April 2007 e-BULLETIN Page MEMBER NEWS • Clayton Utz Welcomes Back Corporate Star to Perth 2 • Fraser Milner Casgrain Welcomes 18 New Lawyers to Real Estate, Tax, Securities and Corporate Practices 3 • Hogan & Hartson Adds Patent Litigation Lawyer to Los Angeles Office 4 • Luce Forward Adds to Business Complex Litigation Practice in San Diego 5 • Muniz Ramirez Perez-Taiman & Luna-Victoria Strengthens Banking, Finance and Capital Markets Practice 5 DEAL MAKING NEWS • Gide Loyrette Nouel Advised IFC and the General Authority of Civil Aviation of Saudi Arabia on first airport PPP project in the Kingdom 6 • Hogan & Hartson Wins False Claims Act and Employment Law Case for Accenture 6 • Luce Forward Assists Eldorado Stone with intellectual property and copyright infringement case – San Diego Jury Verdict Awards over $20 Million 7 • Morgan Lewis - Jury Verdict for Vanguard in Retaliation Case Based Upon Absence of “Reasonable Good Faith Belief” 7 • NautaDutilh Acts for Unibail – Merger of Rodamco and Unibail will create largest property fund in Europe 8 • Rodyk & Davidson Acts for Changi Airports International $220 Million Investment in China’s fifth largest airport 8 COUNTRY ROUNDUPS • AUSTRALIA – Clayton Utz – Tax Changes to Promote International Competitiveness of Investment Funds 9 • BRAZIL – Tozzini Freire Teixeira e Silva – Ending a Monopoly - Overview of New Reinsurance Law 11 • CANADA - Fraser Milner Casgrain – Minority Government Tax Budget Implications for US / Foreign VC’s 14 • CHINA – King & Wood - Ambush Marketing in Sports – Legal and Non Legal Remedies 18 • HONG KONG – Lovells – Intellectual Property NewsFlash –Shadow Companies – Light at the End of the Tunnel? 23 • SINGAPORE – Rodyk & Davidson – Case Update – Swift Fortune Ltd. v Magnifica Marine Sa – Court’s Powers under IAA Do Not Extend to Foreign Arbitrations 25 • UNITED STATES • Hogan & Hartson – SEC Update – Delaware Chancery Court Issues Opinions in Two Stock Option Derivative Suits: Reduces Demand Burden on Plaintiffs; Establishes Action for Spring-loading 28 • Davis Wright Tremaine – Enforcement of Transfer Pricing Rules Increasing in China 34 • Morgan Lewis & Bockius –Labor and Employment Alert – Occupational Safety & Health Administration’s High Injury and Illness Notification and Site Specific Targeting 2007 Inspection Plan 36 PRAC EVENTS (Members Only) • PRAC Members Gathering @ Inta Chicago – Sunday, April 29 – details on line • Seoul Conference • October 20-24, 2007-• Details available on line Tools to Use • PRAC Contacts Matrix & Email Listing –Update (member version only) • Directory 2007 Member Firms now available at PRAC web site • Expert System – IP & Licensing Capabilities Survey available at PRAC web site Private Libraries (members only) PRAC e-Bulletin is published monthly Visit us on line at www.prac.org

CLAYTON UTZ WELCOMES BACK CORPORATE STAR TO PERTH

Perth, 26 March 2007: Clayton Utz continues to strengthen its corporate capability in Perth, welcoming back Heath Lewis to the fold as a partner in the Corporate Advisory/M&A practice.

Heath was a highly-regarded solicitor in the Perth office before heading to London to work at leading 'magic circle' firm Slaughter and May in 2004.

Heath brings to Clayton Utz strong experience across a range of areas, including Private Equity, ECM, M&A and Energy & Resources.

Heath said his decision to re-join his old firm was a natural one given his rapport with the team at Clayton Utz in Perth and the firm's national profile. Armed with two and a half years' broad-based experience at London's pre-eminent corporate practice, the opportunity to return to one of Perth's leading corporate practices proved to be irresistible.

"I am genuinely excited by the prospect of leveraging my first-rate experience and building a practice during what I believe will be a significant period in Western Australia's history," said Heath.

Clayton Utz Perth office partner-in-charge Geoff Simpson said Heath's recruitment added further depth to the corporate team as the office continues to enjoy a strong period of growth.

"Western Australia is experiencing strong growth which is driving activity in a range of sectors. Heath's hire reflects our desire to further boost our Perth-based teams to respond to that activity," said Geoff. "We are getting a strong flow of instructions from both existing and new clients in areas which match Heath's experience, including M&A, Energy & Resources and Private Equity."

ENDS

Disclaimer Clayton Utz Media Releases are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this Media Release. Persons listed may not be admitted in all states.

For additional information visit us at www.claytonutz.com FRASER MILNER CASGRAIN WELCOMES 18 NEW LAWYERS TO REAL ESTATE, TAX, SECURITIES AND CORPORATE PRACTICES

March 28 2007 - Toronto Fraser Milner Casgrain LLP (FMC), one of Canada’s leading full-service business law firms, will add 18 top tier lawyers to its Toronto office in early April 2007. The nine partners, five counsel and four associates joining FMC were previously with Toronto’s highly respected law firm Goodman and Carr. They will enhance FMC’s strength in Real Estate, Tax, Securities, Corporate and Litigation.

"At Fraser Milner Casgrain, our people are our greatest strength," says Michel Brunet, FMC’s Chair and Chief Executive Officer. "These individuals are highly respected in the Canadian legal and business communities. They have sharp minds and a wealth of knowledge in their respective practice areas. By joining FMC, they now have a national platform upon which to grow already strong client relationships and deliver the highest quality counsel and service across the country, regardless of geographic boundaries."

"We are delighted to welcome these leading practitioners to FMC’s Toronto office," says Chris Pinnington, Managing Partner, FMC Toronto. "We consider it a coup that each of them chose FMC in this very competitive market for legal talent. In each case, their expertise, clients and goals are strategically aligned with those of FMC." He adds: "They are among the best in the country, with proven track records and well-rounded experience that further strengthens our diverse practice groups. The addition of this new talent further strengthens FMC’s dynamic team, which anticipates clients’ needs and helps them succeed."

A list of those lawyers who are joining FMC appears below.

About Fraser Milner Casgrain LLP

For more than 165 years, Fraser Milner Casgrain LLP has distinguished itself as one of Canada’s leading business law firms. With over 500 lawyers in Montréal, Ottawa, Toronto, Edmonton, Calgary, Vancouver and an office in New York, FMC offers the essential depth of experience and trusted legal advice to anticipate clients’ needs and help them succeed.

For more information visit www.fmc-law.com

List of Lawyers Joining Fraser Milner Casgrain from Goodman & Carr:

Real Estate: Sheldon L. Disenhouse, Partner (Real Estate/Commercial Leasing) Jules A. Mikelberg, Partner (Real Estate/Condominium Law) Kenneth A. Beallor, Counsel (Real Estate/Property Leasing) Douglas B. Quick, Counsel (Municipal and Land Use Planning) Renata L. Rizzardi, Counsel Tammy Evans, Associate (Real Estate/Condominium Law) Julie Robbins, Associate (Real Estate/Property Leasing)

Tax: Paul Bleiwas, Partner Earl I. Miller, Counsel Joanne Golden, Associate

Corporate/Commercial: Jeffrey J. Fineberg, Partner Laurence M. Geringer, Partner Steve Watson, Partner David Moscovitz, Counsel Anna Balinsky, Associate

Securities/Corporate Finance: Jenny Chu Steinberg, Partner

Commercial Litigation: Neil S. Rabinovitch, Partner Archie Rabinowitz, Partner (Commercial Litigation and Wills & Estates)

HOGAN & HARTSON ADDS PATENT LITIGATION LAWYER TO LOS ANGELES OFFICE

LOS ANGELES, March 29, 2007 – Hogan & Hartson LLP announced today that Rachel Capoccia will join as counsel in the intellectual property practice group of its Los Angeles office. Over the course of her career, Capoccia has established a significant practice focusing on intellectual property litigation with particular capabilities in patent litigation and high technology. Her strong legal experience is complemented by almost 10 years working as a software engineer, designing and developing manufacturing automation software and computer aided design systems for International Business Machines (IBM). Capoccia has represented clients in patent infringement matters involving diverse areas of technology, including video and audio conferencing systems, Internet postage and encryption, CAD/CAM and imaging software, software for banking systems, and medical devices. She has also represented clients in federal and state courts in a variety of IP and general litigation matters including copyright, trademark, and Internet-related disputes. “Rachel is an excellent lawyer who has extensive patent litigation experience and strong technical abilities,” said Richard de Bodo, head of Hogan & Hartson’s West Coast IP practice. “She will be an important addition to the Los Angeles IP group and will further expand our patent litigation practice in the U.S. and Asia.” Commenting on her arrival, Capoccia stated, “I have worked with Rich de Bodo before and am pleased to have the chance to do so again at Hogan & Hartson. I look forward to contributing to what is already an outstanding practice in a firm with a significant IP presence and global scope.” Capoccia was previously with Irell & Manella in Los Angeles. She currently teaches copyright law as an adjunct professor at the University of Southern California Law Center. She received her law degree from the University of Southern California Law Center and her bachelor’s degree in computer science from Rochester Institute of Technology. Following her graduation from law school in 1995, Capoccia served as a law clerk to The Honorable Cynthia Holcomb Hall of the U.S. Court of Appeals for the 9th Circuit. Capoccia is a member of the California State Bar and the American Bar Association. About Hogan & Hartson Hogan & Hartson is an international law firm with more than 1,000 lawyers around the globe. The firm's broad-based international practice cuts across virtually all legal disciplines and industries. Hogan & Hartson has offices in Baltimore, Beijing, Berlin, Boulder, Brussels, Caracas, Colorado Springs, Denver, Geneva, Hong Kong, London, Los Angeles, Miami, Moscow, Munich, New York, Northern Virginia, Paris, Shanghai, Tokyo, Warsaw, and Washington, D.C. For more information about the firm, visit www.hhlaw.com.

