. The Commission’s Paper also asks whether the issuer should be exempted from disclosing inside information in situations where that information concerns emergency measures being prepared in case the issuer’s financial stability is endangered. Such an approach seems to find favour with many respondents to the Commission’s Paper. The recent financial crises meant that a number of companies faced difficult decisions relating to disclosure of such information. One such recent example is where the Treasury in the United Kingdom gave liquidity support to certain financial institutions. The FSA, after some difficulty, decided that such institutions had to disclose that they were in financial trouble but not the extent of the financial support. The British Bankers Association (BBA) and the International Capital Markets Association (ICMA) add, in their response paper, that ‘this point is particularly pertinent in relation to financial services firms and other issuers that are systematically important for financial stability.’19 The point could perhaps be taken further. As a matter of theory, all companies should be able to delay disclosure where their financial stability is endangered. The tension lies between protecting future investors (by early disclosure) and protecting existing investors (by delaying disclosure and avoiding the (almost inevitable) subsequent fall in share price). At present, the balance seems to be weighted too heavily in favour of future investors. The Commission, overall, appears to be broadly receptive to making changes to the provisions on delaying inside information in its consultation paper, acknowledging that: ‘it may be necessary to revisit the mechanism for deferred disclosure of inside information in order to ensure: (i) that the conditions for the use of this possibility are sufficiently precise; and (ii) that when the viability of the issuer is at stake, they are not unduly stringent.’20 The legislative form of such changes is a key question which the Commission will have to address. It suggests that the deficiencies of the deferred disclosure regime might be met through Level 3 guidance. The fundamental flaw of this approach is that it would almost certainly lead to more divergent applications, an issue from which the MAD already suffers greatly. As the BBA and the ICMA point out

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in their response paper, ‘Level 3 guidance has no legislative support in some European jurisdictions (including the United Kingdom) and is accordingly not recognised by the courts as binding’21 If at all possible, the Commission should seek to amend the MAD itself. Insider trading The key issue identified by the Commission in relation to insider trading is divergent applications of Member States of one of the fundamental elements of the insider dealing prohibition. Article 2(1) of the MAD provides that: ‘Member States shall prohibit any person referred to in the second sub-paragraph who possesses inside information from using that information by acquiring or disposing of, or by trying to acquire or dispose of, for his own account, or for the account of a third party, either directly or indirectly, financial instruments to which that information relates.’ There is currently a debate as to how Member States should apply the concept of ‘using inside information’. The Commission summaries the two broad approaches as follows: ‘- Whenever a person being in possession of inside information trades (or attempts to trade) it is in breach of the insider dealing prohibition. - Use of inside information takes place only when person trades (or attempts to trade) on the basis of inside information.’22 This question is currently being considered by the European Court of Justice (ECJ) upon a preliminary reference from a court in Belgium.23 Whilst it would be inappropriate for the Commission to pre-empt the decision of the ECJ, it is clearly a very important issue which has very significant ramifications. If the former interpretation were to be taken, then market efficiency may well be impaired. For example, market making and execution of orders (whilst in possession of inside information) is recognised in Recital 18 of the MAD as not being something which should in itself constitute use of inside information. This would be swept away if the former approach is taken. Further, the menace which the Commission is trying to address must surely be to prevent insiders using inside information to their advantage. Where trading takes place for other reasons,

the Commission surely should not prevent it. To do otherwise would be an undue restraint on the freedom to trade. The Commission’s paper does not invite general comments on the definition of inside information in so far as it relates to the insider dealing prohibition. Nonetheless, there are some areas in which the definition could be improved. In particular, the application of the reasonable investor test to the insider dealing prohibition seems to be inappropriate. The argument again hangs on the menace which the Commission is trying to address, ie, the use of inside information to an insider’s advantage. If an insider is seeking to use information to his advantage, then the reasonable investor test should surely not apply because the advantage will come through a significant effect on the market price – the views of an objective third party should not be a relevant test. For much the same reasons, it seems inappropriate for Article 1(1) of the Implementing Directive to apply to the insider trading prohibition. That article provides that: ‘… information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or which may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of financial instruments or related derivative financial instruments.’ If an insider is aware of a possible future development and making public that possibility (however remote) would be likely to have a significant effect on the price of relevant securities, it seems invidious that such an insider should be allowed to deal. Remoteness goes to whether it would be reasonable to expect a set of circumstances to come into existence. The reasonable expectation test, which works in the context of disclosure of inside information (because it avoids issuers having to make statements which might mislead the market), does not work in the context of insider trading because it leaves open the door for an insider to profit from his knowledge. Making these changes would mean that the definition of inside information would be different as it applies respectively to insider trading and to the disclosure of inside information by issuers. This may go some way securities law NEWSLETTER august 2009

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to addressing the issues created by having a uniform definition of inside information, as articulated above. The Commission’s consultation closed on 10 June 2009 and legislative proposals are expected this September. Notes 1 COM (2009) 114 of 4 March, 2009. 2 Ibid, page 7. 3 Ibid. 4 Directive 2003/6/EC of the Euopean Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse). 5 Supra No 1, page 8. 6 COM(207) 23 of 24 January, 2007. 7 Working document of the Commission services, Review of Directive 2003/6/EC on insider dealing and market manipulation (2009). 8 ESME Report, Market abuse EU legal framework and its implementation by Member States: a first evaluation of 6 July 2007.

9 Ibid, page 5. 10 Ibid. 11 Ibid. 12 Ibid., pages 5 and 6. 13 Ibid., page 7. 14 Commission’s Paper, page 9. 15 Commission Directive 2003/124/EC of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards the definition and public disclosure of inside information and the definition of market manipulation. 16 Woolworths (www.fsa.gov.uk/pubs/final/ woolworths_11jun08.pdf), 11 June 2008. 17 Quoted Companies Alliance response to the Commission’s Paper, 18 June 2009, paragraph 3. 18 Commission Paper, page 10. 19 BBA and ICMA joint response to the Commission’s Paper, 10 June 2009, Appendix 1, paragraph 2.2.2.1. 20 Commission Paper, page 10. 21 Supra No 19, Appendix 1, paragraph 2.2.2.1. 22 Commission Paper, pages 11 and 12. 23 Case C-45/08, Spector Photo Group NV and Chris Van Raemdonck v CBFA.

The abolition of the ‘Swiss Finish’ and ‘Side Pockets’ under Swiss law Abolition of the ‘Swiss Finish’ To increase Switzerland’s attractiveness as a distribution market for investment funds and to bring Switzerland in line with the Undertakings for Collective Investment in Transferable Securities (UCITS) III Directive, the Swiss Financial Market Supervisory Authority (FINMA), formerly the Swiss Federal Banking Commission (SFBC), decided to abolish the so-called ‘Swiss Finish’. The FINMA believes that: ‘The suppression of the “Swiss Finish” should contribute to reposition the Swiss Funds Market and promote Swiss Collective Investment Schemes’. This suppression, decided on 28 January 2009, entered into force on 1 March 2009. Underlying the concept of the ‘Swiss Finish’ are the legal requirements imposed by Swiss law, which are more stringent than the regulations prevailing in other financial centres. For collective investment schemes, these requirements go beyond those imposed by the UCITS III Directive. The rules designated by the term ‘Swiss 28 

Finish’ used to impose several obligations and prohibitions, partly of a material and partly of a formal nature. These included conditions for the collection of a performance fee, the so-called ‘two thirds’ rule, the ‘Double-Dip’ prohibition and some formal requirements linked to the loyalty and transparency duties with respect to investors in collective investment schemes publicly offered and distributed in and from Switzerland. 1.1 Performance fee Under the ‘Swiss Finish’, the collection of a performance fee was allowed only under the following conditions: if its calculation referred to a benchmark or a hurdle rate and if the fund obtained a performance exceeding the selected benchmark or hurdle rate since the payment of the last performance fee. This rule had already been abandoned by the FINMA in March 2008. Since 1 April 2008, the collection of a performance fee is possible if information related thereto complies with the duty of

