No. 17, October 2010 SmartCapital

Current Legal Issues for Investors in Global Businesses

The Long-Arm of the US: Updates on the Potential Reach of US Private Fund Regulation Across the Atlantic

By Kathleen Walsh and David Sparrow Kathleen Walsh Partner Recent regulatory reform legislation and rulemaking in the US portend Corporate Department sweeping revisions to the overall US regulation of financial services, including private fund sponsors.

In their current form, these regulations Most private fund sponsors with assets would not only affect US fund under management of US $150 million sponsors, but would also impact their or more (other than “” European peers, in certain cases to a sponsors) will be required to register David Sparrow significant degree. Recently proposed as investment advisers with the SEC. Associate and approved, regulations include: Sponsors falling below that threshold Corporate Department (i) mandatory registration of private will need to register as investment investment advisers (both US and advisers under applicable state law non-US) with the US Securities and (unless state-specific exemptions Inside This Issue Exchange Commission (the SEC), apply). The Registration Act will also (ii) the taxation of so-called “carried require non-US sponsors of private The Long-Arm of the US: interests” at increased rates and (iii) the funds (whether organised in the US or Updates on the Potential Reach of US Private Fund restriction of campaign contributions elsewhere)to register with the SEC if Regulation Across the Atlantic..... 1 and related payments to elected officials they have US $25 million or more in Latham Advises the Fonds by investment advisers holding public assets under management attributable Stratégique d’investissement (FSI) on its PIPE Investment in pension plan assets. to US clients. French Listed Company, Vilmorin & Cie ...... 4 Many private fund advisers have relied The Dodd-Frank Wall Street Reform Landscape: on the “private adviser” exemption The Kingdom of Saudi Arabia..... 6 and Consumer Protection Act from US registration set forth in Latham Advises on Transforming Mining & On 21 July 2010, the Dodd-Frank Wall Section 203(b)(3) of the Advisers Act Metals Transaction...... 8 Street Reform and Consumer Protection being an adviser that (i) does not hold Germany Tightens Its Act (the US Dodd-Frank Act) was itself out generally to the public as an Disclosure Rules...... 10 signed into law. The Dodd-Frank Act investment adviser, (ii) has had fewer Cadbury/Kraft: includes the Private Fund Investment Advisors Beware!...... 12 than 15 clients during the preceding Advisers Registration Act of 2010 (the Latham News...... 13 12-month period and (iii) does not Registration Act), which substantially Country Update: act as an investment adviser to any Representation of Women amends the registration and compliance registered investment company or on Corporate Boards of requirements under the Investment French Listed Companies...... 14 business development company). The Adviser Act of 1940 (the Advisers Act) Deals...... 15 Registration Act simply eliminates for investment advisers to private funds. the “private adviser“ exemption. As a result, most private fund advisers will be required Carried Interest Tax to register with the SEC as an “investment adviser” Under current US law, a person providing services under the Advisers Act, unless one of the remaining to or for the benefit of a partnership may receive exemptions applies. a “profits interest” or “carried interest” in the A surprising feature of the Registration Act will partnership that generally results in the participant require a substantial number of non US investment being taxed at the rates applicable to the income advisers to non US finds to register with the and gains from the underlying investments of the SEC. The Registration Act provides a limited partnership, which in many cases can include a exemption for “foreign private advisers”, being any significant amount of capital gain and thus a lower adviser that: tax rate.

• Has no place of business in the US; The American Jobs and Closing Tax Loopholes Act of 2010 contains a number of revenue raising • Has, in total, fewer than 15 US clients and US provisions, including one (the Carried Interest investors in private funds advised by the adviser; Provision) that would have increased the rate of • Has less than US $25 million in aggregate assets tax applicable to income attributable ”carried under management attributable to US clients and interests”. While the bill containing the Carried to investors in the adviser’s private funds. The SEC Interest Provision failed to pass a procedural vote may increase this threshold through rulemaking; in the US Senate on 24 June 2010, and no further and action is currently pending, the reintroduction of the Carried Interest Provision in the future is • Neither holds itself out generally to the public in likely. Under the most recent version of the Carried the US as an investment adviser, nor acts as an Interest Provision, in general, 75 per cent of an adviser to any registered investment company or individual’s carried interest income (including business development company. gains from the sale of an investment services The impact of SEC registration on investment partnership interest) would be treated as ordinary advisers is significant, and requires, among other income beginning on 1 January 2011. Fifty per things, the following: cent of an individual’s income attributable to gains made by the partnership on assets held for at least • The establishment of a formal compliance policy; 5 years would be treated as ordinary income, and • A chief compliance officer to monitor compliance 50 per cent of an individual’s gain from sale of an with the firm’s policies; investment services partnership interest held by • Higher level of disclosure of information, such as such individual for at least five years is attributable portfolio company valuations; and to underlying partnership assets held for at least five years, including the goodwill of the partnership, • Regular inspections by the SEC. would be treated as ordinary income. The Registration Act also provides for additional Notwithstanding the absence of an explicit increase rulemaking periods following the enactment of the in taxation of European fund sponsors, the Carried Registration Act. It is unclear at this point whether Interest Provision could indirectly affect European the SEC will adopt rules that could exempt certain fund sponsors in several ways, including increasing European private fund advisers from regulation the tax rate on employees of European fund under the Registration Act if such advisers are sponsors who are located in US satellite offices, or already subject to regulation under the potential who are US citizens living and working outside the European AIFM directive. Although the provisions US for European fund sponsors. Similarly, European of the Registration Act do not become effective citizens working for US fund sponsors could be until one year from its date of enactment, European affected by a reorganization of the compensation private fund advisers who wish to continue to structures of those sponsors in their efforts to manage funds or raise funds with US investors ameliorate the effects of any carried interest tax should consider the impact on their businesses of legislation on their US partners. potential SEC registration.

