No. 15, Third Quarter 2008 SmartCapital European Edition—Current Legal Issues for Investors in European Businesses

Shariah-Compliant Funds By Kai Schneider

As a result of record-high oil prices, the Middle East is experiencing unprecedented financial liquidity. This has fueled a boom in the demand for Islamic financial products, including Shariah-compliant private equity funds. Kai Schneider Associate The Islamic finance market is currently hedge funds, and their operations. Corporate Department estimated to be around US $700 billion globally and Muslims, who now The Basics number close to 1.3 billion worldwide, Many Muslim investors conduct their are also increasingly seeking commercial activities in accordance religiously acceptable products in with an Islamic body of law called which to invest. Conventional private Shariah. Shariah, or literally “the equity fund managers have the way,” is based on the Quran (the opportunity to access this growing religious text in Islam), hadith (the investor base by offering fund sayings and actions of the Prophet products that comply with Islamic Mohammed (PBUH)), ijma (the principles. consensus of Shariah scholars), qiyas (reasoning by analogy) and This article provides a brief centuries of interpretation and introduction to the basics of Shariah precedent. Shariah is also supported and the related investment restrictions by other principles advocating risk and structuring issues raised by a sharing, individual rights and duties, private equity fund. It focuses on property rights and the sanctity of private equity funds and does not contracts. Generally, in the context specifically address the Shariah issues of commercial activities, Shariah raised by other types of funds, such as prohibits riba (the collection and

Shariah-Compliant Private Equity Funds...... 1 Inside PIPE Investments in the UK ...... 4 News on Stake Building in Germany...... 6 This Latham News...... 8 Country Update - UK Pensions Regulator Takes Action Against Private Equity Seller...... 9 Special Purpose Acquisitions Companies...... 10 Issue Recent developments in the de Minimis exception in UK merger control: the FMC/ISP and the Nufarm/AH Marks decision...... 12 UK Companies Act 2006: October 2008 Implementation Update...... 13 Recent European Deals...... 15

The European SmartCapital publication is now available in podcast format. Please visit www.lw.com for further information. Continued from Page 1 — Shariah-Compliant Private Equity Funds

payment of any predetermined guaranteed rate of participating classes of shares. One alternative is a return, such as interest), gharar (an unacceptable unit trust structure, whereby a fund company issues level of risk or uncertainty) and investments in units to investors. Such a contractual arrangement industries that are haraam (against Islamic values). is quite common with Middle East-sponsored funds domiciled in Bahrain. Shariah-compliant private Shariah law does not have a uniform set of standards equity funds with international sponsors, however, and interpretations. While some institutions, such are typically domiciled in the Cayman Islands or as the Bahrain-based Accounting and Auditing other traditional offshore jurisdictions familiar to Organisation for Islamic Financial Institutions international investors. (AAOIFI), work to unify the various interpretations and opinions of scholars, they have no enforcement As a result of their unique operating and investment power. Accordingly, whether an investor views a restrictions, fund managers also frequently establish particular private equity fund and its investments as the Shariah-compliant fund as a parallel fund, which “Shariah-compliant” will depend upon the review invests proportionately in portfolio investments on and approval by a Shariah consultant or supervisory substantially the same terms and at the same time as a separate conventional fund. While the parallel fund will have the same fund manager and investment While Shariah compliance adds an focus as the conventional fund, such a structure allows the fund manager to provide a Shariah- “ additional layer of complexity to a compliant investment vehicle for investors without fund, traditional private equity funds restricting the operations of the conventional fund and burdening its investors with any additional costs. are uniquely positioned to take Investment Restrictions advantage of this growing market”. In order to qualify as Shariah-compliant, a fund’s investment policy must contain restrictions that prohibit investments in industries considered haraam. These restrictions usually prohibit investments in companies involved in the following board engaged by the fund manager or, indeed, the industries and activities: investor’s own consultant or supervisory board. • conventional financial services (including Structure conventional banks and companies); Due to its investments in equity and risk sharing • gambling and casinos; between investors and management, the traditional • alcohol or pork products; private equity fund fits nicely within the Shariah • certain entertainment, such as gossip columns or paradigm. The standard management structure of pornography (but often including cinemas, music a private equity fund is permissible under Shariah. and publications); The management fee is considered an agency • weapons or military equipment; and arrangement (where the fee is a fixed amount or • any other immoral or unethical activities identified a percentage of capital commitments or net asset by the Shariah consultant or supervisory board. value) and the carried interest or performance The application of these investment restrictions is fee is viewed as a mudaraba agreement (a silent subject to differing interpretations. For instance, partnership where one party provides capital and some Shariah scholars argue that an investment by the other party provides expertise and management a fund in a hotel or restaurant that serves alcohol in return for a share of the profit). While the basic is prohibited, whereas other scholars argue that if documentation for a Shariah-compliant fund is the alcohol sales are less than a certain percentage similar to that of a conventional fund, certain terms, of the revenue of the hotel or restaurant, the such as the equalization mechanism for investors investment by the fund may still qualify as Shariah- admitted after the first closing and the charging compliant. of interest on amounts due by defaulting limited partners, must be revisited in the context of Shariah. While a Shariah-compliant fund may engage in leverage through the use of Islamic financing Shariah-compliant private equity funds are normally instruments, it may not obtain or provide structured as standard limited partnerships. Since conventional loans or otherwise invest in Shariah prohibits investments in preferred shares, conventional interest bearing instruments, including a corporate vehicle is typically not feasible due convertible debt securities. Cash held by a fund may to the existence of separate management and only be invested in Shariah-compliant, short-term

