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

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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

What Will the New EU Prospectus Regulation Mean for Issuers?

Posted in Brexit, EU and Competition, Finance and Capital Markets

By James Inness

A new prospectus regulation (Regulation (EU) 2017/1129) (the Regulation) will come into direct effect on 20 July 2017, with a small number of provisions applying immediately and the remainder applying from 21 July 2019. The changes under the Regulation will likely be relevant to issuers both before and after Brexit.

Which Provisions Will Apply Immediately?

The previous exemption allowing issuers to issue up to 10% of the number of shares of the same class already admitted without the need to publish a prospectus will be increased to 20%. The exemption also now applies to all types of securities, not just to shares. Clearly, issuers will welcome this increased flexibility and the market will undoubtedly see larger undocumented deals. Given investor resistance to larger cash-box offerings (absent shareholder approval) we do not expect the changes to the prospectus regime to affect market practice in relation to cash-boxes.

The Regulation will tighten the current exemption allowing issuers to admit shares resulting from convertible securities without a prospectus. The current exemption will now only be available where the issue of shares represents less than 20% of the total shares of a corresponding class of shares that are already admitted. This change is subject to exceptions including shares admitted in connection with convertible securities issued before 20 July 2017. Continue Reading

Will TCFD Final Recommendations Change the Landscape of Climate-related Financial Disclosure?

Posted in Environment, Finance and Capital Markets

By Paul Davies and Michael Green

On 29 June 2017, the Task Force on Climate-related Financial Disclosure (TCFD) published its final recommendations. The TCFD set out information that companies should disclose to enable investors, lenders, and insurance underwriters to better understand how companies oversee and manage climate-related financial risk. Ultimately, the aim is to strike a balance between the need to raise standards for existing climate disclosure standards and the desire to achieve widespread adoption.

The TCFD released its draft report in December 2016, and updated the recommendations in the final report based on industry and public feedback from a public consultation.

The key updates to the final report:

  • Materiality: the recommended disclosures on strategy, metrics, and targets are subject to materiality tests. Disclosures related to governance and risk management recommendations should be provided (regardless of materiality) as many investors want an insight into the governance and risk management context in which an organisation’s financial and operating results are achieved. Furthermore, the TCFD also established a threshold for organisations that should consider conducting a more robust scenario analysis to assess the resilience of their strategies (this covers those in the four non-financial groups[i] with more than US$1 billion in annual revenue).
  • Simplification: simplifying the metrics and targets for non-financial sectors to provide:
    –  Clarity and consistency
    –  Encouragement for further development of metrics in the financial sector (typically, this covers banks, insurers, asset owners, and asset managers)
    –  Clarity regarding the link to financial impact
    –  Additional guidance and standard scenarios to ease implementation
  • Climate-related Financial Risk: providing additional information on the link between financial impact and climate-related risk and opportunities.

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Penalty Clauses in Project Finance Transactions

Posted in Finance and Capital Markets

By JP Sweny, Matthew Brown and Rachel Croft

A number of recent English court decisions have recast the test for determining when a contractual provision may be unenforceable under English law as a “penalty clause”.

The rule against penalty clauses is particularly important in project finance transactions, which typically involve a complex set of commercial contracts and contractual terms that allocate risk between the parties. For example, liquidated damages provisions (often included in construction and supply contracts), “take-or-pay” or “use-or-pay” provisions (often included in offtake agreements, power purchase agreements and agreements for the use of port or transhipment services), and joint venture provisions that require a defaulting party to forcibly transfer its interest in a joint venture, all provide for a pre-agreed contractual outcome. This provision prevents the parties from needing to seek damages or other redress from the courts (or an arbitral tribunal) in certain prescribed circumstances.

Until recently, the general test for determining whether a provision is an unenforceable “penalty” was whether the provision was excessive in its operation, or was intended to deter a breach of the contract by the other party, and/or was not a “genuine pre-estimate” of loss. Continue Reading

New EC Guidelines to Improve Non-Financial Information Reporting

Posted in EU and Competition

By Paul Davies and Michael Green

On 26 June 2017, the European Commission (the EC) published non-binding guidelines on the methodology for reporting non-financial information by certain large companies and groups (the Guidelines) as required by Article 2 of the Directive 2014/95/EU amending the Accounting Directive on the disclosure of non-financial and diversity information (the Directive). The EC intends the Guidelines to help companies disclose high quality, relevant, useful, consistent, and more comparable non-financial information in a way that will encourage growth and provide transparency to key stakeholders.

The Directive was published in the Official Journal on 15 November 2014, entered into force on 5 December 2014, and Member States were required to adopt the necessary measures transposing the Directive into national law by 6 December 2016. Article 2 of the Directive requires the EC to publish the Guidelines, including non-financial key performance indicators (KPI) (both general and sectoral). The EC consulted on the format of the Guidelines in January 2016.

Driving these Guidelines is the principle that appropriate non-financial disclosure is a vital way of ensuring sustainable finance. This builds on the EC’s goal to develop a comprehensive EU strategy on sustainable finance as part of the Capital Markets Union, and forms part of the ongoing work of the High Level Group on Sustainable Finance as established by the EC. Both the Directive and Guidelines reflect the current best practices and most recent developments at international level, including key elements from the UN Sustainable Development Goals, the Paris Climate Agreement, and the industry-led Task Force on climate-related financial disclosures set up by the Financial Stability Board. Continue Reading