2 Latham & Watkins • SmartCapital, Issue 17 • October 2010 Pay-to-Play Regulations In their current form, these regulations would not only affect US fund sponsors, but would also On 30 June 2010, the SEC voted to approve a new “ impact their European peers, in certain cases rule to regulate campaign contributions and related to a significant degree. Recently proposed and payments to elected US state and local officials by approved regulations include: (i) mandatory investment advisers in order to influence awarding registration of private investment advisers contracts for management of public pension plan (both US and non-US) with the US Securities assets (the Pay-to-Play Rule). The Pay-to-Play and Exchange Commission (the “SEC”), (ii) Rule, as approved, would apply to any investment the taxation of so-called “carried interests” adviser (US or non-US) registered with the SEC and at increased rates and (iii) the restriction of any investment adviser exempt from registration campaign contributions and related payments to under section 203(b)(3) of the Advisers Act (in elected officials by investment advisers holding other words, any adviser not holding itself out to public pension plan assets”. the public as an investment adviser that had fewer than 15 clients during the last 12 months). Given the broad Advisers Act registration requirements Very limited exemptions from the restrictions on of the Registration Act on non-US investment campaign contributions apply: (i) up to US $350 per advisers discussed above, the Pay-to-Play Rule can election per candidate if the contributor is entitled be expected to apply to a substantial number of to vote for the candidate, and (ii) an exemption non-US advisers to non-US funds. The Pay-to-Play of up to US $150 per election per candidate if the Rule’s restrictions on campaign contributions are contributor is not entitled to vote for the candidate.. as follows: The Pay-to-Play Rule becomes effective on • Direct Contributions: Investment advisers and 13 September 2010, and compliance with the rule’s certain of their executives and employees are provisions are required within six months of the prohibited from making political contributions to effective date, with the exception of compliance an elected official (or a candidate for an elected with the third-party ban, which is required one position) who is in a position to select (or influence year after the effective date. European fund the selection of) the investment adviser to receive sponsors with US public pension plan investors will a contract to manage public pension plan assets; be subject to the Pay-to-Play Rule. While many if such a contribution is made, then that adviser European fund sponsors and their executives and is banned from providing advisory services for employees may be unlikely to make US political compensation to pension plans, either directly or contributions, they should consider developing through a fund, for two years. and implementing policies to ensure that their executives and employees do not make prohibited • Solicitation of Contributions: Investment advisers campaign contributions that could result in a ban on and certain of their executives and employees investments by such pension plan investors in their are prohibited from soliciting or coordinating funds for a significant period. (i) campaign contributions from others to an elected official who is in a position to influence Conclusion the selection of the investment adviser (or to a candidate for a position that can influence the While the effects of the recently proposed selection of the adviser) and (ii) payments from regulatory reform legislation and rulemaking in the others to political parties in the state or locality US will not be immediate, the regulations already where the investment adviser is seeking business, approved and in their currently proposed form if that conduct would violate the rule if the adviser are ambitious in their reach to encompass non-US made the payments or contributions to it directly. sponsors, and could have significant ramifications for European fund sponsors in the future. European • Third-Party Solicitors: Investment advisers are fund sponsors that have US offices or operations, or prohibited from paying a third party agent to solicit that manage assets of US investors, should begin a government client on behalf of the investment to consider the effects of these regulations on their adviser, unless that third party is an SEC-registered structures and internal policies and recordkeeping investment adviser or registered broker-dealer and reporting procedures. n subject to similar pay-to-play restrictions.

Latham & Watkins • SmartCapital, Issue 17 • October 2010 3 Latham Advises the Fonds Stratégique d’investissement (FSI) on its PIPE Investment in French Listed Company, Vilmorin & Cie

By Nicolas Bombrun

Nicolas Bombrun Latham & Watkins recently advised the Fonds Stratégique d’investissement Partner Corporate Department (FSI), a French strategic sovereign fund controlled by the Caisse des Dépôts et Consignations (51 per cent) and the French state (49 per cent), in connection with its €150 million indirect investment in French listed company Vilmorin & Cie, a world leader in the seed industry.

