Category Archives: Corporate/Commercial Law

Lundbeck: the EU General Court Endorses the Reasoning of the European Commission in Relation to Reverse Payment Settlements

I. Introduction

With the Lundbeck Decision, the European Commission (the “Decision” and the “Commission,” respectively) ended its ten-year investigation on reverse payment settlements and found that the Danish pharmaceutical company, Lundbeck, and four generics producers had concluded anticompetitive agreements, in breach of Article 101 of the Treaty on the Functioning of the European Union (the “TFEU”).[1]  According to the Commission, this would have allowed Lundbeck to keep the price of its drug citalopram artificially high and delay the entry of cheaper medicines into the EU market.[2]

On 8 September 2016, the EU General Court (the “General Court”) confirmed that certain pharmaceutical “reverse payment settlements” can constitute a breach of the EU antitrust rules (the “Ruling”).[3]  Under the so-called “reverse payment settlement agreements”, an original pharmaceutical manufacturer, or “originator”, settles an IP challenge from a manufacturer of generics by paying the latter to stay out of the market.

II. Background

Lundbeck is “a global pharmaceutical company specializing in psychiatric and neurological disorders”.[4] These include medicinal products for treating depression.[5]  From the late 1970s, Lundbeck developed and patented an antidepressant medicinal product containing the active ingredient citalopram’.[6]

After its basic patent for the citalopram molecule had expired, Lundbeck only held a number of the so-called “process” patents, which, according to the Commission, provided only “a more limited protection”.[7]  In particular, Lundbeck had filed a salt crystallisation process patent.[8]

According to the Commission, in 2002, Lundbeck concluded six agreements concerning citalopram with four entities active in the production or sale of generic medicinal products, namely Merck KGaA / Generics (UK), Alpharma, Arrow, and Ranbaxy.  Always according to the Commission, in return for the generic undertakings’ commitment not to enter the citalopram market, Lundbeck paid them substantial amounts.[9]  In addition, Lundbeck purchased stocks of generic products for the sole purpose of destroying them, and offered guaranteed profits in a distribution agreement.[10]

In October 2003, the Commission was informed of the existence of the agreements at issue by the Konkurrence- og Forbrugerstyrelsen (the “KFST”, the Danish authority for competition and consumers).[11]  The Commission took over the case and, by the decision of 19 June 2013, made the following findings:  (i) Lundbeck and the generic undertakings were at least potential competitors;[12] and (ii) the agreements at issue constituted restrictions of competition by object, in breach of the prohibition of anti-competitive agreements provided under Article 101 TFEU.[13]  The Commission imposed a total fine of €93.7 million on Lundbeck and € 52.2 million on the generic undertakings.  The Commission took into consideration the length of its investigation (almost ten years) as a mitigating circumstance which led to fine reductions of 10%.[14]  Lundbeck and the generic undertakings brought actions before the General Court, seeking the annulment of the Commission’s decision.  The Court dismissed the actions brought by Lundbeck and the generic undertakings and confirmed the fines imposed on them by the Commission.[15]

After the Lundbeck case, in 2013 and 2014, the Commission imposed fines on companies in two other reverse settlement investigations – one concerning fentanyl, a pain-killer[16], and the other concerning perindopril, a cardiovascular medicine.[17]  The Fentanyl decision was not appealed.  Several appeals against the Servier decision are pending before the General Court.[18]  In 2016, in the Paroxetine Investigation, the UK Competition and Market Authority (“CMA”) issued infringement decisions to a number of companies regarding ”pay-for-delay” agreements over the supply of an antidepressant.[19] These agreements were found to be an infringement by object and effect. In March 2017, the CMA issued a statement of objections relating to an agreement aimed at delaying the entry into the market for the supply of Hydrocortisone tablets. The CMA has not yet issued its final decision.[20]

In addition, since 2009, the Commission has been continuously monitoring patent settlements in order to identify settlements which it regards as “potentially problematic” from an antitrust perspective, namely those that limit generic entry against a value transfer from an originator to a generic company.  The latest report was published in December 2016.[21]

III. The Ruling

First, like the Commission, the Court analysed whether Lundbeck and the generic manufacturers concerned were indeed potential competitors at the time the agreements at issue were concluded.[22]  The General Court made the following findings in this regard:

In order for an agreement to restrict potential competition, it must be established that, had an agreement not been concluded, the competitors would have had “real concrete possibilities” of entering that market.[23]  The Court held that the Commission had carried out a careful examination, as regards each of the generic undertakings concerned, of the real concrete possibilities they had of entering the market.  In doing so, the Commission relied on evidence such as the investments already made and the steps taken in order to obtain a marketing authorisation[24]

Moreover, the Court noted that in general, the generic undertakings had several real concrete possibilities of entering the market at the time the agreements at issue were concluded.[25]  Those possible routes included, inter alia, launching the generic product with the possibility of having to face infringement proceedings brought by Lundbeck (i.e., the so-called launching ‘at risk’).[26]  More precisely, the General Court was of the view that “the presumption of validity cannot be equated with a presumption of illegality of generic products validly placed on the market which the patent holder deems to be infringing the patent”.[27]  Consequently, the Court, continued, “’at risk’ entry is not unlawful in itself”.[28]

As rightly noted by commentators, these considerations introduce a further layer of complexity in the already intricate relationship between EU Competition law and IP law. In addition, since the right to exclude lies at the core of any IP right and (if there is no competing product) to have a monopoly is not illegal, unless it is attained or maintained by improper means,[29] it can be argued that the Commission’s findings infringes Article 345 TFEU, according to which “[t]he Treaties shall not prejudice the rules in the Member States governing the system of property ownership”.  Thus, Ibañez Colomo has noted that “Lundbeck departs from the principle whereby an agreement is not restrictive by object where it remains within the substantive scope of an intellectual property right”.[30]  This principle would derive from the Erauw-Jacquery,[31] Coditel II,[32] BAT v. Commission[33] and Nungesser[34] rulings of the ECJ.  Ibañez Colomo’s point becomes particularly clear at para. 335 of the (Lundbeck) Ruling where the General Court expressly noted that “even if the restrictions set out in the agreements at issue fall within the scope of the Lundbeck patents – that is to say that the agreements prevented only the market entry of generic citalopram deemed to potentially infringe those patents by the parties to the agreements and not that of every type of generic citalopram – they would nonetheless constitute restrictions on competition ‘by object’ since, inter alia, they prevented or rendered pointless any type of challenge to Lundbeck’s patents before the national courts, whereas, according to the Commission, that type of challenge is part of normal competition in relation to patents (recitals 603 to 605, 625, 641 and 674)”.[35]

Second, the Court analysed whether the Commission was entitled to conclude that the agreements at issue constituted a restriction of competition by object, a point to which we will turn next.

IV. Conclusions:  On Reverse Payments as Restrictions of Competition by Object

The Lundbeck ruling brings a number of what Donald Rumsfeld would probably refer to as “known unknowns”, that is things we know we do not know, in relation to reverse payment settlements.[36]  Indeed, the findings of the Lundbeck ruling can be summarised as follows (see also the table below):

  1. There are certain patent settlements which are likely to be considered compatible with Article 101 TFEU. This is the case of settlements:a. In which, in the words of the General Court, “(i) payment is linked to the strength of the patent, as perceived by each of the parties; (ii) [payment] is necessary in order to find an acceptable and legitimate solution in the eyes of two parties and (iii) [payment] is not accompanied by restrictions intended to delay the market entry of generics”.[37]

    The inclusion of the word “and” is worrying.  The requirements set out in the preceding paragraph should be alternative and not cumulative.  Otherwise for a settlement to be lawful it must not delay entry (which probably is enough, in and of itself, to avoid the antitrust concern, namely, a delayed entry of generics) and it must be necessary (i.e., it probably needs to meet the requirements of an ancillary restraints defence, more on which below) and the payment might be linked to the strength of the patent “as perceived by each of the parties”.  Such an intrinsically subjective requirement appears to the writer as particularly complicated to administrate and at odds with the objective nature of Article 101(1) TFEU.  It would appear that the Court is encouraging conversations such as the following: “let’s settle, but only if we can ensure the settlement reflects (and comes across as reflecting) your and my perception of the strength of the patent (and a number of other cumulative requirements my lawyers and I need to meet), otherwise we might have an antitrust concern”.

    b. Qualifying for an ancillary restraints defence. e., settlements in relation to which the parties to the settlement (for the burden of proof will be on them) can demonstrate they are objectively necessary and proportionate in order to defend their IP rights.[38]

  1. There are certain patent settlements which are likely to be considered incompatible with Article 101 TFEU as restrictions of competition by object. The ruling is not particularly clear in this regard.a. A literal reading of paragraph 334 of Lundbeck could potentially make “problematic” each patent settlement “where they [provide] for the exclusion from the market of one of the parties, which was at the very least a potential competitor of the other party, for a certain period, and where they were accompanied by a transfer of value from the patent holder to the generic undertaking liable to infringe that patent (‘reverse payments’).”

    b. A more holistic reading of Lundbeck would confine the Commission’s finding to the facts of the case. Even though it is difficult to pinpoint what the court considered to be the decisive factors when stating that a reserve settlement constituted a restriction by object, the following factors appear to have been relevant:

    1. The allegedly “disproportionate nature” of such payments “combined with other factors, such as the fact that the amounts of those payments seemed to correspond at least to the profit anticipated by the generic undertaking”.[39] Referring to the US Supreme Court ruling in Actavis,[40] the Court indicated that “the size of a reverse payment may constitute an indicator of the strength or weakness of a patent”.[41]  According to the Commission “the higher the originator undertaking estimates the chance of its patent being found invalid or not infringed, and the higher the damage to the originator undertaking resulting from successful generic entry, the more money it will be willing to pay the generic undertaking to avoid that risk”.[42]
    2. Indeed, the correspondence between the amount of the payment that seemed and the profit anticipated by the generic undertakings if they had entered the market.[43] According to the Commission “the value which Lundbeck transferred, took into consideration the turnover or profit the generic undertaking expected if it had successfully entered the market”. [44]
    3. The absence of provisions allowing the generic undertakings to launch their product on the market upon the expiry of the agreement without having to fear infringement actions brought by Lundbeck.[45]
    4. The presence in those agreements of restrictions going beyond the scope of Lundbeck’s patents,[46] such as restrictions with regard to citalopram products that could have been produced in a non-infringing manner.[47]
    5. According to the Court, “the agreement at issue transformed the uncertainty in relation to the outcome of such litigation into the certainty that the generics would not enter the market which may also constitute a restriction on competition by object when such limits do not result from an assessment, by the parties of the merits of the exclusive right at issue, but rather from the size of the reverse payment which, in such case, overshadows that assessment and induces the generic undertaking not to pursue its independent efforts to enter the market”.[48] The generics thus no longer had an incentive to continue their independent efforts to enter the market.[49]
  1. There are certain patent settlements which (presumably) are considered to be incompatible with Article 101 TFEU as restrictions of competition by their effects. Hic sunt dracones.  More precisely, given that none of the pay-for-delay decisions dealt with by the  Commission conducted an effects analysis, we are left without guidance as to how that analysis will be conducted.  Again, a known unknown.  The Commission’s ten-year investigation on reverse payment settlements has not shed light to how to conduct an effects analysis under Article 101(1) TFEU.  We are left, perhaps, with the findings of the US Supreme Court in Actavis, according to which, “the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment and the lack of any other convincing justification.  The existence and degree of any anticompetitive consequences may also vary among industries”.[50]

Moreover, to the extent that the case for restrictions of competition by object is administrability, this author cannot but note that the Lundbeck ruling does not constitute a positive evolution.  The General Court noted that “it is established that certain collusive behaviour […] may be considered so likely to have negative effects, in particular on the price, quantity or quality of the goods and services, that it may be considered redundant, for the purposes of applying Article 101 TFEU to prove that they have actual effects on the market”.[51]  However, the Decision has 464 pages.  Given that the Fentanyl and Servier decisions occupy 147 and 813 pages, respectively, in investigations that lasted for almost ten years, 27 months and 5 years (again, respectively), one cannot but wonder whether the Commission’s resources would have been better spent analysing the actual effects of the agreement and not defending a legal category.

