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Governance & Securities Law Focus A QUARTERLY NEWSLETTER FOR CORPORATES AND FINANCIAL INSTITUTIONS
Europe Edition January 2011
In this newsletter, we provide a snapshot of the principal European and US governance and securities law developments
of interest to European corporates and financial institutions during the fourth quarter of 2010.
ABU DHABI | BEIJING | BRUSSELS | DÜSSELDORF | FRANKFURT | HONG KONG | LONDON | MENLO PARK | MILAN | MUNICH NEW YORK | PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC
In This Issue ·······················································
EU DEVELOPMENTS 1 Amendments to the EU Prospectus Directive MiFID Review – Commission Consultation Amendment to Credit Rating Agencies Regulation Commission Consults Further on Credit Rating Agencies
GERMAN DEVELOPMENTS 3 Draft Bill to Strengthen Investor Protection and to Improve the
Functioning of the Capital Markets Draft Amendment of the Stock Corporation Act Draft Amendment to the Securities Acquisition and Takeover Act Draft Ordinance on Reporting Requirements in connection with
Naked Short Sales ITALIAN DEVELOPMENTS 4
CONSOB Proposes New Regulation of Takeover Bids in Italy UK DEVELOPMENTS 5
Corporate Governance Developments Higgs Guidance Board Committee Terms of Reference and Guidance (“TORs”) FRC Audit Committee and Turnbull Consultations Annual Re-Election of FTSE 350 Directors ICGN Corporate Risk Oversight Guidelines BIS: A Long-Term Focus for Corporate Britain Consultation The Takeover Panel’s Response to its Takeover Review
Consultation Amendments to Disclosure and Transparency Rule 5 (“DTR 5”) Rights Issue Fees Inquiry
US DEVELOPMENTS 9 SEC Developments Potential Trends to Monitor for the 2011 US Proxy Season and
Beyond Noteworthy US Securities Law Litigation Recent SEC/DOJ Enforcement Matters
DEVELOPMENTS SPECIFIC TO FINANCIAL INSTITUTIONS 19 EU Developments
AIFM Directive Adopted CEBS Final Guidelines on Remuneration EU Financial Supervisory Framework Commission Communication on Sanctions in the Financial
Services Sector UK Developments
FSA Finalises Revised Remuneration Code BIS Consultation on Reforming the Consumer Credit Regime MoJ Consults on Reforming Her Majesty’s Courts Service
and the Tribunals Service UK Government Publishes Final Legislation Introducing Bank
Levy Possible Change to FSA Code of Market Conduct following
Spector Decision German Developments
Act on the Restructuring and Unwinding of Credit Institutions and the Extension of the Statute of Limitations on the Liability of Governing Bodies of Stock Corporations
Act for the Implementation of the amended Banking Directive and the amended Capital Adequacy Directive
EU DEVELOPMENTS
Amendments to the EU Prospectus Directive
The EU Parliament approved certain key changes to the
EU Prospectus Directive (2003/71/EC) in June 2010. The
changes are intended to address a number of ambiguities
and difficulties that have been experienced with the
existing prospectus regime and to extend a number of (or,
in one case, increase the threshold for) the exemptions
from the obligation to publish an approved prospectus.
Following publication in the Official Journal of the
European Union, the amending Directive (2010/73/EU)
requires Member States to implement the changes by 1
July 2012. It is therefore possible that the amending
Directive will be phased in gradually across the EU by
Member States. This poses the risk that during the
transitional period certain offers of securities may be
exempt from the requirement to publish an approved
prospectus in some Member States but not in others. For
example, the UK Government has stated that it wishes to
prioritise the implementation of some aspects of the
amending Directive over others (namely, the increase in
thresholds for offers outside the scope of the Prospectus
Directive from €2.5 million to €5 million, and the increase
in the “100 persons” exemption to 150). Care should be
taken in capital markets deals to ensure that
representations and warranties in underwriting
agreements and offering documents take into account the
potentially unharmonised application of the Prospectus
Directive across the EU until 1 July 2012.
There are no material differences between the text of the
published amending Directive and the text approved by
the EU Parliament which we discussed in our July 2010
Newsletter.
To view the previous quarter’s Governance & Securities Law Focus newsletter please click here.
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MiFID Review – Commission Consultation
On 8 December 2010 the European Commission
published its consultation paper on the review of the
Markets in Financial Instruments Directive (“MiFID”), on
which we reported in our October 2010 Newsletter.
MiFID consists of a framework Directive (2004/39/EC),
an implementing Directive (2006/73/EC) and an
implementing Regulation (1287/2006). The consultation
focuses on revisions to the framework Directive although
changes to the implementing legislation are likely at a
later stage. Responses to the consultation are due by 2
February 2011, following which the Commission will
present a legislative proposal for amending MiFID in
spring 2011.
The consultation covers areas such as market structures,
high frequency trading, OTC derivatives trading, pre- and
post-trade transparency obligations, data consolidation,
commodity derivatives trading, transaction reporting,
conduct of business and conflicts of interest rules,
disclosure, client assets and the possibility of giving the
European Securities and Markets Authority (“ESMA”) the
power to ban specific products or services.
The consultation paper is available at:
http://ec.europa.eu/internal_market/consultations/docs/
2010/mifid/consultation_paper_en.pdf.
Amendment to Credit Rating Agencies Regulation
On 15 December 2010 the European Parliament adopted
amendments to the EU Regulation on credit rating
agencies (Regulation 1060/2009) (the “CRA Regulation”).
The amendments effectively transfer supervision over
credit rating agencies (“CRAs”) from national regulators to
ESMA from July 2011. National regulators will be
responsible for the supervision and enforcement of the
provisions relating to the use of credit ratings for
regulatory purposes.
In particular, ESMA will now be responsible for approving
or refusing an application for registration under the CRA
Regulation and for the ongoing supervision of those
agencies and may charge CRAs fees for its expenses in
undertaking its new supervisory role. In supervising
CRAs, ESMA will be able to:
Require CRAs, persons involved in credit rating
activities, rated entities and related third parties to
provide information necessary for ESMA to carry out
its duties.
Investigate CRAs, persons involved in credit rating
activities, rated entities and related third parties.
Carry out on-site inspections at the business premises
of CRAs, rated entities and related third parties,
including without any prior notice (“dawn raids”).
Upon infringement by a CRA, withdraw the
registration of the CRA, prohibit the CRA from issuing
credit ratings in the EU until the infringement is
remedied, suspend the use of credit ratings for
regulatory purposes of the CRA for a temporary
period, require the CRA to stop the infringement or
issue public notices.
Impose a financial penalty on a CRA for intentional or
negligent infringement of certain rules up to an
amount of 20% of the CRA’s turnover for the previous
year.
ESMA will also be responsible for ensuring that CRAs
comply with their obligation to compare performance
predictions for a rated financial instrument with its actual
performance (“back-testing”).
Drafts of the amending legislation included provisions
requiring CRAs and issuers to provide access to
information via password protected websites to facilitate
the production of unsolicited ratings by CRAs. Due to a
lack of agreement on these provisions, however, they were
not adopted. Instead the Commission is charged with
putting forward legislative proposals after an appropriate
assessment of the issues.
The EU Council will need to officially approve the adopted
text before the amendments become EU law.
Commission Consults Further on Credit Rating Agencies
On 5 November 2010 the European Commission
published a consultation paper addressing certain aspects
of the activities of CRAs. The CRA Regulation requires the
Commission to monitor and assess these issues by the end
of 2012. The Commission is seeking views on:
Various measures that could help reduce the reliance
on external credit ratings and encourage firms to
undertake their own credit risk assessments,
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including where external credit ratings are required
for regulatory capital requirements and in the
mandates and investment policies of investment
managers.
Enhancing transparency and monitoring of sovereign
debt ratings such as requiring CRAs to inform the
country on which they are in the process of issuing a
rating at least three days before the publication of the
rating, disclosure of the CRA’s research reports on
sovereign debt ratings and reducing the minimum
period for review of such ratings from once a year to
six months.
Enhancing the requirements on the methodology and
process of rating sovereign debt, particularly by
imposing the same disclosure obligation as those that
apply to a CRA issuing a rating for a structured
finance instrument.
The establishment of a new independent European
CRA to rate sovereign debt or the establishment of
new national CRAs to stimulate competition.
The introduction of a harmonised approach to civil
liability of CRAs which intentionally or negligently
infringe the provisions of the CRA Regulation leading
to an incorrect rating on which investors have based
an investment decision, including solicited and
unsolicited ratings.
Additional measures to address the conflicts of
interest inherent in the “Issuer-Pays” model.
GERMAN DEVELOPMENTS
Draft Bill to Strengthen Investor Protection and to Improve the Functioning of the Capital Markets
In the aftermath of the financial crisis, the Federal
Government introduced a number of measures to
strengthen investor protection, improve the functioning of
the capital markets and re-establish confidence in market
integrity, including
Providing the Federal Financial Services Supervisory
Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht - BaFin) with
additional controlling functions. Certain employees
of investment service companies in advisory or
compliance functions will be required to register with
the BaFin and any infringements against investor
protection rules will be sanctioned by the BaFin.
Improving the transparency of the capital markets
through the introduction of new reporting and
disclosure obligations for certain transactions not
covered by the current rules. The draft bill focuses on
cash-settled financial instruments. The new reporting
and disclosure obligations will apply to the position of
the seller of a put option, to the repayment claim of
the lender in a securities loan transaction as well as to
repurchase agreements entered into in connection
with repo transactions.
Revising the rules applicable to open-end real estate
funds, in particular the establishment of a minimum
holding period of two years for investors holding
shares in such funds and a more frequent
performance evaluation of the real estate held by the
fund. The aim is to improve the liquidity of open-end
real estate funds and to avoid liquidity problems due
to the imbalance of long-term investments in real
estate and the current right of investor to return their
shares early.