2 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 investment products, such as Islamic money market The Shariah consultant or supervisory board is instruments. As Shariah prohibits the payment of any required to review and approve the private placement predetermined guaranteed rate of return, investments memorandum and other fund documents. The in preferred shares or fixed income securities are also Shariah consultant or supervisory board routinely restricted. reviews the fund’s activities and produces a report regarding ongoing Shariah compliance (usually Similarly, a Shariah-compliant fund is subject to on an annual basis). Such a review may involve, restrictions on the amount of conventional leverage among other things, visiting portfolio companies permitted at the portfolio company level. This often and the examination of documentation pertaining to takes the form of financial parameters in relation to investments. Details of investments proposed by a the debt to equity ratios and interest income of its fund manager, which involve structures or securities investments. The generally accepted standard is that not previously approved by a Shariah consultant the ratio of total conventional debt to total assets or supervisory board, are usually presented to the should be less than 33 percent. Additionally, the ratio consultant or board for review and approval prior to of interest income (plus income from any incidental investment. haraam or unidentifiable activity) to total revenue typically must be less than 5 percent. The ratio of In order to ensure Shariah compliance, the Shariah liquid assets (cash plus accounts receivable) to total consultant or supervisory board may actually require a assets should be less than 45 percent. Finally, any fund to dispose of investments, liquidate businesses or conventional debt of a portfolio company must be activities owned or conducted by a portfolio company, restructured in a Shariah-compliant manner generally deleverage the capital structure of a portfolio company within three years after acquisition. and/or substitute conventional financing with Islamic financing instruments. It is usually possible to purify any haraam earnings of a fund by separating them from the fund’s legitimate Conclusion profits and donating them to an approved charity. The interest in Shariah-compliant funds from investors in the Muslim world will continue to grow. Fund Shariah Consultant or Supervisory Board managers seeking to access this investor base will A Shariah-compliant fund must appoint a Shariah need to ensure that their funds comply with the above consultant or supervisory board that reviews proposed Shariah principles. While Shariah compliance adds investments and operations and issues opinions as an additional layer of complexity to a fund, traditional to their compliance with Shariah. Most Middle East private equity funds are uniquely positioned to take private equity funds simply engage an already existing advantage of this growing market. Shariah board (typically the Shariah supervisory board of the fund’s sponsor or anchor investor). Alternatively, a fund may hire a Shariah consultant or establish its own Shariah supervisory board comprised of various For further information, please contact Kai Schneider Islamic scholars. There are also certain service at [email protected]. n providers with their own Shariah boards, which may be engaged on a contractual basis to advise a fund.

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 3 Pipe Investments in the UK By Martin C. Saywell and Piero V. D’Agostino PIPE transactions are private investments in public equity. They generally involve a cash subscription by an investor in newly issued securities of a listed UK company. Securities include shares, securities convertible into shares and the grant of options and warrants to Martin C. Saywell subscribe for shares. Earlier this year we acted for One Equity Partner Corporate Department Partners on its US$150 million PIPE investment for 12 percent of Clipper Windpower, an AIM listed manufacturer and distributor of wind turbines. This has been one of the most prominent PIPE transactions to have completed in the UK in recent years. The onset of the credit crunch has also led a number of companies to look at their options for raising equity capital, other than by way of the traditional rights issue. This summer, Bank undertook a successful placing and open offer although Bradford & Bingley was unable to complete a proposed PIPE investment by TPG. Piero V. D’Agostino Associate This article looks at some of the key legal points to emerge for PIPE Corporate Department investments in the UK.

Authorisations and Consents issued is restricted to a maximum of 5 percent of the A UK-listed company will need to have sufficient best bid and offer prices immediately prior to the authorised and unissued share capital. Its directors proposed issue. will also need to have requisite authority to allot the shares. Finally, statutory pre-emption rights will need The Statement of Principles recognises that there to be disapplied for cash subscriptions. are circumstances where these parameters may not be appropriate and that greater flexibility may If any of the existing resolutions on these matters be required for AIM companies. Although there is are not sufficient, a fresh resolution will need to be no sanction for not following the guidelines, share passed at an extraordinary general meeting of the issues are closely watched by the UK institutional company convened for the purpose or at the annual investment community and companies do not general meeting. The notice period depends on the generally ignore them. The proposed Bradford & business to be conducted; 21 clear days to disapply Bingley PIPE investment mentioned above was statutory pre-emption rights and amend the articles heavily criticised by the UK institutional investment of association of the company and 14 clear days for community at the time, in part for how it would have most other business. diluted the holdings of existing shareholders.

