Gibson Dunn | Publications


Our lawyers provide sophisticated analysis, practical guidance and thought leadership on a wide range of topics. We encourage our readers to review this collection of client alerts, articles and white papers and benefit from the authors’ exceptional experience, market knowledge, practiced judgment and singular insights.

February 8, 2005

Sector Inquiries under EU Competition Law

Brussels Partner David Wood and Paris Partner Nicolas Baverez authored "Sector Inquiries under EU Competition Law" [PDF] in the 8 February 2005 issue of Competition Law Insight.  This article was first published in the February 8, 2005 issue of Competition Law Insight and is reproduced here with the agreement of the publishers, Informa Law -
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January 26, 2005

2005 Handbook of Competition Enforcement Agencies: German Antitrust Law

Munich Partner Michael Walther authored the "German Antitrust Law" section in the 2005 Handbook of Competition Enforcement Agencies. An extract from The 2005 Handbook of Competition Enforcement Agencies, a Global Competition Review special report -
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January 25, 2005

New Hart-Scott-Rodino Act Thresholds

This morning the Federal Trade Commission issued a press release announcing the indexing of the jurisdictional thresholds under the Hart-Scott-Rodino Act. The new thresholds will become effective for transactions closing on or after thirty days following publication of notice in the Federal Register. Assuming Federal Register publication within the next few days, we would predict an effective date of around March 1.As a result of the indexing, the long-familiar $10 million/$100 million size-of-person test becomes a $10.7 million/$106.2 million test.The $200 million transaction value, above which size-of-person tests are inapplicable, becomes $212.3 million.The $50 million minimum filing threshold becomes $53.1 million.The four subsequent reporting thresholds are increased as follows:$100 million becomes $106.2 million $500 million becomes $530.7 million 25% of total outstanding shares worth more than $1 billion becomes 25% worth more than $1,061.3 million and 50% of total outstanding shares worth more than $50 million becomes 50% worth more than $53.1 million.The amounts of the filing fees have not changed, but the thresholds are increased:Transactions valued at more than $53.1 million but less than $106.2 million pay $45,000.Transactions valued at $106.2 million or more but less than $530.7 million pay $125,000.Transactions valued at $530.7 million or more pay $280,000.Many (but not all) of the dollar amounts appearing in the HSR rules (and particularly in the exemptions) have been similarly adjusted.Malcolm R. Pfunder of Gibson, Dunn & Crutcher LLP has written an article [PDF] for the ABA Antitrust Section's online publication "The Antitrust Source," which explains the indexing in greater detail:* * * * *Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding the HSR Act indexing.  Please contact the Gibson Dunn attorney with whom you work, or Malcolm R. Pfunder (202-955-8227;"Indexing Comes to the HSR Act,"  © American Bar Association.  All rights reserved.  Reprinted from The Antitrust Source, January 2005, a publication of the ABA Section of Antitrust Law.  © 2005 Gibson, Dunn & Crutcher LLP
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January 21, 2005

New EU Standard Clauses for Data Transfers to Non-EU-Countries

In a  decision published earlier this month, the European Commission approved a new set of standard contractual clauses for businesses to facilitate the transfer of personal data to non-EU countries with effect from 1 April, 2005.  Such clauses between the data exporter and the data importer allow businesses operating in one of the EU Member States to freely transfer personal data to a recipient operating in a non-EU country which does not provide a level of data protection that is "adequate" to the EU. The EU Data Protection RegimeThe European Data Protection Directive, adopted in 1994, is targeted at protecting individuals' right to privacy in relation to so-called "personal data".  A particular emphasis of the Directive lies on cross-border data transfers, aiming to safeguard the high standards of data protection established by the Directive in the context of data transfers to non-EU countries.Under the Directive, Member States are required to allow the transfer of personal data to countries outside the EU only if these countries offer "adequate" data protection:  To date, the European Commission has recognized Switzerland, Canada, Argentina, the UK territories of Guernsey and the Isle of Man, Norway, Iceland and Liechtenstein as providing "adequate" data protection.  The same applies to data importers located in the U.S. which adhere to the Department of Commerce's Safe Harbor Privacy Principles.  The Directive also allows cross-border data transfers if the data subject has consented thereto, if the transfer is regarded as necessary for specified purposes and where the data exporter is able to provide national authorities with other evidence proving an adequate level of data protection. The Standard ClausesIn line with these scenarios and with a high practical relevance, the Directive also allows the Commission to issue standard contractual clauses which data exporters located within the EU transferring data to non-EU countries can use to prove "adequate" data protection to the national authorities.  In 2001, the Commission adopted the first set of standard contractual clauses (the "Set I" clauses) which are now complemented by the second set of clauses (the "Set II" clauses), thus satisfying a demand from businesses for a wider choice of such clauses.  Both sets are fully applicable and it is up to the data exporter to choose the set of clauses which best suits its needs.  In addition, data exporters can continue to transfer data under arrangements authorized by national authorities, which is quite a lengthy process and, hence, generally not a practical alternative.Unlike the Set I clauses, the Set II leans heavily on proposals by business representatives themselves.  It is designed to provide a business-friendly contractual framework, responding to the criticisms that the Set I clauses are not sufficiently commercially workable.  The Commission and a committee of EU data protection authorities negotiated over three years, primarily with various business associations led by the International Chamber of Commerce and including amongst others the American Chamber of Commerce.  The main difference between Set I and Set II is the more flexible and pragmatic approach of the new clauses, particularly with regard to litigation, allocation of responsibilities and auditing requirements. Particularly significant is that the liability regime applicable to Set II has been altered compared to Set I.  As an alternative to Set I's system of joint and several liability of the data exporter and the data importer, Set II contains a liability regime based on "due diligence" obligations of the data exporter, allowing the separation and allocation of responsibilities between the data exporter in the EU and the data importer in another country.  Under the new regime, the data exporter might be liable vis-à-vis the data subject for not having made reasonable efforts to determine that the data importer is actually able to satisfy its legal obligations under the new set of clauses.  As an example, such reasonable efforts may include audits of the data importer's premises or ensuring that there is adequate insurance coverage for any damages caused. Nevertheless, due to mutual indemnification clauses, the general rule on liability remains that every party to the contract is responsible for its acts vis-à-vis the data subject.  Finally, in order to prevent abuses of the system, the data protection authorities are given more powers under Set II to intervene and impose sanctions where necessary. Notwithstanding these differences, however, Set II provides for a level of data protection equivalent to Set I.  As with Set I, the new clauses are construed as a model contract (rather than individual clauses) and should be agreed on by the parties in their entirety, e.g., as a free-standing contract or as an exhibit to another contract.  However, parties remain free to add clauses that do not contradict the standard clauses. For example, additional guarantees or safeguards relating to on-line procedures or elements of a privacy policy might be appropriate.  The use of either set is voluntary as both sets are only one of several possibilities which data exporters are free to choose under the Directive in order to lawfully transfer personal data to another country.  Such choice should be carefully considered by companies in light of their specific requirements. "This is a good example of regulating in cooperation with business.  The business community has shown a serious commitment towards data protection and the Commission has carefully listened to business needs", said Single Market Commissioner Charlie McCreevy.Copies of the Commission decision containing the new standard contractual clauses can be downloaded from the Commission's website at* * * * *If you have any questions, please contact:Michael Walther, Partner, +49-89-18933-180; mwalther@gibsondunn.comUlrich Baumgartner, Associate,+49-89-18933-180; ubaumgartner@gibsondunn.comMiranda Cole, Associate, +32-2- 554 7201;© 2005 Gibson, Dunn & Crutcher LLP
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January 18, 2005

The Director Settlements at Enron and Worldcom; Lessons for Directors

As widely reported in the press, a number of former non-management directors of both Enron and WorldCom have entered into agreements to settle pending federal class action lawsuits.  What is remarkable about both of these settlement agreements is that the settling directors have agreed to make substantial personal payments - beyond director and officer insurance proceeds - to fund part of the settlement.  Not since Smith v. Van Gorkom twenty years ago, when prominent directors of Trans Union Corporation were held personally liable in a state fiduciary duty case, has there been such well-publicized instances of non-management directors reaching into their own pockets to pay investor plaintiffs.At the same time as these two settlements, the Delaware Chancery Court trial of the Walt Disney Company case continues.  There, the plaintiffs claim that the directors breached their state law duties of due care and good faith in failing to appropriately monitor and oversee generous compensation and severance packages for former Disney President, Michael Ovitz.  Another case with similar allegations has been brought by creditors against former directors of Integrated Health Services and is apparently headed for trial in the Delaware Chancery Court.  In both these cases, if the directors are found to have so neglected their duties that they were not acting in good faith, they may end up having to personally pay damages to the extent that they do not have enforceable and adequate insurance coverage.In light of these developments, should non-management directors of other corporations be worried?  The answer to that question, it seems to us, is clearly "yes."  In our judgment, however, the greater risk of liability in cases of major corporate fraud should not discourage director service where a corporation and its board are committed to a culture of integrity and to strong board oversight processes.  The more relevant question is, what should concerned directors do to reduce the likelihood of personal liability to an acceptable level? First, some observations about these four cases that help put the recent developments in perspective.WorldCom, Enron and Integrated Health Services all filed for bankruptcy reorganization.  Disney, on the other hand, remains financially healthy.  In the case of WorldCom and Enron, investor losses were massive, and there were significant charges both of financial statement fraud and of failure by the directors to appropriately monitor management.  At both Enron and WorldCom, federal criminal prosecutions are continuing, and WorldCom paid $750 million to settle civil claims with the SEC.In both WorldCom and Enron, there were multiple post-failure internal and external investigations resulting in reports that reached highly negative conclusions as to the actions and, more importantly, the claimed inattention of the boards of directors.While the Disney case is in trial, and Integrated Health may go to trial, no final factual determinations have been made.  As to the Enron and WorldCom settlements, of course, there will never be a trial verdict on the conduct of the settling directors and they have not made any admissions of liability in the settlements.  Thus, these two settlements do not establish new law, even though they may well set a higher bar for future settlements of similar claims.The Enron and WorldCom settlements relate primarily to claims of material misstatements and omissions - disclosure violations - in connection with very large offerings and sales of securities by the two companies.  Liability in such cases can be imposed on directors under the federal securities laws without a showing of fraudulent intent, and the director has the burden of establishing defenses of due diligence, reliance on experts or good faith.In other words, the focus in the WorldCom and Enron cases was, importantly, on what the directors did or did not do before they signed, or permitted to be filed, Form 10-K annual reports and other filings with the SEC and registration statements for securities offerings which, for large issuers such as WorldCom and Enron, incorporate those reports.Thus, each of the four cases differs both as to its factual bases and the legal standards it presents.  Yet, in each case, personal financial responsibility of the directors has become an issue and several of the Enron and WorldCom outside directors each have agreed to pay substantial sums to avoid further litigation.Second, a few other factors have contributed to the current riskier environment.Public officials, including several SEC Commissioners, the SEC Enforcement Director Steven Cutler, and New York State Comptroller Alan Hevesi, have called for "personal accountability" of directors and have noted the perceived unfairness of having shareholders bear the costs of damage awards and insurance premiums paid by the corporations while potentially responsible managers and directors do not pay.Corporate indemnification provisions may be largely unavailable or of limited value in cases of corporate insolvency and are, in every case, subject to good faith and public policy limitations.D&O insurance policies are subject to fraud, improper personal benefit, criminal conduct and other exclusions and may sometimes be rescinded if the policy application and supporting documents are found to have been incomplete or misleading.  For massive corporate failure claims, such as those in Enron and WorldCom, policy limits will be far less than potential damage awards and, if the policy itself has "entity" coverage, the corporation itself may compete with multiple director and officer insureds to access the policy.  Moreover, much of the policy limits may be exhausted by defense costs.These are among the factors that may well have prompted several of the Enron and WorldCom non-management directors to settle now even if they and their counsel believed that they have strong defenses to claims made against them.What, then, can directors of public companies do?  While there is no one-size-fits all solution, here are some helpful guidelines:Do enhanced diligence before accepting a board seat.  It's not enough just to review the company's financial statements and public disclosures.  Ask questions such as:  what is the "tone at the top" of the organization and what motivates the CEO and the rest of the organization?  And, don't forget more personal questions such as:  whether you have sufficient time to devote to the board (recent survey data indicates at least a 150-200 hour per year commitment), whether you're interested in the company and its industry (you can't be an effective director unless you understand how the company's business model works and what the four or five key drivers of financial success are) and what is the culture or dynamic of the board (are meetings scripted or is constructive questioning expected)?  These questions are also relevant for directors considering continued service.  This is an appropriate time for non-management directors to ask these questions of any board on which they sit.Take corporate governance seriously.  Start with a corporate governance assessment or "audit" to be sure that the board and its committees have in place the charters, procedures and policies required by relevant market listing standards.  Benchmark your procedures and policies against the "best practices" published by other corporations and recommended by organizations such as the Business Roundtable and the National Association of Corporate Directors.  Then, be sure that your procedures and policies are actually followed.Pay close attention to transactions with management.  The credibility of corporate governance at both Enron and WorldCom was undermined when large, and insufficiently monitored, transactions with senior management - both loans and related party transactions - were disclosed after the corporate failures.  