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In ThIs Issue

May 15, 2010Volume 22, Number 9

EuroWatch®�

Articles

RepoRting on LegaL and ReguLatoRy deveLopments affecting foReign companies opeRating in the eu

Topical Index Page 2

EU–Brussels Briefing: A Review of Recent Legal and Business Developments in the ECBy Philip Bentley QC and Jacques Pieters (McDermott Will & Emery LLP) ...............................................................................p. 3

EU–European Commission Reforms Rules Applicable to Insurance SectorBy Bertold Bär-Bouyssière and Aymeric de Beaugrenier (DLA Piper UK LLP)...............................................................p. 3

EU–Advocate General Recommends European Court of Justice Not to Extend EU Legal Privilege Protection to In-House LawyersBy Frances Murphy, Johannes Zöttl and Francesco Liberatore (Jones Day)..................................................................................p. 8

EU–New EU Rules for Distribution and Supply AgreementsBy Matthew Hall and Robert Rakison (McGuireWoods LLP)...p. 10

Italy–New Tools to Encourage Shareholder Participation in the Life of Italian Listed Companies By Tobia Croff (Shearman & Sterling LLP)..............................p. 12

United Kingdom–The Bribery Act 2010 - A Brave New World for Business?By John Rupp and Alexandra Melia (Covington & Burling LLP) ................................................................................p. 16

european Commission Reduces scope of Insurance Block exemption RegulationThe European Commission recently published the final text of its new insurance block exemption regulation (BER), and only two out of the four categories of insurance agreements exempted by the latter Regulation have been renewed. EuroWatch explains how the scope of the BER has been reduced. Page 3 eu Legal Privilege Protection May not Be extended to In-house LawyersIf the European Court of Justice follows Advocate General Juliane Kokot’s recent recommendation, no communications between the management of a company and its in-house lawyers will be protected from search and disclosure in EU investigations and proceedings. Some practical implications are explored. Page 8

new Tools to encourage shareholder Participation in Life of Italian Listed CompaniesRecord date, electronic vote, tools to map and identify the shareholders, a new regime of proxy voting and increased dividends for long-term investors are among the principal changes introduced by Italy’s new Legislative Decree. 2

Bribery Act 2010 to Reform and Modernize UK’s Bribery LawsThe Bribery Act represents the most fundamental overhaul of the UK’s anti-bribery regime in over 100 years. EuroWatch explores the Act’s new corporate offenses and precautionary steps to be taken. Page 16

� EuroWatch® May 15, �010

EuroWatch®

Unauthorized reproduction in any form is prohibited by law. Copyright © 2010 by Thomson Reuters/WorldTrade Executive

Advisory Board

ToPICAL Index

Managing Editor: Alyson J. SheehanExecutive Editor: Scott P. Studebaker, Esq.

Production Editor: Heather J. MartelMarketing: Jon B. Martel

Joan Sylvain BaughanKeller and Heckman, Brussels and Washington

Philip Bentley, QCMcDermott Will & Emery/Stanbrook LLP, Brussels

Laura M. Brank, Esq.Dechert LLP, London and Moscow

Alec J. BurnsideLinklaters, Brussels

José A. Sanchez DafosDLA Piper Rudnick Gray Cary, Madrid

Donald C. Dowling, Jr.White & Case LLP, New York

Peter L'EcluseVan Bael & Bellis, Brussels

Gary N. Horlick, Esq. Wilmer Cutler Pickering Hale and Dorr

Washington, DCMark Jones

Norton Rose, LondonAlexander Marquardt

Kramer Levin Naftalis & Frankel, Paris

Gareth MorganTaylor Wessing, London

Giovanni Nardulli Gianni, Origoni, Grippo & Partners, Rome

Angus Phang Willoughby & Partners, Oxford

Daniel J. Plaine, Esq. Gibson, Dunn & Crutcher, Washington, DC

Douglas E. Rosenthal, Esq. Sonnenschein Nath & Rosenthal

Washington, DCMelanie Thill-Tayara

Salans, ParisLode Van Den Hende

Herbert Smith, BrusselsEdurne Navarro Varona

Uría & Menéndez, BrusselsMaria Wolleh

Mannheimer Swartling, Berlin

Publisher: Gary A. Brown, Esq.

Published by WorldTrade Executive, a part of Thomson Reuters

(ISSN 1063-6323)Tel: 978-287-0301; Fax: 978-287-0302

www.wtexecutive.com

Brussels Briefing: A Review of Recent Legal and Business Developments in the EC.......................................p. 3Competition: European Commission Reforms Rules Applicable to Insurance Sector........................................p. 3Competition: New EU Rules for Distribution and Supply Agreements...................................................p. 10Corporate Governance: New Tools to Encourage Shareholder Participation in the Life of Italian Listed Companies.......................................................................p. 1�Corrupt Practices Regulation: The Bribery Act �010 - A Brave New World for Business?...................p. 16Investigation Proceedings: Advocate General Recommends European Court of Justice Not to Extend EU Legal Privilege Protection to In-House Lawyers.................................................................................p. 8

On-Line Research Access to Back Issues of

EuroWatchFor details, please contact

Jay Stanley at [email protected]

or (978) 287-0301.

May 15, �010 EuroWatch® 3

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in two or more EU Member States. More specifically, the Commission is inviting comments on double taxation avoidance conventions and national tax relief, as well as how to remedy the double taxation situation effectively.

Stakeholders are asked to reply to the online questionnaire by June 30 at the latest. Information gathered through this consultation may trigger Commission initiatives for EU action in the field of direct taxation. o

EC Reforms, continued on page 4

Brussels Briefing:A Review of Recent Legal and Business Developments in the EC

By Philip Bentley QC and Jacques Pieters (McDermott Will & Emery LLP)

Commission Consultation on Double Taxation On April �7, �010 the European Commission launched

an online public consultation on double taxation prob-lems in the European Union. The consultation covers all direct taxes and is designed to identify clearly the extent to which individuals and companies are encountering the problem of being taxed on the same income or profits

Philip Bentley is a Partner in the international law firm of Mc-Dermott Will & Emery/Stanbrook LLP based in its Brussels office. He is a member of the Firm’s EU regulatory practice and European Competition and Trade Groups. His practice focuses on EU anti-dumping, trade defense and customs, EU competition (including State aid and public procurement), EU regulatory matters, notably GMOs, and EU litigation. ([email protected]) Jacques Pieters is an Associate in the international law firm of McDermott Will & Emery/Stanbrook LLP based in its Brussels office. He is a member of the Firm’s corporate department, where his practice focuses primarily on Belgian and international corporate, tax and commercial law. ([email protected])

The consultation covers all direct taxes and is designed to identify clearly

the extent to which individuals and companies are encountering the problem

of being taxed on the same income or profits in two or more EU Member States.

European Commission Reforms Rules Applicable to Insurance Sector

By Bertold Bär-Bouyssière and Aymeric de Beaugrenier (DLA Piper UK LLP)

IntroductionThe European Commission published the final text of

its new insurance block exemption regulation (the BER), which applies since April 1, �010 until March 31, �017. Even if the final text integrates a number of comments made by the industry on the European Commission’s October 2009 proposal, it still represents a significant

departure from the �003 Block Exemption (which expired on March 31, �010) and gives industry only six months to ensure full compliance with the new regime.

The BER declares certain categories of insurance agree-ments compatible with the Treaty and competition laws if they fulfil certain conditions. The agreements that are not covered by the BER or that do not meet the conditions set in the BER are not necessarily contrary to competition law, but it is necessary to conduct an individual assessment of their legality. The analytical framework set out in the Commission’s Guidelines on the applicability of Article [101 TFEU]1 to horizontal cooperation agreements� (the Horizontal Guidelines) will assist businesses in assessing the compatibility of such agreements with Article 101 of the TFEU.

By sticking to the provisional conclusions of the Commission’s report published on March �5, �009 and the draft regulation unveiled by the European Commission

Dr. Bertold Bär-Bouyssière, a German-qualified lawyer, also admitted in New York, is an EU competition law Partner for DLA Piper UK LLP based in the firm’s Brussels office. Ber-told Bär-Bouyssière specializes in EU and competition law, merger control, antitrust and State aid law. ([email protected]) Aymeric de Beaugrenier, Avocat au Barreau de Paris, is a Senior Associate with a background in EU competition law, based in the firm’s Brussels office. Aymeric de Beaugrenier specializes in EU and competition law, merger control and antitrust. ([email protected])


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EC Reforms (from page 3)

on October 5, �009, the new BER renews only two out of the four categories of insurance agreements exempted by the latter Regulation. As of April 1, �010, the BER only covers:

• agreements relating to joint compilations, tables and studies and,

• co-(re)insurance pools.