International Bar Association Legal Practice Division

Michel Abt FBT Avocats, Geneva [email protected]

Frédérique Bensahel FBT Avocats, Geneva [email protected]

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loyalty and of transparency in the information provided to investors as required under the Collective Investment Schemes Act (CISA). The method for calculating the performance fee must be provided for in the documents of the collective investment scheme. 1.2 ‘Two thirds’ rule The ‘two thirds’ rule derived from the SFBC’s practice regarding protection against confusion or deception with regard to the designation of a collective investment scheme. (The principle itself of protection against confusion or deception stems from art 12 I CISA and art. 120 II lit c CISA). The purpose of the ‘two thirds’ rule was to prevent investors being misled by the name or corporate name of the collective investment scheme. This rule was applicable to Swiss and foreign collective investment schemes and required that a minimum of two thirds of the invested assets of the collective investment scheme comply with its designation, insofar as the investment strategy derived from its name or from its corporate name. Since the abolition of the ‘two thirds’ practice, the FINMA no longer sets forth quantitative rules on the percentage of investments allowed relative to the name of the collective investment scheme. Collective investment schemes still need to comply with the duties of transparency and loyalty towards the investors. But compliance, including the maintenance of binding documents, such as prospectuses, articles of association or fund contracts that avoid grounds for confusion or deception, is now the responsibility of the fund. In short, the collective investment schemes’ documentation must not be misleading. Intervention by the FINMA, as the supervisory authority, can occur when the above obligations are breached. This may happen during the procedure for obtaining approval for a foreign collective investment scheme to be publicly distributed in or from Switzerland pursuant to Article 120 CISA or at any time thereafter, in order to ensure compliance with Swiss regulations. 1.3 ‘Double-Dip’ Under the ‘Double-Dip’ prohibition, no issuance and redemption fees and only a reduced management fee (up to a maximum of 0.25 per cent) could have been charged when investing in affiliated target funds

managed directly or indirectly by the fund itself, the fund’s management company or its investment manager or by a company to which they are related through common management, control or in which they have a direct or indirect interest exceeding ten per cent of the capital or of the vote. This prohibition was set forth in Article 31 of the Collective Investment Schemes Ordinance (CISO), which has been amended. The Swiss regulation went beyond the EU regulation by considering that a target fund was an affiliated fund if the direct or indirect interest exceeded ten per cent of the capital or of the vote and not just if the direct or indirect interest was significant, and by providing that only a reduced management fee could be charged. The EU regulation stipulates only that the amount of such a management fee must be published in a transparent way. The new Article 31 CISO is in line with EU regulations. The CISO no longer lays down quantitative rules for management fees. It is now possible to charge a non-reduced management fee if its amount is clearly expressed in the binding documents of the collective investment scheme. The purpose of this rule is compliance with the transparency and the loyalty duties set forth in the CISA. The investors must be informed that a management fee is collected, and the fund’s documents should disclose the calculation method thereof. With this amendment, the UCITS collective investment schemes are deemed to be equivalent to Swiss funds pursuant to Article 120 II lit b CISA and no longer need to implement the above-mentioned Swiss version of the ‘Double-Dip’. The ‘DoubleDip’ requirement has also been abandoned for the non-UCITS funds, which still need to be authorised by the FINMA after a full examination procedure. 1.4 Formal requirements The ‘Swiss Finish’ also imposed compliance with several formal requirements derived from the transparency duty, such as the mention of (i) the risk and maximum limit of a possible leverage; (ii) the principle of segregated responsibility of the umbrella funds or the lack of segregation; (iii) the fact that the exchange risk cover between the different classes of shares may undermine the net asset value of another class of shares; and (iv) the information for Swiss shareholders. All these specific Swiss requirements securities law NEWSLETTER august 2009

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resulted in delaying the authorisation procedure for foreign collective investment schemes in general and even for UCITS funds, which had to amend their documentation since Swiss law provided obligations more stringent than those of most EU countries. As most of these formal requirements became unnecessary with the alignment of Swiss law with the UCITS III regulations, the FINMA decided to abandon them. A Swiss collective investment scheme is now deemed to be equivalent to a foreign UCITS one and vice versa. The authorisation procedure of a UCITS fund will therefore no longer be delayed, meaning that the UCITS foreign investment schemes will not have to amend their binding documents to comply with the rules set forth in particular in Article 120 CISA. The only information that still needs to be added in foreign UCITS funds’ documentation is that intended for Swiss shareholders, ie, the mention of the representative and of the paying agent and the payment of retrocessions and trailer fees. This information should be provided in accordance with the guidelines on transparency of the Swiss Funds Association (SFA), which are being amended following the rescinding of the ‘Swiss Finish’. With regard to the foreign collective investment schemes that are not UCITS funds and that do not comply with the UCITS III regulations, the formal requirements of the ‘Swiss Finish’ will also be abandoned, as the foreign non-UCITS funds may be authorised for distribution in Switzerland only if all the conditions set forth in Article 120 CISA are fulfilled. In other words, the equivalence of a foreign non-UCITS collective investment scheme to a Swiss collective investment scheme will be fully examined by the FINMA when it is requested to authorise the fund in Switzerland pursuant to Article 120 CISA. 1.5 Conclusion Despite the abolition of the ‘Swiss Finish’, the FINMA still determines whether non-UCITS collective investment schemes are equivalent to Swiss funds when granting approval for distribution in and from Switzerland under Article 120 CISA. As far as UCITS funds are concerned, they are deemed to be equivalent to Swiss funds which facilitates the approval procedure before the FINMA. In conformity with its duty of supervision of the funds 30 

market, the FINMA can also intervene in cases of abuse after authorisation of the funds. The foreign collective investment schemes, whether UCITS or not, must still comply with the loyalty and transparency duties towards the investors as required by the CISA. Important information should be fully and clearly disclosed in the documents of the collective investment schemes so as not to mislead investors, who need to be protected from confusion or deception. The real practical difference resulting from the abolition of the ‘Swiss Finish’ is that the quantitative rules no longer apply. As a result, foreign collective investment schemes, and especially UCITS ones, have more freedom but also more responsibility to implement the above-mentioned loyalty and transparency duties when providing information to investors. Formal hurdles being removed, access of UCITS funds to the Swiss market should be facilitated. FINMA authorises ‘Side Pocket’ Through the creation of a ‘Side Pocket’, the illiquid assets of a collective investment scheme are separated from the other assets, and the investor’s redemption right is suspended for this illiquid part of the assets. Creating ‘Side Pockets’ is a decision of the fund or of the fund’s management company and requires an amendment of the fund’s contract. As with every modification of the fund’s documentation, the introduction of a clause allowing the creation of ‘Side Pockets’ requires the FINMA’s approval. The FINMA authorises the creation of ‘Side Pockets’ for funds of hedge funds that are partially illiquid to avoid the suspension of the redemptions or the liquidation of the fund. The creation of ‘Side Pockets’ must be in the sole interest of the aggregate investors. ‘Side Pockets’ must be able to protect investors better than the two alternative measures provided by the CISA, ie, the suspension of redemptions or the liquidation of collective investment schemes. Indeed, the creation of ‘Side Pockets’ is a special measure authorised by the FINMA on a case by case basis but not provided for by law. Moreover, the FINMA specifies that the issuance of new shares and the distribution of collective investment schemes that are partially illiquid do not usually comply with the CISA, especially not with the fidelity and information duties. As soon as a Swiss or foreign collective investment scheme is partially illiquid, the approval of public

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distribution in and from Switzerland will usually be suspended. If a foreign collective investment scheme that already has liquidity problems is trying to obtain approval to be publicly distributed in and from Switzerland, the FINMA will not grant such approval. The FINMA specifically recommends not issuing and distributing funds of hedge funds partially illiquid even those that have not created ‘Side Pockets’. Besides the creation of ‘Side Pockets’, collective investment schemes that are partially illiquid have other means of protecting the rights of the investors, such as the creation of gates. A gate is a restriction

Claus Molbech Bendtsen Moalem Weitemeyer Bendtsen Advokatpartnerselskab, Copenhagen [email protected]

Henning H Thomsen Moalem Weitemeyer Bendtsen Advokatpartnerselskab, Copenhagen [email protected]

Anders Quistgaard Moalem Weitemeyer Bendtsen Advokatpartnerselskab, Copenhagen [email protected]

placed on a hedge fund limiting the amount of withdrawals from the fund for each redemption date. From a Swiss point of view, gating has the same implications and consequences as ‘Side Pockets’, that is the fund will no longer be allowed to issue new shares nor to distribute them, as it is partially illiquid. In view of the above, funds that are partially illiquid can, under Swiss law, use different means of protecting investors in order to limit the consequences of this problem. However, side pocketing or gating will suspend authorisation to issue new shares and to distribute the existing ones.

