Governance & Securities Law Focus A QUARTERLY NEWSLETTER FOR CORPORATES AND FINANCIAL INSTITUTIONS

Europe Edition January 2011

In this newsletter, we provide a snapshot of the principal European and US governance and securities law developments

of interest to European corporates and financial institutions during the fourth quarter of 2010.

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In This Issue ·······················································

EU DEVELOPMENTS 1 Amendments to the EU Prospectus Directive MiFID Review – Commission Consultation Amendment to Credit Rating Agencies Regulation Commission Consults Further on Credit Rating Agencies

GERMAN DEVELOPMENTS 3 Draft Bill to Strengthen Investor Protection and to Improve the

Functioning of the Capital Markets Draft Amendment of the Stock Corporation Act Draft Amendment to the Securities Acquisition and Takeover Act Draft Ordinance on Reporting Requirements in connection with

Naked Short Sales ITALIAN DEVELOPMENTS 4

CONSOB Proposes New Regulation of Takeover Bids in Italy UK DEVELOPMENTS 5

Corporate Governance Developments Higgs Guidance Board Committee Terms of Reference and Guidance (“TORs”) FRC Audit Committee and Turnbull Consultations Annual Re-Election of FTSE 350 Directors ICGN Corporate Risk Oversight Guidelines BIS: A Long-Term Focus for Corporate Britain Consultation The Takeover Panel’s Response to its Takeover Review

Consultation Amendments to Disclosure and Transparency Rule 5 (“DTR 5”) Rights Issue Fees Inquiry

US DEVELOPMENTS 9 SEC Developments Potential Trends to Monitor for the 2011 US Proxy Season and

Beyond Noteworthy US Securities Law Litigation Recent SEC/DOJ Enforcement Matters

DEVELOPMENTS SPECIFIC TO FINANCIAL INSTITUTIONS 19 EU Developments

AIFM Directive Adopted CEBS Final Guidelines on Remuneration EU Financial Supervisory Framework Commission Communication on Sanctions in the Financial

Services Sector UK Developments

FSA Finalises Revised Remuneration Code BIS Consultation on Reforming the Consumer Credit Regime MoJ Consults on Reforming Her Majesty’s Courts Service

and the Tribunals Service UK Government Publishes Final Legislation Introducing Bank

Levy Possible Change to FSA Code of Market Conduct following

Spector Decision German Developments

Act on the Restructuring and Unwinding of Credit Institutions and the Extension of the Statute of Limitations on the Liability of Governing Bodies of Stock Corporations

Act for the Implementation of the amended Banking Directive and the amended Capital Adequacy Directive

EU DEVELOPMENTS

Amendments to the EU Prospectus Directive

The EU Parliament approved certain key changes to the

EU Prospectus Directive (2003/71/EC) in June 2010. The

changes are intended to address a number of ambiguities

and difficulties that have been experienced with the

existing prospectus regime and to extend a number of (or,

in one case, increase the threshold for) the exemptions

from the obligation to publish an approved prospectus.

Following publication in the Official Journal of the

European Union, the amending Directive (2010/73/EU)

requires Member States to implement the changes by 1

July 2012. It is therefore possible that the amending

Directive will be phased in gradually across the EU by

Member States. This poses the risk that during the

transitional period certain offers of securities may be

exempt from the requirement to publish an approved

prospectus in some Member States but not in others. For

example, the UK Government has stated that it wishes to

prioritise the implementation of some aspects of the

amending Directive over others (namely, the increase in

thresholds for offers outside the scope of the Prospectus

Directive from €2.5 million to €5 million, and the increase

in the “100 persons” exemption to 150). Care should be

taken in capital markets deals to ensure that

representations and warranties in underwriting

agreements and offering documents take into account the

potentially unharmonised application of the Prospectus

Directive across the EU until 1 July 2012.

There are no material differences between the text of the

published amending Directive and the text approved by

the EU Parliament which we discussed in our July 2010

Newsletter.

To view the previous quarter’s Governance & Securities Law Focus newsletter please click here.

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MiFID Review – Commission Consultation

On 8 December 2010 the European Commission

published its consultation paper on the review of the

Markets in Financial Instruments Directive (“MiFID”), on

which we reported in our October 2010 Newsletter.

MiFID consists of a framework Directive (2004/39/EC),

an implementing Directive (2006/73/EC) and an

implementing Regulation (1287/2006). The consultation

focuses on revisions to the framework Directive although

changes to the implementing legislation are likely at a

later stage. Responses to the consultation are due by 2

February 2011, following which the Commission will

present a legislative proposal for amending MiFID in

spring 2011.

The consultation covers areas such as market structures,

high frequency trading, OTC derivatives trading, pre- and

post-trade transparency obligations, data consolidation,

commodity derivatives trading, transaction reporting,

conduct of business and conflicts of interest rules,

disclosure, client assets and the possibility of giving the

European Securities and Markets Authority (“ESMA”) the

power to ban specific products or services.

The consultation paper is available at:

http://ec.europa.eu/internal_market/consultations/docs/

2010/mifid/consultation_paper_en.pdf.

Amendment to Credit Rating Agencies Regulation

On 15 December 2010 the European Parliament adopted

amendments to the EU Regulation on credit rating

agencies (Regulation 1060/2009) (the “CRA Regulation”).

The amendments effectively transfer supervision over

credit rating agencies (“CRAs”) from national regulators to

ESMA from July 2011. National regulators will be

responsible for the supervision and enforcement of the

provisions relating to the use of credit ratings for

regulatory purposes.

In particular, ESMA will now be responsible for approving

or refusing an application for registration under the CRA

Regulation and for the ongoing supervision of those

agencies and may charge CRAs fees for its expenses in

undertaking its new supervisory role. In supervising

CRAs, ESMA will be able to:

Require CRAs, persons involved in credit rating

activities, rated entities and related third parties to

provide information necessary for ESMA to carry out

its duties.

Investigate CRAs, persons involved in credit rating

activities, rated entities and related third parties.

Carry out on-site inspections at the business premises

of CRAs, rated entities and related third parties,

including without any prior notice (“dawn raids”).

Upon infringement by a CRA, withdraw the

registration of the CRA, prohibit the CRA from issuing

credit ratings in the EU until the infringement is

remedied, suspend the use of credit ratings for

regulatory purposes of the CRA for a temporary

period, require the CRA to stop the infringement or

issue public notices.

Impose a financial penalty on a CRA for intentional or

negligent infringement of certain rules up to an

amount of 20% of the CRA’s turnover for the previous

year.

ESMA will also be responsible for ensuring that CRAs

comply with their obligation to compare performance

predictions for a rated financial instrument with its actual

performance (“back-testing”).

Drafts of the amending legislation included provisions

requiring CRAs and issuers to provide access to

information via password protected websites to facilitate

the production of unsolicited ratings by CRAs. Due to a

lack of agreement on these provisions, however, they were

not adopted. Instead the Commission is charged with

putting forward legislative proposals after an appropriate

assessment of the issues.

The EU Council will need to officially approve the adopted

text before the amendments become EU law.

Commission Consults Further on Credit Rating Agencies

On 5 November 2010 the European Commission

published a consultation paper addressing certain aspects

of the activities of CRAs. The CRA Regulation requires the

Commission to monitor and assess these issues by the end

of 2012. The Commission is seeking views on:

Various measures that could help reduce the reliance

on external credit ratings and encourage firms to

undertake their own credit risk assessments,

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including where external credit ratings are required

for regulatory capital requirements and in the

mandates and investment policies of investment

managers.

Enhancing transparency and monitoring of sovereign

debt ratings such as requiring CRAs to inform the

country on which they are in the process of issuing a

rating at least three days before the publication of the

rating, disclosure of the CRA’s research reports on

sovereign debt ratings and reducing the minimum

period for review of such ratings from once a year to

six months.

Enhancing the requirements on the methodology and

process of rating sovereign debt, particularly by

imposing the same disclosure obligation as those that

apply to a CRA issuing a rating for a structured

finance instrument.

The establishment of a new independent European

CRA to rate sovereign debt or the establishment of

new national CRAs to stimulate competition.

The introduction of a harmonised approach to civil

liability of CRAs which intentionally or negligently

infringe the provisions of the CRA Regulation leading

to an incorrect rating on which investors have based

an investment decision, including solicited and

unsolicited ratings.

Additional measures to address the conflicts of

interest inherent in the “Issuer-Pays” model.

GERMAN DEVELOPMENTS

Draft Bill to Strengthen Investor Protection and to Improve the Functioning of the Capital Markets

In the aftermath of the financial crisis, the Federal

Government introduced a number of measures to

strengthen investor protection, improve the functioning of

the capital markets and re-establish confidence in market

integrity, including

Providing the Federal Financial Services Supervisory

Authority (Bundesanstalt für

Finanzdienstleistungsaufsicht - BaFin) with

additional controlling functions. Certain employees

of investment service companies in advisory or

compliance functions will be required to register with

the BaFin and any infringements against investor

protection rules will be sanctioned by the BaFin.

Improving the transparency of the capital markets

through the introduction of new reporting and

disclosure obligations for certain transactions not

covered by the current rules. The draft bill focuses on

cash-settled financial instruments. The new reporting

and disclosure obligations will apply to the position of

the seller of a put option, to the repayment claim of

the lender in a securities loan transaction as well as to

repurchase agreements entered into in connection

with repo transactions.

Revising the rules applicable to open-end real estate

funds, in particular the establishment of a minimum

holding period of two years for investors holding

shares in such funds and a more frequent

performance evaluation of the real estate held by the

fund. The aim is to improve the liquidity of open-end

real estate funds and to avoid liquidity problems due

to the imbalance of long-term investments in real

estate and the current right of investor to return their

shares early.

In its response to the draft bill the Federal Council

(Bundesrat) has demanded additional rules for and a

more efficient government control over the grey capital

market.

