Category Archives: Corporate/Commercial Law

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

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


Significant Changes to Canadian Takeover Bid Regime Implemented


On May 9, 2016, the Canadian Securities Administrators (the “CSA”) implemented new harmonized takeover bid rules. These new rules represent the most significant changes to the securities regulatory regime for takeovers of public companies in Canada since the original adoption of the takeover bid regime in 1966.

Background to the New Rules

The takeover bid landscape in Canada is shaped by the principle that shareholders should be the ultimate decision makers in determining whether to accept a takeover bid or not.  That principle underpins the key regulatory guidance on defensive tactics by target companies, National Policy 62-202 Take-Over Bids – Defensive Tactics (“NP 62-202”). This policy reflects the principle that shareholder rights plans (poison pills) and other defensive tactics cannot be used to prevent shareholders from ultimately having the opportunity to tender to a takeover bid, and is primarily focused on protecting the bona fide interests of target shareholders.

This shareholder-centric approach has informed numerous decisions of Canadian securities commissions over the past decades that have, with few exceptions, cease traded (i.e. rendered ineffective) shareholder rights plans after a certain time period (generally 45 to 70 days) to allow a hostile bid to proceed. Prior to the new rules, the regulatory regime clearly favoured bidders and significantly limited a target’s ability to defend against hostile bids. In most cases, once a hostile bid was launched, some form of change of control transaction would become almost inevitable.

Following a number of court decisions confirming that the fiduciary duty of directors of Canadian companies is to act in the best interest of the company (and not any one stakeholder group, including shareholders), capital markets participants began to question whether the shareholder-centric approach to takeover bids unduly restricted the ability of boards to defend against hostile bids. In addition, there ongoing concerns have been expressed in recent years that the bidder-friendly nature of Canadian securities and corporate laws may be contributing to the “hollowing out” out of corporate Canada.

In response, the CSA embarked upon a detailed review of the takeover bid regime, which formed the foundation for the new rules.

Overview of the New Rules

The new rules are intended to enhance the quality and integrity of the takeover bid regime and rebalance the dynamic among bidders, target boards and target shareholders by (i) facilitating target shareholders’ ability to make voluntary, informed and coordinated tender decisions, and (ii) providing target boards with additional time and discretion when responding to a takeover bid.

To achieve these objectives the new rules require all takeover bids to:

  • receive tenders of more than 50% of the outstanding securities of the class that are subject to the bid, excluding securities beneficially owned, or over which control or direction is exercised, by the bidder or by any person acting jointly or in concert with the bidder (the “Minimum Tender Condition”);
  • be extended by the bidder for an additional 10 days after the Minimum Tender Condition has been achieved and all other terms and conditions of the bid have been complied with or waived (the “10 Day Extension Requirement”); and
  • remain open for a minimum deposit period of 105 days unless the target board (a) states in a news release a shorter deposit period for any proposed or outstanding bid of not less than 35 days that is acceptable, in which case all contemporaneous takeover bids must remain open for at least the stated shorter deposit period, or (b) issues a news release that it has agreed to enter into, or determined to effect, an “alternative transaction” (being a transaction that is not a takeover bid, such as an arrangement), in which case all contemporaneous takeover bids must remain open for a deposit period of at least 35 days (the “105 Day Requirement”).

The following table compares the key features of the new rules with the previous regime:

Provision Previous Rules New Rules
Minimum tender requirement No minimum tender requirement. Any minimum tender condition stated in the bid could be waived by the bidder prior to the expiration of the bid.

“Any and all” bids permitted.

Bidders are prohibited from taking up securities under a bid unless the bid receives tenders of more than 50% of the securities of the class subject to the bid, excluding those beneficially owned by the bidder.

“Any and all” bids prohibited.

Extension of successful bid following the expiration of the bid No requirement to extend a successful bid, except to satisfy customary “permitted bid” requirements under a shareholder rights plan Following the initial deposit period, all successful bids must be extended for an additional 10 days to enable any shareholder that had previously not tendered to tender its securities
Minimum deposit period Minimum deposit period of 35 days, with extensions given where variations are made to the bid Minimum deposit period of 105 days, which may be reduced at the option of the target, upon the acceptance by the target of a shorter deposit period for any other takeover bid or upon acceptance by the target of an “alternative transaction”

Implications and Issues

Through the new rules, the CSA has accomplished its goal of rebalancing the dynamics among bidders, target boards and target shareholders, and the new rules have a number of important implications.

