Kyoto's Effect on Multinational Companies
By Jeffrey Bates and Susan Cooke
Countries that ratified the 1992 United Nations Framework Convention on Climate Change, including the United States and all European Union member states, adopted the Kyoto Protocol in 1997. By 2012, the protocol is intended to address unwanted climate change by imposing a 5.2 percent reduction upon global emissions of six greenhouse gases (including CO2, methane, natural gas and others). When the Bush administration announced its intention this year not to ratify the protocol, it was widely assumed by the international community that it would not move forward because the United States accounts for the largest amount of greenhouse gas emissions (36 percent) worldwide. Since the protocol must be ratified by at least 55 countries representing at least 55 percent of the emissions of greenhouse gases from developed countries and "economies in transition" (mostly former Soviet states) to go into force, it was implied that without U.S. agreement to the protocol the parties would have to go back to
the drawing board.
Nevertheless, the 55-country requirement has been met. The 55 percent emission requirement will most likely be met in early 2003, when ratification by Russia and Japan is anticipated. All of the EU member states, including the United Kingdom and Germany, have already ratified the protocol.
Companies with operations and markets in ratifying countries will find their businesses affected in myriad ways, even if they are based in a non-ratifying country, such as the United States. This will especially be the case in so-called Annex 1 countries. Annex 1 countries are developed countries and economies in transition that have agreed to reduce their greenhouse gas emissions by specified amounts below their "base year" emissions, which is usually the year 1990. Annex 1 countries that have ratified the protocol or stated their intention to do so include EU member states, EU accession countries (for example, the Czech Republic, Poland and Hungary), Russia, Canada and Japan.
To achieve these reductions, Annex 1 countries will have to either reduce their actual emissions of greenhouse gases from such sources as power plants, factories, cars, trucks, buses, airplanes, agriculture and landfills or acquire internationally sanctioned credits from other countries. Most developed countries cannot achieve their agreed reductions without buying such credits through one of the protocol's "flexible mechanisms."
Kyoto provides three credit mechanisms. The first is the trading of emissions allowances among Annex 1 developed countries that have ratified the protocol. The basic structure will involve national permits that grant a specified number of emission allowances, thereby limiting the greenhouse gas emissions of individual permittees. A permittee may live within its allotment, supplement its allotment by purchasing allowances from another permittee or, if it has allowances to spare, sell a percentage of its surplus allowances to others.
Other mechanisms are called "joint implementation" and the "clean development mechanism." These involve an investment by a party from a ratifying Annex 1 developed country into a ratifying economy in transition (joint implementation) or a ratifying non-Annex 1, developing country (clean development mechanism). If the parties can establish that this investment reduces the recipient country's emissions beyond what they would have been but for the investment, the investing party may take credit for additional allowances that it may use itself or sell.
The value of these trades has been estimated to exceed $30 billion; the infant existing market recently broke the $50 million mark. There are some pilot trading initiatives already underway, and it is expected that allowances markets and related derivatives will develop rapidly once the protocol goes into force. For example, pilot carbon funds have already been capitalized to bundle allowances and resell them as demand increases. In addition, international financial institutions are using anticipated allowances to assist in project financings.
The European Union is providing further momentum. The EU member states have entered into a burden sharing agreement, reallocating their country-specific emissions reduction targets to achieve an EU-wide reduction target. To help achieve these new targets, the European Commission has proposed a mandatory emissions trading directive. The European Parliament approved this proposed directive in October 2002, and the Council of Ministers has announced its intention to approve it in December 2002 so it may go into force in 2003. The European Commission is also actively considering carbon taxes on everything from cars to factories that emit excess greenhouse gases. In addition, each EU member state must issue a national plan to achieve its own target, and these plans are under active development.
Early action by multinational companies and financial firms will be desirable to maximize opportunities and minimize costs. Some such actions will involve adjusting capital, production and marketing plans; some will involve international and national lobbying in intergovernmental, governmental and non-governmental settings.
World Summit 2002: Global Alliance Initiatives
By J. Michael Judin (Goldman Judin Maisels Inc., Johannesburg)
(J. Michael Judin can be reached at +27 11 447 8177 or via e-mail at email@example.com.)
"Jo'burg is just a beginning" reads the headline of a recent article in South Africa's Mail & Guardian, which stated that the World Summit on Sustainable Development has paved the way for action with the following initiatives.
There were several issues discussed at the summit that will affect governments and businesses worldwide. The Global Environment Fund will consider the inclusion of the Convention to Combat Decertification as a focal area for funding. There is a commitment to develop food security strategies in Africa by 2005, and the United States will invest $90 million next year for sustainable agriculture programs. In addition, the United Nations has received 17 partnership submissions, with at least $2 million in additional resources.