Draft Amendment of the Stock Corporation Act

The Ministry of Justice published a draft amendment to

the Stock Corporation Act, introducing, among others,

rules regarding the financing and ownership status of

corporations.

Corporations that are not listed on a stock exchange

may only issue registered shares. The draft

amendment requires such corporations to amend

their articles of association accordingly before 1

January 2015. The option to issue ordinary bearer

shares will only be available to publicly listed

corporations.

Currently, non-voting preference shares mandatorily

carry the right to receive a back payment of dividends,

i.e., if no dividends are payable on the preference

shares due to a lack of earnings in one period, such

dividends have to be paid out of the next period’s

earnings. Under the draft bill, such a back payment

4

on non-voting preference shares will no longer be

mandatory. Going forward, the holder of non-voting

preference shares will only be entitled to a back

payment, if the articles of association of the

corporation so provide. Furthermore, the draft bill

allows financial institutions to allocate proceeds

arising from the issuance of non-voting preference

shares to Tier 1 capital.

Convertible bonds will now allow for a conversion at

the option of the issuer. A corporation may create

conditional capital for this purpose.

The right to bring legal action to declare void

corporate resolutions will be limited in time to avoid

abusive shareholder actions.

Draft Amendment to the Securities Acquisition and Takeover Act

The Social Democratic Party, the opposition party to the

Government, plans to introduce a draft bill amending the

Securities Acquisition and Takeover Act to create an

obligation for a holder of more than 30% (but less than

50%) of the voting rights of a target company, to make a

public tender offer for such target company, if the holder

purchases more than an additional 2% of the voting rights

of the target company within a period of 12 months (so-

called “creeping-in”). This obligation arises each time the

holder crosses any additional 2% barrier. Critics fear an

unintended impediment to takeovers.

Draft Ordinance on Reporting Requirements in connection with Naked Short Sales

The BaFin published a draft ordinance prescribing the

required content, nature and form of the reporting

requirements in connection with naked short sales under

the Act on the Prevention against Abusive Dealings in

Securities and Derivatives.

ITALIAN DEVELOPMENTS

CONSOB Proposes New Regulation of Takeover Bids in Italy

On 6 October 2010, the Italian securities regulator

Commissione Nazionale per le Società e la Borsa

(“CONSOB”) issued a draft regulation intended to

implement Directive 2004/25/EC on takeover bids (the

“Draft Regulation”) into Italian law. CONSOB

simultaneously opened a market consultation that

included, inter alia, an open hearing held on 27 October

2010.

While Italian laws have been amended from time to time

to reflect the provisions of Directive 2004/25/EC on

takeover bids, CONSOB regulations have not been

updated to date. On the basis of past practice and in light

of the numerous comments CONSOB has received, it is

not possible to anticipate the timing of the final approval

of the Draft Regulation.

The Draft Regulation, which touches upon both voluntary

and mandatory takeover bids, contains multiple

provisions capable of reshaping the Italian market for

corporate control. The following is a list of the most

significant provisions set forth in the Draft Regulation:

Consent Solicitations. The Draft Regulation

introduces a partial exemption from the takeover

regime applicable to transactions aimed at, e.g.,

amending the terms and conditions of debentures of

an issuer, thereby reflecting more accurately the true

nature of consent solicitations of this type of

transaction. While CONSOB has in the past

consistently taken the view that any such transaction

should be treated as a takeover bid, the Draft

Regulation exempts the issuer from complying with

the relevant rules, provided that it publishes certain

information documents, which are not subject to the

ordinary CONSOB review process.

Offering Period. The Draft Regulation requires a

bidder to reopen the offering period for additional five

days in certain circumstances that are viewed as

potentially coercive on target shareholders. In

particular, this provision requires that in a takeover

bid launched by an affiliate of the target (e.g., a large

shareholder or any director) that either contemplates

a minimum tender condition or is aimed at acquiring

control of the target, if the bidder announces that the

minimum condition has been met or the control

threshold has been crossed, as the case may be,

simultaneously with the announcement of the results

of the offering, the offer period will automatically

extend for five additional days. The offer period will

not extend, however, in the event that any such

announcement is made at least five days prior to the

expiration of the offer period.

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Issuer’s Statement. The Draft Regulation requires

that the statement to be issued by the board of

directors of the target in connection with the takeover

bid will have to include the “reasoned opinion” of the

independent directors of the target who are not

related parties with the bidder (to the extent that any

such directors exist), setting out the “evaluation of the

offer” and indicating the “adequacy of the

consideration offered”. In addition, if the takeover

bid is launched by directors of the target who are

funding the bid through debt financing, the bidder

will also have to disclose to the independent directors

“any information relating to the takeover bid that has

been disclosed to the entities financing the bid”.

Post-Offering Best Price Rule. The Draft

Regulation expands the current rule that requires the

bidder to raise the offer price in a takeover bid to

match any higher price paid by the bidder in market

transactions pending the offer to any purchases made

by the bidder during the six months following the

expiration of the offering period.

Competing Takeover Bids. The Draft Regulation

allows, inter alia, a bidder to: (i) make a competing

takeover bid at any price and upon any condition,

whereas currently only competing bids with a higher

consideration or fewer conditions precedent are

permissible; and (ii) purchase securities in the market

at a price up to the higher of the consideration offered

by such bidder or any other competing bidder,

whereas currently in a competing bid situation, a

bidder cannot purchase securities in the market at a

price higher than the consideration offered by such

bidder.

Cross-border Takeover Bids. The Draft

Regulation allows takeover bids approved in any EU

member state to be carried out in Italy subject to a

communication to CONSOB and the filing with

CONSOB of: (i) an Italian language translation of the

offer document (although if the original document is

in English, CONSOB will accept a translation of the

“essential elements” of the offer and the risk factors);

and (ii) the preparation of a local supplement with

Italian tax considerations and tender mechanics. As

regards takeover bids approved in a non-EU country,

the Draft Regulation still provides CONSOB with

more discretionary powers.

UK DEVELOPMENTS

Corporate Governance Developments

The last quarter of 2010 saw a succession of

announcements, publications and other developments in

the corporate governance arena, including:

Pro-forma terms of reference and guidance for the key

board committees and further work on the draft

revised Higgs guidance on board effectiveness by the

Institute of Chartered Secretaries and Administrators

(“ICSA”).

Announcements by the Financial Reporting Council

(“FRC”) of a consultation on audit committee

guidance and of a shelving of a review of the Turnbull

internal control guidance.

Various guidelines or statements issued by certain UK

investor protection committees (“IPCs”) and by the

International Corporate Governance Network.

Higgs Guidance

In our October 2010 Newsletter, we discussed the review

being carried out by ICSA of the existing FRC sponsored

guidance for boards of companies to which the

Governance Code applies, on the role of chairmen and

other board members (the so-called “Higgs guidance”).

This review has been designed to bring the guidance into

line with the new emphasis on board effectiveness found

in the FRC's new UK Corporate Governance Code

(“Governance Code”). ICSA has now completed its

consultation on the draft Higgs guidance referred to below

and has passed final draft guidance to the FRC for final

approval. Definitive revised guidance is expected to be

published in the first quarter of this year.

The latest draft Higgs guidance as published by ICSA is

available at:

http://www.icsa.org.uk/assets/files/pdfs/consultations/2

010/Improving%20Boardroom%20Behaviour%20Respon

ses/ICSA%20Policy%20Improving%20Board%20Effectiv

eness%20Document.pdf.

Board Committee Terms of Reference and Guidance (“TORs”)

The ICSA TORs cover audit, remuneration, nomination

and risk committees and include references to the key

6

Governance Code requirements in relation to those

committees (or, in the case of the risk committee, to the

board's responsibility for risk management, since it is the

Walker Review, rather than the Governance Code, that

mandates the creation of risk committees for FTSE 100

listed banks or other financial institutions). They also set

out model terms of reference for those committees which

companies should adapt as appropriate when using them.

Copies of the audit, remuneration, nomination and risk

TORs are available from the ICSA website.

The TORs for audit committees are available at

http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida

nce%20notes%202010/Terms%20of%20Reference%202

010/1010%20Audit%20ToRs%20FINAL.pdf.

The TORs for remuneration committees are available at

http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida

nce%20notes%202010/Terms%20of%20Reference%202

010/1010%20RemCo%20ToRs%20FINAL.pdf.

The TORs for nomination committees are available at

http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida

nce%20notes%202010/Terms%20of%20Reference%202

010/1010%20NomCo%20ToRs%20FINAL.pdf.

The TORs for risk committees are available at

http://www.icsa.org.uk/assets/files/pdfs/guidance/Guida

nce%20notes%202010/Terms%20of%20Reference%202

010/1010%20Risk%20ToRs%20FINAL.pdf.

FRC Audit Committee and Turnbull Consultations

As part of the review of the broader extent of UK corporate

governance guidance, the FRC has been looking at its

guidance to audit committees and its so-called Turnbull

guidance on internal control. The FRC's consultation on

audit committee guidance has concentrated on revisions

to take account of non-audit services provided by the

external auditor’s firm (including disclosure by companies

of such services, the reasons for deciding to take such

services from the external auditor and safeguards with

respect to the auditor’s objectivity) and the rotation of

external audit partners. Updated guidance was published

by the FRC on 17 December 2010. A copy of the FRC’s

consultation on audit committee guidance is available at:

http://www.frc.org.uk/images/uploaded/documents/Gui

dance%20on%20Audit%20Committees%202010%20final

1.pdf.

With regards to the Turnbull guidance on internal control,

the FRC announced that it will be holding a series of

meetings with chairs of boards and audit and risk

committees, and with executives, investors and advisers in

2011 to help consider whether revisions to the Turnbull

guidance are required following the inclusion in the

Governance Code of the new principle requiring boards to

be responsible for determining the nature and extent of

the significant risks they are willing to take in achieving

their strategic objectives.

Annual Re-Election of FTSE 350 Directors

One of the more controversial features of the new

Governance Code has been the provision for the annual

re-election of the entire board of FTSE 350 companies.

