General Counsel update - February 2014

A SUMMARY OF MAJOR DEVELOPMENTS IN KEY AREAS GENERAL COUNSEL UPDATE 27 February 2014 LEGAL GUIDE EDITION 37

HERBERT SMITH FREEHILLS 01 GENERAL COUNSEL UPDATE - ISSUE 37 CONTENTS 02 DEVELOPMENTS OF GENERAL INTEREST 02 TRANS-PACIFIC PARTNERSHIP 02 The Trans-Pacific Partnership Free Trade Agreement thought to be near completion (Cross-border) 02 CORPORATE 02 Preparing your annual report and accounts (UK) 03 Contract law – default provisions held to be unenforceable penalties (UK) 02 DISPUTES 02 Courts taking tough line on compliance following Mitchell decision (UK) 03 Defamation legislation (UK) 03 EMPLOYMENT 03 Whistleblowing: recommendations for reform (UK) 03 Legislative and appeal news (UK and Europe) 03 Disciplinary process: implied right to fair process enforceable by injunction (UK) 04 EMPLOYMENT/INTELLECTUAL PROPERTY 04 Trade secrets: a unified approach (Cross-border) 04 REAL ESTATE 04 Law of distress to be replaced by Commercial Rent Arrears Recovery Scheme (UK) 05 TAX 05 Finance Bill 2014 – proposed changes to partnerships to go ahead (UK) 06 SECTOR SPECIFIC DEVELOPMENTS 06 COMPETITION, REGULATION AND TRADE 06 New UK competition regulator – the Competition and Markets Authority – to take up its role on 1 April 2014 06 Competition law class actions coming to the UK: Consumer Rights Bill introduced to Parliament 06 EU Commission adopts package of measures to ”simplify” the EU merger control regime 06 FINANCE AND INSOLVENCY 06 Change of LIBOR administrator: impact on loan agreements (Cross-border) 07 Derivatives – EMIR reporting requirements come into force this month (Europe) 07 FINANCIAL SERVICES REGULATION 07 MiFID II – Political agreement reached (Europe) 07 ”Topping up” of Financial Ombudsman awards through the courts not allowed: Court of Appeal overturns High Court decision (UK) 08 INSURANCE 08 Solvency II Directive: a new regulatory regime for European insurers and reinsurers 08 INTELLECTUAL PROPERTY 08 Court of Justice of the European Union decides that hyperlinking can be legitimate where the material linked is already freely available 08 Online retailers at risk when bidding on keyword brand names which they do not stock (UK) 09 Consumer survey evidence in IP cases only to be introduced in exceptional circumstances (UK) 09 JUDICIAL REVIEW 09 Further reforms to judicial review (UK) 09 PLANNING 09 More flexible Community Infrastructure Levy from mid-February 2014 (UK) 10 New Planning Court announced by the Ministry of Justice (UK) 10 TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS 10 Cyber security: high on the agenda in the EU and UK 11 REGION SPECIFIC DEVELOPMENTS 11 AUSTRALIA 11 New South Wales Supreme Court upholds registration of Solomon Islands judgment 11 Australian Government changes official position on investor protections 11 Australia pressing ahead with free trade agreements 12 Royal Commission into trade union governance and corruption 12 CHINA 12 Amended company law eases burden 12 HONG KONG 12 Charities law reform in Hong Kong 13 THAILAND 13 Sexual harassment in the workplace 13 US 13 US Supreme Court limits the jurisdictional reach of US courts over foreign corporations 14 CONTRIBUTORS Please do not hesitate to contact any of the named people for further information on the items set out below. We would also like to hear whether you wish to receive this update more regularly or have other suggestions for its improvement. Please e-mail your comments to Simone Pearlman at [email protected] or your relationship partner. HERBERT SMITH FREEHILLS 02 GENERAL COUNSEL UPDATE - ISSUE 37 DEVELOPMENTS OF GENERAL INTEREST TRANS-PACIFIC PARTNERSHIP The Trans-Pacific Partnership Free Trade Agreement thought to be near completion (Cross-border) The Trans-Pacific Partnership (TPP), the free trade agreement covering the major economies of the Pacific Rim, is thought to be nearing signature after three and a half years of secret negotiations. Ministerial meetings were held in February 2014 between the states involved, comprising the United States, Canada, Australia, New Zealand, Japan, Singapore, Malaysia, Vietnam, Mexico, Chile, Peru and Brunei, potentially bringing the parties close to a final agreement. While the content of the TPP has not yet been published, the significance of the negotiating parties and the exceptionally broad scope of the agreement have made it the subject of great speculation. The TPP is expected to have huge implications for global trade dynamics if successfully concluded, creating a trade bloc constituting over 40% of global GDP and 20% of global trade volume, which is second only to the European Union in its scale. The commitments expected to be included in the TPP go well beyond the liberalisation of market access regimes, with far-reaching obligations in relation to intellectual property, financial and environmental regulation, investment protection mechanisms, government procurement regimes and labour standards. Particular impacts are expected to be felt by the energy, agribusiness, TMT, consumer products and automotive sectors, as well as financial services through the harmonisation of rules related to the use of e-commerce. Four draft chapters of the TPP have been leaked through Wikileaks during the negotiations, fuelling heated debate about the scope of the commitments required by the parties. Herbert Smith Freehills is monitoring the negotiations closely. If you would like to discuss the implications of the TPP for your business, please contact Donald Robertson at [email protected], Christian Leathley at [email protected] or Leon Chung at [email protected]. CORPORATE Preparing your annual report and accounts (UK) UK listed companies are this year dealing with a number of key changes affecting the annual report and the resolutions to be put to the annual general meeting. The annual report must now include a strategic report, and UK-incorporated quoted companies must include additional disclosures on gender, human rights and greenhouse gas emissions. The new directors’ remuneration regime requires a directors’ remuneration report with expanded content and a new shareholder voting regime in relation to directors’ pay. There are also a significant number of future developments which are already in the pipeline and which companies need to take into account, including mandatory audit tendering and amendments to the UK Corporate Governance Code. We have issued a briefing focusing on the annual report and AGM changes and the potential future corporate governance changes. The briefing is available here. For further information please contact Carol Shutkever at [email protected] or Kathryn Cearns at [email protected]. Contract law – default provisions held to be unenforceable penalties (UK) A recent Court of Appeal decision, Talal El Makdessi v Cavendish Square Holdings BV ([2013] EWCA Civ 1539), has highlighted the rule against penalties, one of the key limitations on freedom of contract. It also demonstrates that a penalty can include not only a requirement to pay a sum but also the loss of the right to a future payment and a requirement to transfer assets at an undervalue. The Court of Appeal (overturning the High Court decision) held that provisions in a share purchase and shareholders’ agreement were penalties and therefore unenforceable. The relevant provisions provided that on breach of non-compete restrictions the seller lost two deferred consideration payments and a call option in favour of the purchaser was triggered at a price which did not reflect the full value of the seller’s remaining shares. The Court suggested that, had the provision in relation to the deferred consideration payments been drafted so that payment was conditional on compliance, then the doctrine of penalties might not have applied at all. The case has been appealed to the Supreme Court but in the meantime the case shows the risks involved in drafting clauses for payment or forfeiture on breach and the need to carefully consider in each case the tests for what is a penalty and the form of drafting that is used. For further information please contact Carol Shutkever at [email protected]. DISPUTES Courts taking tough line on compliance following Mitchell decision (UK) In our November 2013 update we reported that the Court of Appeal had sent a clear message on the need for strict compliance with rules and court orders in the high profile Mitchell ”plebgate” case. Since then there have been numerous decisions illustrating that the message has been received loud and clear and is being applied at all levels of the judiciary. Tough sanctions have been imposed for various failings including late filing of costs budgets and late service of witness statements and expert reports, in some cases resulting in claims or defences being struck out. The Mitchell case confirmed that the Court of Appeal will support first instances judges who make what it considers to be ”robust but fair” case management decisions. Hot on the heels of Mitchell, in its decision in Durrant v Chief Constable of Avon & Somerset Constabulary [2013] EWCA Civ 1624, the Court of Appeal made it equally clear that it will overturn first instance judgments that fail to take a sufficiently robust approach. The Court said: ”if the message sent out by Mitchell is not to be undermined, it is vital that decisions under CPR 3.9 which fail to follow the robust approach laid down in that case should not be allowed to stand. Failure to follow that HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 03 approach constitutes an error of principle entitling an appeal court to interfere with the discretionary decision of the first instance judge.” For further information see our