Proposed Draft Legislation Clamps Down on Soil Pollution in China

Posted in Environment

By Paul Davies and Andrew Westgate

On 22 June 2017, Chinese legislators released draft proposals to combat soil pollution in China at a bimonthly session of the Standing Committee of the National People’s Congress. The legislation complements the State Council’s ambitious plan to address soil pollution – an area not specifically covered by Chinese environmental law at present. Both  the Council’s plan and the corresponding draft legislation are a response to a series of highly publicised incidents, including one in Jiangsu Province where nearly 500 school students fell ill after exposure to contaminated soil. These incidents have focused public attention on the issue of soil contamination, which had previously received little attention due to the more obvious air pollution issues in Chinese cities.

The proposed law is similar to the United States Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund), in that the law requires landowners to investigate soil contamination where it is identified and imposes liability for soil contamination cleanup on the parties responsible for the pollution — or, if the responsible party cannot be found, on the landowner. The proposed law also establishes a pollution cleanup fund for situations in which the responsible party or landowner either cannot be located or lacks the funds to pay. In cases where the contamination occurred prior to the passage of the new law, a landowner held responsible may also apply to the cleanup fund for reimbursement of the remediation costs. In addition, the proposed law calls for regulators to establish tax benefits for soil remediation, standards for soil monitoring, reporting of contamination data, limits on the release of hazardous substances on farmland, and for more stringent environmental impact evaluations of construction projects (including the prohibition of construction on polluted land until the land has been remediated to the applicable standard). Continue Reading

Private Equity and Privilege: Why Recent Legal Developments Matter to Buyout Firms

Posted in M&A and Private Equity

By Stuart Alford QC, Daniel Smith and Kem Ihenacho

Legal professional privilege allows clients to share information with lawyers, knowing it need not be revealed in court. Privilege extends to legal advice generally, and to documents prepared in contemplation of litigation. Privilege has important implications for private equity beyond litigation, and can affect how firms and portfolio companies conduct internal investigations worldwide, and how information is shared during and after deals. However, challenges to privilege are increasing; from civil litigants, regulators and prosecutors.

Findings of Internal Investigations May Not Be Protected

Data released by the Financial Conduct Authority (FCA) points to a significant increase in investigations of regulated firms. This comes as the FCA broadens the UK’s Senior Managers and Certification Regime to financial sponsors, as part of a programme to assign responsibility and accountability to senior executives. External investigations typically trigger an internal investigation, as firms want to understand and respond to potential wrongdoing or failings. However, buyout firms should note that two recent cases make clear that investigation materials, in particular interview notes and transcripts, might not be privileged and could be disclosable in civil, regulatory and criminal proceedings. Continue Reading

Three Fund Issues That Can Unexpectedly Impact Portfolio Company Investments

Posted in M&A and Private Equity

By Tom Alabaster and Nick Benson

Increasingly complex fund structures and documentation mean that analysing how potential portfolio acquisitions interact with the fund at the top of any deal structure is more important now than ever.

Investor Excuse Rights for Environmental, Social, and Corporate Governance (ESG) Compliance

As investors focus on ESG compliance, requirements for “excuse rights” for non-compliant investments are expanding. Firms usually avoid the most obvious red flags with ease but in our view, restrictions on investing in businesses breaching environmental or anti-corruption standards are more problematic, as even blue-chip multinationals are not immune from these issues. Where an investor is excused, the GP must source cash elsewhere — ideally from remaining investors, who can often be required to increase participation to fill the gap. With many funds accepting commitments representing significant proportions of the total fund size from a small number of large LPs, sophisticated investors are increasingly concerned about the consequences of large LPs being excused from investments and have sought to mitigate such risks through negotiating restrictions on “topping-up” participation. Deal teams must engage in careful diligence early in the deal process and be cognizant of the impact of LP opt-out rights on a fund’s capacity to participate in a deal. Continue Reading

A New European Standard for “Green Finance”

Posted in Environment, Finance and Capital Markets

By Paul Davies and Michael Green

The High Level Expert Group on sustainable finance  (the Group), which the European Commission (the EC) established, published its interim report on 13 July 2017. The report sets out the key steps required to create a financial system that supports sustainable investment, as well as identifying areas for financial policy reform. The EC vice presidents welcomed these initial recommendations. In addition, the EC praised the recommendations’ “great potential” to enable the bloc to lead on green finance.