Hostile Bids Are Now More Challenging

The new rules significantly shift leverage from hostile bidders toward target directors and shareholders. This will make hostile bids more difficult to complete and could, as a result, reduce hostile bid activity in Canada.

Time is generally the enemy of a hostile bidder. The longer a hostile bid remains outstanding, the greater the chance that a competing buyer will emerge, the target company’s circumstances will improve, market conditions will change or some other unexpected development will derail the transaction. The 105 Day Requirement should generally give target boards ample time to respond to an unsolicited offer and, if appropriate, run a thorough sales process to locate potential “white knight” bidders or make a more compelling case that target shareholders reject the hostile bid.

In addition, a longer bid period may mean that third party financing could become harder for bidders to obtain, or at least may be more expensive, as the lender’s commitment will need to be in place for a longer period. Bidders may also find it more challenging to convince key target shareholders to “lock up” to their offer for a minimum of 105 days.

The Minimum Tender Condition and 10 Day Extension Requirement remove what has been one of the most effective tactics available to a hostile bidder – the ability to waive its minimum tender condition and acquire “any and all” tendered shares. That ability permitted a hostile bidder to acquire an effective control position in the target, allowing it to block a competing transaction even if it was unable to gain majority control of the target. This, together with the fact that target shareholders may not know before the tender deadline what the outcome of the bid would be, led to persistent concerns under the previous rules that shareholders could be coerced into tendering to a hostile bid due to the possibility that they may be “left behind” in a potentially illiquid investment with no prospect of another liquidity transaction. Under the new rules, more shareholders may wait to see how the bid plays out before tendering, which could make it even harder for hostile bids to succeed.

Partial bids – offers to acquire less than all of the target company’s outstanding shares – are expected to be much more difficult to execute. Because the Minimum Tender Condition applies to all bids, a bidder that launches a bid for even a relatively small percentage of the target’s shares must still convince the holders of more than 50% of the outstanding shares not owned by it to endorse the offer by tendering to it. However, since partial bids have been quite rare in Canada, the impact of the new rules on partial bids may be of limited practical consequence.

Hostile Bid Tactics Will Evolve

The new rules are expected to cause both bidders and target companies to adjust their hostile bid tactics and commit significant resources to waging hostile bid campaigns. Since a bid’s success or failure will turn on collective, and not individual, decision making by the target shareholders, we expect that bidders will devote more resources to aggressive public relations and solicitation campaigns (e.g., social media, white papers, websites, etc.) to convince shareholders to tender. Proxy solicitors, public relations consultants and social media experts will play an important role on both sides of a hostile bid transaction.

Rights Plans Will Have Limited Utility

Although the need for targets to adopt “tactical” rights plans in the face of a hostile bid is expected to decrease significantly, many issuers may maintain rights plans to prevent “creeping” takeover bids.  The latter are still possible through takeover bid exemptions which permit, for example, the acquisition of shares under a private agreement or through limited market purchases, and which are not affected by the new rules.


The new rules are expected to have a significant effect on the manner in which takeover bids are conducted in Canada and the securities regulators’ role in takeover bid transactions.  In particular, these rules will eliminate some of the most coercive elements of hostile bids available under the previous rules and significantly increase the time available to target boards to explore  potential alternatives to a hostile bid. Yet although the new rules change the playing field, they do not abandon the Canadian principle that a target board cannot indefinitely “just say no.” If there is an offer on the table, shareholders will generally continue to have the final say.


The Automatic Exchange of Financial Information in Bulgarian Context – the Reach

I. Introduction

In 2015 Bulgaria introduced in its Tax and Social Security Procedure Code (“TSSPC”) a system implementing the regionally and globally harmonized rules on automatic exchange of financial information in the field of taxation. The participating jurisdictions are the European Union member states under Directive 2014/107/EC amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (“Directive 2014/107/ЕС”), the United States of America under the intergovernmental Agreement to Improve International Tax Compliance and to Implement FATCA (Foreign Account Tax Compliance Act) and any other jurisdiction, with which Bulgaria or the EU has concluded a treaty for exchange of information. As a result, a whole new section became effective in 2016, regulating the obligations of the financial institutions to collect and submit information and to conduct complex audits. Thus the Bulgarian legislator complied with its EU law and international obligations for fighting against tax evasion. The TSSPC also takes into account the Common Reporting Standard for automatic exchange of financial information (CRS) of the Organization for Economic Co-operation and Development (OECD).

