Category Archives: Corporate/Commercial Law

Franchise Hong Kong and China

Articles, Corporate/Commercial Law, Latest News

Hong Kong has been targeted as the regional franchising hub for many international brands. According to the Hong Kong Trade Development Council, many brands identify Hong Kong as the prime location to set up their franchise network as it is an ideal two-way springboard for gaining access to the Asian markets, and for Asian brands to venture into the global marketplace.

Being one of the world’s freest economy, there is no specific legislation governing franchise operations in Hong Kong, nor are there any exchange controls, foreign equity participation or local management participation regulations. The realms of law that govern franchise agreements are common law, principles of contract law and any legislations relating to registration, licensing and protection of intellectual property rights such as Trade Marks Ordinance, Trade Descriptions Ordinance, Copyright Ordinance, Registered Designs Ordinance and Patents Ordinance.

Despite the lack of regulations in Hong Kong, a non-legally binding association namely Hong Kong Franchise Association (HKFA) offers some guidance on franchising. HKFA defines franchising as a method of marketing goods and services. The basic features of typical franchising arrangement include:

  • the franchisor allowing the franchisee to use its name or brand;
  • the franchisor exercising continuing control over the franchisee;
  • the franchisor providing assistance to the franchisee; and
  • the franchisee making periodical payments to the franchisor.

Additionally, HKFA published a code of ethics on their website as a reference for franchisors and franchisees. This code is divided into four sections, including general provisions, provisions relating to franchisor, provisions relating to franchisee and code of ethics for franchise consultants. A copy of the code of ethics can be found at http://www.franchise.org.hk/codeofethics.asp.

The lack of laws and regulations allows maximum flexibility for parties entering into a franchise relationship to freely negotiate their franchise agreements as well as operate the franchise business without the need of seeking approval from authorities. However, more difficulties arise when entering into the Chinese market.

Unlike Hong Kong, franchising activities are overseen by authorities and is highly regulated in our Chinese counterpart. In China, the Ministry of Commerce (MOFCOM) and its commerce regulatory agencies of various level are the regulating authorities. Several laws and regulations govern franchise activities. The primary laws that are applicable includes: Measures for the Administration on Foreign Investment in Commercial Sector; Regulation on the Administration of Commercial Franchises; Administrative Measures for Information Disclosure of Commercial Franchises; and Administrative Measures for the Record Filing of Commercial Franchises (the “Franchise Laws and Regulations”).

To file as a franchisor in China, the franchisor must provide trademark(s) and/ or patent(s) registration certificates issued by the Chinese authority as well as other business operation resources related to the franchise. A minimum of one such certificate is required from the potential franchisor by the Ministry of Commerce (MOFCOM). However, where the potential franchisor is unable to provide such certification, it may be sufficient to provide MOFCOM with a trademark license agreement or equivalent document indicating authorization to use the trademarks and to sub-license the same to franchisees. It is important that the trademark licence documents must indicate that only the licensor and potential franchisor can use the licensed trademarks and that the potential franchisor can sub-license the trademarks to its China franchisees.

A further requirement specified by the Franchise Laws and Regulations is that a franchisor must have a minimum of two direct sales stores, and have undertaken the business for more than one year. This requirement is also known as the “two plus one” requirement. Only a franchisor or its direct subsidiary will be qua1ified for two plus one requirement but not its parent entity.

Another requirement stipulated by the Franchise Laws and Regulations is that a franchisor must provide an exhaustive list of items to be disclosed prior to signing of the franchise agreement. At least 30 days before entering into the franchise agreement, the franchisor shall furnish the franchisee with the following:­-

  • franchisor’s name, domicile, legal representative, registered capital, business scope and the basic situation of franchising activities;
  • basic information of the franchisor’s registered trademarks, corporate logos, patents, proprietary technology and business model;
  • type, amount and method of payment of franchise fees;
  • price and prerequisites of products providing services and equipment to the franchisee;
  • provide specific methods for continuous business guidance, technical support and operation training to the franchisee;
  • specific methods of supervising and guiding the operation activities of the franchisee;
  • estimated budget of investment for the franchise outlets;
  • number, geographical distribution and business conditions assessment of the existing franchisees in China;
  • last two years’ briefs of financial accounting report and auditing report which are audited by accounting firm;
  • last five years of litigation and arbitration results related to franchising;
  • if there’s any serious illegal business records of the franchisor or its legal representative;
  • other information prescribed by the commercial administrative department of the State Council.

Having met the preliminary requirements to be a franchisor in China, a franchisor must further register al1 relevant franchising materials with MOFCOM within 15 days after entering into a franchise agreement for the franchise to be valid. A franchisor will be fined from CNY 10,000 up to CNY 50,000 should they fail to register these documents. The materials include:

  • a photocopy of the business license or enterprise registration certificate;
  • a sample franchise contract;
  • a brochure for franchised operations;
  • a marketing plan;
  • a written commitment and relevant certification materials proving that provisions in Article 7 of the Regulation on the Administration of Commercial Franchises are followed; and
  • other documents and materials prescribed by the commercial administrative department of the state Council.

Overall franchising in Hong Kong is relatively straightforward in comparison to China and franchising in China is very onerous on the franchisor while appears to benefit the franchisee. Notwithstanding the difficult and burdensome approval process for franchising in China, the rapid changing demographics, rising incomes and increased consumer spending are all attractive factors for franchisors to break into the Chinese market. As McDonald’s CEO Easterbrook revealed on 31 March 2016, the goal is to make China become McDonald’s second largest market, moving it ahead of Japan and directly behind the U.S by opening 1,000 new franchise restaurants in China in the next five years!

Valuing a Component Technology of an Integrated Manufacturing Process

Articles, Corporate/Commercial Law, Latest News, Technology Media & Telecoms

Valuing a technology that is part of a bundle of integrated technologies used in a manufacturing process presents additional challenges beyond those encountered when appraising a stand-alone technology. This additional complexity requires significant experience and judgment to properly apply current valuation best practices and conclude an appropriate and supportable value.

Introduction

The valuation of developing and recently-developed technology can be challenging even when it is the only technology underlying a manufacturing process. Appraising a single component technology used in an integrated process that combines multiple technologies is even more complex. This incremental complexity arises because the benefits are derived from the total technology “bundle” and are realized from the inter-relatedness of the various pieces. In other words, the whole technology bundle provides more utility, and is therefore more valuable, than the sum of the individual component technologies.

To place this issue in context, technology often has a direct, measurable benefit, such as cost savings. These savings can be in the form of requiring less raw material or allowing cheaper inputs. The cost savings can also manifest itself by automating or otherwise reducing the “human capital” required. The technology can also reduce fixed capital costs, for example, by reducing or eliminating certain undesirable byproducts like wastes that require treatment to comply with environmental, safety, or other regulatory constraints. In these circumstances, the value of the future benefits over the economic life of the technology can be quantified and reduced to present value by discounting the benefits using an appropriate rate of return.

In other instances, the technology may yield benefits in a product, rather than the process used to manufacture the product. For example, in the realm of sporting goods, there have been technology cycles in golf and tennis where the equipment has incorporated new, advanced technology that resulted in lighter weight, better accuracy, or greater power. This gave rise to the perception that the average player could improve virtually overnight with this equipment. The economic benefits of

such technology can be quantified based on unit price premiums or incremental market share.

The Excess Earnings Method

In circumstances where such direct economic benefits are not present, or cannot be readily quantified, one must resort to alternative means of valuing the technology. One such technique is the so-called “excess earnings” method, where the income stream associated with the technology is allocated to account for the contribution of all other assets that support the income stream. These contributory assets are often primarily working capital, machinery and equipment, and real property, but can include intangible assets such as trademarks or copyrights. Any earnings in excess of the fair rate of return on all contributory assets are deemed to be due to the technology. This method presents three fundamental issues:

  • Identifying all categories of contributory assets, which, in the case of new technology, typically comprise working capital and tangible assets. Overlooking the economic “rent” on such assets would otherwise overstate the benefit from, and the value of, the technology;
  • Estimating the values and appropriate rates of return for each contributory asset that are commensurate with the asset’s risk. Incorrectly estimating the portion of the total benefits allocable to the contributory assets results in a corresponding miss-measurement of the portion allocable to the subject technology; and
  • Estimating an appropriate rate of return for the subject technology, as that rate is used to discount any excess earnings to present value after accounting for the contributory assets.

Risk Assessment

The second issue can be particularly problematic, as the required risk assessment analysis poses its own set of challenges. For example, the risk analysis for property, plant and equipment entails an evaluation of possible alternative uses. The more alternative uses and the more active the secondary, or resale market, the lower the risk of the assets. Highly-specialized property with limited alternative use, or that cannot easily be sold, is inherently risky because if the technology fails, the entire investment in that asset may be lost. General use property can more easily be re-purposed.