blog posts on the Mitchell and Durrant decisions or contact Anna Pertoldi at [email protected]. Defamation legislation (UK) The Defamation Act 2013, which received Royal Assent on 25 April 2013, came into force on 1 January 2014. Significantly, this Act introduces a requirement for companies and individuals to show serious harm when establishing a claim. Other provisions protect those publishing material which they reasonably believe is in the public interest, replace the common law defence of ”fair comment” with ”honest opinion” and introduce a single publication rule to prevent repeated claims against a person in relation to the same material. The Act, along with the Defamation (Operators of Websites) Regulations 2013, also provides protection for operators of websites hosting user-generated content as long as they follow a prescribed procedure. This will usually require action within 48 hours of receipt of a notice of complaint. The presumption for trial by jury in defamation claims has also been removed and now cases will usually be tried by a single judge. Case law will be reviewed with interest over the coming year and should provide further clarity as to how this legislation will be interpreted by the courts. For further information please contact Alan Watts at [email protected]. EMPLOYMENT Whistleblowing: recommendations for reform (UK) A Whistleblowing Commission established by the whistleblowing charity, Public Concern at Work, has carried out a review of the effectiveness of whistleblowing in the UK. Its report sets out 25 recommendations, including that a statutory code of practice be implemented and taken into account by courts and tribunals when deciding whistleblowing cases. The Commission has itself produced a draft code which emphasises the role that non-executives should play. The code provides that a worker should be permitted to raise concerns with an identified senior executive and/or board member and that the employer should identify one person with overall responsibility for the effective implementation of the whistleblowing arrangements. Periodic audits of the arrangements should be carried out and there should be provision for the independent oversight and review of the arrangements by the Board, Audit or Risk Committee or equivalent body (which should also set out the terms of reference for the periodic audits). Companies that publish annual reports should include information about the effectiveness of whistleblowing arrangements in their reports. The Commission’s report also highlights the key role regulators have to play and suggests that regulators should be encouraged or required to police whistleblowing more effectively. This could be by regulators requiring those they regulate to adopt the code of practice and/or to review the registration of bodies who fail to provide effective whistleblowing protection. The Commission decided against recommending financial rewards or incentives for whistleblowing. Details of further recommendations are included in our blog post. The UK Government, which issued its own call for evidence into whistleblowing in July 2013, has agreed to take account of the Commission’s findings. For further information please contact Andrew Taggart at [email protected]. Legislative and appeal news (UK and Europe)The Court of Appeal has referred to the European Court of Justice the case of USDAW v Woolworths UKEAT/0547/12; 0548/12 on the trigger for collective redundancy consultation obligations for multi-site employers. An expedited hearing will be sought. The original EAT ruling, that the obligation to inform and consult for collective redundancies applies whenever an employer proposes 20 or more redundancies in aggregate even if this is spread across a number of separate workplaces or business units, is summarised in our blog post. Changes to TUPE came into force on 31 January 2014 and are summarised in our blog post. The UK Government has issued amended guidance on TUPE to reflect the changes. The extension of the right to request flexible working to all employees with six months’ employment, and the replacement of the current statutory procedure with a duty to consider requests in a reasonable manner, has been postponed from its original implementation date of April 2014. No new date has been announced as yet.BIS has published a consultation on zero hours contracts, ending on 13 March 2014. The consultation discusses possible approaches to concerns over exclusivity clauses and transparency, including the option of legislation to ban the use of exclusivity clauses in contracts that offer no guarantee of work. Other suggestions include codes of practice and government guidance; there is no proposal to ban such contracts outright. For further information please contact Tim Leaver at [email protected]. Disciplinary process: implied right to fair process enforceable by injunction (UK) The Supreme Court has ruled that there is an implied contractual right to a fair disciplinary process, a serious breach of which could enable an employee to obtain an injunction preventing the employer from completing that process without starting afresh. In Chhabra v West London Mental Health NHS Trust [2013] UKSC 80 this implied right was breached because the conclusions of the person investigating allegations had been amended extensively by an HR adviser. The intervention had resulted in alleged misconduct being wrongly categorised as gross misconduct. The Supreme Court granted an injunction restraining the employer from proceeding with the disciplinary hearing without first carrying out a fresh investigation. Employers should be live to the risk of an employee seeking an injunction if they fail to follow a fair disciplinary process, particularly where capped unfair dismissal compensation would be inadequate (i.e. high earners) or the employee might become unemployable if dismissed (e.g. in the education, medicine, or financial services sectors). The process should include ensuring that the conclusions of the person charged with investigating disciplinary allegations are the investigator’s own, and not influenced by other parties such as HR or legal departments. The Court did recognise that it is legitimate for the investigator to seek advice from HR on questions of procedure, or to ensure that the report is presented clearly and covers all necessary matters. Where there has been input from a third party, it will be helpful to keep a documentary record showing its remit. For further information please contact Peter Frost at [email protected]. 04 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS EMPLOYMENT/INTELLECTUAL PROPERTY Trade secrets: a unified approach (Cross-border) ”Cybercrime and industrial espionage are unfortunately part of the reality that businesses in Europe face every day. We have to make sure our laws move with the times and that the strategic assets of our companies are adequately protected against theft and misuse. Protecting trade secrets is also about more than that.” Commissioner for Internal Market and Services Michel Barnier, November 2013. According to an EU press release, recent studies found that one in five EU companies has suffered at least one attempt to steal its trade secrets in the last ten years; and the numbers are going up with 25% of companies reporting theft of information in 2013, up from 18% in 2012. Across Europe, companies, irrespective of their size, value their trade secrets as much as their intellectual property rights. The capacity of companies to innovate and compete can be seriously harmed when confidential information is stolen or misused. Trade secrets can be particularly important to small and medium-sized enterprises (SMEs) who often choose to protect their businesses through the use of these unregistered rights rather than go through the expense of applying for patents. There are currently significant differences across the EU in the way in which trade secrets can be protected. Some countries rely on general torts or unfair competition law; other countries have a developed system of specific protection in place. Some countries have civil remedies whilst others have criminal sanctions. The fragmented approach within the EU creates different levels of protection and redress. This makes a uniform business policy or protection measure difficult to establish for businesses operating across Europe. Enforcement is also patchy. Businesses are unsure how well their confidential information is protected in each jurisdiction. This can impact on cross-border cooperation between business and research partners and has been identified by the European Commission as a key obstacle to innovation and economic growth within the EU. The European Commission has approved a proposal for a Directive to counter the problem of trade secret theft and provide a clear and uniform level of protection across the EU. The proposed Directive contains a new definition of trade secrets and lays down rules on protection against the unlawful acquisition, disclosure and use of trade secrets. There is also a draft provision for courts to be able to require those involved in a case not to disclose or use any trade secrets revealed in legal proceedings. Many of the provisions are already available in UK legal proceedings or effectively part of UK law through the common law. It is currently expected that the introduction of what will be statutory protection for trade secrets will see the new law running alongside the current case law. The proposed Directive will now go to the Council of Ministers and the European Parliament for debate and adoption; the new measures are expected to be in place within three years. For analysis of the proposal see