In its response to the draft bill the Federal Council
(Bundesrat) has demanded additional rules for and a
more efficient government control over the grey capital
market.
Draft Amendment of the Stock Corporation Act
The Ministry of Justice published a draft amendment to
the Stock Corporation Act, introducing, among others,
rules regarding the financing and ownership status of
corporations.
Corporations that are not listed on a stock exchange
may only issue registered shares. The draft
amendment requires such corporations to amend
their articles of association accordingly before 1
January 2015. The option to issue ordinary bearer
shares will only be available to publicly listed
corporations.
Currently, non-voting preference shares mandatorily
carry the right to receive a back payment of dividends,
i.e., if no dividends are payable on the preference
shares due to a lack of earnings in one period, such
dividends have to be paid out of the next period’s
earnings. Under the draft bill, such a back payment
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on non-voting preference shares will no longer be
mandatory. Going forward, the holder of non-voting
preference shares will only be entitled to a back
payment, if the articles of association of the
corporation so provide. Furthermore, the draft bill
allows financial institutions to allocate proceeds
arising from the issuance of non-voting preference
shares to Tier 1 capital.
Convertible bonds will now allow for a conversion at
the option of the issuer. A corporation may create
conditional capital for this purpose.
The right to bring legal action to declare void
corporate resolutions will be limited in time to avoid
abusive shareholder actions.
Draft Amendment to the Securities Acquisition and Takeover Act
The Social Democratic Party, the opposition party to the
Government, plans to introduce a draft bill amending the
Securities Acquisition and Takeover Act to create an
obligation for a holder of more than 30% (but less than
50%) of the voting rights of a target company, to make a
public tender offer for such target company, if the holder
purchases more than an additional 2% of the voting rights
of the target company within a period of 12 months (so-
called “creeping-in”). This obligation arises each time the
holder crosses any additional 2% barrier. Critics fear an
unintended impediment to takeovers.
Draft Ordinance on Reporting Requirements in connection with Naked Short Sales
The BaFin published a draft ordinance prescribing the
required content, nature and form of the reporting
requirements in connection with naked short sales under
the Act on the Prevention against Abusive Dealings in
Securities and Derivatives.
ITALIAN DEVELOPMENTS
CONSOB Proposes New Regulation of Takeover Bids in Italy
On 6 October 2010, the Italian securities regulator
Commissione Nazionale per le Società e la Borsa
(“CONSOB”) issued a draft regulation intended to
implement Directive 2004/25/EC on takeover bids (the
“Draft Regulation”) into Italian law. CONSOB
simultaneously opened a market consultation that
included, inter alia, an open hearing held on 27 October
2010.
While Italian laws have been amended from time to time
to reflect the provisions of Directive 2004/25/EC on
takeover bids, CONSOB regulations have not been
updated to date. On the basis of past practice and in light
of the numerous comments CONSOB has received, it is
not possible to anticipate the timing of the final approval
of the Draft Regulation.
The Draft Regulation, which touches upon both voluntary
and mandatory takeover bids, contains multiple
provisions capable of reshaping the Italian market for
corporate control. The following is a list of the most
significant provisions set forth in the Draft Regulation:
Consent Solicitations. The Draft Regulation
introduces a partial exemption from the takeover
regime applicable to transactions aimed at, e.g.,
amending the terms and conditions of debentures of
an issuer, thereby reflecting more accurately the true
nature of consent solicitations of this type of
transaction. While CONSOB has in the past
consistently taken the view that any such transaction
should be treated as a takeover bid, the Draft
Regulation exempts the issuer from complying with
the relevant rules, provided that it publishes certain
information documents, which are not subject to the
ordinary CONSOB review process.
Offering Period. The Draft Regulation requires a
bidder to reopen the offering period for additional five
days in certain circumstances that are viewed as
potentially coercive on target shareholders. In
particular, this provision requires that in a takeover
bid launched by an affiliate of the target (e.g., a large
shareholder or any director) that either contemplates
a minimum tender condition or is aimed at acquiring
control of the target, if the bidder announces that the
minimum condition has been met or the control
threshold has been crossed, as the case may be,
simultaneously with the announcement of the results
of the offering, the offer period will automatically
extend for five additional days. The offer period will
not extend, however, in the event that any such
announcement is made at least five days prior to the
expiration of the offer period.
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Issuer’s Statement. The Draft Regulation requires
that the statement to be issued by the board of
directors of the target in connection with the takeover
bid will have to include the “reasoned opinion” of the
independent directors of the target who are not
related parties with the bidder (to the extent that any
such directors exist), setting out the “evaluation of the
offer” and indicating the “adequacy of the
consideration offered”. In addition, if the takeover
bid is launched by directors of the target who are
funding the bid through debt financing, the bidder
will also have to disclose to the independent directors
“any information relating to the takeover bid that has
been disclosed to the entities financing the bid”.
Post-Offering Best Price Rule. The Draft
Regulation expands the current rule that requires the
bidder to raise the offer price in a takeover bid to
match any higher price paid by the bidder in market
transactions pending the offer to any purchases made
by the bidder during the six months following the
expiration of the offering period.
Competing Takeover Bids. The Draft Regulation
allows, inter alia, a bidder to: (i) make a competing
takeover bid at any price and upon any condition,
whereas currently only competing bids with a higher
consideration or fewer conditions precedent are
permissible; and (ii) purchase securities in the market
at a price up to the higher of the consideration offered
by such bidder or any other competing bidder,
whereas currently in a competing bid situation, a
bidder cannot purchase securities in the market at a
price higher than the consideration offered by such
bidder.
Cross-border Takeover Bids. The Draft
Regulation allows takeover bids approved in any EU
member state to be carried out in Italy subject to a
communication to CONSOB and the filing with
CONSOB of: (i) an Italian language translation of the
offer document (although if the original document is
in English, CONSOB will accept a translation of the
“essential elements” of the offer and the risk factors);
and (ii) the preparation of a local supplement with
Italian tax considerations and tender mechanics. As
regards takeover bids approved in a non-EU country,
the Draft Regulation still provides CONSOB with
more discretionary powers.
UK DEVELOPMENTS
Corporate Governance Developments
The last quarter of 2010 saw a succession of
announcements, publications and other developments in
the corporate governance arena, including:
Pro-forma terms of reference and guidance for the key
board committees and further work on the draft
revised Higgs guidance on board effectiveness by the
Institute of Chartered Secretaries and Administrators
(“ICSA”).
Announcements by the Financial Reporting Council
(“FRC”) of a consultation on audit committee
guidance and of a shelving of a review of the Turnbull
internal control guidance.
Various guidelines or statements issued by certain UK
investor protection committees (“IPCs”) and by the
International Corporate Governance Network.
Higgs Guidance
In our October 2010 Newsletter, we discussed the review
being carried out by ICSA of the existing FRC sponsored
guidance for boards of companies to which the
Governance Code applies, on the role of chairmen and
other board members (the so-called “Higgs guidance”).
This review has been designed to bring the guidance into
line with the new emphasis on board effectiveness found
in the FRC's new UK Corporate Governance Code
(“Governance Code”). ICSA has now completed its
consultation on the draft Higgs guidance referred to below
and has passed final draft guidance to the FRC for final
approval. Definitive revised guidance is expected to be
published in the first quarter of this year.
The latest draft Higgs guidance as published by ICSA is
available at:
http://www.icsa.org.uk/assets/files/pdfs/consultations/2
010/Improving%20Boardroom%20Behaviour%20Respon
ses/ICSA%20Policy%20Improving%20Board%20Effectiv
eness%20Document.pdf.
Board Committee Terms of Reference and Guidance (“TORs”)
The ICSA TORs cover audit, remuneration, nomination
and risk committees and include references to the key
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Governance Code requirements in relation to those
committees (or, in the case of the risk committee, to the
board's responsibility for risk management, since it is the
Walker Review, rather than the Governance Code, that
mandates the creation of risk committees for FTSE 100
listed banks or other financial institutions). They also set
out model terms of reference for those committees which
companies should adapt as appropriate when using them.
Copies of the audit, remuneration, nomination and risk
TORs are available from the ICSA website.
The TORs for audit committees are available at
http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida
nce%20notes%202010/Terms%20of%20Reference%202
010/1010%20Audit%20ToRs%20FINAL.pdf.
The TORs for remuneration committees are available at
http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida
nce%20notes%202010/Terms%20of%20Reference%202
010/1010%20RemCo%20ToRs%20FINAL.pdf.
The TORs for nomination committees are available at
http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida
nce%20notes%202010/Terms%20of%20Reference%202
010/1010%20NomCo%20ToRs%20FINAL.pdf.
The TORs for risk committees are available at
http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida
nce%20notes%202010/Terms%20of%20Reference%202
010/1010%20Risk%20ToRs%20FINAL.pdf.
FRC Audit Committee and Turnbull Consultations
As part of the review of the broader extent of UK corporate
governance guidance, the FRC has been looking at its
guidance to audit committees and its so-called Turnbull
guidance on internal control. The FRC's consultation on
audit committee guidance has concentrated on revisions
to take account of non-audit services provided by the
external auditor’s firm (including disclosure by companies
of such services, the reasons for deciding to take such
services from the external auditor and safeguards with
respect to the auditor’s objectivity) and the rotation of
external audit partners. Updated guidance was published
by the FRC on 17 December 2010. A copy of the FRC’s
consultation on audit committee guidance is available at:
http://www.frc.org.uk/images/uploaded/documents/Gui
dance%20on%20Audit%20Committees%202010%20final
1.pdf.
With regards to the Turnbull guidance on internal control,
the FRC announced that it will be holding a series of
meetings with chairs of boards and audit and risk
committees, and with executives, investors and advisers in
2011 to help consider whether revisions to the Turnbull
guidance are required following the inclusion in the
Governance Code of the new principle requiring boards to
be responsible for determining the nature and extent of
the significant risks they are willing to take in achieving
their strategic objectives.