Once these first two issues are resolved and the appraiser has estimated the portion  of the aggregate earnings stream that represents a fair return on each contributory asset, the third issue presents its own challenges. Some of the questions that must be answered include:

  • What alternative technologies are available, if any?
  • What are the strengths and weaknesses of the alternatives compared to the subject technology? This analysis should consider such factors as initial fixed capital cost, physical footprint of the plant; environmental “ footprint”; conversion efficiency/yields; energy efficiency; flexibility in terms of use of alternative raw materials; permitting and regulatory requirements; and ramp-up and deployment time.
  • What is the regulatory environment, currently and prospectively? Environmental concerns must be considered for virtually any type of process technology.
  • In what stage of development is the subject technology? Has it been patented and, if so, how extensive are the patent claims?
  • Has the technology been tested on a bench-top or pilot plant basis? All else equal, the closer the technology is to commercial scale deployment, the lower its risk profile.

When the subject technology is not the only technology employed in the manufacturing process, another step is required. Having allocated the earnings between contributory assets and the total technology bundle, the appraiser must now allocate the excess earnings between the subject technology and any other process technology used in the manufacturing process.

Royalty Rates

In certain situations, this issue can be circumvented. In some circumstances, the output could be sold on the open market, rather than serving its intended purpose as the raw material input for other “downstream” processes. If this notional approach is relevant, then a hybrid market-income method such as the “relief-from-royalty” method may be feasible. Unit prices for the products of the manufacturing process are projected based on market data, and a notional revenue stream is developed. This revenue is then converted into a value estimate using market based royalty rates observed in arm’s-length licensing transactions for comparable or “guideline” technologies. Value is based on these royalty payments that are avoided by owning the asset or technology. The concept is similar to valuing a house by determining the rent that is avoided by owning the house.

The royalty rates indicated by such arm’s-length licensing transactions must be evaluated based on a comparison of the associated technologies and the subject technology. Terms of the licensing agreements are analyzed, such as exclusivity of use, the scope of the geographic markets, the duration of the agreement, and whether an up-front payment is required in addition to the ongoing, or “running”, royalties. All else equal, exclusive rights, wide geographic scope, longer term, and no up-front payment generally correspond with higher running royalties.

The running royalty payments are typically structured as a percentage of top line revenue, either gross or net sales. However, it is not uncommon for such royalties to be applied to a different base such as gross profit, operating profit, or pretax profit. Royalty payments based on profit mitigate risk to the licensee, as royalties are only payable if profits are actually realized.

Royalty rates typically are lower when based on top-line revenue, and progressively higher based on the extent to which the licensee’s costs are captured in a measure of profit. That is, royalties are typically stated as a lower percentage of revenue and a higher percentage of gross profit, and an even higher percentage of pretax profit.

Once an appropriate royalty rate and base are established, the notional royalty payments are then computed using projections for the relevant royalty base (revenue or profit). These projected notional royalties must   then   be   discounted   to   their   present   value

equivalents using a discount rate commensurate with the risk of these payments. For unproven technologies, discount rates are usually much higher than for proven technologies with demonstrated commercial success.

If such a hybrid market-income approach is not practical, an alternate method of allocating the total “excess” earnings between the subject technology and other technologies in the manufacturing process must be identified. The appropriate method depends on the facts and circumstances of the particular technology and situation. One possible option is to use the relative fixed capital costs associated with each technology as a proxy for the relative contribution of each technology to the total “excess” earnings.

Using a reasonable basis for this allocation, the appraiser must then allocate the projected excess earnings between the subject and other technologies. Once this analysis is complete, the excess earnings allocated to the subject technology must then be discounted to their present value equivalents using an appropriate discount rate based on market participant assumptions.

Discounting to Present Value

One useful frame of reference for gauging appropriate discount rates is the venture capital market. Venture capital investments have a higher  level of risk for an investor than most other forms of investment. Venture capital investments are typically early-stage or developmental companies, and are privately owned with little or no collateral security or liquidity. To compensate for this higher risk, venture capitalists seek to achieve a higher rate of return than what is offered by more traditional and secure types of investments. This higher level of risk is similar to that of unproven technology. On an investment-by-investment basis, venture capitalists target high rates of return, with an expectation that certain investments will be unsuccessful and may result in a loss of some or all of the original investment amounts. Only by targeting high individual  rates of return can venture capitalists achieve an acceptable risk-adjusted return on an overall portfolio of investments.

The rates of return targeted by venture capitalists often range from 30 percent to 70 percent. The lower end is applicable to entities that generate revenue and are profitable. The higher end corresponds to start-ups, where market penetration potential is unclear and business plans lack refinement.

Conclusion

Given the complexities discussed herein, one gains an appreciation for the crucial role of judgment and experience. There is often a lack of explicit market data for such key inputs as contributory asset rates of return and technology rates of return. Isolating the excess earnings from the subject technology is particularly challenging. As has been aptly stated, “Valuation is an art, not a science.” This is particularly true when appraising technology that is one part of a bundle, requiring judgment at virtually every step of the analysis.

Appraisal Economics has over 25 years of experience appraising various technologies and the assets of technology firms. We have a seasoned staff of independent valuation experts, including engineers who have significant experience with technology and understand the unique valuation complexities.

If you are looking for an appraisal firm that has a deep understanding of your industry and need a valuation for accounting, tax, transaction, or litigation purposes, please give us a call at +1 201 265 3333.

Disclaimer: this article has content that is general and informational in nature. This document is not intended to be accounting, tax, legal, or investment advice. Data from third parties is believed to be reliable, but no assurance is made as to the accuracy or completeness.

 

Developments and Critical Issues of Corporate Governance in Italy

Articles, Corporate/Commercial Law, Latest News

A summary of the most significant amendments to the Corporate Governance Code for Italian listed companies (the “Code”) approved on July 9, 2015 by the Corporate Governance Committee seated at the Italian Stock Exchange (the Committee)[1] is indicated herein.

Adherence to the Code (or any other corporate governance code) by Italian listed companies is voluntary and based on the so-called “comply or explain” principle[2]. For companies adhering to the Code, the changes (with the exclusion of changes regarding the statutory auditors, which listed companies are invited to apply since the first renewal of the Board of Statutory Auditors occurring after the fiscal year beginning in 2015) should be implemented by listed companies by the end of the fiscal year beginning in 2016, providing information about such implementation in the corporate governance report to be published in the following fiscal year.

Amendments

The main amendments of the Code are indicated for each topic here below.

Role of the Board of Directors

The Committee extends the role of the Board of Directors in relation to the sustainability of the business. In particular, the Board of Directors has to define the risk profile of the company consistently with the company’s strategic objectives, considering the risks that may be relevant for the sustainability of the company’s business activities in the medium-long term[3].

The new provision expands the principle set out in Article 1 of the Code, whereby the Board of Directors has to pursue the overarching goal of “creating value for the shareholders over a medium-long term period”[4].

On the other hand, the new provision includes, among the interests that the Board should take care of, the principle of sustainability, in compliance with the most recent European legislation[5]. This new provision also seems to suggest that sustainability matters (such as environmental matters, social and employee-related matters, human rights concerns, anticorruption and bribery matters)[6] may have a relevant impact on the business and should be considered in the definition of the risk profile and strategic objectives of a company.

Composition of the Board of Directors

The Committee recommends that the corporate governance report (to be prepared by listed companies’ directors jointly with the management report and the financial statement) should state the type and the organizational methods of any initiatives which occurred during the relevant fiscal year with regard to the induction sessions dedicated to directors and statutory auditors, which should be periodically organized by the chairman.

Independent Directors

The Committee expands and clarifies the recommendation according to which the independent directors meet at least once a year separately from the other directors (see Criterion 3.C.6. of the Code).

Establishment and Functioning of the Internal Committees of the Board of Directors

The Committee also adds two new recommendations within the general recommendations on the establishment, composition and functioning of the internal committees of the Board of Directors.

First, the recommendation that meetings of committees be recorded with specific minutes has been integrated with the recommendation that the chairman should provide information to the board of directors regarding aforementioned recording at the first available meeting (see Criterion 4.C.1. of the Code).

The second and more relevant amendment concerns the recommendation that the Boards of Directors of companies listed on the FTSE MIB index[7] evaluate the opportunity to establish a committee in charge of matters regarding the corporate social responsibility (see the Comment section of Article 4 of the Code). The sustainability issues related to the business activities of the company and its interaction dynamics with all its stakeholders would be supervised by this committee. As an alternative to the creation of a dedicated committee, the Board of Directors may choose whether to group or to assign the tasks above to the other established committees, most significantly the Internal Control and Risk Committee.

This second recommendation is not subject to the “comply or explain” principle, as it is included in the Comment section of the Code[8].  

Appointment of Directors

Under Italian law the Board of Directors of Italian listed companies governed by the so-called “traditional” governance mechanism is appointed by the shareholders, pursuant to a voting-list mechanism, which is intended to grant to the minority shareholders the right to designate their representatives on the Board. The voting-list mechanism, including the right to present a list of candidates, is regulated by each company’s by-laws.

Normally, the lists of candidates are presented by the shareholders. However, Comment to Article 5 of the Code provides that the Committee highlights the importance of an engagement of the nomination committee (appointed internally to the Board and composed in majority of independent directors) “in case the Board itself, as far as it is consistent with applicable law, submits a slate for the renewal of the Board”[9].

Furthermore, the Committee also recommends that, if the listed company has adopted a plan for the executive directors’ succession, the plan’s procedure should clearly outline the plan’s scope, instruments and timeline.

Internal Control and Risk Management System

The Committee also passed changes regarding the system of internal control and risk management, which significantly strengthen the effectiveness of internal controls.