our recent e-bulletin and PLC magazine article by Peter Frost, Mark Shillito, Rachel Montagnon and Christine Young. In addition, there is a proposal to enhance the protection of trade secrets in the draft Trans-Pacific Partnership Free Trade Agreement (see article above entitled ”The Trans-Pacific Partnership Free Trade Agreement thought to be near completion”). Proposed by the United States, Mexico, Canada, New Zealand and Japan, the provision would require signatory countries to impose criminal penalties for misappropriating or disclosing, wilfully and without authority, trade secrets relating to a product in national or international commerce for the purposes of commercial advantage or financial gain, and with the intent to injure the owner of such trade secrets. Australia, Singapore, Malaysia, Peru, Vietnam, Chile and Brunei have all opposed the provision. If successful, this proposal is likely to have wide-reaching and important consequences for a variety of industries. Businesses in the financial services, pharmaceuticals, manufacturing, information technology and food/beverage production sectors, which rely heavily on trade secrets to protect commercially valuable confidential information, are likely to be particularly affected. Expanding the protections available to these industries may also impact upon the level of foreign direct investment into TPP countries that do not currently impose criminal sanctions on the disclosure of trade secrets. Stronger protection for trade secrets is also likely to make companies more willing to enter into joint ventures involving commercially-sensitive or confidential information. Protection for trade secrets or confidential know-how is usually high up on the agenda in any cross-border deal, with parties insisting upon contractual protection through extensive non-disclosure agreements, as well as limiting physical access to ”black-box” information. For further information please contact Joel Smith at [email protected], Kristin Stammer at [email protected] or Christine Young at [email protected]. REAL ESTATE Law of distress to be replaced by Commercial Rent Arrears Recovery Scheme (CRAR) (UK) The reforms which form Part 3 of the Tribunals, Courts and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013 will come into force on 6 April 2014. Under the new regime, the archaic common law of distress is abolished, and replaced with the new statutory procedure which places further limits on a landlord’s ability to enter commercial premises occupied by a tenant and seize goods to the value of any rent arrears owed. Under CRAR, the landlord must first have served an enforcement notice on its tenant setting out the amount of arrears owed, allowing him at least seven clear days to pay the arrears. The rents must have been unpaid for at least seven days, be an amount equivalent to at least seven days’ rent, and must also relate to amounts due by way of ”principal” rent only, even if other monies are reserved as rent under the lease. Only following the expiry of the seven day period will a landlord, through a certified enforcement agent, be able to enter onto leased premises, to seize, remove and sell goods to the value of the arrears owed. The new procedure is widely seen as fettering landlords’ ability to take a ”self-help” measure to recover arrears of any payment reserved as rent, and may lead to landlords seeking alternative means of recovering sums owed, for example, by serving statutory demands or looking to draw down on rent deposits. For further information please contact Matthew Bonye at [email protected]. HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 05 TAX Finance Bill 2014 – proposed changes to partnerships to go ahead (UK) The Finance Bill 2014 confirms that two key anti-avoidance measures affecting the taxation of partnerships will take effect from 6 April 2014. Salaried partners proposals These apply only to LLPs and mark a significant departure from original proposals; the common law distinction between partners and employees is no longer proposed as a test for salaried partner status. Instead, members of an LLP will be treated as employees for UK tax and National Insurance purposes where the following conditions are met: 1. the LLP member is to perform services for the LLP in their capacity as a member, and is expected to be wholly or substantially rewarded through a ”disguised salary” that is fixed remuneration or, if varied, varied without reference to the LLP’s profits or losses; 2. the member does not have significant influence over partnership affairs; and 3. the member’s contribution to the LLP is less than 25% of the disguised salary. Mixed membership partnership proposals These apply to all partnerships. HMRC believe mixed membership partnerships (i.e. individuals and corporates, residents and non-residents) artificially take advantage of different tax attributes of partners by allocating profits or losses in a manner which minimises overall tax liability of individual partners. The draft legislation will allow HMRC to:Treat partnership profits allocated to corporate partners as arising to individual partners for income tax purposes. Deny tax relief for partnership losses allocated to individual partners in a mixed membership partnership where there are arrangements with a main purpose of diverting partnership losses from a non-individual to an individual so the individual may access income tax loss reliefs or capital gains relief. To read more, see our e-bulletin. For further information please contact Isaac Zailer at [email protected] or Bradley Phillips at [email protected]. 06 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS COMPETITION, REGULATION AND TRADE New UK competition regulator – the Competition and Markets Authority – to take up its role on 1 April 2014 On 1 April 2014 the UK’s new unified competition regulator, the Competition and Markets Authority (CMA), becomes fully operational and the current competition regulators, the Office of Fair Trading (OFT) and the Competition Commission (CC), will be abolished. The Government’s aim in creating a single regulator was to increase coherence in competition practice, have faster and less burdensome processes for businesses and more flexibility in resource utilisation. A single authority is also expected to carry greater weight as a competition regulator at an international level. Within the CMA’s structure and its decision making process the current two-phase institutional divide has to some extent been retained. The CMA Board will be responsible for overall strategy, performance, rules and guidance, and will be in charge of Phase 1 merger and market decisions (currently dealt with by the OFT). The CMA panel is a panel of independent experts (equivalent to the current CC), available for selection as members of a group to undertake Phase 2 mergers, market investigations and certain regulatory appeals (currently dealt with by the CC). The new CMA has recently published its strategic goals, which indicate that in the first few years it is likely to focus on regulated sectors (in collaboration with the sector regulators), emerging sectors and business models (including online models), and markets that have historically been public services. The creation of the new CMA is one of a number of changes that have been made to the UK competition regime by the Enterprise and Regulatory Reform Act 2013, all of which come into force on 1 April 2014. Click here for a more detailed briefing on the reforms. For further information please contact James Quinney at [email protected] or Susan Black at [email protected]. Competition law class actions coming to the UK: Consumer Rights Bill introduced to Parliament On 23 January 2014 the Government introduced the Consumer Rights Bill to Parliament. The Bill includes various measures reforming the UK competition law private enforcement regime, most controversially the introduction of a new collective redress scheme for competition claims. This follows the announcement of the Government’s reform proposals in January 2013 (see our e-bulletin here) and the publication of the draft Bill for consultation in June 2013. If passed by Parliament, the Bill will create a new competition law specific collective action in the specialist Competition Appeal Tribunal (CAT). The CAT will be required to certify whether an action should proceed on an ”opt-in” basis, or (for UK-domiciled claimants) on an ”opt-out” basis (where the claim is brought, and damages awarded, on behalf of a defined group of individuals and/or businesses, without the need to identify individual group members). The other planned reforms include the introduction of an opt-out collective settlements regime (similar to that in place in the Netherlands), a new ”fast track” cost-capped procedure for competition claims in the CAT, and the extension of the CAT’s jurisdiction. Subject to Parliamentary schedules and approval, adoption of the Bill is expected in late 2014. It is not yet clear when the reforms, if adopted, will come into force. If implemented, the reforms will lead to a significant rise in private competition law litigation in the UK, increasing both burdens on business and potential opportunities for bringing claims. For further information please contact Stephen Wisking at [email protected] or Kim Dietzel at [email protected]. EU Commission adopts package of measures to "simplify" the EU merger control regime On 1 January 2014 a series of revisions to the EU merger control notification and review procedure came into force. The EU Commission claims that the changes will simplify and streamline the EU merger control process. Some of the measures will do so, and are to be