Biodiversity and Ecosystem Management
At the summit, a commitment was made by parties to reduce biodiversity loss by 2010. This includes reversing the current trend in natural resource degradation, to restore fisheries to their maximum sustainable yields by 2015, to establish a representative network of marine-protected areas by 2012 and to improve developing countries' access to environmentally sound alternatives to ozone-depleting chemicals by 2010. These initiatives are required to be undertaken by 2004 to implement the Global Programme of Action for the Protection of the Marine Environment from Land Based Sources of Pollution. The United Nations has received 32 partnership initiatives, with $100 million in resources. The United States announced $53 million for forests from 2002 to 2005.
It was recognized at the summit that opening access to markets is a key to development for many countries and support was generally given for the phase-out of all forms of export subsidies. Also, commitments were made to establish a 10-year framework of programs on sustainable consumption and production, actively to promote corporate responsibility and accountability
and to develop and strengthen a range of activities to improve natural-disaster preparedness and response. The agreement was to the replenishment of the Global Environment Facility with $2.9 billion in resources.
A commitment to increase access to energy services, energy efficiency and the use of renewable energy was discussed. It was agreed upon to phase out, where appropriate, energy subsidies and to support the new partnership for Africa's development objective of ensuring access to energy for at least 35 percent of the African population within 20 years. Nine major electricity companies signed a range of agreements with the United Nations to facilitate technical cooperation for sustainable energy projects in developing countries. The EU announced a $700 million partnership initiative on energy, and the United States countered that it would invest up to $43 million next year. Eskom, South Africa's energy provider, announced a partnership to extend modern energy services to neighboring countries, and the United Nations has received 32 partnership submissions for energy projects, with $26 million in resources.
Health and Wellness
A commitment was made by the attendees at the summit that, by 2020, chemicals should be used and produced in ways that do not harm human health and the environment. Also, it was decided to enhance cooperation to reduce air pollution and to improve developing countries' access to environmentally sound alternatives to ozone-depleting chemicals by 2010. The United States announced it would spend $2.3 billion next year on health. The United Nations has received 16 partnership submissions for health projects, with $3 million in resources.
Water and Sanitation
Regarding water and sanitation, countries made a commitment to reduce in half the proportion of people without access to sanitation and safe drinking water by 2015. The United States announced more than $970 million in investments over the next three years on water and sanitation projects. The European Union announced a Water for Life initiative that seeks to engage partners to meet goals for water and sanitation. The Asia Development Bank provided a $5 million grant to United Nations Habitat and $500 million in fast-track credit for the Water for Asian Cities Programme. The United Nations has received 21 other water and sanitation initiatives, with $20 million in extra resources.
In the publication Exclusive, which puts a spotlight on the United States and the Republic of South Africa business relationship, it was stated that the summit did serve as a valuable forum for exchanging useful information and views. Concrete action now depends on the United Nations, the World Trade Organisation, other multinational and international institutions and those statespeople and business organizations seriously concerned about the issues raised at the summit.
Post-9/11 Importers and Exporters Security Issues
By David Levine
In the post-9/11 world, U.S. agencies that administer and enforce our trade rules and policies have focused on security concerns. This emphasis on security affects all U.S. importers and exporters to and from the United States.
At the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC), which administers U.S. trade sanctions against countries such as Iran, Iraq, Libya and Sudan, parties filing legitimate export license applications that were required to be answered within a matter of days now face months-long processing time due to the heightened level of scrutiny. The U.S Department of Commerce's Bureau of Industry and Security (BIS), which administers various exporting rules, has published warnings of increased boycott requests in Middle East business. U.S. companies doing business in that region should note that cooperation with boycott requests or mere failure to report to BIS could be a violation of U.S. law. Like BIS and OFAC, the U.S. Customs Service, which enforces U.S. importing rules, has established security initiatives that deserve careful attention by all U.S. companies engaged in international trade.
The Customs Service has long faced a tension between two basic functions: to ensure port security and to facilitate trade. In recent years prior to 9/11, the agency tended to emphasize the latter, while still generally satisfying critics in the U.S. Congress and elsewhere with respect to the former, particularly drug interdiction. Since 9/11, the anti-terrorism campaign has heightened the relative importance of the agency's responsibility to ensure port security. For example, the Customs Service just imposed a controversial security rule requiring submission of ship manifests 24 hours before a U.S.-bound ship departs a foreign port. This new rule becomes effective in late 2002 and could impact all parties to a U.S. import transaction, as shippers have claimed it will require earlier (and more costly) delivery of cargo to ocean carriers.