Opinion remains divided as to the merits of this provision,

reflected in the different approaches being taken by

various IPCs in the UK, as well as by a number of FTSE

350 companies who have held their 2010 annual general

meetings since the new Governance Code was published.

Pensions Investment Research Consultants (“PIRC”),

which has been a long time advocate of annual re-election

of boards, has announced it will give companies an

additional 12 months to comply with the Governance

Code’s requirements (which apply to accounting periods

beginning on or after 29 June 2010). On the other hand,

Hermes, Railpen and the Universities Superannuation

Scheme wrote to 700 companies earlier this year to

encourage them to ignore this new requirement due to

their concern that this “will engender a short-term culture

with the risk of effective boards being distracted by short-

term voting outcomes”.

In its recently issued updated draft Corporate Governance

Policy and Voting Guidelines, the National Association of

Pension Funds (“NAPF”) seems to be following a middle

course in this area by recognising that annual re-election

could lead to better accountability but also that there are

associated risks, especially with regards to the continuity

and stability of boards. It has therefore declined to

recommend a voting sanction for companies that do not

adopt annual re-election of the board. Where a company

is not proposing annual re-election, however, NAPF will

require its policy on director re-election to be clearly

explained in the context of shareholders’ interests and is

intending to review this approach in late 2011.

7

ICGN Corporate Risk Oversight Guidelines

In October 2010 the International Corporate Governance

Network – an organisation that represents major

institutional investors, financial intermediaries, academics

and others with an interest in corporate governance –

published Corporate Risk Oversight Guidelines which are

intended to assist investors in monitoring the effectiveness

of companies’ risk management oversight functions.

The guidelines cover:

Board and company processes – focusing on what is

expected of the board.

Investor responsibility – focusing on what investors

should do to assess a board’s risk management.

Board and company disclosure – focusing on what

information should be disclosed to enable effective

investor assessment.

As guidelines, they have no prescriptive or regulatory force

but represent best practice recommendations. Boards are

encouraged to consider appointing a chief risk officer (a

Walker Review recommendation for banks and other

financial institutions) or at least to identify a person with

responsibility for risk management commensurate with

the role of such an officer. Investors are also told to assess

their own capacity and resources for risk management

assessment. For UK listed companies, some of the

disclosure recommendations are already covered by

requirements of the Governance Code or the Disclosure

and Transparency Rule requirement for corporate

governance statements (see DTR 7.2.5R).

A copy of the Corporate Risk Oversight Guidelines is

available at:

http://www.icgn.org/files/icgn_main/pdfs/best_practice

/icgn_corporate_risk_oversight_guidelines.pdf.

BIS: A Long-Term Focus for Corporate Britain Consultation

Also in October 2010 the Department for Business

Innovation & Skills (“BIS”) launched a consultation on the

question of short-termism and market failures in UK

equity markets. Specifically, the consultation asks

whether better corporate governance by itself will not be

enough to ensure the long-term success of corporate

Britain and whether certain legal and/or behavioural

changes will be required. It also looks at the widespread

concerns about the misalignment of the interests of

executive management and shareholders through

excessive executive incentives.

The consultation contains some interesting UK equity

market statistics – such as that FTSE 350 shareholder

attendance at general meetings averages 68% and that the

average period for holding UK equities has fallen from five

years in 1960 to about seven and a half months in 2007

(similar figures apply in New York).

Some key points or questions raised in the consultation

include:

The Government agrees with the UK Panel on

Takeovers and Mergers (the “Panel”) that some

rebalancing of the UK Takeover Code rules is needed

to check the evolution of market practice which has

developed in favour of bidders (see “The Takeover

Panel’s response to its Takeover Review consultation

(PCP 2010/22)” below).

Should all “golden parachute” payments to departing

directors be subject to shareholder approval (under

UK company law, payments made in good faith

pursuant to a pre-existing legal obligation or in

settlement of a claim in connection with loss of office,

etc. do not require shareholder approval)?

Should the shareholders of an acquiring company

always be invited to vote on the company’s takeover

bids?

A copy of the consultation (which closed for responses on

14 January 2011) is available at:

http://www.bis.gov.uk/assets/biscore/business-

law/docs/l/10-1225-long-term-focus-corporate-

britain.pdf.

The Takeover Panel’s Response to its Takeover Review Consultation

On 21 October 2010 the Panel released a response to the

feedback it has received to its wide-ranging June 2010

review of a number of basic principles of UK takeover

regulation.

In its response the Panel has switched its focus from the

impact of short-term investors on the outcome of hostile

bids to a concern that the present rules in its City Code on

Takeovers and Mergers (the “Code”) unduly favour hostile

bidders over their targets and that the position of targets

8

needs strengthening. The changes to the Code that the

Panel is now proposing to address these concerns are

likely to prove just as controversial as the Panel’s earlier

mooted changes to address its concern about the impact of

short-term investors were.

The changes will also apply to recommended transactions

and so a bidder considering making a friendly approach to

a UK target is going to have to be prepared in future: (1) to

go public about its approach and to firm up its bid

intentions much earlier than would previously have been

the case, and (2) to proceed without the benefit of the

usual “no shop” and/or break fee protections that

previously it would have expected to receive from the

target.

Key points from the Panel’s response are:

A potential bidder will now have to be publicly named

in any “possible offer” announcement required under

the Code.

Once publicly named, the bidder will now have just

four weeks in which to announce either a firm (and

binding) intention to make a bid or that it will not bid

(in which case the Code bars the bidder from making

another offer for the next six months).

Inducement (or break) fees and other deal protection

measures will no longer be permitted.

Greater disclosure will be required of:

financial information about the bidder and its

financing of the bid, and this will be required in

all bids (and not just paper bids).

advisers’ fees and other offer-related (including

success) fees.

The Code will include an increased emphasis on:

the consideration of target employees’ interests

in bids.

the target board not being required under the

Code to consider the offer price as the

determining factor in its response to a bid.

The Panel will not be proceeding with the most

controversial of the possible rule changes it discussed

in its June review:

raising the minimum voting rights acceptance

condition from 50% plus one.

disenfranchising voting securities acquired in

the target during an offer period.

It is expected that detailed draft rule changes will be

published shortly and that after a final period of

consultation, the amended rules will take effect later this

year.

A copy of our client publication on the Panel’s earlier

review is available at:

http://www.shearman.com/files/Publication/61a08dc0-

e284-401d-9411-

879baf6470ca/Presentation/PublicationAttachment/5bc0

3e38-aa39-4ad7-8d66-96206c73bc80/FIA-062310-

Review-of-the-UK-Takeover-Code.pdf

A copy of our client publication on the Panel’s response to

that review is available at:

http://www.shearman.com/files/Publication/aeec964a-

ae34-4983-b60b-

d23075d4eb0b/Presentation/PublicationAttachment/7df

76ce3-c372-44a8-a946-7ec9fa6dc7c3/EC-102610-

Update-on-the-UK-Takeover-Panel.pdf

A copy of the Panel’s response is available at:

http://www.thetakeoverpanel.org.uk/wp-

content/uploads/2008/11/2010-22.pdf

Amendments to Disclosure and Transparency Rule 5 (“DTR 5”)

DTR 5 sets out the Transparency Directive obligations for

UK listed companies (and their shareholders) with respect

to announcements regarding the voting rights held in the

company. Companies have to make end-of–month

announcements of the total voting rights in their share

capital and shareholders have to make announcements

when their holdings reach or move through certain levels.

From 1 November 2010 the following amendments have

been made to DTR 5:

In addition to the end-of-month announcements,

companies will also have to make announcements of

their total voting rights as soon as possible when these

rights increase or decrease through the issuer

completing a transaction (e.g., a rights issue) (and in

any event by no later than the next business day

following the day on which the change occurred). No

announcement is required if the change is immaterial

and the FSA states in the rule that in its view an

9

increase or decrease of one percent or more is likely to

be material. (See DTR 5.6.1A R).

In calculating the number of voting rights held,

shareholders will be allowed to exclude passive nil-

paid rights held by them, so long as they do not trade

in any financial instruments (including the nil-paid

rights) of the issuer during the rights period. The

same exemption is available in the case of open offers,

again so long as there is no trading in the issuer’s

financial instruments and provided that the

shareholder maintains its economic position in the

issuer by taking up its full entitlement in the offer.

(See DTR 5.3.1 R (2A)).

A copy of the amended DTR 5.6 can be viewed here:

http://fsahandbook.info/FSA/html/handbook/DTR/5/6

A copy of the amended DTR 5.3 can be viewed here:

http://fsahandbook.info/FSA/html/handbook/DTR/5/3

Rights Issue Fees Inquiry

On 14 December 2010 a report of the Rights Issue Fees

Inquiry, commissioned by the Institutional Investor

Council, was published following a review of the practices

and pricing procedures adopted when new capital is raised

through the issue of UK equity securities. The report

contains a number of recommendations in the areas of

transparency, competition and shareholder involvement.

These are intended to require greater disclosure about the

levels and composition of underwriting fees and greater

involvement by issuers in sub-underwriting decisions.

They also seek to encourage greater competition in the

underwriting market and participation by institutional

shareholders in equity sub-underwriting. A copy of the

report is available at:

http://www.iicouncil.org.uk/docs/rifireport.pdf.

Specifically, the report recommends that:

issuers should be required by the Listing Rules to

disclose in detail all fees paid, to whom and for what.

similar provisions should be included in the current

review of the Transparency Directive.

the current review of the MiFID Directive should

ensure that there are no unnecessary impediments to

shareholders' participation in underwriting of rights

issues.

institutional shareholders should consider appointing

a named individual who can be taken "off market" to

consult with the issuer and its advisers on possible

support for a rights issue, pricing and sub-

underwriting.

In late January 2011, the Office of Fair Trading is expected

to publish its own study into the equity underwriting

market which it launched in June 2010.

