Speaking to clients, in-house general counsel and those in industry, while all are concerned about the deal that may be struck around Brexit, many have to deal with other uncertainties existing in the current market. The exit negotiations of the UK from the EU are still subject to many turns before, and arguably if, any deal is progressed by March 2019 and that has important implications for key Scottish industries such as financial services, manufacturing, agriculture, fisheries and more widely, the marine and food and drink sectors.

Continue reading “The big picture – the key economic factors and what they mean for investment and risk”

A considerable number of buildings in Romania operate without a fire safety permit. While this has been treated in the past as a minor issue, a night club fire in 2015 changed both the approach of the authorities and public perception. Currently, M&A buyers are reluctant to acquire facilities that do not hold a fire safety permit. However, the regulatory risk is not as high as usually perceived and there are options to mitigate it without derailing an M&A deal.

The fire safety permit – a brief history

Fire safety has been regulated in Romania for several decades. However, supervision has been lax, so there was little concern if production facilities or office buildings (or schools) were not issued a fire safety permit. Everything changed in October 2015, when 64 people died and 147 were injured as the Colectiv night club in Bucharest burned to ashes. The public outcry led to the resignation of the then prime minister and to a lasting change in the approach of the public and the authorities towards this matter.

The fire safety authorisation process in Romania currently has two main steps: (i) the issue of a fire safety endorsement – in Romanian, aviz de securitate la incendiu (the endorsement); and (ii) the issue of the fire safety permit – in Romanian, autorizație de securitate la incendiu (the permit). Both documents are required for various commercial facilities with a surface exceeding 600 sq m, including factories and warehouses, office buildings, hotels, restaurants and theatres.

The endorsement is needed before the construction starts and its purpose is to set out how the works should be performed in order to comply with the relevant fire safety requirements, while the permit is needed after the construction completes, in order for the relevant business activity to be started and carried out.

If any changes occur after the permit is issued (eg, the authorised building is modified, the destination of the building is changed or the fire safety requirements are increased as per new legislation), the permit is no longer effective and an updated one needs to be obtained. The beneficiary of the permit is obliged to ensure the continued fulfilment of the conditions on which the permit was issued.

If a permit is missing, the fire fighters (ie the supervisory authority) may apply a fine of up to approximately €11,000 or may even suspend the activity for certain types of facilities.

How missing fire safety permits affect M&A transactions in Romania

Prudent buyers quickly identify the absence of a permit as a key issue when performing legal due diligence on a Romanian business. Production and storage facilities, office buildings, restaurants or hotels often do not hold a permit. Moreover, there is a significant number of instances where, although a permit had been obtained, the building was modified to accommodate for additional equipment or its use was changed (say, from production to warehousing).

Thus, a buyer usually asks the seller to obtain a permit (or to update the existing one). This usually takes the form of a condition precedent to closing. Sellers often argue that this will delay the process since additional works need to be performed and, especially, since the authorities tend to delay the process of issuing the permit by several months. Even if carrying out additional works to meet fire safety standards is not a problem, obtaining the permit in a reasonable amount of time usually is. Therefore, sellers understandably have a strong preference towards removing this condition precedent from the sale-purchase agreement.

In response, compliance-minded buyers tend to view such an approach as unacceptable, since no-one wants to buy a factory or an office building that might theoretically be shut down one day after closing because a basic regulatory document is missing. This approach led to the collapse of a significant number of M&A and real estate deals in Romania during the last two to three years.

Is this really a deal-breaker?

There is no doubt that the absence of a permit is an important issue and that it should be dealt with properly. However, dropping a deal because of this may be excessive. There are two reasons for this: (i) as a matter of law, only certain types of facilities can be shut down by the fire fighters; and (ii) as a matter of practice, only a very small number of buildings have been affected by the suspension of operations due to the absence of a permit.

As regards the first point, the law governing fire safety matters (ie, the Fire Safety Law No 307/2006) provides that the authorities may enforce a shutdown if a permit is not available because of ‘material non-compliance with fire safety requirements as regards the endangering of life, affecting the stability of structural elements and limiting the propagation of smoke and fire within the edifice and the neighbouring areas, based on criteria established via government decision’.

The only government decision issued so far regarding the criteria for establishing material non-compliance with fire safety requirements (ie the Government Decision No. 915/2015) covers only the following types of buildings: (i) commercial (eg bars, restaurants, nightclubs, markets, shopping malls); (ii) cultural (eg, theatres); and (iii) tourism (eg, hotels). There is no government decision at this time referring to criteria for other types of buildings (eg, industrial and storage facilities or office buildings). Moreover, in practice, the fire fighters do not enforce shutdowns for other types of buildings (than the three categories set out above), even if the Fire Safety Law No. 307/2006 would allow for such an action, because – at least for the time being – no specific criteria have been enacted for other types of facilities.

As a matter of practice, the statistics on Romania’s central fire safety authority website indicate the following:

• Control activities in 2017 were reduced in number by 46% compared to 2016 (as a result of the reduction of the size of control departments within the fire safety authorities).
• Sanctions applied in 2017 were 30% lower (in terms of total number) than
  in 2016.
• The size of the fines was reduced by 42% in 2017 (compared to 2016).
• Only four shutdowns were enforced in 2017 (compared to 14 in 2016).

