PLC Global Finance update for September 2009: United Kingdom

Practical Law UK Articles 7-500-4240 (Approx. 5 pages)

PLC Global Finance update for September 2009: United Kingdom

by Norton Rose LLP

Corporate crime

Is a fair trial possible for BAE?

Kelly Hagedorn

The UK Serious Fraud Office (SFO) announced on 1 October 2009 that it will seek the Attorney-General's (AG) permission to prosecute BAE Systems (BAE) over allegations of corrupt activities in relation to deals to sell arms to Tanzania, South Africa, the Czech Republic and Romania. It has been reported (although not announced by the SFO) that this decision has been taken following the breakdown of plea negotiations.

Any agreement reached between BAE and the SFO under the Attorney-General's Guidelines on Plea Discussions in Cases of Serious or Complex Fraud (AG's Guidelines) would require a guilty plea from BAE. It would appear that this was not the issue preventing agreement; rather that they were far apart in terms of an acceptable penalty.

It is easy to understand why the negotiations may have failed. The SFO has secured only one conviction of a corporate defendant for overseas corruption (Mabey & Johnson) and that was by way of a plea agreement. Pleading guilty would be a difficult decision for the BAE directors, considering the uncertainty of a conviction at trial and the lack of precedents from which to gauge an acceptable penalty. Equally, there are obvious reasons why a plea agreement would be desirable for BAE, not least certainty as to penalty and considerable savings on legal costs.

Unless it pleads guilty, BAE can only be convicted if one or more of its senior managers is also convicted. Has the trial of the individuals and/or BAE been prejudiced by the reports in the media about the plea negotiations? It has been reported that any trial would be by a judge only and not a jury, and if so, this may not be an issue. However, the legislation that would allow a judge only trial (section 43 of the Criminal Justice Act 2003) has yet not been enacted.

There may now be a good argument for saying that a fair trial is no longer possible because any jury is bound to be improperly influenced by the knowledge that BAE was considering pleading guilty.

Financial institutions

Global financial recovery: financial institutions in the future

James Bateson

One year on from the collapse of Lehman Brothers, and in the wake of the G20 gathering in Pittsburgh, Norton Rose LLP continues to track market sentiment in relation to the global financial crisis. During these twelve months we have witnessed the implementation of legislative proposals and measures at both a national and international level, with the aim of preventing another crisis in the future. Some of these have been heavily criticised, others accepted as necessary.

More recently there has been a marked shift of sentiment in the media and business community where talk is of "green shoots" – the first tentative signs of recovery. However, opinion is divided; some fear a double-dip recession. In this respect we are at a crossroads. This Norton Rose LLP survey considers this question by looking at some of the challenges and opportunities financial institutions face as they look to their recovery. We also ask whether this global financial crisis has developed as first feared: has this been a truly global financial crisis or simply a phenomenon of the West?

Our aim is to stimulate informed debate on the issues faced by financial institutions at the current time. The survey can take as little as four minutes to complete.

Click here to start the survey.

Government policy

More regulatory transatlantic co-operation

Simon Lovegrove

In August and September there were three separate announcements by the FSA confirming greater transatlantic co-operation. These were:

In August the FSA issued a press statement regarding further co-operation with the Commodity Futures Trading Commission (CFTC) to strengthen cross-border supervision of the energy futures markets. The statement confirmed that both organisations would immediately work towards implementing strengthened surveillance over US linked energy contracts including enhanced direct access rights to trade execution and audit trail data and mutual on-site visits of exchange operators.
In mid-September the FSA and the CFTC signed a new Memorandum of Understanding (MoU) to enhance co-operation and the exchange of information relating to the supervision of cross-border clearing organisations.
The day after the MoU was signed the FSA issued a further press release stating that Hector Sants (CEO, FSA) and Mary Shapiro (chairman of the US Securities and Exchange Commission (SEC)) would explore approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers. In particular, they agreed to establish a common set of data to obtain from hedge funds and their advisers to help them identify risks. This announcement came out of a meeting of the SEC-FSA Strategic Dialogue, through which the SEC and FSA leaders meet periodically to discuss areas of mutual interest.
The press release also confirmed that their recent meeting was wide ranging covering:
- over-the-counter derivatives markets and central clearing;
- accounting issues;
- regulatory reform;
- credit rating agency oversight;
- short selling; and
- corporate governance and compensation practices.

As the FSA has already said many times this year, the global crisis has underlined how intertwined financial markets and institutions are and that there is a need for regulators around the world to work together to ensure appropriate oversight. In the coming months there will probably be more announcements from the FSA concerning greater co-operation, not just on a transatlantic basis but also on a European and international basis.

Restructuring and insolvency

DWP consults on changes to the Employer Debt Regulations

Lesley Harrold

The Department for Work and Pensions (DWP) is consulting on Amending Regulations proposing changes to the current Employer Debt Regulations, aiming to assist up to 50% of corporate restructurings, provided certain conditions are met.

A statutory debt may be triggered under section 75 of the Pensions Act 1995 (a Section 75 Debt) when a final salary scheme winds up, or where a sponsoring employer enters insolvency. A Section 75 Debt also arises when an "employment-cessation event" occurs (for example, where an employer ceases to employ active members when at least one other scheme employer continues to do so). The Amending Regulations propose changes to the definition of "employment-cessation event", so that a Section 75 Debt will not arise following certain corporate restructurings.

Two new mechanisms are proposed:

General easement. No Section 75 Debt would be triggered if:
- the exiting and receiving employers meet the "restructuring test" and the receiving employer will be "at least as likely" as the exiting employer to meet the scheme liabilities it acquires, as well as its own;
- neither employer is insolvent or is likely to become insolvent within the next 12 months;
- the exiting employer's corporate assets and employees are passed to another group employer, with the receiving employer taking on the exiting employer's pension scheme obligations; and
- the receiving employer's head office is in the UK.
De minimis easement. For small scale restructurings. There is no restructuring test but to avoid triggering a Section 75 Debt:
- the scheme's assets must exceed its liabilities measured on the Pension Protection Fund basis;
- the exiting employer must employ fewer than 2% of the total number final salary scheme members and its liabilities must not exceed GBP100,000; and
- in a rolling period of 3 years, no more than 5% of scheme members may be included in such transactions.

Both employers must give assurances regarding their current and expected solvency status over the following year.

The new provisions are expected to come into force in April 2010, with related guidance provided by the Pensions Regulator.

Tax

ECJ rules against UK - tax on shares issued into clearance service unlawful

Dominic Stuttaford

On 1 October 2009, the European Court of Justice (ECJ) ruled in favour of HSBC that the imposition by the UK of a 1.5% stamp duty reserve tax (SDRT) charge where securities were issued into a clearance service breached the 1969 Capital Duties Directive (Directive).

In 2000, HSBC acquired a French bank, partly in exchange for an issue of shares. HSBC obtained a listing on the Paris stock exchange and issued consideration shares into the French clearance service. The bank paid SDRT at 1.5%, but claimed repayment of the tax on the ground that it was unlawful under the Directive which forbids any form of taxation of an issue of shares. (The Directive does allow tax on share transfers - the UK charges SDRT at 0.5% on transfers).

HMRC argued that the 1.5% charge on entry into the clearance service was not a capital duty but operated as a "season ticket" or advance payment of SDRT in relation to future share transfers within the service, which would otherwise escape the tax. This was rejected by the ECJ, which said that the charge had no relationship with hypothetical future transfers that might never occur. The charge was an unlawful capital duty.

On the same day, HMRC published a ministerial statement. The 1.5% tax was suspended with immediate effect in respect of shares issued into a clearance service within the EU. However the Government will amend the SDRT legislation (with effect backdated to 1 October 2009) to ensure that movements of shares into and within clearance services bear their "fair share" of tax while complying with EU law.

Specifically, the current SDRT exemptions (intended to prevent a double charge) for movements between clearance services, or between depositary receipt schemes, or from one to the other, will cease to apply where no tax was paid on entry. HMRC are concerned that otherwise, for example, securities intended for the US market could be routed via a clearance service in the EU to avoid the tax altogether.

Comments

The case raises the following issues for consideration:

Issuers. This ruling is good news for issuers, who normally bear the SDRT cost. Any issuer who has paid the SDRT entry charge on issuing securities into an EU clearance service should consider a repayment claim.
Depositary receipt systems. Although this case dealt only with the tax charge in relation to a clearance service, there is also a similar UK charge on issuing securities into a depositary receipt system. The latter charge now seems potentially indefensible, and those who have paid SDRT on entry into an EU depositary receipt system should equally consider a repayment claim.
Territory. HMRC do not accept that this ruling applies in relation to a non-EU clearance service or a non-EU depositary receipt system. However an issuer who has paid the tax in such cases should consider lodging a claim.

PLC Global Finance update for September 2009: United Kingdom | Practical Law