This deal which closed in March 2010 events, such as a material disagreement was handled by Latham Paris corporate on significant decisions regarding the partner Nicolas Bombrun, with the strategy of the group or the failure to assistance of Paris corporate associate implement the liquidity mechanism Isabelle Rivière, finance associate defined in the shareholders’ agreement Lionel Dechmann and tax partner upon exit of FSI. The price to be paid by Olivia Rausch. Coopérative Limagrain on an exercise of the put option by FSI is to be satisfied The investment was made in Groupe in shares of Vilmorin & Cie. Limagrain Holding (GLH), the direct majority shareholder of Vilmorin & Cie, The Bonds are automatically and was made by way of a direct equity redeemable: investment in GLH (FSI acquiring 13.93 • after seven years with an exchange per cent of the share capital of GLH) and ratio of one bond for 1.15 shares the issue by GLH to the FSI of bonds, of Vilmorin & Cie (subject to legal which are redeemable into shares of adjustments if equity operations are Vilmorin & Cie (the Bonds). carried out by Vilmorin & Cie); and

The proceeds of FSI’s investment • following the occurrence of certain were required to be used by GLH to prepayment events (such as material subscribe for a €200 million share capital disagreements on significant decisions, increase in Vilmorin & Cie pursuant to change of control and issuer’s a shareholders’ subscription preferential insolvency for instance). rights issue launched by Vilmorin & Cie Both the shares in GLH and the and guaranteed by Société Générale Bonds are also subject to the payment and Natixis. of a penalty in cash or shares of The ordinary shares subscribed for by Vilmorin & Cie in the event of an early FSI in GLH are subject to a put option redemption constituting a breach of granted by Coopérative Limagrain material provisions of the shareholders’ (the controlling shareholder of GLH) in agreement, which was negotiated favour of the FSI, which is exercisable by FSI. by FSI on the occurrence of certain

4 Latham & Watkins • SmartCapital, Issue 17 • October 2010 The shareholders’ agreement is sophisticated and • The type of bonds issued by GLH are rarely its purpose is to protect FSI’s investment as well used in French corporate finance, in particular in as to organize the liquidity of its investment. It the context of listed companies and the French deals with the dual structure; i.e., at the level of national association of corporations (ANSA), which the shareholder (GLH) and at the level of the listed often provides comments on French corporate law company (Vilmorin & Cie). issues and stock exchange regulations, published guidelines, following the closing of the transaction, The FSI also obtained in the shareholders’ with respect to this type of structure. agreement various corporate governance rights both at the level of GLH and Vilmorin & Cie, • As the €150 million invested by FSI had to be including seats on the board of directors of GLH used by GLH solely for the subscription for and, under certain conditions, on the board of shares pursuant to the shareholders’ subscription directors of Vilmorin & Cie. preferential rights issue launched by Vilmorin & Cie, the timing of (i) the investment by the FSI in A concerted action, including GLH, Coopérative GLH as well as (ii) the rights issue of Vilmorin & Limagrain, SELIA (a subsidiary of Coopérative Cie had to be carefully planned and coordinated Limagrain) and FSI, was declared to the Autorité with the different equity and debt investment des Marchés Financiers (AMF) in respect of timetables at the level of GLH and the stock Vilmorin & Cie. As a result of the concert crossing exchange timetable for the rights issue at the level upwards the 33 per cent threshold in Vilmorin & of Vilmorin & Cie. Cie, FSI and the concert obtained from the AMF • The structure of the rights issue at the level of a derogation from launching a tender offer on the Vilmorin & Cie was complex to achieve, mainly securities of Vilmorin & Cie. due to the equilibrium that had to be achieved The FSI investment was one of the largest between the subscriptions in the rights issue investments carried out by FSI to date and a having to be made without reduction (à titre very complex and innovative multidimensional irreductible) and those to be made with reduction transaction for the following reasons: (à titre reductible). n

• The investment was in equity and debt, at the level of the holding company (GLH), but the Bonds issued by the holding company are The shareholders’ redeemable in shares of its subsidiary, Vilmorin & “ Cie, the listed company and FSI benefits from a agreement is put option for the shares of GLH it holds. Indeed, sophisticated and its it was important for the FSI that its investment be liquid, and the Bonds and the put option permit purpose is to protect this liquidity through the stock market. FSI’s investment as well as to organize the liquidity of its investment.”

Latham & Watkins • SmartCapital, Issue 17 • October 2010 5 Private Equity Landscape: The Kingdom of Saudi Arabia

By Salman Al-Sudairi According to the research of a major Middle East private equity firm, Saudi Salman Al-Sudairi Arabia accounted for 23 per cent of private equity transactions in the Arab Associate 1 Finance Department world over the past decade, trailing only Egypt and the United Arab Emirates. To date, the private equity landscape in Saudi Arabia has predominantly been dominated by local and regional players, including private equity firms, sovereign wealth funds and family offices, who are able to capitalize on their knowledge of the market, local relationships and lower barriers to entry.