The elements above show that, while the absence of a permit should not be treated lightly, the likelihood of the facility being shut down by the fire fighters is remote.

A view on alternative solutions

Instead of insisting on having the issue of the permit as a condition precedent in the sale-purchase agreement, buyers might consider other options, especially if the target facility is not a restaurant, a shopping mall, a hotel or a similar venue.

The sale-purchase agreement might provide, for instance, that the seller must perform the relevant fire safety works but does not also need to obtain the permit in order to reach close. A specific indemnity (backed by an escrow amount) might apply if a fire occurs within a certain period after closing or if a fine is applied by the competent authority for the lack of a permit. Insurance policies specifically covering such events are also an option, provided the buyer is satisfied with the terms of the coverage.

Finally, a buyer might simply accept the risk that a permit is not available (as is still the case with 90% of schools in Romania, for instance), but start the remediation works immediately after closing. Such a decision – which ensures that the M&A deal gets through – should nonetheless be based on a thorough analysis and understanding of the case, both from a technical and a legal perspective.

The number and value of offshore M&A deals rose in 2017, making it one of the busiest years recorded for the region, according to a report released by offshore law firm Appleby.

The latest edition of Offshore-i, an Appleby report that provides data and insight on merger and acquisition activity in the major offshore financial centres, focuses on transactions announced over the course of 2017. In addition to the rise in deal activity, it also found that 2017 was the busiest year on record for offshore IPOs.

‘In the face of the substantial geopolitical uncertainty which overshadowed 2017, the offshore region’s positive performance is all the more remarkable,’ said Cameron Adderley, partner and global head of corporate at Appleby. ‘These deals were led prominently by acquisitions, although a number of companies also chose to add additional financing firepower by issuing new stocks and bonds to eager investors.’

The report points to a number of factors that could impact M&A in the coming months, including US tax reforms and regulatory scrutiny, the Chinese government’s concern over outbound deals and the deployment of private equity, among others.

The M&A environment across jurisdictions

In total, there were 2,771 deals targeting offshore companies in 2017, representing a total value of $227bn. This marked an increase over 2016, which saw 2,735 deals recorded at a value of $219bn.

Each deal in the offshore top ten in 2017 was worth well over $2bn, with the largest offshore deal being the $6.8bn purchase of all the issued shares of Belle International, a Cayman Islands-incorporated footwear manufacturer listed on the Hong Kong Stock Exchange. Over the course of the year, the offshore region saw three megadeals – those valued at $5bn or more.

The Cayman Islands remained the busiest jurisdiction for offshore transactions in 2017, recording more than 800 deals. It was followed by Hong Kong (592), the British Virgin Islands (505) and Bermuda (402).

Offshore IPOs experience bumper year

Well over 300 IPOs were reported across the offshore region in 2017, making it by far the busiest year on record. The top sector for announced IPOs is technical and engineering consultancy, for fundraising to assist with project finance and the acquisition of additional equipment.

‘In 2016, companies delayed IPOs amid heightened volatility in the financial markets,’ Adderley said. ‘This pent-up demand was released in 2017 and IPO announcements by offshore-incorporated companies are at an all-time high.’

The offshore region also experienced a record with completed IPOs, seeing 179 companies successfully complete their listing. Hong Kong exchanges are the most popular for offshore companies, followed by US and London exchanges.

Acquiror deals involving offshore buyers continue to rise

Though the primary focus of Offshore-i is on transactions in which offshore targets are purchased by investors, the report also examines deals in which the acquiror is based offshore. Up until 2014, there was parity between the levels of activity inbound and outbound from the offshore region. Since that time, however, offshore companies on the acquiror-side have come to dominate, and the report found that figures from 2017 continue to reflect this.

The year 2017 recorded 3,313 such deals worth a cumulative $347bn. China, the US, India and the UK make up the bulk of the locations targeted but there were also many large deals conducted elsewhere, such as the $1bn institutional buy-out of Portugal’s Novo Banco by Bermuda-registered private equity firm, Lone Star.

Key findings of 2017

• The total value and volume of offshore M&A deals rose when compared to 2016. The year saw 2,771 deals worth a total of $227bn.
• The top ten deals were each worth well over $2bn, with the largest offshore deal being the $6.8bn purchase of all the issued shares of Belle International.
• The finance and insurance sector dominated the offshore landscape in terms of deal value.
• Acquisitions in the real estate sector make up the main theme of this year’s highest-value deals. Software development also continues to attract significant acquisitions, as companies compete to build market share in this rapidly evolving sector.
• Cayman remained home to the largest number of deals, followed by Hong Kong, the BVI and Bermuda.
• The offshore region saw well over 300 IPOs reported, making it by far the busiest year on record.
• Despite the new regulatory restrictions, China continued to be the prominent acquiror of offshore targets, with the UK, Taiwan and the US also
  highly placed.
• 128 deals targeting offshore-incorporated companies were financed via private equity and venture capital, for a total value of $40bn. After a relatively quiet 2016, this marks a considerable uptick in offshore activity.
• There were 3,313 outbound deals from the offshore region, worth a combined $347bn. The top outbound deals, the highest-value offshore-related deals over the year, show a healthy spread of sectors, including logistics, manufacturing and banking institutions.

