We can list numerous corporations who rushed into professional marriages without performing legal due diligence or reviewing the corporate structure and relevant documents of the company.
An acquisition transaction is one of the most appropriate decisions taken by a company which frames the future of any organization. Thus, careful due diligence into the financial reports of the target company holds utmost importance.
Legal due diligence of a corporate entity is often a lengthy and a cumbersome task, which can significantly impact the timeline of the project. In any merger or acquisition, parties are usually concerned about the time frame and desire to finish the transaction at the earliest. The Corporate Lawyers of UAE will highlight certain important aspects of due diligence in any merger or acquisition transaction under UAE laws.
Epitome of Due-Diligence
In any Merger or Acquisition transaction, it is advised to evaluate the strengths and weaknesses of the project as well as the target company and its sister companies prior to finalising the deal. The objective of the concerned exercise to obtain all relevant and up-to-date information of the target entity and to understand the significant shortcomings of the company which were earlier not apparent. It can further assist in understanding the financial or legal consequences that might hinder the future growth of the company or can impact the return on investment.
Legal due diligence mostly conducted by Corporate Lawyers of Dubai will comprise of financial and legal review of the targeted company. Wherein, the financial analysis is usually performed by financial experts, and qualified Corporate Lawyers undertake the legal review. In any legal due diligence, lawyers tend to review structure of the company, corporate documents, trade licenses, management structure, power of attorneys, corporate agreements, financial liabilities, employment contracts, outstanding debts, internal policies, insurance agreements or policies, movable and immovable assets, mortgages, loans, corporate and commercial litigation and list goes on. As mentioned above, the ultimate objective of this exercise to prevent the acquiring company from any future casualties post taking over the target company.
The scope of due diligence exercise vary in each transaction, and it will rarely be general and covers all aspects of the company related to the sale. It is less likely that the due diligence review will be limited in scope as it involves review of all significant issues pertaining to the company which might impact the merger or acquisition transaction. It further depends upon the organization structure and the business of the target company that can either be retail, construction, telecommunication or any other activity. In each of the companies, the lawyers have to review the business structure, assets in order to determine the shortcomings of the company and how to improvise such deficiencies. There is a direct nexus between the size of the company and the extent of due diligence review as for a small acquisition transaction does not require extensive due diligence review. However, in a significant acquisition transaction, a thorough investigation of documents is required for in-depth knowledge of target-company.
For instance, in an acquisition transaction between companies providing professional services, the due diligence review will entail reviewing the competence of employees and their contract, determining the licenses obtained by the company, goodwill in the market, intellectual property registration, contracts entered by the company. Whereas, if the target company is sale oriented then it is likely to review the goods purchased and sold, outstanding debt in the market, movable and immovable assets of the company, machinery, factories, additional permits and licenses.
The target company in an acquisition transaction is obliged to provide every relevant document of the company which can affect the acquisition transaction or which is necessary for acquiring the company to review before finalising the deal. The seller will create a data room either online or physical through which they can offer all the relevant documents to the company or their legal representatives. It is essential for the target company to provide all documents otherwise the process and timeline will unduly increase delaying the transaction unnecessarily.
Timeline for Review
The schedule for finishing any due-diligence review is directly correlated to the size of the transaction and the number of documents made accessible for the survey. The seller will either required to provide copies of all documentation or create an information room and give adequate access to it to the legal advisors, bookkeepers and different experts surveying the literature for the buyer. The seller ought to likewise provide answers to inquiries raised by the buyer’s consultants amid the survey that emerges out of the documents submitted. In such circumstances, the process can be completed within a standard time frame. The course of events will undoubtedly be expanded where a seller isn’t adequately helpful and is hesitant to give materials, and data asked for or neglects to do as such quickly. For giant acquisition transaction, parties split up the review into several stages where each stage entails an analysis of specific documentation. Accordingly, the parties can fix a timeline for each step and all the stages can be either co-dependent on each other and can be separated at the same time.
Legal due diligence offers an opportunity to the party to determine the assets, liabilities, market standing, internal structure, management of the target company before finalizing the deal in order to understand the future legal and financial repercussions. It is most beneficial for the purchasing company to determine the current status of the target company and the amount of further investment required in the company. On the basis of the due diligence report, the buyer will be able to analyze the transaction completely and will be able to understand the advantages and disadvantages of acquiring the company. It also opens an opportunity for the buyer to check whether the price offered for the acquisition is up to the standards of the company or will there be a room for negotiations.
It further allows the seller to provide an opportunity for the buyer to remedy if there is any deficiency prior to the transaction. It is always prudent to conduct the due diligence review before the transaction to have complete information prior to signing the deal.
Legal Due diligence in an acquisition transaction is a pivotal step which evaluates the risks involved in the transaction by reviewing the relevant corporate documents of the target company. The exercise will aim to inform the buyer about the true features of the company targeted which subsequently guarantees that necessary precautions are taken while arranging and finalizing the acquisition transaction. As of late, there has been a pattern increasingly more towards gatherings acquiring guarantee insurance to alleviate the dangers related to M&A transactions. Subject to specific prohibitions, this protection will safeguard the parties against costs related to defaults in the due diligence procedure by either party failing to provide relevant documentation. Nevertheless, due diligence review is of the most important part of an acquisition transaction, if carefully undertaken by best Corporate Lawyers in UAE.
There are many great reasons to start your own company, including the desire to be your own boss, the desire to make something happen, passion about your product or service, or even the desire to make more money. A successful startup will need the following:
Healthy financial resources or a solid plan to get them; and
Ensuring that best industry practices are followed.
Regardless of the reason for starting your own company, a startup requires many factors to work so the likelihood of success for startups is still relatively low. Many entrepreneurs are satisfied with their startup being acquired (i.e. bought over) by a bigger company, so that they can reasonable profit upon selling their business. In fact, in the global market, American companies are major acquirers of startups and pay more per acquisition than European companies. Like any buying and selling transaction, there are lots of factors to consider before agreeing to let a bigger company acquire your startup.
First, it is important to understand what kind of buyers/acquirers you may encounter:
Potential buyers could be venture capitalists (VCs), who want to take your company to a new level. In some cases, VCs offer to just invest in your company, while guiding you to success; but in others, the VCs might ask you to step aside, sell your interest, and give up your job in exchange for a large sum of money. If you elect to take VC money as an investment, your investors will likely point out areas of improvement to increase profits. In the case of most startups, few thoroughly analyze their operation for potential problem sectors.
You may not be the only company in the market for your particular product or service, and might have numerous competitors. A competitor may wish to acquire your startup to capture your customers as theirs, or they may buy your company so they can shut it down to eliminate their competition.
A company that your startup supplies to may find it more practical to acquire your business rather than pay you money for your products as its vendor. Alternatively, a company may want to buy your company so that it can sell your products to their customers under their name.