New recommendations for good corporate governance in the boards of directors and managements of banks, savings banks and co-operative banks in Denmark

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his article reviews the recommendations recently published by the Danish Bankers Association and analyses them in relation to the Committee on Corporate Governance’s recommendations for good corporate governance (the Committee’s Recommendations), which apply to Danish companies with shares admitted to trading through NASDAQ OMX Copenhagen A/S (former Copenhagen Stock Exchange). The new recommendations are generally a clarification of the Committee’s Recommendations, but in relation to the management’s incentive programmes, new, supplemental recommendations for good corporate governance of banks, savings banks and co-operative banks are drawn up. The purpose of this article is to describe the new recommendations from the Danish Bankers Association and analyse these in relation to the Committee on Corporate Governance’s

recommendations for good corporate governance, including a focus on what these new recommendations will actually mean to the banking sector. In 2005 the Committee recommendations were published. These recommendations have undergone a number of revisions and have been adopted by NASDAQ OMX Copenhagen A/S and made part of its rules for issuers of shares. Accordingly, it is mandatory for Danish companies with shares admitted to trading on NASDAQ OMX Copenhagen A/S to use the Committee’s Recommendations on a comply-orexplain basis. Such companies must state in their annual report how they address the Committee’s Recommendations. The Committee’s Recommendations have been supplemented by Section 69b of the Danish Companies Act, concerning incentive programmes for the management in Danish public limited companies with shares securities law NEWSLETTER august 2009

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admitted to trading on a regulated market. On 10 December 2008, the Danish Bankers Association issued new recommendations for the association’s member companies (The Danish Bankers Association’s Recommendations).1 The Danish Bankers Association’s recommendations concern good corporate governance and external audit in banks, savings banks and co-operative banks, and partly consist of a request to the members to comply with certain parts of the Committee’s Recommendations, including ‘Guide to description of overall guidelines for incentive programs, cf, the Danish Companies Act Section 69 b’2, a guide for this purpose and recommendations regarding external audit. For the use of the Danish Bankers Association’s Recommendations, a ‘comply or explain principle’ applies to the effect that the member in question must account for its compliance at its home page. If one or more recommendations are not complied with, the reason for this must be given at the member’s home page. The report of reasoning must be composed once a year and must be published, at the latest, simultaneously with the convening of the bank’s general meeting/ the savings bank’s meeting of representatives/ the co-operative bank’s general meeting. In this way, the shareholders are given the opportunity to consider the information and, if necessary, ask questions hereto. Discussions of the yearly report may be included as a permanent item on the agenda for the general meeting in the bank. The subjects of the first part of the Danish Bankers Association’s recommendations follow the committee’s classification, cf, section IV, V, and VI of the Committee’s Recommendations, and deal with: (i) the tasks and responsibilities of the board of directors; (ii) the composition of the board of directors; and (iii) remuneration to the members of the board of directors and the management. The second part of the Danish Bankers Association’s recommendations contains recommendations relating to external audit. The tasks and responsibilities of the board of directors General review of the board of directors’ duties The executive rules on the duties of the board 32 

of directors with regard to public limited companies appear from part 9 of the Danish Public Companies Act3 which, for financial undertakings, is supplemented by the rules in part 8 of the Financial Business Act,4 which applies to all banks, savings banks and co-operative banks. Among other things, these acts state that it is the responsibility of the board of directors and management to run the company and the responsibility of the board of directors to secure a sensible organisation of the company’s business. The Danish Bankers Association’s recommendations In relation to the tasks of the board of directors and the chairman of the board, the Danish Bankers Association recommends: • that the board of directors establishes guidelines for control of the management’s work and the internal division of tasks between the members of the management; • that the board of directors prepares a written overview of the parts of the management’s work which the board of directors must supervise and be involved in. Furthermore it must be determined how the board of directors is to supervise the observance hereof; • that a set procedure exists for the management’s reporting to the board of directors and for the involvement of the board of directors – the procedure must be approved by the board of directors; • that at least once a year, the board of directors must consider whether the management possesses the necessary competences; • that the chairman of the board is responsible for the drafting of a written and specific work and task description which must be included in the board of directors’ rules of procedure; and • that the chairman of the board ensures that the entire board of directors is involved in the work of the board, entailing that all members of the board, to the extent possible, gets the opportunity to make their opinion known. In relation to the management, and in addition to the Committee’s Recommendations, the Danish Bankers Association recommends: • that a detailed written work and task division for the management is drawn up. Furthermore, specific written guidelines for all important decisions made in the bank must be produced. Moreover, it is stipulated in the recommendations that these guidelines must

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specifically address the question of which types of actions may be taken at a certain job level. In addition, formal requirements and requirements for documentation of which employees have been involved in the process and who has made the final decisions must be specified; and • that the management must ensure that the bank’s strategy is continuously updated and that the board of directors receives these updates. The composition of the board of directors The board of directors must be composed in such a way that it may be considered qualified to run a bank, a savings bank or a co-operative bank and, in accordance with section 31(1) of the Danish Auditor’s Act5, at least one of the board members must be skilled within the field of accounting or auditing. At least once a year, the chairman of the board must assess whether the individual members of the board of directors must be offered supplemental relevant education. As regards the independence of the board, the Danish Bankers Association accentuates in their recommendations that it has no influence on the independence of a board member, if he/she is a customer of the bank, savings bank or co-operative bank. Remuneration to the members of the board of directors and the management In relation to the completion of incentive programmes for the management, the Danish Bankers Association recommends that these, in addition to the Committee’s Recommendations, including ‘Guide to description of overall guidelines for incentive pay, cf, the Danish Public Companies Act Section 69 b’, must depend on specifically defined parameters. For example, these parameters may be: • rise in share price; • accounting results; • the size of losses; • increase in earnings; • development of expenses; • completion of specific projects; or • conduct a comparison with the development in a group which is defined in advance and which is composed of comparable banks or savings banks. Moreover, the Danish Bankers Association recommends that an incentive programme must contain a limit for the maximum development of the value, which does not necessarily entail an amount limit. For

example, it could be a programme with a ‘limit’ which entails that the exercise price for a stock option may never be more than a given percentage below the current share price and, as another example, that it, specifically, may not exceed 100 per cent of the share price at the time of allocation. As soon as an incentive programme has been approved at the general meeting/ meeting of representatives, the content of the incentive programme must be published at the company’s home page without undue delay. External audit In order to ensure focus on the role of the external auditor and the quality of the work which he/she performs, the Danish Bankers Association recommends that banks, savings banks and co-operative banks demand: • that the external auditor has received relevant continuing education which has been levelled at the banking sector; and • that the team which the external auditor is using consists of at least two experienced auditors. Analysis of the Danish Bankers Association’s recommendations compared to the Committee’s recommendations The Danish Bankers Association’s recommendations for the board of directors’ and the chairman of the board’s tasks must be considered as a specification of the Committee’s recommendations. What is specified is that written guidelines on which part of the management’s work the board must supervise must be prepared. With the specification, it is our opinion that the Danish Bankers Association sustains the criticism which has been expressed in connection with banks in which the board of directors lacked supervision and the consequences hereof have been made especially visible. Therefore, the consequences of the Danish Bankers Association’s recommendations are that, according to the new recommendations, the board is forced to become much more structured in its approach to the supervision of the management. In relation to the Danish Bankers Association’s recommendations on information passing between the management and the board of directors, we are also dealing with recommendations securities law NEWSLETTER august 2009

