Global Business Magazine - May 2011 by Corporate ABM

gbm May 2011

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Crisis in Japan

the economic impact

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Business Talk Our cover story this month keeps in focus the tragic events that took place on March 11th in Japan. We look at how the Japanese and world economies were affected and what was done by the Japanese government in the immediate aftermath of this natural disaster. Our thoughts and prayers are as ever with the people of Japan and we are sure that they will come through this more united and strong. As the economic climate changes daily and traditional developed countries try and find solutions to bolster their economies, the so called ‘emerging markets’ are finding that they can benefit from this unpredictable business landscape. We take a look with the experts from these countries on what alternative investments they offer and how they can help to shape the future of global business. Our country profile continues to look at the ever growing economy of China and how it is gaining momentum in competing both legally and financially against other global powers. Experts and specialists from China talk about what they can offer and how they can benefit the corporate business world. As the world edges ever closer to becoming one global market place, franchises are starting to spring up everywhere. With businesses extending their reach beyond their country’s borders, the understanding of various laws becomes a mind-blowing mind field for anyone. We give you the experts – Franchise Lawyers – who can step in to give guidance and advise to anyone wishing to avoid the various pitfall and how they can benefit you from franchising all over the world. For most developed countries finding an alternative nation to outsourcing their work can lead to many problems including language differences, culture, timing differences and cost, to name just a few. However, there is one nation that offers a solution to all of the above but is often overlooked – Poland. On the door-step of Europe, outsourcing in Poland is becoming the destination to find the right balance between cost and quality for many businesses and our report looks at why Poland is the new word for outsourcing. Over recent times Banking has been in the spot light for various reasons and as policy makers and governments start to keep a close eye on this service, understanding the laws that govern banks is becoming increasingly complicated. We gather the experts from the field to explain how firms and individuals from around the world can take advantage of their knowledge and know how. This issue also takes a look into the ever changing world of product liability and its impact on various sectors. We look into how the experts can help organisations in times of Corporate Recovery. And finally, we ask you to put your feet up, relax and imagine what it would be like to be spoilt and pampered by world’s elite spa’s.

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The opinions expressed in GBM do not necessarily reﬂect those of the editors, publishers or their agents. The information provided in GBM is general and may not be applied to a speciﬁc situation. GBM does not purport to provide legal or other professional advice and takes no responsibility for actions taken on the basis of information provided herein. Legal advice should always be sought before taking any such action. Laws and government policies are constantly changing and accordingly GBM takes no responsibility for the accuracy or currency of the information provided herein. If you require particular information you are advised to consult with the article’s author or seek legal advice.

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May 2011 • GBM • 03

Business News

• Profits Rise for Shell as Oil Prices Climb

The oil and gas company, Royal Dutch Shell exceeded expectations as it posted strong first-quarter profits due to the rise in oils prices and the increase in margins from its refining business, leading to more optimistic returns on dividends. The company stated that oil and gas production in the first quarter fell 3% compared with the 2010 period, due to divestments. As one of the world’s largest oil and gas companies by market value, shell stated on Thursday that their current cost of supply (CCS) and net income climbed to $6.9 billion (4.1 billion pounds) in the first three months of the year. The Anglo-Dutch company’s result compared well with British rival BP, which posted a 2% fall in replacement cost net profit in April, on the back of an 11% fall in production after selling assets to pay for the Gulf of Mexico oil spill.

It has been predicted by analysts that the increase of new projects in the second half of the year and strong oil prices could allow Shell to boost its dividend as some rivals struggle to keep theirs constant. “Gearing remains low and, with the expected growth in cash generation from H2 2011, supports dividend growth from Q1 2012, in our view,” Citigroup analyst Alastair Syme said in a research note. In recent years, the Dutch based firm has invested heavily in large new initiatives such as Qatargas 4, which are now beginning to come on stream. Brent crude was 38% higher in the first quarter compared to the 2010 period, while global refining benchmarks tripled.

Investec analysts said they expected Shell to continue to outperform BP during 2011. Italian rival Eni reported a 6% rise in replacement cost profit, although the result was muted by the weak dollar and a fall in output due to the conflict in Libya. Like BP, Shell said it would be taking hundreds of millions of dollars in charges related to hikes in British oil taxes, adding it could scale back North Sea investment. Industry leader Exxon Mobil, also due to announce first-quarter earnings on Thursday, was expected to post a 59% jump in net income, according to I/B/E/S estimates.

Following the Japanese earthquake and tsunami, the company befitted from higher (Liquid Natural Gas) LNG prices. This was expected to lead to higher LNG demand in that country as nuclear power is scaled back.

• Apple Face Privacy Probes in Europe

Apple Incorporation may face greater scrutiny in the European Union than the U.S. as regulators investigate possible data-privacy lapses betraying the location of iPhone and iPad users. Similar inquiries have been brought to the door-step of Google in Europe due to data collected by its Street View service, said Nick Graham, head of the London Internet and data protection group of law firm SNR Denton. “Issues that may not look terribly serious in the U.S. can have much greater significance and seriousness here in Europe, as Google has found out in connection with the WiFi,” said Graham. “There is this tension between the U.S. rules which are much narrower and the EU rules which are much broader.” French, Italian and German regulators have said that they are looking into whether

04 • GBM • May 2011

Apple’s iPhone and iPad products violate privacy rules by tracking, storing and sharing data about the locations of users. Google was fined 100,000 euros ($147,000) in France last month for violating the country’s privacy rules. Dutch watchdogs on April 19 gave the company three months to inform users about private data collected via WiFi by its Street View cars. The whole issue surrounding Apple’s privacy and stored data in Europe was initially reported by O’Reilly Radar, a website owned by Sebastopol, Californiabased publisher O’Reilly Media. They stated that Apple devices log latitude-longitude coordinates along with the time of visits to locations across the globe. Apple said the iPhone saves information on Wi-Fi hotspots and cellular towers near a handset’s current location, which helps the phone determine its location when needed by the user. For US based technology firms in Europe,

data protection has recently been seen as problematic. Firms such as Google have been pursued by regulators across the EU for its Street View program. Even in the US, a probe against the Internet search engine giant was dropped as Google promised to improve safeguarding users’ privacy. Matthew Newman, a spokesman for EU Justice Commissioner Viviane Reding said that any tracking technology has to be “proportionate” and allow “users to give consent,” The issue will be tackled in proposals for an overhaul of the EU’s 16year-old data-protection rules later this year, he said. Operating-system developers “must not assume that the user implicitly agrees with the storage of his data on the device,” Rutgers said, declining to comment on specific investigations.

• Gold Hits New Highs as the Dollar Slumps

Of more than $1,532 an ounce Gold climbed to a fresh high, after US Federal Reserve chairman Ben Bernanke effectively ruled out an early interest rate rise, sending the US dollar skidding to a 3 year low. The Federal Reserve chairman used his first ever live press conference to inform the US that the country’s deficit is “not sustainable” and promised to keep US interest rates low in order to keep the country’s economy on track to recovery. In what was a second record-breaking day for gold, the spot price hit $1,532.91 (£918) an ounce. First quarter US GDP data is due to be released and Bernanke predicted a weak performance with growth below 2% and indicated it would be at least two more meetings before the Fed considered raising rates. The Federal Reserve has kept rates low and

pushed money into the economy in an effort to boost lending, however that policy has also helped inflate the prices of dollar-based commodities such as oil, which has soared by 50% since summer 2010. The high oil price lifted Royal Dutch Shell which said underlying profits were up by a fifth at $6.9bn in the first quarter thanks to higher oil prices and fatter refining margins. Shell said it produced 3.5m barrels of oil per day during the period, down 3% from a year ago due to disposal of assets. The price of Brent crude increased nearly 40% in the first quarter compared with last year and is trading at $125.46 a barrel. Shell’s performance are a contrast in comparison with the dipping form of BP’s profits, This was largely due to the fact that BP had to sell assets to pay for cleanup compensation from the Gulf of Mexico oil spill, resulting in a slump in production of 11%.

The dollar fell to a three-year low against a whole range of currencies in the wake of Bernanke’s comments. The flagging dollar has been viewed as the main factor behind gold’s record-breaking rally alongside ongoing issues surrounding the Middle East and North Africa. The euro rose versus the dollar to almost $1.49, the highest level since December 2009. It has been stated by analysts that investors were turning to gold as a so-called “safe haven” investment, with other precious metals including silver and platinum also in demand. Gold has risen by more than $50 an ounce in the last fortnight and more than $200 since early February. Silver prices have increased more than 50% this year as investor’s bank on its dual use as both an industrial material and precious metal.

• PepsiCo Inc.’s Profit Go Flat

The food-and-beverage company PepsiCo Inc.’s (PEP), reported a first-quarter profit drop of 20% compared to a prior-year gain, an adjusted profit that topped analysts’ expectations due to higher worldwide snacks and beverage volume. The acquisition by Pepsi of Pepsi Bottling Group Inc helped to boost the company’s results in the recent quarters. The company stated that it did not want to dampen demand for its products and would remain cautious due to increasing costs on commodities that it relies on. This month, Pepsi posted profit of $1.14 billion, or 71 cents a share, down from $1.43 billion, or 89 cents a share, a year earlier. Excluding the prior-year gain on previouslyheld equity interests in the two bottlers,

merger and integration charges in both periods and other impacts, earnings fell to 74 cents from 76 cents. Revenue climbed 27% to $11.94 billion. The company’s beverage volume jumped 12% in the Americas, or up 2% on an organic basis, while revenue climbed 64%. Last month, trade publication Beverage Digest reported sales of rival Coca-Cola Co.’s (KO) Diet Coke leapfrogged Pepsi-Cola in the U.S. for the first time last year as the diet soda became the No. 2 soda behind regular Coke. Beverage Digest also reported overall volume for U.S. carbonated soft drinks slipped 0.5% in 2010, the sixth straight annual decline.

Volume at its North American Frito-Lay snack business increased 2% while revenue rose 1.5%. At the company’s Quaker Foods North America segment, volume dropped 8% and revenue declined 6%. Shares closed at $67.93 on Wednesday and were inactive in premarket trading.

Analysts polled by Thomson Reuters expected a profit of 73 cents on revenue of $11.71 billion. Gross margin improved to 54.4% from 52.4%.

May 2011 • GBM • 05

Cover story

Crisis in Japan – the economic impact by Steven miscandlon

It’s fair to say that by the beginning of March, 2011 was already shaping up to be an eventful year. Natural disasters, such as major floods in parts of Australia and a 6.3-magnitude earthquake that struck Christchurch in New Zealand, combined with mounting political turbulence in North Africa to bring about an element of unrest, if not outright instability, in economic markets across the world.

Then, on Friday the 11th of March, a powerful 9.0-magnitude earthquake struck off the east coast of Japan. The devastating shock of the earthquake itself was quickly followed by a major tsunami, which battered the coast of the nation’s main island, Honshu.

The immediate impact It was quickly apparent that the earthquake was one of the largest to have struck in modern times. In terms of seismic magnitude alone, it was initially estimated at 7.9 but eventually confirmed at 9.0 – rendering it the fourth largest such event since 1900. The immediate consequences of the shock were horrifying. The initial earthquake caused catastrophic damage to parts of the city of Sendai – a major metropolitan centre with a population of over a million – and the resulting tsunami devastated entire coastal towns. First estimates of the death and damage caused were alarming – and those figures grew steadily worse as time ran on. At the time of writing, Japanese authorities have confirmed over 13,000 people dead, with over 15,000 still missing. The number of home and business properties destroyed or damaged runs into hundreds of thousands. Rescue and relief efforts were thrown into disarray by the level of damage to the infrastructure – roads, bridges and railways, and disruptions to electricity supplies. Subsequent news of trouble at TEPCO’s Fukushima nuclear power plants did little to settle the concerns of the watching world … and that included the stock markets, businesses and economic analysts.

06 • GBM • May 2011

economic shock

Currency value

On the day of the earthquake, the Nikkei 225 index for the Tokyo Stock Exchange immediately dropped 1.7 per cent, while Nikkei futures plunged 5 per cent and the yen saw a slight drop in value.

Although the value of the yen fell on the day of the earthquake and tsunami, this situation was soon to reverse. Within a week of the disaster, the currency had soared to its highest value against the dollar since the end of World War II – extremely bad news for Japan’s heavily export-dependent economy.

While news was still coming through, economic analysis of the likely impact varied substantially. Domestically, some early analysts clearly felt the economic impact would be local, and that nationally, Japan’s economy was strong enough to absorb the shock: “I think we will see industrial production suffer one day's loss of output in March at most and with the south mostly intact I think the impact, even for manufacturers, will be limited, as they may be able to shift production to southern regions … I don't think annual economic growth will be affected at all.” – Takuji Okubo, chief economist at Societe General in Tokyo. As the scale of the disaster became more apparent, however, Takuji Okubo’s initial judgement (which also included a comment that “we're likely talking here about fatalities reaching hundreds, rather than thousands”) was shown to be almost tragically optimistic. Other Japanese analysts offered a much more cautious appraisal of the financial impact in the first few hours after the earthquake: “The extent of the damage is hard to tell but it seems devastating for the northern Japan economy. The government must act quickly to announce support packages and the central bank should pump more money into the economy. Some manufacturers have factories in the quake-hit area and they will face challenges in rebuilding these facilities. But what's more important is that this quake could hamper Japan's overall economy which just started showing some positive signs.” – Tsutomu Yamada, market analyst at Kabu.com Securities

Government action and stock market reaction Tsutomu Yamada’s comments and suggestions certainly hit closer to the truth. On Monday the 14th of March, the Bank of Japan pumped 15 trillion yen (over £110 billion) into financial markets in an attempt to maintain stability and prevent investors from losing faith in the nation’s economy. The Japanese central bank also doubled the size of its assetpurchasing scheme to 10 trillion yen (£73 billion), in a measure aimed at “pre-empting a deterioration in business sentiment and an increase in risk aversion in financial markets from adversely affecting economic activity”. Unfortunately, the Bank of Japan’s pre-emptive and remedial measures seem to have met with limited success – due at least in part to increasing concerns around the problems at the Fukushima nuclear reactors. On balance, it’s difficult to maintain market and investor confidence when news headlines around the world were screaming the words “MELTDOWN” and “FALLOUT”. Negative sentiment from investors saw the already-weakened Japanese stock market suffer further falls, with the Nikkei index on Tuesday the 15th of March down over 10 per cent on the day – contributing to Japan’s largest two-day drop since the 1987 stock market crash. Perhaps unsurprisingly, shares in Fukushima plant owner TEPCO (Tokyo Electric Power Company) saw a staggering 42 per cent wiped off their value over the same two days. Despite all this, Japan’s minister of finance, Kaoru Yosano, displayed a cautious optimism: “Japan's production and the economic power have not fallen. I think the market confusion will calm down in a short time.” Both the Nikkei 225 and TOPIX stock price indices have since shown an encouraging, but muted, recovery.

Akito Fukanaga, a strategist at RBS Japan, succinctly summarised the risks when he said: “Preventive measures on the financial front are urgently needed … Lower stock prices and yen appreciation are on the verge of triggering a credit crunch.” Japanese politicians were particularly critical of the reasons for the surge in currency value, with the country’s deputy finance minister making the following comments in an interview with Reuters: “G7 countries agreed that if we caved in to such speculators that took advantage of people's misfortunes, the Japanese economy would be ruined and the whole world economy would be harmed … Our stance remains unchanged that we will take decisive steps against speculators who act like sneaky thieves at a scene of a fire.” – Fumihiko Igarashi, Senior Vice Minister of Finance The G7 nations quickly rallied to help the Japanese government control the soaring yen value, in the first such co-ordinated intervention since the launch of the Euro. News of the G7 intervention immediately drove down the exchange value of the yen, and boosted the Nikkei stock market index by 3 per cent. In practical terms, the currency intervention involved the governments of Japan, the United States, United Kingdom, Canada and the European Central Bank selling on yen reserves in favour of other currencies. This multi-nation intervention wasn’t entirely selfless – G7 member nations recognised that a mass repatriation of yen assets could easily destabilise the global economy. “We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience of the Japanese economy and financial sector. In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan … in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.” – Joint statement by G7 Finance Ministers and Central Bank Governors on 18th March 2011.

The bottom line Speculation on the total cost of the catastrophe to the Japanese economy has varied significantly. Ten days on from the disaster, the World Bank issued broad and cautious estimates of the earthquake and tsunami’s potential damage costs being anything from around £75 billion to £144 billion – equivalent to 2.5 to 4 per cent of the nation’s (2010) economic output. Goldman Sachs estimated that Japan’s total economic losses could reach 16 trillion yen (£117 billion), while official estimates from the Japanese government have suggested direct losses could be as high as 25 trillion yen (almost £184 billion) – which would place the financial cost to the island nation beyond those sustained by the US following Hurricane Katrina in 2005. Regarding the wider national economy, the World Bank predicted that Japan would likely see only a temporary slowdown in growth

May 2011 • GBM • 07

Cover story

– estimated at 0.5 percentage points this year – before reconstruction efforts begin in earnest. The brutal truth of the matter is that Japan’s economy was judged to be in a precarious position long before the earthquake struck. However, most analysts remain cautiously optimistic about the nation’s ability to ride out and recover from the disaster – while justifiably pointing out Japan’s economic importance on the world stage. “The aftermath of the tragic events in Japan will obviously alter the domestic economy. However, Japan's position in the global economy is such that there must also be some transmission of the shock to other parts of the world.” – Takuji Aida, economist at UBS Securities in Japan

Global effects When the disaster occurred on the 11th of March, it hit not only the Japanese stock market, but markets across the world. Local Asian markets followed the Nikkei’s dip, as Hong Kong's Hang Seng Index fell 1.8 per cent and South Korea's KOSPI dropped by 1.3 per cent. Further afield, the FTSE 100 opened down 0.5 per cent, and Germany’s DAX and France’s CAC fell 1 per cent and 0.9 per cent, respectively. However, with wider political and economic issues in the mix – for example the emerging social unrest in Saudi Arabia and Libya – it is perhaps difficult to gauge to what degree the stock market instability directly resulted from the situation in Japan. Despite assurances that most losses from the disaster would fall on domestic Japanese insurers and the government, speculation that international reinsurers may have to absorb losses “in the $10 billion range” adversely affected the share prices of firms such as Munich Re and Swiss Re, which fell by 4.3 per cent and 3.5 per cent, respectively. Overall, however, the consensus seems to be that the Japanese situation’s direct impact on global stock markets has been limited. “We will have supply chain disruptions in many companies for a while from this, but investors became more confident that the global economy is going to work its way through this.” – John Barr, fund manager at Needham Asset Management

nuclear perspective One effect of the earthquake and tsunami that few might have predicted is the troubles at the Fukushima nuclear plants. Explosions,

08 • GBM • May 2011

cooling problems, the release of radioactive materials and consequent power interruptions have combined to spell trouble for the nuclear industry – not just in Japan, but worldwide. Fukushima reactor owner TEPCO has seen its share price tumble to a shocking 47-year low, prompting speculation on potential nationalisation by the Japanese government. Elsewhere in the world, General Electric – who helped build the Fukushima reactors, and are currently in talks to sell reactors to India – saw shares drop by 1.6 per cent immediately following the news from Japan. Other companies in the nuclear sector – including Shaw Group, Uranium Energy Corp and Uranium Resources, Inc. saw their shares similarly devalued. Conversely, a number of sustainable energy businesses saw their stocks benefit – for example shares in Chinese manufacturer LDK Solar rose 9.3 per cent following news of the problems at Fukushima. Oil prices have generally continued their upward trend over the month since the earthquake, and some analysts have speculated that this may in part be driven by reduced confidence in nuclear power. Taking the recent unrest in the Middle East and North Africa into account, however, makes it difficult to draw a direct correlation between the situation in Japan and increasing fuel prices.

The future At the time of writing (mid-April) Japanese chief cabinet secretary Yukio Edano has commented that the nation’s economy “remains in a severe condition” and that the government has therefore revised the economic outlook downwards – citing the perception of Japan’s reputation in international markets and specifically referring to the ongoing problems at Fukushima. It certainly seems that in the longer term, the worrying sequence of events at the nuclear power plants may overshadow the direct impact of the earthquake itself. Despite this, and perhaps paradoxically, some analysts seem optimistic about Japan’s economic future. Events in the past have shown that significant national disasters can be argued to have bolstered the economy of developed nations in the short term, as reconstruction efforts boost employment, output and ultimately economic growth. Whether this will be the case against the backdrop of Japan’s already fragile economy remains to be seen.

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FinAnCiAl lAw And serviCes

Financial law and services Trade Finance Regulations Like most other sectors of the global economy, international trade finance experienced a significant decline as a result of the recent financial crisis. Recovery appears to be underway, however, as the World Trade Organization (WTO) recognized a record 14.5% growth in world export volume in 2010. Thanks to a strong year, the industry recovered to pre-crisis levels, and continues to experience recovery, although 2011 recovery rates may be more modest than 2010. According to the recent joint BAFTIFSA/IMF Global Trade Finance Survey, trade finance is recovering particularly well.

10 • GBM • May 2011

In the wake of the financial crisis, some regulatory proposals could take a toll on those who operate in the transaction banking space which includes trade finance. Trade finance is the oil to the wheels of commerce, so it underpins the prospects of global economic recovery. Measures that potentially restrict the willingness or ability of banks to support trade have the potential to disrupt or slow global economic growth. The inadvertent consequences of these regulatory proposals could be greater inefficiencies and a move in the opposite direction of a universal application of key regulations. BAFT-IFSA, the leading voice for global transaction banking and key trade finance stakeholders, focuses on developing workable solutions that benefit all stakeholders—the industry and the regulators. As universal solutions or harmonizing initiatives are advanced, efficiencies improve and trade is assured a better market in which to thrive. BAFT-IFSA dialogues with regulators and policymakers regularly to achieve these goals. On proposals affecting trade finance, BAFT-IFSA have highlighted how trade has historically maintained a low risk profile in comparison with other financial transactions. Trade transactions generally involve short-term instruments that cover the movement of goods and are self-liquidating (i.e., exposures are liquidated by payment at maturity). As a result, every effort is made to ensure that trade finance agreements are honored so as not to disrupt valuable trading partner relationships. BAFT-IFSA also develops universal tools to drive efficiency and consistency in the industry, such as common definitions for trade. We are finalizing the “BAFT-IFSA Product Definitions for Open Account Trade Processing and Open Account Trade Finance” (the OA Definitions) as well as “Traditional Trade Definitions”. The OA

oil And gAs seCtor report 2011

Definitions are a product of the BAFT-IFSA Financial Supply Chain Management Committee, which consists of experts from many banks and technology suppliers. SWIFT has participated in the development of the definitions as well and supports the use of such terms as agreed by BAFT-IFSA. The BAFT-IFSA Global Trade Industry Council, consisting of the Heads of Trade from 18 of the largest trade banks in the world, expanded the project to work on Traditional Trade Definitions, and plans to develop a common understanding of other trade finance instruments such as structured trade and commodity finance. The OA Definitions will be designed to generate a common understanding of new Open Account Trade products and will address a long overdue need for clarity and standards to a market that is still evolving. The OA Definitions will also address confusion in the marketplace as the same terms are sometimes used in different ways by different parties. These definitions will serve as a basis from which standard practices can be developed. These definitions will be a major milestone in the broader BAFT-IFSA initiative to provide a common understanding of trade finance in the marketplace and raise the profile of the business. The Definitions documents will represent a consensus of Trade practitioners, which will serve as universal definitions for terminology used by banks when processing, servicing, and financing trade transactions. They will describe both Traditional and Open Account Trade life cycles and identify related trade service processing and financing services a bank may provide. Over the last few years, a movement towards the use of open account over letters of credit has begun to change the landscape. Open Account Trade products are increasingly becoming part of the mainstream for companies actively involved in trade finance. As supply chains are highly interconnected, even occasional users of traditional trade finance products may be requested to enter a financial supply chain program by a key customer. Documentary LCs and Collections are not disappearing. Depending on the nature of the relationship and requirements between the buyer and its supplier, the use of a Letter of Credit or Collection may be the appropriate choice, and financial institutions who offer trade finance services will continue to offer these traditional services. Open Account Trade products are growing in use because trading under open account terms results in lower banking fees to buyers and sellers compared to letters of credit and documentary collections, and cost reduction is clearly an important driver.

Globalization drives this market. Integrated supply chains--when a manufacturer imports materials or parts from many different countries, produces in multiple countries, and then uses different distributors in different regions to sell the goods to a variety of buyers--is becoming more commonplace. As these international trade relationships mature, the parties may determine that the security of a Letter of Credit is no longer required for that particular relationship and the flexibility of Open Account Trade meets the needs better. The definitions are an important advancement as they will represent initial agreement amongst global practitioners that ultimately develops into best practices. The definitions will help formalize practices that have been in place and should further motivate additional market participants to offer Open Account Trade processing and Open Account Trade financing. BAFT-IFSA believes a common understanding will help avoid confusion and ultimately facilitate widespread integration by banks into the provision of Open Account trade services across all market segments-the definitions will provide the baseline for that common understanding. Post-crisis growth within the industry will depend on leaders like BAFT-IFSA. As trade finance continues to evolve with the introduction of new technologies and regulatory involvement, the need for cohesion and new solutions will grow. BAFT-IFSA will continue to provide those solutions and enhance the trade business around the globe.

May 2011 â&#x20AC;˘ GBM â&#x20AC;˘ 11

FinAnCiAl lAw And serviCes

USA an Overview of law and regulation affecting Global Banking By Professor James E. Byrne, Director of the Institute of International Banking Law and Practice, and Professor at the George Mason School of Law in Arlington, Virginia. The Institute of International Banking Law and Practice (www.iiblp.org) is a nonprofit organization dedicated to the harmonization of letter of credit law and practice. Only fifty years ago, the legal dimension of international banking was a simple matter of private law, chiefly involving obligations of banks to one another and their customers. This aspect of international banking has been overtaken by public rather than private law which is wrought with great complexity. There is a difference between the consequences of governmental requirements and the manner in which government gives effect to the private agreements between parties. An example would be the difference between a requirement that a bank maintain minimal capitalization and enforcement of an undertaking by a bank (or its customer). In one sense, all of these measures could be described as “law” or “laws”. In another sense, there is “law” in the sense of a mandate imposed by a legislative authority

Institute of International Banking Law and Practice (IIBLP) Professor Byrne T: +1 (301) 869-9840 F: +1 (301) 926-1265 info@iiblp.org www.iiblp.org

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(positive law), as a result of a judicial decision, or stemming from a regulation promulgated by an administrative agency, bank regulator, or another authority. In this sense, a statute is to be distinguished from a court decision and the rules issued by a bank regulatory authority. Another distinction is between the products of the vehicles of a nation state (e.g., regulations imposed by the Bank of England), public international organizations (such as the Bank of International Settlements), and the framework offered by private organizations (e.g., the Commission on Banking Technique of the International Chamber of Commerce). The older legal order involves letters of credit, collections, banker’s acceptances, funds transfers, foreign exchange, and correspondent banking. These were the subjects addressed in the early 20th Century legal treatises on international banking which defined the nature of these undertakings, distinguished them from one another and other dissimilar undertakings, answered questions not addressed by the express provisions of the undertakings, and addressed the public policy limits to these undertakings, namely when they were overtaken by extraordinary misconduct in the form of fraud or abusive conduct. The law affecting these areas can in a few instances be found in statutes. The most prominent example lies in the field of letters of credit. It aptly illustrates the complex interaction of these various sources. The letter of credit is a creature of mercantile practice and not the law. It emerged from the need and desire for a dependable promise that would operate without support from any particular legal system from the usages of merchants and, particularly, bankers. When disputes arose that could not be resolved by private pressure, the parties resorted to judicial tribunals who had to sort out the nature of the undertakings and to determine whether or not they were enforceable and why, particularly since they did not fit neatly into the framework of the law relating to traditional bilateral contractual obligations nor into the law relating to undertakings assuring performance of promises on behalf of another. Out of this process of judicial and theoretical groping emerged a rough framework of “law” in the sense of generalized principles. They were shaped largely by the expectations of the parties who dealt with them and chiefly of the international banks and bankers whose product they had become. Parallel with this process of legal formulation and, in an important sense, as a prerequisite

to it was the process of formulation of these expectations into rules of practice which emerged as the Uniform Customs and Practice for Documentary Credits (UCP). If the process was remarkable, the achievement was even more so. Without the benefit of statute, treaty, or governmental endorsement, merchants had created a truly international order that functioned well to regulate the payment of enormous sums of money between the subjects of multiple nations. Today, letters of credit are regulated by rules of practice such as the current version of the UCP, UCP600 (2007), the International Standby Practices (ISP98), and the untried Uniform Rules for Demand Guarantees, URDG 758 (2010) supplemented to some extent by SWIFT standardized messaging formats and forms such as the ISP98 Model Forms. The law, on the whole, defers to sound rules of practice. The most developed system of law is the US Uniform Commercial Code Article 5 (Letters of Credit), but China has a remarkably sophisticated letter of credit law promulgated by the Supreme Peoples’ Court. Internationally, the United Nations Convention on Independent Guarantees and Standby Letters of Credit provides an international legal framework which is gradually gaining acceptance. The newer public side of international banking has emerged from recognition of the need for supervision of this area and the bankers involved in it from the perspective of safety and soundness to embrace public policy questions that are closer to matters of illegality. To a considerable extent, this development has tracked the increasing importance of the letter of credit itself. Since the first bank failure resulting from imprudently issued standby letters of credit in the 1970s, regulations have set lending ratios, minimal capitalization requirements, and requirements for safe and sound practices. A premier example of such a regulation is the Interpretative Ruling of the US Comptroller of the Currency contained in 12 C.F.R. Section 7.7016. When the potential for mischief in the use of these devices became recognized, governments began to use their sovereign powers to attempt to turn them into a mechanism to enforce anti money laundering and anti terrorist strategies. The result is a modern landscape of law and regulation that differs greatly from the original focus on enforcement of undertakings, making the practice of international banking far more complicated.

MIDDLE EAST Investment funds and ensuring a joined up approach among the uae's regulators In January 2011, the UAE Securities and Commodities Authority ("SCA") published draft investment funds regulations (the "Regulations") for consultation. When implemented, the Regulations will transfer regulatory responsibility for the licensing and marketing of investment funds and for a number of related activities from the UAE Central Bank to the SCA. This move forms part of a wider project intended to broaden the remit of the SCA (which is currently limited to regulating local securities exchanges and activities concerning securities listed thereon) and to move regulatory responsibility for non-banking products and services from the Central Bank to the SCA. Pursuant to the draft Regulations, all funds made available to UAE investors (irrespective of minimum investments, the size, number or sophistication of investors, and of whether contact results from reverse solicitation) would need to be approved by the SCA and offered through a locally licensed placement agent. If implemented, this may cause problems for many firms located in the Dubai International Financial Centre ("DIFC") or elsewhere outside the UAE, who currently engage in a limited amount of cross-border business with non-retail investors in the UAE in a manner

Tim Plews Partner tim.plews@cliffordchance.com +971 56 683 3427 Max-Justus Rohrig Associate max-justus.rohrig@cliffordchance.com +971 4 362 0665 Jodi Griffiths Associate jodi.griffiths@cliffordchance.com +971 4 362 0687

that was previously tolerated by the Central Bank. The proposed regime is more stringent than that applied by many other regulators in the region (where there is often an informal "tolerated practice" for nonretail business) or in Western jurisdictions (where there is generally an explicit exemption for private placements or exempt offers), and would be most comparable to the position in Saudi Arabia.

invested funds outside the UAE would require SCA approval) and to equally stringent limitations on borrowing and leverage. Proposed requirements that fund management, fund administration and custody services should be performed by separate and unaffiliated entities may require firms to significantly change their business model and to give other banks "access" to their balance sheets.

Whilst this approach may serve a useful function in protecting retail investors, it provides little benefit to sophisticated or institutional investors, and makes it more difficult for foreign firms to offer fund units to sophisticated investors. Even where a fund manager is willing to incur the costs of having the fund approved, translating offering documents into Arabic, and hiring a local placement agent, timing issues (SCA approval may take up to 30 business days) and the limited number of UAE target clients for non-retail funds may mean that that the number and variety of investments available to UAE investors will sink dramatically.

The SCA received a significant number of consultation responses, including an industry response prepared by Clifford Chance LLP and endorsed by 19 firms, as well as individual submissions from many firms and trade associations. The target date for implementation of the Regulations has been extended more than once (most recently to late June), and many fundamental aspects of the Regulations (including the potential creation of an exemption for funds marketed by DIFC firms) remain under discussion within the SCA.