Annual Re-Election of FTSE 350 Directors
One of the more controversial features of the new
Governance Code has been the provision for the annual
re-election of the entire board of FTSE 350 companies.
Opinion remains divided as to the merits of this provision,
reflected in the different approaches being taken by
various IPCs in the UK, as well as by a number of FTSE
350 companies who have held their 2010 annual general
meetings since the new Governance Code was published.
Pensions Investment Research Consultants (“PIRC”),
which has been a long time advocate of annual re-election
of boards, has announced it will give companies an
additional 12 months to comply with the Governance
Code’s requirements (which apply to accounting periods
beginning on or after 29 June 2010). On the other hand,
Hermes, Railpen and the Universities Superannuation
Scheme wrote to 700 companies earlier this year to
encourage them to ignore this new requirement due to
their concern that this “will engender a short-term culture
with the risk of effective boards being distracted by short-
term voting outcomes”.
In its recently issued updated draft Corporate Governance
Policy and Voting Guidelines, the National Association of
Pension Funds (“NAPF”) seems to be following a middle
course in this area by recognising that annual re-election
could lead to better accountability but also that there are
associated risks, especially with regards to the continuity
and stability of boards. It has therefore declined to
recommend a voting sanction for companies that do not
adopt annual re-election of the board. Where a company
is not proposing annual re-election, however, NAPF will
require its policy on director re-election to be clearly
explained in the context of shareholders’ interests and is
intending to review this approach in late 2011.
7
ICGN Corporate Risk Oversight Guidelines
In October 2010 the International Corporate Governance
Network – an organisation that represents major
institutional investors, financial intermediaries, academics
and others with an interest in corporate governance –
published Corporate Risk Oversight Guidelines which are
intended to assist investors in monitoring the effectiveness
of companies’ risk management oversight functions.
The guidelines cover:
Board and company processes – focusing on what is
expected of the board.
Investor responsibility – focusing on what investors
should do to assess a board’s risk management.
Board and company disclosure – focusing on what
information should be disclosed to enable effective
investor assessment.
As guidelines, they have no prescriptive or regulatory force
but represent best practice recommendations. Boards are
encouraged to consider appointing a chief risk officer (a
Walker Review recommendation for banks and other
financial institutions) or at least to identify a person with
responsibility for risk management commensurate with
the role of such an officer. Investors are also told to assess
their own capacity and resources for risk management
assessment. For UK listed companies, some of the
disclosure recommendations are already covered by
requirements of the Governance Code or the Disclosure
and Transparency Rule requirement for corporate
governance statements (see DTR 7.2.5R).
A copy of the Corporate Risk Oversight Guidelines is
available at:
http://www.icgn.org/files/icgn_main/pdfs/best_practice
/icgn_corporate_risk_oversight_guidelines.pdf.
BIS: A Long-Term Focus for Corporate Britain Consultation
Also in October 2010 the Department for Business
Innovation & Skills (“BIS”) launched a consultation on the
question of short-termism and market failures in UK
equity markets. Specifically, the consultation asks
whether better corporate governance by itself will not be
enough to ensure the long-term success of corporate
Britain and whether certain legal and/or behavioural
changes will be required. It also looks at the widespread
concerns about the misalignment of the interests of
executive management and shareholders through
excessive executive incentives.
The consultation contains some interesting UK equity
market statistics – such as that FTSE 350 shareholder
attendance at general meetings averages 68% and that the
average period for holding UK equities has fallen from five
years in 1960 to about seven and a half months in 2007
(similar figures apply in New York).
Some key points or questions raised in the consultation
include:
The Government agrees with the UK Panel on
Takeovers and Mergers (the “Panel”) that some
rebalancing of the UK Takeover Code rules is needed
to check the evolution of market practice which has
developed in favour of bidders (see “The Takeover
Panel’s response to its Takeover Review consultation
(PCP 2010/22)” below).
Should all “golden parachute” payments to departing
directors be subject to shareholder approval (under
UK company law, payments made in good faith
pursuant to a pre-existing legal obligation or in
settlement of a claim in connection with loss of office,
etc. do not require shareholder approval)?
Should the shareholders of an acquiring company
always be invited to vote on the company’s takeover
bids?
A copy of the consultation (which closed for responses on
14 January 2011) is available at:
http://www.bis.gov.uk/assets/biscore/business-
law/docs/l/10-1225-long-term-focus-corporate-
britain.pdf.
The Takeover Panel’s Response to its Takeover Review Consultation
On 21 October 2010 the Panel released a response to the
feedback it has received to its wide-ranging June 2010
review of a number of basic principles of UK takeover
regulation.
In its response the Panel has switched its focus from the
impact of short-term investors on the outcome of hostile
bids to a concern that the present rules in its City Code on
Takeovers and Mergers (the “Code”) unduly favour hostile
bidders over their targets and that the position of targets
8
needs strengthening. The changes to the Code that the
Panel is now proposing to address these concerns are
likely to prove just as controversial as the Panel’s earlier
mooted changes to address its concern about the impact of
short-term investors were.
The changes will also apply to recommended transactions
and so a bidder considering making a friendly approach to
a UK target is going to have to be prepared in future: (1) to
go public about its approach and to firm up its bid
intentions much earlier than would previously have been
the case, and (2) to proceed without the benefit of the
usual “no shop” and/or break fee protections that
previously it would have expected to receive from the
target.
Key points from the Panel’s response are:
A potential bidder will now have to be publicly named
in any “possible offer” announcement required under
the Code.
Once publicly named, the bidder will now have just
four weeks in which to announce either a firm (and
binding) intention to make a bid or that it will not bid
(in which case the Code bars the bidder from making
another offer for the next six months).
Inducement (or break) fees and other deal protection
measures will no longer be permitted.
Greater disclosure will be required of:
financial information about the bidder and its
financing of the bid, and this will be required in
all bids (and not just paper bids).
advisers’ fees and other offer-related (including
success) fees.
The Code will include an increased emphasis on:
the consideration of target employees’ interests
in bids.
the target board not being required under the
Code to consider the offer price as the
determining factor in its response to a bid.
The Panel will not be proceeding with the most
controversial of the possible rule changes it discussed
in its June review:
raising the minimum voting rights acceptance
condition from 50% plus one.
disenfranchising voting securities acquired in
the target during an offer period.
It is expected that detailed draft rule changes will be
published shortly and that after a final period of
consultation, the amended rules will take effect later this
year.
A copy of our client publication on the Panel’s earlier
review is available at:
http://www.shearman.com/files/Publication/61a08dc0-
e284-401d-9411-
879baf6470ca/Presentation/PublicationAttachment/5bc0
3e38-aa39-4ad7-8d66-96206c73bc80/FIA-062310-
Review-of-the-UK-Takeover-Code.pdf
A copy of our client publication on the Panel’s response to
that review is available at:
http://www.shearman.com/files/Publication/aeec964a-
ae34-4983-b60b-
d23075d4eb0b/Presentation/PublicationAttachment/7df
76ce3-c372-44a8-a946-7ec9fa6dc7c3/EC-102610-
Update-on-the-UK-Takeover-Panel.pdf
A copy of the Panel’s response is available at:
http://www.thetakeoverpanel.org.uk/wp-
content/uploads/2008/11/2010-22.pdf
Amendments to Disclosure and Transparency Rule 5 (“DTR 5”)
DTR 5 sets out the Transparency Directive obligations for
UK listed companies (and their shareholders) with respect
to announcements regarding the voting rights held in the
company. Companies have to make end-of–month
announcements of the total voting rights in their share
capital and shareholders have to make announcements
when their holdings reach or move through certain levels.
From 1 November 2010 the following amendments have
been made to DTR 5:
In addition to the end-of-month announcements,
companies will also have to make announcements of
their total voting rights as soon as possible when these
rights increase or decrease through the issuer
completing a transaction (e.g., a rights issue) (and in
any event by no later than the next business day
following the day on which the change occurred). No
announcement is required if the change is immaterial
and the FSA states in the rule that in its view an
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increase or decrease of one percent or more is likely to
be material. (See DTR 5.6.1A R).
In calculating the number of voting rights held,
shareholders will be allowed to exclude passive nil-
paid rights held by them, so long as they do not trade
in any financial instruments (including the nil-paid
rights) of the issuer during the rights period. The
same exemption is available in the case of open offers,
again so long as there is no trading in the issuer’s
financial instruments and provided that the
shareholder maintains its economic position in the
issuer by taking up its full entitlement in the offer.
(See DTR 5.3.1 R (2A)).
A copy of the amended DTR 5.6 can be viewed here:
http://fsahandbook.info/FSA/html/handbook/DTR/5/6
A copy of the amended DTR 5.3 can be viewed here:
http://fsahandbook.info/FSA/html/handbook/DTR/5/3
Rights Issue Fees Inquiry
On 14 December 2010 a report of the Rights Issue Fees
Inquiry, commissioned by the Institutional Investor
Council, was published following a review of the practices
and pricing procedures adopted when new capital is raised
through the issue of UK equity securities. The report
contains a number of recommendations in the areas of
transparency, competition and shareholder involvement.
These are intended to require greater disclosure about the
levels and composition of underwriting fees and greater
involvement by issuers in sub-underwriting decisions.
They also seek to encourage greater competition in the
underwriting market and participation by institutional
shareholders in equity sub-underwriting. A copy of the
report is available at:
http://www.iicouncil.org.uk/docs/rifireport.pdf.
Specifically, the report recommends that:
issuers should be required by the Listing Rules to
disclose in detail all fees paid, to whom and for what.
similar provisions should be included in the current
review of the Transparency Directive.
the current review of the MiFID Directive should
ensure that there are no unnecessary impediments to
shareholders' participation in underwriting of rights
issues.
institutional shareholders should consider appointing
a named individual who can be taken "off market" to
consult with the issuer and its advisers on possible
support for a rights issue, pricing and sub-
underwriting.