However, international private equity firms highlighting a number of ongoing reforms have shown great interest in the Saudi which may make Saudi Arabia an even Arabian market. In fact, David Rubenstein, more attractive jurisdiction for private the founding managing director of the equity activity over the coming years. Carlyle Group identified Saudi Arabia as one of the countries affording the Issues for Private Equity Firms to greatest opportunities in emerging Consider in Investing in Saudi Arabia markets alongside China, India, Turkey, • Licensing of Foreign Investment. Any Taiwan and Korea.2 The Carlyle Group company with foreign shareholding also recently acquired a 30 per cent stake that intends to make an investment in General Lighting Company of Saudi in Saudi Arabia must obtain a foreign Arabia, which is one of the first major capital investment license from the Saudi investments by an international private Arabian General Investment Authority equity firm in Saudi Arabia.3 (SAGIA). The default position is that a The Saudi Arabian government has made foreign entity may invest in all activities a large-scale commitment to investing in Saudi Arabia, however there are in new projects across a wide spectrum certain types of activities which are of industries, including petrochemicals, specifically prohibited from being carried oil and gas, power, healthcare and out by foreign investors. These activities infrastructure and has undertaken wide are set forth in a “Negative List” which ranging economic and regulatory reforms is issued and periodically updated by the to make the country more attractive Supreme Economic Council, and SAGIA for investment. will not issue a foreign capital investment license to any foreign company intending Even though private equity activity has to engage in any such activities.5 Any been relatively limited as compared to private equity firm that is investing more developed markets, the potential in through a vehicle outside of Saudi Arabia the Saudi market is great as the country will therefore be required to obtain a continues to grow and the government foreign capital investment license from continues its economic and regulatory SAGIA and has to make sure that it is reforms. As such, Saudi Arabia presents not investing in any of the activities a great number of potential opportunities published on the “Negative List”. for local, regional and international private • Structuring of Investments. The Saudi equity players. In this article, we identify Arabian companies regulations are some of the major issues to be considered generally less developed compared to the by any private equity firm looking to make rules regulating the establishment and an investment in Saudi Arabia, as well as

6 Latham & Watkins • SmartCapital, Issue 17 • October 2010 conduct of corporate vehicles in other jurisdictions • Financing Products. Private equity players in which private equity firms may be more have historically depended on leverage in their accustomed. The two most typical forms of legal investment strategies. While there is a strong and entities in Saudi Arabia are (i) the limited liability well capitalized banking community in Saudi company (LLC) and (ii) the joint stock company Arabia and there have been acquisition financings (JSC) and each form has certain limitations. For in the past, there is a limited range of acquisition example an LLC requires a minimum of two financing products currently available. This is shareholders and a JSC requires a minimum partly due to the fact that it is often difficult to of five shareholders. In addition, while a Saudi perfect security, and therefore banks typically lend LLC typically limits shareholder liability to the against corporate credit, and may not be as willing value of such shareholder’s shares, shareholders to provide credit to a private equity firm to finance may be held jointly liable for all company debts a without a parent guaranty if losses exceed 50 per cent of the capital and from the firm or other additional security beyond the shareholders fail to dissolve or recapitalize what private equity firms may be accustomed to in the company within a certain period of time. other jurisdictions. Furthermore, both an LLC and a JSC, at least • Tax Considerations. Foreign private equity firms 10 per cent of a company’s net profits must be set are generally subject to a 20 per cent tax on all aside each year to build up a statutory reserve capital gains. In addition, management fees are fund. The shareholders may, by resolution, also typically taxed at a 20 per cent rate. Therefore discontinue setting aside for such statutory reserve it is crucial for any private equity firm considering once the aggregate amount of the reserve equal at an investment in Saudi Arabia to first seek least 50 per cent of the company’s capital. appropriate tax advice. • Exit Strategy. Given the relatively short investment • Other Regulatory Considerations. Depending horizons of most private equity funds, clear and on the industry in which a private equity firm is predictable exit strategies are crucial. Under a seeking to invest, there may be other regulatory JSC, founding shareholders are subject to a third- issues to consider. In fact, depending on the party lock-up period of at least two years and industry, a foreign investor may be required to seek shareholders under an LLC have pre-emptive appropriate regulatory approval prior to obtaining a rights which cannot be waived or transferred, foreign capital investment license from SAGIA. For thereby potentially limiting the ability of an example, investments in telecommunication sector investor to sell its interests in an LLC without may require approvals from the Communications first gaining the approval of other shareholders. and Information Technology Commission and In addition, there are limitations to utilizing an investments in the healthcare and pharmaceutical initial public offering (IPO) exist strategy since, sector may require approvals from the Ministry with limited exceptions, only Saudi Arabian and of Health and/or the Saudi Food and Drug GCC investors are permitted to purchase shares Administration. In addition, an investor should be in Saudi Arabian publicly listed companies. While aware of the Saudi competition law whereby the the Saudi IPO market was quite active prior to the Council of Competition Protection at the Ministry credit crisis, it has slowed down in the last eighteen of Commerce has to approve any acquisition which months. However there appears to be renewed will create a “dominant position” in the market, interest in the IPO market which could make it a i.e. a position where an entity is able to influence more viable option for private equity as an exist prices in a certain market. strategy going forward. Continued on Page 9

…firms are likely to continue monitoring the private equity landscape in Saudi “Arabia as the country continues its pursuit of a market-oriented, private-sector- driven economy with a business and investment culture favourable to greater foreign participation and are likely to continue making strategic investments to capitalize on such favourable opportunities”.

Latham & Watkins • SmartCapital, Issue 17 • October 2010 7

industry Latham focus Latham Advises On Transforming Mining & Metals Transaction

By Glen Ireland and Robbie McLaren Latham & Watkins recently advised Norsk Hydro ASA (Hydro), the

Glen Ireland Norwegian-based aluminium producer, on its acquisition of certain Brazilian Partner aluminium interests of mining giant Vale SA (Vale) for approximately Corporate Department US $5 billion. The deal, which was announced on 2 May 2010, was handled by Latham partners Glen Ireland, Graeme Ward, Olof Clausson, Antti Ihamuotila and Craig Nethercott and lead associates Robbie McLaren and Stephen Soper.