US DEVELOPMENTS

SEC Developments

In our October 2010 Newsletter, we reported on the Dodd-

Frank Wall Street Reform and Consumer Protection Act of

2010 (the “Reform Act”) that was signed into law on 21

July 2010. The Reform Act requires rulemaking by the

SEC to implement certain of its executive compensation

and corporate governance provisions:

SEC Issues Proposed Rules on Say-on-Pay

Provisions

On 18 October 2010 the SEC issued its first set of

proposed executive compensation rules under the Reform

Act, which implement the say-on-pay provisions of the

Reform Act, as described below. The SEC clarified in the

proposed rules that the say-on-pay voting provisions of

the Reform Act do not apply to foreign private issuers.

Say-on-Pay Vote. The Reform Act requires US

issuers to provide shareholders with the right to cast a

non-binding vote approving the issuer’s executive

compensation as disclosed in its proxy statement not

less frequently than once every three years at

shareholders’ meetings occurring on or after 21

January 2011 where compensation disclosure is

required. The proposed rules do not provide for a

specified format or wording for the say-on-pay

shareholder proposal, but do require issuers to

disclose in the proxy statement that they are

conducting a separate shareholder advisory vote on

executive compensation and to briefly explain the

general effect of the vote.

Say-on-Pay Frequency Vote. Shareholders must

also be given the opportunity, at least once every six

years, to have a separate shareholder vote to re-

determine the frequency of the say-on-pay vote,

which may occur every one, two or three years, with

10

the first determination to be made at shareholders’

meetings occurring on or after 21 January 2011 where

compensation disclosure is required. The proposed

rules specify that issuers must provide four choices

regarding the say-on-pay frequency vote (i.e., annual,

biennial, triennial or abstain) and establish a limited

transition rule where proxy service providers cannot

accommodate four choices on a ballot. If an issuer’s

board of directors includes a recommendation on the

frequency of the vote, the proxy statement must

clearly state that shareholders are voting to approve

the actual frequency and not the board of directors’

recommendation.

Additional Say-on-Pay Matters.

The proposed rules confirm that say-on-pay and

frequency votes are non-binding and will not be

construed as overruling the compensation

decisions of the issuer’s board of directors.

It is proposed that issuers be required to address

in their next proxy statement whether and, if so,

how their compensation policies and decisions

have taken into account the results of the prior

say-on-pay votes.

It is proposed that issuers disclose their decision

as to how frequently they will conduct their say-

on-pay votes in the first Form 10-Q (or Form 10-

K) following the frequency vote.

Issuers will not be required to file a preliminary

proxy statement solely as a result of including a

required say-on-pay vote or a frequency vote in

their proxy statement.

Say-on-pay and frequency votes are executive

compensation matters and brokers therefore

may not vote uninstructed shares on these

matters.

Disclosure of Golden Parachutes. The Reform

Act adds a new disclosure requirement for payments

to be made to an issuer’s named executive officers

(whether the payments are made by the target or the

acquiring company) in connection with certain

change-in-control transactions. Proposed new Item

402(t) of Regulation S-K specifies a tabular format for

this disclosure, which is to be accompanied by

narrative and footnote disclosure. The proposed rules

expand the list of SEC forms for which disclosure is

required to include those filed in connection with

proxy and consent solicitations, going private

transactions, third-party tender offers and similar

transactions, as well as registration statements on

Forms S-4 and F-4. If the target is a foreign private

issuer, disclosure under Item 402(t) is not required.

However, if the target is a US issuer, disclosure is

required even if the acquiror is a foreign private

issuer.

Vote on Golden Parachutes. The proposed rules

require issuers to provide a separate shareholder

advisory vote on the arrangements disclosed pursuant

to new Item 402(t) of Regulation S-K. The golden

parachute vote is only applicable to proxy and consent

solicitations by US issuers that occur after the

proposed rules become effective and is not required in

connection with the additional change-in-control

transactions described in the previous paragraph.

The golden parachute vote is only required for

compensation paid by the target issuer to its named

executive officers. Compensation arrangements are

not subject to the golden parachute vote if they were

subject to a prior general say-on-pay vote, but only if

the issuer has previously and voluntarily included

disclosure regarding the change-in-control

arrangements in accordance with Item 402(t) in its

soliciting documents. In the event that compensation

arrangements that were not subject to a prior say-on-

pay vote are in place at the time of a transaction,

issuers would need to segregate the required

disclosure into two tables meeting the requirements

of Item 402(t), the first showing the total amounts

payable under all arrangements and the second

showing the amounts payable under just those new

arrangements subject to the current vote.

The comment period on the proposed rules closed on

18 November 2010 and the SEC anticipates issuing

final rules in the January to March 2011 timeframe.

Our client publication on the proposed rules is

available at

http://www.shearman.com/files/Publication/28fd8d

42-99bb-4296-b59e-

f2b4926cbb2a/Presentation/PublicationAttachment/

d12d061f-3215-4584-845c-bb63d1a3fac5/ECEB-

102610-SEC-Issues-Proposed-Rules-on-Say-on-Pay-

Voting.pdf.

11

SEC Issues Proposed Rules on Whistleblower

Programme

On 3 November 2010 the SEC issued proposed Regulation

21F to implement the whistleblower programme required

by the Reform Act. The programme is designed to provide

incentives for whistleblowers to report securities law

violations to the SEC and substantially expands the

agency’s authority to compensate such individuals. The

new SEC whistleblower programme is primarily intended

to reward individuals who act early to expose violations

and who provide significant evidence that helps the SEC

bring successful cases.

To be considered for an award, a whistleblower must

voluntarily provide the SEC with original information

about a violation of the US federal securities laws that

leads to the successful enforcement by the SEC of a federal

court or administrative action in which the SEC obtains

monetary sanctions totalling more than US$1 million.

This includes matters brought against foreign private

issuers or matters involving the Foreign Corrupt Practices

Act.

An eligible whistleblower must be a natural person.

Whistleblowers may submit information to the SEC

anonymously, but must be represented by counsel to

do so and will ultimately need to reveal their identity

to the SEC to obtain their award.

The information must be provided to the SEC

voluntarily, meaning that it must have been

submitted before the SEC or other select authorities

have made a request or demand to the whistleblower.

The information is also not considered voluntarily

submitted if the individual falls within the scope of an

SEC request or demand made to the individual’s

employer. Importantly, a request or demand made by

the employer’s personnel in conducting an internal

investigation will not make the later submission to the

SEC involuntary.

“Original information” is defined as information

derived from the whistleblower’s independent

knowledge or analysis that is not already known to the

SEC from any other source (unless the whistleblower

is the original source) and that is not taken exclusively

from an allegation made in a judicial or

administrative hearing, in a government report, or

from the news media, unless the whistleblower is the

source of the information. The SEC makes clear,

however, that the “independent knowledge” of the

whistleblower may derive from information that has

been conveyed by a third party. Direct, first-hand

knowledge of a securities law violation is not

necessary to recoup an award.

A whistleblower’s information is deemed to have led

to successful enforcement if (i) the information results

in a new examination or investigation being opened

and significantly contributed to the success of a

resulting enforcement action, or (ii) the conduct was

already under investigation when the information was

submitted, but the information is essential to the

success of the action and would not have otherwise

been obtained.

The amount of the award must fall within a statutory

range of 10% - 30% of the total monetary sanctions

recovered by the SEC, provided the sanctions amount

to at least US$1 million. In determining whether the

statutory minimum threshold of US$1 million has

been reached, the SEC will not aggregate sanctions

from separate actions, making it clear that the term

“action” means a single captioned judicial or

administrative proceeding. It will also not consider

sanctions that the whistleblower himself is ordered to

pay. If the whistleblower’s original information leads

to a successful action in which the SEC obtains

monetary sanctions exceeding US$1 million, the

whistleblower will also be eligible for recoveries in

“related actions” brought by certain selected agencies

and self-regulatory organizations based on the same

original information.

Certain categories of people would generally not be

considered for whistleblower awards, including:

People who are subject to a pre-existing or contractual

duty to report the securities violation.

Attorneys who obtain the information from client

engagements or from a communication subject to the

attorney-client privilege (unless disclosure is

permitted under SEC rules or state bar rules).

Independent public accountants who obtain the

information through an engagement required under

the securities laws.

Internal compliance officers or other persons with

legal, audit, supervisory or governance responsibility

to the corporation to whom the information is

12

reported in the expectation that they will take

appropriate steps to respond to the violation. This

exclusion ceases to be applicable, however, if the

company does not disclose the information to the SEC

within a reasonable time or acts in bad faith.

Certain other persons – such as employees of certain

agencies and people who are criminally convicted in

connection with the conduct – are excluded by the Reform

Act.

The proposed rules attempt to mitigate any unintended

consequences of a whistleblower programme and in

particular try to provide incentives to employees not to

bypass their internal compliance systems. In an attempt

to encourage employees to first make a report to their

corporate compliance department, the SEC is offering

potentially higher rewards for whistleblowers who did so.

In addition, the proposed rules give employees a 90-day

grace period after reporting a violation to their company

in which to bring the case to the SEC and the SEC will

consider the submission effective as of the date it was

reported internally, thereby preserving a whistleblower’s

priority.

Section 21F also contains provisions preserving the

confidentiality of, and prohibiting retaliation by employers

against, whistleblowers. However, they do not provide

amnesty to whistleblowers and enforcement actions can

still be brought against individuals who submitted

information but are wrongdoers themselves. In addition,

to address concerns that the proposed rules will encourage

the proliferation of false claims of corporate wrongdoing,

the rules require any information to be submitted to the

SEC by written statement signed under penalty of perjury.

Comments on the proposed whistleblower bounty

programme were due on 17 December 2010. Final rules

must be adopted by 15 April 2011, although the SEC has

stated that it expects to finalize the rules between January

and March 2011. The proposed rules are available at

http://www.sec.gov/rules/proposed/2010/34-63237.pdf.

