368 Search Results

May 17, 2019 |
In the Wake of International Protectionism, France Strengthens Its Enforcement Scheme Applicable to Foreign Investments

Click for PDF On May 16, 2019, the French Constitutional Court (Conseil constitutionnel) cleared most of the provisions of the ambitious so-called “Pacte” Statute on the development and transformation of businesses. Pacte addresses a number of significant legal issues. Among them, in the wake of international protectionism and EU regulation on establishing a framework for the screening of foreign direct investments (see Gibson Dunn’s alert of March 5, 2019), Pacte significantly strengthens the French enforcement scheme applicable to foreign investments. Government Approval Required for Foreign Investments in Strategic Business Sectors Existing French regulation requires foreign investors, prior to making an investment in one of 14 specified sectors[1], irrespective of its size, to obtain an authorization from the French Minister of the Economy. The affected business sectors comprise those impacting France’s public order, public safety or national defense interests. Since November 29, 2018, are also covered certain R&D activities regarding cybersecurity and artificial intelligence as well as the hosting of data pertaining to sensitive businesses. During the discussions in Parliament on Pacte, the French Government indicated it would further broaden the scope of the business sectors affected to better protect “industries of the future” and innovation. The authorization process applies to EU and non-EU investors who acquire: directly or indirectly a controlling stake in a company whose registered office is located in France; or all or part of a line of business of a company whose registered office is located in France. It applies also to non-EU investors who acquire more than 33.33% of the stock or voting rights of a company whose registered office is located in France. The Minister of the Economy may order an investor in breach of this process to withdraw from the investment, to modify the scope of its investment or to revert it. Failure to abide by the Minister’s order exposes the investor to a fine in a maximum amount equal to two times the investment amount (in addition to the potential cancellation of the investment). Pacte Strengthens the Sanctioning Power of the French Minister of the Economy Under Pacte, the French Minister of the Economy is entrusted with a new power of injunction against an investor in breach of either the authorization process or the terms of the authorization[2]. The Minister may, thus, without delay and without any requirement for a prior Court approval, force the investor, under a daily penalty[3], to abide by the process (or by the conditions imposed as part of the authorization), to revert the investment at its cost or to modify its terms. The Minister may also now withdraw its authorization. If an investment has been made without authorization, the Minister may appoint a representative in charge of ensuring that -within the conduct of the acquired business- France’s interests will be protected; to this effect, the representative will be empowered to block any management decision likely to undermine these interests. In situations where France’s interests are or may be compromised, the Minister of the Economy may take new additional interim protective measures and: suspend voting rights attached to the fraction of the share capital held in violation of the authorization process; freeze or restrict distributions and remunerations pertaining to the share capital held in violation of the authorization process; and suspend, restrict or temporary prohibit the disposal of all or part of the assets falling within the ambit of the strategic business sectors. While none of these measures is subject to a prior Court approval, the investor must be given a formal notice and a 15-day delay to present its arguments, except in case of an emergency, exceptional circumstances or imminent breach of public order, public security or national defense. Effective implementation of the Minister’s extended powers will be outlined in decrees to be released later this year by the French government which will be important to monitor. Pacte Increases Fines Against Non-Complying Investors In addition, Pacte increases the amount of the fines that may be imposed by the Minister on an investor in breach of either the process or the terms of the authorization. The maximum fine that can be inflicted may amount to the higher of the following: two times the amount of the investment, 10 percent of the annual turnover (excluding taxes) of the company engaged in the strategic business sector, or 5 million euros for legal entities and 1 million euros for individuals. Pacte Improves the French Parliament’s Information on Foreign Investments Eventually, in line with the EU Regulation, Pacte aims at improving transparency regarding foreign investments and compels: the Minister of the Economy to disclose annually to the Parliament statistical no-names data regarding the screening of foreign investments in France; and the French government to provide annually to certain members of the Parliament (e.g., the chairmen of the Commissions in charge of economic matters and the secretary (rapporteurs) of the finance Commissions) a report containing qualitative and statistical information on measures taken to protect and promote national interests and strategic business sectors as well as on the screening of foreign investments and the outcomes achieved thanks to the new legislation.    [1]   The list of the 14 covered business sectors is as follows: 1°) gambling industry (except casinos); 2°) private security services; 3°) research and development or manufacture of means of fighting the illegal use of toxics; 4°) wiretapping and mail interception equipment; 5)° security of information technology systems and products; 6°) security of the information systems of companies managing critical infrastructure; 7°) dual-use items and technology; 8°) cryptology goods and services; 9°) companies dealing with classified information; 10°) research, development and sale of weapons; 11°) companies that have entered into supply contract with the French Ministry of Defense regarding goods or services involving dual-use items and technology, cryptology goods and services, classified information or research, development and sale of weapons; 12°) activities related to goods, products or services, essential to preserve French interests in relation to public order, public security and national defense (such as energy supply water supply, electronic communication networks and services); 13°) R&D in relation to business sectors 4°), 8°), 9°) or 12°) regarding cybersecurity, artificial intelligence, robotics; 14)° data hosting with respect to data pertaining to business sectors 11°) to 13°).    [2]   The Minister may in particular order the investor to dispose of all or part of the concerned business.    [3]   The amount of which will be defined by a decree to be released later by the French government. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below): Nicolas Baverez –nbaverez@gibsondunn.com Benoît Fleury – bfleury@gibsondunn.com Jean-Philippe Robé – jrobe@gibsondunn.com Nicolas Autet – nautet@gibsondunn.com © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 16, 2019 |
Webcast: Insuring the Deal: Key Considerations when Utilizing Transactional Insurance

Join a panel of seasoned Gibson Dunn partners and an Aon transactional insurance specialist for a presentation regarding the use of transactional insurance products in public and private M&A transactions, with particular focus on the use of representation and warranty insurance when acquiring a company. The webinar discusses complex issues, market developments, the claims process and key considerations. View Slides (PDF) PANELISTS: Matthew Dubeck is a partner in the Los Angeles office of Gibson, Dunn & Crutcher, where he practices in the firm’s Mergers and Acquisitions, Private Equity and Securities Regulation and Corporate Governance Practice Groups. He advises companies, private equity firms and investment banks across a wide range of industries, focusing on public and private merger transactions, stock and asset sales and joint ventures and strategic partnerships. Mr. Dubeck also advises public companies with respect to corporate governance matters. Jonathan Whalen is a partner in the Dallas office of Gibson, Dunn & Crutcher. He is a member of the firm’s Mergers and Acquisitions, Capital Markets, Energy and Infrastructure, and Securities Regulation and Corporate Governance Practice Groups. Mr. Whalen’s practice focuses on a wide range of corporate and securities transactions, including mergers and acquisitions, private equity investments, and public and private capital markets transactions. Matthew Wiener is the head of Aon’s Transaction Liability team for the Southwest region and the national leader for its energy practice. In this role, Mr. Wiener is responsible for the development and implementation of transactional-based risk solutions, including the deployment of insurance capital for M&A transactions through representations and warranties, litigation, tax and other contingent liabilities insurance. MCLE INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

May 9, 2019 |
UK Nationalisation – Investment Treaties can offer opportunities to reorganise now to protect valuations

Click for PDF The political instabilities caused by Brexit raise the possibility that a General Election may be held in the UK sooner than the scheduled 5 May 2022.  Given current political turbulence, the prospect of Labour winning any such snap election can no longer be dismissed.  If this happens, a future Labour government led by Jeremy Corbyn and John McDonnell is expected to consider nationalising a range of assets, including utilities (such as water, rail and energy), the Royal Mail and possibly even certain private finance initiative (PFI) companies.  Nationalising profitable UK companies on this scale  has not happened since the post-WWII 1945 Labour government. How might nationalisation happen? There is not yet much detail on how any nationalisation programme would be carried out.  Industry-specific regulations and arrangements mean that the process will probably differ depending on the sector.  Some businesses – e.g. rail, certain PFI contracts – are run under  time-limited franchises and a Labour government might simply allow these contracts to run their course before bringing them back under government control.  However, other utilities are run under perpetual licences (e.g. regional water franchises in England and Wales were sold, not leased).  Here, the Government would need to impose a compulsory takeover, possibly issuing Government bonds to shareholders in exchange for their shares in the company owning the asset. Valuations It will not be possible to prevent the expropriation of these assets if it is approved by the UK Parliament.  However, a key question will be how the owners of such nationalised assets will be compensated.  Valuing shares is typically complex (especially with unlisted SPV ownership structures).  Labour has suggested valuations would be made on a case by case basis, with a role for Parliament in the process.  There is a concern, however, that Labour may seek to save money by refusing to pay full market value for the expropriated assets, or that the use of Government bonds as consideration may mean that payment is deferred over extremely long periods (some of the stock issued as consideration for the post-WWII nationalisations was not redeemable for 40 years). Valuations that are seen as unfair will inevitably trigger compensation claims by investors.  There are a number of routes to possible claims, such as under the Human Rights Act 1998 and/or the European Convention on Human Rights.  However, investment treaties may offer some investors a better chance of reclaiming the full value of their expropriated investments.  The standard of compensation under most investment treaties is fair market value.  In order to take advantage of an investment treaty, an investor will need to have in place a corporate structure which includes an entity located in a jurisdiction that is party to an investment treaty with the UK to pursue a treaty claim. What is an investment treaty? An investment treaty is an agreement between states that helps facilitate private foreign direct investment by nationals and companies of one state into the other.  Most investment treaties are bilateral (known as “bilateral investment treaties” or “BITs”), but the UK is also a party to the Energy Charter Treaty, which is a multilateral investment treaty with 51 signatories.  The purpose of an investment treaty is to stimulate foreign investment by reducing political risk.  Amongst other things, it is intended to protect an international investor if an asset it owns in the other state is subsequently nationalised without adequate compensation.  Investment treaties generally provide that the overseas investor will receive fair and equitable treatment and that the compensation for any nationalisation will be appropriate and adequate.  There are currently more than 3,200 BITs in force worldwide. The definition of what constitutes an investment is usually quite broad including, for example, security interests, rights under a contract and rights derived from shares of a company. Importantly, most investment treaties provide investors with a right to commence arbitration proceedings and seek compensation if the state has breached its obligations under the treaty (e.g. for failing to provide adequate compensation for a nationalisation).  This means a UK investment treaty could offer an avenue of protection for an overseas investor of a nationalised UK asset.  A list of countries with a UK BIT is here. How to benefit from a UK investment treaty? Some investors in UK assets that may be the subject of nationalisations are considering restructuring their UK investments to take advantage of investment treaties to which the UK is a party.  In some circumstances, this can be achieved by simply including a holding company in the corporate chain which is located in a jurisdiction that has an investment treaty with the UK.  So long as the restructuring is completed before a dispute regarding nationalisation arises, it will be effective.  Therefore, investors who hold UK assets that potentially may be the subject of nationalisation should consider restructuring now. The UK has investment treaties in force with over 100 jurisdictions but not all of them will be suitable for a restructuring.  Investors will want to analyse not only the substance of the UK investment treaty to which the host country is a signatory (some are more rudimentary than others) but also other risk factors.   In particular, investors will want to check the tax treatment of a particular investment vehicle, including making sure that the new company is not obliged under local rules to withhold tax on any interest or dividends.  Equally, some jurisdictions may be considered unattractive because of geopolitical uncertainties or because their courts and professionals have limited business experience.  The costs and governance associated with any possible restructuring would also need to be carefully considered, especially if the restructuring involves a jurisdiction where the new entity will be required to establish a more substantive business presence.  Given all these risks, there are probably only a very small set of  jurisdictions where investors might consider incorporating an entity within their deal structures. Each investment treaty is different and the possible structure will depend on the exact terms of the relevant treaty.  However, in general terms, the restructuring would usually involve the insertion of a new entity incorporated at the top of the corporate structure that holds the UK assets (but below any fund) via a share-for-share exchange with the existing holding entity. Conclusion If a future Labour government seeks to nationalise private assets it is inevitable that claims will be made, particularly regarding the amount of compensation paid to owners.  Although it is not yet clear how a Labour government would assess compensation levels, investors may wish to consider structuring their investments so that they will have the option of using a UK investment treaty for any valuation disputes. This client alert was prepared by London partners Charlie Geffen, Nicholas Aleksander and Jeffrey Sullivan, of counsel Anne MacPherson and associate Tamas Lorinczy. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or any of the following lawyers: Jeffrey Sullivan – International Arbitration jeffrey.sullivan@gibsondunn.com Tel: 020 7071 4231 Sandy Bhogal – Tax SBhogal@gibsondunn.com Tel: 020 7071 4266 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Tamas Lorinczy – Corporate tlorinczy@gibsondunn.com Tel: 020 7071 4218 © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 25, 2019 |
Gibson Dunn Earns 79 Top-Tier Rankings in Chambers USA 2019

In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.

April 24, 2019 |
CFIUS Developments: Notable Cases and Key Trends

Click for PDF The Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) kicked into high gear this spring with a number of notable cases and developments.  Six key trends have emerged: (1)  CFIUS has forced several companies to divest from U.S. businesses involved in the collection of sensitive personal data or cybersecurity; (2)  The pilot program for mandatory filings of certain critical technology investments has yet to streamline the CFIUS review process, as only a small percentage of pilot program cases have been decided on the basis of the “short-form” declaration (a 5-page alternative to the lengthier 45-page voluntary notice); (3)  CFIUS and its member agencies are increasing staff and resources (including a new office dedicated to detecting transactions that have not been notified); (4)  Mitigation strategies are of critical importance, and CFIUS is encouraging parties to think through such terms when negotiating a deal and to initiate a dialogue with CFIUS regarding proposed mitigation prior to the submission of a notice; (5)  Additional regulations to be published later this year will offer further guidance for investment funds with minority foreign investors (possibly including a “black” and “white” list of countries whose investors may be subject to different levels of scrutiny); and (6)  Large investors may tread carefully with respect to the new rules for non-controlling investments, refraining from appointing board members or exercising the types of governance rights which could trigger CFIUS scrutiny. Background CFIUS is an inter-agency group authorized to review the national security implications associated with foreign acquisitions of or investments in U.S. businesses (“covered transactions”), and to block transactions or impose measures to mitigate any threats to U.S. national security.  Historically, the Committee’s jurisdiction has been limited to transactions that could result in control of a U.S. business by a foreign person.  Recent legislation, the Foreign Investment Risk Review and Modernization Act (“FIRRMA”), expanded the scope of transactions subject to the Committee’s review by granting CFIUS the authority to examine the national security implications of a foreign acquirer’s non-controlling investments in U.S. businesses that deal with critical infrastructure, critical technology, or the personal data of U.S. citizens.  FIRRMA also provided CFIUS with authority to review real estate transactions—including leases, sales, and concessions—involving air or maritime ports or in close proximity to sensitive U.S. government facilities. Emerging Trends (1) Increasing Number of Forced Divestitures The Committee forced divestitures of several investments due to concerns regarding cybersecurity or access to sensitive personal data, suggesting that CFIUS will continue to scrutinize investments in higher risk sectors under the authority granted to it by FIRRMA. Two matters bear note: Kunlun/Grindr.  In late March 2019, the Committee ordered Beijing Kunlun Tech Co. Ltd. (“Kunlun”) to sell its interest in Grindr LLC, a popular dating application focused on the LGBTQ community.  Kunlun, a Chinese technology firm, acquired an approximately 60 percent interest in Grindr in January 2016, and subsequently completed a full buyout of the company in January 2018.  Although CFIUS has not commented publicly, observers have speculated that the action was prompted by concerns over Kunlun’s access to sensitive personal data from Grindr users—such as location, sexual preferences, HIV status and messages exchanged via the Grindr app. iCarbonX/PatientsLikeMe.  CFIUS is forcing the Shenzhen-based iCarbonX to divest its majority stake in PatientsLikeMe, an online service that helps patients find people with similar health conditions.  In 2017, PatientsLikeMe raised $100 million and sold a majority stake to iCarbonX, which was started by genomic scientist Jun Wang.  About 700,000 people use the PatientsLikeMe website to report their experiences with medical conditions.  The company claims to have tens of millions of “data points about disease,” and its partners range from large pharmaceutical companies like Biogen to non-profit health organizations like the International Bipolar Foundation, which uses the site to find patients for clinical studies and research.  The 2017 iCarbonX deal was designed to marry the Chinese company’s artificial intelligence technology for improving health care with PatientsLikeMe’s customers and data sets. (2) Not-So “Expedited” Critical Technology Pilot Program Reviews In late 2018, CFIUS launched a pilot program under which mandatory filings are required for certain types of investments in U.S. critical technology companies.  As of November 10, 2018, non-U.S. companies seeking to acquire control (or, in certain circumstances, a non-controlling stake) in U.S. companies involved in making or designing certain critical technologies related to 27 specific industries must file a mandatory declaration with CFIUS.  In lieu of the lengthy notice that is currently used in voluntary CFIUS filings, the pilot program provides for the submission of “light” or short-form declarations (not to exceed 5 pages).  This filing must be submitted at least 45 days before the expected completion date of the transaction.  The pilot program aimed to provide a streamlined review process, as FIRRMA requires the Committee to respond to a declaration within 30 days by approving the transaction, requesting that the parties file a full written notice, or initiating a further review. Notably, however, a majority of the declarations filed under the pilot program have been pushed into the standard review process, meaning that the streamlined “light” filing actually resulted in a longer review process for the parties involved.  Anecdotal evidence suggests that fewer than 10 percent of cases filed under the pilot program have been decided on the basis of the short-form declaration alone, despite a relatively low volume of filings.  Numerous transactions have required the submission of the full notice, and it has been difficult for the intelligence community to complete their full assessment within the allocated 30 days.  In light of these risks, we continue to advise clients who may qualify for the pilot program to consider submitting the full notice at the outset of the process. The Committee is contemplating the imposition of filing fees for expedited reviews, and expects to publish proposed regulations later this year. (3) Increasing Staff and Resources In late March 2019, the Department of Justice requested a significant budget increase for its national security division to review foreign investments, an effort to increase the resources available to the Committee.  In its proposal for the fiscal year 2020 budget, DOJ requested an increase of $5 million and 21 positions (including 16 attorneys) for its national security division to assist with reviewing CFIUS cases.  At the current budget level, the DOJ employs 13 individuals (including 9 attorneys), which means the national security division is asking to significantly increase its current staff working on CFIUS matters.  Additionally, DOJ requested an increase of $18.3 million—part of which will cover 6 new positions—for the Federal Bureau of Investigation to spend on counterintelligence matters, including work on CFIUS-related cases.  The existing budget and number of positions allocated towards this goal is classified, according to the DOJ.  Last November, the DOJ unveiled its so-called “China Initiative,” which was created to reflect the DOJ’s efforts to counter Chinese national security threats.  The initiative seeks to enforce a full range of laws against espionage, foreign agents and threats to supply chains, as well as to identify U.S. Foreign Corrupt Practices Act cases that involve Chinese companies that compete with American businesses. Furthermore, CFIUS has hired staff to head an office responsible for monitoring the market for covered transactions that had not been notified.  The office is not yet up and running. (4) The Importance of Mitigation It remains critical to think about CFIUS mitigation strategies at the outset of any deal, and to reach out to the Committee before filing the notice to begin a dialogue.  Despite the growing concerns regarding Chinese investments (as demonstrated by the divestitures discussed above), the Committee has approved Chinese deals with appropriate mitigation.  (Notably, Gibson Dunn secured clearance for a Chinese investment in a U.S. semiconductor company in January 2018—the only Chinese-controlled acquisition to be cleared by CFIUS within the statutory period and without mitigation under the Trump administration.) More independent monitors are likely in longer term mitigation agreements, and Treasury is working to build consistency between other U.S. government agencies responsible for the oversight of CFIUS national security agreements. Last year CFIUS imposed a $1 million penalty related to repeated breaches of a 2016 mitigation agreement, including failure to establish requisite security policies and failure to provide adequate reports to CFIUS. Although the penalty was imposed in 2018, it was posted on the Committee’s website in mid-April 2019. (5) More Regulations Are Coming Proposed regulations will be published later this year.  The Committee is taking lessons learned from the pilot program and incorporating them into the new rules. The Committee expects to provide more guidance with regard to what it means to be a foreign person in the context of an investment fund, which may include “black” and “white” lists of countries whose investors will be subject to different levels of scrutiny.  Notably, the Committee recently approved a Chinese investment in a U.S. business through an investment vehicle with a U.S. manager, in keeping with the investment fund carve out set forth in FIRRMA. (6) Cautious Investors Finally, it is worth noting that a number of major foreign investors are treading cautiously with respect to the Committee’s new rules—in some cases, by refraining from appointing board seats despite substantial investments. By contrast, certain Chinese investors are abandoning transactions altogether.  China’s ENN Ecological Holdings Co. recently announced that it had withdrawn its offer for Toshiba’s U.S. liquefied natural gas business because of failure to win approval from CFIUS and shareholders by a specified closing date.  Toshiba announced earlier this month that CFIUS approval had been delayed because of the U.S. government shutdown in early 2019.  Pursuant to FIRRMA, all pending CFIUS reviews were tolled for the duration of the government shutdown. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Jose Fernandez and Stephanie Connor. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 19, 2019 |
Gibson Dunn Ranked in Legal 500 EMEA 2019