In late January 2011, the Office of Fair Trading is expected
to publish its own study into the equity underwriting
market which it launched in June 2010.
US DEVELOPMENTS
SEC Developments
In our October 2010 Newsletter, we reported on the Dodd-
Frank Wall Street Reform and Consumer Protection Act of
2010 (the “Reform Act”) that was signed into law on 21
July 2010. The Reform Act requires rulemaking by the
SEC to implement certain of its executive compensation
and corporate governance provisions:
SEC Issues Proposed Rules on Say-on-Pay
Provisions
On 18 October 2010 the SEC issued its first set of
proposed executive compensation rules under the Reform
Act, which implement the say-on-pay provisions of the
Reform Act, as described below. The SEC clarified in the
proposed rules that the say-on-pay voting provisions of
the Reform Act do not apply to foreign private issuers.
Say-on-Pay Vote. The Reform Act requires US
issuers to provide shareholders with the right to cast a
non-binding vote approving the issuer’s executive
compensation as disclosed in its proxy statement not
less frequently than once every three years at
shareholders’ meetings occurring on or after 21
January 2011 where compensation disclosure is
required. The proposed rules do not provide for a
specified format or wording for the say-on-pay
shareholder proposal, but do require issuers to
disclose in the proxy statement that they are
conducting a separate shareholder advisory vote on
executive compensation and to briefly explain the
general effect of the vote.
Say-on-Pay Frequency Vote. Shareholders must
also be given the opportunity, at least once every six
years, to have a separate shareholder vote to re-
determine the frequency of the say-on-pay vote,
which may occur every one, two or three years, with
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the first determination to be made at shareholders’
meetings occurring on or after 21 January 2011 where
compensation disclosure is required. The proposed
rules specify that issuers must provide four choices
regarding the say-on-pay frequency vote (i.e., annual,
biennial, triennial or abstain) and establish a limited
transition rule where proxy service providers cannot
accommodate four choices on a ballot. If an issuer’s
board of directors includes a recommendation on the
frequency of the vote, the proxy statement must
clearly state that shareholders are voting to approve
the actual frequency and not the board of directors’
recommendation.
Additional Say-on-Pay Matters.
The proposed rules confirm that say-on-pay and
frequency votes are non-binding and will not be
construed as overruling the compensation
decisions of the issuer’s board of directors.
It is proposed that issuers be required to address
in their next proxy statement whether and, if so,
how their compensation policies and decisions
have taken into account the results of the prior
say-on-pay votes.
It is proposed that issuers disclose their decision
as to how frequently they will conduct their say-
on-pay votes in the first Form 10-Q (or Form 10-
K) following the frequency vote.
Issuers will not be required to file a preliminary
proxy statement solely as a result of including a
required say-on-pay vote or a frequency vote in
their proxy statement.
Say-on-pay and frequency votes are executive
compensation matters and brokers therefore
may not vote uninstructed shares on these
matters.
Disclosure of Golden Parachutes. The Reform
Act adds a new disclosure requirement for payments
to be made to an issuer’s named executive officers
(whether the payments are made by the target or the
acquiring company) in connection with certain
change-in-control transactions. Proposed new Item
402(t) of Regulation S-K specifies a tabular format for
this disclosure, which is to be accompanied by
narrative and footnote disclosure. The proposed rules
expand the list of SEC forms for which disclosure is
required to include those filed in connection with
proxy and consent solicitations, going private
transactions, third-party tender offers and similar
transactions, as well as registration statements on
Forms S-4 and F-4. If the target is a foreign private
issuer, disclosure under Item 402(t) is not required.
However, if the target is a US issuer, disclosure is
required even if the acquiror is a foreign private
issuer.
Vote on Golden Parachutes. The proposed rules
require issuers to provide a separate shareholder
advisory vote on the arrangements disclosed pursuant
to new Item 402(t) of Regulation S-K. The golden
parachute vote is only applicable to proxy and consent
solicitations by US issuers that occur after the
proposed rules become effective and is not required in
connection with the additional change-in-control
transactions described in the previous paragraph.
The golden parachute vote is only required for
compensation paid by the target issuer to its named
executive officers. Compensation arrangements are
not subject to the golden parachute vote if they were
subject to a prior general say-on-pay vote, but only if
the issuer has previously and voluntarily included
disclosure regarding the change-in-control
arrangements in accordance with Item 402(t) in its
soliciting documents. In the event that compensation
arrangements that were not subject to a prior say-on-
pay vote are in place at the time of a transaction,
issuers would need to segregate the required
disclosure into two tables meeting the requirements
of Item 402(t), the first showing the total amounts
payable under all arrangements and the second
showing the amounts payable under just those new
arrangements subject to the current vote.
The comment period on the proposed rules closed on
18 November 2010 and the SEC anticipates issuing
final rules in the January to March 2011 timeframe.
Our client publication on the proposed rules is
available at
http://www.shearman.com/files/Publication/28fd8d
42-99bb-4296-b59e-
f2b4926cbb2a/Presentation/PublicationAttachment/
d12d061f-3215-4584-845c-bb63d1a3fac5/ECEB-
102610-SEC-Issues-Proposed-Rules-on-Say-on-Pay-
Voting.pdf.
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SEC Issues Proposed Rules on Whistleblower
Programme
On 3 November 2010 the SEC issued proposed Regulation
21F to implement the whistleblower programme required
by the Reform Act. The programme is designed to provide
incentives for whistleblowers to report securities law
violations to the SEC and substantially expands the
agency’s authority to compensate such individuals. The
new SEC whistleblower programme is primarily intended
to reward individuals who act early to expose violations
and who provide significant evidence that helps the SEC
bring successful cases.
To be considered for an award, a whistleblower must
voluntarily provide the SEC with original information
about a violation of the US federal securities laws that
leads to the successful enforcement by the SEC of a federal
court or administrative action in which the SEC obtains
monetary sanctions totalling more than US$1 million.
This includes matters brought against foreign private
issuers or matters involving the Foreign Corrupt Practices
Act.
An eligible whistleblower must be a natural person.
Whistleblowers may submit information to the SEC
anonymously, but must be represented by counsel to
do so and will ultimately need to reveal their identity
to the SEC to obtain their award.
The information must be provided to the SEC
voluntarily, meaning that it must have been
submitted before the SEC or other select authorities
have made a request or demand to the whistleblower.
The information is also not considered voluntarily
submitted if the individual falls within the scope of an
SEC request or demand made to the individual’s
employer. Importantly, a request or demand made by
the employer’s personnel in conducting an internal
investigation will not make the later submission to the
SEC involuntary.
“Original information” is defined as information
derived from the whistleblower’s independent
knowledge or analysis that is not already known to the
SEC from any other source (unless the whistleblower
is the original source) and that is not taken exclusively
from an allegation made in a judicial or
administrative hearing, in a government report, or
from the news media, unless the whistleblower is the
source of the information. The SEC makes clear,
however, that the “independent knowledge” of the
whistleblower may derive from information that has
been conveyed by a third party. Direct, first-hand
knowledge of a securities law violation is not
necessary to recoup an award.
A whistleblower’s information is deemed to have led
to successful enforcement if (i) the information results
in a new examination or investigation being opened
and significantly contributed to the success of a
resulting enforcement action, or (ii) the conduct was
already under investigation when the information was
submitted, but the information is essential to the
success of the action and would not have otherwise
been obtained.
The amount of the award must fall within a statutory
range of 10% - 30% of the total monetary sanctions
recovered by the SEC, provided the sanctions amount
to at least US$1 million. In determining whether the
statutory minimum threshold of US$1 million has
been reached, the SEC will not aggregate sanctions
from separate actions, making it clear that the term
“action” means a single captioned judicial or
administrative proceeding. It will also not consider
sanctions that the whistleblower himself is ordered to
pay. If the whistleblower’s original information leads
to a successful action in which the SEC obtains
monetary sanctions exceeding US$1 million, the
whistleblower will also be eligible for recoveries in
“related actions” brought by certain selected agencies
and self-regulatory organizations based on the same
original information.
Certain categories of people would generally not be
considered for whistleblower awards, including:
People who are subject to a pre-existing or contractual
duty to report the securities violation.
Attorneys who obtain the information from client
engagements or from a communication subject to the
attorney-client privilege (unless disclosure is
permitted under SEC rules or state bar rules).
Independent public accountants who obtain the
information through an engagement required under
the securities laws.
Internal compliance officers or other persons with
legal, audit, supervisory or governance responsibility
to the corporation to whom the information is
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reported in the expectation that they will take
appropriate steps to respond to the violation. This
exclusion ceases to be applicable, however, if the
company does not disclose the information to the SEC
within a reasonable time or acts in bad faith.
Certain other persons – such as employees of certain
agencies and people who are criminally convicted in
connection with the conduct – are excluded by the Reform
Act.
The proposed rules attempt to mitigate any unintended
consequences of a whistleblower programme and in
particular try to provide incentives to employees not to
bypass their internal compliance systems. In an attempt
to encourage employees to first make a report to their
corporate compliance department, the SEC is offering
potentially higher rewards for whistleblowers who did so.
In addition, the proposed rules give employees a 90-day
grace period after reporting a violation to their company
in which to bring the case to the SEC and the SEC will
consider the submission effective as of the date it was
reported internally, thereby preserving a whistleblower’s
priority.
Section 21F also contains provisions preserving the
confidentiality of, and prohibiting retaliation by employers
against, whistleblowers. However, they do not provide
amnesty to whistleblowers and enforcement actions can
still be brought against individuals who submitted
information but are wrongdoers themselves. In addition,
to address concerns that the proposed rules will encourage
the proliferation of false claims of corporate wrongdoing,
the rules require any information to be submitted to the
SEC by written statement signed under penalty of perjury.