 

   [1]   Commission Decision C(2013) 3803 of 19 June 2013 relating to a proceeding under Article 101 [TFEU] and Article 53 of the EEA Agreement, Case AT.39226 — Lundbeck (the “Decision”).
   [2]   See European Commission Press Release IP/13/563, of 19 June 2013, available athttp://europa.eu/rapid/press-release_IP-13-563_en.htm?locale=en
   [3]   See T-472/13 Lundbeck v. Commission [NYR] (the “Ruling”), of 8 September 2016.
   [4]   See, for more detail, http://www.lundbeck.com/global/about-us.
   [5]   See Ruling, at para. 1.
   [6]   See Ruling, at para. 16.
   [7]   See European Commission Press Release IP/13/563, 19 June 2013, available athttp://europa.eu/rapid/press-release_IP-13-563_en.htm?locale=en.  It should be recalled, in this regard, that, according to Article 27 of the TRIPS (WTO) Agreement, “patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application“.
   [8]   See Ruling, at para. 20.
   [9]   See Ruling, at paras. 26; 35; 39; 42-43 and 47-48.
  [10]   See Ruling, at para. 26; 35; 39; 42-43; 47-48.
  [11]   See Danish Competition and Consumer Authority Press Release 1120-0289-0039/VIS/SEK, 28 January 2004 , available at: http://www.kfst.dk/Afgoerelsesdatabase/Konkurrenceomraadet/Styrelsesafgoerelser/2004/Undersoegelse-af-Lundbeck?tc=E538038EB1E04A96B9964BE4C0F85F46 (Only available in Danish)
  [12]   See Decision at paras. 610 ff.
  [13]   See Decision at paras. 647 ff.
  [14]   See Decision, at paras. 1306, 1349 and 1380.
  [15]   See Ruling, Operative part.
  [16]   See European Commission Press Release IP/13/1233, Commission fines Johnson & Johnson and Novartis € 16 million for delaying market entry of generic pain-killer fentanyl, 10 December 2013, available at: http://europa.eu/rapid/press-release_IP-13-1233_en.htm.
  [17]   See European Commission Press Release IP/14/799, 9 July 2014, Commission fines Servier and five generic companies for curbing entry of cheaper versions of cardiovascular medicine, available at: http://europa.eu/rapid/press-release_IP-14-799_en.htm.
  [18]   See Case T-147/00 Laboratoires Servier v Commission.
  [19]   See Case CE/9531-11 Paroxetine, 12 February 2016.  For a comment on the case see Ezrachi, A., EU Competition Law: An Analytical Guide to the Leading Cases, 5th Edition, Bloomsbury, 2016, 396
  [20]   See CMA Press Release of 3 March 2017, available at: https://www.gov.uk/government/news/cma-alleges-anti-competitive-agreements-for-hydrocortisone-tablets. See also Nathalie Ska, Philipp Werner, and Christian Paul, “Pay-for-delay Agreements: Why the EU Should Judge them by their Effects,  Oxford Journal of European Competition Law & Practice, 3 May 2017.
  [21]   See, European Commission, “7th Report on the Monitoring of Patent Settlements (period: January-December 2015)”, 13 December 2016, available at:  http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report7_en.pdf
  [22]   See Ruling.  The General Court separately analysed each agreement.  See, inter alia, in relation to Lundbeck and Merck, para. 225; in relation to Lundbeck and Arrow, paras. 266-270, in relation to Lundbeck and Alpharma, para. 290 and, in relation to Lundbeck and Ranbaxy, para. 330.
  [23]   See Ruling, at para. 100.  See further Case T-360/90 E.ON Ruhrgas and E.ON v Commission, at para. 86.
  [24]   See Ruling, at para. 131.
  [25]   See Ruling, at para. 97.  See further Decision, at para. 635.
  [26]   See Ruling, at paras. 121.
  [27]   See Ruling, at paras. 97.
[28]   See Ruling, at para. 122.
  [29]   See David J. Teece and Edward F. Sherry, “On patent monopolies: An economic re-appraisal”, CPI Antitrust Chronicle April 2017, available at: https://www.competitionpolicyinternational.com/wp-content/uploads/2017/04/CPI-Teece-Sherry.pdf.
  [30]   See Ibañez Colomo, P., “GC Judgment in Case T-472/13, Lundbeck v Commission: on patents and Schrödinger’s cat”, at Chillin’ Competition, 13 September 2016, available athttps://chillingcompetition.com/2016/09/13/gc-judgment-in-case-t-47213-lundbeck-v-commission-on-patents-and-schrodingers-cat/.
  [31]   See Case 27/87 SPRL Louis Erauw-Jacquery v La Hesbignonne SC, of 19 April 1988.
  [32]   See Case 262/81 Coditel SA, Compagnie generale pour la diffusion de la television, and others v Cine-Vog Films SA and others, of 6 October 1982.
  [33]   See Case 35/83 BAT Cigaretten-Fabriken GmbH v Commission, of 30 January 1985.
  [34]   See Case 258/78 Nungesser v Commission, of 8 June 1982.
  [35]   See Ruling, at paragraph 335.
  [36]   See Rumsfeld, D., Known Unknown:  A Memoir, Sentinel, 2011.
  [37]   See Ruling, at para. 350.
  [38]   See Ruling, at paras. 451 ff, in particular, at paras. 458 and 460.
  [39]   See Ruling, at paras. 354; 355.
  [40]   See Federal Trade Commission v. Actavis, 570 US (2013).
  [41]   See Ruling, at paragraph 353.
  [42]   See Decision, at para. 640.
  [43]   See Ruling, at paras. 354; 383; 414.
  [44]   See Decision, at paras. 6; 788; 824; 874; 962; 1013; 1087.
  [45]   See Ruling, at paras. 354; 383; 410.
  [46]   See Ruling, at paras. 354; 383.
  [47]   See Decision para. 693.
  [48]   See Ruling, at para. 336.
[49]   See Ruling, at paras. 355; 360.
  [50]   See Federal Trade Commission v Actavis 570 US 2013.
  [51]   See Ruing, at para. 341.

The Wait is Over: The ICC’s New Expedited Procedure Rules (and other Updates)

The year 2017 could mark an important turning point for institutional international arbitration. On 20 October 2016, the International Chamber of Commerce (“ICC”) adopted a list of important revisions to its Rules of Arbitration (“ICC Rules”)[1].  By the time this article is published, for example, new “Expedited Procedure Rules” will have come into effect on 1 March 2017. These revisions aim to improve the efficiency and transparency of ICC arbitration.  Time will tell if they actually will.

Through the years, a number of concerns have been raised by parties – individuals, businesses, states, and international organizations – adopting or considering adopting institutional arbitration as a means of resolving their international disputes. These concerns are numerous, yet three common threads are a general desire to make international arbitration more affordable, a wish for more efficient tribunals, and a call for a change in a culture that is often seen as opaque. At the heart of this debate, and fueling calls for change, are an increase in the length of hearings, a significant increase in the breadth and volume of document production, delays in obtaining awards, and the absence of an obligation on the part of certain institutions to provide reasons for institutional decisions that impact an arbitration. Such calls are not surprising since international arbitration was born of the desire to provide parties with a low-cost, effective and efficient alternative to litigation before the courts.  One illustration of the problem has been a significant decline in the number of so-called small cases (i.e. claims involving amounts below US$ 1 million) administered by the ICC[2].

The adoption and implementation of the Expedited Procedure is an attempt by the ICC to address these concerns and to ensure that ICC arbitration remains an attractive means of international dispute resolution notwithstanding the level of complexity of the case and the amount at stake. While some critics may argue that these changes long overdue, they should nevertheless be welcomed by users of international arbitration as well as by counsel and arbitrators.

In December 2016, in a text published in the ICC Dispute Resolution Bulletin, the President of the ICC International Court of Arbitration, Alexi Mourre, described as follows the spirit and rationale behind the Expedited Procedure Rules:

“Some of our colleagues sometimes say in conferences – half jokingly perhaps, but half seriously as well – that in arbitration parties get to choose two out of the three advantages of quality, speed and limited costs; if you have speed and quality, you should be prepared for increased costs, but with less speed, etc. ICC takes issue with that. Our message is that if the parties so decide, they can get quality, speed and limited costs. This is the aim of ICC’s new Expedited Procedure Rules, adopted by the ICC Executive Board on 20 October 2016.”[3]

As to the Expedited Procedure itself, three elements are particularly noteworthy:

  • Under the Expedited Procedure Rules, notwithstanding any contrary term or provision of the arbitration agreement binding the parties, the Court may now submit the arbitration case to a sole arbitrator (as opposed to a three-person tribunal)[4];
  • Under the Expedited Procedures Rules, the arbitrator has six months from the date of the case management conference to render the award[5];
  • The Expedited Procedures Rules expressly confers very extensive powers on the arbitrator with regard to procedure.

The first of these has obvious and broad ramifications. It has the potential to reduce the problems relating to the constitution of the tribunal including its fees, the number of objections raised, the question of the availability of its members, and the time needed to deliberate and agree on the award. On the other hand, it limits party autonomy in a way that has rarely been seen before. It deprives parties of the traditional ability to appoint one arbitrator each – an arbitrator who may, at least in their view, have a better understanding of their concerns – as members of a three-person tribunal, potentially impacting, some say, the legitimacy or integrity of the award itself.

The second of these elements is also significant. Under the Expedited Procedure Rules, the case management conference has to take place at the latest 15 days after the transmission of the file to the arbitrator[6]. The analysis and the drafting of the award will usually take about a month. If the arbitral tribunal has six months after the case management conference to render the award – which might include one month of deliberation and drafting – the remaining time does not leave much time for the process to unfold. Although in all cases the ICC Court may grant an extension if necessary[7], there will be a tremendous pressure on each participant to the arbitration process to get the work done within a short delay.

Also noteworthy, the Expedited Procedures Rules expressly confers very extensive powers on the arbitrator with regard to procedure. Article 3 provides that:

  • “[…] the arbitral tribunal may, after consultation with the parties, decide not to allow requests for document production or to limit the number, length and scope of written submissions and written witness evidence (both fact witnesses and experts)” (para. 4);
  • “[t]he arbitral tribunal may, after consulting the parties, decide the dispute solely on the basis of the documents submitted by the parties, with no hearing and no examination of witnesses or experts”(para. 5).

It is to be expected that these rules will give rise to claims of due process violation by unsatisfied parties.

In addition to the innovations described above, it is to be noted that Article 23 of the ICC Rules which provides that the first task of a tribunal is to prepare, in collaboration with the parties, a document referred to as “Terms of References” – one of the hallmarks of ICC arbitration – will not apply to the Expedited Procedure[8]. Furthermore, once the arbitral tribunal is constituted under the Expedited Procedure Rules, the parties will not be entitled to present new claims without authorization of the tribunal[9]. Article 3 of Appendix VI of the ICC Rules sets up the elements that the arbitral tribunal could consider to decide whether a new claim should or should not be authorized, namely its nature, its cost implications, the stage of the arbitration, and any other relevant circumstances.