The transaction, which is expected CAP), which is developing an alumina to close in the fourth quarter of 2010, refinery project; and will transform Hydro into a fully- • Various related rights and assets, Robbie McLaren integrated global aluminium company Associate including off-take rights and Vale’s with a balanced portfolio of bauxite, Corporate Department rights under certain commercial alumina and aluminium interests, contracts. supporting its existing downstream manufacturing operations. Hydro will Hydro and Vale will also enter into acquire from Vale: agreements relating to Vale’s bauxite entitlements from the bauxite mine • A 60 per cent shareholding in a newly- owned by Mineração Rio do Norte S.A. incorporated joint venture company in Brazil, which is an important source of (Paragominas), which will own Vale’s supply for the Alunorte alumina refinery. interests in the Paragominas bauxite mine (along with a put/call option over The purchase price for the transaction the remaining 40 per cent); with be satisfied through the payment of approximately US $1.1 billion in • A 57 per cent shareholding in cash and the issuance to Vale of a ALUNORTE — Alumina do Norte do 22 per cent equity interest in Norsk Brasil S.A. (Alunorte) (91 per cent Hydro, which is listed on the Oslo and when combined with Hydro’s existing London Stock Exchanges. To finance shareholding in Alunorte), which the cash portion of the purchase price, owns the 6.3 million tpa Alunorte support Hydro’s investment grade rating alumina refinery, the world’s largest and enhance the company’s capacity alumina operation; to implement future projects, Hydro • A 51 per cent shareholding in ALBRAS launched a fully-underwritten rights — Alumínio Brasileiro S.A. (Albras), issue of approximately US $1.75 billion which owns the 460,000 tpa Albras in June 2010, on which Latham is aluminium smelter; also advising.

• A 61 per cent shareholding in In connection with Vale’s 22 per cent Companhia de Alumina do Pará interest in Hydro, the parties have (CAP) (81 per cent when combined with Hydro’s existing shareholding in

8 Latham & Watkins • SmartCapital, Issue 17 • October 2010

entered into a standstill and lock-up agreement All transaction documents were negotiated and containing certain restrictions governing Vale’s agreed within in a period of only one month. ownership of Hydro shares. In connection with the purchase and/or refinancing of indebtedness of the Latham mining and metals partner Glen Ireland target businesses, Vale has also agreed to make commented that the transaction “will reshape the available to Hydro a US $852 million loan facility. global aluminium industry, and secure for our client long-term access to strategic raw materials for its Other notable aspects of the transaction include: aluminium smelting activities”. He noted further that “with commodity prices rebounding following their • The structuring of a complex pre-completion collapse in 2009, we are seeing increased M&A activity reorganisation of the target businesses, and in the mining and metals sector. Transactions are being analysis of related regulatory issues driven by strategic considerations (as in the case of • A review of complex Brazilian regulations the Hydro/Vale transaction) or by a perception that relating to exploitation of mineral reserves in the valuations are, in some cases, now quite attractive.” Amazonian forest region • A highly-tailored approach to structuring the Following recent lateral partner hires, the Hydro/ purchase (including adjustments) for each target Vale deal highlights Latham’s ability to combine entity, based upon the nature of its business and its the strength of its newly-established mining and position in the aluminium value chain metals group with its market-leading cross-border M&A capability. n

Private Equity Landscape: The Kingdom of Saudi Arabia Continued from Page 7

• Other Potential Considerations. Broad reluctance of Saudi Arabia coupled with an increasingly of family-owned companies to relinquish control, progressive regulatory environment, it is likely high valuation expectations, a unique social that there will be an increase in private equity framework, a guarded business culture and talent money attracted to Saudi Arabia. In either case, scarcity are some of the factors that have made it the potential opportunities for local, regional and difficult for external investors to complete deals in international private equity firms are significant, Saudi Arabia. Thus a physical presence with the bearing in mind the unique characteristics of the appropriate level of knowledge of the business Saudi Arabian market. n environment in Saudi Arabia along with a deep understanding of the social setting become a key to Endnotes success for private equity investors. 1 Financial Times article “Private equity sizes up Saudi Potential”; 14 June 2010. Conclusion 2 Financial News article “Carlyle founder reiterates China In the short-term, firms are likely to continue ambitions”; 28 May 2010. 3 monitoring the private equity landscape in Saudi The Carlyle Group press release dated 29 March 2010 at http:// www.carlyle.com/Media%20Room/News%20Archive/2010/ Arabia as the country continues its pursuit of a item10906.html market-oriented, private-sector-driven economy 4 Central Intelligence Agency, the World Fact Book, Country with a business and investment culture favourable Comparison: GDP (Purchasing Power Parity) at https://www.cia. to greater foreign participation and are likely to gov/library/publications/the-world-factbook/rankorder/2001rank. html continue making strategic investments to capitalize 5 Most current negative list is available on SAGIA’s website at on such favourable opportunities. Over the long- http://www.sagia.gove.sa. term, with the tremendous growth potential 6 World Bank Report — ‘Ease of Doing Business 2010’

Latham & Watkins • SmartCapital, Issue 17 • October 2010 9 Germany Tightens Its Disclosure Rules