welcomed. For example, the circumstances in which the so-called ”simplified procedure” will be followed by the Commission have been broadened, and the level of market data which needs to be provided to the Commission when notifying non-problematic mergers (in particular those involving ”offshore” joint ventures which will not be active in the EEA) has been reduced. However, other changes mean that, in some circumstances, more information (including copies of internal documents) will in fact need to be provided by the parties to the Commission. Overall it remains to be seen how the revised procedures will be applied by the Commission in practice, and whether the Commission’s claims that the package will reduce ”red tape” for business will become a reality. See our e-bulletin on the changes here. There are further potential reforms of the EU merger control regime on the horizon, with the Commission expected to publish a White Paper later in 2014 on extending the scope of the regime to cover non-controlling minority stakes (following an initial consultation in 2013). This would be a significant change to the current position. For further information please contact Kyriakos Fountoukakos at [email protected] or James Quinney at [email protected]. FINANCE AND INSOLVENCY Change of LIBOR administrator: impact on loan agreements (Cross-border) On 1 February 2014, ICE Benchmark Administration Limited (ICE) replaced the British Bankers’ Association (BBA) as the LIBOR administrator, the body responsible for compiling and distributing LIBOR rates. This implements one of the recommendations of the ”Wheatley Review” of LIBOR. SECTOR SPECIFIC DEVELOPMENTS HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 07 Draft loan agreements currently under negotiation: In LMA style documents, the ”Screen Rate” definition should be amended by replacing the reference to the BBA as LIBOR administrator with a reference to ICE. Any other reference to the BBA should be reviewed and amended as appropriate. Loan agreements that have already been entered into: In our view, the change of the LIBOR administrator should not affect English law loan agreements that have already been entered into, which incorporate the LMA’s ”LIBOR” and ”Screen Rate” definitions. For such agreements, we believe that an English court would be likely to interpret the reference to BBA LIBOR as a reference to LIBOR as administered by ICE. The analysis for reaching this conclusion depends on whether the current ”LIBOR” and ”Screen Rate” definitions or the previous pre-April 2013 versions of these definitions have been used in the loan agreement. However, if loan agreements contain bespoke provisions (not based on the LMA ”LIBOR” or ”Screen Rate” definitions), the impact of the new LIBOR administrator will need to be considered on a case-by-case basis. For further information please contact Simon Chadney at [email protected] or Will Nevin at [email protected]. Derivatives – EMIR reporting requirements come into force this month (Europe) The European Market Infrastructure Regulation (EMIR) imposes a range of new obligations on derivative counterparties in the EU. One of the new obligations introduced by EMIR is the reporting requirement which came into effect on 12 February 2014 (the Reporting Start Date). Under the reporting requirement, EU counterparties must report details of derivative contracts entered into (or modifications or terminations of those contracts) to a registered or recognised trade repository by the next working day. There are currently six registered trade repositories including CME Trade Repository and ICE Trade Vault Europe. In addition, there are certain backloading requirements for derivatives contracts entered into before the Reporting Start Date (although some grace periods may apply). These requirements apply to all EU derivative market participants, not just regulated entities such as banks and insurance companies. Therefore all EU companies which are party to derivative contracts should already have taken steps to ensure that they will be complying with their obligations under EMIR. Certain non-EU entities may also need to agree terms with or provide details to their counterparties to assist EU counterparties to comply with their own obligations. EMIR allows for the delegation of reporting obligations and this reporting service is already being offered by some banks where both it and its counterparty are subject to the reporting requirement. However, liability for reporting remains with the delegating counterparty. Further information on Obligations for non-financial counterparties under EMIR and Reporting to Trade Repositories are available on the Financial Conduct Authority website. Our more detailed briefing on EMIR is available here. For further information please contact Dina Albagli at [email protected]. FINANCIAL SERVICES REGULATION MiFID II – Political agreement reached (Europe) The first step towards replacing the current Markets in Financial Instruments Directive (MiFID), which had begun with the legislative proposals put forward by the European Commission in October 2011, is drawing to a close. Political agreement on a new regulation (MiFIR) and a recast directive (MiFID II) was reached on 14 January 2014. MiFID II aims to make financial markets more resilient and transparent, and increase the level of protection given to investors. Financial services market participants will need to consider how they will be impacted by MiFID II. Some of the changes introduced in MiFID II are set out below:new market structure framework which ensures that trading takes place on regulated platforms;more stringent corporate governance requirements;position management and limits for derivatives;extension of pre-trade transparency and post-trade reporting to equity-like instruments and non-equities;new regime for non-EU firms seeking to do business in the EU; andrules aimed at increasing investor protection (for example, a ban on inducements in relation to independent advice and discretionary portfolio management). Technical trilogue discussions have concluded and the Level 1 texts of MiFIR and MiFID II are now being checked for inconsistencies, cross-references and linguistic errors. The MiFID II Level 1 package is expected to be adopted by the European Parliament in April, followed by adoption by the Council in May or June 2014. Level 2 discussions, which will consider certain aspects of MiFID II in greater detail, are expected to begin in the next few months; the European Securities and Markets Authority is expected to publish a consultation paper in April this year. MiFID II and MiFIR are expected to enter into force sometime between June 2016 and 2017. For further information please contact Clive Cunningham at [email protected]. "Topping up" of Financial Ombudsman awards through the courts not allowed: Court of Appeal overturns High Court decision (UK) The Court of Appeal has handed down an important judgment holding that complainants who had accepted a Financial Ombudsman Service (FOS) determination were barred from bringing court proceedings in relation to the same cause of action, under the legal principle of res judicata: Clark v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118. In doing so, the Court of Appeal overruled a High Court decision which had held that there was nothing to prevent complainants accepting a FOS determination awarding them the statutory maximum award (now £150,000) and then subsequently claiming for damages above that amount through the courts. That decision had been in direct conflict with other High Court authority and had caused concern in the financial services industry, as it seemingly allowed complainants the opportunity to use FOS awards to build a ”war chest” with which to bring subsequent court proceedings. Respondent financial services firms seeking to strike out court proceedings on account of an earlier FOS complaint will bear the 08 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS burden of proof in persuading the court that the causes of action in the FOS complaint and the litigation proceedings are the same. For further information, please contact Hywel Jenkins at [email protected] or see our briefing on the decision here. INSURANCE Solvency II Directive: a new regulatory regime for European insurers and reinsurers The Solvency II Directive establishes an entirely new framework for the supervision of insurance and reinsurance companies across Europe. It replaces existing EU legislation establishing minimum standards for the sector and introduces economic risk-based capital requirements for EEA insurers and reinsurers for the first time. Solvency II was originally expected to take effect from late 2012 but this date was not met as concerns surfaced over a few key aspects of the new regime. Last November’s announcement that political negotiations had, at last, ended in agreement means that insurers and reinsurers must now focus on what they need to do before 1 January 2016 to prepare for Solvency II. Relatively little of the new regime has been fully finalised to date. Because of this, firms will have to absorb vast amounts of material that EU and UK authorities are expected to generate over the next two years. Issues for firms include the following:Some aspects of the Solvency II regime are only expected to be finalised in the second half of 2015. This leaves little, if any, room for slippage given the 1 January 2016 launch date. Unresolved issues need to be agreed quickly if timetables for finalising the detail of the regime are to be met.Decisions taken at an EU level to make draft legislation and guidance available selectively means that some stakeholders are better placed today than others to understand how Solvency II is intended to operate. This cannot be consistent with good regulatory practice.Development by the International Association of Insurance Supervisors of a global insurance capital standard by 2016 means that Solvency II may not be the end of reforms in this area. This leaves firms facing the worrying prospect of yet more change. A copy of our most recent Solvency II briefing that looks at the legal framework and next steps towards completion of the regime can be found here. For further information, please contact Geoffrey Maddock at [email protected] or Barnaby Hinnigan at [email protected]. INTELLECTUAL PROPERTY Court of Justice of the European Union (CJEU) decides that hyperlinking can be legitimate where the material linked is already freely available The CJEU has held that the owner of a website may, without the authorisation of the copyright holders, redirect internet users, via hyperlinks, to works protected by copyright which are freely available and accessible on another site. This is so even if the copyright material is ”framed” on the site that contains the link, so as to give the impression that it is part of that site (Nils Svensson and Others v Retriever Sverige AB, C-466/12,13 February 2014) The CJEU’s decision is a clear statement that the provision of hyperlinks as references to publicly available material cannot be prevented by copyright holders by the use of their right to restrict communication to the public. Whereas previous cases have concentrated on the use of new technical means to transmit the material as being communication to a new public, in this CJEU decision everything turned on whether that public was one that the copyright holder ”contemplated” being able to access the material when it was posted on the internet on the authorised site originally. The decision will benefit aggregation sites which provide ease of access to publicly available material or the simple use of hyperlinks as references. Where copyright owners may be more surprised is that the CJEU found that even where the copyright material is presented, via the link, as being part of the linking party’s own website (so-called ”framing”), this is not preventable using the communication to the public right. For both linking and framing, copyright holders will now need to consider what other avenues there may be for protection. In Svensson, it was accepted by both parties that the hyperlinked articles were ”freely accessible” on the internet. It therefore remains to be seen what ”freely accessible” means in practice. Whilst a pay wall should preclude content from being freely accessible, it is less clear whether mere registration to access a site, or limitations placed in a website’s terms and conditions will be sufficient. Copyright owners may also consider passing off or unfair competition as avenues to prevent unwanted linking and framing to their material. Two other cases asking similar questions have been referred to the CJEU (C More Entertainment C-279/13 and BestWater C-348/13). The Meltwater reference is also outstanding, which will decide whether the copies made on a computer in the course of browsing are: (i) temporary, (ii) transient or incidental; and (iii) an integral and essential part of the technological process within the meaning of Article 5(1) of Directive 2001/29/EC, and thus non-infringing. If the CJEU decides that they are, there will be few avenues left to copyright holders to prevent simple aggregation of, and viewing of, material that has been placed on the internet in a freely accessible form with their authorisation even if it is subsequently framed within a third party site. See our e-bulletin for more information on this decision. For further information please contact Andrew Moir at [email protected] or Heather Newton at [email protected]. Online retailers at risk when bidding on keyword brand names which they do not stock (UK) A recent case where Amazon was found to infringe Lush’s trade mark by bidding on LUSH as a keyword and displaying it on its own website emphasises the care with which online retailers need to approach the use of keywords and the opportunities brand owners have to crack down on such use. Lush’s Community trade mark was held to be infringed by Amazon’s purchase and use of ”lush” as a keyword through Google AdWords where the sponsored link, which had been triggered by a search for ”lush” in Google’s search engine, showed the trade mark in its advert. However, Amazon’s use of the same keyword was not held to infringe where the word ”lush” was not displayed in its online advert. The display of the word ”lush” in Amazon’s predictive search facility was also held to infringe, as it suggested that Amazon sold Lush’s products when no Lush products were actually on offer on Amazon.co.uk (Cosmetic Warriors Ltd & Lush Ltd v Amazon.co.uk Ltd & Amazon EU SARL [2014] EWHC 181 (Ch)). This decision has important consequences for online retailers, not just in how they advertise, but also in how they separate marketing and fulfilment operations between different corporate entities (often registered in different territories). HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 09 The judgment reiterates that it is unlawful to purchase and use keywords identical to a third party’s registered trade marks, where the customer is not easily able to tell whether or not the products originate from or are connected to the trade mark owner, or are from a third party. It is not lawful to use a third party’s trade mark in this way to promote products online which are not from the trade mark owner. Use of an online search facility (like Amazon UK’s), which, in response to a search by a customer, suggests the names of branded products which are not in fact stocked but link through to competing products, is unlawful. This aspect of Amazon UK’s business model will need to be changed. Companies may not escape liability by trying to rely upon the separation of the legal entities which carry out the marketing on the website and the fulfilment of the order itself, when that artificial separation is not borne out in practice. Advertisers are more likely to infringe if their online adverts contain a disputed trade mark in their text and if customers perceive them as being reliable advertisers who would only advertise to sell goods which they actually have available. However, they are less likely to infringe if their online adverts do not display the disputed trade mark in their text and if customers would expect advertisements emanating from the trade mark owner to display the trade mark. Nevertheless, advertisers may still infringe if their adverts do not feature the trade mark in their text: the nature of the trade mark owner’s business will be taken into account in assessing infringement. For further information please contact Joel Smith at [email protected] or Alexandra Morgan at [email protected], or see our e-bulletin. Consumer survey evidence in IP cases only to be introduced in exceptional circumstances (UK) The Court of Appeal recently clarified the law in relation to the use of consumer survey evidence in passing off cases in Zee Entertainment Enterprises Limited v zeebox Limited [2014] EWCA Civ 82. This is the first case to have gone to the Court of Appeal on the admissibility of survey evidence in a passing off case, since the landmark judgments of the Court of Appeal in Interflora Inc v Marks and Spencer Plc ([2013] EWCA Civ 319 and [2012] EWCA 1501). In the Interflora cases, it was held that the party seeking to introduce survey evidence had to convince the court that it would be of real value and that the likely value justified the costs of introducing such evidence. The Court of Appeal has now confirmed that this real value test can extend to passing off cases. It further expanded on the meaning of the real value test, stating that the test did not compel the court to evaluate the likely outcome of the case, but simply assess the value of the survey as evidence. The appeal was dismissed and the most significant factor was that the survey was obviously flawed and any marginal value that it might have had was outweighed by the disproportionate costs of introducing such evidence. The decision highlights the importance of preparing a credible and robust survey from which to adduce evidence. Leading questions should be avoided and survey respondents should not be shown a mark or sign which is devoid of context. As passing off is a ”real world” cause of action, it is important to try to minimise artificiality and avoid introducing factors not present in normal use. In the post-Jackson era, the decision also highlights that the costs of introducing a survey will be scrutinised by the courts in assessing whether to grant permission to adduce the evidence. The Court of Appeal has once again made it clear that survey evidence is not necessary in cases involving ordinary consumer goods or services and that surveys should only be admitted in special cases. Parties should not seek to deploy survey evidence other than in exceptional circumstances, where the goods or services are sufficiently non-mainstream that the court is likely to need assistance by way of a survey. The Court acknowledged that survey evidence could be of real value if there was a special factor about goods, services or their consumers but that this was not the case here and the trial judge would be more than capable of assessing the alleged deception of consumers without the need for survey evidence. Joel Smith, Sarah Burke and Victoria Horsey acted for zeebox in successfully defending this appeal. For more on this development see our e-bulletin. For further information please contact Joel Smith at [email protected] or Sarah Burke at [email protected]. JUDICIAL REVIEW Further reforms to judicial review (UK) The UK Government has published its response to its recent consultation on further reforms to the judicial review procedure. The following proposals are among those to be implemented:creation of a Planning Court to speed up the consideration of planning and related judicial reviews and statutory challenges;changes to how the courts deal with judicial reviews which are unlikely to affect the outcome for the applicant by amending the current test to ensure judicial reviews cannot proceed on the basis of minor ”technicalities”;reducing the potential for delay to key projects and policies by increasing the scope of leapfrogging appeals (where a case can move directly from the court of first instance to the Supreme Court);tightening the situations in which a court can make a protective cost order in non-environmental judicial reviews to ensure they are only used in exceptional cases properly in the public interest;establishing a presumption that third party interveners in a judicial review will have to pay their own costs and any costs that they have caused to either party because of their intervention; andintroducing new requirements for all applicants for judicial review to provide information about how the judicial review is funded in the courts and Upper Tribunal and how the courts should use this information. The changes aim to ensure that cases are dealt with more quickly – particularly significant planning cases - and to tackle the burden of judicial review by those seeking to generate publicity or delay implementation of decisions that had been properly and lawfully taken. The UK Government has chosen not to pursue its suggestions for changing the rules as to who can bring a judicial review challenge. For further information please contact Andrew Lidbetter at [email protected] or Nusrat Zar at [email protected]. See further article below entitled ”New Planning Court announced by the Ministry of Justice to be established by summer 2014”. PLANNING More flexible Community Infrastructure Levy from mid-February 2014 could help spread out payments on large property developments (UK) The UK Government (the Department for Communities and Local Government) has amended the legislation requiring property developers to pay an up front levy on new development over 10 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS 100 square metres or of more than one dwelling, to make the regime more flexible and to remove some unintended consequences of the regulations. The amendments to the Community Infrastructure Levy (CIL) Regulations came into force on 24 February 2014 and apply to relevant property development which is granted planning permission after this date where a CIL charging schedule is in force. The amendments could help to spread out payments for large property developments by allowing CIL to be paid in phases where a full, hybrid or outline planning permission allows phasing. There is also a new CIL abatement provision to allow developers to avoid a double CIL charge where a new planning permission is granted for design changes to schemes after CIL has already been paid on an earlier permission. The date limiting the pooling of planning obligations is pushed back to April 2015 (instead of 2014), to allow more local authorities to get their CIL charging schedules up and running. Further amendments address other aspects of the CIL regime and include allowing a recalculation of CIL where the affordable housing obligations have been renegotiated, allowing deductions for a building which is in use for six months in the previous three years (rather than one year), allowing payments in kind to include infrastructure and giving the local authority the option to set differential rates of CIL for development of different scales. The changes will be of interest to property developers and investors. For further information please contact Matthew White at [email protected] or Patrick Robinson at [email protected]. New Planning Court announced by the Ministry of Justice to be established by summer 2014 (UK) The Ministry of Justice has confirmed plans for a new Planning Court to be established by summer 2014. This court will be a separate part of the High Court and will be supervised by a specialist judge with planning law expertise, with the aim of reducing delays in the overburdened courts system and supporting growth and infrastructure in the UK. The Government outlined proposals for the new court in a consultation on judicial review reforms in autumn 2013 and recently confirmed the plans in its response to the consultation. The new court will build on the fast-track procedure for planning cases in the Administrative Court and the shortened judicial review period of six weeks for challenging decisions made under the planning acts (measures which came into force in July 2013). The Government’s response to the consultation on judicial review, along with the Criminal Justice and Courts Bill 2013, also confirm the Government’s intention to introduce a permissions filter for statutory challenges under section 288 of the Town and Country Planning Act 1990. This will provide consistency with the judicial review procedure and aims to filter out weak claims early on, again to ease the burden on the courts and reduce delays. The current planning appeals system can delay the progression of development to the construction stage, so the new court and related reforms aim to make the system more efficient and encourage growth in the UK. For further information please contact Matthew White at [email protected] or Patrick Robinson at [email protected]. See further article above entitled ”Further reforms to judicial review”. TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS Cyber security: high on the agenda in the EU and UK Cyber security is important for many companies but perhaps particularly so for those with increased cyber vulnerabilities; for example, companies storing large amounts of sensitive data online, or companies dependent on a substantial (often retail) online presence. The issue of cyber security is also high on the political agenda at both a European and a national UK level. At the European level, the Commission published a Cyber Security Strategy and draft Directive in February 2013 to establish a unified approach to cyber vulnerabilities across Member States. At the national UK level, the Government published voluntary guidance principles on cyber security for internet service providers in December 2013 and, among other initiatives, this year will continue to work with industry to develop a preferred standard and assurance framework for cyber security, with the new profile expected early in 2014. More recently, the Institute of Chartered Accountants in England and Wales and a group of UK professional organisations (including the Association of Corporate Treasurers, the Cabinet Office, the Confederation of British Industry, the Law Society, the Takeover Panel and the London Stock Exchange), published a guide on cyber security in January 2014 focusing on corporate finance activities. The guide highlights how corporate transactions are a prime target for cyber attacks and sets out the related issues, threats and risks associated with such corporate finance activities. The guide also includes suggestions for businesses to manage the cyber security threat at every stage of the corporate finance process. These suggestions include: implementing an incident management plan for the particular transaction; ensuring IT systems and processes are appropriately managed and secure; if practical, identifying one individual within each organisation with responsibility for security of the information being shared; and carrying out due diligence on a target’s cyber security measures and past record of dealing with breaches. The guide also considers the additional risks associated with information stored online in a virtual data room during the due diligence process, as well as whether certain information should be kept offline or subject to a staged release, for example only to short listed bidders. As with any risk, the key to effective management is identifying and understanding the threats, the level of the risk involved and putting in place security measures that are appropriate and proportionate to those threats and risks. Going forward, companies will also need to ensure that they are adequately protected from cyber attacks in a way that complies with any legal requirements coming out of Europe or the UK. For further information please contact Nick Elverston at [email protected] or Nick Pantlin at [email protected]. HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 11 AUSTRALIA New South Wales Supreme Court upholds registration of Solomon Islands judgment Earlier this month the New South Wales Court of Appeal dismissed an appeal against orders for registration of a judgment of the High Court of the Solomon Islands pursuant to the Foreign Judgments Act 1991 (Cth) (the Act) (Quarter Enterprises Pty Ltd v Allardyce Lumber Co Ltd [2014] NSWCA 3). The issue before the court included the question of whether an order that the appellants pay the respondents’ legal costs of failed proceedings in the Solomon Islands was a ”money judgment” for the purposes of the Act. ”Money judgment” is defined in the Act as a ”judgment under which money is payable”. The appellants submitted that the judgment failed to meet criteria set out in the Act because it was expressed in a currency foreign to both the Solomon Islands and Australia. They submitted further that the Solomon Island court had had no jurisdiction to make orders as to costs against certain of the appellants, that the judgment was not final and conclusive and that the registration ought to be set aside on the basis of fraud. The Court of Appeal dismissed the appeal on all grounds. As to the foreign currency, the court said that ”[i]t would be surprising to say the least that an Act providing for the registration of foreign money judgments could not apply to a judgment in a foreign currency”. The question of jurisdiction was dismissed based on the facts of the case and how it had proceeded through the Solomon Island courts. As to the allegations of fraud, the Court of Appeal held that the judgment sought to be registered was not obtained by fraud, but as a result of the appellants’ failure to prosecute the action. For further information please contact Bronwyn Lincoln at [email protected]. Australian Government changes official position on investor protections Investor-state dispute settlement (ISDS) provisions grant foreign investors the right to access an international tribunal if they believe actions taken by a host government breach commitments made under a Free Trade Agreement (FTA) or investment treaty. Under the former Australian Labour Government, ISDS provisions were not supported on the grounds that they conferred greater legal rights on foreign businesses than domestic businesses and constrained the Government’s ability to make laws on social, environmental and economic matters. Until recently, the new coalition Government had not published its official position on ISDS provisions, despite there being some signs (e.g. the inclusion of ISDS provisions in the Korea-Australia Free Trade Agreement) that it might depart from the position adopted by the former Labour Government. However, following the recent publication of a FAQs section regarding ISDS on the Department of Foreign Affairs and Trade website, the official position of the coalition Government is now clear. ISDS provisions will be included on a case-by-case basis. They will not be included if they restrict Australia’s capacity to govern in the public interest — including in areas such as public health, the environment and the economy. However, according to the coalition Government, the rights of governments to make decisions in the public interest can be protected by the incorporation of appropriate safeguards in ISDS provisions. Despite the shift in position, discussions are expected to continue in 2014 regarding the advantages and disadvantages of ISDS and the appropriate drafting of ISDS provisions. In particular, concerns remain regarding the effectiveness of ISDS provisions in increasing inbound foreign direct investment, and the ability of ISDS provisions to favour overseas investors. For further information please contact Leon Chung at [email protected] or Jamie Stollery at [email protected]. Australia pressing ahead with free trade agreements The Australian Government is currently in the process of negotiating eight free trade agreements (FTAs), with the aim of increasing investment and liberalising market access. The Government is seeking to finalise these FTAs in the short to medium term. This reflects the new coalition Government’s stated desire to ”open Australia up for business”. The Australia-Korea Free Trade Agreement (KAFTA) was the first FTA completed and the Government is reportedly set to finalise the Australia-Japan FTA (JAFTA) and the multinational Trans-Pacific Partnership Agreement (TPP) in the coming months. Agreement on KAFTA was reached on 5 December 2013 and the agreement is set to come into operation later in the year following domestic approval processes in Australia and Korea. As a result of the KAFTA, tariffs will be eliminated on key Australian exports to Korea such as resources and energy and new market opportunities will be available in industries such as education and finance. The JAFTA has been under negotiation since April 2007 and it is understood that the Australian Government will seek to finalise negotiations when Prime Minister Tony Abbott visits Japan in April this year. It is expected that the JAFTA will be as comprehensive as the KAFTA. The TPP is a regional FTA under negotiation between Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the USA. The agreement is one of the most significant and comprehensive multi-national FTAs currently under negotiation, with the 12 member states representing approximately 26% of world trade. The countries met in early December for ”advanced stage negotiations” (see this press release) and the negotiations are now reportedly in their final stages. See further the article above entitled ”The Trans-Pacific Partnership Free Trade Agreement thought to be near completion”. Our articles regarding Australian FTAs currently under negotiation are available on our website. REGION SPECIFIC DEVELOPMENTS 12 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS For further information please contact Leon Chung at [email protected] or Emily Cukalevski at [email protected]. Royal Commission into trade union governance and corruption Retired Australian High Court Justice John Dyson Heydon AC QC has been nominated to conduct a Royal Commission into trade union governance and corruption in Australia. Whilst the terms of reference for the Royal Commission are expressed very broadly, the inquiry will focus on: a. bribes, secret commissions or other unlawful payments or benefits arising from arrangements between unions or their officers and any other party (including employers); b. governance arrangements of any separate entities established by unions purportedly for industrial purposes or for the welfare of their members, in particular, the activities of the AWU, CFMEU, ETU, HSU and TWU; and c. the adequacy and effectiveness of existing systems of regulation and law enforcement in dealing with conduct of this nature. The Commissioner will have extensive coercive powers, including to:summon a person to appear to give evidence;require a person to produce a document/thing at a particular time and place; andinspect, retain and make copies of documents relevant to the inquiry. Australian Prime Minister Tony Abbott has said the inquiry will be able to go wherever the evidence leads it. Accordingly, companies and employers who have had dealings with unions are potentially within the scope of the inquiry, and should familiarise themselves with the terms of the inquiry and how they might become involved. For further information please contact John Cooper at [email protected] or Peter Holloway at [email protected]. CHINA Amended company law eases burden A new amendment to China’s Company Law simplifies the capital system applicable to companies established in China. The amendments were passed by the Standing Committee of the National People’s Congress of the People’s Republic of China on 28 December 2013, and will take effect on 1 March 2014. China’s Ministry of Commerce (MOFCOM) and State Administration for Industry and Commerce (SAIC) are currently in the process of revising the various laws and regulations applicable to foreign-invested enterprises (FIEs). Once the revisions are complete, we expect that the simplified capital system will apply to FIEs. The key changes introduced by the new amendment The amendment changes 12 articles of the 2005 Company Law. The key changes are:Subscribed capital system to replace mandatory paid-up capital Currently, capital must be fully paid in within certain statutory time limits. The new amendment instead adopts a subscribed capital system, under which investors may, subject to industry-specific rules, discuss and agree on the timing and amounts of contributions.Verification and registration requirements removed Under the amended Company Law, the total paid-up capital, and the contributions of each investor, will no longer need to be registered in competent registration authority. Capital verification of each capital contribution will also no longer be required.No minimum registered capital Currently, the following minimum registered capital amounts are required:RMB30,000 for a limited liability company with multiple investors;RMB100,000 for a limited liability company with a single investor; andRMB5,000,000 for a company limited by shares. The Company Law amendment removes each of these minimums. Minimum capital requirements may, however, continue to be imposed by industry-specific regulations.Form of capital contributions unrestricted Currently, cash contributions cannot be less than 30% of total registered capital. This minimum requirement is removed by the new amendment, which means that, once the amendment is effective, investors will have more freedom to agree on the form of capital contributions. Impact on foreign investors FIEs are established under separate laws that still require the payment of registered capital within certain timeframes and capital verification. The amounts and form of registered capital are also subject to approval. The effect is to create uncertainty as to when and how the Company Law amendments will apply to FIEs. As noted above, however, MOFCOM and the SAIC are currently reviewing foreign investment laws and have said that the FIE laws will be revised. Once the FIE laws are revised, we expect that all FIEs will benefit from the new Company Law amendments. Foreign investors are likely to particularly appreciate the timing and form flexibility for capital contributions. For further information please contact Karen Ip at [email protected], Gary Lock at [email protected] or Nanda Lau at [email protected]. HONG KONG Charities law reform in Hong Kong In recent years there has been widespread concern over a lack of oversight of the 7,500 tax-exempt charitable organisations currently operating in Hong Kong (there are thought to be many more who have not registered for tax exempt status). There is no single piece of legislation in Hong Kong governing charitable organisations and the current law has been criticised for being inconsistent, archaic and unclear. In December 2013, the Law Reform Commission (LRC) published a report on charities following a six-year review of charity law in Hong Kong. The LRC proposed 18 reforms which push for greater accountability and transparency to build public trust and confidence through proportionate regulation. Some of the key proposals include (i) the creation of a centralised database and the introduction of a registration requirement for all organisations that either have been granted tax exemption or make charitable appeals; (ii) the introduction of a clear statutory definition of what constitutes a charitable purpose; and (iii) measures to improve governance, accounting and reporting. HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 13 Further, the LRC has proposed introducing a number of consequences for non-compliance which include (i) refusing applications, (ii) revoking any existing fundraising licences for permits; (iii) loss of tax exemption privilege; (iv) de-registration; or (v) referral to law enforcement agencies in appropriate cases. It is, at present, unknown how or when the Hong Kong Government will implement the recommendations made in the LRC's report. We are monitoring developments in this area and will keep you informed of any progress. For further information please contact Gareth Thomas at [email protected] or Richard Norridge at [email protected]. THAILAND Sexual harassment in the workplace Sexual harassment in Thai workplaces has been attracting increased attention in recent times. One reason for this is that the Thai government is placing more importance on workplace culture and the elimination of sexual harassment in the workplace in order to attract foreign investment. One step the Government has taken with this goal in mind is legislative amendments. Laws that prohibit sexual harassment now provide broader protection for workers: previously, the Labour Protection Act only protected employees against sexual abuse; however, recent amendments have extended its coverage to sexual harassment, including offensive sexual remarks. In addition, the old provisions only prohibited harassment directed towards female employees and minors, whereas the amended provisions prohibit harassment against all employees. Another development in relation to sexual harassment in the workplace concerns litigation brought by former employees. There appears to be an increasing number of claims brought by former employees who were summarily dismissed after they were found to have engaged in sexual harassment in the workplace. The employees dispute their employer’s right to terminate their employment and seek severance pay and payment in lieu of notice. In a number of these cases, the employer in question has failed to include sexual harassment as a serious offence in the work regulations or collective agreement. As a result, the dismissal was deemed to be ”without cause” and the employer has been required to pay severance and notice of termination or wages in lieu thereof. In the absence of the applicable work regulations or employment terms stipulating that sexual harassment is a serious offence, an employer considering dismissing an employee on the basis of sexual harassment has two options: 1. give prior written warning that the conduct at issue constitutes the offence of sexual harassment; if the employee repeats the offence within a year, terminate the employee ”with cause” and avoid paying severance; or 2. terminate the employee ”without cause” and risk paying severance and payment in lieu of notice. Please note that the Labour Court might still, on a case-by-case basis, determine the sexual harassment act to be serious enough to justify termination without the requirement of prior written warning or payment in lieu of advance notice and severance. Employers should be aware of the broader prohibitions against sexual harassment under the Labour Protection Act and ensure they have appropriate policies and training in place. Employers should consider reviewing (and if necessary revising) their work regulations or employment terms to ensure that sexual harassment is included in the list of serious offences. This inclusion allows an employer to dismiss an employee ”with cause” (i.e. without notice of termination) if they have engaged in sexual harassment in the workplace. For further information please contact Vanina Sucharitkul at [email protected] or Somboon Sangrungjang at [email protected]. US US Supreme Court limits jurisdictional reach of US courts over foreign corporations In Daimler AG v Bauman, No. 11-965, 2014 WL 113486 (U.S. Jan. 14, 2014), the United States Supreme Court addressed – for the first time ever – whether a foreign corporation may be subjected to a court’s general jurisdiction based on its subsidiary’s contacts with the forum state. Rejecting the exercise of jurisdiction, the Court held that a foreign company is not subject to general jurisdiction in California on a claim arising out of events that all took place outside the United States based on its domestic subsidiary’s activities in the state. To do so, the Court reasoned, would ”subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the sprawling view of general jurisdiction.” That could have been the end of the ruling, but the Court went out of its way to delineate substantial limits on courts’ ability to exercise general jurisdiction over corporate defendants. The Court stressed that a court may only exercise general jurisdiction over a foreign corporation when the corporation’s contacts with the state are so extensive as to render it ”essentially at home” in the state. The Court’s decision makes clear that the assertion of general jurisdiction over a corporate defendant, for conduct not directed at the forum, presents a difficult challenge for plaintiffs. Increasingly, in order to subject a foreign corporation to personal jurisdiction, plaintiffs will need to establish a connection between the forum and the defendant’s conduct that gives rise to the claim. Click here for a fuller discussion of the decision. For further information please contact David Wallace at [email protected] or Garrett Kamen at [email protected]. 14 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS CONTRIBUTORS Dina Albagli T +44 20 7466 2390 [email protected] Susan Black T +44 20 7466 2055 [email protected] Matthew Bonye T +44 20 7466 2162 [email protected] Sarah Burke T +44 20 7466 2476 [email protected] Kathryn Cearns T +44 20 7466 2686 [email protected] Simon Chadney T +44 20 7466 2993 [email protected] Leon Chung T +61 2 9225 5716 [email protected] John Cooper T +61 3 9288 1542 [email protected] Emily Cukalevski T +61 2 9225 5590 [email protected] Clive Cunningham T +44 20 7466 2278 [email protected] Kim Dietzel T +44 20 7466 2387 [email protected] Nick Elverston T +44 20 7466 2228 [email protected] Kyriakos Fountoukakos T +32 2 518 1840 kyriakos.fountoukakos@ hsf.com Peter Frost T +44 20 7466 2325 [email protected] Barnaby Hinnigan T +44 20 7466 2816 [email protected] Peter Holloway T +61 3 9288 1693 [email protected] Karen Ip T +86 10 6535 5135 [email protected] Hywel Jenkins T +44 20 7466 2510 [email protected] Garrett Kamen T +1 917 542 7822 [email protected] Nanda Lau T +86 21 2322 2117 [email protected] Christian Leathley T +44 20 7466 2532 [email protected] Tim Leaver T +44 20 7466 2305 [email protected] Andrew Lidbetter T +44 20 7466 2066 [email protected] Bronwyn Lincoln T +61 3 9288 1686 [email protected] Gary Lock T +852 2101 4228 [email protected] Geoffrey Maddock T +44 20 7466 2067 [email protected] Andrew Moir T +44 20 7466 2773 [email protected] HERBERT SMITH FREEHILLS GENERAL COUNSEL UPDATE - ISSUE 37 15 Alexandra Morgan T +44 20 7466 2808 [email protected] Will Nevin T +44 20 7466 2199 [email protected] Heather Newton T +44 20 7466 2984 [email protected] Richard Norridge T +852 21014107 [email protected] Nick Pantlin T +44 20 7466 2570 [email protected] Simone Pearlman T +44 20 7466 2021 [email protected] Anna Pertoldi T +44 20 7466 2399 [email protected] Bradley Phillips T +44 20 7466 2086 [email protected] James Quinney T +44 20 7466 2469 [email protected] Gareth Thomas T +852 21014025 [email protected] David Wallace T +1 917 542 7803 [email protected] Alan Watts T +44 20 7466 2076 [email protected] Matthew White T +44 20 7466 2461 [email protected] Stephen Wisking T +44 20 7466 2825 [email protected] Christine Young T +44 20 7466 2845 [email protected] Isaac Zailer T +44 20 7466 2464 [email protected] Nusrat Zar T +44 20 7466 2465 [email protected] Donald Robertson T +61 2 9225 5523 donald.robertson@ hsf.com Patrick Robinson T +44 20 7466 2129 [email protected] Somboon Sangrungjang T +66 2 6573830 somboon.sangrungjang@ hsf.com Carol Shutkever T +44 20 7466 2013 [email protected] Joel Smith T +61 2 9225 5577 [email protected] Kristin Stammer T +61 2 9225 5572 [email protected] Jamie Stollery T +61 2 9225 5454 [email protected] Vanina Sucharitkul T +66 2 6573821 vanina.sucharitkul@ hsf.com Andrew Taggart T +44 20 7466 2434 [email protected] CONTRIBUTORS (CONTINUED) 16 GENERAL COUNSEL UPDATE - ISSUE 37 HERBERT SMITH FREEHILLS NOTES If you would like to receive more copies of this briefing, or would like to receive Herbert Smith briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please email [email protected]. 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