UK UPDATE – Challenges And Opportunities Of The Increasingly Regulated World: The View From London
Executive summary: The linked memorandum identifies the issues facing financial institutions that do not have sufficiently positive and proactive relationships with their regulators to influence the ways in which new regulatory principles and rules will be applied to them, explains how some of the traditional responses of financial institutions to regulatory change are now outdated, and proposes a new approach to engaging with regulation within financial institutions that can bring significant risk mitigation benefits and business opportunities, for small as well as for large financial institutions.
Click here to read the Memorandum
BRAZILIAN UPDATE – Debenture financing for infrastructure projects, R&D and innovation – Reduced income tax
Highlights:
- New legislation reduces the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are deemed “priorities” by the federal government.
- Legal entities domiciled in Brazil are subject to a 15% tax rate on income earned from Infrastructure Debentures that are issued by December 15, 2015 and meet other conditions.
- With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s needed infrastructure.
MAIN ARTICLE
In June of last year, Federal Law 12,431 introduced new rules on debentures to encourage the private sector to help finance longer term infrastructure projects.
One of the important changes made by the new legislation was to reduce the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are considered to be “priorities” by the federal government (“Infrastructure Debentures”).
Under Law 12,431/2011, the income tax rate for income from Infrastructure Debentures received by individuals resident in Brazil is zero, effectively making it tax-free, while income from Infrastructure Debentures earned by legal entities domiciled in Brazil is subject to income tax at a rate of only 15%, withheld at source.
In order to benefit from these favourable tax rates, the Infrastructure Debentures must be issued by SPCs created to implement “projects for investment in infrastructure or for intensive economic production in research, development and innovation considered to be priorities under regulations issued by the federal government.” In addition, the Infrastructure Debentures must be issued by December 15, 2015, and meet all of the following conditions:
i) the debentures must pay interest at a rate fixed in advance and linked to a price index or reference rate. Post-fixed interest rates are prohibited;
ii) they must have an average weighted term to maturity of more than four years;
iii) they cannot be repurchased by the issuer within the first two years following the issued date, and early redemption and prepayment are prohibited;
iv) the purchaser must not have assumed a commitment to resell the debentures;
v) if interest will be paid periodically under the debentures, the interval between payments must be at least 180 days; and
vi) there must be proof that the debenture was traded on regulated securities markets.
Decree 7603, which was published on November 10, 2011, defines the type of project that will be considered a “priority” by the Brazilian government. According to the Decree, a project will be a “priority” project if it is directed to construction, expansion, maintenance, restoration, adaptation or modernization of facilities in the following sectors:
i) logistics and transportation,
ii) urban mobility,
iii) energy,
iv) telecommunications and broadcasting,
v) basic santitation, and
vi) irrigation.
The priority list is not exhaustive, and in some cases projects in other sectors can be treated as priority.
The Ministries responsible for the various sectors will issue rules setting out the requirements for approval of priority projects, and the mechanisms for overseeing implementation of approved projects.
Each project must be submitted to the appropriate Ministry, together with the supporting documentation listed in the Decree and any other documents the responsible Ministry may require. The various Ministries have discretionary powers to determine if a submitted project meets the requirements to be considered a priority. Projects are approved individually, by publication of the Ministry’s decision in the official gazette.
Decree 7603/2011 provides that any SPC may manage a priority project, as long as it is incorporated specifically for that purpose. Infrastructure Debentures issued by SPCs can be distributed publicly if the SPC obtains issuer registration from the Brazilian Securities Commission, the CVM, although the registration requirement can be waived if the debentures will be placed under a “restricted efforts” offering.
SPCs that fail to implement approved projects are subject to a fine of 20% of the total value of the debenture issue. In order to facilitate inspection and control of SPCs’ compliance with their legal obligations, SPCs are required to:
(i) provide a list of the legal entities that hold interests in the SPC to the responsible Ministry, and keep the list up-to-date;
(ii) in the case of public offerings of Infrastructure Debentures, ensure that the offering documents highlight the number and date of the Ministry’s approval of the priority project, and the commitment to allocate the funds obtained through the offering to the approved priority project; and
(iii) keep all documentation related to the use of the funds available for inspection, for at least five years after the maturity date of the Infrastructure Debentures.
Lastly, the CVM is required to maintain a list of Infrastructure Debentures offerings on its website, showing the amount of each debenture issue and the related priority project.
In addition to the Infrastructure Debentures, Brazil has created other mechanisms to stimulate private investment in large infrastructure projects over the next years, such FIP-IEs, which are private equity infrastructure funds, and the special type of investment fund provided for under Law 12,431/2011, which is designed to acquire Infrastructure Debentures.
