Corporate Update January 2011

Corporate Update Contents

Company Law Update 3

Corporate Governance Update 10

Regulatory Update 13

Takeovers Update 20

Antitrust Update 25

Links to other recent publications 32

Happy New Year and welcome to our latest edition of Corporate Update.

In our Company Law Update , we consider The FSA continues its focus on stamping revolving around the general themes of the draft guidance for corporate anti-bribery out market abuse. In our Regulatory Update , restructuring and M&A and capital markets procedures. The Bribery Act 2010 comes we consider the FSA’s best practice activity in the current climate. For details of into force in April 2011 and companies, to recommendations for the handling of inside these Webinars, please contact Charlotte the extent they have not already done so, information. We also examine the FSA’s Haddock on 020 7006 1294 or at should be acting now to develop and put in recent, and in some cases, ongoing, market [email protected] . place procedures to prevent bribery by abuse and insider dealing prosecutions. persons associated with them. In October 2010, the Takeover Panel This Corporate Update has been produced by The recent judicial decision in the case of published an initial response to its the London Corporate Practice and edited by David Pudge. For more information about the EDI v National Car Parks addresses the consultation on extensive potential changes Corporate Practice and the Editor, please see meaning of the phrase “reasonable to the regulation of takeover bids in the UK. page 2. If you would like more information endeavours”. We examine this decision The consultation was a result of political and about any of the topics covered in this and consider what practical steps media commentary surrounding the Kraft Corporate Update, or to provide feedback, companies can take to ensure that their Foods’ hostile takeover of Cadbury. In our please email your usual Clifford Chance contact ([email protected]) or commercial objectives are best achieved. Takeovers Update , we analyse the Panel’s contact David Pudge (details below). conclusions. As the 2011 AGM season gets into its Email: [email protected] stride, in our Corporate Governance Update In our Antitrust Update we focus on the Tel: +44 (0)20 7006 1537 we highlight the emerging trend of early OFT’s draft guidance on competition Do we have your correct address details? If you adoption of the recommendation in the UK compliance for directors. Directors will need would like to update your details, please email Corporate Governance Code for the annual to familiarise themselves with this guidance or telephone: re-election of directors. In addition, whilst in order to ensure that they are taking the publication of Lord Davies’ review on gender proper steps to promote competition Rachel Reeves diversity in the boardroom is not expected compliance within their organisation. Email: [email protected] Tel: +44 (0)20 7006 1571 until next month, we note his preliminary We will shortly be releasing details of our conclusions that quotas are not the answer Clifford Chance LLP, 10 Upper Bank Street, to ending the under-representation of Spring series of Webinars. These are live London, E14 5JJ women in the boardroom. webcasts in which leading practitioners from across the firm discuss a series of topics www.cliffordchance.com 2 Corporate Update January 2011

The Corporate Practice “It is a highly active and The Clifford Chance corporate practice The Editor handles some of the world’s largest and important practice on the most complex corporate transactions. global stage and advises on many of the international The practice combines global transaction capability with full service English, US and markets’ biggest and most civil law expertise in the key financial challenging deals.” centres across Europe, the Americas and Asia. More than 190 Corporate partners Corporate/M&A, work together across 20 countries and Chambers Global 2010 29* offices.

Clifford Chance has recently announced the opening of an office in Istanbul in David Pudge spring 2011. This new office underlines David specialises in corporate our commitment to the fast growing “The firm houses many finance, domestic and cross-border economy in Turkey and the wider South sector-specific experts and M&A, public takeovers, listed East European region. The Istanbul office company and general corporate will operate in conjunction with Yegin always retains international advisory work. Legal Consultancy, our well-respected service levels.” associate Turkish law firm. Corporate/M&A Recent major transactions include Apart from advising on mainstream M&A Chambers Global 2010 advising: International Power on its activity, the London corporate practice combination with GdF Suez’s includes leading specialist practices in international energy assets by private equity, equity listings, competition, means of reverse takeover; Man restructuring and commercial contracts. Group on its $1.6bn acquisition of US listed alternative investment Our sector teams include “This network remains manager GLG Partners Inc; and telecommunications media and technology, consumer goods and retail, among the weightiest in Vale on its $2.5bn acquisition of a healthcare, energy and infrastructure, Europe, delivering a firm- controlling interest in a joint venture with BSG Resources Limited to insurance, banks and financial wide standard of excellence. institutions, private equity and real estate. develop iron ore concessions in ...the group is still one of the Guinea, West Africa. Clients include FTSE and Global Fortune most successful in 500 companies, investment banks and establishing a localised David is a member of the City of financial institutions, private equity London Law Society’s Company providers and management teams, client base throughout its Law Committee and a contributing international partnerships and governments. European outposts.” author to “A Practitioner’s Guide to the City Code on Takeovers and To find out more about the corporate Corporate/M&A, practice at Clifford Chance, please visit Mergers”. Chambers Global 2010 our website at www.cliffordchance.com

* Clifford Chance has a co-operation agreement with Al-Jadaan Partners Law Firm in Riyadh and a “best friends” relationship with AZB & Partners in India and with Lakatos, Köves & Partners in Hungary.

Company Law Update an organisation, its activities, its Guidelines and by Transparency customers and the markets in which it International) in the form of board-level Government publishes draft operates. Organisations are advised to commitment and the appointment of a guidance for corporate anti- consider: senior manager with responsibility for anti-bribery efforts. bribery procedures n whether those undertaking the In our July 2010 Corporate Update we assessment are adequately skilled 3. Due diligence considered the implications of the and equipped to do so, or whether Commercial organisations should introduction of the new Bribery Act 2010 using external professionals may be develop due diligence policies and (the “ Act ”) which will come into force in appropriate; and procedures which apply to all parties to a April 2011. By way of reminder, the Act business relationship, including the n how best to inform the risk creates a new offence of failure by organisation’s supply chain, agents and management. The draft guidance commercial organisations to prevent intermediaries, all forms of joint venture suggests using both internal information bribery. The offence arises on the and similar relationships and all markets (e.g. annual audit reports, internal occurrence of bribery by a person in which the commercial organisation investigation reports, focus groups associated with the organisation, but is does business. The draft guidance lists and staff/client/customer complaints) subject to a defence of having examples of enquiries that might form and external information. (e.g. publicly established adequate procedures to part of this due diligence. available reports on bribery issues in prevent bribery. particular sectors or jurisdictions). Comment - Given that due diligence is On 14 September 2010, the UK Ministry likely to form the bedrock of an Comment - The draft guidance suggests of Justice published the eagerly awaited organisation’s practical steps to prevent that organisations should look at the level statutory guidance on what commercial bribery, organisations will want to review of internally reported instances of bribery organisations have to do to comply with their procedures to ensure that these or potential bribery in conjunction with the the Act and, in particular, to establish a enquiries are built into all relevant results of an external benchmarking defence of having “adequate procedures” dealings with third parties and that the exercise in order to determine how high in place to prevent bribery by persons enquiries extend more broadly to the the risks are, and where they present associated with the organisation. The environment in which they operate (or themselves. Organisations should ensure, guidance was published in draft for plan to operate), to the relevant law however, that assessments are carried consultation. It is fair to say that the relating to those operations, and to the out on a regular, ongoing basis and that guidance was not as precise as had been nature of the project undertaken. specific risk assessments are undertaken hoped and ambiguities remain in a for new business. 4. Clear, Practical and Accessible number of areas. Policies and Procedures 2. Top level commitment The consultation closed in November The draft guidance advises that an The draft guidance proposes that the 2010 and final guidance is expected to organisation’s anti-bribery policies and management of an organisation should be published at the end of January 2011. procedures should be clear, practical, issue a statement of commitment to accessible and enforceable, and that they The draft guidance sets out six principles, counter bribery in all parts of the should “take account of the roles of the as follows: organisation’s operation. An organisation whole work force from the owners or should also consider reflecting its board of directors to all employees, and 1. Risk Assessment commitment against bribery in its all people and entities over which the Organisations should regularly and management structure. commercial organisation has control”. A comprehensively assess the nature and corporate anti-bribery policy should Comment - “Tone from the top” is extent of both the sector and market include: risks relating to bribery to which they are universally recommended (e.g. by the exposed. The draft guidance accepts that OECD Guidelines for Multinational n a clear prohibition of all forms of whether risk assessment procedures will Enterprises, the FSA, the Serious Fraud bribery “including a strategy for be “adequate” will depend on the size of Office, the US Federal Sentencing building this prohibition into the

decision making processes of the organisation”; n guidance on political and charitable donations; n guidance on gifts, hospitality and promotional expenses (to ensure expenditure is “ethically sound and transparent”); n advice on relevant laws and regulations; n guidance on how to react to blackmail or extortion, including “a clear escalation process”; n guidance on whistle-blowing; and n information on anti-corruption policy; the draft guidance suggests that prevent bribery. Organisations must now programmes relevant to the sector. the test should be whether the expect courts (and regulators) to An organisation may, in addition, wish to organisation has “control”. scrutinise closely, not only their codes have a code of conduct, setting out and policies, but every aspect of the way 5. Effective Implementation expected standards of behaviour and in which such codes and policies are The draft guidance emphasises that forming part of each employee’s communicated, monitored and enforced. embedding anti-bribery policies and employment contract. Active implementation of anti-bribery rules procedures throughout the organisation will be as much the focus as the rules The draft guidance proposes that ensures that the development of policies themselves. financial and auditing controls, disciplinary and procedures “reflects the practical procedures, performance appraisals and business issues that an organisation’s 6. Monitoring and review selection criteria can act “as an effective management and workforce face when The draft guidance suggests larger bribery deterrent”, and recommends seeking to conduct business without organisations ensure they have financial procedures to deal with incidents of bribery”. monitoring, bribery reporting and incident bribery “in a prompt, consistent and management procedures, and that they Larger organisations may need to tailor appropriate manner”. may wish to disclose findings and training for different functions within the recommendations for improvement in the Comment - Most large commercial organisation, and should consider offering organisation’s Annual Report to organisations will have had anti-bribery or requiring the participation of business shareholders. Organisations should policies in place for some time, and may partners in anti-bribery training courses. ensure that their risk assessments and be in the process of revising them to The draft guidance also recommends anti-bribery policies and procedures are ensure compliance with the Act. While organisations communicate their anti- updated to take into account events such the above components are not bribery policies externally. as “government changes, corruption mandatory, they are already standard convictions, or negative press reports”, Comment - The need for internal elements of anti-bribery policies, with the as well as “external methods of issue systems and controls to be genuinely possible exception of information on identification and reporting as a result of effective has been spotlighted by recent sectoral programmes. A difficult question the statutory requirements applying to FSA decisions, such as in the case of can be who should be required to comply their supporting institutions, e.g. money Aon, which was penalised for a failure to with the policy e.g should subsidiaries, laundering regulations reporting by have systems and controls in place to contractors or agents be covered by the

