Wachtell Lipton Discusses UK Corporate Governance Code

The Financial Reporting Council on July 16 issued a revised corporate governance code and announced that a revised investor stewardship code will be issued before year-end. The code and related materials are available at www.frc.org.uk.

The revised code contains two provisions that will be of great interest. They will undoubtedly be relied upon in efforts to update the various U.S. corporate governance codes. They will also be used to further the efforts to expand the sustainability and stakeholder concerns of U.S. boards.

First, the introduction to the code makes note that shareholder primacy needs to be moderated and that … Read more

Skadden Discusses Latest Legislation to Expand Foreign Investment Review

In large part as a response to China’s national industrial goals and subsequent Chinese acquisitions of U.S. and European companies that are technology leaders in key industries, the U.S. government and a number of European governments are seeking to expand the scope of their national security reviews of foreign investments. Below, we outline ongoing developments affecting U.S. national security reviews of inbound foreign investment.1

FIRRMA Moves Ahead

The Senate and House have recently passed their respective versions of the Foreign Investment Risk Review Modernization Act (FIRRMA) legislation that was origi­nally introduced in November 2017 with significant bipartisan support. FIRRMA … Read more

Kirkland & Ellis Discusses CFIUS Reform

On May 22, 2018, the Senate Committee on Banking, Housing, and Urban Affairs  held a hearing to mark up its draft proposed amendment to the Foreign Investment Risk Review Modernization Act (“FIRRMA”). Initially introduced on November 6, 2017, with strong bipartisan support, FIRRMA would — for the first time since 2007 — reform the process by which the Committee on Foreign Investment in the United States (“CFIUS”) assesses “covered transactions.” Proposed in response to a new and evolving macro security environment, FIRRMA would radically impact planning for long-term enterprise investment strategy as well as discrete transactions for U.S. and non-U.S. … Read more

Debevoise Discusses the U.S. CLOUD Act and Europe’s Response

Electronically stored data play a vital role in criminal investigations. The framework for the transfer of such data across national borders continues to be difficult to navigate. Recent legislative developments in the United States and the European Union signal a change in the approach to cross-border data transfer for law enforcement purposes on both sides of the Atlantic.

This Client Update sets out the main provisions of the recently adopted U.S. Clarifying Lawful Overseas Use of Data Act (“CLOUD Act”) and of the draft EU regulation on sharing electronic evidence (“e-Evidence Regulation”). It then considers their implications not only for … Read more

Telecom Italia Vote Shows How Activists and Passive Investors Can Work Together

It’s not every day that Italian capitalism can be heralded as a bastion of transparency. But the showdown on May 4 at Telecom Italia’s board meeting between U.S. activist fund Elliott Management and French conglomerate Groupe Bolloré proved to be one such opportunity.

That is because in Italy, unlike in the United States and other advanced economies, shareholder votes are part of the public record. As such, the vote in Milan was the perfect arena to observe some of the most important fault lines in shareholder capitalism today.

Ultimately, the case turned on the votes of large passive institutional investors, … Read more

Legal Insider Trading in Europe Makes the Case for Enforcement

Evidence about the relative importance of private and public enforcement of securities laws for financial markets is inconclusive. The recently introduced Market Abuse Directive (MAD) (2003/6/EC) sets a European Union (EU) standard for regulation of insider dealing and market manipulation. Under Article 18 of the MAD, EU member states had to implement by October 12, 2004, local regulations that require the disclosure of corporate insider trading. The regulation represents a unique natural experiment that was introduced not in response to a specific case but as a mandate (exogenously) to EU countries (and Switzerland) simultaneously. This experiment allows us to examine … Read more

Cleary Gottlieb on Latest Developments in European Leveraged Finance

EVOLUTION OF THE TRANSFERABILITY CLAUSE

Early 2000s

  • Lenders’ freedom to transfer their participations in large leveraged loans has been gradually eroded by developments introduced through the last few credit cycles.
  • By the time of the pre-crisis peak in 2007/2008, the provisions governing freedom to transfer had settled on the following:
    • Transfers had to be to “another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets”.
    • Borrower consent to any transfer was required (which