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that go beyond the Committee’s recommendations, which entail a heavier workload for the management and the board of directors. The extended tasks are, for example, related to the detailed work and task division, which the management must comply with pursuant to the Danish Bankers Association’s recommendations, and to the responsibility given to the management of the bank according to which guidelines must be formulated for how it is to be substantiated in future decisions who participated in the process and who made the final decisions. In relation to the composition of the board of directors, the Danish Bankers Association’s recommendations specify that the board must be composed in a way which secures that it has relevant qualifications for running a bank, savings bank or co-operative bank. In the same way, the Danish Bankers Association’s recommendations in relation to the independence of the board of directors must be considered as a specification alone, of which it appears that it has no significance to the evaluation of the independence of the board whether a board member is a customer of the bank, savings bank or co-operative bank. In their new recommendations, the Danish Bankers Association supplements the Committee’s recommendations for corporate governance in connection with the preparation of incentive programmes with a number of recommendations for the parameters on which the management’s incentive programmes must rest. The Danish Bankers Association’s recommendations contain very specific recommendations in relation to the exercise price of the stock options which the management receives and, most importantly, recommends that a limit for the size of this exercise price is fixed. These recommendations, in particular, must be seen as a reaction to the criticism which has been expressed regarding the incentive programmes of financial institutions. Conclusion Overall, it must be concluded that most of the Danish Bankers Association’s recommendations must be considered

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an interpretation and specification of section IV, V and VI of the Committee’s recommendations. However, in relation to information from the management to the board of directors, we are dealing with recommendations which go beyond the Committee’s recommendations for good corporate governance. In relation to the management’s incentive programmes, the Danish Bankers Association has chosen to supplement the Committee’s recommendations. We consider the above recommendations from the Danish Bankers Association to be evidence of the Danish Bankers Association wishing to tighten the member’s present management in the Danish financial institutions by focusing on the qualifications of the board of directors and its supervision of the management. Furthermore, the Danish Bankers Association’ s recommendations seem to be characterised by a wish to achieve a more professionalised management structure which may contribute to lessen the risk of new banking scandals in the future. Similarly, the Danish Bankers Association’s recommendations underline the necessity of the external auditing possessing the necessary qualifications. This must be considered a wish to secure that the external auditing may contribute to a sensible control and supervision of the financial institutions. It must be expected that the Danish Bankers Association’s member companies in the future will comply with the Danish Bankers Association’s recommendations, the consequence of which will be, that the financial institutions will, in general, be forced to relate to the abovementioned part of the Committee’s recommendations. So far a number of Danish financial institutions have already chosen to use the recommendations. Notes 1 The Danish Bankers Association’s recommendation may be downloaded at: www.finansraadet.dk 2 Recommendations and Guide may be downloaded at: www.corporategovernance.dk 3 Consolidation Act 2006-06-15 no 649 Danish Public Companies Act 4 Consolidation Act 2008-09-04 no 897 on financial businesses. 5 Act 2008-06,17 no 468 on approved auditors and accountancy firms

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A Cem Davutoğlu Davutoğlu Attorneys at Law, Istanbul [email protected]

Anıl Yılmaz Davutoğlu Attorneys at Law, Istanbul anıl.yılmaz@dav-law. com

Duygu Tanışık Davutoğlu Attorneys at Law, Istanbul duygu.tanısık@dav-law. com

Principles regarding public disclosure of material events in Turkey

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he Capital Markets Board of Turkey (the CMB) has repealed the existing regulation in its entirety and introduced two separate regulations for public disclosure of material events to be made by listed and non listed public companies. ‘Material events’ are defined in the Communiqué on the Principles Regarding Public Disclosure of Material Events1 (the Communiqué) as the events causing internal information and continuous information. This paper will initially explain the new requirements for listed companies and subsequently will briefly mention the new requirements for non-listed companies. Finally the sanctions for non-compliance with the public disclosure requirements will be clarified. I. Listed companies Scope: In terms of scope, the CMB has utilised a two tier approach and set the principles of public disclosure in the Communiqué, moving substantially the list of events subject to disclosure to the new Public Disclosure Guidelines separately available on the CMB’s website.2 Disclosure forms: The CMB now has five different forms for making public disclosures. Forms I to III are for disclosure of internal information and forms IV and V are for continuous information. Although these forms are essentially the same or similar to the previously used forms, we understand that the CMB wants to achieve unity in disclosures and streamline the process. Language: With respect to language of the disclosures, the CMB has clearly set forth that all disclosures must be made in Turkish. Therefore foreign parties under disclosure obligation must also take the translation period into account when making disclosures. However this should not be a problem for continuous information since timing for disclosure of this information has been extended to three business days following the

transaction. Websites: All public companies are required to post their disclosures on their websites and keep the same for five years following the disclosure date. Foreign listing: Companies also listed abroad are required to disclose the information that is not subject to disclosure in Turkey but disclosed in other jurisdictions. CMB’s powers: Through this Communiqué, the CMB has also retained powers to request: (i) disclosure of information that is not subject to disclosure in the Communiqué; and (ii) announcement of the information through printed or broadcast media. Defined terms: As compared to the previous regulation, the Communiqué has wider and more explanatory definitions. Type of information: The Communiqué categorises information to be disclosed under two groups: 1. Continuous information Continuous information is defined as the information which falls outside the scope of internal information and which shall be disclosed under the Communiqué. Continuous information mainly deals with the disclosure obligations arising out of shareholding and voting rights in the company. Acquisitions or sales that results in exceeding or falling below specific thresholds of five per cent, ten per cent, 15 per cent, 20 per cent, 25 per cent, 33 per cent, 50 per cent, 66 per cent, 75 per cent in the shareholding or voting rights will be disclosed by the holders of these shares. Also any holders of a depositary receipt or depositary certificate programme (such as ADRs or GDRs), is under the obligation to disclose their shareholding level also held through these programmes. For example, if an investor holds ADRs representing at securities law NEWSLETTER august 2009

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least five per cent of the share capital of a Turkish public company must disclose to the Istanbul Stock Exchange of its shareholding level. Similarly, to the extent an investor has both shares and ADRs of a Turkish public company, must aggregate its stake to see whether the thresholds for making disclosures have been reached, exceeded or fallen below. Such disclosure requirement for the depositors did not exist in the previous regime. In line with the new regulations enacted simultaneously with the Communiqué, the CMB also requires public disclosure for those stakeholders holding directly or indirectly the securities which gives the right to acquire the shares of a listed company in the future (such as convertible bonds, exchangeable bonds and warrants) and by holding these instruments has an expected right to acquire shares in the future which falls below, reaches to or exceeds the thresholds mentioned above. Such disclosure will be exercised separately from disclosure of the shares which already exist in the portfolio of the investor. The Communiqué has a TL10,000 (approximately US$6,100) threshold for the disclosure requirement of management or audit personnel and other personnel who have regular access to internal information or who can take decisions that affect the company’s future. Until each such individual’s trading activities (together with her close affiliates) in the aggregate exceed TL10,000 within any given 12 month period, she will not be required to disclose trading information. Finally, those shareholders exceeding the five per cent threshold are no longer under the obligation to disclose all of their trades, unless they reach, exceed or fall below the thresholds. 2. Internal information Internal information is the information which might affect the value of the capital markets instrument and the decisions of the investors and which are not yet disclosed publicly. Examples of internal information are included in the Public Disclosure Guidelines. However, those provided for in the Guideline are just examples and the events which might trigger the public disclosure requirement are not limited to the same. A new approach of the Communiqué is to describe the material events to be disclosed and to leave the discretion with 36 