SEC Issues Proposed Rules on Disclosure

Regarding Extractive Industries

In our October 2010 Newsletter, we reported on three

provisions contained in the Reform Act that require

additional disclosure relating to the extraction and use of

natural resources. On 15 December 2010 the SEC

proposed rules to implement these provisions and in each

case comments must be received by 31 January 2011. The

proposed rules will affect foreign private issuers that are

subject to the SEC reporting requirements.

Conflict Minerals. The SEC is proposing changes

to the annual reporting requirements of SEC

reporting issuers. The proposed rules require any

issuer for which “conflict minerals” (i.e., certain

minerals that are determined to be financing conflict

in the Democratic Republic of Congo and adjoining

countries) are necessary for the functionality or

production of such issuer’s products to disclose in the

body of its annual report whether its conflict minerals

originated in the Democratic Republic of Congo or an

adjoining country. If so, that issuer would be required

to furnish a separate report as an exhibit to the annual

report that includes a description of the measures

taken by the issuer to exercise due diligence on the

source and chain of custody of its conflict minerals.

In addition, the proposed rules impose certain

auditing, certification and publication requirements

relating to such report. The proposed rules are

available at

http://www.sec.gov/rules/proposed/2010/34-

63547.pdf.

Payments by Resource Extraction Issuers.

The SEC is also proposing rules, including

amendments to Form 20-F, to implement Section

13(q) of the Securities Exchange Act of 1934, as

amended (the “Exchange Act”), which was added by

the Reform Act. Section 13(q) requires any resource

extraction issuer that is a SEC reporting company to

include in it annual report information relating to any

payments made by that issuer to the US or non-US

governments for the purpose of the commercial

development of oil, natural gas or minerals.

Information required to be disclosed relates to both

the type and total amount of payments made for each

project and to each government. The proposed rules

are available at

http://www.sec.gov/rules/proposed/2010/34-

63549.pdf.

Coal or Other Mine Safety. The SEC is proposing

amendments to its rules, including amendments to

Form 20-F, to implement and specify the scope and

application of Section 1503 of the Reform Act, which

has been in effect since August 2010. Section 1503(a)

requires issuers, including foreign private issuers,

13

that, directly or indirectly, operate a coal or other

mine in the US to disclose in their periodic reports

filed with the SEC certain specified information about

mine health and safety for the period covered by the

report. Issuers that operate, directly or indirectly,

mines outside the United States would not have to

disclose information about such mines under the

proposed rules. However, to the extent mine safety

issues relating to non-US mines are material,

disclosure may already be required under current SEC

rules. In addition, the SEC is seeking comments on

whether it should require foreign private issuers to

disclose the receipt of certain orders or notices

relating to imminent danger or violations of mine

safety regulations on a current basis, as is required for

US issuers. The proposed rules are available at

http://www.sec.gov/rules/proposed/2010/33-

9164.pdf.

SEC Seeks Comments on Private Rights of Action

against Foreign Issuers under Exchange Act

Antifraud Provisions

On 25 October 2010 the SEC issued a release requesting

public comment to determine the extent to which private

rights of action under the antifraud provisions of the

Exchange Act should be extended to cover:

conduct within the United States that constitutes a

significant step in furtherance of the violation, even if

the securities transaction occurs outside the United

States and involves only foreign investors; and

conduct occurring outside the United States that has a

foreseeable substantial effect within the United States.

The request for comment is made pursuant to the Reform

Act, which made clear that the SEC may sue foreign

issuers, but called for a study of whether investors should

also be able to bring private class actions under Section

10(b) of the Exchange Act. The relevant provision of the

Reform Act was inspired by the US Supreme Court’s

decision in Morrison v. National Australia Bank on which

we reported in our July 2010 Newsletter and that

significantly limited the extraterritorial scope of Section

10(b). Comments should be submitted on or before 18

February 2011. A copy of the release is available at

http://www.sec.gov/rules/other/2010/34-63174.pdf.

SEC Issues Observations on Use of XBRL

In November 2010 the staff of the SEC’s Division of Risk,

Strategy, and Financial Innovation issued a report entitled

“Staff Observations From Review of Interactive Data

Financial Statements”. In this report, the staff made

observations from its review of filings with eXtensible

Business Reporting language (“XBRL”) exhibits submitted

from June through August of 2010 and identified common

issues. The staff also encouraged companies to review

their future XBRL filings to ensure they are prepared

consistently with the staff’s observations. The XBRL

requirements apply to non-US issuers that prepare their

financial statements in US GAAP or IFRS as issued by

IASB. Starting in June 2010 large accelerated filers using

US GAAP were required to use XBRL. All public

companies will need to report financial statement

information to the SEC using XBRL for fiscal periods

ending on or after 15 June 2011.

The report is available at

http://www.sec.gov/spotlight/xbrl/staff-review-

observations-110110.shtml.

SEC Updates Financial Reporting Manual

On 6 December 2010 the SEC’s Division of Corporation

Finance updated its “Financial Reporting Manual” for

issues related to, among others, stock-based

compensation in initial public offerings, internal control

over financial reporting, selected financial data and

MD&A.

The new manual is available at

http://www.sec.gov/divisions/corpfin/cffinancialreportin

gmanual.pdf.

Potential Trends to Monitor for the 2011 US Proxy Season and Beyond

On 19 November 2010 the ISS Corporate Governance

Services released its Corporate Governance Policy Updates

on voting recommendations. ISS or Institutional

Shareholder Services Inc., an influential proxy advisory

firm, undertakes an extensive process to update the

policies that inform its benchmark voting

recommendations each year and given ISS’s influence,

many public companies will want to consider these

policies in evaluating their governance and compensation

practices. The policy changes will be effective for meetings

occurring on or after 1 February 2011.

14

ISS maintains different policies for the US, Canada,

Europe and International, which this year covers Japan,

South Africa and Australia. While, in general, the country

of incorporation of an issuer is the basis for the

application of a particular policy, ISS announced that

beginning with the 2011 policy update, it will apply its US

policies to the extent possible to issuers that are

incorporated outside of the United States, but are

considered domestic issuers by the SEC.

ISS’s influence in the US during the 2011 proxy season

may be particularly great this year, given that all US public

companies will be holding advisory votes on executive

compensation and on the frequency of future say on pay

votes. Companies are therefore well advised to review

their policies and practices in the relevant areas to

determine whether any changes are advisable in advance

of the 2011 proxy season.

The following are the key changes made to ISS’s US and

European benchmark corporate governance policies. The

full policy updates are available at

http://www.issgovernance.com/policy.

US Corporate Governance Policy

Frequency of Advisory Vote on Executive

Compensation (Management “Say on Pay”). This

policy item is being adopted in response to a new proxy

item required under the Reform Act as discussed above.

In addition to requiring advisory votes on compensation

(“say-on-pay”), the Reform Act requires that each proxy

for meetings occurring after 21 January 2011 include an

advisory voting item to determine whether, going forward,

the “say on pay” vote by shareholders to approve

compensation should occur every one, two or three years.

ISS is adopting a policy to recommend a vote for annual

advisory votes on compensation, which in their view

provide the most consistent and clear communication

channel for shareholder concerns about companies’

executive pay programmes. This frequency vote is not

binding.

Voting on Golden Parachutes in an Acquisition,

Merger, Consolidation, or Proposed Sale. As

required by the Reform Act and discussed above, the SEC

has proposed rules requiring that shareholders be

provided with a separate advisory vote on merger-related

compensation arrangements (“golden parachutes”). ISS

will evaluate proposals to approve a company’s golden

parachute compensation arrangements on a case-by-case

basis, consistent with its problematic pay practices related

to severance packages, but has identified the following

features that may lead to a negative recommendation:

Recently adopted or materially amended agreements

that include excise tax gross-up provisions or

modified single triggers (since the prior annual

meeting).

Single trigger payments that will happen immediately

upon a change of control, including cash payments

and the acceleration of performance-based equity

despite the failure to achieve performance measures.

Single-trigger vesting of equity based on a definition

of change of control that requires only shareholder

approval of the transaction (rather than

consummation).

Potentially excessive severance payments.

Recent amendments or other changes that make

packages so attractive as to influence merger

agreements that may not be in the best interests of

shareholders.

In case of substantial grand-fathered gross-ups, ISS

will look at the element that triggered the gross-up.

The company’s assertion that a proposed transaction

is conditioned on shareholder approval of the golden

parachute advisory vote, which ISS would consider

problematic from a corporate governance perspective.

If the golden parachute vote is incorporated into a

company’s regular say on pay vote, ISS will evaluate the

entire say on pay proposal in accordance with these

guidelines and may give greater weight to its analysis of

merger-related compensation arrangements, which may

lead to a more rigorous review.

Problematic Pay Practices and Say-on-Pay

Votes. ISS will continue to evaluate a company’s

executive pay and compensation practices on a case-by-

case basis. To the extent a company maintains

problematic pay practices, ISS will issue a negative

recommendation on say on pay votes, or if say-on-pay

votes are not being held in a particular year or in egregious

situations, a negative recommendation or withhold on the

re-election of compensation committee members, or, in

rare cases, the entire board, including the CEO.

15

For the 2011 proxy season, ISS has revised the list of

egregious practices that, by themselves, are sufficiently

problematic to warrant a withhold or negative vote in

most circumstances and include:

Repricing or replacing underwater stock options

without prior shareholder approval.

Excessive perquisites or tax gross-ups.

Entering into new agreements, or extending existing

agreements, that contain “single trigger” (payments

without job loss or substantial diminution of duties)

or “modified single trigger” (executive may voluntarily

leave for any reason and still receive severance

package) change-in-control provisions, provide for

excise tax gross-ups for change-in-control payments

or provide for change-in-control payments in excess

of three times salary and bonus.

Problematic Pay Practices and Prospective

Commitments. Historically, when ISS has identified a

problematic pay practice, it has generally accepted a

commitment by the company that it would eliminate such

practice going forward and therefore preventing or

reversing a negative vote recommendation by ISS. ISS has

revised this policy and, effective immediately, will no

longer consider prospective commitments with respect to

problematic pay practices in its current voting

recommendations.