The Group acknowledged that the recommended investment requirements (including the €177 billion required annually to meet the 2030 climate and energy targets) might appear “overwhelming”. However, the Group emphasised that private capital is currently “available and willing” to back such recommendations.

The Group’s recommendations include: Continue Reading

Selling to China: Four Key Questions All Private Equity Deal Teams Should Ask on an Exit

Posted in M&A and Private Equity

By Frank Sun

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Chinese acquirers are playing an increasingly important role as buyers of private equity sponsored companies — nearly 200 portfolio companies were sold to Chinese entities in 2016. However, in our view, measures taken by the Chinese government to scrutinise transaction fundamentals more closely and slow capital outflows have impacted deals. The number of deals completed so far in 2017 has fallen to 63, compared to 109 at the same point last year. With Chinese deals now facing higher abort risks, we consider what buyout firms must know and do in order to achieve a successful exit.

Why Do the Deal?

Chinese regulators are focusing on the authenticity and commercial purpose of deals by Chinese companies. Acquisitions with a solid rationale that benefit the Chinese economy are unlikely to be rejected outright. So-called “irrational” deals (outside of a Chinese buyer’s core sector, particularly in the real estate, media, sports or hospitality sectors) will face greater regulatory hurdles. Private equity firms and their advisers need to factor this into any approach from a Chinese buyer. Continue Reading

G20 Advances Climate and Energy Action Plan for Growth

Posted in Environment

By Paul Davies and Michael Green

On 8 July 2017, the G20 summit in Hamburg issued a Climate and Energy Action Plan for Growth (the Plan). The Plan reaffirms the commitment of the countries (excluding the United States (US) — which announced its intended withdrawal from the Paris Agreement) to work together to implement the UN Framework Convention on Climate Change (UNFCCC), the Paris Agreement, and the 2030 Agenda for Sustainable Development.

In summary, the Plan promotes the following measures:

  • The main commitments under the Paris Agreement, including the target to limit the temperature increase to 1.5 degrees Celsius and commitments to implement nationally determined contributions (NDCs)
  • Drafting long-term greenhouse gas (GHG) emission development strategies by 2020, for the period to 2050
  • Working towards affordable, reliable, sustainable, and low GHG emission energy systems as soon as is feasible
  • Promoting energy efficiency and improving international collaboration on energy efficiency
  • Scaling up renewable energy and other sustainable energy sources
  • Promoting access to modern and sustainable energy use for all
  • Enhancing climate resilience and climate adaption efforts
  • Aligning finance flows with the goals of the Paris Agreement
  • Mobilising climate finance by multilateral development banks (for example, the European Bank of Reconstruction and Development)
  • Phasing out inefficient fossil fuel subsidies

Continue Reading

Responsibility for German Nuclear Waste Shifts With Creation of State-owned Fund

Posted in Environment

By Paul Davies, Joern Kassow and Alexander Wilhelm

In early July 2017, operators of German nuclear power plants initiated the next step in the process of decommissioning by transferring €24 billion to the new state-owned fund for nuclear power plant waste disposal.

The German state established the Fund for the Financing of the Nuclear Waste Disposal (Fonds zur Finanzierung der kerntechnischen Entsorgung) to transfer the nuclear waste management liabilities from the plant operators to the state. In return for their release from these liabilities, the operators agreed in a public law contract to make a significant cash payment to the fund. The total payment includes a base amount already set aside for this purpose by the operators in their accruals, plus a risk premium aimed at covering the risk of cost increases for the disposal in the future. The operators now benefit from long-term legal certainty, taking into account that the amount paid to the fund was based on the best cost estimates currently available and that the German federal legislators (Bundestag and Bundesrat) have not yet decided on a location for the final repository for nuclear waste. Continue Reading

Recent case law update: Treatment of Trust Assets — Akers (and others) v. Samba Financial Group (2017)

Posted in Finance and Capital Markets

By JP Sweny, Matthew Brown and Rachel Croft

The English Supreme Court has delivered a ruling that provides helpful guidance on the enforceability of trusts in respect of assets located in foreign jurisdictions that do not recognise trusts. The ruling also highlights potential issues in holding foreign assets on trust, particularly when the trustee transfers assets.