A PIPE investment of any magnitude will require Finally, careful consideration needs to be taken of the company and the investor to take account any contractual pre-emption rights or protective anti- of the views of the UK institutional investment dilution rights of any existing debt securities, options community. This is expressed in the Pre-emption or warrants. Group Statement of Principles. It recommends that a disapplication of statutory pre-emption rights should Listing, Prospectus and Disclosure and generally be limited to 5 percent of ordinary share Transparency Rules capital in any one year, with a cumulative limit of Shares generally cannot be offered to the public 7.5 percent in any three-year rolling period. It also in the UK unless an approved prospectus has been recommends that any discount at which equity is made available to the public before the offer is

4 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 made. There is, however, an exemption available Contractual Investor Protections if the offer is made to fewer than 100 people and The subscription will be subject to standard PIPE investments are usually made through a single conditions for regulatory approvals, any necessary subscribing entity. shareholder approvals and the like. In addition, and particularly noteworthy where the listed company or Small issues of shares can, in any event, be made its sector is in some financial difficulty, investors will by a UK-listed company without the cost and seek to include a business and market no material inconvenience of producing a prospectus. The Listing adverse change condition. Rules provide that an issue of shares which increase the number of shares in a class already listed by less than 10 percent does not require a prospectus. The onset of the credit crunch has also The company will be required to make an announcement without delay under its continuing “ led a number of companies to look at obligation requirements when the subscription agreement for the issue of the shares is agreed. their options for raising equity capital,

The investor also has an obligation to notify the other than by way of the traditional company when it makes an acquisition of voting rights issue”. rights in the company in excess of 3 percent as soon as possible, and in any event within two trading days of the acquisition.

Takeover Code The investor will also expect to get customary In the context of an acquisition of a substantial business representations and warranties from the shareholding in a listed company, consideration company, in particular in relation to compliance needs to be given to Rule 9 of the City Code on with its disclosure obligations, so that all material Takeovers and Mergers. This provides that where a information concerning the company and its business person — whether in a series of transactions over a is disclosed to the market. period of time or not, acquires shares which together An investor may, depending on the circumstances, with shares held by his or her concert parties carry 30 be able to negotiate contractual anti-dilution (pre- percent or more of the voting rights of the company emption) protection in addition to its statutory pre- — then that person is required to make a mandatory emption rights. offer to acquire all of the issued share capital of the company. Mandatory offers are restrictive; only a Finally, the company will usually seek to have the general offer and not a scheme of arrangement can investor bound by customary lock-up and standstill be used, the offer can only be subject to a 50 percent arrangements. acceptance condition and anti-trust conditions and must be in cash or accompanied by a cash alternative. For further information, please contact Corporate Governance Martin Saywell at [email protected] or A notable feature of some recent PIPE transactions Piero D’Agostino at piero.d’[email protected]. n involving financial investors is the corporate governance protections usually seen in buy-outs being used to protect their investment in a listed company.

In addition to one, but more often two, non- executive directors on the board of the listed company if a minimum shareholding is retained and representations and warranties in the subscription agreement, it is now often the case that consent rights over certain capital, financial and business activities of the listed company are granted in a relationship agreement between the listed company and the investor.

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 5 News on Stake Building in Germany By Dirk Kocher and Dorothea Bedkowski

Both strategic and financial investors have great interest in building up stakes in listed companies without triggering disclosure obligations. This is of particular importance in the preparatory phase of a public takeover but may also be true for Dirk Kocher Private Investments in Public Equities (PIPE) transactions. Associate Corporate Department Before the deal becomes public, shares can usually be bought at a lower price.