LUCE FORWARD ADDS TO BUSINESS COMPLEX LITIGATION PRACTICE IN SAN DIEGO

Attorney Ben West has joined Luce Forward's Business / Complex Litigation Practice Group as an associate in the firm’s downtown San Diego office. West specializes in intellectual property matters including trademark litigation, domain name litigation, trade secret litigation, Trademark Trial and Appeal Board (TTAB) proceedings, federal procedure, Civil RICO, antitrust litigation, regulatory matters and commercial litigation, and is experienced in industries including gaming, publishing, and consumer products. “As our intellectual property practice continues to grow, we are proud to welcome Ben to the firm,” said Robert J. Bell, Luce Forward’s Managing Partner. “Ben is a talented attorney, and I am confident that he will contribute to the strength of our intellectual property practice and the success of our clients.” West, who recently relocated to San Diego, was previously an associate with Santoro, Driggs, Walch, Kearney, Johnson & Thompson in Las Vegas, Nevada. While in Las Vegas, West also served as the Chair of the Las Vegas Chapter of the J. Reuben Clark Law Society. “Luce Forward has a very advanced intellectual property practice, with an excellent reputation,” West said. “I look forward to working with the Business/Complex Litigation Practice Group’s highly accomplished attorneys.” West earned a Juris Doctor degree from Brigham Young University Law School, and also earned a Bachelor of Arts degree in International Politics from Brigham Young University. West is a member of the American Bar Association and an associate of The Howard D. McKibben American Inn of Court. For additional information visit www.luce.com

MUNIZ RAMIREZ PEREZ-TAIMAN & LUNA-VICTORIA STRENGHTENS BANKING, FINANCE AND CAPITAL MARKETS PRACTICES

Lima, Peru, March 2007.- Muñiz, Ramírez, Pérez-Taiman & Luna-Victoria Abogados is pleased to announce that Andrés Kuan-Veng Cabrejo has been incorporated into the Banking, Finance and Capital Market Practice Group as Senior Associate. In 2003, Mr. Kuan-Veng, who graduated magna cum laude from the University of Lima, earned a LL.M. majoring in Securities and Financial Regulation at Georgetown University Law Center (Washington D.C., USA), where he presented his thesis work titled “Reassessing Elliot”, analyzing the problems involved in the issuance of sovereign bonds owing to the presence of speculative investment bonds, in the light of the Argentinean crisis of 2003. His thesis was published in the Georgetown International Law Journal. Mr. Kuan-Veng began his professional career in 1996, when he became part of the Banking, Finance and Capital Market Practice Group of Estudio Muñiz. After earning his master´s degree, he served as Legal Counsel to the IMF World Economic Studies Division in Washington, D.C. He has specialized in finance transactions through syndicated loans and project finance, including securities transactions, mergers and acquisitions, providing advice to national and foreign financial institutions and multilateral organizations. He has also been a member of the Good Corporate Governance Committee in charge of presenting the final version of the Good Corporate Governance Code applicable to corporations listed on the Lima Stock Exchange. This Code was prepared by the Lima Stock Exchange, Procapitales and “Mercados y Capitales”. For additional information visit www.munizlaw.com.pe

DEAL MAKING NEWS – GIDE LOYRETTE NOUEL ADVISED IFC AND THE GENERAL AUTHORITY OF CIVIL AVIATION OF SAUDI ARABIA ON FIRST AIRPORT PPP PROJECT IN THE KINGDOM and ON ASSOCIATED DESALINATION FACILITIES – ESTIMATED COMBINED AMOUNT OF BOTH PROJECTS IS 300 MILLION USD

19 March 2007 - Gide Loyrette Nouel (GLN) advised IFC (the private sector arm of the World Bank Group) and the recently created General Authority of Civil Aviation of Saudi Arabia on a BTO project relating to the Hajj Terminal Complex at the King Abdulaziz International Airport in Jeddah, as well as a BOT project for new facilities supplying desalinated water to the Airport and its associated facilities. The Hajj Terminal Project is the first airport PPP project in the Kingdom. The new Hajj Terminal Complex will have a capacity of about 9 million passengers per year and will be essentially dedicated to processing the Mecca pilgrims traffic (whether Hajj or Umrah pilgrims). Following an international bidding process, the Saudi Binladin Group has been awarded the project and will undertake the design, financing, construction, operation and maintenance of the Hajj Terminal Complex with technical assistance from Aéroport de Paris Management (ADPM). In addition, the design, financing, construction, operation and maintenance of new desalination facilities (with a capacity of 45.000 m³ / day) has been awarded through an international bidding process to a consortium comprised of SETE Energy, Haji Abdullah Alireza & Co. Ltd., Aquatech and WTD S.R.L. GLN’s Paris and Riyadh offices have acted as lead counsels for both projects (John D. Crothers, Partner, Antoine Cousin, Charles-Henri Arminjon and Robert Willets, Associates. For additional information visit www.gide.com DEAL MAKING NEWS – HOGAN & HARTSON WINS FALSE CLAIMS ACT AND EMPLOYMENT LAW CASE FOR ACCENTURE

BALTIMORE and WASHINGTON, D.C., April 16, 2007 - Hogan & Hartson LLP recently achieved a significant victory for firm client Accenture LLP in connection with federal False Claims Act and related employment claims. During a March 28, 2007 hearing before The Honorable Roger Titus, U.S. District Court for the District of Maryland, the court granted Accenture's motion to dismiss the False Claims Act allegation, both for failure to state a claim under Rule 12(b)(6) and for failure to comply with heightened pleading requirements for allegations of this type under Rule 9(b). The court similarly dismissed the plaintiff's Age Discrimination in Employment Act of 1967 (ADEA) claims for failing to state a claim, and denied the plaintiff’s request under Rule 15 for leave to amend his complaint, finding that amendment was essentially futile. The matter was handled by Hogan & Hartson partners Hank Young and Nick Stavlas and associate Allison Caplis in the firm’s Baltimore office, and by partner Agnes Dover and associate Steve Williams in the firm’s Washington, D.C. office. For additional information visit www.hhlaw.com

DEAL MAKING NEWS – LUCE FORWARD ASSISTS ELDORADO STONE WITH INTELLECTUAL PROPERTY AND COPYRIGHT INFRINGEMENT CASE – SAN DIEGO JURY VERDICT AWARDS OVER $20 MILLION

Luce Forward client Eldorado Stone, one of the country’s leading manufacturers of artificial stone veneer used in home building, was awarded over $20 million this week by a San Diego jury in the case Eldorado Stone, LLC vs. Renaissance Stone, Inc. et al. According to the verdict, Renaissance Stone, a company founded by former Eldorado Stone employee Alfonso Alvarez and Renaissance Stone investor Robert Hager, willfully misappropriated Eldorado Stone’s trade secrets, infringed on Eldorado Stone’s trademarks and copyrights, and intentionally interfered in the economic relationships between Eldorado Stone and its customers. Renaissance Stone’s President, Joseph Smith, was also found liable for copyright infringement. Luce Forward Partners Callie Bjurstrom and Andrea Kimball co-represented Eldorado Stone in the nearly 3-week trial, which stemmed from a suit filed by Eldorado Stone in 2004. “For the past 3 years, Eldorado Stone has fought to preserve the integrity of the product offering it has created,” said Kimball. “The jury in this case sent a clear message that unfair competition through the use of another manufacturer’s intellectual property will not be tolerated. We are pleased to have aided Eldorado Stone in protecting what it rightfully owns.” San Diego-based Eldorado Stone was founded in 1969, and is recognized as an industry leader in the architectural stone veneer industry. The company is a subsidiary of Headwaters Incorporated – (NYSE: HW). “Eldorado Stone has always valued the intellectual capital behind the unique, innovative products that we create,” said Eldorado Stone President Mike Lewis. “Our intellectual property is one of the company’s greatest assets, which has taken years and even decades to develop. We are thankful to the talented Luce Forward team led by Andrea and Callie for their tireless efforts over the past three years.” “Eldorado Stone’s unique intellectual property has clearly set the company apart from others in the industry, and this verdict makes a statement about fairness in the marketplace,” said Bjurstrom. “Our efforts have helped to protect the core of what has made Eldorado Stone successful. We could not be more pleased with the jury's decision, or happier for our client.” Luce Forward was aided in its efforts through the assistance of LECG, a global expert services firm. Michael Bandemer of LECG uncovered key computer evidence in the case supporting the misappropriation of trade secrets by the defendants. Cary Mack, also of LECG, provided the damages analysis in the case. For additional information visit www.luce.com DEAL MAKING NEWS – MORGAN LEWIS – JURY VERDICT FOR VANGUARD IN RETALIATION CASE BASED UPON ABSENCE OF “REASONABLE GOOD FAITH BELIEF”

Philadelphia, April 2, 2007: Mary Pat Russell, an IT Project Manager, challenged the decision of her former employer, The Vanguard Group, Inc., to terminate her employment for insubordination and poor job performance by filing a retaliation lawsuit in the U.S. District Court for the Eastern District of Pennsylvania. In 2003, Russell, who is African American, was considered for a promotion to System Manager. The position ultimately went to another employee, also African American, who became her manager. She was placed on an Oral Warning in May of 2003, a Written Alert in June of 2003, and a Formal Warning in July of 2003. Beginning in June of 2003, Russell complained to the CEO, the VP of HR, and the head of IT, among others, that her manager and his manager (who was white) had discriminated against her on the basis of her race, age, and gender. In her lawsuit filed in 2004, Russell alleged that her termination was motivated by retaliation for making these internal complaints and for filing two EEOC charges against prior managers.

On Friday, March 30, 2007, following a 7-day trial before Judge Louis H. Pollak, the 12-person jury returned a unanimous verdict in favor of Vanguard. The jury was required to answer up to three jury interrogatories, including whether Russell had a reasonable, good faith belief that her complaints related to unlawful discrimination. After deliberating for one hour, the jury came back with the following question: "Does the use of the word 'reasonable' in question number one mean: (a) do we believe that the plaintiff felt her opinions of discrimination were reasonable, or (b) do we believe that a reasonable person in the same circumstances would feel they were being discriminated against?" Judge Pollak instructed the jury that the answer was (b). Ten minutes later, the jury returned its verdict. The jury decided that Russell did not have a reasonable, good faith belief and did not reach the questions of causation and pretext.

The case was tried by Morgan Lewis attorneys Joe Costello and Tamsin Newman. They were supported by Catherine Cugell, Cailin Heilig, Mariann Cheung, and Toni Appel. Prior to trial, the case was also handled by former Morgan Lewis associate Pam Jenoff.

About Morgan, Lewis & Bockius LLP Morgan Lewis is a global law firm with more than 1,300 lawyers in 22 offices located in Beijing, Boston, Brussels, Chicago, Dallas, Frankfurt, Harrisburg, Houston, Irvine, London, Los Angeles, Miami, Minneapolis, New York, Palo Alto, Paris, Philadelphia, Pittsburgh, Princeton, San Francisco, Tokyo, and Washington, D.C. For more information about Morgan Lewis, please visit www.morganlewis.com.

