November 2005 e-BULLETIN

Page MEMBER NEWS • Gide Loyrettte Nouel Strengthens Global Aviation Practice 2 • Hoet Pelaez Castillo & Duque Expands IP Practice with Unfair Competition Practice 3 • Hogan & Hartson Boosts Corporate Transactional Capabilities By Adding Media and Entertainment Partner 4 • Rodyk & Davidson Welcomes New Finance & Corporate Partner 5 • Tilleke & Gibbins International Ltd. Awarded AsiaLaw’s Thailand IP Firm of 2005 5 • Wilmer Cutler Pickering Hale and Dorr Announce General Electric Senior Vice President, Ben W. Heineman, Jr to become Senior Counsel to WilmerHale 6

MAKING NEWS • Gide Loyrette Nouel Istanbul Advises German Banks on Major Transportation Deal 7 • Hogan & Hartson Advises on $3 Billion Natural Gas Pipeline Project 7

MEMBER EVENTS 8

COUNTRY ROUNDUPS • AUSTRALIA – Clayton Utz – Sharing Interest Rate Risk in Social Infrastructure Projects 9 • BRAZIL – Tozzini Freire Teixeira e Silva – Brazilian Government Poised to Open up Reinsurance Market 11 • CHINA – King & Wood – Proposed Property Right Law Significant Impact on Real Estate Investment in China 14 • NETHERLANDS, BELGIUM – NautaDutilh – Sunrise Period for “.eu” Domain Names Starts December 2005 18 • UNITED STATES • Hogan & Hartson – Antitrust & Energy Update – PUHCA Repeal Opens the Door to Foreign Investments 19 • Luce Forward Hamilton & Scripps – California Legislature Eliminates Type 1 Indemnities for Residential Construction 21 • Morgan Lewis & Bockius – Update - Employee Stock Option Plan 23

PRAC EVENTS (Members Only) • Thailand 2006 Conference – May 13-19, 2006 (advance programme available on line) • San Diego 2006 Conference – October 14 -18, 2006 • Los Angeles 2006 Follow on Program – October 18 -19, 2006

Tools to Use • PRAC Contacts Matrix & Email Listing –Update (members’ version only) • Directory 2005 Member Firms now available at PRAC web site • Expert System available at PRAC web site Private Libraries (members only) • Intellectual Property & Licensing Capabilities Survey – 2005 Update Now Available on line (members only)

PRAC e-Bulletin is published monthly Visit us on line at www.prac.org

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GIDE LOYRETTE NOUEL STRENGTHENS GLOBAL AVIATION PRACTICE

24 October 2005

Gide Loyrette Nouel is pleased to announce that Neil McGilchrist, a leading aviation lawyer with extensive experience representing aviation companies and their insurers in litigation, joins on 1st November 2005 as Of Counsel. Neil was previously a partner and chairman of Beaumont & Son, one of the world's leading niche aviation law firms. Beaumont & Son was the winner of Global Aviation Practice Law Firm of the year 2005 in the inaugural Who's Who Legal Awards.

Gide has an historic presence in the aviation sector and a recognised expertise in aviation and insurance work. Neil's appointment is a major step in consolidating Gide's expertise in this area and builds on the reputation of the firm in Paris and around the world.

An important focus of Neil's practice has been the defence of air carriers together with their insurers in respect of aircraft accidents. Recently, this has included the handling of passenger claims for Egypt Air 1999 North Atlantic and Air France Concorde 2000. This work has provided him with extensive litigation experience throughout the world.

Gérard Tavernier, Senior Partner of Gide Loyrette Nouel, said: "We are delighted to have such a highly regarded aviation practitioner join us. Neil will build upon the existing practice of the firm and will focus on establishing a worldwide capability for Gide to serve the global aviation business community and its insurers. We look forward to welcoming him to the firm in November."

Neil McGilchrist commented: "I greatly look forward to working with my new colleagues at Gide in consolidating its aviation practice by capitalising on its existing strengths in the aviation and insurance sectors. Through its network of 18 international offices, Gide is very well placed to develop a fully integrated practice that is capable of serving all the requirements of aviation clients and their insurers, anywhere in the world."

For additional information visit www.gide.com

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HOET PELAEZ CASTILLO & DUQUE EXPAND IP PRACTICE WITH ADDITION OF UNFAIR COMPETITION

Caracas – In a continued effort to better serve our clients, we are pleased to announce the recent expansion of our IP practice with the creation of the department of Unfair Competition.

As of its foundation, more than 60 years ago, Hoet Pelaez Castillo & Duque has been committed to its clients and rendering, in the meantime, high quality legal services. As an acknowledgment to our quality, we have been the first and only law firm in Venezuela to obtain the ISO 9001:2000 certifications.

Our office and its leading IP practice renders a wide array of services including Patent and Trademark prosecution, maintenance, watching service and enforcement, as well as Copyright deposits and enforcement, Domain Name registration and arbitration procedures, technology transfer and licensing, among others. Protection against Unfair Competition extends, among others, to a number of practices such as simulation of products, deceitful or false advertising and violation of business secrets. Our Unfair Competition practice focuses on both advising and taking of legal actions against our client’s competitors who use unfair commercial practices to increase their share in the relevant market.

An effective protection could be obtained through administrative sanctions based on Unfair Competition provisions in the legislation. The Competition Authority is empowered to impose high fines to the unfair competitor and raise those fines in cases of recidivism. Furthermore, the Competition Authority has the power to grant interim measures of protection to avoid damages while a final decision is taken.

We are confident that this new practice will become a good opportunity to strengthen our good professional relationship into the future.

For more information visit us at www.hpcd.com

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HOGAN & HARTSON BOOSTS CORPORATE TRANSACTIONAL CAPABILITIES BY ADDING MEDIA AND ENTERTAINMENT PARTNER

LOS ANGELES, October 20, 2005 – Hogan & Hartson L.L.P. announced today that Robert R. Jesuele has joined as a partner in the firm’s Los Angeles office. Jesuele is widely regarded for his work as an international entertainment transactional lawyer.

Jesuele brings to the firm nearly 20 years of experience handling cross-border transactions on behalf of clients in the media and other industries. He represents major U.S., European, and Asian media, entertainment, consumer products, manufacturing, and automotive companies in a variety of corporate, commercial, and intellectual property matters, including joint ventures, equity investments and debt financings, mergers and acquisitions, licensing and distribution transactions, reorganizations, secured transactions, and securities offerings.

“We are excited to have Rob with us, and believe he will be a tremendous asset, particularly for our U.S. and international clients conducting business in the entertainment and media industries,” said Neil O’Hanlon, managing partner of the firm’s Century City office.

Jesuele has significant experience advising on entertainment transactions including international film co-productions, co- financings and split-rights deals; motion picture slate financings; film and television licensing and distribution; digital media transactions including video-on-demand; and the purchase and sale of film and television libraries and other intellectual property rights. He regularly represents clients in motion picture and literary rights acquisitions; advises on studio and independent film financing, production and distribution and copyright protection; and negotiates writer, producer, talent, and merchandising deals.

“Rob’s arrival allows Hogan & Hartson to further develop our Los Angeles-based transactions practice. Additionally, Rob’s experience representing major French entertainment companies and German media funds doing business in Hollywood will complement the firm’s existing media practices in Paris and Berlin,” commented O’Hanlon.

For the past 15 years, Jesuele was at the Los Angeles office of another prominent international law firm, most recently serving as co-chair of that firm’s entertainment and media practice.

“Hogan & Hartson is a great fit because of its practice depth, industry experience and international reach and vision. I am excited about working with many of the firm’s talented lawyers to serve the needs of clients and expand the corporate, entertainment, and media practices in Los Angeles and internationally,” commented Jesuele.

Jesuele received his undergraduate degree in business finance from Loyola Marymount University and his law degree from Loyola Law School. He is admitted to practice in California.

About Hogan & Hartson

Hogan & Hartson is an international law firm headquartered in Washington, D.C. with over 1,000 attorneys practicing in offices around the globe. The firm's broad-based international practice cuts across virtually all legal disciplines and industries.

Hogan & Hartson has offices in Baltimore, Beijing, Berlin, Boulder, Brussels, Budapest, Caracas, Colorado Springs, Denver, Geneva, Hong Kong, London, Los Angeles, Miami, Moscow, Munich, New York, Northern Virginia, Paris, Shanghai, Tokyo, Warsaw, and Washington, D.C.

For more information about the firm, visit www.hhlaw.com.