The reduction of the scope of the BER is in line with the European Commission’s current policy of realigning all sectors with the general rules of competition, and to eliminate the particular sector-specific regulations when they are not justified. (For instance, the European Com-mission is also in the process of abolishing the specific rules applicable to motor vehicle distribution, and to keep specific rules only for car maintenance.)

Stakeholders (insurers, reinsurers and brokers) will have to deal with a regulatory situation where the Euro-pean Commission and national competition authorities have already announced that they will intensify their monitoring of the insurance sector and will act whenever they observe anti-competitive behavior in the market (as the Commission did in other sectors that were previously block exempted, for instance in the maritime sector).

Agreements Related to Joint Compilations, Tables and Studies

Subject to certain conditions, the previous BER ex-empted agreements relating to joint calculations, tables and studies of statistical data and so does the new BER, but it brought some adjustments.

The new Regulation exempts agreements with respect to the “joint compilation” and distribution of information necessary for:

• the calculation of the average cost of covering a speci-fied risk in the past; and

• the construction of mortality tables, and tables show-ing the frequency of illness, accident and invalidity in connection with insurance involving an element of capitalization.

The BER exempts (subject to the conditions described hereafter) the joint carrying out of studies on the probable impact of general circumstances external to the interested undertakings, either on the frequency or scale of future claims for a given risk or risk category or on the profit-ability of different types of investment and the distribution of the results of such studies. However, insurers must keep in mind that the benefit of the exemption is subject to certain conditions:

(i) Cooperation is only permitted when it is necessary. However, the European Commission failed to clearly define what it understands by “necessary”3.

(ii) The compilations, tables and study results should explicitly be non-binding and should not contain any indication of the level of commercial premiums.

(iii) The compilations, tables and studies in question should be made available to all insurance undertak-ings and (subject to public security) to consumer and customer organizations. Before, it was only required that the results were made available to potential new entrants to the industry, now the new BER extends this requirement to “consumer or customer organizations” (except where non-disclosure is justified on grounds of public security).

Even if the final text integrates a number of comments made by the industry on the European Commission’s October

2009 proposal, it still represents a significant departure from the 2003 Block

exemption and gives industry only six months to ensure full compliance with

the new regime.

Access to such information by third parties and to potential new entrants will have to be granted on “reasonable, affordable and non-discriminatory terms”. Unfortunately, the BER does not define the meaning of “reasonable, affordable and non-discriminatory terms”, it is up to insurers and associations to come across feasible solutions that act in accordance with their interests as well as with competition rules. This new provision is somewhat arduous for insurers and their associations, since the rel-evant data may contain crucial business secrets, and no specific mechanism to protect business secrets has been put in place. Concern has also been raised regarding this provision as it is mainly inspired by customer protection background and less by competition law aspects, which renders its interpretation and concrete application dif-ficult to grasp.

Insurance companies have the option to claim, or not, for the benefit of the block exemption. Sometimes, if they consider that the conditions are too burdensome, they may prefer to depart from the “safe haven” created by the BER, and assess their cooperation under the general rules applicable to Article 101 TFEU. This may be the case, for instance, when insurers do not want to grant access to statistics or studies. In certain circumstances, it may be more advantageous to assess whether an agreement relating to joint compilations, tables or studies of statisti-cal data causes any anti-competitive effects (it can often


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be the case) or falls within the exemption rule of Article 101 (3) TFEU, rather than shaping the agreement to fall within the straight jacket defined by the BER.

The stringent conditions attached to the BER limit the value of having a specific BER applicable to the insurance sector and illustrates the European Commission’s willing-ness to progressively abandon the sector specific rules.

3. Co-(Re) Insurance PoolsIn fact, the core of the Insurance BER is the insurance

pools, and merely justifies the existence of specific rules for the insurance sector. The questions raised by insurance pools are very specific and have very little equivalents in other sectors. In particular, the Commission considers that risk sharing for certain types of risks (such as nuclear, terrorism and environmental risks), for which individual insurance companies are reluctant or unable to insure the entire risk alone, is crucial in order to ensure that all such risks can be covered.

In renewing the exemption, the Commission made the following key changes: (i) a change to the approach to market share calculation in order to bring it into line with other general and sector-specific competition rules, so that not only gross premium income earned within the pool by the participating undertakings but also gross premium income achieved outside the pool will be taken into account; and (ii) an amendment and expansion to the definition of ‘new risks’.

The BER makes a distinction and has put in place two separate regimes for “new risks” and other pools. However, there is also a common set of rules applicable to both types of pools.

“New Risks” PoolsAccording to the BER, the notion of “new risk” com-

prises: (i) risks which did not previously exist4 and (ii) risks that have undergone such a material change

in nature that it is objectively impossible to foresee the extent of the subscription capacity necessary to cover such risk.

A pool created exclusively to cover new risks will be block exempted for a period of three years from the estab-lishment of the pool, regardless of its market share.

Other PoolsPools that are not considered as covering “new risks”

will only be covered by the BER if the combined market share of the participating undertakings within and outside the pool in question does not exceed �0% (in the case of a co-insurance pool) or �5% (in the case of a co-reinsur-ance pool).

Similarly to other block exemption regulations, the BER will continue to apply for a limited period5 if the market share rises above the �0% or �5% threshold.

Common Set of RulesIt is important to know that the BER only applies

if certain specific conditions are met. These conditions correspond to those applicable in relation to other block exemption regulations and include (among others) the following:

• Pool participants must have the right to withdraw from the pool after a reasonable notice period;

• Participants must be free to insure or reinsure outside the pool;

• The agreement must not restrict output or sales or allocate markets or customers; and

• Participants of a co-reinsurance pool must not agree on the commercial premiums they charge for direct insurance.

The reduction of the scope of the BeR is in line with the european Commission’s current policy of realigning all sectors with the

general rules of competition, and to eliminate the particular sector-specific regulations when they are not justified.

Additionally, the European Commission specifically pointed out that many insurers were incorrectly using the pool exemption in the old BER (Regulation No 358/�003) as a “blanket” exemption. This means that the exemption was being used by the companies without carrying out the required legal assessment of a pool’s compliance with the conditions of the BER, in particular in relation to market share thresholds6.

Therefore, the reliance on the “safe harbor” provided by the new BER will depend on the assessment of the specific pool characteristics, whether it complies or not with the conditions to be block exempted7.

The European Commission also pointed out that ad-hoc co-(re)insurance agreements on the subscription market8 are not covered by the BER.

Abolished Exemptions - Standard Policy Condition (SPCs) and Security Devices

Two of the four exemptions in the previous BER, namely agreements on standard policy conditions (SPCs) and security devices, have been removed from the scope of the insurance BER.

This is primarily because they are not specific to the EC Reforms, continued on page 6


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insurance sector and therefore their inclusion in specific legal instrument may result in unjustified discrimination against other sectors which do not benefit from a specific BER. In addition, although these two forms of coopera-tion may give rise to some benefits to consumers, the BER review showed that they can also give rise to certain competition concerns. Therefore, it is more appropriate that they are subject to self-assessment.

Although non-renewal of the BER in relation to these two types of cooperation inevitably results in slightly less legal certainty, it should be emphasized that the insurance sector now benefits in this regard from the same level of legal certainty as the other sectors that do not benefit from a BER. Furthermore, the Commission plans to address both these forms of cooperation in its new Horizontal Guidelines. The Commission published its draft new Hori-zontal Guidelines on May 4, 2010, which include specific examples referring to these two issues, which can be used in carrying the self assessment.9

SPCsOn the basis of the evidence found during the BER

review, the Commission no longer considers that a sector specific BER is necessary since cooperation on SPCs is not specific to the insurance sector, but common to many others, such as the banking sector, which do not benefit from a BER. As SPCs are not specific to the insurance sec-tor it is appropriate that any guidance on SPCs is afforded to industry as a whole and in the form of a horizontal instrument.

The Commission considers that in many cases SPCs can give rise to positive effects for competition and con-sumers. In the draft Horizontal Guidelines (para. 3�3), the Commission indicates that even if such standardization can lead to a limitation in the product variety, it can also lead to the facilitation of comparison by consumers of con-ditions offered by insurance companies. These compari-sons facilitate switching between insurance companies. The conditions are also likely to reduce transaction costs and facilitate entry of new players, if they are available to new entrants on a non-discriminatory basis. However, the standard conditions shall not provide for the level of the insurance premium or limit of cover of risk as this could lead to a standardization of the products offered to consumers. The standard conditions shall be adapted to each client’s individual needs.