Read more

Corporate Governance and Human Capital: Evidence from SMBO Boards

Consistent with predictions made in the late 1980s, the buyout market has grown tremendously and, together with the private equity (PE) model, has become a global phenomenon. One consequence of the maturity of the market is substantial secondary management buyout (SMBO) activity. In an SMBO, the ownership structure and governance mechanism are retained as the initial (primary) buyout is acquired by new PE financiers. The popularity of SMBOs has created some controversy, especially regarding whether the benefits for PE funds come at the expense of the longer term health of portfolio companies.

In our recent paper we examine reasons for … Read more

Davis Polk Discusses the Impact of European Data Protection Regulation on U.S. M&A

The winds of change will shortly sweep across the data privacy landscape in the European Union (“E.U.”) and the gale will be felt worldwide.  The European General Data Protection Regulation (“GDPR”) will come into force on May 25, 2018.[1]  Currently, some U.S. M&A practitioners prioritize U.S. law, absent a target with a strong business nexus with the E.U., but the GDPR’s extraterritorial scope, together with increased fines for non-compliance (up to the greater of 20,000,000 Euros or four percent of annual global revenue), will force its consideration into U.S. M&A activity.

We discuss below the … Read more

Kirkland & Ellis Discusses Trump Administration’s Ban on Dealings in Venezuelan Cryptocurrency

On March 19, 2018, President Trump issued an Executive Order “Taking Additional Steps to Address the Situation in Venezuela” (“Executive Order”) that prohibits U.S. persons from engaging in dealings in any digital currency, digital coin, or digital token issued by, for, or on behalf of the government of Venezuela.[i] The same day, the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”) issued corresponding guidance that lays the groundwork for potential sanctions related to digital currency transactions more generally. Taken together, these actions reflect tightening sanctions on Venezuela, and may foreshadow OFAC asserting jurisdiction over cryptocurrency in … Read more

Davis Polk Discusses Greater Risk of Scrutiny for More UK Deals

The UK’s Competition and Markets Authority (CMA) has announced proposals to tighten its jurisdiction over mergers in the military, quantum technology and computing hardware industries. The changes, which are subject to a consultation period through April 12, 2018, would lower the thresholds at which the CMA and the Secretary of State can exercise their powers of review and intervention.

Specifically, the CMA is proposing to:

  • reduce the ‘target turnover threshold’ from £70 million to £1 million, and
  • broaden the ‘share of supply threshold’ to catch targets with 25% or more share of supply in the UK, even if the acquirer

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Morrison & Foerster Discusses Corruption Perceptions Index for 2017

On February 21, 2018, Transparency International (“TI”) released its annual Corruption Perceptions Index (“CPI”) for 2017, surveying and ranking perceptions of public sector corruption in 180 countries and territories, on a scale of 0 (highly corrupt) to 100 (very clean).  A score close to 100 indicates more freedoms, access to information about public spending, stronger standards of integrity for public officials, and independent judicial systems.  Scores below 50 are considered failing, possibly due to lack of government accountability and lack of oversight, while scores below 30 indicate severe systemic corruption that violates human rights, prevents sustainable development and fuels … Read more

The Rise of U.S.-Listed VIEs from China: Balancing State Control and Access to Foreign Capital

We investigate Chinese firms’ use of variable interest entities (VIEs) to evade Chinese regulation on foreign ownership and list in the U.S. We find that the use of VIEs for such ends is widespread, growing, and associated with valuation discounts of as much as 30 percent relative to Chinese non-VIE firms listed in the U.S. The discount varies predictably with events that change the risk of government intervention and managerial malfeasance, and is tempered by better oversight and lower regulatory risk. To protect shareholders, VIE firms are more likely to have these characteristics as well as to curry government favor … Read more

Skadden Discusses Novel Theories Emerging in Merger Enforcement

Antitrust merger enforcement historically has focused on horizontal mergers — consolidation of two firms that compete directly in the same space. This is especially true in the U.S., where antitrust authorities have challenged few vertical mergers — those of a firm with one of its customers or suppliers — and are even less prone to scrutinize conglomerate mergers that marry complementary assets, or transactions that may affect  innovation competition that isn’t tied to specific products or markets.