DEAL MAKING NEWS – NAUTADUTILH ACTS FOR UNIBAIL – MERGER OF RODAMCO AND UNIBAIL WILL CREATE LARGEST PROPERTY FUND IN EUROPE

The intended merger between Unibail and Rodamco Europe – an AEX listed fund that will be valued at €11.2 billion through the transaction – will create by far the biggest property fund in Europe with a total portfolio of €21.7 billion. The NautaDutilh team supervising the transaction for Unibail consists of Hein Hooghoudt, Erik Hammerstein, Christiaan de Brauw, Jochem Prinsen and Joost van Hunnik. In addition to the Corporate M&A core team, Christel Grundmann, Marian Scheele, Josephine Tijssen, Nico Blom, Willem Calkoen, Gijs Rooijens, Paul Verkleij and Ronald Pasanea of NautaDutilh are also involved in the biggest ever foreign takeover of a Dutch company. For additional information visit us at www.nautadutilh.com DEAL MAKING NEWS – RODYK & DAVIDSON ACTS FOR CHANGI AIRPORTS INTERNATIONAL $220 MILLION INVESTMENT IN CHINA’S FIFTH LARGEST AIRPORT

Rodyk acted for Changi Airports International in its S$220 million investment for a 29% stake in Nanjing Lukou International Airport. This deal is the first of its kind in Singapore. The airport, already the biggest in the Jiangsu province, is China's fifth largest in terms of international cargo volume. The deal is Changi Airports International’s biggest deal to date. It is also the first private-equity investment in a Chinese airport by a foreign airport operator, and the largest active foreign equity partnership in a Chinese airport Partner Josephine Koh led in this transaction, supported by partner Valerie Ong, Chinese Law consultant Chen Yimin, associates Xu Rui, Stella Gao and Gene Chen from our Shanghai office, and Terence Lin, Wong Hong Boon, Lau Kiat Wee and Yolanda Lee from our Singapore office. For additional information visit www.rodyk.com

AUSTRALIA – CLAYTON UTZ – TAX CHANGES TO PROMOTE INTERNATIONAL COMPETITIVENESS OF INVESTMENT FUNDS

On 4 April, the Minister for Revenue, the Hon Peter Dutton announced proposed tax changes to allow stapled groups to interpose a unit trust as a head trust between the stapled entities and ultimate investors.

The change is intended to enhance the competitiveness of such structures as they expand offshore. It is perceived that there is a lack of understanding of stapled structures by potential foreign investors.

As stated in the Press Release:

• The rollover will allow the interposition of a holding unit trust between a stapled group and unit-holders; and

• Modifications will be made to Division 6C to ensure that the tax status of the new head unit trust will not be tainted by merely holding units in a stapled entity that is subject to Division 6C.

We have had discussions with Mr. Dutton's office to seek more information for our clients. From these discussions we understand:

• For the rollover to be available, the group must have otherwise been subject to Division 6C either before or because of the interposition of the new head unit trust.

• Examples provided were a stapled group that includes an operating company or a group that includes a trust taxed as a company under Division 6C will qualify for the rollover.

• The current thinking is that stapled groups that would not be "impacted" by Division 6C (eg. those made up of only "flow through" unit trusts) will not be eligible for rollover.

We need to wait to see what form the rollover will take, although scrip for scrip would seem most likely. However, the scope of the rollover still remains uncertain so it will be difficult to apply with confidence until the draft legislation is available.

The Press Release anticipates the need for industry consultation and such input is being welcomed by the Minister's office. Some of the issues for resolution include:

• How eligible stapled groups will be defined. It is not uncommon for a stapled group to be made up of "flow through" unit trusts that each own an interest in an operating entity, where no single trust controls the operating business of the entity.

From our discussions there was some hesitation as to whether such a "stapled group" would qualify for the rollover. There appears no logical reason to exclude such a group. Division 6C may not be currently applicable but could be if the head unit trust is put in place. This may work through during consultation.

• Whether the opportunity will be taken to clarify the control test and anti avoidance rules to recognise stapled structures as an acceptable tool to manage Division 6C implications when investing.

• Whether the Division 6C modifications will allow new investments to be structured in this way with protection from Division 6C. There would appear to be no reason to restrict their application to existing stapled groups interposing a head unit trust.

• Can stapled groups owning Australian property, exclusively or as part of a global portfolio apply the rollover or is it exclusively for international investors? There appears to be no reason to limit its application to international investors.

• Stapled groups with Australian properties will need to consider state-based stamp duty rules if they wish to utilise the rollover. Lobby efforts could also focus on the need for exemptions at the state level.

It seems from the Press Release that the repeal of Division 6C as a solution remains a longer term issue.

The amendments will apply to transactions entered into during and after the 2006/07 tax year.

Treasury expects to begin consultation in June, with legislation to be introduced in the Spring sitting of Parliament at the earliest.

For additional information visit us at www.claytonutz.com

D isc la imer Clayton Utz News Aler t is intended to prov ide commentary and genera l in format ion. I t should not be re l ied upon as legal adv ice. Formal legal adv ice should be sought in par t icu lar t ransact ions or on mat ters o f interest ar is ing f rom th is bu l le t in. Persons l is ted may not be admit ted in a l l s ta tes.

BRAZIL – TOZZINI FREIRE TEIXEIRA E SILVA – Ending a Monopoly: Overview of the New Brazilian Reinsurance Law

Marcio M. S. Baptista Partner in the Corporate and Insurance Practice Groups Responsible for the New York Office of TozziniFreire Advogados mbaptista@tozzinifreire.com.br Marta Viegas Partner in the Corporate and Insurance Practice Groups of TozziniFreire Advogados - Brazil mviegas@tozzinifreire.com.br In January, a supplemental law was enacted to set forth the legal framework for the Brazilian reinsurance market, which will cease to be a monopoly once implementing regulations are enacted by the insurance authorities. The reinsurance law ends a monopoly of almost 70 years held by the Brazilian state-controlled reinsurer, IRB - Brasil Resseguros S.A. While no deadline was set for the enactment of the implementing regulations, they are expected by July this year. Even though the reinsurance law does not provide for a waiting period, it is not clear whether foreign companies will be able to start operating in Brazil promptly after these regulations are issued, because the law does state that implementing regulations must give IRB at least 180 days to adapt to the new regulatory environment. The 180-day period is only to protect IRB, exempting it from complying with certain requirements during that period, and should not, in principle, delay the actual opening of the Brazilian reinsurance market. However, it is uncertain how the insurance authorities will interpret the law. In addition to reinsurance matters, the new law also regulates retrocession and co-insurance transactions, purchase of insurance abroad and insurance in foreign currency.

Breaking the Monopoly The opening of the Brazilian reinsurance market generated heated discussions in Brazil. The possibility of extinguishing the reinsurance monopoly held by IRB was introduced into the Brazilian Constitution through a constitutional amendment in 1996. The amendment needed, however, to be regulated by a supplemental law before becoming effective. The government of former President Fernando Henrique Cardoso put in a great deal of effort towards opening the reinsurance market and Congress approved a new federal law at the end of 1999.However, the legality of this federal law was questioned at the Brazilian Supreme Court, which decided that the opening of the market and the privatisation of IRB required a supplemental law and not an ordinary federal law (a supplemental law requires more votes in Congress for approval). As a consequence, the process of privatising IRB was suspended and the market remained closed for private investments until the enactment of the reinsurance law earlier this year. A key difference between the 1999 law and this most recent act is that under the new regulations IRB will remain in the market as a state-owned local reinsurer, and will not be privatised as originally planned. The new law does corrected the long-standing conflict of having a monopolistic company regulating its own activities by transferring those powers to independent authorities: the National Council of Private Insurance - Conselho Nacional de Seguros Privados “CNSP” and the Superintendence of Private Insurance – Superintendência de Seguros Privados – “SUSEP”. How the new law works According to the new reinsurance law, “ceding company” is the insurance company that contracts reinsurance coverage or the reinsurance company that contracts retrocession. Retrocession is defined as the transfer of risks between reinsurance companies or from a reinsurance company to a Brazilian insurance company. Although insurance companies may not engage in reinsurance activities, they may accept retrocession transactions. Coinsurance means the insurance transaction where two or more insurance companies share the risks of a policy, with no joint liability between them, provided that the policyholder so agrees. The reinsurance law does not specify whether the policyholder’s approval must be expressly given. We understand that the silence of a policyholder when questioned about this issue should be sufficient to characterise approval, but this is not clear and may be further regulated by CNSP or SUSEP. The law established three categories of reinsurers authorised to operate in the Brazilian reinsurance market:

• Local reinsurer – an entity headquartered in Brazil organised as a stock corporation (“sociedade por ações”), dedicated exclusively to the business of reinsurance and retrocession.

• Admitted reinsurer – a reinsurance entity with its head office outside of Brazil, a representative office in Brazil, and

registered with the Brazilian insurance authority to engage in reinsurance operations.

• Occasional reinsurer - a reinsurance entity with its head office outside of Brazil, with no representative office in Brazil, and registered with the Brazilian insurance authority to engage in reinsurance operations.

Local reinsurers must comply with all local laws and regulations generally applicable to Brazilian insurance companies, including those relating to intervention or liquidation and management liability, except for those relating to technical, contractual and operational particularities of the insurance business.

Admitted and occasional reinsurers must meet the following conditions, among others:

• be duly incorporated under the respective laws of their place of incorporation, with authorisation to underwrite local and international reinsurance in the fields that they intend to operate in Brazil, and at least five years of reinsurance underwriting experience;

• comply with certain minimum economic and financial requirements established by CNSP;

• have a rating issued by a rating agency recognized by SUSEP equal to or higher than the minimum established by CNSP;

• appoint an attorney-in-fact, resident in Brazil, with full administrative and judicial powers, including powers to receive summons and notifications.

Admitted reinsurers must also keep an escrow account in foreign currency with SUSEP, in an amount to be established by CNSP, to guarantee their operations in Brazil, and periodically present financial statements to SUSEP. Occasional reinsurers cannot be incorporated in tax haven jurisdictions, which does not impose income tax or where income tax is imposed at a maximum rate of 20 per cent, or which laws impose confidentiality with respect to the corporate ownership of legal entities (the Bermudas, Bahamas and Cayman Islands, among others, meet these criteria). Favouring the locals The reinsurance law favours local over admitted or occasional reinsurers. The most significant incentive for the formation of a local reinsurance company is the right of first refusal. Brazilian insurance companies must offer to local reinsurers preference for 60 per cent of reinsurance cessions during the first three years of the law and 40 per cent thereafter. The law does not contain specific provisions on the mechanics of the right of first refusal. There were some provisions on this regard in the bill of law which originated the reinsurance law, but these provisions were vetoed by the Brazilian president. But by analysing the vetoed provisions, we may infer that the right of first refusal will most likely be allocated among local reinsurers in accordance with their respective net worth. The insurance company interested in ceding risks to admitted or occasional reinsurers would have to obtain binding quotations from them and then present such quotations to local reinsurers, on the same terms and conditions. Local reinsurers would then have the right of first refusal to underwrite such risks, according to their net worth. Nevertheless, all rules concerning the implementing mechanisms of first refusal rights should be later defined by CNSP and SUSEP. As mentioned above, the definition of “ceding company” also includes reinsurers. Therefore, the right of first refusal will have to be observed not only by insurance companies, but also by reinsurers when ceding retrocession risks to other reinsurers or local insurance companies. The reinsurance law also establishes that risks related to life insurance and private pension plans can only be ceded to local reinsurers. Finally, CNSP may impose a limit on the percentage of risks that can be annually ceded to occasional reinsurers. Requirements for Reinsurance Agreements The reinsurance law authorises Brazilian insurance authorities to impose mandatory provisions in reinsurance agreements, establish deadlines to formalise agreements after the coverage has been purchased, and restrict inter-company reinsurance operations. It also requires reinsurance agreements to expressly provide that the responsibility of reinsurers survives bankruptcy or liquidation of the insurance company, and that the reinsurance amount must be paid to the bankrupt or liquidated estate, regardless of whether payments have been made by the insurance company to the insured party.