To learn more about Appleby’s Offshore-i report, simply visit: applebyglobal.com/offshore-i/offshore-i.aspx

Shareholder activism continues to grow in the UK as it does globally, both in terms of capital deployed and the publicity it attracts. While shareholder activism is not a new concept in the UK, the type of investors involved in activist campaigns, the companies that they are targeting, the tools that activists are using and the outcomes that they are seeking to achieve have evolved over recent years. The more typical response of the board of a company that is targeted has also changed reflecting a change in tone and approach away from straight defence tactics alone, and towards that of ‘board preparedness’ and ‘constructive engagement’.

The activists

The activists involved in campaigns are no longer just the funds for whom activism is a business model. Passive funds and institutional investors are also more willing to become involved in campaigns, whether publicly or privately. Consequently, there is some convergence between activism and stewardship. This is in part due to the broadening of activists’ campaigns to target wider governance issues.

The outcomes being sought

Activist campaigns often just used to focus on achieving changes to the board of directors, with the aim of then driving change from the inside. This approach has changed over recent years and many campaigns target a single specific issue, such as:

• intervening in M&A (whether to push a company to execute a transaction or preventing it from undertaking a transaction);
• strategic issues, such as operational performance or overall business strategy;
• governance issues such as remuneration or corporate social responsibility; or
• capital structure, such as return of funds.

The tools

The legal framework for activism has not changed to any significant degree in recent years but the use of the tools has evolved.

English law confers on shareholders some significant rights which they can use to challenge a board, including giving shareholders which hold 5% of the company’s shares the right to requisition a shareholder meeting to consider resolutions put forward by those shareholders. These could include resolutions to remove some or all of the directors and appoint new directors. These only require ordinary (rather than special) resolutions, and so a simple majority of 50% plus one vote is sufficient to pass the resolutions. As it is only a majority of those shareholders present and voting at the meeting which is required, in fact a much smaller overall bloc of shareholders may be able to pass or block resolutions, depending on turnout.

Even if the activists are not seeking to change the board, the fact that they can do so with a simple majority of those voting at the relevant meeting means that the shareholder has a powerful tool to underpin its message.

Shareholders can also requisition a resolution at a shareholder meeting convened by the company. Provided the proposal, if passed, would be effective, there is no limit to the type or wording of a resolution that an activist may propose. Resolutions may be put as directive resolutions (ie binding on the company) or advisory (non-binding). Examples of resolutions that have recently been requisitioned include a resolution to establish a shareholder committee (at RBS’s 2018 AGM) and a resolution to require a company to set and publish environmental targets (at Royal Dutch Shell’s 2018 AGM). Shareholder resolutions concerning broader directional issues (such as setting environmental targets), rather than containing a specific proposal (for example, to remove or appoint a director), are fairly uncommon and do not often attract much support – the RBS resolution received just 1.35% of votes for the resolution.

As an alternative to calling a shareholder meeting or requisitioning a resolution, shareholders may instead choose to exercise their power through voting on resolutions proposed by the company at a general meeting or annual general meeting. For example, shareholders may elect to show their discontent with how a company is run by voting against the directors’ remuneration, which is the subject of an annual advisory vote at each AGM, with a binding AGM vote every three years on the remuneration policy. They may also target particular directors and vote against their re-election if they feel that their performance has not been up to scratch – the UK Corporate Governance Code requires all directors of companies in the FTSE 350 to be put up for re-election annually.

An activist may also seek to block an M&A transaction – for example, where the targeted company is a premium listed UK company, shareholder approval may be required under the Listing Rules for a large transaction and an activist may seek to rally other shareholders to block the transaction. In that situation, the use of proxy solicitation agents, who contact shareholders and urge them to vote in a particular way, has become more common. Activists may also agitate to effect an M&A transaction, eg, a sale or demerger.

Shareholders may also express their view on a takeover. In the UK, it is the target shareholders’ (rather than target directors’) view which ultimately matters on a bid and they can elect whether to vote for or against a scheme of arrangement, or whether or not to accept a contractual takeover offer. A practice has grown in recent years, referred to as ‘bumpitrage’, where a fund takes a stake in a company that is the subject of an offer with the intention of forcing the bidder to increase its offer. There have been instances where this tactic has been used very effectively, although it is not always successful.

Activists have increased use of tools such as social media and microsites to reinforce their campaigns. However, it is important not to forget any legal and regulatory restrictions when conducting a campaign, from ensuring that statements are not defamatory, to not disclosing inside information in breach of the requirements of the Market Abuse Regulation or triggering the requirement to make a mandatory offer for the company under Rule 9 of the Takeover Code. All of these issues require careful consideration.

Board preparedness

It is not just the activists which have changed their tactics in relation to campaigns. The board of a company facing an approach from activist shareholders may have various strategies to defend its position. The key change we have seen is an increasing number of boards who prepare for an activist approach in advance, and a willingness to engage with shareholders on the issues they raise. Refusal to engage is unlikely to assuage or address concerns.