Patents, trademarks, and other intellectual property can be highly valuable, and if you have a patented product or a trade name that another company wants, you can be an acquisition target.
We’ve identified the different buyers that may want to acquire you, and their possible reasons for wanting to acquire your startup, which is the easy part. The next step is to identify how to make your company visible and attractive to potential acquirers. The following is a list of things you will need to do this:
Those with the Means to Acquire You
When big companies look to expand, they have to decide whether to build or buy. Hypothetically speaking, let’s say that General Mills is looking to add energy bars to their arsenal, which your startup happens to produce. General Mills can always start an energy bar division from scratch, but if a company exists that already meets their criteria, then buying that company may be more cost effective than building one from scratch. If you are setting yourself up as an acquisition target, you need to first identify potential buyers, and then once they have been targeted, you need to get your startup ready.
A Solid Vision
It is important to make sure your company’s vision aligns with your potential acquirer. For example, if Pepsi is the targeted buyer, and they are currently looking to target a healthier market, you should tailor your next big product launch to be for a health-based drink, and not something like Super Sweet Natural Sugar Flavored Tea.
The idea is to look for and attract potential acquirers that are compatible with the products and services of your startup.
An Attractive Product
If acquisition is the main goal, you will need a superior product. An old-school business motto is that to enter a market, you need a product or service that is better, cheaper and faster than the ones that already exist. Today, disruptive is also on that list. Clayton Christensen described disruption as an “innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products and alliances.” Chief examples are Uber and Lyft.
Sometimes an acquirer can be drawn in by a well-oiled team. A company will consider buying a startup if they know the team is well-versed in the product or service and they can avoid the learning curve that comes with hiring new people.
A Good Story
Another thing in common about startups that are successfully acquired is a great story. That great story can be about how you develop your products, build your company structure, serve your customers, and simultaneously plan for the future. A great story goes a long way in attracting potential acquirers.
Technological integration of your product or service can really boost the chances of acquisition. For example, well-developed app or system that efficiently moves your product or service into your customer’s hands can quickly make you visible to bigger companies looking to expand.
Companies with a clean history will have a much better chance of being acquired. A recent CEO looking for financing on Shark Tank was was rejected once the sharks discovered that the company had lost $14 million earlier and had been operating for 10 years without showing a profit.
Finally, position yourself so that you can show how a potential deal will add value to both you and your acquirer. The key is to show the potential acquirer that their purchase will push them towards profitability, while making certain that your efforts and hard work are also rewarded.
A commercial lease for office or retail space is a serious commitment for your business. They are typically long-term contracts lasting at least five years, the rent is often your second-biggest monthly expense after payroll, and the rights and limitations in your lease agreement have major effects on your ability to expand, contract and relocate your business.
Companies large and small can make major mistakes when planning for new space and negotiating the lease – these are the most common.
1. Not Allocating Enough Time
Conventional wisdom in the commercial real estate industry is to allow six to 12 months to complete a deal for less than 10,000 square feet and nine to 18 months for larger deals. The lead time is required for the various complicated steps in any business relocation – due diligence of possible locations, negotiation of the lease, planning and design of your new space with an architect and engineer, bidding out and awarding the construction work required to customize the space (known as a “fit-out”), obtaining construction and business permits, and completion of the fit-out itself.
Just as important, the lease commencement date needs to take these steps into account. Otherwise, you’ll be paying rent for the new space before you’ve moved in. You’ll also need to coordinate your plans with your current landlord by giving sufficient notice of your move and negotiating a rent deal for any period that you remain in your current space beyond the term of your current lease (known as a holdover).
2. Insufficient Planning
Closely related to the lead time issue is the failure to adequately plan your new space. The way you want to do business should drive the location and design of your space; your real estate shouldn’t determine how you do business.
You need to think about how much space you need and whether you need any specialized space (reinforced floors for heavy equipment? a data center? backup power?). An experienced architect and a good tenant broker/representative can help your senior management consider all the right issues, including:
How will you coordinate moving all your business functions, particularly technology and your employees?
Who will make decisions about the ongoing project (a committee or one person)?
What corporate image do you want to project, and what kind of office space will convey this image?
What ratio of collaborative office space vs. private office space makes sense for how your business is run?
What is your budget?
What space plan makes sense for possible growth? (e.g. How much additional space might be needed in the next three to five years? Or is there a possibility of downsizing?)
3. Lack of Representation
There is no such thing as a “standard commercial lease.” Landlords – the building owners and their property managers – do not have your best interests in mind when they draft a lease, and business real estate deals have none of the legal consumer protections of apartment leases. The financial terms and legal provisions of most commercial leases are specialized and hard to understand, and most business people lack the background to effectively review and negotiate a lease agreement.
You’ll need an experienced commercial real estate lawyer admitted in the state where the property is located – preferably one who has dealt with your landlord (or your landlord’s lawyer) in prior deals. You should also seriously consider engaging a tenant broker/representative – a consultant that represents only commercial tenants (and NOT building owners or property managers) in leasing deals. A good tenant rep will know the condition of your market (like the current “market rent” per square foot in your city), the present and future vacancies in the buildings you are considering, and the best way to deal with the landlords of those buildings.
4. Lack of Due Diligence
The physical and legal condition of your company’s space can significantly affect your business operations, and you need to protect yourself with an investigation of the facts. In addition to reviewing the proposed lease, your real estate lawyer should also:
Confirm that the building’s zoning will permit your company to conduct its operations as intended.
Engage a title company to produce a report of the building’s liens, mortgage lenders and any pending legal claims.
In addition to planning and designing your new space, your architect and engineer should inspect the building’s electrical, plumbing and HVAC systems and review the space’s compliance with building codes, fire and safety regulations, and disabled person access laws. Your architect should also confirm that the leased space actually contains the square footage stated by the landlord.
5. Not Understanding Crucial Lease Provisions
This is the length of the lease – the commencement and termination dates. Like everything else in a commercial lease this not as straightforward as you think.
Does the term start when you sign it or only after you commence operations in the space (i.e. when the fit-out construction has been completed)?
Even if rent isn’t payable until you move in, is your business on the hook for building insurance and maintenance charges starting at the signing?
Near the beginning of the lease, you’ll see a clause entitled “Term.” This clause describes the length of your lease and specifies the starting and ending dates.
How can the Term be extended – does it happen automatically or only after a party gives notice?
Are there circumstances when you or the landlord can end the Term early?
Calculation of Rent
The calculation of rent and other tenant charges in most commercial leases is complicated and can result in some unpleasant surprises during the lease term if the terms aren’t fully understood at the beginning.
Some of the common rent structures are:
Single net lease or net lease: The tenant pays only its portion of the utilities and property tax (calculated by the percentage of space leased in the building), while the landlord pays for all maintenance, repairs and insurance.
Net-net, or double net lease: The tenant is responsible only for its portion of the utilities, property taxes and insurance premiums for the building (again, based on the percentage of space leased in the building), with the landlord paying all maintenance and repairs.