By Joachim von Falkenhausen Recently, the German Ministry of Finance presented a draft bill of a “Law to Strengthen Investor Protection and to Improve the Functioning of the Capital Market”. Joachim von Falkenhausen Partner Corporate Department It provides for tighter regulation of Schaeffler had concluded that it did the capital markets, particularly in the not need to disclose these swaps under following areas: the rules governing disclosure of substantial shareholdings even though • Extension of certain rules to the “grey it was probable that the underlying capital market” which was previously shares would be sold to Schaeffler unregulated when the swaps were terminated. • Stricter regulation of open-ended real After an investigation, the German estate funds regarding valuation and securities regulator (BaFin) concluded the duty to buy back that Schaeffler had not violated the • Compliance rules for financial disclosure rules. This caused an services companies intense debate among capital market • Prohibition of “naked” short sales — lawyers and many proposed that the this part has been brought forward law should be changed. In particular, and will be enacted as a separate law German corporates urged the German • Extension of the rules governing government to introduce new rules disclosure of substantial governing the disclosure of financial shareholdings to include certain instruments which are equivalent financial instruments to shareholdings. In parallel, This article covers the extension of the other European countries such as disclosure rules. Switzerland1 and the United Kingdom2 introduced new rules to deal with Background such instruments.

In summer 2008, the Schaeffler The German Ministry of Group announced a takeover offer Finance presented a draft bill for Continental AG, the German (Diskussionsentwurf) earlier this year automotive company. Schaeffler had at which the government passed in the time of the announcement entered September 2010 and plans to have it into cash settled swaps covering presented to the German Parliament nearly 30 per cent of the Continental’s soon with an expected effective date shares. As far as is known, these in early 2011. swaps were total return equity swaps which conferred upon Schaeffler the The Proposed Rules financial position of an owner of the Presently, under German Law every shares without holding any shares or shareholder of a listed company has to voting rights. Thus, Schaeffler had notify the company and the regulator the economic benefit of securing the BaFin if its holdings of voting shares before the price went up when shares cross one of the thresholds the offer was announced.

10 Latham & Watkins • SmartCapital, Issue 17 • October 2010 of 3, 5, 10, 15, 20, 25, 30, 50 and 75 wording of the draft law suggests …the law will per cent. The same applies — with that such contracts will be covered “ make it much exception of the 3 per cent threshold by the new rules and will need to be more difficult to — for holders of financial instruments disclosed even before such conditions secure substantial giving a right to acquire such voting have been satisfied. This may result in shares. This covers in particular many disclosures which are confusing stakes in German forward contracts and call-options. rather than enlightening. companies without The draft law extends these disclosure Financial institutions in the EU are disclosure”. duties to any instruments which exempted from the new disclosure “enable” the acquisition of voting regime with regard to instruments shares. The draft law names examples they issued on a regular basis. Even of “enabling” instruments as those though the law does not state this where: explicitly, the exemption should • The counter-party can hedge its risk cover not only options etc. issued to under the instrument by holding investors, but also the transactions by voting shares. which the risk is hedged.

• There is a right or an obligation to acquire voting shares. Under this What Will the Law Achieve? alternative, it is assumed that options Certainly, the law will make it much are exercised. more difficult to secure substantial stakes in German companies without Thus, the new law will require the disclosure. On the other hand, new disclosure of for example: ways will most probably be developed • Contracts for difference allowing to stake building without • Cash settled equity swaps triggering a disclosure obligation. • Call options, even if cash settled Disclosures of shareholdings in • Put-options for the party writing the Germany are complicated and often option confusing, and therefore do not make There was preciously some doubt shareholder structures transparent. whether stock lending and repo The new law will add complexity, and transactions were covered by the may thus increase the confusion. n existing disclosure regime; BaFin assumes that they are not subject to disclosure presently. The new law Endnotes subject them to disclosure. 1 Article 20 subparagraph 2 bis BEHG. It is BaFin’s opinion that, under 2 DTR (Disclosure Rules and Transparency Rules) 5 to the Financial Services Act. the current law, stock purchase agreements do not need to be disclosed if they are subject to conditions outside of the control of the contractual parties, in particular subject to merger control. The

Latham & Watkins • SmartCapital, Issue 17 • October 2010 11 Cadbury/Kraft: Advisers Beware!

By Rod Brown The decision by the UK’s Takeover Panel (the Panel) to issue a statement of public criticism1 — the first such statement for three years — of Kraft Foods Inc. (Kraft) for failure to meet certain standards required by the

Rod Brown Takeover Code (the Code) offers a timely reminder for advisers in UK bids Partner of their obligations not only to their clients but also to the Panel itself. Corporate Department