With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s infrastructure, and consequently reducing the demands on public resources.
RUSSIAN UPDATE – Changes to the Rules Governing Foreign Investment in Russian Strategic Companies
Highlights:
- New amendments to the Federal Law on Foreign Investment in the Russian Federation and the Federal Law on Foreign Investment in Companies of Strategic Importance for National Defence and Security generally improve the environment for foreign investments in Russian strategic companies.
- Transactions involving international financial institutions set up in accordance with international treaties of the Russian Federation or with which the Russian Federation has concluded international treaties with respect to Russian strategic companies will not be subject to prior approval under the Federal Law.
MAIN ARTICLE
Goltsblat BLP advises on adoption of Federal Law No. 322-FZ, dated 16 November 2011, “On Amendments to Article 6 of the Federal Law “On Foreign Investment in the Russian Federation” and the Federal Law “On Foreign Investment in Companies of Strategic Importance for National Defence and Security”[1], came into force on 18 December 2011.
In general, the new amendments listed below improve the environment for foreign investments in Russian strategic companies.
1. Transactions involving international financial institutions set up in accordance with international treaties of the Russian Federation or with which the Russian Federation has concluded international treaties with respect to Russian strategic companies will not be subject to prior approval under the Federal Law.
The list of such international financial institutions is to be approved by the Government of the Russian Federation.
2. The Federal Law will not apply to transactions in relation to Russian strategic companies concluded by organisations under the control of the Russian Federation or citizens of the Russian Federation that are, under the Russian legislation, tax residents of the Russian Federation (apart from Russian citizens with dual citizenship).
For the purpose of determining control, the provisions of parts 1 and 2, article 5 of the Federal Law are applied by analogy.
3. In relation to a Russian strategic company using subsoil sectors of federal significance, control by a non-government foreign investor or group of persons and prior approval of their transactions will begin not from 10 but 25 per cent of the total votes on the shares (ownership interests) in the authorised capital or the composition of the collegial management body or collegial executive body of such a company.
At the same time, with the given ownership interest (25% or more) belonging to a non-government foreign investor or group of persons in the authorised capital of the company, the transaction will not be subject to prior approval if acquisition of shares (ownership interests) in the company does not entail an increase in the ownership interest of this foreign investor of group of persons in the company.
The other criteria of control and the requirement for prior approval of transactions in relation to a company remain in place (that is, the possibility of determining the decisions of the company by voting at the General Meeting, by participating in the Board of Directors or other management bodies of the company, by concluding a management agreement with the company or similar agreements, and in the case of the right to appoint the sole executive body).
4. The four types of activity of strategic importance for national defence and security are specified in detail and now exclude:
- operation of radiation sources by companies in the civil sector of the economy for which this does not constitute their core business;
- licensable distribution and technical maintenance of encryption (cryptographic) means, provision of services in the sphere of information encryption by banks with no state participation.
5. When establishment of control or a transaction entails an audit of a Russian strategic company, the audit will be performed by the federal executive authority in the defence sphere (Ministry of Defence of the Russian Federation) and, as before, the federal executive security agency (Federal Security Service of the Russian Federation).
They are now allowed 30, rather than 20, days for sending the authorised body (the Federal Anti-monopoly Service) conclusions concerning emergence or absence of a threat to national defence and security.
6. Changes have been introduced into certain procedures and the timeframe for implementation of a decision taken by the Government Commission for control over foreign investment in the Russian Federation regarding approval of the transaction or control subject to an agreement being concluded with the applicant securing its fulfilment of certain obligations.
The agreement will now be concluded within 30 rather than 20 days of the competent authority receiving the Commission’s decision (with the possibility of a maximum 14-day extension on the basis of a request from the applicant).
If the Commission decides on approval of the transaction or control subject to conclusion of an agreement and the applicant refuses to assume certain obligations or to conclude this agreement or if the agreement is not concluded by the set deadline, the decision on refusing to grant approval will be taken not by the Commission but by the competent authority (the Federal Anti-monopoly Service), which will then notify the Commission to this effect.
[1] The Federal Law “On Foreign Investment in Companies of Strategic Importance for National Defence and Security” is hereinafter referred to as the Federal Law.
CHINESE UPDATE – MOFCOM Clears Seagate/Samsung Deal – with conditions
Highlights:
- The Chinese Ministry of Commerce (MOFCOM) conditionally approved Seagate’s acquisition of Samsung’s hard disk drive business, making it the 4th conditional approval of this year and the 10th conditional approval by MOFCOM since China’s Anti-Monopoly Law went into effect.
- While MOFCOM still relies heavily on market share and market structure, it also takes in account a comprehensive set of factors as well as pragmatic evidence in its analysis.