Boards should therefore consider best practice on preparedness which could include:

• monitoring their shareholder register on a regular basis and maintaining a dialogue with their shareholders;
• continuing to undertake an independent or self-assessment of strategy and issues through the lens of an activist;
• having a plan for how to respond to any activist campaign which includes dealing with the activist and other external players, as well as internal stakeholders (board communication and unity being key);
• engaging with any activist who appears on their register, including by giving consideration to their proposals.

Key, both for the target and the activist, will be the public response to any campaign and a media strategy should be put in place which addresses the relevant issues without falling foul of the legal and regulatory framework. That said, the ultimate arbiters will be the body of shareholders (a simple majority or 75%, depending on the issue) and so both company and activist will want to ensure their positions are effectively communicated. Substance at the end of the day should prevail over form.

Activism is here to stay and will continue to grow. Companies should therefore consider putting in a strategy as to what to do if they are targeted.

You only need to dip into the news each day to appreciate that there remains an enormous amount of uncertainty around almost every aspect of Brexit. Not only is the UK negotiating with the EU it is doing so against the backdrop of political infighting within both the Conservative party itself and across the political spectrum. However we do know a few things and just to summarise these:

• Article 50 was triggered on 29 March 2017 with a two-year notice period for withdrawal.
• The first phase of negotiations was finalised on 8 December 2017.
• The deadline to settle the withdrawal agreement is currently October 2018 to enable ratification prior to the date on which the two-year notice period ends – 29 March 2019 – there are significant political hurdles to be cleared to achieve this.
• There will be a transition (or continuation) period that will run from 30 March 2019 to 31 December 2020 – during this period negotiations for the relationship agreement setting out the trading arrangement between the UK and the EU will continue with the aim that it will become effective when the UK leaves the EU – 1 January 2021.

Given the above-referenced uncertainty, many of the key terms of these agreements are as yet unknown. The impact on the financial services sector is particularly acute given its importance to the UK economy and the City’s position as a leading global financial centre. Both sides of the table accept that passporting will end when the UK leaves the EU. Following this, the UK is advocating mutual recognition while the EU members are split between those advocating the current limited equivalence regime and those arguing for freer markets and enhanced equivalence or even mutual recognition.

Most of our clients have established some level of project to address Brexit and for some approaches are beginning to emerge. Within the financial services sector, for example, our clients may be looking at a range of things: consideration of branch structures, new subsidiaries/entities, establishment of funds in the EU, looking at third-party providers and their provision of services and repapering. In-house legal is a key component of such projects and this is putting, or will put, a substantial strain on existing resources with the need for other solutions. This may be exacerbated by the shape of a legal function that may be focused on delivering business-as-usual work but not be shaped or equipped to deliver such a significant and potentially complex project. One obvious solution is the bolstering of the in-house team through interim resource, often drawing on enterprise-wide project budgets to support this.

Through our experience within ES Agile, we have seen the emergence of specialist skillsets in recent years in connection with large change projects, for example MiFID II, ringfencing and GDPR often combining deep product knowledge with project management – indeed specialist legal project managers are in greater demand than ever as it is recognised that legal skills alone are not sufficient to deliver such a project successfully. Indeed, we see legal consultants generally enthusiastic to deliver projects of this sort given that it is transformational but with a defined timescale. However, the resource is finite and Brexit has the potential to apply the greatest demand of all. We would therefore encourage our clients’ in-house teams to act early to establish the resource required as leaving things too late may risk a lack of resource. Of course, as an alternative, suitable in-house lawyers may be transferred onto project teams with their roles ‘backfilled’ by interim resource – this can have the added advantage of ensuring valuable team members are challenged with new opportunities and also leverages their institutional knowledge.

As well as the more strategic project input and the need for subject matter expertise, Brexit will throw up a very significant requirement for other levels and types of input – equally crucial to a successful outcome. Different skillsets are required at different stages of large regulatory change projects. Initially, project teams may require the senior technical expertise that is strategic, putting the building blocks of the project strategy and regulatory relationship in place. As this stage completes, work may become more delivery focused and require a different skillset. The strength of using contingent resource is the flexibility to put in place the right skillset for the right periods of the project, and change swiftly when needed. The consultants used at the start of a project may not be those needed to operationally deliver the project itself. Managing knowledge transfer then becomes key in ensuring projects are efficiently delivered while resource changes during the project lifecycle.

ES Agile can provide that continuation of knowledge sharing and briefing, so that, although consultants may change, there is continuity in knowledge transfer. Clients can resource a project flexibly, with different skills, pricing levels at different project stages, with the safety that the knowledge drain can be mitigated by working with ES Agile and its relationship processes. This can extend to the volume contract change aspects (repapering) and while this may involve seeking interim resource at the more junior or paralegal level, it may also involve the outsourcing of parts of the work to third parties who can help support the data cleansing and apply their own technology and resource in delivering the outreach. This aspect can take a surprising amount of upfront time (data quality is often poor in advance of any repapering outreach and contracts may be difficult to retrieve or out of date) but if properly done can make for a very smooth and efficient repapering. Again we would recommend that these aspects are addressed early. Within Eversheds Sutherland, we often find our clients deploying various solutions here and seeking junior resource through ES Agile alongside the more senior-specialist resource referred to above and also utilising our technology enabled outsourcing business ES Ignite, which has tremendous recent experience in large repapering projects.