Additionally, the finished Regulations may include an obligation to publish daily NAV figures and to submit audited accounts within 30 days from the end of each financial quarter, with which it may be difficult or impossible for funds investing in less liquid assets (e.g. real estate, private equity, illiquid securities) to comply. Whilst exemptions may be available on a case-by-case basis, many fund managers may decide that the cost and uncertainty involved are unacceptable and may simply not offer their funds to UAE investors. This may reduce investor choice, increase prices, and ultimately force wealthy investors to conduct more business offshore (as many Saudi investors already do e.g. in Switzerland). As a result, the draft Regulations may ultimately operate to the detriment of both the UAE funds industry and of UAE institutional and retail investors. Whilst some initially thought that the Regulations would benefit local firms (who would increasingly act as local placement agents and would be sheltered from foreign competition), local institutions have their own concerns regarding the Regulations. Placement agents may be required to "insure" investors against non-investment losses (such as those resulting from fraud or operational errors by the manager), and may be unwilling to take that risk in return for a relatively small placement fee. Firms establishing their own domestic funds would be subject to stringent investment restrictions (investing more than 10% of

Notwithstanding the fact that regulations requiring Central Bank approval for funds to be publicly marketed in the UAE have not been formally repealed and that the draft Regulations have not been finalised or implemented, the SCA has already begun to approve funds to be marketed in the UAE (and the Central Bank has stopped issuing new approvals). The precise allocation of responsibilities between the SCA and the Central Bank remains unclear, and the position is further confused by the fact that local placement agents and fund managers would, under the draft Regulations, need to be licensed and supervised by both regulators. Whilst the current position is far from satisfactory, it remains to be seen whether (and how) these concerns will be addressed. Unfortunately, the SCA have indicated that the next published draft of the Regulations is likely to be final, which operates to limit the scope for further consultation.

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CANADA John W. Teolis Partner Blake, Cassels & Graydon LLP Tel: +1 416-863-2548 john.teolis@blakes.com www.blakes.com

How should a foreign bank carry on business with residents of a country? As financial markets continue to change, and banks look for ways to increase their revenues while minimising their costs, an important issue is whether banks should, and whether they are permitted to, carry on business with residents of another country without having a physical presence in that country. I will discuss this situation from the perspective of a non-Canadian bank that wishes to carry on business with Canadians. I will refer to the model by which a foreign bank carries on business with residents of one country (Canada) without having a presence in Canada as the ‘cross-border model’ and the alternative model where a foreign bank carries on business with Canadians through a Canadian entity as the ‘in-country model’. There are material cost advantages in the cross-border model, since the foreign bank is not required to have personnel or premises in Canada, nor is it subject to regulation by the Canadian banking regulators. Currently, a foreign bank may carry on business with Canadians using the cross-border model, provided it avoids the prohibition against a foreign bank carrying on business in Canada with Canadians. Although a foreign bank may carry on business with Canadians from outside Canada, it may not do so from within Canada unless it does so through a Canadian entity. A foreign bank would generally be in compliance with the cross-border model when carrying on business with Canadians provided that: it signs all relevant credit documentation after all the other signatories and its representative was not in Canada when he or she signed the documentation; and, all material negotiations take place without a representative of the foreign bank participating while in Canada. Although the cross-border model is legally available, experience has shown that many multi-national banks believe there are advantages in having a physical presence in Canada. For example, in the past few years, Barclays Bank plc has joined several other foreign banks in establishing a Canadian Branch and Wells Fargo Bank, NA is in the process of doing so. By establishing a Canadian presence, a foreign bank subjects itself to Canadian regulation. The extent of the regulation depends upon the minimum amounts the foreign bank wishes to borrow and from whom. If it wishes to borrow in amounts of $150,000 or less, then it could only do so through a Canadian bank, the most stringent type of regulated entity in Canada. If it were willing to borrow only from financial institutions, then it could establish a lending branch, which is subject to

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only minimal regulation and requires only capital of $100,000. In fact, if it wished, it could establish a nonregulated Canadian entity. In practice, most foreign banks that choose the incountry model establish a full service branch that may borrow funds from any person provided the borrowings are in amounts greater than $150,000. In return for being able to deal with a broader group of funders, a full service branch is required to maintain a capital equivalency deposit equal to 8-10% of third party liabilities. In addition, it is also subject to some other Canadian bank regulation, such as having to satisfy the regulators as to its material policies and procedures. Historically, the type of Canadian presence chosen by a foreign bank was largely dependent upon the extent to which it wanted to borrow funds. However, I think that we will see an increasing tendency in Canada (and elsewhere) by regulators to require foreign banks that wish to deal with Canadians to do so through the in-country model. I think this will particularly be the case with respect to those foreign banks wishing to deal with Canadian consumers. Like most other developed countries, Canada has a broad array of consumer protection legislation. However, if a foreign bank is dealing with a Canadian consumer and does not have a Canadian presence, it is difficult in practice for that consumer protection legislation to be imposed upon the foreign bank. As a result, there will be more circumstances where regulators will require that, if a foreign bank wishes to deal with Canadian consumers, it will have to do so through a Canadian presence. Once the foreign bank has a regulated affiliate in Canada, it will be subject to Canadian regulation. Canadian regulators are rightfully experiencing worldwide praise at the safety of their regulation during the financial crisis. Since they will undoubtedly be blamed for the failure or improper conduct of any financial institution carrying on business in Canada, it is inevitable that, over time, the Canadian banking regulators will increase the scope of regulation of a foreign bank that deals with Canadians using the cross-border model. Although this may not be desirable to a foreign bank, nevertheless, it may be the ‘cost’ of dealing with Canadians. If you have any questions regarding this article or Canadian financial law in general, please do not hesitate to contact the author, John Teolis of Blakes, by e-mail john.teolis@blakes.com or by phone 416-8632548.

ARGENTINA Esteban Buljevich +5491131817000 esteban@buljevich.com www.estebanbuljevich.com

Esteban Buljevich is an international business lawyer with almost two decades of experience in the fields of project and corporate finance, transnational business transactions, and international banking. He holds a law degree from the University of Buenos Aires, an MBA in international business from L’Ecole des Ponts et Chaussée de Paris and the University of Belgrano, a Masters degree in finance and investment banking from New York University, and an LLM from Georgetown University. He is admitted to practice law in Buenos Aires and New York, as well as before the US Supreme Court and is a member of several professional associations, including the American Bar Association, International Bar Association, the Association for International Petroleum Negotiators, and the International Law Institute, among others. Esteban Buljevich’s professional expertise primarily focuses on practice areas such as: debt and capital markets financing; banking; project financing and corporate purchases and acquisitions; securitisation and structure financing; oil, gas and mining; corporate restructurings and reorganisations; corporate recovery and litigation; foreign direct investments; real estate; investment funds; and, business negotiation, conflict resolution and crisis management. Esteban Buljevich served as principal counsel in the legal department of the International Finance Corporation (IFC), a member of the World Bank Group, for more than 12 years, where he retired in late 2007 from his position of head counsel responsible for legal affairs for the Southern Cone and Latin America in general and cohead of the global distressed assets practice group. Before joining IFC, he worked for approximately six years in top-tier law firms in New York (Skadden, Arps, Slate, Meagher & Flom) and Buenos Aires (Gallo & Bruchou) and in an Argentine conglomerate (Benito Roggio) at the beginning of his career. While he was a law student, he worked, both as an employee and officer, for around five years in the Federal Criminal Courts of Buenos Aires city, where he retired as a federal clerk.

Esteban Buljevich co-authored Project Financing and the International Financial Markets published by Kluwer Academic Publishers in the US in 1990, and he participated in and contributed to the publication of the book Project FinanceSelected Issues in Choice of Law published by Euromoney Books in England in 1996. He is also the author and editor of Cross Border Debt Restructurings, Innovative Solutions For Creditors, Borrowers and Sovereigns, published by Euromoney Books in England in 2005. Esteban Buljevich has written numerous articles and publications in several local and international magazines relating to areas of his business and legal expertise. Also, he frequently participates in numerous trainings, seminars and conferences, both locally and internationally, related to topics of his professional expertise organised by different magazines, governmental and nongovernmental institutes and organisations. Esteban Buljevich’s global practice has involved transactions and clients located in many countries within Latin America, Asia, Europe, Eastern Europe, the Middle East and Africa. He focuses his business law practice mainly on an international, regional and domestic level, representing clients not only in Argentina but also in transactional work, mainly around Latin America. His clients are primarily multilateral and bilateral institutions, international and domestics banks, multinational and domestic corporations, institutional investors, hedge and investment funds and certain public-sector clients. Also, he and his firm, Pastoriza Eviner Cangueiro Ruiz Buljevich (PECRB), dedicate part of their work to pro bono activities. PECRB is a prestigious, reputable and well established business law firm founded in the early 1990s, headquartered in the City of Buenos Aires with a satellite office in the Province of Mendoza, Republic of Argentina, and a permanent presence in New York and Washington, DC.

several practices areas, such as: project and corporate finance; capital markets; corporate acquisitions; corporate mergers and reorganisations; securitisation and structure financing; oil, gas and mining; infrastructure and utilities; debt restructuring; foreign direct investments; real estate; investment funds; and, business negotiation and conflict resolution. PECRB is also recognised for its broad professional experience in other important practice areas of the commercial and business law arena, including, among others: litigation; general corporate law practice; judicial reorganisations; composition with creditors and bankruptcy proceedings; arbitration and alternative dispute resolution; intellectual and industrial property; patents; tax planning and customs law; and, social security and labour law. PECRB’s diversified client base, while primarily international in nature, includes: renowned multilateral and bilateral development banks; international and local banks and other financial institutions; multinational and domestic corporations; institutional investors; hedge and investment funds; and, certain public-sector clients. The outstanding combination of PECRB’s unique international experience, variety of legal practice and expertise as well as the diversity of its client base, has consistently allowed it to assure its clients of high quality and comprehensive legal services that will exceed their reasonable expectations. PECRB’s paramount objective is to build a strong and sustainable relationship with each client, based on: mutual trust and fluid communications; practical, creative, innovative and dynamic legal solutions; the success and effectiveness of its legal services; the achievement of goals according to real and reasonable expectations; and, above all, the constant quest for professional excellence and client satisfaction.

PECRB renders legal services, both within the domestic and international markets, in

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CHINA China’s emerging Financial Services Industry By Edward E. Lehman, Managing Director

Edward E. Lehman Managing Director E-mail: elehman@lehmanlaw.com Zhang Dan Legal Counsel E-mail:dzhang@lehmanlaw.com LEHMAN, LEE & XU A Licensed Chinese Law Firm 10-2 Liangmaqiao Diplomatic Compound No.22 Dongfang East Road Chaoyang District Beijing 100600 China Tel: (86)(10) 8532-1919 Fax: (86)(10) 8532-1999 elehman@lehmanlaw.com http://www.lehmanlaw.com

Throughout 2010 China’s financial services sector has presented strong growth by means of healthy credit advancements and a more confident promotion of its financial derivatives sector. As a result of the rapid expansion of available credit, experts anticipate a corresponding increase in Non-Performing Loans (NPL); this, in turn, has created an ongoing concern about the financial stability of what is otherwise a rapidly developing and robust credit sector. Although the Chinese banking system has recently improved credit standards, there is doubt concerning system sustainability in relation to the future levels of nonperforming loans. In accordance with such anticipation, there is a fear that an overabundance of non-returning credit may result in the market not only lagging, but also becoming unstable in the face of China’s economic development. Foreign financial institutions have always been concerned about the presence of a level playing field. Unfortunately there are many aspects of China’s regulatory environment that remain opaque and uncertain for a number of foreign financial institutions. Rules involving locally-rooted foreign banks, holds placed upon RMB licenses, and delays on certain financial procedures due to extensive sanction requirements have ensured that the balance of power in China’s financial services industry is tilted towards local, rather than foreign firms. In order to further support China’s financial environment for more innovative products, I would recommend that Chinese authorities implement the type of standards and transparent administrative guidelines that will provide further liquidity and improve on China’s 25% household savings rate. By opening up domestic funds to wholly-foreign owned banks the Chinese will have access to the proper financial products that will allow them invest and put their savings to work. Chinese savings have not been able to expand at the same rate as the overall economy. In order to maintain a healthy and robust financial services sector, the Chinese

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authorities need to promote competition and address the presence of monopolization. Currently China Union Pay controls the market for transaction clearing – this creates a faulty foundation for the overall financial services industry. By ending this monopoly and advocating for a more competitive environment the Chinese government could provide consumers with the type of environment that promotes innovation, not duplication. By eliminating this monopoly, the electronic payment industry would not only be able to provide its customers with a greater variety of products and services, but would also be able to ensure a more stabilized, well-protected industry base in case of possible system failure. By distributing the market share amongst a competitive group of companies, the industry would be able to minimize its risk factor and further protect the economy’s driving force—the Chinese consumer.

BRITISH VIRGIN ISLANDS

GREECE Banking law in Greece and koutalidis law Firm

With more than 900,000 companies having been incorporated in the British Virgin Islands (BVI), it is hardly surprising that BVI Companies feature in numerous types of financing transactions, either as a borrower or as a security provider for the borrower’s obligations under the credit agreement. Such security can take many forms for example: a guarantee; a security power of attorney; a fixed and/or floating charge over some or all of its assets; or a share charge by its shareholder(s) in respect of the BVI company’s shares. The use of a BVI company as an offshore entity in financing transactions offers many benefits to both lenders and borrowers. The BVI has flexible company legislation. The company law concepts of corporate power, director’s fiduciary duties and limited liability, and concepts of trust law are in all substantive respects the same as the English common law. There are subtle differences providing for greater flexibility, by way of example, the BVI Business Companies Act 2004 expressly allows financial assistance for the purchase of shares in a BVI company. The BVI Insolvency Act 2003 (IA) introduced a new insolvency regime into BVI law called ‘administrative receivership’. This is primarily for the benefit of secured creditors holding a floating charge. The holder of a floating charge may appoint an administrative receiver over the whole of the company’s business and assets in order to realise them for the benefit of that secured creditor. The IA provides that netting provisions in financial contracts are exempted from the insolvency provisions of the IA. Significantly, this includes voidable transactions. Even where an insolvent entity that is party to a financial contract goes into liquidation. This innovative feature will preserve the sanctity of the netting provisions contained in the netting agreements. This exemption is confined to financial contracts between two parties and does not include arrangements involving more than two parties. Financial contracts are contracts pursuant to which payment or delivery obligations that have a market or an exchange price are due to be performed at or within a certain period of time. Withers BVI is recognised as a premier firm in advising leading banks and commercial clients on both onshore and offshore international financing transactions. Withers BVI is part of Withers Worldwide and comprises 105 partners and more than 650 people across eight strategic offices in Europe, the US and Asia. The international finance practice comprises 26 lawyers with expertise in: general banking; private banking; art finance; trade finance; real estate finance; asset finance; acquisition and leveraged finance; multilateral finance; capital markets, derivatives and structured finance; fund finance; tax, trusts and agency; financial services regulatory; finance litigation; asset tracing; and insolvency. Withers BVI John Greenwood Partner Tel: +1 284 494 4949 Fax: +1 284 494 4947 john.greenwood@withersworldwdie.com www.withersworldwide.com

From the start of his career, our senior partner worked in Olympic Airways for Aristotle Onassis, who introduced him, although an aviation lLaw specialist, into the financing world. More than 40 years ago (1968), Koutalidis Law Firm realised the first worldwide aeroplane leasing financing. Nowadays, most of the aeroplanes used by the airlines, are covered by lease financing. Recently, the banking department of Koutalidis Law Firm advises on major restructuring transactions. Highlights include: advice to a consortium of 17 Greek and foreign banks in the €783m debt restructuring of Neochimiki SA; also, the banking and finance department advised the super senior and senior secured lenders, and the security agent in the Wind Hellas Group €1.4bn debt restructuring, based on the ‘IMO Car Wash’ precedent. The firm also advised the super senior secured lenders and the security agent in the second restructuring of Wind Hellas Group’s debt, aggregating to €1.8bn. Our restructuring team also advised Emporiki Bank, National Bank of Greece and Piraeus Bank on the €185m restructuring of Euromedica’s debt. Currently, the firm is advising Regency, a BC Partners-owned casino operator, on the restructuring of its €1bn deb. In the securities field, the firm acted as the sole Greek law advisor in the €968m rights issue of Alpha Bank, advising a group of seven international banks (namely: BofA Merrill Lynch, Deutsche Bank, Morgan Stanley, Citi, Nomura International, UBS Investment Bank and JP Morgan, acting as global coordinator). Koutalidis Law Firm also advised Alpha Bank in the update of its €30bn EMTN Programme (the largest established by a Greek bank) and Emporiki Bank, the Greek subsidiary of Credit Agricole, in the update of its €9.2bn EMTN Programme. Koutalidis Law Firm advised Alpha Channel on the second €60m securitisation of business receivables structure and the National Bank of Greece on its €1bn tender offer for the acquisition of hybrid securities.

Senior partner: Dr Tryfon J Koutalidis Managing partner: Nicholas C Koritsas Number of lawyers: 30 Worldwide office contacts Greece 4 Valaoritou Street, GR-106 71 Athens Tel: +30 210 3607811 Fax: +30 210 3600069 info@koutalidis.gr www.koutalidis.gr Banking law contacts Nicholas C Koritsas Tel: +30 210 3607811 +30 210 3600069 nkoritsas@koutalidis.gr

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FinAnCiAl lAw And serviCes

ICELAND

ITALY

Collapse and restructuring of the Icelandic ﬁnancial system

The Issuance of Parent Company Guarantees under the Italian legal Framework

In the autumn of 2008, practically the entire financial system of Iceland fell to pieces as a result of the global financial crisis. The system was vastly oversized compared to the gross economy of Iceland and was the first western banking system to fail. The main difference between Iceland and other countries that have run into financial difficulties is that Iceland allowed its banks to fail, as they were too big for the government to rescue.

Under Article 9(5) of the Italian Ministerial Decree No. 29/2009 the issuance of guarantees (i) in favour of creditors other than banks or financial intermediaries enrolled in the special register held by the Bank of Italy (so called “near-banks”) and (ii) in relation to obligations of a company not belonging to the same group of the guarantor would have been classified as a restricted financial activity (i.e. a financial activity carried vis-à-vis the public at large), thus requiring the enrolment of the guarantor in the register of financial intermediaries held by the Bank of Italy pursuant to the Italian Banking Act.

The Financial Supervisory Authority in Iceland (FME) was authorised by an Emergency Act to take over control of failed Icelandic banks. The authority of the Emergency Act included the power to set up new banks (the New Banks). The purpose was to keep the basic infrastructure of a domestic financial system functioning while the major banks failed. Hence, one bank was set up for domestic operations of each of the large old banks. The oversized Kaupthing, Glitnir and Landsbanki (the Old Banks) were thus left as holding companies with vast debt and the bulk of their assets (mainly foreign). From the very outset of the financial collapse, LOGOS has been heavily involved in the entire process. We have, as the largest law firm in Iceland, represented many major foreign creditors in the claims filing process and its aftermath, including complex litigation process in Iceland, settlement assistance and general legal advice. We have also been involved in the financing of the New Banks, asset sales from the Old Banks, etc. The Old Banks are all in the winding-up process according to Icelandic laws. The control of the process is in the hands of a Resolution Committee, appointed by the FME), and a Winding-up Board appointed by the District Court of Reykjavik. Both authorities work together but are very independent in their tasks. The claim filing process is Icelandic, and in many aspects is quite different from that of other European countries. The Central Bank of Iceland has, since 2008, had currency controls in place due to the weak and unstable currency (ISK). This was put in place as a direct result of the banking collapse. The restrictive rules are quite complex, and are subject to constant review and administrative discretion. Hence, all investors need to be diligent when dealing in transactions into or out of Iceland. Such transactions may also have tax implications. As induced by the above, the current situation of the financial system is Iceland is quite complex. Even though the regulatory framework is harmonised to that of the EU due to Iceland’s participation in the European Economic Area, the circumstances are different and country specific rules apply.

LOGOS Reykjavík, London, Copenhagen Heiðar Ásberg Atlason heidar@logos.is Gunnar Sturluson gunnar@logos.is

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Nonetheless, the recent Italian Legislative Decree No. 218/2010 (hereinafter, “Decree 218”) has provided for certain amendments to the Italian legal framework applicable to financial intermediaries other than banks as well as to the activities reserved to such entities only. In this context, Decree 218 has introduced a temporary rule pursuant to which, starting from 18 December 2010 and until the implementation of specific rules enacting certain provisions of the Italian Banking Act (as recently amended by Decree No. 141/2010), the issuance of guarantees in relation to obligations of a company belonging to the same group of the guarantor does not classify as a financial activity carried out vis-à-vis the public at large. For this purpose, “group” shall mean the holding company(ies) and its(their) subsidiaries pursuant to Article 2359 of the Italian Civil Code, as well as any other company participated by the same holding company. Therefore, following the coming into force of Decree 218, the issuance of a guarantee in the interest of a company belonging to the same group of the guarantor (i) does not classify as a financial activity carried out vis-à-vis the public at large and (ii) the guarantor shall not be required to be enrolled under Article 106 of the Italian Banking Act, regardless of the “legal classification” of the beneficiary of the guarantee (i.e. irrespectively of the fact that the beneficiary belongs to the same group of the guarantor). In this respect, it is worth mentioning that, also prior to Decree 218, it has been argued that this specific activity would have not classified as an activity carried out vis-à-vis the public at large if not carried out on a professional basis. In any event, it is to be considered that – as anticipated – the amendments provided for by Decree 218 still require to be implemented by the provisions of the Italian Banking Act, that presumably will confirm the approach of the temporary rules. Nevertheless, the legislative evolutions will have to be monitored and there is still some degree of uncertainty as to the definitive contents of the rules that will implement the Decree 218.

Legance Andrea Giannelli and Emanuela Campari Bernacchi Partners Tel: +39 02 89 63 071 Fax: +39 02 89 63 07 810 agiannelli@legance.it; ecampari@legance.it www.legance.it

International Advisory Forum

International Advisory Forum Canada The Canadian banking industry: Strength in the face of economic turbulence The Canadian banking industry While the Canadian economy has not escaped the recent global financial crisis completely unscathed, comparatively speaking, it has emerged in an enviable position. A significant factor contributing to this achievement is the relative strength of Canada’s banks vis-à-vis banking and other financial service firms in other parts of the world. Not surprisingly therefore, the World Economic Forum in its 2010-2011 Global Competitiveness Report ranked Canada’s banking system for the third straight year as the soundest in the world. In addition, Global Finance Magazine (October 2010) counted all of Canada’s six largest banks w Royal Bank of Canada (RBC), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), The Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC) and National Bank of Canada - as among the safest in the world. Even US President Barack Obama has offered praise of Canada’s financial system and its governance. The primary reasons credited for the strength of Canada’s banks are the strong capital adequacy requirements of the Canadian regulatory regime, active supervisory oversight, and conservative risk management and lending practices of Canadian financial institutions. International growth While Canada’s major banks have the ability, as well as the appetite, to expand their businesses, opportunities for expansion within Canada are limited. Past merger proposals among Canada’s banks have been turned down by regulators, and legislation requires that Canada’s major banks be widely held. The result is that the Canadian banking system is highly concentrated, with six major banks holding almost 90% of total bank assets. Accordingly, the growth strategy of most of Canada’s major banks is focused outside of Canada. Canada’s major banks have had a substantial international presence for many years, including, in particular, in the US, the Caribbean, Latin America and East Asia. Moreover, 2010 saw a marked increase in the number of international acquisitions by Canada’s banks, notably: RBC acquired wealth management assets from, among others, UK-based BlueBay Asset Management plc and Fortis Wealth Management Hong Kong Limited; BNS bolstered its long-time presence in Latin and South America with an agreement to acquire one of the largest banks in Uruguay, Nuevo Banco Comercial, as well as the corporate and commercial banking assets of Royal Bank of Scotland in Chile; BMO expanded its presence in the US mid-west, by acquiring Wisconsin’s biggest bank, Marshall & Ilsley Corp; in December 2010, TD announced its agreement to purchase Chrysler Financial Corp., which will make TD one of the top five motor vehicle financiers in North America; and, CIBC purchased an interest in a

Bermuda bank, Bank of NT Butterfield and Son Ltd. In 2011, it is likely that we will see Canada’s major banks continue to use their balance sheets to expand their presence abroad. Financing trends - infrastructure & P3s Since the early 1990s, private-public partnerships, or ‘P3s’ as they are most commonly known in Canada, have been increasingly used in Canada to deliver infrastructure projects. Despite considerable debate in early years as to the merits of the P3 model, all levels of Canadian government now regularly consider P3 when assessing new projects. While originally focused on hospitals, schools, roads and bridges, P3s are now being implemented in sectors including telecommunications, renewable energy and rapid transit. More recently, there has been an increase in interest in developing P3 structures that accommodate the needs of additional stakeholders, including municipal governments and First Nations’ groups. The role of Canadian banks in P3 deals has typically been limited to short-term construction financing and to financial advisory roles. Prior to the credit crisis (and to some degree since), longterm financing (typically having a 20-30 term) had been provided by UK and European banks. In the wake of the financing vacuum caused by the credit crisis, Canadian P3 projects have largely been financed through the Canadian, US and international bond markets in both private-placement and public bond offerings. Canadian banks have been active as underwriters and lead arrangers for these bond issuances, and there is every indication that they will increase in 2011 and beyond. Canadian banks’ strong domestic business models and record of conservative but sustained growth, coupled with the surge in interest in P3 projects, suggest that there will be many opportunities for a more extensive role by Canadian banks in the Canadian P3 sector in the coming years. Eric Belli-Bivar, Partner, Megan Filmer, Associate Counsel, and Andrew Lloyd, Associate Davis LLP Eric Belli-Bivar Partner Banking & Financial Services Group Leader 416.941.5396 ebelli-bivar@davis.ca www.davis.ca

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International Advisory Forum

mexico Jáuregui, Navarrete Y Nader, S.C. Miguel Jáuregui Rojas Torre Arcos Paseo de los Tamarindos 400-B 7th, 8th & 9th Floors 05120 México, DF Tel: +52 55 5267 4503

Fax: +52 55 5258 0348 mjauregui@jnn.com.mx www.jnn.com.mx

Integrated service contracts The 2008 Energy Reform resulted in the enactment of new legislation related to the oil sector, including the Law of Petróleos Mexicanos and its Regulations (Regulations) and Procurement Guidelines, which introduced incentive-based contracts called integrated service contracts (IEPCs). The board of directors of Petróleos Mexicanos (Pemex) approved the draft form of IEPCs on 24 November 2010, initially for mature oilfields in southern Mexico. Participants in IEPCs will receive performance incentives of the payment of a per-barrel fee (PBF) plus recovery of costs. The Mexican Nation remains the owner of the hydrocarbons to be exploited and IEPCs are not production sharing contracts or concessions; IEPCs grant no rights over reservoirs and/or hydrocarbons. IEPCs will regulate contractually the rendering of services for the exploration, development and production of hydrocarbons in selected areas, and are principally directed to reduce capex and technology costs for Pemex. IEPCs have a duration of up to 25 years divided in two periods: a period of evaluation of 24 months of the areas of oilfields bidded; and, a period of up to 23 years for the development of said areas. Participants may elect to discontinue their participation during the first period of evaluation. Payments PBF, plus costs actually incurred, will be made monthly, calculated from the minimum between the PBF, plus the recovery of certain percentage of costs, and available cashflow, calculated on a percentage of the estimated gross revenues of Pemex, based on the estimated value of the hydrocarbons produced. Evaluation by Pemex of participant performance in IEPCs will be based on key performance indicators, such as: productivity, budget and health. Good performance will be a mandatory factor in allowing future participation in IEPCs bids. The participation of Pemex in an IEPC is not yet defined; it is assumed that the participation of Pemex in the first three IEPCs to be put up for bid will be of up to 10% of the investment required. Other relevant terms of IEPCs are: Participants will be obligated to procure on Pemex’s behalf: land-access to the oilfield awarded, and apply for and obtain other necessary regulatory permits. Participants and any related entity will have no right to book hydrocarbon reserves. Participants, with Pemex’s prior approval, will be obligated to carry out the construction of pipelines, gas processing facilities and related infrastructure; although, Pemex may elect to carry out such construction itself. Participants, upon execution of same, will have to deliver to Pemex an irrevocable standby letter of credit guaranteeing 20 • GBM • May 2011

compliance with their obligations under IEPCs to be entered into. Such letter must cover the first period of evaluation and the second period of development, and must be maintained in effect during both periods. Participants must deliver to Pemex geological, geophysical, engineering and other technical and economic information obtained or generated during the performance of IEPCs; however, unless covenanted otherwise by participants with Pemex, the proprietary information of the participants will be disclosed and used exclusively for the performance by the participants in IEPCs. The development plan and work programme, prepared by participants and forming part of the IEPCs, must contain a covenant that the IEPC must have a 40% national content. IEPCs contain sundry additional provisions dealing with indemnification, termination, arbitration and observance of anti-corruption rules. The Supreme Court of Justice of the Nation (SCJN) resolved on 2 December 2010 that article 62 of the Regulations was constitutional and so was the remuneration to participants of IEPCs, based on, inter alia, the achievement of goals or determined indicators related to productivity, capacity, recuperation of reservoirs, timing and costs. Furthermore, the SCJN clarified that the aforementioned remuneration scheme constitutes no ownership of Mexican oil reservoirs, since hydrocarbons or by-products would remain in the ownership of the Mexican Nation as mandated by Mexican Constitution, and ultimately delivered to Pemex. The merits alleged in the constitutional challenge proceedings filed with the SCJN by the Mexican House of Representatives were that IEPCs allowed ownership of reserves and production of hydrocarbons by private companies contravening the Mexican Constitution. Pemex Exploración y Producción (PEP) published on 1 March 2011 the first round of public bids in connection with the exploration, development and production of hydrocarbons in the Santuario, Carrizo and Magallanes onshore mature oilfields in southern Mexico. The rendering of these services by private investors will be regulated by the terms and conditions of the IEPCs, allowing for recovery by private investors of investments in rendering said services and incentives in cash per barrel produced. To inform prospective bidders and advisors about the bidding process, PEP held seminars in March 2011 in Mexico City, Houston, Calgary and Buenos Aires. The seminars also focused on advising prospective bidders on the IEPCs and provided technical data of the mature oil fields subject matter of the bidding process. PEP has offered to likewise hold one-on-one meetings with interested bidders and is encouraging interested bidders in forming joint ventures or partnerships to participate. PEP will allow technical visits to the oilfields, hold clarification meetings and pre-qualification stage events between March and June of 2011. The final award to the bidders is expected for the second week of July of 2011.

uk KPMG LLP Erica Howard Partner Tel: +44 207 311 2549 erica.howard@kpmg.co.uk www.kpmg.co.uk/transferpricing

KPMG’s global transfer pricing services (GTPS) practice has the experience to develop globally consistent approaches to transfer pricing to help meet the requirements of national tax authorities. Drawing on a large team of experienced transfer pricing professionals from KPMG’s global network, KPMG provides a range of services including, compliance and documentation, defence against tax audits, advance pricing agreements, Sarbanes Oxley (S-O) controls and tax efficient business reorganisation. The GTPS practice approach also goes beyond tax law to cover broader commercial issues, with a strong emphasis upon economic thinking - KPMG firms pioneered the use of economists in this area. With a presence in many of the major trading nations, our member firms offer a team that works together across national boundaries. KPMG’s UK transfer pricing (TP) team is spread across the country, meaning that experienced resources are close at hand. By bringing together accountants, tax advisers, economist and ex-HMRC (HM Revenue & Customs) staff in one group, KPMG offers an outstanding range of professionals. The team includes professionals in industry sectors such as, financial services, oil and gas, telecommunications, pharmaceutical and automotive. KPMG’s team also has experience in funding, valuations of intellectual property, competent authority and advance pricing agreements. The TP team works closely with professionals in other parts of KPMG to ensure that any strategy properly considers other tax issues and is consistent with the client’s broader business objectives. The number of countries that have transfer pricing regimes has grown significantly in the past decade, and continues to grow today. The tax authorities of virtually all the major market economies have implemented transfer pricing rules, often accompanied by documentation requirements with significant penalty provisions. In the past, it was possible to focus on transfer pricing compliance on the requirements of just one country; but now multinational companies must respond to an ever-changing landscape of court decisions, rule making, regulations and pronouncements. With an increasing range of challenges, transfer pricing policies and documentation are designed (to the extent possible) to satisfy the requirements of each tax authority that has an interest in the transaction. Dealing effectively with tax authorities is complicated by differences in transfer pricing regulations and practices. The overriding principle of the ‘arm’s length standard’, as set forth in the guidelines of the Organisation for Economic Co-operation and Development (OECD), enjoys almost universal acceptance; however, local country approaches vary considerably. These differences need to be addressed as effectively as possible on a proactive basis. Given the need to meet the requirements of two or more tax authorities with sometimes conflicting rules, transfer pricing becomes an exercise in risk management rather than simple compliance. With each new announcement of transfer pricing enforcement initiatives, the development of transfer pricing policies that meet corporate objectives, satisfy each of the tax authorities at issues and reduce the risk of double taxation becomes increasingly more complex.