Security DevicesThe previous BER exempted: (i) technical specifica-

tions, rules or codes of practice regarding security de-vices and procedures for assessing and approving their compliance with these standards as well as (ii) technical specifications, rules or codes of practice for the installa-tion and maintenance of security devices and procedures

for assessing and approving the compliance of undertak-ings which install or maintain security devices with such standards.

However, the Commission considers that the setting of technical standards falls into the general domain of standard setting, which is not unique to the insurance sector. As these kinds of agreements are not specific to the insurance sector, they will be treated under the new Horizontal Guidelines.

It is now clear that after the 2007 sector Inquiry in the Business Insurance

sector, the european Commission will closely monitor the behavior of the

insurance market players, in particular the operations of insurance pools. Therefore, (re)insurers will have to

carefully assess a great proportion of their cooperation agreements.

The current drafting (para. 318) provides that the pro-cess of standard setting shall be transparent and allows for the participation of interested parties and that the result is easily accessible on a reasonable and non-discriminatory basis for anyone that wishes to have access to it.

Provided that the standard does not have negative ef-fects on the downstream market (for example by excluding certain installers through very specific and not justified requirements for installations that cannot be fulfilled by certain installers) it is not likely to lead to a restrictive ef-fect on competition.

The standards would assist insurers to analyze to what extent such installation systems reduce the relevant risk and prevent losses so that they can reduce premi-ums. They would also, subject to the caveat set out above regarding the downstream market, be more efficient for installers, allowing them to comply with one set of stan-dards for all insurance companies in the affected Member States rather than be tested by every insurance company separately. They could also facilitate consumers switching between insurers. In addition, they could be beneficial for smaller insurers who may not have the capacity to test separately.

ConclusionInsurance companies should not lose any time in

reviewing their cooperation agreements, as they are only left with a 6 months transitional period. They should first

EC Reforms (from page 5)

7 EuroWatch® May 15, �010

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concentrate their efforts in the self-assessment of the SPCs and security devices that are no longer covered by the BER. Such assessment can be made trough two main instruments: the Horizontal Guidelines (currently being revised)10 and the Guidelines on the application of Article 101 (3) TFEU11.

The European Commission has warned the insur-ance sector actors against simply assuming to be shel-tered from the normal application of competition rules. It is now clear that after the �007 Sector Inquiry in the Business Insurance sector, the European Commission will closely monitor the behavior of the insurance market players, in particular the operations of insurance pools. Therefore, (re)insurers will have to carefully assess a great proportion of their cooperation agreements. We can trust that the European Commission is actively looking for its first test case in the sector, which will emphasize that the insurance sector is like any other sector subject to strong antitrust enforcement. o

1 Treaty on the Functioning of the European Union� See paragraph 7 of Commission Notice of 6 January �001: Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements, OJ C 3, 6.1.�001, p. �. 3 The only explanation provided to define “necessary” is related with the costs of insurance products which are unknown at the time the price is agreed and the risk covered. For this reason according to the Commission, the calculation of risk is a key issue in pricing all insurance products which appears to be a differentiating factor from other sectors including the banking

sector. This makes access to past statistical data in order to techni-cally price risks crucial. Therefore, the Commission considers that cooperation in this area is both specific to the insurance industry and also necessary in order to price risks. 4 The Commission provided little guidance on what is actually a new risk, it merely indicates that pools are not considered to be a “new risk” pool when they include existing risks and new risks that have existed for more than three years.5 The period can vary from one calendar year (when the market share of the participating undertakings was not more than �5% but subsequently raises above 30%) to two calendar years (when the market share of the participating undertakings was not more than �5% but subsequently raises above that level without ex-ceeding 30%).6 Furthermore, it is crucial that any pools covering new risks and purporting to fall within the BER ensure that they are in fact covered by the precise definition of new risks in Article 1 of the new BER.7 e.g. market share thresholds and “new” risks definition.8 Whereby a certain part of a given risk is covered by a lead insurer and the remaining part of the risk is covered by follow insurers who are invited to cover the remainder. 9 The final text that will be adopted before the end of 2010 may depart from the current drafting. The consultation period is opened until June �5. The draft Horizontal Guidelines are available at: http://ec.europa.eu/competition/consultations/�010_horizon-tals/guidelines_en.pdf10 For the process of revision of the Horizontal Guidelines see: http://ec.europa.eu/competition/consultations/�010_horizon-tals/index.html 11 OJ C 101, �7.4.�004, p. 97

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Advocate General Recommends European Court of Justice Not to Extend EU Legal Privilege Protection to In-House Lawyers

By Frances Murphy, Johannes Zöttl and Francesco Liberatore (Jones Day)

On April �9, �010, Advocate General (“AG”) Juliane Kokott at the Court of Justice of the European Union (“ECJ”) issued her opinion in Case C-550/07 P, Akzo Nobel Chemicals Ltd and Akcros Chemicals LTD v European Commission. This case deals with the question of whether, in the context of European Commission (“Commission”) investigations and proceedings, communications with in-house lawyers are protected by legal professional privilege. The AG recom-mends that the ECJ should say that such communications are not protected. Advocates General are members of the Court, but not judges, and the Court’s senior legal advisors. They independently propose to the Court a legal assessment of the cases for which they are responsible. If the Court follows the approach the AG suggested - as it normally does -, no com-munications between the management of a company and its in-house lawyers will be protected from search and disclosure in EU investigations and proceedings.

BackgroundThis case stems from a Commission investigation into a

cartel on the plastic additives market. During a dawn raid at the premises of Akzo and Akcros in the United Kingdom in February �003, the Commission copied and placed on its file, among other things, two e-mails exchanged between the general manager of Akcros and a member of Akzo’s in-house legal department, who was admitted as a lawyer to the Netherlands Bar. Akzo and Akcros brought a challenge before the General Court arguing that the communications were protected by legal professional privilege and that therefore the Commission should not be permitted to have access to them, among other documents (Cases T-1�5/03

and T-�53/03). The General Court dismissed this challenge on the basis of an earlier ECJ ruling on the scope of legal professional privilege.

Frances Murphy is a Partner in the London office of Jones Day. She has considerable competition law experience repre-senting clients in behavioral and transactional matters across a range of markets. Frances leads the London competition law practice. ([email protected]) Dr. Johannes Zöttl is a Partner in the Frankfurt office of Jones Day. He represents companies in antitrust regulation before the German Federal Cartel Office and the European Commission, including merger reviews and antitrust enforcement actions, and in antitrust actions for damages. ([email protected]) Francesco Liberatore is an Associate based in the firm’s London office. He has extensive experience in advising clients on all aspects of the application of EU and United Kingdom antitrust/com-petition laws as they relate to TMT (technology, media, and communications), pharmaceutical, and retail sectors, among others, as well as in handling EU and multijurisdiction merger filings. ([email protected])

Given that legal professional privilege is considered to apply only to

communications with (external) eu lawyers, it follows that communications with non-eu lawyers will not attract legal

professional privilege and will not be protected from search and disclosure in

EU investigations and proceedings.

Earlier ECJ Ruling on PrivilegeThe authority relied upon by the General Court in

rejecting Akzo and Akcros’ challenge dates back to 198� (AM&S, Case 155/79). In AM&S, the ECJ recognized that the confidentiality of written communications between lawyer and client must be protected at EU level, in two cumulative circumstances:

• First, the communication with the lawyer must have a connection with the exercise of the client's right of defense: it must be a "communication" made "for the purposes and in the interests of the client's rights of defense"; and

• Second, it must be a communication with an independent lawyer, that is to say with a lawyer who is "not bound to the client by a relationship of employment."

The issue considered by the AG in her opinion concerns only the second of these criteria: namely, the independence of the lawyer with whom communications are exchanged.

AG OpinionAkzo and Akcros, supported by the IBA, the Netherlands

Bar and many other interveners, submitted that the ruling in AM&S did not preclude documents emanating from in-house lawyers registered at the national Bar and subject to the disciplinary regimes of them being protected by legal professional privilege. Alternatively, it was submitted that AM&S required reconsideration, particularly in view of recent


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developments in many EU member states regarding the status of in-house lawyers, that the position should be modified to permit the extension of legal privilege to the communications of certain in-house lawyers. However, the AG rejected these arguments. She did so despite acknowledging the develop-ments that had taken place in the EU member states since 198�, and concluded (¶70/71).

In addition to their economic dependence on their em-ployer, enrolled in-house lawyers usually exhibit a consider-ably stronger personal identification with the undertaking for which they work, as well as with its corporate policy and corporate strategy than would be true of external lawyers in relation to the business activities of their clients.