respect to timing of the disclosure (together with the liability) to the management. Pursuant to the Communiqué, public companies are allowed to delay disclosure of critical internal information which, if disclosed to the public, might harm the company’s legitimate interests unless such a delay misleads the investors and on the condition that the company must keep the information secret. Companies are required to document the decision to delay through a board of directors’ resolution or approval of the authorised individual. Furthermore companies are required to maintain an updated list of individuals with access to internal information and share this with the CMB and/or the relevant exchange, if requested. Each updated version would be held by the company for eight years. II. Non-listed companies The communiqué regarding non-listed companies has laid out two significant amendments: • The acquisition and sale of shareholders reaching, exceeding or falling below thresholds of five per cent, 25 per cent, 33 per cent, 50 per cent and 66 per cent in the shareholding or voting rights of the company shall be disclosed whereas the Previous Communiqué required thresholds of five per cent, ten per cent, 15 per cent, 20 per cent, 25 per cent, 33 per cent, 50 per cent, 66 per cent and 75 per cent with regard to the same. • The deadline for making disclosure in respect of the non-listed companies has been extended. The Previous Communiqué required disclosure to be made almost as soon as the relevant circumstances arose. The Communiqué extended the period to five business days. The Communiqué regarding non-listed companies has abolished many disclosure requirements which existed in the Previous Communiqué and are mostly still in force for the listed companies. Some of these are as set forth below: • Execution and termination of agreements regarding intellectual property; • Winning bids, the value of which exceed the threshold of ten per cent of the gross sales in the last income statement; • Commencing and resulting collective bargaining agreements, decisions of commencing and lifting strike and lockout; • D e c i s i o n s o n m a k i n g , c o m m e n c i n g , postponing, completing investments, the

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value of which reach or exceed 10 per cent of the assets in the last balance sheet; • Guarantees granted by the company which exceed five per cent of the assets in the last balance sheet for third party debt and ten per cent of the same for activities of the company; • Change of the independent audit firm; • Resulting of the rates conducted by rating institutions; • Decisions regarding share acquisitions of managers and employees; and • Issuing capital markets instruments, listing the company shares on domestic and foreign exchanges, applying for the same, listing conditions, moving to another exchange. Finally, confirmation liability of the companies arising out of news in the market and/or talks among press and public as to the companies which might effect the investment decisions and the value of the capital markets instruments do not exist for the non-listed companies anymore. III Non-compliance with public disclosure requirements According to the Capital Markets Law numbered 2499 (the ‘Law’), the Capital Markets Board of Turkey is the supervisory body for the implementation of all provisions of the Law. The Law provides for a wide range of liability clauses applicable upon breach of the Law. These liability clauses are set out in the forms of: i) Measures – to be taken by the CMB; ii) Criminal liabilities – to be enforced by the public prosecutors upon the CMB’s appeal; and iii) Administrative liabilities – fine penalties to be enforced by the CMB. The Law provides each of the three liabilities mentioned above for the cases of noncompliance with the public disclosure requirements. Measures: In case the CMB comes across a non-compliance with disclosure requirements while conducting its supervision activities, it is entitled to make the relevant disclosure by collecting the costs from the companies which were responsible to make such public disclosure in accordance with the relevant legislation. Criminal liabilities: Unless it gives rise to a crime for which a heavier penalty is imposed by law, in cases of: • groundless, inaccurate, or wrong information

is disclosed or news is released which might affect the value of the capital markets instruments; and • required information is not disclosed, responsible individuals, companies and their representatives and anyone who is acting in concert with those shall be sentenced to imprisonment of two to five years and criminal fine of five thousand to ten thousand days. Pursuant to the relevant legislation, daily amount of criminal fine ranges from TL20– 100 to be determined by the court taking into consideration the economical status of the criminal. Moreover, the Law provides for a blanket criminal liability clause for non-compliance with certain provisions of the Law. One of the provisions referred to in this clause is the general provision regarding public disclosure requirements. This blanket clause imposes two hundred and fifty days of criminal fine to those who do not comply with the general disclosure requirements set forth by the relevant legislation. Administrative liabilities: In cases of noncompliance with regulations, CMB decisions, standards and forms based on the Law, the non-complying individuals and legal entities shall, for the year 2009 be imposed by an administrative fine of TL16,800–112,000 to be determined by the CMB. Ranges of such fines are subject to re-evaluation of the CMB each year. In the event of repetition of the acts resulting to administrative liabilities, the amount of fines mentioned above shall be increased depending on the number of the repetition as set forth by the Law. A criminal fine may only be imposed by a criminal court in the form of a verdict upon the court’s finding of the relevant act as a breach of law whereas an administrative fine is imposed by administrative bodies like the CMB merely as a result of their own discretionary assessment of the relevant act as a breach of law to the extent these bodies are authorised by law to impose such penalties. Based on the CMB’s practice, it is understood that the CMB initially warns the non-disclosing party, and issues the minimum fine in the following non-disclosure event, unless the non-disclosure also qualifies as a breach of another provision of the law. The fines increase together with the number of breach of disclosure obligations.

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Notes 1 Issued by the Capital Markets Board of Turkey and published in the Official Gazette numbered 27133 and dated 6 February, 2009

2 Available through the following link: www.spk.gov.tr/ daireduyurukarargoster.aspx?aid=92&ct=f&ext=. pdf&filename=92.pdf

Country update on New Zealand: Changes to the Financial Reporting Act 1993 and Securities Commission review of financial statements Certain New Zealand-registered companies, branches of overseas companies in New Zealand, and all issuers of securities in New Zealand are required to file annual financial statements. Over the past year there have been significant changes to the Financial Reporting Act 1993 (the ‘Act’). Recent changes to the Act now allow the Registrar of Companies to issue infringement fines of NZ$7,000 to each director of a company which is found to not comply with the Act. Financial statements need to be filed with the Registrar of Companies within five months and 20 working days of the company’s balance date. The Act also requires that where a company is a branch of an overseas company, the financial statements of its head office must also be filed along with the New Zealand branch financial statements. Further, the Act requires that where a company has one or more subsidiaries group financial statements need to be filed in respect of the company and its subsidiaries. However, non-active entities are able to file a non-active entity declaration form in lieu of annual financial statements.

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In addition to the increased penalties, those offering securities in New Zealand have another reason to be particularly vigilant with regards to their annual financial statements – the Securities Commission has an ongoing financial reporting surveillance programme in respect of issuers’ financial statements. In their recent review they noted that the following areas require particular attention: • the fair value of assets – the basis of determination and how well this has been disclosed; • impairment of assets such as goodwill; • related party information, in particular, key management personnel compensation; • disclosure of significant judgments, key assumptions and major sources of estimation uncertainty; • support for the value of intangible assets; and • definition and classification of cash flows. Securities Commission Chief Accountant Alastair Boult stated that: ‘Full and timely disclosure is essential to keep the market well informed in the changing economic environment… It is important for market confidence that issuers will tell the full story about their operations in their financial statements. Boiler-plate disclosure will not suffice.’

International Bar Association Legal Practice Division

David Quigg Quigg Partners, Wellington davidquigg@ quiggpartners.com

John Horner Quigg Partners, Wellington johnhorner@ quiggpartners.com

Asha Stewart Quigg Partners, Wellington ashastewart@ quiggpartners.com

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Guy David Gowlings, Ottawa guy.david@gowlings. com