While customs officials have emphasized to trade members that its missions of ensuring port security and facilitating trade remain equally important, some key initiatives indicate that security concerns will remain of paramount importance for the foreseeable future. Companies involved in international trade should pay close attention to these issues as part of their overall compliance efforts. Chief among these is the Customs-Trade Partnership Against Terrorism (C-TPAT) and corresponding security guidelines. U.S. importers should consider signing on for C-TPAT or at least adopting the security guidelines suggested by the Customs Service. More generally, importers should undertake regular self-assessments of their operations to ensure compliance with all applicable rules and to avoid possible imposition of penalties by an ever-vigilant Customs Service.
Shortly after 9/11, the Customs Service established C-TPAT as a government-business initiative intended to enhance international supply chain and border security. C-TPAT is now open to all U.S. importers and carriers (air, rail and sea). Although some reports indicate the Customs Service will curtail applications at some point, it nevertheless intends to expand eligibility to all members of the trading community, including importers, carriers, brokers, warehouse operators and manufacturers, to participate in order to enhance security awareness by all parties involved in the supply chain.
There are several C-TPAT requirements. Importers must complete a supply chain security self-assessment using the C-TPAT security guidelines and respond to a security profile questionnaire. Importers must also implement a security program throughout the supply chain per the guidelines and build the C-TPAT security guidelines into all supply chain relationships.
C-TPAT's benefits to participants include a reduced number of inspections, with reduced border times; an assigned account manager, if one is not already assigned; access to the C-TPAT membership list; eligibility for account-based processes (for example, monthly and bimonthly payments); the reduced likelihood of customs verifications; and emphasis on self-policing.
The Customs Service has published supply chain security guidelines for importers, brokers, manufacturers, warehouses, air carriers, sea carriers and land carriers. The guidelines provide common-sense direction for any company involved in international trade. Security measures recommended by the Customs Service address procedural security, physical security, access controls, personnel security, education and training awareness, manifest procedures and conveyance security.
Procedural security requires protection against unmanifested material being introduced into the supply chain, accomplished through strict supervision of cargo, marking, weighing, counting and documenting shipments, as well as conducting random security assessments and reporting these to the Customs Service. Physical and access security involves ensuring the integrity of all buildings, perimeter fences, locking devices, gates and conveyances against intrusion.
The Customs Service's recommendations for ensuring personnel security include screening employees and conducting periodic background checks. Companies also should provide security awareness training programs for employees, including incentives for participation. Secure manifest procedures should ensure complete, accurate and timely manifests to the Customs Service (as well as compliance with the new rule noted above). Finally, regarding conveyance security, importers need to maintain secure control over conveyances, including all compartments and other areas, to ensure against tampering and smuggling.
Generally, the Customs Service urges companies to conduct regular self-assessments of their import-export operations to check compliance with all applicable laws and rules. U.S. companies involved in international trade should heed this recommendation, with full support of company management. Companies can also visit the Customs Service's website for more information, including the Customs Self-Assessment guide and C-TPAT materials, at www.customs.ustreas.gov.
PRISM Initiative Researches Value Management
By Larry Cohen
The PRISM initiative is a European Commission funded think tank. For years, Europe has had an inferiority complex: Why does the United States do so well when Europe does relatively less so? There are often periods of time when the United States moves into recession ahead of Europe and, for short isolated periods, Europe does relatively better. But with the unemployment problems, overblown bureaucracies and over-regulation of Germany and France, the European Commission is looking towards the intellectual property regime and the creation of knowledge management to be its savior. This is misplaced. Until restrictive practices, red tape and an overarching bureaucracy are reined in, Europe will continue with low growth, high unemployment and high taxes.
Within those confines, PRISM is an interesting initiative. I sit on the advisory group, which arose out of the High Level Experts Group that advises the European Commission on the intangible economy, impact and policy issues. This advise, which is continuing, resulted in a report being produced in 2001 entitled "The intangible economy impact and policy issues" published by the European Commission.
PRISM is a meeting of academics with non-academics. It is now looking at how to value knowledge management so governments and businesses can make correct investment decisions based on a fuller understanding of the metrics. Within this will be a recommendation as to areas of weakness of European intellectual property and also better understanding of the strategy of applying for and obtaining intellectual property rights, which at present is not well understood. By way of example, studies show that there is little correlation between the number of patents an organization has and the value of its patent portfolio. This is not surprising since one patent that is a basic patent to a technology may be extremely valuable, whereas a large number of patents may be applied for as purely defensive. Until some way is found of measuring such value, maintaining a patent portfolio is likely to be as much of an art as a science.