Both their considerably greater economic dependence and their much stronger identification with the client – their employer – militate against the proposition that enrolled in-house lawyers should enjoy the protection afforded by legal professional privilege in respect of internal company or group communications.

If the ECJ follows the AG’s opinion, it will remain the case that communications from in-house lawyers are, in the context of EU competition law investigations and proceed-ings, not covered by legal professional privilege, even if the in-house lawyer is registered with the local Bar of one of the EU member states.

National Legal PrivilegeSome national competition law authorities in the EU,

such as Ireland, the Netherlands, and the United Kingdom, do operate on the basis that communications from in-house lawyers are protected by legal professional privilege. In other EU jurisdictions, such as Germany and Austria, the legal professional privilege may be available, depending on the scope and organization of the in-house counsel’s work and the matters involved. Akzo and Akcros raised the objection that it is unacceptable that the protection of the confidence of a document containing legal advice should depend on whether it is a national competition authority or the Commission which attempts to take it away in the course of a dawn raid. Although the AG expressed her sympathy for this concern, her view is that it is “none the less untenable from a legal point of view”. It follows that, if for example the German Federal Cartel Office (“FCO”) assists a Commission investigation, the FCO will be entitled to access internal communications with in-house lawyers. Conversely, if the FCO investigates a company in its own right, either on national or EU competi-tion law grounds, national legal professional privilege rules may apply and the FCO will not be able to access internal communications with in-house lawyers (as confirmed, for instance, by the Regional Court of Bonn in �005). In case of a dawn raid, it is therefore crucial for companies to check which authority ordered the search when the officials come knocking on your door.

Practical ImplicationsThe AG’s opinion is of significance to all in-house coun-

sel. Their exclusion from legal professional privilege protec-

tion is increasingly significant given their invaluable role in a company’s day-to-day business, in particular having regard to their intimate knowledge of the business concerned and the growing importance of internal compliance programs.

The AG’s opinion is also of significance for external lawyers who are not admitted in the EU. In fact, given that legal professional privilege is considered to apply only to communications with (external) EU lawyers, it follows that communications with non-EU lawyers will not attract legal professional privilege and will not be protected from search and disclosure in EU investigations and proceedings.

one question that remains unanswered by the AG opinion is whether legal

advice from external eu lawyers that does not relate to the subject matter of a Commission investigation can benefit

from legal professional privilege.

However, the AG’s opinion does not call into question the General Court’s earlier findings that certain internal documents prepared for the purpose of seeking legal advice from an external EU lawyer are protected by legal profes-sional privilege. Whether or not an internal document merits such protection will depend on the factual circumstances concerned. Wording such as ‘Privileged and confidential. Prepared for the purposes of obtaining external EU legal advice’ should therefore continue to be a good practice for email headers and the like.

Finally, one question that remains unanswered by the AG opinion is whether legal advice from external EU lawyers that does not relate to the subject matter of a Commission inves-tigation can benefit from legal professional privilege. While such legal advice may be safe from Commission inspection on grounds of relevance, it would be useful for the EU Courts to clarify that all communications between external lawyers and their clients exchanged for the purposes of obtaining legal advice are privileged. This question arose, for example, in relation to documents containing legal advice from external IP lawyers during the dawn raids conducted by the Commis-sion in its pharmaceutical sector inquiry. On that occasion, the Commission took the view that legal professional privilege is restricted to legal advice in connection with EU competition law proceedings and, on this basis, it copied the documents containing IP legal advice despite the fact that it emanated from external EU lawyers. Several companies complained that, in doing so, the Commission infringed the applicable legal professional privilege principles, but no formal com-plaint has ever been brought to date against the Commission in this regard. As a result, this point remains unsettled as a matter of case law. o


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New EU Rules for Distribution and Supply Agreements

By Matthew Hall and Robert Rakison (McGuireWoods LLP)

On April �0, �010, the European Commission adopted a new block exemption regulation covering so-called “vertical” agreements such as distribution and supply agreements (the new Vertical Restraints Block Exemp-tion Regulation or New VRBER). EU block exemptions automatically exempt certain types of agreement from the general ban on anti-competitive agreements in the EU contained in Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) (by applying the exemption provisions in Article 101(3) TFEU).

The New VRBER is highly significant due to the ubiq-uity of vertical agreements in the EU and the fact that they often contain restrictive provisions (such as exclusivity) which may in principle be considered anti-competitive. Re-flecting this, the existing Vertical Restraints Block Exemption Regulation (Old VRBER), which expires May 31, �010, has been, since it came into force in �000, probably the most relied upon EU competition law instrument of all.

The New VRBER will apply from June 1, �010, until May 31, �0��. Agreements in force on May 31, �010, which do not satisfy the conditions of the New VRBER but which do on that date satisfy the provisions of the Old VRBER, will continue to benefit from the Old VRBER up to May 31, �011.

Broadly, the New VRBER exempts from Article 101(1) vertical agreements entered into between undertakings which are not competitors, subject to market share limits concerning the goods or services in question, and provided that the agreement does not contain a “hardcore” restric-tion. The definition of vertical agreements essentially covers the full range of business-to-business purchase and distribution agreements, whether the goods or services are

resold or used as an input (save in the automobile sector, so long as a separate regime applies there).

The hardcore restrictions are very similar to those con-tained in the Old VRBER and include in particular resale price maintenance provisions and provisions intended to divide the EU market along national lines. The important exception allowing for a restriction on “active” sales by a distributor into territories or to customers reserved to the supplier or another distributor where exclusive distribu-tion arrangements are being used is retained. “Passive” sales (responding to unsolicited requests) must however always be allowed, regardless of the type of distribution arrangements employed.

Matthew Hall ([email protected]) is a Partner in the Brussels office of McGuireWoods LLP. He focuses his practice on all aspects of EU and UK competition law. He has substantial experience with merger control, State aid, cartels and issues arising out of trading agreements and practices, such as abuse of dominance, distribution and agreements between competitors. Robert Rakison ([email protected]) is a Partner in the London office of McGuire-Woods LLP. He concentrates his practice on international company and commercial law, with a special emphasis on cross-border mergers, acquisitions and joint ventures. He also has extensive experience advising on mergers and acquisitions for U.K. private companies, venture capital and private equity investment, both for venture capitalists and private equity houses as well as targets, raising private equity capital and debt finance for entrepreneurial companies with a further emphasis on e-commerce financing and structuring, general and financial business matters.

The two most significant changes introduced by the new VRBeR, as

compared to the old VRBeR, and those which attracted the most attention during

the consultation period leading up to the adoption of the new VRBeR and the notice, concern the market share limits

and the treatment of Internet sales.

The commission also published on April �0, �010, a notice titled “Guidelines on Vertical Restraints.” The notice further explains the application of the New VRBER and the treatment of vertical agreements which fall outside it. It is important to note in this context that a vertical agreement which falls outside the New VRBER is not necessarily il-legal, and in particular there is no presumption that this is the case where the market share limits are exceeded. Undertakings will have to consider whether any such agreement contains anti-competitive provisions (such that Article 101(1) may apply), and if so, whether Article 101(3) applies to allow for an individual exemption for the agreement. It will, however, generally be difficult to justify a “hardcore” restriction under Article 101(3).

The two most significant changes introduced by the New VRBER, as compared to the Old VRBER, and those which attracted the most attention during the consultation period leading up to the adoption of the New VRBER and the notice, concern the market share limits and the treat-ment of Internet sales.


eu

Under the Old VRBER, a 30% market share limit on the supplier applied in most cases. Under the New VRBER, in all cases there is a 30% market share limit on the supplier in its selling market(s) as well as a 30% market share limit on the buyer in its purchasing market(s). The commission considers that this change “is particularly beneficial to small and medium-sized enterprises, because they are the most likely (as competitors of the powerful buyer or as a supplier unable to countervail the market power of the buyer) to be harmed by buyer-led vertical restraints.”

The commission faced extensive lobbying in relation to its treatment of Internet sales. The New VRBER itself makes no mention of Internet sales, the issue being dealt with solely in the notice in terms which the commission describes as “Internet friendly.” The key points are:

• “Active” sales are considered by the commission to include approaching a specific customer group or cus-tomers in a specific territory through advertisement on the Internet (such as by using territory-based banners on third-party websites) and by sending unsolicited e-mails. Thus, these activities can be restricted in the context of exclusive distribution arrangements with-out removing the benefit of the New VRBER.