Coming soon: a national securities regulator? The jury is out as to whether Jim Flaherty will succeed in wresting control over securities matters from the provinces. The Expert Panel he appointed released a report favouring a national regulator as a means to enhance investor protection, reduce systemic risks, streamline enforcement and improve access to the market for issuers. Similar proposals have failed, but the current initiative may have more traction due to a confluence of extenuating factors. Thus far, public reaction to the market meltdown appears to support the federal position, with the financial sector agenda swinging towards national and international risk mitigation and investor protection. With this shift in focus, the main provincial concern – that local markets are better understood and regulated by local regulators – seems to carry less weight with the Expert Panel. Indeed, market participants in consultation with the Expert Panel showed a clear preference for national rather than local regulation. With regards to international concern over the regulation of complex financial instruments such as derivatives, the report suggests that neither Canada’s provincial disclosure and market conduct rules nor its federal prudential rules alone will be sufficient. It also anticipates difficulties in coordinating efforts between the federal Office of the Superintendent of Financial Institutions (OSFI) and the 13 provincial/ territorial regulators. Proposing federal-level regulatory convergence as a solution, the report further recommends that Ottawa enter the field immediately by creating a federal Capital Markets Oversight Office, pending formation of a national securities commission. Some suggest that the non-bank assetbacked commercial paper (ABCP) crisis

supports the federal position. ABCP traded in the exempt market permitted by provincial securities legislation. Prescriptions in the Expert Panel report would require the alignment of policies between the OSFI and the national securities regulator to close gaps such as those that contributed to the ABCP freeze. It is argued that with both bodies answering to the Minister of Finance, a more seamless regulatory environment would result. The current passport system which includes all provincial-level securities regulators except the Ontario Securities Commission (OSC), has had the unintended effect of empowering the OSC as de facto national regulator. Twelve jurisdictions extend passport treatment to Ontario, but Ontario does not reciprocate. Thus non-Ontario companies must clear securities offerings with the OSC in addition to their own jurisdictions to gain access to the largely Ontario-based capital markets. By contrast, Ontario issuers must clear only with the OSC. It has been suggested that, under the status quo, passport system provinces enjoy less influence than they would under a politically and regionally sensitive national system. The final effect of the report remains to be seen. Alberta and Quebec remain firmly opposed, concerned with the loss of locally tailored regulation and arguing the constitutional validity of a federal regulator. Fuelling contention is the report’s ‘optin’ recommendation which could allow market participants in opposing provinces to participate in the federal regime. Previous attempts to reach consensus have failed. All that can be said with certainty is that Ottawa’s path will be rocky as it balances its desire for consensus with its will to succeed.

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The quality of the marketplace – the OSC HudBay decision

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n 28 April 2009, the Ontario Securities Commission (OSC) released the full reasons supporting its 23 January 2009 order prohibiting HudBay Minerals Inc from issuing shares in connection with its proposed acquisition of Lundin Mining Corporation without first obtaining HudBay shareholder approval for the transaction. The transaction was cancelled following the OSC’s order. Key findings

The OSC took the opportunity in its reasons to comment negatively on two practices: • the compensation of a financial advisor retained to provide a fairness opinion for an acquisition through fee arrangements that are contingent upon the success of the transaction; and • an acquirer voting shares in the target company in support of approving the acquisition when such shares were recently acquired in a connected transaction. Although these issues were peripheral to the questions before the OSC panel, we expect that these views will be influential in future transactions and these practices will become less common. In its first interpretation of section 603 of the TSX Company Manual and the meaning of the phrase ‘quality of the marketplace’ from that section, the OSC concluded that this phrase was a broad concept of market integrity, akin to the public interest, that encompasses the fair treatment of shareholders. Accordingly, this decision has the potential to provide shareholders with an informal and expedient means of contesting the fairness of a proposed transaction at the level of a TSX listing application, in addition to the options of pursuing a complaint before the OSC or an action under the oppression remedy before the courts. Although the strategy of challenging the TSX’s listing decision before the OSC proved successful in this case, we do not expect that this will become commonplace. The OSC clearly indicated that it will generally defer to a reasoned decision of the TSX, unless the 40 

applicant discharges the ‘heavy burden’ of demonstrating grounds for OSC intervention articulated in prior OSC decisions. Although the applicant was able to establish adequate grounds in this case, the bar remains high. The OSC’s decision to intervene and undertake its own analysis of the impact of the proposed transaction on the ‘quality of the marketplace’ was motivated in part by the lack of a record from the TSX proceedings indicating that this issue was considered by the TSX. We expect that the TSX will adjust its practices to ensure that there will be a more fulsome record of its reasoning in the future, especially in controversial transactions. The transaction On 21 November 2008, HudBay and Lundin announced that HudBay would acquire Lundin in a share exchange transaction. The proposed transaction was highly dilutive to existing HudBay shareholders, as the number of shares to be issued exceeded the then number of outstanding HudBay shares. The share exchange ratio for the proposed transaction represented a significant premium for Lundin shareholders. The proposed transaction was subject to approval by the Lundin shareholders; however, under existing corporate law and TSX rules, HudBay shareholder approval was not specifically required and the HudBay board determined not to have a shareholder vote. The market reaction to the announcement was very negative and the HudBay share price fell by approximately 40 per cent. Following the announcement, several shareholders of HudBay publicly objected to the proposed transaction and began to take steps to oppose the deal, such as requisitioning a shareholder meeting to replace the HudBay board and commencing an oppression action before the courts. On 10 December 2008, the Listed Issuer Services Committee of the TSX considered, and conditionally approved, the listing of the additional shares to be issued by HudBay. In doing so, the committee considered a

International Bar Association Legal Practice Division

Robert Black* Borden Ladner Gervais LLP, Toronto [email protected]

David Surat Borden Ladner Gervais LLP, Toronto [email protected]

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recommendation of TSX staff in support of the transaction as well as correspondence from shareholders of HudBay objecting to the proposed transaction and requesting that the TSX exercise its discretion to require HudBay shareholder approval of it. Following the conditional approval by the TSX, HudBay announced that it had subscribed for common shares of Lundin in a private placement connected to the proposed transaction. The Lundin shares represented approximately 19.9 per cent of the total number of outstanding shares after the private placement and would be voted in favour of approving the proposed transaction. The Lundin shareholder meeting to consider the proposed transaction was scheduled for 26 January 2009, with an anticipated closing date of 30 March 2009. HudBay scheduled the shareholder meeting requisitioned by its disgruntled shareholders to consider replacement of the HudBay board for 31 March 2009. Jaguar Financial Corporation, a shareholder of HudBay, applied to the OSC for an order setting aside the TSX’s decision to approve the listing of the additional HudBay shares in connection with the proposed transaction and requiring HudBay to obtain shareholder approval of the transaction. The OSC issued an order granting Jaguar’s application on 23 January 2009. The quality of the marketplace – fairness to shareholders Section 611 of the TSX Company Manual requires security holder approval where the number of securities to be issued or issuable in payment of the purchase price for an acquisition exceeds 25 per cent of the issuer’s outstanding securities, on a non-diluted basis. However, subject to sections 603 and 604, the TSX will not require security holder approval where a reporting issuer (or equivalent status) having 50 or more beneficial security holders, excluding insiders and employees, is acquired by a listed issuer. The OSC’s decision focused on the application of section 603 of the TSX Company Manual. Once the TSX receives notice of a transaction by a listed issuer involving the potential issue of listed securities, section 603 provides that: ‘TSX has the discretion: (i) to accept notice of a transaction; (ii) to impose conditions on a transaction; and (iii) to allow

exemptions from any of the requirements contained in Parts V or VI of this Manual. In exercising this discretion, TSX will consider the effect that the transaction may have on the quality of the marketplace provided by TSX, based on factors including the following: (i) the involvement of insiders or other related parties of the listed issuer in the transaction; (ii) the material effect on control of the listed issuer; (iii) the listed issuer’s corporate governance practices; (iv) the listed issuer’s disclosure practices; (v) the size of the transaction relative to the liquidity of the issuer; and (vi) the existence of an order issued by a court or administrative regulatory body that has considered the security holders’ interests.’ The OSC concluded that in exercising the discretion under section 603, as with the exercise of the OSC’s public interest jurisdiction, that: ‘… we must carefully consider all of the policy issues raised by this matter and the potential impact of our decision on the interests of market participants and on market practice. We must weigh and balance factors such as: (i) deal and regulatory certainty; (ii) the ability of the TSX to act quickly and efficiently in interpreting and applying its rules; (iii) the fair treatment of HudBay and Lundin and the other persons directly affected by our decision; and (iv) the fair treatment of the HudBay shareholders.’ Ultimately, the OSC concluded that permitting the proposed transaction to proceed without a HudBay shareholder vote in these circumstances would be ‘manifestly unfair’ to HudBay shareholders. The OSC identified the following factors as relevant in determining whether the transaction could have a significant adverse effect on the quality of the marketplace: 1. Dilution HudBay was proposing to issue common shares representing over 100 per cent of the number of shares then outstanding. The OSC noted ‘[t]hat level of dilution is extreme.’ Although not determinative, the level of dilution was considered to be a highly important consideration, since it can fundamentally affect the economic securities law NEWSLETTER august 2009

