Made in Germany

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No. 2 – June 11, 2015

In this issue Focus India – M&A transactions – Warranty insurance – FACTA – Trade secrets –

Supervisory board – Compliance – Corporate governance – IP securities

2 – Editorial/content – BLM – No. 2 – June 11, 2015

Business Law Magazine:Cooperation with ACCE

Dear Reader,

We are proud to inform you that we have started a cooperation with the Association of Corporate Counsel Europe (ACCE, www.acce.com). Carsten Lüers, Member of the Board of ACCE and Managing Counsel EMEA of Verizon has also joined our significantly expanded advisory board. We also welcome Prof. Dr. Michael Smets, Saïd Business School, University of Oxford, and Dr. Christian Rau, General Counsel EMEA of Davita, an international healthcare company headquartered in the US.

Furthermore, in this issue we cover a wide range of subjects, from German law to questions concerning trade secrets at EU level. Internationally, we take a look at the investment climate in India and introduce you to recent developments in the global fight against tax evasion and money laundering—all important, relevant topics for conducting your daily business—so enjoy reading!

Yours sincerely,

Thomas Wegerich

Professor Dr. Thomas Wegerich, Publisher, Business Law Magazine

wegerich@businesslaw-magazine.com

Focus3 _ Made in India—made by Germany

By Bernhard Steinrücke

Compliance/financial markets5 _ The OECD common reporting

standard (CRS): FATCA is going global The CRS poses new compliance challenges for financial institutions By Dr. Hans Martin Schmid and Dr. Eike W. Grunert

EU law/international trade9 _ Handle with care

The protection of trade secrets—exciting new developments coming at the EU level By Dr. Stefan Dittmer

Mergers & acquisitions14 _ Bridging the gap

Overview of recent trends in warranty insurance in M&A transactions By Andreas Stilcken and John Cunningham

Intellectual property/ corporate transactions17 _ A textbook approach is not enough

Intellectual property as security in corporate transactions By Christoph J. Crützen

Corporate governance/company law20 _ Increasing professionalism

Stricter requirements for the supervisory boards of listed companies By Dr. Martina Schmid

25_ Advisory board26_ Strategic partners

27_ Cooperation partners28_ Imprint

3 – Focus – BLM – No. 2 – June 11, 2015

When German global players that are active in India like BASF, Bayer, Bosch, DHL, KSB

Pumps, Merck, Schaeffler Group, Siemens or ZF present their 2014 results to their boards these days, some of the CEOs might rub their eyes and ask their CFOs if they’ve got their numbers right from their Indian subsidiaries. In almost all cases, the book value has doubled, if not tripled, from the one year to the next. Indeed, the Indian Sensex has gone up by 30%, and yes, the rupee has strengthened by 10% against the euro, but outperforming the market with increases in the stock prices between 80 and 200% certainly comes as a pleasant surprise. The market value of the 10 largest German companies listed in India alone stands at €27.9 billion. Considering the fact that this only reflects the performance German companies listed in India, one can only speculate as to how non-listed German companies in India have done.

German companies in India: a success story

In many cases, it is well known that German companies in India are market leaders and have

become true success stories over the years. Allianz Insurance, along with their Indian joint-venture partner Bajaj, has become the second largest foreign insurer and the clear leader in the life and general insurance industry (including health insurance) in a span of just 14 years. With more than 15,000 employees and more than 100,000 certified exclusive agents, it is a unique success story for the Allianz group globally and a favorite in the Asia-Pacific region. DHL, as part of Deutsche Post, the global logistic leader, is not only listed in India as Blue Dart Express, but also has its own airline and is the leader in the German logistics industry in India. This important sector is well represented by other well-known names like DB Schenker, Hapag-Lloyd, Dachser, Hellman, Lufthansa Cargo, Hamburg-Süd and Rhenus, just to name a few. The Bosch Group, the largest German industrial employer India, is not only a household name, but with many of its products represents a distinct market leader in the country, known for its unique quality and competitiveness. With recognizable names like Audi, BMW, Mercedes