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RODYK & DAVIDSON WELCOMES NEW PARTNER TO FINANCE & CORPORATE PRACTICE GROUP

Rodyk is pleased to announce the appointment of Karen Gan-Marumo, who joins the firm’s Finance & Corporate Practice Group as Partner. Her primary areas of practice are banking and real estate.

She has advised extensively on banking and financial services and securities, and derivatives. Karen has represented local and foreign banks, finance companies, multinational corporations and corporate institutions in domestic and cross- border transactions relating to syndicated loans, project financing, transferable loan facilities, multi-currency facilities, corporate banking, trade finance and corporate debt restructurings. Her experience in handling derivatives matters includes having represented various corporate clients in advising, negotiating and documenting ISDA documentation with banks, in particular ISDA Master Agreement and Schedule in relation to interest rate swaps, currency swaps, cross- currency swaps, FX transactions, currency options transactions, rate caps, collars and floors. Karen has written articles on a range of issues concerning financing and residential property development.

Karen graduated from the National University of Singapore with an LLB (Hons) degree in 1984. She was called to the bar in February 1985 after being acknowledged, jointly with another, for the Aw Boon Haw & Aw Boon Par Memorial Prize for top performance in the Postgraduate Practical Law Course 1984.

Contact Details: Karen Gan-Marumo DID +65 6885 3650 Fax +65 6557 2322 Email [email protected]

For additional information visit www.rodyk.com

TILLEKE AND GIBBINS AWARDED ASIALAW’S THAILAND IP FIRM OF 2005

(Nov 2, 2005) - Tilleke & Gibbins (www.tillekeandgibbins.com) was awarded AsiaLaw’s Thailand IP Firm of 2005. The basis for selection for the AsiaLaw IP awards (presented on November 3, 2005 at the Ritz Carlton Hotel in Hong Kong) combined legal market polls, nominations from a judging panel of over 100 in-house counsel and extensive editorial research. This marks the second year in a row that Tilleke's IP practice has received this distinction. Tilleke's IP team was described in the voting as being "very strong in all areas of IP, including prosecution, enforcement, government lobbying and training. It has also been responsive to its clients' needs for cost containment and has come up with some creative billing options with no decrease in its activity level." In the past year, Tilleke has been privileged to represent Carlsberg A/S in connection with a high profile international commercial arbitration involving breakdown of a license agreement, which was settled in August 2005. Tilleke was also selected by the Pharmaceutical Research and Manufacturers Association (PReMA) in Thailand as lead external counsel on IP and market access issues and for representation of the local R&D industry in connection with the Thai-US Free Trade Agreement negotiations. In early 2005, Tilleke & Gibbins was also ranked as a "top tier" firm for both patent and trademark/copyright works in Thailand, in a survey (based on votes from leading global IP professionals) conducted by Managing Intellectual Property magazine.

Tilleke & Gibbins is one of the largest independent law firms in Thailand offering a wide range of legal services to its clients. Founded in 1893, the firm has a track record extending more than 100 years of providing advice, knowledge, and judgment to best accomplish its clients’ objectives. Based in Bangkok, the firm has offices also in Phuket, Thailand, and Hanoi and Ho Chi Minh City, Vietnam. Long recognized as a leader in intellectual property practice, the firm has for many years been consistently voted as one of the top two intellectual property firms in Thailand by IP practitioners around the world. The firm’s hallmark IP practice is supplemented by solid corporate and commercial expertise and extensive abilities in litigation and alternative dispute resolution.

For additional information visit www.tillekeandgibbins.com.

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WILMER CUTLER PICKERING HALE AND DORR ANNOUNCE GENERAL ELECTRIC SENIOR VICE PRESIDENT, BEN W. HEINEMAN, JR., TO BECOME SENIOR COUNSEL TO WILMERHALE

October 31, 2005

NEW YORK, NY— October 31, 2005—Wilmer Cutler Pickering Hale and Dorr LLP today announced that Ben W. Heineman, Jr., Senior Vice President for Law and Public Affairs at General Electric Company (GE), will become Senior Counsel to the firm, effective February 1, 2006. Heineman, who was GE’s Senior Vice President-General Counsel from 1987-2003, will work on a wide range of issues: globalization, public policy, corporate citizenship and governance, mediation and arbitration. He will retire from GE at the end of this year.

On February 1, 2006, Heineman will also become a Senior Fellow at the Belfer Center for Science and International Affairs at Harvard University’s John F. Kennedy School of Government, Distinguished Senior Fellow at the Program on the Legal Profession at the Harvard Law School and a Senior Advisor to the Center for Strategic and International Studies. He will research and write on a variety of topics, including globalization, anticorruption, corporate citizenship, dispute resolution and the legal profession.

“We are thrilled to welcome a legend to the firm. Ben’s wealth of experience and keen insight into complex legal issues will serve as an invaluable resource to our clients around the world,” said Jamie Gorelick, Partner and Co-chair of both the Public Policy and Strategy Practice and the Defense, National Security and Government Contracts Practice at WilmerHale.

As GE’s General Counsel, Heineman was responsible for managing a team of more than 1,000 in-house lawyers in over 100 countries around the world. As the premier corporate general counsel in the world, Heinemen helped create a culture of integrity and compliance where lawyers also play a key role in business and management. Under Heineman’s leadership, the GE law department has become world-renowned for its excellence. A number of former GE corporate counsels now head law departments at other Fortune 500 companies.

Prior to joining GE, Heineman was Managing Partner at Sidley & Austin’s Washington office focusing on Supreme Court and test case litigation. Prior to that, Heineman served as Assistant Secretary for Planning and Evaluation with the U.S. Department of Health, Education, and Welfare under President Carter.

“It’s a pleasure to join such a deep team of accomplished lawyers. I look forward to this new opportunity and new chapter in my legal career,” noted Mr. Heineman.

Heineman is a graduate of Harvard College, Oxford University and Yale Law School. A Rhodes scholar, Editor in Chief of the Yale Law Journal, and Law Clerk to Supreme Court Justice Potter Stewart, Heineman started his career as a Staff Attorney for the Center for Law & Social Policy in Washington, D.C. and then as a litigator at Williams & Connolly. Mr. Heineman serves on the boards of the Center for Strategic and International Studies, Memorial Sloan Kettering Cancer Center, Transparency International-USA and The National Constitution Center. He is the author of books on British race relations and the American presidency. He received The American Lawyer’s Lifetime Achievement Award in 2005.

About Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale is nationally and internationally recognized for its premier practices in antitrust and competition; aviation; bankruptcy; civil and criminal trial and appellate litigation (including white collar defense); communications; corporate (including public offerings, public company counseling, start-up companies, venture capital, mergers and acquisitions, and licensing); defense and national security; financial institutions; intellectual property counseling and litigation; international arbitration; life sciences; securities regulation, enforcement and litigation; tax; and trade. WilmerHale was formed in May 2004 through the merger of two of the nation’s leading law firms, Hale and Dorr LLP and Wilmer Cutler Pickering LLP. With a staunch commitment to public service, the firm is renowned as a national leader in pro bono representation. The firm has more than 1,000 lawyers and offices in Baltimore, Beijing, Berlin, Boston, Brussels, London, Munich, New York, Northern Virginia, Oxford, Palo Alto, Waltham and Washington, DC.

For more information, please visit http://www.wilmerhale.com/.

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MAKING NEWS - GIDE LOYRETTE NOUEL ISTANBUL ADVISES GERMAN BANKS ON MAJOR TRANSPORTATION DEAL

The Istanbul office of Gide Loyrette Nouel has advised German banks Landesbank Baden–Württemberg ("LBBW") and Commerzbank Aktengesellschaft on two loans to the Istanbul Electric Tramway Tunnel Administration ("IETT").

The loans (in the amount of approximately €17 million and €106 million respectively) are to be used to purchase 450 Mercedes Benz buses.

The City of Istanbul acted as guarantor of the obligations of IETT under the loans. The Treasury of the Republic of Turkey gave its foreign borrowing approval to each of IETT in relation to the loans and the City of Istanbul in respect of its loans guarantee. LBBW and Commerzbank also have the benefit of an export credit guarantee provided by Hermes, the German Export Credit Agency.

LBBW and Commerzbank was advised on this transaction by Gide partner Guillaume Rougier-Brierre, senior associate Bülent Ozdirekcan and associates Erhan Colakel and Zeynep Sener.

Guillaume Rougier-Brierre commented: "Our Turkish finance team was very happy to work with LBBW, Commerzbank and Hermes in putting in place this critical transportation financing for Istanbul".