In case of a public may now constitute acting-in-concert if the parties takeover, the possession intend to change the company’s strategic direction in of a significant stake may a permanent and substantial manner. On the other discourage defensive acts hand, cooperation in order to protect the status quo is by the target and may also irrelevant outside of the general meeting. As before, be an effective deterrent the coordinated acquisition or disposal of shares does to possible white knights. not constitute acting-in-concert. Stake building is currently very much the focus of Aggregation of shares and financial instruments discussion in Germany Under the old law, a single investor could build up Dorothea Bedkowski because the respective a stake of up to 2.99 percent in shares plus 4.99 Associate percent in financial instruments without triggering Corporate Department disclosure rules are being amended by the so-called any disclosure obligations. This will now change Risk Limitation Act and since any shares held or attributed will be taken due to the discussions into consideration for determining the notification around the use of SWAPs in the stake building for thresholds for financial instruments. As a result, the the Continental bid by Schaeffler. new maximum stake is 4.99 percent in total, of which a maximum of 2.99 percent may be in shares. New disclosure rules – Risk Limitation Act Stakes in German-listed companies have to be Information duties and sanctions disclosed if the thresholds of 3, 5, 10, 15, 20, 25, 30, An investor who acquires 10 percent or more will 50 and 75 percent are either reached or crossed. The have to disclose the purpose of his or her investment 30 percent threshold triggers the obligation to launch (investment intent) and the source of his or her funds a public tender offer. There are numerous rules on within 20 trading days under the new rules, unless the attribution of voting rights, e.g. through shares the issuer has opted out of this rule in its articles of held by subsidiaries or for the account of somebody association. else. The same disclosure rules apply to financial A violation of the German disclosure rules may instruments that give the right to acquire shares lead to administrative fines of up to € 200,000 (up (with the exception of the 3 percent threshold). Cash- to € 1,000,000 in cases where a mandatory public settled instruments are excluded unless — under tender offer is not published) and the exclusion of their terms — individualized shares are held for the all shareholder rights (in particular voting rights account of the counterparty. The Risk Limitation Act and dividend rights) until a correct notification is brings important changes to some details of these made. Under the new rules, the exclusion of voting rules. rights will persist for at least six months after the New rules on acting in concert notifications have been made (or corrected) if a The German Federal Supreme Court mistake affects the number of voting rights in such a (Bundesgerichtshof) had limited acting-in-concert way that the number is wrong by at least 10 percent as a basis for the attribution of voting rights to the or a threshold would be reached if the number was arrangement concerning the execution of voting corrected and if the mistake is based on intentional rights in the general meeting. Under the new rules, misconduct or gross negligence. even cooperation outside of the general meeting

6 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 Whereas the new provisions on acting-in-concert, Especially in this case one will have to check as well as the stricter sanctions, came into force carefully also for any violation of insider trading rules immediately, i.e. on 19 August 2008, the aggregation by all parties involved. rule will only apply from 1 March 2009 and the new information regime for significant shareholdings will become effective on 31 May 2009. Stake building is currently very much SWAPs and the Continental case “ the focus of discussion in Germany Facts of the Continental case Besides using the maximum amounts for buying because the respective disclosure shares and options, the German family owned Schaeffler group had announced that they had rules are being amended by the so- entered into Total Return Equity SWAPs for 28 percent of the capital of Continental AG with called Risk Limitation Act…” the right of termination at any time. The SWAPs were cash settled, i.e. Schaeffler had no right to request the delivery of shares. The bank acting as counterparty was free to hedge the SWAP by Conclusion buying shares but had no obligation to do so. The Since Continental was the first case were SWAPs bank did not disclose its hedging positions — if any were used in preparation for a take-over bid in — under the notification rules for shares or financial Germany, this gave Schaeffler a big advantage instruments. Finally, Schaeffler went public and at the outset since most observers believed that announced a take-over bid for Continental. Schaeffler really controlled the 28 percent stake. Once the market has understood that disclosure The German regulator (BaFin) has accepted this and can only be avoided if there is no such control, the decided not to enforce any disclosure obligations or benefit for an investor may be much more limited. sanctions. This is based on the understanding that However, this strategy may still work, in particular there are no side agreements (even as gentlemen’s if there is no competing bid. It also remains to be agreements) according to which the bank was seen if the legislator will intervene or if the regulator supposed to buy shares and/or sell them to Schaeffler will become more active in other cases if any side afterwards. It may be debatable how clear this result agreements are detected. Finally, a court may still is regarding a possible attribution of shares bought come to a different conclusion than the regulator. by the bank that may be regarded as being held for the account of Schaeffler. However, as long as the bank had no obligation to do so, there are strong arguments against an attribution. For further information, please contact Dirk Kocher at [email protected] or Dorothea Bedkowski at Suitability for stake building [email protected]. n This case shows that SWAPs can be an efficient method of avoiding disclosure. However, if used, an investor has no control over shares either, and the investor cannot be sure that (i) the banks will hedge the SWAP position by buying shares and (ii) the banks will finally tender these shares under the public offer of the investor. Both may or may not be the case. In particular, if a competing bidder offers a higher price per share, the banks will be hard pressed to justify anything but accepting the higher offer. If they accept the lower offer of their SWAP counterparty, there may be suspicion that there actually was a secret deal and that disclosures should have been made.

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 7 Latham n e w s New Partners – Milan and Dubai Latham & Watkins is pleased to announce that two new partners have joined the firm, one in Milan and one in Dubai.

Antonio Coletti has joined the firm’s Milan office as a partner in the Corporate Department. Mr. Coletti is a corporate finance attorney with extensive experience representing investment banks, private and public companies and private equity funds in relation to IPOs, secondary equity offerings, rights issues and convertible bonds issues. He advises listed companies in relation to general corporate and compliance matters and also advises companies regarding the distribution of UCITS, the establishment and placement of real estate investment funds and financial market regulation. Mr. Coletti has strong ties to international and Italian investment banks and a track record of advising on some of the most high-profile securities transactions worldwide.

Tim Ross has joined the firm’s Dubai office as a partner in the Finance Department. Mr. Ross is a recognised leader in financing transactions involving entities in the Middle East. He has extensive experience representing banks, borrowers and funds in high value syndicated loans, acquisition finance, private equity and restructuring transactions.