and Porsche, German car manufacturers have a market share of around 90% in the luxury class and are the undisputed kings of the road. Latecomer Volkswagen has also not only managed to penetrate the Indian market and become very visible with its Polos and Ventos, but also to engage India as a manufacturing hub for exporting tens of thousands of cars to other emerging markets like Mexico. For Deutsche Bank, India is one of the best performing markets globally with €1.7 billion under capital. For SAP, the Bangalore R&D lab is the second largest after its headquarters in Waldorf, and a critical element for SAP’s global success story. Without the roughly 7,000 Indian software engineers in its ranks, SAP would hardly be competitive internationally. ThyssenKrupp, too, has been a household name in India for decades and has not only been serving the Indian market, but also its clientele throughout the world. The engineering company UHDE, especially, has been designing and commissioning global UHDE projects and it certainly came as no surprise when the long time UHDE India CEO was installed as the global

UHDE CEO. This kind of India expertise also enabled the long time Bosch India MD to become the global Bosch Rexroth CEO.

From cash and carry to Bharat Benz

Metro Cash and Carry is the only non-Indian cash and carry company that was able to conquer the Indian wholesale market and is expanding against all odds. The Daimler group has not only invested €800 million in its Indian commercial vehicle plant, but with Bharat Benz has even created its own brand for Daimler, made in India. The Bertelsmann group, Europe’s largest publishing house under Random House, is also India’s largest publisher and with Avarto Bertelsmann has one of its largest back office operations in India. Linde Group, the German engineering and gas giant in India, has an order volume of about €2 billion mainly from the petrochemical industry and thus is a market leader in the country. In the airline industry, Lufthansa is not only Europe’s largest carrier to the sub-continent, but also exclusively runs its “Miles and More” loyalty program out of –>

Made in India—made by Germany By Bernhard Steinrücke

Bernhard Steinrücke, Director General, Indo-German Chamber of Commerce

steinruecke@indo-german.com

Gurgaon, thus fully reliant on India. Schloeman Siemag, the world leader in steel plant equip-ment, is supplier to more or less every Indian steel plant and thus critical for the whole Indian steel industry. Another German global player, Deutsche Boerse, is not only a 5% shareholder in Bombay Stock Exchange, but also manages the whole derivative business of BSE on its platform. India is also home to many of the Germany’s success stories such as Lapp, EFD Induction, Festo, Rittal, R. Stahl, EBM Pabst, Mahle, M+W, Eisen-mann, GEZE, ElringKlinger, Häfele, SEW EU-RODRIVE, Ottobock, Wirtgen, Dorma, Kübler, Baer Shoes, and many more.

Five of the 30 German DAX listed companies have key Indian personnel, including Anshu Jain as Co-CEO of the Deutsche Bank (Note from the Editor: He has recently announced his resignation for the end of June 2015), Sanjeev Gandhi, Member of the Board of BASF SE, Sanjiv Lamba, Member of the Board of Linde AG and Arunjai Mittal, Member of the Board of Infineon and Kamesh Goyal as well as Head of Group Planning

and Controlling, Allianz SE. With TÜV Rheinland, TÜV Süd and TÜV Nord, the German quality control institutions are also present throughout the country, thus supporting Indian and non-Indian companies to achieve global standards.

Investment in India: Germany as a front-runner

Germany has always been the frontrunner when it comes to investments in India, be it with Rourkela after the Second World War, or following the liberalization of the Indian economy in the 1990s, or after 2003 during the revival of the Indian economy following the Asia crises. Even in the last three years, when the Indian economy slowed down, it was German companies, big and small, who invested heavily so that as of today, a German factory is opened every month and German companies are anxious to produce goods and provide services in India. At this year’s Hannover Fair, many of these companies have shown the world that “Made in India—made by Germany” is already a reality and a perfect win-win situation.