For further information on ES Agile or ES Ignite please contact David Boyd (davidboyd@eversheds-sutherland.com) or Richard Hill (richardhill@eversheds-sutherland.com)

Israel has been, and continues to be, a highly desired market for foreigners to invest in. 2017 saw total Israeli exit transactions of approximately $23 billion, including Mobileye for $15.3bn. Though this is down in terms of volume, it is up in terms of value. This is perhaps an indicator that the Israeli market is maturing and that Israeli entrepreneurs are now more able and willing to grow their companies to the point of significant market share, or past an IPO, prior to exit, as opposed to historical trends of those entrepreneurs looking for a quick exit. Continue reading “Foreign investment in Israel”

Perhaps there are no better words than those above of Paulo Coelho, Brazilian author, to describe how to approach Latin America when exploring investment in the region for the first time. There has been a notable shift in traditional international investment to more exotic locations, where new opportunities meet new challenges.

The term Latin America is somewhat misleading. Unlike Europe or North America, Latin America is more fractured and diverse. This can be illustrated by the existence of the two principal trading blocks: Mercosul, made up of Argentina, Brazil, Paraguay, Uruguay and Venezuela, or indeed the Pacific Alliance, made up of Chile, Colombia, Mexico and Peru.

One of the biggest barriers, or at least perceived barriers, to investment in Latin America is political instability. Chile being the notable exception, elections lead to new and sometimes radically different policies, regulation and economic decisions, which affect both local and foreign investment. Luckily for us lawyers, this is outside of our remit and I would always advise obtaining specific intelligence on mid- and long-term outlooks before investing.

The second barrier is legal uncertainty. Traditional dispute resolution can be costly, lengthy and unpredictable in most Latin American countries. The safest option for a foreign investor therefore is to resolve any disputes by arbitration, rather than being at the mercy of local courts. Whether or not specific bilateral investment treaties (BITs) or multilateral investment treaties (MITs) exist, the international commercial arbitration route is almost always an option.

In the context of arbitration, distinctions can also be drawn, for example by way of ICSID countries. Cuba, Mexico and Dominican Republic have not ratified the convention. Antigua and Barbuda, Belize, Dominica and Suriname also remain outside the jurisdiction. Brazil has neither approved the convention nor ratified any BITs, despite having signed many treaties. Bolivia was the first state to withdraw from the ICSID convention in 2007. Ecuador withdrew in 2010 followed by Venezuela in January 2012. Argentina threatens to withdraw.

In light of the above, it is more helpful to examine three specific jurisdictions, and draw your own conclusions on the region.

Mexico

Mexico is the second-largest economy in Latin America, and 15th in the world. It has large energy, automotive and service sectors with increasing private ownership. Like most countries in the region, there are limitations on foreign investment.

In the energy sector, an amendment to the Mexican constitution in 2013 (Article 27 of the Constitution of the United Mexican States), opened the conduct of some activities, through concessions or assignments, by the private initiative such as extraction and exploration of oil and hydrocarbons; electric energy distribution and transmission; and the generation of nuclear energy and radioactive minerals.

The Mexican legislation also considers certain activities reserved exclusively for nationals or domestic companies, with a provision excluding foreign nationals the right to own land and waters, and obtain exploitation licences for mines and waters. The state may grant the same right to foreign nationals, provided they agree to be considered as Mexicans and not to invoke the protection of their governments in reference to said property, before the Ministry of Foreign Affairs.

Mexico has ratified 29 BITs and 15 other international agreements containing investment provisions, including the investment chapter of the North American Free Trade Agreement (NAFTA). It signed ICSID in January 2018, but has not yet ratified it.

Where disputes arise, it is open to the parties to chose any governing law, in principle. If the parties do not prescribe the law governing the substance of the controversy, the arbitral tribunal shall determine the applicable law, taking into account the characteristics and the nexus of the matter (Article 1445 of the Commercial Code).

Colombia

Colombia is one of the most liberal jurisdictions where restrictions to foreign investment are concerned. Foreign investment is permitted in all sectors of the economy (Decree 2080 of 25 October 2000), except for defence and national security and processing and disposal of hazardous or radioactive products not produced in Colombia.

 

Colombia is a party to eight BITs and free trade agreements, for
a total of 16 international investment agreements. It ratified ICSID
in 1997.

Under Article 869 of Colombia’s Commercial Code, agreements executed abroad but performed in Colombia are governed by Colombian law, adopting the principle of lex loci solutionis. However, where parties elect to resolve their disputes by way of arbitration, Law 1563/2012 states that parties to a contract are entitled to choose a foreign law as the governing law of the contract. Therefore, parties to a contract may agree on a foreign substantive governing law so long as such agreement is included in an international arbitration clause.

Parties may agree to international arbitration with a foreign choice of law if one of the following conditions is met: (a) the parties to have their domiciles in different countries; (b) a substantial part of the obligations of the agreement is to be performed outside of the country in which the parties have their principal domicile; or (c) the dispute affects international commerce or trade interests.

Brazil

Brazil is the largest economy in Latin America and the world’s
eighth. The greatest investment opportunities for foreign capital
lies in infrastructure and energy, especially renewable and upstream
oil and gas.