Most importantly, the rules contained in the new Article 30 of the ICC Rules and in the Appendix VI will apply automatically if three conditions are met: (1) the arbitration agreement is concluded after 1 March 2017, (2) the amount in dispute is below US$ 2 million, and (3) the parties have not explicitly chosen to derogate from the expedited procedure[10].  Going forward this means among other things that parties negotiating an arbitration agreement should consider seriously the possibility of “opting-out” where they feel that the Expedited Procedure is not ideally suited to the type of dispute envisaged. An example of an opting-out clause is available at the end of the revised ICC Rules. Such a clause should be drafted carefully keeping in mind that if it is not clear enough, the Expedited Procedure Rules will apply and the parties will be deemed to have agreed to them. In other words, problems might inadvertently arise where arbitration agreements contradict the provisions contained in the Expedited Rules. Without entirely opting-out, the parties could also potentially decide in advance to derogate to some sections of the Rules only, for example to have three arbitrators instead of a sole one. The ICC Court might however have the power to ignore such exemption if it finds that it violates the spirit of the Rules and the Appendix (see: Article 5 of Appendix VI of the ICC’s Rules).

While these Expedited Procedure Rules will apply on an opt-out basis to all arbitration agreements satisfying the conditions mentioned above, the ICC Court retains the power to decide that the Expedited Procedure Rules should not apply in a particular case[11]. The current Rules and explanatory Note to Parties do not indicate on what basis such a decision would be made. One may presume that a key factor will be the level of complexity of the case. This is based on the premise that the amount in dispute does not always – although often – reflect the level of complexity of a case. Following the same logic, parties to a dispute for which the amount in dispute is greater than US$ 2 million, should also consider, where appropriate, the possibility of “opting-in”. Indeed, nothing prevents parties from agreeing to use the Expedited Procedure. On the contrary, this should even be encouraged where the circumstances allow it.

Finally, it is worth mentioning that the fees under the Expedited Procedures Rules, which include the administrative fees paid to the ICC and the fees due to the sole arbitrator, are 20% lower than the fees applicable to other ICC proceedings[12].

These new rules, while novel in the context of ICC arbitration, are largely inspired by the existing rules of arbitration institutions, for example the Singapore International Arbitration Centre (SIAC), and the International Centre for Dispute Resolution (ICDR). As mentioned above, this set of changes form part of a broader effort by the ICC to enhance efficiency and transparency in international arbitration. They are part of a broader reform in which the streamlining procedure has not been left out. The following changes to the ordinary procedure should also be mentioned:

  • Article 23(2) has been amended to reduce the time-limit for the establishment of Terms of Reference from two months to one month;
  • Article 11(4) has been amended, in order to allow the ICC Court to provide reasons for its decisions made on challenges, as well as for other decisions;

Survey after survey shows that arbitration is the preferred disputed resolution mechanism for cross-border disputes. When it comes to decide between institutional arbitration and ad hoc arbitration, users more often than not choose the former. The ICC is itself the love-child of institutional arbitration. In 2016, the annual International Dispute Resolution Survey for Technology, Media and Telecoms Dispute showed that the ICC was the choice of 64% of the respondents. For EU based respondents, this number goes up to 74%[13]. If these revisions to the ICC Rules have the intended effect, that is to reduce the time and cost of arbitrating these claims, they could confirm and increase the existing trend. The manner in which the Expedited Procedure Rules will be applied will be of significant importance considering the many applicable exceptions. This will determine whether or not the entry into force of these rules will be a turning point for the ICC or more like a stone thrown into a pond.

 

[1] These rules are available at http://www.iccwbo.org/Data/Documents/Business-Services/Dispute-Resolution-Services/Arbitration/Arbitration-Rules/ICC-Rules-of-Arbitration-2017-Revision/.

[2] See the ICC Statistics from 1999 to 2015 available at http://www.iccwbo.org/Products-and-Services/Arbitration-and-ADR/Arbitration/Introduction-to-ICC-Arbitration/Statistics/.

[3] Alexis Mourre, “Message from the President” (2016) 2 ICC Bull. 3, at 4.

[4] See Expedited Rules at Appendix VI, Art. 2(1)-(2).

[5] See id, Art. 4(1).

[6] See id, Art. 3(3).

[7] See id, Art. 3(3) and 4(1).

[8] See id, Art. 3(1).

[9] See id, Art. 3(2).

[10] See ICC Rules, Art. 30(1)-(3).

[11] See Expedited Rules at Appendix VI, Art. 1(4).

[12] See id, Art. 4(2) and Appendix III of the ICC Rules.

[13] The report from Queen Mary University of London and Pinsent Masons is available at http://www.arbitration.qmul.ac.uk/research/2016/.

RECENT DEVELOPMENTS – COMPANY FORMATIONS IN GREECE

The Greek Private Capital Company and recent legislative initiatives to meet current business requirements.  

According to the Greek legislation, the following types are the main capital company formations for conducting business in Greece and are usually preferred over entrepreneurships, in principal due to the limited liability of their shareholders : (i) the Greek limited liability by shares company (“Societe Anonyme” – “SA”), (ii) the limited liability company (“EPE”), (iii) the Private Capital Company (“PCC”- “I.K.E.”) and (iv) the European company (“Societas Europea” -“SE”). While the SA has been for years the most common company formation in Greece, recently the P.C.C. has started to gain significant ground due to fewer formal requirements for incorporation that enable its operation literally few days after its registration at the Business Register.

Introduced in Greece in virtue of the law n. 4072/2012, the P.C.C is incorporated pursuant to a simple private agreement signed by its founders. The articles of association are included in the agreement and can be customized according to the special needs or objects of the desired business. The agreement for the company’s incorporation should then be filed with the competent – determined by the place of the company’s registered seat and main business activity – Business Register and the whole procedure for the company’s establishment is completed at the One-Stop-Shop department of the Business Register, within 10-15 days after the submission of the required documentation. Simultaneously with the company’s registration at the Business Register, the company is also directly registered at the Greek Tax Authorities, obtaining a Tax Identification Number, which is necessary for starting conducting business according to its objects. For any amendments to the articles of association or for any shares sale and purchase agreements thereof during the lifetime of the company, a simple private agreement suffices; amendments to the articles of association should be also filed with the Business Register and they come into force upon their registration.

The articles of association of a P.C.C, any amendments thereof and the shareholders’ resolutions could be drafted in one of the official EU languages, but the Greek version shall prevail concerning relations between the company and its shareholders on one hand and third parties on the other hand. The founders of a P.C.C. resolve upon the amount of the share capital, without any limitation as per its minimum amount (this could be even zero). Since the previously imposed tax of 1% on the company’s initial share capital has been abolished (according to law n. 4254/2014, yet remaining for any share capital increase), actually there are not any restrictions towards determining the initial share capital, apart from that this should be deposited at the company’s treasury or bank account within 30 days of registration.

Regarding management, the P.C.C. is managed by one or more administrator(s), whose powers of representation are determined in the articles of association and by the shareholders’ resolutions. The administrator should be a natural person/individual, Greek or European citizen holding a Tax Payer Identification number in Greece, and in case of a non-European resident, a Visa is normally requested (Visa-D for business executives), according to the provisions of law n. 4251/2014 (Greek Immigration and Social Integration Code). The administrator should be also registered at the Greek social security system and pay the respective social security contributions. The administrator is liable towards the company for any breach of the company’s articles of association, of the law or of the shareholders’ resolutions, as well as for any damage caused as a result of breach of duties. Such liability does not exist in case of actions or omissions based on a lawful resolution taken by the shareholders or on reasonable business decision, conducted in good faith, based on sufficient information and only towards the corporate interest. If more managers acted together, they are jointly and severally liable. The shareholders may discharge the administrator(s) from any and all liability during the annual General Meeting of the shareholders which resolves upon the approval of the financial statements of the previous fiscal year.

As per the reporting requirements, apart from obligation to file with the Business Register any amendment to the articles of association as well as any resolution taken by the shareholders or the administrator that should be filed according to the law, the annual financial statements should be also filed with the Business Register and then approved by the shareholders. Greek Law n. 4403/2016, which incorporated into the Greek legal system the EU Directive 2013/34/EC, has recently introduced several developments concerning the commercial companies’ financial statements by regulating their preparation and publication based on their classification, aiming at the facilitation of cross-border investment and the improvement of Union-wide comparability and public confidence in financial statements and reports through enhanced and consistent specific disclosures. This regulation, which is applicable to all capital –by shares – companies, attempts to balance between the interests of the addressees of financial statements and the interest of undertakings in not being unduly burdened with reporting requirements.

The main advantages of the P.C.C. and the flexibility for its incorporation and operation are obvious when compared with the corresponding legal requirements for the incorporation of a Societe Anonyme (“SA”); governed by mandatory legislation (“ius cogens”), i.e. the codified law n. 2190/1920, the Greek SA is incorporated through a notarial deed, executed before a notary public in Greece, which includes the company’s articles of association. The share capital should be always indicated in money even if the shareholders’ contributions consist in kind. The share capital, which should be at least 24.000,00 Euro, must be paid either in cash or in kind within two (2) months after registration. After the execution of the notarial deed for the incorporation, the company should be registered at the competent Business Register and upon its registration, it acquires legal personality. The rest of corporate documentation (minutes of General Meetings of the shareholders and minutes/resolutions of the Board of Directors) do not have to be notarized, except for the General Meetings of the Shareholders in case of one sole shareholder. The SA is managed by a Board of Directors, consisted of at least three members, which may be either individuals or legal entities (in such case for the exercise of management a representative should be appointed). There is not any restriction as per the nationality or residence of the members of the Board of Directors. It should be noted that for some specific activities, SA is the only available company type according to the law and several parameters, beyond the abovementioned basic framework, should be taken into consideration in order to decide upon between P.C.C. and S.A.

The Business Register in Greece has been recently reformed providing access to the existing data base via its website (www.businessregistry.gr), which can be used both by the registered businesses and the public. Until the full integration of all Greek companies/businesses at the general Business Registry at the end of year 2012, different registration systems and registers existed for each company/business type. Thereupon, the reformation of the Business Register has facilitated significantly the capability of the companies to comply with their reporting obligations under the law through its portal (www.businessportal.gr) but has also enhanced the actual publicity of the companies’ data, as required by the law, and thus has reinforced the transparency and the security of the transactions.  Through the platform www.businessportal.gr any business can carry out the entire procedure for submitting a registration request to the Business Register, filing the necessary documents and payment of the relevant fees. The processing and verification of any request as well as the completion of registration are also conducted electronically through the system.

Recently in virtue of Greek Law n. 4441/2016, “e-One Stop Shop” has been introduced. This new, modern institution aims at the incorporation of the most popular types of companies in Greece, through a procedure completed entirely on an electronic platform practicing techniques like “e-ID Authentication Process” (EU REG 910/2014), links between other e-platforms like “TAXIS” (Greek Tax Online Platform) and taking all necessary actions in order for a company to be incorporated online, thus accelerating and facilitating business and corporate activity in Greece.

The combination of a single general Business Register with the establishment of the one-stop-shops for the incorporation of companies constitutes a major step towards simplification of the basic procedures of the Greek business environment, aiming to meet the needs and requirements of the parties involved and the effective use and exploitation of information collected.