For additional information visit www.gide.com

MAKING NEWS – HOGAN & HARTSON ADVISES ON $3BILLION NATURAL GAS PIPELINE PROJECT

WASHINGTON, D.C., October 31, 2005 – Lawyers with Hogan & Hartson L.L.P’s Washington, D.C. office recently represented the subsidiaries of EnCana Corporation —EnCana Marketing (USA) Inc. and Entrega Gas Pipeline Inc. — in a $3 billion Rockies Express natural gas pipeline project with Kinder Morgan Energy Partners L.P. and Sempra Pipelines & Storage, a unit of Sempra Energy.

Under a Memorandum of Understanding, EnCana Marketing (USA) Inc. has agreed to support the proposed Kinder Morgan-Sempra Energy 1,500-mile pipeline. It is the largest natural gas pipeline project built in the United States in more than 20 years, and it will have capacity of up to 2 billion cubic feet per day.

Under the terms of the deal, EnCana will deliver natural gas from producing areas in the Rocky Mountain region to the upper Midwest and Eastern United States. The pipeline is expected to benefit producers in the Rocky Mountain region and U.S. consumers that increasingly rely on domestic energy sources.

Kinder Morgan and Sempra Pipelines & Storage are sharing responsibility for development activities. Pending customer commitments and regulatory approval, the proposed pipeline is expected to enter into service in late 2007 and continuing through 2009.

EnCana Corporation is one of North America's leading natural gas producers. It is among the largest holders of gas and oil resource lands onshore North America.

The Hogan & Hartson team included Bob Pender, Lee Alexander, Stefan Krantz, and Eduardo Carvajal.

For more information visit www.hhlaw.com

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MEMBER EVENTS

PRAC Member: Wilmer Cutler Pickering Hale and Dorr LLP Date: November 17, 2005 Place: Boston, Massachusetts Event: EMPLOYMENT LAW UPDATE 2005 AND WHISTLEBLOWER AND RETALIATION SEMINAR

This seminar will provide (i) an overview of the most important developments in labor and employment law in 2005; and (ii) a discussion of whistleblower and retaliation claims (including those under whistleblower, employment discrimination, and other employment law statutes), the common law public policy exception to the employment at-will rule, and Sarbanes-Oxley. Lastly, of particular interest to those who have operations in the UK and elsewhere in the EU, this seminar will discuss how compliance with US whistleblower and anti-retaliation statutes may conflict with EU privacy directives.

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Projects Insights 08 November 2005

Sharing interest rate risk in social infrastructure projects

Recent NSW social infrastructure projects have heralded a change in the NSW Government's approach to interest rate risk on social infrastructure projects post financial close. While in previous projects NSW has expected the private sector to manage interest rate risk during the term of the project, recent projects have seen NSW more willing to accept some level of interest rate risk where this represents value for money.

No change has occurred to the policy where NSW will not accept the risk of changes in margins bid by proponents.

Why the change?

There are two main reasons for this change.

Firstly the change harmonises NSW's position on interest rate risk on Public Private Partnerships (PPPs) with its debt portfolio. NSW currently has a debt portfolio in excess of $20bn which it uses to fund government and its businesses. NSW currently accepts and manages variability in its interest rate exposure in its long-term debt exposure, yet in the context of previous PPPs, NSW was effectively seeking funding on a fixed rate basis.

Ignoring arguments that the debt in PPPs does not represent government debt but that of the private sector, the recent change in NSW's approach to interest rate risk post financial close seeks to ensure consistency in the manner in which NSW manages its general funding commitments in its debt portfolio with that procured under PPPs.

The second reason for this change is value for money. The concession terms for PPPs are generally longer than is typically funded by the debt markets and accordingly hedging the interest rate risk for long term funding may result in the private sector having to raise funds in niche or less liquid markets.

A paper released by NSW Treasury in February 2004 indicated that historically the cost of borrowing for ten years is on average 40 basis points greater than borrowing for five years. Accordingly, by providing more flexible options for the management of interest rate risk post financial close, NSW encourages the private sector to create financing solutions which may provide greater value for money for NSW over the term of the project, while not exposing NSW to greater risk than is inherent in the management of its existing debt obligations.

The three main options for allocation of interest rate risk

There now appears to be three main options for allocating interest rate risk.

Option 1 - Nominal fixed rate debt

This is the traditional approach adopted in the UK which sees the private sector accepting nominal interest rate risk and providing hedged nominal finance over the term of the project.

Option 2 - CPI linked debt

Under this option the private sector will bear real interest rate risk but NSW will bear full CPI risk through indexation of the service fee. This option recognises the increasing popularity of CPI indexed bonds in

Page 9 of 28 recent infrastructure financings in Australia. This approach was adopted on the first New Schools Project.

Option 3 - Floating base rate debt

Under this option NSW will accept interest rate risk against a reference rate, such as the 90 day or the 180 day bank bill swap rate and accordingly to the extent that the 90 day or 180 day bank bill swap rate varies, NSW will bear this risk. However, consistent with NSW Treasury Policy, NSW will not accept this interest rate risk during the construction phase of a project.

NSW will also entertain financing solutions which contemplate the floating rate being set at time periods longer than 90 or 180 days. Some possible funding structures are:

z rolling 5 year fixed rates; z rolling 10 year fixed rates; or z combinations of the above.

How will NSW evaluate the three options against one another?

To date NSW has evaluated the three options by converting each of the options to a fixed nominal basis. The following table is a simplified summary of how this would occur:

Option 1 Option 2 Option 3

No specific Proposal will be adjusted Proposal will be converted to a adjustment assuming a forecast CPI fixed nominal basis on the required. rate. The assumed assumption that the reference rate forecast CPI rate is at each reset point will equal the generally specified in the applicable NSW Treasury call documents. Corporation bond yield less a forecast term premium.

The NSW Treasury Corporation bond yield will generally be that corresponding to the weighted average of the average loan lives of the debt tranches.

For more information regarding this article please contact:

Name: John Shirbin - Partner Name: Julian Gratiaen - Solicitor Tel: +61 2 9353 4117 Tel: +61 2 9353 4745 Fax: +61 2 8220 6700 Fax: +61 2 8220 6700 Email: [email protected] Email: [email protected]

Disclaimer Clayton Utz Insights is produced by Clayton Utz. It is intended to provide general information in summary form on legal topics, current at the time of publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters. Persons listed may not be admitted in all states.

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BRAZILIAN GOVERNMENT POISED TO OPEN UP REINSURANCE MARKET THE END OF MONOPOLY

Marcio M. S. Baptista Partner in charge of the New York office of Tozzini, Freire, Teixeira e Silva Advogados [email protected]

Marta Viegas Associate at Tozzini, Freire, Teixeira e Silva Advogados São Paulo – Brazil [email protected]

It appears that the Brazilian Government is finally putting an end to one of the last government monopolies in Brazil, the reinsurance sector.

IRB-Brasil Resseguros S.A. (“IRB”) is the government owned reinsurance company granted a monopoly by Brazilian legislation in 1939. The first clear signal that the government is finally preparing this company for sale was made at the December 6, 2004 general shareholders’ meeting where the government, in its capacity as the controlling shareholder of the company, approved a number of long needed reforms in operations and rules of corporate governance. These include (i) a cleaner and clearer distribution of powers amongst the existing officers of the company (President, Vice-President, Chief Financial Officer, Chief Claims Officer, Chief Property Risks Officer and Chief Transportation Risks Officer) and (ii) the creation of two deliberative committees, a foreign underwriting committee and a claims committee as well as five consulting committees: technical, investment, security, planning/budget and retention committees. These reforms were prepared in consultation with a private independent consulting firm and one of the best business schools in Brazil (Fundação Getúlio Vargas) and are expected to increase the speed and transparency of IRB’s decision making process.

On December 29, 2004, Brazil’s Finance Minister Antonio Palocci published a report entitled “Microeconomic Reforms and Long Term Growth,”1 which sent an even clearer signal of the government’s intentions. In it, the government indicated that one of its goals for 2005 was to introduce a bill in Congress declaring the end of the IRB state sanctioned monopoly over the reinsurance industry in Brazil and authorizing the privatization of IRB. Shortly thereafter, Luiz Fernando Furlan, the Brazilian Minister of Industry and Trade, indicated at the February 1, 2005 session of the EU – Mercosul Forum that the government would soon announce the end of the reinsurance monopoly.