Comments on the proposed whistleblower bounty
programme were due on 17 December 2010. Final rules
must be adopted by 15 April 2011, although the SEC has
stated that it expects to finalize the rules between January
and March 2011. The proposed rules are available at
http://www.sec.gov/rules/proposed/2010/34-63237.pdf.
SEC Issues Proposed Rules on Disclosure
Regarding Extractive Industries
In our October 2010 Newsletter, we reported on three
provisions contained in the Reform Act that require
additional disclosure relating to the extraction and use of
natural resources. On 15 December 2010 the SEC
proposed rules to implement these provisions and in each
case comments must be received by 31 January 2011. The
proposed rules will affect foreign private issuers that are
subject to the SEC reporting requirements.
Conflict Minerals. The SEC is proposing changes
to the annual reporting requirements of SEC
reporting issuers. The proposed rules require any
issuer for which “conflict minerals” (i.e., certain
minerals that are determined to be financing conflict
in the Democratic Republic of Congo and adjoining
countries) are necessary for the functionality or
production of such issuer’s products to disclose in the
body of its annual report whether its conflict minerals
originated in the Democratic Republic of Congo or an
adjoining country. If so, that issuer would be required
to furnish a separate report as an exhibit to the annual
report that includes a description of the measures
taken by the issuer to exercise due diligence on the
source and chain of custody of its conflict minerals.
In addition, the proposed rules impose certain
auditing, certification and publication requirements
relating to such report. The proposed rules are
available at
http://www.sec.gov/rules/proposed/2010/34-
63547.pdf.
Payments by Resource Extraction Issuers.
The SEC is also proposing rules, including
amendments to Form 20-F, to implement Section
13(q) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), which was added by
the Reform Act. Section 13(q) requires any resource
extraction issuer that is a SEC reporting company to
include in it annual report information relating to any
payments made by that issuer to the US or non-US
governments for the purpose of the commercial
development of oil, natural gas or minerals.
Information required to be disclosed relates to both
the type and total amount of payments made for each
project and to each government. The proposed rules
are available at
http://www.sec.gov/rules/proposed/2010/34-
63549.pdf.
Coal or Other Mine Safety. The SEC is proposing
amendments to its rules, including amendments to
Form 20-F, to implement and specify the scope and
application of Section 1503 of the Reform Act, which
has been in effect since August 2010. Section 1503(a)
requires issuers, including foreign private issuers,
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that, directly or indirectly, operate a coal or other
mine in the US to disclose in their periodic reports
filed with the SEC certain specified information about
mine health and safety for the period covered by the
report. Issuers that operate, directly or indirectly,
mines outside the United States would not have to
disclose information about such mines under the
proposed rules. However, to the extent mine safety
issues relating to non-US mines are material,
disclosure may already be required under current SEC
rules. In addition, the SEC is seeking comments on
whether it should require foreign private issuers to
disclose the receipt of certain orders or notices
relating to imminent danger or violations of mine
safety regulations on a current basis, as is required for
US issuers. The proposed rules are available at
http://www.sec.gov/rules/proposed/2010/33-
9164.pdf.
SEC Seeks Comments on Private Rights of Action
against Foreign Issuers under Exchange Act
Antifraud Provisions
On 25 October 2010 the SEC issued a release requesting
public comment to determine the extent to which private
rights of action under the antifraud provisions of the
Exchange Act should be extended to cover:
conduct within the United States that constitutes a
significant step in furtherance of the violation, even if
the securities transaction occurs outside the United
States and involves only foreign investors; and
conduct occurring outside the United States that has a
foreseeable substantial effect within the United States.
The request for comment is made pursuant to the Reform
Act, which made clear that the SEC may sue foreign
issuers, but called for a study of whether investors should
also be able to bring private class actions under Section
10(b) of the Exchange Act. The relevant provision of the
Reform Act was inspired by the US Supreme Court’s
decision in Morrison v. National Australia Bank on which
we reported in our July 2010 Newsletter and that
significantly limited the extraterritorial scope of Section
10(b). Comments should be submitted on or before 18
February 2011. A copy of the release is available at
http://www.sec.gov/rules/other/2010/34-63174.pdf.
SEC Issues Observations on Use of XBRL
In November 2010 the staff of the SEC’s Division of Risk,
Strategy, and Financial Innovation issued a report entitled
“Staff Observations From Review of Interactive Data
Financial Statements”. In this report, the staff made
observations from its review of filings with eXtensible
Business Reporting language (“XBRL”) exhibits submitted
from June through August of 2010 and identified common
issues. The staff also encouraged companies to review
their future XBRL filings to ensure they are prepared
consistently with the staff’s observations. The XBRL
requirements apply to non-US issuers that prepare their
financial statements in US GAAP or IFRS as issued by
IASB. Starting in June 2010 large accelerated filers using
US GAAP were required to use XBRL. All public
companies will need to report financial statement
information to the SEC using XBRL for fiscal periods
ending on or after 15 June 2011.
The report is available at
http://www.sec.gov/spotlight/xbrl/staff-review-
observations-110110.shtml.
SEC Updates Financial Reporting Manual
On 6 December 2010 the SEC’s Division of Corporation
Finance updated its “Financial Reporting Manual” for
issues related to, among others, stock-based
compensation in initial public offerings, internal control
over financial reporting, selected financial data and
MD&A.
The new manual is available at
http://www.sec.gov/divisions/corpfin/cffinancialreportin
gmanual.pdf.
Potential Trends to Monitor for the 2011 US Proxy Season and Beyond
On 19 November 2010 the ISS Corporate Governance
Services released its Corporate Governance Policy Updates
on voting recommendations. ISS or Institutional
Shareholder Services Inc., an influential proxy advisory
firm, undertakes an extensive process to update the
policies that inform its benchmark voting
recommendations each year and given ISS’s influence,
many public companies will want to consider these
policies in evaluating their governance and compensation
practices. The policy changes will be effective for meetings
occurring on or after 1 February 2011.
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ISS maintains different policies for the US, Canada,
Europe and International, which this year covers Japan,
South Africa and Australia. While, in general, the country
of incorporation of an issuer is the basis for the
application of a particular policy, ISS announced that
beginning with the 2011 policy update, it will apply its US
policies to the extent possible to issuers that are
incorporated outside of the United States, but are
considered domestic issuers by the SEC.
ISS’s influence in the US during the 2011 proxy season
may be particularly great this year, given that all US public
companies will be holding advisory votes on executive
compensation and on the frequency of future say on pay
votes. Companies are therefore well advised to review
their policies and practices in the relevant areas to
determine whether any changes are advisable in advance
of the 2011 proxy season.
The following are the key changes made to ISS’s US and
European benchmark corporate governance policies. The
full policy updates are available at
http://www.issgovernance.com/policy.
US Corporate Governance Policy
Frequency of Advisory Vote on Executive
Compensation (Management “Say on Pay”). This
policy item is being adopted in response to a new proxy
item required under the Reform Act as discussed above.
In addition to requiring advisory votes on compensation
(“say-on-pay”), the Reform Act requires that each proxy
for meetings occurring after 21 January 2011 include an
advisory voting item to determine whether, going forward,
the “say on pay” vote by shareholders to approve
compensation should occur every one, two or three years.
ISS is adopting a policy to recommend a vote for annual
advisory votes on compensation, which in their view
provide the most consistent and clear communication
channel for shareholder concerns about companies’
executive pay programmes. This frequency vote is not
binding.
Voting on Golden Parachutes in an Acquisition,
Merger, Consolidation, or Proposed Sale. As
required by the Reform Act and discussed above, the SEC
has proposed rules requiring that shareholders be
provided with a separate advisory vote on merger-related
compensation arrangements (“golden parachutes”). ISS
will evaluate proposals to approve a company’s golden
parachute compensation arrangements on a case-by-case
basis, consistent with its problematic pay practices related
to severance packages, but has identified the following
features that may lead to a negative recommendation:
Recently adopted or materially amended agreements
that include excise tax gross-up provisions or
modified single triggers (since the prior annual
meeting).
Single trigger payments that will happen immediately
upon a change of control, including cash payments
and the acceleration of performance-based equity
despite the failure to achieve performance measures.
Single-trigger vesting of equity based on a definition
of change of control that requires only shareholder
approval of the transaction (rather than
consummation).
Potentially excessive severance payments.
Recent amendments or other changes that make
packages so attractive as to influence merger
agreements that may not be in the best interests of
shareholders.
In case of substantial grand-fathered gross-ups, ISS
will look at the element that triggered the gross-up.
The company’s assertion that a proposed transaction
is conditioned on shareholder approval of the golden
parachute advisory vote, which ISS would consider
problematic from a corporate governance perspective.
If the golden parachute vote is incorporated into a
company’s regular say on pay vote, ISS will evaluate the
entire say on pay proposal in accordance with these
guidelines and may give greater weight to its analysis of
merger-related compensation arrangements, which may
lead to a more rigorous review.
Problematic Pay Practices and Say-on-Pay
Votes. ISS will continue to evaluate a company’s
executive pay and compensation practices on a case-by-
case basis. To the extent a company maintains
problematic pay practices, ISS will issue a negative
recommendation on say on pay votes, or if say-on-pay
votes are not being held in a particular year or in egregious
situations, a negative recommendation or withhold on the
re-election of compensation committee members, or, in
rare cases, the entire board, including the CEO.
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For the 2011 proxy season, ISS has revised the list of
egregious practices that, by themselves, are sufficiently
problematic to warrant a withhold or negative vote in
most circumstances and include:
Repricing or replacing underwater stock options
without prior shareholder approval.
Excessive perquisites or tax gross-ups.
Entering into new agreements, or extending existing
agreements, that contain “single trigger” (payments
without job loss or substantial diminution of duties)
or “modified single trigger” (executive may voluntarily
leave for any reason and still receive severance
package) change-in-control provisions, provide for
excise tax gross-ups for change-in-control payments
or provide for change-in-control payments in excess
of three times salary and bonus.