In 2017, Greece while being at the heart of the economic recession affecting all financial markets globally and especially EU, struggles to keep up with the current requirements in business activity, by amending its relevant legislation towards the modernization of its corporate, tax and business system thus making great efforts to further promote productivity, investment and employment. Newly introduced, flexible, corporate forms like P.C.C, new institutions and platforms like the Business Register where most of the ordinary corporate actions are completed online, constitute the modern ‘’tools” provided to any entrepreneur who wishes to make business in the country, forming an effective solution by putting in place a flexible framework which can reduce obstacles to the smooth functioning of the market, hoping to make Greece an attractive country not only to visit and explore but also to invest.

The Italian benefit corporation: to profit and …. beyond!

Benefit corporations are for-profit companies that – in addition to maximize shareholder’s value and profits – undertake to expand their purpose to explicitly include the creation of public benefit and the commitment to carry out their activities in a responsible, sustainable and transparent way, in favour of persons, communities and environment. They are being introduced in some legal systems to meet the global trends demanding greater accountability and transparency from business and stimulate a new role that business can and should play in society.

Italy is the first country after US to have introduced in its legal system (Law n. 208 of December 28, 2015, hereinafter “Law”) the so called “società benefit” (hereinafter “SB”). The main characteristics of the SB are taken from the US benefit corporation, which was firstly introduced in the US legal system in 2010 in Maryland and then in other 29 US States.

What is a benefit corporation?

The distinguishing features of the Italian SB are: (i) the legal duty to create general public benefit in addition to financial return; (ii) to carry out its activities in a responsible, sustainable and transparent way in favour of persons, communities, environment, cultural and social activities, associations and other stakeholders (hereinafter collectively “Beneficiaries”); and (iii) the impact of the SB’s activities must be assessed annually by the directors with a written report, and must take into account the requirements set forth in Annex 4 to the Law.

The Italian legislator did not create a new form of corporation but provided for that any company can change its status and become an SB. It is the intentional creation of social and economic benefit that differentiates the SB from traditional for-profit and non-profit entities. In an SB the directors are committed to pursue the general benefit, while the market and the public must be correctly and transparently informed on how the corporation is achieving its goals.

What are the advantages of becoming an SB?

Benefit corporations can help meet the demands of those who are interested in having their business help solve social and environmental challenges. Becoming an SB can also help the company to grow its business and market share, since an increasing number of consumers expect companies to act and align their policies to a sustainable growth, to take into consideration not only profit but also values like the need of social communities and the impact on the environment.

The benefit activities

The activity/ies of public benefit selected by the SB must be specifically indicated in the SB’s bylaws and must be achieved taking into account and balancing both the shareholder’s interest and the interest of the Beneficiaries. The SB must achieve a general public benefit (“beneficio comune”).  This is defined both to induce a positive impact or reduce the negative effects on the Beneficiaries and other stakeholders (“altri portatori di interesse”). Other stakeholders are the persons or groups who benefit from the SB’s activities, such as workers, customers, suppliers, financial backers, creditors, public administration and civil society.

The annual report

The SB must prepare annually a report (to be attached to the yearly financials) where it assesses the impact of its activities on the general public benefit. The report must be published on the SB’s website. The report must include: (i) a description of the ways and actions implemented by the directors to purse general public benefit during the year and any circumstances that have hindered or delayed its creation; (ii) an assessment of the SB’s performance determined taking into account the standards outlined in the EAS; (iii) a section outlining the new goals that the SB wants to achieve in the following year.

Third-party validation

The report must be prepared applying a third-party standard (“standard di valutazione esterno” or “EAS”) that must be: (i) comprehensive because it assesses the effects of the business and its operations upon the general public benefit; (ii) developed by an entity that is not controlled by the SB; (iii) credible because it is developed by an entity that both: (a) has access to necessary expertise to assess overall corporate social and environmental performance; and (b) uses a balanced multi-stakeholder approach to develop the standard, including a reasonable public comment period; (iv) transparent because the following information is publicly available: (a) the criteria considered when measuring the overall social and environmental performance of a business; (b) the relative weightings, if any, of those criteria; (c) the identity of the directors, officers, material owners, and the governing body of the entity that developed and controls revisions to the standard; (d) the process by which revisions to the standard and changes to the membership of the governing body are made; (e) an accounting of the revenue and sources of financial support with sufficient detail to disclose any relationships that could reasonably be considered to present a potential conflict of interest.

The EAS is not to be confused with the B Lab certification that – contrary to the EAS – is not mandatory. An SB can become a B Corp (Benefit certified corporation) by meeting the B Lab standards and obtain the relevant certification. B Lab is a non-profit organization that serves a global movement of people using business as a force for good.

The areas of assessment

The assessment of the effects of the SB’s activities, must include the following areas: (i) SB’s corporate governance:  so that to assess the degree of transparency and commitment of the corporation for the achievement of the benefit indicated; (ii) employees: to determine the relationship with workers and associates in terms of salary, other benefits, training opportunities, quality of the workplace, internal communication, flexibility and health & safety at work; (iii) other stakeholders: to assess the relationship of the corporation with suppliers, the territory and local communities, charity activities, donations, cultural and social activities and any other actions implemented to support the local development and the SB’s supply chain; (iv) environment: to assess the impact of the SB’s products and activities regarding the use of resources, energy, raw materials, the manufacturing, logistic and distribution cycles, the use, consumption and disposal of the products.

Directors’ duties

In addition to the general duties that directors have under Italian corporation laws, the SB legislation set forth specific duties that SB’s directors must comply with. Section 380 of the Law set forth that the SB must be managed in way to balance the interests of shareholders, the pursuing of the general public benefit and the interests of the other Beneficiaries. The corporation must appoint the person/s who shall have the responsibility to achieve the goals indicated, who can be one of the directors but also an officer of the corporation or a third party, taking however into account the general duty that directors have to put place a corporate governance structure that is adequate for the dimensions and nature of the corporation.  If this duty is delegated to a third party, it is appropriate that the delegate has enough experience in the specific sector that the SB has chosen for achieving the general benefit.

Directors responsibilities

SB’s directors (like directors of any other corporation) must act in the best interest of the corporation and in compliance with the obligations set forth by the law and the corporation’s bylaws. Directors have a duty of care, duty to act knowledgeably (for example, with the appropriate skill and professionalism) and to monitor the actions of the other directors.

The extent of these duties and responsibilities and the standard of care required for each director depend on the director’s office and specific expertise. Directors may have civil liability duties towards: (i) the corporation, if they have caused damage to that corporation due to the breach of the law, the corporation bylaws, or the general duties; (ii) the corporation’s creditors, if the directors have breached the specific rules regarding the preservation of the corporate assets, and those assets are insufficient to pay the creditors off; (iii) each shareholder and each third party, if they have suffered direct damage from an act performed with fraud or gross negligence by the directors.

As to the SB, it is questionable and still to be assessed by jurisprudence, whether directors can have any liability towards the other Beneficiaries. In any event, directors are not accountable and responsible for the negative results of the corporation provided that their decisions were taken with adequate diligence and with the goal of achieving the corporate object. SB’s directors are however liable in the event they fail to appoint a person who has the duty to supervise, control and be responsible to implement all actions necessary to achieve the general benefit. The Law does not provide any sanctions for failure to prepare the annual report but, since this is mandatory obligation, directors shall be liable also in this latter case.

Sanctions for non-compliance

The Law set forth that the SB which fails to achieve the general benefit indicated, is subject to the sanctions established by Legislative Decree 145/2007 (governing unfair competition and misleading advertising) and by Legislative Decree 206/2005 (the so called Consumer’s Code, with particular reference to the rules regarding the prohibition of unfair commercial practices). This provision was enforced in order to guarantee that all information disclosed to the public are true and accurate so to avoid that an SB that does not comply with the Law, take any illicit advantage with respect to its competitors as well to avoid any distortion of the information provided and disclosed to consumers. It is the Italian Competition Authority (Autorità garante della concorrenza e del mercato) that shall have the duty to sanction any non-complying SB, with administrative sanctions provided for by the law.

 

References: Assonime, Circolare n. 19, of June 20, 2016; Esela – The first European benefit corporation: blurring the lines between social and business; Le società benefitLa nuova prospettiva di una Corporate Social Responsibility con Commitment (Fondazione nazionale dei Commercialisti); Domenico Siclari – Le società benefit nell’ordinamento italiano; Autorità garante della concorrenza e del mercato http://www.agcm.it/en

Counseling Early Stage Companies: Advance Preparation for the Exit

Representing early stage, high-growth companies often involves supporting a team of entrepreneurs to take a business from an idea, through commercial launch and market penetration, to a successful exit, often through an acquisition by a strategic or financial purchaser.  The speed and intensity of the client’s activity can be tremendous.  Under the pressure of achieving critical product development or revenue milestones – often driven by the client company’s investors – management will sometimes forego certain basic contracting, human resources and capitalisation  management measures.   Unfortunately, these short cuts will surface during the exit transaction, where the acquirer’s due diligence on the target company will spot these shortcomings in order to identify potential risks as well as opportunities to revalue the target company’s assets and business and reduce the purchase price.  The attorney representing the early stage company can streamline the exit transaction and minimise adverse due diligence discoveries by helping the client institute the following four relatively simple disciplines at the company’s outset (or at least at the outset of the counsel’s engagement), well in advance of any merger and acquisition considerations.