Triple net leases: Tenant pays its portion of all costs of the building, except the landlord is generally responsible for structural repairs.
Full service gross, or modified gross lease (also called modified net lease): The tenant and landlord agree to split structural repairs and operating expenses (property taxes, property insurance, common area maintenance and utilities), with the tenant’s portion called “base rent.”
Percentage lease: Used almost exclusively for leases of retail space, this type of lease means some portion of the rent is calculated as a percentage of the tenant’s customer sales at the property.
In addition, you need complete clarity on how and when rent can be increased – both on an annual basis and cumulatively over the entire Term.
Unlike a standard apartment lease, a commercial landlord can demand more than 2 months’ rent in cash. It can be whatever amount the landlord thinks it needs based on the creditworthiness of your business. If you are a brand new business without an operating history this will be a big issue for the landlord.
The landlord can also demand a security deposit in the form of a Letter of Credit issued by a bank. With an LC your bank sets aside a portion of your cash so that the landlord has an easy remedy if you breach the payment obligations under the lease (the landlord doesn’t need to sue you in court).
Improvements and Alterations
If the new space needs to be renovated or customized for your operations (a “fit-out”), the lease needs to specifically address these issues. You’ll need to negotiate who does the space design work, who does or manages the construction, whether there are hard deadlines for completion and who pays for it. It is also important to reach agreement on any rent payment obligations during the fit-out.
Parking and Signs
Day-to-day details can also be important in the lease. Does renting space in the building entitle you to a certain number of parking spaces? Do you need to pay for additional spaces if you need them. Where can you install signs identifying your business? Do they need to be designed in a certain way?
If your business and the landlord get into a dispute, how will it be resolved? Is there a required period of negotiation? Do the parties need to submit the dispute to mediation (usually cheaper than court) or can the parties sue each other immediately? Are rent obligations suspended during a major dispute? Can you withhold a portion of the rent that reflects the cost of the disputed issue?
6. Not Focusing the Lease Negotiations on Key Business Issues
Prospective tenants should not focus only on the rent and other payment terms – other key lease provisions can be much more significant to the future of your business. It’s important to ask and resolve the following questions:
How much notice does the landlord entity need to give if it wants to relocate your space to another part of the building?
Can you sublet or assign part of the lease if your business contracts?
Can you acquire additional space in the building if your business expands?
Can you cancel the lease and move to another building if there’s insufficient available expansion space?
Can you extend the term if you want to stay in the building?
Can you assign the lease to a buyer of your business?
Is the lease still valid if your business has a change of control?
7. Underestimating Negotiation Leverage
A tenant representative will understand the current condition of the real estate market in your city and the current situation of your particular landlord. For example, does the landlord need tenants? Is it about to lose a major tenant which will cause a significant vacancy in the building? Or does the landlord have a fully leased building for the indefinite future? Without this information, your company won’t understand how much negotiating leverage you may have and the range of incentives your landlord may be willing to offer to sign a new tenant.
Landlords will commonly agree to:
Periods when no rent is payable (so called “free rent”).
Periods of discounted rent.
Contributions to the costs of the tenant’s fit-out of the space.
Make certain improvements to the building that the tenant wants or needs.
A cap on annual rent increases (including the portions tied to building expenses).
In addition, landlords can often be persuaded that no personal guarantee will be required from the tenant’s owners or major shareholders to back up the payment obligations in the lease. Or if a guarantee is required at the beginning of the lease, landlords will sometimes agree that it expires a few years into the initial term once a you establish a reliable payment history.
A good foundation is crucial in starting any business and one of the pillars that keep a business stout and upright is a great business lawyer. As a business owner, you want to allot your focus and energy in running and growing the business while someone else is on top of understanding the legalities that surround the business. Just how crucial is it to have an attorney right at the very beginning of your business journey?
Almost every aspect of your business would call for an effective business attorney – from choosing the business type upon putting up the company, to writing contracts, resolving business claims and issues, and navigating mergers and acquisitions, to name a few. A common mistake businesses make is holding off hiring a business lawyer until they need one. Here are some of the aspects of a business in which a business lawyer plays an integral role.
Preparing contracts with clients and suppliers. Business lawyers know how to make contracts iron-clad in order for all parties to be well-protected. When signing a contract for any reason, your attorney will be in charge of spotting issues and negotiate revisions to contracts with loopholes that can potentially put you in unnecessary liabilities in the future.
Securing intellectual properties through trademark and copyright protection. While patents and copyrights are handled by intellectual property specialists, your business attorney can help you with these as they are part of legal networks. It would be an advantage if your business lawyer can also help you acquire patents and copyrights.
Transacting with landlords and real estate sellers. In terms of dealing with properties, and this includes leasing and warehousing, a business lawyer can thoroughly review contracts and agreements to make sure that you are getting into a fair and legitimate deal with a seller. Your lawyer must have a standard “tenant’s addendum” that contains provisions in your favor, which can be included in the printed lease document.
Knowing the tax consequences of your business transactions. You want to make sure that you do not encounter unnecessary tax liabilities while on business. While your accountant takes care of preparing and filing of taxes, having a business lawyer means you have somebody who knows how to register your business for both federal and state tax IDs, and understands the tax consequences of your business transactions.
Venues for Finding an Attorney
In your search for a great business lawyer, make use of various resources. This will garner more options and give you the ability to make a valid judgement. There are many channels that you can utilize and here are some of them:
Referrals. It is important to understand that every lawyer has their own strengths, and one way to gauge whether a lawyer is best fit for your particular problem is to seek the advice of people who have experienced the same. Find out who they hired at the time, and gather leads from there. However, relying solely on referrals might not give you reliable leads as the relationship between the business owner and lawyer will depend on how they respond to each other’s style and personality.
Local Bar Association. A bar association is a professional organization of lawyers serving different purposes. Most bar associations make referrals based on specific areas of law, which can help you find a lawyer with the right expertise and area concentration. However, there are services that make referrals without concern for the lawyer’s level of experience. Seek out referral services that work under programs certified by the American Bar Association.
Online Services. Sites such as Upcounsel can aid in finding and connecting with top-rated business attorneys who can provide a wide array of business law services for startups and large businesses alike.
Hiring a business lawyer is a major investment for any business, which is why optimal sourcing techniques are very crucial in this process. Not finding the right lawyer for your business will cost you money, and can potentially lead to long-term consequences for your company. Watch out for these red flags when making a decision:
The lawyer is not well-versed in the language of your business. In order to properly represent you, your business lawyer must speak your language and understand the field in which you are operating.
The lawyer is learning on the job. Your business should not be your lawyer’s on-the-job training. If you see that the lawyer is doing something completely new to him, he may not be the best candidate to represent your business.
