In this newsletter, we provide a snapshot of the principal Asian, US, European and selected international governance and securities law developments of interest to Asian corporates.
The previous quarter's Governance & Securities Law Focus newsletter is available here.
Financial regulation developments are available here.
ASIA DEVELOPMENTS
HKEx Publishes Consultation Conclusions on Weighted Voting Rights
On 19 June 2015, The Stock Exchange of Hong Kong Limited (the "Stock Exchange") published its Consultation Conclusions to its Concept Paper on Weighted Voting Rights ("WVRs" - governance structures that give certain persons voting power or other related rights disproportionate to their shareholding). For the background to the Concept Paper, you may refer to the Governance and Securities Law Focus of October 2014.
The Stock Exchange has stated that it is clear from responses to its Concept Paper that there are strong and divided views on WVRs but sufficient support to proceed to a second stage consultation on proposed listing rule changes on the acceptability of WVR structures. In terms of responses to its Concept Paper, the Stock Exchange reported that accountancy firms, investment banks, law firms and listed company staff overwhelmingly supported permitting WVR structures, in certain circumstances. Investment managers seemed split on the question whilst the professional bodies representing investment managers seemed, as a whole, strongly opposed to the possibility of companies with WVR structures listing in Hong Kong. A small number of respondents favoured the introduction of a class action regime prior to permitting companies with WVR structures listing but twice as many disagreed that this should be a prerequisite.
The Stock Exchange expects that listings of companies with WVR structures will not become commonplace in Hong Kong. The use of WVR structures would certainly be limited to new applicants though they will not be limited to a particular industry. The Stock Exchange believes that it is possible to implement certain investor protection standards, which may be associated with higher eligibility standards (e.g., a higher market capitalisation) and other pre-determined characteristics. Consultation with the Takeovers Panel of Hong Kong's Securities and Futures Commission ("SFC") is significant as the acceptance of certain WVR structures may be seen as frustrating bona fide offers for listed companies. Likely restrictions may also include the negation of WVRs on transfer, for example, to unaffiliated members of founding shareholders, and on-going requirements on the retention of a certain portion of equity for WVR rights to subsist.
The Stock Exchange has conducted a wholesale review of its listing rules and will propose changes to them as part of the second stage of its consultation on proposals to list companies with WVR structures. In addition, the Stock Exchange will review its policy that companies with a "centre of gravity" in China are not generally eligible for secondary listings. The purpose of this requirement was to ensure issuers based in Hong Kong or Mainland China that sought primary listings on other exchanges did not subsequently apply for a secondary listing in Hong Kong, taking advantage of waivers that only pertain to secondary listings. Whilst this is likely to remain a relevant consideration, the Stock Exchange will review the "centre of gravity" restriction for secondary listings.
Subsequent to the issue of the Consultation Conclusions, Hong Kong's ultimate market regulator, the SFC issued a press release on 25 June 2015 stating that its Board does not support the draft proposal on primary listings with WVR structures. The SFC is of the view that Hong Kong's securities market and reputation would suffer if listed companies with WVR structures became commonplace. The SFC is concerned that the proposal to restrict WVR structures to large companies with high market capitalisations may be flawed as size offers no assurance that companies would treat its shareholders fairly. In addition, the reference to additional or enhanced "suitability" criteria involves a subjective element for regulators to determine eligibility, which gives rise to uncertainty and could result in inconsistent and unfair decision-making. It is also important to have measures in place to prevent ineligible issuers bypassing eligibility criteria through spin-offs, asset transfers or other corporate restructurings.
The Stock Exchange has indicated that it will consult further with the SFC in light of the views expressed and no expectation on timing for the second stage of the consultation was provided.
The Consultation Conclusions are available at:
http://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp2014082cc.pdf
Corporate Governance Reforms in Japan
The last 18 months have brought a series of significant corporate governance reforms to Japan as part of the Abe government's economic revitalisation policies, including a Stewardship Code for institutional investors, a Corporate Governance Code for listed companies and a new board structure for public companies.