• Sales made from a website are considered to be “pas-sive” sales within the meaning of the New VRBER. Thus, distributors can never be stopped from operat-ing a website from which purchases can be made. Further, and consistent with this, the commission considers that hardcore restrictions include provisions requiring an exclusive distributor: to prevent custom-ers from outside the exclusive territory from viewing the distributor’s website; automatically to re-route such customers; or to terminate transactions over the Internet once a credit card reveals an address outside that distributor’s exclusive territory. In the context of selective distribution, the commission considers the imposition of criteria for online sales which are not overall equivalent to those imposed for sales from brick and mortar shops to be hardcore restrictions.

• The commission further considers that it is a hardcore restriction for a supplier and a distributor to agree to limit the proportion of the distributor’s overall sales made over the Internet, although there can be a requirement for a distributor to sell a certain absolute amount offline, and that it is also usually a hardcore restriction to charge a higher price for products in-tended to be resold online than for those intended to be resold offline.

• The New VRBER allows a supplier using a selective distribution network to require distributors to have one or more brick and mortar shops, and to conform to the standards required of the distributors’ own websites when using third-party platforms for dis-tribution.

The commission presents the new regime as simple, and at its headline level it is. Companies are free to decide how and on what terms to distribute their products in the EU, provided their agreements do not contain hardcore restrictions and the market shares of the supplier and buyer both do not exceed 30%. Further, approved distribu-tors are generally free to sell on the Internet without any limitation on the quantities, their customers’ location and on the prices.

Internet sales practices, as with various other issues in relation to

vertical agreements, will continue in many cases to be complex and require

significant analysis even where the basic requirements of the New VRBER are met.

However, as ever, “the devil is in the details.” Internet sales practices, as with various other issues in relation to vertical agreements, will continue in many cases to be com-plex and require significant analysis even where the basic requirements of the New VRBER are met. In this regard, the new regime is the same as the old regime. o

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1� EuroWatch® May 15, �010

ITALy

New Tools to Encourage Shareholder Participation in the Life of Italian Listed Companies

By Tobia Croff (Shearman & Sterling LLP)

Record date, electronic vote, tools to map and iden-tify the shareholders, a new regime of proxy voting and increased dividends for long-term investors are among the principal changes introduced by Legislative Decree No. �7 of January �7, �010, implementing E.U. Directive �007/36/EC of July 11, �007, on the exercise of certain rights of shareholders in listed companies. While the Legislative Decree entered into force on March �0, �010, the new rules relating to the shareholders meeting will apply only starting from October �010.

Legislative Decree No. �7 of January �7, �010 (the “Decree”) brings significant changes into the landscape of Italian listed companies and their shareholders.

The Decree, adopted pursuant to Article 31 of Law 88 of July 7, �009 (the “Law 88”) and implementing E.U. Directive �007/36/EC of July 11, �007, shapes new voice rights for the shareholders of listed companies with the intent to encourage their participation in the corporate life and, notably, the exercise of their voting rights.

The Decree, which amends the Italian Civil Code and Legislative Decree No. 58 of February �4, 1988 (the “Italian Securities Act”), introduces a variety of changes. This article briefly addresses some of the new rules that may trigger the interest of banks, investment funds and other institutional investors, as well as listed companies themselves. Most of the provisions discussed hereinafter do not apply to cooperatives.

The Record DateThe shareholders of Italian companies listed on any

Italian or E.U. regulated market1 will be allowed to attend shareholders meetings by means of a notice of ownership issued by their financial intermediary to the issuer, on the basis of the intermediary’s records at closing of business on the seventh trading day prior to the date of the meet-ing (Article �370(5) of the Civil Code and Article 83-sex-ies(1)(�) of the Italian Securities Act)�.

This is the so called record date, and pursuant to this new regime, shareholders may attend a meeting and ex-ercise voting rights in respect of those shares even if they transfer their shares after the record date. Conversely,

the purchaser of the shares after the record date will not be entitled to attend the meeting (Article 83-sexies(�) of the Italian Securities Act). The Decree however provides that a person that purchases shares after the record date will have standing to challenge the resolution or exercise withdrawal rights, where applicable (Article 1�7-bis(1)(�) of the Italian Securities Act).

Tobia Croff is a Partner in Shearman & Sterling’s European Corporate Group practicing in Italy and advises a variety of corporations and financial institutions in connection with both public and private corporate merger, acquisition, sale and joint venture transactions, and in capital markets transactions. ([email protected])

The decree shapes new voice rights for the shareholders of

listed companies with the intent to encourage their participation in the corporate life and, notably, the

exercise of their voting rights.

Listed companies must receive the relevant notices of ownership on or before the third trading day prior to the date of the meeting (Article 83-sexies(4) of the Italian Se-curities Act). This term, however, is not final: shareholders will be entitled to attend the meeting and cast their vote to the extent that the issuer receives the relevant notice prior to the opening of the meeting.

The introduction of the record date might trigger in-vestment strategies arbitraging on the decoupling of the voting rights and the economic effects of the vote. Both the shareholders who transfer their shares after the record date (who will not bear the economic effects of their vote) and the purchasers thereof (who will be able, under certain cir-cumstances, to insulate themselves from the consequences of a vote they did not take part in) might devise profit strategies on stock trading around the meeting.

Mapping the Shareholders of Listed Companies A rule bearing the potential to significantly impact the

transparency of the shareholdings of listed companies3 is new Article 83-duodecies of the Italian Securities Act, which affords issuers a tool to map their shareholders, if their bylaws so provide.

Upon a request submitted by a listed company (which may be bound to act also on the written request of a number of shareholders owning half of the percentage of the issuer’s share capital necessary to file slates for the election of the board of directors), financial intermediaries


ITALy

must communicate certain identification information on the issuer’s shareholders within ten trading days of the request (Article 83-duodecies(1)(�) of the Italian Securities Act)4. The company (but not, based on the black letter of the law, the requesting shareholders) needs to motivate its request to the intermediaries (Article 83-duodecies(4) of the Italian Securities Act). If the request is submitted upon shareholders’ request, the concerned issuer is required to disclose the identity of, and the interests held by, the requesting shareholders (Article 83-duodecies(4) of the Italian Securities Act).

The new provision also introduces certain disclosure requirements. Listed companies must disclose the submis-sion of the request to the market (outlining the reasons thereof, if the request is being submitted by the company itself), have to make the information obtained from the intermediaries available to the shareholders and are further required to update their stock ledger accordingly (Article 83-duodecies(4) of the Italian Securities Act). This provision seems to resemble the rules on the disclosure of significant shareholdings in listed companies, requiring that the information obtained from the intermediaries be shared with all other shareholders and the market.

The shareholders requesting to map their fellow hold-ers of interests in a listed company will share with the company the costs associated therewith, in accordance with the criteria that the Commissione Nazionale per le Società e la Borsa, the Italian securities regulator (“CON-SOB”), will determine (83-duodecies(3) of the Italian Securities Act)5.

Privacy protection concerns might, however, limit the application of this new shareholder mapping tool. Any requested financial intermediaries will be bound only to communicate the data and information regarding share-holders who did not expressly forbid them to do so (Article 83-duodecies(1) of the Italian Securities Act).

Proxies and Proxy SolicitationThe previously applicable rules entailed strict quanti-

tative and qualitative requirements applicable to proxies, including the prohibition on proxies granted to the direc-tors of the issuer or any of its subsidiaries.

Not only does the Decree repeal these restrictions (Article �37�(8) of the Civil Code), but it now allows listed companies to adopt a new tool to encourage shareholders’ attendance in meetings: the “designated representative” of the company.

The “Designated Representative” Unless otherwise stipulated in the bylaws, listed

companies must appoint a single representative per each meeting to which the shareholders, no later than the end of the second trading day prior to the meeting, may grant proxies to vote their shares (Article 135-undecies(1) of the Italian Securities Act). Proxies granted without specific voting instructions relating to the agenda of the meeting will be ineffective (Article 135-undecies(1) of the Italian

Securities Act). Moreover, proxies must be granted on a CONSOB-approved form. Further rules apply to certain conflicts of interest of the “designated representative” (Article 135-undecies(4) of the Italian Securities Act).

Individual ProxiesNotwithstanding the corporate “designated represen-

tative”, shareholders will still have the power to appoint their own representatives at each meeting, whose conflicts of interest are also regulated in the statute (Article 135-novies et seq. of the Italian Securities Act).

Both the shareholders who transfer their shares after the record date (who will not bear the economic effects of their vote)

and the purchasers thereof (who will be able, under certain circumstances,

to insulate themselves from the consequences of a vote they did not take part in) might devise profit strategies on

stock trading around the meeting.