The UK’s basic rule refers to a ‘provision’ made or imposed between two persons, where one controls the other, or both are under common control, by means of a transaction or series of transactions, which can include transactions with third parties. It requires the adjustment for tax purposes of income, profits or losses where that provision (including the terms and conditions attaching to the actual transaction or series of transactions) departs from the arm’s length standard and has created a potential advantage to the taxpayer for the purposes of UK taxation. A potential advantage exists if, because of the actual provision, the taxpayer’s income or profits are less than, and/or its losses are greater than, they would have been had the arm’s length provision been made between the affected persons. Through this concept of ‘advantage’, the transfer pricing legislation permits adjustments only where these will increase taxable income or profits, or reduce allowable losses, or both. When signing the declaration on the tax return, the taxpayer will need to consider whether any provision was made or imposed in relation to associates, by mean of a transaction or series of transaction, which was other than that which would have existed between independent enterprises. If so, the taxpayer must consider the tax effect of that provision. If the effect of the ‘actual provision’ is to confer an advantage on the taxpayer, then the taxpayer will be required to adjust the tax computation accordingly. To satisfy the rules, companies need to document and monitor transfer pricing arrangements and stay abreast of a stream of new tax laws. Failure to comply can lead to extended tax audits, uncertainty about tax liabilities, double taxation and substantial penalties. It is therefore essential to find ways to manage these risks. However, changes also bring opportunities. With many countries keen to enforce transfer pricing rules, governments are increasingly concerned to stamp out artificial tax avoidance. In aligning business and tax objectives, companies can achieve real tax efficiencies, in some cases reducing the group’s effective tax rate. KPMG is a global network of member firms and provides audit, tax, and advisory services to local, national and multinational organisations. At KPMG, there are more than 100,000 employees and partners in member firms across 144 countries.

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International Advisory Forum

italy Cleary Gottlieb Steen & Hamilton LLP Ferdinando Emanuele, partner femanuele@cgsh.com Milo Molfa, associate mmolfa@cgsh.com Tel +39.06.69.52.21 Fax +39.06.69.20.06.65 www.cgsh.com

Court assistance in the taking of evidence in arbitral proceedings: The Italian perspective By Ferdinando Emanuele and Milo Molfa, Cleary Gottlieb Steen & Hamilton LLP Arbitral tribunals lack coercive powers with respect to the taking of evidence. Accordingly, parties to arbitration would normally have to resort to the assistance of state courts to: compel the appearance of witnesses; secure the preservation of evidence; and, order the production of documents. The scope of state court assistance in evidentiary matters is laid down in the law of the seat of the arbitration. The rules described below apply to arbitral proceedings with an Italian seat. Appearance of witnesses The 2006 reform of Italian arbitration law introduced specific rules designed to compel the appearance of witnesses in arbitral proceedings. Specifically, pursuant to article 816-ter, second and third paragraphs, of the Italian Code of Civil Procedure (CCP), “[t]he arbitral tribunal may hear witnesses […]. Should a witness refuse to appear, the arbitral tribunal, if it so deems proper appropriate in light of the circumstances, may request the chairman of the court where the seat of the arbitration is established to order the appearance of the witness.” In Italy, unlike similar rules existing in other countries and the Model Law, only arbitral tribunals (and not the parties) are vested with the power to seek assistance from state courts to compel the appearance of witnesses. Arbitral tribunals enjoy a certain degree of discretion in deciding whether to resort to the state court for assistance. The factors that it would normally consider include: the reasons given by the witness for his/ her refusal to appear before the arbitral tribunal; whether a party has filed a petition with the arbitral tribunal seeking state court assistance; and, the probative value of the witness testimony for the outcome of the case. Pursuant to Article 816-ter, fourth paragraph, CCP, if the arbitral tribunal seeks state court assistance, the time limit for the rendition of the award is stayed until the hearing date for the appearance of the witness before the arbitral tribunal. If a witness refuses to appear, even after a state court has ordered it, the arbitral tribunal 22 • GBM • May 2011

may request the state court to compel such appearance with the assistance of law enforcement pursuant to article 255 CCP. Preservation of evidence Prior to the 2006 reform, Italian arbitration law did not contemplate any form of state court assistance in evidentiary matters. To fill this vacuum, a number of scholars had suggested resorting to the rules of the CCP governing the preservation of evidence in anticipation of litigation proceedings. Specifically, a party may seek urgency measures from the court aimed at: securing pre-trial witness depositions if there are “strong reasons to believe that one or more witnesses may not be available during the proceedings,” for example, due to health reasons (article 692 CCP); and, ordering pre-trial inspections of objects or premises if there is “urgency to ascertain their status or condition” (article 696 CCP). The Italian Supreme Court repeatedly dismissed attempts to seek court-ordered urgency measures in aid of arbitral proceedings on the grounds that the parties’ agreement to arbitrate precludes reliance on provisions intended to apply to court proceedings. In a 2010 ruling, however, the Italian Constitutional Court took a different position, holding that parties to arbitration may resort to a state court in order to obtain urgency measures relating to evidence in aid of arbitration (Constitutional Court judgment No. 26 of 28 January 2010). According to the Constitutional Court, any contrary interpretation would violate the fundamental principles of equality (article 3 of the Constitution) and access to justice (article 24 of the Constitution) because it would result in an unreasonable discrimination between arbitrating and non-arbitrating parties with respect to evidentiary matters. Pursuant to this ruling, arbitrating parties may today resort to state courts to obtain urgency measures for the preservation of evidence to be used in arbitration proceedings. Document production Pursuant to article 670 No 2 CCP, a party to litigation proceedings may request the court to order the production of specific documents in the possession of

the opposing party or of a third party. Although this provision is designed to apply to litigation proceedings, the rationale underlying the above-mentioned 2010 Constitutional Court ruling should apply with respect to document production as well. Accordingly, arbitrating parties should be entitled to seek state court assistance with respect to document production. Other procedural devices In addition to those described above, there are other procedural devices that a party should consider before seeking state court assistance. Articles 118, second paragraph, and 210, first paragraph, CCP empower an arbitral tribunal to draw adverse inferences against a party refusing to comply with an order of document production or inspection. Similar provisions are contained in the International Bar Association Rules on the Taking of Evidence. In order to avoid undue delays of the arbitral proceedings, parties may request the arbitral tribunal to draw adverse inferences against the party refusing to comply with an order of the arbitral tribunal, rather than seeking the assistance of the state court to secure compliance. However, in the event the document requested or the subject matter of an order of inspection is in the possession of a third party, the value of adverse inferences is nil, and the party should thus seek state court assistance to secure compliance. Cleary Gottlieb Steen & Hamilton LLP is a leading law firm with approximately 1,100 lawyers and 12 offices located in major financial centers around the world. The firm is recognized among the top litigation and arbitration groups in the world, both domestically and internationally. Cleary Gottlieb’s Italian litigation and arbitration lawyers represent Italian and international clients, including sovereign states, in high-profile cases. They handle a broad range of contractual, financial, corporate governance and regulatory disputes (including antitrust, energy and transportation), before civil and administrative courts, as well as arbitral tribunals. Cleary Gottlieb’s dispute resolution practice and lawyers are ranked among the best in Italy by leading legal journals.

global Roundtable 2011 Washington, DC, USA 19-20 October 2011

THE Tipping poinT

Sustained stability in the next economy

Tipping point (physics): the point at which an object is displaced from a state of stable equilibrium into a new, different state. Tipping point (sociology): the event in which a previously rare phenomenon becomes dramatically more common. Tipping point (climatology): the point in which global climate changes irreversibly from one state to a new state.

What is the next tipping point...? Join leading financial experts to hear (and debate) their answers: nassim Taleb, author of best-selling book The Black Swan James Balsillie, co-CEO of Research in Motion and member of the UN High Level Panel for Global Stability Achim Steiner, Under Secretary-General, United Nations and Executive Director UNEP

For more information and to register, visit: www.unepfi.org/washington

Proudly sponsored by:

May 2011 â&#x20AC;˘ GBM â&#x20AC;˘ 23

unep Fi Fi gl0BAl gl0BAl round round tABle tABle unep

demystifying materiality By Jessica Boucher and Margot Hill A growing number of studies and institutional reports have highlighted the materiality of environmental risks for the finance sector and outline the development of alternative risk management tools. However, many of these tools are still in development and fewer still have been mainstreamed across industries in order to provide the requisite level of information that investors need for robust decision-making.

As the impacts of environmental degradation and global change creep from the fringes of philanthropic concern to tangible global economic losses, it is becoming increasingly apparent that the current frameworks for risk analysis and management do not sufficiently capture the full range of threats to the finance sector. Lessons learned from the crash show not only that financial engineering made the world a riskier place, but that the lack of willingness from regulators and financiers alike to admit to, measure and manage the system risk that they themselves created remains as strong as ever. Environmental risks can be seen as yet another form of creeping system risk, in this case brought on the financial sector as a result of the failure to address, identify, measure and incorporate system risks into decision making. Despite the existence of a growing market for innovative environmental risk frameworks, significant challenges remain in embedding them into existing financial processes such as credit risk analysis and investment decision making. It is vital to begin to address this gap in order to ensure that the finance sector has more influence over the companies they themselves finance. Despite the significant barriers that remain, there is an array of internal and external steps that finance institutions can take to foster a deeper operationalisation of environmental risk into the sector as a whole. A few examples of the mounting materiality of environment risk include the following. A number of large food and beverage companies, including Unilever, Nestlé, Burger King and Kraft Foods, disengaged from the Indonesian Sinar Mas Group and its subsidiaries owing to the company’s alleged illegal logging in 2010. Throughout the United States of America, a growing number of banks, such as Credit Suisse, Morgan Stanley, JPMorgan Chase, Bank of America and Citibank have increased their levels of scrutiny when lending to companies involved in mountaintop-removal mining, or have ended the lending altogether. BP’s oil spill in the Gulf of Mexico is another recent case that shows a growing level of materiality of biodiversity and ecosystem services (BES) issues for companies and the financial institutions that provide debt, equity and insurance services to them. In recognition of the growing materiality of environmental degradation and pressures, there is an increasing proliferation of tools and guidance on environmental risk for the finance sector as a

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whole, beyond just the corporate clients that they serve. These tools range from guidance documents, metrics/benchmarking exercises, risk assessment frameworks and corporate reporting. Table 1 provides a snapshot of a few existing tools and guidance. This list is growing and by no means exhaustive. Table 1. Environmental, Social and Governance (ESG) tools for the finance sector. Category of Tools Guidance

Environmental, Social and Governance (ESG) tools for the finance sector UNEP Finance Initiative (UNEP FI) publications

UNEP World Conservation Monitoring Center (UNEP-WCMC) Integrated Biodiversity Assessment Tool (IBAT) The Economics of Ecosystems and Biodiversity (TEEB)

Metrics /Benchmarking Risk Assessment Frameworks

World Resources Institute (WRI) Corporate Ecosystem Services Review CERES: Developing an investor framework to benchmark corporate water management (informed by leading best practice) Natural Value Initiative (NVI) – Ecosystem Services Benchmark Global Environmental Management Initiative (GEMI) Collecting the Drops: A Water Sustainability Planner Tool DEG KFW BANKENGRUPPE & World Wildlife Fund (WWF) Water Risk Assessment Tool Water GAP – Water Global Analysis and Prognosis World Resources Institute (WRI) – Aqueduct – Measuring and Mapping Water Risk The Equator Principles – voluntary set of standards for determining, assessing and managing social and environmental risk in project financing Internal Institutional Risk Mitigation Tools Equator Principles - The process, particularly including covenants in the loan agreement, can certainly help mitigate the risks The World Business Council for Sustainable Development (WBCSD) Global Water Tool – map water use and assess risk Water Footprint Network

Reporting

Carbon Disclosure Project and Water Disclosure Project Global Reporting Initiative (GRI) Forest Footprint Disclosure Integrated Reporting (IR) and the International Integrated Reporting Committee (IIRC)

Challenges of mainstream Integration Despite the growing range of products to address environmental risk in the finance sector, ongoing difficulties remain in translating this awareness into actual policies and lending/investment practices. Part of this lag can be assigned to the continuing valuation of most environmental risk as being reputational. Other major challenges to the implementation or mainstreaming of these frameworks into financial decision making include: •

Non-standardisation in proliferation of tools – this makes it hard to integrate multiple tools into investment decision making. The recent proliferation of initiatives and methodologies has meant that financiers face a confusing market of tools that are not being directly integrated into financial services, but rather extra-financial services. There is therefore a need for data integration and standardisation.

•

Lack of a compelling business case – there is a lack of data and metrics that can easily monetise environmental risks. There is therefore a need for improved data and metrics to advance the business case.

•

Lack of maturity in the approach from the client side – clients are not asking the right questions. Need for capacity building and knowledge transfer.

•

Overall skill and knowledge gap – again, a large need for training and institutional change.

overcoming the Challenges There are certain areas of innovation where investors can play a forward-thinking role in treating natural capital issues as drivers of shareholder value. While regulatory drivers can act as a stick to the finance industry, carrots can be found in market drivers and consumer choices, encouraging increased positive behaviour. Financial institutions should be looking at where those ecoconscious consumer trends are heading, and how they are placed to support developments in market behaviour. Financial institutions can seize opportunities related biodiversity and ecosystem services (BES) in different ways: •

Early movers that can demonstrate integration of BES can bolster their organisation’s reputation and create value for marketing practices.

•

Building capacity in-house on BES can be beneficial in terms of advisory services for corporate clients.

•

Advising clients how to integrate BES in supply chain management can lead to cost reductions for clients.

•

Environmental markets are increasingly beginning to take shape in a growing number of countries. Financial institutions that understand these markets may profit through offering brokerage services, registries or specialised funds.

The United Nations Environment Programme Finance Initiative will be hosting their biennial Global Roundtable in Washington DC on October 19th and 20th 2011. This event arrives just a few months ahead of the landmark United Nations Conference on Sustainable Development (UNCSD) scheduled for June 2012 in Rio de Janeiro, Brazil. UNEP FI’s 2011 Global Roundtable will thus provide an exclusive platform where the global financial sector will have a unique opportunity to define what it expects to achieve in Rio. The event agenda has been conceptualized to: 1.

Bridge the gap between financial sector and policy-makers: plenaries will take the form of a dialogue between CEOs from the banking, investment and insurance industries and high-level policy-makers;

Discuss in depth the most pressing issues for the financial sector.

It is important to note that successful and responsible finance means being able to understand how macro and micro external factors such as climate change, ecosystem degradation and water scarcity affect consumer behaviour, demand for products, and the competitiveness of sectors and companies in different geographies. Leading companies and institutions are taking steps to better understand and manage their impacts and dependence on natural capital. Senior executives must continue to recognise that environmental risk is not something that can be dealt with as a peripheral issue. Hardwiring these issues into the heart of business models and core strategies is vital for long-term growth and success in any sector. Jessica Boucher and Margot Hill work on biodiversity and ecosystem services at UNEP FI.

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miCro FinAnCe CorporAte reCovery investment And insolvenCy veHiCles

CorporAte reCovery And insolvenCy uk Steven Law, R3 President R3 Steven Law President Tel: 020 7566 4217 r3press@r3.org.uk www.r3.org.uk

Historically, the early stages of a recovery have been a dangerous time for businesses as they struggle to generate the working capital necessary for expansion and creditors become more aggressive in their debt collecting as the value of assets rise. In fact, in the recessions of the 80s and 90s corporate insolvency figures peaked several quarters after the return to growth. The delayed peak in corporate insolvencies has been identified by our members as the ‘insolvency lag’ and many insolvency firms predicted the number of corporate insolvencies to peak in 2010. However, the Insolvency Service’s latest figures show that, although high, there were less corporate insolvencies in 2010 than there were 2009 which suggests that this recession has been atypical. Although the ‘insolvency lag’ has not materialised there are certain factors that have undoubtedly stemmed the flow of corporate insolvencies such as HMRC’s Time to pay scheme and historically low interest rates. HMRC’s Time to Pay scheme allows businesses to defer their tax payments until they get their house in order financially. HMRC’s scheme has been used by close to 400,000 and the latest figures show that the number of businesses in the scheme is dropping. Whilst there is no data on how many businesses have asked for ‘repeat’ or ‘renegotiated’ agreements, HMRC’s figures show that in 2010 the rejection rate for time to pay requests stood at just 5 per cent. This indicates that there is a low barrier to entry. Our members believe that it is extremely important that this scheme remains available for viable businesses, but want to make sure that HMRC is not being used by zombie businesses as an alternative credit facility. If a business asks for more than one Time to Pay agreement, it may well be that the business’ financial difficulties are serious and that a tax-deferral is not the correct solution. 26 • GBM • May 2011

As of March 10 2011, interest rates have been at the historically low level of 0.5% for two years and this has definitely benefitted businesses, especially those that are highly geared. The low interest rate has meant that the cost of servicing debts has stayed relatively low and hence more affordable, keeping many zombie companies alive. Our members have noted that creditors have been more supportive in this recession than previously and this could be attributed to the low interest rates which have enabled all but the excessively geared businesses to service their debts. Unfortunately for businesses, interest rates will not be held at 0.5% forever, and once interest rates rise and with it the value of their assets, business owners can expect to see creditors taking a much harder line. As insolvency practitioners our duty is to the body of creditors, so we are concerned with maximising the returns to creditors, be it through liquidation or an informal procedure. Unbeknown to many people, insolvency practitioners spend more than a quarter of their time working with businesses to make sure they avoid insolvency – this often involves restructuring a business’ debts. Insolvency practitioners spend all their time at the coal-face working with businesses and our exposure to businesses of varying size and across the sectors means that we are able to identify which sectors and industry will struggle and survive. Recently, R3 surveyed its members to discover which sectors they believed would face challenges in 2011. Our members expect that most of the corporate insolvencies that occur this year will be businesses in the wholesale and retail sector as a result of the VAT rise. The VAT rise put those UK businesses that rely on consumer spend in a difficult position. They had to decide whether to absorb the tax increase or pass it

on and make their offering more expensive at a time when consumers are already tightening their belts. Regardless of which option businesses opted for many will have seen a reduction in their profits. Retailers were not the only businesses flagged up as vulnerable; our members expect the public sector cuts to have a negative impact on those in the construction industry will be hardest hit by the public sector cuts as, although many significant Government-sponsored infrastructure projects will go ahead, the considerable decrease in spending in education and social housing will affect the industry. This is particularly worrying as the construction sector accounts for by far the greatest number of trading-related bankruptcies – so a large number of business failures in this industry is likely to lead to an increase in related personal insolvencies. Although trading conditions are comparatively benign they are likely to become more difficult and it is important that businesses take steps to protect themselves and this can include looking out for key signs of being overstretched such as constantly being at the maximum limit of their overdraft or being unable to pay bills when they fall due. As well as looking at outgoings it is essential that businesses keep an eye on what is coming in. More than a quarter of corporate insolvencies are caused by another business becoming insolvent so it is wise to ensure that you have tight credit controls in place to make sure that all monies are paid to you on time. If a business is overburdened, it is best to seek advice sooner rather than later as that means there is more chance that an insolvency practitioner can save the business, which is always preferable to closure.

JaPan Baker & McKenzie Shinichiro Abe Partner Telephone: 81-3-5157-2951 shinichiro.abe@bakermckenzie.com www.taalo-bakernet.com

Preliminary report on the economic aftershocks of the Tohoku earthquake The earthquake that struck Japan on 11 March 2011 caused a major human tragedy, killing tens of thousands and leaving scores injured and missing. Its global economic impact is already being felt. For example, many parts manufacturing plants have been damaged, and plant shutdowns are threatening parts supplies worldwide. It has been reported that Apple, General Motors and other global manufacturers have had to temporarily stop production as a result. Also, the nuclear power plant in Fukushima run by the Tokyo Electric Power Company (TEPCO) has been damaged and is leaking harmful radiation into the surrounding area. I will therefore discuss the above issues from the standpoint of their economic consequences.

the question will be whether the foreign manufacturer has standing to sue in Japan. One obstacle may be that Japanese law provides that foreign law shall not be applied when it is judged that its application would be “contrary to public order or morality.” Article 90 of the Civil Code of Japan provides that “a juristic act with any purpose which is against public policy is void”. This provision cannot be rendered void by agreement between contracting parties. Furthermore, foreign court rulings in favour of plaintiffs found to be contrary to public order or morality are not enforceable in Japan. This is also the case with decisions rendered by courts of arbitration. This issue should therefore be carefully considered when dealing with Japanese courts.

liability of parts manufacturers within the global supply chain

TePCo’s liability for the disaster at the Fukushima nuclear power plant

Japanese parts manufacturers have been forced to shut down their plants, thereby stopping production and shipment of parts, and their major overseas customers have had to stop production of their products as a result. The liability of parts manufacturers in such cases will depend on the following. Whether their contracts have force majeure clauses: When a force majeure clause is provided in a contract, the devastation wrought by the earthquake will be regarded as a force majeure event and the parts manufacturer will be held exempt from liability for losses caused by it. Without a force majeure clause, a parts manufacturer’s liability will be determined under the applicable law specified in the contract. Under Japanese law, earthquake damage can be treated as a force majeure incident. Therefore, parts manufacturers would not usually be held liable for damages under Japanese law. Where a contract is governed by foreign law, the result will of course depend on the particularities of the relevant law. For example, under English law, the doctrine of frustration may be applied and the obligation of parts manufacturers to supply parts wholly discharged. However, English courts do not apply this doctrine liberally. The doctrine of frustration under English law states that: “A contract may be terminated on the ground of frustration when, without default of either party, something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of the entry into the contract.” Interpretation of foreign law/complexities of enforcing foreign judgments in Japan: Where a contract is governed by foreign law and provides that a parts manufacturer shall not be exempt from liability even due to unforeseen events, including natural disasters,

The Act on Compensation for Nuclear Damage: Compensation for nuclear damage must be paid under the provisions of the Act on Compensation for Nuclear Damage. Under the Act, TEPCO bears unlimited liability without fault for nuclear damage. Furthermore, the plant operator bears all liability for nuclear damage. The government maintains that the immunity provision provided in the Act, to be invoked in the event of unusual/emergency situations, shall not apply. Thus, TEPCO will have to pay an amount in excess of the limit of its nuclear liability insurance (JPY 120 billion). The government will support TEPCO by providing subsidies and the like, but none of these measures will in any way exempt TEPCO from its duty to meet its liabilities. Total damages TEPCO will have to bear: With respect to the recent nuclear power plant accident, in a 29 March 2011 report for investors, a credit analyst at Bank of America Merrill Lynch wrote that the utility may face claims of up to JPY 10 trillion in total if it takes two years to resolve the crisis (http://jp.reuters.com/article/ topNews/idJPJAPAN-20441220110405). TEPCO’s reputation has been significantly damaged, its credit ratings have been cut, and it is braced for further downgrades. Its shares slumped 11% to JPY 413 on 31 March 2011 on the Tokyo Stock Exchange, compared with JPY 2,153 on the day before the quake (10 March 2011). It should also be noted that should TEPCO’s total liabilities become excessive, other utilities in Japan that currently operate nuclear plants might also face significant downgrades to their ratings. Lastly, a shareholders’ representative suit may be brought by investors to recover the more than JPY 5549 billion worth of capital invested in the autumn of 2010.

May 2011 • GBM • 27

CorporAte reCovery And insolvenCy

uSa Latham & Watkins LLP Robert J Rosenberg and Michael J Riela Mr Rosenberg is a partner and Mr Riela is a counsel in the New York office of Latham & Watkins LLP Tel: (212) 906 1200 Fax: (212) 751 4864 robert.rosenberg@lw.com michael.riela@lw.com www.lw.com

Basics of ﬁnancial restructuring under Chapter 11 of the united States Bankruptcy Code Chapter 11 of the United States Bankruptcy Code (USBC) provides a mechanism for troubled companies to restructure their debts, contractual obligations and other liabilities. A bankruptcy case may be commenced voluntarily, where the company files a petition with the Bankruptcy Court. There is no substantive test for a company’s eligibility to commence chapter 11 proceedings (although entities, such as banks, stockbrokers and US insurance companies, are ineligible). Bankruptcy proceedings against a company can also be commenced involuntarily by at least three holders of non-contingent, undisputed claims that aggregate at least $14,425 more than the value of any lien on property held by the petitioning creditors. In certain circumstances, fewer than three such creditors may commence an involuntary bankruptcy case. Under chapter 11, a trustee is not automatically appointed to control the company. Rather, the company’s board and management normally continue the business as a ‘debtor-in-possession’ while the bankruptcy case proceeds. Debtors-in-possession are fiduciaries to creditors and shareholders. If there is a concern about the board’s or management’s conduct, a bankruptcy court can order the appointment of a chapter 11 trustee or convert the case to a chapter 7 liquidation. As a debtor-in-possession, the company has significant latitude to conduct its business. It may enter into transactions that are in the ordinary course of business without Bankruptcy Court approval. Transactions that are ‘out of the ordinary course’ of the company’s business require Bankruptcy Court authorisation. Automatically upon the commencement of a bankruptcy case, the filing or continuation of any actions or proceedings outside of bankruptcy court against a company or its property are enjoined. This ‘automatic stay’ halts litigation, collection efforts, lien enforcement actions and foreclosure related actions. However, the Bankruptcy Court may lift the automatic stay ‘for cause’. Moreover, there are exceptions to the automatic stay, such as criminal actions. In bankruptcy, a company may adopt (‘assume’) or disavow (‘reject’) unexpired leases or executory contracts, except that contracts for personal services, certain intellectual property licences and financial accommodations cannot be assumed. Rejected contracts are treated as a court-authorised breach that provides the counterparty only with a pre-petition claim for damages resulting from that breach. Furthermore, the USBC permits a company to assign its unexpired leases and executory contracts to a third party, notwithstanding the existence of anti assignment provisions, so long as certain requirements are met. In a chapter 11 case, a company may sell its assets to third parties. Sales of substantial assets are generally regarded as outside the

28 • GBM • May 2011

ordinary course of business and require Bankruptcy Court approval. With Bankruptcy Court approval, the debtor may sell its assets free and clear of liens, claims and encumbrances, and the purchaser receives clean title. When a company seeks to sell substantial assets, other potential purchasers could surface and attempt to outbid the initial offeror. Typically, companies in chapter 11 conduct a sale by finding an initial bidder to act as a ‘stalking horse’, granting such initial bidder bid protections and subjecting the initial bid to competitive bidding. Chapter 11 plans provide for the comprehensive treatment of all claims asserted against the company and its property, and may provide for the readjustment or extinguishment of equity interests. It can provide for a reorganisation, sale or orderly liquidation. The company initially is given a 120-day period during which only it can propose a reorganisation plan and a 180-day period within which to obtain the requisite acceptances. The bankruptcy court may reduce or enlarge these periods for cause: the 120-day plan proposal period cannot be extended to more than 18 months, and the 180-day solicitation period cannot be extended to more than 20 months. Upon the expiration or termination of these exclusive periods, other parties may propose and solicit votes on a chapter 11 plan. Only classes of claims and interests that are ‘impaired’ by the plan and that receive a distribution may vote to accept or reject such plan. Generally, a class of claims or equity interests is considered unimpaired if the plan leaves unaltered the rights of the applicable claim or interest. Unimpaired classes are deemed to accept the plan, and classes that receive no distributions are deemed to reject the plan. For a class of claims to accept a plan, more than one half in number and two thirds in claim amount that vote, must vote to accept. Even if one or more impaired classes reject the plan, it may still be confirmed through the ‘cramdown’ power. Cramdown allows a plan proponent to confirm its plan over the resistance of dissenting classes. For a plan to be crammed down, it must not discriminate unfairly, and must be fair and equitable, with respect to each dissenting class. If a plan is confirmed and becomes effective, those voting against the plan are still bound by its terms. Upon confirmation of a plan of reorganisation, property of the debtorin-possession vests in the post confirmation debtor or its assignee. Except as provided in the plan or confirmation order, all such property is free and clear of all claims of pre confirmation creditors and equity-holders. Upon the effective date of a plan of reorganisation, the company will generally be free to operate and manage its business without Bankruptcy Court approval.

uk Susan Kelly Co-Chair, International Insolvency Group Squire Sanders Hammonds Trinity Court, 16 John Dalton Street Manchester M60 8HS, UK Tel: +44(0)161 830 5006 susan.kelly@ssd.com

Squire Sanders Hammonds has more than 90 restructuring and insolvency lawyers in 27 offices across 15 countries in the United States, the UK, Europe, Asia, and Central and South America. The strength and diversity of our practice across the globe mean we can be onsite anywhere in the world, with the capacity and experience to deal with multisite restructurings and insolvencies. Here we look at the UK and cross-border-insolvency procedures which we use to achieve results for our clients. Unlike the United States, UK insolvency proceedings are mostly conducted out of court but are heavily regulated. Licensed insolvency practitioners are usually appointed to conduct the insolvency process in place of management. These are generally accountants from the UK accountancy firms. Creditors, especially secured creditors, tend to control the proceedings, either by initiating the process or at least dictating which process will be followed and which insolvency practitioners will act. There are four principal types of insolvency proceedings applicable to corporations in England, Wales and Northern Ireland— Administration, Receivership, Liquidation and Company Voluntary Arrangements and Schemes. Scotland has a separate legal system with very similar insolvency procedures and schemes. Administration is the collective rehabilitation proceeding in the UK and the most analogous to a Chapter 11 proceeding in the US. It is the most prevalent procedure used in UK corporate insolvencies, steadily taking over from receivership since 2003. The presentation to court of an administration application or the filing in court of a notice of intention to appoint an administrator triggers a moratorium on creditors’ legal actions, which continues if the company goes into administration. The primary objective of an administration is to rescue the company as a going concern. Many US companies which are restructured in Chapter 11 proceedings, exit from bankruptcy and become successful companies. UK administrations typically result in a sale of the business or liquidation rather than a restructuring. An administrator may be able to sell the company’s business and assets as a going concern in excess of liquidation values. He or she may therefore prefer a sale to a restructuring, which may present a greater number of practical problems. Many of the business sales go forward by way of a so-called “pre-packaged” sale, on terms negotiated before the administrator is appointed, which are then completed immediately upon appointment of the administrator. These are contentious but legal, provided that the correct procedures are followed. Given the global nature of business today, there are usually crossborder issues to consider in any UK insolvency proceedings. The EC Regulation on Insolvency Proceedings 2000 establishes principles for recognition and co-operation in cross-border

Thomas J. Salerno Co-Chair, International Insolvency Group Squire Sanders Hammonds 30 Rockefeller Plaza New York, New York 10112, US Tel: +1 212.872.9800 Thomas.salerno@ssd.com

insolvencies across Europe (except Denmark) and provides a framework within which the different insolvency regimes in each member state can operate and interact. It does not apply to certain insurance companies, credit institutions or investment undertakings that hold funds or securities for third parties. Under the EC Regulation, the main insolvency proceedings of a debtor must be opened where it has its centre of main interests (“COMI”). The COMI is where the debtor conducts the administration of its interests on a regular basis and should be ascertainable by third parties. The EC Regulation creates a rebuttable presumption that the COMI of a debtor is where it has its registered office. It is a legitimate, although controversial, exercise for a debtor to relocate its registered office specifically for the purpose of choosing the member state which it wants to have jurisdiction over its restructuring. If a US company has its COMI in the UK, an English court has jurisdiction to grant an administration order. Main proceedings have universal scope and encompass all of a debtor’s assets and affect all creditors, wherever located. The opening of main proceedings will not prevent the enforcement of security in other jurisdictions. Once main proceedings have been opened, secondary proceedings may be opened in other member states where the debtor has an establishment (that is, trades with employees from a premises). Although secondary proceedings in a jurisdiction are limited to realisation of the debtor’s assets in that specific jurisdiction, secondary proceedings may still complicate a restructuring. The UNCITRAL Model Law has been adopted in the UK under the Cross Border Insolvency Regulations 2006 and in the US as Chapter 15 of the Bankruptcy Code. In the UK, if there is a conflict between the 2006 Regulations and the EC Regulation, the EC Regulation will prevail. If foreign proceedings are recognised as main proceedings, an automatic stay will apply to certain types of creditor action and the transfer or disposal of the debtor’s assets in the UK. Discretionary relief may also be granted to protect the debtor’s assets in the UK or creditors’ interests. The stay does not prevent a creditor from enforcing security over the debtor’s property or exercising set-off, provided such rights could be exercised in a UK liquidation. The stay will also not prevent the commencement of UK insolvency proceedings, although any such proceedings will be limited to assets in the UK. If foreign proceedings are recognised as secondary proceedings, no automatic stay applies but discretionary relief may still be granted to protect a debtor’s assets in the UK or creditors’ interests. As world economic conditions continue their slow recovery process, UK insolvency proceedings, with their attendant cross-border complexities, will remain a busy area of the legal landscape which Squire Sanders Hammonds are uniquely placed to deal with.