Reinsures all over the world received the government’s statements with cautious enthusiasm. In 1999 the government of former President Fernando Henrique Cardoso began the process of privatizing IRB when Congress enacted Law 9.932/99, which transferred IRB’s regulatory powers to the Brazilian insurance agency (the Superintendence of Private Insurance – SUSEP). After the enactment of this law, several reinsurance companies from Europe and North America prepared for the opening of the market by setting up operations in Brazil and made significant investments in time, money, energy and personnel by both transferring senior executives and hiring local talent.

However, in 2000, a few days before the IRB privatization auction was to be held, the opposition party of the time, the Workers’ Party (the same party led by current President Luiz Inacio Lula da Silva) initiated a lawsuit challenging the constitutionality of Law 9.932/99 and successfully obtained and injunction thereby stalling the privatization process and causing foreign companies to loose their investments. However, the Supreme Court never ruled on the merits of this suit because, in 2003, Congress approved an amendment to the Brazilian Constitution which changed the grounds on which the case was based.2 In short, it appears that, in 2005, the Lula government is poised to clear the last remaining legal hurdle to opening up the Brazilian reinsurance market.

1 “Reformas Microeconômicas e Crescimento de Longo Prazo”, which can be viewed in Portuguese at www.cultiva.org.br/textos/reformasmicro.pdf 2 Law 9.932/99 was approved by simple majority of Congress and not super majority, as required by the Constitution. The constitutional amendment eliminated the need for super majority vote.

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During this period of legal squabbling, IRB has become a more attractive investment. Fiscal year 2004 revenues are estimated to be R$2.9 billion (approximately US$1 billion) while 2004 profits are estimated to be between R$430 and R$450 million (approximately US$148 and US$155 million).3 The latest round of changes in governance seems to be the final step in a series of reforms initiated by the Cardoso government.

Because the main opposition to the IRB privatization in the past came from the current President’s party, the Government’s indications about the privatization of IRB should be taken seriously. Since taking office in 2002, the current Lula government has professed a strong interest in improving employment rates, increasing market competition and making Brazil a prime target for foreign investment. The government appears to be headed for the long awaited opening up of the reinsurance sector with the privatization of IRB in 2005.

3 Profits for fiscal year 2003 were of R$328 million (approximately US$117 million).

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October 2005

Proposed Property Right Law Significant Impact on Real Estate Investment in China

By Harry Du/Fan Lin*/Amy Ho**

In July 2005, the Standing Committee of the National People’s Congress passed the Property Right Law Bill (“Bill”), which may be approved and adopted in the National People’s Congress’s final discussion in March 2006.

We will discuss in this article the significant impacts of this Bill on investments in real property in China once it becomes effective. The term ‘property or properties’ used herein shall mean only real property1.

Registration

1) Registration by property owner

The Bill introduces a compulsory and consolidated registration requirement for property owners who want to secure and preserve their property rights.

The establishment, modification, transfer or rescission of property rights must be registered otherwise such rights shall be void, unless otherwise provided in PRC laws. Registration shall be made at the registration authorities of the province where the property is located. Upon registration, the name of the property owner will be recorded in a registration book and the owner’s property rights shall become effective.

The significance of the registration book is that it provides the basis for the vesting of ownership of the property rights. In case of inconsistency between the information appearing in the registration book and the property ownership certificate, the registration book shall prevail.

2) Registration by other parties

On the basis of the aforesaid compulsory registration system, the Bill further introduced two new registration systems: a) Dispute registration Where any dispute arises over the property rights recorded in the registration book, the disputing party may request a ‘dispute’ be recorded over the property. The ‘dispute’ will be recorded if the owner listed in the registration book gives consent in writing or a judgment for the registration of a ‘dispute’ is obtained from a court.

1 In the draft Bill of October 2004, Real Property was defined as “land and the buildings, etc, pertaining on the land” but was deleted in the draft Bill of July 2005.

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After a ‘dispute’ is registered, any attempt by the owner to transfer title to the property will be deemed invalid unless the disputing party subsequently validates it.

The ‘dispute’ will be extinguished if the disputing party fails to initiate proceedings or apply for alteration of the record in the registration book within 3 months from receipt of consent from the owner or if the disputing party fails to initiate proceedings within 15 days from the effective date of the court order.

This dispute registration will protect third parties from entering into transactions for disputed property. b) Pre-notice registration

Where parties agree to purchase or transfer certain property rights, if the creditor (who possesses a security interest in the property) wishes to limit the debtor’s rights to dispose of such properties so as to ensure preservation of the property rights, the creditor may apply to the registration authorities for ‘pre-notice’ registration. If so requested, a ‘pre-notice’ registration shall be recorded if the creditor has paid more than half of the price or the debtor agrees in writing. Thereafter, the debtor will not be allowed to dispose of the property in the absence of consent by the creditor.

However, the pre-notice effect will extinguish upon the debtor’s discharge of liabilities with respect to the creditor or where the creditor fails to register as owner within 3 months of the date the creditor is entitled to do so.

Impact

Once implemented, the registration system will increase the transparency of developers and real estate projects, thereby providing more protection to investors when investing in real estate in China. When conducting due diligence for potential investments, investors are now entitled to investigate the relevant registration documentation of developers and projects, including land use right certificates and property ownership certificates. In the past, government administrative bodies would often interfere with and obstruct such investigation efforts. Now, investors must take one additional step to search over the information recorded in the registration book because the records of the registration book, and not the property ownership certificate, determines title ownership and it also discloses whether any third-party rights adhere to the property by way of dispute or pre-notice registration.

The pre-notice registration system is particularly applicable to pre-sale transactions in China and will help prevent developers from entering into more than one pre-sale contract with buyers over the same property. Assuming that all contracts are valid, only one buyer can obtain title to the property and the rest will become claimants seeking compensation for breaches of contract. Now, upon registration of a ‘pre-notice’, subsequent buyers will not proceed with purchasing the property since any further pre-sale will be ineffective. However, investors should be aware that the pre-notice registration can only be made during the validity of the Presale Registration Permit for

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Commercial Properties (to be obtained by the developer), meaning registration can not be made where such permit has not yet been obtained or has expired. Further, where construction is completed and the Building Completion Inspection Registration Record has been issued, but before the pre-sale owners obtain full title through issuance of a Property Ownership Certificate, pre-notice registration procedures might still be available within a reasonable period after project completion in accordance with local government regulations.

Building Premises Ownership

1) Property Ownership

The Bill divided the ownership within a building area into exclusive and collective ownership. Property owners have exclusive ownership over the interior residential or commercial premises they purchase, but shall have collective ownership and management rights over common areas, which includes: - greenery areas, roads and property management premises, except where the same is used for municipal governmental development; - clubhouse and garages, unless otherwise agreed, or the developer provides evidence to prove its ownership over the same.

The Bill provides that upon transfer of the owner’s exclusive ownership rights, the collective ownership and management rights over the common areas shall be similarly transferred.

These provisions lay down the foundation for solving some common disputes between property owners and developers, which include: a) the developer often reserves the right to use the rooftop or external walls of the building for commercial rental to third parties. According to the Bill, the developer will no longer be able to claim the right to use such areas by prior contractual arrangements. b) property management premises are often the subject of dispute between developer, management company and property owners. Normally, the developer would reserve the ownership rights or rights to use the premises and then, without prior consent of the owners, rent it out for profit. Now, the Bill makes it clear that the management and ownership rights of the premises, the facilities pertaining thereto and any operational revenues arising therefrom shall belong to the property owners collectively. c) The Bill provides that, in principle, the rights to garages and clubhouses belong to the owners jointly unless otherwise agreed or the developer has concrete evidence to prove it owns such rights (e.g. property ownership certificate or investment proof). This helps to resolve disputes between developer and owners concerning the ownership rights to garages or clubhouses.

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October 2005

2) Property Management

The Bill lays down the owners’ property management rights to the building. An Owners Committee shall be formed by all of the owners as the management organization for the building or all the buildings in the area together with the facilities pertaining thereto.

The Owners Committee has the power to manage the building(s) or to employ a property management agency to manage the building(s), to replace the property management agency employed by the developer, and to establish a property maintenance fund for the maintenance, repair and reconstruction of the building(s).

The Bill also grants the Owners Committee official legal status, enabling it to be a party to legal proceedings. Thus, either in its own name or via an appointed third party, the Owners Committee may initiate litigation proceedings or apply for arbitration.

The above provisions enhance the owners’ power to exercise management rights over their own properties and helps harmonize the legal relationship between the owners and the property management agency.