Latham & Watkins Relocates Group of Experienced Partners to the Middle East Latham & Watkins is pleased to announce that four partners from the firm’s London, and Silicon Valley offices will be relocating to the Gulf Region this year.

The group comprises London corporate partners Bryant Edwards and Charles Fuller, New York finance partner We are focused on growing the Kenneth Schuhmacher and Silicon Valley corporate practice and the arrival of the new partner Nicholas O’Keefe. Bryant Edwards has recently “ been appointed as Office Managing Partner for the partners significantly enhances Middle East offices. our regional credentials – and New York finance partner William Voge and San our intention to be the leading Francisco corporate partner Tracy Edmonson will transactional firm in the Gulf”. be moving to the firm’s London office in the coming months. Mr. Voge has extensive experience in all aspects of project development and project financings and has a formidable track record advising on some of the most high profile energy deals in the Middle — Bryant Edwards Office Managing Partner, East. Ms. Edmonson is an experienced capital markets Middle East partner who will add further experience to the firm’s already strong corporate finance team in Europe.

8 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 BTI “Power Elite” Latham & Watkins was named to BTI’s 2008 “Power Elite” — a group of leading law firms chosen based on client satisfaction and service that “boast the most and the best client relationships”, according to BTI Consulting. To compile the list, BTI polled more than 400 corporate counsel at Fortune 1000 companies and large organisations. Benchmarked against more than 350 law firms, Latham continues to have a top market position with clients four years running. According to the study, firms within the BTI “Power Elite” possess more primary relationships with large and Fortune 1000 clients, win more slots on clients’ short lists, demonstrate prowess in “bet-the-company matters” and boast superior levels of client satisfaction.

Legal Business “Global Elite” Latham & Watkins has once again been named to the “Global Elite” group of firms, according to Legal Business. The “Global Elite” is a list of the world’s 18 most prestigious law firms that continue to represent the pinnacle of the legal profession, according to the magazine. “To be considered a member of the Global Elite”, Legal Business writes in its July / August 2008 issue”, a firm must be able to demonstrate market-leading prowess in two of three key practice areas — M&A, finance and disputes; boast a disproportionately high number of relationships with financial institutions, FTSE-100 or Fortune-250 clients; and be considered serious competition in either M&A or finance by firms on both sides of the Atlantic”.

Country Update UK Pensions Regulator Takes Action Against Private Equity Seller The UK Pensions Regulator has recently required Duke Street Capital (DSC) to pay £8 million into the underfunded defined benefit pension plan of one of the Wickes group of companies, which DSC had sold to Cerberus Capital Management in 2007.

Although the Regulator’s right to do so has always been clear in the legislation, this is the first time that it has taken action against an entity which is no longer connected with the relevant pension plan. It appears that the Regulator stopped short of actually issuing a contribution notice or financial support direction (known as its “moral hazard powers”) to DSC, but commentators suggest it may have threatened to do so.

We understand DSC did not seek clearance from the Regulator at the time of the sale, nor was any additional funding made available to the pension plan at that time, and that the Regulator may have concluded that without such mitigation, the transaction was detrimental to the plan.

This latest action, together with the proposed widening of the Regulator’s powers in relation to its moral hazard powers, on which we are expecting draft regulations shortly, has prompted industry experts to warn that such actions might deter private equity houses from investing in companies with defined benefit pension plans.

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 9 Special Purpose Acquisitions Companies By Paco Iso and Xavier Pujol

After a slow beginning in Europe, 2008 has seen a marked increase in the popularity of Special Purpose Acquisitions Companies (SPACs) with two recent listings on the NYSE Euronext in Amsterdam market. SPACs have evolved over the past few years Paco Iso from single-target acquisition vehicles common in the US, to the Associate Corporate Department multi-acquisition vehicles commonly found on AIM, and now Euronext, listings.