Even though the reinsurance law establishes that reinsurance companies cannot be held liable by the policyholder for the reinsurance amount, direct payments to policyholders may be made upon bankruptcy or liquidation of the insurance company in the case of either non-mandatory reinsurance or mandatory reinsurance with a cut-through clause. This direct payment provision called our attention, as cut through clauses applied in the context of liquidation or insolvency proceedings may cause conflicts among policyholders, insurance companies and reinsurers, since their use may benefit some policyholders in detriment of others. The future of IRB IRB will remain operational as a local reinsurer. The federal government will have the authority to offer to preferred shareholders of IRB the option of redeeming their shares and using the funds to subscribe to newly issued shares of a local reinsurer. The reimbursement of IRB’s preferred shareholders will most probably be effected through capital reductions of IRB. The bill of law which originated the reinsurance law contained a provision requiring the federal government to restore IRB’s capital, which was vetoed by the president. In this regard, IRB may be looking for alternatives to restore redeemed capital in the future. The new reinsurance law also revokes a provision of the insurance law from 1966, which established that IRB would have the right to control the claims’ regulation of the losses it had reinsured. Accordingly, in the open market, insurance companies will have the right to control the claims’ regulation, unless agreed otherwise with the reinsurers through a claims’ control clause. Conclusion Once implementing regulations are enacted, potential players will be able to take advantage of a variety of business opportunities in the Brazilian reinsurance market. Interested investors must closely follow up the issuance of new regulations by CNSP and SUSEP and also start planning the strategy to enter the Brazilian market, as all points of entry have advantages and disadvantages. For additional information visit www.tozzinifreire.com.br This article first appeared in the LATIN LAWYER magazine

Focus on Venture Capital

Canadian Budget Implications for U.S./Foreign VCs

On March 19, 2007, Canada’s minority Conservative government announced the 2007 Budget, which includes a number of tax measures intended to give technology companies that are incorporated in Canada greater access to international sources of capital.

Canadian founders of technology start-ups face a difficult choice when deciding whether to incorporate in Canada or the United States. On the one hand, there are numerous tax advantages associated with carrying on business as a Canadian-controlled private corporation (CCPC), which can only be incorporated in Canada. For example, CCPCs are eligible for lower tax rates on certain income; CCPCs are eligible to receive investment tax credits (ITCs) for scientific research and experimental development (SRED) at a favourable rate and on a refundable basis; Canadian founders may be able to take advantage of the lifetime capital gains exemption on the sale of shares of a CCPC (increased in the Budget from $500,000 to $750,000); and certain tax deferrals and deductions are only available for stock options granted by a CCPC. On the other hand, U.S. and other non-resident investors can experience tax problems on an exit from a Canadian-incorporated company. These tax issues have meant that many U.S. venture capitalists will not consider a direct investment in a Canadian corporation. As a result, some of the most promising Canadian technology companies have either incorporated in the U.S. in the first instance, or have reorganized as U.S. corporations, in order to secure U.S. venture capital investment.

What has been addressed?

The Budget proposes to address some of the more serious tax issues encountered by U.S. and other non-resident investors in Canadian corporations, as detailed below.

1. LLCs under the Canada-U.S. Tax Treaty

Many U.S.-based venture capital funds are structured as limited liability companies (LLCs). Currently, the Canada Revenue Agency (CRA) does not recognize LLCs as U.S. residents for the purposes of the Canada-U.S. Income Tax Convention (the "Treaty"), because of the status of such corporations as disregarded entities for U.S. tax purposes. As a result, any gain (or loss) from the sale of shares of a Canadian corporation by a LLC is fully taxable in Canada. For this

Focus on Venture Capital

reason, a direct investment by a LLC in a Canadian corporation is not tax effective for the LLC or its shareholders, and LLCs have been forced to either decline the investment or put in place costly off-shore holding company structures as a "work around". The Budget proposes to extend Treaty benefits to LLCs. However, the implementation of this proposal depends on finalizing treaty negotiations with the United States, currently expected to occur in the near future with effect likely to be in 2008.

2. Elimination of Withholding Tax on Interest

A Canadian corporation is required to withhold and remit withholding tax on interest payable to non resident lenders. The withholding tax rate is either 10% or 25%, depending on whether the payee is covered by the Treaty. The Budget proposes to eliminate non-resident withholding tax on interest on all arm’s length payments of interest to non-residents and eventually to non-arm’s length U.S. treaty residents. This is good news for Canadian-incorporated technology companies that want to access the well-established U.S. venture debt market without having to agree to tax gross-ups typically required by non-resident lenders. In addition, this measure will make it more attractive for U.S. venture capitalists to finance Canadian corporations through bridge debt and other debt instruments. Timing of the elimination of non-resident withholding tax vis-à-vis U.S. lenders depends on finalizing treaty negotiations with the United States. This measure will only be effective for the calendar year following ratification by the two countries (making 2008 the earliest possible date for implementation). The proposal to eliminate withholding on non-arm’s length interest is expected to be implemented over a 3-year transition period commencing with the implementation of the Treaty.

3. Public Offerings on AIM

Some Canadian technology companies have recently had success in raising substantial capital on the Alternative Investment Market (AIM) of the London Stock Exchange plc. However, AIM is not a "prescribed stock exchange" for the purposes of the Income Tax Act (Canada) (the "ITA"). This means that the shares of a Canadian-incorporated company are "taxable Canadian property" for the purposes of the ITA, and that shareholders not resident in Canada will be subject to Canadian capital gains tax when the shares are traded (unless a treaty exemption is available). Non-resident shareholders will also be required to obtain a clearance certificate from CRA prior to disposing of the shares. These factors have forced some Canadian technology companies to employ complex "work-arounds" (such as reorganizing as a mutual fund corporation) if they wish to undertake an AIM-only IPO. The Budget has proposed a wholesale rewrite of the concept of "prescribed stock exchange" which means that a Canadian corporation will be able to go public on AIM without extraordinary tax structuring. This proposal will be effective immediately on Royal Assent to the Budget. However, as we currently have a minority government in Canada, there can be no assurance when or if Royal Assent will be obtained.

Focus on Venture Capital

4. Other Announcements

The Budget also included other positive developments for the Canadian technology sector. For example, the Budget included commentary that the federal government will, over the coming year, identify opportunities to improve the SRED tax credit program to further encourage R&D within the business sector in Canada. However, investors are reminded that Canada is currently in a fairly volatile minority government situation and that there can be no guarantee that the government will not be forced to call an election before the proposals described above can be implemented.

What was not addressed?

Unfortunately, the Budget failed to address certain tax issues that have driven many Canadian start-up companies to incorporate or reorganize in the U.S.:

1. Non-Resident Withholding Tax on a Sale of Private Company Shares

Currently, 25% of the proceeds of disposition of the sale of shares of a private Canadian corporation by a U.S. or other non-resident seller must be withheld by the purchaser and remitted to CRA to cover the seller’s tax liability. The purchaser is only relieved of this obligation if it obtains a clearance certificate (sometimes referred to as a s. 116 certificate) from CRA. In theory, the clearance certificate is an administrative requirement only and should be available if the sale of shares is exempt from capital gains tax under the Treaty. However, in practice the withholding tax and clearance certificate requirements have created numerous problems for U.S. venture capital funds disposing of a Canadian portfolio investments. First, it can be difficult for a fund structured as a limited partnership to obtain a clearance certificate, since CRA will require detailed tax information regarding a fund’s limited partners in order to determine if a Treaty exemption is available. This can cause privacy concerns for limited partners and/or the required information may simply not be available (particularly if limited partners are themselves structured as partnerships or LLCs). Second, it has not been possible to obtain a clearance certificate at all for a seller that is LLC since these entities have not been covered by the Treaty. While the recent Budget proposals to extend Treaty coverage to LLCs will partially address this problem, we are concerned that even once this proposal is implemented that LLCs may, like limited partnerships, be required to disclose detailed tax information regarding their investors which may impair the ability to obtain a clearance certificate on a timely basis (or at all). Third, the time to process clearance certificate applications has often extended to two or three months which remains problematic for transactions which typically are required to close in a shorter time frame. Finally, in the case of a share-for-share acquisition of a portfolio company by a publicly-traded acquirer, sellers can be exposed to fluctuations in equity markets while they wait for CRA to process their

Focus on Venture Capital

clearance certificate applications.

2. No Roll-over Treatment for Canadian Shareholders

Currently, Canadian shareholders of a Canadian corporation do not receive a tax-free roll-over on a share-for-share acquisition by a U.S. acquirer. This means that a Canadian shareholder will incur a tax liability in the year of the acquisition. If the acquirer’s shares are illiquid or subject to resale restrictions, the Canadian shareholder may be in a position where he cannot sell the shares to satisfy the resulting tax liability. This issue is commonly addressed by using an exchangeable share structure, which may be costly to implement and can result in reduced liquidity for Canadian shareholders. In November 2000, CRA announced a proposal to provide roll-over treatment in a share-for-share acquisition, but to date we have not seen any action on this proposal, and this item was not addressed at all in this year's Budget.

Summary

There are of course other issues that influence where to incorporate, such as U.S. tax rules (including CFC and PFIC rules) and the stringent minority shareholder protections available under Canadian corporate statutes relative to the more permissive Delaware statute. However, if the remaining Canadian tax issues discussed above can be addressed, the new Budget proposals mean that more Canadian technology companies can be expected to incorporate in Canada and attract U.S. venture capital investment.

In summary, while impediments to direct investments in Canadian companies will continue to persist, when and if the Budget proposals described above become law, some meaningful progress will have been made to level the playing field for Canadian companies seeking U.S. or other foreign investment.

For more detailed information on these proposals please click here.

Contact Us

If you have any questions or would like any further information, please contact, Tom Houston, Andrea Johnson or David Little or a member of our Technology Companies/Venture Capital Group.

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Ambush Marketing in Sports: Legal and Non-Legal Remedies

By Liao Fei *

I. Introduction Ambush Marketing is a term used to describe the attempt by a company to mislead others into believing existence of a sponsorship or association between itself and an event (mostly a sporting event) without paying the sponsorship fee. The conducts include, for example, using an Olympic mascot or a slogan like “Wishing Success to Beijing Olympic Games” in advertising; purchasing the surrounding advertising time on broadcasting of the event, or advertising on billboards or public transportation near the venue; handing out free branded merchandise (such as caps and T-shirts) near the event so that its brand can appear in the venue and subsequently on TV; and giving away tickets for free or as prizes in marketing. All these sports marketing conducts by non-official sponsors would bring harm to the exclusive investment and marketing interests by legitimate sponsoring companies, and subsequently affect the funding and brand marketing of the event in the future. As the Chinese term for “ambush marketing” phrases it, ambush marketing is a “concealed” marketing, and this has been a heavily debated issue since the first day the public became aware of it.1 It includes not only the conducts traditionally deemed as infringing or unlawful (especially in intellectual property –or “IP”), but also those concealed marketing behaviors the legal status and remedies of which are hard to define or that do not qualify as legal issues. As China is preparing for hosting a series of events in the next five years, including the Beijing Olympic Games, FIFA Women’s World Cup, World Universiade, Asian Games and World Expo, there is an urgent demand for safeguarding against ambush marketing. II. International Legal Remedies against Ambush Marketing The following main legal remedies against ambush marketing in sports are available in major jurisdictions.