Squire Sanders Hammonds is the trade name of Squire, Sanders & Dempsey (UK) LLP, a Limited Liability Partnership registered in England and Wales with number OC 335584 and regulated by the Solicitors Regulation Authority.

May 2011 • GBM • 29

CorporAte reCovery And insolvenCy

uk Cooper Parry LLP Tyrone Courtman Partner, Turnaround Restructuring Recovery and Insolvency 0116 262 9922 tyronec@cooperparry.com www.cooperparry.com

Will business recoveries hit the headlines in 2011? Talk to anyone in the business turnaround and recovery business, and if they’re honest, you might be surprised to hear that most have found the past 18 months quiet. The number of UK insolvencies has remained on a downward trend resulting in lower than anticipated recovery revenues for most firms. I’d like to say that the falling insolvency numbers are largely as a consequence of the work done by turnaround specialists; but I suspect, with one or two exceptions, most would relay experiences that mirror those of the insolvency firms. So why is this? Low interest rates, HM Revenue & Customs time to pay and state-owned banks prepared to amend, extend and pretend provide most of the answer. The speed and savage reduction in economic activity during spring 2009 enabled many to unlock cash tied up in debtors and inventories. The liquidation of working capital positions, combined with an increasingly flexible workforce, provides the balance of the answer. Will business recovery become a key feature of 2011? In the shortterm, no; but in the medium term, increasingly yes. The coalition has grappled with the moral dilemma of implementing less pain now to defer most of the deficit reduction to our children. And the longer we take to address the public finances, the more money we’ll have to borrow, on which an increasing proportion of our national income will be spent servicing interest. I am not optimistic about the prospects for the UK economy. At best, it will grow very slowly. But increasing tax burdens, reduced public

30 • GBM • May 2011

spending, rising unemployment and inflation will make most feel like the economy is stood still and all the poorer for it. The difficulty is that there are hoards of businesses with zombie balance sheets, being supported by the banks because they are simply not prepared to crystallise their positions. This is a major problem for the UK economy. All too often, management teams leave the call for help until it is imposed upon them, by which time it is far too late. Not surprisingly, the solutions are limited and mostly involve simply sizing the corpse for a descent burial. Taking specialist advice in a timely manner at the first sign of trouble is critical to ensuring the business stands the best chance of survival in the long-term. Management will need someone who can help them see the bigger picture and at the same time dispassionately challenge the status quo. Increasingly, enlightened management teams are turning to the appointment of a CRO (chief restructuring officer). I remain to be convinced that we have yet seen the worst of this recession, and 2011 may just be the start of it. I hope I am wrong.

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internAtionAl emerging mArkets Business Crime report

emerging markets The global playing field has seen many changes and developments over the last few years and has paved the way for emerging markets to make a real and true impact, especially in the business arena. Year on year many investors are continuously looking to invest in emerging economies to try and capitalise on rapid growth, developing laws and relaxed trade regulations.

Brazil, Poland, UAE, China, and India all have taken advantage of various factors affecting the developed countries like Western Europe, the United States and Japan. With souring prices in inflation, consumables, trade, natural resources, services and the cost of the work-force, emerging markets can offer the same product or service at a much cheaper and cost-effective rate. This in turns has opened the door for investors to try something new. Emerging countries were largely unaffected by the credit crunch and have grown significantly in recent years. Although this growth is seen to be slowing down, our attention should not be diverted from the fact that we are currently living through the biggest shift in the global economy since the Industrial Revolution over 200 years ago. There is a shift in the balance of power to economies such as China, India and Brazil. The volume of transactions by emerging markets private equity funds has also picked up “significantly” since the financial crisis, according to EMPEA, a Washington, DC-based trade body. Some $13bn of deals were struck in the first half of the year, up from $8bn in the same period of 2009, while the number of transactions rose 44 per cent to 402, led by a “surge” into Latin America, China and India. Emerging market fund managers are increasingly bullish in light of stabilising markets and lower valuations. Private equity investors have started to put more money to work in emerging markets following a sharp fall in allocations during the financial crisis. Funds targeting the region raised $11bn (£6.8bn, €8.3bn) of fresh investment in the first half of 2010, up from $9bn in the same period last year, Asian funds accounted for 55 per cent of the inflows, with China responsible for 60 per cent of this according to the Emerging Markets Private Equity Association. Emerging economies are much better able to cope with a slowdown and are likely to rebound strongly. A new debt-free middle class is growing across Asia. In Africa, the private sector is generating jobs on a large scale, while in the Middle East, as well as India and China, an infrastructure boom the likes of which has never been seen before is under way. Of course there will be setbacks but, make no mistake, many of these economies plan to move up the value curve.

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Emily Yiolitis Emily.yiolitis@harneys.com or your usual Harneys contact.

Cyprus: A new destination for funds Cyprus is fast gathering pace as an alternative jurisdiction for funds. Funds have been available in Cyprus since 1999 in the form of International Collective Investment Schemes (“ICIS”) and since 2004 in the form of Undertakings for Collective Investments in Transferable Securities (“UCITS”) . Till now, neither form of fund really took off due to the fund hostile tax environment. All this changed last year with the amendment of the Cyprus tax regime with a specific view to facilitating the island’s competitiveness in the fund industry. Barriers to micro holdings were lifted with the abolition of minimum holding percentages, the redemption of units was reclassified as a disposal leading to tax free income in the hands of investors, and Cyprus resident investors were subjected to mere 3% defence tax on dividends, in substitution of the previously applicable 15%. Already, the change is felt in the dramatic increase in ICIS applications before the Central Bank of Cyprus and as for UCITS, a draft bill (the “Draft Bill”) is currently before the Cyprus parliament to update the existing UCITS legislation which implements the UCITS IV Directive and simultaneously provides the framework for the future regulation of other open-type collective investment vehicles . Funds in Cyprus In Cyprus, there are two types of fund structures available, and UCITS is one of them. UCITS in Cyprus may take the form of a Mutual Fund or a Variable Capital Investment Company. Both require the approval of the Securities and Exchange Commission which is the regulatory body for UCITS. Cyprus must transpose the provisions of the UCITS IV Directive into national legislation by July 2011. In accordance with the Draft Bill, the minimum initial asset value for a Mutual Fund is €200,000 and the share capital requirement for a Variable Capital Investment Company which must be paid up in cash is €200,000 , raised to €300,000 if the Variable Capital Investment Company does not appoint a Management Company (“ManCo”). The Mutual Fund has no legal personality and must necessarily appoint a ManCo whereas the Variable Capital Investment Company can either appoint a ManCo or designate itself as “self-managed” in which case the capital requirements will be higher as noted above, and it must comply with a number of further criteria as set out in Section 34 of the draft bill. The ManCo must have an initial capital of at least €300,000. The second type of fund available in Cyprus is the ICIS which are regulated by the Central Bank of Cyprus and are private in practice (up to 100 investors). Whereas UCITS in Cyprus will be regulated by UCITS IV as will be transposed soon into national legislation, the private ICIS, as explained in more detail below, will fall outside the ambit of the EU legislation and will therefore not be subject to any of the burdensome requirements of the UCITS legislation providing a unique alternative for offshore fund managers wishing to continue to manage an EU fund. Although the legislative framework permits the set up of four different types of ICIS, in practice the ICIS that is in general use is the private ICIS in the form of an International Variable Capital Company. The reasons for this are multifold. This type of ICIS is viewed by the Central Bank as a private arrangement and is subject to less burdensome requirements. A private ICIS does not require the appointment of a professional manager or trustee and it is possible for its shares to be issued without par value. From a regulatory perspective, the Markets in Financial Instruments Directive and the Prospectus Directive are both not applicable for a private ICIS reducing administration and cost. In accordance with Regulation 311/99 issued by the Central Bank of Cyprus an

ICIS may borrow an amount up to a maximum of 10% of its assets, which borrowing may be secured on the assets of the ICIS, and cash held and amounts receivable may not be set off against borrowings when determining the percentage of borrowings outstanding. Interestingly, a private ICIS is not bound to observe these provisions and hence is free of borrowing restrictions otherwise applicable to other types of ICIS and UCITS. Tax Treatment of Funds in Cyprus Funds in Cyprus are subject to tax corporate income tax on the same basis as other corporate structures in Cyprus i.e. at a flat rate of 10% which is the lowest effective EU corporate tax rate and similarly investors in funds are subject to normal tax rates as applicable from time to time for Cyprus resident legal or physical persons . Profits realized from the sale of securities (defined in an expansive list of titles in accordance with a circular issued by the Inland Revenue) are fully exempt from taxation and there is no capital gains tax in Cyprus except on the sale of immoveable property based in Cyprus or shares representing immoveable property based in Cyprus. This makes the distinction between trading profits and capital gains from the disposal of securities obsolete as in both instances the profits/ gains will be exempted from taxation. Dividends received from non Cyprus tax resident subsidiaries are exempted from taxation provided certain requirements are met and these requirements are fairly easy to satisfy so that in the vast majority of cases the incoming dividend is exempted. The Income Tax Law was recently amended to remove the requirement of a 1% holding in the subsidiary in order to meet the participation exemption requirements with a specific view to enticing funds. It has been clarified that investment funds pay income tax of only 10% on income received and Cyprus resident investors are liable to a reduced rate of deemed dividend distribution (3% instead of 15%). Moreover redemption of participations/units in funds is considered a disposal of securities so the redemption proceeds exceeding the capital contributed by the investor is exempted from corporate income tax in Cyprus. No withholding tax arises in the case of dividends or interest paid from Cyprus to non resident shareholders and if capital losses arise on the disposal of assets they can be carried forward indefinitely. The Way Forward Cyprus’ non-UCITS funds legislation, in force since 1999, and the impending transposition of UCITS IV provides a choice of vehicles for global fund promoters and managers seeking EU compliance at minimum cost and maximum tax optimization. Investors too, including local investors are catered for in the recent legislation removing a significant barrier to Cyprus companies investing in Cyprus funds, being the previously applicable 15% defence tax. As for managers, Cyprus is ideally placed to act as a passporting jurisdiction for funds seeking EU investors under the AIFMD. For an AIFM seeking to raise investment in the EU, the advantage of being able to passport in the EU is almost certain to outweigh any reasons for establishing an AIF outside the EU. The flexibility offered by a private ICIS is unique as an EU offering and remains unaffected by the advent of UCITS IV enabling offshore managers to continue managing onshore funds. AIFMD is predicted to cause the relocation of a significant number of AIF and their managers from current offshore locations to the EU and the regulatory requirements and compliance costs of both AIFMD and UCITS IV are expected to cause these managers to look to alternative, cheaper EU jurisdictions with an attractive legislative, regulatory and tax framework to host their operations. Cyprus is the obvious solution. FURTHER INFORMATION The foregoing is for general information purposes only and not intended to be relied upon for legal advice in any specific or individual situation.

May 2011 • GBM • 33

emerging markets

India Anand and Anand, Plot No. 17 A, Sector 16 A, Film City Noida - 201301 (UP) India Ms. Philachui d. Sareo Tel: +91.120.4059300 Fax:+ 91.120.4243056-058

phila@anandandanand.com www.anandandanand.com

Entertainment industry and law in India: A new dawn With a history of over 50 years, India’s media entertainment industry is one of the largest in the world, and India is at the cusp of an entertainment revolution. To given an idea: in India - on an average of 1,100 films made every year - there are 12,500 movie screens, 75 million Cable TV homes, eight million broadband connections, 700 million mobile phone users and over 500,000 people employed in entertainment industry, adding up the value of the sector to be about $12bn, which is now growing at a stable growth rate of 18% per annum.

In another historic case, Gramophone Company of India Limited v Super Cassettes Industries Limited, the court in its ruling clarified the law on making ‘cover versions’ under the statutory licence provision and further held that mobile ‘ringtones’ made from such cover versions are valid; a person who makes such cover versions is entitled to exploit the same on mobile and digital platforms. This is another example of a progressive ruling and how copyright laws are being interpreted to suit emerging markets and emerging platforms of commercial exploitation.

With the increased privatisation in the media and entertainment industry, and the government’s liberal policies, emerging trends are indeed promising. The growing importance of this industry is also seen by related developments in law. The government and especially the courts in India have come to understand the needs and nuances of the industry. Recently, the courts have given unprecedented and forward-looking rulings, including in the area of the copyright law. Some of the key rulings and developments worth mentioning are below.

Keeping pace with the fast changing and evolving ecosystem in the industry, the government has introduced the Copyright (Amendment) Bill, 2010 (the Bill), which proposes several radical changes to ensure more equitable distribution of wealth in favour of authors and composers and also promote balanced and widespread growth in the industry.

In Super Cassettes Industries Limited v Nirulas Corner House (Pvt) Ltd, the court ruled that unlicensed display of audio-visual entertainment through a Cable TV Network within the confines of a hotel room amounts to infringement of copyright, and copyright owners are entitled to royalties. The defence that the broadcast Cable TV network had a licence to broadcast will not protect such a hotel from an action in law. Copyright collecting societies and copyright owners have, during the past few years, succeeded in several actions where such public performances in premises like hotels, malls, discotheques, party and public events have been held liable for infringement of copyright and have been compelled to pay royalties. Interpreting the laws progressively, the courts have also recognised trademarks in names associated with popular films and its popular characters. In Sholay Media & Entertainment Pvt Ltd v Parag Sanghvi, the court in its ruling recognised the trademark in the name of film (Sholay) and names of its character ‘Gabbar Singh’ and ‘Jai-Veeru’, and restrained the defendants from using such name in their film. Given India’s socio-economic context, realising the potential of FM Radio as a platform of ‘mass-media’, the government has liberalised its licensing policy to encourage more private investment. In the next phase, 800 new private stations will be added across India, taking the numbers to over 1,000. However, the biggest stumbling block in the radio industry was the quantum of copyright royalty payable for radio broadcast where the revenue is driven by an indirect source - advertising. After a long legal battle lasting ten years, in Music Broadcast Private Limited v Phonographic Performance Limited, in August 2010 the Copyright Board ruled that copyright royalty for broadcast on FM Radio stations should be fair and reasonable and should be calculated as a percentage of the net advertising revenue generated by a station and not on a rate per hour. The ruling, a historical one, demonstrates that judicial forum in India has evolved to understand the business nuances of the entertainment industry. This ruling has been welcomed by radio broadcast industry with open arms and has sent out encouraging signals to the investors.

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Some of the key proposals made in the Bill are: the director of a film is to enjoy joint authorship in the film with the producer; works of authors and composers to be made unassignable, thereby ensuring royalties go to them; providing for statutory licensing in audio and audio-visual material to benefit broadcasters that can liberally use copyright work by paying a statutory fee and ensuring smoother licensing processes; protection to entities that are intermediaries in digital dissemination processes of copyrighted works (films and music) against liability of infringement of copyright where their role is of a mere conduit; and, making the Copyright Board, a specialised body for the entertainment industry, a full time and a permanent body to ensure speedier disposal of disputes. The Indian media & entertainment industry is not just about art and expression. It is no longer a ‘cottage industry’, but now a full-fledged industry, expanding and maturing only to grow into a robust part of the Indian economy. The developments in law and policy are indicators of the exciting times ahead.

poland WKB is a Polish law firm with its head office in Warsaw and branch office in Poznan. The firm’s lawyers’ broad experience in serving business clients covers most areas of law, makes WKB capable of advising on legally complex and challenging projects. The firm’s services are always tailored to meet the needs of each client. Depending on the definition applied, Poland is a country classified as either emerging or mature market. Being part of the CEE region, Poland is deemed leader in terms of the overall value of the completed merger and acquisition deals, WKB’s area of specialisation. The value of M&A transactions in Poland in 2010 equals to two thirds, and the number of transactions to 36 per cent of all deals within this region. An observable degree of investors’ acceptance of prices higher than the average ones in the CEE, based on the indicator profit / EBITDA was a characteristic feature of the transactions in Poland. Considering noticeable trends on the global M&A market, which signal an increased interest on the part of the acquirers, including but not limited to the equity funds the coming two years will be a period of time fruitful for companies specialising in services related to acquisitions. Researchers of the Polish market indicate certain basic areas, in which M&A transactions will take place. Firstly, privatization processes regarding both large companies controlled by the State Treasury (Lotos - market leader in lubricant oil in Poland, PAK – major electricity

producer in Poland, Enea - Poland based electric energy company, SPEC – company specialising in transfer and distribution of heat energy, PKP Cargo – freight transport company, JWS – energy company) and smaller ones. These processes feature three risks. One is the political risk connected with the possible change of approach of the State from a sale-oriented one into an approach to maintain control over the loosely defined strategic businesses, depending on the outcome of the coming parliamentary election. The attitude of trade unions signalling firm reluctance towards privatization, interpreted sometimes as negotiation leverage for reaching far-fetched employment guarantees and salary increase (JWS, Cargo). Negotiation skills and knowledge of both labour law and mentality of the trade union negotiators will be needed badly in the course of these type of deals. The third risk, of strictly legal nature, is the shaped state policy on the part of the seller in order not to give practically any representations or guarantees. Therefore, the role of the due diligence process is incomparably more important than in the classical private-to-private transactions. All in all, the privatization process itself is in a large part regulated by relevant Act and the policy of the Ministry of State Treasury, the knowledge of which is required to ensure taking correct actions by the investor. Another phenomenon influencing the M&A market is the process of market consolidation,

dr Andrzej Wiercinski, Senior Partner advocate, head of WKB’s Corporate and M&A Practice andrzej.wiercinski@wkb.com.pl WKB Wiercinski, Kwiecinski, Baehr Sp. k. ul. Polna 11 00-633 Warsaw, Poland phone: (+48) 22 201 00 00 fax: (+48) 22 201 00 99 www.wkb.com.pl first of all on the manufacturing, whole and retail trade and construction ones. It is connected with big fragmentation in these economy sectors. These markets feature an intensified activity of private equity funds. And lastly, the third area is sale of business by private owners justified by the willingness to sell a long-term effort or the willingness to invest elsewhere. It is again the area of activity of investment funds, but from time to time the local knowledge of business culture proves to be the key for success. Having said that, WKB and its experiences teams of M&A lawyers look optimistically towards the coming two years as far as future transactions are concerned.

Brazil the most important international law firms known in the banking and finance sector and to assist companies and banks that need Brazilian advice to structure, negotiate and document loans and all sorts of guarantees, project finance, derivatives, debt and equity instruments and all types of transactions involving the Brazilian and international financial and capital markets.

Walter Stuber Consultoria Jurídica Walter Douglas Stuber Founding Partner Tel: 0055 11 3372 0033 walter.stuber@stuberlaw.com.br www.stuberlaw.com.br Walter Stuber Consultoria Jurídica (WSCJ) is a highly sophisticated boutique focused on business law and has talented and experienced professionals with outstanding credentials in the Brazilian and international market. Its geographic focus is Brazil. The firm has a record of providing customised and reliable services noted for their excellence and efficiency, as well as delivering high quality services to local and foreign companies, and specialises in domestic and international banking and finance matters. WSCJ is used to work with

Unlike other jurisdictions, the banking and finance environment in Brazil is highly regulated and supervised by the Central Bank of Brazil in accordance with the policies established by the Brazilian Monetary Council, and the Brazilian financial system is very solid and sophisticated. Brazil is very attractive to foreign investment and one of the jurisdictions in which business acquirers outside the country are very interested. WSCJ takes care of many cross-border transactions and the majority of its clients are basically formed by foreign companies, Brazilian companies that are subsidiaries or joint ventures of foreign companies, and international institutions. It is paramount to advise the companies involved in investments and acquisitions in Brazil about the most effective structure to be adopted to reduce costs and maximise

revenues and analyse all the related legal and tax implications. The firm’s banking and finance expertise helps its clients to overcome any difficulties that may arise during any such negotiation. In recent years, only Brazilian multinational corporations (such as Petrobras, Vale, Gerdau, etc) have invested abroad. Nowadays, however, some Brazilian medium-size companies are also seeking opportunities in other countries. The primary challenges associated with this are generally the cultural issues that must be faced by the Brazilian prospective new investors and it is always very important to have local support to overcome any such difficulties. WSCJ has developed a network of correspondents worldwide that can assist companies to identify opportunities in other countries. The name partner, Walter Stuber, has been recognised as an expert in banking and finance by The Guide to the World’s Leading Emerging Markets Practitioners published in 2010 by Euromoney and he is the immediate past co-chair of the International Financial Products and Services Committee of the American Bar Association’s Section of International Law (SIL) and co-chair of the International Securities and Capital Markets Committee of the SIL for 2010-2011.

May 2011 • GBM • 35

emerging mArkets

IndIa Mrs. Zia Mody Managing partner AZB & Partners Address: 23rd Floor, Express Towers Nariman Point, Mumbai 400 021, India Tel: +91 22 6639 6880 zia.mody@azbpartners.com AZB & Partners was founded approximately 15 years ago in Mumbai, later expanding to Delhi, Bangalore and Pune. The firm consists of 225 professionals, proving expertise in all practice areas. The firm has advised clients in: M&A; joint ventures and general corporate; regulatory practice and securities laws; private equity; capital markets; funds practice; banking and finance; microfinance; derivatives; infrastructure and project finance; real estate; telecom; media and entertainment; information technology and business process outsourcing; employment; insurance; intellectual property; pharmaceuticals and biotechnology; taxation; aviation; competition law; anti trust and dispute resolution; and, litigation and arbitration. We also assist our overseas clients in establishing and operating their businesses in India. Being an emerging market, Indiaâ&#x20AC;&#x2122;s investment and financial products markets are highly regulated. Having undergone a series of economic reforms in its regulatory policies, India is now an attractive investment destination. Domestic M&A and private equity investments are governed by laws typical to corporations and financial institutions in other common law countries. Foreign investments, by way of strategic acquisitions, private equity investments or other portfolio inverters, are subject to exchange control and foreign investment regulations. Furthermore, our banking & finance practice is governed by rules and regulations framed by the Central Bank of India, including Exchange Control Laws. Infrastructure, automobile, oil and gas and services industry are key drivers of the Indian economy, contributing extensively to the GDP. Efficient governance, prudent financial policymaking and rule of law are the factors that lead to a successful emerging market. But

36 â&#x20AC;˘ GBM â&#x20AC;˘ May 2011

emerging markets can still learn prudent regulatory systems and best practice of governance from developed markets and nations. Emerging markets are influenced by global financial conditions; uncertainty in the global financial market affects the rapid growth of emerging markets. The inflow of funds from developed markets has spurred the growth of emerging markets, but the recent global financial crisis has stymied this inflow, introducing uncertainty regarding future fund flow. Hence, economic growth suffered a slowdown in most emerging markets. Reversal in global economic recovery poses the risk of uncertainty along with a recessionary trend in emerging markets, which may be of concern to respective investors. Also, recent inflationary trends can impact returns. The laws that govern emerging market funds in India are securities regulations, framed by SEBI (the securities regulator) and exchange control regulations, framed by the Reserve Bank of India (the monitory regulator). Although no specific legislation has been passed, the government is trying to consolidate and reorganise existing policies, especially in a financial regulatory regime, bringing certainty and clarity to investors. Recent years have seen a maturity in the Indian market, along with increasing interest from serious, long-term investors. Also, the introduction of sophisticated financial products has now prepared India to move into the next phase of economic and financial growth.

Country proFile – CHinA

Business in China report The underbelly of the dragon The growth of China over recent years has seen its economy catapult to the second largest in the world and become a major player in the global political arena. With industries ranging from electronics, clothing, automobiles, outsourcing, machinery and now even the ﬁnancial and legal services, China is being regarded as the major player to trade with. The economy will grow signiﬁcantly and has set its GdP growth target at around 8% this year. Beijing's massive $586 billion stimulus program and more than $1 trillion in new lending have helped the Chinese economy overcome a drop in exports and strengthen its domestic market. Going forward, this is a strategy that will pay off for China's economy and Chinese markets are about to make a handful of investors incredibly rich. Reported in The Economic Times, the International Monetary Fund (IMF) has predicted the Chinese Economy to grow significantly and will surpass the US economy by 2016. Furthermore, The Economist had predicted in December 2010 that China would overtake the US in terms of nominal GDP in 2019.

ministry of Commerce People’s republic of China (MOFCOM) The Ministry of Commerce (MOFCOM) of the People's Republic of China, formerly the ministry of Foreign Trade and Economic Co-operation (MOFTEC) is an executive agency of the State Council of China. it is responsible for formulating policy on foreign trade, export and import regulations, foreign direct investments,

consumer protection, market competition and negotiating bilateral and multilateral trade agreements. The current Commerce minister is Chen Deming. In November 1949, the People's Republic of China established the Ministry of Trade and three years later the Ministry was renamed the Ministry of Foreign Trade (MFT). Ye Jizhuang was the first Minister and died in the post in 1967. In March 1982, the Ministry of Foreign Trade was merged with the Ministry of Foreign Economic Liaison (MOFEL), the State Import and Export Regulation Commission (STERC), and the State Foreign Investment Regulation Commission (SFIRC)), and became the Ministry of Foreign Economic Relations and Trade (MOFERAT). In March 1993, the Ministry of Foreign Economic Relations and Trade was renamed to the Ministry of Foreign Trade and Economic Co-operation. In the spring of 2003, the former Ministry of Foreign Trade and Economic Co-operation (MOFTEC) went through a reorganization and was renamed Ministry of Commerce. The ministry also incorporates the former State Economic and Trade Commission (SETC) and the State Development Planning Commission (SDPC). MOFCOM is responsible for: drafting policies and regulations to discipline market performance and commodity circulation; facilitating the establishment and improvement of the market framework; furthering the distribution system restructuring; monitoring and analysing market performance and commodity supply and demand; organizing international economic cooperation; coordinating antidumping and anti-subsidiary issues and arranging industry damage survey.

To study on, put forth and implement multilateral and bilateral trade and economic cooperation policies, be responsible for multilateral and bilateral negotiations on trade and economic issues, coordinate domestic positions in negotiating with foreign parties, and to sign the relevant documents and monitor their implementation. To establish multilateral and bilateral intergovernmental liaison mechanisms for economic and trade affairs and organize the related work. To handle major issues in country-specific economic and trade relationships, regulate trade and economic activities with countries without diplomatic relationship with China. In line with the mandate, to handle the relationship with the World Trade Organization on behalf of the Chinese government, undertake such responsibilities under the framework of the WTO as multilateral and bilateral negotiations, trade policy reviews, dispute settlement, and notifications and inquires. To steer the work of the commercial branches of China’s Permanent Mission to the WTO, to the UN and other relevant international organizations, as well as Chinese embassies in foreign countries. To keep in touch with the representative offices of multilateral and international economic and trade organizations in China and the commercial functions of foreign diplomatic missions in China.

moFCom’s mission is to:

To organize and coordinate the work pertaining to antidumping, countervailing, safeguard measures and other issues related to fair trade for import and export. To institute a fair trade early warning mechanism for import and export, and organize industry injury investigations. To guide and coordinate domestic efforts in responding to foreign antidumping, countervailing, and safeguard investigations and other issues concerned.

To formulate development strategies, guidelines and policies of domestic and foreign trade and international economic cooperation, draft laws and regulations governing domestic and foreign trade, economic cooperation and foreign investment, devise implementation rules and regulations. To study and put forward proposals on harmonizing domestic legislations on trade and economic affairs as well as bringing Chinese economic and trade laws into conformity with multilateral and bilateral treaties and agreements.

To be responsible for the training, selection and management of Chinese professionals working in the Permanent Mission of the People's Republic of China To the World Trade Organization, the Economic and Commercial Counsellor’s Offices of the Chinese Embassies and missions to other international organizations. To guide the work of the chambers of commerce for import and export and other relevant associations and societies. And to undertake other assignments entrusted by the State Council. May 2011 • GBM • 37

Country proFile – CHinA - outsourCing serviCes KPMG China Ning Wright Partner in charge, outsourcing and shared services advisory, China Tel: +86 (21) 2212 3602 Fax: +86 (21) 6288 1889 ning.wright@kpmg.com www.kpmg.com/cn 50th Floor, Plaza 66 1266 Nanjing West Road Shanghai 200040, China The current state of outsourcing and shared services in China China has emerged as a key location amid the evolving global outsourcing industry — establishing a physical presence in China is now a principal strategy among global enterprises. The thriving outsourcing economy is driven by the huge investments pouring into China, as well as domestic enterprises taking a global route. Multinationals’ growth in China has largely been driven by individual business units, which have adopted both organic and inorganic development strategies. Integration and consolidation of individual business units have been overlooked in favour of market growth. Increased competition and sustainable growth opportunities have compelled organisations to seek cross-business unit synergies, scale and cost structure optimisation. China’s vast talent pool, sound infrastructure and strong government support all point to a bright future for outsourcing and shared services over the coming decade. China’s Ministry of Commerce launched the ‘Thousand Hundred Ten’ project in 2006 in a bid to build ten service outsourcing base cities to promote the transfer of service outsourcing business of 100 multinational companies to China and to establish 1000 service outsourcing enterprises. This initiative has certainly elevated services outsourcing to national strategic levels. Through the Chinese government’s focus on the 11th Five-Year Plan to boost the services outsourcing industry, there are now more than 10,000 service providers, while 21 Chinese cities have been identified as service outsourcing model cities, poised to attract investors via special preferential policies in tax and subsidiary incentives. Having leveraged the opportunity to issue local policies in support of the development of the outsourcing industry, these cities were able to invest heavily in public infrastructure, industrial parks, education and training. The transformed economies of these model cities reflect the success of the government’s drive. Having exceeded the target set under the 11th Five-Year Plan, the recently announced 12th Five-Year Plan includes focus on the software and outsourcing industries.