A SPAC is a development- This emphasis was reflected by the fact that 90 stage company that has percent of the take-up was made by European no specific business investors. Although some SPACs had previously plan or purpose or, been taken public on London’s AIM market, the alternatively, has listings of PEHAC, Liberty and Germany1 represent indicated that its business a milestone for the use of SPACs in the European- plan is to engage in regulated markets. a future merger or acquisition. SPACs are Main Features corporate shells with a Several integral features of SPACs are that they Xavier Pujol management team (but are sponsored by senior investment professionals Associate (who have a significant track record), include Corporate Department no operating track record) formed for the purpose institutional investors (e.g. hedge funds, mutual of raising capital through funds, etc.) as shareholders and, in recent times, are an IPO in order to seek often underwritten by “bulge bracket” investment and complete an acquisition of a yet-unknown target banks. These sponsors share the risk of the venture within a specified time frame. In this sense, in the with the investors by means of the acquisition of US, the SPACs’ purpose generally is to make one sponsor units, composed of shares and warrants. acquisition, while in the UK, several acquisitions This sponsor investment is usually locked in at least below the enterprise value threshold are possible. until the consummation of the acquisition (and up to one year post-acquisition). In addition, the sponsors SPACs are not an entirely new phenomenon; they waive their rights to participate in any liquidation were popular in the in the 1970s and distribution if the SPAC is liquidated and the 1980s in the form of “blank cheque” companies warrants expire without value. In some instances, and were closely scrutinized by US regulators due underwriters have also made an “underwriter co- to a number of frauds on investors. In their new investment” by purchasing units in the SPAC. shape, however, SPAC vehicles include significant investor-protection and transparency features which The units offered to the public in the IPO also consist have enhanced their marketability and reduced the of shares and warrants. The warrants entitle the monitoring pressure from regulatory bodies. holder to acquire generally one share per warrant. The warrants are generally exercisable upon the Germany1 Acquisition Limited’s (Germany1) July later of the consummation of a business combination listing is the third SPAC listing in Amsterdam after and one year from the date of the prospectus, and Liberty International Acquisition Company (Liberty) expire five years from the date of the prospectus. in February 2008. Liberty’s listing in Amsterdam Warrants may also be redeemed upon request represented only the second listing of a SPAC in a by the holder. In Europe, units do not generally regulated European market (following the listing constitute independently transferable securities of Pan-European Hotel Acquisition B.V. (PEHAC) and the underlying shares and warrants trade in 2007), raising approximately €600 million with separately immediately upon issuance. The price of the intention of buying a European company with units is fixed in the initial filing and has generally between €3 billion and €5 billion within two years. been around $10 per unit. A substantial proportion Germany1 successfully raised €275 million in an of IPO proceeds (usually 85-90 percent, and often initial public offering which, unlike the listing of now closer to 100 percent) is held in an interest- Liberty, specifically targeted European investors. bearing escrow or trust account until an acquisition

10 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 is completed. The remaining portion of the net an environment of difficult debt-financing, SPACs proceeds is used as working capital and to cover may find firms to be ideal partners in order to meet taxes. In addition, part of the underwriting fee is also the equity funding levels required to complete a placed in trust and will be forfeited if no acquisition deal. takes place. • SPACs may act as portfolio company purchasers. The size of the listed SPACs has traditionally At the time of the IPO, the SPAC’s target company limited the scope of companies susceptible to is generally unknown. If a potential target or targets being targeted. However, with the increasing size have been identified, no negotiations will have been of SPAC capital raising, it is now possible to see entered into as this would require their disclosure leveraged SPAC acquisitions well above the US $1 in the IPO prospectus. To avoid the obvious risks of billion mark. handing over a ‘blank cheque’ investment, there are • SPAC deals bring alternative exit scenarios for a number of customary investor protections: buyout firms, allowing them not only to sell a • There is a typical deadline of 18 to 24 months to invest the IPO funds raised. If a suitable acquisition target is not found within the defined The growth in SPACs will be of time period, the SPAC is liquidated and the funds are returned to investors. “ interest to the private equity industry • Potential investments are, however, often because, unlike the familiar model constrained as regards to their size. SPACs commonly agree, for example, not to carry out for the private raising of funds, any investment unless the value of the target private equity firms can tap the public represents at least 80 percent of their net assets and a controlling interest in the target. markets with the transparency and • Transactions have to be approved by the shareholders (and warrant-holders) prior to liquidity of a listed company”. their consummation and prescribed acceptance thresholds usually stand at around 65 percent (it is an identifiable trend that rejection thresholds have portfolio company for cash but offer a method been increasing from 20 percent to 35 percent and to take a private company to the public markets sometimes even to 40 percent). In an approved using a merger or ‘reverse’ takeover of the SPAC. deal, however, dissenting stockholders commonly This exit route presents significant advantages have a redemption right over their shares up to when compared to a standard IPO or private sale, a certain percentage of the trust account as well particularly in light of stagnant IPO markets, tight as the option of selling their stock in the market. credit markets and lower buyout market activity. Sponsors typically agree to vote their shares with One practical advantage is that a reverse merger the majority. If the approval threshold is not met may be executed in a shorter period of time than and the deal is rejected, the SPAC is liquidated an IPO (which requires intensive preparation, and the funds are returned to investors. including lengthy road-shows and negotiations Private Equity with authorities) and a private sale (which entails The growth in SPACs will be of interest to the private substantial negotiations and may be contingent on equity industry because, unlike the familiar model financing). for the private raising of funds, private equity firms • The SPAC management team is rewarded through can tap the public markets with the transparency and the gains on their units following the IPO, rather liquidity of a listed company. The number of private than through the remuneration or management equity firms acting as SPAC sponsors is increasing; fee. however, it is important for firms intending to be • SPAC acquisitions are usually less leveraged than active in both conventional fund management and traditional buyout transactions. sponsoring a SPAC to define their investment policies • Investors who may not otherwise qualify to invest clearly and regulate the relationship between both in private equity funds have the opportunity to areas so to avoid any potential conflicts regarding participate in the acquisition of companies while which vehicle to use at the time of making an retaining liquidity (albeit perhaps limited) as a investment. result of the SPAC’s public offering. • The investor approval requirements of a SPAC Other interesting features of SPACs for the private in order to complete an acquisition may make it equity community are: less able to approve an acquisition efficiently, as compared to a conventional private equity fund. • Firms may decide to work side-by-side with SPACs through the setting up of acquisition consortia. In