In particular, the revised Article 7 of the Code now explains that an effective system of internal controls and risk management contributes to the reliability of the information provided to the corporate bodies and not only of the publicly disclosed financial information[10]. Particularly, this provision includes the reliability of the internal flow of information among the core tasks of an effective system of internal control and risk management.

In this regards, in the Comment to Article 1, the Code provides the following: “under relevant circumstances, the Board of Directors acquires any necessary information and adopt any suitable measure to protect the company and the information to the market”.

The Control and Risk Committee[11] appointed within the Board may assist the Board in this respect. In fact, the Control and Risk Committee “supports, with adequate preliminary activities, the Board of Directors’ assessments and resolutions on the management of risks arising from detrimental facts that the Board may have been become aware of”[12].

The aforementioned amendment represents an important development as, pursuant to the Code, the Control and Risk Committee is composed by a majority, or exclusively, of independent directors[13].

According to the provisions of the Code, each company should provide for the coordination of the corporate bodies and functions with specific tasks in the context of the system of internal control and risk management “in order to enhance the efficiency of the internal control and risk management system and reduce activities overlapping”. In order to reinforce this provision, the Code now requires each company to describe in its annual Corporate Governance Report the instruments adopted to ensure the coordination among the corporate bodies and functions responsible for the system of internal control and risk management[14].

In the Comment to Article 7, the Code provides that an adequate internal control and risk management system – at least in the most significant companies (i.e., companies included in the FTSE-MIB index) – should include a so-called “whistleblowing” system, consistently with domestic and international best practices and ensuring “a specific and confidential communication channel as well as the anonymity of the reporting person”.

Statutory Auditors

The last amendments to the Code approved by the Committee concern the recommendations applicable to statutory auditors.

Pursuant to the “traditional” governance structure of Italian joint stock corporations, the shareholders appoint a Board of Statutory Auditors, vested with wide monitoring responsibilities within the supervisory system of a company.

According to the amendments passed by the Committee, the results of the verification of the independence requirements of the statutory auditors, to be performed after their appointment and subsequently on an annual basis, shall be submitted to the Board of Directors. The Board will then disclose such results through a press release to the market relating to the first verification conducted after the first appointment and in the relevant corporate governance report with reference to the annual verification (Criterion 8.C.1. of the Code).

Moreover, the Code now provides a new remuneration criteria, since the compensation of the member of the Board of Statutory Auditors was not proportionate to their wide spectrum of responsibilities and potential liabilities (Criterion 8.C.3. of the Code).

[1] The Committee, with seat at Borsa Italiana S.p.A., Milan, Piazza Affari 6 (the Italian Stock Exchange), was set up, in its current composition, in June 2011 on the initiative of the main Italian associations representing corporations and institutional investors (ABI, ANIA, Assonime, Confindustria, Assogestioni) and Borsa Italiana S.p.A. and it is composed of representatives of the promoters above and Italian listed companies.

The Committee is in charge of promoting good corporate governance of Italian listed companies, pursued by a constant alignment of the Code with best practices and through initiatives which would enhance the credibility of the Code.

[2] As provided pursuant to Directive 2013/34/EU and Article 123-bis of the Consolidated Law on Finance (i.e., Legislative Decree No. 58 of 24 February 1998, as subsequently amended), each listed company is required to include a “corporate governance statement” in its annual management report, indicating “the corporate governance code which the undertaking may have voluntarily decided to apply”. In case a listed company decides to depart from any provision of the corporate governance code to which it voluntarily adhered, it should provide a clear and exhaustive explanation thereof. A listed company should also adequately explain its decision not to adhere to any corporate governance code (see Article 20 of EU Directive 2013/34/EU; see also the Commission Recommendation of April 9, 2014 “on the quality of corporate governance reporting (“comply or explain”)”.

[3] Criterion 1.C.1, letter b), of the Code.

[4] Principle 1.P.2 of the Code.

[5] Reference is especially made to Directive 2014/95/EU of 22 October 2014, providing new disclosure obligations for larger undertakings on “non-financial information” – and in particular on environmental, social and employee matters, respect of human rights, anti-corruption and bribery matters – and information on diversity policies.

[6] See Whereas 6 of Directive 2014/95/EU of 22 October 2014.

[7] The FTSE-MIB is the primary benchmark index for the Italian equity markets, comprising 40 shares listed on the Italian Stock Exchange and capturing approximately 80% of the domestic market capitalization. The Index is comprised of highly liquid, leading companies in Italy.

[8] However, since the sustainability matters should be included in the definition of the risk profile of each company pursuant to the new Criterion 1.C.1, letter b), of the Code, the Board of each company should reasonably supervise such sustainability matters (if appropriate, with the support of the Control and Risk Committee).

[9] Consider that under Italian law do not exist specific provisions on the subjects entitled to the formation of the lists of candidates to be voted by the shareholders and that, according to some scholars, the Board of Directors in office may decide to present such a list of candidates. The Code seems to support this interpretative position.

[10] Principle 7.P.2 of the Code.

[11] According to Principle 7.P.3. letter (ii) of the Code, the Board of Directors shall identify within the Board “a control and risk committee […] to be charged with the task of supporting, on the basis of an adequate control process, the evaluations and decisions to be made by the Board of Directors in relation to the internal control and risk management system, as well as to the approval of the periodical financial reports”.

[12] Criterion 1.C.2, letter g) of the Code.

[13] Pursuant to principle 7.P.4 of the Code, “The Control and Risk Committee is made up of independent directors. Alternatively, the committee can be composed of non-executive directors, the majority of which being independent; in this latter case, the chairman of the committee is selected among the independent directors. If an issuer is controlled by another listed company or is subject to the direction and coordination activity of another company, the committee shall be made up exclusively of independent directors”.

[14] Criterion 7.C.1, letter d) of the Code.

Malta – an Island of Opportunities

Articles, Corporate/Commercial Law, Latest News, Tax

1. Corporate Vehicles

Over the years, Malta has developed a strong reputation as a financial services centre offering an attractive and competitive environment for operators looking to set-up a business or invest in a European Union compliant jurisdiction. The benefits of selecting Malta are numerous, including a quick and efficient incorporation process, comparatively low running costs, a skilled and diverse workforce, and an extensive treaty network.

The Maltese jurisdiction recognises a variety of legal vehicles taken from both the Civil and the Common law tradition thus allowing individuals a choice of structures to fit their specific needs, whether in relation to business structuring, estate planning or other purposes. The various forms include commercial partnerships, public and private limited liability companies, trusts, foundations and associations.

2. Limited Liability Companies

The defining feature of a Limited Liability Company is the fact that the liability of the shareholders is limited to the part unpaid (if any) on their shares.

Form

A limited liability company is the preferred means of doing business in Malta, due to its separate legal personality and limited liability.  Limited liability companies can be classified as either of a private nature (Limited or Ltd) or of a public nature (Plc).  With the exception of single member companies (discussed below), private and public companies must have a minimum of two shareholders.

Private limited companies are formed by means of capital divided into shares and shareholder liability is limited to the amount of unpaid share capital. In a private company, the right to transfer shares must be restricted, for example through pre-emption rights, the number of members cannot exceed fifty and invitations to the public to subscribe to its shares or debentures are prohibited.

It is possible to set-up a single member private company, however, such a company may only carry out one principal activity. In addition, it must satisfy the conditions of a private exempt company, being, that it cannot have more than fifty debenture holders and that no body corporate can act as a director.

There are no restrictions regarding the nationality or the place of residence of the directors, shareholders or other officers of a Malta company. Furthermore, a Malta company may be set-up for any lawful purpose. There are, therefore, no restrictions regarding the type of activity of a company, provided that certain activities may render the company subject to license requirements such as, for example, gaming companies, telecommunications companies and financial services companies.

Shareholders in Malta companies can be either individuals or bodies corporate. It is also possible for shares in a Maltese company to be held on a fiduciary basis by an entity authorised/ licensed for such purposes allowing the beneficial owners to retain confidentiality.

The Memorandum and Articles of Association of both private and public companies must contain:-

  1. the name of the company; which is to include Plc, Limited or Ltd, subject to the public or private nature of the company respectively,
  2. the name and residence of the subscribers (in the case that a fiduciary is appointed, the name and details of the fiduciary are specified),
  3. the registered office of the company, which must be located in Malta,
  4. objects of the company,
  5. the authorised and issued share capital of the company divided into shares of fixed nominal value,
  6. number of directors,
  7. name and residence of first directors, and name and registered or principal office, if the director is a body corporate,
  8. the manner in which the company is to be represented, and the chosen representative, and
  9. name and residence of first company secretary.

Share Capital Requirements

The minimum share capital in private limited companies is €1,165 and the minimum percentage paid up is 20%, whereas in public companies the minimum share capital is €46,588 and minimum percentage paid up is 25%.

Time

Following satisfactory completion of the KYC/due diligence process, a company can be registered by submitting the necessary documentation to the Registrar of Companies, including therefore the Memorandum of Association as well as an identification document of the subscribers and proof that the initial share capital was deposited in favour of the company-in-formation.  The Memorandum and Articles of Association must be signed by the subscribers or their attorneys. Generally, registration is completed within 24 hours of receipt of all documentation required.