1. Special legislation for Olympics The most important and efficient measure against ambush marketing taken by various countries is Olympics-specific legislation. Host countries like Australia, China and United Kingdom have enacted Olympic-related decrees and regulations to protect various Olympic symbols. For example, for 2012 London Olympic Games, the London Olympic Games and Paralympic Games Act 2006 not only protects common

1 It is said that one of the first cases of ambush marketing in sports occurred in the 1984 Los Angeles Olympic Games where Kodak as a non-sponsor, by sponsoring the TV broadcasts of the Games as well as the United States track team, “ambushed” Fuji, the official sponsor; Subsequently Fuji rebounded the “ambush” in the 1988 Seoul Olympic Games of which Kodak was the official sponsor.

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Olympic symbols, but also specifies certain “Listed Expressions” which a court may take into particular account in determining an infringement case, such as, “Games”, “2012”, “London”, “medals”, “summer”, “gold”.

2. Trademark Infringement, Passing Off, Dilution, Copyright Infringement

Big international sporting events like Olympics and FIFA World Cup have paid close attention to registering their relevant trademarks, logos and symbols and have since established relatively perfect defense systems for ambush marketing. These trademark registration systems, coupled with copyright laws, anti-passing off laws and anti-dilution laws, are able to identify the infringing use of symbols subject to IP protection for commercial purpose.

3. Torts - Interference with Contract and Prospective Advantage These can be independent claims for relief under the common law system. The aggrieved party (the official sponsor) can initiate a lawsuit based on the claim that the contractual relationship between itself and the event, as well as the related economic advantages have been harmed by the ambush marketing conduct. However, to date no successful cases based on this claim have been reportedly decided.

4. Breach of Revocable License A typical conduct of this type is to market by handing out tickets as a prize or a gift. To combat it, an event organizer may print the following clause on the backs of the tickets: “Unless specifically authorized, this ticket may not be offered in a commercial promotion or as a prize in a sweepstakes or contest.” By purchasing the tickets, the potential ambush marketer is bound by the limiting clause and subject to a revocable license. If the clause is breached, the ticket could then arguably be declared void.

5. Other Other courses of action available may include unfair competition (mainly in civil law countries), misleading advertising and reverse confusion. III. Legal Trends on Regulating Anti-ambush Marketing in China So far, China has established a basic anti-ambush marketing system, though not yet perfect, consisting of laws, regulations and administrative organs. The most effective and typical example is that for protecting the Beijing 2008 Olympics, which is analyzed below. Among the various forms of ambush marketing, the most common one is to directly use the Olympic-related symbols (including mottos, mascots, and emblems) which could trigger application of such laws and regulations as

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the Trademark Law, Copyright Law, Regulations on the Protection of Olympic Symbols, and/or Regulations on the Administration of Special Signs. For example, the unsanctioned uses of registered trademarks, special signs or copyrighted works such as “Olympic”, “Fuwa” (name of the Beijing Olympic mascot) and the five ring design, whether for the purpose of products or services promotion, or under the disguise of celebration for winning the bid for the Olympics or promoting the Olympic spirits, undoubtedly violate the law and constitute infringement. Also, while all the Olympic symbols are generally regarded as intellectual property rights, in fact the subjects of the Trademark Law, the Copyright Law or other IP laws in China do not cover the broad range of “Olympic symbols” which are under protection of the Regulations on the Protection of Olympic Symbols. For example, “Beijing 2008”, due to its lack of inherent distinctiveness, is not registerable as a trademark or a special design, or protectable by copyright; however, it is safeguarded under the Regulations on the Protection of Olympic Symbols and has therefore been protected ex officio by the China Trademark Office who refuses various registrations of similar trademarks in examination.2

Other ambush marketing conduct that does not involve IP infringement (conduct that does not use any Olympic-related symbols) can be addressed on the general principles of honesty, creditability and fairness set in the General Principles of the Civil Law and Anti-Unfair Competition Law. Moreover, the Anti-Unfair Competition Law (Art. 9), the Advertising Law (Art. 4) and the Law on the Protection of Consumers’ Rights and Interests (Art. 14) all comprise a similar provision which prohibits misleading and/or false advertising.3 As such, if a company hosts a series of sports marketing campaigns, including an Olympic-related quiz and giving away Olympic tickets as prizes, a claim might be made against the company based on the legal principles and provisions mentioned above, though the marketing itself may not involve Olympic-related IP and does not contain false statement. Furthermore, if necessary and applicable, the appropriate standards from the general and abstract provisions in the Anti-Unfair Competition Law (such as Articles 2 & 9) may be used to address various forms of ambush marketing. One characteristic example of ambush marketing on the Beijing Olympics that has been widely reported is marketing by Mengniu Diary (Group) Co., Ltd. On Aug. 8, 2006 (the 2nd anniversary countdown to the Beijing Olympic Games), Mengniu launched a nationwide sportsmen selection campaign during which it used a similar Olympic five-ring design and the logos as “Now Starts for Enthusiastic 08” and “Common People’s Olympic Games”. Their conduct was later halted by a written warning from the Beijing Organizing Committee for the 29th Olympic Games (“BOCOG”). This is a typical successful case of combating ambush marketing on the forthcoming Beijing Olympics. Another case publicized by the BOCOG is the advertisement launched by Tag Heuer, “Tag Heuer Watches Support China’s Diving Team to Participate in the 2008 Beijing Olympic Games and have become

2 For example, in the past two years there have been over 50 registration applications by different individuals for clothing, footwear and headgear in Class 25 and businesses for trademarks containing the figure “2008”, such as “梦想世界 2008 (Dreaming World2008)”, “相约 2008 (Meeting in 2008)”, “奥八 2008 (Ao Eight 2008)”, and “北京之夏 2008(Summer of Beijing 2008), all of which have been or will be officially rejected. 3 A subtle difference should be noted that Art. 9 of the Anti-Unfair Competition Law and Art. 14 of the Law on the Protection of Consumers’ Rights and Interests stipulate that the advertising shall not be both misleading and false, while Art. 4 of the Advertising Law only forbids advertising “misleading” consumers.

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its official timekeeper”. This is also a common form of ambush marketing against Olympics by sponsoring one individual team of the sports event. Another relatively cunning method of ambush marketing is to simply claim the non-official status of the advertiser or its products in an advertisement to avoid possible legal liability in the future. Some ambush marketers did succeed in cases abroad. For example, in the 2002 Salt Lake City Winter Games, a small brewery, Schirf Brewery, launched an advertisement “The Unofficial Beer. 2002 Winter Games”. Since no Olympic symbols appear in their advertisement, Budweiser, the official sponsor of the Winter Olympics had no effective recourse against them. If a similar situation occurs in China the advertiser would wrongfully associate itself with the event on bad faith and be punishable for breach of principles of honesty and creditability, even though the ambush marketer unambiguously declares their unofficial status. More importantly, this type of advertisement will usually use signs and symbols subject to protection under IP law or special legislation. Such usage of phrases like “2002 Winter Games” in the advertisement mentioned above, if targeting the Beijing Olympic Games, would very possibly fall under sanction by the Regulations on the Protection of Olympic Symbols. Finally, while there might be a claim available in the common law system against breach of revocable license (especially marketing cases where tickets are given away as prizes or gifts), this doctrine has not yet been applied in any reported cases related to ambush marketing, even in the common law system.4 However, this method will not constitute an independent cause of action in China. In fact, some issues remain unclear in such method, such as the identifying illegally gifted ticket and whether a unilateral claim or reservation could effectively bind the bona fide ticket holders. Moreover, whether the rights over such merchandise as tickets can be exhausted remains a controversial issue as well. In response to this problem, claiming an infringement claim based on trademarks, signs or symbols of the event would be more effective, because this type of marketing usually uses such signs to refer and attract consumers to the event. IV. Non-legal Perspectives on Anti-Ambush Marketing The legal status of several types of ambush marketing remains ambiguous. As a result, a successful anti-ambush marketing program should require the joint participation and cooperation of legislators, events organizers, right owners, administrative organs at different levels, media and corporate sponsors. In China, BOCOG is cooperating with relevant governmental agencies to safeguard against ambush marketing. For example, billboards surrounding the event have been reserved (it is reported that all the billboards within the fifth ring road in Beijing will be controlled by BOCOG during the games) and any coincidental social events in the host cities lacking authorization from BOCOG will be banned. Additionally, all the organizers of Olympic-related

4 The earliest case in this type is NCAA v. Coors Brewing Co. [2002] US. Dist. LEXIS 21059 (S.D. Ind. Oct. 25, 2002). Coors used NCAA Men’s Basketball Final Four tournament tickets as prizes in commercial promotions. There was a claim on the backs of tickets prohibiting offering in commercial promotions. NCAA filed the suit based on two claims: breach of revocable license and unfair competition. The case eventually settled without setting precedent on ambush marketing.

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public affairs activities, social events and symposiums are not allowed to accept sponsorship from any unofficial sponsoring enterprises; they must provide corporate sponsors with contracts that fully protect against ambush marketing; and they should be proactive in preventing corporate sponsors from exceeding their sponsorship scope and preventing unauthorized parties from unjustly exploiting the authorization granted to the corporate sponsors. Protection from ambush marketing is a right corporate sponsors should enjoy and expect from event organizers and/or the government. In fact, the corporate sponsors should not only invest heavily to win the sponsorship, but also follow up with necessary investment to promote, exploit and safeguard the sponsorship. They should hold a series of Olympic-related promoting and popularizing activities as well as commercial campaigns to fully educate consumers of their sponsorship identity. This proactive approach by corporate sponsors would prevent the mala fide confusion regarding sponsorship caused by ambush marketers. Moreover, corporate sponsors should also substantially invest in occupying all the important advertising sources to keep ambush marketers out of advertising space. They should be aware of the protection clauses in agreements with the event organizers. They are also strongly urged to monitor various circumstances where ambush marketing may possibly occur to combat improper reliance on any limitations or gray areas in legal or commercial boundaries by competitors. Also, since media plays a substantial role in ambush marketing, official corporate sponsors should restrict or pressure media to avoid exposure of ambush marketing to the public. This may be done either by administrative power or through contractual relationships. V. Conclusion When asked how to combat ambush marketing in the Beijing Olympic Games, Anthony Laver, Director of the Olympic Marketing Department of Volkswagen said, “the Chinese people is another weapon we have to win over the ambush marketing”. What Mr. Laver means is that event sponsors can also rely on the consumers’ moral level to condemn and repel ambush marketing behavior as immoral. However, moral resolutions can be fragile and limited to the profit-oriented enterprises, and legal tools, though much more powerful and aggressive, cannot extend to all aspects of modern commerce. So, we still need to put substantial efforts into research and construct a systematic protection network that combines aspects of law, morality, administrative power, public opinion, and commercial strategy to successfully protect the interests of sponsoring enterprises and safeguard China as a splendid stage for world sports.

(This article was originally written in Chinese. The English version is a translation.) *Liao Fei is a partner at King & Wood’s Beijing office.