The lawyer comes up with extra costs. Hiring a business lawyer should be a well-calculated move, and needless to say, it should be cost-effective. Surprise and extra costs must always be kept to a minimum.
Choosing an Attorney
After exhausting your resources to find the right business lawyer and coming up with a short list of candidates, it is time set up interviews. In your initial meeting, be ready and upfront in describing your business and your legal needs. Make sure to express that you are interested in building a long-term relationship. Take careful notes of what the lawyer says and does during the interview, and pay attention to these aspects:
Experience. Begin by asking how long they have been practicing law and their areas of expertise. Assess whether their expertise is aligned with the needs of your business.
Ability to communicate. It is crucial that you and your business lawyer have rapport, and you can gauge this as early as your initial interview. Your lawyer must be able to express himself clearly, without the use of too much jargon or legalese.
Availability. Ask the best way to reach him and how quickly he responds to phone calls or emails. Will he be available after business hours? This is crucial in your working relationship.
References. Ask the history of business and cases he had handled in the past, and see if they are similar with yours. You can also ask for a list of clients you can contact to ask about his competence, service, and fees.
Fees. Ask about his rate and the payment terms – flat, hourly, capped, etc. It is important to get this information as you can use it when you compare your candidates. However, do not decide based on the rate alone. The lowest rate may not be indicative of quality work.
With the Lundbeck Decision, the European Commission (the “Decision” and the “Commission,” respectively) ended its ten-year investigation on reverse payment settlements and found that the Danish pharmaceutical company, Lundbeck, and four generics producers had concluded anticompetitive agreements, in breach of Article 101 of the Treaty on the Functioning of the European Union (the “TFEU”). According to the Commission, this would have allowed Lundbeck to keep the price of its drug citalopram artificially high and delay the entry of cheaper medicines into the EU market.
On 8 September 2016, the EU General Court (the “General Court”) confirmed that certain pharmaceutical “reverse payment settlements” can constitute a breach of the EU antitrust rules (the “Ruling”). Under the so-called “reverse payment settlement agreements”, an original pharmaceutical manufacturer, or “originator”, settles an IP challenge from a manufacturer of generics by paying the latter to stay out of the market.
Lundbeck is “a global pharmaceutical company specializing in psychiatric and neurological disorders”. These include medicinal products for treating depression. From the late 1970s, Lundbeck developed and patented an antidepressant medicinal product containing the active ingredient citalopram’.
After its basic patent for the citalopram molecule had expired, Lundbeck only held a number of the so-called “process” patents, which, according to the Commission, provided only “a more limited protection”. In particular, Lundbeck had filed a salt crystallisation process patent.
According to the Commission, in 2002, Lundbeck concluded six agreements concerning citalopram with four entities active in the production or sale of generic medicinal products, namely Merck KGaA / Generics (UK), Alpharma, Arrow, and Ranbaxy. Always according to the Commission, in return for the generic undertakings’ commitment not to enter the citalopram market, Lundbeck paid them substantial amounts. In addition, Lundbeck purchased stocks of generic products for the sole purpose of destroying them, and offered guaranteed profits in a distribution agreement.
In October 2003, the Commission was informed of the existence of the agreements at issue by the Konkurrence- og Forbrugerstyrelsen (the “KFST”, the Danish authority for competition and consumers). The Commission took over the case and, by the decision of 19 June 2013, made the following findings: (i) Lundbeck and the generic undertakings were at least potential competitors; and (ii) the agreements at issue constituted restrictions of competition by object, in breach of the prohibition of anti-competitive agreements provided under Article 101 TFEU. The Commission imposed a total fine of €93.7 million on Lundbeck and € 52.2 million on the generic undertakings. The Commission took into consideration the length of its investigation (almost ten years) as a mitigating circumstance which led to fine reductions of 10%. Lundbeck and the generic undertakings brought actions before the General Court, seeking the annulment of the Commission’s decision. The Court dismissed the actions brought by Lundbeck and the generic undertakings and confirmed the fines imposed on them by the Commission.
After the Lundbeck case, in 2013 and 2014, the Commission imposed fines on companies in two other reverse settlement investigations – one concerning fentanyl, a pain-killer, and the other concerning perindopril, a cardiovascular medicine. The Fentanyl decision was not appealed. Several appeals against the Servier decision are pending before the General Court. In 2016, in the Paroxetine Investigation, the UK Competition and Market Authority (“CMA”) issued infringement decisions to a number of companies regarding ”pay-for-delay” agreements over the supply of an antidepressant. These agreements were found to be an infringement by object and effect. In March 2017, the CMA issued a statement of objections relating to an agreement aimed at delaying the entry into the market for the supply of Hydrocortisone tablets. The CMA has not yet issued its final decision.
In addition, since 2009, the Commission has been continuously monitoring patent settlements in order to identify settlements which it regards as “potentially problematic” from an antitrust perspective, namely those that limit generic entry against a value transfer from an originator to a generic company. The latest report was published in December 2016.
III. The Ruling
First, like the Commission, the Court analysed whether Lundbeck and the generic manufacturers concerned were indeed potential competitors at the time the agreements at issue were concluded. The General Court made the following findings in this regard:
In order for an agreement to restrict potential competition, it must be established that, had an agreement not been concluded, the competitors would have had “real concrete possibilities” of entering that market. The Court held that the Commission had carried out a careful examination, as regards each of the generic undertakings concerned, of the real concrete possibilities they had of entering the market. In doing so, the Commission relied on evidence such as the investments already made and the steps taken in order to obtain a marketing authorisation
Moreover, the Court noted that in general, the generic undertakings had several real concrete possibilities of entering the market at the time the agreements at issue were concluded. Those possible routes included, inter alia, launching the generic product with the possibility of having to face infringement proceedings brought by Lundbeck (i.e., the so-called launching ‘at risk’). More precisely, the General Court was of the view that “the presumption of validity cannot be equated with a presumption of illegality of generic products validly placed on the market which the patent holder deems to be infringing the patent”. Consequently, the Court, continued, “’at risk’ entry is not unlawful in itself”.
As rightly noted by commentators, these considerations introduce a further layer of complexity in the already intricate relationship between EU Competition law and IP law. In addition, since the right to exclude lies at the core of any IP right and (if there is no competing product) to have a monopoly is not illegal, unless it is attained or maintained by improper means, it can be argued that the Commission’s findings infringes Article 345 TFEU, according to which “[t]he Treaties shall not prejudice the rules in the Member States governing the system of property ownership”. Thus, Ibañez Colomo has noted that “Lundbeck departs from the principle whereby an agreement is not restrictive by object where it remains within the substantive scope of an intellectual property right”. This principle would derive from the Erauw-Jacquery,Coditel II,BAT v. Commission and Nungesser rulings of the ECJ. Ibañez Colomo’s point becomes particularly clear at para. 335 of the (Lundbeck) Ruling where the General Court expressly noted that “even if the restrictions set out in the agreements at issue fall within the scope of the Lundbeck patents – that is to say that the agreements prevented only the market entry of generic citalopram deemed to potentially infringe those patents by the parties to the agreements and not that of every type of generic citalopram – they would nonetheless constitute restrictions on competition ‘by object’ since, inter alia, they prevented or rendered pointless any type of challenge to Lundbeck’s patents before the national courts, whereas, according to the Commission, that type of challenge is part of normal competition in relation to patents (recitals 603 to 605, 625, 641 and 674)”.