In addition to manufacturing, skills are the other area where Germany proves to be a role model for Mr. Modi, and to be sure, there can be “no making without the skill”. Here, too, Germany and German companies have contributed a great deal in India. The vocational training provided for decades by Bosch in Bangalore is probably the best in the country, as demonstrated by the first prizes won almost every year by their apprentices at pan-India competitions. Volkswagen has its own in-house training center for mechatronics in Chakan, and the GTTI technical training institute has just been recognized with an award as the best vocational training institute in India. The company Würth offers vocational training for their staff, much in line with the German system of dual education, and Siemens is putting up a state-of-the-art training center with a three-year dual course for blue-collar workers. The Indo-German Chamber of Commerce introduced vocational training for the Industriekaufmann/Industriekauffrau (manage-ment trainees) almost 25 years ago and has trained more than 1,000 Indians who are “making it in India” with German companies today. And

even when it comes to R&D, German companies are using the huge potential that India has to offer. For instance, Mercedes, that is vastly expanding its biggest R&D center outside Germany in Bangalore, or BASF, that is investing €60 million in a new state-of-the-art R&D hub in Mumbai, or Bosch and Siemens that are using India as their hubs for frugal and smart engineer-ing. And the much renowned Nano, along with its 18 German suppliers, is a car that is the result of a combination of Indian vision and German innovation. In a nutshell: Build, deliver and research in India—a tremendous basis for a bright Indo-German future. <–

www.indo-german.com

Editor`s note: In issue 3/2015 of Business Law Magazine you will find an in-depth article on “Investments in India” written by Markus Burianski and Nandan Nelivigi (White & Case).

4 – Focus – BLM – No. 2 – June 11, 2015

The OECD common reporting standard (CRS): FATCA is going globalThe CRS poses new compliance challenges for financial institutionsBy Dr. Hans Martin Schmid and Dr. Eike W. Grunert

Recently, financial institutions in Germany and throughout the world have had to comply

with ever-increasing regulatory require-ments and enforcement activity. Many of those requirements were imposed in the wake of the 2008 financial crisis,

aimed at making the global financial system less vulnerable to incidents such as the subprime mortgage crisis. Additionally, a great number of require-ments were—and still are—based on increasing efforts to fight money laundering, terrorist financing and tax

evasion. Indeed, states have expanded their focus beyond offenders and are now also targeting financial institutions, not only as potential co-perpetrators of these crimes but also as involuntary (but powerful) assistants to the authorities in collecting necessary facts and evidence.

The U.S.: alone at the van-guard for a long time

When it comes to fighting tax evasion through offshore accounts, until very re-cently, the United States was somewhat alone at the vanguard. Most notably, –>

5 – Compliance/financial markets – BLM – No. 2 – June 11, 2015

The OECD Common Reporting Standards will facilitate worldwide enforcement of money laundering and tax evasion crimes. © ArtmannWitte/iStock/Thinkstock/Getty Images

over the past years the U.S. succeeded in rolling out the worldwide implemen-tation of the U.S. Foreign Account Tax Compliance Act (FATCA) that provides for, among other things, the automatic exchange of information between the U.S. and states and financial institutions that commit to FATCA reporting, requir-ing the automatic disclosure of informa-tion relating to U.S. account holders who have preexisting accounts or who open new accounts with financial institu-tions in FATCA-participating countries.

Yet fighting tax evasion is a common interest and challenge for jurisdictions all over the world. Cooperation across national boundaries and the automatic exchange of financial account infor-mation between tax authorities are considered essential in this fight. These goals led to the development of the CRS, a regime similar to FATCA but creat-ing reciprocity among dozens of states. Financial institutions will be facing the impending implementation of this global compliance burden, increasing the risks and costs of servicing those custom-ers who hold and manage investments through financial institutions outside of their country of tax residence.

The imminent CRS has a relatively short history. On February 13, 2014, the Or-

ganization for Economic Cooperation and Development (OECD), following initiatives by finance ministers and central banks of the G20 member states, released a global “Standard for Automatic Exchange of Financial Account Information”. The new standard uses the international FATCA regime as a blueprint. If implemented as widely as scheduled, it will lead to what perhaps can best be described as “Global FATCA”, comprising the automatic exchange of financial account informa-tion between all states that commit to participate. The standard consists of a model bilateral agreement between the participating CRS reporting states, cover-ing data protection issues and procedures for collaborating on compliance and en-forcement between national governmen-tal agencies. The CRS, an annex to the standard, describes due diligence require-ments for financial institutions, including the specific types of accounts that they must identify and the scope of data that needs to be reported on those accounts.

Next step: early adopter states and others are on track

By October 2014, around 60 so-called “early adopter states”, including Germany, had committed to swiftly implement CRS in domestic laws and to exchange financial account data starting as early

as September 2017. Another 40 states have agreed to start data exchange in 2018, and additional states may follow.