In Brazil, there are many restrictions on the acquisition of rural and Amazonian land by foreign nationals or companies controlled by foreign capital. The restrictions relate specifically to property investments to protect national sovereignty and limit foreign investment in an area (agriculture) regarded as strategic for the national economy (Article 1 §1° of Federal No 5.709/1971).

Brazil is a sharp contrast to other nations when it comes to international investment treaties. Fourteen BITs were signed, but
never ratified. In 2015, Brazil entered into a new phase when it signed co-operation and facilitation investment agreements with Angola, Chile, Colombia, Malawi, Mexico and Mozambique, which provides the template for Brazil’s alternative BIT.

In terms of commercial arbitration, Brazil has always been considered a relatively friendly jurisdiction for foreign investors. One contentious recent development is the law passed in the state of Rio de Janeiro (Decree 46.245/2018). It governs all arbitrations involving a public entity controlled by the state. The law imposes an obligation to seat the arbitration in the city of Rio de Janeiro and use Portuguese as the language. The application of Brazilian procedural law is mandatory.

The law also provides for the Attorney General’s office of the state to be responsible for drafting a standard arbitration clause to be inserted in public contracts, following São Paulo, which in 2015 prepared a model arbitration clause for public-private partnerships contracts. Other features include a provision which establishes that, where the public entity is the requesting party, the respondent must advance the costs of the reference.

Conclusion

As we can see even at a glimpse, we can find important differences from one country to another. There are risks involved in any new investment in the region. It is important to obtain proper advice when considering investment in Latin America for the first time. However, these risks can be properly mitigated by engaging with trusted local advisers or competent and knowledgeable advisers in your own jurisdiction. The British consulates or the Department for International Trade can be first ports of call. Often there are tax or other government incentives to investment in these regions and speaking with government agencies can be very helpful.

It is important to focus on a single project, do your homework and be brave. You cannot gain experience without entering the venture. It may be difficult to break into Latin America, but if you speak to anyone who has, they are likely to confirm it was worth it.

To understand the importance of digital trust, particularly in the legal world, one doesn’t have to look far. Recent history is littered with examples of what can go wrong if that trust is misplaced. The most famous being the massive data breaches suffered by the Panamanian law firm Mossack Fonseca and the offshore firm Appleby, which respectively led to the Panama and Paradise Papers scandals. In the case of Mossack Fonseca, which announced its closure in March, the reputational damage was fatal. The firm’s sobering fate will have prompted plenty of in-house and private practice lawyers to reassess how they harness and protect their digital data. Given the consequences when things go wrong, for them to sleep well at night would require a huge amount of trust. Not just in the internal employees and external collaborators who have direct access to the data, but also in the technology put in place to protect that data, and the people who are developing and managing that technology. Digital trust on that scale requires careful management.

In order to gauge how the legal market is approaching the all-important issue of Digital Trust, The In-House Lawyer teamed up with Safelink Data Rooms to survey over 50 key individuals within the industry, including general counsel, chief technology officers and leading IT decision makers. The findings show that while many respondents have confidence in the strategies they are implementing, there is still plenty of room for improvement, particularly when it comes to external collaboration. Of the respondents, only 61% had a formal Digital Trust Management Policy (DTMP) for both internal and external collaboration. And while 76% of respondents acknowledge that it is important to have a DTMP in place, a worrying 24% claim they don’t understand the implications and consequences of not having one.

‘If you don’t have a framework that enables you to trust things are being done appropriately, then the consequences are dire,’ says Harry Boxall, a director at Safelink Data Rooms. ‘It’s not just the compliance and security risk, but the breakdown in supply chain implications, and the implications for your brand if they don’t work. People say they have a policy, but for what? Who does it include and how far down the supply chain does it go?’

External threats

A company might have the best processes in place, but they won’t count for much if their external collaborators aren’t holding up their end of the bargain. Worryingly for in-house legal departments, the survey exposes the fact that law firms are far less confident about their own digital trust management than their clients. 32% of law firm respondents said they couldn’t confidently tell their internal stakeholders that they were covered for key digital trust issues, such as GDPR. The same divergence occurs when it comes to DTMPs for external collaboration. Only 59% of law firms have policies in place for external collaborators, compared to 94% of in house legal departments surveyed. In spite of this, in house legal departments are generally more confident in their external collaborators than law firms (76% compared to 62%), which raises the question of whether this confidence is misplaced.

Rob Booth, general counsel and company secretary at The Crown Estate, feels that the largest law firms are heading in the right direction.

‘Two years ago, I would have had a pretty patchy response back from the law firms with regard to how they manage their data and what protections they have in place,’ says Booth, who is also The Crown Estate’s ‘senior information risk owner’. ‘I talk to firms now and I get a pretty sophisticated response back. At the very top end, the bigger commercial firms we work with have better information security systems in place than we do, which is very comforting. Over the last year there has been a real improvement at the top end, which might slightly be driven by Mossack Fonseca or the Paradise Papers. Sometimes you need a crisis to catalyse change. Anecdotally, I understand it can still be quite patchy with some of the smaller firms.’

When it comes to the shortfalls, the problems are typically cultural ones, rather than technological ones.