Second, the Court analysed whether the Commission was entitled to conclude that the agreements at issue constituted a restriction of competition by object, a point to which we will turn next.
IV. Conclusions: On Reverse Payments as Restrictions of Competition by Object
The Lundbeck ruling brings a number of what Donald Rumsfeld would probably refer to as “known unknowns”, that is things we know we do not know, in relation to reverse payment settlements. Indeed, the findings of the Lundbeck ruling can be summarised as follows (see also the table below):
There are certain patent settlements which are likely to be considered compatible with Article 101 TFEU. This is the case of settlements:a. In which, in the words of the General Court, “(i) payment is linked to the strength of the patent, as perceived by each of the parties; (ii) [payment] is necessary in order to find an acceptable and legitimate solution in the eyes of two parties and (iii) [payment] is not accompanied by restrictions intended to delay the market entry of generics”.
The inclusion of the word “and” is worrying. The requirements set out in the preceding paragraph should be alternative and not cumulative. Otherwise for a settlement to be lawful it must not delay entry (which probably is enough, in and of itself, to avoid the antitrust concern, namely, a delayed entry of generics) and it must be necessary (i.e., it probably needs to meet the requirements of an ancillary restraints defence, more on which below) and the payment might be linked to the strength of the patent “as perceived by each of the parties”. Such an intrinsically subjective requirement appears to the writer as particularly complicated to administrate and at odds with the objective nature of Article 101(1) TFEU. It would appear that the Court is encouraging conversations such as the following: “let’s settle, but only if we can ensure the settlement reflects (and comes across as reflecting) your and my perception of the strength of the patent (and a number of other cumulative requirements my lawyers and I need to meet), otherwise we might have an antitrust concern”.
b. Qualifying for an ancillary restraints defence. e., settlements in relation to which the parties to the settlement (for the burden of proof will be on them) can demonstrate they are objectively necessary and proportionate in order to defend their IP rights.
There are certain patent settlements which are likely to be considered incompatible with Article 101 TFEU as restrictions of competition by object. The ruling is not particularly clear in this regard.a. A literal reading of paragraph 334 of Lundbeck could potentially make “problematic” each patent settlement “where they [provide] for the exclusion from the market of one of the parties, which was at the very least a potential competitor of the other party, for a certain period, and where they were accompanied by a transfer of value from the patent holder to the generic undertaking liable to infringe that patent (‘reverse payments’).”
b. A more holistic reading of Lundbeck would confine the Commission’s finding to the facts of the case. Even though it is difficult to pinpoint what the court considered to be the decisive factors when stating that a reserve settlement constituted a restriction by object, the following factors appear to have been relevant:
The allegedly “disproportionate nature” of such payments “combined with other factors, such as the fact that the amounts of those payments seemed to correspond at least to the profit anticipated by the generic undertaking”. Referring to the US Supreme Court ruling in Actavis, the Court indicated that “the size of a reverse payment may constitute an indicator of the strength or weakness of a patent”. According to the Commission “the higher the originator undertaking estimates the chance of its patent being found invalid or not infringed, and the higher the damage to the originator undertaking resulting from successful generic entry, the more money it will be willing to pay the generic undertaking to avoid that risk”.
Indeed, the correspondence between the amount of the payment that seemed and the profit anticipated by the generic undertakings if they had entered the market. According to the Commission “the value which Lundbeck transferred, took into consideration the turnover or profit the generic undertaking expected if it had successfully entered the market”. 
The absence of provisions allowing the generic undertakings to launch their product on the market upon the expiry of the agreement without having to fear infringement actions brought by Lundbeck.
The presence in those agreements of restrictions going beyond the scope of Lundbeck’s patents, such as restrictions with regard to citalopram products that could have been produced in a non-infringing manner.
According to the Court, “the agreement at issue transformed the uncertainty in relation to the outcome of such litigation into the certainty that the generics would not enter the market which may also constitute a restriction on competition by object when such limits do not result from an assessment, by the parties of the merits of the exclusive right at issue, but rather from the size of the reverse payment which, in such case, overshadows that assessment and induces the generic undertaking not to pursue its independent efforts to enter the market”. The generics thus no longer had an incentive to continue their independent efforts to enter the market.
There are certain patent settlements which (presumably) are considered to be incompatible with Article 101 TFEU as restrictions of competition by their effects. Hic sunt dracones. More precisely, given that none of the pay-for-delay decisions dealt with by the Commission conducted an effects analysis, we are left without guidance as to how that analysis will be conducted. Again, a known unknown. The Commission’s ten-year investigation on reverse payment settlements has not shed light to how to conduct an effects analysis under Article 101(1) TFEU. We are left, perhaps, with the findings of the US Supreme Court in Actavis, according to which, “the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment and the lack of any other convincing justification. The existence and degree of any anticompetitive consequences may also vary among industries”.
Moreover, to the extent that the case for restrictions of competition by object is administrability, this author cannot but note that the Lundbeck ruling does not constitute a positive evolution. The General Court noted that “it is established that certain collusive behaviour […] may be considered so likely to have negative effects, in particular on the price, quantity or quality of the goods and services, that it may be considered redundant, for the purposes of applying Article 101 TFEU to prove that they have actual effects on the market”. However, the Decision has 464 pages. Given that the Fentanyl and Servier decisions occupy 147 and 813 pages, respectively, in investigations that lasted for almost ten years, 27 months and 5 years (again, respectively), one cannot but wonder whether the Commission’s resources would have been better spent analysing the actual effects of the agreement and not defending a legal category.