Construction Land Use Right a) Construction Land Use Rights Construction Land Use Rights refer to the rights to occupy, use and receive revenue from land owned by the State, and the right to construct and operate buildings and other related facilities over it. The Bill provides that Construction Land Use Rights shall be transferred through auction, bidding, agreement or (mostly free) allocation by the government, etc. Recently, because of government efforts to curb overheating of the real estate market, the government has ceased the transfer of Construction Land Use Rights by agreement but has adopted an open transaction approach, including bidding and auction to affect such transfers. Investors in the business of real estate development should obtain Construction Land Use Rights through bidding or auction or by way of mergers and acquisitions of existing real estate companies which have received the relevant Construction Land Use Rights. b) Unity of title to property and land The owner of Construction Land Use Rights has the right to dispose of its rights through transfer, exchange, investment, gift or mortgage, etc., unless otherwise provided by law. Based on the principle of unity of title to property and land, the land use rights and the building constructed over it shall be disposed of altogether and not separately. c) Renewal of land use rights Upon expiry of the Construction Land Use Rights, should the owner of such rights wish to renew, the owner may apply one year in advance and the transferor should agree for such extension unless the land must be

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October 2005

returned to the State for social and public benefits use. If the owner does not apply for renewal, ownership of the buildings and related facilities constructed upon the land shall revert to the transferor. If the transferor needs to repossess the land for social and public use, the transferor must pay reasonable compensation to purchase the building and the related facilities from the owner.

The above provisions set forth clear instructions to real estate investors in China, providing that investors may obtain land use rights through open proceedings and shall have the right to dispose of the property. In addition, investors are entitled to apply for renewal of the land use rights after expiration.

By addressing many of the most pressing concerns among developers and investors and incorporating greater transparency, the new Bill makes significant improvements to China’s relatively nascent system of privately-held land use rights. Lawmakers hope that these measures will result in greater functionality and stability in the market, which will ultimately play an important role in the sustained growth of China’s market economy. Only time will tell if they are right.

* Fan Lin is an associate at Real Estate Department, King & Wood Beijing head office. ** Amy Ho is an associate at Real Estate Department, King & Wood Beijing head office.

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© 2005 King & Wood www.kingandwood.com

October 2005

Sunrise period ".eu" domain names starts December 7, 2005

As we announced earlier, towards the end of this year, holders of registered trademarks will have the opportunity to pre-register .eu domain names on the basis of their trademarks.

Sunrise period ".eu" domain names starts December 7, 2005

Last week, EURid, the organisation overseeing the implementation and registration of .eu domain names, announced that the so-called 'Sunrise period' that will precede the general opening of the .EU registration will start on December 7, 2005. This Sunrise period will consist of two phases: in the first phase, from December 7, 2005 until February 7, 2006, only public bodies, the territories governed by them and registered trademark holders will be eligible to pre-register the .eu domain names relating to their trademarks. In the second phase, from February 7, 2006 until April 7, 2006, pre-registration of company names, business identifiers and unregistered trademarks, tradenames and the distinctive titles of protected literary and artistic works will also become possible. After the Sunrise period ends, the aptly named 'Landrush' period will commence, when all remaining domain names will be available to all comers, with the Czech Arbitration Court providing ADR services for domain name conflicts.

For clients seeking to improve their chances of successfully claiming a certain .eu domain name for which they do not yet have a corresponding trademark, we offer the option of registering a trademark for that domain name through the so called expedited procedure. This will enable clients to apply for the desired .eu domain name during the Sunrise period. In close cooperation with the client's internet provider, NautaDutilh can assist in filing the application. Should the client's provider not be an accredited EURid registrar, we can instruct one of our registrar contacts on their behalf.

For more information, please contact Charles Gielen (T +31 20 71 71 902), Florence Verhoestrate (T+32 2 566 8452) or Boudewijn van Vondelen (T +31 20 71 71 455)

Antitrust and Energy Update October 2005

Energy Policy Act of 2005: PUHCA Repeal Opens the Door to Foreign Investment

On August 8, 2005, President George W. Bush signed into law the Energy Policy Act of 2005 (EPA 2005), ambitious new legislation that reaches virtually all aspects of the energy business, ranging from a regulatory reform of the natural gas and electric power industries to tax credits and renewables.

This Client Update focuses on those provisions of the EPA 2005 that are of special interest to foreign firms contemplating investment in U.S. utilities. Specifically, effective February 8, 2006, EPA 2005 repeals one of the most significant regulatory barriers to foreign investment in the U.S. energy industry, the Public Utility Holding Company Act of 1935 (PUHCA).

EPA 2005 Lifts Onerous Requirements of PUHCA

The repeal of PUHCA opens the door to foreign investment in the U.S. electric power and natural gas utility industries as there will be no more oversight by the Securities and Exchange Commission (SEC), and related regulatory hurdles, associated with holding company status. Moreover, the repeal makes possible new types of combinations, made by new types of investors.

EPA 2005 repealed the onerous conditions PUHCA imposed on mergers and acquisitions by registered and exempt holding companies. Specifically, EPA 2005 removed PUHCA’s mandate that the operations of the holding company system be limited to “a single integrated public-utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system.” Despite recent relaxation of the integration requirement, the effect

Copyright © 2005 Hogan & Hartson L.L.P. All rights reserved.

had been the confinement of a holding company system to a single geographic area or, at most, a region. The EPA 2005’s lifting of the “incidentality” requirement means that mergers with and acquisitions of U.S. utilities can now be made by any foreign entity, whether a utility company or a nontraditional investor such as a financial institution or an industrial firm. Removal of the integration requirement allows innovative combinations among geographically diverse utilities, including those located in Europe.

Conversely, under PUHCA, the SEC regulated a wide range of activities by so-called “registered holding companies” and their subsidiaries. PUHCA also governed the issuance of securities, intercompany financings, and affiliate transactions involving holding company systems. To avoid PUHCA’s expansive reach, a public utility holding company had to fit within one of PUHCA’s five exemptions. Together, the onerous PUHCA requirements applicable to registered holding companies, as well as foreign investors’ practical inability of meeting the PUHCA exemptions, long made foreign acquisition of U.S. utility assets impracticable.

Federal, State Merger Reviews Remain Under EPA 2005

Under EPA 2005, the U.S. Federal Energy Regulatory Commission (FERC) has approval authority over mergers of electric power public utility companies, over the acquisition, sale or other disposition of more than $10,000,000 in assets or stock of a public utility company or holding company, and over the leasing of more than $10,000,000 in public utility assets. For the first time, FERC is given jurisdiction over mergers, purchases and leases of generation-only assets that are used for interstate wholesale power sales. EPA 2005 also requires FERC to consider whether disposition, consolidation, acquisition, or change in control of a public utility will result in cross-subsidization of a non-utility associate company or will involve a pledge or encumbrance of utility assets for the benefit of an associate company. Additionally, FERC must determine whether a transaction is consistent with the public interest.

Although EPA 2005 substantially eases foreign entry into the U.S. public utility sector, state and federal oversight over mergers and acquisitions involving public utility assets remains and, in some cases, is strengthened by the new legislation. Public utility holding companies, and their affiliate companies, must maintain and make available to the FERC on a confidential basis books, accounts and other records relevant to costs incurred by public utilities. To carry out its statutory duties under EPA 2005, the FERC may also impose rules related to additional accounting, cost-allocation, recordkeeping, and reporting requirements similar to those formerly imposed by the SEC. Holding companies that own only foreign utility companies (FUCOs), qualifying facilities (QFs), or exempt wholesale generators (EWGs) are exempt from EPA 2005 as it applies to the FERC’s books and records access requirements. However, that exemption is not an exemption from the books and records requirement under the Federal Power Act (FPA), which may apply to EWGs and the small number of QFs that are deemed “public utilities” under the FPA. Please note that in its recent proposed rulemaking, the FERC has interpreted EPA 2005 to mean that the exemption from the books and records requirement is limited to those holding companies that attained FUCO or EWG status before repeal of PUHCA.

State requirements related to public utility asset acquisitions vary by state and may apply to both electric power and natural gas assets. At least in some states, the local regulators can be even tougher than the FERC, as they seek to protect the state utility and its consumers. Similar to the FERC, EPA 2005 grants to state regulatory commissions authority to obtain access to books and records of a holding company and its affiliate companies if the state commission determines that such books and records are relevant to costs incurred by the electric or gas distribution utility and access is necessary for the effective discharge by that state commission of its responsibilities.