Voting on Director Nominees in Uncontested

Elections

Director Attendance. It is ISS’s current policy to

issue a negative recommendation or withhold its vote

from directors who attend less than 75 percent of

board and committee meetings without a valid

excuse. ISS is now clarifying that the only acceptable

reasons for directors’ absences it will consider are (i)

medical issues/illness; (ii) family emergencies; and

(iii) if the director’s total service was three meetings

or less and the director missed only one meeting.

In addition, ISS is now eliminating the company’s

option of providing the reason for absences to ISS

privately. According to the new policy, the reason(s)

for directors’ absences will only be considered by ISS

if disclosed in the proxy statement or another SEC

filing. In addition, if the disclosure is insufficient to

determine whether a director attended at least 75

percent of board or committee meetings in aggregate,

ISS will generally issue a negative recommendation or

withhold its vote.

Responsiveness to Majority-Supported

Shareholder Proposals. ISS has amended its

policy and will now vote withhold or against the entire

board if the board fails to act on a shareholder

proposal that received approval (i) by a majority of

the shares outstanding the previous year and (ii) by a

majority of shares cast in the last year and one of the

two previous years. This is a change from the

previous policy that required an approval in each of

the last two years and recognizes that a series of

successful shareholder proposals on topics of

paramount importance to shareholders may be

interrupted by a company through excluding a

shareholder proposal as allowed by SEC rules.

Shareholder Ability to Act by Written Consent.

The 2010 proxy season saw an increase in shareholder

proposals requesting shareholder’s ability to act by written

consent and this trend is likely to continue into the 2011

proxy season. Although ISS generally votes in favour of

these proposals, it recognizes the potential risk of abuse of

the right to act by written consent such as bypassing

procedural protections, particularly in hostile situations,

and the fact that it may not be beneficial for all

shareholders in certain circumstances. Given the evolving

corporate governance landscape and the alternative

mechanisms available to shareholders to express concern,

in evaluating these proposals ISS will be taking into

account a company’s overall governance practices and its

takeover defences, such as

An unfettered right for shareholders owning 10

percent of the shares to call special meetings.

“Unfettered right” means no restrictions on

agenda items or number of shareholders who

can form a group to reach the 10 percent

threshold, and only reasonable limits on when a

meeting can be called other than limits for up to

30 days after the last annual meeting and up to

90 days prior to the next annual meeting.

A majority vote standard in uncontested director

elections.

No non-shareholder approved pill.

An annually elected board.

16

Net Operating Loss (“NOL”) Protective

Amendments or Pills. ISS will recommend voting

against a management proposal to approve either an

amendment to the company’s governing documents or a

poison pill to protect a company’s NOL if the term would

exceed the shorter of three years and the exhaustion of the

NOL.

European Corporate Governance Policy

Compensation Guidelines (Europe). ISS’s

assessment of compensation principles in Europe follows

the ISS Global Principles on Executive and Director

Compensation. Applying these principles, ISS has

formulated European Compensation Guidelines which

take into account local codes of governance, best market

practice and the recommendations published by the

European Commission.

The key changes to ISS’s compensation policy for 2011 are

to (i) strengthen the power of sanction in case of

discretionary payments or pay for failure, (ii) establish the

link between sustainable long-term performance and

actual pay and (iii) include reference to market practice

and disclosure with respect to severance payment and

other compensation practices.

As a general observation and in line with the

recommendation of the European Commission, ISS

believes that seeking annual shareholder approval for a

company’s compensation policy is a positive corporate

governance provision.

Executive Compensation-Related Proposals.

ISS will evaluate proposals that relate to executive

compensation on a case-by-case basis. It will issue a

negative recommendation if they fail to comply with

the following global principles:

Provide shareholders with clear and

comprehensive disclosures, in a timely manner

and with appropriate details.

Maintain an appropriate pay-for-performance

alignment with emphasis on long-term

shareholder value.

Avoid arrangements that risk “pay for failure”.

For example, severance pay agreements must

not be in excess of 24 months’ pay or any more

stringent local requirement.

Maintain an independent and effective

compensation committee. No executives may

serve on the board and in certain markets, the

compensation committee must be composed of

a majority of independent members.

Non-Executive Director Compensation.

According to ISS, proposals relating to non-executive

director compensation must avoid awarding

inappropriate pay to non-executive directors. ISS will

therefore generally issue a positive recommendation

for proposals to award cash fees. To the contrary, ISS

will issue a negative recommendation if

The proposal provides for the granting of stock

options or similarly structured equity

compensation or introduces retirement benefits

for non-executive directors.

The proposal provides for an excessive fee

amount or proposes an excessive increase in the

fees.

No appropriate disclosure of the fees paid to

non-executive directors is made prior to the

general meeting.

Proposals that provide for both cash and share-based

compensation and proposals that bundle executive

and non-executive director compensation will be

considered on a case-by-case basis.

Equity-Based Compensation Guidelines. ISS

will issue a positive recommendation for equity-based

compensation proposals for employees if the plan is

in line with the long-term shareholder interests and

aligns the award with shareholder value. In order to

achieve this

The volume of awards transferred must not be

excessive.

The plan must be sufficiently long-term in

nature and structure.

The awards must be granted at market price.

Any performance standards must be fully

disclosed, quantified and long-term, with

relative performance measures preferred.

Combined Chair/CEO (Europe). ISS’s current policy

is to issue a negative recommendation for a proposal to

have a combined chair/CEO at core companies in

European markets unless the company provides

17

compelling reasons for a combination of the roles, or if

there are exceptional circumstances that justify combining

the roles. While ISS is currently considering several

exceptional circumstances in issuing its recommendation,

in 2011 according to ISS, the only circumstances that can

justify that the two position not be split is if the company

provides assurance that the chair/CEO would only serve in

the combined role on an interim basis (of no more than

two years), with the intent of separating the roles within a

given time frame and in this case, ISS would make its vote

recommendation on a case-by-case basis. The company

would be required, however, to provide for adequate

control mechanisms on the board, such as a lead

independent director, a high overall level of board

independence, and a high level of independence on the

board’s key committees.

According to ISS, European markets have further moved

toward broad acceptance of the separation of the chair and

CEO roles, as reflected by general practice among

European public companies, as well as the adoption of

best practice recommendations to this end in local

corporate governance codes, and, therefore, the interim

appointment has come to represent the only potentially

acceptable explanation for a combination of the roles in

Europe.

By contrast, ISS has not changed its policy with respect to

independent chair proposals in the US and will continue

to evaluate these proposals on a case-by-case basis taking

into account whether the company has a robust

counterbalancing governance structure and any

problematic performance, governance or management

issues.

Noteworthy US Securities Law Litigation

Foreign issuer exposure to US securities fraud

actions curbed even further: In re Société

Générale and Plumbers’ Union v. Swiss Re.

Lower federal courts in the US continue to explore the

boundaries of the US Supreme Court’s landmark decision

in Morrison v. National Australia Bank. In Morrison, the

Court adopted the so-called “transactional test” and

limited the applicability of the US securities laws to fraud

that is “in connection with the purchase or sale of a

security listed on an American stock exchange, and the

purchase or sale of any other security in the United

States.” After the Morrison decision, several lower federal

courts have ruled that the “transactional test” bars

securities fraud claims brought by both foreign and US

investors, as long as the investors purchased the securities

on a foreign exchange.

Two recent federal court decisions have taken the

Morrison decision a step further. In In re Société

Générale, the plaintiff argued that Morrison should not

apply because the plaintiff was a US investor who

purchased Société Générale’s American Depositary

Receipts (“ADR”) on the US over-the-counter market. The

court, however, disagreed, stating that the antifraud

provisions of the US securities laws did not apply to the

plaintiff’s ADR transactions because “trade in ADRs is

considered to be a predominantly foreign securities

transaction.” The court explained that Société Générale’s

ADRs “were not traded on an official American securities

exchange [and] . . . were traded in a less formal market

with lower exposure to US-resident buyers.” As a result,

the court concluded that the purchases failed to satisfy

Morrison’s “transactional test” and dismissed the

plaintiff’s securities fraud claims with prejudice. Some

commentators have questioned whether this opinion

(which was limited to stocks traded over the counter) will

survive appellate review.

In Plumbers’ Union v. Swiss Re, the plaintiffs argued that

Morrison should not apply because the plaintiffs were US

residents that placed orders for Swiss Re stock in Chicago

from a trader who electronically executed the trades from

Chicago. The court rejected these arguments, stating that,

for purposes of determining whether a securities

transaction is “domestic” under Morrison, the location of

the investor and trader are immaterial. The court

explained that Swiss Re’s securities are listed only on the

SWX Swiss Exchange and, even though the purchase

order may have been electronically transmitted from the

US, the actual stock transaction was executed, cleared, and

settled on a subsidiary of the Swiss Exchange based in

London. Because the transaction occurred outside of the

US, the Court ruled that, under Morrison’s “transactional

test,” the plaintiffs’ securities fraud claims must be

dismissed.

These cases are important because, if they are upheld on

appeal, they would further limit foreign issuers’ exposure

to private securities fraud lawsuits in the US.

18

Issuers’ exposure in US securities fraud class

actions in context of failure to meet earnings

estimates limited: In re Oracle Corporation

Securities Litigation.