Against this backdrop, the TSSPC aligns with the expectations for compliance with all of the above stated pieces of legislation and should not be regarded as the elephant in the room from comparative point of view especially when put next to other national legislations in the EU.

Further below, one could find an essential overview of the newly established countering tax evasion reporting system.

II. Who is affected?

The persons affected from the new rules on Automatic Exchange of Financial Information are to be differentiated in persons whose accounts are subject to processing and provision of information (i.e. “Reportable Persons”) and the institutions that are under the obligation to collect, process and submit the relevant information for the respective Reportable persons (“i.e. “Reporting Financial Institutions”).

  1. Reportable Persons

For the purposes of the TSSPC and the Automatic Exchange of Financial Information system a Reportable Person is (i) an individual or entity that is resident for tax purposes in one or more participating jurisdictions under the tax laws of such jurisdiction, or a hotchpot of a late that was resident for tax purposes of a participating jurisdiction. Where the tax residency of an entity such as a partnership, limited liability partnership or similar legal arrangement (except for trusts that are passive non-financial entities) cannot be determined, such entities shall be treated as resident in the jurisdiction in which their place of effective management is situated. The TSSPC provides explicitly that corporations, whose stocks are regularly traded on one or more established securities markets and its affiliated corporations, governmental entities, international organizations, central banks and financial institutions, are to be excluded from the list of persons for which reporting is made. Specific definition exists for Reportable Persons under the FATCA Agreement. A Reportable Person is any US person specified under Article 1, Paragraph (1), letter (aa) of the FATCA Agreement.

  1. Reporting Financial Institutions

The TSSPC categorizes the persons, who are under the obligation to collect, process and submit the information. The main group of persons refers to the so called “Reporting Bulgarian Financial Institutions”. In general terms these include custodial institutions, depository institutions (i.e. banks), investment entities, and some insurance companies.

Geographic-wise the coverage of the TSSPC spreads to encompass any financial institution that is resident for tax purposes in Bulgaria (excluding branches of such financial institutions located outside Bulgaria) and any branch of a financial institution that is not resident for tax purposes in Bulgaria, if that branch is located in Bulgaria.

III. What type of information would be collected and shared?

The Reporting Financial Institutions are under the obligation to provide to the Executive Director of the National Revenue Agency certain information on individuals or legal entities and their accounts, meeting the conditions for being qualified as reportable[1]. Such information would comprise the following:

  1. name / company name, address, the participating jurisdiction of which the respective person is a tax resident, the taxpayer identification number, date and place of birth (if an individual) for each account holder, who qualifies as a Reportable Person;
  2. where the account holder is an entity which, after implementation of due diligence procedures, has been identified as a passive non-financial entity with one or more controlling persons, who are Reportable Persons then the following information is to be provided: name, address, taxpayer identification number and participating jurisdiction or other jurisdiction of which the entity is a tax resident, as well as for each controlling Reportable Person the name, address, participating jurisdiction of which that person is a tax resident, the taxpayer identification number, date and place of birth;
  3. account number or, where there is no number, the functional equivalent;
  4. name and identification number of the reporting financial institution;
  5. account balance or value, including, in the case of a cash value insurance contract or an annuity contract – the cash value or surrender value, as of the end of the calendar year or the date on which the account is closed;
  6. in the event of a custodial account:
    1. the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year, and
    2. the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year, with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;
  7. in the event of a deposit account: the total gross amount of interest paid or accrued (credited) into the account during the calendar year;
  8. in the event of an account not specified in item 6 or item 7 above then the following information is to be provided: the total gross amount paid or accrued into the account to the benefit of the account holder during the year, with regard to which amount the Reporting Financial Institution has a reporting obligation, including the aggregate amount of any redemption payments to the account holder during the calendar year.