Antitrust and Energy | 2

Conclusion

The repeal of PUHCA creates broader foreign investment opportunities in the U.S. electric power and natural gas utility industries. Although foreign utility acquisitions will continue to be scrutinized by federal and state authorities after the repeal of PUHCA, the repeal creates a new landscape that opens the door to new combinations and new types of investors from around the world. * * * * * For more information about the matters discussed in this Update, please contact the Hogan & Hartson L.L.P. attorney with whom you work or either of the attorneys below. If you are interested in any of our other publications, please visit http://www.hhlaw.com/site/news.aspx. Jolanta Sterbenz Washington, D.C. [email protected] 202-637-5885 John R. Lilyestrom Washington, D.C. [email protected] 202-637-5633 www.hhlaw.com

This Update is for informational purposes only and is not intended as basis for decisions in specific situations. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. To receive future Updates or to have your e-mail address removed from the list for distribution of future issues of this newsletter, please send an e-mail to [email protected]

Antitrust and Energy | 3 UNITED STATES - LUCE FORWARD HAMILTON & SCRIPPS LLP - California Legislature Eliminates Type I Indemnities for Residential Construction Defects

10/13/2005 On September 29, 2005, Governor Schwarzenegger signed into law Assembly Bill 758, which renders unenforceable any indemnity given to a builder by a subcontractor for liability arising out of residential construction defects for the developer's negligence or the negligence of others. AB 758 applies only to residential construction contracts entered into after January 1, 2006. The new law only applies to construction defect liability. It does not apply retroactively or affect commercial or public construction contracts. Roger C. Haerr Until now, California law allowed builders to seek indemnification from residential construction subcontractors for claims arising out of the negligence of the builder and others regardless of fault, except for the sole negligence or willful misconduct of the builder. These indemnities were typically referred to as Type I. AB 758 narrows the type of liabilities for which a builder can seek indemnity from a subcontractor, and renders unenforceable indemnities given by subcontractors to builders for liability for residential construction defects caused by the work of others. A "builder" is Lynn A. Borkenhagen defined by reference to the recently enacted Right to Repair Laws as any entity in the business of selling residential units to the public.

The new law cannot be waived or modified by agreement of the parties. Moreover, AB 758 allows the builder and subcontractor to mutually agree on the timing and immediacy of providing a defense and provisions for reimbursement of defense costs, so long as the agreement does not waive or modify the otherwise prohibited indemnity. The law expressly does not affect the additional insured obligations of an insurance carrier to provide an immediate defense under the Presley Homes precedent.

As a result of the new law, residential developers and builders will be required to quickly re-evaluate their subcontractor indemnities. For example, nothing prevents a developer from seeking a Type I indemnity from subcontractors for liability arising out of workers compensation or bodily injury claims. In addition, the developers may enter into defense cost reimbursement agreements if, upon final resolution of the claim, the agreement does not violate the proscribed indemnity. Commencing on January 1, 2006, subcontractors can only be required to indemnify a builder for construction defects relating to the subcontractor's scope of work and performance under the construction contract, but not for any negligence of the builder and defects in design or construction that do not arise out of the scope of the subcontractor's work.

If you have any questions concerning the impact of AB 758, please visit www.luce.com or contact:

Roger C. Haerr - 619.699.2564 - [email protected]; or Lynn A. Borkenhagen - 619.533.7366 - [email protected]; or

Any member of the firm's Construction Law, Real Estate or Real Estate Litigation practice areas.

NOVEMBER 2005 BEST PLAN PRACTICES FOR RETIREMENT PLANS IN THIS ISSUE 1 BEST PLAN PRACTICES FOR RETIREMENT HOLDING COMPANY STOCK PLANS HOLDING COMPANY STOCK

It seems that hardly a week passes by A review of the plan documents and the 4 MCKESSON REVISITED YET AGAIN – without news of yet another company or minutes of board of directors meeting will DISTRICT COURT APPLIES A BRIGHT-LINE plan fiduciary being sued by employees usually reveal who the “named” or “desig- TEST TO EXEMPT ESOP FIDUCIARIES over drops in the value of company stock nated” fiduciaries are. For example, a FROM LIABILITY FOR FAILURE TO held by the company’s retirement plan. committee typically will be designated as DIVERSIFY Most of the attention has been engen- the principal fiduciary for plan invest- dered by the spectacular collapse of ments, including an investment in several large public companies whose company stock. However, a broadly 5 IRS ANNOUNCES RETIREMENT PLAN 401(k) retirement plans were invested in worded designation can pose a trap for the DOLLAR LIMITATIONS FOR 2006 stock of the sponsoring employers. In unwary. For example, if a plan document particular, several articles have been or board resolution simply names the written, and more will undoubtedly be “company” as the fiduciary of the plan, a CALENDAR OF EVENTS written, on what the Enron and WorldCom court may hold that all of the members of plan fiduciaries did or did not do as the board of directors and/or the officers company stock prices declined dramati- of the company are plan fiduciaries. cally over a very short period of time. Because of these developments, compa- In addition, other individuals or groups nies are, and should be, focusing on best may be treated as plan fiduciaries, even if practices for governance of their retire- they are not specifically named or desig- ment plans. This article will review some nated as such in the plan documents. For EDITORS of the fiduciary issues being faced by example, individuals (such as corporate DAVID ACKERMAN 312.324.1170 ESOP companies and their fiduciaries, and officers or members of the board of direc- [email protected] describe some best plan practices for tors) who actually make or influence the addressing these issues. investment decisions of a retirement plan — the people actually “calling the shots” on these matters — may be con- WHO ARE THE FIDUCIARIES? JOHN KOBER 214.466.4105 sidered fiduciaries. In addition, those [email protected] The answer may seem obvious, but the who appoint or monitor the designated first question that arises in most fiduciary plan fiduciaries can themselves be con- lawsuits involving retirement plans is sidered fiduciaries, at least with respect “Who are the plan’s fiduciaries?” In other to those functions. ELIZABETH PERDUE 312.324.1180 words, who can the plaintiffs sue for a [email protected] breach of fiduciary duty? In determining Best Plan Practices: Designate and who the fiduciaries are, the courts take a Educate. It may be impossible to control close look at (1) who the designated fidu- completely whom a court will ultimately JOSEPH RONAN 215.963.5793 ciaries of the plan (2) who are the determine to be the fiduciaries of a retire- [email protected] individuals that influence the investment ment plan. However, best plan practices decisions of the plan are, and (3) who is can be used to make sure fiduciary roles responsible for appointing and monitoring are specifically designated up front as This newsletter is provided as a general informational service to clients and friends of Morgan, Lewis & the other fiduciaries. much as possible. For example, compa- Bockius LLP. It should not be construed as imparting nies adopting best plan practices are legal advice on any specific matter. ensuring that their plans specifically des- © 2005 Morgan, Lewis & Bockius LLP. continued on page 2 All Rights Reserved.

