Squire Sanders is a leader in energy, treaty investor and commercial arbitration. Its practitioners are sophisticated, flexible and globally experienced to minimize our clients exposure or to maximize the value of our clients' claims. Arbitration specialists are located in many of the firm's offices worldwide in Asia, Europe and the Americas. In fact, our lawyers have recently acted as counsel in arbitrations with aggregate claims exceeding US$6 billion.

For more information about our international dispute resolution practice, please contact George M. von Mehren.

A related issue is spring loading – the timing of option grants just before the announcement of good news or shortly after the announcement of bad news. The legality or illegality of spring loading depends on the facts and circumstances of the options grants, but the issue is a strong focus of the SEC's new executive compensation disclosure rules.

Squire Sanders advises public companies, and their boards, especially on three aspects of this issue: (1) reviewing past option grants to determine whether they have a back-dating problem, (2) reviewing their option grant policies and practices in light of evolving best practices and (3) compliance with the new SEC rules on compensation disclosure in this area, including consideration of disclosure in their next 10-Q filings.

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For more information contact Nicholas Unkovic.

"From a policy standpoint, the key focus in amending the Company Law was to encourage investment and strengthen protection for small and midsized shareholders," states Amy Sommers, national partner in Squire Sanders’ Shanghai office. Sommers added, "This was done by lowering the requirements for registered capital levels and reinvestment. It also improved supervision and remedies available to shareholders and creditors."

Revision of the Company Law also has changed the rules governing liaison offices and branches. For all of these reasons, and more, anyone sorting through the 100+ amendments in an effort to gain a clear picture of the overall situation in China will face a daunting and confusing task better suited to advisers experienced in guiding companies through the ins and outs of doing business there.

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For more information contact Amy Sommers.

Under the terms of its December 2001 World Trade Organization (WTO) accession, China committed to implement a set of reforms lowering trade barriers in various sectors of its economy including financial services. James M. Zimmerman, partner in Squire, Sanders & Dempsey L.L.P. Beijing office, observes, “In general, China is in compliance with its WTO commitments but it has, at the same time, created regulatory or procedural barriers that hinder full access for foreign companies.”

Zimmerman explains, “The new media regulations are a significant impediment to informed decisions in mergers, acquisitions and foreign direct investment transactions. Without timely and accurate financial information, due diligence efforts are stymied. This increased restriction on the flow of information sends the wrong message to both domestic and international investors.”

The new regulations may be intended to provide economic and social stability through the rigid control of information. However, that stability holds only in the short term – the lack of transparency, in the long term, may result in the flow of misinformation that leads to poor investment decisions and misjudgments that could be far more rattling than the day-to-day bumps that come from the free flow of information.

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For more information please contact James M. Zimmerman.

In early September 2006, six agencies of the People’s Republic of China (PRC) enacted the amended Regulation on Merger of Domestic Enterprise by Foreign Investor (Regulation). The significant changes include permitting share exchanges, strictly regulating overseas listings and roundtrip investment, antitrust examinations and national economic security considerations.

The Regulation now explicitly allows using stock-for-stock exchanges in acquisitions of PRC companies, provided certain requirements are met. For example, the foreign investor must be listed in an overseas public stock exchange with a price that has been stable for the preceding year. Dan Roules, partner in Squire Sanders’ Shanghai office observes, “This requirement eliminates the possibility of using share exchange for mergers involving private companies, reflecting PRC concerns about the difficulty in appraising the value of nonlisted shares.”

To take advantage of tax incentives for foreign investment, many PRC companies and citizens in recent years have set up offshore companies to invest in China by acquiring PRC domestic companies, a phenomenon known as roundtrip investment. The amended Regulation requires the Ministry of Commerce (MOFCOM) to approve the movement of money offshore for investment purposes, as well as the longstanding requirement of MOFCOM approval for the acquisition of a domestic company by an offshore company. This change is intended to limit sham foreign investment by PRC companies seeking investment incentives.

The new Regulation also requires antitrust examinations during a merger. Under a number of circumstances including third-party request, the investor must report to MOFCOM and the State Administration of Industry and Commerce. In addition, MOFCOM reporting can be triggered if the transaction will result in the transfer of control of a PRC company owning famous trademarks, traditional trade names, important industries or factors that can potentially affect the PRC’s national economic security.

Roules concludes, “These new regulations both expand and complicate the potential for foreign investment in China through mergers and acquisitions. However, I would still advise interested parties to structure transactions carefully in order to get through the approval process swiftly.”