Proxy SolicitationIn an attempt to simplify a set of rules that so far raised

scarce interest from the market, the Decree also amended the regime of proxy solicitations.

First, the Decree introduced a de minimis exemption: rules on proxy solicitation will not apply if the solicitations is addressed to no more than �00 shareholders, provided that the solicitation does not come with indications that may influence the voting process (Article 136(1)(b) of the Italian Securities Act).

Second, the person promoting a proxy solicitation will no longer be required to hold 1% of the company’s stock capital.

Third, the person soliciting proxies will no longer need to appoint a financial intermediary, although the solicita-tion will continue to require a prospectus (Article 138(1) of the Italian Securities Act). The repeal of the financial intermediary requirement and the elimination of the minimum holding requirement respond to the directive of “simplifying the regulation of proxy voting”, indicated by the Parliament (Article 31(1)(n) of the Law 88).

Shareholders Meetings: Notice, Financial Report, Disclosure, Participation and Vote

The Decree significantly amends the regulation of the shareholders meetings.

New Tools, continued on page 14


ITALy

Call of the Shareholders Meetings upon a Shareholders Request

The Decree reduces to 5% the interest that any share-holders, who intend to have a meeting called, must own (Article �367(1) of the Civil Code).

The requesting shareholders must now prepare a report on the items on the agenda that they seek to vote on. The directors, who may add their observations and remarks, are required to make this report available to all shareholders along with the notice of meeting (Article 1�5-ter(3) of the Italian Securities Act).

Notice of MeetingThe Decree also amends the timeline and deadlines

applicable to the call of the shareholders meeting. Notably, a notice of meeting must be published on the company’s website, in accordance with CONSOB requirements:

• within the 30th day prior to the date of the meeting (Article 1�5-bis(1) of the Italian Securities Act)6; or

• in the event of a meeting called to appoint the admin-istrative or auditing bodies, within the 40th day prior to the meeting, to allow an easier submission of slates of candidates by the shareholders (Article 1�5-bis(�) of the Italian Securities Act); or

• in the event of a meeting called after the reduction of the share capital due to losses or below the minimum statu-tory requirement, within the �1st day prior to the meeting (Article 1�5-bis(3) of the Italian Securities Act)7; or

• in the event of meetings called to authorize defensive measures pending a take-over bid, within the 15th day prior to the meeting (Article 104(�) of the Italian Securities Act).

Supplementing the AgendaShareholders may now request that the agenda of the

meeting be supplemented with additional items within ten days of the publication of the call notice of the meeting (Article 1�6-bis(1) of the Italian Securities Act)8, as opposed to the previously applicable five-day period.

The call notice must clearly indicate the deadline to exercise this right (Article 1�5-bis(4)(b)(1) of the Italian Securities Act).

“Single Call” Shareholders MeetingsListed companies will now be allowed to hold “single

call” meetings if their bylaws so provide. The bylaws can exclude calls after the first, provided

that the following quorum apply to any “single call” meet-ing (Article �369(1) of the Civil Code):

• in the event of an ordinary shareholders meeting, the quorum currently applicable to second calls applies;

• in the event of an extraordinary shareholders meeting, the quorum currently applicable to any meeting after the second applies.

Right to Ask Questions before the Shareholders Meeting

The shareholders will now have the right to ask ques-tions regarding items on the agenda even before the meet-ing (Article 1�7-ter of the Italian Securities Act).

The company, which is required to answer no later than the meeting, may discharge this duty through a Q&A providing the requested information, to be made available on its website (Article 1�7-ter(�) of the Italian Securities Act).

not only does the decree repeal these restrictions applicable to proxies, but it now allows listed companies to adopt a new tool to encourage shareholders’

attendance in meetings: the “designated representative” of the company.

Financial Reporting Disclosure Listed companies whose bylaws allow that a share-

holders meeting may be called to approve the financial statements within 180 days from the end of the fiscal year (as opposed to the normal 1�0-day period) will only be required to make available (and no longer to approve) their draft financial statements within 120 days from the end of the fiscal year (Article 154-ter(1) of the Italian Securities Act).

Furthermore, the shareholders meeting called to ap-prove the financial statements may only be held upon the lapse of a �1-day period starting on the date on which the financial statements are made available to the shareholders (Article 154-ter(1-bis) of the Italian Securities Act).

Electronic VoteTo the extent that the bylaws so provide, Italian com-

panies may now allow their shareholders to cast their vote not only via mail (as currently permitted by the Civil Code), but also electronically (Article �370(4) of the Civil Code).

The details of the electronic voting process will be set forth in a CONSOB regulation (Article 1�7 of the Italian Securities Act)9.

Special Increased DividendsA new provision not expressly included among the

guidelines set forth by the Parliament (as noted in the Gov-ernment Report on the Decree) will allow the bylaws of listed companies to establish a dual regime for dividends payable to their common shareholders (Article 1�7-qua-ter of the Italian Securities Act, which expressly deviates

New Tools (from page 13)


ITALy

from the pro-rata standard set out in Article �350(1) of the Civil Code).

Under this new rule, the bylaws may entitle compa-nies to distribute increased dividends by up to 10% to any persons holding common shares for at least one year (Article 1�7-quater(1) of the Italian Securities Act). The by-laws, however, may subject the payment of the increased dividends to additional requirements.

Any shares subject to a shareholders’ agreement, or owned by shareholders exercising a significant or domi-nant influence over the issuer, do not qualify for increased dividends (Article 1�7-quater(�) of the Italian Securities Act). Similarly, increased dividends cannot be paid out on any shareholding or part thereof exceeding 0.5% of the issuer’s share capital (Article 1�7-quater(�) of the Italian Securities Act).

The Government Report on the Decree construes this provision, in line with the opinion of the Justice and Fi-nance Committees of the Camera dei Deputati, the lower House of the Italian Parliament, as an instrument “to foster long-term investments by minority shareholders, a prerequisite for their higher involvement in the exercise of corporate rights.”

It seems difficult to predict, prior to the application of the new rule, what effects increased dividends might have on the contestability or the liquidity of the concerned shares.

Entry into ForceThe amendments brought by the Decree and briefly

discussed in this client publication will apply to the share-holders meetings whose call notice will be published after October 31, �010 (Article 7(1) of the Decree).

The provision allowing issuers to map their sharehold-ers will not be subject to such delayed entry into force, although for it to be fully operational companies will need to amend their by-laws.

Preliminary ConsiderationsThe Decree provides the shareholders of Italian listed

companies with a set of instruments that, properly oper-ated, may intensify their involvement and influence on the life of listed companies.

The introduction of the record date, the new regime for the proxy voting and proxy solicitation, the possibility to map the shareholders and the new participation tools, if properly combined, may prove to raise the voice rights of shareholders of Italian listed companies.

Only time will tell whether and how minority share-holders (and among them, notably, institutional investors) will be willing to operate any of these new tools, and to what extent they will be keen to use them to increase their returns. o

1. This provision also applies to the shares listed on any Italian or E.U. multilateral trading facility. �. Article �370(5) of the Civil Code indeed refers to Article 83-sexies of the Italian Securities Act as regards companies where

shares are held through a center depository system.3. This provision also applies to Italian companies with shares listed on any Italian or E.U. multilateral trading facility being held by a central depository system (Article 83-duodecies(�) of the Italian Securities Act). 4. This term may be amended by CONSOB through a regulation to be adopted jointly with the Bank of Italy (Article 83-duode-cies(�) of the Italian Securities Act).5. Prior to the adoption of the relevant CONSOB regulation, the costs will be borne by the motioning shareholders (Article 7(3) of the Decree).6. This provision also applies to private companies with a broad shareholders base, or emittenti azioni diffuse tra il pubblico in mi-sura rilevante (Article 116(�-ter) of the Italian Securities Act).7. This provision also applies to private companies with a broad shareholders base, or emittenti azioni diffuse tra il pubblico in mi-sura rilevante (Article 116(�-ter) of the Italian Securities Act).8. This provision also applies to private companies with a broad shareholders base, or emittenti azioni diffuse tra il pubblico in mi-sura rilevante (Article 116(�-ter) of the Italian Securities Act).9. This provision also applies to private companies with a broad shareholders base, or emittenti azioni diffuse tra il pubblico in mi-sura rilevante (Article 116(�-ter) of the Italian Securities Act).

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The Bribery Act 2010 - A Brave New World for Business?

By John Rupp and Alexandra Melia (Covington & Burling LLP)

on corporate officers whose companies commit bribery offenses with their consent or assistance, likely will enable the UK enforcement authorities to prosecute companies and their corporate officers more easily than has been the case in the past.