accountants and solicitors”. Larger and proportionate” and where it For further information about the Act organisations or those with a higher risk “seeks to improve the image of a please refer to our various client briefings profile may also “wish to consider commercial organisation, better to available at whether to commission external present products and services, or http://www.cliffordchance.com verification or assurance of the establish cordial relations”. The draft /publicationviews.html effectiveness of anti-bribery policies, or to guidance suggests that hospitality or seek membership of one of the promotional expenditure given to a Distributable profits: ICAEW independently-verified anti-bribery code foreign public official will not be an publishes TECH 02/10 monitored by industrial sector “advantage” for the purposes of The Institute of Chartered Accountants in associations or multilateral bodies”. section 6 where the cost of such England and Wales (“ ICAEW ”) and the hospitality would otherwise be borne Institute of Chartered Accountants of Comment - Although the draft guidance by that official’s government. suggests public disclosure of the findings Scotland (“ ICAS ”) have issued Technical of internal monitoring, and says Comment - Until the law is clarified Release, TECH 02/10 containing an “[t]ransparency is an important anti- by case law in this area commercial expanded version of the guidance in bribery tool”, organisations which seek to organisations are advised to exercise TECH 01/09 on the determination of adopt this measure will need to ensure extreme caution when providing realised profits and losses in the context that policies on disclosure take account hospitality to foreign public officials, of distributions under the Companies Act of the legal risks that may arise, for even in cases which would appear to 2006 (“ CA 2006 ”). example defamation, breach of be covered by the final statement. TECH 02/10 includes some significant confidentiality, tipping off and loss of legal additional guidance which was originally privilege, as well as reputational and n Facilitation payments are likely to published in draft as TECH 03/09. Key commercial risk. trigger both the section 6 offence and the section 1 offence (offence of issues covered by the additional guidance Some specific issues bribing another person). include: In addition to the six principles, the draft n linked transactions - when a group guidance seeks to clarify the application Comment - This provides no comfort or series of transactions or of the law in certain difficult areas. for commercial organisations struggling with such issues. arrangements should be viewed as n Offset arrangements (where an artificial, linked or circular (and additional investment is offered or In deciding whether to prosecute, consequently viewed as a whole) in made by a tenderer for a contract) will prosecutors will consider whether there is assessing whether a company has a not be an offence under section 6 sufficient evidence to provide a realistic realised profit (of particular relevance (the foreign public official offence) prospect of a conviction, and, if so, where a company is attempting to where this is permitted or required by whether a prosecution is in the public create distributable reserves through local applicable law, but may interest. intra-group transactions); otherwise be at risk of prosecution. Comment - This simply re-states the n cash box structures - whether a Comment - The requirement that current test for prosecutors. The Director reserve arising on a cash box placing payments to foreign public officials be of Public Prosecutions and the Director of or other cash box share issue (and permitted or required under written the Serious Fraud Office are currently which is not recorded as share law is likely to lead to a greater need drawing up joint legal guidance for premium) is a realised/distributable for local legal opinions. prosecutors on the Act. This is expected profit; to be published early in 2011. n Hospitality and promotional n distributions in kind – how to apply expenditure “can be employed The draft guidance is available at s.846 CA 2006 (determination of improperly and illegally as a bribe”, http://www.justice.gov.uk/consultations amount) where the asset to which an but the draft guidance says it will be /docs/bribery-act-guidance- unrealised reserve relates has been permissible where it is “reasonable consultation1.pdf replaced by a different asset or where the distribution is of fungible assets

such as shares or loan notes received /174921/icaew_ga /Technical_and_ Objectives” and to “act in good faith in as consideration for the sale of Business_Topics/ Technical_releases/ respect of the same and in accordance another asset; Tech/Tech_02_10/pdf with this Agreement”. When the project was no longer considered viable because n distributions settled by set off – for Reasonable or best alternative car parking facilities in that part example, where a subsidiary wishes endeavours - is there a of town were not available, EDI served to make a distribution to its parent of difference? notice to NCP asking for their £5m back an unrealised profit and the (relying on a further contractual provision distribution would result in the The question of whether to give or accept for the return of this sum, to deal with the elimination or reduction of the asset an obligation to use “reasonable” or situation whereby planning consent or which represents the unrealised profit; “best” endeavours to achieve a particular similar could not be obtained). NCP objective or procure its achievement refused to make the repayment and n reduction of a liability – whether a commonly arises in practice in the argued that EDI were in breach of contract decrease in a liability assumed by a context of commercial transactions. because they had not used “all reasonable company from a third party for Commercial agreements reflect a wide endeavours” to pursue the development. consideration is a realised profit; spectrum of endeavours clauses (“best Findings - Relying on Rhodia n foreign currency share capital and endeavours”, “all reasonable endeavours” International Holdings Limited v use of presentation currencies – and “reasonable endeavours”). Huntsman International LLC [2007] 2 the effect of the share capital being In EDI Central Limited v National Car Lloyds Rep 325 , the judge held that the denominated in a currency other than Parks [2010] ScotCS CSOH_141 , the obligation to use “all reasonable the functional currency, and the effect Scottish Court of Session provided a endeavours” is a more onerous obligation of the whole of the accounts being useful insight into how the courts will than one simply to use “reasonable translated into a presentation interpret a contractual obligation to use endeavours”. The judge also noted that currency of free choice; “all reasonable endeavours”. The case “best endeavours” may not require much n cash pooling arrangements and highlights how ambiguous this phrase more effort than “all reasonable group treasury balances – can be and provides a useful review of endeavours” since “it is difficult to clarification of the circumstances in the recent case law on such obligations. conceive that an obligation to use “best which a group treasury balance will The case serves as a reminder that the endeavours” requires a party to take fall within the definition of “qualifying best way to achieve certainty when steps which are unreasonable”. consideration” and guidance on the drafting relevant clauses is to consider As held in CPC Group v Qatari Diar realisation of a profit where a balance carefully the extent of the parties’ Real Estate Investment Co. [2010] is constantly turning over even though obligations and to document specifically EWHC 1535 (Ch) , in order to determine a substantial core balance remains those actions that a party must take in what is encompassed by the obligation to outstanding; and using its reasonable or best endeavours. use “all reasonable endeavours”, the n reclassification of financial Facts - NCP entered into an agreement Court must consider whether there were instruments – whether, if an asset is with EDI under which EDI would pay £5m reasonable steps which could have been no longer readily convertible to cash, for the right to take forward a taken but were not taken. The party on this has an effect on the “realised” redevelopment of the Castle Terrace Park whom the obligation is placed will be status of prior fair value gains. operated by NCP. The contract included expected to explore all avenues an obligation on EDI to use “all reasonable reasonably open to it, and to explore English and Scottish Counsel have endeavours” to pursue the development them all to the extent reasonable, but the confirmed that the guidance in TECH “as would be expected of a normal party is neither obliged to disregard their 02/10 is consistent with the law at prudent commercial developer own commercial interests, nor required to 1 June 2010. experienced in developments of that continue trying to comply if it is clear that nature” and a requirement that NCP and all further efforts would be fruitless. TECH 02/10 is available at the developer “use all reasonable Where there are several obstacles to http://www.icaew.com/index.cfm/route endeavours to achieve the Main overcome, the party is not required to

continue using all reasonable efforts to overcome them all once it became clear that one of them is insurmountable.

“All reasonable endeavours” might require the affected party to inform the other party of any difficulties he is encountering and to see whether that party has a possible solution to any problems faced, but this will depend on the circumstances.

Considering the effect of a clause requiring “good faith”, the judge held that a duty to use good faith imposed the duty to observe reasonable commercial standards of fair dealing, faithfulness to the agreed common purpose, and consistency with the justified expectations of the other party. Combined with the duty to use “all reasonable endeavours”, the judge held that it requires the party requirement to include certain financial n the aggregate nominal value of shares “genuinely to do their best to achieve the information in the statement of capital in each class; and desired result and not merely to go (see Guidance on filing statements of through the motions”. capital in our January 2010 Corporate n the aggregate amount unpaid on shares in each class (whether on Judgment - : The judge ruled that EDI Update for further details). As a result, the account of nominal value of the had indeed used “all reasonable Government commenced a consultation shares or by way of premium). endeavours as would be expected of a on this issue in November 2009. normal prudent commercial developer” in In December 2010, the Government At the same time, the Government also pursuing the development. Even if EDI published details of its intention to intends to simplify the information had pressed harder in other areas, the simplify the financial information requirements on the rights attached to judge was satisfied that they would not requirements for all companies, in all shares which must currently be included have succeeded since the problem of statements of capital, except those in statements of capital. finding alternative car parking space could required on formation and in the Annual Whilst for many of the instances where a not be overcome. Any further efforts by Return, to require the following statement of capital is required, EDI would have been completely futile information: and so there was no obligation on them including the Annual Return, the to take those further actions. n the total number of shares of the Companies Act 2006 contains a power company; for the Secretary of State to amend the Government announces its requirements by statutory instrument, for intention to amend financial n the aggregate nominal value of those a number of others there is no such shares; power. The Government has concluded information requirements in that the changes to statements of statements of capital n the aggregate amount unpaid on capital should be introduced those shares (whether on account of Even prior to the full implementation of simultaneously to minimise confusion nominal value of the shares or by way the Companies Act 2006 on 1 October and intends to publish detailed of premium); 2009, it became apparent that a proposals as soon as a suitable legislative vehicle is available. significant number of companies would n the total number of shares in each have difficulty complying with the class;

In the meantime however, it intends to make an earlier change to the requirements in the statement of capital in the Annual Return, on the basis that the inclusion of a statement of capital in the Annual Return represents a significant proportion of the burden of the requirements on companies, and it is also the only instance in which a statement of capital is required when no change in share capital has taken place.

Accordingly, the Government proposes that the Annual Return statement of capital should include only the following information: n the total number of shares of the company and their aggregate nominal value; and n the total number of shares of each class and their aggregate nominal value.

