In the news this week

Author: John Crabb, Karry Lai, Olly Jackson | Published: 20 Apr 2018
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Asia Pacific: building tension, not bridges

Trade tension between China and US is continuing to mount. This week, the US Department of Commerce placed a seven-year ban on US firms from selling components to China’s telecom equipment maker ZTE after it was caught illegally shipping goods to Iran. ZTE is the second largest telecom equipment maker in China and an estimated 25 to 30% of its components are supplied by US companies.

Meanwhile, US chipmaker Qualcomm is refiling an antitrust application with China’s Ministry of Commerce for its $44 billion takeover of NXP Semiconductors. Qualcomm has received eight of the nine antitrust approvals needed from regulators in various countries with the China one remaining.

The Singapore Exchange’s second consultation on dual-class shares is open until April 27. Market feedback is being sought on how to appropriately address expropriation and entrenchment risks of dual class shares. Singapore expects to adopt dual class shares after June.

Americas: all change now

Over the last month the Securities and Exchange Commission has been hinting heavily that it intends to release its best interest standard for brokers, and on April 18 voted 4-1 to progress its new rulemaking package. If approved the rule will replace the one put in place by the Department of Labor in 2017, a cause of constant criticism for the broker-dealer. Most notably, the Secretary of the Commonwealth of Massachusetts, William Galvin, filed a complaint in February against Arizona-based discount brokerage Scottrade, citing a violation against the rule.

In other news, the Federal Reserve and the Office of the Comptroller of the Currency released proposals suggesting tailoring an enhanced supplementary ratio, while the latter has asked for comment on stress capital buffer amendments. Both are seen as an attempt to simplify the bank capital process.

On March 20 the House voted to pass the Alleviating Stress Test Burdens to Help Investors Act, which if passed will partially repeal a Dodd-Frank Act stress test requirement requiring company stress testing for a number of financial companies, including investment companies and investment advisers, that hold over $10 billion in assets.

EMEA: locking up

Locked box contracts in M&A transactions are growing in popularity in the US, shifting the transaction risk closer to the buyer. Historically, the UK M&A market has been seen as more seller-friendly in comparison to its US counterpart. But the increase in locked box contracts in US M&A challenges this notion and could mean that some are encouraged to use US state contract law instead. However, material adverse change clauses are easier to invoke in the US, in comparison to the UK, which shifts the balance in the buyers’ favour. Linklaters M&A partner in New York Scott Sonnenblick said: "There is an almost sacrosanct ability for a buyer to have a MAC clause in a US deal." Because of this, the UK M&A contract law will remain an attractive one for sellers.

Break fees were banned in the UK seven years ago because they were said to be deterring competing bids for target companies and creating less value-creating deals. But the M&A market now is in a very different state to seven years ago and with reverse break fees remaining, despite the belief that they would disappear following the 2011 ban, it is time to bring break fees back? Graeme Sloan, M&A Global co-head at Morrison & Foerster said that there was a feeling that the ban was politically inspired, that companies were too easy to take over at the time. Other issues like the target’s board not agreeing to accept a competing bid without asking the first bidder to see if they wanted to match it were said to be more problematic than break fees.

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