Rule 19.1 of the Code Similar statements were made in its firm offer announcement in November On 28 May 2010, the Panel Executive 2009, its offer document in December issued a statement of public criticism of 2009 and in its revised offer document Kraft for failing to meet “the standards in January 2010. Kraft’s offer for required under Rule 19.1 of the Code Cadbury was declared unconditional on in connection with certain statements” 2 February 2010. Just over a week later, made by Kraft about one of Cadbury’s Kraft announced that it had reluctantly manufacturing facilities. Rule 19.1 accepted that the Somerdale facility provides that: would, after all, be closed. “Each document or advertisement published, or statement made, during The Panel’s verdict the course of an offer must be prepared Kraft stated that it “believe[d]” it could with the highest standards of care and continue to operate the factory — it was a accuracy and the information given must statement of belief because Kraft did not be adequately and fairly presented.” know the detail of the planned closure. Note 1 to Rule 19.1 goes on to say that the According to the Panel, Kraft’s own plans Panel “regards financial advisers as being for Cadbury had not been developed responsible to the Panel for guiding their “beyond a superficial level”. Of the clients ….with regard to any information actual statement by Kraft, the Panel said published during the course of an offer.” the following: where a party… makes a statement of In its criticism of Kraft, the Panel stated “ belief of the kind made by Kraft, Rule that “it attaches great importance to Rule 19.1. Compliance with the Rule 19.1 requires not only that the party is fundamental to the orderly conduct honestly and genuinely holds that belief (a subjective test) but also that it has of takeovers”. a reasonable basis for so holding that belief (an objective test)… [I]n view Kraft’s Statements of the statements’ prominence and What had Kraft done that so upset the significance attached to them by.. the Panel? When Kraft announced its employees… particular care was required possible offer for Cadbury in September in relation to statements regarding 2009, it stated: Somerdale…..The Executive accepts that Kraft held an honest and genuine “we believe we would be in a position belief that it could keep Somerdale to continue to operate the Somerdale operational….[H]owever,… Kraft should facility which is currently planned to not have made the statements in the form be closed…thereby preserving UK in which it did”. manufacturing jobs”.

12 Latham & Watkins • SmartCapital, Issue 17 • October 2010 news Latham Latham & Watkins Ranks High for M&A in the US and Globally

The Latham & Watkins M&A team finished the first half of 2010 with top rankings globally across the major M&A league tables.

Latham placed in the Top 10 for Global and Top 5 for By industry, the firm gained Top 10 rankings in the US M&A by deal value and ranked #2 by Bloomberg pharmaceuticals, energy, manufacturing, e-commerce, for both US and Global M&A by number of deals. medical instruments & services, telecom, leisure sectors by Reflective of the strength of the M&A group’s work for value and number of deals according to mergermarket. principals, the firm ranked #3 globally by deal count and #2 in the US according to Bloomberg; Latham The significant additions to our energy focused M&A also secured Thomson Reuters’ #5 ranking for any teams in Houston, New York and the Middle East have involvement in US public M&A by value. The firm also complimented our existing top-tier M&A practice: nearly maintained strong European rankings by number of US $25 billion in deal value was contributed by our energy deals securing Top 10 spots for Europe as a whole. colleagues in the first half of 2010. Latham also rose to the #5 spot in Russia and #7 spot in CEE by deal value according to mergermarket and ranked #7 in for any German involvement according to Thomson Reuters.

The Panel went onto say that as Kraft had the Introduction to the Code states that the “Code insufficient detail it was “not a belief which Kraft applies to all advisers…financial advisers have a had a reasonable basis for holding.” In short, Kraft particular responsibility to comply with the Code had failed the objective test. and to ensure, so far as they are reasonably able, that their client and its directors are aware of their & Co, Limited (Lazard) responsibilities under the Code and will comply with them”. What of Lazard, lead financial adviser to Kraft and primarily responsible for advising Kraft in relation Note 1 to Rule 2.1 makes it clear that it is the role of to the Code? The Panel stated that Lazard’s conduct advisers to warn clients of the importance of secrecy “was not sufficient to merit public criticism” but and security and the restrictions on dealings in target stated that Lazard should have made further enquiry shares. Note that “advisers” is not limited to financial as to the basis for Kraft’s belief that Somerdale advisers — the obligations under the Code extend could remain open: “Lazard made no such further to all advisers including lawyers. It is particularly enquiry and, as such, failed to discharge fully its important to bear that in mind when clients are first responsibilities under Note 1 on Rule 19.1”. considering a bid for a UK public target where there may be no financial adviser in place. n Summary Whilst Lazard was not publicly criticised in the Endnotes formal sense, clearly the publicity surrounding Kraft’s 1 If the Panel finds a breach of the Code it may, (i) issue a private conduct and Lazard’s advice is extremely unwelcome statement of censure (ii) issue a public statement of censure for an adviser. (iii) report the offender to a regulatory body (iv) publish a Panel Statement indicating that the offender is someone who is not likely to comply with the Code — such an offender would be The Code makes a number of references to deemed to have been “cold shouldered” and members of advisers and their responsibilities under the Code. professional bodies (such as the UK Financial Services Authority) For example, in addition to note 1 to rule 19.1 would be obliged not to act for the person in question in a discussed above and Rule 2.5 , paragraph 3(f) of transaction subject to the Code.

Latham & Watkins • SmartCapital, Issue 17 • October 2010 13 Country Update: Representation of Women on Corporate Boards of French Listed Companies

By Bénédicte Bremond

Bénédicte Bremond In January 2010, a bill was adopted by In the meantime, on April 19, 2010, Knowledge Management the French National Assembly increasing the two main associations representing Lawyer Corporate Department the representation of women on boards French corporations (the AFEP and the of directors (the Bill). The Bill provides MEDEF) have issued a non-binding for legally binding quotas to boost the recommendation to be included in their percentage of women on boards of Corporate Governance Code providing directors of French listed companies up for the same target percentages as to (i) at least 20 per cent within three those proposed in the Bill. Pursuant to years, and (ii) at least 40 per cent within this recommendation, the three- and six years. When the board of directors six-year periods shall begin either (i) is composed of less than nine members, from 19 April 2010, or (ii) from the the difference between the number of admission of the company’s securities directors of each gender at the end of the on a regulated market where such six-year period should not be higher than admission takes place after such date. two. As currently drafted, the Bill provides This recommendation provides that that any appointment of a director made boards of directors of French listed in violation of these rules would be companies that do not yet have any declared null and void, and that, under women directors should propose the certain circumstances, the decisions of a nomination of a woman director by board of directors which does not comply their 2012 shareholders’ meeting at the with these quotas could also be declared latest. While this recommendation is null and void. not binding, the AFEP/MEDEF Code is the primary standard for corporate The Bill has not yet been considered by governance in France and as such is the French Senate and is expected to expected to be followed by most French be discussed during next fall’s session. listed companies. n