‘Most law firms will mandate that partners can’t use certain file sharing websites because they aren’t secure and they’re a terrible break point, yet they all will because they are partners and think they can do what they like,’ says Dan Brown, an independent technology consultant. ‘The best practices aren’t being implemented. Because law firms tend to be run by the people who own them, they are always trying to cut corners because of their budgets. If you look at transactions between big corporates and banks, law firms are the weakest links, and they are made worse by partners who will continue to utilise certain programs as part of external collaboration tools.’

The human factor

One thing that most can agree on is that an organisation should establish a solid foundation of responsible human behaviour before it invests in the latest IT software. Spending millions of pounds on the finest firewall won’t get you far if the finance director leaves their laptop on a train.

‘It’s very much a culture first, tech second approach,’ says Booth. ‘The vast majority of best practice for us comes out of having a well-educated and engaged workforce who are alive to the requirements, the issues and the threats that can be thrown in our direction.’

Figuring out the most important stakeholders is also vital, as this can vary from organisation to organisation.

‘For a lot of organisations that aren’t acting in a sensitive space, the HR team will hold some of your most sensitive information, so working closely with them is a sensible thing to do. Then we’re looking at the physical security side too, because walking into a building and stealing information is often more easy than hacking the IT,’ says Booth, who applies similar considerations to his external collaborators. ‘One thing to look for is how professional the organisation is with regard to where it leaves its information. Do people leave their computers on their desks, do people carry sensitive papers around? You can get a sense of how seriously an organisation takes it by watching the little things.’

Future proof

Once an organisation has its internal culture in order, then it can start investigating the best ways in which it can harness and protect its digital data. One obvious issue here is that data and technology have always been locked in a game of digital leapfrog, and this is never likely to change. Today’s technology cannot necessarily be trusted to protect the data of tomorrow. Equally, technological advances will bring about new types of data and new ways to access it, both legally and illegally. This is why a forward-looking management policy is crucial, as it forces you to look beyond the protections you currently have in place.

 

The preference for many clients now is that they establish their own ecosystem for collaboration that remains under their control.‘A big part of the discussion isn’t necessarily in the here and now, it’s about finding the skills gaps and managing the trust issues that will arise in the coming years,’ says Brown. ‘Have you seriously considered the impact of some of this next generation technology and how it will impact your trust and security considerations? This is an evolving issue that needs much more consideration than uploading a new program.’

Law firms and other external entities will then have to fit in accordingly, rather than the other way around. This is becoming easier to achieve than it was in the past, as the providers of data storage and collaboration tools become more adaptable.

‘We’re seeing a more collaborative approach between the tech providers, so that widget X can speak to widget Y and widget Z,’ says Booth. ‘A material part of what we look for is compatability with other systems.’

If that compatability exists, then client organisations, and their respective law firms, can achieve much greater efficiency.

‘It’s not about doing more with less, it’s just about doing less,’ says Boxall. ‘It’s about finding how to take some of the inefficient processes that exist within the department and automating those. For large organisations, being able to do that and being able to reduce the reliance on external parties is a huge thing. What they really need are technologies to enable it, and, more importantly, they need the time to map out what these processes look like.’

Ultimately, it is only when an organisation understands and regularly engages with those processes, both at the digital and the human level, that it can learn how to trust them.

 

Do you have an understanding of the implications and consequences of not having a Digital Trust Management Policy and supporting processes?

Yes: 76% (In-house legal departments 88%, law firms 71%)

No: 24% (In-house legal departments 12%, law firms 29%)

Do you have a Digital Trust Management Policy for internal and external collaboration and communication?

Both: 61%
Internal: 20%
External: 10%
Neither: 10%

Law firms with a DTMP for external collaboration: 59%

In-house legal departments with a DTMP for external collaboration: 94%

How confident are you that law firms on your panel/your clients are able to demonstrate the appropriate, necessary measures related to Digital Trust?

Confident (In-house legal departments 76%, law firms 62%)

Class actions represent a growing area of risk for UK corporates, with increasing numbers of high-profile and high-value group claims being brought, or threatened to be brought, in the English courts.

The principal mechanism used to litigate these claims differs from the ‘opt-out’ class action familiar from the US, where claimants who fall within a defined class are automatically included unless they take steps to opt out. In contrast, claims in the English courts normally proceed on an ‘opt-in’ basis, with claimants issuing claims which are then managed together by the court under a group litigation order (or GLO).

Why the increased focus?
There are many factors contributing to the rise in class or group litigation in England and Wales. One is the increased activity of claimant firms and third party litigation funders in this area. Class actions are attractive for those looking to invest in litigation as an asset class; while the costs may be high, the potential returns may be commensurately very attractive. Another factor, in relation to shareholder actions, is a shift in mindset on the part of institutional investors, who have become much more open to the possibility of participating in group actions where appropriate, and the emergence of shareholder action monitoring services that will assist investors to identify relevant actions globally.