IV. How is it collected?

The Reporting Financial Institutions are obliged to follow specific due diligence procedures in order to acquire and process the necessary information for the Reportable Persons. The procedures for collection of complex and diverse data differ depending on whether the Reportable Person is a legal entity or a natural person and whether the accounts under examination are existing or newly created.

  1. Individuals

For natural persons it should be noted that there is also a difference in the methods of scrutiny of low value and high value accounts. The relevant threshold for differentiating between low value and high value accounts is USD 1,000,000. Against this background, the TSSPC chose to combine both the permanent residence address test and the indicia search test. The permanent residence address test uses information on the addresses of the Reported Person stored by the Reporting Financial Institution. The indicia search test on the other hand is based on the electronic data held by the Reporting Financial Institution for low value existing accounts. The indicia search test is to be used by the Reporting Financial Institution only where the Reporting Financial Institution does not apply the permanent residence address test. On the basis of such tests the Reporting Financial Institution may qualify a Reported Person as a tax resident of any of the participating jurisdictions. The test applicable for the FATCA Agreement obligations is in fact an adjusted version of the indicia search test, which includes also a check on whether the person is an US citizen and whether the person is born in the United States.

More stringent procedures apply for high value accounts of natural persons. In these cases the Reporting Financial Institution is to use the indicia search test without application of the permanent residence address test. The more stringent review requires the Reporting Financial Institution to scrutinize the electronic dossier of the respective person and the paper dossier for the last five years where necessary (as the case may be).

For the purposes of the FATCA Agreement, the Reporting Financial Institutions have the discretion not to implement the due diligence procedures and not report on the following already existing individual accounts:

  • a pre-existing individual account with a balance or value not exceeding the BGN equivalent of USD 50,000 as of 30 June 2014;
  • a cash value insurance contract or an annuity contract with a balance or value equal to or lower than the BGN equivalent of USD 250,000 as of 30 June 2014;
  • a deposit account with a balance equal to or lower than the BGN equivalent of USD 50,000 as of 30 June 2014.

Finally, with regard to individuals and for their newly created accounts, as a general rule, a self-certification procedure applies, which aims at collecting the necessary information for determination of the tax residency of the respective person on the basis of a sample declaration.

  1. Entities

Regarding existing accounts of legal entities the TSSPC introduces a threshold below which the Reporting Financial Institutions are not obliged to perform the due diligence check. Nevertheless, they retain their full right to do so. The threshold is the BGN equivalent of USD 250,000 (for the purposes of the FATCA Agreement the relevant sum is the BGN equivalent of USD 1,000,000) as of 31 December 2015 (for the purposes of the FATCA Agreement the relevant date is 30 June 2014). However, if the value of the accounts is over the threshold or exceeds at certain point in time the threshold the account would be subject to review.

With respect to accounts for which a due diligence check is performed, the Reporting Financial Institution should carry out an examination on whether the entity(ies) holding the account is a Reportable Person or a passive non-financial entity.

The Reporting Financial Institutions analyze available documentation and information in order to determine whether the entity is a Reportable Person. The TSSPC provides that the Reporting Financial Institutions could use the information kept for regulatory or customer relation purposes, including information submitted for compliance with the anti-money laundering legislation and the self-certification method.

The Reporting Financial Institution must determine whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons. This check is made on the basis of the information that the Reporting Financial Institution already has on the entity, including information provided for anti-money laundering purposes and also on publicly available information. If any of the controlling persons of the passive non-financial entity is a Reportable Person, then the reporting financial institution must treat the account as a reportable account. Specific rules for determining passive non-financial entities exist for the purposes of the FATCA Agreement.

For newly created entity accounts, a check needs to be performed by the Reporting Financial Institution whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons, similarly to the checks of existing accounts. Two of the main differences between the due diligence procedures for existing accounts and for newly created accounts are: first for the latter no thresholds apply and secondly the collection of the necessary information is made through the self-certification method (i.e. through submission of a sample-form declaration). For the purposes of the FATCA Agreement specific due diligence procedure applies.