Stewardship Code
The first of such regulatory reforms, the Japanese Stewardship Code, was introduced in February 2014. Foreign observers have long criticised Japanese institutional investors for playing a passive role in corporate governance, prioritising their business relationships with the investee-company rather than financial returns. The Stewardship Code aims to change this dynamic by defining a more active role for these institutional investors. The Stewardship Code encourages institutional investors to work towards enhancing the medium to long-term investment return for their clients and beneficiaries by improving the investee companies' corporate value and sustainable growth through constructive engagement. The Stewardship Code sets forth seven principles, which are not legally binding but are applied in a comply-or-explain basis, and delineates duties that should be undertaken by institutional investors in order to ensure responsible investment. As of 11 June 2015, 191 institutional investors have announced their acceptance of the Stewardship Code.
An English translation of the Stewardship Code can be found at:
http://www.fsa.go.jp/en/refer/councils/stewardship/20140407/01.pdf
Corporate Governance Code
The most significant reform is the new Corporate Governance Code introduced in June 2015. The Corporate Governance Code applies to all listed companies in Japan and, similar to the Stewardship Code, will be binding on a comply-or-explain basis. The most noteworthy elements of the Corporate Governance Code include:
- A requirement for at least two independent directors on the board of directors, with an aspirational goal that one-third of the directors be independent;
- Encouragement of increased dialogue between companies and their shareholders;
- A requirement for disclosure of the company's capital policy, cross-shareholdings in other listed companies and anti-takeover measures; and
- A recommendation to arrange for director training and to disclose director training policies.
An English translation of the Corporate Governance Code can be found at:
http://www.fsa.go.jp/en/refer/councils/corporategovernance/20150306-1/01.pdf
One-Tier Board with Audit Committee Structure
The final significant reform is a new board structure for public companies known as the "One-Tier Board with One Committee" structure, introduced through amendments to the Companies Act that became effective on 1 May 2015. The conventional board structure for Japanese companies is a two-tier structure, comprised of a board of directors and a committee of non-voting statutory auditors. The boards of directors under such structure have traditionally been comprised of inside directors, with non-management individuals serving only as non-voting statutory auditors. The new One-Tier Board with One Committee structure, by incorporating the audit committees into the board of directors, will result in the introduction of more outside directors because the audit committee must include at least two outside independent directors. As of 19 June 2015, over 200 listed companies have announced that they will adopt this new board structure.
US DEVELOPMENTS
SEC and NYSE/Nasdaq Developments
SEC Chair Speaks on Whistleblower Programme
In April 2015, US Securities and Exchange Commission ("SEC") Chairwoman Mary Jo White delivered a speech on the SEC as the whistleblower's advocate, and in particular, discussing the recent enforcement action against KBR Inc. ("KBR") for improperly restrictive language in a confidentiality agreement that impeded whistleblowers from communicating with the SEC (discussed in further detail below).
Commenting on the success of the SEC's whistleblower programme in the four years since it was implemented as part of the reforms established by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act"), Chairwoman White noted that one effect of the programme has been to create a powerful incentive for companies to self-report wrongdoing to the SEC, as companies now know that if they do not, the SEC may hear about the conduct from someone else.
Under the programme, a whistleblower may be entitled to an award where he or she voluntarily provides the SEC with original information that leads to a successful enforcement action or related action with monetary sanctions exceeding $1,000,000. If those criteria are met, the whistleblower may apply for an award, which can range between 10% to 30% of the amounts collected in the case. A total of 17 whistleblowers have thus far received awards. Payouts have totalled nearly $50 million, and the SEC has made individual awards in excess of $1 million three times. The highest award to date is over $30 million. In the last fiscal year, the SEC issued more awards to more people for more money than in any previous year – and that trend is expected to accelerate.
In the context of discussing how confidentiality agreements are affected by the rule prohibiting actions that could impede an individual from communicating directly with the SEC staff about possible securities law violations, Chairwoman White said, "The SEC is not trying to dictate the language of these agreements or warnings – that is the company's responsibility. But a company needs to speak clearly in and about confidentiality provisions, so that employees, most of whom are not lawyers, understand that it is always permissible to report possible securities laws violations to the Commission."