This would have the result of removing entirely the requirement in the Annual The document draws together a number tax for the profits of foreign branches Return for information about voting rights of ongoing consultations including: of UK companies from 2011. Draft and the amounts paid/unpaid on shares. legislation was published on 9 This change is expected to be made in n the latest proposals in relation to December 2010. October 2011. Draft regulations for controlled foreign companies consultation are likely to be published in (“ CFCs ”) – there will be a full reform The document confirms, as already January 2011. of the CFC regime from 2012, with announced, that there will be a staged interim changes to be introduced in reduction in the main rate of Corporation For a copy of the Government’s press 2011. Draft legislation on the interim Tax from the current 28% rate to a 24% release see http://www.bis.gov.uk/ changes was published on 9 rate by financial year 2014. The consultations/companies-act-2006- December 2010. document also confirms that the statements-of-capital-consultation Government will not pursue significant n the taxation of intellectual property - Corporate tax reform - changes to the UK’s competitive regime the introduction of a preferential for interest deductibility, but will continue proposals to enhance UK regime for profits arising from patents to keep this area under review. tax competitiveness (“ the Patent Box ”) from 1 April 2013. The Government will also review For further details on the key points On 29 November 2010, HM Treasury and Research and Development tax arising from the document please see HMRC issued a consultative document credits. our client briefing Corporate Tax Reform . setting out a series of proposed reforms Details of how to access this briefing can to the corporate tax system over the next n the taxation of overseas branches - be found on the back page of this five years. an opt-in exemption from corporation Update.

Corporate capital gains warranties and indemnities in share New tax avoidance measures purchase agreements are drafted. announced Following a consultation earlier this year, draft legislation has been published in A further change will allow the A number of anti-avoidance measures relation to simplifying the taxation of Substantial Shareholding Exemption were announced on 6 December 2010. capital gains for groups of companies. to apply when a trading activity is Draft clauses have now been published The changes relate to three sets of anti- transferred to a newly incorporated on the following: avoidance provisions: group company, which is then sold out of a trading group. This will avoid n group mismatches n Degrouping charges – the most the need for complex structuring significant changes relate to the way n derecognition where a trading company wishes to that most corporate capital gains dispose of a business or part of a n disguised remuneration degrouping charges are computed. In business. Further technical changes most cases, instead of the have been made to the degrouping n functional currency degrouping charge arising in the charge, some of which have also company leaving the group (as is n VAT zero-rating: splitting of supplies been made to the Intangible Fixed currently the case) it will instead apply Assets tax code. so as to increase the proceeds of sale HM Treasury also announced that it will be setting up a study group to consider a for the shares being sold. Any n Capital losses after a change of general anti-avoidance rule (GAAR). shareholder reliefs that may apply to ownership – the amendments will the share disposal (such as the remove some existing restrictions on For further background on these changes Substantial Shareholdings Exemption) the use of capital losses within a please see our client briefing HM Treasury will apply to the degrouping charge, group of companies after an announces new Tax Avoidance assuming that the relevant conditions acquisition of a business. Measures . Details of how to access this are met. This is a welcome change. briefing can be found on the back page Unfortunately, these changes do not n Value shifting – the current value of this Corporate Update. appear to be being made to the shifting rules will be replaced with a similar degrouping rules in the new motive based anti-avoidance rule Intangible Fixed Assets tax code. that will target tax driven arrangements intended to reduce One consequence of this change is the value of a company before a that, where an exemption or relief is share sale. not available, the degrouping charge will now automatically arise on the These changes will generally apply to seller and not the target. This may disposals on or after Royal Assent of the have some effect on the way tax Finance Act 2011.

Corporate Governance Update Clifford Chance AGM and Governance Update 2011 published You will have already received our AGM and Governance Update 2011, published in December 2010. That Update is split into three key sections:

AGM Update n Reporting against the new UK Corporate Governance Code – we Practice Suggestions from the Higgs appearing in The Guardian that he is examine the emerging trend for early report addressing the roles of the unlikely to recommend the introduction of adoption of the Code. In particular, as chairman and non-executive mandatory female representation on the AGM season progresses, there is directors. We look at the draft boards. a clear move towards the early guidance published to date. The final adoption by issuers of the Code guidance is expected imminently; Evidence shows that women represented provision requiring annual re-election only 12% of all directors of FTSE 100 of all directors; n ICSA’s updated terms of reference companies in 2009. Concerns over the for board committees - ICSA has low proportion of women holding n Seeking shareholder authority to updated its existing terms of reference directorships prompted the Government hold general meetings on 14 day’s and also prepared new terms of to initiate a Call for Evidence on 8 notice – the IPCs raised concerns reference for risk committees. These October 2010. Lord Davies is expected about such resolutions during the have been developed in response to to publish his findings and 2010 AGM season. Whilst the the recommendation of the Walker recommendations in February 2011. position appears more settled now, Review that boards of FTSE 100 companies seeking an enabling banks and other financial institutions Whilst recognising that quotas had resolution of this type will need to should establish a risk committee proved successful in a number of consider the circumstances in which which is separate from their audit countries, Lord Davies indicated that they would consider holding a general committee; many of the women he has spoken to meeting on 14 days’ notice and were not in favour of them. Other options explain these in their AGM circular; Financial Reporting Update under consideration include the creation n The Update looks at the recent work of a best practice code for recruitment Governance Update of the FRC, FRRP and BIS in the area consultants tasked with board level and n Updated shareholder voting of financial reporting. other senior appointments and a focus guidelines – both PIRC and NAPF on increasing the transparency of the way have updated their voting guidelines to See the back cover of this Corporate in which board appointments are made bring them in line with the new UK Update for details of how to access our by the nominations committee. Corporate Governance Code. Given AGM and Governance Update 2011. the increased focus of the IPCs on For a copy of the full article in The good governance, we highlight the key Lord Davies indicates board Guardian, see http://www.guardian.co.uk changes for companies to be aware of; gender quota unlikely /commentisfree/2010/dec/31/women- equality-boardrooms n ICSA review of Higgs Guidance – Lord Davies, currently leading a review of ICSA has been tasked by the FRC to boardroom diversity on behalf of the review and update the Good Government, has indicated in an article

FRC publishes revised requirement for the audit committee to QCA publishes updated Guidance on Audit consider whether the skills and corporate governance experience of the audit firm make it “ the Committees most ” suitable supplier of the non-audit guidelines for smaller In July 2010, the FRC consulted on service (amended paragraph 4.29). quoted companies limited changes to its Guidance on Audit Further guidance is given regarding those In September 2010, the Quoted Committees (formerly known as the non-audit services which may require Companies Alliance ( QCA ) published Smith Guidance). This Guidance was last specific approval from the audit updated Corporate Governance updated in October 2008. The committee before they are contracted Guidelines for Smaller Quoted consultation paper set out proposed (paragraphs 4.30 – 4.32); Companies (“ Guidelines ”). The changes to the Guidance which were Guidelines supersede the QCA’s Disclosure of non-audit services – a intended to reinforce disclosure about the Corporate Governance Guidelines for AIM new paragraph 4.38 provides additional non-audit services provided by a Companies (February 2007) and guidance as to the substance of the company’s auditor, in order reduce the Guidance for Smaller Quoted Companies explanation to be included in the annual perceived threats to auditor objectivity – The Combined Code on Corporate report regarding how, if the auditor and independence arising from the Governance (August 2004). provision of such services. provides non-audit services, auditor objectivity and independence is The Guidelines have been updated to On 17 December 2010, the FRC safeguarded. incorporate recent revisions to the UK published an updated version of its Corporate Governance Code. The A copy of the updated Guidance on Audit Guidance on Audit Committees, along Guidelines combine the content of both Committees is available at with a summary of responses to its July the previous guidelines and have been http://www.frc.org.uk/images/uploaded/ consultation. The Guidance includes the revised to focus on the outcomes of documents/Guidance% following new provisions: corporate governance. 20on%20Audit%20Committees Internal audit – where the external %202010%20final1.pdf The Corporate Governance Guidelines for auditor is being considered to undertake AIM Companies (now superseded by the aspects of the internal audit, a FRC to begin review of Guidelines) already had strong support in recommendation that the audit Turnbull Guidance on risk the market and, in the July 2010 edition committee consider the effect this may and internal control of its newsletter, Inside AIM (Issue 2), the have on the effectiveness of the London Stock Exchange endorsed its On 22 December 2010, the FSA company’s overall arrangements for support for the Guidelines for AIM announced that it intends to bring internal control and investor perceptions Companies. in this regard (new paragraph 4.8); together company directors, investors and others in early 2011 to explore how The Guidelines have been prepared for Provision of non-audit services – in companies are responding to the new UK use by all UK smaller quoted companies, addition to developing the company Corporate Governance Code provision on including standard listed, AIM or PLUS- policy on the provision of non-audit boards’ responsibilities for risk. The FRC quoted companies. Whilst premium listed services by the auditor, the audit will consider whether the Turnbull companies must report compliance committee should keep such policy under Guidance on risk and internal control will against the UK Corporate Governance review. In determining whether the require amendment in light of these Code, the QCA believes that they may provision of such services impairs the meetings. still find the Guidelines of use, particularly external auditor’s independence or in explaining any areas of non For a copy of the FRC’s press release see objectivity, a new factor to consider has compliance. been added to the Guidance, namely a www.frc.org.uk /press/pub2479.html

Copies of the Guidelines can be Guidance and Principles for Unlisted purchased at http://www.theqca.com Companies in the UK. The Guidance is /shop/guides/30221/corporate- based on ecoDa’s guidance and governance-guidelines-for-smaller-quoted principles for unlisted companies in -companies-september-2010- Europe, but has been adapted to reflect downloadable-pdf.thtml UK company law and practice. The Guidance is intended to assist unlisted EcoDa and IoD publish companies that wish to establish a Corporate Governance corporate governance framework and Guidance and Principles for includes a set of 14 principles. Unlisted Companies in A copy of the guidance is available at the UK http://www.ecoda.org/docs /Corp%20Gov%20Guidance On 19 November 2010, the European %20and%20Principles% Confederation of Directors’ Associations 20for%20Unlisted%20Companies%20in (ecoDa ) and the Institute of Directors %20the%20UK_Final.pdf (IoD ) published Corporate Governance

Regulatory Update UKLA publishes List! (Issue no. 25) In July 2010, the UKLA published Issue no. 25 of its newsletter List!. The two articles of particular note relate to reverse takeovers and break fees:

Reverse takeovers: The UKLA has outlined two key changes to its approach on reverse takeovers. A reverse takeover is a transaction consisting of an acquisition by a listed issuer of a The changes in the UKLA’s approach are: business being acquired. Previously business, an unlisted company or assets the use of a topco structure avoided n A change to the minimum level of where any percentage ratio (applying the the risk of a listing suspension. There information required to be disclosed class tests set out in the Listing Rules) is is now a presumption that the issuer’s on the target business (where it is not 100% or more or which would result in a equity shares will be suspended until subject to a public disclosure regime) fundamental change in the business or in the earlier of the publication of a new to avoid a listing suspension. List! a change in board or voting control of the applicant prospectus or of the sets out details of the information listed issuer. minimum information referred to which must be provided by the issuer. above even where a topco structure The UKLA may suspend the listing of any The UKLA will also require a private is being used. securities if the smooth operation of the comfort letter from the sponsor market is, or may be, temporarily confirming that, in their opinion, the Break fees: The UKLA has considered jeopardised or it is necessary to protect announcement contains sufficient the application of the break fee provisions investors. There is a rebuttable information about the business to be in the Listing Rules to arrangements presumption that an issuer’s equity acquired, to provide a properly which are designed to serve a similar shares will be suspended on the informed basis for assessing the purpose to a conventional break fee. announcement or leak of a reverse issuer’s financial position. Note that in LR 10.2.7R provides some shareholder takeover, pending the publication by the the case of acquisitions by a cash control over the ability of issuers to enter issuer of sufficient information about the shell, or in situations where the into break fee and similar arrangements transaction and the target business that acquisition would fundamentally where the fees exceed 1% of the value of the UKLA is satisfied that the market can change the nature or strategic the issuer. The UKLA considers that a properly price the issue’s securities. The direction of the issuer, the approach break fee is “an obligation of an issuer for presumption can be rebutted if the UKLA described above would not apply. In payment of a sum to the counterparty to is satisfied that there is already sufficient those situations the UKLA would a proposed transaction which will be information in the market about the suspend the issuer’s equity shares triggered by, or linked to, the occurrence proposed transaction. until a prospectus on the new group has been published. of certain specified events which have the The rationale underlying this approach is effect of materially impeding a transaction that in the case of a reverse takeover, the n A change to the approach taken or causing the transaction to fail”. target business will form the majority of where an acquisition (which would A crucial part of this test is that the issuer the enlarged group, so the market needs otherwise be classified as a reverse must be obliged to make the payment to sufficient disclosure on the target takeover) is effected by the imposition the other party to the failed transaction. business to properly price the issuer’s of a new holding company (topco) by This test must be applied irrespective of securities. way of a scheme of arrangement above both the issuer and the the particular arrangement.

Any undertaking where the result of this and other Listing Rule underwriting fees have not been reduced consequences of breach have the effect changes, including the evolution of the commensurate to the risks assumed. of materially impeding a transaction or interpretation of the Prospectus Directive, Investors have also raised concerns causing it to fail and in relation to which a a number of the articles published in List! about the role played by leading banks as payment is made is therefore likely to be are now out of date. pure “financial” underwriters with an caught by LR 10.2.7R unless the fees are interest in the individual fund raising, capped below the 1% threshold (once Recognising this, the UKLA has rather than acting as a natural long-term aggregated with any other break fee or published a series of technical and owner of the shares. similar arrangements). By way of procedural updates, which bring together example, the UKLA considers that go those articles which are still valid together The Inquiry makes a number of shop and no shop undertakings would with some updated articles (including recommendations under three principal fall within LR 10.2.7R where they meet updated rule references where relevant) headings of transparency, competition the criteria set out above. under various key themes and topics. and shareholder involvement. These include the following: Other items covered by this edition of Whilst the information in these updates is List! include: not new (they consolidate existing Transparency relevant published guidance from n issuers should be required under the n the factors which the UKLA will previous editions of List!), having the Listing Rules to disclose in detail all consider in determining whether a guidance consolidated in this manner is fees paid, to whom and for what; new applicant for a premium listing undoubtedly useful. satisfies LR 6.1.4 – the requirement to n audit and risk committees should demonstrate that at least 75% of its The updates can be accessed at: incorporate details of the issue and business is supported by a three year http://www.fsa.gov.uk/Pages/Doing/ alternatives considered as part of their revenue earning record and that it is UKLA/ukla_publications/index.shtml governance reporting process; carrying on an independent business n issuers should be actively involved in as its main activity; Results of Rights Issue Fees Inquiry published compiling the proposed sub- n classifying joint venture arrangements; underwriting list; In December 2010, the Institutional n class tests – assessing whether an Investor Council published the results of Competition item is exceptional for the profits test; its Rights Issue Fees Inquiry. The Inquiry n companies should seek independent was set up to consider the practices and advice unless the executive team or n the advertisement provisions under pricing procedures adopted on rights board are particularly experienced in the Prospectus Directive; and issues. equity capital raising; n the venture capital trust board The Inquiry identified that both issuers n companies should, wherever possible, independence rules. and investors have concerns about the put the primary underwriting contract level of fees which issuers are paying for out to tender; UKLA consolidates List! rights issues, particularly to their banking n there should be no automatic newsletters into series of advisers, along with concerns regarding a assumption that issues should be fully lack of competitiveness and opacity Technical Updates underwritten; around what fees are actually paid, to There are currently 25 editions of List!, whom and what for. n institutional shareholders, advisers dating back from 2010 to 2003. Over and issuers should collectively that period, the listing regime has Notwithstanding that the level of risk lead evaluate the practicalities of sub- experienced considerable change, underwriters bear has fallen in the last underwriting offset and of including the implementation of the decade (with the possible exception of reintroducing tendering for sub- Prospectus Directive and the wider 2008 when the financial crisis was at its underwriting as a means of reducing review of the Listing Rules in 2005. As a peak), the inquiry concluded that issue costs; and

Shareholder involvement By way of recap, in June 2009, the FSA Effect of the 1 November 2010 changes: n institutional shareholders should introduced changes to DTR5 which consider appointing a named require disclosure of not only relevant n Nil paid rights –DTR 5.1 and DTR individual who can be taken “off holdings of voting rights attaching to 5.3 were amended to give effect to market” and speak to issuers and shares and shares underlying qualifying the views expressed by the FSA in their advisers with authority on financial instruments, but also holdings in their Q&A. matters such as support for a rights financial instruments that have a similar n TVR announcements –DTR 5.6 and issue, pricing and sub-underwriting. economic effect to qualifying financial DTR 5.8 were amended to require instruments, such as contracts for issuers to announce material changes The Office of Fair Trading are currently differences. At that time there was a lack in total voting rights as soon as undertaking a wider market study of equity of clarity surrounding the treatment of nil possible and in any event no later underwriting and associated services. paid rights under the extended disclosure than the end of the business day regime, in response to which the FSA For a copy of the Inquiry’s report see following the day on which the published revised Questions & Answers. http://www.iicouncil.org.uk/docs/ increase or decrease occurs. The rifireport.pdf In its Q&A, the FSA made clear its views materiality qualification is intended to that a right issued under a rights issue fell avoid issuers being required to make Prospectus and within the scope of the extended announcements on a regular basis as Transparency Directives – disclosure regime. However, the FSA a result of issuing share options etc. Amending Directive confirmed that it did not expect persons The requirement in DTR 5.6.1 to announce any change in voting rights published who had received rights under a rights issue to include those rights in the at the end of the month has been A Directive to amend the Prospectus calculation of their position in the issuer’s retained to ensure that any immaterial Directive and the Transparency Directive shares unless they actively acquire or changes are captured at that time. was published in the Official Journal of dispose of rights under the issue. In that the European Union on 11 December case, they will be required to include all Market Watch No. 37 - 2010. Member states have 18 months the rights, whether acquired actively or handling leaks of inside from 31 December 2010, the “effective passively, in calculating a change in their information date” of the Directive, to implement its position. The same analysis applies to a On 23 September 2010, the FSA provisions into domestic law. pro rata entitlement to acquire shares published Market Watch Newsletter Issue under an open offer (i.e. a person who Clifford Chance has prepared a client No. 37. This issue focused on leaks of maintained their proportionate holding by briefing Prospectus and Transparency inside information and set out the key virtue of inaction would not need to Directives – Amending Directive published findings of the FSA’s enquiries over the disclose the entitlement). which considers the changes to these previous three years into potential Directives and analyses how they might In addition, there have been long standing disclosures of inside information to the affect issuers of securities. See the back concerns that DTR 5.6.1 (which requires media ahead of announcements. The page of this Corporate Update for details issuers to announce changes to the total FSA’s monitoring work mainly highlighted of how to access this briefing. number of voting rights in issue at the end issues at regulated firms but the FSA of each calendar month ( TVR believes that issuers should consider Reminder of changes to announcement )) can lead to a misleading applying the recommendations and good DTR5 which took effect on impression of an issuer’s total voting rights, practice points as appropriate in order to 1 November 2010 where for example, a large secondary issue meet their obligations. is conducted early in the month, but no Readers are reminded that changes to Despite its focus on how firms could TVR announcement is required to be made Chapter 5 of the Disclosure and tighten their controls on handling inside until the end of the month. Transparency Rules (Vote Holder and information and the prevention of its Issuer Notification Rules) ( DTR5 ) took improper disclosure contrary to the effect from 1 November 2010. market abuse regime, the FSA noted that