The European Union’s antitrust regulator, the European Commission, has been more apt to examine vertical issues, conglomer­ate effects and innovation competition, pushing the … Read more

Cross-Border Cooperation in Financial Regulation: Crossing the Fintech Bridge

The growth of Fintech, the use of technology in providing financial services, has accelerated rapidly since the 2008 global financial crisis (GFC). While Fintech provides both economic benefits and increasing levels of financial inclusion, it also comes with risks. These risks can affect individual users of new Fintech offerings or schemes that are fraudulent or susceptible to cyber-attacks. Importantly, the rapid rise of Fintech may also affect broader financial and economic systems.[1]

In a recent article, we examine the implications of the rise of Fintech for achieving effective cooperation in the area of financial regulation. While the disruptive and … Read more

Paul Weiss Reviews Economic Sanctions and Anti-Money Laundering Developments for 2017

Economic sanctions and anti-money laundering (“AML”) remain at the forefront of U.S. regulatory priorities. Indeed, in 2017, federal and state agencies imposed over $2.5 billion in penalties for sanctions/AML violations. And, despite its generally deregulatory agenda, the Trump administration has taken a rigorous approach in this area, particularly with respect to sanctions.  At the state level, the New York Department of Financial Services (“DFS”) continues to take aggressive action on both the regulatory and enforcement fronts.  This memorandum surveys major developments and trends in 2017 and provides an outlook for the year ahead.  We also provide some practical advice for … Read more

Debevoise on Brexit: The “No-deal Deal”

It has become common in Britain to argue about whether those who forcefully suggested that a vote to leave the EU would have a very negative effect on the UK economy were wide of the mark.  This argument may be rather pointless and, since the UK has not actually left yet, somewhat premature.  It is also an argument that will be very hard to settle, because measurable economic impacts have a wide variety of underlying causes, and to identify an effect is to beg the question, rather than answer it.  So this week, when Lord O’Neill – prominent pro-EU campaigner … Read more

Europe Faces Problem of Strong Shareholders and Weak Outside Investors

Corporate governance literature has largely focused on listed firms with dispersed ownership, but those with controlling stockholders are increasingly important in the United States and Europe. In the U.S., the likes of Google, Facebook, and other technology firms have gone public with their founders retaining a controlling stake. This has prompted interest in understanding the impact that controlling shareholders have on firm value and the problems they pose for outside investors. Moreover, in Europe, where most listed firms have controlling shareholders, the control exercised by those shareholders has been blamed for the gap in stock market development relative to the … Read more

How Chinese Investments Can Pass CFIUS Scrutiny

It is no secret that Chinese investments in the United States can face an uphill battle at the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS is an interagency committee of the U.S. government that has broad jurisdiction to review transactions that could result in control of a U.S. business by a foreign person. The CFIUS process is a joint, voluntary process that parties initiate based on the perceived risk that the President of the United States might require divestment post closing if there are national security or critical infrastructure concerns associated with a particular transaction within the … Read more

Materiality Disclosures and Their Effect on Investors’ Decisions

Auditors consider misstatements or omissions in financial statements to be material if they could influence the economic decisions of financial statement users. Additionally, materiality affects how auditors plan and perform an audit and evaluate identified misstatements. Regulators in the UK (Financial Reporting Council) and the Netherlands (Nederlandse Beroepsorganisatie van Accountants) require auditors to disclose their threshold for materiality in auditors’ reports of listed companies. The International Auditing and Assurance Standards Board does not require disclosure of the materiality threshold in an audit report but does not preclude auditors from voluntarily disclosing that threshold.[1] In the U.S., however, the Public … Read more