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 11 • Following the insurgence of ‘greenmail’ where The SPACs are surging in Europe as they are large stakes in the SPAC were accumulated perceived by the investors as the perfect destination and then sold at a premium to the management for their funds in the context of a burgeoning market. by threatening a ‘no vote’ on the business With 5 to 10 SPACs in the pipeline to raise money combination, a ‘bulldog’ provision was introduced through IPOs in the second half of 2008, the coming pursuant to which holders with more than 10 months appear to be critical for the consolidation of percent of shares (acting as a group) cannot the SPACs in Europe. convert their shares for a pro rata share of the trust account. • The officers and directors of the SPAC usually For further information, please contact Paco Iso grant the SPAC a ‘right of first review’ pursuant to at [email protected] or Xavier Pujol at which they agree, typically until the earlier of the [email protected]. n completion of a business combination, 24 months from the IPO or the date he or she ceases to be an officer or director, to present to the SPAC for consideration prior to any other entity, potential acquisition opportunities of private companies with a certain enterprise value.

Recent Developments In the de Minimis Exception In UK Merger Control: The FMC/ISP and the Nufarm/AH Marks Decisions By Adrian Cox The recent FMC/ISP and Nufarm/AH Marks decisions show how the Office of Fair Trading (OFT) is likely to exercise its power to apply the newly revised de minimis exception to mergers involving markets below £10 million in size in practice.

The OFT conducts the one-to-two month first phase In evaluating whether to apply the de minimis of UK merger control with jurisdiction to review any exception, the OFT considered the following: relevant merger. It must refer a relevant merger to the Competition Commission (CC) where it believes • Relevant turnover in the anti-reflux alginates the transaction has a 50 percent or more chance of market was less than £2 million; resulting in a substantial lessening of competition • Although the parties were close competitors, the (SLC). The CC then conducts a lengthy six-month merger’s adverse impact would be limited if it did second phase review to decide whether the merger not persist; will cause a SLC, and to order any remedial action, • The adverse impact of the merger would not including prohibition. persist indefinitely: market entry was conceivable in the medium to long-term; and The OFT has the power to clear a merger • The acquisition of market power was not a unconditionally rather than refer it to the CC, material part of the rationale behind the wider where the merger involves markets of insufficient transaction. importance to warrant a reference (the “de minimis Overall, these factors suggested that the adverse exception”). In November 2007, the OFT produced impact of this merger was very limited. Accordingly, revised guidance whereby affected markets in the the OFT applied the de minimis exception. UK worth less than £10 million in annual turnover in aggregate are likely to be considered of insufficient Nufarm/AH Marks decision importance (previously £400 million). The Nufarm/AH Marks case concerned the completed acquisition of AH Marks by Nufarm. The FMC/ISP Decision Although not voluntarily notified, the OFT The FMC/ISP merger concerned the acquisition by nonetheless investigated this transaction. Both FMC of ISP’s alginates business. The OFT believed companies are the leading UK suppliers of two that in the supply of anti-reflux alginates there was a chemicals employed to make herbicides used by realistic prospect of an SLC. farmers.

12 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 In its assessment of the transaction, the OFT lengthy in-depth competition review but only considered that: where the OFT judges that any adverse impact on competition is unlikely to be significant and that the • Nufarm could raise prices post-merger; de minimis exception therefore applies. Also, the • Farmers were unlikely to switch to alternative OFT has indicated that it may choose not to apply products if Nufarm raised the price of its chemical the exception where an investigation would have ingredients; important precedent value, and/or a substantial • There was only one other supplier in the UK; and proportion of the likely detriment would be suffered • Foreign suppliers were unlikely to enter the UK by vulnerable customers. In any event, careful market post-merger. advance presentation of the case to the OFT can Overall, the OFT decided to refer the merger to increase the prospect of the de minimis exception the CC on the basis that the merger could result in being applied. an SLC and that the de minimis exception was not applicable because the merger’s adverse impact was likely to be significant. For further information, please contact Adrian Cox at [email protected]. n Conclusion These recent cases demonstrate that mergers involving UK markets below £10 million in size, even between close competitors, may escape

UK Companies Act 2006: October 2008 Implementation Update By Andrew Boyd

Certain provisions of the Companies Act 2006 (the 2006 Act) have come into force with effect from 1 October 2008. The key changes see the relaxation of the financial assistance prohibition and simplification of the reduction of capital procedure for private companies, as well as the further codification of directors duties.