 Commission Decision C(2013) 3803 of 19 June 2013 relating to a proceeding under Article 101 [TFEU] and Article 53 of the EEA Agreement, Case AT.39226 — Lundbeck (the “Decision”).  See European Commission Press Release IP/13/563, of 19 June 2013, available at: http://europa.eu/rapid/press-release_IP-13-563_en.htm?locale=en  See T-472/13 Lundbeck v. Commission [NYR] (the “Ruling”), of 8 September 2016.  See, for more detail, http://www.lundbeck.com/global/about-us.  See Ruling, at para. 1.  See Ruling, at para. 16.  See European Commission Press Release IP/13/563, 19 June 2013, available at: http://europa.eu/rapid/press-release_IP-13-563_en.htm?locale=en. It should be recalled, in this regard, that, according to Article 27 of the TRIPS (WTO) Agreement, “patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application“.  See Ruling, at para. 20.  See Ruling, at paras. 26; 35; 39; 42-43 and 47-48.  See Ruling, at para. 26; 35; 39; 42-43; 47-48.  See Danish Competition and Consumer Authority Press Release 1120-0289-0039/VIS/SEK, 28 January 2004 , available at: http://www.kfst.dk/Afgoerelsesdatabase/Konkurrenceomraadet/Styrelsesafgoerelser/2004/Undersoegelse-af-Lundbeck?tc=E538038EB1E04A96B9964BE4C0F85F46 (Only available in Danish)  See Decision at paras. 610 ff.  See Decision at paras. 647 ff.  See Decision, at paras. 1306, 1349 and 1380.  See Ruling, Operative part.  See European Commission Press Release IP/13/1233, Commission fines Johnson & Johnson and Novartis € 16 million for delaying market entry of generic pain-killer fentanyl, 10 December 2013, available at: http://europa.eu/rapid/press-release_IP-13-1233_en.htm.  See European Commission Press Release IP/14/799, 9 July 2014, Commission fines Servier and five generic companies for curbing entry of cheaper versions of cardiovascular medicine, available at: http://europa.eu/rapid/press-release_IP-14-799_en.htm.  See Case T-147/00 Laboratoires Servier v Commission.  See Case CE/9531-11 Paroxetine, 12 February 2016. For a comment on the case see Ezrachi, A., EU Competition Law: An Analytical Guide to the Leading Cases, 5th Edition, Bloomsbury, 2016, 396  See CMA Press Release of 3 March 2017, available at: https://www.gov.uk/government/news/cma-alleges-anti-competitive-agreements-for-hydrocortisone-tablets. See also Nathalie Ska, Philipp Werner, and Christian Paul, “Pay-for-delay Agreements: Why the EU Should Judge them by their Effects”, Oxford Journal of European Competition Law & Practice, 3 May 2017.  See, European Commission, “7th Report on the Monitoring of Patent Settlements (period: January-December 2015)”, 13 December 2016, available at: http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report7_en.pdf  See Ruling. The General Court separately analysed each agreement. See, inter alia, in relation to Lundbeck and Merck, para. 225; in relation to Lundbeck and Arrow, paras. 266-270, in relation to Lundbeck and Alpharma, para. 290 and, in relation to Lundbeck and Ranbaxy, para. 330.  See Ruling, at para. 100. See further Case T-360/90 E.ON Ruhrgas and E.ON v Commission, at para. 86.  See Ruling, at para. 131.  See Ruling, at para. 97. See further Decision, at para. 635.  See Ruling, at paras. 121.  See Ruling, at paras. 97.  See Ruling, at para. 122.  See David J. Teece and Edward F. Sherry, “On patent monopolies: An economic re-appraisal”, CPI Antitrust Chronicle April 2017, available at: https://www.competitionpolicyinternational.com/wp-content/uploads/2017/04/CPI-Teece-Sherry.pdf.  See Ibañez Colomo, P., “GC Judgment in Case T-472/13, Lundbeck v Commission: on patents and Schrödinger’s cat”, at Chillin’ Competition, 13 September 2016, available at: https://chillingcompetition.com/2016/09/13/gc-judgment-in-case-t-47213-lundbeck-v-commission-on-patents-and-schrodingers-cat/.  See Case 27/87 SPRL Louis Erauw-Jacquery v La Hesbignonne SC, of 19 April 1988.  See Case 262/81 Coditel SA, Compagnie generale pour la diffusion de la television, and others v Cine-Vog Films SA and others, of 6 October 1982.  See Case 35/83 BAT Cigaretten-Fabriken GmbH v Commission, of 30 January 1985.  See Case 258/78 Nungesser v Commission, of 8 June 1982.  See Ruling, at paragraph 335.  See Rumsfeld, D., Known Unknown: A Memoir, Sentinel, 2011.  See Ruling, at para. 350.  See Ruling, at paras. 451 ff, in particular, at paras. 458 and 460.  See Ruling, at paras. 354; 355.  SeeFederal Trade Commission v. Actavis, 570 US (2013).  See Ruling, at paragraph 353.  See Decision, at para. 640.  See Ruling, at paras. 354; 383; 414.  See Decision, at paras. 6; 788; 824; 874; 962; 1013; 1087.  See Ruling, at paras. 354; 383; 410.  See Ruling, at paras. 354; 383.  See Decision para. 693.  See Ruling, at para. 336.  See Ruling, at paras. 355; 360.  SeeFederal Trade Commission v Actavis 570 US 2013.  See Ruing, at para. 341.
The year 2017 could mark an important turning point for institutional international arbitration. On 20 October 2016, the International Chamber of Commerce (“ICC”) adopted a list of important revisions to its Rules of Arbitration (“ICC Rules”). By the time this article is published, for example, new “Expedited Procedure Rules” will have come into effect on 1 March 2017. These revisions aim to improve the efficiency and transparency of ICC arbitration. Time will tell if they actually will.
Through the years, a number of concerns have been raised by parties – individuals, businesses, states, and international organizations – adopting or considering adopting institutional arbitration as a means of resolving their international disputes. These concerns are numerous, yet three common threads are a general desire to make international arbitration more affordable, a wish for more efficient tribunals, and a call for a change in a culture that is often seen as opaque. At the heart of this debate, and fueling calls for change, are an increase in the length of hearings, a significant increase in the breadth and volume of document production, delays in obtaining awards, and the absence of an obligation on the part of certain institutions to provide reasons for institutional decisions that impact an arbitration. Such calls are not surprising since international arbitration was born of the desire to provide parties with a low-cost, effective and efficient alternative to litigation before the courts. One illustration of the problem has been a significant decline in the number of so-called small cases (i.e. claims involving amounts below US$ 1 million) administered by the ICC.
The adoption and implementation of the Expedited Procedure is an attempt by the ICC to address these concerns and to ensure that ICC arbitration remains an attractive means of international dispute resolution notwithstanding the level of complexity of the case and the amount at stake. While some critics may argue that these changes long overdue, they should nevertheless be welcomed by users of international arbitration as well as by counsel and arbitrators.
In December 2016, in a text published in the ICC Dispute Resolution Bulletin, the President of the ICC International Court of Arbitration, Alexi Mourre, described as follows the spirit and rationale behind the Expedited Procedure Rules:
“Some of our colleagues sometimes say in conferences – half jokingly perhaps, but half seriously as well – that in arbitration parties get to choose two out of the three advantages of quality, speed and limited costs; if you have speed and quality, you should be prepared for increased costs, but with less speed, etc. ICC takes issue with that. Our message is that if the parties so decide, they can get quality, speed and limited costs. This is the aim of ICC’s new Expedited Procedure Rules, adopted by the ICC Executive Board on 20 October 2016.”