The Legal 500 EMEA 2019 has recommended Gibson Dunn in 14 categories in Belgium, France, Germany and UAE.  The firm was recognized in Competition – EU and Global in Belgium; Administrative and Public Law, Dispute Resolution – Commercial Litigation Industry Focus – IT, Telecoms and the Internet, Insolvency, Insurance, Mergers and Acquisitions, and Tax in France; Antitrust, Compliance, Internal Investigations and Private Equity in Germany; and Corporate and M&A and Investment Funds in UAE. Chézard Ameer, Ahmed Baladi,  Jean-Pierre Farges and Dirk Oberbracht were all recognized as Leading Individuals. Jérôme Delaurière was listed as a “Next Generation Lawyer.”  

March 28, 2019 |
Gibson Dunn Wins Corporate Team of the Year at the Legal Business Awards

Legal Business magazine has named Gibson Dunn as the “Corporate Team of the Year” at The Legal Business Awards 2019. The firm received the award for its representation of William Hill on its entry into a U.S. partnership with Eldorado Resorts, which Legal Business described as “a groundbreaking and high-pressure transaction.” The awards were presented at a ceremony in London on March 28, 2019.

March 26, 2019 |
Global Competition Review Recognizes Gibson Dunn for Merger Control Matter of the Year

Global Competition Review has named the AT&T/Time Warner matter as the “Merger Control Matter of the Year – Americas” at its annual GCR Awards. Gibson Dunn was counsel to AT&T. The awards were presented on March 26, 2019.

March 25, 2019 |
M&A Report – 2018 Year-End Activism Update

Click for PDF This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion during the second half of 2018. Shareholder activism underwent a modest decline in the second half of 2017, but accelerated again in the first half of 2018. A similar pattern emerged during the second half of 2018, with a modest decline relative to the second half of 2017 in the numbers of public activist actions (40 vs. 46), activist investors taking actions (29 vs. 36) and companies targeted by such actions (34 vs. 39). However, in light of the robustness of shareholder activism activity in the first half of 2018, full-year numbers for 2018 are virtually identical to those of 2017, including with respect to the numbers of public activist actions (98 vs. 98), activist investors taking actions (65 vs. 63) and companies targeted by such actions (82 vs. 82). During the period spanning July 1, 2018 to December 31, 2018, four of the 34 companies targeted by activists were the subject of multiple campaigns, led by Dell Technologies Inc., which was the subject of four different activist campaigns. Bunge Limited was also the subject of two simultaneous campaigns by D.E. Shaw Group and a company before settling both campaigns at the same time. As to the activists, seven out of the 29 covered in this Client Alert launched multiple campaigns. The market capitalizations of those companies reviewed in this Client Alert ranged from just above the $1 billion minimum to just under $100 billion, as of December 31, 2018 (or as of the last date of trading for those companies that were acquired and delisted). By the Numbers – 2018 Full Year Public Activism Trends Additional statistical analyses may be found in the complete Activism Update linked below.  Compared to the first half of 2018, activists focused their campaigns more squarely on M&A as compared to other rationales. In the case of 65% of campaigns, M&A, including advocacy for or against spin-offs, acquisitions and sales, was an activist motivation (as compared to 32% in the first half of 2018), followed by business strategy (50% of campaigns, as compared to 36% in the first half of 2018). Changes to board composition, which had gained prominence in the first half of 2018 as the most common rationale for activist campaigns, represented the goal of activists in 45% of campaigns in the second half of 2018 (as compared to 76% in the first half of 2018). On the other hand, advocacy for changes in governance (20% of campaigns in the second half of 2018), return of capital (15% of campaigns), managerial changes (13% of campaigns) and attempts to take corporate control (5% of campaigns) represented less-frequently cited rationales for activist campaigns. Proxy solicitation transpired in 15% of the campaigns, representing a modest decline relative to the first half of 2018, in which 20% of campaigns featured activists filing proxy materials. (Note that the above-referenced percentages sum to over 100%, as certain activist campaigns had multiple rationales.) Consistent with the heightened focus on M&A and diminished attention paid by activists in their campaigns to board composition and governance, the number of publicly filed settlement agreements declined to nine (as compared to 21 in the first half of 2018). Consistent with prior trends, certain key terms have become increasingly standard in such settlement agreements. Voting agreements and standstill periods appeared in each of the settlement agreements, and non-disparagement covenants and minimum and/or maximum share ownership covenants appeared in all but one of the settlement agreements. Expense reimbursement appeared in over half of the settlement agreements reviewed (five), continuing a trend that began in the first half of 2018, when 62% of publicly filed settlement agreements contained such a provision (as compared to an historical average of 36% from 2014 through the first of 2017). Strategic initiatives did not figure prominently in settlement agreements entered into during the second half of 2018, being included in only two settlement agreements. We delve further into the data and the details in the latter half of this edition of Gibson Dunn’s Activism Update. We hope you find Gibson Dunn’s 2018 Year-End Activism Update informative. If you have any questions, please do not hesitate to reach out to a member of your Gibson Dunn team. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this publication.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors in the firm’s New York office: Barbara L. Becker (+1 212.351.4062, bbecker@gibsondunn.com) Dennis J. Friedman (+1 212.351.3900, dfriedman@gibsondunn.com) Richard J. Birns (+1 212.351.4032, rbirns@gibsondunn.com) Eduardo Gallardo (+1 212.351.3847, egallardo@gibsondunn.com) Saee Muzumdar (+1 212.351.3966, smuzumdar@gibsondunn.com) Daniel Alterbaum (+1 212.351.4084, dalterbaum@gibsondunn.com) William Koch (+1 212.351.4089, wkoch@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Mergers and Acquisitions Group: Jeffrey A. Chapman – Dallas (+1 214.698.3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202.955.8593, siglover@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310.552.8641, jlayne@gibsondunn.com) Securities Regulation and Corporate Governance Group: Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949.451.4343, jmoloney@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 19, 2019 |
China Revamps Laws on Foreign Investments

Click for PDF On March 15, 2019, the National People’s Congress of China passed the Foreign Investment Law (the “Foreign Investment Law”) which, upon taking effect on January 1, 2020, will replace some of the basic laws and regulations relating to foreign investments in China (the “Existing Laws”).  This new law represents a major overhaul of China’s foreign investment regulatory regime developed over the last four decades. Current Regime The Existing Laws consist primarily of three pieces of legislation:  the Sino-Foreign Joint Venture Law (the “Equity JV Law”), the Foreign Enterprise Law (the “WFOE Law”) and the Sino-Foreign Co-operative Joint Venture Law (the “Co-operative JV Law”).  Each of these laws allows foreign investors to invest in a particular type of legal entity in China.  Under the WFOE Law, for example, a foreign investor can incorporate a wholly foreign owned enterprise (a “WFOE”).  Similarly, under the Equity JV Law and the Co-operative JV Law, foreign investors can set up equity or co-operative joint ventures with Chinese partners (the “Joint Ventures”).  The WFOEs and the Joint Ventures are collectively referred to as foreign invested enterprises (the “FIEs”).  Apart from these laws, China has (and periodically updates) a foreign investment catalogue (the “Foreign Investment Catalogue”) which divides foreign investments into those that are encouraged and those that are on a negative list (the “Negative List”).  The Negative List contains two sub-categories: the prohibited (i.e., no foreign investment is allowed) and the restricted (i.e., foreign investment is allowed subject to satisfaction of certain conditions).  Those sectors that are not on the encouraged list or the Negative List are treated as permitted. The overriding feature of China’s regulation of foreign investments is that the FIEs are treated very differently from companies that are not owned by foreign investors (the “Domestic Companies”).  While China is not unique in this regard, it is the degree of such difference that sets China apart from many other countries.  For instance, the FIEs not only have to satisfy the requirements under the Foreign Investment Catalogue, they also must be registered as different legal entities and subject to different governance procedures compared with the Domestic Companies.  Furthermore, the FIEs are often required to obtain more approvals and enjoy less benefits than the Domestic Companies. Over the last several years, partly as a result of complaints and pressure from foreign governments and businesses, China has taken steps to grant more equal treatment to the FIEs.  While the incorporation documents for all FIEs had to be reviewed and approved by China’s Ministry of Commerce (“MOFCOM”), such requirement is now only applicable to investments in sectors on the Negative List.  The Foreign Investment Law can be seen as another step towards creating a more level playing field in China for both the FIEs and the Domestic Companies. Major Provisions The major provisions of the Foreign Investment Law include the following: National Treatment The Foreign Investment Law specifically provides that the market entry management system for foreign investments in China consists of national treatment plus complying with the Negative List.  In other words, unless otherwise required under the Negative List, the FIEs should be treated in the same way as the Domestic Companies.  This is the first time such national treatment principle is expressly and unequivocally provided in a national law in China. The law also includes some specific requirements for national treatment, including that government policies in supporting business development be applied equally to the FIEs and that equal treatment be accorded to the FIEs in respect of government procurements. Moreover, after the Foreign Investment Law becomes effective, the FIEs will undergo the same incorporation process required under the PRC Company Law (instead of the Existing Laws) as the Domestic Companies.  The FIEs will also be governed in the same way as the Domestic Companies. Protection of Foreign Investments In addition to national treatment, the Foreign Investment Law also contains some  general principles which apparently are aimed at allaying concerns over lack of protection of foreign investments in China, including: there will be no expropriation of foreign investments, unless in special circumstances required for public interest and conducted through a legal process with fair and reasonable compensation made in a timely fashion; the intellectual property rights of the foreign investors and FIEs will be protected and infringements of such rights will be prosecuted strictly according to law; while voluntary technological cooperation between Chinese and foreign investors is encouraged, the terms of such cooperation should be discussed by the investing parties themselves based on principles of fairness and equality, and government authorities or officials may not force transfer of technology through administrative means; government authorities and officials must keep confidential commercial secrets obtained from the foreign investors and FIEs while performing normal government functions; government authorities may not decrease the lawful rights of the FIEs, increase their obligations, impose market entry or exit conditions or interfere with their normal business activities, unless otherwise required by law; local government authorities must honor and perform promises to and contracts with the foreign investors and FIEs made pursuant to law; and a mechanism will be established to collect and address complaints from the FIEs. Requirements under Other Laws The Foreign Investment Law also refers to a number of other laws and regulations relating to foreign investments in China, such as the PRC Anti-Monopoly Law and regulations relating to national security review.  These laws and regulations will continue to be applicable after the Foreign Investment Law comes into effect. Unanswered Questions The Foreign Investment Law is generally viewed as an improvement over the Existing Laws, but it also leaves some important questions unanswered.  One glaring example is that MOFCOM issued a prior draft of the Foreign Investment Law in 2015 for public comments (the “2015 Draft”), which, among other things, dealt with issues relating to variable interest entities (the “VIEs”) (please click here for our comments on the 2015 Draft).  However, the VIE related provisions have all been dropped from the promulgated Foreign Investment Law.  As the VIE structure has been widely used in investments in certain sectors in China for many years, the fact that the Chinese government is still unwilling or unready to tackle this issue is a disappointment to many foreign investors. Furthermore, the Foreign Investment Law is a rather short piece of legislation which contains primarily broad language on general principles.  The extent to which it will actually improve the environment for foreign investments in China will depend on what specific rules and policies will be adopted to implement the law.  For instance, the current Negative List was issued in June 2018.  Many foreign investors are hoping that, with the passage of the Foreign Investment Law, the Negative List will be updated again to further liberalize restrictions on foreign investments in certain sectors.  Similarly, the Foreign Investment Law provides that foreign investors can freely remit out of China their earnings, royalties, capital gains and proceeds from disposal of assets.  However, given China’s tight foreign exchange controls, foreign investors often encounter obstacles and delays in actually making such remittance.  One encouraging development was that three days after the Foreign Investment Law was passed, China’s forex authority issued a circular revising and simplifying rules on cross border financing activities by multinational companies. The Foreign Investment Law is intended to promote and protect foreign investments by making the FIEs less “foreign” in China.  This is a challenge as well as a welcome step in a country which traditionally has believed strongly that there is a big difference between what is domestic and what is foreign.  It remains to be seen whether the purported benefits for foreign investors under  the Foreign Investment Law will be fully realized in real life. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about this development.  Please contact the Gibson Dunn lawyer with whom you usually work or the following authors: Yi Zhang – Hong Kong (+852 2214 3988, yzhang@gibsondunn.com) Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com) Keron Guo – Beijing (+86 10 6502 8505, kguo@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 11, 2019 |
Gibson Dunn Receives China Business Law Award for Mergers & Acquisitions

Gibson Dunn was among the firms recognized by China Business Law Journal in the category of Mergers & Acquisitions – International Firms for its annual 2019 awards.  The awards were announced on March 11, 2019. Gibson Dunn’s Mergers and Acquisitions Practice Group is an international leader in mergers, acquisitions, divestitures, spin-offs, proxy contests and joint ventures.  Our M&A capabilities are worldwide.  Gibson Dunn’s combination of U.S.-based lawyers and network of offices in financial centers abroad allows us to handle the most complex cross-border deals effectively and efficiently.  Our lawyers are accustomed to serving clients from around the world, and all of our lawyers, regardless of location, share our approach to delivery of the highest quality of service to our clients.

March 8, 2019 |
Gibson Dunn Ranked in Chambers Europe 2019

Gibson Dunn received 30 rankings in Chambers Europe 2019: 22 individual rankings and eight firm rankings. The firm was recommended in the following categories: Competition/European Law – Belgium; Corporate Investigations – Europe-wide; Corporate/M&A: High-End Capability – France; Restructuring/Insolvency – France; TMT: Information Technology – France; Compliance – Germany; Corporate/M&A: High-End Capability – Germany; Dispute Resolution: White-Collar Crime: Corporate Advisory – Germany. The following Gibson Dunn partners were recognized as leaders in their fields: Peter Alexiadis, Ahmed Baladi, Sandy Bhogal, Jérôme Delaurière, Jean-Pierre Farges, Benoît Fleury, Charlie Geffen, Ariel Harroch, Chris Haynes, Ali Nikpay, Dirk Oberbracht, Wilhelm Reinhardt, Sebastian Schoon, Benno Schwarz, Steve Thierbach, David Wood, and Finn Zeidler.