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For more information contact Dan Roules.

But why do real estate transactions need to be reported if there are no antitrust concerns or even, as in some cases, a European element to the deal? Oliver H. Geiss, Senior Associate with Squire Sanders’ Brussels office notes, “The answer lies in the way the merger laws of Germany and the EU are structured. Those laws rely exclusively on the company group turnover of the parties involved rather than on the size of the transaction.”

Germany’s notification thresholds are comparatively low. A transaction that may affect the German market, a broadly interpreted criterion, requires notification if the companies involved have a combined worldwide turnover exceeding €500 million and one company has turnover in Germany of €25 million. For instance, if a large international investment bank acquired a portfolio of German real estate, it is likely that the transaction would need to be reported in Germany.

What kind of delay is involved? Geiss calculates, “Factoring in the time for preparation, companies should schedule at least five to six weeks for the notification and approval process in cases without antitrust concerns in Germany and seven to eight weeks at the EU level.”

The impact on transaction timing, management time and cost is significantly increased if the EU’s merger control requirements need to be met. While turnover thresholds at the EU level are generally very high, a loophole in the rules on joint ventures leads to a remarkably broad notification requirement.

Businesses need to be mindful of these EU merger rules whenever an acquired portfolio includes assets in Germany or the transaction involves two large, globally active entities – even if the deal has no apparent European component. If a transaction should fall in the notification-required category, Geiss recommends further analysis, risk assessment and guidance on possibly avoiding the requirement altogether.

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For more information contact Oliver H. Geiss

Title VIII § 5364 of the Act is of significant concern to financial transaction providers and payment systems because it compels private parties to monitor and block payments related to restricted Internet gambling transactions. What’s more, the cost of implementing this provision is going to be their responsibility. 

Cynthia Ricketts, partner in Squire Sanders’ Phoenix office, notes, “The enforcement provisions of § 5364 do not include any appropriations for establishing these policies and procedures, so the cost of compliance will fall on the financial transaction providers and payment systems that are required to implement them.”

The Act’s broad definition of financial transaction providers will likely be interpreted to include electronic funds transfer networks, third party payment processors and other participants in the Automated Clearinghouse Network.

According to Ricketts, “Payment processors should act now by reviewing client accounts and assessing whether their clients are in any way involved with an Internet gambling business. Furthermore, all financial entities should consider reviewing and revising their form contracts so that they are protected from liability for the actions of clients who may participate in an Internet gambling business.”

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For more information please contact Brian M. McQuaid.

The Thompson Memorandum posed a perilous decision for companies under criminal investigation. It sets out nine factors a federal prosecutor must consider when making a charging decision against an organization and was used as a hammer against companies in many federal districts to coerce companies into waiving their attorney-client and work product doctrine privileges or face prosecution. Repeated abuse of the Thompson Memorandum came to a head in US v. Stein, where the government threatened KPMG with indictment if it did not cut off legal fees to employees who were uncooperative with its investigation. A federal court found the government’s threat violated these employees’ constitutional rights.

Rebekah J. Poston, who has practiced criminal law for more than 25 years and is a partner in Squire Sanders’ Miami office, remarked, “Employees had become reluctant to cooperate in internal investigations for fear that what they revealed would be turned over to federal prosecutors to save the company.”

The McNulty Memorandum establishes approval requirements and mandates main Justice Department review of prosecutor requests for both nonprivileged and privileged information from companies under investigation. It also states companies can pay the legal fees of any employees involved in the investigation without a prosecutor using that fact against them, unless by doing so, companies are attempting to obstruct the government’s investigation.

If the prosecutor is authorized to ask a company to provide its nonprivileged information, the company can refuse. However, refusal can be considered as a negative factor in a prosecutor’s charging decision. On the other hand, if the prosecutor is authorized to ask a company for its privileged information and the company refuses, its refusal can not be considered as a negative factor in the prosecutor’s charging decision.

Although many companies consider the McNulty Memorandum a significant improvement over the Thompson Memorandum, concerns remain about other provisions from the Thompson Memorandum that the McNulty Memorandum did not change. Two examples are a company that continues to employ workers under government investigation and the signing of a joint defense agreement. These factors can be weighed against the company.