the frequency of leaks does not appear information may already have been Market Watch Issue no. 37 is available at to have reduced. leaked should be escalated to http://www.fsa.gov.uk/pubs/newsletters compliance at the firm and the /mw_newsletter37.pdf Of particular concern is the suspected relevant issuer for consideration as to practice of core insiders strategically whether an immediate announcement FSA has power to leaking inside information. The FSA found is required under the relevant prosecute for money that media reports containing leaks were disclosure rules or under Rule 2 of the laundering offences often closely preceded by telephone Takeover Code. conversations between insiders with Neil Rollins, a former senior manager of senior roles on a corporate transaction n Handling leaks (paragraphs 6 to PM Onboard Limited, a waste industry and the journalists. The report 17): The FSA makes a number of firm, was found guilty in November 2010 acknowledges that some insiders may recommendations in relation to of five counts of insider dealing and four have been speaking to journalists to handling leaks and the conduct and counts of money laundering in a case confirm details the journalist already held, outcome of leak enquiries, including brought by the FSA after he traded on but notes that insiders who confirm liaison with the FSA Market Conduct the basis of information he obtained as a information put to them still potentially team and, where relevant, the result of his senior position and laundered commit market abuse as they are Takeover Panel. The FSA encourages the proceeds. disclosing inside information through leak enquiries to be issuer-led. affirmation. The report also highlights a Before Rollin’s trial his lawyers had tried number of areas of concern relating to n Training staff (paragraph 18): to argue that the FSA could not use the handling of inside information in the Relevant staff at regulated firms money-laundering charges in this case – context of media enquiries. should receive regular and structured the first time the regulator has exercised training on media and leak-handling such powers. The Supreme Court upheld Recommendations: The policies and the market abuse regime. the Court of Appeal’s decision ( R v recommendations set out in the Rollins [2010] UKSC 39) that the FSA n Regularly communicating with newsletter are directed at situations does have the power to prosecute for staff (paragraphs 19 to 21): The where a regulated or unregulated firm or money laundering offences and is not prohibition on leaks should be issuer is handling inside information. The limited in the exercise of its right to bring regularly communicated to staff to recommendations should not be treated private prosecutions for those criminal reinforce the message and establish as exhaustive and should be read in offences specifically identified in FSMA. conjunction with the good practice an anti-leaking culture. recommendations made in Market Watch The practical effect of this decision is n Establishing a strong reporting Issues No. 21 and No. 27. that, whilst a money laundering offence culture (paragraphs 22 to 24): charge can be derived from a charge of Regulated firms should establish a n Media policies (paragraphs 1 to 5): insider dealing, there is nothing to prevent separate reporting line for staff to The recommendations relate to the FSA from bringing money laundering raise concerns about leaks, concerns internal media policies and charges (or any other charges such as about leaks should be logged and procedures of regulated firms. It is fraud, as substantive offences) where that firms should monitor for an absence expected that in most cases where a is consistent with the FSA’s statutory of reporting. media enquiry is potentially related to functions. What this means in practice inside information, it will be solely n Disciplinary action (paragraph 25): will depend on what happens to the handled by the regulated firm’s media Staff must be clear that disciplinary FSA’s prosecution functions following the relations team. Where it is necessary action will follow for breach of internal creation of the new Consumer Protection to involve non-media relations policies in addition to any appropriate and Markets Authority (see A new personnel there are a number of FSA action. Senior management are approach for financial regulation: recommendations regarding the basis urged to adopt a robust stance to Government consultation and initial on which authorisation to create a culture that firmly and response below). In the meantime, communicate with the media may be actively discourages leaks. companies need to continue to maintain granted. Concerns that inside vigilance for money laundering.

Rollins’ sentencing and confiscation hearing will take place later this month. Shifting the burden of proof in market abuse cases: FSA consults on changes to Code of Market Conduct The FSA is consulting on amending the Code of Market Conduct following the European Court of Justice’s decision in the Spector case (Case C-45/08, Spector Photo Group NV, Chris Van Raemdonck v Commissie voor het Bank, Financie- en Assurantiewezen ). In that case, the ECJ found that the fact that a person who holds inside information trades in financial instruments to which that information relates implies that the person has ‘used that information’, but that is without prejudice Latest market abuse and were being bought and sold on their to the person’s rights of defence and, in insider dealing actions behalf. In order to defer clients having to particular, the right to rebut that pay for the shares, many of the trades presumption. FSA hands out ban and fine to an were rolled over from client to client individual for role in share ramping without being settled. The sales MAR 1.3.4E sets out the FSA’s opinion scheme - As referred to in our July 2010 campaign resulted in FEI share price that if the inside information was the Corporate Update, the FSA fined Simon being pushed up from 2.5p in May 2003 reason for, or a material influence on, the Eagle £2.8m and banned him from to a high of 11.75p in July 2004. decision to deal, this indicates that the working in the financial services industry person’s behaviour is “on the basis of” after he orchestrated a prolonged share Betton knew that there was a clear risk inside information. This evidential ramping scheme for his own financial that many clients had not authorised their provision suggests that evidence of a benefit. Graham Betton, who, together trading in FEI shares and that their person’s intention would be necessary, as with Simon Eagle, was the managing apparent demand for FEI shares was a separate element, to prove insider director of agency-only stockbroker SP not genuine. dealing. In light of the ECJ’s decision in Bell, has now been banned from working the Spector case, the FSA’s view is that in financial services by the FSA pursuant Trading in FEI shares was suspended in it is not necessary to provide evidence of to section 56 FSMA and the Upper July 2004 leaving over £9m of unsettled a person’s intention in order to prove Tribunal is now considering the fine that is trades which neither SP Bell nor its insider dealing. The FSA is therefore appropriate for his actions. clients could meet. SP Bell ceased proposing the deletion of MAR 1.3.4E. trading and went into administration. SP To create a market in the shares he was Bell has received a public censure and The consultation closed on seeking to sell, Betton instructed SP Bell would have been fined had it not gone 6 December 2010. staff to sell FEI shares to clients, many of into liquidation. whom were unaware that the shares

The Tribunal is considering the fine that it /2010/166.shtml and (PRA ): operational responsibility for deems appropriate for Betton’s actions http://www.fsa.gov.uk/pages/Library/ the prudential regulation of individual and will announce this at a later date. On Communication/PR/2010/169.shtml firms will be transferred from the FSA the grounds that artificially raising the to a new subsidiary of the Bank of price of the stock betrayed his duty to his The SEC’s announcement is available at England. The PRA will be responsible clients and was damaging to market http://www.sec.gov/news/press for the prudential regulation of all confidence, the FSA has prohibited /2010/2010-234.htm deposit-taking institutions, insurers Betton from working in the financial and investment banks; and FSA celebrates sixth successful services industry. The Tribunal prosecution for insider dealing - On commented that it would “ be wrong, n a new Consumer Protection and 10 January 2011, the FSA announced its damaging to market confidence and, Markets Authority ( CPMA ): this body most recent successful prosecution for indeed, unthinkable if Betton were will be responsible for the regulation insider dealing. Christian Littlewood, a allowed to continue operating ”. of conduct within the financial system, senior investment banker and his wife including the conduct of firms Parallel investigation into market Angie Littlewood, along with a family towards their retail customers and the abuse/insider dealing by FSA and friend, Helmy Omar Sa’id, have all conduct of participants in the SEC - On 25 November, the FSA pleaded guilty to eight counts of insider wholesale financial markets. The announced that it had charged five dealing. They are alleged to have made CPMA will have primary statutory individuals, including two former directors approximately £590,000 profit from the responsibility to promote confidence and one former senior trader of Blue trades. A full sentencing and confiscation in financial services and markets. Index Limited ( Blue Index ), a specialist hearing are scheduled for early Accordingly, the CPMA is to take on Contract for Difference brokerage, with February 2011. all the FSA’s responsibilities for 17 counts of insider dealing, contrary to conduct of business regulation and For a copy of the FSA’s press release see section 52 of the CJA, including in the supervision of firms. www.fsa.gov.uk/ pages/Library/ relation to dealing ahead of takeover Communication/PR /2011/002.shtml announcements. In addition, as part of possible wider reforms to tackle economic crime, the This announcement was followed, on 1 A new approach for Government stated its intention to consult December 2010, by further financial regulation: on whether to transfer responsibility for announcements from both the FSA and Government consultation prosecuting criminal offences involving the US Securities and Exchange and initial response insider dealing, other forms of market Commission (“ SEC ”). In a parallel abuse and criminal law breaches which investigation with the FSA, the SEC and In July 2010, the Government announced the FSA currently prosecutes to a new the US Department of Justice, with the launch of its consultation on the Economic Crime Agency ( ECA ). assistance from the FBI, have charged a implementation of reforms to financial former Deloitte Tax LLP partner and his regulation. The consultation outlined the The Government also sought views on wife, with insider trading in violation of US Government’s intention to overhaul the whether it should merge the functions of federal securities laws. Mr and Mrs UK system of financial regulation by the UKLA with other regulatory functions McClennan are charged with repeatedly disbanding the FSA and establishing a relating to companies and corporate leaking confidential merger and new system of more specialised and information, notably those of the Financial acquisition information to Mrs focused regulators: Reporting Council ( FRC ). The McClennan’s sister (the wife of the co- Government stated its belief that this n a new Financial Policy Committee owner of Blue Index and a defendent in would have the benefit of bringing the (FPC ): the FPC will be part of the the FSA action referred to above) in a UKLA’s regulation of primary market Bank of England and will have primary multi-million dollar insider trading scheme. activities alongside the FRC functions statutory responsibility for maintaining relating to company reporting, audit and For a copy of the FSA’s announcements financial stability; corporate governance. The consultation see http://www.fsa.gov.uk questioned whether the UKLA should be n a new Prudential Regulation Authority /pages/Library/Communication/PR merged with the FRC under the

Department for Business Innovation and The Government is continuing to develop Skills or whether it should remain within its plans for regulatory reform and intends the CPMA markets division. The to publish a further consultation consultation closed on 18 October 2010. document (including draft legislation) in early 2011. In November 2010, the Government published in its response document “ A For a copy of the response paper see new approach to financial regulation: http://intranet/etc/medialib/practices/ summary of consultation responses ” that London/finance/facm/topicguides2010 the UKLA will not be merged with the /uk_financial_supervisory/summaryof FRC. Instead, the UKLA will form a part condocresponses241110.Par.Single.File. of the FSA’s partial successor, the CPMA. dat/summaryofcondocresponses241110 With regard to its plans to transfer the .pdf FSA’s market abuse enforcement powers to a new ECA, the Government has now said that those powers will also fall under the remit of the CPMA.

Takeovers Update KEY PROPOSED CODE REFORMS Proposed changes to n General prohibition of break fees and other deal protection measures Takeover Code – increased n Requirement to identify bidders at the start of the offer period protection for target companies from hostile n Fixed put up or shut up (PUSU) deadline of 4 weeks from when potential bidder publicly named bidders In our July 2010 Corporate Update, we n Disclosure of bid-related fees in offer document and/or defence document discussed the Takeover Panel’s n Increased financial disclosure in offer documentation consultation on extensive potential changes to the regulation of takeover n Statements of bidder’s intentions in respect of target group will be expected to bids in the UK. The consultation paper hold true for at least 12 months (unless shorter period is stated) had outlined a wide range of possible changes to the UK takeover regime, in n Improved ability of employee representatives to make their views known on the response to political and media bid commentary surrounding Kraft Foods’ n Clarification regarding the matters which a target board should consider when hostile takeover of Cadbury. In October assessing an offer 2010, the Panel published an initial response to that consultation and over The proposed banning of break fees and the current time. These are listed in the the past few months it has become other deal protection measures means box on the following page. clearer how various issues and the package of proposed changes will uncertainties covered in that response affect not only hostile bids, but also Up-front identification of potential may take shape. agreed and competitive transactions. bidders and a fixed PUSU (put up or shut up) deadline of 4 weeks from Overview of the Panel’s conclusions The Code will also be amended to make when a potential bidder is publicly The Panel concluded that hostile bidders it clearer that target boards can take named - The new rules are expected to have been able to obtain a tactical factors other than the price of the offer require all potential bidders who have advantage over targets, which operates into consideration. approached the target to be named in to the detriment of the target company the announcement which starts the and its shareholders. It is proposed that Whilst no formal timetable for the offer period. the Code will be amended to redress the introduction of new rules has yet been balance in favour of target companies. set, it is our current understanding that Once a bidder has been publicly named the Panel expects to publish the next there would be a fixed 4 week PUSU The proposed reforms are more a consultation paper (which will set out the deadline, within which it must either pragmatic and politically expedient detailed drafting of the proposed Code announce an offer or announce that it will response to the post-Cadbury furore amendments) shortly, and that the new not be making an offer. This deadline will than a radical re-writing of the Code. The rules are likely to come into effect in late only be extendable with the consent of changes will, however, make hostile bids spring 2011, after a transitional period. the target. for UK companies more difficult. Although the Panel has rejected more Key proposed Code amendments These changes are designed to give draconian measures such as raising the The key proposed Code amendments are target companies greater protection acceptance threshold and summarised in the box above and are against “virtual bids” (where a potential disenfranchising shares bought during an discussed in further detail below. bidder announces that it is considering offer period, the changes will impact making an offer, but without committing “virtual bids” and require disclosure of Some of the more controversial itself to doing so). The Panel considers advisers’ fees upfront. suggestions set out in the original Panel that the changes will give target consultation are not being progressed at