In the SEC's recent enforcement action, the company addressed the issue by changing the violative language to say explicitly that the agreement does not prevent individuals from reporting possible violations of the law to federal law enforcement agencies. And to remedy any potential harm already done, the company also undertook to notify employees who had signed the original agreement that they are not required to seek permission before communicating with any governmental agency concerning possible violations of federal law. Companies would be well-served to review their own agreements and policies to ensure that they are consistent with this and all of the whistleblower rules.
The full text of Chairwoman White's speech, "The SEC as the Whistleblower's Advocate" is available at:
http://www.sec.gov/news/speech/chair-white-remarks-at-garrett-institute.html
Our related client publication is available at:
NYSE and Nasdaq Revise Guidance on Application of 20% Shareholder Approval Rule to Convertible Bonds
Both the New York Stock Exchange (the "NYSE") and the NASDAQ Stock Market ("Nasdaq") require companies that are listed on their exchanges to obtain shareholder approval for issuances of common stock, or securities convertible into or exercisable for common stock, representing 20% or more of the voting power or number of shares of common stock outstanding before the issuance. This "20% rule" does not apply to public offerings or where the price of the stock to be issued is at least the greater of the book or market value of the stock. This rule is intended to protect public shareholders from dilutive transactions.
The NYSE and Nasdaq altered their views about how the 20% shareholder approval rule applies to convertible bonds. The new views remove a potential obstacle to US public companies seeking convertible bond financing. The changes specifically affect companies doing offerings made pursuant to Rule 144A ("Rule 144A") under the Securities Act of 1933 (the "Securities Act") where the number of shares underlying the convertible bonds exceeds 20% of the outstanding shares.
The NYSE and Nasdaq rule changes apply to Rule 144A offerings of convertible bonds that allow for settlement in cash or a combination of cash and shares. Previously, shareholder approval was required if a listed company offered convertible bonds like that under Rule 144A and the number of shares of common stock underlying the convertible bond exceeded 20% of the outstanding shares or voting power. Now, the NYSE and Nasdaq will treat alike convertible bonds with flexible settlement and convertible bonds that only convert into shares of common stock. If the conversion price is at least equal to the greater of the book value and market value per share of common stock, no shareholder approval will be required.
It should be noted, however, that Nasdaq's rules have a separate requirement for a shareholder vote if the use of proceeds of convertible bonds with 20% or more underlying common stock is to acquire the stock or assets of another company. In such a case, the greater than book and market exemption is not available.
The new guidance was published by Nasdaq in March 2015 under FAQ # 1136 on the Frequently Asked Questions section of Nasdaq's website. The NYSE has also changed its interpretation of the greater than book and market exemption in its rules. The new interpretation can be confirmed with NYSE staff members.
An article by Shearman & Sterling partner Robert Evans on this topic is available at:
Regulation A+ Comes into Effect, Providing New Capital Raising Alternatives for Non-SEC Reporting Companies
Non-SEC reporting US and Canadian companies may now raise up to $50 million in a 12-month period under an expanded exemption from the registration requirements of the Securities Act under amendments to Regulation A. This expanded exemption, often referred to as Regulation A+, came into effect on 19 June 2015.
Prior to the adoption of the amendments, offerings under Regulation A were limited to $5 million in any 12-month period, required significant disclosure and were subject to compliance with state securities or "Blue Sky" laws. As a result, Regulation A was rarely used.
The amended rule creates two tiers of offerings: Tier 1 for offerings of up to $20 million in any 12-month period, and Tier 2 for offerings of up to $50 million in any 12-month period. These two tiers have different disclosure and ongoing reporting obligations. Under the amended rule, the exemption is available for sales by existing stockholders, though subject to tighter limits. The amended rule provides many of the benefits available to "emerging growth companies," including permitting issuers to make confidential submissions to the SEC for the first offering, engage in certain test-the-waters activities and delay implementation of new accounting rules in certain circumstances. Tier 2 offerings are not subject to registration or qualification requirements under Blue Sky laws, although issuers may still be required to make filings and pay fees in states where securities are sold. Tier 1 offerings remain subject to Blue Sky laws.