Nevertheless, hope is on the horizon. Senator Arlen Specter, Chairman of the US Senate Judiciary Committee, announced his introduction of the Attorney-Client Protection Act of 2006. This bill seeks to protect the sanctity of the attorney-client relationship by prohibiting federal investigations from requesting waivers of attorney-client privilege or the work product doctrine. It also prohibits prosecutors them from conditioning any charging decision or cooperation credit on waiver or nonwaiver of privilege, the payment of an employee’s legal fees, the continued employment of a person under investigation or the signing of a joint defense agreement. The bill also preserves a company’s ability to voluntarily offer internal investigation findings to federal prosecutors, but only if such an offer is unsolicited, while allowing prosecutors to seek materials that they believe are not privileged.

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For more information contact Rebekah J. Poston.

Recent amendments to the Federal Rules of Civil Procedure apply to all cases filed after December 1, 2006 and “insofar as just and practicable” to all pending proceedings. These amendments formalize existing authority and best practices regarding the procedures for discovery of electronically stored information and place a premium on being proactive, practical and transparent.

The rules make it essential for lawyers to understand a company’s computer network and systems. They must also understand the various forms of document production such as native files, TIFF, PDF and so on, as well as a client’s preferred way to produce and receive documents. These new burdens must be shouldered in order to take advantage of the standards set forth in the new rules, such as the reasonable accessibility of electronically stored information and the “safe harbor” from sanctions.

Scott Kane, partner in Squire Sanders’ Cincinnati office, notes, “Businesses will need to work closely with their counsel at an early stage, prior to litigation, to discuss the accessibility of all potential sources of discoverable information. Businesses must ensure that counsel does not commit them to costly or indefensible positions because of a failure to understand the client’s data systems.”

He adds that it’s important to maintain perspective about how the standards interact with the specific case, not your technology. “What might be ‘reasonably accessible’ in a US$100 million patent case is not necessarily ‘reasonably accessible’ in a US$100,000 contract dispute.”

Therein lies the strength of the new rules – they encourage measured, appropriate behavior without inflicting undue burdens. To take advantage of these rules, however, businesses and counsel must be prepared.

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For more information contact Scott Kane.

Why so few exits through IPO? In short, PE funds aren't active in the industries seeing lots of IPO action. Instead, PE in Russia targets maturing industries not ready for IPO. For the time being, PE is expected to stick with other options. 

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For more information contact David Wack.

Carolyn Buller, a Squire Sanders partner who counsels companies on managing internal reviews and restatements, says that companies can find themselves in murky waters.

"Some of the backdating cases involve fairly clear-cut fraud like backdating the minutes of a compensation committee meeting to a date when the stock price was lower. However, many of the companies that have announced an investigation involve much more difficult issues of the relationship between the date of grant and the movement of the stock price either immediately before of after that grant."

Buller adds, "In these cases, the company might have engaged in bad faith market manipulation. But they very well may not have; the stock movement around the date of grant might have been an unexpected coincidence. Sorting out the facts and intentions in these cases will be important."

Best practices for granting options going forward will be an ongoing challenge for compensation committees as they try to balance granting options at times that are least likely to raise questions and maintaining options as an effective recruiting and retention compensation practice.

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For more information contact Carolyn Buller.

“The challenges for Rosneft and other Russian public companies are more in the post-IPO period," states David Wack, partner in the Moscow office of Squire Sanders. "Most Russian companies tend to believe that an IPO is the end of the story and it is all wine and red roses afterwards. They are under-prepared for the rigors of market as public companies,” added Wack, who recently hosted a three-day conference in Moscow on private equity investments and exit strategies.

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For more information contact David Wack.

On September 1, 2006 the target company distributed a proxy statement soliciting shareholder voting on several issues. UNITE HERE, owning but a few shares of stock in the company, filed a motion claiming the company had failed to disclose information regarding the ownership of a jet by the company's chairman, familial relationships with outside counsel and a transaction with a local racetrack. As a remedy, it sought to have these disclosures disseminated before the company's October 10 shareholder meeting, have the results of the proxy vote invalidated or have the meeting rescheduled.

UNITE HERE argued that the disclosures were relevant to the issues on which shareholders were being asked to vote because they reflected the character of the individuals being elected and the conduct of the company. A federal judge ruled otherwise, however, and denied UNITE HERE's motion. D. Lewis Clark, a partner in Squire Sanders' Columbus and New York offices, notes, "The judge determined UNITE HERE had no belief in its claims and intended only to harass the corporation to leverage its unionizing efforts."

Invoking securities law and proxy voting is becoming a common tactic as unions attempt to organize companies and negotiate contracts while trying to by-pass democratic secret ballot elections. Clark adds, "Companies should be aware that unions have expanded their methods beyond strikes and boycotts. It is imperative that companies file accurate securities disclosure statements to protect themselves from potential harassment."