>>Financial accounts to be re-ported under CRS include depository and custodial accounts as well as equity or debt interest in the financial institution itself

<<Financial institutions that have already implemented processes and systems for FATCA aim to leverage those processes for CRS. The main differences between CRS and FATCA are driven by the multilateral nature of CRS, and by FATCA criteria that are specific to the U.S., including the U.S. concept of taxation on the basis of citizenship, and the presence of a significant and compre-hensive FATCA withholding tax. Notably, the FATCA regime is limited to reporting on financial data of U.S. account holders only, and thus the volume of data required to be collected and reported under CRS will be tremendously higher, covering data on all financial accounts whose direct or indirect holders are tax residents in any of more than 100 participating states. Further, as states commit to participation over time, report-ing under CRS will be implemented incre-

mentally, requiring financial institutions to observe multiple deviating deadlines as new CRS reporting states join, and further add-ing to the complexity of implementation.

CRS reporting will be mandatory for a range of financial institutions includ-ing custodial institutions, depositary institutions, investment entities or specified insurance companies. Branches of foreign financial institutions that are located in any of the CRS report-ing states will also be subject to CRS. Financial accounts to be reported under CRS include depository and custodial accounts as well as equity or debt inter-est in the financial institution itself.

CRS rules distinguish between individual/entity accounts and preexisting/new ac-counts, and include requirements to look through passive entities to report on the controlling persons. With regard to preexist-ing accounts, financial institutions will be obligated to perform comprehensive due diligence throughout their customer data to assess the tax residence of all account holders and controlling persons. Mandatory due diligence requirements include elec-tronic searches for indicia of tax residency in another CRS reporting state such as current mailing or residency address, telephone numbers, outbound standing instruc-tions, powers of attorney or signature –>

6 – Compliance/financial markets – BLM – No. 2 – June 11, 2015

7 – Compliance/financial markets – BLM – No. 2 – June 11, 2015

authorities granted to persons resident abroad, and hold-mail instructions or an “in-care-of” address in another CRS reporting state, if that in-care-of ad-dress is the sole address on file for the account holder or controlling person.

>>With regard to preexisting ac-counts, financial institutions will be obligated to perform comprehensive due diligence throughout their customer data to assess the tax resi-dence of all account holders and controlling persons

<<For accounts exceeding $1 million in value, due diligence requirements further include manual searches through certain paper records unless a financial institution’s electronically searchable data includes fields for, and reliably captures, all of the informa-tion to be searched, as well as inquiries to relationship managers regarding their actual knowledge about the account holder’s tax residency.

For new customers, financial institu-tions will have to collect self-certifica-

tions regarding tax residency. For pre-existing individual accounts, financial institutions will be obliged to review accounts without application of any de minimis threshold. Preexisting entity accounts below $250,000 in value, however, will not need to be reviewed under CRS by the financial institutions.

Financial information to be reported under CRS includes the name, address, tax identification number (TIN), date and place of birth of each account holder and controlling person (or any such relevant information for legal entities) with tax residency in one or more other CRS reporting state(s). Moreover, account number, account balance or value and total gross amounts of interest, dividends, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account, or pay-ments made from the account have to be reported. Financial institutions are required to report this information to their national tax authority or other competent authority. In Germany, this will be the Federal Central Tax Office (Bundeszentralamt für Steuern). These authorities will, in turn, provide the information to the competent authori-ties in all other CRS reporting states. –>

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For the early adopter states, including Germany, the expected timeline for re-viewing, identifying and reporting on the existence of reportable accounts is the end of December 2016 for accounts with a value above $1 million, and the end of De-cember 2017 for accounts of lower value. Reporting of the actual detailed account information as described above to the other CRS reporting states is due by the end of September of the following year.

Outlook: further challenges ahead?