Key changes number of conditions. Under the new provisions of The following key changes are effective from 1 the 2006 Act, the prohibition for private companies October 2008: is relaxed, so that where shares are to be acquired in a private company, the giving of assistance by that • Financial Assistance — restriction abolished for company or a private company subsidiary, is now financial assistance for acquisition of shares in permitted. Consequently the ‘whitewash’ procedure private companies. (which permitted the giving of financial assistance • Reduction of Share Capital — private companies if a number of criteria were complied with) becomes granted director solvency statement alternative to irrelevant for private companies. reducing company share capital without having to seek court approval. Although the financial assistance rules remain • Directors’ Duties — fiduciary duties codified unchanged for public companies, for private relating to conflict of interest, interests in proposed companies, the practical impact of the changes transactions and accepting benefits from third are likely to mean that documentation of many parties. transactions, for example acquisition financings, • Corporate Directors — all companies required to become less complex. have at least one director who is a natural person. Reduction of Share Capital Financial Assistance New provisions of the 2006 Act provide private The Companies Act 1985 (the 1985 Act) prohibited companies with an alternative to the court sanctioned private companies from giving financial assistance reduction of share capital procedure under the for the acquisition of shares unless it satisfied a

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 13 1985 Act, whereby a private company may reduce 2007, and the remaining three provisions, deferred its share capital by passing a special resolution primarily to allow public companies the opportunity supported by a solvency statement made by the to amend their articles, are effective from 1 October directors. Directors making solvency statements 2008: without having reasonable grounds for doing so may be subject to fines and/or a maximum of two years • Duty to avoid conflicts of interest — imposes a imprisonment, and it may be for this reason alone positive duty on directors to avoid having a direct that directors of some companies chose the existing or indirect interest that conflicts with the interests court approval route for capital reductions that does of the company. not contain this risk to directors; however, the new • Duty not to accept benefits from third parties procedure should provide other private companies — forbids a director from accepting a benefit with a more expedient means reducing share capital. conferred by reason of his being a director. The new procedure is not an option for public • Duty to declare interest in proposed transaction companies, who continue to have to pass special or arrangement — requires that a director must resolutions and seek court approval. declare the nature and extent of any direct or indirect, interest in a proposed transaction or arrangement with the company.

Although the financial assistance Corporate Directors rules remain unchanged for public The 2006 Act requires that from 1 October 2008, “ all companies must have at least one director who companies, for private companies, is a natural person. (There is a grace period until October 2010 for companies who only had corporate the practical impact of the changes directors when the 2006 Act received royal assent on are likely to mean that documentation 8 November 2006). of many transactions, for example Other Provisions The October 2008 implementation brought in the acquisition financings, become less following additional changes:

complex”. • A right to object to the opportunistic registration of a company name that is the same or misleadingly similar to one in which the applicant has goodwill Directors’ Duties • A minimum age of 16 for directors The 2006 Act codifies what is largely existing • A new form of annual return requiring less law relating to directors’ duties. Codified duties information on the company’s shareholders to exercise skill and care, act in good faith in the best interests of the company and act within the powers conferred by the company’s memorandum For further information, please contact Andrew Boyd and articles of association and to exercise powers at [email protected]. n for proper purposes were implemented in October

14 Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008 Recent e u r o p e a n d e a l s

Our comprehensive Altares D&B BARTEC Group experience in all aspects of private equity LBO Acquisition by AXA PE of Altares Acquisition by Equity Partners of D&B, a member of the Dun & Bradstreet BARTEC Group, a provider of high-quality investment enables Network and leading provider of financial industrial safety technology. information in France. us to service the full Not public Not public array of legal needs of fund sponsors and investors alike, from fund formation to investment acquisition, Clipper Windpower plc Fullsix International structuring, financing Acquisition by One Equity Partners of 12.5 Acquisition by Cognetas of Fullsix and disposition. percent of the outstanding share capital of International, a leading marketing agency Clipper Windpower plc, a manufacturer of in Europe. advanced wind turbines and developer of €25,000,000 The following is a wind energy projects. selection of recent €150,000,000 European deals.

Hansa Hydrocarbon Labco Premier Research Group plc

Investment by Leveraged acquisition by Labco, a Acquisition by the management of Premier in Hansa Hydrocarbons, a company European medical diagnostics company, Research Group plc of Premier Research acquiring and developing oil and natural of 30 target companies in France, Spain, Group plc, a pharmaceutical research gas reserves in the North Sea and Portugal, Germany and Italy. Latham organization, in a management buyout Northern Europe. advised ICG as senior and junior transaction. mezzanine lender. $100,000,000 £60,100,000 €700,000,000

Warwick International Group Limited SSP Technology A/S Validate

Sale of the entire issued share capital of Acquisition by Ventizz Capital Fund IV, Aquisition by SQS of Validate, a Swedish Warwick International Group Limited by L.P. of a 70 percent majority stake in SSP provider of software testing and quality its parent, Sequa Limited (a subsidiary of Technology A/S, a Danish rotor blade management services. Sequa Corporation, which forms part of a manufacturer, from Plambeck Neue Not public group of companies owned and controlled Energien AG. by the Carlyle group) Not Public Not public

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