MORGAN LEWIS ON ESOPS  1 BEST PLAN PRACTICES FOR RETIREMENT PLANS HOLDING COMPANY STOCK ignate selected individuals to serve as assets of an ESOP be primarily invested Best Plan Practices: Monitor and committee members or other plan fidu- in company stock, while ERISA requires Document, Document and Monitor. An ciaries, or designate a specific that the fiduciary act in the exclusive ESOP fiduciary’s determination of independent fiduciary, as opposed to interest of the participants and in a whether to continue to hold or invest in the appointments being the sole prudent manner. In times of economic company stock will be based on facts responsibility of the board of directors stress and dropping stock prices, it can and circumstances, including the extent or an officer of the company. be difficult for a trustee to navigate of the fiduciary’s knowledge and the these requirements, and the current severity and imminence of the In addition, and perhaps more impor- legal standards of fiduciary duty are company’s financial distress. Again, it tantly, best plan practices should somewhat uncertain. This is an area of may be impossible to second-guess how include educating fiduciaries and the law that is evolving as litigation a court will ultimately view a fiduciary’s potential fiduciaries (such as the board moves through the courts. decisions, particularly given the possi- of directors) as to their roles and bility of different legal standards being responsibilities with respect to retire- The leading view, and one that is applied and the fact that a court will ment plans. Officers and board useful for fiduciaries trying to come to have the benefit of hindsight. members are often unaware of the fact grips with what they should be doing, However, fiduciaries adopting best plan that, in a given situation or in connec- derives from a 1995 Third Circuit deci- practices are implementing processes tion with a certain decision, they are sion, Moench v. Robertson. Moench for (a) regularly monitoring the acting as plan fiduciaries with an obli- essentially stands for the proposition company’s stock performance and gation to act in the plan participants’ that there is a “presumption” that it is financial performance, (b) documenting best interests. When board members prudent for the fiduciary of an ESOP to this monitoring, and (c) documenting are made aware of the different hats invest in company stock. Therefore, an the fiduciaries’ deliberations about the they wear (and of when they are ESOP fiduciary should be able to hold company’s financial performance and wearing them), they are better company stock under a number of cir- other issues affecting the decision to equipped to make decisions based on cumstances when, for any other type of hold or divest the plan of employer the proper fiduciary standards. retirement plan investments, a prudent stock. Regardless of the legal standard fiduciary would conclude that those that is ultimately applied by a court, a Finally, companies following best assets should be sold. However, this is fiduciary that adopts such procedures plan practices are establishing well- a rebuttable presumption and, under will be better equipped to show that it thought-out written retirement plan certain extreme circumstances, an ESOP was appropriately monitoring the governance procedures addressing the fiduciary may be forced to conclude company’s financial situation, and that companies’ fiduciary obligations that that company stock is an imprudent its decisions were based on a full consid- traditionally have not been addressed investment, no matter what the plan eration of the facts and circumstances. in the retirement plan documents, and documents contractually require. How they are adopting, following and extreme must the circumstances be in THE CHALLENGES ENCOUNTERED BY keeping these procedures up to date. order to require an ESOP fiduciary to For example, ESOP committee charters, divest the plan of company stock? INSIDER FIDUCIARIES ESOP voting policies, ESOP communica- Moensch and its progeny focused on cir- A recurring theme in company tion policies, statements of QDRO policy cumstances involving a precipitous stock–related fiduciary litigation is that and statements of investment policy are decline in value and a fiduciary’s knowl- the fiduciaries failed to act in the sole being established with an emphasis on edge of the company’s impending interest of plan participants in deciding best practices and fiduciary obligations. collapse. However, some courts have to purchase, sell, vote, tender or retain rejected Moensch (holding that an ESOP the company stock investment in the trustee, unlike other trustees, does not retirement plan. Insider fiduciaries are AN ESOP FIDUCIARY’S CONFLICTING have a specific obligation to diversify more susceptible to these types of DUTIES ESOP plan assets if that would violate claims, given the multiple responsibili- Fiduciaries of ESOPs continue to the terms of the plan), and some courts ties they have within a company and struggle with the sometimes competing have formulated or applied the Moensch the high potential for actual, or per- requirements of ERISA and the ESOP standard differently. The “right answer” ceived, conflicts of interest. plan documents. For example, the plan for a particular fiduciary may well documents and ERISA mandate that the depend on which court hears the case. In addition, as the recent highly

MORGAN LEWIS ON ESOPS  2 publicized cases are making evident, independent fiduciary is to ensure unbi- no person who is otherwise a fiduciary insider fiduciaries face a dilemma when ased oversight of the plan and its will be liable for any loss that results it comes to managing nonpublic or con- investments. Of course, the independ- from a participant’s decision to invest in fidential information, and deciding ent fiduciary must be qualified, and the company stock. This may not represent whether such information should be board of directors or a designated com- a panacea for ESOP fiduciaries, however. used for the benefit of the plan or dis- mittee must monitor the fiduciary’s Courts have held that Section 404(c) closed to plan participants. Reconciling activities. However, use of an independ- does not necessarily protect fiduciaries this situation can be very difficult in the ent fiduciary can help relieve the company who are responsible for deciding what current environment. One early case, and its board from a certain level of investment options will be made available Hall v. Policy Systems, generally held actual, or perceived, conflicts of interest. to participants. However, for practical that a plan fiduciary does not have a and legal reasons and because of recent duty to disclose any information to a Companies are also appointing indi- events, the trend has been to allow participant if the disclosure would viduals to serve on their retirement plan greater employer diversification rights. violate securities laws, and that fiduci- committees who do not have access to ary committee members are not inside information about the companies Best Plan Practices: Consider Expanded obligated to make trading decisions financial situation and marketplace Diversification Rights. Companies based on insider information they issues. This means that the chief exec- implementing best plan practices should possess. However, the situation may utive officer, president, chief financial consider the benefits and risks of turn out to be more complicated if the officer, chairman of the board and other expanding diversification rights under fiduciary has gained confidential infor- members of the board of directors do not their retirement plans. While increased mation from a board of directors’ serve on any fiduciary retirement plan diversification does reduce the risk of meeting or officers’ meeting. In its committee, unless their expertise is employees “putting all their eggs in one amicus brief filed in the Enron case, the essential to the committee’s function. basket,” there are also potential down- Department of Labor took the position sides to be considered. For example, for that the officers of Enron, who were also a private company, increased diversifica- DIVERSIFICATION ISSUES plan fiduciaries and who held nonpublic tion rights will put increased pressure on information, were not protected from Public companies, and in some cases the company’s cash flow, as shares must liability because of the need to comply private companies, are considering how be repurchased to provide funds to par- with insider trading laws. According to their retirement plans can be designed ticipants who are diversifying their the DOL, the officers could have (i) dis- to reduce some of the market risks asso- accounts. Repurchases in excess of closed the insider information to all ciated with employee investments in those required by statute may be limited shareholders (i.e., the participants of company stock, and thereby at the same under the company’s senior loan docu- the retirement plan and the public), (ii) time potentially reduce exposure to fidu- ments, which will need to be reviewed. eliminated Enron’s stock as a plan ciary litigation. Companies are And at a certain point, if the number of investment, or (iii) reported to the SEC exploring options to revise their retire- shares of company stock held by the and the DOL that misinformation was ment plans to provide additional ESOP as a whole is substantially reduced being provided to the participants. diversification rights, especially in situ- through diversification, the plan may Obviously, applying the DOL’s standards ations where employees direct some or cease to be an ESOP because it is no (which are not law) will be very difficult all of their salary reduction deferrals longer “primarily invested” in company for fiduciaries in certain situations. In into company stock investments. By stock. Finally, if a company is hoping to addition, court decisions in recent cases shifting some of the investment deci- benefit from the protections of Section have criticized the DOL’s position, sions to the participants, this approach 404(c), it must make sure that it is in stating that ERISA does not preempt may have the benefit of putting less compliance with the disclosure require- insider trading laws or require disclo- pressure on plan fiduciaries to make ments of that section. sures that would further reduce the proper decisions as to when to buy, sell value of assets held by a plan. or hold company stock in the plan. THE ROLE OF EMPLOYEE Best Plan Practices: Consider By providing additional diversification COMMUNICATIONS Independent Discretionary Fiduciaries. options, companies are also hoping to Historically, much of the responsibil- For a number of reasons, including those take advantage of the protections of ity for communications relating to discussed above, more and more compa- ERISA Section 404(c). Section 404(c) employee benefits (including ESOPs) has nies are appointing independent generally provides that if a retirement been placed in the hands of the human discretionary fiduciaries for their retire- plan permits participants to exercise resources department, with assistance ment plans. The primary purpose of the investment control over their accounts, from plan administrators and other continued on page 5

3 MORGAN LEWIS ON ESOPS  MCKESSON REVISITED YET AGAIN – DISTRICT COURT APPLIES A BRIGHT-LINE TEST TO EXEMPT ESOP FIDUCIARIES FROM LIABILITY FOR FAILURE TO DIVERSIFY

On September 9, 2005, the U.S. District diversify a plan out of company stock can simultaneously (1) imposing a multi- Court for the Northern District of be liable for breaching the duty of pru- faceted duty of prudence upon ESOP California ruled that members of dence, even if it means the fiduciary must fiduciaries and yet (2) exempting them from one particular aspect of it: the McKesson Corp.’s board of directors did violate the express terms of the plan. duty to diversify. not breach their fiduciary duties when they failed to divest the company’s ESOP The court carefully examined the rea- Based on its holding that ERISA of employer stock. The facts of the case, soning in Moensch, and found it to be Section 404 prohibits claims against fidu- and the court’s prior tentative rulings, flawed. Noting that the exemption lan- ciaries for failing to diversify an ESOP, the were outlined in detail in the September guage of Section 404 is sweeping and court dismissed most of the plaintiffs’ issue of MORGAN LEWIS ON ESOPS. unqualified, the court stated that claims against the fiduciaries. The court “Congress fashioned a bright-line exclu- also found that, even if the Moensch In its final decision, the district court sion for ESOP fiduciaries from liability for standard were applied, the circumstances absolved the fiduciaries of liability for their alleged failure to sell company presented did not rise to the level of failure to diversify the plan out of stock.” While ESOP fiduciaries could still imminent financial collapse required by company stock, based on the court’s breach their fiduciary duties by engaging Moensch to overcome the presumption of reading of ERISA Section 404, which in various forms of imprudence, such as prudence. However, the court did allow states that, for ESOP fiduciaries, “the overpaying for securities, charging a the plaintiffs to proceed on their claim diversification requirement. . . . and the commission or acquiring stock for prohib- that the fiduciaries breached their duties prudence requirement (only to the extent ited reasons, the court found that mere by contributing company stock to the it requires diversification) . . . are not failure to diversify was exempt from plan instead of cash. Unlike the claims violated by acquisition or holding of attack. The court also stated: that the court dismissed, this particular [company stock].” 29 U.S.C. § Moensch questionably jumps from the claim involved an allegedly imprudent 1104(a)(2). The court rejected and premise that ESOP fiduciaries are gener- judgment made by the fiduciaries within strongly criticized Moensch v. Robertson, ally subject to the duty of prudence to the terms of the plan. the Third Circuit case that has been relied the determination that ESOP fiduciaries on by federal courts for years for the may breach the duty of prudence by Given the widespread acceptance of proposition that, while ESOP fiduciaries refusing to sell company stock. The Moensch in many federal courts, it is dif- enjoy a presumption of prudence for duty of prudence is broader than – and ficult to say whether the Northern investing in company stock, that pre- in fact encompasses – the duty of District’s position will be followed in sumption is rebuttable. Under certain diversification. Moensch does not other jurisdictions. circumstances, according to Moensch and appear to recognize that there is its progeny, an ESOP fiduciary who fails to nothing inconsistent with section 404