V. Temporal Reach

From temporal standpoint 2016 is the first year for which automatic exchange of information would be effected between the National Revenue Authorities and the competent authorities of the participating jurisdictions. This, however, is subject to exceptions agreed under an international agreements for automatic exchange of financial information (i.e. in situation where such international agreements provide for other relevant dates). For instance, regarding the exchange of financial information with the competent authorities of the United States, the earliest starting year, as of which an exchange of information is to be performed, is 2014. Thus, depending on the data to be exchanged and the regime under which it is exchanged, it is possible that an exchange is performed retrospectively.

Last but not least, it should be recognized that the financial institutions providing information should complete the review of existing accounts of individuals of high value until 31st of December 2016 and existing accounts of individuals of low value until 31st of December 2017. A high value existing account under the TSSPC is an account with total amount or value that exceed the BGN equivalent of USD 1,000,000 as of the 31st of December 2015 or 31st of December of each subsequent year. For the purposes of FATCA Agreement the relevant dates for estimation of whether the threshold is met or exceeded are 30th of June 2014, 31st of December 2015 or 31st of December of each subsequent year. An existing low value account of an individual is one with total amount or value below the BGN equivalent of USD 1,000,000 as of 31st December 2015. For FATCA purposes the date is 30 June 2014.

The review of existing accounts of entities (legal entity or legal arrangement, including company, partnership, trust or foundation) with total amount or value exceeding the BGN equivalent of USD 250,000 should be completed until 31st of December 2017, and for FATCA purposes until 30th of June 2016.

The Reporting Financial Institutions should supply the collected information to the National Revenue Authorities on an annual basis in electronic manner by 30th of June of the year following the year of collection of the financial information.

VI. Conclusion

The TSSPC implements the idea of introducing a somehow uniform standard in the automatic exchange of financial information. The TSSPC relies on three main methods in the process of collection and processing of the relevant data. These are the permanent residence address test, the indicia search test and the self-certification method. The first two tests count mainly on the anti-money laundering and know your client data bases kept by the Reporting Institutions. Nevertheless, all these methods of collection and processing of information and the possibility of having the obligation to make a retrospective examination of accounts and persons in fact affect both the economic operators acting as Reporting Financial Institutions and their clients, namely the Reportable Persons. They create burdensome administrative obligations for both service providers and clients, the effectiveness of which is yet to be seen. Thus, the assessment on whether this new system is proportionate to the aim of countering tax evasion and whether the same results can be achieved through less restrictive and less burdensome measures is also yet to be made.

[1]           Reportable account means a financial account that is maintained by a reporting financial institution and is held by one or more reportable persons or by a passive non-financial entity with one or more controlling persons that are reportable persons, provided it has been identified as such pursuant to the relevant due diligence procedures.

Structuring European M&A activity: why Gibraltar?

The European M&A market saw record trends in 2015, with Q4 2015 being the highest ever quarter for deal value in Europe, exceeding €420billion[1]. A weakening euro resulted in strong US investment playing an important role, and amounting to over US$ 208 billion. This seems to have particularly fuelled European M&A, which saw deal values increase 40% in the first quarter of 2016, compared to the same period in 2015, despite uncertainty in Europe in the lead-up to the UK referendum on retention of its EU membership.[2]

The increasingly international nature of transactions is evidenced by the fact that cross-border M&A represents significant proportions of overall activity. The key challenge in structuring deals of this nature is to minimise costs for the purchaser, both in terms of professional fees and importantly, tax liabilities. Gibraltar provides unique attributes which make it an ideal international financial centre for structuring M&A transactions.

The recent decision of the UK to leave the EU will affect Gibraltar, which depends on the UK’s EU status for its own membership. While this has inevitably created a period of uncertainty, the EU methodologies discussed in this article will certainly remain available until such time as Article 50 of The Lisbon Treaty is triggered by the UK government and EU law ceases to be applicable to the UK.

 1. Membership of the EU

Companies looking to enter into the European single-market can use Gibraltar as a gateway to Europe. In contrast with the other international financial centres, it is often compared to, such as Jersey or Guernsey, Gibraltar’s membership of the EU enables a Gibraltar company to passport services throughout Europe at low cost, with the support of a cooperative, easily accessible, responsive and business-focused regulator. These factors make Gibraltar an attractive location for inbound European M&A activity from the US and Asia.