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For more information please contact D. Lewis Clark, Jr.

China’s populace, angry with the government for its tolerance of egregious polluters, has recently taken environmental enforcement into its own hands. Riots have erupted in several areas as polluting industrial facilities are increasingly viewed to cause serious health problems and deaths. Internal unrest has led Zhou Shengxian, head of China’s State Environmental Protection Administration, to declare that pollution poses “a great threat to social stability.” And in China, threats to social stability are taken extremely seriously.

On top of that attention-getter, an estimated 15,000 journalists are to descend on China to cover the 2008 Beijing Olympics, and press scrutiny is already intensifying. Charles R. McElwee II of Squire Sanders’ Shanghai offices observes, “The PRC government wants to present the press with a cleaner China – it wants the story to be about China’s environmental beauty, not environmental degradation. They have also become increasingly aware that domestic pollution can have international consequences, and China does not want to be seen as a bad international citizen.”

Although China’s environmental eye has been trained mostly on incidents involving state- and township-owned enterprises, foreign-invested enterprises can’t afford to be complacent. In fact, foreign-invested enterprises with fewer community connections could prove to be safer, easier targets for government enforcement.

McElwee advises, “It will not be long before China gets tough on those who break environmental laws to curb pollution ahead of the Olympics and ease social pressure, and companies currently in China or thinking about coming to China should examine their environmental compliance procedures and be aware of the evolving situation.”

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For more information contact Charles R. McElwee II.

With the advent of Linden Lab’s Second Life, virtual reality has begun to fulfill its much-hyped potential as an immersive, malleable world capable of sustaining personal, professional and commercial relationships. With a click of your mouse, you can enter another world of work and play. After converting to the “local” currency, you can buy and sell goods and property, rent a storefront, invent things and generally engage in all manner of commerce. With this potential, however, have come legal questions that defy simple answers.

On average, more than US$1 million in commerce changes hands each day among Second Life residents’ avatars – users’ detailed “in-world” alter egos – mostly for avatar accessories such as clothing, hairstyles and software add-ons that allow avatar actions. This begs the question, who owns the intellectual property rights to these items?

Linden Lab’s terms of service include provisions that grant Second Life users the property rights to the works they create in-world, an unprecedented move that surely fuels the Second Life economy. However, there are no legal protections in place in Second Life, and it is unclear under what jurisdiction it would fall in the real world if a lawsuit arising from a copyright infringement in Linden Lab’s virtual world were to be filed. In short, Second Life is at the moment a completely unregulated US$35 million-per-month economy devoid of any legal framework. Surely this situation will not go unchallenged.

With 350,000 Second Life residents, should Linden Lab be required, much like a de facto government, to institute such a framework to protect its users from one another? Or is everything that occurs in Second Life a contractual issue governed by the established terms of service? The popularity, momentum and commercial potential of virtual realities ensure these questions will be answered in time.

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For more information please contact Brent Britton.

On one hand, employers must avoid running afoul of their employees’ legal rights. However, these concerns must be balanced with employers’ potential liability for defamatory and harassing comments, the losses associated with disclosure of sensitive information and their data privacy obligations.

Weblogs, MySpace and Internet bulletin boards all pose risks for employees and employers alike. Individual state laws, federal statutes and constitutional protections do not, in all cases, provide employees carte blanche to publish, even anonymously, content that is anti-employer or in violation of established company policy. Despite the fact that blogs come under the umbrella of personal expression, disciplinary action can be levied against employees for the content they put on the internet.

Conversely, employers need to be careful to avoid running afoul of employee privacy rights, rights under the National Labor Relations Act, antidiscrimination statutes and whistleblowing statutes. Further, if the blogging is done off-duty on an employee’s personal computer, the employer must be aware of state and local statutes prohibiting discipline for lawful off-duty conduct.

Against the backdrop of the employer/employee relationship is the very real risk of liability to a third party resulting from Internet activity. Employee Internet activity can risk the release of private data, trade secrets and other sensitive material that can put a company in a precarious legal position.

Because these workplace issues have only recently come to light, case law remains murky on the subject. Courts have ruled both for and against employers in Internet activity-related suits. “Employers should establish and communicate a written Internet content policy,” advises William Nolan, partner in Squire Sanders’ Columbus office. “In the absence of a communicated policy, employers face additional risk of liability for employee Internet activity and wrongful termination suits.”

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For more information contact William Nolan, D. Lewis Clark, Jr. or Chandra Bowling.