38 • GBM • May 2011

It revealed that China plans to invest about RMB 2 trillion in the information communication technology industry, specifically on the development of new technology and the ongoing upgrade of infrastructure. With this boost, other economically active cities are also striving to step up their efforts to gain a foothold in the service outsourcing industry. In all, a wide range of enterprises have set up service outsourcing bases in various Chinese cities, including global outsourcing enterprises and relatively new domestic Chinese enterprises. Many of these cities not only serve as a destination for outsourcing and offshoring, but they have also benefited from a strong domestic market thanks to the pace of economic development and active foreign investment. The drivers have been different for the various categories of investors, namely multinationals, and both stateowned and privately owned enterprises. Many multinational corporations already have a presence in China or are considering a market entry or market expansion strategy in China. Selecting an optimum location for outsourcing is a critical issue and often presents a challenge to these companies looking to fully tap the China market in tandem with an integral approach to outsourcing strategy, model and business case development. Current observations indicate multinationals are leaning towards setting up a separate entity to house their shared services centres, primarily to seek economies of scale through cross business unit synergies and also to capitalise on tax savings, subsidies and other government incentives. Additionally, enterprises are also using their shared services centres in China not only to serve Chinese and North Asian operations but also to serve global operations. The scope of services being offered by these shared services centres is also moving up the value chain. The trend is shifting from functional or piece-meal processes such as accounts payable, etc, to end-to-end process approaches such as purchase to pay etc. As Chinese companies grow in size and complexity, the business case for setting up outsourcing or shared services arrangements becomes stronger. Undoubtedly, the growth of both state-owned and privately owned

Edwin Fung Chairman, Global China Practice; Partner in Charge, Markets Tel: +86 (10) 8508 7032

enterprises has been tremendous. In turn, catalysts have driven such entities to adopt outsourcing or shared services strategies. For state-owned enterprises, it is the focus on better people management as opposed to headcount reduction. Process improvement and better visibility of operations are also among the consideration points. For privately owned enterprises, the drivers tend to lean towards cost reduction, improvement in profit margin and a better control and transparency of operations. Even though the drivers to adopt a shared services strategy may differ across the various categories of organisations in China, the success of such initiatives are largely dependent upon absolute management commitment from the highest executive or board levels. This usually involves an organisation-wide restructuring strategy given a corporate culture deeply rooted in transformation. The Chinese outsourcing industry is currently in the growth stage of the industry lifecycle. The tried and tested model of realising cost savings internally and then commercialising once matured will continue to be a prevalent trend. The adoption of a hybrid model will gain traction especially as global organisations continue to utilise outsourcing service providers to process transactional activities while retaining business-facing activities and higher value activities internally in Centre of Excellence and Shared Services Centres. Therefore, with continued government support, it is expected that China will be a formidable force in the global outsourcing market. How kPMG China can help KPMG China’s outsourcing advisory services can help companies with strategy development, solution design, benefit realisation and governance aspects. With strong experience in global outsourcing industry, backed by our proven methodologies, our professionals offer a thorough approach to help directly address your company’s needs and realise benefits from shared services or outsourcing initiatives. KPMG China has more than 9000 professional staff based in 13 cities across China.

Country proFile – CHinA - FinAnCiAl serviCes About the author Matthew leads service delivery to major ﬁnancial services clients in China and specialises in advising foreign ﬁnancial services sectors on China Tax and Investment.

Matthew Wong Partner and China Financial Services Tax Group Leader Tel: +86 (21) 2323 3052 matthew.mf.wong@cn.pwc.com

Financial services taxation in China - seeing the bigger picture

now being drafted in preparation of the new VAT regime to come.

All eyes are now on the financial services industry in China. China’s robust economy and growing middle class, together with the gradual opening of its banking and capital markets, have led financial services players to accelerate their pace of expansion and investment in China. Meanwhile, various PRC financial services sectors are also undergoing significant tax and regulatory changes that will substantially impact their future growth and development.

Some common questions raised by the Chinese financial services players on the upcoming VAT reform include: Will the new VAT regime allow financial services companies to enjoy their existing preferential BT exemption under the old BT system? Will the upcoming VAT reform offer new incentives to financial services sectors? In the worst scenario, where the Chinese government does not allow VAT exemption on insurance sector in the future, what would be the future VAT rate applicable to insurers? In the event that the Chinese government offers VAT exemption as zerorate to financial institutions in future, can they recover the input VAT credit paid on capital expenditure on daily supplies?

Still in a state of flux, the Chinese tax system governing financial institutions has gone through a series of reforms. The 2008 corporate income tax reform in China ended all preferential tax treatments of foreign financial services sectors; foreign and domestic banks in China are now both subject to the same unified tax rate of 25%. The China tax reform also introduced a thin capitalisation tax rule - prescribed debt-toequity (D/E) ratio. This rule is an anti-tax avoidance measure to counter the abusive use of loan-finance, which is used to jet up the interest deduction and reduce taxable income of the borrowing enterprise. For financial institutions, the D/E ratio is set at 5:1. When the ratio of the debt from related parties exceeds the set ratio in a year, the interest expense pertaining to the debt from the related parties would not be deductible except when special approval is obtained. In China, indirect taxes often exceed income tax and can have a far greater impact on financial sectors. Currently, financial institutions in China are not required to pay value-added tax (VAT) because they are subject to a separate turnover tax known as business tax (BT), which is charged at 5% on the financial institutions’ gross earnings. However, the existing BT regime has been deemed by the Chinese government as incompatible with the Chinese VAT system, which is why an upcoming VAT reform on financial services industry will be launched in due course. Spearheaded by the Ministry of Finance and special working group under the People’s Congress, the new VAT law is

Chinese financial services players should express their view to the tax legislators on the upcoming VAT reform. Having these issues addressed at an early stage would help them develop an effective tax strategy. In the private equity space, structuring investment into China through an offshore holding structure has long been seen as a common best practice. The use of a suitable offshore intermediate holding company structure for a China project may not only increase the flexibility in the future exit options but also offer tax treaty protection on future repatriation of earnings and capital gains arising from the project. However, the China tax authorities have gradually extended their tax net to combat abuses in relation to the use of an offshore holding platform to create tax leakage. Matters such as treaty shopping, indirect offshore exit and beneficial ownership are now under the radar of the Chinese tax authorities.

Cassie Wong Tax and Business Advisory Services Leader, China; Regional Tax Leader, Asia Pacific Tel:+86 (10) 6533 2222 cassie.wong@cn.pwc.com

The GAAR adopt the principle of substance over form. Chinese tax authorities may disregard the existence of enterprises, where an offshore holding structure that is lacking adequate commercial substance, especially those in tax haven countries, is interposed in an investment structure. Chinese tax benefits secured under such tax avoidance arrangements could be revoked or not honoured. There are already high profile tax cases where the PRC tax authority claimed taxing rights on offshore share transfers by private equity houses that were seen to be indirectly transferring the equity interest to an underlying Chinese investment. China has also introduced its beneficial ownership test to seek to deny offshore structure in securing tax treaty reliefs. A beneficial owner must be engaged in substantive business activities in the form of individual, corporation, or other forms. Accordingly, a pure conduit, or shell company formed merely to fulfil legal registration obligations in a foreign jurisdiction, does not qualify for treaty benefits as a beneficial owner. The PRC tax rules articulates seven negative factors that may trigger the application of the anti-abuse provisions. PwC is a leading professional services firm with the largest specialised financial services practice in Mainland China, Hong Kong, Taiwan and Singapore. Our financial services practice group provides a wide range of services to help financial institutions in China.

China’s current General Anti-avoidance Tax Rules (GAAR) empowered tax authorities to conduct investigation under one of the following scenarios: abuse of preferential tax treatments; abuse of tax treaties; abuse of corporate structure; use of tax havens for tax avoidance purposes; and, other ‘arrangements’ that do not have reasonable commercial purpose.

May 2011 • GBM • 39

Country proFile – CHinA - FinAnCiAl serviCes Dezan Shira & Associates Chris Devonshire-Ellis Senior Partner Tel: +86 10 6566 0088 Fax: +86 6566 0288 info@dezshira.com www.dezshira.com

China Phasing Out More FDi Tax incentives

and seeking to expand its own consumer base. This means that the new opportunities lie in selling to the Chinese consumer market. However, in doing so, foreign investors will come under far more competitive stress than before in battling for market share with Chinese owned businesses. Here, the playing field is decidedly not level.

“Equal treatment” policy ignores practical differences between foreign invested and domestic enterprises China’s policy of phasing out tax incentives previously available to foreign investors reached its end game at the end of 2010 as some of the last remaining specialist incentives came to a close. Affecting everyone from financial institutions to cosmetics and semiconductor manufacturers, the incentives reaching the end of the line are as follows:

Foreign

investors have long enjoyed a variety of incentives, including the once very attractive five year tax breaks, but these are now long consigned to the scrap heap as China aims to put foreign investors on the same financial platform as its domestic companies. However, in some regards this makes it harder for foreign companies to compete. While legally foreign investors should be treated the same way as domestic corporations, in reality they are not. Foreign invested enterprises are considered as Chinese companies in law, however treatment of them in administrative areas often leaves them at a decided disadvantage when compared with Chinese owned domestic businesses. These include financial assistance during the economic downturn only being made available to Chinese owned businesses; cheap loans and financing not being offered to foreign invested enterprises; raising money via IPOs being restricted to Chinese owned entities; an additional 10 percent dividends tax being required to repatriate profits overseas; obscure licensing requirements effectively barring foreign invested enterprises from tenders and contract bids; leniency towards Chinese owned businesses in matters of labour disputes and the payment of mandatory welfare; and lax financial controls and personal arrangements affecting audit and income tax payments. The phasing out of the last tax incentives in China signals the end of an investment era, and especially the future of labour intensive, export based production. Just as once “Made in Hong Kong” was to be found stamped on the bottom of plastic toys, the “Made in China” label will move towards more added value appliances and products. “Made in India” and “Made in Vietnam” will begin to take over the low-end segment of the manufacturing industry. China meanwhile will be both moving up the added value chain

40 • GBM • May 2011

The discrepancies between foreign invested and domestic owned companies will change, at least in part. China does intend to reform its listing requirements for IPOs in Shanghai and Shenzhen and is working to allow foreign enterprises a mechanism to raise money in RMB to fund China expansion. HSBC, for example, may list in Shanghai next year. The penetration of international banks into China will also permit greater access to domestic financing by foreign investors than has previously been the case. However, the more insidious aspects of business in China – the deliberate weighting of tender requirements to favour domestic owned businesses, and the ability to get away with lax interpretations of the law, will continue to grate. In some respects, business in China is often operated by local governments as mini fiefdoms, a situation that surely cannot be tolerable or wise in the longer term. Foreign investors will need to fight their corner in order to ensure they are not discriminated against. While the end of an investment era draws to a close in China, the new era begins, and it is one that will require more patience, strength, and on-the-ground knowledge than ever before as an investment destination to succeed in. Foreign investors will need to be diligent in maximizing their financial effectiveness, and using all the tools at their disposal in order to grow. Business investments into China will need to be far more corporate minded than before, and companies setting up in the country more inquisitive about the right way to structure and financially manage their business than was the case in the past. If not, those weaknesses will work against China invested enterprises over the longer term. The new era requires more professionalism within foreign investors and the services firms that advise them. This year-end is a good time to take stock as concerns internal operations and the level of support being provided to your business. The new era will demand a higher level of professional competence and acquiring it will prove key to growth. With annual audits in China shortly to be due, now is a good time to evaluate your business in conjunction with the audit process to assess if it can match up to these new demands. Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with seventeen offices in four jurisdictions, employing over 170 business advisory and tax professionals. By Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates (http://www.dezshira.com/chris-devonshire-ellis.html )

Country proFile – CHinA - legAl serviCes Martyn Huckerby (Partner and chief representative) Unit 608-611 1 One Corporate Avenue 222 Hubin Road Shanghai 200021, PRC T: 86 21 2308 7628 F: 86 21 2308 7699 M: 86 1391 896 0360 martyn.huckerby@mallesons.com

Tingting Cai (Associate) Unit 608-611 1 Corporate Avenue 222 Hubin Road Shanghai 200021 T: 86 21 2308 7619 F: 86 21 2308 7699 tingting.cai@mallesons.com

China’s new national security rules raise the stakes for investors For the first time, China has provided details of the regime that the Chinese government will utilise to scrutinise transactions on national security grounds in a broad range of sectors (including, agriculture, energy, infrastructure, transport and technology). Foreign investors are now paying close attention to the trial procedures that have been introduced to see what impact the new system will have on proposed investments, and taking additional time to seek approvals on transactions that are caught. On 12 February 2011, the State Council, China’s cabinet issues a ‘Notice on the Establishment of the Security Review System in M&As of Domestic Enterprises by Foreign Investors’ (Guo Ban Fa [2011] No 6) (the Rules) and these Rules took effect on 5 March 2011. Following the promulgation of the Rules, on 5 March 2011 the Ministry of Commerce (MOFCOM) issued corresponding implementing provisions entitled the ‘Interim Provisions on Issues Relating to Implementing the Security Review System for Foreign Investors’ Merger with and Acquisition of Domestic Enterprises’ (MOFCOM Provisions). The MOFCOM Provisions took effect on 5 March 2011 and remain valid until 31 August 2011, following which it is likely that these provisions will be extended or replaced by permanent procedures.

Investors should be aware that under the new regulations, Chinese government agencies, trade associations, competitors, suppliers and other related parties have the power to apply for a national security review of a foreign investment deal, which may delay proposed foreign investments.

Under the Rules, an Inter-Ministerial Committee has been established to conduct national security reviews, led by the National Development and Reform Commission (NDRC) and MOFCOM, and working with relevant government agencies in the target industry. The Rules provide that foreign investment in the military industry and acquisition of actual control in vital industries involving national security (such as important agricultural products, vital energy and resources, essential infrastructures, crucial transportation services, key technologies and major equipment manufacturing, etc) is subject to a national security review. Relevant transactions may be blocked due to their impact on militaryrelated production capacity, the stability of the national economy, basic social life order, or the capacity of indigenous research and development of key technologies.

If the Inter-Ministerial Committee considers that a transaction raises a potential risk to national security, the applicant is prohibited from proceeding with the relevant transaction. Furthermore, MOFCOM may unwind any transaction that has taken place or take such other measures as may be required (ie, ordering the transfer of shares/ assets) to mitigate any negative impact on national security.

The MOFCOM Provisions further detail the security review procedures by specifying the documents to be provided and by clarifying the relevant period for initial review. In particular, the MOFCOM Provisions specifying a time period within which a particular review must be commenced (ie, 15 working days from the day it notifies an applicant in writing that its application is complete and accepted).

While investors interested in undertaking transactions that may be caught wait to see how the Rules and the MOFCOM Provisions are applied in practice, and to what extent they are used to block transactions that would previously have proceeded, it is important that they implement a regulatory strategy to maximise the prospect of approval being granted.

The diagram illustrates the procedure for security reviews under the Rules, as well as the relevant time periods provided for review: As illustrated by the diagram, the process incorporates two stages of review: an initial routine review, and a special review. First, a routine examination (through written inquiries made of government departments) must be conducted by an Inter-Ministerial Committee to determine if the transaction will harm China’s national security. If the relevant departments consider that the transaction will not affect national security, then there will be no need for any further review. However, if concerns are raised, a further special review will commence, which will involve preparation of a separate evaluation report. Following its investigation (and liaison with the State Council), if the Inter-Ministerial Committee considers that a transaction has impact or may impact national security, the committee shall request that MOFCOM coordinates with other relevant departments to terminate the transaction, or take such other measures as may be required to eliminate the impact of the transaction on China’s national security.

May 2011 • GBM • 41

Country proFile – CHinA - legAl serviCes Zhejiang Confuway Law Firm Helen Jiang Managing partner Tel: +86 571 8837 1688 Fax: +86 571 8837 1698 E-Mail: helen@confuway.com Web: www.confuway.com Confuway Law Firm (Confuway) provides a full range of corporate legal services and finance services in such areas of practice as: corporate investment and financing; legal services for banking and financing; foreign direct investment; overseas investment; venture capital; transnational mergers and acquisitions; domestic and/or overseas listing; and, corporate risk control, etc. With its professional services, highly efficient team and corporate management systems, Confuway has had substantial accomplishments and provided professional legal services for many domestic and overseas enterprises relating to private equity, mergers and acquisitions, domestic/overseas listing and overseas investment, etc. Main projects and clients include: Acted as legal counsel of ‘Yuemei Investment in Nigeria programme’ for China Development Bank’s Zhejiang Branch, contacted Nigeria’s law firm for issuing legal opinions for China Development Bank’s Zhejiang Branch relating to its loan to Yuemei Group for its investment in Yuemei (Nigeria) textile industrial zone. Acted as legal adviser for China Development Bank’s Zhejiang Branch relating to its loan to the Hangqian highway merger project, providing legal opinions in relation to the subject qualification of the

42 • GBM • May 2011

borrower, the legality of the examination and approval procedures of the transaction, the legality of control of the repayment capital flow of the borrower and legal guarantee for lender’s rights, etc. Acted as legal counsel of China Development Bank’s Zhejiang Branch in relation to ‘Lishui 36-1 gas field project financing’. Confuway drafted documents including, but not limited to: legal opinions; loan memo; RMB loan agreement; guarantee contract; pledge agreement of rights under petroleum contract; pledge agreement of accounts receivable; accounts pledge agreement; accounts supervision agreement; assets pledge contract; the first insurance beneficiary contract and insurance interests transfer contract, etc, in relation to subject qualification of the borrower; financing negotiation; and, other legal matters. Acted as legal counsel of China Development Bank’s Zhejiang Branch in relation to overseas borrowing by a company in the Democratic Republic of Congo relating to its Crude Cobaltous Hydroxide Hydrometallurgical Process’. Confuway issued legal opinions on the qualification of the borrower, verification of the feasibility of financing structure, conditions for extending a loan, communicated with overseas lawyers and drafted documents including loan agreement, guarantee contract and assets mortgage contract etc..

Country proFile – CHinA - reCommended Hotel Shangri-La Hotel, Beijing Reservations Telephone: +86 10 68416824 Fax: +86 10 68418005 reservations.slb@shangri-la.com www.shangri-la.com

Shangri-la Hotel, Beijing

with broadband and wireless Internet connections.

Shangri-La Hotel, Beijing has earned a reputation as one of the finest hotels in Beijing and played host to numerous dignitaries from all over the world. The award-winning Shangri-La Hotel, Beijing has a total of 670 well-appointed guestrooms and seven exceptional restaurants and bars. A variety of refreshing beverages are served in the Lobby Lounge, Garden Bar and Terrace, offering a stunning view of the landscaped garden, complete with a Koi pond and Chinese pavilions. At the Cloud Nine Bar, there are distinct signature cocktails especially concocted by our bartenders to pamper to your every mood. The Nishimura Japanese restaurant offers Japanese cuisine in a fun, modern and exciting environment with a sushi bar, teppanyaki and traditional Tatami Room. The Shang Palace is the ideal setting for savouring exquisite Cantonese cuisine, by our Hong Kong chef, with signature dishes, regional specialties and daily dim sum lunch. Also, the 220-seat Café Cha offers a stimulating dining experience with a multicuisine buffet served at open kitchens and individual food stations, and an unrivalled garden setting. Blu Lobster offers modern European cuisine in a chic décor with the most extensive selection of Bordeaux wines The 142 rooms and suites in Valley Wing have modern facilities, luxurious amenities

and complimentary broadband and wireless Internet access. With a chauffeur-driven limousine service, a private driveway and an exclusive check-in lounge, guests of the Valley Wing can enjoy an unparalleled level of service. Complimentary breakfast, snacks and beverages, including free flow of champagne, wines and canapés are available all day in the grand Valley Wing Lounge, one of the largest executive lounges in the Shangri-La Hotels and Resorts group worldwide. Guests also have complimentary access to meeting rooms and computers

For the health conscious and fitnessmotivated, the hotel’s health club offers the latest in exercise equipment, a 25-metre heated indoor swimming pool, and guests can relax in the whirlpool, sauna and steam room. Meanwhile, Shangri-La’s exclusive spa, CHI, The Spa brings some of the largest and most luxurious private treatment suites to the city, offering guests their very own ‘spa within a spa’. Each of the 11 spa suites features a changing area and rain shower, in addition to heat treatments, bathing and relaxation spaces. Impressive may not be enough to describe the grand ballrooms: modern, contemporary, artistic and elegant best describes the two grand ballrooms. Upon entering, one is enchanted by the glittering chandeliers and majestic effects of the marble decoration. Mirroring the marble lightings and wood panelled walls is the soft gold and burgundy carpet with a hint of chinoiserie. The two ballrooms are divisible into separate rooms to cater for any events up to 2,100 guests in total. For more intimate occasions, a selection of 21 elegant function rooms are available, each with state-of-the-art audio-visual technology, and serviced by an attentive and professional team. For more information and reservations, please contact a travel professional or access the website at www.shangri-la.com.

May 2011 • GBM • 43

Luxury Brand Series – Spa Resorts

Luxury Brand Series

Spa Resorts Living the Spa Lifestyle In a fast-paced 24/7 society it’s hard to find a balance between work, family, friends and taking care of ourselves. More and more people are realizing that the spa is the place to turn to learn healthy habits. There is a wide variety of options at the spa – everything from hydrotherapy to healthy cooking classes. The key is to understand what’s available and what it can do for you.

De-Stressing

that incorporate local elements. You can get a seaweed wrap at the beach or vinotherapy in California’s wine country. For busy travelers, express treatments provide the perfect opportunity to take a short break. These 30-minute or less treatments are offered by 75 percent of spas in the U.S. You would be surprised how relaxed you truly feel after only a half hour. There are also options to experience various treatments through spa sampling menus. These menus are for guests that can’t make up their minds, and offer several mini-treatments so they can decide what they like. It’s tapas-style spaing!

In the past 20 years the spa industry has experienced tremendous growth thanks in part to our overwhelming battle with stress. There’s been a mentality shift over the last two decades towards wellness as opposed to pampering at the spa. In fact, the No. 1 reason why people go to the spa worldwide is to reduce and relieve their stress. And, the No. 1 treatment that both men and women seek out is a basic stress-reducing massage.

Spa Etiquette

The International SPA Association (ISPA) has been the authoritative voice for more than 20 years on educating both spa professionals and spa-goers about the benefits of leading a healthy spa lifestyle. According to the World Health Organization, by 2020 the top five diseases will all have the underlying contributing factor of stress. Treatments like massage, meditation and acupuncture have been proven to aid in stress-reduction. People are seeking out spas as a place to recharge their batteries and take a break from all the tension in their lives. It’s one of the last places where you can truly unplug, and give yourself permission to pause.

ISPA developed a Code of Conduct to help spa-goers know exactly what rights and responsibilities they have. (Code of Conduct pdf is attached)

Finding a spa experience to fit your needs is simple since almost all experiences can be customized. Spas will actually book blocks of time instead of specific treatments, so you can consult with your therapist or esthetician in order to meet your goals. A spa experience should be your time to reflect, revitalize and rejoice depending on what is happening in your life.

For more information contact the International SPA Association at 1.888.651.4772 or ispa@ispastaff.com.

Spa on the Go Many travelers are seeking out spa experiences since they are a perfect complement to any vacation or business trip. Spas are offering indigenous treatments to truly make the experience unique and memorable. In the U.S. alone 23 percent of spas offer treatments 44 • GBM • May 2011

Many first-time spa-goers have cold feet because they fear the unknown. Most questions can be put to rest by simply calling the spa and asking. Doing your own homework before booking a treatment is essential. Do you need to deal with stress, a skin condition or are you simply looking to take a day off? The spa has the answer to all of the above.

ISPA Membership It’s important to seek out an ISPA member when you’re looking for a spa because they adhere to the ISPA Code of Conduct and sign a standards and practices agreement. You can easily find a member by visiting the ISPA web site at experienceispa.com. ISPA provides its members with business tools, education and networking events to ensure that they are the premiere properties in the world.

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CODE OF CONDUCT Your Rights and Responsibilities as a Spa Guest Although there are many spas around the world, each offering a unique experience, they are all devoted to enhancing overall well-being through a variety of professional services that encourage the renewal of mind, body and spirit. To enjoy your spa experience to the fullest, observe the Code of Conduct, act responsibly and be aware that common sense and personal awareness can help ensure your satisfaction, comfort and safety, as well as that of others.

AS A SPA GUEST, IT IS YOUR RESPONSIBILITY TO:

Communicate your preferences, expectations and concerns

Communicate complete and accurate health information and reasons for your visit

Treat staff and other guests with courtesy and respect

Use products, equipment and therapies as directed

Engage in efforts to preserve the environment

Adhere to the spa’s published policies and procedures

Ofﬁcially endorsed and prepared in partnership by: International SPA Association and Resort Hotel Association.

w w w. e x p e r i e n c e i s p a . c o m

Luxury Brand Series – Spa Resorts

Trends in the spa industry Aging Aging may not be new or popular, but the necessary demographic is pushing towards anti-aging services such as fat grafting, Botox, fillers and non-ablative skin rejuvenation. Hospital spas are increasing with fervour and have become the Ritz Carlton or Mandarin Oriental of the medical experience. While ten years ago, many current spagoers wouldn’t have considered an aesthetic revision at the plastic surgeon or dermatologist’s office, today it is the norm and the expected maintenance that comes with rejuvenation; result-oriented services are making for an impressive average sale of $673 for in-office visits.

McSpa Fortunately, or unfortunately, spa-goers have become bargain hunters and avidly shop around for the deal of the day when requesting services such as Botox, massage and laser hair removal. While consumers cannot typically appreciate the type of laser or the skill of the injector when it comes to administering services, many spas are finding their supplies and payroll costs are outweighing their revenues. The tight economic situation, cost of fuel and unemployment add to what will become a survival of the fittest. Some spas will depend on volume to remedy this crisis, while other spas will turn to educating clients about the quality of services provided and not the base dollar price.

Differentiation In an industry packed with ‘mom’ and ‘pop’ businesses, the only way for a spa or a regional chain of spas to thrive is to create a difference. This difference must be what a

46 • GBM • May 2011

facility and their team do very well. The day of the ‘one-stop-shop’ has fallen away to a well-defined niche market. Some of the most profitable spas out there right now are: under a thousand square feet, committed to performing only waxing, facials, contouring, hair removal, etc, and are very efficient in the manner in which they approach the spa-goer from initial contact to re-booking. Every aspect of running a spa well is expensive, and refining your business model is essential.

Foundation Building a business of any sort is an investment. While the old adage that cashflow is essential is obviously true, a more important aspect of creating a worldclass spa is centred on relationships. Every lead, phone call, potential client and warm body in or near your spa is a resource and a potential client. If your budget is overloaded and your marketing coffers are empty, try returning to the old fashioned but effective word of mouth. Focus on up selling. Create an urgency among your staff to recruit. Your spa is an experience that is as unique as your fingerprint. Don’t forget that underlying truth. The Spa Association (SPAA) is an international organisation representing spas in the day, resort, medical and wellness realms. The Spa Association was founded in 2001 and includes membership resources of health insurance, business tools and webinars, and spa business coaching to its members. Leadership, responsibility and consumer protection are core values of SPAA. To find out more please visit our website www.thespaassociation.com or call 970-218-5414.

a cocoon of tranquillity overlooking the South Paciﬁc

Bebe Spa Sanctuary Fiji Located on the highest point of the five star resort, Outrigger on the Lagoon Fiji, Bebe Spa Sanctuary commands a sweeping Fijian panorama, which evokes the classic romanticism of the South Seas. Below the Lomalagi Hill on which it stands, the lush, landscaped gardens of the resort spread towards the pale blue of the lagoon. To the north and south stretches the reef, fringed by a thin line of surf and beyond that the endless stretch of the Pacific Ocean. Above this flutters Bebe (pronounced Behm-beh), a Fijian word that means butterfly and, by association, cocoon and sanctuary, one in which the spa’s clients can immerse themselves in the experience of Fijian massage therapy. Bebe contains eight open air treatment rooms, a Bure ni Loloma (house of love) wedding chapel and a post- and pre-treatment relaxation lounge. One level above it, the Kalokalo Bar offers champagne views of the best sunsets in the South Pacific. Four of the treatment rooms contain sunken spa baths, which overlook the reef, adding another level of luxury to the treatment. Massage treatments available include the Bobo, a unique Fijian style that involves fluid strokes with the hands, elbows and forearms using warm coconut oil.

A menu of five body wraps employs a thermal water capsule in which the guest is cocooned after warm essential oils have been applied, while a Sabai Stone Therapy involves a massage with heated malachite and zincite stones after oils have been painted over the body. The spa has a selection of three signature treatments including the three hour ‘Totoka’, meaning ‘beautiful’, involving a South Pacific massage, coconut scrub, milky flower bath, mini facial and sweet mandarin body oil application. The other two signature treatments include the ‘Time Together’ couples treatment and the Romantic Discovery treatment, which are exclusive to Bebe. Manicures, pedicures, waxing and tinting are also available. In 2010, Bebe Spa Sanctuary was awarded the prestigious Spa Design of the Year Award (Oceania). Bebe Spa - Fijian for the cocoon from which you emerge relaxed, rejuvenated and at peace with your surrounds. For additional information visit www.outriggerfiji.com, www. bebespafiji.com

Cabe, meaning ‘to ascend’, prepares the skin with a sugar scrub before an application of Mandarin oil using traditional South Pacific techniques, while the Bebe Vakaviti Signature Massage blends Fijian and Hawaiian styles using massage, light stretching and warm towels to loosen muscles and realign the body. Exfoliation treatments include the Fresh Sugar Cane Body Glow using fresh local sugar cane crystals, virgin coconut oil and nut extracts, while a full menu of facials features locally grown papaya, pineapple and coconut together with European products.

Bebe Spa Sanctuary Praveena Dewan Spa Manager (679)6500044 EXT 8800 Fax: (679)65000420 bebespa@outriggerfiji.com.fj www.bebespafiji.com

BEBE SPA May 2011 • GBM • 47

Luxury Brand Series – Spa Resorts

The Spa at Coworth Park Berkshire, UK The Spa at Coworth Park is nestled in a contemporary eco-luxury setting, decorated with natural and organic materials, flooded throughout with natural daylight. The curved two storey spa is set against a natural bend of tall Silver Maple and English Oak trees and has views over Coworth Park’s 240 acres of Royal Berkshire parkland. It is the first UK hotel spa, and the first hotel spa outside the USA, to offer 100% organic Dr Alkaitis treatments, alongside three of the award-winning product ranges currently offered at The Dorchester Spa; namely Carol Joy London, Aromatherapy Associates and Kerstin Florian. Designed by award-winning interior design company, Fox Linton Associates, all design items have been sourced from the UK and influenced by the textures of the spa’s raw materials. In keeping with the vision to ensure furnishings, furniture and art are mostly British-made and to acknowledge a local tradition of craftsmanship, contemporary works by British artists are permanently on display throughout the spa for guests to admire.

48 • GBM • May 2011

The Spa at Coworth Park has eight tranquil treatment rooms including two double suites. All treatment rooms have natural light from the recessed skylights, which cannot be seen by guests on the treatment bed, but throw a wash of natural light across each rooms’ high ceiling. Guests enter the spa on the upper floor and a staircase and lift connects to the ground floor where the indoor swimming pool and gym are located. A minimalistic, clean design, the swimming pool offers guests underwater music and floor-to-ceiling glass windows overlooking the spa’s sun terrace, sun loungers and spa hillside. Guests can also enjoy the spa’s unique experience shower or relax in the steam room. The spa also contains a gym equipped with Technogym cardiovascular and resistance equipment and one side is made completely from glass and looks out onto the spa hillside. It is the UK’s only spa to use carbon negative hemp walling with natural lime render to provide thermal and environmental performance. A Living Roof

of plants and herbs such as, camomile, lavender and thyme, reduces solar gain and increases the building’s insulation. The spa also has recycled zinc fascias, gutters and downpipes, natural limestone and granite flooring. The hotel and spa’s biomass boiler and heat exchangers are 30% beyond the Government’s Target Emission Rate. Guests can relax and unwind in the spa’s relaxation room which offers a large selection of books and has views of the meadow, parkland and polo fields of Coworth Park. A varied menu of healthy snacks, light meals, cocktails and champagne can also be enjoyed in the spa’s restaurant the Spatisserie. Telephone: + 44 (0) 1344 756 756 spa.coworthpark@dorchestercollection.com

The Dorchester Spa London, UK The Dorchester Spa reopened in May 2009 after a complete transformation bringing an exclusive new pampering destination to London. Within its first year of opening The Dorchester Spa was voted Favourite UK Hotel Spa 2010 in the Condé Nast Traveller UK Readers Spa Awards. This ranks The Dorchester Spa as the 12th best spa in the world.

long sweeping ivory drapes with general décor enhanced by rich textures and lustrous materials. A suite comprising of two manicure and two pedicure stations is located near to a serene and spacious relaxation room dedicated to deep relaxation and features a choice of sumptuous day beds and winged armchairs in a rich deep blue.

Exuding 1930s Art Deco glamour combined with a contemporary edge. Award-winning interior design company Fox Linton Associates created a captivating, irresistible and elegant environment. Design is inspired by the iconic British style of The Dorchester, with an emphasis on style and exclusivity. The colour palate features strong accents of deep blue and ivory complimented with sumptuous velvet, silk, leather and satin materials. Low-level lighting assures an atmosphere of elegance and discretion.

The spa features nine tranquil treatment rooms including two double suites, with heated treatment beds and cosy duvet sheets for luxurious comfort. Signature facials are by new discovery Carol Joy London and treatments are by European skincare brand Kerstin Florian for the first time in London alongside acclaimed British brand Aromatherapy Associates.