INTELLECTUAL PROPERTY NEWSFLASH 10 APRIL 2007

SHADOW COMPANIES - LIGHT AT THE END OF THE TUNNEL?

ANHEUSER-BUSCH INC. SUCCEEDS IN CHANGING THE NAME OF 9 SHADOW COMPANIES IN HONG

KONG

Background

Shadow Companies, that is, companies which adopt a well-known brand name as part of their name upon

incorporation have been a serious problem for many a brand owner in Hong Kong in recent years. Typically, the

directors and shareholders of such companies are PRC nationals who give false addresses for themselves and

for the company, and use the shadow company vehicle to imply an association with a well-known brand and give

legitimacy to infringing activities across the border. The problem has escalated in recent years with some brand

owners facing scores of such shadow companies in Hong Kong.

The Problem

Under Hong Kong law, there is no requirement for company names to be screened for potential trade mark

infringement prior to the incorporation of a company. The Companies Registrar has the power under section 22

of the Companies Ordinance to direct a company to change its name within 12 months of registration if in his

opinion the proposed company name is too like a name that is already registered. It is up to an aggrieved brand

owner to raise this within the 12 month period. In practice, not many complaints lodged under section 22 of the

Companies Ordinance are successful as the mere addition of one or two words around the hijacked brand is

enough to persuade the Registrar that the two names are not that similar. Objections raised on the basis that the

name infringes a well-known trade mark are not entertained.

Since most of these shadow companies have no operations in Hong Kong - could the companies be de-registered

on the basis that they are defunct? In theory, this is possible, in practice, this is difficult to achieve. Brand owners

can apply under section 291 of the Companies Ordinance to strike off the shadow company from the register on

the basis that it is defunct. Such applications take at least a year and the mere filing of an annual return can be

sufficient evidence to defeat an application under section 291. Evidence of business being carried on outside

Hong Kong (say in the PRC), including business which may consist of infringing acts under Hong

Kong intellectual property laws, may also be sufficient to persuade the Registrar that the shadow company is not

defunct.

In such circumstances, brand owners are left with no option but to take trade mark infringement and/or passing off

actions against shadow companies. Many brand owners have done just that. Such actions are invariably

uncontested and default judgments are obtained quite easily and at relatively little cost. Up until now, these

victories have remained Pyrrhic victories, as orders to change a company name obtained against

the shadow companies only are in practice useless. A change of the name of a company requires a special

resolution by the shareholders of the company. Without such a resolution the Companies Registry cannot effect

the change of name ordered by the courts of Hong Kong.

This so far, has been the impasse faced by many companies which have obtained court orders requiring the

change of name of shadow companies, only to find that such orders could not be enforced.

abc

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Light at the End of the Tunnel?

There is consensus in the IP community in Hong Kong that changes to the Companies Ordinance should be

made to deal with this problem. One possible solution could be that adopted in the English Companies Act 2006,

which allows brand owners to object to a registered name on the ground that it is the same as a name in which

the applicant has goodwill. The complaints are heard by a company name adjudicator appointed by the Secretary

of State. In the event that the company name adjudicator decides that the shadow company should change its

name and it does not comply, the company name adjudicator can determine a new name for the shadow

company and effect the change of name on its behalf. An amendment to the Companies Ordinance in Hong

Kong is likely but unfortunately such amendment is not to be expected in the next three years.

In the meantime, orders granted in the High Court of Hong Kong in January this year, to Anheuser-Busch Inc.,

may offer an interim solution to the problem. In 9 actions brought in the High Court of Hong Kong, Anheuser-

Busch Inc., joined the directors and shareholders of 9 shadow companies as co-defendants to the actions (as

being the individuals who incorporated the companies, created the instruments of deception and designed the

shadow company names). Anheuser-Busch Inc., obtained orders against the Defendants requiring them to

change the name of each of the shadow companies incorporated by them, in addition to orders rendering void

any letters of authorisation issued by such shadow companies. Upon the authority of English Court of Appeal

case Halifax plc and others v Halifax Repossessions Ltd & ors [2004] EWCA Civ 331, Anheuser-

Busch Inc., also obtained orders which granted powers to its solicitors, Lovells, to sign special resolutions on

behalf of the respective shareholders and directors of the 9 shadow companies in the event the Defendants failed

to comply with the orders to change the names of the shadow companies within a prescribed period of time. The

Companies Registry accepted the special resolutions filed by Lovells because they have the same legal effect as

the passing of a special resolution by the shareholders of the Defendant company in a general meeting, and

issued the new Certificates of Change of Name.

It is hoped that as more and more brand owners explore this newly found solution and actually manage to change

the name of shadow companies, company name hijackers may be deterred from spending money incorporating

such companies in Hong Kong.

If you are facing a similar problem in Hong Kong, please feel free to contact:

Gabriela Kennedy at gabriela.kennedy@lovells.com

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Any information in this e-mail is provided as a general guide only. It should not be relied upon as a substitute for specific legal advice. If you

would like any further information on any of the matters raised in this e-mail, please contact the person at Lovells with whom you usually deal.

So that we can send you this newsletter and other marketing material we believe may interest you, we keep your e-mail address and other

information supplied by you on a database. The database is accessible by all our offices, including offices outside the European Economic Area

(EEA) where the level of protection for personal data may not be as comprehensive as within the EEA. We will not disclose any of your

information to third parties unconnected with Lovells other than our data processors or as required by law. If you do not wish us to use your

information for marketing purposes, please let us know here.

This newsletter is a commercial communication from Lovells - 23/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.

© Lovells 2007.

All Rights Reserved.

Limited Liability Partnership Registration No. LL0700439L On 2 April 2007, Rodyk & Davidson LLP was converted from a firm to limited liability partnership.

LITIGATION BRIEF

Case Update: Swift Fortune Ltd v Magnifica Marine SA – Court's Powers Under IAA Do Not Extend to Foreign Arbitrations The recent Court of Appeal ("CA") judgment in Swift-Fortune Ltd v Magnifica Marine SA [2006] SGCA 42 has clarified the scope and source of the Court's jurisdiction to grant Mareva interim relief under the International Arbitration Act ("IAA"). The CA held that the Court has no jurisdiction under the IAA to grant Mareva interim relief in aid of foreign arbitration proceedings (that is, arbitrations with their seat outside Singapore). This finding is significant because Singapore is a regional financial hub where substantial assets are parked, which assets may be the subject of potential Mareva applications in Singapore in support of foreign arbitrations. Prior to this CA decision there was some uncertainly on this issue stemming from two conflicting prior decisions of the High Court.

The Swift Fortune Case In Swift-Fortune Ltd v Magnifica Marine SA [2006] 2 SLR 323 (HC) ("Swift Fortune"), Judith Prakash J held that the Court had no power to grant Mareva relief in support of a London arbitration between a Panamanian seller and a Liberian buyer of a vessel. Prakash J held that such powers were derived entirely from statute, here from section 12(7) IAA, which applied only to arbitrations seated in Singapore. Article 9 of the UNCITRAL Model Law on International Commercial Arbitration (which has the force of law under the IAA) did not confer any such power. It merely permitted parties to international arbitrations to apply to domestic Courts for protection where the relevant domestic law already had provisions conferring such power on the Courts.

The Front Carriers Case Subsequently, Belinda Ang J in Front Carriers Ltd v Atlantic & Orient Shipping Corp [2006] 3 SLR 854 (HC) ("Front Carriers") took a different view. She held that the Court was empowered to grant a Mareva injunction in support of a London arbitration between a Liberian company and a West-Indian company. Section 12(7) gave effect to article 9 which preserved the Court's jurisdiction to grant interim measures in support of arbitration proceedings irrespective of the place of arbitration. This was provided the Court had personal jurisdiction over the defendant and the range of interim measures is limited by section 12(7). Additionally, section 4(10) of the Civil Law Act ("CLA") applied

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with article 9 also conferred such a power, as long as there was a justiciable right between the parties recognised by the Singapore Courts.

Court of Appeal Decides The CA then delivered its judgment in the Swift Fortune appeal, affirming Prakash J's decision below. The CA held that the Court had no jurisdiction under section 12(7) or article 9 to grant Mareva relief in aid of foreign arbitration proceedings. The CA considered the genesis of article 9 and concluded that the article was not intended to, and did not, confer jurisdiction. It merely declared the compatibility between resolving a dispute substantively via arbitration and simultaneously seeking assistance from the Court for interim protection orders. After an in-depth examination of the legislative history, language and context of section 12(7), the CA held that it was not intended to, and did not, apply to foreign arbitrations but only to international arbitrations seated in Singapore. The CA emphasised that the Courts had no inherent extraterritorial jurisdiction. Unless authorised by statute, Singapore law has no extraterritorial application. The Court had to exercise great care in its approach to the existence and exercise of supervisory and supportive measures so that it did not go against the chosen law of the foreign arbitration. Section 12(7) had to be read in the context of section 12(1) (a) to (i) of the IAA, which sets out the measures the Court may grant under section 12(7). If section 12(7) was construed as applying to foreign arbitrations, the measures in section 12(1)(a) to (i) would become statutorily implied terms in all foreign arbitrations. These measures included the ordering of discovery or interrogatories or security for costs, which may be antithetical to the chosen law of the foreign arbitration. As such, Parliament could not have intended section 12(7) to apply the powers in section 12(1) to foreign arbitrations. Further, section 12(7) did not independently confer any power on the Court. This power was instead derived from section 4(10) of the CLA (read with section 18(1) of the Supreme Court of Judicature Act). It was section 4(10) that conferred on the Court the powers under section 12(7), which could only be exercisable in respect of a Singapore international arbitration. However, the CA left unanswered the question whether, quite apart from section 12(7), section 4(10) of the CLA itself conferred jurisdiction on the Court to grant Mareva relief in aid of foreign arbitration proceedings where the cause of action is justiciable in Singapore, namely where the plaintiff has a recognisable cause of action under Singapore law, and the Court has personal jurisdiction over the defendant in Singapore (e.g. by reason of his having assets within jurisdiction). This was the alternative ground of the Court's decision in Front Carriers, where it was held that there was such a justiciable cause of action. There was no such holding here. The CA also emphasised that, as it was not sitting in appeal from the Front Carriers decision, it was not expressing any approval or disapproval of that decision vis-a-vis section 4(10).

Conclusion The CA has clarified that the Court's jurisdiction under the IAA to grant interim relief, including Mareva relief, applies only to international arbitrations seated in Singapore, and do not extend to foreign arbitrations.

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Nevertheless, the CA's decision not to comment on the decision in Front Carriers on the effect of section 4(10) leaves open the possibility (and hence uncertainty) that that section may be relied on to apply for Mareva relief in aid of a foreign arbitration in a case where the plaintiff's cause of action is recognised under Singapore law and the Court has personal jurisdiction over the defendant. [Note: An appeal was filed in Front Carriers but it is uncertain whether it will proceed or be discontinued].