Problematic Pay Practices and Prospective
Commitments. Historically, when ISS has identified a
problematic pay practice, it has generally accepted a
commitment by the company that it would eliminate such
practice going forward and therefore preventing or
reversing a negative vote recommendation by ISS. ISS has
revised this policy and, effective immediately, will no
longer consider prospective commitments with respect to
problematic pay practices in its current voting
recommendations.
Voting on Director Nominees in Uncontested
Elections
Director Attendance. It is ISS’s current policy to
issue a negative recommendation or withhold its vote
from directors who attend less than 75 percent of
board and committee meetings without a valid
excuse. ISS is now clarifying that the only acceptable
reasons for directors’ absences it will consider are (i)
medical issues/illness; (ii) family emergencies; and
(iii) if the director’s total service was three meetings
or less and the director missed only one meeting.
In addition, ISS is now eliminating the company’s
option of providing the reason for absences to ISS
privately. According to the new policy, the reason(s)
for directors’ absences will only be considered by ISS
if disclosed in the proxy statement or another SEC
filing. In addition, if the disclosure is insufficient to
determine whether a director attended at least 75
percent of board or committee meetings in aggregate,
ISS will generally issue a negative recommendation or
withhold its vote.
Responsiveness to Majority-Supported
Shareholder Proposals. ISS has amended its
policy and will now vote withhold or against the entire
board if the board fails to act on a shareholder
proposal that received approval (i) by a majority of
the shares outstanding the previous year and (ii) by a
majority of shares cast in the last year and one of the
two previous years. This is a change from the
previous policy that required an approval in each of
the last two years and recognizes that a series of
successful shareholder proposals on topics of
paramount importance to shareholders may be
interrupted by a company through excluding a
shareholder proposal as allowed by SEC rules.
Shareholder Ability to Act by Written Consent.
The 2010 proxy season saw an increase in shareholder
proposals requesting shareholder’s ability to act by written
consent and this trend is likely to continue into the 2011
proxy season. Although ISS generally votes in favour of
these proposals, it recognizes the potential risk of abuse of
the right to act by written consent such as bypassing
procedural protections, particularly in hostile situations,
and the fact that it may not be beneficial for all
shareholders in certain circumstances. Given the evolving
corporate governance landscape and the alternative
mechanisms available to shareholders to express concern,
in evaluating these proposals ISS will be taking into
account a company’s overall governance practices and its
takeover defences, such as
An unfettered right for shareholders owning 10
percent of the shares to call special meetings.
“Unfettered right” means no restrictions on
agenda items or number of shareholders who
can form a group to reach the 10 percent
threshold, and only reasonable limits on when a
meeting can be called other than limits for up to
30 days after the last annual meeting and up to
90 days prior to the next annual meeting.
A majority vote standard in uncontested director
elections.
No non-shareholder approved pill.
An annually elected board.
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Net Operating Loss (“NOL”) Protective
Amendments or Pills. ISS will recommend voting
against a management proposal to approve either an
amendment to the company’s governing documents or a
poison pill to protect a company’s NOL if the term would
exceed the shorter of three years and the exhaustion of the
NOL.
European Corporate Governance Policy
Compensation Guidelines (Europe). ISS’s
assessment of compensation principles in Europe follows
the ISS Global Principles on Executive and Director
Compensation. Applying these principles, ISS has
formulated European Compensation Guidelines which
take into account local codes of governance, best market
practice and the recommendations published by the
European Commission.
The key changes to ISS’s compensation policy for 2011 are
to (i) strengthen the power of sanction in case of
discretionary payments or pay for failure, (ii) establish the
link between sustainable long-term performance and
actual pay and (iii) include reference to market practice
and disclosure with respect to severance payment and
other compensation practices.
As a general observation and in line with the
recommendation of the European Commission, ISS
believes that seeking annual shareholder approval for a
company’s compensation policy is a positive corporate
governance provision.
Executive Compensation-Related Proposals.
ISS will evaluate proposals that relate to executive
compensation on a case-by-case basis. It will issue a
negative recommendation if they fail to comply with
the following global principles:
Provide shareholders with clear and
comprehensive disclosures, in a timely manner
and with appropriate details.
Maintain an appropriate pay-for-performance
alignment with emphasis on long-term
shareholder value.
Avoid arrangements that risk “pay for failure”.
For example, severance pay agreements must
not be in excess of 24 months’ pay or any more
stringent local requirement.
Maintain an independent and effective
compensation committee. No executives may
serve on the board and in certain markets, the
compensation committee must be composed of
a majority of independent members.
Non-Executive Director Compensation.
According to ISS, proposals relating to non-executive
director compensation must avoid awarding
inappropriate pay to non-executive directors. ISS will
therefore generally issue a positive recommendation
for proposals to award cash fees. To the contrary, ISS
will issue a negative recommendation if
The proposal provides for the granting of stock
options or similarly structured equity
compensation or introduces retirement benefits
for non-executive directors.
The proposal provides for an excessive fee
amount or proposes an excessive increase in the
fees.
No appropriate disclosure of the fees paid to
non-executive directors is made prior to the
general meeting.
Proposals that provide for both cash and share-based
compensation and proposals that bundle executive
and non-executive director compensation will be
considered on a case-by-case basis.
Equity-Based Compensation Guidelines. ISS
will issue a positive recommendation for equity-based
compensation proposals for employees if the plan is
in line with the long-term shareholder interests and
aligns the award with shareholder value. In order to
achieve this
The volume of awards transferred must not be
excessive.
The plan must be sufficiently long-term in
nature and structure.
The awards must be granted at market price.
Any performance standards must be fully
disclosed, quantified and long-term, with
relative performance measures preferred.
Combined Chair/CEO (Europe). ISS’s current policy
is to issue a negative recommendation for a proposal to
have a combined chair/CEO at core companies in
European markets unless the company provides
17
compelling reasons for a combination of the roles, or if
there are exceptional circumstances that justify combining
the roles. While ISS is currently considering several
exceptional circumstances in issuing its recommendation,
in 2011 according to ISS, the only circumstances that can
justify that the two position not be split is if the company
provides assurance that the chair/CEO would only serve in
the combined role on an interim basis (of no more than
two years), with the intent of separating the roles within a
given time frame and in this case, ISS would make its vote
recommendation on a case-by-case basis. The company
would be required, however, to provide for adequate
control mechanisms on the board, such as a lead
independent director, a high overall level of board
independence, and a high level of independence on the
board’s key committees.
According to ISS, European markets have further moved
toward broad acceptance of the separation of the chair and
CEO roles, as reflected by general practice among
European public companies, as well as the adoption of
best practice recommendations to this end in local
corporate governance codes, and, therefore, the interim
appointment has come to represent the only potentially
acceptable explanation for a combination of the roles in
Europe.
By contrast, ISS has not changed its policy with respect to
independent chair proposals in the US and will continue
to evaluate these proposals on a case-by-case basis taking
into account whether the company has a robust
counterbalancing governance structure and any
problematic performance, governance or management
issues.
Noteworthy US Securities Law Litigation
Foreign issuer exposure to US securities fraud
actions curbed even further: In re Société
Générale and Plumbers’ Union v. Swiss Re.
Lower federal courts in the US continue to explore the
boundaries of the US Supreme Court’s landmark decision
in Morrison v. National Australia Bank. In Morrison, the
Court adopted the so-called “transactional test” and
limited the applicability of the US securities laws to fraud
that is “in connection with the purchase or sale of a
security listed on an American stock exchange, and the
purchase or sale of any other security in the United
States.” After the Morrison decision, several lower federal
courts have ruled that the “transactional test” bars
securities fraud claims brought by both foreign and US
investors, as long as the investors purchased the securities
on a foreign exchange.
Two recent federal court decisions have taken the
Morrison decision a step further. In In re Société
Générale, the plaintiff argued that Morrison should not
apply because the plaintiff was a US investor who
purchased Société Générale’s American Depositary
Receipts (“ADR”) on the US over-the-counter market. The
court, however, disagreed, stating that the antifraud
provisions of the US securities laws did not apply to the
plaintiff’s ADR transactions because “trade in ADRs is
considered to be a predominantly foreign securities
transaction.” The court explained that Société Générale’s
ADRs “were not traded on an official American securities
exchange [and] . . . were traded in a less formal market
with lower exposure to US-resident buyers.” As a result,
the court concluded that the purchases failed to satisfy
Morrison’s “transactional test” and dismissed the
plaintiff’s securities fraud claims with prejudice. Some
commentators have questioned whether this opinion
(which was limited to stocks traded over the counter) will
survive appellate review.
In Plumbers’ Union v. Swiss Re, the plaintiffs argued that
Morrison should not apply because the plaintiffs were US
residents that placed orders for Swiss Re stock in Chicago
from a trader who electronically executed the trades from
Chicago. The court rejected these arguments, stating that,
for purposes of determining whether a securities
transaction is “domestic” under Morrison, the location of
the investor and trader are immaterial. The court
explained that Swiss Re’s securities are listed only on the
SWX Swiss Exchange and, even though the purchase
order may have been electronically transmitted from the
US, the actual stock transaction was executed, cleared, and
settled on a subsidiary of the Swiss Exchange based in
London. Because the transaction occurred outside of the
US, the Court ruled that, under Morrison’s “transactional
test,” the plaintiffs’ securities fraud claims must be
dismissed.
These cases are important because, if they are upheld on
appeal, they would further limit foreign issuers’ exposure
to private securities fraud lawsuits in the US.
18
Issuers’ exposure in US securities fraud class
actions in context of failure to meet earnings
estimates limited: In re Oracle Corporation
Securities Litigation.