  1. Protect and Preserve Company Intellectual Property. For many early stage companies, intellectual property assets can represent the core of the company’s value at exit.  Those assets, of course, are generated by employees and contractors working on behalf of the company.  In the course of the company’s history, employees and independent contractors come and go.  However, sophisticated acquirers will often probe the target company’s files for potential intellectual property “leaks” or gaps – situations where employee or contractor inventions or developments may not clearly belong to the target company.The simple but often neglected solution to this due diligence red flag is drafting and religiously using a standard employment agreement or independent contractor/consultancy agreement with all new employees and service providers. These standard agreements should contain the following basic covenants:I. Confidentiality: Provisions prohibiting an employee or independent contractor from disclosing or otherwise using the company’s confidential information both during the relationship and for multiple years beyond the term of the agreement.ii. Invention Assignment: Provisions indicating that all “inventions, original works of authorship, trade secrets, concepts, ideas, discoveries, developments, improvements, combinations, methods, designs, trademarks, trade names, software, data, mask works, and know-how, whether or not patentable or registrable under copyright, trademark or similar laws” developed during the term of employment or contractor service belong to the company.  This covenant should similarly include an acknowledgement that all copyrightable material is a “work made for hire.”  Note that company counsel should confirm the impact of the applicable state laws on these covenants. For example, the “work made for hire” clause should be excluded from independent contractor/consultancy agreements governed by California law, as California law dictates that individuals subject to this type of covenant in a services agreement may be deemed employees under the California Labour Code .  Avoid the temptation to limit company ownership of employee or contractor developments to only those generated “on company time” or “using company resources.”  This limitation will only act to invite ownership ambiguity – an unnecessary impediment in the acquisition due diligence process.iii. Pre-existing Intellectual Property Disclosure and Licenses: Provisions obligating employees or contractors utilising pre-existing intellectual property in their work for the company to (i) clearly identify the pre-existing IP and (ii) grant the company a perpetual, transferrable license to use, in the course of its business, any relevant pre-existing IP included in works created by the employee or contractor for the company.
  2. Facilitate Shareholder Decisions. The decision to exit the business will naturally require the approval of both the Board of Directors and the shareholders of the company.  Minority shareholders who are no longer associated with the business, or who have a different perspective on the company’s direction and objectives, can seek appraisal rights, demand certain concessions, or take other steps to block or disrupt the transaction.  While reverse merger structures can be used to minimise the disruption caused by dissenting minority shareholders, these structures increase both transaction costs and the potential liability to the target company.The pre-emptive solution here is a basic shareholder agreement, prepared and negotiated when the early stage company’s shareholder base is relative small and cohesive. The shareholder agreement should include the following elements:i. Dragalong Rights. Terms requiring minority shareholders to support and vote with the majority on fundamental company decisions, including a vote to sell the company and/or waive of appraisal rights.ii. Buy/Sell Arrangements. Structures that ensure that the equity interests of disaffiliating shareholders are (or can be) repurchased by the company or the remaining shareholders;iii. Joinder Provisions. Requirements that all new shareholders (including those acquiring their equity interests through the conversion of debt) become signatories to the shareholder agreement.
  3. Simplify Contract Assignment. A major factor in the acquired business’ valuation is the status of its contractual relationships with customers, vendors, strategic partners and other third parties, and how easily an acquirer can continue to take advantage of those contracts following the acquisition. Contracts that include non-assignability clauses – provisions requiring counterparty’s consent prior to assignment – can greatly obstruct this transition, particularly if the transaction is structured as an asset sale (vs. a stock sale or merger). At best, these clauses can delay a closing while the target company pursues the counterparty’s consent, who may see an opportunity to extract a contractual concession from a vulnerable target.  At worst, the target company’s inability to obtain a counterparty’s consent may result in the termination or rejection of the contract by the acquirer, which can reduce the target company’s valuation.Since non-assignability clauses are often a standard part of the “boilerplate” sections of many agreements, and since solving the anti-assignment clause problem once the contract has been signed is difficult, if not impossible, company counsel should help the client implement the following prophylactic measures at the outset of the negotiations:i. Removal: Generally, the absence of a non-assignability clause in a contract allows both parties to assign the contract freely.ii. Change of Control Carve-Out: An exception that eliminates the need for the counterparty’s consent when the contract is assigned to a successor organization in the event of a merger, spin-off, or other reorganization, or any sale to any entity which buys all or substantially all of the assigning party’s assets, equity interests or business can eliminate the issue in an exit transaction.iii. Reasonableness Standard. As a fallback, incorporate a requirement that the counterparty’s consent to a contract assignment may not be “unreasonably withheld.” While this does not eliminate the need to secure the counterparty’s consent, it will impose a baseline legal standard which may facilitate the assignment negotiation.
  4. Maintain Good Corporate Capitalisation Hygiene. While cases of mystery shareholders appearing at the closing of an acquisition transaction are rare, confusion over the accuracy of the capital structure of the target company, as well as the identification of non-compliance with securities laws, can materially disrupt an exit transaction.  Common causes of capitalisation problems most often relate to (i) failing to either register or file a registration exemption with the Securities and Exchange Commission and/or state authorities in connection with the sale of private securities issued by the target company to early investors, which are usually friends and family, (ii) issues involving the company’s equity incentive plan, including unsigned documents, unclear vesting schedules, and uncertain stock repurchase provisions and exercise; and (iii) overlapping and conflicting convertible securities, including securities with conflicting conversion terms or circular conversion formulas. Many buyers will avoid assuming any risks associated with an ambiguous capital structure or improperly issued shares, preferring instead to let the target company identify and resolve discrepancies before closing.As with the other sets of issues described in this article, the preventive solutions are straightforward and, in most cases, inexpensive:i. Comply With Applicable Federal and State Securities Laws in Securities Offerings: Most states and the SEC have numerous exemptions allowing early stage companies to issue securities without the need for a formal registration.  The exemption process, however, often requires the issuing company to file a registration exemption with the appropriate securities regulator. Failing to file a registration exemption may not require the company to register its shares, but it may prevent the company from utilising a “safehabour ” in future transactions, including an exit transaction with another private company.  Filing the necessary registration exemption forms will not only help ensure securities law compliance; it will also provide assurance to a potential acquirer that these registration exemptions will remain in effect in future transactions.ii. Invest in a Commercial Cap Table Management Software. There are a number of quality, low cost software solutions on the market that can help track and automate company cap tables and “date-stamp” capital structure changes, in order to allow for a simple analysis of capitalisation changes and confirmation of issuances.iii. Automate the Effect of Certain Equity Incentive Plan Triggers. For example, if a company’s restricted stock plan provides for the buyback of unvested shares if the employee terminates, the company’s repurchase of those unvested shares should occur automatically.  Relying on the affirmative action of the company (and potentially the memory, or filing system, of the company’s executives) can result in inconsistent equity incentive plan operation and unintended equity ownership.

    iv. Create Pro Forma Models to Reflect the Terms of Convertible Securities. Going through the exercise of translating the terms of convertible securities – particularly where different securities are issued at different times to multiple parties – will help pressure test the conversion terms and validate that they function as intended.

The foregoing measures, designed to minimise exit disruption, are neither difficult nor time-consuming.  In fact, the most difficult task is often convincing the client company to expend the time, effort and resources to implement these disciplines, even years in advance of a potential exit.  As noted above, it is ultimately time and energy well spent.

Evaluating and Managing Environmental Risk in Real Estate and M&A Transactions in the United States

The complex environmental regulatory regime in the United States can raise a variety of legal and financial risks in real estate or corporate acquisitions.  Accordingly, lawyers should understand the nature of potential environmental liabilities for different transactions, the relevant facts, and how to structure environmental due diligence tools to provide clients meaningful advice.

Tailoring Environmental Due Diligence to the Transaction

Environmental due diligence is not a “one-size-fits-all” activity.  The type of transaction, and the client’s objectives, often dictate the appropriate scope of due diligence.

Transactions take a variety of forms, such as the purchase or lease of real property, acquisition of the assets of operating businesses or facilities, stock acquisitions, corporate mergers and divestitures.  In real estate acquisitions, primary environmental due diligence concerns include identifying potential contamination, and either protecting against cleanup liability or evaluating remediation methods.  These transactions usually rely on Phase 1 and 2 environmental site assessments to identify contamination, help establish landowner liability protections, and assess cleanup strategies.  Analyzing other environmental regulatory constraints on site development may also be prudent.

Conversely, acquisitions of operating businesses or facilities, or corporate transactions such as stock deals and mergers, raise additional environmental due diligence concerns.  These include evaluating the target company or facility’s regulatory compliance status, the availability of permits to conduct and grow the business, and capital and operating costs needed to achieve compliance, implement permit conditions, and satisfy other environmental requirements.  For these deals, evaluating regulatory compliance and permitting issues may be equally, if not more, important than contamination concerns.

Superfund Liability and Defenses

In the U.S., fear of liability for contaminated property is largely driven by the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA” or “Superfund”).  CERCLA establishes four categories of parties liable for the release or threat of release of hazardous substances into the environment, including current facility owners or operators, former owners or operators at the time of disposal, those who arrange for hazardous substance disposal at a facility, and those who transport hazardous substances to a facility for disposal.   Superfund liability can be severe, as it is retroactive, strict (i.e., regardless of fault), and joint and several.

Moreover, CERCLA offers only very limited defenses for landowners.  The most useful of these is the bona fide prospective purchaser (“BFPP”) defense.  This provision allows prospective purchasers to acquire facilities that the purchaser knows to be contaminated while avoiding Superfund liability.  To establish the defense, the purchaser must satisfy several conditions.  Pre-acquisition conditions include taking title to the facility after January 11, 2002 and after all disposal occurred; making “all appropriate inquiry” into the former uses and ownership of the facility consistent with good commercial and customary standards; and not being a potentially liable party or affiliated with such a party through certain relationships.  The purchaser must also comply with several post-acquisition requirements, including making legally required notices; taking reasonable steps to stop continuing releases, prevent future releases, and limit exposure; cooperating with persons performing remediation; complying with any land use restrictions or institutional controls; and responding to governmental information requests.  (Tenants may also utilize the BFPP defense in certain situations.)

Although the BFPP defense provides a valuable tool to protect against Superfund liability when obtaining contaminated property, the defense does not protect against potential liability under other federal or state environmental statutes. It is also not a defense to claims under other liability schemes such as tort, occupational safety and health laws, or breach of contract.

All Appropriate Inquiry (“AAI”) – Phase 1 Environmental Site Assessments

While all of the statutory requirements must be satisfied to support the BFPP defense, the primary objective of environmental due diligence in the U.S. involves performing AAI.  In 2005, the U.S. Environmental Protection Agency (“EPA”) published a rule, 40 C.F.R. Part 312, establishing the regulatory requirements for AAI.  In coordination with EPA, the standard-setting organization ASTM International revised its existing standard for Phase 1 environmental site assessments (“ESAs”) to comport with the Rule.  In practice, purchasers seeking to perform AAI do so by following the ASTM Phase 1 standard (currently E1527-13).

Phase 1 ESAs are non-invasive property investigations that seek to identify and document recognized environmental conditions (“RECs”) indicating a release or threat of release of a CERCLA hazardous substance (or petroleum, which is not regulated by CERCLA). Unlike Phase 2 investigations, Phase 1 ESAs do not include sampling and analysis of environmental media.  In addition to establishing one of the CERCLA BFPP defense conditions, a Phase 1 ESA (perhaps combined with Phase 2 testing) may also provide insight into possible common law and toxic tort risks posed by acquiring property, should the investigations identify contamination that could impact residential neighborhoods, potable water sources, or other sensitive receptors.

Most AAI tasks must be undertaken by an “environmental professional” meeting certain qualifications, or someone under his or her direct supervision. Basic Phase 2 elements include interviews with the current site owner, any occupiers likely to handle hazardous substances, state or local government officials, and potentially others; review of historical information sources (e.g., aerial photographs, fire insurance maps, land title records, and building permits) dating back to the earlier of 1940 or the property’s earliest developed use; review of federal, state and local regulatory agency records involving the property and other sites within defined search radii; and visual inspection of the property and of adjoining properties.  In addition, the standard calls for certain information from the user of the Phase 1 (typically the prospective purchaser), such as a review of title and judicial records for environmental cleanup liens and activity and use limitations; any specialized knowledge the user may have of the property and surrounding area; and whether the purchase price reflects any discount for contamination. The environmental professional must document the evaluation in a written report containing, among other things, the professional’s opinion as to whether conditions indicative of a release or threatened release exist, and a list of any data gaps and their significance.

Although Phase 1 ESAs have become extremely commonplace in environmental due diligence, a few important points are worth noting.  First, to satisfy the AAI rule a Phase 1 must be completed no sooner than one year prior to property acquisition, and certain elements must be completed or updated within six months before acquisition.  Also, remember that Phase 1 ESAs are designed to identify potential contamination, and do not evaluate other environmental issues (e.g., the presence of asbestos or lead-based paint in buildings, mold damage, or wetlands and other natural constraints on site development) unless expressly added as “non-scope” items.  In addition, given increasing scientific knowledge and regulatory concern regarding the potential for certain contaminants (such as those associated with petroleum and chlorinated solvent releases) to volatilize and enter occupied structures in vapor form, a 2013 update to the ASTM Phase 1 standard now requires evaluating the vapor intrusion pathway as part of identifying RECs.  Finally, as mentioned above, the BFPP defense requires more than satisfying AAI; the purchaser must meet several post-acquisition conditions as well.