A Gibraltar vehicle could also be used for the structuring of deals involving other EU member state companies, which is facilitated by the fact that Gibraltar has transposed the Cross Border Merger Directive (“the CBMD”).

The CBMD facilitates cross-border M&A activity for limited companies by providing a simple framework drawing largely on national laws applicable to domestic mergers. This avoids the sometimes prohibitively high costs of cross-border M&A deals, as well as avoiding the winding up of the target company. A Gibraltar company can merge with a company registered in any other EU member state. Interestingly, the CBMD does not operate between Gibraltar and the UK, which are not deemed to be the separate EU Member States for this purpose. The same result can be obtained, however, by undertaking two cross-border mergers, one between the Gibraltar company and a company registered anywhere in the EU, and another between that company and the UK company.

Gibraltar’s EU membership and first class regulatory regime means that holding structures or special purpose vehicles in Gibraltar will be fully compliant with the standards expected by the European Commission and applicable tax laws. This, coupled with Gibraltar’s adoption of EU standards of administrative co-operation in the field of taxation and other tax information exchange regimes, resulted in Gibraltar scoring “largely compliant” in its review by the OECD. This reputation facilitates dealings with third parties, ensuring lack of transparency does not hinder the business.

2. Flexible company law regime for modern-day transactions and business-focused tax laws

  • Corporate law and tax regime 

    Gibraltar overhauled its Companies Act in 2014, to include some features which make Gibraltar companies attractive for structuring acquisition vehicles and facilitating M&A activity. Gibraltar corporate vehicles enjoy the flexibility of the English common law; a legal regime which is widely used and preferred by businesses around the world. A Gibraltar company only requires one director and one secretary (which can be corporate entities), with no requirements for agents or resident directors (although the location of management and control can determine the company’s tax residence). There is no limit on the number of shareholders a company can have, which enables a Gibraltar company to be funded easily with a large share capital, which would be subjected to a fixed capital duty of only £10. It is also possible to have different share classes, such as redeemable shares, or shares with preferential rights to dividend and/or a return of capital on a winding up. There are no minimum capital requirements and share capital can be denominated in any lawful currency. Shares can be issued  per any value and at a premium. Nominee shareholdings are also permitted.The taxation of companies are relatively simple, and also facilitate business needs. All companies are chargeable on taxable profits accrued and derived in Gibraltar, at a fixed rate of 10%. Capital gains are not taxed, and no withholding tax is imposed on the payment of interest or dividends. Interest income is generally not taxable, unless it is inter-company loan interest that is received by or accrues to a company and is in excess of £100,000 p.a. Furthermore, the transfer of shares in a Gibraltar company is not subject to any tax or duty, unless the company whose shares are transferred holds Gibraltar real estate.

  • Gibco as an investment vehicle 

    Gibraltar Private Limited companies are able to convert to public companies, as well as a number of different forms. The shares of Gibraltar companies have been listed on international recognised stock exchanges, such as the London Stock Exchange. The fact that capital gains are not taxed makes an IPO for institutional investors and private equity houses to be attractive. It is also possible for Gibraltar companies to return capital to shareholders (e.g., by delivering redemption proceeds on a redemption of the shares) as opposed to distributing profits by way of dividend.The fund industry in Gibraltar has been growing at a rapid pace and continues to expand. There are many types of fund in Gibraltar, including private funds, Experienced Investor Funds (EIFs), Non-UCITS Retail funds and protected cell companies. This makes Gibraltar a serious option for basing investment funds.

3. Mergers and schemes of arrangement

Mergers are possible for public companies, and the Companies Act 2014 provides a framework for reconstructions and schemes of arrangement. The recent prohibition on cancellation schemes of arrangement in the UK (by virtue of the Companies Act (Amendment of Part 17) Regulations 2015) has resulted in stamp duty payments on the transfer of shares being an additional cost to a purchaser. Given that cancellation schemes were the overwhelmingly preferred structure for conducting high value acquisitions, the closure of this loophole has resulted in a significant increase in costs involved in an acquisition. While the rate of stamp duty in the UK is currently only set at 0.5%, this can amount to a significant quantity in a high-value M&A deal. Purchasers of UK businesses may therefore consider whether the stamp duty saving could be retained by using Gibraltar to structure the deal.