Cost

A registration fee is to be paid to the Registrar of Companies, the value of which depends on the amount of authorised share capital of the company being set-up but ranges between a minimum of €245 (for a share capital that does not exceed €1,500) and a maximum of €2,250 (for a share capital exceeding €2,500,000).

3. Directors (power, appointment, duties and liability)

Appointment

The business of limited liability companies is conducted by its directors. The directors are appointed by the shareholders.  A private company must have at least one director, two in the case of a public company. Directors may be individuals or corporate entities.  The shareholder/s may be appointed as director/s. A person shall not be qualified for appointment or hold office as director of a company if:

  • he is interdicted or incapacitated or is an undischarged bankrupt;
  • he has been convicted of any of the crimes affecting public trust or of theft or of fraud or of knowingly receiving property obtained by theft or fraud;
  • he is a minor who has not been emancipated; or
  • he is the subject to a disqualification order.

Power

Company directors are generally vested with the legal and judicial representation of the company. This authority is however limited by the Companies Act, in that, directors may not:

  • act or enter into transactions which go beyond the company’s objects and powers;
  • disregard other limitations imposed by the company’s Memorandum or Articles of Association; or
  • disregard instructions properly issued by the company in relation to the exercise of their powers.
    The Directors have the power to appoint and remove the company secretary.

Duties and Liabilities

The directors must perform their duties with a degree of care, diligence and skill which is to be exercised by a reasonably diligent individual.  They must not have a conflict of interest between the benefit of the company and their personal benefit and they must not compete with the company.

Furthermore, the Director qua fiduciaries owe fiduciary obligations towards the company which include the duty of loyalty and care of a bonus pater familias. They must keep property acquired under fiduciary obligations separate from their own personal property, they must render an account and keep records in relation to the management of the property held under fiduciary obligation, and are duty bound to return property held under a fiduciary obligation when their mandate terminates.

Directors, as officers of the company, are entrusted with keeping statutory registers and minute books such as a register of members, a register of debentures, minutes of board and general meetings’ and minute books as well as completing the annual returns and filing any changes in the company’s corporate structure with the Registry of Companies.

Directors are personally liable in damages for any breach of duty committed as well as liable to make a payment towards the company’s assets, as deemed fit by the court, upon dissolution, if the company continues to trade while said director knew, or ought to have known that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency. The court may release the director from liability if it is satisfied that the director took every step he ought to have taken with a view of minimising the potential loss to the company’s creditors.

4. Filing Obligations

All companies registered in Malta must prepare financial statements which must be audited by a Certified Public Accountant who must also be a registered auditor. Audited financial statements must be presented to the tax authorities and to the Registry of Companies on an annual basis.  A company is also required to prepare and submit its annual tax return and make payment of the annual tax due. If the company’s activities are subject to VAT, the company will also need to submit VAT returns every quarter and pay the relative VAT thereon. The company may also need to submit recapitulative statements depending on its activities.

5. Taxation of Malta Companies

Companies registered in Malta are very tax efficient vehicles which one can use to carry out trading activities and / or hold overseas investments. A company is considered resident in Malta if it is incorporated in Malta or, in the case of a foreign body of persons, if its management and control are exercised in Malta. Companies that are resident and domiciled in Malta are subject to income tax in Malta on their worldwide income and capital gains at the rate of 35% which is the maximum rate of tax in Malta. However, in view of Malta’s full imputation system of taxation, any income tax paid by the company is credited in full to the shareholder upon a distribution of dividends, so as to avoid economic double taxation and, in addition, entitles shareholders to a refund of any tax paid by the company which is in excess of the shareholders’ income tax liability.

Tax Refunds

Shareholders of Maltese resident companies are also entitled to a refund with respect to the corporate tax paid by the company on the profits distributed to the shareholders. The amount of refund varies depending on the type of income being distributed.

Participation Exemption

The participation exemption regime ensures that dividends and capital gains derived by companies registered in Malta from their qualifying participating holdings in any jurisdiction will not be subject to any tax in Malta, provided that the anti-avoidance measures are satisfied in case of dividend income.

Alternatively at the option of the Malta Company, income or gains derived from a participating holding may be taxed at a flat rate of 35% less any available double taxation relief.  In such circumstances, however, upon a subsequent distribution of dividends by the company out of the said taxed income or gains, the shareholders of the Malta company would be entitled to a full refund (100%) of the Malta tax paid.

Double Taxation Relief in Malta

Malta does not impose any withholding tax on outgoing dividends, interest and royalties irrespective of the recipient’s tax residence and status. However, income received from foreign sources may be subject to foreign withholding tax or other foreign taxes. Consequently Malta’s fiscal legislation offers different forms of double taxation relief to ensure that double taxation is avoided. Malta has concluded more than 70 double taxation agreements, mostly based on the OECD Model Convention, which provide for the relief of double taxation.

Branches

Maltese legislation provides for companies incorporated or constituted outside Malta to conduct business in or through Malta by using a branch or a place of business in Malta. This creates a viable alternative when companies opt not to register a separate legal entity, yet carry out business in Malta by an extension of their foreign corporate vehicle. As a result, a branch qualifies to be considered as a company registered in Malta and is taxed in Malta on any income and gains arising in Malta which are attributable to the branch at a rate of 35%. Tax refunds may still be claimed in relation to dividends distributed from such branch profits.

6. Other Vehicles

Other commercial partnerships

Maltese law provides for partnerships en nom collectif where the liability of the partnership is guaranteed by the unlimited, joint and several liability of all the partners, and partnerships en commandite where the liability of the partnership is guaranteed by the unlimited, joint and several liability of the general partners, and by the liability, limited to the amount, if any, unpaid on the contribution, of one or more partners, called limited partners.  The advantage with partnerships is that they can elect to be taxed as companies or can be tax transparent in which case the income of the partnership is taxed at the level of the partners.

Trusts

The Trusts and Trustees Act regulates the creation and administration of trusts. A Maltese trust may be created verbally, in writing (including by will), by operation of law or by a judicial decision. Trusts are an ideal instrument for estate planning as they allow flexibility and a degree of privacy.

Foundations

Maltese law also provides for the creation and administration of foundations (whether set-up for private or charitable purposes). A foundation, as opposed to a trust is a separate legal entity subject to registration with the Registrar of Legal Persons. Unlike the trust deed, which is kept by the trustee under confidentiality, the deed of foundation is registered with the Registrar of Legal Persons and is available for inspection by the public. However, the identity of the beneficiaries may be specified in a separate document which is not published.  Foundations are the ideal structure for non-profit organisations because they enjoy the benefit of separate legal personality while having non-commercial aims.

The presence of such a wide variety of vehicles, together with an advantageous tax regime makes Malta and ideal jurisdiction to set-up a business or within which to invest.

Embracing Innovation to Prepare for A New Culture of Fixed Fees

Articles, Corporate/Commercial Law, Latest News

The legal sector is no stranger to radical change. Take the Jackson reforms, for example, which forced personal injury firms to rethink how they sourced new business. And most recently, with the consultation period underway on fixed fees for medical negligence, this is another area of law set to be overhauled.

By October of this year, it’s expected that a fixed fees system will be in place for clinical negligence claims in England and Wales. The system will place a cap on the amount that lawyers can charge for claims of medical negligence where damages are under a certain limit (most likely up to £250,000).

The aim of the new system is to bring down the NHS’ huge legal bill; £1.3 billion at the last count. Given the increasing number of public spending cuts, the current cost of NHS negligence is politically and economically hard to stomach.

But for the firms handling such cases of negligence, a system of fixed fees could mean financial difficulties, with some cases becoming less financially viable to pursue.

With time running out before the new regime is implemented, firms need to be proactive and prepare themselves early on before the changes take root. Now is the time to rethink business structures and implement new processes that will be able to withstand any challenges that the system may bring.

Investing in effective case management

When systems and processes work well, members of staff are able to operate more efficiently and effectively. As a result, clients have greater confidence their case is being handled by a professional and experienced team, and other parties involved in the process are also encouraged to be more efficient.  

Any errors to business systems or processes cause real headaches. And when profit margins are tight, errors can have bigger consequences, even leading to a firm’s decline in the worst possible cases.

This is why it’s vital to invest in paperless solutions. Gone are the days of manually searching through endless files of paperwork, and we no longer have to wait for members of staff to come back into the office after a holiday to get an update on where a crucial part of a case is up to. Paperless solutions allow employees to communicate and share documents quickly and easily. With the implementation of fixed fees restricting the amount of time lawyers can spend on a case, efficient handling of cases is now even more crucial.

 Developing effective marketing strategies

As fixed fees will change the financial value of cases, it’s important that firms have a sustainable amount of work coming in to make sure they occupy a strong position in the market. Having a regular flow of work gives the business better financial stability and more control over the direction the firm is heading in.

The key is to invest in effective marketing strategies that will build the brand and help the firm appeal directly to the public. Clients will be more inclined to approach a firm that has a positive image and understands their needs, concerns and fears.

This way of working also means firms can better manage the volume of work they have coming in; increase marketing efforts to bring in more work when needed, or turn down the amount of marketing during really busy periods. It is going to be difficult to reply on third parties to bring in new business. When fixed fees are introduced, firms need to have this control so they’re not dependent on other companies and can adapt to the needs of the industry with confidence.