PRISM is half way through its reporting cycle and is due to firm up some of its concepts and recommendations during 2004 with a view to reporting to the European Commission by the end of 2004 or early 2005.
McDermott, Will & Emery will be calling together a group of intellectual property experts from across Europe to form a top-level experts group to feed into PRISM the pan-European experience of those who have seen industry, government and business over a number of years and in a large number of areas.
Court of Justice Reviews "Seat Theory"
By Jörg Kretschmer and Christophe Samson
Even within the European Union there are only the traces of a single, common company law. That is why when facts of a case involve various countries the central question that has to be answered first is which national legal system applies to the facts? Is the company law issue a question of German or foreign, such as U.S., company law?
Foundation Theory and Seat Theory
The question of which law governs a foreign company is answered differently from country to country. In Anglo-American legal circles the "foundation theory" dominates. According to this, it is sufficient if a company was founded abroad. In that case the company is also recognized domestically, for example, in the United States. This means registration abroad is sufficient in order for a company to be legally formed with legal consequences domestically.
The seat theory is the counter theory to the foundation theory and is consistently applied by the German courts. The seat theory asks where the company has its "administrative seat." The administrative seat is where the company is managed, such as the place where its actual management is conducted. Once the administrative seat has been determined, the next stage is then to look at whether the company was legally established under the law of the "administrative seat." In contrast to the foundation theory, according to the seat theory the conditions for foundation must be fulfilled not at the physical place of foundation but at the place of actual administration. If these conditions are fulfilled, the company will be recognized under German law.
Non-Recognition of Foreign Corporations
According to the consistent case law of the German Federal Supreme Court (Bundesgerichtshof), the seat theory means that a company that has been legally established in a foreign country but has its actual administrative seat in Germany is not recognized. This is even the case if a company is legally established in a foreign country and, subsequently, moves its actual administrative seat to Germany. The classic case of a company not being recognized in Germany is the "P.O. box company," for example, a company that only has an address (such as a secretarial office) in the country where it was established without anything more actually "happening" there. Such a company does not exist under German law. The entity that does not have legal capacity cannot sue in the German courts. Any transfer of rights from a parent company to a "P.O. box subsidiary" is void. The shareholders are generally not protected and are personally liable without limitation for debts of the non-recognized company.
Restriction of Seat Theory within European Union
On May 25, 2000, the German Federal Supreme Court referred an issue to the Court of Justice of the European Unions (ECJ) for a preliminary ruling concerning, among other issues, the compatibility of the seat theory with European community law. On December 4, 2001, Attorney General Colmer made his final submissions: He established that the seat theory restricts the European freedom of establishment because the denial of legal capacity is supposed to prevent the main business activity of a company being conducted in a member state other than the state in which the company was founded. Although the freedom of establishment is restricted in order to protect the company's creditors, the German employees and the revenue authorities, the denial of legal capacity is disproportionate for a company that has been established abroad and, therefore, such denial breaches European company law.
If the ECJ reaches the decision proposed by Attorney General Colmer in his final submissions, this would mean that the denial of legal capacity of a company established in a European country abroad would be contrary to European law. This ought to reduce the risk of foreign European companies being treated as not existing on the grounds of the seat theory. Nevertheless, this possibility cannot be completely ruled out. If the ECJ comes to the conclusion that the seat theory is contrary to the freedom of establishment, the courts will next have to consider whether this case law also applies to the treatment of non-EU companies, for example, whether it also applies to U.S. companies.
German Public Takeover Law
By Alexander Hirsch and Konstantin Günther
In January 2002, the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und übernahmegesetz, WpÜG) came into force becoming the first act ever to address the complex subject of public offers and takeovers of German companies.
The act applies to all public offers in which the target company is a stock corporation (Aktiengesellschaft) or partnership limited by shares (Kommanditgesellschaft auf Aktien), has its registered offices in Germany and whose stock is admitted to trading on a "regulated market" in Germany or anywhere else in the European Economic Area, such as the member states of the European Union as well as Switzerland, Norway, Iceland and Liechtenstein.
The domicile of the offeror or the shareholders of the target company is irrelevant. Thus, in principal, an offer must also be made to shareholders outside Germany. Such cross-border takeover bids addressed to shareholders in jurisdiction outside of Germany are particularly complex. They must be in compliance with the applicable securities laws of all jurisdictions involved. In particular, timing of these cross-border takeover bids is crucial. The Federal Agency for Supervision of Financial Services (Bundesanstalt für Finanzdienstleistungsaufsicht) only rarely grants exemption from the obligation to make an offer to shareholders outside of Germany. Such exemption requires detailed proof that it is unreasonable for the offeror to make a tender offer or to obtain an exemption from making such an offer under foreign securities laws.