Upon arrival, guests are ushered into a different world via a deep blue passageway and into the reception area. The focal points being a beautiful chandelier comprising 72,000 South Pacific white pearls and

The Dorchester Spa also maintains a Fitness Studio equipped with Technogym cardiovascular and resistance equipment as well as a full set of free weights. Personal training is available by appointment and fitness studio membership is also available. Royston Blyth hair salon brings together renowned celebrity and runway hairdressers

Royston Blythe and partner Nick Malenko and a dedicated team of professionals to offer a comprehensive range of styling services. Exclusive to The Dorchester Spa is the uniquely named ‘Spatisserie’, an opulent, but intimate space for light lunches, afternoon tea with elegant, bite size cakes, biscuits and pastries, savoury nibbles, and Champagne and Spa cocktails – all reflecting the ethos that ‘a little of what you love is good for you.’ The ‘Spatisserie’ can seat 15 and guests are not obliged to book a treatment in order to dine in the Spatisserie.

Telephone: + 44 (0) 20 7319 7109 spa.dorchester@dorchestercollection.com

May 2011 • GBM • 49

Luxury Brand Series – Spa Resorts

Zara Spa at the Mövenpick Resort & Spa Dead Sea Dead Sea, Jordan Relax into our Award Winning Zara Spa Experience with breathtaking views of the healing waters. From our famous signature Dead Salt and Mud Rituals to results driven Thalgo facials and slimming therapies, we shall guide you through the right treatment options with a complimentary consultation to help you maintain a happy and healthy wellbeing. Here you can find peace with the world and yourself. Awards: • On 2009 Readers of Condé Nast Traveller magazine voted the Zara Spa at

50 • GBM • May 2011

the Mövenpick Resort & Spa Dead Sea their favorite destination spa at the 12th annual awards

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On 2010 Readers of Conde Nast Traveler UK have selected Zara Spa at Mövenpick Resort and Spa Dead Sea as third best Destination Spa worldwide

•

On 2011 Readers of Conde Nast Traveller: Zara Spa obtained the highest ranking in the Middle East in the prestigious Readers' Spa Awards within the ‘Spa Retreat, Overseas Category’.

Zara Spa at the Mövenpick Resort & Spa Dead Sea Sweimeh, Dead Sea Road P.O.Box 815538 Amman 11180 , Jordan Phone: 962 5 3491310 Fax: 962 5 3561125 resort.deadsea.spa@moevenpick.com wwww.moevenpick-deadsea.com

St. Gregory Singapore, Malaysia, Japan, China More than just a spa, St. Gregory is a leading brand in the spa and wellness industry with its integrated lifestyle management philosophy built on the four unique pillars of Therapy, Fitness, Aesthetics and ActiveAgeing. Established in Singapore in 1997, St. Gregory offers a wide range of specialised and traditional healing therapies ranging from Chinese Tui Na to Javanese massages and Ayurveda treatments, coupled with advanced technologies and techniques from Europe and Asia. Its therapists are recruited from the countries of origin to ensure the highest level of authenticity and service. As a one-stop centre for health and wellness, St. Gregory offers state-of-the-art equipment and workout systems, complete with personal training programmes and fitness classes. To enhance wellbeing, it also partners with a team of aesthetic and wellness professionals to provide specialised treatments and health management programmes.

Singapore

Unwind in any of the four tranquil St. Gregory outlets located in city hotels - ideal retreats for business and leisure travellers alike. Only top-of-the-line UK and French brands Elemis and Thal’ion are utilised in St. Gregory’s menu of treatments in Singapore. You can even sign up for personal training sessions at the PARKROYAL on Beach Road outlet. St. Gregory recently took top honours at the World Luxury Spa Awards 2011, bagging Best Luxury Spa Group and Best Luxury

Hotel Spa (Pan Pacific Singapore and PARKROYAL Kuala Lumpur) awards. Its Tui Na Massage was awarded Best Muscle-Relief treatment in The Singapore Women’s Weekly (SWW) Best of Beauty Salons, Spas and Services 2011, marking the third consecutive year the treatment has clinched an award in the publication’s annual awards. St. Gregory also took top honours in Harper’s Bazaar (Singapore) Spa Awards, winning Best Skin Clarifying Facial for the St. Gregory Purifying Facial, and Most Pampering Eye Treat for Elemis Japanese Silk Eye Zone Therapy. Marina Mandarin Singapore Tel: 6845 1161 stgregory.marina@meritushotels.com Pan Pacific Singapore Tel: 6826 8140 stgregory.ppsin@panpacific.com PARKROYAL on Beach Road Tel: 6505 5755 enquiry.prsin@stgregoryspa. com Conrad Centennial Singapore Tel: 6432 7333 singaporeinfo@conradhotels.com

Malaysia

Located in a city hotel in Kuala Lumpur and beachfront resort in Penang, two distinctly different spa experiences await you when you travel to Malaysia.

for Most Luxe Couple’s Getaway in the Harper’s BAZAAR (Malaysia) Spa Awards 2011 while PARKROYAL Kuala Lumpur’s Javana Bliss Ritual won the award for Best Traditional Overall Treatment in the same awards. PARKROYAL Kuala Lumpur Tel: (603) 2782 8356 enquiry.prkul@parkroyalhotels.com PARKROYAL Penang Resort Tel: (604) 886 2288 stgregory.prpen@parkroyalhotels.com

Japan

Relax in your choice of VIP suites, relaxation lounges, Jacuzzis and individual treatment rooms in an exclusive waterfront location near the heart of Tokyo. 3F Urban Dock Lalaport Toyosu Tel: (813) 6910 1429

China

St. Gregory’s latest outlet and first in China is located in the stunning Pan Pacific Suzhou, with rich architecture reminiscent of Chinese palaces of yore, flanked by a magnificent backdrop of traditional gardens. Check into the St. Gregory Wellness Suite, a luxurious and spacious duplex featuring in-built Jacuzzi baths and a serene courtyard view, and enjoy your treatments in absolute exclusivity and privacy. Pan Pacific Suzhou Tel: (86) 512 6510 3388 stgregory.ppszv@panpacific.com

In 2011, PARKROYAL Penang Resort’s Royal Honeymoon Ritual won the award May 2011 • GBM • 51

Luxury Brand Series – Spa Resorts

The Waters of Royal Malewane Bush Spa, Royal Malewane, Hoedspruit, South Africa Royal Malewane is internationally renowned as providing the pinnacle of luxury game viewing in all of Africa. Now, this regal getaway is also home to one of the most exclusive spas on the continent. Completely surrounded by the untamed African bush, the Waters of Royal Malewane Bush Spa is a veritable oasis of calm. With internationally qualified therapists on hand to provide therapeutic massage, luxurious body treatments and hydrotherapy, this is the ultimate refuge for those seeking to refresh and restore the mind, body and spirit. The Waters of Royal Malewane Bush Spa prides itself on treating guests to a truly African spa experience. As such, every aspect of the spa has been designed to encapsulate this philosophy. While the treatments utilise the very best of eastern and western thinking, they also incorporate specially selected indigenous elements that reflect the magnificence and magic of the bush. Defining the African experience are the Waters of Royal Malewane signature treatments. Completely unique and unashamedly indulgent, these treatments 52 • GBM • May 2011

make use of rare indigenous oils and traditional ingredients to provide a sensory experience with an unforgettable African touch. The Waters of Royal Malewane Bush Spa philosophy also draws on the muchcelebrated healing powers of water. All hydrotherapy treatments make use of untainted, mineral-rich water specially sourced from an underground stream that flows through the game reserve. Filtered through limestone and granite, these are the very waters after which this incomparable Bush Spa is named. Inspired by the natural beauty of bushveld, the Waters of Royal Malewane Bush Spa has been created to be completely at one with its breathtaking surroundings. Stretching out majestically between gnarled Jackelberry and Acacia Thorn, the Bush Spa’s clean lines and minimalist design exude an air of complete balance and tranquillity. In the knowledge that a tranquil environment contributes towards a calm state of mind, careful attention was paid to each and every detail of the Bush Spa’s design and layout. Soothing colours, complemented by rich organic textures and uncluttered open-plan design, create a mood of pure serenity.

Gentle whispers of flowing water invite guests through majestic antique Indian teak doors into the Bush Spa’s beautiful central courtyard. Here, with the seamless African sky as a ceiling, guests are free to relax around the palatial 25m heated pool and enjoy the sights and sounds of Africa. Positioned around the central courtyard are the beautifully appointed treatment rooms, as well as a fully equipped gymnasium, a steam room, hot and cold African baths and bush casitas, where guests can enjoy the treatment of their choice, or simply relax in private. Nestled in the heart of 13,000 hectares of wildest Africa, the Waters of Royal Malewane Bush Spa is quite simply the ultimate sanctuary for the senses. Paola McFarlane info@royalmalewane.com www.royalmalewane.com Tel: +2715 793 0150 Fax: +2715 793 2879

The Marbella Club Thalasso Spa Marbella The Marbella Club Thalasso Spa is without a doubt, one of the best spas to be found in a major European tourist destination. Located on the beach, with the Mediterranean at its doorstep, the Thalasso Spa occupies 800 square meters equipped with the state-ofthe-art facilities, including a dynamic indoor sea-water pool, hammams (Turkish baths), saunas, a relaxation room overlooking the sea, and 12 treatment rooms. The spa takes its inspiration from ancient healing practices around the world and specializes in Thalassotherapy. The Latin saying “Sanus per Aquam” or spa, dates from a tradition that preceded the ancient civilization of Rome and which used thermal springs and sea water for therapeutic purposes. Modern Thalassotherapy at the Thalasso Spa is ideal for stress reduction, increasing blood circulation, as well as for boosting the immune system and relaxing muscular tension. It softens the skin while adding tone and firmness to the figure. The treatment itself is a pleasure, and the results are immediately noticeable. A delightful playground for tired and stressed – out bodies and souls, the Spa offers a full range of thalassotherapy and beauty treatments, with Rejuvenation, Weight Loss and Anti-Stress Programmes,

as well as new and exclusive treatments, such as the holistic and stabilizing Shi Tao massages and Sea Creation, facial massages with seashells. One should not miss is the newly introduced Hammam Morjana Ritual. Since the time of the Ottomans the steaming and cleansing offered in a traditional hammam treatment leaves bodies glowing with health and cleanliness. The treatment results rejuvenated skin and a revitalized mood. But that is not all in terms of health and well-being. Marbella Club Hotel guests can also enjoy our heated outdoor pools and the renowned state-of-the-art Puente Romano Tennis & Fitness club, located at the Puente Romano Hotel, a 5 minute walk away. Located on the Southern Spanish Costa del Sol, on the heart of the ‘Golden Mile’ only 5 minutes to Old Town Marbella and Puerto Banús, the Marbella Club Hotel • Golf Resort & Spa enjoys 325 days of sunshine. Open year round, the renowned Marbella Club Hotel, one of the “The Leading Hotels of the World” was once the private residence of Prince Alfonso von Hohenlohe and features 85 luxury bedrooms, 36 suites and 14 Andalusian-Style villas throughout 42.000 square metres (452.083 sq. ft.) of lush subtropical garden.

Thalasso Spa Marbella Club Hotel, Golf Resort & Spa Bulevar Principe Alfonso von Hohenlohe, 29600 Marbella, España +34 95 282 2211 For more information or to book a reservation, please contact spa@marbellaclub.com. May 2011 • GBM • 53

luxury BrAnd series – spA resorts

Yaxkin Spa at Hacienda Chichen resort Chichen itza, Yucatan, Mexico Yaxkin Spa: a Holistic Maya Wellness Center maya natural Holistic Care an ancient Healing arts The ancient art of Maya natural cleansing and holistic healing rituals perseveres in the mist of Chichen Itza at Yaxkin Spa, a healing sanctuary of life and personal wellness. Within the vast gardens of Hacienda Chichen Resort, Yaxkin Spa offers you a variety of stress-relief care and holistic healing experiences based on ancient Maya holistic traditions, seeking to reunite your soul with Mother Nature. This holistic center, located just a five-minute walk from the world's most famous Mayan site, is devoted to holistic wellness and healing care through earthy elements. The natural healing essences found in wild organic Melipona honey, cacao, Aloe Vera, Mayan herbs, wild flowers, sacred oils, and tropical fruits invigorate and cleanse your body, mind, and energy from toxins cause by stress and anxiety. At Yaxkin Spa, these natural ingredients are combined with authentic Mayan fine clays, aromatherapy, gems, hot stone massages, sisal rubs, and marine sponge baths to induce the unique source of spiritual and physical energy that ancient Maya healing rites help manifest in each of us. Mayan natural healing herbs and plants are carefully selected by Yaxkin Spa healers at the Hacienda Chichen private Nature Reserve and also grown organically inhouse to ensure purity, quality, freshness, and proper energy charge. Ix’Men Beatriz Correa personally prepares each ritual’s

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herbal therapeutic blend and sancochos to clean the skin’s impurities and renew your healthy personal energy glow. At Yaxkin Spa, you will find Chichen Itza’s sacred Maya ceremonial garden, secluded within a lush jungle landscape and surrounded by majestic views of Mayan pyramids that embrace an authentic Mayan cave; where the traditional Maya zumpul-che, holistic sweat-bath purification ceremony, is performed by Maya J-Men shamans and healers to renew the pure essence of your Ch’ulel or Chi inner vital energy in union with Mother Nature and the Cosmos. Traditional Maya healing and wellness arts are based on prayer, rituals, and the blessing of water, fire, earth, and air / spiritual essences that provide the frame in which your mind, emotions, soul, and spirit become one, empowering your Ch’ulel and purifying invasive energy toxins; transforming the effects of stress to wellness; thus, bringing inner harmony and balance. The powerful essence of aroma and touch found in each of Yaxkin Spa renewal treatments restores inner calmness and equilibrium. Yaxkin offers you a range of services in unique environments, from inviting private chambers decorated with Maya artistic touches to a couple’s sanctuary in a private tropical garden with a cenote water-bath and open-air massage enclave. You are invited to indulge your senses in the mystical Mayan therapeutic practices and sacred renewal spiritual rituals offered at Yaxkin Spa, its ancient wellness care will help revitalize and purify your emotional, spiritual, mental, and physical bodies.

Ix-Men Beatriz Correa, Mayan Senior Healer yaxkinspa@haciendachichen.com info@yaxkinspa.com www.haciendachichen.com/spa-mayaretreat.htm www.yaxkinspa.com US – Canada Toll Free Reservations: 1 877 631 4005

Six Senses Spa at Hotel Missoni Kuwait Six Senses Spa at Hotel Missoni Kuwait Open For Business Late May 2011 Kuwait City, Kuwait – 17 April 2011 – Six Senses Spa at Hotel Missoni Kuwait, which overlooks the Arabian Gulf along Gulf Road, will open its thirteen treatment rooms on 25 May 2011. When it opens in late May the Six Senses Spa will be conveniently located on the second floor of the hotel and will consist of thirteen treatment rooms in total. The exclusive member spa, which will have a limited number of memberships available, comprises separate areas for men and women, separate hammam treatment rooms and even a bridal suite, complete with hairstylist, manicurist and make up artist. The 1,500 square meter spa will also house a fitness center, a ladies only gym, a yoga studio, a infra red sauna, a steam room an experience shower and luxurious relaxation areas to unwind and even to taste the natural juices from the menu. In addition, members will also be able to swim or laze around the main pool of the hotel. “When we open later next month this will represent 18 months of hard work. For this project, we have seen over 60% of our staff come from other Six Senses properties, which means they also bring their wealth of experience with them, which is good news for guests and members alike. Add to this 5 dedicated personal training staff from Europe and we feel confident that we can tackle the challenges of our members health and wellness concerns,” said Six Senses Spa at Hotel Missoni Kuwait Spa Director Patrick Taffin d'Heursel. As well as Six Senses signature treatments and traditional Asian therapies, the spa menu will also offer locally inspired treatments, using local and organic ingredients such as dates, olives and Arabic spices. There will also be de-tox and weight loss programs along with complementary treatments, such as cupping, bamboo massage and cold glass therapy. Activities such as yoga, pilates and meditation will be available privately as well as in group sessions and health retreats may be booked, combining personal training with exercise, spa cuisine and spa treatments. A limited number of exclusive spa memberships will be available in early May, and for more information about the complete spa member offering you can contact Six Senses Spa at Hotel Missoni Kuwait spa Director Patrick Taffin d'Heursel dir-missonikuwait-spa@sixsenses.com

company established in 1995, which manages resorts under the brand names Soneva, Six Senses Hideaways, Six Senses Latitudes and Evason, plus Six Senses Spas and Six Senses Destination Spas. Six Senses Spas – Balancing Senses Six Senses Spa - a key element of all Six Senses properties, offers a wide range of holistic wellness, rejuvenation and beauty treatments administered under the guidance of expert therapists. Six Senses Spas are also hosted by prestigious hotels and resorts in many other locations. Kane Dowsett Director speakup@outburstpr.com

Six Senses Resorts & Spas Six Senses is a resort and spa management and development

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eu outsourcing report polAnd outsourcing in the age of Turbulence By: Jagdish Dalal, Managing Director, Thought Leadership, IAOP

Today’s world can best be described as hyper-competitive with a set of disruptive dynamics – such as global competition, internet, low cost entry and game changing innovations. In this global economy, every company must compete against customer choices coming from everywhere and anywhere. Barriers to the marketplace are dropping quickly, with new competitors just a mouse-click away from customers. outsourcing creating a new business model It is against this backdrop of hypercompetition and increasing pressure for performance that the classical view of organizations as vertically-integrated and self-sufficient has changed. It’s an approach dating back to the industrial revolution that may no longer be possible, practical, or even desirable. The accelerating pace of change dramatically compresses investment cycles, making the competitive advantage from an organization’s internal investments last for shorter and shorter periods of time. At the same time, all the operational activities across an organization are becoming increasingly specialized and knowledge-driven. Rapid advancement in every field makes it a practical impossibility for any organization to develop and sustain best-in-world expertise in every facet of its operation. As a result, organizations are moving away - being forced away - from this classical structure. Increasingly organizations are finding that the better approach is to focus their internal resources on the activities that provide them a unique competitive advantage, their core competencies, while engaging the external market of service providers through outsourcing for more and more of their critical, yet non-core activities. This is the new shape of business, driven by utilizing outsourcing as a strategy for change. Companies also look to outsourcing as a way to lower their cost – especially by utilizing lower-cost market service providers. 56 • GBM • May 2011

“We live in an interesting time”; to paraphrase a famous Chinese curse. Curse or not, we are living in an interesting time where the horizon is cloudy, decision window times are short and what has worked in the past doesn’t provide assurance for ongoing success. These are the times when companies need to examine their strategy, tactics and management model and think of options which can help them, not just weather the storm, but steer their companies on a safe course. Outsourcing is viewed as one of the tools that management has available to them. IAOP, the largest professional organization for outsourcing, defines outsourcing as “long-term, results-oriented business relationship with a specialized 3rd party services provider.”

Beneﬁts of outsourcing Although, the general view of outsourcing is that it is a cost savings opportunity, IAOP has learned, through our survey that cost saving, although a dominant driver, may not be the key driver. In fact, a survey of IAOP membership has shown that the cost savings through outsourcing was not the major reason for their decision to outsource. Innovation, capital conservation, access to skilled labor, creating a variable cost basis and diverting management focus were the strategic drivers for the majority. The pharmaceutical industry is full of examples where companies outsource their R&D activity for new drug development. Real estate outsourcing provides companies with options for conserving their capital instead of investing in a building. Information technology functions have long used outsourcing companies to provide both the needed skilled resources and innovation. Manufacturing outsourcing provides many examples of converting fixed cost base for production to a more variable cost basis. outsourcing and risk management As in all business models, outsourcing also has inherent risks associated with it. There are two distinct ways to look at these risks: 1. Risk of not outsourcing and 2. Managing outsourcing risks. Business conditions and drivers identify risks in functions that are performed in house – inflexible, dated processes, low productivity, lack of investment and talent in improving performance. These risks act as a major barrier in many instances for the company to fight off competition or change its business direction. In fact, one can argue that a business would consider outsourcing when it believes that performing a function in-house contains greater risks than having a service provider do it. Strategy for managing outsourcing risks forms the basis for evaluating outsourcing opportunity, selecting providers and

implementing the governance process. Businesses balance risks – real and perceived, against the value – current and future. When the value reaches a point where it exceeds risks, company will have reached a “consideration point.” When value far exceeds risks, we consider it to be a “decision point” and when value is overwhelmingly greater than risks, company will have reached “imperative point.” Several business processes, which are now considered “commoditized” have reached this stage of imperative point. Companies now question their need to manage their own IT infrastructure (network and computing) or real estate or supply chain. outsourcing – where is it headed We believe that outsourcing is no longer a novel business tactic where companies are forced to outsource a function they cannot manage internally. Outsourcing is providing companies alternative business models whereby a company can manage a small but a market-differentiating core while engaging expert third parties to perform the necessary work. It is this “atomic” business model that is helping companies not only weatherthe storm but create a market advantage – even in these turbulent times. outsourcing and IaoP International Association of Outsourcing Professionals® is a global organization dedicated to promoting the concept that outsourcing is a profession –just as accounting is. Our 110,000+ professional members and affiliates worldwide, buyers, providers and advisors, are engaged in some form of activity in the field of outsourcing and are constantly improving how outsourcing is viewed, done and managed. In order to strengthen the thought that Outsourcing is a profession, we manage a rigorous program of certifying outsourcing professionals; just as accounting profession awards CPA. For further information please visit www.iaop.org

Poland - a preferred nearshore IT outsourcing destination for western european companies

Vimanet sp.k. Krzysztof Korbel Director Tel: +48 505 164 475 Fax: +48 12 411 08 02 E-Mail: krzysztof. korbel@vimanet.com www.vimanet.com

Vimanet is a software house and outsourcing company that works with SMEs and corporates across all industries. Established in 2007, Vimanet has a wealth of experience in outsourcing software development services and delivering high quality web applications. We have many years of experience in ASP.NET development and CMS implementations based on Kentico CMS. Since the very beginning, we have been working exclusively with international companies providing outsourcing services mainly to Norway, Ireland, Belgium and the UK. Our work spans many countries and lots of industries and markets, including banking, HR, media publishers, art galleries and others. Microsoft technologies experts Pure focus on .NET technology and not on a specific business domain allowed us to build exceptional experience and a knowledge base that all our customers can benefit from. C#, ASP.NET, Silverlight, MVC, SQL Server 2008 are the cores of our competence. We continually push our own boundaries to use new technologies, theories and industry best practices. The team We are a small team of eight passionate and dedicated professionals. Most of us have experience in full application life cycle, from requirements gathering phase, through technical specs, development, testing, deployment and support. We are proud to be Microsoft Certified Developers (Microsoft Certified Solution Developer, Microsoft Certified Professional Developer, Microsoft Certified Web Developers) and

Andrzej Bednarczyk Managing director a.bednarczyk@itspree.pl ITSpree Sp. z o.o. Mazowiecka 65 60-623 Poznan POLAND www.itspree.pl

Among many of the western European IT companies, there’s a long-term tradition of outsourcing IT work to an offshore destinations like India or China. The upside of this type of outsourcing is, of course, cost efficiency - the downsides, however, are the distance and problems with communication (also caused by cultural differences). It’s the main reason why a better alternative started to emerge very recently - outsourcing to the new EU member states from eastern and central Europe (such as Poland). Poland is becoming the major target of such activity; in the Ernst Young European Attractiveness Survey for 2007, Poland was ranked 7th in the world, 3rd in the EU and 1st in the ‘new’ Europe, with key advantages, including EU membership, largest pool of skilled IT engineers in Central Europe, competitive labour costs, good transport connection with EU and a large, stable and growing economy. This is why more and more western companies discovers all the benefits of nearshore outsourcing lower IT development costs, excellent work efficiency, wide area of IT skills available and, most importantly, a very close distance (typically only a two hour flight from most major western capitals, like London or Amsterdam) and cultural alignment. Apart from the typical cost-related reasons, there are also other advantages of nearshore outsourcing: it increases resource availability (on-demand scheme), reduces recruitment fees and moves the IT infrastructure cost (eg, development servers, software licences, etc,) to

we all speak fluent English. We are a team of experts, where quality of work, experience and knowledge is much more important than a large number of resources. Clients Our clients range from well-known global organisations to local companies. While we predominantly work with companies in Europe, we do have a few clients across the ocean. Recommendations from all our clients are available on demand. A selection of organisations that put their trust in Vimanet include: Apriso, Art Access & Research , BizMaps, Brog Media, InMente, Koko Fitness, Steel London, Vintage Productions and Watch Health Care. Why choose Vimanet? Excellent communication and responsiveness, creativity, technical skills, understanding of customer requirements and experience are our strong points. Vimanet is proud to have a very low staff turnover, which means you will deal with the same team members each time. Whether you would like to outsource a complete project, extend your own team with additional resources, speed up the project or outsource a support work, we will be glad to help you. If you are looking for a software development partner that will share their knowledge and competence to win a competitive advantage for your business we invite you to contact us.

the 3rd party offshore company. ITSpree is a typical nearshore outsourcing company specialising in web and mobile software development, nearshore IT outsourcing and quality assurance. The company works primarily with interactive agencies, web start-ups and new media businesses from UK, Germany and Netherland. According to our experience, the biggest challenge for the companies that consider nearshore outsourcing is the problem of planning, communication and team management. If you think about nearshore outsourcing, remember to: plan first and never execute outsourcing on ad hoc basic; engage a nearshore team as project on its own; and, consider engaging the nearshore partners’ team into the planning phase as well - they usually have a lot of experience finding the best solution. Start your team small, and keep growing steadily - just like with your in-house employees, the offshore team will need time to mature and align with your company’s internal processes and teams. At ITSpree, we know that projects are successfully accomplished only in very specific environments where technical knowledge comes in partnership with good communication and effective development, process and risk management. This is why we put a great emphasis on the best outsourcing management techniques to help offer more complex and trustworthy services.

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Brains for hire The biggest mistake you can make while investing in an unknown country is an inappropriate selection of people. Even if you implement the best, reliable solutions to your business, it is the people that decide your success. In Poland, we have a saying: “The devil is in the details.” The investor is responsible for the image of the enterprise and presents a global approach. We complete this image with details, capture the weak links and are the early warning system. The four-eyes principle

For tax advice contact: Agnieszka Jasica-Skalbmierska Partner in ATA Finance agnieszka.jasica@atafinance.pl phone: +48 322542001 For audit contact: Izabela Stenzel Partner in ATA Finance izabela.stenzel@atafinance.pl phone: +48 222928250 For accounting contact: Rafał Wójcik Partner in ATA Finance rafal.wojcik@atafinance.pl phone: +48 222928280

Your creative enthusiasm spreads among your staff. You think that you and your partners are aiming for the same goal; that in the future your invested time, energy and resources will be returned. But do things look the same when viewed from a side-on perspective? What do those people think, who are better oriented in local realities and who speak the same language as your partners? It is worth asking for the opinion of an impartial and competent person at every stage of the investment. A well-conducted financial and tax audit prior to the transaction, merger or joint undertaking facilitates performing a much more detailed and critical analysis of the situation. Our experts aren’t limited to standard and routine reviews of accounting records. We explore the given business and know where risk may be hidden. We look to the future, the same as our clients, only we don’t wear rose-tinted glasses. We speak the same language Poland has been in the EU for seven years and Polish regulations within the scope of accounting correspond to IFRS to a large degree. Most likely, in civil law, you will find many similarities to your own country’s system. You may also certainly find personnel that speak a foreign language. Therefore, why is it often so difficult to communicate with your Polish partners and co-workers? After all, they are great specialists. Maybe they are lacking a global approach and comparative scale. This is a frequent problem, especially in the first stages of cooperation. That is why we are often the link between our client and his local personnel or contractors. We know the specifics of our administration, tax regulations, the Polish market and, thanks to our experience in cooperating with international customers, we are able to evaluate the expectations of the investors in comparison to reality. We also know when expectations must be adapted to reality, and when an energetic and persistent fight should be undertaken with existing realities. a signature has its weight in gold Polish enterprises complain about complicated regulations, especially tax-related, and an excess of informative obligations in regard to the state. However, in many countries, even in the EU

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itself, the tax system is much more complex, and bureaucracy much more arduous. This is, however, a system and bureaucracy known to the investor, and therefore less demonised by him. When signing a tax declaration or financial report in Poland, you incur both liability and risk, which sometimes you are unable to evaluate. Foreign investors operating in Poland sometimes joke that their accountants are more careful about the interest of tax office than that of their companies. There is some truth to this; awareness of responsibility ‘per signature’ is at large with Polish employees. Working with our auditors, accounting experts and tax advisers, the risk of disputes with the administration can be restricted to a minimum. However, contrary to individual staff, our advisers always aim at optimisation, both within the scope of accounting as well as taxes. It is us, in principle, who are the first contact for administrative authorities; we sign either on behalf of, or together with, the client, all key documents and tax declarations. We are also the ones who incur the obligation of regular and timely provision of information to the client regarding complete financial data, informing him about tax and financial risks. The client finds out from us about significant changes in tax regulations that influence his business, whereas individual staff often passively wait for training or basically learn from their own mistakes. We are everywhere Where should an adviser be in order to professionally support a client? Everywhere a need arises. We cooperate with foreign investors running businesses in all areas of Poland. In general, we must be in contact both with company representatives abroad as well as staff within the country. Warsaw, where our office is located, has the best communication with foreign countries, and at the same time is a large economic centre, Polish financial centre and location of the majority of foreign companies. Industry is distributed throughout Poland; the largest industrial centre is Górny Śląsk, where we also have an office. Even though Polish infrastructure resembles a construction site, we reach every corner, where our clients need us. Many of our customers’ projects have a transborder character. Therefore, we are involved along with experts from international IGAF Polaris association, which has members in over 80 countries. Today, many issues can be taken care of via the Internet or telephone. However, our experience shows that direct contact is best for understanding and cooperation. Therefore, no teleconference can replace our joint ‘brainstorming’ session with the client and his adviser at one table, having a coffee*. We are waiting for you! * We also serve tea.

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Setting-up a business in Poland by a foreign entity: a brief overview

Michal Sierpinski Law Firm Michal Sierpinski Advocate Tel: +48 510 086 360 Fax: +48 618 52 33 52 adwokat@michalsierpinski.pl www.michalsierpinski.pl

Establishing a business in Poland by a foreign entity entails an obligation to register it. Undertaking and pursuing economic activity is governed by the Act on Freedom of Economic Activity, which defines a foreign person as: a natural person who is not a Polish citizen; and, a legal person based abroad. Polish law provides for different requirements for foreign entities. Foreigners residing in Poland and investors from EU and EFTA member countries may undertake and conduct economic activity on the same terms as Polish citizens. As to other foreigners, the Act provides for certain limitations: they may conduct economic activity by establishing or joining limited partnerships, limited joint-stock partnerships, limited liability companies (LLCs) and joint-stock companies or by purchasing and acquiring shares in such partnerships and companies. In practice, a LLC is one of the most popular forms. Such company can be established by one or more persons, and its shareholders are not responsible for its liabilities. The minimum share capital requirement is about £1,000. New regulations have reduced the company formation time: in general, all necessary documents are now filed with the court on one occasion and soon online registration will be allowed. Articles of association of a LLC are drafted as a notarial deed. To form and register a company, its shareholders do not need to come to Poland as an apostilled power of attorney for a Polish advocate signed before a foreign notary is sufficient. The company must keep books of account and file annual financial statements with the court for

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financial and property transparency reasons. An important registration requirement is to have title to premises to house the company’s registered office in Poland; the company must lease or buy real estate. However, a non-EU foreigner may buy real estate on the basis of a minister’s permit only. Foreigners doing business abroad can also form branches in Poland; branches can only conduct activities within the foreign investor’s business. To identify the branch, the foreign investor’s name plus ‘Branch in Poland’ is used. The investor must appoint its representative with regard to the branch’s activity. The branch must also keep its own books in Polish. Foreign investors may also form representative offices in Poland (they can only promote and advertise the foreign investor). Commercial companies (including limited liability companies) and branches of foreign investors are entered into the Polish Court Register. Information contained in that register is accessible to the public. When commencing economic activity, a form of taxation must be selected. Tax laws provide for two taxation forms: tax base and tax rates (18% and 32%) or a flat 19% tax rate. Michal Sierpinski Law Firm provides assistance to foreign entities on selecting the appropriate form of doing business in Poland and the court registration procedure.