In November 2010 a federal appeals court in California

affirmed the dismissal of a securities fraud class action

because the plaintiffs’ failed to put forth sufficient

evidence on the element of loss causation. In Oracle, the

plaintiffs asserted that the company defrauded the market

by failing to disclose that certain of its products were

defective. The plaintiffs also asserted that the “truth”

about Oracle’s defective products was revealed to the

market when Oracle missed its quarterly earnings

projections. The federal appeals court rejected these

arguments, stating that in order to establish loss

causation, the plaintiffs must plead and prove that “the

market learn[ed] of a defendant’s fraudulent act or

practice, the market react[ed] to the fraudulent act or

practice, and a plaintiff suffer[ed] a loss as a result of the

market’s reaction.” After evaluating the totality of the

evidence in the case, the court held that the plaintiffs

failed to put forth evidence from which a reasonable jury

could find that Oracle’s share price dropped as a result of

the market learning of and reacting to the company’s

purported fraud, as opposed to the company’s poor

financial health generally. As a result, the court ruled that

the plaintiffs failed to establish the element of loss

causation and affirmed the district court’s decision

granting summary judgment for Oracle.

This case is important because it limits an issuer’s

exposure in securities fraud class actions when it fails to

meet earnings estimates.

Recent SEC/DOJ Enforcement Matters

DOJ and SEC settle FCPA charges against

Alcatel-Lucent.

On 27 December 2010 the SEC charged Alcatel-Lucent, SA

with violating the Foreign Corrupt Practices Act (“FCPA”)

by paying bribes to foreign government officials to illicitly

win business in Latin America and Asia. The SEC alleged

that Alcatel’s subsidiaries used sham consultants to pay

bribes to government officials in order to obtain or retain

lucrative telecommunications contracts and other

contracts and three Alcatel subsidiaries pleaded guilty to

FCPA bribery offenses. The pleadings detail a number of

compliance failings, mostly centred on due diligence on

third parties and providing travel to officials. A main

concern was that Alcatel had a fairly good paper

compliance programme that it failed to enforce or

deliberately evaded.

Without admitting or denying the SEC’s allegations,

Alcatel agreed to pay more than US$45 million to settle

the SEC’s charges and pay an additional US$92 million to

settle criminal charges brought on the same day by the US

Department of Justice. Alcatel also consented to a court

order permanently enjoining it from future violations of

the FCPA; ordering the disgorgement of wrongfully

obtained profits; and ordering it to comply with certain

undertakings including an independent compliance

monitor for a three-year term. In total, Alcatel agreed to

pay over US$229 million in fines, penalties, and

disgorgement to the DOJ and the SEC with respect to

contracts in which the company realised over US$45

million in profits.

This case is important because it demonstrates the SEC’s

increased willingness to enforce the FCPA against non-US

issuers and shows the importance of adequate internal

corporate control systems to detect and prevent bribery

payments that are properly enforced.

DOJ and SEC settle FCPA charges against

various companies in the oil services sector and a

freight forwarding company.

On 4 November 2010 the DOJ and SEC announced a

settlement with six oil services companies and a global

freight forwarding company for alleged violations of the

FCPA. The DOJ and SEC alleged that, between 2001 and

2007, the companies bribed customs officials in more than

10 countries in exchange for such perks as avoiding

applicable customs duties on imported goods, expediting

the importation of goods and equipment, and lowering tax

assessments. In order to resolve the coordinated DOJ and

SEC investigations, the companies agreed to pay US$80

million in civil disgorgement, interest, and penalties, and

criminal fines of US$156.5 million. The companies

involved in the settlement are Panalpina, Inc., Pride

International, Inc., Tidewater Inc., Transocean, Inc.,

GlobalSantaFe Corp., Noble Corporation, and Royal Dutch

Shell plc.

This case is important as it is the first time that the US

government has conducted a coordinated FCPA

investigation of a particular industrial sector and

19

represents the largest number of companies to settle FCPA

allegations simultaneously.

SEC settles Regulation FD enforcement action for

implied messages: Office Depot.

In October 2010 the SEC filed a civil complaint against

Office Depot and two of its executives for violating

Regulation FD for selectively communicating to analysts

that it would not meet quarterly earning estimates.

Regulation FD prohibits issuers or persons acting on their

behalf from “selectively” disclosing material non-public

information to securities analysts, institutional investors,

or other enumerated persons without first or

simultaneously disclosing that information to the general

public. The SEC alleged that Office Depot made a series of

one-on-one calls to analysts in which they signalled,

without directly stating, that Office Depot would not meet

its estimates. In response to these calls, the analysts

promptly lowered their estimates for the company. Office

Depot agreed to settle the SEC’s charges without

admitting or denying the allegations, and will pay a US$1

million penalty. The two senior executives also agreed to

settle the Regulation FD charges and will pay US$50,000

each.

This case is important because it demonstrates that the

SEC views Regulation FD broadly to include, not only

explicit selective statements, but also “indirect signalling”

that is not simultaneously disclosed to the general public.

Regulation FD prohibits selective disclosure by US issuers,

although its principles would broadly apply to foreign

private issuers as well.

DEVELOPMENTS SPECIFIC TO FINANCIAL INSTITUTIONS

EU Developments

AIFM Directive Adopted

The Alternative Investment Fund Managers Directive (the

“AIFM Directive”) was adopted by the European

Parliament on 11 November 2010. For the first time, EU

fund managers will be subject to pan-European

regulation. Alternative investment funds (“AIFs”),

including hedge, private equity, infrastructure and real

estate funds, located in the EU will be capable of being

marketed across Europe, by EU managers, on a

“passported” basis, removing the need for the current and

costly country-by-country legal analysis of marketing

restrictions. However, EU fund managers will be,

amongst others, subject to detailed reporting and

disclosure requirements, required to defer large portions

of bonuses to key staff, and restricted as to delegation and

use of service providers.

It is expected that the AIFM Directive will enter into force

in March/April 2011. However, its provisions will only

take effect once EU Member States have passed their own

legislation to implement the Directive – a process to be

completed two years after the Directive comes into effect

(i.e., March/April 2013).

The AIFM Directive will have far-reaching implications for

investment managers, their funds and service providers –

whether located in, or outside, the EU. Key highlights of

the AIFM Directive are as follows:

Compulsory regulation of EU alternative investment

fund managers.

Lighter “registration only” regime for smaller fund

managers.

Regulated managers will be subject to capital

requirements, and detailed disclosure and reporting

obligations.

Additional disclosure and other obligations for

managers of (i) funds engaged in substantial leverage

and (ii) funds acquiring significant stakes in

companies.

Restrictions on the ways in which a regulated

manager can remunerate its staff (including by

requiring large percentages of bonuses to be

deferred).

Allows funds to be marketed to professional investors

across the EU with a “passport” – but initially only

available to EU managers of EU funds.

For non-EU managers and non-EU funds, different

marketing regimes to be phased in and out over the

next eight years. A marketing “passport” is eventually

expected to be available, but will effectively require a

non-EU manager to be regulated under, and comply

with, the entire Directive as if it was an EU manager.

Managers required to ensure that each fund has a

depositary for holding assets. Restrictions on location

of depositary and near-strict liability for the

depositary.

20

Managers can only delegate if certain conditions are

satisfied, and the manager’s liability to the fund and

investors can never be affected by delegation.

Managers required to set leverage limits for each fund

and demonstrate that those limits are reasonable.

Member States may in exceptional circumstances

impose leverage limits on a manager.

Numerous provisions of the Directive to be fleshed

out by rules to be adopted over the coming months by

the new ESMA.

Access to European investors will be restricted for funds

managed by non-EU managers and even for many non-

EU funds that are managed by EU managers. A marketing

passport may become available for non-EU managers in

the future, but only if those non-EU managers agree to

submit themselves to the provisions of the AIFM

Directive. Below are key timeframes relating to the

marketing of funds in the EU:

2011 - 2013: Business as usual, except in Member

States which implement before the deadline for

implementation.

March/April 2013: Deadline for implementation in

EU Member States. National Private Placement

Regime commences for non-EU managers and EU

managers of non-EU funds.

Beginning 2015: Possible introduction of Passport

Regime, alongside the National Private Placement

Regime.

Beginning 2018: Possible falling away of National

Private Placement Regime, leaving Passport Regime

in place.

See our client publication for a comprehensive overview of

the AIFM Directive and its implications which is available

at:

http://www.shearman.com/files/Publication/8f16883f-

635b-4a7e-a2b1-

5bdede179084/Presentation/PublicationAttachment/b32

e9572-028d-4c43-a868-167a6136c317/FIA-111210-

European-Regulation-of-Fund-Managers.pdf.

CEBS Final Guidelines on Remuneration

On 10 December 2010 the Committee of European

Banking Supervisors (“CEBS”) published its final

Guidelines on Remuneration Policies and Practices. CEBS

was mandated to provide guidance on the implementation

of the remuneration principles set out in CRD3 (i.e., the

Banking Consolidation Directive and the Capital Adequacy

Directive, as amended, on which we reported in our April

2010 Newsletter). Member States were required to

implement CRD3 from 1 January 2011.

The Guidelines apply to all firms subject to the CRD,

including banks and investment firms that are subject to

MiFID. The Guidelines came into force on 1 January 2011

and therefore cover 2010 bonuses. However, due to the

tight deadline there is provision for regulators to take into

account that some measures may take time to implement.

With the aim of assisting firms to ensure that their

remuneration policies comply with CRD3, the final

Guidelines clarify how firms should apply the

requirements in practice and how supervisors can assess

compliance by firms, including the assessment of staff,

disclosure to public, severance payments and pensions,

share-like instruments and retention of deferred

remuneration.

EU Financial Supervisory Framework

The new EU Financial Supervisory Framework came into

effect on 1 January 2011 through the following legislation:

Regulation 1092/2010 on EU macroprudential

oversight of the financial system, establishing the

European Systemic Risk Board (“ESRB”).

Regulation 1093/2010 establishing the European

Banking Authority, seated in London.

Regulation 1094/2010 establishing the European

Insurance and Occupational Pensions Authority

(“EIOPA”), seated in Frankfurt.

Regulation 1095/2010 establishing the European

Securities and Markets Authority (“ESMA”), seated in

Paris.

Directive 2010/78/EU amending Directives

1998/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC,

2003/71/EC, 2004/39/EC, 2004/109/EC,

2005/60/EC, 2006/48/EC, 2006/49/EC,

2009/65/EC in respect of the powers of the EBA, the

EIOPA and the ESMA (the “Omnibus I Directive”).