Our related client publication, which provides further information on the "Regulation A+" exemption, is available at:
The SEC has published compliance and disclosure interpretations, providing guidance on frequently asked questions regarding the new "Regulation A+" rules, which can be found at:
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#182.01
Conflict Minerals Reporting Update
1 June 2015 marked the deadline for the second year of reporting under the SEC's conflict minerals rule. Under the SEC's conflict minerals reporting requirements, companies that are subject to reporting under the US Securities Exchange Act of 1934 (the "Exchange Act") must assess whether they manufacture or contract to manufacture products containing tin, tungsten, tantalum or gold ("Conflict Minerals"). If Conflict Minerals are necessary to the functionality or production of the reporting company's products, the company must undertake a reasonable country of origin inquiry and file with the SEC a specialised disclosure report on Form SD. If the company knows or has reason to believe that the Conflict Minerals used in its products originated in the Democratic Republic of the Congo or one of the countries that borders it, the company must also undertake due diligence on the source and chain of custody of those Conflict Minerals and file a Conflict Minerals Report with the SEC.
In April 2015, two human rights non-governmental organisations, Amnesty International and Global Witness, published a report analysing compliance by US reporting companies with the SEC's conflict minerals rules. The report, which reviewed the conflict minerals disclosures of 100 companies, provides helpful insights for identifying best practises for conflict minerals supply chain due diligence and reporting.
Best practises identified by the report for companies to consider at the reasonable country of origin inquiry and Form Securities and Exchange Commission ("SD") disclosure stage include:
- disclosing information on the number of suppliers surveyed and the supplier response rate;
- adopting a policy for following up with unresponsive or uncooperative suppliers; and
- building conflict minerals-related clauses into existing, new and/or renewed contracts with suppliers that require suppliers to comply with information requests about conflict minerals chain of custody or requiring compliance with the reporting company's conflict minerals policy.
At the due diligence and Conflict Mineral Report stage, the report's recommendations for companies to demonstrate the actions they have taken to meet each step of the due diligence framework are set forth in the Organization for Economic Co-operation and Development's ("OECD") Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (the "OECD Guidance") include:
- adopting a conflict minerals policy based on the model supply chain policy in Annex II of the OECD Guidance and implementing internal controls to put the policy into practise;
- implementing a grievance mechanism, or whistleblower policy, to improve risk awareness;
- seeking to identify the specific smelters and refiners from which the conflict minerals in their supply chain were ultimately sourced or, if a company is unable to do so, describing in detail the company's efforts to identify the smelters and refiners; and
- reporting on how they defined, identified, mitigated and managed risk in their supply chain with specific details and examples, and, in each reporting period, companies should demonstrate where they have made measurable improvements in terms of identification and management of risk in their conflict minerals supply chain.
The Amnesty International/Global Witness report, Digging for Transparency, is available at:
http://www.globalwitness.org/campaigns/democratic-republic-congo/digging-transparency/
Our related client publication is available at:
http://www.shearman.com/en/newsinsights/publications/2015/04/sec-conflict-minerals-rule-compliance
Sanctions Round-Up
On 22 April 2015, we published the first quarter 2015 issue of our quarterly Sanctions Round Up.
After months of intense negotiations, the first quarter of 2015 saw the announcement of a framework agreement between the P5+1 and Iran that, if it results in a final agreement, will lead to a suspension of Western sanctions. In another historic moment, the United States announced the first Cuba-related regulatory reforms following President Obama's 2014 announcement that his administration would seek to improve economic ties with the country. The United States and the EU continue to implement tough sanctions targeting Russia despite the negotiation of a new Ukraine armistice in February. In the spotlight for enforcement actions this quarter was the long-anticipated settlement between Commerzbank AG and US authorities over alleged sanctions violations.
Included in this quarter's Sanctions Round Up is a discussion of the following:
- the United States and the EU continue targeting Russia for its activity in Ukraine;
- Cuba-related regulatory reforms announced;
- P5+1 and Iran reach framework agreement;
- US enforcement actions: Spotlight on Commerzbank AG;
- the United States uses sanctions to target terrorists abroad; and
- Office of Foreign Assets Control ("OFAC") continues use of Kingpin Act to target drug traffickers worldwide.
Our Sanctions Round-Up: First Quarter 2015 is available at:
http://www.shearman.com/en/newsinsights/publications/2015/04/sanctions-round-up-first-quarter-2015
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