companies more certainty over the length become currently market standard of the offer process and reduce the time undertakings from a target board to a SUGGESTIONS FROM THE INITIAL period during which they are effectively bidder to take certain actions to PANEL CONSULTATION PAPER “under siege”. implement a Code offer (or refrain from WHICH ARE NOT BEING taking actions which might arguably PROGRESSED AT The protection against extended “virtual facilitate a competing bid), generally THE CURRENT TIME bids” may raise challenges for bidders in contained in implementation agreements. n Increasing the acceptance terms of their ability to meet the 4 week It seems that undertakings not to actively condition above 50% announcement deadline and the solicit rival bidders will also be subject to obligation to post within a further 28 this prohibition. n Disenfranchising shares acquired days. This is particularly likely to be a during the offer period concern in the case of cross-border Going forward, only limited specific deals, or offers involving share-exchange undertakings from the target board are n Introducing bidder shareholder consideration or complex financing expected to be permitted (i.e. protections arrangements. confidentiality, non-solicitation of employees and customers, and n Introducing a private PUSU regime In light of the proposed changes, a provision of information for regulatory n Banning success fees bidder will have a strong incentive to approvals etc). avoid a leak of its interest in the target n Reducing the Rule 8 disclosure company, given the fixed 4 week time The Code will be amended to provide threshold from 1% to 0.5% period during which it would then need to that, for recommended bids implemented table a formal offer. However the changes by way of a scheme, a scheme timetable n Re-introducing the Substantial will also impact the time at which a must be agreed with the Panel in Acquisition Rules (SARs) potential bidder is likely to approach a advance and adhered to by the target. target, given the risk of being “outed” at The Panel considers that this will n Shortening the formal bid timetable an early stage, and the need to be well effectively remove the need for progressed with bid planning if a implementation agreements on schemes. n Requiring separate advice to target potentially hostile offer is in shareholders contemplation. As a result, we may well Deal protection measures will, however, n Requiring publication of offer see changing tactics on the part of be permitted where a target is put up for acceptances and scheme voting potential bidders in this regard. sale via a formal public auction process. decisions As a result of the above changes, there The general ban on break fees and other may be more instances of potential deal protection measures is to address a costs associated with due diligence and bidders preferring to agree with the Panel practice which the Panel considers has other bid and financing related expenses, to “down tools” to avoid being named become typical in the context of Code in circumstances where they can no (e.g. where they consider it unlikely that offers, for target boards to be presented longer rely on a break fee or other they will get the target board to agree to with (and put under considerable contractual provisions to protect them a process intended to lead to a firm pressure to accept) a standard “package” against being out of pocket if a intention to bid announcement within 4 of deal protection measures. The Panel competing bidder intervenes. weeks) and it is expected that the Panel considers that such packages may cause competing bidders to make an offer on may seek to formalise the current It is not clear to us that deal protection less favourable terms, or deter them “downing tools” regime. measures have in practice been a completely. significant impediment to rival bids but, General prohibition on break fees and going forward, bidders may need to other deal protection measures – this However, these changes may be a major focus more on other non-contractual deal would include a ban on not only break impediment for some types of buyers (in protections such as stakebuilding and and inducement fees, but also what have particular private equity buyers) who may be unwilling to commit to the upfront obtaining irrevocables. These non-

Intentions regarding target group employees, locations of business and fixed assets – the existing rules are regarded as requiring adequate disclosure but a new requirement for negative statements where the bidder has not formulated plans will be introduced. In addition, the Panel will require that statements in the offer documentation regarding a bidder’s intentions for the target group will be expected to hold true for at least 12 months from the bid becoming wholly unconditional (unless a shorter period is stated).

Improving the ability of employee representatives to make their views known on the bid – in particular the target will be required to inform employee representatives at the earliest opportunity of their right to circulate their opinion on the offer to shareholders and to pay the costs reasonably incurred by employee representatives in verifying information in their opinion. contractual deal protections are more any success, incentive or ratchet Clarification regarding the target effective in the context of a traditional mechanism will have to be disclosed. board’s considerations – it will be made contractual offer structure (as opposed to Although commercially sensitive clearer that a target board is able to take a takeover implemented by way of a information will not have to be disclosed, account of factors other than price when scheme of arrangement), and therefore it is not clear how this will work in giving its opinion on an offer and reaching we may once again see greater debate practice. Material changes to disclosed a conclusion as to whether it should around the relative merits of the use of amounts must be announced promptly. recommend. This largely reflects directors’ offers rather than schemes once these existing statutory duties and is unlikely to changes are implemented. Increased financial disclosure in offer documentation – there is to be a new make a significant difference in practice but Disclosure of bid-related fees – requirement to include pro forma addresses concerns raised by politicians estimated advisory fees are to be set out information on the combined group and the media that target boards do not in the offer document and/or defence where the offer is material to the bidder sufficiently consider the interests of other circular. Estimated aggregate fees for (note, there is currently no guidance on stakeholders such as employees. each party need to be disclosed (by what is material in this context), and The Panel response published in October category of adviser). Fees relating to details of changes to the ratings 2010 can be found at financing are to be disclosed separately. attributed to a bidder as a result of the http://www.thetakeoverpanel.org.uk/wp- offer will need to be set out. In addition, content/uploads/2009/12/2010-221.pdf Incentive and success-based fees will increased disclosure of bidder financial continue to be permitted within existing information (e.g. for cash bidders) will be parameters but the minimum and required and all financing agreements will maximum amounts payable as a result of need to be disclosed and put on display.

BIS Call for Evidence: A Long-Term Focus for Corporate Britain In October 2010, the Government published a Call for Evidence “A Long- Term Focus for Corporate Britain” as the first stage of a review into corporate governance and economic short-termism in the UK capital markets. This Call for Evidence follows on from the Government’s Command Paper and Vince Cable’s announcement in September 2010 that the Government would carry out a comprehensive review into corporate governance and economic short-termism, looking at the economic impact of takeovers, shareholder responsibility, corporate incentives and pay. The Government’s Call for Evidence follows the Panel’s consultation and response reviewing certain aspects of the regulation of takeover bids (discussed above).

The Government welcomes the Panel’s proposed changes to the Takeover Code relating to the conduct of bids and shareholders and wider stakeholders; against the bid, causing the offer to agrees with the Panel that some and fail in circumstances where the offeror rebalancing of the rules of the Takeover would have otherwise been unable to Code away from the bidder and in favour n whether bidder shareholders should lapse its offer. of the target and target shareholders is always be invited to vote on takeover necessary. bids. This particular issue raises a In addition, the Call for Evidence number of concerns, not least the considers Part 22 of the Companies Act In light of the Panel’s review, the suggestion that it would be 2006 (information about interests in a Government is looking into the economic appropriate or indeed feasible for UK company’s shares) and ss.215 – 222 CA case, and the corporate law framework, laws to seek to regulate the 2006 (payments for loss of office). for takeovers. In particular, it would like to protections afforded to a non-UK consider: offeror’s shareholders simply because Part 22 CA 2006 (information about the offeror was making a bid for a interests in a company’s shares): The n whether on balance, the economic company to which the Takeover Code Call for Evidence comments that effective framework for takeovers is likely to applies. In addition, any such communication between companies and improve the long-term requirement could reduce the shareholders demands that directors competitiveness of UK companies; certainty of the offer being concluded, know the identity of the owners of their company. Under Part 22 of the CA 2006, n whether boards consider sufficiently possibly to the detriment of the boards of public companies can require carefully the long-term implications of offeree’s shareholders. In a situation disclosure of information about the takeover bids, and whether they where market conditions changed beneficial owners of a company’s shares. communicate these effectively to after an offer had commenced, the offerors’ shareholders could vote Many public companies make use of this

in order to enhance investor relations and transparency to any material extent. shareholders more direct involvement in to monitor potential changes in the profile deciding the amount of payments to of its shareholder base. It has been Payments for loss of office (ss.215 – directors for loss of office, particularly if suggested that better overall 222 CA 2006): The CA 2006 requires they consider they are not warranted on transparency would be achieved if this specific prior shareholder approval of the basis of a particular director’s information were required of all investors payments to directors for loss of office performance. There are, however, and not disclosed only at the instigation (so-called “golden parachutes”). These significant practical difficulties to this of the company. It is not clear whether are payments made to directors to proposal, not least the fact that an the Government is going to take this compensate them for ceasing to be a individual considering employment with a suggestion any further. Given UK publicly director, or losing any other office or company is extremely unlikely to agree to traded companies, which are subject to employment with the company (including such a public process, particularly where the Disclosure Rules and Transparency as the result of a takeover). However, he or she is still employed elsewhere. Rules, are notified of the identity of 3%+ shareholder approval is not required if the controllers of voting rights and any further payment is made under an existing The Call for Evidence can be downloaded movements through a percentage point, contractual entitlement (which is almost at http://bis.gov.uk/Consultations/a-long- it is unclear to what extent any change to always the case in practice and which term-focus-for-corporate-britain the Part 22 regime (with the related costs does not require shareholder approval). of compliance for investors) will increase The Government believes there is a case for removing this exception to give