Attracting talent from outside of the sector

In light of the proposed changes, it’s time for firms to think beyond the law profession and start to become more business-minded. After all, each firm is a business. Those firms which begin to innovate and embrace new strategies will be the ones to flourish in this fast-changing sector.

Of course, this isn’t without its challenges. Lawyers will have spent years of their lives training in their specific areas of law, but running a business might go beyond their typical skill set. This is where professionals from outside of the legal industry can play a huge part. Bringing in experts from other industries can provide new outlooks and approaches when it comes to solving issues, and these people will be able to offer knowledge outside of a lawyer’s training to help grow the firm.

For example, in September 2015, Fletchers Solicitors gained approval as an Alternative Business Structure (ABS). This meant that we were able to draw upon senior talent from outside of the legal sector – we now have three non-lawyer non-executive directors from a variety of backgrounds. This has been a big enabler for innovation within the firm, and has been crucial in making sure we are prepared to deal with any changes that may occur within the sector, such as fixed fees.

Creating the right support teams

The legal industry typically places a lot of demands on a lawyer and their days are often extremely busy. Their role involves more than just carrying out legal work on their case files, and their day can also be filled with administration jobs and the time-consuming job of reviewing records and reports.

As with any business, it’s important that employees feel as though there is support in place so they’re able to perform their role effectively. We’ve found that by creating teams to deal with the different stages of a case, everyone can focus their attention on a specific area, instead of having to juggle crippling workloads. For example, our junior paralegals are in charge of acquiring all the crucial information and research for each case. This helps to support the lawyers and means they can focus their attention on more important matters, such as making legal judgements.

Applying a team approach to the management of cases not only means work is completed more cost effectively, but also with greater care and attention. Cases will be moved through the legal process more smoothly and in a timely manner, with everyone having clear responsibilities for each stage.

To keep teams motivated and working well together, regular training and support meetings should also be put in place. Training sessions help employees develop and improve their skills so they’re of continued value to the business. Setting up support meetings gives everyone the opportunity to discuss any areas that may be causing concern, particular when handling cases, which in turn creates a positive and open culture within the firm. A great working environment makes for a happier workforce and will go towards minimising errors or inaccuracies.

Bespoke is best

In the rapidly changing legal sector, flexibility is crucial. Moving away from traditional solutions when it comes to case management and opting for the bespoke route is a great enabler. Many solutions are marketed to legal firms from software developers, but these are typically very a very ridged and structured ‘one size fits all’ option. Software developers are usually very skilled in what they do, however understanding the difference between a wrist fracture case and a C6 spinal injury case is unlikely to be one of their specialist abilities.

In comparison, investing in bespoke solutions gives firms more freedom to develop a system that will meet its specific needs and goals. This option opens the door to future innovation and allows the firm to adapt systems to incorporate new ideas or changes that will inevitably occur within law.

As we move further into 2016, its time to start accepting that change is coming. Although it’s still to be decided how these changes will take effect, time is running out to make the necessary preparations. Traditionally, the legal sector has been slow to innovate and has been set in its ways. But with change becoming a common phenomenon in recent years, as a profession, we need to recognise that reacting early is the best approach. In fact, change represents the opportunity to develop better ways of doing business and this should certainly be embraced by the industry.

 

For more information, please visit www.fletcherssolicitors.co.uk

Incorporation of Chilean Companies

Articles, Corporate/Commercial Law, Latest News

The most common way to materialize an investment by a foreign company in Chile, is through a local subsidiary (legal entity) created especially for such purpose. Hereby, we will summarize which are the type of entities most frequently used as an investment vehicle in Chile, the procedure for their incorporation, the differences among each other, and other matters that should be considered at the moment of deciding to incorporate a legal entity Chile.

The legal entities most commonly used as an investment vehicle in Chile are: (i) Limited Liability Partnerships (hereinafter “LLC”); (ii) Stock Corporations (hereinafter “SC”) and (iii) Companies per Shares (hereinafter “SpA”). This last kind of entity was created as a simplify form of SC, it is regulated in the Commerce Code, and it gives to its shareholders broad faculties to set their by-laws (management system, dividend distribution, etc), however, all matters not otherwise regulated in the provisions applicable to the SpA, or in their by-laws, will be subject to the regulations applicable to the SC.

As a general note, the basic differences and similarities between the entities above mentioned, are the following:

(i)    Management: the SC is managed by a board of directors. The LLC and SpA have a very flexible management structure (a board of directors is not required as in case of the SC), they can be administrated for example by a managing partner/shareholder;

(ii)    Number of partners or shareholders: the LLC and SC must have at least two partners or shareholders (both of them may be foreigners), the SpA can have just one shareholder who may also be a foreigner;

(iii)    Amendment of the by-laws: the by-laws of the LLC can be amended through a public deed executed by all its partners. The amendment to the by-laws of the SC and SpA has to be approved by an extraordinary shareholders meeting, in case of the SC, such shareholders meeting shall be always held in the presence of a notary public. It is important to note that in the SpA or SC the majority rule is applicable, on the other hand in the LLC the unanimously of the partners is required. The amendment of the by-laws of the SpA can also be approved by the execution of a public deed by its partners;

(iv)    Capital for incorporation: no minimum capital is required for the incorporation of either of these types of entities. Moreover, in the SpA and SC, the capital is divided into shares, and the owners of the shares are “shareholders”. In the LLC, the capital is divided into equity rights and the owners of the equity rights are “partners”. This difference is due to the fact that the SpA and SC are capital based entities, while the LLC is based in the personal confidence between the partners. Thus, in case of the LLC, the identity of the partners is material and, as a result, the formalities for the transfer of equity rights will differ from the once required in the SpA or the SC; and

(v)    Transfer of shares and equity rights: the transfer of equity rights in the LLC implies an amendment of the by-laws of the Company, as it has to be approved by all the partners considering the identity of these is one of the principal elements of the LLC. Regarding the SC, in order that the transfer of shares be valid, it has to comply with one of the following formalities: (i) to be signed before a notary public; or (ii) that each party signs before two witnesses (who have to be duly singularized by their ID number). These witnesses can be the same if the assignor and assignee of the shares sign the relevant document in the same act. The transfer of shares in the SC does not require the approval of the other shareholders, neither an amendment of the by-laws. The transfer of shares of the SpA, will be subject to the same provisions applicable to the SC, unless something different has been specially provided in the SpA by-laws.

In connection to the incorporation process, there are not many differences in the establishment procedure between the entities mentioned above. LLC, SC and SpA are incorporated by a public deed granted by the initial partners or shareholder(s). Such public deed shall contain the by-laws of the legal entity. A summary of this public deed must be duly authorized by a Notary Public, registered in the Registry of Commerce and published in the Official Gazette, within 60 days from the date of the public deed in case of the LLC and SC, and within 30 days in case of the SpA. In any case, in practical terms, the registration and publication may usually take 10 business days from the granting of the relevant public deed. Amendment of by-laws of each of these entities shall follow the same proceeding than for its incorporation.

Furthermore, it is important to bear in mind that, in order to incorporate a legal entity in Chile, the partners or shareholders must obtain a tax identification number or Rol Único Tributario (“Tax ID number”) granted by the Chilean Internal Revenue Service or Servicio de Impuestos Internos (“SII” or “Chilean IRS”). Pursuant to the regulation that entered into force on January 2015, the filing with the SII has to be completed with some additional information and documentation than before. In connection to the foregoing, the foreign entity shall appoint and maintain as representative in Chile, a person domiciled or with residence in Chile, with faculties to submit any relevant declaration and/or documentation before de SII and specially, to be served by the latter on its behalf. Likewise, this representative shall submit to the SII the information and documents before mentioned, which should contain the following information regarding the foreign entity: (a) name of the foreign entity; (b) Commercial name (in case this is different from the name indicated in letter (a)); (c) specify which kind of entity it is; (d) country, address and date of incorporation; (e) country of tax residence; and (f) indicate its tax identification number (and submit a copy of it). It will also be necessary to submit a good standing certificate of the foreign entity and to identify its partners or shareholders (name, date of birth, address, country, tax residence and ID number). This last information, regarding its partners or shareholders, will be required unless it is a public stock corporation, or is under one of the other situations that Chilean regulation exempts from submitting this information (pension funds, foreign governmental entities, etc). All the documents have to be submitted in original, duly translated to Spanish (if they were granted in a different language) and duly legalized. This Tax ID number is obtained immediately once all the relevant documentation is duly submitted to the Chilean IRS.

Finally, in order for a Chilean entity be able to start its business activities, it must obtain a Tax ID number and give notice to the Chilean IRS that will start its business in Chile. The Tax ID number is obtained immediately once the relevant documentation is submitted to the Chilean IRS. Moreover, this number is usually required by third parties, and in case of banks it will be absolutely necessary before moving forward with the opening of a bank account. Furthermore, all Chilean companies must necessarily appoint and register, at the Chilean IRS, a duly authorized representative for service of process purposes, who must be Chilean or a foreigner with permanent residence in Chile. This representation implies to bear the responsibility over the accounting records of the Company in Chile for IRS and Tax compliance.