Phase 2 ESAs – Evaluating Contamination and other Due Diligence Concerns

When a Phase 1 ESA identifies one or more RECs at a property, the next step often involves performing invasive “Phase 2” testing to confirm the presence and extent of any contamination.  Information from Phase 2 ESAs can serve several due diligence purposes, including deciding whether to proceed with or terminate the transaction; identifying post-acquisition tasks to satisfy the BFPP “reasonable steps” condition; allocating environmental responsibility through contract provisions such as purchase price adjustments, indemnities, cleanup obligations, and environmental insurance; developing remediation strategies and cost estimates to obtain liability protection through federal or state voluntary “brownfield” cleanup programs; and identifying natural or other constraints to site development.

Given their varying objectives, Phase 2 ESAs, unlike Phase 1 investigations, typically do not follow a single protocol.  A Phase 2 investigation may involve one or more of several elements, such as collecting samples of soil, groundwater, soil gas, indoor air, or other environmental media for laboratory analysis; searching for underground tanks, vaults, and other subsurface structures using geophysical techniques; evaluating the presence and extent of environmental conditions inside structures such as asbestos-containing materials, lead-based paint, mold, and radon; and identifying potential site development constraints such as wetlands, endangered species, and cultural or historic resources.

Phase 1 and 2 ESA Practical Considerations

To protect their interests, both parties in a real estate or corporate transaction should negotiate access provisions governing the performance of Phase 1 and 2 ESAs during due diligence.  These provisions should cover issues including, at a minimum, submission of a work plan for  owner approval; permissible entry times, pre-entry notice requirements, and non-interference with ongoing site operations; restoration of any property damage; compliance with applicable law and proper disposal of any investigation-derived waste; provision of split samples, test results, and reports to the site owner; and insurance and indemnification related to liability arising from the investigations.

Access provisions should also address confidentiality of environmental due diligence results.  Generally, owners require buyers to keep due diligence data and reports confidential, but buyers should seek certain exceptions including the ability to share results with lenders, counsel, and other due diligence team members (who may also be required to keep the results confidential), and to make disclosures if required by law (in which case the owner will want to control the reporting process).

Aside from access and confidentiality issues, parties planning to perform Phase 1 and 2 ESAs should keep a few other points in mind.  First, although Phase 1 and 2 ESAs can be performed concurrently, it is better to use Phase 1 results to develop the Phase 2 scope.  Also, take care when identifying and retaining an environmental consultant for the due diligence team.  Phase 1 and 2 investigations can vary significantly in scope and extent, and therefore potential consultants and firms should be evaluated for the necessary experience and skills appropriate to the type of site and anticipated tasks.  In addition, carefully review and negotiate consultant proposals regarding cost structure, markup of subcontractor and other expenses, anticipated timing for deliverables, and “boilerplate” terms and conditions such as insurance coverages, indemnity provisions, limits on liability, and confidentiality.

Evaluating Regulatory Compliance in Acquiring Ongoing Operations

In addition to assessing potential site contamination and development constraints, acquisition of an active facility or business requires evaluating the target’s compliance status with environmental regulatory requirements. These evaluations typically include issues such as whether the business or facility holds all permits and other approvals necessary to continue operations; whether these authorizations can or will need to be transferred as part of the transaction; and whether the business or facility currently has any significant noncompliance, or a history of noncompliance, with regulatory requirements or permit conditions (as evidenced by notices of violation, penalty assessments, administrative or judicial orders, consent decrees, etc.).

Depending on the type of operation, regulatory programs to evaluate for compliance issues may include, among others, air pollution control, wastewater and stormwater discharges, solid and hazardous waste management, emergency planning and community right-to-know reporting, management of storage tanks, use of pesticides, and maintenance and removal of asbestos-containing building materials.  Information on a business or facility’s compliance status may be found by reviewing facility and agency files, interviewing the target’s environmental health and safety personnel, and searching agency on-line databases.  In addition to identifying regulatory noncompliance issues, the due diligence effort should also attempt to estimate the potential costs of bringing the business or facility back into compliance.

Wrapping Up

Environmental due diligence in real estate and corporate transactions can be a complex and time-consuming task.  To make this process as efficient and productive as possible, tailor the scope of the diligence effort to the type of transaction, the client’s objectives, and the time and resources available to complete the process before closing.  Assembling a qualified and experienced team of technical and legal professionals to lead the diligence effort can help ensure that the client goes into a transaction with eyes wide open to potential environmental pitfalls.

Aspects to Consider when Closing a Merger in Venezuela

Venezuela is currently going through a very complex situation in which the climate for doing business has become difficult for all parties involved in any part of the economic process. The regulatory burden for entities doing business in the country is very high, and companies are required to be registered, keep in place records and processes in a vast amount of governmental entities, a fact that requires the commitment of a substantial amount of resources and time for each entity that exists and operates in the country. As a consequence of the foregoing, many businesses that were structured with various legal entities for different reasons, including tax and liability mitigation, have opted to downsize their operations by merging their subsidiaries into one or some few entities, in order to have fewer structures to operate.

The reality described above also permeates into the complexities of successfully completing a merger in Venezuela, where a number of filings must be made in order to perform the legal steps required to close a merger. In such regard, the process  of completing a merger will require proper organization,  planning and will typically  last for approximately 6 months  before it will be completed.

From a legal  standpoint, the decision to merge two companies shall be adopted  in the  shareholders’ meeting, a meeting that would discuss how both entities should be merged. The Articles of Incorporation of the companies often contain special quorum and voting requirements in order to approve a merger, but if the Articles of Incorporation are silent, the decision shall be adopted in a meeting where 75% of the shares representing the total capital is present and with the affirmative vote of at least, half of the shareholders attending the meeting[1].

The companies to be merged shall enter into a “merger agreement” which shall be executed by authorized representatives of both parties. The merger agreement must set forth the terms and conditions of the merger, such as specifications  that could lead to the survival of the entity,  and conditions that could cease the entities’ existence, as well as any other matter that may be relevant. Even though the law does not specifically require it, commercial registries require that the merger agreement  should be notarized.[2]

Financial statements of both companies dated on the date of the merger shall be prepared and presented to the commercial registry together with the notarized merger agreement and the shareholders meetings of both companies approving the merger.

It is important to point out that the registration processes before the Commercial Registries are frequently delayed for many reasons, including the fact that Commercial Registries often request changes to be made  on the documentation that has been presented, to the form in which documents are presented or in the supporting documents that shall be filed. These requirements changes from one Commercial Registry to another. Therefore,  the timing of the merger is an important issue and so, it is very  crucial to go beforehand  to the Commercial Registry  with much anticipation as possible,  so as to understand the requirements established by the Commercial Registry  in which the specific merger documentation will be registered.

Once the shareholders meetings are registered in the Commercial Registry or registries the merger agreement shall be published in an authorized legal publication. In practice, the shareholders meetings approving the merger are also published.

The merger will not be effective until a 3-month period  which will be counted from the date on which the publication previously indicated has been made. The Commercial Code establishes that the merger may be closed before such period if evidence of  payment of the  company’s debts or the approval of all creditors is evidenced. However, this is very unusual since in practice, there are just too many potential creditors for any given company, and the 3-month period is seen in practice as almost mandatory without exception.

During the 3-month period indicated before, any creditor can oppose the merger, which if done, will suspend the merger until the suspension is lifted through a definitive judicial decision.

Once the 3-month period elapses without any opposition from the creditors of the merging companies, the merger may become effective and the surviving company shall assume all rights and liabilities of the company that ceases to exist. In such manner, most practitioners and authors assume the position that the surviving company is the universal successor of the company  which ceases to exist.

Once the merger becomes effective, many notices to all kind of governmental entities shall be made. In such regard, the Tax administration shall be notified of the merger within one month from  the date  the merger became effective. Also, an income tax return shall be filed for the “short” fiscal period of the entity that is extinguished and that will end on the date the entity  ceases to exist.

In addition, all governmental entities in which the company that ceases to exist is registered (such as the social security administration, apprenticeship programs, housing and other parafiscal entities) shall be notified of the merger  so that their records may be properly updated to reflect the surviving entity as successor of the entity that  ceased to exist.

Another matter that shall be dealt with much care is the labour situation of employees of the company that ceases to exist. In such regard, prior to the merger, a strategy and plan shall be decided and implemented setting forth the steps and timing that will be taken vis a vis the employees of the company that will cease to exist. The company shall determine if it will carry out a procedure of notification of “change of employer” where notices of the change of employer are given to both employees of the company that will cease to exist and labour administrative authorities, indicating that the surviving company shall be the new employer of the employees of the company that will cease to exist. Employees that do not wish to continue as employees of the new surviving company may as well leave the company and request severance payment as if the company terminated them.

[1]Article 280 of the Venezuelan Code of Commerce.

[2] Based on an Article 23 of Resolution Number 19 of the Ministry of Interior, Justice and Peace dated January 13, 2014

Tips for Effective Drafting and Enforcement of Restrictive Covenants

The speed of business in the 21st Century has undoubtedly placed tremendous burdens upon employers seeking to enforce restrictive covenants in the modern business world.   In today’s fast-paced and high-tech society, trade secrets can be lost with the click of an iPhone camera and customer information can be mined from protected databases and stolen through the use of an inexpensive flash drive.  Often, the only protection available to prevent further harm is the legal construct known as the restrictive covenant.  Yet, the restrictive covenant’s status as the great elixir is directly linked to its ability to be enforced.  The past decade has ushered in an era of tremendous conflict in connection with the relationship between employers who seek to hold employees accountable for agreements that control the end of the parties’ economic relationship, and the ability of employees to escape the enforcement of such agreements.   This article will explore the methods used in drafting and enforcing restrictive covenants.    

The Basics:

Restrictive covenants in the employment context seek to protect business interests of a corporation by limiting post-employment engagements of an individual or individuals who has moved on from the company.  As a general rule in all jurisdictions, our country’s courts will not allow a company to enforce restrictions if such enforcement will not benefit the legitimate business interests of the ex-employer. See, Guardian Fiberglass Inc. v. Whit Davis Lumber Co. 509 F.3d 512 (8th Cir. 2007).  This notion stems from the fact that our judicial system considers restrictive covenants to be a restraint upon trade by their nature.  This is of course balanced against the parties’ inherent freedom to enter into a contract, which has led courts to a common ground in most jurisdictions.   In large part, most jurisdictions will not issue a blanket prohibition against restrictive covenants and will uphold restrictive covenants to the extent that: 1) the restriction is fair and reasonable and; 2) protects a legitimate business interest.   In determining what constitutes a legitimate business interest, courts usually identify trade secrets, confidential proprietary information, goodwill and special training as protectable property of the business.  With these protectable interests in mind, it becomes essential for the employer to identify how to protect each interest and specifically tailor the agreement to meet its specific needs.   Stated another way, there is no “one size fits all” restrictive covenant.   Business owners and employees must narrow their proposed agreements to match their specific needs.  Doing so requires an understanding of the various types of agreements that are classified as follows:

Non-Competition Agreements:  A Non-Competition Agreement prohibits a former employee from engaging in an employment or ownership affiliation with a competing separate entity or group.

Non-Solicitation Agreements:  These agreements protect against employees who solicit current and or former customers. 

Non-Disclosure Agreements:  These agreements prohibit the employee from utilising and or disclosing trade secrets and confidential information belonging to the employer.

Non-Poaching Agreements:   Non-Poaching Agreements are also commonly referred to as “anti-raiding” covenants and bar employees from hiring away employees to join a new entity.