Regulation 1096/2010 conferring specific tasks on the

European Central Bank concerning the functioning of

the ESRB.

21

Commission Communication on Sanctions in the Financial Services Sector

On 8 December 2010 the European Commission

published a communication which sets out the key areas

of divergence across Member States in the national

sanctioning regimes in the financial services sector and its

policy proposals for achieving greater convergence and

efficiency of those regimes. The Commission suggests that

an EU legislative proposal is the best method for

addressing the following shortcomings:

Regulators do not have the same types of sanctioning

powers for certain violations of financial services law.

The level of pecuniary sanctions varies widely across

Member States.

Some regulators cannot impose sanctions on both

natural and legal persons.

Regulators do not take into account the same criteria

in the application of sanctions.

The range of violations for criminal sanctions differs

across the EU.

The level of application of sanctions varies across

Member States.

The proposed legislation would be sector-specific and

would include the introduction of criminal sanctions for

the most serious violations of financial services law. The

Commission will also consider further convergence on

other issues such as the rules of burden of proof which

may be necessary to ensure that sanctions are effectively

applied. Responses to the consultation are due by 19

February 2011.

UK Developments

FSA Finalises Revised Remuneration Code

On 17 December 2010 the FSA issued the final form of the

revised Remuneration Code (the “Code”) to take into

account changes required by the Capital Requirements

Directive (“CRD”, made up of the Recast Banking

Consolidation Directive (2006/48/EC) and the Recast

Capital Adequacy Directive (2006/49/EC)). The revised

Code will encompass a much larger group of entities,

including all banks and building societies, investment

banks, asset and fund managers, financial advisors and

stockbrokers.

The Code applies to those categories of staff whose

professional activities have a material impact on the firm’s

risk profile, including directors, senior management, risk

takers, those undertaking control functions and employees

whose total remuneration puts them in the same

remuneration bracket as senior management, collectively

referred to as “Code Staff”.

Individuals who are in a “significant influence function”,

employed by a branch or subsidiary based in the UK, but

nevertheless located outside the UK, also fall within the

definition of Code Staff. The Code equally applies to

individuals on secondment to a firm in the UK even if such

individuals remain employed and remunerated by a non-

UK entity in a group of companies.

The following are key remuneration structure provisions:

The firm should set appropriately balanced ratios

between fixed and variable remuneration; the fixed

element should be sufficiently high to allow a fully

flexible remuneration structure, including the option

to pay no variable remuneration at all.

At least 40% of variable remuneration of Code Staff

must be deferred with a vesting period of not less than

three to five years; the percentage should be as high as

60% where variable remuneration is above £500,000.

In line with CEBS guidelines, at least 50% of variable

remuneration should consist of shares; this

requirement should be applied proportionally to both

deferred and vested portions.

Firms must not offer guaranteed bonuses unless they

are “exceptional” (i.e., the firm is undergoing a major

restructuring and there are prudential reasons for the

use of such bonuses), occur in the context of hiring

Code Staff and are limited to the first year of service

only.

The Code contains a “de-minimis” exception, pursuant to

which provisions of the Code that relate to remuneration

structures will not apply to an individual whose variable

remuneration is equal to or less that 33% of their total

remuneration and their total remuneration is not more

than £500,000.

The current form of the Code contains the principle of

“proportionality”, which allows firms to match

remuneration policies and practices to a firm’s individual

22

circumstances and to disapply certain provisions of the

revised Code.

Firms already within the scope of the Code were required

to comply in full with the revised Code from 1 January

2011, other firms coming within the Code for the first time

must comply as soon as practicable and in any event by 31

July 2011.

On 17 December 2010 the FSA also published its final

rules on remuneration disclosure. The FSA announced

that:

The FSA will implement requirements on disclosure

of remuneration which are consistent with CRD3.

The proposals on frequency and form of disclosure

provide sufficient flexibility for firms to comply

without undue difficulty.

The four-tier approach to disclosure is a proportional

approach that takes account of firms’ risk profiles to

the extent that is practicable and enforceable.

Group entities will have to report on a consolidated

basis at the level of the highest proportionality tier of

any entity in the group.

The next steps for implementation are as follows:

By 28 February 2011, the FSA must make a decision

on whether to put forward proposals for consultation

on the question of extending the scope of the

disclosure requirements to third-country BIPRU

firms in relation to their activities carried out from

establishments in the UK. If the FSA do decide to

make a consultation they will aim to do so in spring

2011.

By 31 December 2011, all firms within the scope of the

rules must have made the first annual requisite

disclosures on remuneration.

BIS Consultation on Reforming the Consumer Credit Regime

In December 2010 BIS issued a consultation on reforming

the consumer credit regime. The consultation sets out the

Government’s proposal to create a new consumer

protection and markets authority (“CPMA” – a working

title) which would be founded upon a clear remit for

consumer protection. To this end, the consultation

includes proposals to transfer responsibility for consumer

protection from the Office of Fair Trading (“OFT”) to the

CPMA.

The consultation also addresses the competition and

general consumer functions of the OFT by analysing and

requesting views on two options for reform:

A regulatory regime for consumer credit under the

CPMA within a legal framework based on the model

set out in the Financial Services and Markets Act

2000 and therefore consistent with the regulation of

other retail financial services; or

A specific consumer credit regime based on the

Consumer Credit Act 1974.

The paper further addresses important issues relating to

transitional arrangements, should consumer credit

responsibility be transferred to the CPMA. These include

the application of a new regime to existing agreements

and consumer credit licences.

Responses to the consultation are requested by 22 March

2011 in anticipation that the Government will produce a

response to the consultation in the spring. A copy of the

consultation is available at

http://www.bis.gov.uk/Consultations/consultation-

reforming-consumer-credit?cat=open.

MoJ Consults on Reforming Her Majesty’s Courts Service and the Tribunals Service

On 30 November 2010 the Ministry of Justice (“MoJ”)

published a consultation paper including proposals to

unify Her Majesty's Courts Service and the Tribunals

Service. The new organisation, to be called Her Majesty's

Courts and Tribunals Services (“HMCTS”), would start

operating on 1 April 2011. If the proposals proceed,

financial institutions will have to appeal decisions of the

FSA, the OFT and the MoJ to HMCTS instead of the

Upper Tribunal (Tax and Chancery Chamber), the First-

tier Tribunal (Consumer Credit) and the First-tier

Tribunal (Claims Management Services), respectively.

UK Government Publishes Final Legislation Introducing Bank Levy

On 9 December 2010 the Government announced the

publication of final legislation to implement the bank levy

which is intended to encourage banks to move to less risky

funding profiles and ensure that banks make a fair

23

contribution given the risks they present to the financial

system and wider economy. The legislation forms part

of the Finance Bill 2011 which is following the

legislative passage through the Houses of Parliament.

The bank levy is likely to affect UK banks, banking

groups, building societies, foreign banking groups

operating in the UK through permanent establishments

or subsidiaries and UK banks and banking sub-groups

in non-banking groups. According to the

announcement, the levy will take effect from 1 January

2011 and will be permanent. The rate for 2011 will be

0.05 per cent, rising to 0.075 per cent from 2012

resulting in annual revenues of around £2.5 billion.

Possible Change to FSA Code of Market Conduct following Spector Decision

The FSA has consulted on amending the Code of

Market following the European Court of Justice’s

decision in Spector Photo Group NV, Chris Van

Raemdonck v Commissie voor het Bank, Financie-en-

Assurantiewezen (Case C-45/08). In the Spector case,

the ECJ found that the fact that a person who holds

inside information trades in financial instruments to

which that information relates implies that the person

has ‘used that information’. However, that is without

prejudice to the person’s rights of defence and right to

rebut that presumption. The FSA considers that the

wording in the Code of Market Conduct suggests that it

would need evidence of a person’s intention to prove

insider dealing and that this is not necessary due to the

Spector decision. Responses to the consultation were

due on 6 December 2010.

Our client publication on the Spector case is available

at: http://www.shearman.com/the-spector-photo-case-

-ecj-rules-on-the-interpretation-of-the-market-abuse-

directive-02-05-2010/.

German Developments

Act on the Restructuring and Unwinding of Credit Institutions and the Extension of the Statute of Limitations on the Liability of Governing Bodies of Stock Corporations

The Act, effective as of 1 January 2011, fundamentally

reforms the laws and instruments applicable to credit

institutions that fail to prevent insolvency by

introducing a new two-step process specifically

designed for the restructuring and reorganisation of

distressed credit institutions. In addition, a so-called

restructuring fund will be put in place with the purpose

to cover the costs of restructuring measures for failing

system-relevant credit institutions. The restructuring

fund will be funded by annual and extraordinary levies

on all credit institutions. Further, the Act extends the

statute of limitations with regard to the liability of

members of the management board and supervisory

board of a corporation, which is listed on a stock

exchange, and credit institutions from five to ten years.

Act for the Implementation of the amended Banking Directive and the amended Capital Adequacy Directive

The Act implements, inter alia, Directive 2009/44/EC

and Directive 2009/111/EC into German law. Among

others, the Act amends the rules applicable to

securitisation transactions as set forth in the German

Banking Act. As of 1 January 2011, the issuer of a

securitised claim has to retain a stake of at least 5%

(10% as of 1 January 2015), while institutions investing

in such securities are obliged to carry out an extensive

examination of their investment. The Act further

amends the rules for financial institutions regarding the

recognition of hybrid capital as Tier 1 capital and the

management of liquidity risks

.

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NEW YORK Jerry Fortinsky +1.212.848.4900 jfortinsky@shearman.com

Doreen Lilienfeld +1.212.848.7171 dlilienfeld@shearman.com

Allison Harris +1.212.848.5093 allison.harris@shearman.com

Jeffrey Resetarits +1.212.848.7116 jeffrey.resetarits@shearman.com