Rodney KEONG Direct: +65 6885 3633 Email: rodney.keong@rodyk.com * This article was written for the March 2007 edition of the Rodyk Reporter and is also available online at http://www.rodyk.com/publications/rodyk_reporter/mar07/

SEC UPDATE | March 2007 | 1

SEC UPDATE

Delaware Chancery Court Issues Opinions in Two Stock Option Derivative Suits: Reduces Demand Burden on Plaintiffs; Establishes Action for Spring-loading

It is virtually impossible to open the business section of any newspaper today without reading about

another company faced with an internal investigation, resignation of officers, or Securities and

Exchange Commission (SEC) review of its stock option grant process. At last report, almost 200

public companies have launched, either on their own, or prompted by the SEC, investigations into

potential backdating of their stock option grants.1 Criminal charges have been filed against

company executives in several of these cases.2 And where there are investigations and criminal

cases, the civil lawsuits — class actions and derivative cases — are soon to follow.

Last month, Chancellor Chandler of the Delaware Chancery Court issued two opinions directly

addressing the issue of backdating and spring-loading in option grants that will likely make it easier

for plaintiffs’ lawyers to bring derivative actions against companies accused of irregularities in their

stock option grant process. In Ryan v. Gifford, C.A. No. 2213-N (Del. Ch. Feb. 6, 2007), the first

Delaware case to address stock option backdating, Chancellor Chandler expressly ruled on the

illegality of the practice. In addition, the chancellor addressed both the demand requirement under

Aronson3, and the substance of the backdating allegations against the company, Maxim Integrated

Products, Inc. In In re Tyson Foods, Inc. Consolidated Shareholder Litigation, C.A. No. 1106-N

(Del. Ch. Feb. 6, 2007), the court both rejected a statute of limitations defense to spring-loaded

options and cemented the theory that spring-loading is a basis for a breach of fiduciary duty claim.

Both these cases raise the specter of increased scrutiny of stock option transactions, even when

the SEC or prosecutors decline involvement.

Ryan v. Gifford

Following a March 18, 2006 Wall Street Journal article discussing a statistical analysis of option

grants, Merrill Lynch issued a report on stock option grants by various semiconductor companies

including Maxim. Ryan, at 1. A derivative suit alleging breach of fiduciary duties against Maxim

founder and CEO John Gifford soon followed. The suit alleged at least nine instances of backdated

options issued to Gifford in alleged violation of the shareholder approved stock option plan. Id. at 7.

1 See K. Gullo et al., Apple’s Jobs May Still Face Scrutiny Over Options, Bloombergs.com (Jan. 8, 2007), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXNFkJiq7icK. 2 See, e.g., United States v. Alexander, 06-817M (E.D.N.Y., indicted Sept. 20, 2006); United States v. Reyes, CR06-0556 (N.D. Cal., indicted Aug. 10, 2006). . 3 Aronson v. Lewis, 473 A.2d 805, 6812 (Del. 1984).

Hogan & Hartson LLP

SEC UPDATE | March 2007 | 2

Defendants moved to dismiss the suit both for failure to make a demand upon the board of

directors and for failure to state a claim for relief. The court rejected both of these arguments.

Much of the court’s discussion of backdating takes place in its extended analysis of the demand

requirement under Delaware law. Under Aronson demand is excused where the plaintiff can raise a

reasonable doubt that either, (a) a majority of the board is disinterested or independent, or (b) the

challenged acts were the product of the board’s valid exercise of its business judgment.4 The court

stated, however, that where the challenged action was not taken by the board, as is often the case

in option grant situations, Aronson did not govern and instead, under Rales v. Blasband,5 plaintiffs

must “create a reasonable doubt that, as of the time the complaint is filed, the board of directors

could have properly exercised its independent and disinterested business judgment in responding

to a demand.”6 The court further recognized that under Delaware law the board of directors in

place at the time of the grants would have been justified in relying upon the decision of a stock

option or compensation committee on decisions relating to option grants.

Thus, where stock option grants were made by a compensation committee or stock option

committee, the question is whether the board in place at the time the lawsuit is filed can act in a

disinterested and independent manner in responding to a demand. Demand is required so long as

the current board is capable of making an independent decision as to the demand.

The court, however, added a significant qualifier to this rule. The chancellor said that where, as was

the case at Maxim, “at least one-half or more of the board in place at the time the complaint was

filed approved the underlying challenged transactions, which approval may be imputed to the entire

board for purposes of proving demand futility, the Aronson test applies.”7 Thus, where option grants

were approved by either a full board of directors or by a committee representing half or more of

current directors, the more stringent test of Aronson applies.

The analysis then turned to the substance of the backdating allegations. The court found that the

complaint adequately alleged facts that raise doubt as to whether the challenged grants were a

valid exercise of business judgment.8 The plaintiff claimed that the stock option plan in place at

Maxim required that grants be made at 100 percent of the fair market price of the company’s stock

at the time the option was granted. This provision of the stock option plan meant the board had no

authority to grant “in the money” options as they had done. The plaintiff argued that knowing and

intentional contravention of the plan could not be a reasonable exercise of business judgment.9

The court agreed. The plaintiff had alleged that the nine questioned grants were made at the lowest

market price in either the month or year granted. The complaint also made allegations, taken from

the Merrill Lynch report, that the timing of the option grants resulted in an annualized return to the

grantees of 243 percent versus a 29 percent annualized market return in the same period. The

court noted that the questions raised by this data were supported by the fact that the grants were

4 Aronson, 473 A.2d at 812. 5 634 A.2d 927, 933 (Del. 1993). 6 Ryan at 18-19 (quoting Rales, 634 A.2d at 933-4) 7 Id. at 20. 8 Id. at 21. 9 Id. at 21-22.

SEC UPDATE | March 2007 | 3

made not at regular intervals, but in a sporadic pattern.10 The court concluded that where the plan

provided no discretion to grant options below market price the directors would violate their fiduciary

duty by falsifying the date on which the options were granted in order to avoid the limits of the

plan.11

Although the opinion’s discussion of Aronson might suggest this result was dependent upon the

fact that the plan required a market rate strike price, what the court did next suggests that the ruling

was not intended to be that narrow. Although, affirming that Aronson applied, the court went on to

consider what would have been the result under the Rales test.12 Noting that at least four current

board members were implicated in the backdating allegations, the court said that the directors

named in the complaint would have a disabling interest for demand purposes under Rales where

the potential for liability rose beyond a mere threat to a substantial likelihood. The court then stated:

A director who approves backdating of options faces at the very least a substantial likelihood of

liability, if only because it is difficult to conceive of a context in which a director may simultaneously

lie to his shareholders (regarding his violations of a shareholder-approved plan, no less) and yet

satisfy his duties of loyalty. Backdating options qualifies as one of those “rare cases [in which] a

transaction may be so egregious on its face that board approval cannot meet the test of business

judgment, and a substantial likelihood of director liability therefore exists.”13

The court further went on to reject the motion to dismiss for failure to state a claim, finding that

allegations of an intentional violation of a shareholder approved stock option plan, coupled with

fraudulent disclosures regarding the director’s purported compliance with the plan, constitute an act

of disloyalty and therefore are done in bad faith for purposes of a Rule 12(b)(6) analysis of the

claim.14 “I am unable to fathom a situation where the deliberate violation of a shareholder stock

option plan and false disclosures, obviously intended to mislead shareholders into thinking that the

directors complied with honestly with the shareholder-approved option plan, is anything but an act

of bad faith.”15

A reader of the Ryan case might initially assume that the key element of the Court’s opinion was

the fact that the plan in question provided no options but market-based grants, thus not reaching

instances of backdating under more flexible plans. However, the Tyson case issued the same day

makes clear that the court’s overwhelming concern is not necessarily the plan violation, but the

deception allegedly practiced upon shareholders.

In re Tyson’s

In a continual saga of derivative litigation involving the Tyson family’s control of Tyson Foods, the

derivative plaintiffs in this case filed an action challenging a number of related party transactions

10 Id. at 22-24. 11 Id. at 24. 12 Id. at 25-26. 13 Id. at 25 (quoting Aronson, 473 A.2d at 815). See also In re Baxter Int’l, Inc. Shareholders Litig., 654 A.2d 1268, 1269 (Del. Ch. 1995). 14 Ryan, at 30. 15 Id. at 30-31.

SEC UPDATE | March 2007 | 4

and alleging that the company made grants of spring-loaded options to insiders.16 The plaintiffs

alleged that days before Tyson would issue press releases, that were judged likely to drive stock

prices higher, the compensation committee of Tyson would issues stock options to key employees.

According the to the complaint, the total amount of options issued in this manner totaled 2.8 million

shares.17

The court first considered the defendants’ statute of limitations challenge to the allegations. The

plaintiffs, conceding that the limitations period would otherwise extend back to only 2003, argued

that the spring-loading could only be discovered after investors were able to observe a pattern of

option grants.18 The court agreed with the plaintiffs that knowingly spring-loading options to key

executives, while making public disclosures that such options were granted at market rates, was, “if

not a lie, certainly exceptionally parsimony with the truth – constitutes an act of ‘actual artifice’ that

satisfies the requirements of the doctrine of fraudulent concealment.”19 The court went further,

however, stating that the directors’ roles as fiduciaries would, in and of itself, justify a tolling of the

statute.

It is difficult to conceive of an instance, consistent with the concept of loyalty and

good faith, in which a fiduciary may declare that an option is granted at “market

rate” and simultaneously withhold that both the fiduciary and the recipient knew

at the time that those options would quickly be worth much more.20

The court also rejected arguments that the plaintiffs were on inquiry notice of the facts because

portions of the relevant information was presented in proxy statements and press releases.21

The court then turned to the substance of the complaint and initially found that given that the

company, consistent with Delaware law, vested authority to grant options in the compensation

committee, only those directors who were members of the committee approving the options could

be named as defendants with respect to the option allegations.22

Then turning to the facts at hand the court stated, as the members of the compensation committee

were independent, in order to proceed the plaintiffs were required to meet the heavy burden of

demonstrating that the option grants could not be within the bounds of the committee’s business

judgment. Thus, it had to be shown that, “no person could possibly authorize such a transaction if

he or she were attempting in good faith to meet their duty.”23

16 Tyson at 11. 17 Id. at 14. . The opinion lays out several examples of this spring-loading as taken from the complaint. . For example, Tyson issued 355,000 options to three executives on September 28, 1999 at a $15 strike price. . The next day, Tyson announced that its Pork Group was being acquired on favorable terms. . The price rose to $16.53 per share within six days. . Other grants were followed by similar price increases. . Id. at 14-15. 18 Id. at 47-48. 19 Id. at 48. 20 Id. at 49; see also In re Dean Witter Partnership Litig., 1998 WL 442456, at *6. 21 Tyson, at 49-50. 22 Id. at 51. . The Court noted that although the beneficiaries of such grants could not be said to have necessarily violated their duty of loyalty, recovery was still possible on an unjust enrichment theory under Schock v. Nash, 732 A.2d 217, 232-233 (Del. 1999). 23 Id. at 51-52 (quoting Gagliardi v. TriFoods Int’l. Inc., 683 A.2d 1049, 1052-53 Del. Ch. 1996)(emphasis added).