As to the Expedited Procedure itself, three elements are particularly noteworthy:
Under the Expedited Procedure Rules, notwithstanding any contrary term or provision of the arbitration agreement binding the parties, the Court may now submit the arbitration case to a sole arbitrator (as opposed to a three-person tribunal);
Under the Expedited Procedures Rules, the arbitrator has six months from the date of the case management conference to render the award;
The Expedited Procedures Rules expressly confers very extensive powers on the arbitrator with regard to procedure.
The first of these has obvious and broad ramifications. It has the potential to reduce the problems relating to the constitution of the tribunal including its fees, the number of objections raised, the question of the availability of its members, and the time needed to deliberate and agree on the award. On the other hand, it limits party autonomy in a way that has rarely been seen before. It deprives parties of the traditional ability to appoint one arbitrator each – an arbitrator who may, at least in their view, have a better understanding of their concerns – as members of a three-person tribunal, potentially impacting, some say, the legitimacy or integrity of the award itself.
The second of these elements is also significant. Under the Expedited Procedure Rules, the case management conference has to take place at the latest 15 days after the transmission of the file to the arbitrator. The analysis and the drafting of the award will usually take about a month. If the arbitral tribunal has six months after the case management conference to render the award – which might include one month of deliberation and drafting – the remaining time does not leave much time for the process to unfold. Although in all cases the ICC Court may grant an extension if necessary, there will be a tremendous pressure on each participant to the arbitration process to get the work done within a short delay.
Also noteworthy, the Expedited Procedures Rules expressly confers very extensive powers on the arbitrator with regard to procedure. Article 3 provides that:
“[…] the arbitral tribunal may, after consultation with the parties, decide not to allow requests for document production or to limit the number, length and scope of written submissions and written witness evidence (both fact witnesses and experts)” (para. 4);
“[t]he arbitral tribunal may, after consulting the parties, decide the dispute solely on the basis of the documents submitted by the parties, with no hearing and no examination of witnesses or experts”(para. 5).
It is to be expected that these rules will give rise to claims of due process violation by unsatisfied parties.
In addition to the innovations described above, it is to be noted that Article 23 of the ICC Rules which provides that the first task of a tribunal is to prepare, in collaboration with the parties, a document referred to as “Terms of References” – one of the hallmarks of ICC arbitration – will not apply to the Expedited Procedure. Furthermore, once the arbitral tribunal is constituted under the Expedited Procedure Rules, the parties will not be entitled to present new claims without authorization of the tribunal. Article 3 of Appendix VI of the ICC Rules sets up the elements that the arbitral tribunal could consider to decide whether a new claim should or should not be authorized, namely its nature, its cost implications, the stage of the arbitration, and any other relevant circumstances.
Most importantly, the rules contained in the new Article 30 of the ICC Rules and in the Appendix VI will apply automatically if three conditions are met: (1) the arbitration agreement is concluded after 1 March 2017, (2) the amount in dispute is below US$ 2 million, and (3) the parties have not explicitly chosen to derogate from the expedited procedure. Going forward this means among other things that parties negotiating an arbitration agreement should consider seriously the possibility of “opting-out” where they feel that the Expedited Procedure is not ideally suited to the type of dispute envisaged. An example of an opting-out clause is available at the end of the revised ICC Rules. Such a clause should be drafted carefully keeping in mind that if it is not clear enough, the Expedited Procedure Rules will apply and the parties will be deemed to have agreed to them. In other words, problems might inadvertently arise where arbitration agreements contradict the provisions contained in the Expedited Rules. Without entirely opting-out, the parties could also potentially decide in advance to derogate to some sections of the Rules only, for example to have three arbitrators instead of a sole one. The ICC Court might however have the power to ignore such exemption if it finds that it violates the spirit of the Rules and the Appendix (see: Article 5 of Appendix VI of the ICC’s Rules).
While these Expedited Procedure Rules will apply on an opt-out basis to all arbitration agreements satisfying the conditions mentioned above, the ICC Court retains the power to decide that the Expedited Procedure Rules should not apply in a particular case. The current Rules and explanatory Note to Parties do not indicate on what basis such a decision would be made. One may presume that a key factor will be the level of complexity of the case. This is based on the premise that the amount in dispute does not always – although often – reflect the level of complexity of a case. Following the same logic, parties to a dispute for which the amount in dispute is greater than US$ 2 million, should also consider, where appropriate, the possibility of “opting-in”. Indeed, nothing prevents parties from agreeing to use the Expedited Procedure. On the contrary, this should even be encouraged where the circumstances allow it.
Finally, it is worth mentioning that the fees under the Expedited Procedures Rules, which include the administrative fees paid to the ICC and the fees due to the sole arbitrator, are 20% lower than the fees applicable to other ICC proceedings.
These new rules, while novel in the context of ICC arbitration, are largely inspired by the existing rules of arbitration institutions, for example the Singapore International Arbitration Centre (SIAC), and the International Centre for Dispute Resolution (ICDR). As mentioned above, this set of changes form part of a broader effort by the ICC to enhance efficiency and transparency in international arbitration. They are part of a broader reform in which the streamlining procedure has not been left out. The following changes to the ordinary procedure should also be mentioned:
Article 23(2) has been amended to reduce the time-limit for the establishment of Terms of Reference from two months to one month;
Article 11(4) has been amended, in order to allow the ICC Court to provide reasons for its decisions made on challenges, as well as for other decisions;
Survey after survey shows that arbitration is the preferred disputed resolution mechanism for cross-border disputes. When it comes to decide between institutional arbitration and ad hoc arbitration, users more often than not choose the former. The ICC is itself the love-child of institutional arbitration. In 2016, the annual International Dispute Resolution Survey for Technology, Media and Telecoms Dispute showed that the ICC was the choice of 64% of the respondents. For EU based respondents, this number goes up to 74%. If these revisions to the ICC Rules have the intended effect, that is to reduce the time and cost of arbitrating these claims, they could confirm and increase the existing trend. The manner in which the Expedited Procedure Rules will be applied will be of significant importance considering the many applicable exceptions. This will determine whether or not the entry into force of these rules will be a turning point for the ICC or more like a stone thrown into a pond.
The Greek Private Capital Company and recent legislative initiatives to meet current business requirements.
According to the Greek legislation, the following types are the main capital company formations for conducting business in Greece and are usually preferred over entrepreneurships, in principal due to the limited liability of their shareholders : (i) the Greek limited liability by shares company (“Societe Anonyme” – “SA”), (ii) the limited liability company (“EPE”), (iii) the Private Capital Company (“PCC”- “I.K.E.”) and (iv) the European company (“Societas Europea” -“SE”). While the SA has been for years the most common company formation in Greece, recently the P.C.C. has started to gain significant ground due to fewer formal requirements for incorporation that enable its operation literally few days after its registration at the Business Register.