The increased focus on class actions in this jurisdiction has been given further impetus by a number of high profile claims to hit the English courts in recent years, including two major shareholder actions brought under GLOs (the RBS rights issue litigation, which settled last year, and the Lloyds/HBOS litigation, which came to trial earlier this year) and the high-profile claims by thousands of motorists in the VW emissions litigation, in which a GLO has recently been granted. There is also an increasing trend towards ‘class action tourism’ in which UK corporates, typically in the mining and energy sectors, are sued in the English courts based on the operations of their subsidiaries abroad. Over the past decade or so, claims have been brought in London based on incidents that took place in such widespread locations as the Ivory Coast, Colombia, Zambia, Nigeria and Peru.

Other expected growth areas for class actions include claims relating to data breaches, particularly given the heightened focus on data protection issues generally with the recent implementation of the General Data Protection Regulation (GDPR), and competition law breaches under the controversial opt-out regime for claims in the Competition Appeal Tribunal introduced by the Consumer Rights Act 2015.

An ounce of prevention?
There is no magic bullet for defendants to avoid being on the receiving end of such claims, but there are steps that can be taken to minimise the risks.

The first, and obvious, point is to have robust procedures to minimise the likelihood of an incident occurring that may lead to liability on a mass scale, including putting in place robust health and safety, data protection and competition compliance programmes.

The second line of defence, where an incident does occur that could give rise to liability, is to take early steps to rectify the issue and consider ways to provide redress to those affected.

Defendant strategies
If all else fails and a class action is launched, what strategies can defendants bring to bear to improve their position in the litigation? Clearly much will depend on the particular case, but there are a number of points for defendants to think about.

There is no magic bullet for defendants to avoid being on the receiving end of group litigation, but there are steps that can be
taken to minimise the risks.

Challenging jurisdiction
Where there are good arguments to suggest that the English court is not the appropriate forum in which to bring a claim, a defendant may wish to consider a jurisdiction challenge. At present, where the defendant is a UK company, there may be little chance of successfully challenging jurisdiction on this basis, due to EU case law to the effect that a defendant can be sued as of right in its ‘home’ member state. That could change, however, either because of the UK’s impending exit from the EU (and depending on the arrangements agreed between the UK and the EU going forward) or because of case law – the Supreme Court is due to consider the effect of the EU jurisprudence in the context of a potential group action relating to alleged environmental pollution in Zambia.

Challenging the grant of a GLO
The court has a discretion to make a GLO where there are a number of claims that give rise to common or related issues of fact or law. In some cases, it may be in the interests of the defendant, as well as the claimants, to have the claims managed under a GLO so as to maximise efficiency and cost-effectiveness. As an obvious example, if the common issues are determined in favour of the defendant, the need to determine potentially thousands of individual claims may be avoided. In some circumstances, however, particularly where the claims are very fact-sensitive, a defendant may wish to challenge the grant of a GLO as it may simply increase costs to no real benefit.

Applying for strike out or summary judgment
In some circumstances, the court has the power to strike out a statement of case or grant summary judgment, either in whole or in part and in favour of the claimant or defendant. Given their drastic impact, the bar for the exercise of these powers is set high, but they have been used to good effect by defendants in the group action context. In the Lloyds/HBOS group litigation, for example, the defendants successfully applied to strike out the claimants’ allegation that directors owed shareholders a series of broad fiduciary duties, thereby narrowing the issues to be addressed at trial.

Ensuring appropriate investigation of individual issues
In any group action the court will need to strike a balance between addressing generic issues, which are common to all or most of the claims, and individual issues, which are distinct to the individual claimant. In a shareholder action, for instance, the generic issues may include the question of whether particular statements made by the company were true, whereas issues of reliance and quantum may have to be considered individually. In general terms, the claimants will be keen to focus on generic issues, so as to put maximum pressure on the defendant at minimum cost; the defendant will be equally keen to investigate individual issues, which will likely be just as important in determining whether it is liable and to what extent.

Applying for security for costs
Where a GLO has been made, the claimants’ liability for the defendant’s costs will typically be several, not joint. In other words, each claimant will be liable only for a proportion of those costs, making it significantly more difficult for a defendant to recover its costs in full at the end of the litigation. An order for security for costs, particularly against a third party litigation funder, may therefore provide important protection for the defendant. The courts have shown themselves willing to order claimants to disclose the identity of those funding the litigation, to allow a defendant to consider an application for security for costs, and indeed to order funders to provide security where appropriate. Such an order was made, for example, in the RBS rights issue group litigation.

Settlement considerations
In group litigation as in any other, the defendant’s preference may be to reach a settlement, assuming reasonable terms can be agreed, so as to manage its risk and avoid further costs. However, it may be difficult or impossible to agree a settlement until the relevant limitation period has expired, or at least until any cut-off date in the GLO has passed. Until that point, the defendant will not know how many more claims might come out of the woodwork, and therefore may be understandably reluctant to do a deal. Settlement dynamics may also be complicated, in the group litigation context, by the presence of different claimant groups who may have different interests or expectations in terms of recovery, as well as by the involvement of third-party funders, or indeed claimant solicitors, with a financial stake in the litigation. All of these factors must be carefully managed.

Damian Grave, Gregg Rowan and Maura McIntosh are the general editors of Class Actions in England & Wales, recently published by Sweet & Maxwell. Written by lawyers from Herbert Smith Freehills, the text provides practical guidance for those looking to bring or defend class action litigation in the courts of England and Wales.