March 5, 2019 |
EU Regulation on Establishing a Framework for Screening of Foreign Direct Investments into the European Union Has Been Adopted

Click for PDF The regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments (“FDI”) into the European Union (“EU”) was adopted on March 5, 2019.  This new regulation (“FDI Regulation”) is based on a proposal by the European Commission (“Commission”) presented in September 2017 following an initiative for investment reviews at the EU level by the French, German and Italian governments from February 2017. The FDI Regulation will come into force on the 20th day following its publication in the Official Journal of the EU, hence, presumably sometime in April. It will, however, only apply 18 months after entry into force, thereby giving the EU member states (“Member States”) enough time to take necessary measures for its implementation. The FDI Regulation establishes an EU-coordinated cooperation among Member States and is the result of the EU’s efforts to strike a balance between the opportunities globalization offers and the potential cross-border impact of FDI inflows on security or public order of the Member States and the EU as a whole. By establishing a common framework for screening by Member States and for a mechanism for cooperation on EU level concerning FDI, the FDI Regulation seeks to provide legal certainty for Member States’ screening mechanisms on the grounds of security and public order (by, e.g., expressly determining critical infrastructure, critical technologies, supply of critical inputs, access to sensitive information, and freedom and pluralism of the media as factors that may be taken into consideration in national screening decisions) and to ensure EU-wide coordination and cooperation on the screening of FDI likely to affect security or public order.[1] The creation of designated contact points and the regulated exchange of information at an EU level is aimed to increase transparency and awareness on FDI likely to affect security or public order. The FDI Regulation also provides the Members States and the Commission with the means to address such risks to security or public order. The Commission may issue an opinion and the other Member States may provide comments which are both non-binding but shall be given due consideration by the Member State where the FDI is planned or has been completed. Where an FDI is likely to affect projects and programs of EU interest (regarding areas such as research, space, transport and energy), the Member State concerned will even have to take utmost account of the Commission’s opinion and provide an explanation to the Commission if its opinion is not followed. The FDI Regulation neither aims to harmonize national screening mechanisms (which currently exist in 14 out of 28 Member States), nor does it replace national screening mechanisms with a single EU screening mechanism, i.e., it does not create a European one-stop shop solution. The FDI Regulation also does not oblige Member States without screening mechanisms in place to establish one. The decision whether to set up a screening mechanism, or to screen a particular FDI, remains the sole responsibility of the Member State concerned.[2] Any maintenance, amendment or adoption of a screening mechanism, however, needs to be in line with the provisions of the FDI Regulation.[3] Even though the FDI Regulation stresses that Member States without screening mechanisms are not required to create one, the mere existence of a screening framework at the EU level may nonetheless increase the likelihood of more Member States establishing a national screening mechanism – examples being Hungary, which has introduced a national screening mechanism in January 2019, as well as Sweden and the Czech Republic which may follow suit in the near future. The establishment of a screening framework will also have an impact on currently existing screening mechanisms, most of which will have to be adjusted to allow for the integration of the new EU cooperation process. It is likely that besides extending time frames, national screening rules may be tightened (further), as it is for instance expected in the case of Germany. The developments in Europe can be seen as part of a global trend towards more awareness and scrutiny of foreign investments. Background Prior to the FDI Regulation, there was no comprehensive framework at EU level for the screening of FDI on the grounds of security or public order. No formal coordination was in place, neither between the Commission and the Member States nor amongst the Member States themselves. When the Commission presented its draft proposal for the FDI Regulation in September 2017, only 12 out of 28 Member States had a national mechanism for screening of FDI in place; meanwhile 14 Member States screen FDI, namely Austria, Denmark, Germany, Hungary, Finland, France, the Netherlands, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom. These national FDI screening mechanisms are not aligned and may differ widely in their scope and design. Key Aspects of the FDI Regulation Enhanced Cooperation A key aspect of the FDI Regulation is the establishment of a formal mechanism for cooperation between the Member States, and between Member States and the Commission, which takes on an active role. The cooperation mechanism is enabled through the following instruments: Designated Contact Points. All Member States (regardless of a national screening mechanism being in place or not) and the Commission have to establish a contact point for the implementation of the FDI Regulation.[4] Such contact points should be appropriately placed within the respective administration, and have the qualified staff and the powers necessary to perform their functions under the coordination mechanism and to ensure a proper handling of confidential information.[5] Direct cooperation and exchange of information between the contact points shall be supported through a secure and encrypted system provided by the Commission. The Member States (and the Commission alike) need to ensure the protection of confidential information acquired in application of the FDI Regulation in accordance with EU law and their national law. It also needs to be ensured that classified information shared under the FDI Regulation is not downgraded or declassified without the prior written consent of the originator.[6] The foregoing confidentiality obligations are particularly important to protect and avoid misuse of commercially sensitive information. The FDI Regulation further stipulates that personal data has to be processed in accordance with EU data protection laws and only to the extent necessary for screening of FDI by the Member States and for ensuring the effectiveness of the cooperation provided for in the FDI Regulation, and may only be kept for the time necessary to achieve the purposes for which it was collected.[7] Group of Experts. A group of experts on the screening of FDI into the EU was set up by Commission decision of November 29, 2017.[8] The group of experts consists of representatives of the Member States and is chaired by a representative of the Commission’s Directorate General for trade. It functions as a second institutional coordination body – next to the envisaged FDI screening contact points – and provides advice and expertise to the Commission on matters relating to FDI into the EU.[9] The group of experts provides a forum to discuss issues relating to the screening of FDI, share best practices and lessons learned, and exchange views on trends and issues of common concern relating to FDI.[10] International Cooperation. The FDI Regulation encourages international cooperation by expressly stating that the Member States and the Commission may also cooperate with the responsible authorities of (like-minded) third countries on issues related to the screening of FDI on grounds of security and public order.[11] Other Stakeholders and Interest Groups. Albeit not directly invited to share their viewpoint (and somewhat hidden in the recital), economic operators, civil society organizations, and social partners such as trade unions may convey relevant information in relation to FDI likely to affect security or public order to the Member States and the Commission, which might consider such information.[12] Active Role of the Commission. The Commission is now equipped with the competence to request information and share its opinion on FDI that are likely to affect (i) projects and programs of EU interest on grounds of security or public order, or (ii) security and public order in more than one Member State which allows it to play an active role in the cooperation mechanism. The Member State where the FDI is planned or has been completed needs to give due consideration to the Commission’s opinion, or, in case of projects and programs of EU interest likely being affected, is even required to take utmost account of it and provide an explanation if it does not follow the Commission’s opinion. Increased Transparency on FDI The FDI Regulation introduces certain notification, reporting and information requirements related to FDI inflows and screening mechanisms, which shall increase the level of transparency and information exchange. The Member States are required to initially notify the Commission of their existing screening mechanisms no later than 30 days after the entry into force of the FDI Regulation. No later than three months after having received such notifications, the Commission will make publicly available (and keep up to date) a list of the Member States’ existing screening mechanisms. Any newly adopted screening mechanism or any amendment to an existing screening mechanism needs to be notified to the Commission within 30 days of the entry into force of the newly adopted screening mechanism or of any amendment to an existing mechanism. By March 31 of each year, the Member States are required to submit to the Commission an annual report which shall include aggregated information on (i) FDI that took place in their territory, on the basis of information available to them, (ii) the requests received from other Member States, and (iii) the application of their screening mechanisms (including the decisions allowing, prohibiting or subjecting FDI to conditions or mitigating measures and the decisions regarding FDI likely to affect projects and programs of EU interest), if any.[13] The Commission is expected to provide standardized forms in order to improve the quality and comparability of information provided by the Member States and to facilitate compliance with the notification and reporting obligations.[14] The Commission in turn will provide an annual report to the European Parliament and the Council on the implementation of the FDI Regulation, which will be made public for greater transparency. The FDI Regulation further provides for a notification requirement regarding FDI undergoing screening in a Member State with screening mechanism as well as a minimum level of information with regard to all FDI falling under the scope of the FDI Regulation, to be shared either mandatorily (for FDI undergoing screening) or upon request (for FDI not undergoing screening for lack of a national screening mechanism), unless such information is not available in exceptional circumstances despite best efforts. Minimum information to provide includes aspects such as the ownership structure and the business operations of the foreign investor and the target company, as well as the financing of the planned or completed investment and its source. Legal Certainty By creating a framework for screening mechanisms of Member States, the FDI Regulation aims to provide legal certainty for Member States and investors. Screening mechanisms of Member States need to be based on the grounds of security and public order, thereby being compliant with the requirements for imposing restrictive measures under GATS,[15] OECD,[16] or Free Trade Agreements (FTAs), and sending a signal against protectionism.[17] Member States shall apply time frames under their screening mechanisms and allow for the consideration of comments of other Member States and the opinion of the Commission. Rules and procedures relating to screening mechanisms shall provide for the protection of confidential information made available to the Member State conducting the screening, not discriminate between third countries and be transparent by way of setting out the circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules. National screening mechanisms shall also be equipped with measures necessary to identify and prevent circumvention of the screening mechanisms and screening decisions, and provide foreign investors and target companies concerned with the possibility to seek recourse against the screening decisions of the national authorities. Scope of Application A foreign direct investment, pursuant to the FDI Regulation, is an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the target company to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity. Not covered by the FDI Regulation are portfolio investments, i.e. investments without any intention to influence the management and control of a company. Foreign investor is defined as a natural person of a third country or a company of a third (i.e., non-EU) country, intending to make or having made an FDI. How does the new EU cooperation mechanism work? There are three different scenarios to distinguish: (a) FDI undergoing screening by a Member State, (b) FDI not undergoing screening for lack of a national screening mechanism, and (c) FDI likely to affect projects or programs of EU interest. (a) FDI undergoing screening in a Member State with screening mechanism Step 1: The Member State conducting the screening notifies the Commission and the other Member States of the FDI and provides information. The Member States shall, as soon as possible, notify the Commission and the other Member States of any FDI in their territory that is undergoing screening. The notification may include a list of Member States whose security or public orders is deemed likely to be affected and shall indicate whether the FDI is likely to fall within the scope of the EC Merger Regulation. Information to be provided in the notification of an FDI includes: the ownership structure of the foreign investor and of the target company in which the FDI is planned or has been completed, including information on the ultimate investor and participation in the capital; the approximate value of the FDI; the products, services and business operations of the foreign investor and of the target company in which the FDI is planned or has been completed; the Member States in which the foreign investor and the target company in which the FDI is planned or has been completed, conduct relevant business operations; the funding of the investment and its source, on the basis of the best information available to the Member State; and the date when the FDI is planned to be completed or has been completed. The Member State conducting screening may request the foreign investor or the target company in which the FDI is planned or has been completed to provide the above information.[18] Step 2: The other Member States and the Commission notify the Member State conducting the screening of their intention to provide comments or an opinion and may request additional information. After being notified of the FDI, other Member States and the Commission have 15 calendar days to notify the Member State conducting the screening of their intent to provide comments or an opinion, and to request additional information. Any request for additional information, however, has to be duly justified, limited to information necessary to provide comments or issue an opinion, proportionate to the purpose of the request and not unduly burdensome for the Member State conducting the screening. The Member State conducting the screening shall endeavor to provide such additional information, if available, to the requesting Member States and/or the Commission without undue delay. Step 3: Determining whether the FDI is likely to affect security or public order (screening factors). The FDI Regulation provides for a non-exhaustive list of factors that the Member States and the Commission may take into consideration when determining whether an FDI is likely to affect security or public order. Firstly, the Member States and the Commission may consider the FDI’s potential effects on, inter alia: critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial  infrastructure, and sensitive facilities as well as land and real estate crucial for the use of such infrastructure; critical technologies and dual-use items as defined in point 1 of Article 2 of Council Regulation (EC) no. 428/2009[19], including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies; supply of critical inputs, including energy and raw materials, as well as food security; access to sensitive information, including personal data, or the ability to control such information; or the freedom and pluralism of the media. Secondly, the Member States and the Commission may also take into account, in particular: whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding; whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or whether there is a serious risk that the foreign investor engages in illegal or criminal activities. Step 4: The other Member States and the Commission may provide comments or an opinion. Other Member States may provide comments to the Member State conducting the screening if they consider that the FDI is likely to affect their security or public order, or if they have information relevant for such screening. The Commission may issue an opinion addressed to the Member State conducting the screening if it considers that the FDI is likely to affect security or public order in more than one Member State, or if it has relevant information in relation to that FDI. The Commission may issue an opinion irrespective of whether other Member States have provided comments. The Commission shall, however, issue an opinion where justified following comments from at least one-third of Member States considering that the FDI is likely to affect their security or public order. Other Member States’ comments and the Commission’s opinion have to be duly justified. The Member State conducting the screening may also itself request that the Commission issues an opinion, or other Member States provide comments if it considers that the FDI in its territory is likely to affect its security or public order. Comments and opinions are to be addressed and sent to the Member State conducting the screening no later than 35 calendar days following the receipt of the information conveyed with the notification of the FDI (see above). If additional information was requested, such comments or opinions are to be issued no later than 20 calendar days following receipt of the additional information or the notification that such additional information cannot be obtained. Moreover, the Commission – irrespective of having notified its intention to issue an opinion (pursuant to Step 2 above) – may issue an opinion following comments from other Member States where possible within the aforementioned deadline(s), but not later than 5 calendar days after those deadline have expired. Should the Member State conducting the screening consider that its security or public order requires immediate action, it may issue a screening decision before the time frames above have lapsed. The Member State conducting the screening will need to notify the other Member States and the Commission of said intention and duly justify the need for immediate action. The other Member States and the Commission shall hence endeavor to provide its comments or opinion expeditiously. The Commission will notify the other Member States that comments were provided or that an opinion was issued. Step 5: The Member State conducting the screening makes final screening decision after having given due consideration to the comments of the other Member States and to the opinion of the Commission. The Member State conducting the screening needs to give due consideration to the comments of the other Member States and to the opinion of the Commission. Recital 17 of the FDI Regulation elaborates in this regard that a Member State should give due consideration through, where appropriate, measures available under its national law, or in its broader policy-making, in line with its duty of “sincere cooperation” laid down in Article 4 para. 3 Treaty on European Union (“TEU”). The final screening decision in relation to any FDI, however, remains the sole responsibility of the Member State conducting the screening. For the sake of clarity, the Commission and the other Member States do not have the power to overrule the screening decision made by the competent national authority of the Member State conducting the screening. (b) FDI not undergoing screening (for lack of a national screening mechanism) Step 1: The other Member States and the Commission may request information from the Member State where the FDI is planned or has been completed without undergoing screening. Where the Commission or a Member State considers that an FDI planned or completed in another Member State, where it is not undergoing screening for lack of a national screening mechanism, is likely to affect security or public order, it may request information from the Member State where the FDI is planned or has been completed. Such information may include: the ownership structure of the foreign investor and of the target company in which the FDI is planned or has been completed, including information on the ultimate investor and participation in the capital; the approximate value of the FDI; the products, services and business operations of the foreign investor and of the target company in which the FDI is planned or has been completed; the Member States in which the foreign investor and the target company in which the FDI is planned or has been completed, conduct relevant business operations; the funding of the investment and its source, on the basis of the best information available to the Member State; and the date when the FDI is planned to be completed or has been completed. Additional information to the above may be requested. Please note that the Member State where an FDI is planned or has been completed may request the foreign investor or the target company in which the FDI is planned or has been completed to provide the above information.[20] Any request for information, however, has to be duly justified, limited to information necessary to provide comments or to issue an opinion, proportionate to the purpose of the request and not unduly burdensome for the Member State where the FDI is planned or has been completed which, in turn, shall ensure that the requested information is made available to the Commission and the requesting Member States without undue delay. Step 2: Determining whether the FDI is likely to affect security or public order (screening factors). See above Step 3 for FDI undergoing screening in a Member State with screening mechanism. Step 3: The other Member States and the Commission may provide comments or an opinion. Other Member States may provide comments to the Member State where an FDI is planned or has been completed which is not undergoing screening in that Member State if they consider that the FDI is likely to affect their security or public order, or if they have relevant information in relation to that FDI. The Commission may issue an opinion addressed to the Member State in which the FDI is planned or has been completed if it considers that the FDI is likely to affect security or public order in more than one Member State, or if it has relevant information in relation to that FDI. The Commission may issue an opinion irrespective of whether other Member States have provided comments. The Commission shall, however, issue an opinion where justified following comments from at least one-third of Member States considering that the FDI is likely to affect their security or public order. Other Member States’ comments and the Commission’s opinion have to be duly justified. The Member State which duly considers that an FDI in its territory is likely to affect its security or public order may also itself request the Commission to issue an opinion, or other Member States to provide comments. Comments and opinions are to be addressed and sent to the Member State where the FDI is planned or has been completed no later than 35 calendar days following the receipt of the requested information or the notification that such information cannot be obtained. Should the Commission issue an opinion following comments from other Member States, it has 15 additional calendar days for issuing that opinion. In order to provide greater certainty for investors, Member States and the Commissions may only issue comments and an opinion in relation to completed FDI not undergoing screening for lack of a national screening mechanism for a limited period of 15 months after the FDI has been completed.[21] This time frame, however, does not apply to FDI completed before the entry into force of the FDI Regulation. The Commission will notify other Member States that comments were provided or that an opinion was issued. Step 4: The Member State where the FDI is planned or has been completed shall give due consideration to the comments of the other Member States and to the opinion of the Commission. The Member State where the FDI is planned or has been completed needs to give due consideration to the comments of the other Member States and to the opinion of the Commission. Recital 17 of the FDI Regulation elaborates in this regard that a Member State should give due consideration through, where appropriate, measures available under its national law, or in its broader policy-making, in line with its duty of “sincere cooperation” under Article 4 para. 3 TEU. The decision to screen an FDI or to establish a screening mechanism for that matter, however, remains the sole responsibility of the Member State in question. (c) FDI likely to affect projects or programs of EU interest If an FDI potentially affects “projects or programs of EU interest” on grounds of security and public order, the Commission’s opinion carries more weight in the sense that the Member State in which the FDI is planned or has been completed (i.e., regardless of whether the FDI is undergoing screening or not) needs not only to give due consideration to, but needs to take utmost account of, the Commission’s opinion and, additionally, provide an explanation to the Commission in case its opinion is not followed. Recital 19 of the FDI Regulation elaborates in this regard that a Member State should take utmost account of the opinion received from the Commission through, where appropriate, measures available under its national law, or in its broader policy-making, and provide an explanation to the Commission if it does not follow its opinion, in line with their duty of “sincere cooperation” under Article 4 para. 3 TEU. The underlying objective is to give the Commission a tool to protect projects and programs, which serve the EU as a whole and represent an important contribution to its economic growth, jobs and competitiveness.[22] “Projects or programs of EU interest” shall include projects and programs which involve a substantial amount or a significant share of EU funding, or which are covered by EU law regarding critical infrastructure, critical technologies or critical inputs, which are essential for security or public order. In its annex, the FDI Regulation sets out a list of eight projects and programs of EU interest, namely the European GNSS programs (Galileo & EGNOS), Copernicus, Horizon 2020, Trans-European Networks for Transport (TEN-T), Trans-European Networks for Energy (TEN-E), Trans-European Networks for Telecommunications, European Defense Industrial Development Program, and the Permanent structured cooperation (PESCO). The Commission is authorized to amend this list by way of adopting a delegated act. As for the cooperation mechanism, the above outlined procedures for FDI undergoing screening / not undergoing screening apply accordingly except for three modifications: (i) the Member State conducting the screening may indicate in the FDI notification whether it considers that the FDI is likely to affect projects and programs of EU interest; (ii) the Commission’s opinion shall be sent to the other Member States (instead of the Commission only notifying the other Member States of the fact that an opinion was issued); and (iii) the Member State where the FDI is planned or has been completed needs to take utmost account of the Commission’s opinion and provide an explanation to the Commission in case its opinion is not followed. Interplay with German Foreign Investment Control Current German Investment Control Regime Germany has had an FDI screening mechanism in place since 2004, which is based on the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz or “AWG”) and codified in more detail in the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or “AWV”). The German Federal Ministry of Economic Affairs and Energy (the “German Ministry”) has the competence to review and potentially prohibit or restrict investments in domestic companies (direct or indirect acquisition of 25% – if in a security-sensitive sector or a critical infrastructure now already of 10% – or more of the voting rights) by a foreign investor on the grounds of public order or security, or to ensure the protection of essential security interests of the Federal Republic of Germany. The rules for German investment control distinguish between so-called “sector-specific reviews” (defense and certain parts of IT security industry) and “cross-sector reviews” (all other industry sectors). In case of sector-specific reviews (defense and certain parts of IT security industry), the foreign investor – EU and non-EU investor – is obliged to report the transaction to the German Ministry which then has three months to initiate formal review proceedings or otherwise clearance is deemed granted. Should the German Ministry decide to enter into formal review proceedings, it has a further period of three months of receipt of certain information on the transaction to render a screening decision. Any such decision by the German Ministry, that is any clearance, restriction or prohibition of a transaction, is consensually agreed with the Foreign Office (Auswärtiges Amt), the Federal Ministry of Defense (Bundesministerium der Verteidigung), and the Federal Ministry of the Interior (Bundesministerium des Inneren). In case of cross-sector reviews (all industry sectors but defense and certain parts of IT security), German Ministry has the competence to review the transaction independently despite the foreign investor – non-EU/non-EFTA – being obliged to report the transaction to the German Ministry, that is if the target company operates a critical infrastructure as listed in sec. 55 para. 1 sentence 2 AWV. The German Ministry then has three months to initiate formal review proceedings; otherwise it foregoes its right to review the transaction. Foreign investors also have the option to apply – even prior to the signing of the acquisition agreement – for a certificate of non-objection (Unbedenklichkeitsbescheinigung), which shall be deemed granted if the German Ministry does not initiate formal review proceedings within two months of receipt of the application. For the sake of transaction security and time, investors will often make use of this option and apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung). Either way, should the German Ministry decide to enter into formal review proceedings, it has a further period of four months of receipt of certain information on the transaction to render a screening decision. Any decision to restrict or prohibit the transaction requires the consent of the German government. Hence, both types of review proceedings, the sector-specific as well as the cross-sector review, may take up to six (or even seven) months. It is noteworthy, however, that, regardless of the industry sector concerned, the ultimate duration of a formal review proceeding is likely to stretch even longer in the individual case as the review period is suspended if and so long as negotiations on contractual arrangements ensuring the protection of public order and security are taking place between the German Ministry and the parties involved in the transaction. In December 2018, the German government further tightened its rules for German foreign investment control. The amended rules provide for greater scrutiny of FDI by lowering the threshold for review of investments in German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates in security-sensitive sectors (defense and certain parts of IT security industry) or a critical infrastructure. In addition, the amendment also expands the scope of the German screening mechanism to include certain media companies that contribute to influencing the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such has the purpose to increase the number of reported, and ultimately, reviewed investments, the broader scope is aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. Interplay and Potential Friction between German Investment Control and the FDI Regulation As said above, the newly established framework for screening of FDI into the EU does not supersede German investment control but rather adds a layer of overall transparency and awareness among the Member States and, arguably even more importantly, provides the German Ministry with additional screening factors it may consider when reviewing an FDI under German investment control rules. In the case of the German robot manufacturer Kuka for instance, this would have allowed the German Ministry to actually prohibit the takeover of Kuka by Chinese investors. While, in 2016, robotics itself was not deemed to affect the public order or security of the Federal Republic of Germany – even under the current, more tightened regime, it still is not – it is considered a critical technology pursuant to the FDI Regulation and, as such, may be taken into account by the German Ministry in its screening decision. The EU-wide cooperation process under the FDI Regulation will take place between the respective contact points appointed for the implementation of the FDI Regulation by the Commission and the Member States. The German contact point will almost certainly be the department of the German Ministry in charge of investment control. The German Ministry, therefore, continues to be the sole point of contact for investors. It will need to inform the Commission and other Member States of FDI which undergo German review. The time frame for cooperation activities under the FDI Regulation is generally set to 55 calendar days (60 calendar days in case the Commission decides to issue an opinion following comments from other Member States) but may be longer depending on the individual circumstances that go with the obligation of the Member State concerned to make available additional information requested “without undue delay”. At first glance, the time frames under the FDI Regulation do not seem to conflict with the German screening procedure given that the German Ministry has, depending on the sector concerned, two or three months, to decide on entering into formal screening proceedings while the Commission/other Member States have 15 calendar days to notify their intent to provide an opinion/comments and no longer than 35 calendar days to actually do so. The time frame to issue an opinion or comments, however, may easily stretch longer than 35 calendar days in the event that the Commission or other Member States include a request for additional information in their notification of intent because an opinion or comments only need to be issued (no later than) 20 calendar days following receipt of the additional information. Even though the Member State concerned – in our example the German Ministry – is to ensure that the information requested is made available without undue delay, it is highly unlikely that the Member State concerned will be in a position to provide the information the same day. Therefore, the Commission/other Member States may actually have (much) longer than 35 calendar days to provide an opinion/comments in the individual case which in turn may collide with current time frames under German investment control rendering it impossible for the German Ministry to effectively consider such opinion/comments. This will be true especially in case of applications for certificates of non-objection (Unbedenklichkeitsbescheinigung) which need to be processed within two months. Therefore, it is certain that the German rules will be amended to ensure that both time frames are reconciled. Instead of simply extending the time frames to allow for the inclusion of the new EU cooperation mechanism, it is also conceivable that the German screening process will not start or be suspended until the EU cooperation procedure is completed. There will also be a need to reconcile information requirements. The information to be provided under the EU cooperation mechanism goes beyond what is required under the German screening mechanism. It is to be expected that the information to be submitted under the German screening procedure will be extended to comply with information requirements under the FDI Regulation. Alongside of extended information requirements, foreign investors should also prepare for an increased need for translations, as the German Ministry requires information to be submitted in German – and will continue to do so – whereas information to be shared with the Commission and other Member State will most likely (and at least) need to be provided in English. The German Ministry anticipates that the implementation of the FDI Regulation will take at least until end of 2019 and that the German investment control regime most likely will be tightened even further in the process.    [1]   See FDI Regulation, recital no. 7.    [2]   See FDI Regulation, recital no. 8 and article 1 para. 3.    [3]   See FDI Regulation, article 3 para. 1.    [4]   See FDI Regulation, recital no. 26 and 27.    [5]   See FDI Regulation, recital no. 27.    [6]   See FDI Regulation, article 10 para. 3.    [7]   See FDI Regulation, article 14.    [8]   Commission Decision of November 29, 2017 setting up the group of experts on the screening of foreign direct investments into the European Union (not published in the Official Journal), C(2017) 7866 final.    [9]   See article 2 and article 5 of the Commission Decision of November 29, 2017 setting up the group of experts on the screening of foreign direct investments into the European Union (not published in the Official Journal), C(2017) 7866 final.   [10]   See FDI Regulation, recital no. 28.   [11]   See FDI Regulation, recital no. 29 and article 13.   [12]   See FDI Regulation, recital no. 14. [13]   See FDI Regulation, recital no. 22 and article 5.   [14]   See FDI Regulation, recital no. 22.   [15]   The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) which establishes a framework of rules to ensure that services regulations are administered in a reasonable, objective and impartial manner and do not constitute unnecessary barriers to trade.   [16]   The Organisation for Economic Co-operation and Development (OECD) is an international organization with currently 36 member countries committed to promote policies that will improve the economic and social well-being of people around the world by providing a forum in which governments can work together to share experiences and seek solutions to common problems.   [17]   Statement made by Commission member Dr. Sylvia Baule during her presentation at the panel discussion “M&A – The evolving landscape of foreign direct investment – Just another thing to deal with or the new ice age for cross-border M&A?” at the German & American Lawyers Association (Deutsch-Amerikanische Juristen-Vereinigung or “DAJV”) Working Group Day 2018.   [18]   See FDI Regulation, article 9 para. 4.   [19]   Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items (OJ L 134 29.5.2009, p. 1) (whereby ‘dual-use items’ shall mean items, including software and technology, which can be used for both civil and military purposes, and shall include all goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices).   [20]   See FDI Regulation, article 9 para. 4.   [21]   See FDI Regulation, recital no. 21.   [22]   See FDI Regulation, recital no. 19. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following: Wilhelm Reinhardt – Frankfurt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Jens-Olrik Murach – Brussels (+32 2 554 7240, jmurach@gibsondunn.com) Stefanie Zirkel – Frankfurt (+49 69 247 411 513, szirkel@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 19, 2019 |
FTC Publishes Revised Hart-Scott-Rodino Notification Thresholds for 2019

Click for PDF On February 15, 2019, the Federal Trade Commission announced its annual update of the thresholds for pre-merger notifications of M&A transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”).  Pursuant to the HSR Act, these thresholds are updated annually to account for changes in gross national product. The size of transaction threshold for reporting proposed mergers and acquisitions under Section 7A of the Clayton Act will increase by $5.6 million, from $84.4 million in 2018 to $90 million in 2019.  The new thresholds, the issuance of which were delayed due to the government shutdown, are expected to take effect in March, 30 days after notice is published in the Federal Register. Original Threshold Current Threshold Revised Threshold $10 million $16.9 million $18 million $50 million $84.4 million $90 million $100 million $168.8 million $180 million $110 million $185.7 million $198 million $200 million $337.6 million $359.9 million $500 million $843.9 million $899.8 million $1 billion $1.6878 billion $1.7995 billion The maximum fine for violations of the HSR Act has increased from $41,484 per day to $42,530. The amounts of the filing fees have not changed, but the thresholds that trigger each fee have been increased: Fee Size of Transaction $45,000 Valued at more than $90 million but less than $180 million $125,000 Valued at $180 million or more but less than $899.8 million $280,000 Valued at $899.8 million or more The 2019 thresholds triggering prohibitions on certain interlocking directorates on corporate boards of directors are $36,564,000 for Section 8(a)(l) and $3,656,400 for Section 8(a)(2)(A).  The Section 8 thresholds take effect upon publication in the Federal Register. If you have any questions about the new HSR size of transaction thresholds, or HSR and antitrust/competition regulations and rulemaking more generally, please contact any of the partners or counsel listed below. The following Gibson Dunn lawyers assisted in preparing this client update: Adam Di Vincenzo, Andrew Cline and Chris Wilson. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the HSR Act or antitrust issues raised by business transactions. To learn more about these issues, please feel free to contact any of the following practice group leaders and members: Washington, D.C. D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com) Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com) Richard G. Parker (+1 202-955-8503, rparker@gibsondunn.com) Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com) Jeremy Robison (+1 202-955-8518, wrobison@gibsondunn.com) Andrew Cline (+1 202-887-3698, acline@gibsondunn.com) Chris Wilson* (+1 202-955-8520, cwilson@gibsondunn.com) New York Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com) Los Angeles Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com) Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com) Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com) Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com) San Francisco Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Trey Nicoud (+1 415-393-8308, tnicoud@gibsondunn.com) Dallas M. Sean Royall (+1 214-698-3256, sroyall@gibsondunn.com) Olivia Adendorff (+1 214-698-3159, oadendorff@gibsondunn.com) Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com) Mike Raiff (+1 214-698-3350, mraiff@gibsondunn.com) Brian Robison (+1 214-698-3370, brobison@gibsondunn.com) Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Denver Richard H. Cunningham (+1 303-298-5752, rhcunningham@gibsondunn.com) *Not admitted in D.C.; practicing under supervision of principals of the firm. © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 29, 2019 |
Europe’s Highest Court Finds in Favor of UPS in Merger Review Appeal

Click for PDF On 16 January 2019, the European Union’s highest court, the Court of Justice, upheld the claim of United Parcel Service, Inc. (“UPS”) that the European Commission (“Commission”) had breached its rights of defense. It had breached those rights when it had declared that UPS’s proposed merger in 2012 with TNT Express NV (“TNT”) was incompatible with the internal market because it would lead to significant impediment of competition in up to 15 Member States of the European Economic Area.[1]  The Court of Justice thus upheld a Judgment of the General Court taken in 2017.[2] Both UPS and TNT are leading providers of international express delivery of small parcels. The violation of the UPS’s rights of defense occurred when the Commission failed to provide UPS with the opportunity to comment upon a revised econometric model which served as the Commission’s basis for prohibiting the proposed merger because of the supposed risk that prices would rise post-merger.  In the circumstances of the case, that failure on the part of the Commission was sufficiently important to justify the conclusion that the Commission Decision adopted on 13 January 2013[3] should be annulled.  The Court of Justice’s Judgment is of high importance to merger practitioners both because of the confirmation of the procedural standard which the Commission needs to satisfy in its merger reviews, but also because of the possible ramifications which the Judgment might have on the procedures to be followed in future merger proceedings. 1.   Background In upholding UPS’s action for annulment of the Commission’s Decision nearly four (4) years after the filing of the appeal against the Commission’s veto Decision in the proposed UPS/TNT merger, the General Court in Luxembourg ruled that the Commission had breached UPS’s rights of defense by relying on a modified version of its initial econometric analysis without having shared that version with the merging parties before the Decision to block the merger was adopted. The Commission appealed against the General Court’s Judgment on three separate grounds, the first two of which related to an infringement of the rights of defense (and the consequences arising therefrom) and the third ground consisting of an alleged infringement of the obligation on the Commission to state reasons for its adopted Decisions. 2.   Infringement of the rights of defense The cornerstone of the Commission’s challenge to the General Court Ruling lay in its denial that it was under an obligation to communicate the final econometric analysis to the merging parties before adopting its final decision. In support of its position, the Commission expressed its view that, after a Statement of Objections (“SO”) has been issued to the notifying parties, it is not obliged to disclose any interim or preliminary conclusions until the time of the adoption of its Decision, as its conclusions in the intervening period between a SO and the Decision might be subject to modification or change.[4]  To this end, argued the Commission, the only findings that are challengeable are those that are contained in the final adopted Decision, even if one assumes that the Commission cannot rely on grounds of which the notifying parties are unaware.[5]  Moreover, the Commission argued that the General Court had erred in implying that the Commission was under an obligation to disclose all of its internal views prior to the adoption of a Decision, as the right of access to the file does not extend to internal documents.[6]  Finally, the Commission contended that, even if UPS’s rights of defense had been infringed, this could not lead to an annulment of the Commission’s Decision because – at least with respect to some of the markets – an impediment to competition had already been found based on factors other than the economic analysis.[7] The Court of Justice commenced its Ruling with an affirmation that the right of defense is a general principle of EU law that must be observed.  With respect to merger control review, the application of that general principle requires, among other things, that the Commission provide written notice to the notifying parties of the Commission’s objections, and that this notice be accompanied by an appropriate period in which the notifying parties can address those objections in writing.[8]  What this means in practice is that the notifying parties must be put in a position in which they can make known their views on the accuracy and relevance of all the factors upon which the Commission intends to base its Decision.  To the extent that the Commission seeks to justify its position by reference to an econometric model, it follows that the parties must be able to submit their observations on that particular econometric model. In the view of the Court, the fact that an SO only sets forth the Commission’s provisional conclusions, which may legitimately be modified in light of observations received and evidence collected, does not entitle the Commission to amend its econometric model upon which its objections are based without having first communicated those amendments to the notifying parties.[9] In light of the importance attributed by the Commission to econometric models in assessing the effects of a merger, the Commission’s failure to disclose such information ran counter to the policy priority accorded to transparency in the merger review process.  Such a practice would have the effect of undermining any effective judicial review of Commission Decisions by the Courts.[10]  As such, the Court of Justice concluded that the General Court had not erred in law in holding that the Commission Decision should be annulled as a consequence of the infringement of UPS’s rights of defense.[11] 3.   The obligation on the General Court to state reasons Finally, the Commission sought that the General Court’s Ruling be overturned because the General Court had failed, in its view, to acknowledge formally a number of arguments raised by the Commission when responding to certain questions raised by the General Court at the hearing in Luxembourg.  In the circumstances, argued the Commission, the General Court should be held to have failed to examine and address the arguments raised by the Commission.[12] The Court of Justice rejected the Commission’s arguments on this point, holding that the General Court had addressed the points put forward by the Commission, even if it had only done so implicitly.[13] In particular, the Commission criticized the General Court for having failed to take formal note of an argument according to which the use in the econometric model of a continuous variable for the prediction stage was warranted and followed from UPS’s methodology on estimation rate.  The Court recalled that the General Court had noted that the Commission relied on a discrete variable at the estimation stage and on a continuous variable at the prediction stage, holding that although the use of a discrete variable had been discussed repeatedly during the administrative procedure, it did not appear from the file that it had also been the case with regard to the use of different variables at the different stages of the econometric analysis.[14]  For those reasons, the Court considered that the General Court had justified in law its Ruling and had implicitly rejected the Commission’s arguments that UPS had “intuitively” been able to identify the amendments to the econometric model.[15] Lastly, the Commission also claimed that UPS’s plea that its rights of defense had been infringed should have been dismissed by the General Court, because the finding of a significant impediment to effective competition on the respective Danish and Dutch markets had not been based exclusively on the results of the econometric model.  In these circumstances, the Commission claimed that it was contradictory for the General Court to annul its Decision on the basis of an infringement of the rights of defense while at the same time concluding that the revised econometric model was capable of overriding the qualitative information taken into account by the Commission (given that it could not have reduced  the number of Member States in which the merger would have given rise to a significant impediment to effective competition).[16] This argument was dismissed by the Court of Justice, which considered that the premise on which the argument was based was incorrect. The Court concluded that the Commission had wrongly assumed that the infringement of the rights of defense would only lead to the annulment of the Decision if, in the absence of the procedural irregularity, the Decision would have been different in content. Indeed, the Court considered that an infringement of the rights of defense should be able to lead to the annulment of a Commission Decision provided that – in the absence of such infringement – there was “even a slight chance” that the merging parties would have been better able to defend themselves.[17] 4.   Potential impact of the Judgment The Court of Justice’s Ruling in the UPS Case has a number of important implications on EU merger practice. (i) This Ruling constitutes an emphatic application of the doctrine of “equality of arms” as an integral part of the rights of defense, insofar as it emphasizes the notifying parties must have access to the documentation that makes up the case against them.  Moreover, the Court of Justice also found fault with such an act of non-disclosure by the Commission because it would risk the effectiveness of review by the Courts.  To the extent that the Commission bases its objections to a merger on certain facts, these must be disclosed to the notifying parties to afford them the opportunity of defending themselves during the review period, rather than consigning their objections to an appeal process after their merger has been shelved.  In the circumstances of the case, the evidence contained in the final version of the econometric model relied upon by the Commission was clearly material to its substantive review, and therefore should have been made available by the Commission. Hairs may no doubt be split in the future about which acts of Commission non-disclosure might be actionable, but the Court was clear that there was little doubt that the notifying parties’ defense during the merger review was seriously hampered by the Commission’s act of non-disclosure. (ii) The Court elevates the rights of the defense to a higher standard than has been acknowledged in previous case-law, insofar as the Court did not consider it necessary to engage in an enquiry into whether the Commission’s act of non-disclosure amounted to an error whose magnitude was likely to change the nature of its final conclusions (i.e., a “manifest error”).[18]   The Court reference to “even a slight chance” appears to constitute an important erosion of the Commission’s otherwise wide discretion in interpreting economic evidence, as it will now be aware that its discretion will need to exercised alongside a full disclosure of the underlying supporting evidence.  It will only be in unusual circumstances that the Commission will be able to assert with confidence that an act of non-disclosure would not have been capable of affecting its substantive conclusions. The particular fact pattern in the UPS Case has probably played a very material role in the Court of Justice’s Ruling, suggesting that no hair-splitting was necessary. For example, the econometric model was revised after exchanges that had been made in the course of the Oral Hearing held in the latter stages of the Commission’s review. Moreover, UPS had contended that those changes, rather than being an appropriate response to what had been argued at the Oral Hearing, were changed unilaterally by the Commission in ways which were arguably inappropriate and which were unsubstantiated in the text of the Commission’s Decision, being only revealed in the course of the proceedings before the General Court. This fact pattern therefore suggests that this was a case which amounted to much more than a situation of a notifying party submitting evidence late in the review process and thereby compromising the Commission’s tight review deadlines. As a result, it was clear that the Court was concerned with the potential misuse or biased use of economic models by the Commission, having stressed that the methodological basis behind the models used “must be as objective as possible in order not to prejudge the outcome of the analysis on way or another”.[19] What remains unclear from the Ruling is whether an enquiry into whether a final Decision was affected by a Commission infringement will still be required by the Court in relation to failings of a less fundamental nature, so that the Court’s tough stance regarding the infringement of the rights of defense applies only where the nature of the infringement is sufficiently egregious, as it was in relation to the handling of key economic evidence.  What falls short of a failure to provide access to a revised econometric model is therefore likely to require clarification through subsequent case-law. (iii) In agreeing to UPS’s procedural challenge, the European Courts have opened up the possibility that the actions for damages lodged by UPS and others[20] may bear fruit.  To date, actions for damages for blocked mergers have resulted in relatively meagre damages awards by the European Courts, other than in the Schneider/Legrand Case,[21] where the Commission’s procedural infringements were wilful and serious. Given the underlying circumstances in the UPS Case, it cannot be discounted that the Court may be willing to adopt the approach to damages taken in Schneider/Legrand.  Will the Court of Justice’s uncompromising stance on the gravity of the procedural failings in the UPS Case have a similar effect in ramping up the quantum of damages to which the Commission may be subject? Practitioners will await with interest the approach of the European Courts  to the damages claims that will follow in the wake of the UPS Ruling. (iv) It seems inevitable that the Commission will react to the Court’s strong rebuke by modifying its procedures of review.  One can envisage one of two possibilities, neither of which is ideal from a practitioner’s perspective and neither of which addresses the procedural problem really at issue in the UPS Case. First, the Commission might move away from its current flexible procedure of allowing notifying parties the ability to file submissions virtually throughout the course of the review period.  Instead, notifying parties might find themselves in a position of being obliged to file certain types of economic data within specified time limits in order for them to be taken into account.  In this way, multiple modifications to economic evidence might become procedurally untenable.  The major drawback of this approach would be that the notifying parties might not be able to respond sufficiently quickly with appropriate economic evidence, especially if the Commission is exploring a novel theory of harm. Second, the Commission might open up the possibility of multiple exchanges on economic evidence, but only if the procedural quid pro quo is a relatively elastic extension of the period of review.  Sacrificing the commercial benefits of a relatively certain fixed period of review for an open-ended review period would not be seen in many quarters of the business community as desirable. One thing is clear: given the increasing importance attached by the Commission to economic evidence, the procedural aftermath of the UPS Case will be felt for some time in the ways in which such economic evidence is processed. Whether or not the approach of the European Courts signals an increased willingness of the Courts to subject the Commission’s broad discretion in examining economic evidence remains to be seen.    [1]   See ECJ’s Judgment in Case C‑265/17 P – European Commission v United Parcel Service, Inc., 16.01.2019, ECLI:EU:C:2019:23. Available at: http://curia.europa.eu/juris/document/document.jsf;jsessionid=6EDA43936703CA52E17A4149562E80E2?text=&docid=209848&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=7507536    [2]   See ECJ’s Judgment in Case T‑194/13 – United Parcel Service, Inc. v European Commission, 07.03.2017, ECLI:EU:T:2017:144. Available at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=188600&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=7508760    [3]   See the European Commission’s Decision on Case COMP/M.6570 — UPS/TNT Express, 30.01.2013. Available at: http://ec.europa.eu/competition/mergers/cases/decisions/m6570_20130130_20610_4241141_EN.pdf    [4]   An SO is a document which summarizes the Commission’s prima facie antitrust concerns regarding the merger.  While the arguments in the SO serve as the basis for the Commission’s final conclusions in support of its Decision to block the merger, the Commission is not bound to follow its views in the SO as a matter of law.  See para. 36 of the ECJ’s Ruling and para. 63 of ECJ’s Judgment in Case C‑413/06 P – Bertelsmann and Sony Corporation of America v Impala, 10.07.2008, EU:C:2008:392. Available at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=67584&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=9868410    [5]   See para. 24 of the ECJ’s Ruling.    [6]   See para. 26 of the ECJ’s Ruling.    [7]   See para. 50 of the ECJ’s Ruling.    [8]   See para. 29 of the ECJ’s Ruling.    [9]   See paras. 36 and 37 of the ECJ’s Ruling. [10]   See para. 50 of the ECJ’s Ruling. [11]   See para. 56 of the ECJ’s Ruling. [12]   See paras. 59 to 62 of the ECJ’s Ruling. [13]   See paras. 64 to 68 of the ECJ’s Ruling. [14]   See para. 66 of the ECJ’s Ruling. [15]   See paras. 65 to 67 of the ECJ’s Ruling. [16]   See para. 62 of the ECJ’s Ruling. [17]   See paras. 68 and 69 of the ECJ’s Ruling. [18]   See para. 68 of the ECJ’s Ruling. [19]   See para. 53 of the ECJ’s Ruling. [20]   According to the official notice published in the EU’s official journal, UPS brought an action against the European Commission on 29.12.2017.  The Irish airline ASL also brought an action against the European Commission on 11.09.2018.  Both notices are available at: http://res.cloudinary.com/gcr-usa/image/upload/v1519658653/EU_Journal_ks934v.pdf. and https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62018TN0540&from=EN [21]   See ECJ’s Judgment in Case C-440/07 P – Commission v. Schneider Electric SA, 16.07.2009, ECLI:EU:C:2009:459. Available at: http://curia.europa.eu/juris/document/document.jsf?docid=72486&doclang=en The following Gibson Dunn lawyers assisted in preparing this client update: Peter Alexiadis, David Wood, and Maria Francisca Couto. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following lawyers in Brussels: Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Brussels Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com) David Wood (+32 2 554 7210, dwood@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com) Munich Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) Washington, D.C. D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com) Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com) Richard G. Parker (+1 202-955-8503, rparker@gibsondunn.com) Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com) Jeremy Robison (+1 202-955-8518, wrobison@gibsondunn.com) New York Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com) Los Angeles Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com) Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com) Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com) Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com) San Francisco Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Trey Nicoud (+1 415-393-8308, tnicoud@gibsondunn.com) Dallas M. Sean Royall (+1 214-698-3256, sroyall@gibsondunn.com) Olivia Adendorff (+1 214-698-3159, oadendorff@gibsondunn.com) Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com) Mike Raiff (+1 214-698-3350, mraiff@gibsondunn.com) Brian Robison (+1 214-698-3370, brobison@gibsondunn.com) Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Denver Richard H. Cunningham (+1 303-298-5752, rhcunningham@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 24, 2019 |
Webcast: The Current (and Future) State of Oil and Gas M&A

Notwithstanding the recent (and precipitous) decline in commodity prices, the prior 12 months proved to be a relatively robust year for transactional activity in the oil and gas sector. Corporate consolidation, opportunistic acquisitions/divestitures, infrastructure development, and alternative financing arrangements have kept – and continue to keep – many of us busy. But will this continue, particularly in a (continued) volatile price environment? Join members of Gibson Dunn’s Mergers and Acquisitions and Oil and Gas Practice Groups for a 60 minute presentation to share their views on this question, as well as to (1) discuss the current state of mergers and acquisitions at the corporate level (“M&A”) and acquisitions and divestitures at the asset level (“A&D”) in the oil and gas sector; (2) identify trends in M&A and A&D in the sector; and (3) use their crystal balls to attempt to foresee what the future holds for M&A and A&D in the sector in 2019. View Slides (PDF) PANELISTS: Michael P. Darden is Partner-in-Charge of the Houston office of Gibson, Dunn & Crutcher, chair of the firm’s Oil & Gas practice group, and a member of the firm’s Energy and Infrastructure and Mergers and Acquisitions practice groups. His practice focuses on international and U.S. oil and gas ventures, including LNG, deep-water, and unconventional resource development projects, international and U.S. infrastructure projects, asset acquisitions and divestitures, and energy-based financings, including project financings, reserve-based loans, and production payments. Justin T. Stolte is a partner in the Houston office of Gibson, Dunn & Crutcher, and a member of the firm’s Mergers and Acquisitions and Energy and Infrastructure practice groups. He represents exploration and production companies, midstream companies, private equity groups, and other financial institutions in complex transactions across the energy sector, with a particular focus on acquisitions, divestitures, and joint ventures involving upstream (onshore and offshore), midstream (gathering, processing, transportation, fractionation, and storage), liquefied natural gas (LNG), and downstream (petrochemicals and refining) assets. MODERATOR: Jeffrey A. Chapman is Co-Chair of Gibson Dunn’s Global Mergers and Acquisitions Practice Group. He maintains an active M&A practice representing private equity firms and public and private companies in diverse cross-border and domestic transactions in a broad range of industries. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of  1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

January 22, 2019 |
M&A Report – A New Twist in the Oxbow Joint Venture Saga: Delaware Supreme Court Rules the Covenant of Good Faith and Fair Dealing Cannot Save the Day

Click for PDF The Delaware Supreme Court recently overruled a Court of Chancery opinion that had relied on the covenant of good faith and fair dealing to allow the minority owners in a joint venture to force an exit transaction. In its opinion, the Delaware Supreme Court offered useful guidance for parties seeking to draft joint venture exit provisions and indicated that parties should not expect to rely on the implied covenant of good faith and fair dealing to deliver them from a harsh outcome dictated by clear contractual language. In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, No. 536, 2018, 2019 WL 237360 (Del. Jan. 17, 2019), the Delaware Supreme Court refused to invoke the implied covenant of good faith and fair dealing to resolve a dispute over whether certain minority members of Oxbow Carbon LLC (“Oxbow”) had a contractual right under Oxbow’s limited liability company agreement (the “LLC Agreement”) to force Oxbow to engage in an “Exit Sale.” The decision highlights the need for parties to devote special attention when drafting joint venture exit provisions and to take care when admitting new members to ensure that such admission does not create unintended consequences for the forced sale or other provisions in the agreements. The dispute arose when two minority members of Oxbow, both of which were owned by the private equity fund Crestview Partners L.P. (“Crestview”) and together owned approximately one-third of the outstanding equity of Oxbow, sought to enforce a contractual right under the LLC Agreement to force Oxbow to engage in an Exit Sale. The LLC Agreement contained an exit sale provision which provided that, beginning on the seventh anniversary of Crestview’s investment (May 2014), Crestview had the right to force Oxbow to engage in an Exit Sale. The LLC Agreement defined an “Exit Sale” as a “Transfer of all, but not less than all, of the then-outstanding Equity Securities of [Oxbow] and/or all of the assets of [Oxbow].” The Exit Sale provision also stated that the exercising party “may not require any other Member to engage in such Exit Sale unless the resulting proceeds to such Member equal at least 1.5 times such Member’s aggregate Capital Contributions through such date.” The dispute centered on two small holders (the “Small Holders”) of Oxbow securities, both of which were controlled by the CEO, founder and majority member of Oxbow, William Koch (“Koch”). Notably, when the Small Holders were admitted as members of Oxbow in 2011 and 2012, respectively, Oxbow (controlled by Koch) failed to follow the procedures required by the LLC Agreement and did not obtain all requisite approvals for the admission of the new members. In connection with the admission of the Small Holders, the existing members should have been asked to waive their preemptive rights; because it was a related party transaction, the admission of the Small Holders should have been approved by a supermajority vote of the existing members; and the Small Holders should have delivered counterpart signature pages to the LLC Agreement. None of these conditions were satisfied, except that signature pages were delivered after the commencement of litigation. Nevertheless, the other members (including Crestview) treated the Small Holders as members and did not raise the defects in their admission until the dispute regarding the Exit Sale arose. Under the terms of Crestview’s proposed Exit Sale, the Small Holders would not receive the 1.5 times return on investment required by the terms of the Exit Sale provision in the LLC Agreement. As a result, Koch and the Small Holders brought suit seeking a declaratory judgment from the Court of Chancery that, absent a 1.5 times return on investment for all members of Oxbow including the Small Holders, Crestview did not have the right to force the proposed Exit Sale. The Small Holders argued that if an Exit Sale does not satisfy the 1.5 times requirement for any member, and that member chooses not to participate, then the Exit Sale cannot go forward because it no longer would involve “all, but not less than all, of the then-outstanding Equity Securities of [Oxbow].” The Court of Chancery referred to this argument as the “Blocking Theory.” In contrast, Crestview argued that if an Exit Sale does not satisfy the 1.5 times requirement for any member, then that member can choose to participate in the Exit Sale, but cannot be forced to sell, and the Exit Sale can proceed without such member. The Court of Chancery referred to this argument as the “Leave Behind Theory.” Crestview also argued that, assuming the Small Holder’s preferred Blocking Theory was adopted and assuming the Exit Sale would not satisfy the 1.5 times requirement for the Small Holders, the Exit Sale should still be able to proceed if the Small Holders receive additional funds sufficient to satisfy the 1.5 times requirement—i.e., if the Small Holders are provided with an additional amount of the sale proceeds such that they receive the 1.5 times return on investment required by the Exit Sale provision. The Court of Chancery referred to this argument as the “Top Off Theory.” The Small Holders responded to Crestview’s Top Off Theory-argument by citing the equal treatment provision in the LLC Agreement which stated that an Exit Sale must treat all members equally by offering “the same terms and conditions” to each member and allocating proceeds “by assuming that the aggregate purchase price was distributed” pro rata to all unitholders and that the unequal distribution proposed by the Top Off Theory would violate such requirement. The Court of Chancery held that the plain language of the LLC Agreement foreclosed Crestview’s arguments in favor of the Leave Behind Theory and Top Off Theory. The Court of Chancery noted that in interpreting contract language, the court must construe the agreement as a whole and give effect to all of its provisions. The Court of Chancery pointed out that while the language of the Exit Sale provision in isolation could be interpreted as supporting Crestview’s Leave Behind Theory, the Leave Behind Theory was inconsistent with the definition of “Exit Sale,” which did not contemplate a partial exit, and Crestview’s Top Off Theory was inconsistent with language in the LLC Agreement requiring payments in an Exit Sale be made on a pro rata basis. Crestview also contended that the Small Holders were not properly admitted as members because the required approvals had not been obtained and required procedures had not been followed in connection with their admission. As a result, according to Crestview, because the Small Holders had not properly been admitted as members, the dispute over the 1.5 times return on investment was moot. The Court of Chancery rejected this argument based on the equitable defense of laches – that Crestview had known about the admission of the Small Holders as far back as 2011 and had not objected until this dispute arose. Notwithstanding the rejection of Crestview’s arguments based on the contractual language and the defective admission of the Small Holders, the Court of Chancery nevertheless invoked the implied covenant of good faith and fair dealing to allow the Exit Sale to proceed. The Court of Chancery noted that the implied covenant ensures that the parties’ contractual expectations are fulfilled in unforeseen circumstances, and the implied covenant supplies terms to fill gaps in the contract. In this case, the Court of Chancery determined that, while the LLC Agreement clearly contemplated the possibility of adding additional members, the LLC Agreement did not specify the rights that later-admitted members would have. Instead, the LLC Agreement empowered Oxbow’s board to determine such rights when additional members were admitted. However, when the Small Holders were admitted, Oxbow failed to follow required procedures, which resulted in the board of Oxbow not determining the rights of the Small Holders. Consequently, according to the Court of Chancery, there were gaps as to how the LLC Agreement and the 1.5 times return on investment requirement were intended to apply to the Small Holders. Ultimately, the Court of Chancery held that the 1.5 times requirement did not give the Small Holders a blocking right. In reaching this decision, the Court of Chancery appeared sympathetic to Crestview, particularly in light of the fact that the failure of the board to determine the rights of the Small Holders arguably stemmed from failures of Oxbow (as controlled by Koch), and stated that an alternative finding would have “produce[d] a harsh result by effectively blocking an Exit Sale.” The Court of Chancery further determined that, had the parties considered the rights of the Small Holders at the time of their admission, Crestview never would have agreed to a re-set of the 1.5 times clause. Koch and the Small Holders appealed the Court of Chancery’s decision to the Delaware Supreme Court. On appeal, the Delaware Supreme Court agreed with the Court of Chancery’s determination that the plain language of the LLC Agreement foreclosed Crestview’s arguments in favor of the Leave Behind Theory and Top Off Theory. However, the Delaware Supreme Court disagreed with the lower court’s conclusion that there had been any “gaps” in the LLC agreement. The Delaware Supreme Court held that the LLC Agreement conferred discretion on the board to determine the terms and conditions applicable to newly admitted members (such as the Small Holders) when they were admitted, and this deferral of determination until admission was a contractual choice and did not create a gap in the LLC Agreement. That is, the fact that the board had discretion to set the terms and conditions applicable to the Small Holders, but it did not require that the Small Holders be treated differently for purposes of determining whether an Exit Sale could proceed, did not create a contractual gap. Rather, the failure to set such terms and conditions resulted from Crestview’s “sloppiness and failure to consider the implications of the Small Holders’ investment.” The Supreme Court pointed out that, while not every procedural formality in connection with the Small Holders’ admission had been followed, Crestview approved the admission of the Small Holders, received a distribution based on the investment from the Small Holders and treated the Small Holders as members. Indeed, the Court of Chancery had held that the equitable defense of laches foreclosed Crestview from arguing that the Small Holders had not been admitted. The Supreme Court noted that the Court of Chancery’s determinations both that Crestview had approved the admission of the Small Holders (notwithstanding the failure to follow certain formalities for admission) and that a contractual gap exists resulting from such failure created “an untenable tension.” The Supreme Court further cautioned that use of the implied covenant of good faith and fair dealing is a limited and extraordinary legal remedy that does not apply when the contract addresses the conduct at issue. The Supreme Court agreed with the Court of Chancery that the plain language of the LLC Agreement foreclosed Crestview’s arguments based on the contractual language. This case highlights the need for parties to devote special attention when drafting joint venture exit provisions in limited liability company agreements and to take care when admitting new members to ensure that such admission does not create unintended consequences for the forced sale or other provisions in the agreements. As a starting point, parties should be careful to address how any minimum return on investment requirement, such as the LLC Agreement’s 1.5 times requirement, will apply to members who are admitted as members at different times. The parties should also consider whether, in the case of a minimum return requirement, they desire to have the flexibility of a topping off option or if the minimum return requirement may only be satisfied upon pro rata and equal distribution of an exit sale’s proceeds. In addition, the parties should be explicit about what type of exit sale a joint venture partner can force. That is, parties should consider whether such provisions should be limited only to equity sales, changes of control or sales of assets, and they should think through how a sale of assets would be accomplished if a holder is entitled to stay behind and not participate in a sale. Further, parties should be extremely careful when using defined terms that also apply to other provisions because such overlapping usage may incorporate concepts not intended to be applied to an exit sale. For example, in the LLC Agreement, the definition of “Exit Sale” also applied to the drag-along provision, and the equal treatment provision applied to the drag-along and other provisions. While the definition and the equal treatment provision made sense in the context of the drag-along provision, they raised issues in the context of Crestview’s right to force a sale because they effectively granted the Small Holders a blocking right. If the exit provision includes a minimum return on investment requirement, the exit provision language should make clear whether the minimum return on investment requirement creates a blocking right or a leave behind right. If the leave behind concept applies, the parties should be explicit about how such leave behind would work in the event of a sale of all the assets of the company. In sum, parties should take care to address all potential contingencies in drafting exit provisions, including how such provisions will apply to newly admitted members, and, in particular, should ensure they do not inadvertently create a blocking right over a forced sale. As demonstrated by the Delaware Supreme Court’s opinion, courts are unlikely to use the implied covenant of good faith and fair dealing to rescue a party faced with “an extreme, harsh and unforeseen result arising from a plain reading” of the contract in question. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the following authors: Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com) Eric B. Pacifici – Dallas (+1 214-698-3401, epacifici@gibsondunn.com) Please also feel free to contact any of the following practice group leaders: Mergers and Acquisitions Group: Barbara L. Becker – New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Private Equity Group: Sean P. Griffiths – New York (+1 212-351-3872, sgriffiths@gibsondunn.com) Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com) Steven R. Shoemate – New York (+1 212-351-3879, sshoemate@gibsondunn.com) Charlie Geffen – London (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 18, 2019 |
Gibson Dunn Ranked in Legal 500 Asia Pacific 2019

Gibson Dunn has been recognized in 12 categories in the 2019 edition of The Legal 500 Asia Pacific. The Singapore office was ranked in the following Foreign Firms categories: Banking and Finance, Corporate and M&A, Energy and Restructuring.  The Hong Kong office was ranked in the Antitrust and Competition, Corporate (including M&A), Private Equity, Projects and Energy, and Regulatory: Anti-Corruption and Compliance categories.  Additionally, the firm was ranked for its work in India, Indonesia and the Philippines.  Brad Roach was named as a Leading Lawyer in the Singapore: Energy – Foreign Firms and Indonesia: Foreign Firms categories; Kelly Austin was named as a Leading Lawyer in the Hong Kong: Regulatory: Anti-Corruption and Compliance category; Michael Nicklin was named as a Leading Lawyer in the Hong Kong: Banking & Finance category; Scott Jalowayski and Brian Schwarzwalder were named as Leading Lawyers in the Hong Kong: Private Equity category; and Troy Doyle was named as a Leading Lawyer in the Singapore: Restructuring & Insolvency – Foreign Firms category; and John Fadely and Albert Cho were named as Leading Lawyers in the Hong Kong: Investment Funds category. Youjung Byon has also been named as a Next Generation Lawyer for Hong Kong: Investment Funds.

January 11, 2019 |
2018 Year-End German Law Update

Click for PDF Looking back at the past year’s cacophony of voices in a world trying to negotiate a new balance of powers, it appeared that Germany was disturbingly silent, on both the global and European stage. Instead of helping shape the new global agenda that is in the making, German politics focused on sorting out the vacuum created by a Federal election result which left no clear winner other than a newly formed right wing nationalist populist party mostly comprised of so called Wutbürger (the new prong for “citizens in anger”) that managed to attract 12.6 % of the vote to become the third strongest party in the German Federal Parliament. The relaunching of the Grand-Coalition in March after months of agonizing coalition talks was followed by a bumpy start leading into another session of federal state elections in Bavaria and Hesse that created more distraction. When normal business was finally resumed in November, a year had passed by with few meaningful initiatives formed or significant business accomplished. In short, while the world was spinning, Germany allowed itself a year’s time-out from international affairs. The result is reflected in this year’s update, where the most meaningful legal developments were either triggered by European initiatives, such as the General Data Protection Regulation (“GDPR”) (see below section 4.1) or the New Transparency Rules for Listed German Companies (see below section 1.2), or as a result of landmark rulings of German or international higher and supreme courts (see below Corporate M&A sections 1.1 and 1.4; Tax – sections 2.1 and 2.2 and Labor and Employment – section 4.2). In fairness, shortly before the winter break at least a few other legal statutes have been rushed through parliament that are also covered by this update. Of the changes that are likely to have the most profound impact on the corporate world, as well as on the individual lives of the currently more than 500 million inhabitants of the EU-28, the GDPR, in our view, walks away with the first prize. The GDPR has created a unified legal system with bold concepts and strong mechanisms to protect individual rights to one’s personal data, combined with hefty fines in case of the violation of its rules. As such, the GDPR stands out as a glowing example for the EU’s aspiration to protect the civic rights of its citizens, but also has the potential to create a major exposure for EU-based companies processing and handling data globally, as well as for non EU-based companies doing business in Europe. On a more strategic scale, the GDPR also creates a challenge for Europe in the global race for supremacy in a AI-driven world fueled by unrestricted access to data – the gold of the digital age. The German government could not resist infection with the virus called protectionism, this time around coming in the form of greater scrutiny imposed on foreign direct investments into German companies being considered as “strategic” or “sensitive” (see below section 1.3 – Germany Tightens Rules on Foreign Takeovers Even Further). Protecting sensitive industries from “unwanted” foreign investors, at first glance, sounds like a laudable cause. However, for a country like Germany that derives most of its wealth and success from exporting its ideas, products and services, a more liberal approach to foreign investments would seem to be more appropriate, and it remains to be seen how the new rules will be enforced in practice going forward. The remarkable success of the German economy over the last twenty five years had its foundation in the abandoning of protectionism, the creation of an almost global market place for German products, and an increasing global adoption of the rule of law. All these building blocks of the recent German economic success have been under severe attack in the last year. This is definitely not the time for Germany to let another year go by idly. We use this opportunity to thank you for your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues. Without our daily interaction with your real-world questions and tasks, our expertise would be missing the focus and color to draw an accurate picture of the multifaceted world we are living in. In this respect, we thank you for making us better lawyers – every day. ________________________ TABLE OF CONTENTS 1.      Corporate, M&A 2.      Tax 3.      Financing and Restructuring 4.      Labor and Employment 5.      Real Estate 6.      Compliance 7.      Antitrust and Merger Control 8.      Litigation 9.      IP & Technology 10.    International Trade, Sanctions and Export Controls ________________________ 1.       Corporate, M&A 1.1       Further Development regarding D&O Liability of the Supervisory Board in a German Stock Corporation In its famous “ARAG/Garmenbeck”-decision in 1997, the German Federal Supreme Court (Bundesgerichtshof – BGH) first established the obligation of the supervisory board of a German Stock Corporation (Aktiengesellschaft) to pursue the company’s D&O liability claims in the name of the company against its own management board after having examined the existence and enforceability of such claims. Given the very limited discretion the court has granted to the supervisory board not to bring such a claim and the supervisory board’s own liability arising from inactivity, the number of claims brought by companies against their (former) management board members has risen significantly since this decision. In its recent decision dated September 18, 2018, the BGH ruled on the related follow-up question about when the statute of limitations should start to run with respect to compensation claims brought by the company against a supervisory board member who has failed to pursue the company’s D&O liability claims against the board of management within the statutory limitation period. The BGH clarified that the statute of limitation applicable to the company’s compensation claims against the inactive supervisory board member (namely ten years in case of a publicly listed company, otherwise five years) should not begin to run until the company’s compensation claims against the management board member have become time-barred themselves. With that decision, the court adopts the view that in cases of inactivity, the period of limitations should not start to run until the last chance for the filing of an underlying claim has passed. In addition, the BGH in its decision confirmed the supervisory board’s obligation to also pursue the company’s claims against the board of management in cases where the management board member’s misconduct is linked to the supervisory board’s own misconduct (e.g. through a violation of supervisory duties). Even in cases where the pursuit of claims against the board of management would force the supervisory board to disclose its own misconduct, such “self-incrimination” does not release the supervisory board from its duty to pursue the claims given the preponderance of the company’s interests in an effective supervisory board, the court reasoned. In practice, the recent decision will result in a significant extension of the D&O liability of supervisory board members. Against that backdrop, supervisory board members are well advised to examine the existence of the company’s compensation claims against the board of management in a timely fashion and to pursue the filing of such claims, if any, as soon as possible. If the board of management’s misconduct is linked to parallel misconduct of the supervisory board itself, the relevant supervisory board member – if not exceptionally released from pursuing such claim and depending on the relevant facts and circumstances – often finds her- or himself in a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. In such a situation, the supervisory board member might consider resigning from office in order to avoid a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. Back to Top 1.2       Upcoming New Transparency Rules for Listed German Companies as well as Institutional Investors, Asset Managers and Proxy Advisors In mid-October 2018, the German Federal Ministry of Justice finally presented the long-awaited draft for an act implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). The Directive aims to encourage long-term shareholder engagement by facilitating the communication between shareholders and companies, in particular across borders, and will need to be implemented into German law by June 10, 2019 at the latest. The new rules primarily target listed German companies and provide some major changes with respect to the “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a stock corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors. “Say on pay” on directors’ remuneration: remuneration policy and remuneration report Under the current law, the shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. The law only provides for the possibility of an additional shareholder vote on the management board members’ remuneration if such vote is put on the agenda by the management and supervisory boards in their sole discretion. Even then, such vote has no legal effects whatsoever (“voluntary say on pay”). In the future, shareholders of German listed companies will have two options. First, the supervisory board will have to prepare a detailed remuneration policy for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years (“mandatory say on pay”). That said, the result of the vote on the policy will continue to remain only advisory. However, if the supervisory board adopts a remuneration policy that has been rejected by the shareholders, it will then be required to submit a reviewed (not necessarily revised) remuneration policy to the shareholders at the next shareholders’ meeting. With respect to the remuneration of supervisory board members, the new rules require a shareholders vote at least once every four years. Second, at the annual shareholders’ meeting the shareholders will vote ex post on the remuneration report (which is also reviewed by the statutory auditor) which contains the remuneration granted to the present and former members of the management board and the supervisory board in the past financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report including the audit report, as well as the remuneration policy will have to be made public on the company’s website for at least ten years. Related party transactions German stock corporation law already provides for various safeguard mechanisms to protect minority shareholders in cases of transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, in the case of listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for transactions between the company and related parties. Material transactions exceeding certain thresholds will require prior supervisory board approval. A rejection by the supervisory board can be overcome by shareholder vote. Furthermore, a listed company must publicly disclose any such material related party transaction, without undue delay over media providing for a Europe-wide distribution. Identification of shareholders and facilitation of the exercise of shareholders’ rights Listed companies will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the company to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain. In addition, companies will be required to confirm the votes cast at the request of the shareholders thus enabling them to be certain that their votes have been effectively cast, including in particular across borders. Transparency requirements for institutional investors, asset managers and proxy advisors German domestic institutional investors and asset managers with Germany as their home member state (as defined in the applicable sector-specific EU law) will be required (i) to disclose their engagement policy, including how they monitor, influence and communicate with the investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests, and (ii) to report annually on the implementation of their engagement policy and disclose how they have cast their votes in the general meetings of material investee companies. Institutional investors will further have to disclose (iii) consistency between the key elements of their investment strategy with the profile and duration of their liabilities and how they contribute to the medium to long-term performance of their assets, and, (iv) if asset managers are involved, to disclose the main aspects of their arrangement with the asset manager. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis. Thus, investors and asset managers may choose not to make the above disclosures, provided they give an explanation as to why this is the case. Proxy advisors will have to publicly disclose on an annual basis (i) whether and how they have applied their code of conduct based again on the “comply or explain” principle, and (ii) information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany. The present legislative draft is still under discussion and it is to be expected that there will still be some changes with respect to details before the act becomes effective in mid-2019. Due to transitional provisions, the new rules on “say on pay” will have no effect for the majority of listed companies in this year’s meeting season. Whether the new rules will actually promote a long-term engagement of shareholders and have the desired effect on the directors’ remuneration of listed companies will have to be seen. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements. Back to Top 1.3       Germany Tightens Rules on Foreign Takeovers Even Further After the German government had imposed stricter rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5), it has now even further tightened its rules with respect to takeovers of German companies by foreign investors. The latest amendment of the rules under the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, “AWV“) enacted in 2018 was triggered, among other things, by the German government’s first-ever veto in August 2018 regarding the proposed acquisition of Leifeld Metal Spinning, a German manufacturer of metal forming machines used in the automotive, aerospace and nuclear industries, by Yantai Taihai Corporation, a privately-owned industry group from China, on the grounds of national security. Ultimately, Yantai withdrew its bid shortly after the German government had signaled that it would block the takeover. On December 29, 2018, the latest amendment of the Foreign Trade and Payments Ordinance came into force. The new rules provide for greater scrutiny of foreign direct investments by lowering the threshold for review of takeovers of German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates a critical infrastructure or in sensitive security areas (defense and IT security industry). In addition, the amendment also expands the scope of the Foreign Trade and Payments Ordinance to also apply to certain media companies that contribute to shaping the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such will lead to an expansion of the existing reporting requirements, the broader scope is also aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. There are no specific guidelines published by the German government as it wants the relevant parties to contact, and enter into a dialog with, the authorities about these matters. While the German government used to be rather liberal when it came to foreign investments in the past, the recent veto in the case of Leifeld as well as the new rules show that in certain circumstances, it will become more cumbersome for dealmakers to get a deal done. Finally, it is likely that the rules on foreign investment control will be tightened even further going forward in light of the contemplated EU legislative framework for screening foreign direct investment on a pan-European level. Back to Top 1.4       US Landmark Decision on MAE Clauses – Consequences for German M&A Deals Fresenius wrote legal history in the US with potential consequences also for German M&A deals in which “material adverse effect” (MAE) clauses are used. In December 2018, for the first time ever, the Supreme Court of Delaware allowed a purchaser to invoke the occurrence of an MAE and to terminate the affected merger agreement. The agreement included an MAE clause, which allocated certain business risks concerning the target (Akorn) for the time period between signing and closing to Akorn. Against the resistance of Akorn, Fresenius terminated the merger agreement based on the alleged MAE, arguing that the target’s EBITDA declined by 86%. The decision includes a very detailed analysis of an MAE clause by the Delaware courts and reaffirms that under Delaware law there is a very high bar to establishing an MAE. Such bar is based both on quantitative and qualitative parameters. The effects of any material adverse event need to be substantial as well as lasting. In most German deals, the parties agree to arbitrate. For this reason, there have been no German court rulings published on MAE clauses so far. Hence, all parties to an M&A deal face uncertainty about how German courts or arbitration tribunals would define “materiality” in the context of an MAE clause. In potential M&A litigation, sellers may use this ruling to support the argument that the bar for the exercise of the MAE right is in fact very high in line with the Delaware standard. It remains to be seen whether German judges will adopt the Delaware decision to interpret MAE clauses in German deals. Purchasers, who seek more certainty, may consider defining materiality in the MAE clause more concretely (e.g., by reference to the estimated impact of the event on the EBITDA of the company or any other financial parameter). Back to Top 1.5       Equivalence of Swiss Notarizations? The question whether the notarization of various German corporate matters may only be validly performed by German notaries or whether some or all of these measures may also be notarized validly by Swiss notaries has long since been the topic of legal debate. Since the last major reform of the German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) in 2008 the number of Swiss notarizations of German corporate measures has significantly decreased. A number of the newly introduced changes and provisions seemed to cast doubt on the equivalence and capacity of Swiss notaries to validly perform the duties of a German notary public who are not legally bound by the mandatory, non-negotiable German fee regime on notarial fees. As a consequence and a matter of prudence, German companies mostly stopped using Swiss notaries despite the potential for freely negotiated fee arrangements and the resulting significant costs savings in particular in high value matters. However, since 2008 there has been an increasing number of test cases that reach the higher German courts in which the permissibility of a Swiss notarization is the decisive issue. While the German Federal Supreme Court (Bundesgerichtshof – BGH) still has not had the opportunity to decide this question, in 2018 two such cases were decided by the Kammergericht (Higher District Court) in Berlin. In those cases, the court held that both the incorporation of a German limited liability company in the Swiss Canton of Berne (KG Berlin, 22 W 25/16 – January 24, 2018 = ZIP 2018, 323) and the notarization of a merger between two German GmbHs before a notary in the Swiss Canton of Basle (KG Berlin, 22 W 2/18 – July 26, 2018 = ZIP 2018, 1878) were valid notarizations under German law, because Swiss notaries were deemed to be generally equivalent to the qualifications and professional standards of German-based notaries. The reasons given in these decisions are reminiscent of the case law that existed prior to the 2008 corporate law reform and can be interpreted as indicative of a certain tendency by the courts to look favorably on Swiss notarizations as an alternative to German-based notarizations. Having said that and absent a determinative decision by the BGH, using German-based notaries remains the cautious default approach for German companies to take. This is definitely the case in any context where financing banks are involved (e.g. either where share pledges as loan security are concerned or in an acquisition financing context of GmbH share sales and transfers). On the other hand, in regions where such court precedents exist, the use of Swiss notaries for straightforward intercompany share transfers, mergers or conversions might be considered as an alternative on a case by case basis. Back to Top 1.6       Re-Enactment of the DCGK: Focus on Relevance, Function, Management Board’s Remuneration and Independence of Supervisory Board Members Sixteen years after it has first been enacted, the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), which contains standards for good and responsible governance for German listed companies, is facing a major makeover. In November 2018, the competent German government commission published a first draft for a radically revised DCGK. While vast parts of the proposed changes are merely editorial and technical in nature, the draft contains a number of new recommendations, in particular with respect to the topics of management remuneration and independence of supervisory board members. With respect to the latter, the draft now provides a catalogue of criteria that shall act as guidance for the supervisory board as to when a shareholder representative shall no longer be regarded as independent. Furthermore, the draft also provides for more detailed specifications aiming for an increased transparency of the supervisory board’s work, including the recommendation to individually disclose the members’ attendance of meetings, and further tightens the recommendations regarding the maximum number of simultaneous mandates for supervisory board members. Moreover, in addition to the previous concept of “comply or explain”, the draft DCGK introduces a new “apply and explain” concept, recommending that listed companies also explain how they apply certain fundamental principles set forth in the DCGK as a new third category in addition to the previous two categories of recommendations and suggestions. The draft DCGK is currently under consultation and the interested public is invited to comment upon the proposed amendments until the end of January 2019. Since some of the proposed amendments provide for a rather fundamentally new approach to the current regime and would introduce additional administrative burdens, it remains to be seen whether all of the proposed amendments will actually come into force. According to the current plan, following a final consultancy of the Government Commission, the revised version of the DCGK shall be submitted for publication in April 2019 and would take effect shortly thereafter. Back to Top 2.         Tax On November 23, 2018, the German Federal Council (Bundesrat) approved the German Tax Reform Act 2018 (Jahressteuergesetz 2018, the “Act”), which had passed the German Federal Parliament (Bundestag) on November 8, 2018. Highlights of the Act are (i) the exemption of restructuring gains from German income tax, (ii) the partial abolition of and a restructuring exemption from the loss forfeiture rules in share transactions and (iii) the extension of the scope of taxation for non-German real estate investors investing in Germany. 2.1       Exemption of Restructuring Gains The Act puts an end to a long period of uncertainty – which has significantly impaired restructuring efforts – with respect to the tax implications resulting from debt waivers in restructuring scenarios (please see in this regard our 2017 Year-End German Law Update under 3.2). Under German tax law, the waiver of worthless creditor claims creates a balance sheet profit for the debtor in the amount of the nominal value of the payable. Such balance sheet profit is taxable and would – without any tax privileges for such profit – often outweigh the restructuring effect of the waiver. The Act now reinstates the tax exemption of debt waivers with retroactive effect for debt waivers after February 8, 2017; upon application debt waivers prior to February 8, 2017 can also be covered. Prior to this legislative change, a tax exemption of restructuring gains was based on a restructuring decree of the Federal Ministry of Finance, which has been applied by the tax authorities since 2003. In 2016, the German Federal Fiscal Court (Bundesfinanzgerichtshof) held that the restructuring decree by the Federal Ministry of Finance violates constitutional law since a tax exemption must be legislated by statute and cannot be based on an administrative decree. Legislation was then on hold pending confirmation from the EU Commission that a legislative tax exemption does not constitute illegal state aid under EU law. The EU Commission finally gave such confirmation by way of a comfort letter in August 2018. The Act is largely based on the conditions imposed by a restructuring decree issued by the Federal Ministry of Finance on the tax exemption of a restructuring gain. Under the Act, gains at the level of the debtor resulting from a full or partial debt relief are exempt from German income tax if the relief is granted to recapitalize and restructure an ailing business. The tax exemption only applies if at the time of the debt waiver (i) the business is in need of restructuring and (ii) capable of being restructured, (iii) the waiver results in a going-concern of the restructured business and (iv) the creditor waives the debt with the intention to restructure the business. The rules apply to German corporate income and trade tax and benefit individuals, partnerships and corporations alike. Any gains from the relief must first be reduced by all existing loss-offsetting potentials before the taxpayer can benefit from tax exemptions on restructuring measures. Back to Top 2.2       Partial Abolition of Loss Forfeiture Rules/Restructuring Exception Under the current Loss Forfeiture Rules, losses of a German corporation will be forfeited on a pro rata basis if within a period of five years more than 25% but not more than 50% of the shares in the German loss-making corporation are transferred (directly or indirectly) to a new shareholder or group of shareholders with aligned interests. If more than 50% are transferred, losses will be forfeited in total. There are exceptions to this rule for certain intragroup restructurings, built-in gains and business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) ruled that the pro rata forfeiture of losses (a share transfer of more than 25% but not more than 50%) is incompatible with the constitution. The court has asked the German legislator to amend the Loss Forfeiture Rules retroactively for the period from January 1, 2008 until December 31, 2015 to bring them in line with the constitution. Somewhat surprisingly, the legislator has now decided to fully cancel the pro rata forfeiture of losses with retroactive effect and with no reference to a specific tax period. Currently pending before the German Federal Constitutional Court is the question whether the full forfeiture of losses is constitutional. A decision by the Federal Constitutional Court is expected for early 2019, which may then result in another legislative amendment of the Loss Forfeiture Rules. The Act has also reinstated a restructuring exception from the forfeiture rules – if the share transfer occurs in order to restructure the business of an ailing corporation. Similar to the exemption of restructuring gains, this legislation was on hold until the ECJ’s decision (European Court of Justice) on June 28, 2018 that the restructuring exception does not violate EU law. Existing losses will not cease to exist following a share transfer if the restructuring measures are appropriate to avoid or eliminate the illiquidity or the over-indebtedness of the corporation and to maintain its basic operational structure. The restructuring exception applies to share transfers after December 31, 2007. Back to Top 2.3       Investments in German Real Estate by Non-German Investors So far, capital gains from the disposal of shares in a non-German corporation holding German real estate were not subject to German tax. In a typical structure, in which German real estate is held via a Luxembourg or Dutch entity, a value appreciation in the asset could be realized by a share deal of the holding company without triggering German income taxes. Under the Act, the sale of shares in a non-German corporation is now taxable if, at some point within a period of one year prior to the sale of shares, 50 percent of the book value of the assets of the company consisted of German real estate and the seller held at least 1 percent of the shares within the last five years prior to the sale. The Act is now in line with many double tax treaties concluded by Germany, which allow Germany to tax capital gains in these cases. The new law applies for share transfers after December 31, 2018. Capital gains are only subject to German tax to the extent the value has been increased after December 31, 2018. Until 2018, a change in the value of assets and liabilities, which are economically connected to German real estate, was not subject to German tax. Therefore, for example, profits from a waiver of debt that was used to finance German real estate was not taxable in Germany whereas the interest paid on the debt was deductible for German tax purposes. That law has now changed and allows Germany to tax such profit from a debt waiver if the loan was used to finance German real estate. However, only the change in value that occurred after December 31, 2018 is taxable. Back to Top 3.         Financing and Restructuring – Test for Liquidity Status Tightened On December 19, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down an important ruling which clarifies the debt and payable items that should be taken into account when determining the “liquidity” status of companies. According to the Court, the liquidity test now requires managing directors and (executive) board members to determine whether a liquidity gap exceeding 10% can be overcome by incoming liquidity within a period of three weeks taking into account all payables which will become due in those three weeks. Prior to the ruling, managing directors had often argued successfully that only those payables that were due at the time when the test is applied needed be taken into account while expected incoming payments within a three week term could be considered. This mismatch in favor of the managing directors has now been rectified by the Court to the disadvantage of the managing directors. If, for example, on June 1 the company liquidity status shows due payables amounting to EUR 100 and plausible incoming receivables in the three weeks thereafter amounting to EUR 101, no illiquidity existed under the old test. Under the new test confirmed by the Court, payables of EUR 50 becoming due in the three week period now also have to be taken into account and the company would be considered illiquid. For companies and their managing directors following a cautious approach, the implications of this ruling are minor. Going forward, however, even those willing to take higher risks will need to follow the court determined principles. Otherwise, delayed insolvency filings could ensue. This not only involves a managing directors and executive board members’ personal liability for payments made on behalf of the company while illiquid but also potential criminal liability for a delayed insolvency filing. Managing directors are thus well advised to properly undertake and also document the required test in order to avoid liability issues. Back to Top 4.         Labor and Employment 4.1       GDPR Has Tightened Workplace Privacy Rules The EU General Data Protection Regulation (“GDPR”) started to apply on May 25, 2018. It has introduced a number of stricter rules for EU countries with regard to data protection which also apply to employee personal data and employment relationships. In addition to higher sanctions, the regulation provides for extensive information, notification, deletion, and documentation obligations. While many of these data privacy rules had already been part of the previous German workplace privacy regime under the German Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG), the latter has also been amended and provides for specific rules applicable to employee data protection in Germany (e.g. in the context of internal investigations or with respect to employee co-determination). However, the most salient novelty is the enormous increase in potential sanctions under the GDPR. Fines for GDPR violations can reach up to the higher of EUR 20 million or 4% of the group’s worldwide turnover. Against this backdrop, employers are well-advised to handle employee personnel data particularly careful. This is also particularly noteworthy as the employer is under an obligation to prove compliance with the GDPR – which may result in a reversal of the burden of proof e.g. in employment-related litigation matters involving alleged GDPR violations. Back to Top 4.2       Job Adverts with Third Gender Following a landmark decision by the German Federal Constitutional Court in 2017, employers are gradually inserting a third gender into their job advertisements. The Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) decided on October 10, 2017 that citizens who do not identify as either male or female were to be registered as “diverse” in the birth register (1 BvR 2019/16). As a consequence of this court decision, many employers in Germany have broadened gender notations in job advertisements from previously “m/f” to “m/f/d”. While there is no compelling legal obligation to do so, employers tend to signal their open-mindedness by this step, but also mitigate the potential risk of liability for a discrimination claim. Currently, such liability risk does not appear alarming due to the relative rarity of persons identifying as neither male nor female and the lack of a statutory stipulation for such adverts. However, employers might be well-advised to follow this trend, particularly after Parliament confirmed the existence of a third gender option in birth registers in mid-December. Back to Top 4.3       Can Disclosure Obligation Reduce Gender Pay-Gap? In an attempt to weed out gender pay gaps, the German lawmaker has introduced the so-called Compensation Transparency Act in 2017. It obliges employers, inter alia, to disclose the median compensation of comparable colleagues of the opposite gender with comparable jobs within the company. The purpose is to give a potential claimant (usually a female employee) an impression of how much her comparable male colleagues earn in order for her to consider further steps, e.g. a claim for more money. However, the new law is widely perceived as pointless. First, the law itself and its processes are unduly complex. Second, even after making use of the law, the respective employee would still have to sue the company separately in order to achieve an increase in her compensation, bearing the burden of proof that the opposite-gender employee with higher compensation is comparable to her. Against this background, the law has hardly been used in practice and will likely have only minimal impact. Back to Top 4.4       Employers to Contribute 15% to Deferred Compensation Schemes In order to promote company pension schemes, employers are now obliged to financially support deferred compensation arrangements. So far, employer contributions to any company pension scheme had been voluntary. In the case of deferred compensation schemes, companies save money as a result of less social security charges. The flipside of this saving was a financial detriment to the employee’s statutory pension, as the latter depends on the salary actually paid to the employee (which is reduced as a result of the deferred compensation). To compensate the employee for this gap, the employer is now obliged to contribute up to 15% of the respective deferred compensation. The actual impact of this new rule should be limited, as many employers already actively support deferred compensation schemes. As such, the new obligatory contribution can be set off against existing employer contributions to the same pension scheme. Back to Top 5.         Real Estate – Notarization Requirement for Amendments to Real Estate Purchase Agreements Purchase agreements concerning German real estate require notarization in order to be effective. This notarization requirement relates not only to the purchase agreement as such but to all closely related (side) agreements. The transfer of title to the purchaser additionally requires an agreement in rem between the seller and the purchaser on the transfer (conveyance) and the subsequent registration of the transfer in the land register. To avoid additional notarial fees, parties usually include the conveyance in the notarial real estate purchase agreement. Amendment agreements to real estate purchase agreements are quite common (e.g., the parties subsequently agree on a purchase price adjustment or the purchaser has special requests in a real estate development scenario). Various Higher District Courts (Oberlandesgerichte), together with the prevailing opinion in literature, have held in the past that any amendments to real estate purchase agreements also require notarization unless such an amendment is designed to remove unforeseeable difficulties with the implementation of the agreement without significantly changing the parties’ mutual obligations. Any amendment agreement that does not meet the notarization requirement may render the entire purchase agreement (and not only the amendment agreement) null and void. With its decision on September 14, 2018, the German Federal Supreme Court (Bundesgerichtshof – BGH) added another exception to the notarization requirement and ruled that notarization of an amendment agreement is not required once the conveyance has become binding and the amendment does not change the existing real estate transfer obligations or create new ones. A conveyance becomes binding once it has been validly notarized. Before this new decision of the BGH, amendments to real estate purchase agreements were often notarized for the sake of precaution because it was difficult to determine whether the conditions for an exemption from the notarization requirement had been met. This new decision of the BGH gives the parties clear guidance as to when amendments to real estate purchase agreements require notarization. It should, however, be borne in mind that notarization is still required if the amendment provides for new transfer obligations concerning the real property or the conveyance has not become effective yet (e.g., because third party approval is still outstanding). Back to Top 6.         Compliance 6.1       Government Plans to Introduce Corporate Criminal Liability and Internal Investigations Act Plans of the Federal Government to introduce a new statute concerning corporate criminal liability and internal investigations are taking shape. Although a draft bill had already been announced for the end of 2018, pressure to respond to recent corporate scandals seems to be rising. With regard to the role and protection of work product generated during internal investigations, the highly disputed decisions of the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) in June 2018 (BVerfG, 2 BvR 1405/17, 2 BvR 1780/17 – June 27, 2018) (see 2017 Year-End German Law Update under 7.3) call for clearer statutory rules concerning the search of law firm premises and the seizure of documents collected in the course of an internal investigation. In its dismissal of complaints brought by Volkswagen and its lawyers from Jones Day, the Federal Constitutional Court made remarkable obiter dicta statements in which it emphasized the following: (1) the legal privilege enjoyed for the communication between the individual defendant (Beschuldigter) and its criminal defense counsel is limited to their communication only; (2) being considered a foreign corporate body, the court denied Jones Day standing in the proceedings, because the German constitution only grants rights to corporate bodies domiciled in Germany; and (3) a search of the offices of a law firm does not affect individual constitutional rights of the lawyers practicing in that office, because the office does not belong to the lawyers’ personal sphere, but only to their law firm. The decision and the additional exposure caused by it by making attorney work product created in the course of an internal investigation accessible was a major blow to German corporations’ efforts to foster internal investigations as a means to efficiently and effectively investigate serious compliance concerns. Because it does not appear likely that an entirely new statute concerning corporate criminal liability will materialize in the near future, the legal press expects the Federal Ministry of Justice to consider an approach in which the statutes dealing with questions around internal investigations and the protection of work product created in the course thereof will be clarified separately. In the meantime, the following measures are recommended to maximize the legal privilege for defense counsel (Verteidigerprivileg): (1) Establish clear instructions to an individual criminal defense lawyer setting forth the scope and purpose of the defense; (2) mark work product and communications that have been created in the course of the defense clearly as confidential correspondence with defense counsel (“Vertrauliche Verteidigerkorrespondenz”); and (3) clearly separate such correspondence from other correspondence with the same client in matters that are not clearly attributable to the criminal defense mandate. While none of these measures will guarantee that state prosecutors and courts will abstain from a search and seizure of such material, at least there are good and valid arguments to defend the legal privilege in any appeals process. However, with the guidance provided to courts by the recent constitutional decision, until new statutory provisions provide for clearer guidance, companies can expect this to become an up-hill battle. Back to Top 6.2       Update on the European Public Prosecutor’s Office and Proposed Cross-Border Electronic Evidence Rules Recently the European Union has started tightening its cooperation in the field of criminal procedure, which was previously viewed as a matter of national law under the sovereignty of the 28 EU member states. Two recent developments stand out that illustrate that remarkable new trend: (1) The introduction of the European Public Prosecutor’s Office (“EPPO”) that was given jurisdiction to conduct EU-wide investigations for certain matters independent of the prosecution of these matters under the national laws of the member states, and (2) the proposed EU-wide framework for cross-border access to electronically stored data (“e-evidence”) which has recently been introduced to the European Parliament. As reported previously (see 2017 Year-End German Law Update under 7.4), the European Prosecutor’s Office’s task is to independently investigate and prosecute severe crimes against the EU’s financial interests such as fraud against the EU budget or crimes related to EU subsidies. Corporations receiving funds from the EU may therefore be the first to be scrutinized by this new EU body. In 2018 two additional EU member states, the Netherlands and Malta, decided to join this initiative, extending the number of participating member states to 22. The EPPO will presumably begin its work by the end of 2020, because the start date may not be earlier than three years after the regulation’s entry into force. As a further measure to leverage multi-jurisdictional enforcement activities, in April 2018 the European Commission proposed a directive and a regulation that will significantly facilitate expedited cross-border access to e-evidence such as texts, emails or messaging apps by enforcement agencies and judicial authorities. The proposed framework would allow national enforcement authorities in accordance with their domestic procedure to request e-evidence directly from a service provider located in the jurisdiction of another EU member state. That other state’s authorities would not have the right to object to or to review the decision to search and seize the e-evidence sought by the national enforcement authority of the requesting EU member state. Companies refusing delivery risk a fine of up to 2% of their worldwide annual turnover. In addition, providers from a third country which operate in the EU are obliged to appoint a legal representative in the EU. The proposal has reached a majority vote in the Council of the EU and will now be negotiated in the European Parliament. Further controversial discussions between the European Parliament and the Commission took place on December 10, 2018. The Council of the EU aims at reaching an agreement between the three institutions by the end of term of the European Parliament in May 2019. Back to Top 7.         Antitrust and Merger Control 7.1       Antitrust and Merger Control Overview 2018 In 2018, Germany celebrated the 60th anniversary of both the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB) as well as the German federal cartel office (Bundeskartellamt) which were both established in 1958 and have since played a leading role in competition enforcement worldwide. The celebrations notwithstanding, the German antitrust watchdog has had a very active year in substantially all of its areas of competence. On the enforcement side, the Bundeskartellamt concluded a number of important cartel investigations. According to its annual review, the Bundeskartellamt carried out dawn raids at 51 companies and imposed fines totaling EUR 376 million against 22 companies or associations and 20 individuals from various industries including the steel, potato manufacturing, newspapers and rolled asphalt industries. Leniency applications remained an important source for the Bundeskartellamt‘s antitrust enforcement activities with a total of 21 leniency applications received in 2018 filling the pipeline for the next few months and years. On the merger control side, the Bundeskartellamt reviewed approximately 1,300 merger cases in 2018 – only 1% of which (i.e. 13 merger filings) required an in-depth phase 2 review. No mergers were prohibited but in one case only conditional clearance was granted and three filings were withdrawn in phase 2. In addition, the Bundeskartellamt had its first full year of additional responsibilities in the area of consumer protection, concluded a sector inquiry into internet comparison portals, and started a sector inquiry into the online marketing business as well as a joint project with the French competition authority CNIL regarding algorithms in the digital economy and their competitive effects. Back to Top 7.2       Cartel Damages Over the past few years, antitrust damages law has advanced in Germany and the European Union. One major legislative development was the EU Directive on actions for damages for infringements of competition law, which was implemented in Germany as part of the 9th amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB). In addition, there has also been some noteworthy case law concerning antitrust damages. To begin with, the German Federal Supreme Court (Bundesgerichtshof, BGH) strengthened the position of plaintiffs suing for antitrust damages in its decision Grauzementkartell II in 2018. The decision brought to an end an ongoing dispute between several Higher District Courts and District Courts, which had disagreed over whether a recently added provision of the GWB that suspends the statute of limitations in cases where antitrust authorities initiate investigations would also apply to claims that arose before the amendment entered into force (July 1, 2015). The Federal Supreme Court affirmed the suspension of the statute of limitations, basing its ruling on a well-established principle of German law regarding the intertemporal application of statutes of limitation. The decision concerns numerous antitrust damage suits, including several pending cases concerning trucks, rails tracks, and sugar cartels. Furthermore, recent case law shows that European domestic courts interpret arbitration agreements very broadly and also enforce them in cases involving antitrust damages. In 2017, the England and Wales High Court and the District Court Dortmund (Landgericht Dortmund) were presented with two antitrust disputes where the parties had agreed on an arbitration clause. Both courts denied jurisdiction because the antitrust damage claims were also covered by the arbitration agreements. They argued that the parties could have asserted claims for contractual damages instead, which would have been covered by the arbitration agreement. In the courts’ view, it would be unreasonable, however, if the choice between asserting a contractual or an antitrust claim would give the parties the opportunity to influence the jurisdiction of a court. As a consequence, the use of arbitration clauses (in particular if inconsistently used by suppliers or purchasers) may add significant complexity to antitrust damages litigation going forward. Thus, companies are well advised to examine their international supply agreements to determine whether included arbitration agreements will also apply to disputes about antitrust damages. Back to Top 7.3       Appeals against Fines Risky? In German antitrust proceedings, there is increasing pressure for enterprises to settle. Earlier this year, Radeberger, a producer of lager beer, withdrew its appeal against a significant fine of EUR 338 million, which the Bundeskartellamt had imposed on the company for its alleged participation in the so-called “beer cartel”. With this dramatic step, Radeberger paid heed to a worrisome development in German competition law. Repeatedly, enterprises have seen their cartel fines increased by staggering amounts on appeal (despite such appeals sometimes succeeding on some substantive legal issues). The reason for these “appeals for the worse” – as seen in the liquefied gas cartel (increase of fine from EUR 180 million to EUR 244 million), the sweets cartel (average increase of approx. 50%) and the wallpaper cartel (average increase of approx. 35%) – is the different approach taken by the Bundeskartellamt and the courts to calculating fines. As courts are not bound by the administrative practice of the Bundeskartellamt, many practitioners are calling for the legislator to step in and address the issue. Back to Top 7.4       Luxury Products on Amazon – The Coty Case In July 2018, the Frankfurt Higher District Court (Oberlandesgericht Frankfurt) delivered its judgement in the case Coty / Parfümerie Akzente, ruling that Coty, a luxury perfume producer, did not violate competition rules by imposing an obligation on its selected distributors to not sell on third-party platforms such as Amazon. The judgment followed an earlier decision of the Court of Justice of the European Union (ECJ) of December 2017, by which the ECJ had replied to the Frankfurt court’s referral. The ECJ had held that a vertical distribution agreement (such as the one in place between Coty and its distributor Parfümerie Akzente) did not as such violate Art. 101 of the Treaty on the Functioning of the European Union (TFEU) as long as the so-called Metro criteria were fulfilled. These criteria stipulate that distributors must be chosen on the basis of objective and qualitative criteria that are applied in a non-discriminatory fashion; that the characteristics of the product necessitate the use of a selective distribution network in order to preserve their quality; and, finally, that the criteria laid down do not go beyond what is necessary. Regarding the platform ban in question, the ECJ held that it was not disproportionate. Based on the ECJ’s interpretation of the law, the Frankfurt Higher District Court confirmed that the character of certain products may indeed necessitate a selective distribution system in order to preserve their prestigious reputation, which allowed consumers to distinguish them from similar goods, and that gaps in a selective distribution system (e.g. when products are sold by non-selected distributors) did not per se make the distribution system discriminatory. The Higher District Court also concluded that the platform ban in question was proportional. However, interestingly, it did not do so based on its own reasoning but based on the fact that the ECJ’s detailed analysis did not leave any scope for its own interpretation and, hence, precluded the Higher District Court from applying its own reasoning. Pointing to the European Commission’s E-Commerce Sector Inquiry, according to which sales platforms play a more important role in Germany than in other EU Member States, the Higher District Court, in fact, voiced doubts whether Coty’s sales ban could not have been imposed in a less interfering manner. Back to Top 8.         Litigation 8.1       The New German “Class Action” On November 1, 2018, a long anticipated amendment to the German Code of Civil Procedure (Zivilprozessordnung, ZPO) entered into force, introducing a new procedural remedy for consumers to enforce their rights in German courts: a collective action for declaratory relief. Although sometimes referred to as the new German “class action,” this new German action reveals distinct differences to the U.S.-American remedy. Foremost, the right to bring the collective action is limited to consumer protection organizations or other “qualified institutions” (qualifizierte Einrichtung) who can only represent “consumers” within the meaning of the German Code of Civil Procedure. In addition, affected consumers are not automatically included in the action as part of a class but must actively opt-in by registering their claims in a “claim index” (Klageregister). Furthermore, the collective action for declaratory relief does not grant any monetary relief to the plaintiffs which means that each consumer still has to enforce its claim in an individual suit to receive compensation from the defendant. Despite these differences, the essential and comparable element of the new legal remedy is its binding effect. Any other court which has to decide an individual dispute between the defendant and a registered consumer that is based on the same facts as the collective action is bound by the declaratory decision of the initial court. At the same time, any settlement reached by the parties has a binding effect on all registered consumers who did not decide to specifically opt-out. As a result, companies must be aware of the increased litigation risks arising from the introduction of the new collective action for declaratory relief. Even though its reach is not as extensive as the American class action, consumer protection organizations have already filed two proceedings against companies from the automotive and financial industry since the amendment has entered into force in November 2018, and will most likely continue to make comprehensive use of the new remedy in the future. Back to Top 8.2       The New 2018 DIS Arbitration Rules On March 1, 2018, the new 2018 DIS Arbitration Rules of the German Arbitration Institute (DIS) entered into force. The update aims to make Germany more attractive as a place for arbitration by adjusting the rules to international standards, promoting efficiency and thereby ensuring higher quality for arbitration proceedings. The majority of the updated provisions and rules are designed to accelerate the proceedings and thereby make arbitration more attractive and cost-effective for the parties. There are several new rules on time limitations and measures to enhance procedural efficiency, i.e. the possibility of expedited proceedings or the introduction of case management conferences. Furthermore, the rules now also allow for consolidation of several arbitrations and cover multi-party and multi-contract arbitration. Another major change is the introduction of the DIS Arbitration Council which, similar to the Arbitration Council of the ICC (International Chamber of Commerce), may decide upon challenges of an arbitrator and review arbitral awards for formal defects. This amendment shows that the influence of DIS on their arbitration proceedings has grown significantly. All in all, the modernized 2018 DIS Arbitration Rules resolve the deficiencies of their predecessor and strengthen the position of the German Institution of Arbitration among competing arbitration institutions. Back to Top 9.         IP & Technology – Draft Bill of German Trade Secret Act The EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure has already been in effect since July 5, 2016. Even though it was supposed to be implemented into national law by June 9, 2018 to harmonize the protection of trade secrets in the EU, the German legislator has so far only prepared and published a draft of the proposed German Trade Secret Act. Arguably, the most important change in the draft bill to the existing rules on trade secrets in Germany will be a new and EU-wide definition of trade secrets. This proposed definition requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection – e.g. by implementing technical, contractual and organizational measures that ensure secrecy. This requirement goes beyond the current standard pursuant to which a manifest interest in keeping an information secret may be sufficient. Furthermore, the draft bill provides for additional protection of trade secrets in litigation matters. Last but not least, the draft bill also provides for increased protection of whistleblowers by reducing the barriers for the disclosure of trade secrets in the public interest and to the media. As a consequence, companies would be advised to review their internal procedures and policies regarding the protection of trade secrets at this stage, and may want to adapt their existing whistleblowing and compliance-management-systems as appropriate. Back to Top 10.       International Trade, Sanctions and Export Controls – The Conflict between Complying with the Re-Imposed U.S. Iran Sanctions and the EU Blocking Statute On May 8, 2018, President Donald Trump announced his decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose U.S. nuclear-related sanctions. Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in business with Iran. But with the end of the wind-down periods provided for in President Trump’s decision on November 5, 2018, such non-U.S. entities are now no longer broadly permitted to provide goods, services, or financing to Iranian counterparties, not even under agreements executed before the U.S. withdrawal from the JCPOA. In response to the May 8, 2018 decision, the EU amended the EU Blocking Statute on August 6, 2018. The effect of the amended EU Blocking Statute is to prohibit compliance by so-called EU operators with the re-imposed U.S. sanctions on Iran. Comparable and more generally drafted anti-blocking statutes had already existed in the EU and several of its member states which prohibited EU domiciled companies to commit to compliance with foreign boycott regulations. These competing obligations under EU and U.S. laws are a concern for U.S. companies that own or seek to acquire German companies that have a history of engagement with Iran – as well as for the German company itself and its management and the employees. But what does the EU prohibition against compliance with the re-imposed U.S. sanctions on Iran mean in practice? Most importantly, it must be noted that the EU Blocking Statute does not oblige EU operators to start or continue Iran related business. If, for example, an EU operator voluntarily decides, e.g. due to lack of profitability, to cease business operations in Iran and not to demonstrate compliance with the U.S. sanctions, the EU Blocking Statute does not apply. Obviously, such voluntary decision must be properly documented. Procedural aspects also remain challenging for companies: In the event a Germany subsidiary of a U.S. company were to decide to start or continue business with Iran, it would usually be required to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran. Before doing so, however, EU operators must first contact the EU Commission directly (not the EU member state authorities) to request authorization to apply for such a U.S. special license. Likewise, if a Germany subsidiary were to decide not to start or to cease business with Iran for the sole reason of being compliant with the re-imposed U.S. Iran sanctions, it would have to apply for an exception from the EU Blocking Statute and would have to provide sufficient evidence that non-compliance would cause serious damage to at least one protected interest. The hurdles for an exception are high and difficult to predict. The EU Commission will e.g. consider, “(…) whether the applicant would face significant economic losses, which could for example threaten its viability or pose a serious risk of bankruptcy, or the security of supply of strategic goods or services within or to the Union or a Member State and the impact of any shortage or disruption therein.” As such, any company caught up in this conflict of interests between the re-imposed U.S. sanctions and the EU Blocking Statute should be aware of a heightened risk of litigation. Third parties, such as Iranian counterparties, might successfully sue for breach of contract with the support of the EU Blocking Regulation in cases of non-performance of contracts as a result of the re-imposed U.S. nuclear sanctions. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of the EU operator are affected, directly or indirectly, by the re-imposed U.S. Iran sanctions. If the EU operator is a legal person, this obligation is incumbent on its directors, managers and other persons with management responsibilities of such legal person. Back to Top The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Silke Beiter, Lutz Englisch, Daniel Gebauer, Kai Gesing, Maximilian Hoffmann, Philipp Mangini-Guidano, Jens-Olrik Murach, Markus Nauheim, Dirk Oberbracht, Richard Roeder, Martin Schmid, Annekatrin Schmoll, Jan Schubert, Benno Schwarz, Balthasar Strunz, Michael Walther, Finn Zeidler, Mark Zimmer, Stefanie Zirkel and Caroline Ziser Smith. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices: General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 121, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 510, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 121, sbeiter@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com Finance, Restructuring and Insolvency Sebastian Schoon (+49 89 189 33 160, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 518, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 218, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 19, 2018 |
Webcast: CFIUS Reform: Implications for Private Equity Investments