Will the impacts of CRS be limited to the costly compliance burden for financial institutions, or can further challenges be expected? Inevitably, the automatic ex-change of detailed account information through CRS will significantly increase the opportunities for further investiga-tions through the taxation authorities in all CRS reporting states, including quick and cost-effective technology-based reviews. Thus, the new transparency on a global basis may lead to enhanced enforcement actions, directed not only against tax evaders, but also against financial institutions. Ultimately, and probably in exceptional cases only, this may include allegations of banks col-laborating in money laundering, terrorist financing or tax evasion. Examples might include (a) actively supporting customers

in hiding undeclared assets by disguis-ing account holder identities through nominees or sham legal entities (b) mak-ing incorrect statements about beneficial owners in certifications that are relevant for taxation or (c) target-oriented recruit-ing of foreign investors using strict local banking secrecy laws as a shield against disclosure. Financial institutions should be aware of this risk, and, when prepar-ing to implement the new CRS standards, take measures to secure and compile information that may become relevant to address such types of allegations where appropriate. Notably, financial institu-tions should consider internal investiga-tions or other remediating measures to assess and mitigate potential risks in this regard. Irrespective of implementation costs and other challenges triggered, CRS will undoubtedly become an impor-tant tool for the global fight against tax evasion through offshore accounts. <–

www.gibsondunn.com

8 – Compliance/financial markets – BLM – No. 2 – June 11, 2015

Dr. Eike W. Grunert, Attorney at Law, Associate, Gibson, Dunn & Crutcher LLP, Munich

egrunert@gibsondunn.com

Dr. Hans Martin Schmid, Attorney at Law, Partner, Gibson, Dunn & Crutcher LLP, Munich

mschmid@gibsondunn.com

9 – EU law/international trade – BLM – No. 2 – June 11, 2015

Handle with careThe protection of trade secrets—exciting new developments coming at the EU levelBy Dr. Stefan Dittmer

W hat is a “trade secret”? Why protect it, and why does the EU care? How

does trade secrets protection affect competition and innovation, and does it restrict workers’ mobility? This arti-cle will try to present answers to these questions and draw attention to a legislative initiative bringing the protec-tion of trade secrets to a new level.

What is a trade secret?

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) defines trade secrets as information which is secret in the sense that (a) it is not generally known or readily accessible to persons normally dealing with the kind of information (b) has commercial value because it is secret and (c) has been subject to reasonable steps by the person lawfully in control of the information to keep it secret (Article 39 Sec. 2 TRIPS).

Why protect trade secrets?

Trade secrets are enormously relevant. Just like patents, they are often the

foundation of a company’s commercial success. Unlike patents, their lifespan is theoretically unlimited, but unlike reg-istered intellectual property rights, they are extremely vulnerable. They are not an intellectual property right, although some question this, and their commercial value will diminish when they become commonly known. Innovative companies, in particular SMEs, rely heavily on trade secrets and often prefer trade secrets protection over the option of applying for the patent registration of an invention. Additionally, for those who will eventually rely on patent protection, trade secrets are often a pre-stage of an invention on its way to becoming patentable. And trade secrets need not be technical. The effectiveness of a marketing campaign may depend on maintaining the secrecy of its concept. “Undisclosed business information” may properly describe this variety of undisclosed information.

But why deal in legislation with protect-ing trade secrets when protection can be obtained by keeping information secret and by imposing a secrecy –>

Trade secrets are often the foundation of a company’s commercial success. © RynioProductions/iStock/Thinkstock/Getty Images

10 – EU law/international trade – BLM – No. 2 – June 11, 2015

obligation on third parties to whom secret information shall be disclosed? A simple but correct answer is that statu-tory protection of trade secrets will lower the costs of keeping information secret. More importantly, the transfer of know-how will be facilitated, and competi-tion and innovation will be fostered.

Why does the EU care?

National legislators have recognized these mechanisms and given attention to the legal protection of trade secrets. But they have done so in very differ-ent ways, even across Member States of the EU. The resulting patchwork of legal protection, including inconsisten-cies in legal concepts and instruments for the enforcement of trade secrets, contrasting sharply with the widespread use and commercial relevance of trade secrets, has led to uncertainty among businesses and created obstacles to cross-border transactions and know-how transfer involving trade secrets.

This is why, in November 2013, as a part of the “Europe 2020 Flagship Initiative Innovation Union”, the Commission presented a proposal for a “DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of undisclosed know-how and business

information (trade secrets) against their unlawful acquisition, use and disclosure” (http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52013PC0813) (the “Directive”). Meanwhile, the legislative process is progressing, but some issues remain to be resolved and the wording of the Directive has yet to be finalized.

The content of the Directive

Let’s take a look at a few key ele-ments of the Directive and put them in context with the current situa-tion familiar to the German reader.

Definition of the term “trade secret”

The title of the Directive summarizes undisclosed know-how and business in-formation under the term “trade secrets”, explaining why the definition and sub-sequent provisions of the draft Directive only use the term “trade secrets”. Consist-ent with the definition of “undisclosed information” pursuant to Article 39 of the TRIPS Agreement, Article 2 of the Direc-tive defines “trade secrets” as information that (a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, gener-ally known among or readily accessible to persons within the circles that normally deal with the kind of information in ques-

tion (b) has commercial value because it is secret and (c) has been subject to reasonable steps under the circum-stances, by the person lawfully in control of the information, to keep it secret.

Not fully consistent with that, and in the absence of any statutory definition under German law, the German courts require (a) the intention of the person lawfully in control of the information to keep it secret and (b) that such intention rest upon a sufficient commercial interest of that person. In practice, however, the courts routinely assume this intention and do not undertake any balancing of conflicting interests of the parties concerned in the context of examining whether an infor-mation qualifies as a trade secret. Hence, the practical effect of these extra require-ments will be minimal. Other, less obvious, differences in the respective definitions will not have any material effects either.

Infringing activities

More fundamental are the differ-ences between Article 3 of the Directive, prohibiting the unlawful acquisition, use and disclosure of trade secrets, and the prerequisites whereby, pursuant to German law, an infringement can be prohibited. While German law of-fers the trade secret holder a claim for

injunction against infringing activities irrespective of intent or negligence on the part of the infringer, the concept of the Directive requires intent, gross negligence or negligence as constitu-tive elements of the unlawfulness of the acquisition, use or disclosure of a trade secret. This has encountered harsh criti-cism from the German Association for the Protection of Intellectual Property (GRUR e.V.; http://www.grur.org/uploads/tx_gstatement/2014-03-19_GRUR_Stel-lungnahme_zum_Know-how-Schutz.pdf), and may yet be modified in the further course of the legislative process.

Where the Directive defines “infringing goods” as “goods whose design, quality, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, used or disclosed” (Article 2 no. 4 of the Directive), it is unclear how an infringement can be derived from the marketing of a product whose design, quality or manufacturing process have not benefited from trade secrets unlawfully acquired, used or disclosed. Most likely, the purpose of that part of the definition is to indicate that, when the design, quality or manufactur-ing process of a product benefits from trade secrets unlawfully acquired, used or disclosed, the marketing of such prod-uct shall be deemed unlawful, too. –>

11 – EU law/international trade – BLM – No. 2 – June 11, 2015

More critically, the Directive does not sufficiently clarify that trade secrets can relate not only to physical goods but also to services, and that measures against the unlawful acquisition, use or disclosure of a trade secret must also be available in relation to services.

Exceptions to infringing activities

The exceptions to the protection of trade secrets are another subject matter wherein the Directive materially differs from the familiar German approach. In addition to activities widely accepted as lawful means of the acquisition of a trade secret, the Directive expressly allows reverse engineering, provided the product or object concerned has been made available to the public or is otherwise lawfully in the posses-sion of the acquirer of the information (Article 4 Sec. 1 lit b of the Directive). In contrast to that, legal doctrine and case law in Germany to date regarded reverse engineering as unlawful unless the technical information embodied in an object can be considered to have become obvious as a result of the object being made available to the public. The U.S. and many other EU countries have been following the approach of the Directive for a long time. Inevitably, Ger-many will have to adopt that position.

Further, the Directive stipulates that the legal remedies provided for in the Directive against the acquisition, use or disclosure of a trade secret shall not be available, inter alia, if someone, by acquiring, using or disclosing a trade secret, (a) makes legitimate use of the right to freedom of expression and information (b) reveals misconduct, wrongdoing or illegal activity on the part of the trade secret holder, provid-ed that the acquisition, use or disclo-sure of the trade secret was necessary for such revelation and that the reveal-ing party acted in the public interest (“whistleblowing”) or (c) acted for the purpose of protecting a legitimate in-terest (Article 4 Sec. 2 of the Directive).

While, quite clearly, these exceptions are not meant to provide blanket excuses for the infringement of trade secrets by simple reference to a fun-damental right of the infringer, they have raised concerns and attracted significant attention in discussions and statements accompanying the legisla-tion (for the statement of GRUR e.V. see http://www.grur.org/uploads/tx_gstatement/2014-03-19_GRUR_Stel-lungnahme_zum_Know-how-Schutz.pdf). The objective of these discussions is to ensure that the Directive clarifies that for such an exception to apply –>

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12 – EU law/international trade – BLM – No. 2 – June 11, 2015

the interests of the person acquiring, using or disclosing a trade secret must outweigh those of the trade secret holder.

Limitation period

The Directive proposes that civil re-dress may be sought “within at least one year but not more than two years after the date on which the applicant became aware, or had reason to become aware, of the last fact giving rise to the action” (Article 7 of the Directive).

The wisdom of introducing a limitation period applicable specifically to trade secrets and differing from periods ap-plicable to intellectual property rights is debatable; the proposed length of the period appears to be quite short because the applicant may need more time from the first suspicion of an infringement to collect evidence sufficiently sub-stantive to justify bringing an action for infringement. For example, by the time the results of criminal investiga-tions against the alleged infringer allow an applicant to verify the validity of a suspicion of an infringement, the limitation period may have expired. The words “reason to become aware of the last fact giving rise to the action” do not reliably ensure that the limita-tion period not start prematurely.

Measures and remedies

Among the measures stipulated by the Directive, such as the cessation or prohi-bition of the use or disclosure of a trade secret, the prohibition to produce, offer, place on the market, use, import, export or store infringing goods for those purposes, and the seizure of suspected infringing goods (Article 9 Sec. 1 and Article 11 Sec. 1 of the Directive), the prohibition of transit is not included. Regarding the ongoing dis-cussion on the proposed revisions to the Community Trademark Regulation and the Trademark Directive advocating effective instruments against the transit of trade-mark infringing goods, it would be worth-while to consider providing for a similar instrument in the context of the Directive.

Procedures

Most notably, and within the context of the obligation of the Member States to ensure the availability of civil redress against the unlawful acquisition, use and disclosure of trade secrets, the Direc-tive stipulates that Member States take measures to preserve the confidential-ity of trade secrets in the course of legal proceedings (Article 8 of the Directive).

This subject matter is of highest rel-evance because, for the uncertainty over

whether the applicable rules of civil procedure provide sufficient safeguards against the disclosure of confidential information to the adverse party and to the public, trade secret holders suspicious of an infringement of a secret by a third party have been prevented from seeking civil redress. Uncertainties arise where the claimant must identify and disclose the trade secret for the purpose of sup-porting the claim against the alleged infringer, and where the alleged infringer (often a competitor), for reasons of “fair trial” principles, must be given access to that confidential information. Conversely, an effective defense may require the defendant to disclose and make accessi-ble to the other party information falling under the definition of trade secrets.

With certain limitations, the disclosure of trade secrets to the public in the course of a civil action can be prevented by a court order excluding the public from oral hearings of the matter. More fun-damental shortcomings of the current procedural regime arise from the fact that, in many cases, the trade secret is the very subject matter of the dispute, and that the contradictory discussion of that subject matter, at least in prin-ciple, must not be restricted. Enforcing that principle, however, would mean that, by suing the alleged infringer, the

trade secret holder would disclose and thereby lose the secret with certainty, or otherwise risk losing the action.

Among the measures most frequently proposed in the interest of maintain-ing the secrecy of information is an “in camera” procedure wherein the secret information is disclosed to the court, but not to the adverse party. Interpreta-tions of the term “in camera” differ in that some advocate that the parties’ counsel shall have access to the confi-dential information while others want to exclude counsel from that informa-tion, too. Allowing counsel to access the adverse party’s confidential information would require setting up an informa-tion barrier between counsel and party that, in turn, may create conflicts with counsel’s duties under the attorney-client relationship. To avoid such conflicts, another variation of the “in camera” concept is to appoint an independent expert, such as a certified accountant, made subject to defined rights of dis-closure and confidentialiy obligations.