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interests of shareholders and it directly affects shareholder voting, distribution and residual rights. The OSC also considered this level of dilution as more indicative of a merger of equals than an acquisition by HudBay. Since there is potentially a much greater impact from a merger of equals than an acquisition, the OSC questioned why shareholders of Lundin, who were to receive a significant imputed premium, should be entitled to vote on the transaction while shareholders of HudBay, who were suffering extreme dilution, were not. 2. Economic impact on shareholders The OSC commented that the approximate 40 per cent drop in the HudBay share price following the announcement of the transaction was far more than the market reaction that one would expect from the announcement of such a transaction. This unusual and significant drop in market price was considered to be a reflection of the significant impact of the transaction on HudBay shareholders. 3. Corporate governance As a result of the proposed transaction the ‘… shareholders of HudBay are being subjected to a radical change in the composition of the board without their consent or concurrence.’ Given that the right of shareholders to vote on and determine the make-up of the board of directors is a fundamental governance right, the OSC considered that such a change required shareholder approval. The OSC also commented on the scheduling of the shareholder votes for Lundin and HudBay. Scheduling the shareholder vote requisitioned by dissident HudBay shareholders to replace the HudBay board after the proposed closing date of the transaction appeared to the OSC to have been done for the purpose of frustrating the legitimate exercise by HudBay shareholders of their fundamental rights. 4. Transformational impact of the transaction on HudBay and its shareholders The OSC referred to evidence that HudBay insiders regarded the transaction as ‘transformational’ and a ‘radical shift in business plans’ for HudBay. The transaction 42 

would result in a significant increase in HudBay’s risk profile, through exposure to higher-risk jurisdictions, exposure to minority interests in joint ventures and increased longterm debt. The impact of this greater risk was magnified by the credit crisis. 5. Fair treatment of HudBay shareholders Based on the above factors, the OSC concluded: ‘In this case, we believe that the fair treatment of HudBay shareholders is fundamentally more important than considerations such as deal or regulatory certainty in assessing the impact of the Transaction on the quality of the marketplace. We are satisfied that ensuring the fair treatment of HudBay shareholders in this case far outweighs any prejudice to HudBay or Lundin of requiring HudBay shareholder approval of the Transaction. We have carefully considered the implications of our decision for market participants and on market practices. In our view, far from undermining confidence in our capital markets, our decision will foster such confidence.’ Financial advice to the special committee The OSC did not deal with allegations that the HudBay board and special committee processes were defective or inappropriate. However, it did comment on the fact that the financial advisor retained to provide a fairness opinion to the special committee was entitled to a fee on signing of the arrangement agreement for the proposed transaction and a success fee on closing of the transaction: ‘Such fees create a financial incentive for an advisor to facilitate the successful completion of a transaction when the principal focus should be on the financial evaluation of the transaction from the perspective of shareholders. While the Commission does not regulate the preparation or use of fairness opinions, in our view, a fairness opinion prepared by a financial adviser who is being paid a signing fee or a success fee does not assist directors comprising a special committee of independent directors in demonstrating the due care they have taken in complying with their fiduciary duties in approving a transaction.’ This statement could lead to a change in the

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practice of directors relying on their principal financial advisor for fairness opinions in the absence of a requirement for an independent valuation. Subject to cost considerations, directors may prefer to retain an independent financial advisor, not compensated by a success fee, for this purpose in future transactions. Connected private placement HudBay purchased shares of Lundin equal to 19.9 per cent of its total outstanding shares in a private placement connected to, but not conditional on, the proposed transaction. HudBay had agreed to vote these shares in favour of the transaction at the Lundin shareholder meeting. Private placements of this nature have been employed recently in a number of high profile transactions. While there may be valid business reasons for such a private placement, allowing the potential acquirer to vote such shares in favour of approving the proposed acquisition makes it more difficult for the existing shareholders to oppose the transaction. The OSC indicated: ‘In our view, an acquirer should not generally be entitled, through a subscription for shares carried out in anticipation of a merger transaction, to significantly influence or affect the outcome of the vote on that transaction. The acquirer in a merger transaction has a fundamentally different interest in the outcome of the transaction than the shareholders of the target.’ The OSC acknowledged that, in this case, Lundin shareholder approval was likely a foregone conclusion. However, this statement provides a clear indication of the OSC’s views in the event that such a private placement is used as a deal protection strategy in circumstances where target shareholder approval is in question. Implications of the HudBay decision TSX security holder approval requirements There has been considerable controversy regarding whether security holders should have the right to approve the issuance of new securities in a dilutive acquisition. As discussed above, the TSX rules require a listed company to obtain security holder approval to issue securities as consideration for an acquisition that exceeds 25 per cent

of the outstanding securities of the company, on a non-diluted basis. However, there is an exemption from the approval requirement if the target is a public company. This exemption is relatively unusual. The rules in most major jurisdictions require security holder approval, at varying levels of dilution, regardless of the nature of the target. For example, the New York Stock Exchange and NASDAQ require security holder approval if the level of dilution is 20 per cent, while the approval requirement for the Hong Kong Stock Exchange is triggered by 50 per cent dilution. The issue received considerable attention in 2006 in connection with the acquisition of Glamis Gold Ltd by Goldcorp Inc. In that transaction, Goldcorp proposed to issue shares as consideration that would dilute existing shareholders by approximately 67 per cent. The Goldcorp board determined not to have a shareholder vote, based on legal advice that a vote was not required and a concern that seeking such approval would jeopardise the successful completion of the transaction. Robert McEwen, the founder and former CEO of Goldcorp and holder of approximately One and a half per cent of the outstanding Goldcorp common shares, objected to the proposed arrangement and launched various efforts to cause Goldcorp to seek shareholder approval. Along with a vigorous press campaign, Mr McEwen commenced a court application, pursuant to which he sought, among other things, an order compelling Goldcorp to obtain approval from its shareholders for the arrangement. The Ontario Superior Court denied the application by Mr McEwen to force Goldcorp to obtain shareholder approval of the large number of shares being issued from Goldcorp’s treasury. An appeal by Mr McEwen of this decision was denied. The TSX did not require a Goldcorp shareholder vote because Glamis was widely held and the issuance of Goldcorp shares did not materially affect control of Goldcorp. The NYSE also did not require a Goldcorp shareholder vote. Goldcorp was able in that situation to successfully argue that the TSX was its primary trading market, and the NYSE deferred to Goldcorp’s domestic regulation, in accordance with the NYSE policy of avoiding duplicative regulation. The Glamis plan of arrangement was ultimately approved by the Supreme Court of British Columbia and by 98.6 per cent of the votes cast at a meeting of Glamis shareholders securities law NEWSLETTER august 2009

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in October 2006. In the wake of the Goldcorp/Glamis transaction, the TSX commenced a policy review of the exemption from the security holder approval requirement for the acquisition of widely-held companies. In October 2007, the TSX published a request for comment that surveyed the rules in other jurisdictions and questioned whether a rule change was warranted. The issuance of the OSC’s order in HudBay in January of this year brought the issue of security holder approval to renewed prominence. On 3 April 2009, the TSX published a proposed amendment to the Company Manual with a summary of the comments received in response to its 2007

request for comment. The TSX is now proposing to require security holder approval for the issuance of securities in payment of the purchase price for the acquisition of a public company which exceed 50 per cent of the number of issued and outstanding securities of the issuer on a non-diluted basis. We expect that the need to consider dilution as part of the impact on the quality of the marketplace will provide the impetus for the TSX to implement a brightline test for security holder approval, whether at 50 per cent or another level of dilution. * If you have any questions about these TSX rules or the OSC decision, please contact the authors or your usual lawyer in BLG’s Securities & Capital Markets Group.

