Lawyers discovering Dublin. 30 September — 5 October International Bar Association held its Annual Conference in Dublin, Ireland

Olga A. Usenko

As the available evidence shows, it is a must have for legal practitioners to learn and understand key developments in foreign jurisdictions because of their relevance in a globalized world. That is why the popularity of the IBA annual conferences increases year on year.

Practitioners from all over the world came to Dublin to exchange the latest developments and thoughts about the latest legal business developments, legislative updates, lessons and opportunities derived from the current economic situation.

The Ukrainian delegation has a record number of participants from such law firms as Arzinger, AstapovLawyers, Asters, Vasil Kisil & Partners, Legal Alliance Company, Sayenko Kharenko, Spenser & Kauffmann, Ulysses.

Recovery path under review

The opening ceremony of the IBA Annual conference in Dublin was opened with a speech by the keynote speaker, prominent American economist Professor Joseph Stiglitz. Having dwelt on present economic policies, he put into question strict budgetary cut policies in recessionary times. The speaker stated that economic encouragement is an alternative to overcoming crisis consequences and reinforce the recovery path for the global economy.

The topical issue of the current sovereign debt crisis in Europe, which Professor Stiglitz touched upon, has been analyzed from different angles during numerous working sessions. The debt crisis entailed Euro redenomination risks and credit crunch. The last one resulted in debt funding to leverage deals and refinance existing leveraged loans.

As for the global impact, the groundbreaking effect is breaking the banking monopoly on providing bridging finance.

As legal practitioners agreed, this situation means it is exactly the time to consider alternative capital providers — insurance companies, pension funds, hedge funds, senior credit funds, etc. Obviously they cannot replace traditional lenders but in the medium-term perspective they might become a valuable reserved source.

Bank on corruption

30 years ago the role of financial institutions in anti-corruption was almost equal to zero. But today they have become innovators in developing and introducing the best anti-corruption practices, concluded panelists at the session “The role of financial institutions in the fight against corruption — can we bank on them?” For example, the World Bank can, as a lender, request to control spending of its finance in accordance with the purpose of designated lending. For this reason the Bank introduced specific requests towards compulsory compliance in corporate governance, lending finance dissemination and technical assistance breakdown. The World Bank has a designated department authorized to conduct anti-corruption investigation and apply sanctions in public.

An interesting experience demonstrated international banks for development. Five key banks recently signed Mutual Enforcement Agreement when each party to the agreement recognizes sanctions imposed by other parties. Despite the fact that the Agreement took long-time to negotiate it became ground-breaking for harmonizing sanction practices against corruption, fraud, coercion, collusion.

“The fact that a company can be sanctioned by five banks simultaneously is an essential preventive mechanism against corruption”, noted Enery Quinones from the European Bank for Reconstruction and Development (UK).

Thus, the Agreement doesn’t cover actions of government officials, sanctions imposed through recognition of national courts decisions, undisclosed sanctions and sanctions issued under World Bank programs.

As the EBRD is a private sector oriented banking institution and gradually obtains new mandates to offer finance, it becomes more and more careful in conducting due diligence before giving finance.

At the level of commercial banks anticorruption practices are carried out by specialist departments and predominantly cover compliance and due diligence procedures. According to Raja Chatterjee, Morgan Stanley (USA), the establishment of an external coordination of sanctions like those of banks for development is rather unlikely. However, commercial banks are anticipated to reinforce cooperation with the banks for development in this field.

The state anticorruption policies are usually enforced by specially established government agencies. Over the last couple of years this trend is dramatically relevant for developing countries. However, the panelists argued what is the way to preserve essentiality in terms of limited budget spending and avoid any conflict of interests.

M&A in flux

The “Current legal developments” session becomes, from year to year, a traditional forum to discuss regional M&A activity and gathers transactional legal practitioners from different jurisdictions.

The main event for the UK M&A market encompasses enactment of the new Takeover Code rules. UK lawyers are engaged in experiencing the new Code, that led to a so-called “put up or shut up” regime (in practice deadlines are often extended and some formal sales processes), break fees and cooperation agreements (for instance, reverse break fee, regulatory clearances, employee incentive agreements), employee representative opinions. “In practice shareholder value tends to be the most important matter”, said Peter King, Weil Gotshal & Manges, while talking about the role of other stakeholders in M&A. Moreover, directors of UK incorporated companies should “have regard” to the interests of employees, the local community, environment, company’s reputation, the longer the effect of decisions.

The current decline of M&A activity in the US is attributed to European sovereign debt and oil price issues. “Continued uncertainty about US elections and fiscal issues as well as concerns about the Euro and the Middle East also tempered activity”, Philip Gelston, Cravath Swaine & Moore, emphasized. The increasing number of transactions funded with cash and LBO activity continues to slowly strengthen but with much smaller sizes that during the “boom”.