Antitrust Update OFT draft guidance on competition compliance for directors As we reported in our July 2010 edition of Corporate Update, last year the Office of Fair Trading (“ OFT ”) announced a shift in policy towards greater use of its powers to seek disqualification of directors of companies that have committed breaches of the competition rules (i.e. the prohibitions on anticompetitive agreements and abuse of a dominant position that are contained in the Competition Act 1998 and the Treaty on the Functioning of the EU (“ TFEU ”)). This includes an increased risk of disqualification in circumstances in which a director was not aware of infringing the OFT to have a level of understanding or potential effect on competition). conduct carried out by employees of his that is appropriate for their position and However, it believes that directors ought or her company, but – in the eyes of the the nature of their companies’ activities, to have sufficient understanding of the OFT – should have been aware of it. and to update and refresh their principles of competition law to recognise knowledge on an ongoing basis. At risks, and to realise when to make further This prompted a number of calls for minimum, they must: enquiries, to seek legal advice, or to take greater guidance from the OFT regarding steps to address risks or breaches that the steps that it considers directors n be aware of the importance of are identified. should take to promote competition competition compliance and the compliance within their companies, and possible legal consequences of a In particular: to uncover potential breaches of the breach, both for them and for their competition rules. Consequently, the OFT company; n directors with responsibility for has issued some draft guidance for competition compliance will be directors for consultation with a request n understand the “hard core” breaches expected to have a sufficient grasp of for comments by 21 January 2011. It is of competition law, i.e. price-fixing, the principles of competition law to also conducting a separate consultation market sharing, bid-rigging, market identify and assess the types of risk on draft compliance guidance for sharing (including of customers or to which the company is exposed, businesses. territories); agreements between rivals and to take steps to address those to limit production; sharing certain risks; The draft guidance for directors makes it categories of commercially sensitive clear that the OFT’s expectations of information; and resale price n directors with responsibility for the directors’ knowledge of the law, and the maintenance. company’s dealings with competitors steps that they ought reasonably to take should be aware of the law relating to to prevent or detect infringements, will The OFT recognises that it would be indirect exchanges (e.g. via a supplier) both depend on the nature of their role. disproportionate to expect all directors to of commercially sensitive information understand the detailed application of between competitors, often referred What are directors expected to know competition law to other types of to as “hub and spoke” or “ABC” of competition law? The draft guidance infringement (and, in particular, those the information exchanges; states that all directors are expected by legality of which depends on their actual

n directors with responsibility for For directors with direct or indirect responsible for espousing an commercial contracts should responsibility for a particular area of activity unambiguous commitment to competition understand that certain types of (e.g. for sales staff or setting prices), the compliance, and those tasked with contractual arrangements carry OFT may take the view that they “ ought to specific compliance functions or greater competition law risks, such as have known ” of infringing conduct if decisions will be treated in the same way joint ventures with rivals, long term sufficient evidence of that conduct was as any other director with responsibility exclusive supply agreements (and available to them (or should have been for executive decisions. In particular, they agreements that have the effect of available). Such evidence could include, are not expected to take any additional creating or inducing exclusivity), terms for example, unexpected price increases, steps to detect possible breaches of restricting another party’s pricing abnormal commercial contracts, staff in competition law. freedom, non-compete obligations or possession of information about a rival’s terms obliging a buyer to purchase all prices or strategy, attendance by Non-executive directors are not expected (or substantially all) of its requirements employees of meetings with competitors, to have an intimate knowledge of the from the company; selective or unexplained travel or other business company’s day-to-day activities, but are distribution arrangements; and expenses. expected to challenge decisions of “standardisation” agreements executive directors and, in particular, to between competitors on industry or Those with specific management ask questions to ensure that appropriate technology standards; and responsibilities are expected to have a compliance methods have been adopted greater awareness of any anticompetitive to prevent and detect breaches. In n directors with responsibility for behaviour within their business unit. particular, they should satisfy themselves commercial strategy or market Consequently, the draft guidance states that the company’s executive directors conduct should appreciate whether that “ the OFT will generally take the view have demonstrated a commitment to the business has market power and that directors in smaller organisations competition law compliance, taken therefore whether it is appropriate to who are personally involved in day-to-day appropriate steps to identify and assess consider whether the rules on abuse business ought to be aware of any the company’s exposure to competition of a dominant position might apply. If anticompetitive behaviour which is law risks, taken appropriate steps to so, directors should understand that occurring ”. For directors in larger mitigate those risks, including ensuring additional compliance steps are organisations having overall responsibility that training is provided to staff in higher required, and that it is likely to be for a business area, but no immediate risk positions, and reviewed the necessary to seek legal advice when management responsibility, the OFT will company’s exposure to risk and considering new pricing terms, or any consider what evidence that director compliance measures on a regular basis. conduct or commercial strategy actually saw (or was presented with), and which could exclude competitors from what he or she should have seen, having Where non-executive directors are the market. made reasonable enquiries. In particular, involved in board level decisions to the draft guidance states that the OFT will approve commercial activities (for What are directors expected to do to assess whether the information was of example, a decision to enter into a new prevent or detect breaches? For all the type that would usually be made joint venture), they are also expected to directors, evidence of anticompetitive available to a director in that position satisfy themselves that the proposal has, intention or secretive behaviour will be and/or whether the information would where appropriate, been reviewed for viewed as indicating that a director was have come to light if the company had an compliance with competition law. aware that his or her actions, or those of effective compliance programme. The Comment - The guidance is still in draft others, might infringe competition law OFT does not, however, expect directors form and it is hoped that certain points and that steps ought to have been taken to be aware of information in will be clearer in the final version. It is to address this. The draft guidance also circumstances where an appropriate nevertheless a good indication of the high sets out an “ overriding principle… that a compliance programme and culture are in standards to which the OFT intends to director cannot be absolved from the place, but information was deliberately hold company directors. It also serves to responsibility to keep himself informed ”. concealed from them. Beyond that, expectations vary underline the importance of a well according to the role of the director. All directors are, in the OFT’s eyes, designed and rigorously implemented

competition compliance programme and a commitment to preventing and deterring breaches at all levels of business.

The draft guidance is available at: http://www.oft.gov.uk/shared_oft /consultations/OFT1277.pdf Court of Appeal strikes out Safeway’s claim to recover a cartel fine from former directors and employees The Court of Appeal has confirmed that an undertaking that infringes provisions of the Competition Act 1998 relating to anticompetitive activity cannot recover any penalty imposed on it from its directors or employees.

On 21 December 2010, the Court of In September 2008, Safeway brought the fined for breaches of the Competition Act Appeal handed down its judgment in claim against eleven of its former should not be allowed to pass on the Safeway v Twigger [2010] EWCA Civ directors and employees to recover the amount of the fine (by effectively claiming 1472 , reversing the first instance decision amount of the fine and the costs it had under a D&O insurance policy). and holding that the case brought by incurred during the course of the OFT’s Safeway against eleven of its former investigation. Safeway alleged that the Although unsuccessful at first instance, directors and employees to recover a directors and employees, in causing the Court of Appeal found in favour of the £10.7 million fine imposed on it by the Safeway to breach the Competition Act, defendants and, in a unanimous OFT for breaches of competition law had acted in breach of their employment judgment, struck out Safeway’s claim. should be struck out. contracts and/or fiduciary duties, and/or Application of the ex turpi causa had been negligent. It was recognised by Background - In 2007, the OFT maxim - Both at first instance and on the courts at first instance and on appeal announced that it proposed to impose appeal, the courts held that that Safeway’s motivation was to recoup fines on a number of supermarkets and contraventions of the Competition Act the fine and costs from its directors and dairies that it alleged had engaged in were sufficiently serious to engage the officers (D&O) insurance policy. anticompetitive exchanges of pricing maxim ex turpi causa, and a penalty information regarding the prices of milk, The defendants applied for the claim to imposed under section 36 of the butter and cheese in 2002-2003. Several be struck out or for summary judgment in Competition Act 1998 was akin to a fine. parties to the investigation, including their favour, on the basis of the legal This follows a number of earlier cases in Safeway (which had been taken over by maxim ex turpi causa non oritur action which the quasi-criminal character of Morrisons in 2004), entered into “early which prevents a claimant from competition law infringements has been resolution agreements” (ERAs) with the recovering for damage arising from his recognised. OFT – a form of settlement, under which own criminal act. It was assumed for the The Court of Appeal held that Safeway they admitted liability and agreed to pay a purposes of the strike-out application that was personally (not vicariously) liable for reduced penalty. The ERA entered into the defendants were responsible for the the penalty imposed on it. The court between Safeway and the OFT provided alleged breach. At first instance, the stated that a penalty is imposed on an for Safeway to pay a fine of £10.7 million. defendants also argued that as a matter undertaking under the Competition Act of broader public policy an undertaking

where the undertaking itself has The court’s approach should be overall levels of concentration and cross- intentionally or negligently committed an welcomed by companies and competition ownership in the market across infringement of the Act. In those regulators as good news for leniency infrastructure as a whole. circumstances, the court held, it is the programmes. For companies , individuals undertaking which is personally at fault will surely be more willing to report (or In particular, the OFT concluded that no (there can be no one else who is) and, confess to) a suspected infringement if particular infrastructure ownership model once the ex turpi causa maxim is they are not at risk of being sued by their could be singled out as providing better engaged, the undertaking cannot say that employer for the amount of a fine that or worse outcomes for consumers, as, it was not personally at fault in order to may ultimately be imposed. The OFT overall, there is more variation in defeat the application of the maxim. should also be glad of this outcome, as a performance within than between Whether or not the defendants were judgment in Safeway’s favour would have different ownership types, and there was Safeway’s “directing mind and will” – had a chilling effect on the OFT’s leniency conflicting evidence regarding the relative such that their actions could be viewed programme in circumstances where benefits of ‘not for profit’ or non- as directly attributable to the company - individuals are reluctant to speak out, conventional companies (including public was not, the Court of Appeal said, sources of information dry up and sector operators). Moreover, the increase relevant. On the contrary, the court held companies’ ability to blow the whistle on in infrastructure asset prices over time (at that if it were the law that the ex turpi a suspected infringement is hampered. least until the recent economic downturn) causa maxim could only be used against The criminal cartel offence and the OFT’s could not, in the OFT’s view, be attributed a company if the act was specifically powers to disqualify directors already to ownership types, financing models or authorised by the whole Board of present serious disincentives to inflated asset valuations by infrastructure Directors or the shareholders in a general individuals who might otherwise infringe funds, but was instead likely to reflect the meeting, there would be little scope for competition law (or cause their employer underlying market power of the assets the maxim to be used at all in a corporate to do so). themselves. As regards foreign context. investment, the OFT considered this to Clifford Chance acted for the 8th have a positive effect on capital market D&O insurance - Pill LJ noted that the Defendant. The claim against the 8th competition, and that increased potential policy of the Competition Act attributes Defendant was discontinued shortly for takeovers can place an important liability to undertakings and it is for the before the appeal hearing. discipline on managers and costs. undertakings to organise their affairs in such a way as to prevent infringements of OFT Stock-take of The OFT’s enforcement policy - While the Act. That policy would be undermined Infrastructure Ownership many infrastructure markets have a degree of market power, even where if undertakings were able to pass on the and Control liability to their employees, or the there is no direct price regulation, the employees’ D&O insurers. The OFT has reported on its investigation OFT highlighted its desire not to deter into UK infrastructure markets – including investment through excessive Comment - This is an important energy, water, waste, communications intervention. The report sets out the judgment for companies found to have and transport – and the impact of framework that the OFT will follow in infringed the competition rules who were different forms of ownership on order to assess whether intervention in an considering bringing a claim against their competition in those markets. The OFT’s infrastructure market is desirable. While directors and employees in an effort to hope is that this study will provide greater this largely reflects the factors that the pass on to D&O insurers the costs of the certainty to investors about when and OFT will consider in any case (and not OFT investigation and the penalty how competition policy might apply in just those involving infrastructure), there is imposed. The Court of Appeal’s judgment infrastructure markets and procurements an important policy statement that the is unequivocal in rejecting such an for work on infrastructure projects. OFT will take into account the source of approach. The financial consequences of an infrastructure owner’s market power. breaching the competition rules therefore A clean bill of health - Importantly, the In particular, the OFT will be markedly falls squarely on the company found to OFT found no evidence that the merger less inclined to intervene to address be in breach – and no-one else. regime is not operating as intended, and substantial market power that has arisen had no “immediate” concerns about due to innovation, as this could risk