Given the various types of restrictions available to business owners, it is critical at the outset for the drafter to identify, with particularity, what specific business interests the company seeks to protect.  After identifying the company’s needs, the framework of the agreement may be constructed in a manner that avoids the common pitfalls that have a detrimental effect upon the enforcement of restrictive covenants.  Aside from these agreements, one should be mindful of the separate common-law duty of loyalty in many jurisdictions which prohibits employees from acting in a manner that is contrary to the best interests of the employer during the employment relationship.

Effective Enforcement of Restrictive Covenants Begins with The Drafting of An Effective Agreement – What Every Business Owner Should Know:

When drafting a restrictive covenant, the practitioner must always be mindful of the notion that courts in all jurisdictions historically characterise restrictive covenants as a restraint upon trade.  Because of the judiciary’s conceptual concerns over the restraints presented in this setting, the drafter must be especially mindful of the fact that the agreement must be precise in its scope and more importantly, should only go as far as necessary to protect specific business interests.  Drafters of restrictive covenants should take great care in avoiding the common mistake of creating a covenant that will not stand judicial scrutiny on account of the overbroad nature of the restrictions placed upon the departing owner or employee.  A hallmark of an effective agreement achieves a delicate balance between the protection of the business’ legitimate interests and fairness to the departing individual(s).  

Avoid Broad Geographic Restrictions At All Costs

One of the most critical errors in the process of drafting a restrictive covenant occurs when a party attempts to inject an overly protective limitation on the area in which the departing party may operate a business.  A restrictive covenant must be reasonable in its geographic area.  Generally, this limitation is defined as the area where the existing company does business.  Depending upon the nature of the specific business at issue, the geographic areas often vary and are best described as economies of scale.  While there is no bright-line rule per se, it is generally accepted that geographic restrictions contained in restrictive covenants can restrict an area as small as a few miles as in the case of a “mom and pop” business, or can span the continent as in the case of a large corporation.  Because of the uncertainty attached to geographic limitations, recent strategies in drafting restrictive covenants often de-emphasise a detailed geographic restriction in favour of protecting confidential information and or trade secrets.  By focusing on the information, not the location of the business, the covenant is more likely to be found to be a reasonable protection of a legitimate business interest as opposed to an unreasonable restraint on trade.   Through careful craftsmanship of a targeted and precise geographic restriction, or alternatively focusing on confidential information, (not location), the restrictive covenant is more likely to withstand any challenge, and will likely be enforceable.

Avoid Lengthy Periods of Restriction

Because excessive restrictive periods will not be enforceable, the drafting of an enforceable restrictive covenant requires the infusion of a reasonable time period controlling the former employee or co- adventurer’ conduct toward existing or former customers and the handling of confidential information.  Typically, these the types of restrictions: 1) aim to control the length of time that an individual must refrain from soliciting the employer’s clients or customers and; 2) prohibit the use of  business’ confidential information.   With regard to the former, the duration and the nature of the customer relationship are critical factors in determining whether the prohibition from soliciting customers is reasonable.  In these instances, the duration of the restriction is generally reasonable only if it is no longer that necessary for the former employer to put a new employee to work as a means to demonstrate his or her skill-set in satisfying the former employer’s clients and customers.

In the case of confidential information, the focus shifts to the type of information being protected, not geography. A key consideration in this regard is the length of time the information remains confidential before it becomes part of the public domain or stale and unusable.  The longer the time the information retains its confidentiality, the longer the restrictive period will be found to be reasonable.   By examining the nature of the relationship between the customer or client and the identification of the of information being protected, the period of the restriction set forth in the agreement can be gauged appropriately which will protect the terms of the agreement from collateral attack.

 Identify Whether the Agreement Contains Proper Consideration

Because it is a contract, a restrictive covenant must have adequate consideration (a bargained for exchange) for the covenants to be enforceable.   The most common form of consideration is contained in a services agreement, such as an employment agreement where the owner receives services from the employee in exchange for salary.   In a variety of states, the act of requiring a new employee to sign a restrictive covenant at the commencement of employment as well as conditioning an employee’s continued employment upon execution of the agreement are considered valid consideration.   However, the concept of employment as consideration is not universally accepted in each state and it is imperative for the practitioner to be aware of the jurisdiction’s treatment of employment as adequate consideration.  For example, New Jersey courts hold that employment is valid consideration in a restrictive covenant, whereas Pennsylvania courts hold that mere continued employment is not sufficient consideration and will not enforce a restrictive covenant absent some additional consideration.  See, A.T. Hudson, 216 N.J. Super. at 431-32 (non-compete signed at hire supported by adequate consideration) But See, Socko v. MidAtlantic Systems  of CPA,  105 A.3d 659 (2014) (holding that continued employment is not sufficient consideration to support a restrictive covenant under Pennsylvania law.)   Because of these conflicts of law, drafters must be keenly aware of their state’s handling of employment as consideration to avoid challenge to the sufficiency of the entire agreement.

Be Cautious With Choice of Law and Forum Selection Provisions

Choice of law and forum selection clauses can present significant risks in the context of restrictive covenants because not every jurisdiction treats restrictive covenants in the same manner.  There exists a strong possibility that selection of a choice of law clause could have unintended consequences which prove fatal to the enforceability of the agreement.  For these reasons, parties drafting these types of agreements must exercise due diligence and familiarize themselves with the procedural and substantive law of the foreign jurisdiction.  For example, restrictive covenants are void as a matter of law in California except for a small number of limited circumstances expressly authorized by statute, e.g., where owner is selling goodwill of business. California Business and Professions Code § 16600.  Similarly, not all states honor forum selection clauses, effectively rendering the parties’ intent moot.  To avoid the latent dangers associated with these provisions, it is extremely important for the parties to familiarize themselves with relevant state law in both choice of law and forum selection settings.  Otherwise, these seemingly innocuous provisions could have potentially devastating ramifications upon the enforceability of the agreement.

 The Importance of Confidentiality Agreements

 As mentioned above, a confidentiality agreement protecting the company’s confidential information is independent of  the tighter restrictions of non-competes.  For this reason, it is worthwhile to explore the utility in drafting a confidentiality agreement in tandem with a restrictive covenant insofar as the confidentiality provisions may withstand scrutiny when a restrictive covenant fails.

Strategies For Enforcing Your Agreement

Armed with an agreement that adheres to the foregoing characteristics and honed to the particular laws of the relevant jurisdiction; a party seeking to enforce the agreement by obtaining a remedy for a breach of the agreement can confidently pursue an action at law and equity in several ways:

The Injunction

In a majority of jurisdictions, injunctive relief fashioned to prevent further violations of a restrictive covenant is available under specific circumstances where the relief is necessary to prevent irreparable harm, meaning that the damage cannot be remedied by monetary damages.  For example, acts such as disclosing confidential trade secrets and interfering with customer relationships have been recognised as conduct that sufficiently rises to the level of irreparable harm in various state and federal courts.

Money Damages

Monetary damages may be recovered against a former employee who violates a valid and enforceable restrictive covenant as a means to place the injured party in the position it would have been in but for the action of the party who breached the agreement.  In determining the amount of damages that may be recovered, courts will typically review what the expectations of the parties were at the time of the agreement and will analyse the foreseeability of the harm caused by the breaching party in setting the amount of monetary damages.

Having an agreement that comports with the above principals will

The Blue Pencil Doctrine:

In many jurisdictions, even where = certain portions of the parties’ agreement may be found to be unreasonable, all may not be lost.  Restrictive covenants containing certain unenforceable provisions may still be enforced to the extent reasonable under the circumstances.  In various jurisdictions known as “Blue Pencil States”, the courts have broad equitable power to grant partial enforcement of a restrictive covenant both by removing offensive terms and by adding limiting language in order to grant an employer only that protection which the court deems necessary; to protect what the court’s deem to be legitimate business interestsThis principle allows courts to redraft an unreasonable restrictive covenant to make it reasonable and, therefore, make it enforceable based on the equities in the case.  The doctrine, known as the “Blue Pencil Doctrine” is not universal and must be analysed on a state by state basis.

While the restrictive covenant is not the perfect elixir on all occasions and in all locations, if properly utilised, it can be the best line of defence against threats to the very existence of a business.  However, because of the various state by state idiosyncrasies associated with laws governing the enforceability of restrictive covenants, it is fundamentally important to familiarise one’s self with the particular state law in the jurisdiction at issue and not simply assume that the “cookie cutter” restrictive covenant will suffice.

Law Society practice note gives law firms more impetus to use electronic signature platforms

In the haze of the Brexit referendum, you can be forgiven if the new EU Regulation on Electronic Identification and Trust Services in the Internal Market (EU No 910/2014) (eIDAS Regulation) passed you by. This important new law came into force on 1 July and establishes a new regulatory framework for “trust services” including electronic signatures throughout the EU.

On 13 July, a joint working party of the Law Society and the City of London Law Society (JWP) published a practice note endorsing the use of electronic signatures in commercial transactions under English law.  This is a welcome development. The practice note (and the eIDAS Regulation) will spur law firms to use electronic signature platforms and boost the digital transformation of business.

The aim of the practice note

The practice note aims to help lawyers and clients gain a better understanding of the applicable law, and foster confidence in electronic signatures for commercial transactions; its terms of reference did not include consumer contracts, but the rules on authentication are broadly the same as for commercial transactions.

What is an electronic signature?

Article 3 of the eIDAS Regulation defines an electronic signature as: “data in electronic form which is attached to or logically associated with other data in electronic form and which is used by the signatory to sign”. It has many guises:

  • Typing a name into a contract or into an email containing the contract’s terms;
  • Clicking an “I accept” button on a website;
  • Pasting a signature into an electronic contract;
  • Using a web-based electronic signature platform to generate:
    – an electronic representation of a handwritten signature; or
    – a digital signature using public key cryptography.

Validity of electronic signatures under English law

The practice note confirms that an electronic signature may be used to execute simple contracts as well as those documents (such as a guarantee) which are required by English law to be “in writing” or “signed”. The practice note also clarifies that a deed may be validly executed using an electronic signature. If the deed needs to be witnessed, the JWP recommends that the witness “physically” observes the signature of the deed; however, there does not appear to be any legal impediment to the witness attesting the signature using video technology.

Section 7 of the Electronic Communications Act 2000 states that electronic signatures are admissible in legal proceedings to establish the authenticity or integrity of an electronic document. But the evidential weight of the electronic signature will depend on the circumstances in which it is created and on what steps are taken to verify the identity of a signatory. And this is why the leading law firms such as Linklaters and A&O are turning to electronic signature platforms. The best platforms generate a signature that offers a higher level of authenticity and security, and a better alternative to a “virtual signing” where signature pages are exchanged by email.

The benefits of using an electronic signature platform

Agility. A platform speeds up workflow and execution of documents, especially where clients are in different hemispheres and time zones.  An authorised signatory just needs an email address and an internet connection to sign from any location.

Efficiency and cost savings. Printing, faxing, scanning, and sending documents by post or courier is inefficient and expensive. Law firms routinely pass on these costs with a margin to their clients. But it is worth sacrificing this margin for the higher goal of improving client service.

Digital audit trail. In a dispute over the authenticity or integrity of an electronic document, a platform provider can verify the identity of the signatory (often using two-factor authentication). The audit trail  will record who signed the document, including their email and IP address, when the document was signed and sometimes where. This can help law firms and their clients strengthen their regulatory compliance, particularly in the realm of data protection, security and retention.