Securities Law Committee Activities

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e are pleased to report that the Securities Law Committee submitted comments to the European Commission in respect of two consultations recently launched by the EU Commission that relate to European directives regulating the securities markets – a proposal to amend the Prospectus Directive (2003/71/EC) and a call for evidence on the review of the Market Abuse Directive (2003/6/EC) – initiated under the Action Programme for Reducing Administrative Burdens in the European Union. In respect of the Prospectus Directive, the Committee submitted a letter to the Commission on 10 March 2009 addressing a number of disclosure related issues. Noted below are some of the key conclusions offered by the Committee: • In the context of the ‘retail cascade’ of securities (that is, the activity by which financial intermediaries resell securities to retail investors following the initial issue), the committee recommended an amendment of Article 3(2) of the Prospectus Directive (which sets out certain exemptions from the obligation to publish a prospectus). In particular, the committee proposed the inclusion of specific provisions clarifying that subsequent sellers may rely on the prospectus published by an issuer so long as (a) such

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reliance is with the issuer’s express consent, (b) the prospectus remains valid and (c) necessary supplements have been published (where applicable). • The committee noted that the requirement to publish a prospectus supplement in accordance with Article 16(1) of the Prospectus Directive should cease to apply at the earlier of the ‘final closing of the offer to the public’ or the ‘beginning of trading on a regulated market’. In particular, an overlap to the issuer’s obligation to disclose inside information about itself that applies immediately upon the issuer’s request for admission to trading of securities according to Article 6 of the Market Abuse Directive was deemed unnecessary. Also, the committee felt that the requirement to have a prospectus supplement approved by the competent authority (and to allow that authority a review period of up to seven working days) should be abolished. • The committee proposed that the definition of ‘offer of securities to the public’ be amended to provide that an offer to the public should not be deemed to have been made until such time as a binding declaration to purchase or subscribe for securities to be offered can actually be made by an investor. Currently, the definition in Article 2(1)(d) of the Prospectus Directive emphasises the question of whether information has been

International Bar Association Legal Practice Division

Securities Law Committee Activities

provided to an investor enabling such person to make an investment decision, rather than whether such person is in a position to actually purchase securities. The submission also addresses issues concerning the content and prescribed word-count of prospectus summaries, the disclosure of information in respect of government guarantee schemes and state guarantors, the need for an alignment of the definition of ‘qualified investor’ with ‘professional clients’ for the purposes of private placements, prospectus exemptions in respect of employee share schemes and in respect of small-quoted companies, and the need for certain issuer-related information to be made available on issuers’ websites and, ultimately, on a central European database. Also, the committee supported the proposal made by the European Securities Markets Expert Group (ESME) to achieve a higher level of harmonisation in terms of prospectus liability, specifically to require that the issuer of securities should primarily be liable for information contained in a prospectus (an issue that had already been discussed at the 25th International Financial Law Conference in Stockholm 2008). With regard to the commission’s question as to whether rights issues should, under certain circumstances, be exempted from the requirement to publish a prospectus, the committee had a lively discussion but could not form a common view. Valid arguments were raised both for a more liberal approach that exempts rights issues from publishing a prospectus (that is, if there is no rights trading and the offer is only made to existing shareholders) and in favour of a strict application of the existing regime with a view to investor protection. Finally, the committee decided to refrain from commenting on this topic. In respect of the Market Abuse Directive, the committee submitted a letter on 10 June 2009, commenting on a number of insider dealing and market manipulation related issues. Specifically the letter discusses the following major issues and submits a number of related proposals: • The committee recommended that, as far as an issuer’s disclosure obligation is concerned, the definition of ‘inside information’ should be amended as follows: (a) Only information relating to an issuer’s economic situation and its business should trigger the disclosure obligation. More

specifically, information should only need to be disclosed if a reasonable investor would use it as a basis for an investment decision. (b) Future corporate developments of an issuer should only be required to be disclosed if their occurrence is more likely than not (that is, greater than 50 per cent). (c) Transactions subject to staged decision-making processes should not have to be disclosed as long as they remain subject to an issuer’s internal decision-making process (that is, the obligation to disclose should not arise before the relevant decisionmaking body has taken its definitive decision). • With regard to the deferred disclosure mechanism (the issuer’s ability to delay disclosure of inside information to avoid its legitimate interests being prejudiced), the committee took the view that the conditions for delaying disclosure should be less restrictive and more specific. Particularly, where an issuer is in negotiations to implement emergency measures to avoid its financial collapse, it should be allowed to delay disclosure of inside information if the preparation of those emergency measures is underway and such measures may be jeopardised by premature disclosure. However, despite the fact that this scenario is of particular relevance in light of the ongoing financial crisis, in the committee’s opinion, this situation could be dealt with under the existing deferred disclosure mechanism – if the criteria for its application were clarified. • For the purposes of the insider dealing prohibition, the committee is of the view that information should only be deemed to be ‘used’ when a person trades (or attempts to trade) on the basis of inside information (rather than when a person in possession of inside information concerning certain securities trades in such securities). • The committee recommended that the obligation of issuers and their advisors to draw up insider lists should only commence upon the initiation of an investigation, rather than in respect of each and every transaction entered into by an issuer (in which, most of the time, such lists are neither needed or relevant). • In respect of buy-back programmes, the committee recommended that the safe harbour provided pursuant to Article 8 of the Market Abuse Directive should be extended securities law NEWSLETTER august 2009

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Securities Law Committee Activities

to cover all buy-backs permitted under corporate law as well as to the buy-back of debt securities, which are currently not covered in the definition of ‘buy-back programmes’. The submission also addresses issues concerning, among other things, the scope of the Market Abuse Directive (including whether it should be extended to cover multilateral trading facilities, to physical products, or to commodity derivatives issuers), the definition of ‘financial instruments’, the

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general definition of ‘inside information’ (for purposes other than corporate disclosure), the need for clarification of the circumstances in which issuers may utilise the deferred disclosure mechanism (including the need for guidance on what constitutes an issuer’s ‘legitimate interests’), transaction reporting by managers, stabilisation activities and shortselling. A copy of the submission is available on the Securities Law Committee’s website.

International Bar Association Legal Practice Division

The IBA’s Human Rights Institute The International Bar Association’s Human Rights Institute (IBAHRI), established in 1995 under the Honorary Presidency of Nelson Mandela, has become a leading global force in setting governments’ agendas in human rights, supporting judges, lawyers and human rights campaigners and promoting respect for the rule of law worldwide. The IBAHRI runs training and workshops, capacity building projects, fact-finding missions, trial observations, technical assistance, thematic reports and guidelines and many other projects in pursuit of these goals. All our activities are funded by grants and individual donations. Become a member for just £35 a year – less than £3 a month – to help support our projects. Your contribution will have a tangible effect on the protection and promotion of human rights around the world. Visit http://www.ibanet.org/IBAHRI.aspx for more information, and click join to become a member. Alternatively, email us at [email protected].

Map illustrating the IBAHRI’s work around the world

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What will Madrid 2009 offer? Madrid is considered the major financial centre of the Iberian Peninsula. It combines the most modern infrastructure with an important cultural and artistic heritage; the legacy of centuries of fascinating history, while its diversity and culture perfectly reflect the ethos of the International Bar Association. • The largest gathering of the international legal community in the world – a meeting place of more than 3,500 lawyers and legal professionals from around the world • More than 150 working sessions covering all areas of practice relevant to international legal practitioners • The opportunity to generate new business with many of the leading firms in the world’s key cities • Registration fee which entitles you to attend as many working sessions throughout the week as you wish • Continuing legal education and continuing professional development • A variety of social functions providing ample opportunity to network and see the city’s key sights • Integrated guest’s programme • Excursion and tours programme

International Bar Association 10th Floor, 1 Stephen Street, London W1T 1AT Tel: +44 (0)20 7691 6868  Fax: +44 (0)20 7691 6544

www.ibanet.org/conferences/Madrid2009

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