As you may see from our brief explanation above, the procedure to incorporate a Chilean company is a very straightforward process, and is practically the same proceeding to incorporate a LLC, a SC or a SpA. Today, we consider that the most difficult point, in the incorporation of a Chilean entity, could be to obtain a tax payer number for the foreign entity that will hold participation in the Chilean entity. The foregoing, due to the regulation that entered into force in 2015, which required new information, for example regarding its shareholders or partners, if those are not under one of the situations that Chilean regulation exempts from this information, it will be necessary to submit details regarding all its partners or shareholders, even though if the company have hundreds of them, which could complicate the process. Notwithstanding this last point, in general terms, the incorporation of a Chilean entity is a simple and strait forward proceeding which can be done in a short period of time.

Why law firms can’t rest on their laurels

Articles, Corporate/Commercial Law, Latest News, Technology Media & Telecoms

Our latest Legal Benchmark Report carries a clear message on its front cover: law firms need to avoid complacency.

That message is key for 2016, as the legal sector adjusts to what we refer to as “the new, post-recession norm.”

So how did we get to this “new norm”?  The answer is it’s been via a route involving significant shake-ups.

Prior to the global financial crisis, legal firms in the UK were charging their lawyers out at unprecedented rates, with highly qualified professionals carrying out relatively low-level work.

That’s all changed. Recession brought with it the challenges also faced by myriad other industries and sectors and it arguably wasn’t until 2014 that the UK was able to enjoy sustained economic performance.

That year signaled the release of pent-up demand, with the booming housing market leading to an increase in conveyancing and corporate confidence delivering additional business.

And this more stable environment rolled on into 2015, with corresponding increases in fee income and profit per equity partner.

But fast forward to 2016 and, as our Legal Benchmark Report outlines, many firms appear to be struggling to deliver growth levels achieved in the previous two years.

Delegates at our local autumn 2015 conferences signalled this too, indicating that while generally there’s a positive mood, there’s also less confidence in firms’ ability to grow revenue and profits.

So while the last couple of years have seen firms restore balance sheets that had been hit by the recession, we’ve now moved into a phase where the focus needs to be on what happens next.

This has also come about partly because more lawyers are now competing for work and, in contrast to the pre-recession days, this is a time where providing cost-effective legal services to clients is key.

Therefore, with profitability being squeezed, the avoidance of complacency and actively looking to move forward into the future is now all important for law firms.

How can this be done if profits can’t necessarily be boosted simply through extra work? The answer is one which applies to more than just the legal sector – efficiency.

A fundamental way in which law firms can become more efficient is through their use of technology. The fourth biggest cost for firms, after people, premises and insurance, is IT. And in a NatWest survey conducted in September last year, respondents attributed 7.55% of their costs to spending on technology – which equates to tens of millions of pounds for some of the higher-earning firms.

Despite the cost, a massive 96% of the leading UK law firms we questioned also said they saw IT systems as a source of competitive advantage in the legal profession. Given this importance, companies must ensure they get the best from their technology.

One of the best ways it can be done is by looking at how IT is financed and managed. Lombard, NatWest’s asset finance arm, is taking a leading role in this through its Lombard Technology Services (LTS) division.

LTS provides finance for a wide range of assets, from software to servers and tablets to telephony systems, which can mean that firms can release cash to invest in other areas. It also enables firms to match the funding cycle to the useful lives of the assets.

But efficiency can also be gained beyond the simple financing of assets, with support available throughout the lifecycle of a product. This includes the sourcing, installation, maintenance and disposal of assets so that technology inventories are as efficient as possible. The associated upgrading and updating of systems also offers improved security against cyber-attacks, which many in the legal sector view as a significant future risk.

Elsewhere, there’s also been plenty of talk about the role of artificial intelligence (AI) in the legal profession.

While this might conjure up images of robots in courtrooms, the potential reality isn’t quite that far-fetched. Yet it has the potential to bring efficiencies to many of the tasks which take place in the legal world and in professional services as a whole.

These industries rely on data, information, records and analysis. And while AI is unlikely to see massive reductions in headcount in the near future, it’s predicted that it could transform the way legal services are undertaken.

Irrespective of whether that happens sooner, later or at all, it remains vital for firms to ensure that technology investment supports their business strategy and happens in the most cash-flow and tax-efficient way.

Beyond technology, there are of course other ways in which efficiencies can be achieved, one of which is via mergers. Today’s environment of relative stability, combined with the older owners of legal firms wishing to retire, does lay a platform for merger activity.

And with mergers come efficiencies. Fewer offices, fewer partners and less admin are clearly by-products of two firms becoming one, leading to better economies of scale and increased profitability.

What this all boils down to is that the legal sector isn’t standing still – and adapting to change needs to happen if firms are to achieve success.

That’s why we’ve got such a clear message on our latest Legal Benchmarking Report, which in itself is the largest one to date, covering 390 firms and focusing on those operating within the SME sector. Contributions are up by 15%, while we’ve also incorporated data showing changes across critical business indicators over the last four years.

The report looks at areas including fees, profit, lock-up and finance, while an additional element looks at how legal firms perform compared to accountancy firms.

It’s an interesting and detailed picture of the legal sector – a sector that’s generally in good health but can’t ignore the challenges that this and future years are likely to bring.

Further Changes Expected in Indian Companies Act 2013

Articles, Corporate/Commercial Law, Latest News

Background:

For more than fifty years Companies were in India were governed by the Companies Act, 1956.However there was need to replace the old legislation with a new act which could address the changing landscape of the Indian corporate world.  The majority of the provisions of the new Indian Companies Act 2013 (‘Act’) came into effect in two phases- 98 sections of the Act were brought into effect in October 2013 and 183 sections were notified and brought into effect in April 2014.  However the Act was seen by many as restrictive and cumbersome- particularly for closely held private companies.  Private Companies were finding it increasingly difficult to comply with the various procedural requirements prescribed for aspects like raising of further capital, private placement of shares etc. Further some of the compliance requirements under the Act were considered to be too onerous on private and small companies.

In June 2015, the Ministry of Corporate Affairs of the Government of India, constituted the Companies Law Committee (‘CLC’) to make recommendations on the issues arising from the implementation of the Act. The CLC released its report on February 1, 2015 and recommended as many 100 changes to the Act.

Significant Recommendations of the CLC

While the CLC has suggested several changes, some of the more significant recommendations of the CLC are as follows:

  1. Changes in some key definitions: Under the Act, an associate company has been defined as one in which another company has control of: (i) at least 20% of shares, or (ii) business decisions. It is now proposed that this definition should be changed and an associate company should be defined as one in which another company has: (i) control of at least 20% of voting power, or (ii) control or participation in business decisions.
  1. Raising of Further Capital by Private Companies: The two sections that deal primarily with raising of further capital under the Act are section 42 and section 62. Section 42 deals with private placement of securities.   Under section 42, Companies were required to go through a long drawn out procedure for raising capital by way of private placement of securities. This procedure included  opening of a separate designated account where the consideration for the securities could be transferred, obtaining certificate of valuation of securities and  submission of separate offer letters disclosing certain information about the company. It has now been recommended that this procedure should be simplified for private companies.

Section 62 of the Act deals with further issues of shares on preferential basis. Under the erstwhile Companies Act 1956, private companies were not required to follow the procedure specified for preferential allotment. However the present Act makes no difference between public and private companies in terms of the procedure to be followed for preferential allotment.  This created hardships for closely held private companies and in view of this is now proposed that procedure for preferential allotments for private companies should be simplified.

  1. Investment through subsidiaries: As per the Act, Companies were restricted from making investments through more than two layers of investment subsidiaries. The CLC has recommended removal of restrictions on layering of subsidiaries. The CLC has explained that the existing restrictions were having a substantial   bearing   on   the   functioning, structuring and the ability of companies to raise funds .This is a positive development as this will allow Companies to undertake corporate restructuring which shall benefit their business.
  1. Forward Dealing Forward dealing involves purchasing securities of a company for a specific price at a future date which is currently prohibited under the Act for directors and key managerial personnel of a company. The Act through Sections 194 and 195 has restricted forward dealing by directors and key managerial persons (‘KMP’s) of a company and insider trading by any person including directors and KMPs respectively.  The CLC has noted that since the securities in private companies would not be marketable, they  would  not qualify  as  securities  within  the  meaning  of  Section  195,  and  thus  would  exclude private  companies  from  the  ambit  of  the  said  provision.  The CLC observed that it would be unjustified to apply the insider trading regulations to private companies. The CLC further noted that  insider  trading  prohibitions  can  be  problematic  in  the  context  of  the  rights of first refusal that are frequently contained in the shareholders’ agreements of private companies. The  CLC has  also  noted  that the regulations specified by the Securities Exchange Board of India in terms of insider trading are comprehensive in the matter (and also apply to companies intending  to  get  listed),  and  in  view  of  the  practical  difficulties  expressed  by stakeholders, sections 194 and 195can be omitted from the Act. While logically this seems to be a sound recommendation, it does not take into account the fact that that there are valid reasons for including the insider trading prohibitions in company law in addition to securities law, as directors have  fiduciary responsibilities and there may be  directors even in private companies and unlisted who may abuse their  position  and  use  confidential  information,  which  have  come  to  them  through their  position,  for  personal  profit  and  not  act  in  the  best  interests  of  the  company. While the CLC noted this, they did not take this aspect into consideration while making their recommendations.
  1. Thresholds for pecuniary relationships of Independent Directors: The Act specifies that an independent director must not have any pecuniary relationship with the company, its holding, subsidiary or associate company or their promoters or directors, during the two immediately preceding financial years or during the current financial year. There were no thresholds specified and even minor pecuniary relationships were covered due to this provision even though such transactions may not impact the independence of directors. The CLC has proposed to introduce a threshold for pecuniary relationships in relation to qualification for an independent director. Further Clauses  149(6)(e)  (i) of the Act restricted the  appointment  of  an  individual  as  an Independent  Director  in  case  his  relative  is  or  was  a  KMP  or  an  employee  in  the company,  its  holding,  subsidiary  or  associate  company  during  any  of  the  preceding three  financial  years. In  this  regard,  the  CLC has  recommended  that  the  scope of  the  restriction should  be  modified and the   restriction   should be   only with respect to   relatives   holding  Board   or KMP/one   level   below   board   positions   prior to the appointment of such Independent Directors. However, the CLC has clarified that  as it would be possible to influence an Independent Director in case  his  relative  is  also  working  in  the  situations  referred  to  in  the  section irrespective of the position he holds, the scope of restriction after appointment of such Independent Directors should, therefore, be retained as originally prescribed.