When a security trustee holds assets on trust for a group of finance parties, the risk of unauthorised transfer of assets is limited. This is because a security trustee will be required to, and will usually want to, seek instructions from the beneficiaries before exercising any powers of disposal. However, the Akers case is particularly relevant to project financing transactions that involve an English law security trust created over assets located in other jurisdictions that may not recognise trusts.

In the Akers case, the trust property consisted of shares in certain Saudi Arabian corporations, held on trust under Cayman Islands law trust arrangements. It was accepted in the case that because the relevant corporations were incorporated in Saudi Arabia and the shares were registered in Saudi Arabia, the lex situs (the law of the jurisdiction in which the relevant property is located) was Saudi Arabian law. Saudi Arabian law does not recognise trusts or the division of legal ownership and beneficial interest. Continue Reading

Buyout Firms Must Take Action to Respond to Global Cyber Threats

Posted in Data Protection, M&A and Private Equity

By Gail Crawford

Cybercrime has become a critical issue for buyout firms as hackers are increasingly targeting sensitive business data to profit from insider knowledge. According to a Private Funds Management survey of 91 PE houses, 54% of PE firms said they had been hit with a cyberattack, while 45% said cybersecurity was a high threat to business operations. Despite this, 66% of PE firms said their cybersecurity programme was only partially implemented.

Buyout Firms Are Vulnerable

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If a PE firm falls victim to a cyberattack, highly sensitive information is likely to leak. This is problematic, especially in cases of listed buyout firms where performance data will be market sensitive, or in public- to-private transactions where any leak is price sensitive. Even where entities are not listed, buyout firms hold valuable information, not only on acquisition targets and portfolio companies, but also on their investors, which may include sovereign wealth and pension funds.

In our view, cybersecurity needs to be a priority for PE firms. However, many PE firms may have a limited number of IT support staff and a small budget to fight cybercrime. In order to combat the growing threat, this will need to change. Continue Reading

Will Tougher Environmental Laws Mean Measurable Change for Pollution in China?

Posted in Environment

By Paul Davies and Andrew Westgate

In reforming and updating its environmental laws, China has until recently been focusing on air pollution. Attention is now turning to addressing water and soil pollution as well. For example, the Chinese government is now considering more robust penalties for those responsible for water pollution, indicating that the government could ban the building of homes and schools in areas with contaminated soil.

China’s issues with air pollution are well-known, with some urban areas experiencing particulate pollution levels exceeding those found in forest fires. A new study from Nanjing University’s School of the Environment estimates that smog kills 1.1 million people a year and is responsible for a third of deaths in China. As a result, the Chinese government is increasingly open to innovative prevention strategies. A recent example is the Liuzhou Forest City — designed by Stefano Boeri, an Italian architect famed for his “Vertical Forest” plant-covered skyscrapers. The Liuzhou Forest City will house up to 30,000 residents and is due for completion by 2020. Built across 175 hectares along the Liu River in Liuzhou, the Liuzhou Forest City will feature one million plants and 40,000 trees of over 100 different species that are intended to absorb 10,000 tonnes of carbon dioxide and 57 tonnes of pollutants annually, producing 900 tonnes of oxygen in the process. In addition to reducing air pollution, it is predicted that the plant life should reduce average air temperatures, create a noise barrier, and provide a habitat for wildlife. A high-speed electric rail line with geothermal energy-powered air conditioning and solar panels for electricity will connect the new development to the city of Liuzhou. Continue Reading