In November 2010 a federal appeals court in California
affirmed the dismissal of a securities fraud class action
because the plaintiffs’ failed to put forth sufficient
evidence on the element of loss causation. In Oracle, the
plaintiffs asserted that the company defrauded the market
by failing to disclose that certain of its products were
defective. The plaintiffs also asserted that the “truth”
about Oracle’s defective products was revealed to the
market when Oracle missed its quarterly earnings
projections. The federal appeals court rejected these
arguments, stating that in order to establish loss
causation, the plaintiffs must plead and prove that “the
market learn[ed] of a defendant’s fraudulent act or
practice, the market react[ed] to the fraudulent act or
practice, and a plaintiff suffer[ed] a loss as a result of the
market’s reaction.” After evaluating the totality of the
evidence in the case, the court held that the plaintiffs
failed to put forth evidence from which a reasonable jury
could find that Oracle’s share price dropped as a result of
the market learning of and reacting to the company’s
purported fraud, as opposed to the company’s poor
financial health generally. As a result, the court ruled that
the plaintiffs failed to establish the element of loss
causation and affirmed the district court’s decision
granting summary judgment for Oracle.
This case is important because it limits an issuer’s
exposure in securities fraud class actions when it fails to
meet earnings estimates.
Recent SEC/DOJ Enforcement Matters
DOJ and SEC settle FCPA charges against
Alcatel-Lucent.
On 27 December 2010 the SEC charged Alcatel-Lucent, SA
with violating the Foreign Corrupt Practices Act (“FCPA”)
by paying bribes to foreign government officials to illicitly
win business in Latin America and Asia. The SEC alleged
that Alcatel’s subsidiaries used sham consultants to pay
bribes to government officials in order to obtain or retain
lucrative telecommunications contracts and other
contracts and three Alcatel subsidiaries pleaded guilty to
FCPA bribery offenses. The pleadings detail a number of
compliance failings, mostly centred on due diligence on
third parties and providing travel to officials. A main
concern was that Alcatel had a fairly good paper
compliance programme that it failed to enforce or
deliberately evaded.
Without admitting or denying the SEC’s allegations,
Alcatel agreed to pay more than US$45 million to settle
the SEC’s charges and pay an additional US$92 million to
settle criminal charges brought on the same day by the US
Department of Justice. Alcatel also consented to a court
order permanently enjoining it from future violations of
the FCPA; ordering the disgorgement of wrongfully
obtained profits; and ordering it to comply with certain
undertakings including an independent compliance
monitor for a three-year term. In total, Alcatel agreed to
pay over US$229 million in fines, penalties, and
disgorgement to the DOJ and the SEC with respect to
contracts in which the company realised over US$45
million in profits.
This case is important because it demonstrates the SEC’s
increased willingness to enforce the FCPA against non-US
issuers and shows the importance of adequate internal
corporate control systems to detect and prevent bribery
payments that are properly enforced.
DOJ and SEC settle FCPA charges against
various companies in the oil services sector and a
freight forwarding company.
On 4 November 2010 the DOJ and SEC announced a
settlement with six oil services companies and a global
freight forwarding company for alleged violations of the
FCPA. The DOJ and SEC alleged that, between 2001 and
2007, the companies bribed customs officials in more than
10 countries in exchange for such perks as avoiding
applicable customs duties on imported goods, expediting
the importation of goods and equipment, and lowering tax
assessments. In order to resolve the coordinated DOJ and
SEC investigations, the companies agreed to pay US$80
million in civil disgorgement, interest, and penalties, and
criminal fines of US$156.5 million. The companies
involved in the settlement are Panalpina, Inc., Pride
International, Inc., Tidewater Inc., Transocean, Inc.,
GlobalSantaFe Corp., Noble Corporation, and Royal Dutch
Shell plc.
This case is important as it is the first time that the US
government has conducted a coordinated FCPA
investigation of a particular industrial sector and
19
represents the largest number of companies to settle FCPA
allegations simultaneously.
SEC settles Regulation FD enforcement action for
implied messages: Office Depot.
In October 2010 the SEC filed a civil complaint against
Office Depot and two of its executives for violating
Regulation FD for selectively communicating to analysts
that it would not meet quarterly earning estimates.
Regulation FD prohibits issuers or persons acting on their
behalf from “selectively” disclosing material non-public
information to securities analysts, institutional investors,
or other enumerated persons without first or
simultaneously disclosing that information to the general
public. The SEC alleged that Office Depot made a series of
one-on-one calls to analysts in which they signalled,
without directly stating, that Office Depot would not meet
its estimates. In response to these calls, the analysts
promptly lowered their estimates for the company. Office
Depot agreed to settle the SEC’s charges without
admitting or denying the allegations, and will pay a US$1
million penalty. The two senior executives also agreed to
settle the Regulation FD charges and will pay US$50,000
each.
This case is important because it demonstrates that the
SEC views Regulation FD broadly to include, not only
explicit selective statements, but also “indirect signalling”
that is not simultaneously disclosed to the general public.
Regulation FD prohibits selective disclosure by US issuers,
although its principles would broadly apply to foreign
private issuers as well.
DEVELOPMENTS SPECIFIC TO FINANCIAL INSTITUTIONS
EU Developments
AIFM Directive Adopted
The Alternative Investment Fund Managers Directive (the
“AIFM Directive”) was adopted by the European
Parliament on 11 November 2010. For the first time, EU
fund managers will be subject to pan-European
regulation. Alternative investment funds (“AIFs”),
including hedge, private equity, infrastructure and real
estate funds, located in the EU will be capable of being
marketed across Europe, by EU managers, on a
“passported” basis, removing the need for the current and
costly country-by-country legal analysis of marketing
restrictions. However, EU fund managers will be,
amongst others, subject to detailed reporting and
disclosure requirements, required to defer large portions
of bonuses to key staff, and restricted as to delegation and
use of service providers.
It is expected that the AIFM Directive will enter into force
in March/April 2011. However, its provisions will only
take effect once EU Member States have passed their own
legislation to implement the Directive – a process to be
completed two years after the Directive comes into effect
(i.e., March/April 2013).
The AIFM Directive will have far-reaching implications for
investment managers, their funds and service providers –
whether located in, or outside, the EU. Key highlights of
the AIFM Directive are as follows:
Compulsory regulation of EU alternative investment
fund managers.
Lighter “registration only” regime for smaller fund
managers.
Regulated managers will be subject to capital
requirements, and detailed disclosure and reporting
obligations.
Additional disclosure and other obligations for
managers of (i) funds engaged in substantial leverage
and (ii) funds acquiring significant stakes in
companies.
Restrictions on the ways in which a regulated
manager can remunerate its staff (including by
requiring large percentages of bonuses to be
deferred).
Allows funds to be marketed to professional investors
across the EU with a “passport” – but initially only
available to EU managers of EU funds.
For non-EU managers and non-EU funds, different
marketing regimes to be phased in and out over the
next eight years. A marketing “passport” is eventually
expected to be available, but will effectively require a
non-EU manager to be regulated under, and comply
with, the entire Directive as if it was an EU manager.
Managers required to ensure that each fund has a
depositary for holding assets. Restrictions on location
of depositary and near-strict liability for the
depositary.
20
Managers can only delegate if certain conditions are
satisfied, and the manager’s liability to the fund and
investors can never be affected by delegation.
Managers required to set leverage limits for each fund
and demonstrate that those limits are reasonable.
Member States may in exceptional circumstances
impose leverage limits on a manager.
Numerous provisions of the Directive to be fleshed
out by rules to be adopted over the coming months by
the new ESMA.
Access to European investors will be restricted for funds
managed by non-EU managers and even for many non-
EU funds that are managed by EU managers. A marketing
passport may become available for non-EU managers in
the future, but only if those non-EU managers agree to
submit themselves to the provisions of the AIFM
Directive. Below are key timeframes relating to the
marketing of funds in the EU:
2011 - 2013: Business as usual, except in Member
States which implement before the deadline for
implementation.
March/April 2013: Deadline for implementation in
EU Member States. National Private Placement
Regime commences for non-EU managers and EU
managers of non-EU funds.
Beginning 2015: Possible introduction of Passport
Regime, alongside the National Private Placement
Regime.
Beginning 2018: Possible falling away of National
Private Placement Regime, leaving Passport Regime
in place.
See our client publication for a comprehensive overview of
the AIFM Directive and its implications which is available
at:
http://www.shearman.com/files/Publication/8f16883f-
635b-4a7e-a2b1-
5bdede179084/Presentation/PublicationAttachment/b32
e9572-028d-4c43-a868-167a6136c317/FIA-111210-
European-Regulation-of-Fund-Managers.pdf.
CEBS Final Guidelines on Remuneration
On 10 December 2010 the Committee of European
Banking Supervisors (“CEBS”) published its final
Guidelines on Remuneration Policies and Practices. CEBS
was mandated to provide guidance on the implementation
of the remuneration principles set out in CRD3 (i.e., the
Banking Consolidation Directive and the Capital Adequacy
Directive, as amended, on which we reported in our April
2010 Newsletter). Member States were required to
implement CRD3 from 1 January 2011.
The Guidelines apply to all firms subject to the CRD,
including banks and investment firms that are subject to
MiFID. The Guidelines came into force on 1 January 2011
and therefore cover 2010 bonuses. However, due to the
tight deadline there is provision for regulators to take into
account that some measures may take time to implement.
With the aim of assisting firms to ensure that their
remuneration policies comply with CRD3, the final
Guidelines clarify how firms should apply the
requirements in practice and how supervisors can assess
compliance by firms, including the assessment of staff,
disclosure to public, severance payments and pensions,
share-like instruments and retention of deferred
remuneration.
EU Financial Supervisory Framework
The new EU Financial Supervisory Framework came into
effect on 1 January 2011 through the following legislation:
Regulation 1092/2010 on EU macroprudential
oversight of the financial system, establishing the
European Systemic Risk Board (“ESRB”).
Regulation 1093/2010 establishing the European
Banking Authority, seated in London.
Regulation 1094/2010 establishing the European
Insurance and Occupational Pensions Authority
(“EIOPA”), seated in Frankfurt.