Women Enriching Business The “Women Enriching Business” (WEB) the visibility of a variety of role models, initiative launched by Latham & Watkins addressing the interest that clients is a two-pronged initiative designed to have in working with a more diverse promote women in business by creating firm, partnering with clients’ similar broader networks and productive initiatives, etc. business relationships and by attracting On 2 June 2010, Paris Office WEB and investing in the long-term success hosted a Petit-déjeuner du WEB (WEB of women. breakfast) featuring Patricia Barbizet Latham & Watkins is one of the few firms (Artémis, PPR), Véronique Morali (Fimalac to have implemented such a program Développement, Fitch, WCD) and dedicated to women starting back in 2006. Caroline Apfell (Heidrich & Struggles) The innovation of our initiative comes on the topic: “More Women in Boards of from its goals which includes providing Directors: How?”. n networking opportunities, increasing

14 Latham & Watkins • SmartCapital, Issue 17 • October 2010 deals Latham Our comprehensive experience in all aspects of private equity investment enables us to service the full array of legal needs of fund sponsors and investors alike, from fund formation to investment acquisition, structuring, financing and disposition. The following is a selection of recent deals.

AXA Private Equity Capvis Equity Partners AG Charterhouse Capital Partners Acquisition by Axa Private Equity of Acquisition by Capvis Equity Partners Acquisition by Charterhouse Capital Go Voyages, a leading European tour AG and Partners Group of a majority Partners LLP of Card Factory. operator, from Group Arnault. interest in Kaffee Partner Holding Confidential GmbH. Kaffee Partner GmbH, the €375,000,000 nationwide market leader in commercial coffee provision to the SME sector. Confidential

Fonds Stratégique MultiPlan, Inc. Qatar Investment Authority D’Investissement Sale of MultiPlan, Inc., the oldest Acquisition by Qatar Holding LLC Acquisition by Fonds Stratégique and largest supplier of independent, (a wholly owned subsidiary of Qatar d’Investissement of an equity stake network-based cost management Investment Authority) of the Harrods in Groupe Limagrain Holding, the solutions in the United States, by The Group, a luxury department store controlling parent of French listed Carlyle Group and Welsh, Carson, located in the United Kingdom. company Vilmorin & Cie, producers of Anderson & Stowe to BC Partners and Confidential plant varieties and seeds. Silver Lake Partners. €150,000,000 $3,100,000,000

QInvest LLC Riverstone/Carlyle Global Energy Moraún Investments SA Acquisition by QInvest of a 40 per Acquisition by Noble Corporation of Sale of the majority shares in cent stake in Intercat Hospitality, an FDR Holding Limited (Frontier Drilling), SimonsVoss Technologies AG, the integrated food and beverage catering a private equity-backed oil and gas European leader of digital radio-based business in the UAE, and Butlers Dry drilling company. Latham represented locking and access control systems to Cleaning and Laundry Services, an Carlyle/Riverstone as a primary selling HgCapital. institutional dry cleaning and laundry sponsor. Confidential business in the UAE. $2,160,000,000 Confidential

Norsk Hydro ASA Tenaska, Inc. Ventizz Capital Fund IV L.P. Acquisition by Norsk Hydro ASA of Vale Infrastrux Group, Inc. Acquisition by Ventizz Capital Fund IV SA’s aluminium business. Sale by Tenaska Energy, Inc. of L.P. of a 44.2 per cent interest in onlinet InfrastruX Group, Inc., a provider of Holding, Essen, a provider of turnkey $4,900,000,000 construction and engineering services, glass-fiber infrastructure solutions and to Willbros Group, Inc. fiber-to-the-home networks. $605,000,000 Confidential

Vedanta Resources plc Ver Capital SGR S.p.A. Acquisition by Vedanta Resources plc Nem Due SGR SpA of 51 per cent of the duly diluted share Acquisition by Ver Capital SGR S.p.A. capital of Cairn India Limited, an India and Nem Due SGR S.p.A. of Rimor natural resources company, from Cairn Holding S.p.A. from funds managed by Energy PLC. Private Equity. $10,000,000,000 Confidential

Latham & Watkins • SmartCapital, Issue 17 • October 2010 15 Contact latham & watkins SmartCapital is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed below or the attorney whom you normally consult. A complete list of our publications can be found on our website at www.lw.com. If you wish to update your contact details or customise the information you receive from Latham & Watkins, please visit www.lw.com/LathamMail.aspx to subscribe to our global client mailings program. If you have any questions about this issue of SmartCapital, please contact Charles Fuller in our Dubai office at +971.4.704.6300, or any of the attorneys listed below.

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