ELVINGER, HOSS & PRUSSEN LUXEMBOURG LAWYERS

Quality Innovation Independence

Corporate and Tax Banking, Insurance and Finance Commercial, Employment, Litigation and Arbitration Investment Funds and Asset Management Administrative, Property and Construction Law Insolvency Law and Restructuring

Elvinger, Hoss & Prussen 2, Place Winston Churchill BP 425 L-2014 Luxembourg

www.ehp.lu

FrAnCHising your Business

FrAnCHising your Business in Association with the iFlA

an Introduction to Franchising Simply put, afranchise is an agreement or license between two legally independent parties, enabling a person or group of people (franchisees) the right to market a product or service using the trademark or trade name of another business (franchisors). in turn, the franchisee has an obligation to pay a fee for these rights, and franchisors provide training and support. Franchise businesses represent a wide range of industries – health, elder and child care services; home improvement and maintenance companies; printing, advertising and marketing ﬁrms; sporting goods and photography services, food and beverage services/restaurants and personal care product ﬁrms name just a few. The franchise system, or franchisor, is the one who owns the right to the name or trademark of the business, while the franchisee is the one who purchases the right to use the trademark and system of business. The franchisee’s commitments and obligations to the franchise system are typically detailed in a variety of documents, including the franchise agreement, contract, franchise disclosure document (FDD) and/or operating and procedural manuals. Many companies successfully use the franchise business model to help achieve expansion and growth, greater brand recognition and consistent delivery of a product or service. The economic impact of franchising is significant. In the United States alone, there are currently more than 825,000 franchise businesses across 300 business lines that generate more than $2.1 trillion to the U.S. economy and provide for nearly 18 million jobs. There are generally two types of franchises: • Product distribution arrangements in which the dealer is to some degree, but not entirely, identified with the manufacturer/supplier; and • Business format franchises in which there is complete identification of the dealer with the buyer. Product distribution franchises simply sell the franchisor’s products and are supplier-dealer relationships. In product distribution franchising, the franchisor licenses its trademark and logo to the franchisees, but typically does not provide them with an entire system for running their business. The more common business format franchises offer the franchisee not only a trademark and logo,but also a complete system of doing business. Indeed, the word “system” is the key concept to franchising. A franchisee receives assistance with site selection of the business, training, business set-up, advertising, and product supply. In exchange for these services, the franchisee pays an upfront franchise fee and an on-going royalty, enabling the franchisor to provide training, research and development, and support for the business. In addition to different types of franchises, there are also different types of franchise arrangements: •

A single-unit (or direct-unit) franchise. Should a franchisee purchase additional single-unit franchises once the original unit begins to prosper, the relationship is then typically considered a multiple, single-unit relationship.

•

A multi-unit franchise, which can typically be handled via an area development or a master (sub-franchising relationship).

Under an area development franchise, a franchisee has the right to open more than one unit during a specific time, within a specified location. For example, a franchisee may agree to open 7 units over a ten-year period in a specified territory. The franchisor grants the 62 • GBM • May 2011

franchisee exclusive rights for the development of that territory or jurisdiction. A master franchise agreement gives the franchisee more rights than an area development agreement. In addition to having the right and obligation to open and operate a certain number of units in a defined area, the master franchisee also has the right to sell franchises to other people within the territory, known as sub-franchises. Therefore, the master franchisee takes over many of the tasks, duties and benefits of the franchisor, such as providing support and training, as well as receiving fees and royalties. Master franchise agreements are often used for cross-border franchise growth and expansion. Regardless of the type of franchise or arrangement, a good relationship and ongoing communication between the franchisor and franchisee are critical for the success of both parties. It is vital to have a clear understanding of the franchise program at the outset. The complexities and variances of the laws and regulations that govern franchising—particularly as related to cross-border franchising—are outside the scope of this article, and theadvice of experienced franchise counsel in the local jurisdiction of the agreement is always recommended. In general, however, in addition to the obvious considerations of cultural suitability to the product or service, language requirements, currency fluctuations, site selection and tax and legal ramifications, additional key points to explore when considering cross-border franchising include: •

A master franchise (or sub-franchise) partnership arrangement vis à vis a direct relationship and the financial, training/support and tax implications that both options might entail

•

The protection of trademarks and intellectual property (IP) rights in the new jurisdiction(s)

•

Contracts, agreements and disclosure requirements, including timing, need for registration, translation, etc.

•

Royalties and any cross-border tax and legal implications regarding the repatriation of fees.

•

Renewal and termination rights and consequences.

Whether franchising in one location or across multiple borders, open and honest communication is key. As noted in the International Franchise Association’s (IFA’s) Code of Ethics: “franchising is a unique form of business relationship. Nowhere else in the world does there exist a business relationship that embodies such a significant degree of mutual interdependence. To be successful, this unique relationship requires continual and effective communication between franchisees and franchisors.” For more information, contact the International Franchise Association (IFA) at +1 202 628 8000, or see www.franchise.org. About the International Franchise Association The International Franchise Association is the world’s oldest and largest organization representing franchising worldwide. Celebrating 50 years of excellence, education and advocacy, IFA protects, enhances and promotes franchising through government relations, public relations and educational programs.

sweden

Dan-Michael Sagell Partner Sagell & Co. Advokatbyrå AB Biblioteksgatan 3, 5 tr P.O. Box 7174 SE-103 88 Stockholm Sweden +46 8 611 55 42 www.saglaw.se/eng/ dms@saglaw.se

Franchise disclosure law in Sweden In 2006, the Swedish parliament passed a law regulating the information a franchisor and a master franchisee must disclose within reasonable time before a potential franchisee or a sub franchisee signs the franchise agreement. The aim - to enhance the position of a potential franchisee in the discussions and negotiations that precede the signing of a franchise agreement. The law defines a franchise agreement as that by which an enterprise agrees with a party that the party against consideration shall use the specific business model of the enterprise regarding marketing and selling of products and services, and use the trademarks and the proprietor rights of the enterprise, and accepts regular controls that the franchise agreement is complied to. The franchisor shall disclose, in clear and understandable writing, the implications of the franchise agreement and any other conditions necessary concerning the circumstances in question. At minimum, a description of the franchise business to be operated by the franchisee must be included as well as information on: the other franchisees in the franchise chain and the size of their businesses; the payments the franchisee shall make to the franchisor and the other financial conditions in the franchise agreement; the proprietor rights that are to be licensed to the franchisee; the products and services that the franchisee is obligated to buy or lease; any non-competition clause that is to be valid during the term of the franchise agreement or after the expiration of the agreement; the term of the franchise agreement, the conditions for change, prolongation and termination of the agreement and about the financial consequences connected with the termination of the franchise agreement; and, the dispute resolution rules in the franchise agreement and how the costs for such dispute resolution shall be finally distributed between the parties. The Swedish Market Court can decide that a franchisor that failed to present information according to the law prior to the signing of the franchise agreement must hand over the piece of information not presented to the inflicted franchisee, and in connection with all its future franchise agreements. Failure to hand over this information does not make the individual franchise agreement automatically null and void. Failing such information could give a franchisee a good argument for pleading that an onerous clause in his agreement should be declared unreasonable, thus null and void under section 36 of the Swedish Contract Act, if he has not been informed by this clause and as this lack of information is a breach of a mandatory obligation to inform. Although, this argument has yet to be tested before a district court and at the end by the Swedish Supreme Court in order to establish a precedent for such argument.

usa

Harold L Kestenbaum Owner Tel: 516-745-0099 Fax: 516-745-0293 hkesten@att.net www.thefranchiseguru.net

I am a transactional franchise attorney in NY, US representing only franchisors (both start-up and established) for over 35 years, and have represented over 500 companies. I have written So You Want To Franchise Your Business on ‘how to franchise your business’. Franchising in the US is much regulated, at federal level by the Federal Trade Commission and by 15 individual states. We have the FTC Rule that governs franchising and then there are 15 states that have pre-sale disclosure laws. Franchisors are typically corporations or limited liability companies. Foreign companies that wish to franchise in the US must comply with the FTC Rule and with the individual states that have franchise disclosure laws. Each of the 15 states has their own statutes that govern the sale of franchises, and each state has registration laws that must be complied with unless the franchisor falls within one of the limited exemptions. Each statute has its own exemptions, as does the FTC Rule. The FTC Rule is a disclosure law, not a registration law, but the 15 states do require some type of registration or filing before a company can legally sell a franchise to a resident of that state. The FTC Rule and the states require disclosure 14 days prior to the signing of the franchise agreement or before any money can exchange hands. The franchise disclose document must be updated at least annually if there have been any material changes. The FTC has its own enforcement policies, as do each of the 15 states. Franchisors are required to obey these disclosure laws or else franchisees will have remedies, such as rescission or damages, or both. The states are very tough when it comes to enforcement and will take remedial steps against franchisors that violate state laws. Foreign franchisors coming into the US must retain franchise counsel to navigate these tough disclosure laws. Foreign franchisors are not treated any differently in the US; they must comply with the federal and state franchise laws. In addition, there are 24 states that have franchise relationship laws that must be adhered to once the franchise relationship has been entered into. These state laws are enforced to protect the franchisees, and franchisors must follow these laws or be subject to sanctions. These laws regulate the termination and renewal/non-renewal of franchise agreements and require franchisors to have ‘good cause’ before they can terminate a franchisee or not renew a franchise agreement. More franchisors are requiring arbitration (typically quicker and many times is less costly) as opposed to judicial resolution of disputes. Some, however, prefer judicial resolution. Foreign franchisors can have great success in the US if they follow the laws and hire US attorneys and franchise consultants to help them navigate the myriad of laws and regulations regarding franchising.

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frANCHISING YOUR BUSINESS

germany

Patrick Giesler Partner Tel: 0049 228 72636-32 Fax: 0049 228 72636-77 giesler@meyer-koering.de www.meyer-koering.de

A focus on international expansion of franchise networks The result of a merger of two well-established German law offices, both dating back to the beginning of the 20th century, MeyerKöring combines a fresh perspective with more than a century of tradition. With a total of no more than 30 lawyers, Meyer-Köring, a medium-sized operation by German standards, pursues a policy preferring strict quality standards, highly personalised client-lawyer relations and arm’s length working processes over rapid growth. Long-standing relationships provide a high degree of insight into clients’ specific legal concerns, financial issues or personal situation, allowing the professionals at Meyer-Köring to identify, avoid or resolve conflict, and enabling sensitive and capable problem-solving. For many years, the firm has been active in the field of franchising law throughout Germany and other European countries. Today, Meyer-Köring are advisers to more than 150 franchisors in Europe and North America. The firm has particular experience in the development, reorganisation and expansion of franchise networks. Its franchise practice group focuses exclusively on advising franchisors and master franchisees in the optimisation and management of franchise networks. It is Meyer-Köring’s paramount priority to advise franchisors not only in the field of franchising law but, equally important, also in strategic questions with respect to international expansion. According to Who’s Who Legal, Dr Patrick Giesler, who heads the franchise practice group, is one of the leading German franchise lawyers. He is the author of numerous books and publications on franchising law. Furthermore, Dr Giesler is president and founder of the International Franchise Lawyers’ Association, a world-spanning network of law firms specialising in this field. Catering to the needs of foreign clients also outside and beyond the domain of franchising, Meyer-Köring, from its Berlin office, operates an international department where lawyers, fully conversant in English and French, provide advice and guidance to companies from all fields of business life, to foreign states and diplomatic missions as well as to banks, real estate partnerships and individual investors. Key specialisations are in real estate and labour law.

united kingdom

David Bigmore & Co. David Bigmore Managing director, David Bigmore Limited Tel: +44 (0)1978 855058 Fax: +44 (0)1978 854623 db@dbigmore.co.uk www.dbigmore.co.uk David Bigmore & Co is a specialist franchising law firm in the North West of England that works in conjunction with Goodman Derrick LLP based in the City of London. David Bigmore has specialised in franchising for 25 years and is acknowledged as one of the leading experts in franchising law in the UK. The firm advises on international franchising, master licensing and area development agreements, setting up franchises in the UK and represents many franchisors and franchisee associations in all aspects of franchising. There are no special laws that apply to franchises: the general law applies. Franchise agreements are therefore governed by the same rules applying to all contracts. There are no laws in the UK requiring franchisors to register with any governmental authorities. Similarly, there is no legal requirement for any pre-contractual disclosure to be made to franchisees. The British Franchise Association (BFA), a voluntary body that regulates its franchisor members in the UK, does have a requirement for certain disclosure, but this is part of the BFA’s Code rather than a legal requirement. While there are no special statutory rules or legislation for franchising, there is a growing amount of case law developed by judges in recent years. A franchisor cannot derogate from grant (the Fleet Mobile case [2006]). If a franchisee is ‘holding over’, he will be entitled to reasonable notice to terminate, the length of which notice will depend upon all of the circumstances of the case (the Swinton case [1998]). The Swinton case also decided that, in the absence of express terms to the contrary, there is no obligation on a franchisor to renew a franchise agreement. In the UK, franchising is governed by the Competition Act 1998. There was formerly an exclusion for vertical agreements (including franchise agreements) that was scrapped some years ago. For the most part, the provisions of the Competition Act reflect the antitrust provisions of the EU (except that they are applicable only within the UK). The main provisions are divided into two: the Chapter I prohibition and the Chapter II prohibition. The Chapter I prohibition reflects the provisions of article 101 of the Treaty on the Functioning of the European Union (TFEU). The Chapter II prohibition reflects the provisions of article 102 TFEU. The Chapter II prohibition (abuse of a dominant position) is rarely relevant in franchising. The Chapter I prohibition may be relevant if the franchisor has a significant market share in the UK. In addition to domestic competition law, EU competition law will apply directly in the UK. Article 101 TFEU (formerly article 81 of the Treaty of Rome) will apply if the franchise agreement has the object or the effect of preventing, restricting or distorting competition within the EU.

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austriA

Gerhard Hochedlinger Partner of HLMK attorneys at law Tel: +43 1 533 70 77-0 Fax: +43 1 533 70 77-77 hochedlinger@hlmk.at www.hlmk.at

Franchising in Austria - chances and risks Numerous international franchise systems keep trying to get a foothold in the Austrian market. One important prerequisite for a successful market entry, however, is sufficient consideration of the applicable legal framework. Austria does not have a separate law on franchising agreements. However, this does not imply that the field is dominated by anarchy and freedom. Besides European legislation, important individual legal regulations, as well as Supreme Court findings on issues pertaining to the distribution of goods and services, are highly relevant. For example, if an individual franchising agreement is deemed to be a ‘contract form’ (which may apply in case of conclusion of a large number of franchising agreements of identical content), so-called ‘unusual contract elements’ may not constitute part of the agreement. Furthermore, it can have an effect on the design of the franchising agreement (eg, as regards arbitration clauses) if a (future) franchisee is a natural person. Indeed, in some respects, franchise legislation is rather friendly to the franchisee. Thus, the question as to whether, upon termination of the franchising agreement, the franchisee is entitled to compensation in the same way as a commercial agent can often be answered in the affirmative by court rulings in Austria. What is more, the Austrian Commercial Code even sets forth a kind of investment compensation according to which particularly franchisees, upon termination of their contractual relationship with the franchisor, are entitled to compensation for investments they were obliged to undertake under the franchising agreement to the extent such investments have not paid off yet at the time of termination.

On the other hand, in contrast to the situation of commercial agents, most existing literature finds a stipulation of a post-contractual noncompete clause for the franchisee admissible. Litigation between franchisors and franchisees often deals with the issue of disclosure requirements concerning the franchisor. There are no statutory disclosure rules governing the specific extent of disclosure requirements in Austria, but franchisors are well advised to disclose to (potential) franchisees the most important data of the franchise system. It is therefore obvious that franchising in Austria requires a contact who is familiar with all these legal questions, some of which are outlined above. One of the top experts on legal questions regarding franchising is Gerhard Hochedlinger of HLMK attorneys at law, a Vienna-based law firm focusing on all questions of distribution law. Gerhard Hochedlinger’s experience, competence and business acumen form the cornerstone of his consulting services. Easy access and quick response times set HLMK apart from other law firms. The partners of HLMK always offer clients personal, direct and individual service.

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Libya - Gadaffi’s Black Gold

Gadaffi’s Black Gold: The effect of the Libyan crisis on the global oil market By Robin Whitlock In order to understand how the Libyan crisis has affected the global oil market it is important to know how global oil economics work generally, or, put more simply, what factors affect the price of oil.

This is a topic which is most often dealt with by economists and investors, but the basics of it are relatively easy to understand. Like any other commodity, the price of oil fluctuates in accordance with the level of supply and demand. This is in turn affected by various geopolitical factors, such as the state of world economies, extreme weather events that affect drilling and refinery equipment and also wars and political strife. During times of recession demand for oil may decrease which in turn lowers the price per barrel. This occurs as people cut down on the consumption of goods manufactured from oil derivatives, such as plastic and other synthetic materials, and also change the way they travel and heat their homes. Production levels are controlled by OPEC, the Organisation of Petrol 66 • GBM • May 2011

Exporting Countries, whose members include Iran, Iraq, Kuwait, Saudi Arabia, Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria and Venezuela. OPEC’s major role is to keep global oil prices more or less around $30 per barrel. Increasingly, this has become somewhat difficult, for a whole variety of reasons. A brief post-war history of global oil prices Over the course of the post-war period, following the end of the Second World War in 1945, the median price for global oil has hovered at around $19.60 (2008 prices). Only half that period of time has seen prices exceed this figure (Williams, undated). In the early 1970’s the US ran out of spare production capacity and this

meant that it no longer had any means by which it could impose an upper limit on oil prices. Subsequently, the ability to control global oil prices passed from the US solely to OPEC. This was tested a few years later during the Yom Kippur Arab-Israeli war in 1973 when a number of oil exporting countries placed an embargo on exports to countries supporting Israel. This produced a number of ‘oil shocks’ when the price of oil in western countries escalated dramatically. Similar events such as the 1979-1980 Iranian revolution, the subsequent Iran-Iraq war, two Gulf wars against Iraq have also led to dramatic price increases. Furthermore, these events have reduced the production capacity of Iran and Iraq which remains a factor

both in global oil production and in pricing. Over the years since the 1970’s oil shocks, OPEC has had mixed, some would say limited, success in controlling oil prices which have generally continued to rise. Throughout 2000, the global oil price has continued to rise as a result of increased demand from US and other world economies. In 2000 OPEC adopted a price band of between $22 - $28 per barrel. This had to be abandoned in 2005 because of declining capacity and the resulting increase in prices which OPEC has largely been powerless to prevent. During the course of 2000 OPEC granted a number of quota increases, but this failed to reduce the price. In November 2000 a final attempt succeeded and the price began to fall. This downward continued in the wake of the September 11th attacks. In subsequent years increased demand alongside the loss of capacity in Iran and Venezuela meant that OPEC started to eat into its excess production capacity. For example in 2002 there was in excess of 6 million barrels per day spare capacity but by 2004-5 this had shrunk to under a million. A million barrels per day is not enough to cope with any loss of production that might be incurred by OPEC member states. Since 2005 the price of crude has continued to escalate and now stands at over $100 a barrel. The International Monetary Fund (IMF) has recently stated that it expects the price to average around $107 per barrel over the course of this year (Barr, April 2011). Libya’s oil industry On February 22nd this year Reuters reported yet another oil price rise in response to the wave of unrest sweeping Middle Eastern countries and particularly Libya. So where does this leave the oil industry in Libya itself? Prior to the Libyan crisis the country produced 1.6 million barrels per day and stood at 17th in the list of large oil producing nations, being the 3rd largest oil producer in Africa. Libya holds the largest oil reserves on the African continent, most of the oil being light crude. Most of the country’s oilfields are located in and around the Sirte basin which contain around 80% of the country’s proven reserves, but other important fields include the Ghadames and the Cyrenaica

Basins and another field at Murzuq in the south. Al Jazeera has reputedly claimed that one oilfield at Nafoora in the Sirte Basin has stopped production. The Libyan oil industry is run by the stateowned National Oil Corporation which implements production and exploitation sharing agreements with international oil companies alongside its own oil operations which, in conjunction with various smaller companies, accounts for 50% of the country’s annual oil output (Williams, N. 2011). International oil companies involved in Libya include Eni, StatoilHydro, BP, Occidental Petroleum, OMV, ConocoPhillips, Hess Corp, Marathon, Shell, ExxonMobil and Wintershall, the latter company being a subsidiary of BASF. Libya is a net exporter of oil with its own domestic consumption limited to 270,000 barrels per day. The oil is exported through six large ports, five of which are in the eastern part of the country at Es Sidr, Marsa el Brega, Ras Lanuf, Tobruk and Zuetina. The sixth port is situated near Tripoli at Zuetina in the western part of Libya. There are five domestic refineries which maintain a capacity of 378,000 barrels per day. Over 85% of Libyan oil goes to Europe, with around 13% going to Asia (Williams, N. 2011). According to the Reuters report when the Libyan crisis began oil companies started to reassess their operations in the country and some oilfields experienced disruption, mostly due to a breakdown in communications. Libyan oil production is not sufficiently large enough to disrupt global oil supplies, but the main worry seems to be that the unrest will spread further afield to countries with larger reserves (Williams, N. 2011). Nevertheless, when the Libyan unrest erupted, oil prices in south-east Asia jumped to $99 a barrel and the International Energy Agency reported that production had been reduced to 750, 000 barrels per day (Kennedy, 2011). That was in February. By late March, Time Magazine was reporting that the Libyan oil industry is teetering on the edge of chaos and that the NOC has been placed under international sanctions with EU countries being banned from purchasing any Libyan oil (Walt, 2011). Meanwhile, workers from international oil companies have fled leaving Libyan nationals to try and maintain a basic level of operation. At least one subsidiary of NOC, Arabian Gulf Oil, has handed over its operations to rebel control. The result, according to energy analysts, is that oil production has now dwindled to between 200,000 and 300,000 barrels per day. With the natural resources now being split between east and west, the situation could degenerate into a long bloody war as each side taps into its oil resources, providing they can find customers. The rebel leaders have apparently already set up their own oil company with revenues being paid into the Central Bank of Bhengazi. How all this is going to develop is difficult to predict, but William Ramsay, a former US State Department official now working for the French Institute for International Relations in Paris, said recently that if security could be restored in both east and west Libya, you could still have major oil producing activity but that would require large customers like the EU ‘to give credibility to eastern authorities’. It is also clear that large western oil corporations could suffer since Gadaffi has threatened to shun those companies from countries involved in air strikes on his forces (Walt, 2011). May 2011 • GBM • 67

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produCt liABility lAw International organisation for Standardisation

The use of ISO/IEC standards in conformity assessment procedures allows for harmonization throughout the world and this, in turn, not only facilitates international trade between countries but also facilitates trade within countries by giving the purchaser of the product or service confidence that it meets the requirements.. should the product be found not to meet the specified requirements.

Conformity assessment can cover one or more of the following activities: - Testing of a product/service to determine if it complies or performs in accordance with the specified requirements. - Inspecting the manufacturing process of a product to ensure that it is manufactured in a safe manner and according to regulations (e.g. fire extinguishers). - Implementing a management system to ensure that products/services are produced or delivered by an organization in a consistent manner and meet customers’ expectations.

For manufacturers, it allows them to have peace of mind that they have implemented systems within their own organizations to ensure that the products and services they deliver meet the necessary criteria. The fact that their product or service meets ISO International Standards also gives them a competitive edge over those that do not. For regulators, it allows them to use the conformity assessment infrastructure as part of the process they use to ensure health and safety as well as environmental conditions are being continuously met. The regulator will often make conformity assessment obligatory when it involves health, safety and/or environmental issues. Without official assessment and approval the regulator may prohibit the sale of products and services.

Conformity assessment provides benefits to everyone in the supply and demand chain. This includes the consumer, manufacturer and the supplier. It also includes regulators who are responsible for ensuring the health and safety of the general public.

Therefore not only does conformity assessment provide confidence to consumers and purchasers but it also facilitates the free flow of goods and services between national boundaries.

The consumer benefits from conformity assessment, as it is a mechanism providing confidence to consumers that the products and services they purchase are fit for the purpose. It may also allow the consumer the possibility to seek appropriate remedies

This is the most common form of conformity assessment. Testing also provides the basis for other types of conformity assessment like inspection and product certification. Here a product is tested against a specified set of criteria. It can be used to make decisions on

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Testing

the performance of the product. Depending on the risk associated with the product, the testing laboratory may choose to be accredited. The general requirements for laboratories or other organizations to be considered competent to carry out testing calibration and sampling are specified in the joint International Standard ISO/IEC 17025:2005 General requirements for the competence of testing and calibration laboratories. Inspection bodies These organizations examine a huge range of products, materials, installations, plants, processes, work procedures and services, in the private as well as the public sector, and report on such parameters as quality, fitness for use and continuing safety in operation. The overall aim is to reduce risk to the buyer, owner, user or consumer of the item being inspected. The general requirements for the operation of various types of inspection body are given in the joint International Standard ISO/IEC 17020:1998 General criteria for the operation of various types of bodies performing inspection. Certiﬁcation/registration Certification/registration is when a third party gives written assurance that a product (including services), process, personnel, organization or management

system conforms to specific requirements. The terms certification and registration are interchangeable and the use of one over the other is largely dependant on the geographical region. management system certiﬁcation The most well-known examples are the certification of quality management systems and environmental management systems as conforming, respectively, to ISO 9000 and ISO 14000 standards. More than 800 000 organizations worldwide have been certified to ISO 9001 and/or ISO 14001. It should be noted that ISO itself does not assess the conformity of quality or environmental management systems to ISO 9000 or ISO 14000 standards. ISO does not issue certificates of conformity to these standards. ISO 9001 and ISO 14001 certification is carried out independently of ISO by the many certification or registration bodies active nationally or internationally. Although ISO does not control the certification bodies, it contributes to best practice and consistency in their activities through the development of standards and guides. ISO/IEC 17021:2011, which gives general requirements for bodies providing audit and certification of management systems, is applicable for all types of management systems generally. ISO has developed some sector specific management standards which all have their basis in ISO/ IEC 17021 and only differ in those areas which are deemed absolutely necessary and relate specifically to the discipline covered. For example, food safety and ISO/ TS 22003, developed for the certification of management systems related to food safety. The list of accreditation bodies with their contact information and links to their Web sites can be found on the Internet site of the International Accreditation Forum (www. iaf.nu), under “Members” > “Accreditation members”. In general, accreditation bodies’ Web sites contain an up-to-date list of certification bodies that they have accredited which can be used for selecting a certification body. Product certiﬁcation ISO/IEC Guide 65:1996 General requirements for bodies operating product certification systems can be used in combination with a number of related product standards and guides to demonstrate that a product complies with specified criteria. There are other standards within this family of standards that give guidance of the various types of product certification schemes which can be used.

Product certification may consist of initial testing of a product combined with assessment of its supplier’s quality management system. This may be followed up by testing of samples from the factory and/or the open market. Other product certification schemes comprise initial testing and surveillance testing, while still others rely on the testing of a sample product - this is known as type testing. The type of product certification scheme chosen will depend on the level of risk to the consumer as well as other factors. For a very low risk product you may have a once-off type test and for a high risk product you may have a scheme which has type testing, requires an ISO 9001 management system in place with regular product testing from the factory and also products taken from the outlets for testing. Personnel certiﬁcation ISO/IEC 17024:2003 specifies requirements for a body certifying persons against specific requirements, including the development and maintenance of a certification scheme for personnel. A listing of all CASCO documents (referred to collectively as the CASCO toolbox) is available under the section Publications and Resources. accreditation Accreditation is the procedure by which an authoritative body gives formal recognition that a body or person is competent to carry out specific tasks. In relation to management systems, an accreditation body will evaluate the competence of a certification body to perform the certifications for which it wishes to be accredited. Once accredited, this indicates to the client of the certification body that its competence to do the certifications has been independently confirmed. Accreditation of testing laboratories, product certification and inspection bodies is also carried out. This again is independent verification that they are competent to perform the activities for which they are accredited. Some conformity assessment bodies may wish to distinguish themselves from their competitors by having an impartial evaluation of their competence by an accreditation body based on internationallyrecognized criteria. These criteria are contained in ISO/IEC 17011 Conformity assessment - General requirements for accreditation bodies accrediting conformity assessment bodies. These conformity assessment bodies are then said to be accredited. Mutual recognition agreements (Mra’s) The primary objective of conformity

assessment is to give its users confidence that requirements applicable to products, services, systems, processes and materials have been met. One of the reasons why internationally-traded goods and services are subject to repeated conformity assessment controls is a lack of confidence by users of conformity assessment in one country regarding the competence of bodies carrying out conformity assessment activities in other countries. Therefore, measures are needed to increase the confidence of both private and public sector purchasers, and of regulators, in the work of conformity assessment bodies and accreditation bodies - particularly those in other countries. Such confidence can be achieved through cross-border cooperation among conformity assessment bodies and also among accreditation bodies. This cooperation is formalized in what are known as Mutual Recognition Agreements/Arrangements (MRAs) whereby the parties involved agree to recognize the results of each other’s testing, inspection, certification or accreditation. MRAs can be an important step towards reducing the multiple conformity assessment that products, services, systems, processes and materials may need to undergo, especially when they are traded across borders. Since MRAs facilitate the acceptance of goods and services everywhere on the basis of a single assessment in one country, they contribute to the efficiency of the international trading system to the benefit of suppliers and customers alike. ISO/IEC Guide 68:2002 provides an introduction to the development, issuance and operation of arrangements for the recognition and acceptance of results produced by bodies undertaking similar conformity assessment and related activities. Supplier’s declaration of conformity (SDoC) By making a self-declaration of conformity, a supplier organization avoids the costs of third-party assessment but commits that they do in fact meet the criteria and should be able to demonstrate this should they be so requested. A supplier may decide to take this option if it believes that it enjoys a sufficiently high market reputation for it to dispense with independent confirmation of conformity. However, a supplier’s declaration may not be appropriate in all cases, particularly where the health, safety or environmental risks of the product concerned are high. A self-declaration does not exempt the supplier from its responsibility to meet relevant regulations for example, in relation to product liability - and such declarations generally need to be accompanied by effective post-market surveillance. ISO/IEC 17050 specifies the general criteria for a supplier’s declaration of conformity in relation to International Standards.