deterring future innovation, or when it results from a process of competition for the market (such as competition for a contract, in which bidders take on some degree of risk about future returns), as this could risk chilling the market and undermining the bidding process.

Where the OFT identifies a problem, it will only act if a proportionate and effective remedy is likely to be available (which will not always be the case, given the desirability of maintaining the economies of scale associated with a particular infrastructure asset). The report’s case studies suggest that a focus of remedies in infrastructure markets will often be the removal of government-created entry barriers, such as those created by the planning process, or promoting a more effective process of competition for the market, through well designed procurements.

Comment - The outcome of the report is broadly positive for infrastructure operators and for infrastructure funds in particular. In particular, it finds no provision of retail banking services to could constrain certain banks from evidence to support accusations that are both individual consumers and Small and operating normally; commonly levelled at private Medium Sized Enterprises (“ SMEs ”) n there are no significant barriers to exit; infrastructure investors - such as within the UK. and unwarranted inflation of asset values or In its review, the OFT considered that: under-investment associated with n there may be significant challenges to particular ownership models – while n regulatory requirements are not a new entrants in attracting customers identifying benefits arising from major barrier. The process of and achieving scale and expanding foreign investment and competition in obtaining FSA authorisation to accept market share. The OFT considered capital markets. deposits can be problematic, but this the chief cause of this to be customer procedure has just been revised inertia, but high levels of brand loyalty The report and the associated data and which should lead to improvements; and preferences for providers with a case studies are available at: branch network may also form http://www.oft.gov.uk/OFTwork/markets- n there are no significant barriers to significant barriers to entry that can work/infrastructure-ownership/ accessing essential inputs for retail deter potential new entrants. banking services. However, the OFT OFT publishes review of noted that it can be difficult for new Comment - Although the OFT has not barriers to entry in retail entrants to lend to the smallest SMEs issued any recommendations following banking as there is less credit and risk the publication of its review, its findings information in existence about these can be expected to inform future The OFT has published its review of entities. The OFT also recognised that regulation of the sector. The OFT has barriers to entry, expansion and exit in the the recent lack of interbank funding stated that a copy of the review will be

passed to the Independent Commission In April 2008, the General Court upheld Google: Commission on Banking, which is examining issues of the Commission’s decision. On 14 investigates alleged abuse competition and stability in the banking October 2010, the ECJ decided that the market, and may be useful to both the General Court had not committed an error of dominance FSA and Department for Business, of law in dismissing DT’s appeal against The Commission has initiated a formal Innovation and Skills. The OFT has stated the Commission’s decision. antitrust case against Google Inc. that it hopes the review will contribute to (“ Google ”) to investigate alleged abuses the wider debate on the future of banking The ECJ decided that: of a dominant position in online search. in the UK. n although wholesale prices for access On 26 July 2010, the Commission The OFT’s report is available at: to the local loop were approved by announced the initiation of a formal http://www.oft.gov.uk/shared_oft the national regulator, the General investigation of whether Google’s conduct /personal-current-accounts/oft1282 . Court was entitled to find that the was compatible with Article 102 TFEU. margin squeeze was attributable to This follows a preliminary inquiry, Deutsche Telekom margin DT on the basis that DT had sufficient launched on 24 February 2010, in squeeze appeal dismissed scope to adjust its retail prices; response to three complaints that Google gave preferential treatment to the ranking The European Court of Justice (the n the General Court correctly held that of its own services in unpaid search “ECJ ”) has dismissed an appeal from the margin squeeze was capable of results (also referred to as “natural”, Deutsche Telekom (“ DT ”) against a fine constituting an abuse of dominance “organic” or “algorithmic” results) as well imposed by the European Commission under Article 102 TFEU, and that as sponsored links (i.e., the paid-for third (the “ Commission ”) for abuse of there was no need to demonstrate party advertisements). dominance by way of “margin squeeze”. that the wholesale or retail prices were in themselves abusive; and However, the Commission’s formal Background - In 1997, the incumbent investigation will cover a wider scope of telecoms operator DT was required to n a pricing practice such as that issues than those raised in the provide fully unbundled wholesale adopted by DT has an exclusionary complaints it received initially and, more access to the local network (local loop) effect on competitors who are at least particularly, whether Google has abused to competitors on the retail market. DT’s as efficient by squeezing their margins a dominant market position in online wholesale prices were subject to and is capable of making market search by allegedly: approval by the telecoms regulator and entry more difficult or impossible for some of its retail prices were subject to those competitors to the detriment of n demoting, in unpaid search results price caps. However, DT had some consumers. The General Court and rankings, competing service providers discretion in setting its prices, in Commission were entitled to rely on specialised in specific online content, particular its price for ADSL broadband an “as-efficient competitor” test which e.g. price comparisons (“vertical services. In 1999, the Commission considered only a dominant search services”); received complaints from DT’s company’s charges and costs instead competitors in relation to DT’s pricing of the particular situation of its n lowering the ‘Quality Score’ for practices. competitors. sponsored links to competing vertical search services, whilst according Facts - In May 2003, the Commission Comment - The ECJ’s judgment preferential placements to Google’s fined DT EUR 12.6 million for abuse of a endorses the as-efficient competitor test own vertical search services; dominant position. The Commission contained in the Commission’s Guidelines considered that DT had charged its on Article 102 and confirms that the n imposing exclusivity obligations on competitors higher prices for access to the costs of a dominant firm, not those of its advertising partners, and computer local loop than DT’s retail prices, which competitors, are an appropriate measure and software vendors, with the aim of resulted in a margin squeeze discouraging for assessing exclusionary pricing excluding competing search tools; new competitors from entering the market. practices. and/or

n imposing restrictions on the transfer of antitrust authorities have both been settled Google, Foundem and several industry online ad campaign data to other recently by Google – and Google may yet alliances have already made numerous online advertising platforms. choose to settle the case brought by the public pronouncements on the allegations. Commission, if only to avoid a formal This is perhaps unusual in the context of The Commission stressed that the finding that it is dominant in any market. Article 102 investigations by the initiation of proceedings does not imply The case continues a line of technology Commission, but appears to be a feature proof of any infringement. sector cases recently initiated by the in common with the formal investigations Commission under Article 102 – such as that the Commission launched earlier this Comment - The Commission is believed investigations into IBM, Intel, Rambus and year against IBM. to be the third antitrust authority to have Qualcomm and several cases against begun formally investigating Google’s Microsoft – of which an increasing number conduct. Cases launched in the past two are settled. years by France and Italy’s national 32 Corporate Update January 2011

The Corporate Update series In addition to this bi-annual edition, we publish shorter ad hoc briefings as part of the Corporate Update series throughout the year. Copies are available to download from www.cliffordchance.com/publicationviews.html

Recent briefings include: • AGM and Corporate Governance Update 2011 December 2010 • Changes to DTR5 taking effect on 1 November 2010 October 2010 • Stopping and fixing a leak: Market Watch 37 October 2010 • Proposed changes to UK Takeover Code October 2010 • The hunt for a red October October 2010 • Changes to issuer liability regime taking effect on 1 October 2010 September 2010 • Corporate Update July 2010 • Publication of FRC’s Stewardship Code July 2010 • Pensions – first contribution notice/historic liabilities July 2010 • OFT to probe equity underwriting fees June 2010 • Publication of the new UK Corporate Governance Code (formerly the Combined Code) June 2010 • Possible Review of the Regulation of UK Takeover Bids June 2010

Other relevant publications A wide range of other Clifford Chance publications are available to download from http://www.cliffordchance.com/publicationviews.html .

Examples include: • Prospectus and Transparency Directives – Amending Directive published December 2010 • HM Treasury announces new Tax Avoidance Measures December 2010 • New EU rules for co operation between competitors December 2010 • The SEC grants a temporary reprieve for certain non-US transactions from compliance with Rule 17g-5(a)(3) November 2010 • New horizons for structured debt transactions November 2010 • Interim Changes to the CRC Energy Efficiency Scheme November 2010 • Business and Human Rights – Update November 2010 • Corporate Tax Reform November 2010 • Fly me to the Courtroom November 2010 • AXA UK PLC ECJ case C-175/09 – Impact in Luxembourg and the UK November 2010 • The changing role and responsibilities of the trustee in capital markets transactions November 2010 • Employee Benefits Newsletter October 2010 November 2010 • Contentious Commentary: A review for litigators November 2010 • Remuneration Reform in the Financial Services Sector: New Disclosure Rules November 2010 • The changing contractual landscape November 2010 • ECJ rejects legal professional privilege for corporate counsel in EU investigations September 2010

© Clifford Chance LLP, January 2011 This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other Clifford Chance LLP is a limited liability partnership registered in England and advice. Wales under number OC323571. If you do not wish to receive further information from Clifford Chance about events or Registered office: 10 Upper Bank Street, London, E14 5JJ. legal developments which we believe may be of interest to you, please either send an email to [email protected] or contact our database administrator by We use the word ‘partner’ to refer to a member of Clifford Chance LLP, or an post at Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf, London E14 5JJ. employee or consultant with equivalent standing and qualifications.

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