The UK prohibition on cancellation schemes does not prevent a cancellation scheme of arrangement from being used to insert a holding company over the target company. It is possible therefore, to insert a Gibraltar holding company over the UK target, by cancelling the shares in the UK company in consideration for issuing to the shareholders, new shares in a Gibraltar company which will hold shares in the target. A purchaser could then acquire the shares in the Gibraltar company by way of a share transfer.

The shares of a Gibraltar company with a share register maintained outside the UK are not subject to stamp duty in the UK. In Gibraltar, no stamp duty is payable on shares (unless the transaction involves real estate located in Gibraltar). In an increasingly cost-conscious market, this can amount to a significant saving for the purchaser.

The proposal is illustrated below:

  1. Shares in UKCo cancelled, in consideration for the issuing of shares in Gibraltar HoldCofig1
  1. BuyerCo purchases shares of Gibraltar HoldCo. No stamp duty is payable in the UK on shares in Gibraltar companies and no stamp duty on shares in Gibraltar.fig2

In addition, there would be no tax on the dividends received from the UK target to the Gibraltar HoldCo, and no withholding tax on dividends paid from Gibraltar HoldCo to the BuyerCo. Corporation tax would only be on profits accrued and derived in Gibraltar, at a flat rate of 10%.Furthermore, the lack of VAT provides significant savings on professional fees.

4. Redomiciliation

Gibraltar law permits redomiciliation of companies registered in a number of other countries to Gibraltar, as well as the redomiciliation of Gibraltar companies elsewhere. This can be vastly helpful in the context of M&A transactions. In the above example, for instance, companies incorporated and registered in jurisdictions which do not recognise the scheme of arrangement, who wish to take advantage of the benefits structuring the acquisition in this way can provide redomicile under the Companies Act 2014. Once redomiciled to Gibraltar, the scheme of arrangement provisions under Gibraltar corporate law can be utilised. Similarly, after completing an M&A transaction, the new business may consider redomiciling to Gibraltar to take advantage of the competitive and flexible taxation and legal regime.

Companies registered in any of the following jurisdictions may redomicile into Gibraltar:

Any of the EEA States, Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, Cayman Islands, Falkland Islands, Guernsey, Isle of Man, Jersey, Montserrat, Pitcaim, St. Helena, Turks and Caicos Islands, British Virgin Islands, States which are members of the British Commonwealth, Liberia, Panama, Singapore, Switzerland, Hong Kong and the USA.

The arrangements are reciprocal, so a Gibraltar company is also able (subject to local laws) to redomicile into any of the above-listed jurisdictions.

Upon a redomiciliation, a company continues in uninterrupted existence, so the assets and liabilities, rights and obligations of the company remain as they are in the original state, which further facilitates post-acquisition synergies.

5. SocietasEuropaeas

The Companies Registrar in Gibraltar recognises and registers SocietasEuropaeas, which also facilitates cross-border M&A activity.. Such entities are able to transfer their registered office from one EU member state to another, without having to comply with the more onerous procedure to migrate a company, which involves the transfer of assets and liabilities, dissolutions and re-incorporations. A SocietasEuropaeas can be formed by a merger between two public companies in different EU Member States. This may be of particular benefit to companies in the gaming sector, as many of the largest providers in the gambling market operate out of Gibraltar.

6. Conclusion

At a time where clients are more cost-conscious than ever, structuring a merger or acquisition effectively, while keeping costs and tax-liabilities at a minimum is key. Gibraltar offers a variety of mechanisms for M&A deal structures, as well as post-transaction corporate group structuring. Gibraltar boasts a diversified economy which is rapidly growing in sectors such as financial services, gaming, shipping and tourism. Despite the uncertainty and instability resulting from the UK’s decision to exit the EU, the legal matrix in which the market operates remains unchanged. Following 2015 as a record year in the European M&A market, 2016 may see Gibraltar featuring increasingly on the radars of M&A professionals, indicating that notwithstanding its small size, Gibraltar has a lot to offer.

[1]Deloitte“Impact of the EU referendum on M&A activity in the UK” accessed on 5th August 2016 on