- This deal was also notified in the U.S. and the EU, but MOFCOM is the only authority that has imposed remedies, showing that MOFCOM is getting increasingly independent in reaching its own decision.
MAIN ARTICLE
On December 12th, 2011, the Ministry of Commerce (“MOFCOM”) conditionally approved the acquisition of the hard disk drive (“HDD”) business of the Korean Samsung Electronics (“Samsung”) by the US Seagate Technology (“Seagate”)[1]. This is the 4th conditional approval of this year and the 10th conditional approval by MOFCOM since China’s Anti-Monopoly Law (“AML”) entered into effect in 2008.
According to MOFCOM’s announcement, this review process lasted for almost 7 months starting from May 19th when the notification was first submitted to MOFCOM. The review process entered into the Extended Phase II and was cleared on the next business day of the expiry date of this phase.[2]
Relevant Market
According to the Announcement, the relevant market is the worldwide HDD market. Although MOFCOM found that the HDD market could be further divided into narrower market segments based on the end use application (such as desktop computers, mobile computers), it considered the HDD market as a whole and carried out competition analysis only in the HDD market.
Competitive Assessment
MOFCOM mainly considered the following factors in its analysis:
Market Structure. MOFCOM noted that the worldwide HDD market is highly concentrated with only five players, i.e. Seagate (33%), Western Digital (29%), Hitachi (18%), Toshiba (10%) and Samsung (10%), whose market shares are similar in China. It found that the HDD market is very transparent. Since the HDD products are homogenous and large computer manufacturers as the main downstream customers are relatively few in number, it is easy for HDD manufacturers to gain competitor’s information.
Purchasing Pattern. MOFCOM emphasized the importance of the current purchasing pattern on the maintenance of competition in HDD market. In order to ensure stable supply, large computer manufacturers procure through a confidential bidding process and split the order among two to four HDD manufacturers based on the competitiveness of their prices. This model incentivizes HDD manufacturers to compete for larger orders.
Buyers’ Bargaining Power. MOFCOM found that large computer manufacturers generally will not oppose price increases and will instead shift such price burden to end consumers that have little countervailing buyer power. As pragmatic evidence, MOFCOM cited an example indicating how the recent price increases by Western Digital due to its impaired production by the floods in Thailand were passed on to end consumers.
MOFCOM also found that the capacity utilization rate of the HDD manufacturers are very high (90% in the fourth quarter of 2010), entry barriers are significant (no new entry into the worldwide HDD market in the past 10 years) and that innovation is quite important for HDD manufacturers to obtain competitive advantages.
Taking into account the above, MOFCOM was of the view that this merger will cause negative impact on Chinese consumers. It is likely to restrict competition by removing an important competitor from the market, undermining the effect the purchasing pattern has on bringing competitive pressures on HDD manufacturers and increasing the possibility of coordination among the remaining players considering the relative transparency of the HDD market.
Remedies
According to MOFCOM’s decision, Seagate shall have the following obligations:
(1) Seagate shall adopt measures to keep Samsung’s brand as a separate competitor, such as establishing an independent subsidiary for independent pricing and sales of Samsung products, creating firewalls to avoid information exchange etc.;
(2) Seagate shall keep its promise to expand the Samsung production capacity within six months of the decision, and reasonably determine and report the production capacity and volumes of Samsung’s products thereafter;
(3) Seagate shall not materially change its current business model, forcing customers to buy HDDs exclusively from Seagate or its controlled entities;
(4) Seagate shall not force TDK (China) Investment Co. to supply magnetic pickup head for HDDs to Seagate or its controlled entities exclusively or restrict the quantity TDK sells to other HDD manufacturers; and
(5) Seagate shall invest at least USD800 million per year for three years in R&D.
It is interesting to note that Seagate is entitled to apply to MOFCOM for release of the first two of the above obligations after the elapse of 12 months from the date of the decision. MOFCOM will then decide whether to approve based on the market conditions.
Comments
The decision is the most comprehensive decision MOFCOM has published to date. Whereas MOFCOM still relies heavily on market share and market structure, it also takes in account a comprehensive set of factors as well as pragmatic evidence in its analysis.
Moreover, this deal was also notified in the U.S. and the EU. But MOFCOM is the only authority that has imposed remedies, showing that MOFCOM is getting increasingly independent in reaching its own decision. This raises another interesting issue: how and to what extent would antitrust authorities in different jurisdictions cooperate with each other in the face of a cross-jurisdictional merger filing if significant divergence is likely to happen?
In relation to the remedies, it is also interesting to note that for the first time, MOFCOM included a periodic review clause in its clearance. Western Digital/Hitachi, the other major transaction in HDD market, obtained conditional approval from the European Commission in November. MOFCOM may have considered that the Western Digital/Hitachi transaction and the divesture commitments made by Western Digital may eventually change the competitive landscape of the HDD market and therefore Seagate’s obligations may merit review at a later stage.