While the boards had some knowledge of some of the transactions, the charges are that they did not fully inform themselves of the terms and did not follow up as transactions evolved.  Transactions with managers of the company, members of their families or their close business associates, should be subject to strict scrutiny, and where in the best interest of the company, should be approved and monitored by the audit committee or another committee of independent directors.Pay close attention to executive compensation.  Similar to related party transactions, executive compensation is coming under enhanced scrutiny, as the Disney and Integrated Health cases indicate.  Compensation committees must fully understand senior management compensation and severance packages, and should get independent advice from advisers, selected by the committee, before approving such packages.  So too, compensation committees must understand the incentives the company's compensation plans create and their relationship to the company's strategic plan.  And, they must see that all executive compensation is adequately disclosed.Focus on compliance.  Directors should see that the corporation has a strong code of ethics and a pre-approval policy for trading by senior management and directors in the corporation's securities.  Rule 10b5-1 trading plans should be considered for those who trade actively.  Directors also need to consider whether the audit committee, another committee or the full board is the appropriate body to assume greater oversight of the corporation's compliance program as required by the revised Federal Sentencing Guidelines and whether to appoint a full-time compliance officer.Audit committees continue to be on the hot seat.  Audit committees have a range of new duties and responsibilities under the Sarbanes-Oxley Act and securities market listing standards.  They have primary responsibility for dealing with all relationships with the external and internal auditors and for oversight of financial reporting and risk assessment and management.  Thus, audit committee members must be not only financially literate - and one or more should be "expert" - but they must put in the time to prepare and fully participate in their key audit and reporting oversight functions.  Boards need to take a hard look at whether current audit committee members have both the experience and the time to meet these demands and, importantly, to justify other directors placing reliance on the committee's work. Nominating and governance committees need to focus on director qualifications and board and committee effectiveness.  In today's environment, the appearance of independence is as important as an independent state of mind.  Merely meeting minimum securities market listing standards is not enough.  Cronies, business associates, or personal advisers to the CEO or other senior managers, directors affiliated with charitable organizations that receive significant support from the company, and directors who do not have visible qualifications to make a meaningful contribution to boardroom deliberations may not be viewed as "independent" and generally should not be placed on key board committees.  No director should serve who does not have the time to fully prepare for, attend and participate in board and board committee meetings.  The nominating or governance committee should evaluate directors against these criteria every year before renomination, and should supervise a serious annual evaluation process for the board as a whole and for each of the board's key committees.Don't forget the full board; take the time to be careful; get independent advice when needed; document what the board has done.  While much of the important work of the board of directors is done in committees, all directors need to be informed about the significant matters addressed by the committees - both to assess the reasonableness of relying on the committees and to demonstrate their diligence.  In the current environment, it's more important than ever that both the process and substance of decisions are documented carefully in minutes of the board and its committees and otherwise.  When management is submitting a major decision for board or committee approval, be sure that the board or committee gets a full presentation, including the alternatives management considered, and takes the time for thorough discussion.  And, boards and committees should obtain input from experts where outside advice is necessary. Think about independent leadership for the board.  Some companies are well-served by a structure in which the CEO serves as chair of the board, but the board must have a means to provide independent leadership.  The setting of board agendas, evaluating the CEO and senior management, dealing with management development and succession and presiding at executive sessions of the board all require board leadership.  Whether this leadership is provided by a non-executive chair, a lead director or the chair of a board committee, it's an issue that should be addressed by the board.Do your homework and pay attention.  Board members should not only read board "packages" in advance of meetings, and come prepared to ask questions, but should regularly receive copies of all analyst reports and significant press stories, unfavorable as well as favorable, about the company.  And, to the extent any questions are raised by this information, directors should follow up with management until satisfactory answers are provided and speak up if additional information is necessary.The audit committee should regularly receive a summary of employee hotline calls, not just formal "whistle blower" complaints, and should meet regularly, in executive sessions, with the general counsel to hear directly about significant litigation and contingent claims.  This "homework" will help to disclose the yellow and red flags that will lead to appropriate board inquiry before problems get out of hand.  Similarly, the audit committee should be promptly notified of any governmental investigations, or assertions of regulatory non-compliance or accounting deficiencies (including comment letters from the SEC staff) and should oversee, and monitor to completion, the company's responses and appropriate corrective actions.Listen to your shareholders.  Don't forget that directors are serving as shareholder representatives.  Be aware of what institutional investors and the shareholder activists are saying about your company, and, where necessary, improve the relationship.  Pay attention to shareholder proposals.  If you're on a board that's in the position of receiving a majority vote on a shareholder proposal, take the resolution seriously.  If the board believes that the requested action is not in the best interest of shareholders, make sure the board explains its position to the proponent and to shareholders generally.Subject D&O policies and indemnification provisions to independent review.  Directors need input from experts in order to understand the specifics of the protection provided by a company's D&O policy and indemnification provisions.  Just buying more insurance is not the whole answer.  The types of policies and their terms and conditions - especially with respect to "severability,"
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January 14, 2005

Indexing Comes to the HSR Act

Of Counsel Malcolm R. Pfunder is the author of "Indexing Comes to the HSR Act" [PDF] which appears in the January 2005 issue of The Antitrust Source, an ABA publication. © 2005 American Bar Association. All rights reserved. Reprinted from The Antitrust Source, January 2005, a publication of the ABA Section of Antitrust Law.
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