Regulation 1095/2010 establishing the European
Securities and Markets Authority (“ESMA”), seated in
Paris.
Directive 2010/78/EU amending Directives
1998/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC,
2003/71/EC, 2004/39/EC, 2004/109/EC,
2005/60/EC, 2006/48/EC, 2006/49/EC,
2009/65/EC in respect of the powers of the EBA, the
EIOPA and the ESMA (the “Omnibus I Directive”).
Regulation 1096/2010 conferring specific tasks on the
European Central Bank concerning the functioning of
the ESRB.
21
Commission Communication on Sanctions in the Financial Services Sector
On 8 December 2010 the European Commission
published a communication which sets out the key areas
of divergence across Member States in the national
sanctioning regimes in the financial services sector and its
policy proposals for achieving greater convergence and
efficiency of those regimes. The Commission suggests that
an EU legislative proposal is the best method for
addressing the following shortcomings:
Regulators do not have the same types of sanctioning
powers for certain violations of financial services law.
The level of pecuniary sanctions varies widely across
Member States.
Some regulators cannot impose sanctions on both
natural and legal persons.
Regulators do not take into account the same criteria
in the application of sanctions.
The range of violations for criminal sanctions differs
across the EU.
The level of application of sanctions varies across
Member States.
The proposed legislation would be sector-specific and
would include the introduction of criminal sanctions for
the most serious violations of financial services law. The
Commission will also consider further convergence on
other issues such as the rules of burden of proof which
may be necessary to ensure that sanctions are effectively
applied. Responses to the consultation are due by 19
February 2011.
UK Developments
FSA Finalises Revised Remuneration Code
On 17 December 2010 the FSA issued the final form of the
revised Remuneration Code (the “Code”) to take into
account changes required by the Capital Requirements
Directive (“CRD”, made up of the Recast Banking
Consolidation Directive (2006/48/EC) and the Recast
Capital Adequacy Directive (2006/49/EC)). The revised
Code will encompass a much larger group of entities,
including all banks and building societies, investment
banks, asset and fund managers, financial advisors and
stockbrokers.
The Code applies to those categories of staff whose
professional activities have a material impact on the firm’s
risk profile, including directors, senior management, risk
takers, those undertaking control functions and employees
whose total remuneration puts them in the same
remuneration bracket as senior management, collectively
referred to as “Code Staff”.
Individuals who are in a “significant influence function”,
employed by a branch or subsidiary based in the UK, but
nevertheless located outside the UK, also fall within the
definition of Code Staff. The Code equally applies to
individuals on secondment to a firm in the UK even if such
individuals remain employed and remunerated by a non-
UK entity in a group of companies.
The following are key remuneration structure provisions:
The firm should set appropriately balanced ratios
between fixed and variable remuneration; the fixed
element should be sufficiently high to allow a fully
flexible remuneration structure, including the option
to pay no variable remuneration at all.
At least 40% of variable remuneration of Code Staff
must be deferred with a vesting period of not less than
three to five years; the percentage should be as high as
60% where variable remuneration is above £500,000.
In line with CEBS guidelines, at least 50% of variable
remuneration should consist of shares; this
requirement should be applied proportionally to both
deferred and vested portions.
Firms must not offer guaranteed bonuses unless they
are “exceptional” (i.e., the firm is undergoing a major
restructuring and there are prudential reasons for the
use of such bonuses), occur in the context of hiring
Code Staff and are limited to the first year of service
only.
The Code contains a “de-minimis” exception, pursuant to
which provisions of the Code that relate to remuneration
structures will not apply to an individual whose variable
remuneration is equal to or less that 33% of their total
remuneration and their total remuneration is not more
than £500,000.
The current form of the Code contains the principle of
“proportionality”, which allows firms to match
remuneration policies and practices to a firm’s individual
22
circumstances and to disapply certain provisions of the
revised Code.
Firms already within the scope of the Code were required
to comply in full with the revised Code from 1 January
2011, other firms coming within the Code for the first time
must comply as soon as practicable and in any event by 31
July 2011.
On 17 December 2010 the FSA also published its final
rules on remuneration disclosure. The FSA announced
that:
The FSA will implement requirements on disclosure
of remuneration which are consistent with CRD3.
The proposals on frequency and form of disclosure
provide sufficient flexibility for firms to comply
without undue difficulty.
The four-tier approach to disclosure is a proportional
approach that takes account of firms’ risk profiles to
the extent that is practicable and enforceable.
Group entities will have to report on a consolidated
basis at the level of the highest proportionality tier of
any entity in the group.
The next steps for implementation are as follows:
By 28 February 2011, the FSA must make a decision
on whether to put forward proposals for consultation
on the question of extending the scope of the
disclosure requirements to third-country BIPRU
firms in relation to their activities carried out from
establishments in the UK. If the FSA do decide to
make a consultation they will aim to do so in spring
2011.
By 31 December 2011, all firms within the scope of the
rules must have made the first annual requisite
disclosures on remuneration.
BIS Consultation on Reforming the Consumer Credit Regime
In December 2010 BIS issued a consultation on reforming
the consumer credit regime. The consultation sets out the
Government’s proposal to create a new consumer
protection and markets authority (“CPMA” – a working
title) which would be founded upon a clear remit for
consumer protection. To this end, the consultation
includes proposals to transfer responsibility for consumer
protection from the Office of Fair Trading (“OFT”) to the
CPMA.
The consultation also addresses the competition and
general consumer functions of the OFT by analysing and
requesting views on two options for reform:
A regulatory regime for consumer credit under the
CPMA within a legal framework based on the model
set out in the Financial Services and Markets Act
2000 and therefore consistent with the regulation of
other retail financial services; or
A specific consumer credit regime based on the
Consumer Credit Act 1974.
The paper further addresses important issues relating to
transitional arrangements, should consumer credit
responsibility be transferred to the CPMA. These include
the application of a new regime to existing agreements
and consumer credit licences.
Responses to the consultation are requested by 22 March
2011 in anticipation that the Government will produce a
response to the consultation in the spring. A copy of the
consultation is available at
http://www.bis.gov.uk/Consultations/consultation-
reforming-consumer-credit?cat=open.
MoJ Consults on Reforming Her Majesty’s Courts Service and the Tribunals Service
On 30 November 2010 the Ministry of Justice (“MoJ”)
published a consultation paper including proposals to
unify Her Majesty's Courts Service and the Tribunals
Service. The new organisation, to be called Her Majesty's
Courts and Tribunals Services (“HMCTS”), would start
operating on 1 April 2011. If the proposals proceed,
financial institutions will have to appeal decisions of the
FSA, the OFT and the MoJ to HMCTS instead of the
Upper Tribunal (Tax and Chancery Chamber), the First-
tier Tribunal (Consumer Credit) and the First-tier
Tribunal (Claims Management Services), respectively.
UK Government Publishes Final Legislation Introducing Bank Levy
On 9 December 2010 the Government announced the
publication of final legislation to implement the bank levy
which is intended to encourage banks to move to less risky
funding profiles and ensure that banks make a fair
23
contribution given the risks they present to the financial
system and wider economy. The legislation forms part
of the Finance Bill 2011 which is following the
legislative passage through the Houses of Parliament.
The bank levy is likely to affect UK banks, banking
groups, building societies, foreign banking groups
operating in the UK through permanent establishments
or subsidiaries and UK banks and banking sub-groups
in non-banking groups. According to the
announcement, the levy will take effect from 1 January
2011 and will be permanent. The rate for 2011 will be
0.05 per cent, rising to 0.075 per cent from 2012
resulting in annual revenues of around £2.5 billion.
Possible Change to FSA Code of Market Conduct following Spector Decision
The FSA has consulted on amending the Code of
Market following the European Court of Justice’s
decision in Spector Photo Group NV, Chris Van
Raemdonck v Commissie voor het Bank, Financie-en-
Assurantiewezen (Case C-45/08). In the Spector case,
the ECJ found that the fact that a person who holds
inside information trades in financial instruments to
which that information relates implies that the person
has ‘used that information’. However, that is without
prejudice to the person’s rights of defence and right to
rebut that presumption. The FSA considers that the
wording in the Code of Market Conduct suggests that it
would need evidence of a person’s intention to prove
insider dealing and that this is not necessary due to the
Spector decision. Responses to the consultation were
due on 6 December 2010.
Our client publication on the Spector case is available
at: http://www.shearman.com/the-spector-photo-case-
-ecj-rules-on-the-interpretation-of-the-market-abuse-
directive-02-05-2010/.
German Developments
Act on the Restructuring and Unwinding of Credit Institutions and the Extension of the Statute of Limitations on the Liability of Governing Bodies of Stock Corporations
The Act, effective as of 1 January 2011, fundamentally
reforms the laws and instruments applicable to credit
institutions that fail to prevent insolvency by
introducing a new two-step process specifically
designed for the restructuring and reorganisation of
distressed credit institutions. In addition, a so-called
restructuring fund will be put in place with the purpose
to cover the costs of restructuring measures for failing
system-relevant credit institutions. The restructuring
fund will be funded by annual and extraordinary levies
on all credit institutions. Further, the Act extends the
statute of limitations with regard to the liability of
members of the management board and supervisory
board of a corporation, which is listed on a stock
exchange, and credit institutions from five to ten years.
Act for the Implementation of the amended Banking Directive and the amended Capital Adequacy Directive
The Act implements, inter alia, Directive 2009/44/EC
and Directive 2009/111/EC into German law. Among
others, the Act amends the rules applicable to
securitisation transactions as set forth in the German
Banking Act. As of 1 January 2011, the issuer of a
securitised claim has to retain a stake of at least 5%
(10% as of 1 January 2015), while institutions investing
in such securities are obliged to carry out an extensive
examination of their investment. The Act further
amends the rules for financial institutions regarding the
recognition of hybrid capital as Tier 1 capital and the
management of liquidity risks
.
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