Conclusion:

The Companies Act 2013 is one of the key and important legislations in the country. Through notifications, circulars, amendment orders and clarifications, the Ministry of Corporate Affairs, has brought about approximately 140 changes to the original legislation since its inception. While the recent recommendations are very positive, it must be noted that if brought into effect, these will result in another 100 amendments and significantly alter the landscape of governance of companies in the country. The number of amendments has caused hardships to companies and their advisors as the regulatory and compliance structure remains unclear. Many companies have taken steps to ensure compliance with the existing provisions, only to be told subsequently that the provisions are not applicable to them. One hopes that this is the final major exercise with respect to the amendments to the Act and the act gets a sense of finality.

Recent Changes to Australian Foreign Investment Laws

Accounting and Audit, Articles, Corporate/Commercial Law, Latest News

Following the Foreign Investment Review Board’s (FIRB) updated foreign investment policy (effective 1 December 2015), which coincided with the introduction of mandatory fees for foreign investors, the Treasurer of the Commonwealth of Australia announced on 22 February 2016 new conditions for all foreign investment applications in Australia to ensure that companies, and their ‘associates’ (as defined in section 318 of the Income Tax Assessment Act 1936 (Cth)), investing in Australia pay tax on their Australian earnings.

Foreign investment into Australia requiring FIRB approval will only be permitted where it passes the ‘national interest’ test (in light of factors such as national security, the impact of competition, the character of the investor, and the impact on the economy and community). The new taxation conditions on foreign investment do not represent a change in the law, but rather increase the focus on taxation and add to the ‘national interest’ test (that is, foreign investors must comply with the new taxation conditions in order to satisfy the ‘national interest’ test). The new taxation conditions include the following:

  1. the applicant and its associates must comply with Australia’s taxation laws;
  2. the applicant and its associates provide information or documents required by the Australian Taxation Office (ATO) in connection with the application;
  3. the applicant and its associates must notify the ATO of any material transactions or other dealings to which transfer pricing rules in the Income Tax Assessment Act 1997 (Cth) or anti-avoidance rules in the Income Tax Assessment Act 1936 (Cth) may apply (if not already previous notified);
  4. the applicant and its associates must pay any outstanding taxation debts; and
  5. the applicant must provide an annual report to FIRB on compliance with the taxation conditions.

Where significant tax risks are identified, further conditions may also apply, including:

  1. the applicant must engage in good faith with the ATO to resolve any tax issues (for example, negotiation of an advance pricing arrangement or seeking a ruling from the ATO);
  2. the applicant must provide information to the ATO on a periodic basis (for example, a forecast of tax payable).

These new taxation conditions will apply prospectively. Under section 72 of the Foreign Acquisitions and Takeovers Act 1975 (Cth), the new conditions appear to commence for all applications being considered or received after 22 February 2016.

Failure to comply with these taxation conditions may be very significant to a foreign investor and could result in prosecution, fines and potentially forced sale of assets.

Foreign investors should ensure that they obtain appropriate taxation advice to ensure that they comply with the new taxation conditions and avoid unintentional breach of the new taxation conditions.

New Withholding Requirements for Purchasers of Interests in Australian Land

From 1 July 2016, purchasers of direct and indirect interests in land in Australia could potentially be subject to an additional cost of 10% of the purchase price if they fail to withhold that amount from payments made to vendors if the relevant clearance certificates or residency declarations are not provided.  The new rules will apply to contracts entered into from 1 July 2016, but both purchasers and vendors will need to get ready for these changes well before any sale is executed to ensure they are not adversely affected.

Summary

The withholding provisions apply to require the purchaser to pay to the Commissioner of Taxation (Commissioner) an amount equal to 10% of the purchase price (including the money paid and the market value of any property given) of the asset on or before becoming the asset owner for assets acquired from a non-resident which are:

  • Taxable Australian Real Property (TARP) such as land, fixtures, mining tenements in Australia;
  • indirect Australian real property interests (for example more than 10% of the shares in a company where 50% or more of the assets of the company are TARP); or
  • an option or right to acquire TARP or indirect Australian real property interests.

There are a number of exceptions and exemptions, and the procedures are quite different for direct and indirect real property interests.

Direct Australian Real Property Interests (TARP)

The withholding provisions apply to real property located in Australia including a lease of land, mining, quarrying or prospecting rights in Australia, and include fixtures to the land and options or rights to acquire real property.  This can include real property sold as part of the sale of a business, or the sale or grant of leases.  Company title interests also fall under this category (even though technically they are indirect interests in land).

A vendor will be assumed to be a non-resident unless they supply a clearance certificate to the purchaser prior to settlement which has been issued by the Commissioner certifying that they are an Australian resident.  In order for a vendor to obtain a clearance certificate they may be required to ensure all their tax returns are up to date.  Clearance certificates will be valid for 12 months, so it is recommended that any vendors intending to sell property apply for a clearance certificate well before the proposed settlement date. If there are a number of vendors, a clearance certificate must be obtained for each.

There are a number of exceptions from the withholding provisions:

  • Where the value of the land is less than AU$2 million (where there are multiple purchasers it is the total value of the land, not just the purchaser’s interest);
  • Where every vendor has supplied a clearance certificate;
  • Where the vendor is a company under administration or the transaction is part of the administration of a bankrupt estate or an arrangement with creditors; or
  • Where another withholding obligation applies to the transaction.

If the vendor is not able to provide a clearance certificate, the purchaser must pay 10% of the purchase price to the Australian Taxation Office (ATO) unless they receive a variation certificate issued by the ATO before settlement.  The vendor can apply for a variation certificate if they believe the actual tax payable in respect of the sale will be less than 10%, such as if they have carried forward tax losses, or if there are multiple vendors with only one being a non-resident.  A secured creditor can also apply for a variation certificate if they consider the proceeds of sale will be insufficient to discharge the debt as well as pay the Commissioner.  In each case a variation will only be effective if it is provided to the purchaser.

Indirect Real Property Interests

There are also withholding provisions which apply to indirect Australian real property interests such as shares in a company or units in a trust where an interest of 10% or more is held in an entity where 50% or more of the assets of the entity are Australian real property.  The potential exceptions from withholding for indirect interests in real property are quite different from direct interests.  The AU$2 million threshold does not apply to indirect interests in real estate, so interests of any value are potentially caught.  However there is no need for a vendor of indirect interests to provide a clearance certificate as residency can be established in other ways.

There are a number of exceptions from the withholding provisions for indirect interests, for example where:

  • the vendor has made a declaration that they are an Australian resident;
  • the vendor has made a declaration the assets are not indirect Australian real property assets;
  • the purchaser has reasonable grounds to believe every vendor is an Australian resident (the ‘knowledge condition’);
  • a variation certificate has been provided to the purchaser prior to settlement (by either the vendor or a secured creditor as outlined above) and the variation reduces the withholding payment to nil;
  • the transaction is conducted through an approved stock exchange or crossing system;
  • the transaction is a securities lending arrangement;
  • the vendor is a company under administration or the transaction is part of the administration of a bankrupt estate or an arrangement with creditors; or
  • an amount is already required to be withheld as withholding tax for some other reason.

Payments to the ATO

In the case of both direct and indirect interests of property, the purchaser may withhold the required amount from the purchase price payable to the vendor.  However if the purchaser fails to withhold, the obligation to pay to the Commissioner still exists and the purchaser may be liable for an administrative penalty and interest costs. These rules therefore place onerous obligations on the purchaser.

Inaccurate Declarations

A purchaser is entitled to rely on a vendor’s declaration of residency or declaration that the interest is not an indirect real property interest unless they know the statement to be incorrect.  They are able to rely on the declaration even if they have grounds to doubt the accuracy of the declaration unless they have specific knowledge that the statement is false.

The vendor may however be liable for penalties if the statements made are false or misleading.