CANADIAN UPDATE – Supreme Court of Canada Rejects Proposed Legislation for a National Regulator
Highlights:
- The Supreme Court of Canada issued a unanimous decision that the proposed federal Canadian Securities Act, as currently drafted, is unconstitutional as it is not a valid exercise of the Federal Government’s power to regulate trade and commerce.
- The Court expressly noted that there were specific aspects of the Act aimed at addressing matters of genuine national importance going to trade as a whole; however, viewed as a whole, the Act is principally directed at the day‑to‑day regulation of all aspects of securities—which would duplicate and displace the existing provincial and territorial securities regimes.
- The Court appears to have left it open to legislators to introduce narrower legislation which is specifically targeted at matters of national concern such as the regulation of systemic risk and national data collection. Alternatively the Court noted that the provinces and federal authorities could cooperate to design a regulatory scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns.
MAIN ARTICLE
Earlier today the Supreme Court of Canada issued a unanimous decision that the proposed federal Canadian Securities Act, as currently drafted, is unconstitutional as it is not a valid exercise of the Federal Government’s power to regulate trade and commerce under s. 91(2) of the Constitution Act, 1867. Davies represented the Canadian Coalition for Good Governance in the proceedings before the Supreme Court of Canada.
Background
In May 2010, the Federal Government initiated a reference to the Supreme Court of Canada. A single question was asked: does the Federal Government of Canada have legislative authority to enact the proposed Canadian Securities Act (the “Act”). The Act would have created a single national securities regulator ultimately overseeing a unified national securities regulation system for Canada.
The Canadian securities industry evolved provincially and has since remained regulated by the provinces. This is not to suggest the regime has been without controversy. Dating back to the 1935 Royal Commission on Price Spreads, many federally and provincially-appointed commissions have called for consolidation under a national regulator. Most recently, both the 2002 Wise Persons Committee and the 2009 Hockin panel issued reports endorsing a single national regulator. The federal government responded by forming the Canadian Securities Transition Office, charged with establishing a Canadian securities regulator within three years.
On April 13, 2011, arguments were heard at the Supreme Court concerning the proposed Act. Advocating in favour of a national regulator were the federal government, together with the government of Ontario and a group of industry organizations including the Canadian Coalition for Good Governance, the Canadian Bankers Association and the Canadian Foundation for Advancement of Investor Rights. Their principal argument was that the securities markets have undergone significant transformation in recent decades, evolving from local markets to markets that are now nationally and internationally defined and resulting in systemic risks that can only be dealt with on the national level. The evolving national character of securities markets brings those markets within the general trade and commerce power.
The other provinces disputed that the securities markets had evolved to become a matter of national concern. They argued that Canadians are adequately served by the existing framework of provincial legislation. More importantly, however, these provinces perceive the nationalization of securities regulation as a threat to the balance of federalism. They believe it would allow the Federal Government to enact legislation that would unilaterally define the scope of its power, thereby usurping the provincial powers over matters of a local or private nature.
The Opinion of the Supreme Court
The Court held that the main thrust of the proposed Act is to regulate, on an exclusive basis, all aspects of securities trading in Canada. In doing so it would duplicate and displace the existing provincial and territorial securities regimes. While the Court agreed that the preservation of capital markets is a matter that goes beyond a specific industry and engages trade as a whole, it found that the proposed Act is chiefly concerned with the day‑to‑day regulation of all aspects of contracts for securities which falls within the provinces’ authority over property and civil rights under the Constitution.
The Court expressly noted that there were specific aspects of the Act aimed at addressing matters of genuine national importance going to trade as a whole. These included management of systemic risk and national data collection. With respect to these aspects of the Act, the provinces, acting alone or in concert, lack the constitutional capacity to sustain a viable national scheme and the federal government would have been justified in acting. However, the Court concluded that, viewed as a whole, the Act is not chiefly aimed at genuine federal concerns. It is principally directed at the day‑to‑day regulation of all aspects of securities.
The Court concluded that the proposed Act overreaches genuine national concerns. While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry, which is the ultimate consequence of the proposed federal legislation.
The Court noted that “the policy question of whether a single national securities scheme is preferable to multiple provincial regimes is not one for the Court to decide.”
The Way Forward
Ultimately, the Court appears to have left it open to legislators to introduce narrower legislation which is specifically targeted at matters of national concern such as the regulation of systemic risk and national data collection. Alternatively the Court noted that the provinces and federal authorities could cooperate to design a regulatory scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns.