a summary of major developments in key areas General Counsel Update 29 September 2014 LEGAL GUIDE EDITION 40
01 General counsel update - issue 40 HERBERT SMIT H FREE HILLS Contents 02 DEVELOPMENTS F O GENERAL INTEREST 02 Arbitration 02 New CIA L rbitAration lesR u oricne cft1o ber O0142 02 Corporate 02 Reporting y xbtraective ompcanies n overgnoment payments – early UK implementation 02 Corporate rust t nd aranstparency ill –n trodi uBced into Parliament 02 2014 orpoCrate oveGrnance odeC ublisphed y RbC F 03 Emplo yment 03 Shared arenptal eavel 03 Disability: mpleoyers ouldc ace fn careainse laiinm s c from obese employees 03 Women n ooardBs: HRCE uidagnce n hoe imt itsl f o lawful positive action 04 Real estate 04 Proposed inimmum nergey erfoprmance tandsards 04 New nergEy avinSgs ppoOrtunity chemS e ESO(S) requires "large undertakings" to conduct an energy consumption audit every four years 05 Sector specific developments 05 Competition , reg ulation and trade 05 Warning f evoerse onsecquences f ailourfe o otmpcly with EU merger control rules 05 EU ommCission hitWe aperP n xoteneding U Eergmer control regime to non-controlling minority stakes 05 Constr uction 05 Conflicting tandsards or efsigdn bligaotions 05 Enforcement f isopuDte djudAication oardBs' ecisdions 06 Corporate crime 06 EU xpaneds ectosral kraiUne-related anctsions against Russia 06 US reasTury nnoaunces xpanesion f o Ukraine-related sanctions 06 Corporate and financial services reg ulation 06 Implementation f heo tew nU EarkMet busAe Regulation – ESMA consultations 06 Financial services reg ulation 06 Senior anaMgers nd aertifCication egimRe 07 FCA ropopses emptorary rodupct tervinention ulesr for CoCos 07 Ins urance 07 Changes o sturainnce aw l tepa losecsr 07 Intellect ual propert y 07 The efinidtion f oarao dy p 08 Pensions 08 Pensions mbOudsman oldsh hat tast pchems e ractpice does not give rise to "reasonable expectations" that the practice will continue into the future 08 Tec hnolog y, media and telecomm unications 08 New K Uata DetenRtion nd antercIeption ct Aassepd 09 Region specific developments 09 Australia 09 High ourCt f uostrAalia ulesr o npliiemd ermt f o mutual trust and confidence in Australian employment contracts 09 China 09 Harsher ersopnal nd aorpocrate enaplties or forkw safety accidents in China 10 Hong Kong 10 The dicijaury rovidpes rama eworkf or -fdisceovery n i Hong Kong commercial litigation cases 10 The FC Soldsh s iristt fuperSvisory riefiBng essiSon 10 Four-party greeament or hfe thangShai-Hong ongK "through train" signed 10 Further rogrpess adem n ToC Oerivadtives eformr 11 CONTRIBU TORS 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 firstname.lastname@example.org or your relationship partner.
02 General counsel update - issue 40 HERBERT SMIT H FREE HILLS DEVELOPMENTS OF GENERAL INTEREST Arbitration New LCIA Arbitration Rules in force 1 October 2014 The London Court of International Arbitration (LCIA) Court's new rules come into force on 1 October 2014 and are to apply to any arbitration commenced after that date. The LCIA has retained the distinctive character of the institution and rules, whilst modernising its provisions to meet user demand. The most substantial changes are those intended to make the LCIA arbitration process less costly and more efficient, for example including an emergency arbitrator provision, whilst other revisions are designed to improve the handling of complex multi-party disputes. A key innovation is an annex of general guidelines on the conduct of party representatives and a power for the arbitral tribunal to impose sanctions for breach of those guidelines. For further discussion of these changes, please see our blog, www.hsfnotes.com/arbitration. For further information, please contact Paula Hodges QC at email@example.com. Corporate Reporting by extractive companies on government payments – early UK implementation Two EU Directives were passed in 2013 which mandate annual reports on payments to governments by companies in the extractive industries. In the UK, the government has confirmed that these requirements will be implemented early and will apply to listed and other large companies for financial years beginning on or after 1 January 2015. The relevant provisions of the two EU Directives are: Chapter 10 of the new EU Accounting Directive (2013/34/EU) (published in June 2013), which applies to large companies and any "public interest entities" (that is any company with securities traded on an EU regulated market) incorporated in an EU Member State; and Article 6 of the amended EU Transparency Directive (2004/109/EC, as amended by 2013/50/EU) (published in November 2013), which extends the regime to all companies with securities (debt or equity) listed on an EU regulated market, therefore including non-EU incorporated companies with an EU listing. The UK government has issued its response paper following its consultation on implementing the government payments provisions of the Accounting Directive. It sets out how those aspects of the law over which EU Member States have some control, including timing of implementation of the requirements, format and timing of publication of reports, and the penalty regime, will be addressed in the UK. The Financial Conduct Authority has also issued its corresponding consultation paper (CP14/17) on amendments to the Transparency Rules to implement the equivalent provisions in the Transparency Directive. The key points in relation to early UK implementation are: Large unlisted companies will have to publish their payments report within 11 months of their financial year end; listed companies will have six months after their year-end to publish their report. The payments report will be a separate report to be filed with the registrar for UK companies and not part of the annual report. It is proposed that listed companies will additionally have to make their payments reports public, via a Regulatory Information Service announcement, and keep them available on their websites for 10 years. The penalty regime will be similar to that for failing to file other company information with the registrar and for other regulated information published by listed companies. We have produced a briefing on the EU Directives, available here, and on early UK implementation, available here. For further information please contact Carol Shutkever at firstname.lastname@example.org or Stephen Murray at email@example.com. Corporate trust and transparency – Bill introduced into Parliament The Government has introduced the Small Business, Enterprise and Employment Bill into Parliament. The Bill covers a wide range of topics including corporate trust and transparency and company filing requirements. Under the Bill the main company law changes will be to: create a public register of companies’ beneficial owners (referred to as a register of people with significant control); prohibit bearer shares; prohibit corporate directors (that is, the use of a company as the director of another company), subject to certain limited exemptions; allow companies to file a statement confirming their corporate information rather than having to file an annual return each year; and give private companies the option of not keeping certain registers, such as the register of directors and register of members. Other topics covered by the Bill include public sector procurement, a Pubs Code, insolvency and whistle blowing. The measures relating to corporate trust and transparency and company filings are included in Parts 7, 8 and 9 of the Bill (headed Companies: Transparency; Company Filing Requirements; and Director Disqualification Regime). The Bill and a summary of its contents are available on the services. parliament.uk website. For further information please contact Carol Shutkever at firstname.lastname@example.org or Sarah Hawes at email@example.com. 2014 Corporate Governance Code published by FRC The Financial Reporting Council (FRC) has issued an updated, 2014 edition of the UK Corporate Governance Code. The 2014 edition of the Code will apply to accounting periods beginning on or after 1 October 2014. The FRC has issued a series of consultations in connection with these changes over the last few years, starting with the publication of the
03 General counsel update - issue 40 HERBERT SMIT H FREE HILLS Sharman Report on Going Concern in June 2012, and culminating in its April 2014 consultation. Risk management, internal control and going concern The 2014 edition of the Code requires companies to: Going concern – state whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so (C.1.3); Longer-term viability – state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate (C.2.2). The period is to be chosen by the board but it is expected that the period assessed will be significantly longer than 12 months; and Monitoring of risk controls – monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report (C.2.3). In order to assist companies in complying with these new requirements, it has also issued new "Guidance on Risk Management and Internal Control and Related Financial and Business Reporting", which is an amalgamation of the previous 2005 Turnbull guidance on internal control and its 2009 guidance on going concern. Directors’ remuneration and votes against a resolution The other key changes in the 2014 edition of the Code are: Remuneration policies – Remuneration policies for directors should be designed with the long-term success of the company in mind (as opposed to being sufficient to "attract, retain and motivate" directors). Claw back arrangements – Companies should put in place arrangements to enable them to recover or withhold variable pay from directors when appropriate to do so. Votes against a resolution – Companies should explain when publishing general meeting results how they intend to engage with shareholders when a “significant percentage” (not defined) has voted against any resolution. The FRC announcement and 2014 edition of the Code are available on the FRC website. For further information please contact Carol Shutkever at firstname.lastname@example.org or Sarah Hawes at email@example.com. Employment Shared parental leave Employers should be considering the terms of their current parental leave policies now. The new shared parental leave regime will apply to babies where the expected week of childbirth is 5 April 2015 or later, so some eligible parents will already be expecting. Co-parents will also gain the right to accompany a pregnant woman to two antenatal appointments (unpaid) from 1 October 2014. Existing parental leave policies may need to be updated alongside putting in place a new policy to deal with the new rights. One key issue to consider will be the extent to which employers providing enhanced maternity pay can or should offer enhanced pay during periods of shared parental leave, in light of the potential for sex discrimination claims. A recent tribunal ruling suggests that the most likely risk is an indirect discrimination claim, so employers may need to consider carefully their justification for adopting a particular approach. Our HSF briefing for clients looks at the new regime in detail – please contact firstname.lastname@example.org for a copy. For further information please contact Tim Leaver at email@example.com. Disability: employers could face an increase in claims from obese employees The Advocate General of the ECJ has given his opinion rejecting the contention that EU law prohibits discrimination on the ground of obesity per se. However, the effects of obesity may mean that an obese individual satisfies the definition of disability, at least where they are morbidly obese. (Kaltoft v The Municipality of Billund, C-354/13) This is largely consistent with the approach taken by the Employment Appeal Tribunal in a 2013 case. However, the publicity surrounding this case (concerning a childminder allegedly dismissed due to his obesity preventing him from carrying out his duties, such as bending down to tie children's shoelaces) may mean employers face an increase in claims, assuming the ECJ takes the same line when it gives its judgment. The Court's judgment is expected in the next few months and, although the Advocate General's opinion is not binding on the Court, it is often followed. Employees and job applicants may claim discrimination or harassment, or contend that an employer has a duty to make reasonable adjustments such as larger office furniture or work equipment, preferential parking arrangements, or changes to duties or work location to accommodate reduced mobility. Further details are included in our blog, www.hsfnotes.com/employment. For further information please contact Christine Young at firstname.lastname@example.org. Women on Boards: EHRC guidance on the limits of lawful positive action The Equalities and Human Rights Commission has published guidance on the legality of women-only shortlists for the executive search sector. The guidance discusses the legal framework and notes that the law only permits employers to prefer the under-represented gender when choosing between candidates of equal merit (as a tie-break provision), and there is unlikely to be sufficient evidence of equality of merit at the longlisting and shortlisting stages. The guidance states that the EHRC “does not believe it is lawful to address under-representation by longlisting or shortlisting only female candidates to the detriment of male candidates”. It is also not lawful to adopt artificially low thresholds for criteria to allow more candidates into a tie-break position. Further details are set out in our blog, www.hsfnotes.com/employment. The EHRC has also launched a Great Britain wide inquiry into the recruitment and appointment practices of the top 350 listed companies at board level. The findings of the inquiry are due to be published in spring 2015 and used to produce best practice guidance. For further information please contact Andrew Taggart at email@example.com.
04 General counsel update - issue 40 HERBERT SMIT H FREE HILLS Real es tate Proposed minimum energy performance standards In the last General Counsel Update we reported on provisions in The Energy Act 2011 which require the Government to bring regulations into force which could prohibit the letting or sub-letting of the least energy efficient commercial and residential properties until measures to improve their energy efficiency have been performed. The regulations must be brought into force no later than 1 April 2018. The consultation on these regulations, promised for February 2014, was finally published in July and the consultation closed on 2 September. For non-domestic properties, the consultation indicates that, when first implemented, the regulations will apply to buildings rated F or G on their Energy Performance Certificates (EPCs). Owneroccupied buildings and those which do not require an EPC are likely to be exempt. It had been feared that failure to comply with these regulations might invalidate a lease, but landlords will be relieved to learn that this is not likely to be the case. Non-compliance will result in a civil fine, the levels of which have not yet been set. The consultation seeks views on three methods of introducing the regulations: a "soft" start meaning the regulations would apply only to new leases granted to new tenants on or after 1 April 2018; a "hard" start meaning that the regulations would apply to all leased properties from 1 April regardless of whether the property is occupied on that date; or a phased introduction whereby the regulations would apply to new leases to new tenants from 1 April 2018 but with a "hard" backstop date of 1 April 2023 when the regulations would apply to all leases. This phased introduction is the Government's preferred option. Organisations with F and G rated properties in their portfolio need to be alert to the Government's response to this consultation, which is expected this autumn. For further information please contact Shelagh McKibbin at firstname.lastname@example.org or Don Rowlands at email@example.com. New Energy Savings Opportunity Scheme (ESOS) requires "large undertakings" to conduct an energy consumption audit every four years "Large undertakings" (and their corporate groups) have until 31 December 2014 (the qualification date) to determine whether they are in scope for the first phase of ESOS. If so, they have until 5 December 2015 to conduct an ESOS Assessment and report compliance to the Environment Agency, the scheme administrator. The scheme applies across the UK and operates in four-yearly phases. The Department of Energy and Climate Change estimates that 9,400 organisations are likely to be within scope for the first phase. Many affected organisations will not have previously carried out energy audits and even those which already measure their energy consumption (to comply with other schemes) are likely to find that ESOS introduces a considerable additional administrative burden as well as further compliance costs. "Large undertakings" are defined as those which, on the qualification date, have more than 250 employees in the UK, or those which have fewer than 250 employees but have an annual turnover exceeding €50 million and a balance sheet exceeding €43 million. Participants will essentially have to do four things: measure their total energy consumption across a 12 month period; conduct an energy audit to identify cost-effective energy efficiency recommendations; have the ESOS Assessment reviewed by a Board level director and approved by a Lead Assessor; and then notify the Environment Agency of compliance. Deadlines are tight for both registration and compliance so organisations within scope should take action at the earliest opportunity. For further information please contact Shelagh McKibbin at firstname.lastname@example.org or Don Rowlands at email@example.com General counsel update - issue 40 HERBERT SMIT H FREE HILLS Competition, regula tion and trade Warning of severe consequences of failure to comply with EU merger control rules On 23 July 2014 the EU Commission imposed a fine of €20 million on Norwegian company Marine Harvest for acquiring a 48.5% stake in its competitor Morpol (in advance of the acquisition of the remaining shares via a public bid) for "gun-jumping" in breach of the EU merger control rules. The EU Merger Regulation (EUMR) requires the parties to a transaction which falls within the EUMR's jurisdictional scope to notify the transaction to the EU Commission in advance and to suspend completion of the transaction prior to receiving clearance. Here, the Commission found that Marine Harvest had acquired "de facto" sole control over Morpol (as Marine Harvest enjoyed a stable majority at shareholders' meetings in practice, due to the wide dispersion of the remaining shares and previous attendance rates) prior to notifying the transaction to the Commission in breach of these requirements. This followed a previous €20 million fine in a similar case involving Electrabel, which was upheld by the EU Court of Justice on 3 July 2014. These cases demonstrate that the Commission will not tolerate breaches of the EUMR and will impose significant fines. They serve as an important reminder of the need for all companies to carefully consider the application of the EUMR to their transactions. See our e-bulletins on these cases (here and here) for more detail. For further information please contact Kyriakos Fountoukakos at firstname.lastname@example.org. EU Commission White Paper on extending EU merger control regime to non-controlling minority stakes The EU Commission is currently consulting on extending the EU merger control regime to cover certain non-controlling minority stakes, following an earlier consultation in 2013. The EU Merger Regulation (EUMR) currently only applies where an acquirer (of a majority or minority stake) obtains control over the target. This can be contrasted with the wider jurisdictional scope of some other regimes (eg, the UK, Australia, the US and Germany). The Commission believes that this causes an enforcement "gap" and proposes to plug this gap by imposing a requirement to file an "information notice" prior to the acquisition of certain minority stakes ie, where this constitutes a "competitively significant link", and the EUMR turnover thresholds are met. As proposed this is a wide concept which would apply where: the acquirer and the target are competitors or in a vertical relationship; and the acquirer acquires: (i) a specified shareholding/voting rights, for example 20% (or the de facto ability to exercise such rights); or (ii) a specified shareholding/voting rights, for example 5%, plus "additional factors", eg, the right to nominate a Board member or to obtain commercially sensitive information. Although the notice would not require the same level of information as a normal EUMR notification, the Commission envisages some market share information being required. Moreover, it proposes that the transaction could not complete for 15 working days following submission of the notice (within which the Commission could decide whether to open an investigation and require a full notification). If adopted, the new regime risks significantly widening the scope of the EUMR and imposing material additional burdens on businesses. The consultation closes on 3 October 2014. It will then be up to the new Competition Commissioner, Margrethe Vestager, to put the proposals to the College of Commissioners before the final legislative proposals to revise the EUMR are forwarded to the European Parliament and Council for adoption. For further information please contact Kyriakos Fountoukakos at email@example.com. Construction Conflicting standards for design obligations The court considered in MT Hojgaard A/S v E.ON Climate and Renewables  EWHC 1088 TCC (15 April 2014), whether a fitness for purpose obligation in a contract overrode an obligation to comply with the contract specification. Defects had arisen in wind turbine generators as a result of an error in the published standard on which the defendant's contractor's design had been based. The contractor had warranted that the turbine would have a service life of 20 years. In addition, it was obliged to use reasonable skill and care in applying the published standard. The court decided that the express obligation to construct work capable of carrying out the function specified overrode the obligation to comply with plans and specifications. The court held that fitness for purpose and reasonable skill and care terms could co-exist in a contract and were not mutually incompatible. For example, a building might be robust enough to last for its design life, but there might be a claim for defective workmanship if there were cosmetic errors. The court decided that the contractor was in breach of the obligation to provide turbines that would have a service life of 20 years, but not in breach of its duty to exercise reasonable skill and care in carrying out its design calculations. In terms of the fitness for purpose obligation, the contractor bore the risk that the standard might contain an error. Enforcement of Dispute Adjudication Boards' decisions The case of Perusahaan Gas Negara (Persero) TBK v CRW Joint Operations (Indonesia)  SGHC 146 (Court of Appeal (Singapore) 16 July 2014), concerned the enforceability of interim awards under the FIDIC form of contract. It was partly concerned with enforceability under local legislation. The case also indicates the appropriate procedure for enforcing a Dispute Adjudication Board's decision by way of an interim award. The claimant contractor had entered into a FIDIC contract to construct a pipeline. A Dispute Adjudication Board (DAB) had Sector specific developments 06 General counsel update - issue 40 HERBERT SMIT H FREE HILLS awarded a substantial sum to it, which was unpaid. The contractor obtained an interim arbitral award requiring the employer to pay. The award was interim, in the sense that the justifiability or otherwise of the DAB's award would be determined by the final award, but in the meantime the interim award was to be complied with. The court accepted that it could order such compliance even though at a later stage a different view might be taken by the Arbitral Tribunal on the amount properly due in respect of the underlying dispute. At that stage, a greater or lesser sum might become due from the employer. The decision supports the enforceability of DAB's decisions through the courts. For further information please contact Mark Lloyd-Williams at firstname.lastname@example.org or Ann Levin at email@example.com. Corporate crime EU expands sectoral Ukraine-related sanctions against Russia The EU has published new legislation expanding its existing sanctions against Russia in light of the situation in Ukraine. In summary, the new measures provide for: an expansion of the restrictions on dealing in transferable securities issued by listed Russian banks and their extension to certain lending activity; the application of these restrictions to listed Russian companies in the military and oil sectors; additional trade restrictions, including in relation to dual use goods and certain services necessary for particular oil projects; and an expansion of the existing asset freeze. Please click here to read our full briefing regarding these sanctions. For further information please contact Susannah Cogman at firstname.lastname@example.org, Daniel Hudson at email@example.com or Andrew Cannon at firstname.lastname@example.org. US Treasury announces expansion of Ukraine-related sanctions The US Office of Foreign Assets Control (OFAC) has implemented extensive new sectoral sanctions in response to the situation in Ukraine and added additional entities to the Specially Designated Nationals (SDN) list. In summary, the new measures: update and add to the entities in the Sectoral Sanctions Identification List (SSI List) under Directive 1 (applicable to certain financial institutions) and reduce the tenor of permissible financing and dealings in new debt to 30 days or fewer, from 90 days or fewer for persons subject to Directive 1; update and add to the entities in the SSI List under Directive 2 (applicable to certain companies in the energy sector); create a new prohibition against financing persons in the SSI List under a newly announced Directive 3. These entities are largely defense-related companies; and create a new prohibition against the provision of goods, services (other than financial services) or technology in support of certain deep-water, Arctic offshore or shale products which could produce oil for Russia and which involved specified companies listed in new Directive 4. To read more about the measures from our team in New York, please click here. For further information please contact Scott Balber at email@example.com or Jonathan Cross at firstname.lastname@example.org. Corporate and fi nancial se rvices regula tion Implementation of the new EU Market Abuse Regulation – ESMA consultations Companies whose shares are admitted to trading on an EU regulated market or multilateral trading facility (eg, AIM) should monitor the European Securities and Markets Authority's (ESMA) proposals on implementing standards for the EU Market Abuse Regulation and may wish to consider responding to two live ESMA consultations, by the closing date of 15 October 2014. Certain of ESMA's implementing measures would have a significant impact on these companies; the consultation represents a rare opportunity to influence ESMA's thinking. Important proposals include: new rules, procedures and templates for the reporting to and by the company of PDMR transactions, including ESMA's proposed restrictive approach to permitting certain dealings by PDMRs during what is a "closed" period; new EU-wide templates for insider lists and new rules for maintaining and updating these lists; systems and procedures, including strict record-keeping requirements, regarding the new prescriptive procedures set out in EU Market Abuse Regulation (MAR), for conducting "market soundings"; these would apply to the issuer in the same way as other market participants; technical means for delaying the disclosure of inside information, as contemplated by MAR. ESMA's papers are here (2014/808) and here (2014/809). ESMA will be holding an open hearing on these papers on 8 October, in Paris. Registration is via ESMA's website at www.esma.europa.eu. Please see General Counsel Update Edition no.39 (July 2014) for general information about MAR. For more information please contact Carol Shutkever at email@example.com or Karen Anderson at firstname.lastname@example.org. Financial se rvices regula tion Senior Managers and Certification Regime Following the recommendations of the Parliamentary Commission on Banking Standards (PCBS) and the subsequent amendments to the Financial Services and Markets Act 2000 (FSMA) made by the Financial Services (Banking Reform) Act 2013, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have published a joint consultation on a new regime to assess and hold individuals accountable for the roles they perform within firms. These proposals will have a significant impact on UK banks, building societies, credit unions, PRA investment firms and the individuals working within them. The new regime will include the following: A new Senior Managers Regime (SMR) will apply to individuals carrying out Senior Management Functions (SMFs). A narrower group of decision-makers than under the current approved persons regime will be subject to the SMR and will require regulatory approval to carry out SMFs. A Certification Regime – Firms will be required to certify certain employees as being fit and proper to perform significant-harm functions; the certification is subject to annual renewal by firms but is not subject to regulatory approval. 07 General counsel update - issue 40 HERBERT SMIT H FREE HILLS New conduct rules will replace the existing Statements of Principles and Code of Practice for Approved Persons which currently only apply to approved persons. The new conduct rules will apply to a much wider population of employees within firms. The consultation also contains further information on the anticipated use of the regulators' new enforcement powers. The deadline for responses to the consultation is 31 October 2014 and the PRA and FCA plan to publish final rules at the end of this year. A joint consultation on the implementation of new remuneration rules was also published at the same time. For further information please contact Andrew Procter at email@example.com, Karen Anderson at firstname.lastname@example.org or Clive Cunningham at email@example.com. FCA proposes temporary product intervention rules for CoCos The FCA announced on 6 August that it is proposing to use its temporary product intervention powers for the first time to restrict firms from distributing contingent convertible instruments (CoCos) to the mass retail market for a 12 month period from 1 October 2014. The announcement follows statements from the European Securities and Markets Authority (ESMA) and the Joint Committee of ESAs highlighting the risks of CoCos and firms’ responsibilities when selling them. The temporary rules will affect all authorised persons in the UK, including both issuers of CoCos and firms promoting or intermediating transactions in CoCos. The rules do not apply to the distribution of CoCos to professional or institutional clients or the distribution of prospectuses issued in compliance with the Prospectus Directive, nor do they apply to clearing, registration, settlement, custodial or back office processing services. The FCA plans to consult on permanent rules on CoCos in September and is expected to publish a policy statement in Q2 2015, with final rules to take effect on 1 October 2015, when the temporary product intervention rules expire. Further details are included in our FSR blog, http://hsfnotes.com/fsrandcorpcrime. For further information please contact Karen Anderson at firstname.lastname@example.org or Clive Cunningham at email@example.com. Insu rance Changes to insurance law a step closer The Insurance Bill has recently been submitted for parliamentary review. It could come into force in early 2016. Once passed it will be the most significant change in insurance law for over 100 years. The Bill aims to modernise business insurance law but will also drive practical changes in the way insurance is placed and underwritten. We have given considerable thought to the change in approach that will be required by policyholders. If you would like us to come and discuss this further with you please contact Paul Lewis. The Bill includes the following key reforms: The Bill amends the insured's duty of disclosure. A business policyholder will be required to give insurers a "fair presentation of the risk" before entering into an insurance contract. Where the policyholder has breached its duty of good faith, the Bill provides the insurer with a range of proportionate remedies. A breach of warranty will no longer automatically discharge the insurer's liability. Warranties will become "suspensory conditions", meaning that the insurer's liability is suspended while the policyholder is in breach but can then be restored if the breach is subsequently remedied. "Basis of the contract" clauses (which operate to turn pre-contractual representations into warranties) will be abolished. The Bill also amends the Third Parties (Rights Against Insurers) Act 2010 with a view to the Act finally being brought into force. See our e-bulletin for a more detailed briefing. For further information please contact Paul Lewis at firstname.lastname@example.org. Intellec tual property The definition of a parody The Central Court of the European Union (CJEU) has confirmed that parody is an autonomous concept of EU law that is to be interpreted uniformly throughout the EU, thus setting the standard for what is a permitted reproduction of a copyright work under the exception to copyright infringement provided for by Article 5(3)(k) of the Information Society Directive 2001/29/EC (the Directive). On 3 September, in Case C-201/13 Deckmyn, the court held that the essential characteristics of a parody were: to evoke an existing work whilst being different from it; and to be an expression of humour or mockery. It is for the national courts to apply the test and strike a balance between the rights owners of the original works and the creators of any parody work, and such a balance will require consideration of all the circumstances. The CJEU decision clarifies the basic characteristics which must exist for an adaptation of a work to be a parody, whilst seemingly preserving the ability of national courts to take into account local interpretation and perception of any parody works. However, whilst the CJEU's comments give some comfort to any rights owner where their work may be used in a parody conveying a discriminatory or unsavoury message that they may be able to ensure that their original copyright work is not associated with the parody, it will be for the national courts to determine such issues. The national courts will therefore be tested to find the boundaries as to what is an acceptable parody, and what has gone too far in damaging the original work protected by copyright. The potential for different courts to reach different conclusions suggests that this will not be the last reference on the scope of the parody exception, given that the starting point for the provisions in the Directive is that they should be given a consistent interpretation throughout the EU. In the UK, the CJEU decision is a timely one as The Copyright and Rights in Performances (Quotation and Parody) Regulations 2014 amending and expanding the UK exception to copyright infringement to take full advantage of the scope of Article 5(3)(k) are due to come into force on 1 October 2014. The amended section retains its reference to fair dealing, which will enable the court to reflect the balancing act articulated by the CJEU. For more on this see our IP e-bulletin of 5 September 2014. For further information please contact Joel Smith at email@example.com, Heather Newton at firstname.lastname@example.org or Rachel Montagnon at email@example.com.
08 General counsel update - issue 40 HERBERT SMIT H FREE HILLS Pensions Pensions Ombudsman holds that past scheme practice does not give rise to "reasonable expectations" that the practice will continue into the future In Thompson (PO-1203), the Deputy Pensions Ombudsman has not upheld a complaint by Mr Thompson, a member of the GE Pension Plan and a top-up pension arrangement in relation to a decision by the employer (and trustee) of the schemes not to grant discretionary increases from 2010 onwards for pensions accrued before April 1997. Mr Thompson had argued that the employer had breached its duty of good faith to its employees by refusing to grant the discretionary increases as such increases had always been granted in the past and this had given rise to "reasonable expectations" for the affected members that they would be continued. The employer had an implied contractual obligation to provide the pension increases due to existing custom and practice. The concept of members' "reasonable expectations" in the context of an employer's duty of good faith was developed considerably by the High Court in the recent case of IBM v Dalgleish  – for our update on that decision, click here. The Ombudsman found, however, that the IBM judgment did not support the view that past practices are sufficient to give rise to reasonable expectations that a benefit will continue to be awarded. The fact that the benefit had been granted in the past cannot be said to give rise to a future expectation, particularly, as was the case here, where that benefit was discretionary rather than an existing right of members which was being curtailed or limited. As to Mr Thompson's assertion that members had been given assurances in 2002 that the discretionary practice will continue, the Ombudsman found that the member had not produced any evidence to support this assertion. Moreover, as the assurances which the member was referring to were purportedly made in 2002, a full eight years before the increases were disapplied; the Ombudsman stated that it was unlikely that any assurances given would be expected to apply indefinitely and over such a long period of time. It was expected by many when the IBM judgment was handed down that there would be an increase in the use by members of the "reasonable expectations" argument to challenge changes to their pensions arrangements and the current complaint is likely to be one of many to come before the Ombudsman in the coming years (unless of course the IBM decision is successfully appealed). However, it is worth noting that the Ombudsman's interpretation of the IBM judgment seems to be somewhat at odds with the judgment given by Warren J in that case. For instance, the Ombudsman states in her determination, that "there would need to be more than a statement of intention to give rise to a reasonable expectation". In contrast, Warren J had said in IBM that a promise or guarantee could clearly create a reasonable expectation but an employer's statement of intention could also do so, though the most that members could expect from statements of intent is that the employer will not change its intention without some rational ground to do so. For further information please contact Daniel Schaffer at firstname.lastname@example.org or Alison Brown at email@example.com. Tech nology, media and telec ommunica tions New UK Data Retention and Interception Act passed In the wake of the European ruling on the Data Retention Directive in April this year, the UK Government has passed emergency data retention and interception legislation to ensure that communications providers in the UK remain under a mandatory obligation to retain communications data. On 17 July 2014, the Data Retention and Investigatory Powers Act (DRIP Act) received Royal Assent. The Bill had only been announced on 10 July 2014 and presented to Parliament for the first time on Monday 14 July. It was passed using the "fast-track" procedure for legislation. The DRIP Act has three key elements: The first component of the Act relates to Government requirements for retention of communications data. The second component of the Act relates to the extra-territorial effect of the interception and communications data requirements of the Regulation of Investigatory Powers Act 2000 (RIPA). The third component of the Act provides for a review of investigatory powers to report by 1 May 2015. It is difficult to say at this stage what practical difference, if any, the new legislation will have. The Government maintains that it is not extending the existing regime. However, the changes to definitions could mean that more organisations are served with data retention notices than was previously permitted under the 2009 Data Retention Regulations. In addition, the legislation could still be subject to challenge or review, and it remains to be seen whether or not the EU will take any interest in the extent to which the legislation complies with the proportionality principles laid down by the ECJ in its ruling on the Data Retention Directive. Either way, it seems likely that data retention is going to remain a hot topic in the UK (or even outside the UK) for the foreseeable future. For further information please contact Nick Pantlin at firstname.lastname@example.org or Amanda Hale at email@example.com.
09 General counsel update - issue 40 HERBERT SMIT H FREE HILLS Aus tralia High Court of Australia rules no implied term of mutual trust and confidence in Australian employment contracts In one of the most important High Court cases relating to employment law in recent times, the High Court of Australia has unanimously held there is not an implied term of mutual trust and confidence (implied term) in Australian employment contracts. In reaching its decision the High Court found that the history of the development of the implied term in the United Kingdom is not applicable in Australia. In Commonwealth Bank of Australia v Barker  HCA 32, the High Court found that the implication of the implied term would be a step beyond the legitimate law-making function of the courts and should not be taken. The High Court reasoned that the existence of an implied term must be determined with reference to whether the proposed implication is necessary, in that it is implicitly required by the nature of the contract itself and it is not determined by the reasonableness of the implication. The implied term did not answer the criterion of necessity required to support its implication in law in Australian contracts generally. Given the previous level of uncertainty in Australian law in relation to the existence and extent of the implied term, this clear High Court authority is of great utility to employers. However, the High Court was careful to note its judgment should not be taken as reflecting upon the question of whether there is a general obligation to act in good faith in the performance of contracts, nor does it reflect on the related question of whether contractual powers and discretions may be limited by good faith and rationality requirements. This leaves open the possibility that employees will seek to argue these points as a means of seeking remedies, particularly in circumstances where they are excluded from the statutory based unfair dismissal jurisdiction. To read our briefing on this case please click here. For further information, please contact Miles Bastick at firstname.lastname@example.org or Amanda Lyras at email@example.com. Chi na Harsher personal and corporate penalties for work safety accidents in China On 31 August 2014, the Standing Committee of the National People’s Congress approved the Amendments to the Work Safety Law which will come into effect on 1 December 2014 (the Amendments). The Amendments make more than 70 changes to the existing law with a view to: improving accident prevention and emergency response systems; enhancing law enforcement; and increasing penalties for companies and their executives in violation of the law. The Amendments impose on companies fines ranging from RMB 200,000 to RMB 20 million. The amount of fines depends on the seriousness of the accident. There are four categories of work safety accidents which are defined with reference to casualties and losses incurred as a result of the accident. More severe penalties will also be imposed on the “person in charge” if the accident occurs due to his/her fault or negligence. For this purpose, the “person in charge” generally will be the legal representative or other senior executives of a company. The penalties include demotion or dismissal as well as a fine between 30% and 80% of the person’s income of the previous year. The “person in charge” who is responsible for a serious or extremely serious accident will also be permanently prohibited from serving as the "person in charge" in a company in the same industry. The Administration of Work Safety has also been granted more enforcement authority. In addition to its existing enforcement authority, it is now empowered to: seal up facilities and equipment that fail to comply with national or industrial standards for work safety; confiscate hazardous materials produced, stored, used, traded or transported illegally; and close down a workplace for producing, storing, using or trading hazardous materials in violation of law. Information on serious offenders will be published and shared with other governmental regulators and banks. It is recommended that companies should: review their work safety policies and implementation in light of the Amendments; and review their work safety liability insurance in light of the nature of their operations and potential risks. Company executives should be aware of potential liabilities, and take a more rigorous role in supervising the work safety conditions of their companies. See our e-bulletin for further details. For further information please contact Karen Ip at firstname.lastname@example.org, Nanda Lau at email@example.com or Angela Zhao at firstname.lastname@example.org. Region specific developments10 General counsel update - issue 40 HERBERT SMIT H FREE HILLS Hong Kong The judiciary provides a framework for e-discovery in Hong Kong commercial litigation cases The Hong Kong judiciary has launched a pilot scheme for the discovery and production in commercial litigation cases of documents that are stored in electronic form. Practice Direction SL1.2 (Practice Direction) provides a framework for the reasonable, proportionate and economical discovery and supply of electronic documents as evidence. It applies to all actions commenced in, or transferred to the Commercial List on or after 1 September 2014 where the claim or counterclaim exceeds HK$8 million and there are at least 10,000 documents to be searched, or where either the parties agree or the court directs them to follow the Practice Direction. In respect of what is discoverable, the Practice Direction applies a narrower test of direct relevance than the usual broad Peruvian Guano "train of enquiry" test, which remains applicable in Hong Kong for general discovery. Parties taking their obligations under the Practice Direction seriously will need to ascertain at an early stage how electronic documents are preserved, where they are kept, who are the most important custodians, what the appropriate parameters are in terms of keywords, dates etc. Parties will also need to familiarise themselves with the technical aspects of electronic discovery and may, as a result, need to retain an e-discovery or data management provider early on in the process. For more information on the pilot scheme and its possible implications for litigation in Hong Kong, please click here to access our e-bulletin. The e-bulletin also looks at some practical steps parties can take to identify and preserve electronic documents for review and discovery under the new framework. For further information please contact Gareth Thomas at email@example.com or Julian Copeman at firstname.lastname@example.org. The SFC holds its first Supervisory Briefing Session On 2 September 2014, the Securities and Futures Commission (SFC) held its first ever Supervisory Briefing Session to share with market participants its major findings and observations emanating from recent inspections of the equities and FICC (Fixed Income, Commodity, Currencies) businesses. The briefing session was attended by over 200 participants, including representatives from investment banks, licensed firms, and regulatory practice advisers. The main speakers at the briefing session were Ashley Alder (CEO of the SFC), James Shipton (Executive Director of the SFC and Head of the Intermediaries Division), Mark Steward (Executive Director of the SFC and Head of Enforcement Division) and Stephen Po (Senior Director of Intermediaries Supervision). A number of issues were discussed, including but not limited to senior management responsibility, the importance of internal systems and controls, specific issues arising out of the SFC's recent inspections, as well as the SFC's enforcement approach. Please click here to read our e-bulletin on what we consider are the key points raised during the briefing session. For further information, please contact William Hallatt at email@example.com or Mark Johnson at firstname.lastname@example.org. Four-party agreement for the Shanghai-Hong Kong "through train" signed On 4 September 2014, The Stock Exchange of Hong Kong Limited (SEHK), the Hong Kong Securities Clearing Company Limited, the Shanghai Stock Exchange (SSE) and the China Securities Depository and Clearing Corporation Limited signed an agreement for the establishment of the Shanghai-Hong Kong Stock Connect (Stock Connect), a scheme allowing mutual market access between Mainland China and Hong Kong. This follows a joint announcement by the Securities and Futures Commission and China Securities Regulatory Commission on 10 April 2014 giving approval in principle to the development of the Stock Connect. Through the Stock Connect, Hong Kong and overseas investors will be able to trade certain securities listed on the SSE (Northbound Trades), whereas Mainland institutional investors and individual investors holding an aggregate balance of not less than RMB 500,000 will be able to trade certain securities listed on the SEHK (Southbound Trades). Capital flowing into and out of both markets are subject to aggregate quotas of RMB 300 billion for Northbound Trades and RMB 250 billion for Southbound Trades, as well as daily quotas of RMB 13 billion for Northbound Trades and RMB 10.5 billion for Southbound Trades. The provisional launch date of the Stock Connect is 13 October 2014, subject to regulatory approvals and finalisation of the relevant trading and clearing rules and systems. It is expected that large securities firms in Hong Kong and China will benefit most, in view of the increased opportunities in trades. Please click here to read our e-bulletin on this topic. For further information, please contact William Hallatt at email@example.com or Matt Emsley at firstname.lastname@example.org. Further progress made on OT C derivatives reform The Hong Kong Monetary Authority and the Securities and Futures Commission have recently issued a joint consultation paper detailing their proposed requirements relating to the mandatory reporting and record keeping obligations for over-the-counter (OTC) derivative transactions in Hong Kong. The joint consultation paper sets out the draft proposed Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping) Rules and is the first of a series of further consultations on the subsidiary legislation under the Securities and Futures (Amendment) Ordinance 2014 (the Amendment Ordinance). In response to the 2008 global financial crisis (which highlighted the need to regulate the OTC derivatives market), the Legislative Council enacted the Amendment Ordinance in April 2014 following two rounds of public consultations. Banks, approved money brokers, SFC licensed corporations and unlicensed entities dealing in or advising on OTC derivative transactions are advised to consider the scope and effect of the proposed obligations on their businesses, and stay tuned for further regulatory developments, in particular on mandatory clearing and trading obligations. Please click here to read our e-bulletin regarding the proposals under the joint consultation paper. For further information, please contact William Hallatt at email@example.com or Matt Emsley at firstname.lastname@example.org.