On August 13, 2018, President Trump signed legislation that will significantly expand the scope of inbound foreign investments subject to review by the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”). The Foreign Investment Risk Review Modernization Act (“FIRRMA”) expanded the scope of transactions subject to the Committee’s review by granting CFIUS the authority to examine the national security implications of a foreign acquirer’s non-controlling investments in U.S. businesses that deal with critical infrastructure, critical technology, or the personal data of U.S. citizens. Critically, an express carve-out for indirect foreign investment through certain investment funds may prevent many transactions by private equity funds from falling into the Committee’s expanded jurisdiction. In this webcast presentation, our panelists discuss the new CFIUS legislation and its impact on private equity investments. View Slides (PDF) PANELISTS: Judith Alison Lee, a partner in Gibson Dunn’s Washington, D.C. office, is Co-Chair of the firm’s International Trade Practice Group. She practices in the areas of international trade regulation, including USA Patriot Act compliance, economic sanctions and embargoes, export controls, and national security reviews (“CFIUS”). She also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers. Jose W. Fernandez, a partner in Gibson Dunn’s New York office and Co-Chair of the firm’s Latin America Practice Group, previously served as Assistant Secretary of State for Economic, Energy and Business Affairs during the Obama Administration, and led the Bureau that is responsible for overseeing work on sanctions and international trade and investment policy. His practice focuses on mergers and acquisitions and finance in emerging markets in Latin America, the Middle East, Africa and Asia. Stephanie L. Connor, a senior associate in Gibson Dunn’s Washington D.C. office, practices primarily in the areas of international trade compliance and white collar investigations. She focuses on matters before the U.S. Committee on Foreign Investment in the United States (“CFIUS”) and has served on secondment to the Legal and Compliance division of a Fortune 100 company. Michael Garson is a Senior Managing Director at Ankura with more than 20 years of experience as an attorney in private practice, an in-house general counsel, and a C-suite operations and compliance executive. In those roles, he advised companies and enterprises of all sizes on US federal, state, and municipal procurements and grants and has specific expertise in defense and technology matters. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.