John Rupp is a Partner based in the firm’s London office. He specializes in commercial litigation, including arbitration, and has substantial experience structuring and undertaking internal investigations involving trade control issues, bribery, accounting irregularities, and pharmaceutical marketing is-sues. ([email protected]) Alexandra Melia is an Associate in the dispute resolution group of Covington & Burling’s London office. Ms. Melia’s practice encompasses a wide range of contentious and quasi-contentious matters, including litigation before the English courts, arbitral proceedings and internal corporate investigations. ([email protected])

Summary On April 8, �010, the UK Bribery Bill received Royal

Assent as the Bribery Act �010 (the “Act”). The Act, which became law in the final days of the current Parliament, represents the most fundamental overhaul of the UK’s anti-bribery regime in over 100 years. The Act’s stated aim is to reform and modernize the UK’s bribery laws. In furtherance of that goal, the Act introduces the concept of “improper performance” as the basis for the offenses of giving and receiving bribes. Further, these offenses will apply to instances of private sector bribery connected with the activities of a business, trade or profession, whether committed in the UK or abroad. The Act also creates a separate offense of bribing a foreign public official. Most significantly for companies and partnerships that carry on all or part of their business in the UK, the Act creates a new offense of failure by a commercial organization to prevent bribery.

The Act bears a strong resemblance to the UK Bribery Bill (the “Bill”) that was introduced into Parliament on November 19, �009, although it incorporates a number of amendments that were proposed at various stages of the Bill’s passage through Parliament.

The Act is expected fully to come into force in the fall/winter �010. The reason for the delay is to permit businesses to align their existing anti-bribery compliance programmes with the statutory guidance on adequate bribery prevention procedures that the Act requires the UK Government to publish. Businesses active in the UK that already have US Foreign Corrupt Practices Act 1977 (“FCPA”) compliant anti-bribery procedures nonetheless will need to ensure that their compliance programmes reflect the new UK regime since the UK regime differs from and extends the requirements of the FCPA in several respects.

The importance of taking these precautionary steps in a timely manner cannot be over-emphasized, largely because the new corporate offense of failing to prevent bribery, coupled with the imposition of criminal liability

unITed KInGdoM

The Act’s stated aim is to reform and modernize the UK’s bribery laws. In furtherance of that goal, the Act

introduces the concept of “improper performance” as the basis for the

offenses of giving and receiving bribes.

The Bribery Offenses The Act repeals the existing common law and statu-

tory bribery offenses and replaces them with four new offenses that cover:

• individuals who or companies/partnerships that give, promise or offer bribes;

• individuals who or companies/partnerships that request, agree to receive or accept bribes;

• individuals who or companies/partnerships that bribe foreign public officials; and

• companies or partnerships that fail to prevent persons acting on their behalf from paying bribes.

Giving and Receiving Bribes in the Public and Private Sectors

The Act makes it an offense for a person to offer, promise or give an “advantage” to someone (1) with the intention that he / she or another will be induced to behave “improperly,” (�) as a reward for him / her or another behaving in an “improper” manner or (3) knowing or believing that the recipient’s acceptance of the “advan-tage” would constitute “improper” behavior. The offense expressly applies to circumstances in which an agent is used to offer, promise or pay a bribe.

The recipient of a bribe also will be guilty of an of-fense if he / she requests, agrees to receive or accepts an “advantage” (1) with the intention that he / she or another will behave “improperly,” (�) as a reward for that person or another person behaving in an “improper” manner, (3) when the request, agreement or acceptance itself


constitutes “improper” behavior or (4) when that person or another person has behaved “improperly” either in anticipation or consequence of the request, agreement to receive or acceptance of an “advantage.” For the purpose of this offense, it is immaterial whether the “advantage” is for the benefit of the recipient and/or whether the recipient requested, agreed to receive or accepted the “advantage” directly.

In circumstances (�), (3) and (4) directly above, it is irrelevant whether the recipient knows or believes that the behavior in question is “improper.” Further, when a person other than the recipient of an “advantage” behaves “im-properly” in circumstance (4) it is also irrelevant whether they know or believe that the behavior in question is “improper.” The breadth with which these offenses have been drafted necessitates that companies and partnerships check that their current business practices do not inadver-tently fall foul of the Act, particularly because the decision to pursue a conviction for giving or receiving a bribe will be the subject of prosecutorial discretion.

The Act defines an “advantage” widely to include both financial and other benefits. As with a number of other provisions of the Act, what constitutes such an advantage is not addressed in the Act and is instead to be determined by the UK courts.

The test for “improper” behavior under the Act in-volves an assessment of whether the person performing the relevant function / activity was expected to perform it in good faith, expected to perform it impartially or acted from a position of trust and, in turn, whether that person’s performance was in breach of the relevant expectation. A “relevant function / activity” can be performed in the public or private sectors, can be performed abroad and does not need to have a connection with the UK. Under the Act, the “relevant expectation” is what a reasonable person in the UK would expect. Consequently, when the performance of the function / activity is not subject to UK law, local custom or practice is to be disregarded unless it is permitted or required in writing by local legislation, the governing constitution or case law.

Bribing Foreign Public Officials The Act creates a separate offense of bribing a foreign

public official, which is designed to comply with the requirements of the OECD Convention on Combating Bribery of Foreign Public Officials in International Busi-ness Transactions (the “OECD Convention”). A person will be guilty of this offense if he / she - whether directly or indirectly - offers, promises or gives an “advantage” to a foreign public official that is not permitted or required to influence that person in his / her capacity as a foreign public official under the written constitution, legislation or case law of the official’s country (or in the case of an official of a public international organization, the written rules of that organization). The giving of an “advantage” to another person with the official’s permission, or at their request, also would constitute an offense.

For this offense to be committed, the “advantage” must be intended to influence the person in his / her capacity as a foreign public official to obtain or retain business or some other advantage in the conduct of business. Consequently, for the purpose of this offense it is not necessary for the person offering, promising or giving an “advantage” to know or intend that the relevant foreign public official might act “improperly.” An intention to influence the of-ficial is sufficient. This element of the offense goes beyond the requirements of the OECD Convention, which requires such a person to seek an “improper” advantage.

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The breadth with which these offenses have been drafted necessitates that companies and partnerships check that their current business practices do not inadvertently fall foul of the

Act, particularly because the decision to pursue a conviction for giving or

receiving a bribe will be the subject of prosecutorial discretion.

Under the Act, “foreign public official” means (1) an individual who holds a legislative, administrative or judicial position outside the UK, (�) an individual who exercises a public function for or on behalf of a country, ter-ritory or public agency / enterprise outside the UK or (3) an official or agent of a public international organization. Such officials will be considered to have been “influenced” if they fail to exercise their functions or seek to use their official position to a particular end, even if acting outside their authority when doing so.

Facilitation Payments and Hospitality Under the Act, facilitation payments will remain a

criminal offense. When introducing the Bribery Bill (the “Bill”) at its Second Reading in the House of Lords, Lord Bach - the Minister for Justice - warned that companies that make facilitation payments to obtain a business advantage run the risk of prosecution because “[b]ribery on any scale cannot and should not be tolerated or condoned.” The Government has indicated that the policing of such payments will be by means of prosecutorial discretion ex-ercised in the public interest. In that connection, Lord Bach has suggested that it may not be in the public interest “to prosecute where payments are small,” although he quali-fied that observation by stating that much will depend on the particular circumstances of a case. No further official guidance yet has been issued on this point.

The Bribery Act 2010, continued on page 18


The Government has stated that corporate hospitality is an accepted part of modern business and that it does not seek to penalize corporate hospitality for legitimate business purposes. Richard Alderman - the Director of the Serious Fraud Office - also has suggested that “most routine and inexpensive hospitality would be unlikely to lead to a reasonable expectation of improper conduct.” However, the Government also believes that prosecutors are best placed to differentiate between legitimate and illegitimate corporate hospitality. Consequently, prosecu-tors will be able to prosecute corporate hospitality that is given with the intention of influencing the recipient of the hospitality to act “improperly” or, in the case of corporate hospitality provided to a foreign public official, when there is no written law that permits the hospitality to be given to the official.

To Whom Do These Offenses Apply? The offenses of giving and receiving bribes and

bribing foreign public officials apply to UK citizens, UK companies, UK partnerships and individuals ordinarily resident in the UK regardless of where the relevant act occurs. They also apply to non-UK nationals, companies and partnerships if an act or omission forming part of the offense takes place in the UK.

Criminal Liability of Senior Company Management

Under the Act, directors, managers, corporate secretar-ies and other similar officers of companies and partner-ships who consent to or assist in the commission of one of the above-mentioned bribery offenses by their company or partnership will face personal criminal liability provided that they have a close connection with the UK (e.g., they are a British citizen or are ordinarily resident in the UK).