Superior client experience. Advances in cloud and mobile technology mean clients can sign and retrieve their documents anytime, anywhere and from any device (desktop, tablet or smartphone) using an email address and an internet connection.

Law firms must use technology to innovate and improve their standard of service; no firm can afford to look like a digital laggard in the fierce battle to win and retain clients.

Secure cloud storage. Documents will be encrypted and stored securely at the provider’s data centre(s). Providers are acutely aware that their credibility depends on keeping data secure and confidential, both in transit and at rest. Law firms should conduct due diligence focussed on the provider’s information security and risk management practices. In particular, they should verify whether the provider is certified to the ISO 27001 standard for “information security management systems”.

Employee productivity increases. This message will resonate strongly with Managing Partners who preach the mantra of “smart working”. A platform ensures lawyers spend less time chasing signatures and drafting powers of attorney to close out transactions, and shift their focus to other clients’ business.

Legal effect of electronic signatures. An electronic signature will facilitate valid execution of most commercial, consumer, corporate, financial and HR contracts under UK law.

Some providers also offer digital signatures, which – boffins take note – are defined in the eIDAS Regulation as “advanced electronic signatures” and “qualified electronic signatures”. A digital signature is a subcategory of electronic signature. It is produced using public key cryptography and inserted into the code of the electronic document. The signature is supported by a digital certificate from a “trust service provider” that verifies the identity of the signatory.  The JWP practice note affirms that the law and market practice in England and Wales overwhelmingly favours electronic signatures.

Nevertheless, lawyers should be aware that there is demand in some UK industry sectors, such as banking and pharmaceuticals, for the extra security and more advanced identity-proofing afforded by a digital signature/certificate. Moreover, there are some transactions under foreign laws (including Scottish law) that must be authenticated with a digital signature.

The Right to Information Act No. 12 of 2016 of Sri Lanka

The fight for responsible accountability, good governance which is against corruption can only be strengthened if the information held by responsible authorities is more readily available. The result of relaxing the obstructing tight mechanisms that prevent the access of information would create a more transparent system of administration.

It is remarkable and broadly accepted by legal academics that the true essence of democracy can be achieved by the declaration of “Right to Information” to the public. The scrutiny of such is notably to maintain a more democratic system in the country whilst entertaining the true spirit of transparency.

Sri-Lanka, having face a 30 year conflict of war and a rather traumatic era left the purported ‘right to information’ under the Constitution of Sri Lanka (Article 14A of the Constitution of Sri Lanka 1978), restricted to an article engraved in the Constitution until 2016. One may argue that the Constitution prevails over any other legal document. In a practical approach, however, the right will remain to be a grey area as the abovementioned article would entail an exhaustive list of laws relating to same. The absence of a legally binding document guaranteeing the right to information would leave a lacuna in the context of justice. Therefore, the enforceability of the right guaranteed by the Constitution will only be effective in reference to an act pertaining to “Right to Information”. This principle was established in the case of Giustiniani v. Y.P.F. S.A., a case decided in the territory of Argentina, in which the court ruled in favor of the plaintiff and further urged the public company Yacimientos Petroliferos Fiscales to produce a copy of the investment agreement related to the exploitation of hydrocarbon /oil resources.

The country although having other commitments to look into due to the war, yet functioned in ways and means to give effect to the United Nations proposed Resolution 59 (1) in the year 1946. This resolution was further taken up for discussion in the year 1995 by the UN Commission. Therein, it was stated that “Freedom will be bereft of all effectiveness if the people have no access to information. Access to information is basic to the democratic way of life. The tendency to withhold information from the people at large is therefore to be strongly checked.”[1] To give effect to the abovementioned resolution, Sri Lanka attempted to formulate a concrete ground for RTI in mid 1990’s (Legislative Draftsman’s Department, LDO Number 23/2003) which however, failed to conclude positively.

Furthermore, this principle was also encrypted under Article 19 of the International Covenant on Civil and Political Rights and Article 19 of the Universal Declaration of Human Rights which recognizes the right and access to information where Sri Lanka is a party to, with the placement of signature on the treaty.

On realizing the importance of such a right in existence, Sri Lanka, a country that looks over the democratic system, began the process of documenting the fundamental right. After several attempts of passing draft Right to Information Bills over the years, in August 2016, the Bill of Right to Information (“RTI Bill”) was passed with the view to provide a more centralized transparent system of governance. The RTI Bill was brought to the attention of the Parliament in the midst of March 2016. The sole purpose of promoting the Bill, as stated in the preamble of the RTI Bill, was to structure “a society in which the people of Sri Lanka would be able to more fully participate in public life through combating corruption and promoting accountability and good governance”[2]. The recognition of the absence of the right was further highlighted with the inception process for the 19th Amendment to the Constitution as a fundamental right. Supporting the views enacting the RTI, the Center of Law and Democracy assessed the RTI to be the 7th strongest in the world.

The prime need for the establishment of this fundamental piece of legislation was opined by Chief Justice Sarath N Silva whilst deciding the case of Environmental Foundation Limited v Urban Development Authority of Sri Lanka and others (Galle Face Green Case)[3]. He stated that “a bare denial of access to official information as contained in P10, sent by the UDA, in my view amounts to the infringement of the Petitioner’s fundamental rights as guaranteed by Article 14 (1) (a) of the constitution…the implicit right of a person to secure relevant information from a public authority in respect of a matter that should be in the public domain”.

However, the urge for the Right Information dates back to 1984 which was derived from the case of Visuvalingam v. Liyanage where it was held that the need for easy access to information was needed to be reckoned as the right to information from many sources was possible[4]. Therefore, it was prominently noted that the documentation of the right through an Act was essential to make the system of justice more approachable.

The RTI Act provides an absolute right and gives effect to the constitutional right of every citizen to access information under Section 3 of the RTI Act. Nevertheless, the granting of the right was on the other hand, followed with limitations. These limitations are in the form of a comprehensive list as stated under Section 5 of the RTI Act.

The limitations stipulated in the RTI Act include that the denial to access information may arise the personal information in concern has no public activity or interest. Disclosure of information is a threat to national security. Disclosure of such information could harm the economy of the country. Denial of information related to trade secrets or intellectual property. Providing medical records unless consented and permitted to by the person in question. Communication trails between a professional and public authority unless consented to i.e. communication between the attorney general and public authority. Existence of a fiduciary relationship. Information which may obstruct the detection of a crime. Exposure of identity of a confidential source may be revealed. Third party does not consent to the disclosure of the information. Contempt of court. Infringement of parliament privilege. Harm integrity of an examination being conducted by the Department of Examination.

Furthermore, in the process of debating the RTI Bill in Parliament, concerns and proposed changes in order to protect the confidentiality of sensitive information relating to Section 5 of the Act on ‘Denial of Information’ were raised. Accordingly, when the Parliament certified the RTI Bill, Section 5 of the Act was further expanded giving effect to Section 5 (m) whereby ‘if information is a cabinet memorandum in relation to which a decision has not been taken’ the request may be refused. Further, Section 5 (n) where ‘the information requested to be disclosed is with regard to an election conducted by the Commissioner of Elections’, which is required by the relevant election laws to be kept confidential. This was formally engraved in the Act as a stance for the public authorities to deny disclosure of information.

Moreover, many concerned parties raised their nonconforming views indicating that some of these exceptions stated under Section 5 were conflicting with the articles in the Constitution of Sri Lanka. One example of a recent dissimilarity raised to concern was the exemption stated under Section 5 in relation to denial of disclosure of information as it would harm the economy. The denial of information related to trade agreements as stated under Section 5 (v) was noted to be a clause conflicting with Article 14, 14A and 15 of the Constitution.

Dr. A.G. Damayanthi Perera, a Specialist in Food, Nutrition, an Independent Researcher, along with two other Software Engineers, raised the issue relating to the conflict of Section 5(v) by filing a petition in the Supreme Court of Sri Lanka. The Petition stated that, a developing country like Sri Lanka will find it difficult to tackle the challenging concepts in the corporate arena when dealing with overseas companies.

The exceptions to the fundamental rule of the right to information was also opined by Lord Toulson’s in the case of Kennedy v Charity Commission, in which he stated that “Judicial processes should be open to public scrutiny, unless and to the extent, that there are good reasons for secrecy”.[5] Thus, despite the right of information being a fundamental right, the times at which the denial to access of information is validly construed yet exist in the legal sense.

It is nonetheless important to note that the above limitations could be avoided where the request of information is very much urgent and as per severe circumstances surrounding the necessity of such information. This is engraved under Section 6 of the RTI Act. Additionally, if the disclosure of information is denied by the public authorities, the aggrieved party is within the capacity of making an appeal to the “Right to Information Commission”- a body corporate with perpetual succession which will be established in the conformity of Part IV of the RTI Act.

Above all, these flaws are contained within the proposed validity of the right to information. It is important to note the very exceptional advantages. The recently passed RTI Act will be a monitor for showcasing the reality, whilst making the latent motives of a government accessible to the public to some extent.

Many professionals in the arena of law supported the RTI Bill coming into force, claiming that the ideology of the Bill would restructure the transparency of the government and public authority dealings. Thus, the instances in which the public being blindfolded in times of corruption will be limited, and the Act will further provide the public with an avenue to raise their dissenting views and concerns of the same.

Looking over to our neighboring country, India, who enacted the fundamental right by way of the Right to Information Act 2005, would clear the murky waters of how successful the enactment would be in Sri Lanka. Dr. Rajesh Tandon made positive comments stating that Since the RTI law was introduced, India has seen an improvement in governance, dissemination of information and involvement of civil society in the governance process”[6]. However, the challenge in India is that acts such as the Official Secrecy Act and the Right to Information Act co-exist side by side with the right to information laws. Accordingly, the enactment of the Right to Information Act in India has exposed both how it can thrive a country to success and the possible existence of challenging conflicts to be tackled with.

Similarly, despite the anticipated positivity of the Act, a number of challenges remain when the implementation of the RTI in Sri Lanka is taken into consideration. For instance, archaic acts, such as the Establishments Code of Sri Lanka 1971 and the Sri Lanka Press Council Law No. 5 of 1973, continue to be in force. The existence of such Acts restricts the scope of the new Act in place and limits the public access to the benefits afforded in terms of Section 2 and 3 of the RTI Act. One such important Act that needs to be brought to attention is the Official Secrets Act No. 32 of 1955. The existence of this Act restricts access to documents that are confidential and documents that contain very sensitive information. Although, this act is buried and ignored and the terminology is stated to be outdated, the Act continues to be in force in Sri Lanka and consequently needs to be rectified by ways and means which will diminish the conflict with the new Act in place.

Nevertheless, the Parliament of Sri Lanka, which has the intention of achieving the promising outcomes of the act, certified the RTI Bill with a few proposed amendments on 04th August 2016. Although, the Act will take 6 months to be in force, the effectiveness and the essence of implementing the laws will continue to thrive for the aims of providing an approachable, transparent governance system. All in all, the implementation of a Right to Information Act in Sri Lanka is imperative to foster a nation of transparency, accountability and good governance and to ensure the rights of the public citizens of the country are safeguarded which Sri Lanka believes as a country driven by democratic principles.

[1] 2 UN Doc. E/CN.4/1995/32, para. 35.

[2] Right to Information, Gazette, Preamble December 2015.

[3] (S.C.F.R 47/2014)

[4] 1984

[5] Kennedy v. the Charity Commission [2014] UKSC 20

[6] http://srilankabrief.org/2015/03/beyond-rti-towards-open-government-in-sri-lanka/