SEC UPDATE | March 2007 | 5

Observing that the question of spring-loading was more difficult than that of backdating, the court

said, “at their heart, all backdated options involve a fundamental, incontrovertible lie, directors who

approve an option dissemble as to the date on which the grant was actually made.” Indeed, the

court, referencing Ryan, stated that the backdating of options always involves a factual

misrepresentation to a shareholder and, in the context of a shareholder approved incentive stock

plan, amounts to a disloyal act taken in bad faith. 24 Allegations of spring-loading, according to the

court, implicate a much more subtle deception. The grant of spring-loaded options, without

“authorization from shareholders, clearly involves an indirect deception.”25

The decision makes plain that it is inconsistent with the duty to deal fairly and honestly with

shareholders, “to ask for shareholder approval of an incentive stock option plan and then later to

distribute shares to managers in such a way as to undermine the very objectives approved by

shareholders,” even if the board complies with the procedures set forth in the plan.26

While the issue of spring-loading remains unclear under federal securities laws, and many

commentators agree that such action does not constitute insider trading,27 the court rejected this as

a defense to the derivative claims:

The relevant issue is whether a director acts in bad faith by authorizing options

with a market-value strike price, as he is required to do by a shareholder-

approved inventive option plan at a time when he knows those shares are

actually worth more than the exercise price. A director who intentionally uses

insider information not available to shareholders in order to enrich employees

while avoiding shareholder-imposed requirements cannot, in my opinion, be said

to be acting loyally and in good faith as a fiduciary.28

The court did recognize that under this theory a plaintiff was required to demonstrate that the

options were granted pursuant to a shareholder approved plan and that the directors approving

spring-loaded option grants possessed material non-public information that would impact the

company’s share price, or was otherwise seeking to circumvent shareholder approved restrictions

upon the strike price granted.29 Nevertheless, the court’s opinion made clear that even if they

escape scrutiny under federal securities laws, board’s that have spring-loaded shares, or even

“bullet-dodged” their grants, are susceptible to shareholder litigation.30

24 Id. at 52. 25 Id. at 53. . The Court noted that it was conceivable that the use of spring-loaded options could be a legitimate compensation tool, if made in good faith and properly disclosed. . Id. at 52, n.75. 26 Id. at 53-54. 27 See references cited in Id. at 53, n. 77. 28 Id. at 53-54. 29 Id. at 54-55. . The Court also said that such a rubric also applied to options granted immediately after bad news was announced by a company, so called bullet dodging whereby a grant of options is delayed until the price of company stock is depressed by adverse news reported to the public. 30 The focus on deception by the Court could conceivably open up the door to criminal prosecution of spring-loaded stock option grants under a mail or wire fraud theory. . The government would likely point to a scheme to defraud shareholders of their right to honest services under 18 U.S.C. § 1346.

SEC UPDATE | March 2007 | 6

It would appear from these two opinions that the focus of the Delaware courts is on the deception

practiced on shareholders by corporate boards that either backdate their option grants or seek to

do an end-run around grant restrictions by timing their grants to the release of material information

about the company while accurately dating the grants. The court has made clear such deception is

inherently inconsistent with directors’ duties to shareholders. While companies under investigation

for backdating and other option related issues already faced intense scrutiny from government

regulators, these two decisions will likely lead to even greater scrutiny of stock option grants from

the plaintiffs’ bar.

For more information about the matters discussed in this SEC Update, please contact the Hogan & Hartson LLP attorney with whom you work, or any of the attorneys below who contributed to this SEC Update.

TY COBB DAN SHEA tcobb@hhlaw.com dfshea@hhlaw.com 202.637.6437 303.454.2475 Washington, D.C Denver STUART ALTMAN smaltman@hhlaw.com 202.637.3617 Washington, D.C This Update is for informational purposes only and is not intended as basis for decisions in specific situations. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship.

Copyright © 2007 Hogan & Hartson LLP. All rights reserved. Hogan & Hartson LLP is a District of Columbia limited liability partnership with offices across the United States and around the world. Some of the offices outside of the United States are operated through affiliated partnerships, all of which are referred to herein collectively as Hogan & Hartson or the firm.

www.hhlaw.com

China Practice/Shanghai Office Advisory Bulletin

Enforcement of Transfer Pricing Rules in China Increasing

By Jim H. Young, R.Z. Margaret Lu, and Brian Todd [April 2007]

A business engaged in related-party transactions, if unprepared, could face significant business interference and financial costs if selected for a transfer pricing audit in China. Chinese transfer pricing rules are embodied in the <Tax Administrative Rules on Business Transactions between Affiliated Companies> of 1998 (guo shui fa [1998] No.059), and its 2004 revision (guo shui fa [2004] No. 143) (hereafter collectively referred to as “Transfer Pricing Rules”). Last August, The Ministry of Taxation of China published an official notice (guo shui han [2006] No. 807) to uphold the effectiveness of the 1998 Rules the provisions of which are not explicitly revised by the 2004 Revision (“Notice”). More importantly, the Notice seems to be consistent with the recent escalation, as reported, of the Chinese government’s anti-tax-evasion actions and reflects the Chinese government’s increasing commitment to enforcing the Transfer Pricing Rules against companies in business transactions with related parties and affiliates. It also has been reported that a new set of rules on contemporaneous transfer pricing documentation will be published soon.

The Transfer Pricing Rules are similar, in many places, to the transfer pricing rules in the U.S. Section 482 of the U.S. Internal Revenue Code provides, “In any case of two or more organizations . . . or businesses . . . owned or controlled directly or indirectly by the same interests, the Secretary [of the Treasury] may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations . . . or businesses . . . to [clearly] reflect the income of any of such organizations . . . or businesses.” Like Internal Revenue Code Section 482, the goal of the Transfer Pricing Rules is to require the tax aspects of related party transactions to be reported on the basis of arm’s length principles to prevent taxpayers from artificially moving income to low-tax jurisdictions. The three transfer pricing methods traditionally used in the United States -- i.e., the Comparable Uncontrolled Price method, the Cost Plus method and the Resale Price method -- have become the default methods to determine appropriate transfer pricing under the Transfer Pricing Rules in China. When the default methods are found inappropriate, most of the non-traditional methods used in the United States, such as the Profit Split method and the Transactional Net Margin method, are acceptable alternatives in China.

Preparing for and avoiding a transfer pricing audit

If faced with a transfer pricing audit, auditors will ask for details of transactions with related parties. Once a business is chosen for such an audit in China, it typically will be required to provide up to three years of financial and business records of all parties involved. The audit often lasts for more than six months. Furthermore, in China, the chance of a successful appeal from a completed audit is remote.

To reduce unnecessary business interruptions and costs, it is advisable for any business involved in related-party transactions in China to be ready at the outset for a transfer pricing audit. The following points are worth keeping in mind:

● Transactions with related-parties doing business in low-tax jurisdictions (such as the British Virgin Islands, Bermuda, the Cayman Islands and Panama) have become triggers of transfer pricing audits in China. Therefore, companies should try to avoid such transactions or otherwise be ready to substantiate their validity if audited.

● A company doing business in China that is party to related-party transactions is advised to consult its legal counsel and accountant to determine if it has a transfer pricing policy in place that complies with the Transfer Pricing Rules and should maintain records of all related party transactions and any relevant information (e.g., arm’s length or market pricing of products or services comparable to those in the transactions, and markups of the company’s competitors and/or resellers.)

DWT LLP | Print Pages

● Consider the feasibility of entering into an Advance Pricing Agreement with China’s tax authorities. By

entering into such an agreement and supplementing the information provided to the authorities on a regular basis, the risk of a transfer pricing audit may be greatly reduced, if not eliminated.

For more information, please contact:

R.Z. Margaret Lu Seattle, Washington (206) 628-7753 margaretlu@dwt.com

Brian Todd Seattle, Washington (206) 628-7669 briantodd@dwt.com

Jim H. Young Seattle, Washington (206) 438-8179 jimyoung@dwt.com

This China Practice Advisory is a publication of the China Practice/Shanghai Office of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent legal developments in China. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations. Attorney Advertising. Prior results do not guarantee a similar outcome. Thank you.

Copyright © 2007, Davis Wright Tremaine LLP.

Occupational Safety and Health Administration’s High Injury and Illness Notification and Site Specific Targeting 2007 Inspection Plan 

March 26, 2007 

On March 14, 2007, the Occupational Safety and Health Administration (OSHA) sent letters to 14,201 employers notifying them that its 2005 Data Initiative (which collected injury and illness data for calendar year 2005) showed that they had among the highest Days Away, Restricted, and Transfer (DART) injury and illness rates in the country – above 5.3 per 100 employees. 

Although the letter itself is not notification of an inspection, it is a good indication that an OSHA inspection may occur under the Site Specific Targeting (SST) Program.  In 2006, that program led to the inspections of almost 3,000 worksites nationwide.  Accordingly, employers that received the letters should take this opportunity to review their compliance status and prepare for inspection. 

In its recent letters, OSHA has suggested remedial resources including consultation programs that are available to employers.  It is important to note that the suggested resources for compliance assistance in OSHA’s letters have both positive and negative implications that should be carefully weighed.  For example, although the letter suggests using the “confidential” Consultation Program, it does not inform employers that if they do not satisfactorily resolve issues identified in consultation – without recourse to review or resolution – the issue will be turned over to OSHA for inspection and potential citation. 

Our nationwide OSHA Practice Team is prepared to assist clients with OSHA compliance and inspections.  We have significant experience in counseling employers on assessing their compliance with OSHA’s standards and developing appropriate compliance plans where necessary. We can also assist in preparing a protocol to be followed in the event of an OSHA inspection.  Employers have a number of rights during an OSHA inspection and must be prepared to assert them.  Finally, in the event that your workplace is inspected, we can assist with the inspection and the resolution of any citations that may be issued. 

We encourage all employers to review these materials and to speak with a member of the firm’s OSHA Practice Team if they have any questions. 

Philadelphia Thomas Benjamin Huggett  215.963.5191  tbhuggett@morganlewis.com Dennis J. Morikawa  215.963.5513  dmorikawa@morganlewis.com

Chicago James E. Bayles, Jr.  312.324.1123  jbayles@morganlewis.com Nina G. Stillman  312.324.1150  nstillman@morganlewis.com 

Los Angeles Jason S. Mills  213.612.7387  jmills@morganlewis.com Clifford D. Sethness  213.612.1080  csethness@morganlewis.com 

About Morgan, Lewis & Bockius LLP Morgan Lewis is a global law firm with more than 1,300 lawyers in 22 offices located in Beijing, Boston, Brussels, Chicago, Dallas, Frankfurt, Harrisburg, Houston, Irvine, London, Los Angeles, Miami, Minneapolis, New York, Palo Alto, Paris, Philadelphia, Pittsburgh, Princeton, San Francisco, Tokyo, and Washington, D.C. For more information about Morgan Lewis or its practices, please visit us online at www.morganlewis.com. 

This LawFlash is provided as a general informational service to clients and friends of Morgan, Lewis & Bockius LLP. It should not be construed as imparting legal advice on any specific matter. © 2007 Morgan, Lewis & Bockius LLP. All Rights Reserved.