American courts increasingly scrutinize conflicts of interests in M&A transaction and are skeptical of “business as usual”. The legal standards for conflicts in the US are currently in a state of flux. But it is still unclear how boards should respond to these changes. As Philip Gelston noted, US stockholders are not able to replace a board majority. A board can decide what stockholder “want” even when a majority of stockholders disagree with a board’s position. Although a board continue to receive scrutiny in situations where a conflict of interests is present, their power in other circumstances remains strong. Meanwhile, government and labor involvement is limited.

The resurgence of “mega-deals” from strategic buyers is typical for developed countries traditionally reached in mineral resources, in particular, Canada. However, the regulatory field becomes complicated. Competition and foreign investment regulation in Canada require high level of disclosure. According to the observations of Canadian lawyers, shareholders are taking an increasingly active role.

The M&A market in Chile remains very active due to divestitures by companies from Europe affected by global economic situation, market consolidation, expansion of so-called “mutilatins” as well as higher activity of private equity funds in the middle market. “Mining, energy, infrastructure and financial institution continue to dominate in M&A. Pipeline also has very good prospects”, said Pablo Iacobelli, Carey y Cla. Despite higher scrutiny on antitrust matters, there is no mandatory pre-merger control in Chile.

At the same time, both defensive schemes and hostile takeovers remain very rare.

Notably that special rules have been enacted lately to balance the power of controlling persons in public companies. These included independent director/directors committee, mandatory tender offer to acquire control. Despite limited application squeeze out is now available for the controlling shareholder of a listed corporation in certain cases. According to the speaker, a recently enacted law envisages big changes in M&A structuring due to retraction on the deductibility of interest payments versus cost of exit.

The Japanese M&A market experienced the dramatic consequences of an earthquake and Fukushima in 2011.

But the first half of 2012 could be described as “the year of recovery and diversification”. As Yuto Matsumura, Mori Hamada & Matsumoto said, the volume of deals is evaluated at USD 70-80 billion (1,000-1,200 deals). Outbound investments are active especially by volume; the domestic market is active by value, while inbound experiences decrease (both volume and value). The main effect on the M&A market is predicted with the recent and coming reforms: new regulation of the Tokyo Stock Exchange, Amendment of the Industrial Revitalization Act, proposed amendment of the Companies Act.

Expected reforms touch upon:

— New issue of shares (more control by shareholders);

— Controlling shareholders transaction (more transparency);

— Exchange offer by Japanese company (more flexibility);

— Expedition of squeeze out (more speed for take private transactions).

“Unconventional” challenge

The world battle for resources has led to exploration of alternative “fuels”. Shale oil, oil sands and shale gas explorations make up the industry of unconventional hydrocarbons. It is currently not as well developed in Europe as it is in North America. Thus, recent evaluations introduced this topic into the agenda of governments of many developing countries, including Ukraine.

US experience in exploring and producing shale remains the most indicative. As Michael King, Latham & Watkins, said at the session “Unconventional hydrocarbons: exploration, production and transportation” the main legal instruments are domestic onshore sale agreements and joint development/participation agreements. Of late there has been participation by international companies in these deals, which are motivated by investment into a profitable asset and access to US know-how. “Knowledge transfer is a big part in these transactions”, he outlined. The industry is also driven by environmental law “approval”, which entails less emission than conventional carbon production.

Contrary to the US, Latin America is trying to take its first steps in setting up appropriate regulations, identifying market players and deposit expertise. Argentina doesn’t have regulations yet and players try to predict government policy. According to Giovanni Loss, Mattos Filho, Veiga Filho, Marrey Jr e Quiroga (Brazil), the only one document in Argentina at present is the Gas Plus Program, under which gas produced in its framework is not subject to restrictions. The production of shale gas is predicted to be aligned in five years.

The only country in the region that conditioned unconventional fields is Columbia.

Summing up limitations in the Latin American region, the speaker distinguished typical regional risks, in particular:

— Disposition of many governments towards nationalization;

— Regulatory changes — water legislation, new regulation for drilling;

— Environmental reaction: drilling licensing from environmental authorities could be hard to get;

— Unlike the US, Latin America doesn’t have an infrastructure in place. Pipeline transport needs huge time and complex financing.

All the challenges presented could be extrapolated on other developing countries with “unconventional” deposits.

Lessons from mergers

The effects of mergers of law firms are not always instantly positive in their results. As the participants of the subsequent session agreed, one or even two years after the law firm merger revenue per partner could stay at the same level. The first post-merger year profitability may fall, while integration costs could be higher than expected. Scope mergers and scale mergers have different results. It is for this reason that proper budgeting and evaluation of amalgamation enforcement measure are truly the turning point of managerial strategy.

Practical experience explored shows that, as a rule, partners who resist merger and more than others negotiate on stake, equity, compensation, leave a firm within at least two years. The migration of other staff is unavoidable though could be predicted and optimized.