IRS CIRCULAR 230 DISCLOSURE

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax

advice contained in this communication (including any attachments) is not intended or written to be

used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or

(ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. For information about why we are required to include this legend herein, please see www.morganlewis.com/circular230.

MORGAN LEWIS ON ESOPS  4 IRS ANNOUNCES RETIREMENT PLAN DOLLAR LIMITATIONS FOR 2006

The Internal Revenue Service has • The dollar limit used in the definition of • The limitation on deferrals under Code announced the 2006 cost-of-living “highly compensated employee” under Section 457(e)(15) for deferred compen- adjustments to dollar limits applicable to Code Section 414(q)(1)(B) is increased sation plans of state and local retirement plans. from $95,000 to $100,000. governments and tax-exempt organiza- tions is increased from $14,000 to • The limitation on the annual benefit • The annual compensation limitation $15,000. under a defined benefit plan under Code under Section 401(a)(17) for eligible Section 415(b)(1)(A) is increased from participants in certain governmental • The dollar limit under Code Section $170,000 to $175,000. plans that, under the plans as in effect 414(v)(2)(B)(i) for catch-up contribu- on July 1, 1993, allowed cost-of-living tions to an applicable employer plan, • The dollar limit under Code Section adjustments to the compensation limita- other than a plan described in Code 416(i)(1)(A)(i), relating to the definition tion under the plans under Section Section 401(k)(11) or Section 408(p), for of “key employees” in a top-heavy plan, 401(a)(17) to be taken into account, is individuals age 50 or over has increased is increased from $135,000 to $140,000. increased from $315,000 to $325,000. from $4,000 to $5,000. The dollar limit • The limitation on annual additions to the • The compensation amounts under under Code Section 414(v)(2)(B)(ii) for accounts of individual participants in Treasury Regulation Section 1.61- catch-up contributions to an employer defined contribution plans under Code 21(f)(5)(i), regarding the definition of plan described in Code Section Section 415(c)(1)(A) is increased from “control employee” for fringe benefit val- 401(k)(11) or Code Section 408(p) for $42,000 to $44,000. uation purposes, is increased from individuals age 50 or over has increased • The annual compensation limit under $80,000 to $85,000. The compensation from $2,000 to $2,500. Code Sections 401(a)(17), 404(l), amount under Treasury Regulation • The minimum compensation under Code 408(k)(3)(C) and 408(k)(6)(D)(ii) is Section 1.61-21(f)(5)(iii) is increased Section 408(k)(2)(C) regarding SEPs increased from $210,000 to $220,000. from $170,000 to $175,000. remains at $450. • The dollar limit under Code Section • The limitation under Code Section 409(o)(1)(C)(ii) for determining the 402(g)(1) on the exclusion of elec- BEST PLAN PRACTICES FOR RETIREMENT maximum account balance in an tive deferrals described in Code Section employee stock ownership plan subject 402(g)(3) is increased from $14,000 to PLANS HOLDING COMPANY STOCK to a five-year distribution period is $15,000. continued from page 3 increased from $850,000 to $885,000, • The limitation under Code Section while the dollar amount used to deter- 408(p)(2)(E) for SIMPLE retirement mine the lengthening of the five-year accounts remains unchanged at service providers. In some cases, the distribution period is increased from $10,000. chief financial officer and other members $170,000 to $175,000. of firm management may have had some input or involvement in those communi- cations. In addition, in communicating information about benefit plans, many CALENDAR OF EVENTS companies have tended to rely on plan documents, such as summary plan November 10-11, 2005 Costa Mesa, CA descriptions (SPDs), which comply with Two-Day Technical Conference Scott Adamson will be making a presentation ERISA requirements but may not neces- The ESOP Association on “Handling the Repurchase Obligation. sarily be user friendly or responsive to Caesars Palace employees’ questions and concerns. Las Vegas, NV December 1, 2005 David Ackerman’s speaking topics will be 2005 AEC Mergers & Acquisitions Summit “General Responsiblities of ESOP Fiduciaries” ZweigWhite Best Plan Practices: Focus on Proactive and “Legal Aspects of Corporate Governance of Palm Beach, FL Employee Communications. In light of an ESOP Company.” John Kober’s topic will be The Breakers the recent activity involving retirement “Capital Market Type of ESOP Transaction,” Erin Morgan Lewis is a sponsor of this event. John Turley’s topic will be on “Fiduciary and Kober will be making a presentation with John plans that invest in employer stock, com- Corporate Governance Caselaw Update,” and Hommel, Senior Vice President, North Star ESOP panies employing best plan practices are Riva T. Johnson will be presenting on two & Fiduciary Services, LLP, on “Structures Used focusing more on the type and tone of topics, "Inside Trustee Issues” and “The to Create Shareholder Liquidity and Legislative, Regulatory and Caselaw Update.” Implementation of Management Succession their communications with employees, to November 16, 2005 Using an ESOP.” ensure such communications are fre- Challenges & Solutions for Mature ESOP quent, objective, accurate and neutral. Companies Companies are also focusing on the way The National Center for Employee Ownership Holiday Inn Costa Mesa continued on page 6

MORGAN LEWIS ON ESOPS  5 BEST PLAN PRACTICES FOR RETIREMENT PLANS HOLDING COMPANY STOCK continued from page 6

information is conveyed to employees in diversified retirement portfolio, and, In conclusion, it is important to be town hall employee meetings, in an where appropriate, detailed and user- aware of the case law as it continues to effort to avoid giving or misrepresenting friendly descriptions of distribution evolve in this area, and companies, fidu- information because of enthusiasm. procedures and options. Finally, compa- ciaries, and ESOP committee members Companies are taking a fresh look at nies are becoming more proactive in should proceed by implementing best their SPDs and updating them to make communicating matters involving their practices to address retirement plan sure they are accurate and readable, and ESOPs throughout the year as develop- matters as they arise from time to time. are beefing up SPDs and other communi- ments occur, rather than limiting cations to include disclosures concerning communications to an annual report of the risks associated with owning the company’s stock value. company stock and the importance of a THE MORGAN LEWIS ESOP Team E David Ackerman Chicago 312.324.1170 [email protected]

John Kober Dallas 214.466.4105 [email protected]

Scott Adamson Los Angeles 213.612.7365 [email protected]

Ted Becker Chicago 312.324.1190 [email protected]

Craig Bitman New York 212.309.7190 [email protected]

Brian Dougherty Philadelphia 215.963.4833 [email protected]

John Ferreira Pittsburgh 412.560.3350 [email protected]

Brian Hector Chicago 312.324.1160 [email protected]

Riva Johnson Dallas 214.466.4107 [email protected]

Renee Lewis Chicago 312.324.1128 [email protected]

Michael Peipert Chicago 312.324.1126 [email protected]

Elizabeth Perdue Chicago 312.324.1180 [email protected]

Jason Ray Dallas 214.466.4112 [email protected]

Joseph Ronan Philadelphia 215.963.5793 [email protected]

Gary Rothstein New York 212.309.6360 [email protected]

Erin Turley Dallas 214.466.4108 [email protected]

Allison Wilkerson Dallas 214.466.4120 [email protected]

MORGAN LEWIS ON ESOPS  6