Practical Points

This legislation raises a large number of important issues for purchasers, vendors and secured creditors.  These include:

  1. All vendors who are considering selling direct interests in land which could have a value over AU$2 million should consider whether their tax affairs are in order and apply for a clearance certificate well before the proposed settlement date.
  2. Vendors of shares or units in trusts should consider whether the stake would constitute an indirect real property interest in order to determine whether they were able to make an appropriate declaration to avoid having tax withheld.
  3. If the vendor is not able to obtain a clearance certificate or make a relevant declaration, they should consider whether they would be entitled to a variation of the amount of tax withheld. They should allow plenty of time prior to settlement to obtain the variation certificate.
  4. Secured creditors who become aware of a proposed sale should consider whether they should seek a variation certificate.
  5. Purchasers of direct real estate need to ensure that a clearance certificate is provided on or before settlement.
  6. Purchasers should ensure the appropriate declarations are included in all contracts of sale of indirect interests in land.
  7. If the purchaser is required to pay an amount to the ATO, they will need to ensure that they have sufficient funds available to make the payment at settlement (this is particularly relevant if the acquisition is made for non-cash consideration), and they complete an online “Purchaser Payment Notification” form on or before settlement.

The Future of Third Party Ownership and Influence in Football Following the FC Seraing Case

Articles, Competition and Anti-Trust, Corporate/Commercial Law, Latest News

Third Party Ownership and Third Party Influence in football have long been topics of much mystique.  What exactly are they?  How do they work? Why are they so controversial?  And most importantly, are they legal?  This article attempts to answer these questions and examines the possible effects of a recent case involving these issues
What is the difference between Third Party Ownership and Third Party Influence?
Third Party Ownership (“TPO”) refers to the circumstances in which a physical or legal person (who is not a football club) invests in the economic rights of a professional football player, with the likely intention of receiving a share of the value of any future transfer of that player.

Third Party Influence (“TPI”) is wider and relates not just to ownership of players but outside parties who are not involved in the ownership of the club (e.g. sponsors, intermediaries or some other external third party) having an influence on the way a football club operates.

FIFA Regulations

There is inevitably some overlap between TPO and TPI.  As recently as 2014, FIFA were content to allow some forms of TPO and TPI to exist in football.  Up until that point, the only FIFA rules on these issues were contained at Article 18bis of the FIFA Regulations on the Status and Transfer of Players (“FIFA Regulations”):
“No club shall enter into a contract which enables any party to that contract or any third party to acquire the ability to influence in employment and transfer related matters, its independence, its policies or performance of its teams.”  

However, effective from May 2015, FIFA introduced a new Article 18ter which deals with TPO. The relevant rule reads:
“No club or player shall enter into an agreement with a third party whereby a third party is being entitled to participate, either in full or in part, in compensation payable in relation to the future transfer of a player from one club to another, or is being assigned any rights in relation to a future transfer or transfer compensation.”

For these purposes, a Third Party is defined as:
“A party other than the two clubs transferring a player from one to the other, or any previous club with which the player has been registered.”

How does TPO work in practice?

TPO has long since been an accepted and prevalent practice in a number of countries on the South American continent as well as other European countries such as Portugal.  A classic example of TPO in operation is as follows.  A third party sports agency pay a promising Brazilian teenager’s club a certain sum of money for 50% of the player’s economic rights.  The club believes that the player may well be worth more than that but is in dire need of finance and accepts the offer.  That player turns into a star and earns a “big money” move to a European club.  At the point of transfer to the European club the third party sports agency is entitled to 50% of the transfer fee, as well as 50% of any future transfer fee whilst they own 50% of the player’s economic rights.

Pros and Cons of TPO

Many commentators believe that TPO undermines the integrity of football. The theory being that the transfer of players should be driven solely by the sporting/commercial considerations of the selling club, the purchasing club and the player.  TPO by its very nature could involve a third party having (at the very least) an indirect involvement/influence in the consideration of whether or not the player should be sold.
Added complications could arrive when the sports agency that owns a percentage of the player’s economic rights also has some (direct or indirect) involvement in the purchasing club calling into the question the integrity of the transfer and indeed the competitions that both the selling and purchasing club participate in.  There are also potential policy issues with money from these transfers flowing out of the game, rather than being reinvested in football.

The plethora of difficult issues that arise from TPO resulted in many countries choosing to outlaw the practice before Article 18ter of the FIFA Regulations came into effect.  For example TPO was banned in England following the infamous “Carlos Tevez affair”, where a third party owner of Tevez had a right in contract to force Tevez’s club, West Ham United FC, to sell the player in the event of a suitable bid being received.  Although West Ham were ultimately found to be in breach of other domestic rules (i.e. “material influence” rules – as the third party owner could force West Ham to sell the player, the third party had a material influence over the decision making of the club) at the time these events occurred in 2006, there were no rules preventing TPO in England.  Following the Tevez case, the English football authorities brought in a complete ban on TPO.
Notwithstanding all of the above, proponents of TPO would argue that it has significant financial advantages to clubs that participate in the practice.   The inequality of arms prevalent in European football means that clubs from less wealthy leagues such as Scotland, Portugal and Holland struggle to compete with the European elite.  They would argue that TPO allows them to attract a better quality of player than they could otherwise afford.

Scotland is an interesting example in the sense that prior to the 2015/16 season, the Scottish FA did not prevent TPO (but had of course implemented Article 18bis of the FIFA Regulations concerning TPI).  Scottish clubs were vehemently opposed to a banning of TPO in Scotland on the basis that they were operating in a similar market for players as those clubs from countries that did allow TPO.  If the Scottish FA had banned TPO, Scottish clubs argued it would be more difficult for them to attract the desired players. If a player subject to a TPO arrangement had a choice between a club in Portugal, (who permitted TPO) and Scotland (who did not), then the player could only move to Portugal.  Such arguments became academic following the introduction of Article 18ter of the FIFA Regulations.  All national football associations are now required to implement those rules into their own national regulations.

How has the ban on TPO been implemented?

It has now been almost a year since the implementation of the TPO rules and we are now starting to see some cases and decisions emanating from Article 18ter of the FIFA Regulations.

A number of cases involving TPO involve the controversial Doyen Sports Group (“Doyen”).  Doyen has built up a reputation in football for being a key source of funding for football clubs facing financial difficulties.  Doyen acquire economic rights from certain players, on the basis that they believe those players’ transfer value will increase.  If that increase is realised, Doyen earn profits when the player transferred.

Doyen have been involved in two recent cases which both pre-date Article 18ter of the FIFA Regulations, one involved the transfer of Argentinean defender Marcus Rojo from Sporting Lisbon to Manchester United, and the other involved investment in Dutch club, FC Twente.  Article 18ter of the FIFA Regulations does not apply retrospectively and as such Doyen could not be found to be in breach of any existing rules.

However, the most recent case involving Doyen and Belgian club FC Seraing did involve Article 18ter of the FIFA Regulations and provides a useful insight into the operation of the new rules.

FC Seraing/Doyen Case

A case was brought before FIFA as a result of allegations that Doyen had added €300,000 to FC Seraing’s budget in exchange for 30% of some players’ economics rights.
The act of investment by Doyen into FC Seraing was clearly permitted but the fact that it was offered in exchange for a percentage of economic rights of certain players caused FIFA to investigate the matter.  Following that investigation and a hearing before the FIFA Disciplinary Committee, FC Seraing was found to be in breach of Articles 18bis (TPI) and 18ter (TPO).  The club were sanctioned with a two year transfer ban and a fine of CHF 150,000 (c.£106,000).  The transfer ban prevented the club from registered any new players for four complete and consecutive registration periods.

FC Seraing appealed FIFA’s decision and also sought, together with Doyen, to challenge the FIFA Regulations on TPO in Belgian court.  The scope of FC Seraing and Doyen’s appeal to the Belgian court is worthy of an article in its own right and outwith the scope of the present one.  However, in short, FC Seraing and Doyen argued that Article 18ter of the FIFA Regulations in respect of TPO were disproportionate and did not protect a legitimate interest and as such sought provisory measures which included an interim ruling that 18ter of the FIFA Regulations was not lawful, pending a full reference being made to the European Court of Justice.

In considering this application, the Belgian court took account of Article 18bis of the FIFA Regulations and ruled that it had proved ineffective in seeking to regulate TPO and TPI in football.  As such, they indicated that a complete ban on TPO as introduced by Article 18ter of the FIFA Regulations might well be necessary.  Accordingly, they denied the provisory measures sought.

Following the failure of the FC Seraing and Doyen’s provisory Belgian court challenge, their appeal to FIFA’s Appeal Committee was unsuccessful.  The Appeal Committee upheld the decision of FIFA’s Disciplinary Committee in its entirety.

Where now for TPO?

FIFA have not released the reasons for either the Disciplinary Committee or Appeal Committee so providing extensive commentary on these decisions is not possible.
However, it seems entirely possible that TPO challenges are likely to continue. FC Seraing and Doyen appear be prepared to continue with the action in Belgium.  Now that FIFA have taken their first action in relation to the TPO rules, it is likely that more will follow. As such, further challenges in courts all over Europe are likely.

The courts have long since acknowledged the so-called “specificity of sport” and acknowledged that the EU free movement rights are not absolute.  If deemed necessary and proportionate, exceptions to free movement rights can and will be permitted.
The battle between FIFA and clubs involved in TPO has just began, and whilst FIFA have survived the first challenge successfully, only time will tell if their ban on TPO is here to stay and what effect it will have.