Failure of Commercial Organizations To Prevent Bribery

The Act creates a new offense for commercial orga-nizations that fail to prevent bribes being paid on their behalf. This offense will be committed if a person who is performing services on behalf of a company / partnership bribes another person to obtain or retain business or an advantage in the conduct of business for that company / partnership and the company / partnership did not have adequate procedures to prevent people performing services on its behalf from engaging in bribery.

For the purpose of this offense, the capacity in which a person acts on behalf of a company or partnership is immaterial. The Act creates a rebuttable presumption that an employee acts on behalf of his / her employer. In other circumstances, this issue will be determined from an assessment of all relevant circumstances, not merely the nature of the relationship between the person and the company / partnership.

In this connection, a key issue will be the extent to which subsidiaries, joint ventures and consortia are held to be performing services on a company’s / partnership’s behalf. This issue is not addressed in the Act and, as yet, the Government has not fully clarified this point. However, Lord Tunnicliffe stated at the Bill’s Committee Stage in the House of Lords that “[o]ur purpose is clear; we want to en-courage organizations which are involved in joint ventures to ensure that they are satisfied that adequate procedures are built into the arrangements for their joint venture. The same can be said of any other business model.”

There is no need for a person performing services on behalf of a company / partnership (e.g., an employee, agent or subsidiary) to have been prosecuted for bribery, provided that he / she / it is, or would be, guilty of the offense of giving a bribe or of bribing a foreign public official.

The offense will apply to all companies and partner-ships that carry on any part of their business in the UK, whether they are incorporated in the UK or elsewhere. The Act does not address what it means to carry on part of a business in the UK. However, the Government purport-edly believes that the UK courts will interpret this phrase in a common sense manner. In practice, this offense will require every company or partnership active in the UK to address the question of how to deal with and prevent bribery by those persons that perform services on the company’s / partnership’s behalf. Also, as an offense will be deemed to have been committed irrespective of where the acts or omissions comprising the offense take place, compliance measures of some sort will be needed every-where the company or partnership does business.

It is a defense to this offense for companies and part-nerships to prove that they have implemented adequate procedures to prevent persons performing services on their behalf from committing bribery. The Act requires the Secretary of State to publish guidance about such proce-dures. The Government has indicated that it will publish guidance on “adequate procedures” prior to this offense coming into force to provide companies and partnerships with an opportunity to align their compliance programmes with the statutory guidance, which will set out relevant principles backed up by illustrative examples of good practice rather than being prescriptive in nature. However, the Government has indicated that, prior to the publication of guidance, businesses should pro-actively take steps to implement compliance programmes that respond to the provisions of the Act.

The Ministry of Justice is currently engaged in drafting this guidance. While there will be no formal consultation in relation to the guidance, input has been sought from businesses, as well as non-governmental organizations ac-tive in the anti-corruption field. During the Act’s passage through Parliament, it was suggested that the issues the guidance likely would address are:

• board-level responsibility for anti-corruption compli-ance programmes;

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The Bribery Act 2010 (from page 17)


• identification of a named senior officer with responsi-bility for the anti-corruption compliance programme within an organization;

• the need for a clear code of conduct that is published both internally and on an organization’s website;

• risk assessment and management procedures; • employment procedures that enable vetting of

potential employees, the inclusion of express anti-corruption language in employment contracts and appropriate disciplinary measures to be taken against employees that commit corrupt acts;

• training to ensure that anti-corruption compliance procedures are adequately embedded throughout an organization;

• effective due diligence prior to entering into business relationships;

• effective reporting, monitoring and review process-es;

• gifts and corporate hospitality policies; • financial control mechanisms; • controls to avoid facilitation payments; and • procedures to prevent bribery by agents, intermediar-

ies, joint venture partners and syndicates.

Lord Bach has suggested that an organization facing this charge will be able to point to its size, business sector and involvement in high-risk markets as factors relevant to the assessment of the appropriateness and proportion-ality of its anti-bribery compliance programme. In addi-tion, the Government has said that when culpability at a management or board level is suggested by the evidence in a case, the courts should be permitted to consider this information when assessing whether an organization’s procedures were adequate in the circumstances.

Penalties In relation to any of the bribery offenses described

above, the Act provides for a maximum penalty of: • ten years imprisonment, coupled with an unlimited

fine, for an individual; and • an unlimited fine for a company / partnership.

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The Act has dramatically altered the conditions in which companies and partnerships that carry on all or part

of their business in the uK will be operating.

The UK courts will be required to ensure that the amount of the fine that is imposed reflects both the seriousness of the offense and the circumstances of the case, including the known financial circumstances of the offender. The recent sentencing remarks of Lord Justice Thomas in the case of Regina v. Innospec Limited provide some guidance concerning the approach the courts may take when imposing fines for bribery offenses.

In his sentencing remarks in the Innospec case, Lord Justice Thomas characterized the corruption of foreign government officials / ministers as “at the top end of seri-ous corporate offending both in terms of culpability and harm.” He went on to state that while there may be reason to differentiate the custodial penalties imposed for corrup-tion between the US and the UK, “there is every reason for

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The Bribery Act 2010 (from page 19)

states to adopt a uniform approach to financial penalties for corruption…so that the penalties in each country do not discriminate either favorably or unfavorably against a company in a particular state.”

Enforcement of the Act The current strategy of the lead enforcement authority

under the Act - the Serious Fraud Office (“SFO”) - is to encourage organizations to self-report suspected instances of bribery. In its July �009 report, the Joint Select Commit-tee on the Draft Bribery Bill (the “Committee”) stated that the provisions of the Public Contract Regulations �006 (the “Regulations”), which currently require a company con-victed of a corruption offense to be automatically and per-manently debarred from competing for public contracts in UK and the EU, pose a major impediment to the realization of this goal. The Committee’s report went on to suggest that self-reporting would be effective only if debarment under the Regulations was made discretionary.

During the Act’s passage through Parliament, Claire Ward - a Justice Minister - stated that “active consideration” was being given, in particular, to whether the corporate offense of failure to prevent bribery would trigger manda-tory debarment under the Regulations. In this connection, Ms. Ward noted that “[t]his is not a straightforward issue, and there are a number of complex points that we need to consider.” During the Public Bill Committee Stage in the House of Commons, Ms. Ward further stated that the Government hopes to reach a view on this issue shortly but, in any event, “the Government’s position will be clear before any of the offenses are brought into force.” The position that the Government eventually adopts on this

issue likely will be of importance to the development of a culture of self-reporting among companies doing business within the public sector in Europe.

The SFO’s approach to the prosecution of corruption was also addressed by Lord Justice Thomas in the recent Innospec case, which involved global settlement of a cor-ruption offense brokered by the US and UK enforcement authorities. In his sentencing remarks, Lord Justice Thomas stated that “the SFO cannot enter into an agreement under the laws of England and Wales with an offender as to the penalty in respect of the offense charged” because that is a matter for the judiciary to decide based upon an assess-ment of the extent of the criminal conduct in the particular case. He went on to state that “it will rarely be appropriate for criminal conduct by a company to be dealt with by means of a civil recovery order” because the perpetrators of such crimes should not be viewed or treated differ-ently than other criminals. Finally, Lord Justice Thomas expressed the view that the imposition of compliance and monitoring orders is expensive and unnecessary and that the resources allocated to compliance with such orders should more properly be made available for fines, confis-cation and compensation. It remains to be seen how the SFO will respond to the views expressed by Lord Justice Thomas in enforcing the provisions of the Act.

When Will the Act Come Into Effect? The Act has cross-party support and its implementa-

tion therefore is unlikely to be impeded by any change of Government following the General Election. An imple-mentation date of the Autumn/Winter �010 currently is being discussed, although there has been some discussion concerning the desirability of implementing the Act in stages to allow companies to implement adequate proce-dures ahead of the corporate offense coming into force.

If a phased approach to implementation ultimately is taken, some provisions of the Act are likely to be implemented in June �010 and the remaining provisions are likely to be implemented in the Autumn/Winter �010.

ConclusionThe Act has dramatically altered the

conditions in which companies and part-nerships that carry on all or part of their business in the UK will be operating. The wide latitude granted to prosecutors and the broad scope of the offenses in the Act will require companies and partnerships to evaluate and enhance their existing compli-ance procedures. In light of the greater ease with which enforcement authorities in the UK likely will be able to achieve corporate convictions once the Act comes into effect, the need to complete this process expedi-tiously cannot be overstated. o

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