Surprisingly enough, the act does not provide for a definition of the term "public offer." Due to the countless variants of offers in real life, the legislator did not want to provide a legal definition that may prove to have loopholes. This missing definition, however, leaves a potential offeror, as well as its advisors, with a degree of uncertainty whether or not an offer is to be considered as a public offer (bearing in mind that an offer made by one person to another may, under certain circumstances, qualify as a public offer).
The act governs all public offers, whether made voluntarily or following a mandatory obligation. Three types of offers have to be distinguished under the act. These are voluntary offers that do not aim at control over the target company. Takeover bids are an offer aiming at control over the target company. A takeover bid must be made by an offer to acquire all outstanding shares and mandatory bids following the acquisition of control over a target company other than by a public offer.
Whether or not an offer aims at the acquisition of control is a pivotal question. The act defines control as the direct or indirect holding of 30 percent of the voting rights in a company. An offer aims at the acquisition of control if, after a successful offer, the offeror holds more than 30 percent of the voting rights, irrespective of how many shares are subject to the offer. Therefore, an offer to acquire one single share may qualify as a takeover bid.
The act sets forth complex rules for the attribution of voting rights. In certain circumstances, even the shares of non-affiliated entities may be attributed to an offeror. Hence, in order to exceed the control threshold the offeror itself does not need to hold 30 percent of the voting rights if only such voting rights are attributed to the offeror. Thus, in most companies, thorough fact-finding is absolutely necessary to determine whether such a threshold is exceeded.
Voluntary Takeover Bids and Mandatory Offers
If an offeror wants to acquire control of a stock corporation, this offer is by definition a takeover bid. Such an offer must be extended to all shareholders in a non-discriminatory manner. Shareholders accepting the offer will be entitled to a supplemental payment, if the offeror acquires stock at a higher price in any transaction during the offer period or within one year following thereafter.
A shareholder who gains control of 30 percent or more of the votes in a stock corporation other than by a public offer is obliged to submit a mandatory offer to the other shareholders of the target company. The controlling shareholder has to follow a strict procedure prescribed by the act. This procedure provides for tight deadlines that must not be missed. However, under certain limited circumstances, the agency may grant an exemption from the obligation to make a mandatory offer. Such circumstances may be present in the case of an intra-group corporate restructuring.
Sanctions in the Event of Violation of the Act
The agency may levy severe monetary fines on each offender, including individual members of the management board of the offeror. The agency is also authorized to prohibit or invalidate all non-conforming offers and impose a one-year ban on re-submission. Furthermore, if a shareholder has failed to make a timely mandatory offer he or she may lose the right to vote those shares previously acquired.
A number of issues and details are not explicitly covered by the act. Therefore, administrative practice of, and close consultation with, the agency in each single case is absolutely vital. Infringement of the act may have considerable consequences. Not only may each member of the management board of the offeror be subject to severe fines, but the threat of losing the voting rights in shares acquired may prove as the most severe consequence and may have adverse effects on the future business of the offeror -who itself may not even be aware of being subject to a mandatory bid under the act.
Düsseldorf Office Adds to International Presence
With the opening of McDermott, Will & Emery's second office in Düsseldorf, Germany on September 2002, the Firm increases its ability to serve international clients with more than 900 lawyers in 11 offices worldwide.
Düsseldorf in an important center for U.S. and international businesspeople, serving as a major hub of the global community as well as being known as a significance area for international mergers and acquisitions and patent litigation. Founding the Firm's newest office are Dr. Thomas Hauss, Konstantin Günther, Dr. Alexander Hirsch and Volker Teigelkötter, all formerly at Menold & Aulinger. Recognized as practice leaders in the areas of corporate, German and cross-border mergers and acquisitions, capital markets, antitrust and competition, intellectual property and labor, McDermott's new Düsseldorf team reflects the firm's multidisciplinary excellence.
"McDermott is known as a firm for high-quality legal advice and for a sound and coherent strategy of expansion in Europe. By joining them we put an excellent set of resources at their disposal-both in terms of geography and practice areas, while providing our clients with the experience base of more than 900 professionals," commented Konstantin Günther.
The Firm has been advising European and U.S. clients in cross-border mergers and acquisitions, joint ventures, capital markets transactions and in the full range of commercial legal services. Most recently, for example, a cross-office team led by the Firm's New York-based German practice advised on the sale of the plastic container and closure businesses of Schmalbach-Lubeca AG, headquartered in Ratingen, Germany, a portfolio company of Allianz Capital Partners, to Amcor Limited for the purchase price of euro 1.725 billion (US$1.56 billion).