For more information please visit www.iso.org/iso/home.htm May 2011 • GBM • 69

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Germany Carroll, Burdick & Mcdonough International LLP Dr. Ralf Deutlmoser, LL.M. Partner Tel: +49.7031.439.9615 Mob: +49.172.730.1901 Fax: +49.7031.439.9602

rdeutlmoser@cbmlaw.com www.cbmlaw.com

Mediation: Settle your dispute without creating a loser Not every dispute is right for mediation but smart dispute resolution professionals keep alternative dispute resolution (ADR) in mind in every case. Dispute resolutionoriented attorneys living up to today’s client expectations must not only be litigation experts, but should also advise about ADR and ensure the proper dispute resolution procedure is selected. Classic B2B-conflicts are currently solved by direct negotiations and/or court proceedings (PwC/Europa-Universität Viadrina, Commercial Dispute Resolution I, Study 2005, p13), despite enterprises being highly critical of the court system, perceiving it as slow, expensive and cumbersome. Despite clarity in what they desire from conflict resolution mechanisms, and negative experiences in litigation, enterprises act contrary to their institutionalised knowledge and continue to choose the court system over the much higher rated mediation (PwC/ Europa-Universität Viadrina, Commercial Dispute Resolution II, Study 2007, p13 f.), creating a Dispute Resolution Paradox. The European Mediation Directive 2008/52/ EC (MD), and the proposed German Mediation Law (ML (Reg-R)) implementing it, aim to boost ADR to avoid time/moneyconsuming, stressful litigation (German Attorney General press statement 12 January 2011). The MD provides a legal framework for cross-border mediation only, stating: “[…] mediation can provide a cost-effective and quick extra-judicial resolution of disputes […] through processes tailored to the needs of the parties”. As there is no reason to limit the beneficial aspects of mediation to cross-border conflicts, the ML (Reg-E) is not restricted to cross-border disputes (Draft of the German Bundesregierung, 8/12/2010, p16). Parties will likely engage in open and honest discussions only if they are certain none of the shared information can be used in a later proceeding should the mediation not end in an amicable solution. The MD requires member states to ensure that the mediator shall, unless otherwise agreed by the parties, not be compelled to give evidence in a court proceeding or arbitration regarding information arising out of or in connection

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with a mediation (mediation information), absent an applicable exception. The scope of confidentiality sought by the MD is insufficient to properly ensure the parties’ reliance on the safe sharing of mediation information. The ML (Reg-E) sets forth a general professional secrecy obligation for mediators that results in a privilege to refuse to give evidence under the German Code of Civil Procedure (ZPO). However, even this falls short of reaching the confidentiality level required. Accordingly, the German Bundesrat opined that a dispositive prohibition on the taking of evidence relating to the mediation session, as well as a pleading prohibition covering the same, would be preferable (Statement of the Bundesrat, BR-DS 60/11, p11; rejected by Statement of the Bundesregierung, BT-DS 17/5496, p5 f.). Therefore, currently confidentiality agreements drafted by experienced counsel are essential, especially in cross-border disputes. Unfortunately, whether parties’ attorneys may attend the mediation session is in question. Under the ML (Reg-E), they are considered third parties (Draft of the German Bundesregierung, 8/12/2010, p16) whose attendance requires consent. Parties need to trust that their participation does not subsequently worsen their position in litigation or arbitration should the mediation fail; one of the main concerns is the expiration of limitation periods while the parties are in mediation. According to §203, 1 ZPO, the statute of limitations is tolled in the event the parties are engaged in negotiations. Mediation and negotiations about the feasibility of mediation constitute such negotiations (Draft of the German Bundesregierung, 8/12/2010, p16). However, the ML (Reg-E) deals insufficiently with cut-off periods. Unfortunately, the current draft requires this issue to be dealt with by contractual agreements between the parties (Diop/Steinbrecher, BB 2011, 131, 134). While agreements reached in mediation are commonly complied with (Eidenmüller/ Prause, NJW 2008, 2737, 2740), the member states shall ensure that the parties can request that mediation agreements be made enforceable unless contrary to the law of the member state where the request is made

(MD, article 6). §796d ZPO will provide a cheap and easy means of obtaining an enforceable instrument upon the request of all parties from the competent district court. Mutual trust with respect to confidentiality, effect on limitation periods and enforcement shall be fostered by certain quality and quality control measures to be decided upon and implemented by the member states. According to the MD, the member states should encourage the initial and further training of mediators, the development of and adherence to voluntary codes of conduct and the introduction of appropriate quality control measures. §5, ML (Reg-E) requires the mediator to vouch that he/she has the necessary theoretical and practical experiences to expertly guide the parties through the mediation process. As it is highly disputed whether federal minimum standards should be established (the current draft contains none), it remains to be seen how the final version of the law will look. The MD and ML (Reg-E) are a step in the right direction. However, while a legislative framework should prove helpful, a true change in the legal culture will only happen if the Dispute Resolution Paradox is overcome by sophisticated parties and practical and innovative counsel. Dr Ralf Deutlmoser is licensed to practice law in Germany and the US (New York) and a certified mediator (CVM). His practice focuses primarily on international dispute resolution. Since 2001, he has been actively involved in numerous mediations, mostly related to product liability and class action litigation in the US. Dr Deutlmoser is particularly interested in German and transnational ADR and dispute resolution in the supply and distribution chain. He also works with clients to establish conflict management programmes, be it within or between enterprises or between enterprises and their customers. Carroll, Burdick & McDonough is a global leader in international defence work. Clients are provided with cost-effective services, including international product defence coordination and litigation, warranty litigation and claims management, global regulatory compliance advice and document retention and preservation solutions.

Spain Hogan Lovells LLP Joaquin Ruiz Echauri Partner Tel: + 34 91 349 8200 Fax: + 34 91 349 8201 joaquin.ruiz-echauri@hoganlovells.com www.hoganlovells.com

Spanish general regulations concerning product liability claims are nowadays consolidated into the Royal Legislative Decree 1/2007, dated 16 November 2007 (RDL 1/2007). RDL 1/2007 does not set out a specific definition of a defective product, but article 137.1 refers to defective products as those that “do not provide the safety which a person is entitled to expect, taking all circumstances into account”. Therefore, according to this definition, the main characteristic of a defective product is its lack of safety, and not its suitability for its use. Where article 137.1 refers to the circumstances to be taken into account in order to decide if a product is defective or not, it lists the following factors: the presentation of the product; the reasonably be expected use of the product; and, the time the product was put into circulation. There is plenty of case law in Spain referring to this concept of defective product and the interpretation of these three circumstances. For example, the judgement dated 19 February 2007 of the Spanish Supreme Court points out that the main characteristic of a defective product is its lack of safety according to what a person is entitled to expect. Article 137.2 states that the standard of safety to be taken into account is that provided by products resulting from the same batch. Note that the lack of safety is not the same concept as the accomplishment of regulatory manufacturing rules applicable to the products. In spite of the fact that a product counts on the administrative licences to be in circulation in Spain, it may be considered as defective according to article 137.1 if it is affected by a lack of safety (Supreme Court Judgments dated 10 June 2002 and 20 September 2006) RDL 1/2007 lists the agents that may be found liable for defective products, including the manufacturer of the finished goods and also the producers of some components of the product, and even, under certain circumstances, the suppliers. Article 135, RDL 1/2007, sets out the general principle by which “the producer shall be liable for damage caused by a defect in his product”. This article also states that the term ‘producer’ does not only include the

one that manufactured a finished product but also the producer of any raw material or the manufacturer of a component of the product and any person who puts his name, trademark or other distinguishing feature on the product presenting himself as its producer as per article 5 of RDL 1/2007. On the other hand, according to article 132, RDL 1/2007, when two or more persons are liable for the same damage, they shall be liable jointly and severally. Section 2 of article 138, RDL 1/2007, adds that, where the producer of the product cannot be identified, each supplier of the product shall be treated as its producer unless he informs the injured person, within three months, of the identity of the producer or of the person who supplied him with the product. In addition, it states that the supplier is liable in those cases in which it is proven the he was aware of the defect on the product at the time it was supplied to the customers.

To help on these matters, our Spanish product liability team is composed of specialists in different industries and sectors: aviation (Luis Alfonso Fernandez Manzano), automotive (Jose Luis Huerta) and pharma (Joaquin Ruiz Echauri) are three among other examples. Our expertise (both as seasoned litigators, specialists in expert-witness techniques in Spanish Courts and also in proceedings before Court related to valuation of personal and moral damages), united with our ability to define the best corporate communication technique in cases of crisis arising from product liability news leaking to the Spanish media, make our team a solid and mighty ally on claims and losses related to alleged product liability cases.

According to article 139, RDL 1/2007, the injured person shall be required to prove: the damage; the defect; and, the causal relationship between defect and damage. The producer shall not be liable if he proves that one or more of the following exonerating circumstances take place: when the manufacturer proves that the product has not been put into circulation by him; having regard to the circumstances, it is probable that the defect that caused the damage did not exist at the time when the product was put into circulation by him or that this defect came into being afterwards; that the product was neither manufactured by him for sale or any form of distribution for economic purpose nor manufactured or distributed by him in the course of his business; that the defect is due to compliance of the product with mandatory regulations issued by the public authorities; and, that the state of the art at the time when he put the product into circulation was not such as to enable the existence of the defect to be discovered. With respect to the exonerating circumstance letter (d), it should be noted that Spanish Courts find relevant the fact that the product complied with all the administrative authorisations at the moment it was put into circulation.

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produCt liABility lAw

Brazil Veirano Advogados Associados Rosângela Delgado Partner at the litigation department Rosângela Delgado rosangela.delgado@veirano.com.br Tel: (55-21) 3824-4747

an Overview of Product liability in Brazil Product liability used to be governed by the general liability rules of the Brazilian Civil Code of 1916 until the Consumer Defence Code (“CDC”) was enacted in 1991. The elaboration of the CDC was a direct consequence of the Brazilian Federal Constitution of 1988, which expressly established in its article 5, XXXII, that the State would promote consumer’s defence by law. The CDC was enacted to meet the needs of consumers, ensure the respect to their dignity, health and safety, and the protection of their economic interests, as well as to improve their life quality and the harmonization of consumer relations. Since its enactment in 1991, the CDC has become one of the most popular laws ever passed in Brazil, not only in the judiciary, but amongst the population in general. The CDC introduced several innovations to facilitate the protection of consumers’ rights, among which: (i) strict liability of the manufacturer (i.e., not fault-based); (ii) shifting of the burden of proof in court; (iii) possibility of modifying contractual clauses harmful to the consumer and the nullity of abusive clauses; (iv) protection against misleading and abusive advertising; and (v) creation of administrative consumer bodies to inspect compliance with the CDC, settle disputes or impose sanctions at an administrative level.

The CDC forbids misleading and abusive advertising. Misleading advertising is that which is totally (or partially) false and can lead consumers into error concerning any characteristic of the product, even by omission. Abusive advertising is the one which is discriminatory in any form, incites violence, exploits fear or superstition, takes advantage of children’s’ judgment limitations, disrespects environmental values, or can cause consumers to behave in a way detrimental to their safety or health. Information plays a very important role and manufacturers are required to be accurate and clear on quantity, characteristics, composition, quality, price and risks associated with the product. The strict liability regime can be considered the most advanced innovation introduced by the CDC, as it does not require consumers to prove that manufacturers acted with guilt.

Most of the above changes are open legal concepts, as there is no exact definition in the law as to most of these terms. The shifting of the burden of proof, for instance, should be applied whenever, at the judge’s discretion, the consumer’s allegation seems credible or when the consumer is incapable according to the ordinary rules of experience. This constitutes an important mechanism to balance the unequal forces of consumers and manufacturers, in litigation.

In this regard, the CDC established the concepts of (i) product defect, when a product does not offer the safety legitimately expected from it, considering its presentation, risks reasonably anticipated and time when it was placed into the market; and (ii) product vice, when the product does not meet, or poorly meets, its own finality. While in the first case the concern lies in the product safety to avoid the so-called “consumption accident”, the latter aims at ensuring the product will meet its quality and quantity standards.

The CDC allows consumers to review contractual clauses imposing disproportional obligations or those which become excessively onerous. It specifies several abusive clauses that are null and void, leaving the list open to additional ones to be identified case by case.

The CDC created administrative consumer bodies, such as the PROCONs, which may settle disputes between consumers and manufacturers and impose administrative fines for failure to comply with CDC rules. The CDC also created Public Attorneys’ Offices fully specialized and dedicated to

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consumer protection, which, along with the Consumer Protection and Defence Department and PROCONs, are very active in conducting preliminary investigations which can lead to the filing of collective lawsuits. The ability to successfully negotiate with such authorities has proven to be an effective tool to prevent litigation. Finally, Brazil has seen an increase in the number of collective consumer lawsuits in recent years. The CDC provides for the collective protection of diffuse rights (transindividual, indivisible, belonging to a group linked by a factual circumstance), collective interests (transindividual, indivisible, belonging to a group linked by a juridical relationship); and homogenous individual rights (deriving from a common origin). Public Attorneys’ Offices, the Public Defender’s Office, the Federal Union, States, Municipalities, Public entities and civil associations, which include consumer defence among its institutional purposes, have legal standing to file such collective consumer lawsuits. Though the CDC has brought many important innovations to product liability rules in Brazil and is still viewed as an effective consumer protection system, more than two decades have gone by since its enactment. Thus, some respected scholars and magistrates have recently started to work on a proposed amendment, so far focused on super indebtedness and electronic contracts. The amendment is expected to be voted by the Legislature and enacted within the next two years.

England & Wales Dr Adela Williams Arnold & Porter (UK) LLP Partner Tel: +44 207 786 6100 Fax: +44 207 786 6299 adela.williams@aporter.com www.arnoldporter.com

Product liability In england and Wales In England and Wales, claims arising from harm caused by products may generally be brought in contract, strict liability or in negligence and are often advanced on more than one basis. The term “product liability” is often however used to refer to the strict liability regime and this article accordingly focus on claims under the Consumer Protection Act 1987 (the CPA), implementing the European Product Liability Directive 85/374/EEC in the United Kingdom. Strict liability under the Consumer Protection act 1987 The European Product Liability Directive was intended, firstly, to remove barriers to trade created by variations in regimes for claims in respect of defective products across the Community and, secondly, to protect consumers by providing for compensation for personal injury and loss attributable to defective products. The Directive imposes liability on the producer of a defective product, defined as the manufacturer, person who affixes his own brand to the product, the importer or any supplier who fails to notify a claimant of the identity of the person from whom he obtained the product. There is no requirement to establish fault by the producer, but a claimant must prove that the relevant product was defective and that the defect has caused him to suffer harm. Various defences are provided. The UK CPA applies to products supplied after 1 March 1988. It largely follows the wording of the Directive, although there are some significant differences. Section 3 provides that “there is a defect in a product … if the safety of the product is not such as persons generally are entitled to expect …”. In determining the safety which persons generally are entitled to expect, all the circumstances shall be taken into account, including the manner and purposes for which the product has been marketed, any instructions or warnings provided in relation to the product and the time when it was supplied by the producer to another. The meaning of “defect” was considered by the Court in A v National Blood Authority [2001] 3 All ER 289, brought by claimants infected with hepatitis C through

contaminated blood transfusions. The Judge in that case considered the factors which were “relevant circumstances” for assessing the safety which persons generally are entitled to expect, concluding that the “benefit/risk” profile of the product and the knowledge of treating doctors as to the risks (in that case information was not provided directly by the National Blood Authority (NBA) to patients) should not be taken into account. He said that while it was not possible, at material times, for the NBA to determine whether a particular transfusion was contaminated or to prevent such contamination, the public at large was entitled to expect that transfused blood would be free from infection. He therefore found that the blood transfusions which had infected the claimants were defective for the purposes of the CPA and the Directive. This decision has however been the subject of considerable academic criticism and, significantly, it has not received detailed consideration or approval by the higher courts. Defences to a finding of a defective product are provided at Section 4(1) of the CPA, namely: the defect is due to compliance with legal obligations imposed by UK or EU law; the defective product was not supplied by the defendant; the product was not supplied for profit and in the course of business; the defect did not exist at the time the product was supplied; the state of scientific and technical knowledge at the relevant time was not such that a producer of products of the same description as the product in question might be expected to have discovered the defect if it had existed in his products while they were under his control (the so-called development risks defence). The wording of the development risks

defence in the CPA is different from that contained in the Directive and was the subject of proceedings brought by the European Commission against the UK Government under Article 169 of the Treaty (Commission -v- UK, Case C-300/95, 1-2663). The issue raised by the Commission was that Section 4(1)(e) of the CPA introduced a subjective element (the conduct of the reasonable producer) creating a negligence based regime rather than that of strict liability under the Directive. The European Court of Justice dismissed the Commission’s application, finding there was no evidence that the English courts would apply Section 4(1)(e) of the CPA inconsistently with the Directive. Under the CPA compensation may be awarded for personal injury and damage to property (subject to a minimum threshold of £275). Exemplary or punitive damages are rarely awarded for these type of claims. Procedural matters and costs Claims under the CPA are heard by a judge sitting alone. The current position is that an unsuccessful party will generally be ordered to pay the successful party’s reasonable costs of bringing an action. Claims in tort must generally be brought within six years of the date on which the cause of action accrued, although personal injury actions must be brought within three years of the date when the cause of action accrued (i.e. the date of injury or death) or three years of the date of knowledge, if later. CPA claims are subject to a longstop provision and are extinguished ten years after the relevant product was put into circulation.

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Country FoCus - QAtAr

QaTaR

History Qatar is a Middle East country that has been inhabited for many millennia. However Qatar, as we truly recognize effectively starts in 1868 when the Bahraini rule of the Al Khalifa family ceased. At the request of the Qatari nobles of the time the British effected a settlement of the Al Khalifa reign and, in 1872, the Ottoman Turks assumed occupation. The beginning of the 1st World War saw the Turks withdraw to be replaced by the Al Thani family, who are still the ruling dynasty today. The first of these rulers was Sheikh Abdullah bin Jassim Al Thani who had his position strengthened by being recognized by the British, who agreed to offer protection form any sea based aggression, and to support any land attacks. A 1934 treaty strengthened these undertakings. The discovery of oil and its subsequent development in 1935 has been the principal factor in promoting the country’s prominence in the world’s economic field, as well as its prominence in the Middle East. The significant growth attributable to this oil was felt in the 1950’s and 1960’s when social and economic development really moved on apace, could be said to be a turning point in the country’s history.

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In 1971 the British protectorate agreement was annulled and Qatar gained its full independence. Since that date, and in particular with it benefiting from the ever-increasing oil prices, the economy has boomed. The legacy of the British presence in Qatar is that although the country is predominantly Muslim, there are a significant number of expatriates living there on a permanent and semi-permanent basis, and this has created a legal system that has a certain duality to it. legal System. Qatar is unique in that it operates two legal systems, Sharia and Adlia. The Sharia system is based on the teachings of the Qu’ran and is thus Islamic in application, whilst the Adlia system is a reflection of the British influence and is civil, operating on the basis of precedence. The Adlia court stands outside of the jurisdiction of the Emir and his courts and maybe said to be independent. It deals with civil matters, whereas the Sharia court has no differentiation between civil and religious laws. The court relies purely on the Qu’ran to guide the law, but as in all cases the interpretation is

selective. The rules on neither charging interest nor paying interest are flouted on a daily basis. The other issue attached to this court is that with the growing trend in fundamentalism the interpretation is now, on occasions, excessive. For this reason the rise in civil cases being heard by the Adlia court is very evident. In taking a case to the civil courts the laws are clearly prescribed. The original purpose of the establishment of the court that was to deal in disputes between foreigners and Qatar’s nationals has been retained, but the scope of the court extended. The growth in civil, criminal and labour laws has promoted the importance of the Adlia court. The Sharia courts do however continue to grow in Family Law matters. The strength of the Sharai courts is that they do influence government decisions. As to the future in these matters there would appear to be a strong case for both courts to continue in Qatar. Whilst the Adlia court has most certainly developed a niche, in that lawyers are now well skilled in Western law and thus practice in the Adlia courts on civil matters, the strength of Islam in Qatar will allow Sharia courts to continue. The problem is that a number of decisions of the Sharia courts are seen across the world at large as excessive and not in accordance with normally accepted practices, and the rise of fundamentalism is a catalyst in these matters. Dualism will exist for many years to come and this will on occasions lead to divisions with the society of Qatar, as the decisions of the Adlia court are often seen as contravening the Qu’ran. Political status. The political and economic future of Qatar is integrally bound into the Al Thani family. They as a family have held power since 1971 and at present that power rests in perpetuity. It is however fair to say that there is a gradual evolving from traditional society to a modern welfare state, but there are distinct limits on what one may call a democratic approach. Nonetheless there are now government departments established to deal with social and economic growth. The limitations of democracy can be traced to the Basic Law of Qatar 1970 which reinforce the Emir’s power and the Islamic stronghold on the country. There is rule by consensus with the right of appeal to the Emir, but this is a last resort. In effect the Emir himself cannot contradict Islamic (Sharia), law and traditions. The one indication of a move towards a country that wishes to listen to its people is the establishment of a Consultative assembly. At present it has some 35 members but there is a move to increase to 45. This was to be establish in 2007 but has now been deferred to 2013, thus this assembly which only has consultative powers appears to have limited significance. The claim that Qatar is developing into a constitutional monarchy does not yet pass the relevant tests. Economy. The economy is based on oil and gas exports. The rise in the price of these commodities has given growth to the Per Capita Income (PCI) as displayed by the figures below. Year (2000=100) (as % of USA) 1980 1985 1990 1995 2000 2005 2010

GDP

28,631 22,829 26,792 29,622 64,646 137,783 149,995

US Dollar Exchange

3.65 3.63 3.64 3.63 3.63 3.64 3.64

Qatari Qatari Qatari Qatari Qatari Qatari Qatari

Rials Rials Rials Rials Rials Rials Rials

Inflation Index

Per Capita Income

53 64 77 85 100 115 122

266.18 104.82 67.85 55.75 86.03 127.05 145.30

The fluctuations in the commodity market does impinge on the GDP and the per capita, however even allowing for the financial crisis recently experienced worldwide, it is apparent that the position of Qatar as the country with the second highest PCI behind Lichtenstein is being upheld. Indeed that PCI is synonymous with Qatar being the richest country in the Muslim world. The economy in the 70’s had an unsustainable growth of 1,1476% which, when oil prices fell in the 80’s, saw a very considerable drop to 57%. Oil demand has now allowed the growth pattern to be around 110% at present. To support the oil exports ammonia, fertilizers, petrochemicals and commercial ship repair bolster the exports. The principal partners for Qatar are Japan and South Korea. It will be seen from the above that the country has little need for public debt which at percent is 5.2% of GDP. Looking at revenues against expenses the latest figures show a surplus, year on year, of $13 million thus adding to a stable economy. No tax is payable on earnings generated in Qatar for the nationals of that country. Additionally no Value Added Tax or Wealth Tax is payable. Nonetheless some taxes are payable as follows: a) Corporation Tax which is mainly applicable to foreign companies. This tax is payable on a scale of between 5% and 35% with 35% being chargeable on all income in excess of QR 5million. b) Import duties on essential items which is imposed at a rate of 4% on most products. c) A service tax of 10% and government levy of 5% on restaurant and hotel bills. d) Self employed foreign professionals also have tax levied on their income at 10% if they are deemed as resident, whilst all non-residents will have withholding tax levied at between 5%-7% on their gross income. The future. What does the future hold for Qatar? The one thing that can be said with certainty is that the troubles present in the Middle East at present will not infiltrate Qatar. However there will be a need to recognize that democracy is a growing issue in that region and that Qatar cannot claim to be exempt from that. This could well lead to a bigger call for a constitutional monarchy as well as the Consultative Assembly’s size being ratified and that body assuming more than consultative powers. The greatest threat to the social development will be the fundamentalists within the Islamic faith. As social growth develops a lot of it will be in opposition to their views and Sharia Law. Careful handling of their views is needed so as not to disturb the stability of the country. The economy in the foreseeable future is soundly based as there are sufficient reserves in terms of both cash and commodities to ensure that GDP and PCI remain at their present levels, subject to world oil prices. The country attracts many people who are not of Qatar nationality to live there thus there is no labour shortage. The only possible negative on the horizon is that the exports to Japan may take a dip for a period, as yet not ascertainable, due to the recent tsunami, but Qatar would appear to have a solid future.

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Deal Directory

Admission to AIM - dotDigital Group Plc

Founded in 1999, dotDigital Group Plc (dotDigital) has grown to become a leader in the provision of intuitive ‘software as a service’ (SaaS) products for digital marketing professionals. These products include the dotDigital’s email marketing platform, dotMailer and e-commerce offering, dotCommerce. As part of its broader offering to help clients to grow their businesses online, dotDigital also provides search marketing services, digital strategy advice and managed services.

dotDigital is a full service digital marketing company and market leader in email marketing services. Founded in 1999 to provide bespoke website design and development services, the business is industry recognised through its market leading brand name ‘dotMailer’ - a service originally developed as an email marketing solution for a division of the BBC. In 2008, following the increasing focus towards digital marketing, the company underwent a rebranding, becoming ‘dotMailer – The Digital Marketing Agency’, providing website design and development, content management, e-commerce packages and survey tools. Devoted to innovative product platforms and excellent customer service, the company has developed strong brand recognition and loyalty. dotMailer listed on PLUS in February 2009 through the reverse takeover of West End Ventures Plc, which changed its name to dotDigital Group Plc. For more information please visit: www. dotdigitalgroup.com and www.dotmailer. co.uk Dealings in dotDigital’s shares started trading on AIM at the start of business on Tuesday 29 March 2011, and the market capitalisation as at admission was £21m, based on the middle market price of 7.875p per share as quoted on PLUS at the close of business on Monday 28 March. dotDigital employs 35 staff employed in six offices throughout the UK and has a support team in Minsk. With over 3,500 clients and very broad earnings across the client base with high levels of recurring revenues, dotDigital has a strong financial base: Year

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to June 2010 - £1.14m profit after tax on £6m turnover; interim results announced on 15 March 2011 show turnover and profits up by 48%; and, cash: circa £2m and minimal debt as at the December 2010 half year end. The directors of dotDigital remain committed to the delivery of products with recurring revenues and scalability. Accordingly, investment in product development and marketing is expected to accelerate in the year ahead. In addition, the directors have commenced plans to expand into new market areas including overseas markets. Peter Simmonds, chief executive, dotDigital, commented: “A move to AIM is another key milestone for us and is part of a strategy to develop even greater awareness of our business plans with investors and our product plans with clients and new business prospects.” Ross Andrews and Nick Cowles at Zeus Capital Limited acted as nominated adviser and nominated broker in the admission. Zeus Capital is a rapidly growing investment banking operation based in Manchester whose experienced team provides a relationship driven service. Zeus Capital provides quality financial advice and execution expertise in both public and private markets on all types of transactions, including flotations, mergers and acquisitions, debt restructuring, private placements and fundraisings. PLUS Advisers were Nick Michaels and Jon Isaacs at Alfred Henry Corporate Finance. Financial PR was provided by Guy McDougall and Nicholas at Nelson Hansard

communications. On 1 April 2011, dotDigital (AIM:DOTD) announced the appointment of Charles Stanley Securities as co- broker with immediate effect. Peter Simmonds, chief executive, dotDigital, commented: “I am delighted that Charles Stanley has come on board. They have displayed an exceptional understanding of dotDigital’s business and its industry drivers and they will complement the excellent team of professionals supporting the efforts of our management and staff.”

Aggreko to acquire rental business in New Zealand

On 7 March 20011, Aggreko plc, the global leader in the supply of temporary power and temperature control solutions, entered into an agreement to acquire N. Z. Generator Hire Limited (NZG), a leading provider of temporary power solutions in New Zealand and the Pacific Islands. The total consideration is NZ$27.5m (£12.7m); in the calendar year 2010, NZG had revenues of NZ$13m (£6.0m) and net assets of NZ$22.5m (£10.4m). The agreement is contingent on the satisfaction of a number of pre-closing conditions usual for a transaction of this type.

The acquisition of NZG supports Aggreko’s strategy of expanding its local businesses; the operations of Aggreko’s existing business in New Zealand will be merged with those of NZG and the combined entity will be the market leader in temporary power in New Zealand and the Pacific Islands. The acquisition will strengthen Aggreko’s business in Australia-Pacific, and give Aggreko a total of 19 service centres across the region. Headquartered in Auckland, NZG began operations 20 years ago and has built a strong customer base within the domestic and Pacific rental power market. With a fleet of 156 generators providing 45 MW of power, NZG operates out of five locations around New Zealand and also has several long-term contracts for power projects in the Pacific Islands. Rupert Soames, the chief executive of Aggreko said: “We are delighted to have this opportunity to strengthen our business in New Zealand and the Pacific Islands, and we look forward to welcoming the employees of N.Z. Generator into the Aggreko team. This is the kind of bolt-on acquisition which adds value to our business, and follows the acquisition in December 2010 of Northland Power Services in the United States.” NZG’s service offerings and ethos match very closely with those of Aggreko: a reliable, responsive service with 24/7 availability, use of quality equipment and a strong commitment to safety. The

acquisition of NZG by Aggreko will serve to enhance the exceptional range of expertise and equipment available to new and existing customers in New Zealand and the Pacific. Philip Lendich, the current managing director of NZG, will manage the combined business, which will trade under the Aggreko brand name. Aggreko plc is the world leader in the supply of temporary power and temperature control solutions. Aggreko employs over 3,500 people operating from 144 locations. In 2009, they served customers in about 100 countries, and had revenues of approximately £1.0bn (US$1.6bn or €1.1bn). Aggreko plc is listed on the London Stock Exchange (AGK.L), is a member of the FTSE100 index, and is headquartered in Scotland. For more information, please visit the company website at www.aggreko.com Aggreko provides power and temperature control solutions to customers who need them either very quickly, or for a short or indeterminate length of time. Examples would be the supply of power to an industrial site that needs to service its permanent power supply, supplying a whole city in times of power shortage, or providing a major sporting event with power and cooling systems. Aggreko serve their customers either through their 144 service centres, which they call the ‘local business’, or globally through their ‘international power projects’ business.

for about half of their revenues, Aggreko hire their equipment to customers, who then operate it for themselves, although they retain responsibility for servicing and maintaining it. In the ‘international power projects’ business, which also accounts for about half of their revenues, they operate as a power producer. They install and operate power plants and charge their customers both for providing the generating capacity, and for the electricity that Aggreko produce. They design and manufacture equipment specifically for these requirements in their factory in Dumbarton, Scotland. Recent customers include the 2010 FIFA World Cup, the Vancouver 2010 Olympics, as well as power utilities and governments in around 50 countries including the UK, France, Angola, Kenya, Indonesia, Bangladesh, Venezuela, Chile, Brazil and the US.

In the ‘local business’, which accounts

May 2011 • GBM • 77

Deal Directory

Intertek acquires Moody for £450m

On 7 March 2011, Intertek Group plc (Intertek), a leading international provider of quality and safety services, announced that it had entered into a conditional agreement to acquire Moody International (Moody) for a consideration of US$730m (£450m) on a cash-free and debt-free basis (the acquisition).

Intertek is a leading provider of quality and safety solutions serving a wide range of industries around the world. From auditing and inspection to testing, quality assurance and certification, Intertek people are dedicated to adding value to customers’ products and processes, supporting their success in the global marketplace. Intertek has the expertise, resources and global reach to support its customers through its network of more than 27,000 people in over 1,000 laboratories and offices in more than 100 countries around the world. Intertek is funding the acquisition entirely in cash from new and available debt facilities. Moody is a leading worldwide provider of quality and safety services to the global energy industry. It also provides systems certification services to the manufacturing, construction and service markets. Moody is headquartered in Haywards Heath, UK, and employs approximately 2,500 people in over 80 offices and 60 countries. Moody is currently owned by companies controlled by Investcorp Securities Limited, and the management of Moody. Moody will join the industrial services division of Intertek. Together, Intertek and Moody will have a leading technical services platform in Intertek’s sector of the global energy market. The acquisition offers significant benefits for and opportunities to Intertek, including: becoming a leading provider of quality and safety services for the global energy market; creating a global platform for the provision of industry services, extending existing EU and North American positions; extending the depth of the service portfolio for energy assets, processes and products; becoming a global player in systems certification;

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increasing revenue diversification for Intertek; and, pre-tax cost synergies rising to approximately £6m are expected to be achieved by the third full year of ownership. The value of Moody’s gross assets, which are the subject of the acquisition, was US$330m as at 31 December 2009, the latest date at which audited consolidated accounts are available for Moody. For the year ended 31 December 2009, Moody generated revenue of US$457m, operating profit before the deduction of goodwill amortisation (EBITA) of US$66m and profit before tax of US$49m. (2009 numbers are sourced from consolidation schedules to audited Moody accounts.) Moody’s unaudited management accounts for the year ended 31 December 2010 show revenue of US$476m and EBITA of US$54m. The consideration of approximately US$730m represents a multiple of 11.1x 2009 EBITA and 13.4x 2010 EBITA. The acquisition, excluding reorganisation and associated costs, is expected to be earnings enhancing for Intertek in the current financial year and is expected to be materially earnings enhancing next year. The acquisition is conditional upon competition clearances in certain countries. It is anticipated that the necessary clearances will be obtained by the end of April 2011 and the transaction will complete immediately after. Brendan Connolly, Moody’s chief executive officer, will remain as part of the management team going forward. Wolfhart Hauser, chief executive officer of Intertek, commented: “Today’s announcement marks an important stage

in the ongoing development of Intertek. Moody operates in one of our core industries, the global energy market, which is set for strong long term growth. Moody is a successful company with a well regarded management team. The combination of Moody and Intertek provides a platform for the enlarged group to further develop its service offerings and network within the oil and gas industries specifically, but also to the wider energy and industrial markets. Intertek will now have a leading position in providing quality and safety services to the assets, processes and products for the energy market. The good match between the geographic exposure of the two businesses gives Intertek scale in new countries and the enlarged group a greater presence in the fastest growing regions of the world. We are also pleased to be merging our systems certification business with that of Moody. The businesses are strongly complementary with good geographic and customer fit and this will make Intertek a significant player in this industry.” Brendan Connolly, chief executive officer of Moody, commented: “Moody and Intertek are a perfect fit. We can offer our world class technical inspection, consultancy and training services to Intertek’s clients and we will benefit from the Intertek expertise in providing quality and safety services to existing, and often ageing, energy assets. By combining these two businesses, we will ensure that the enlarged group takes a leading position in the global energy market. The fit of our businesses also applies to the merger of our two strong systems certification platforms. Overall, this is a compelling combination.”

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