Introduced in Greece in virtue of the law n. 4072/2012, the P.C.C is incorporated pursuant to a simple private agreement signed by its founders. The articles of association are included in the agreement and can be customized according to the special needs or objects of the desired business. The agreement for the company’s incorporation should then be filed with the competent – determined by the place of the company’s registered seat and main business activity – Business Register and the whole procedure for the company’s establishment is completed at the One-Stop-Shop department of the Business Register, within 10-15 days after the submission of the required documentation. Simultaneously with the company’s registration at the Business Register, the company is also directly registered at the Greek Tax Authorities, obtaining a Tax Identification Number, which is necessary for starting conducting business according to its objects. For any amendments to the articles of association or for any shares sale and purchase agreements thereof during the lifetime of the company, a simple private agreement suffices; amendments to the articles of association should be also filed with the Business Register and they come into force upon their registration.
The articles of association of a P.C.C, any amendments thereof and the shareholders’ resolutions could be drafted in one of the official EU languages, but the Greek version shall prevail concerning relations between the company and its shareholders on one hand and third parties on the other hand. The founders of a P.C.C. resolve upon the amount of the share capital, without any limitation as per its minimum amount (this could be even zero). Since the previously imposed tax of 1% on the company’s initial share capital has been abolished (according to law n. 4254/2014, yet remaining for any share capital increase), actually there are not any restrictions towards determining the initial share capital, apart from that this should be deposited at the company’s treasury or bank account within 30 days of registration.
Regarding management, the P.C.C. is managed by one or more administrator(s), whose powers of representation are determined in the articles of association and by the shareholders’ resolutions. The administrator should be a natural person/individual, Greek or European citizen holding a Tax Payer Identification number in Greece, and in case of a non-European resident, a Visa is normally requested (Visa-D for business executives), according to the provisions of law n. 4251/2014 (Greek Immigration and Social Integration Code). The administrator should be also registered at the Greek social security system and pay the respective social security contributions. The administrator is liable towards the company for any breach of the company’s articles of association, of the law or of the shareholders’ resolutions, as well as for any damage caused as a result of breach of duties. Such liability does not exist in case of actions or omissions based on a lawful resolution taken by the shareholders or on reasonable business decision, conducted in good faith, based on sufficient information and only towards the corporate interest. If more managers acted together, they are jointly and severally liable. The shareholders may discharge the administrator(s) from any and all liability during the annual General Meeting of the shareholders which resolves upon the approval of the financial statements of the previous fiscal year.
As per the reporting requirements, apart from obligation to file with the Business Register any amendment to the articles of association as well as any resolution taken by the shareholders or the administrator that should be filed according to the law, the annual financial statements should be also filed with the Business Register and then approved by the shareholders. Greek Law n. 4403/2016, which incorporated into the Greek legal system the EU Directive 2013/34/EC, has recently introduced several developments concerning the commercial companies’ financial statements by regulating their preparation and publication based on their classification, aiming at the facilitation of cross-border investment and the improvement of Union-wide comparability and public confidence in financial statements and reports through enhanced and consistent specific disclosures. This regulation, which is applicable to all capital –by shares – companies, attempts to balance between the interests of the addressees of financial statements and the interest of undertakings in not being unduly burdened with reporting requirements.
The main advantages of the P.C.C. and the flexibility for its incorporation and operation are obvious when compared with the corresponding legal requirements for the incorporation of a Societe Anonyme (“SA”); governed by mandatory legislation (“ius cogens”), i.e. the codified law n. 2190/1920, the Greek SA is incorporated through a notarial deed, executed before a notary public in Greece, which includes the company’s articles of association. The share capital should be always indicated in money even if the shareholders’ contributions consist in kind. The share capital, which should be at least 24.000,00 Euro, must be paid either in cash or in kind within two (2) months after registration. After the execution of the notarial deed for the incorporation, the company should be registered at the competent Business Register and upon its registration, it acquires legal personality. The rest of corporate documentation (minutes of General Meetings of the shareholders and minutes/resolutions of the Board of Directors) do not have to be notarized, except for the General Meetings of the Shareholders in case of one sole shareholder. The SA is managed by a Board of Directors, consisted of at least three members, which may be either individuals or legal entities (in such case for the exercise of management a representative should be appointed). There is not any restriction as per the nationality or residence of the members of the Board of Directors. It should be noted that for some specific activities, SA is the only available company type according to the law and several parameters, beyond the abovementioned basic framework, should be taken into consideration in order to decide upon between P.C.C. and S.A.
The Business Register in Greece has been recently reformed providing access to the existing data base via its website (www.businessregistry.gr), which can be used both by the registered businesses and the public. Until the full integration of all Greek companies/businesses at the general Business Registry at the end of year 2012, different registration systems and registers existed for each company/business type. Thereupon, the reformation of the Business Register has facilitated significantly the capability of the companies to comply with their reporting obligations under the law through its portal (www.businessportal.gr) but has also enhanced the actual publicity of the companies’ data, as required by the law, and thus has reinforced the transparency and the security of the transactions. Through the platform www.businessportal.gr any business can carry out the entire procedure for submitting a registration request to the Business Register, filing the necessary documents and payment of the relevant fees. The processing and verification of any request as well as the completion of registration are also conducted electronically through the system.
Recently in virtue of Greek Law n. 4441/2016, “e-One Stop Shop” has been introduced. This new, modern institution aims at the incorporation of the most popular types of companies in Greece, through a procedure completed entirely on an electronic platform practicing techniques like “e-ID Authentication Process” (EU REG 910/2014), links between other e-platforms like “TAXIS” (Greek Tax Online Platform) and taking all necessary actions in order for a company to be incorporated online, thus accelerating and facilitating business and corporate activity in Greece.
The combination of a single general Business Register with the establishment of the one-stop-shops for the incorporation of companies constitutes a major step towards simplification of the basic procedures of the Greek business environment, aiming to meet the needs and requirements of the parties involved and the effective use and exploitation of information collected.
In 2017, Greece while being at the heart of the economic recession affecting all financial markets globally and especially EU, struggles to keep up with the current requirements in business activity, by amending its relevant legislation towards the modernization of its corporate, tax and business system thus making great efforts to further promote productivity, investment and employment. Newly introduced, flexible, corporate forms like P.C.C, new institutions and platforms like the Business Register where most of the ordinary corporate actions are completed online, constitute the modern ‘’tools” provided to any entrepreneur who wishes to make business in the country, forming an effective solution by putting in place a flexible framework which can reduce obstacles to the smooth functioning of the market, hoping to make Greece an attractive country not only to visit and explore but also to invest.
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.
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.
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.
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 benefit – La nuova prospettiva di una Corporate Social Responsibility con Commitment (Fondazione nazionale dei Commercialisti); Domenico Siclari – Le società benefit nell’ordinamento italiano; Autorità garante della concorrenza e del mercato http://www.agcm.it/en
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.
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.
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.
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.
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.
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.
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.
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