Apart from the significant degree of limitation such measures would im-pose on fundamental procedural rights of the adverse party, neither of these measures could prevent the ultimate (and unrestricted) disclosure –>

13 – EU law/international trade – BLM – No. 2 – June 11, 2015

of the secret to the other party in the form of the operative provisions of a judgement in favor of the plaintiff.

The Directive proposes to tackle these issues with a combination of measures. For example, the courts shall be author-ized to restrict access to documents of the parties or of third parties containing trade secrets, or to restrict access to hear-ings when trade secrets may be disclosed and to records or transcripts of such hear-ings (Article 8 Sec. 2 of the Directive). The restriction of access may apply to the par-ties, resulting in the fact that the hear-ings would take place, and a trade secret that has hitherto had restricted access would then be disclosed in the presence of the parties’ counsel or authorized ex-perts. To retain the confidential character of a trade secret in spite of its disclosure in the course of legal proceedings, the Directive stipulates that the parties, the parties’ counsel, court officials, witnesses and any other person participating in the legal proceedings or having access to documents forming part of those proceedings be prohibited from using or disclosing any trade secret they become aware of (Article 8 Sec. 1 of the Directive). Further, only a non-confidential version of a judgement wherein the portions con-taining trade secrets have been removed shall be made availble to the public.

Details of these measures are still under discussion but, once properly implement-ed by the Member States, the proposals of the Directive will significantly facili-tate the enforcement of trade secrets and thereby render the trade secret an even more useful instrument for the protection of intellectual property.

Does trade secrets protection re-strict fundamental freedoms, com-petition or workers’ mobility?

Critics of better trade secret protection across the EU have raised concerns that it would hamper the mobility of workers in innovative industries, hinder competi-tion or even restrict basic freedoms such as the freedoms of speech or expression.

The short discussion of key elements of the Directive above has shown that the Directive is seeking to bal-ance the protection of trade secrets and fundamental rights of free speech or expression. And an increased and more consistent level of trade secret protection is much more widely seen as a prerequisite for, rather than an obstacle to, easier know-how transfer, more competition and innovation.

The concerns over workers’ mobility arise from the fact that workers in knowledge-

based industries are often holders of trade secrets, and that restrictions to their ability to carry their knowledge along to a new employer could be a bar-rier to their mobility affecting not only fundamental individual rights relating to the choice of occupation, but also competition for qualified personnel—a driver for growth and innovation.

Nevertheless, the concerns again appear to be overstated. In Germany, employees must maintain the confidentiality of their inventions beyond the end of their employment, unless the employer has released an invention. And employees are prohibited from taking documents or files with them when they leave the company. On the other hand, they are in principle entitled to apply their knowledge and experience to the benefit of a new em-ployer and to contact customers of the previous one, unless they have taken lists with customer names and details along with them. Restrictions will apply where the confidential information, though memorized by the employee, is similar to an invention or recipe (such as the Coca-Cola formula), or easily distinguish-able from the employee’s qualifications and know-how. More criteria will apply, depending on the circumstances of the individual case, but certainly for the pur-pose of striking a fair balance between

the interest of a company in maintaining the secrecy of confidential information and the interest of an employee to take advantage elsewhere of the know-how and experience acquired during the term of his or her employment.

Conclusion

Subject to the results of ongoing dis-cussions in the legislative process, the Directive, if properly implemented by the Member States, will take trade secrets protection to a new level. It will facilitate cross-border know-how trans-fer within the EU, foster innovation and competition, and additionally, measures to preserve the confidentiality of trade secrets in the course of legal proceed-ings will allow trade secret holders to enforce trade secrets more effectively. <–

www.dlapiper.com

Dr. Stefan Dittmer, Attorney at Law, Partner, DLA Piper, Hamburg

stefan.dittmer@dlapiper.com

Bridging the gapOverview of recent trends in warranty insurance in M&A transactionsBy Andreas Stilcken and John Cunningham

In the current economic climate, the appetite of buyers to take on risk in an M&A transaction has greatly de-

creased. At the same time, sellers remain under intense pressure to minimise out-standing liabilities, and achieve a “clean exit” from the business they are selling. This article looks at the use of warranty and indemnity insurance (“warranty in-surance”) as an innovative way to “bridge the gap” between buyer and seller in negotiations and as a means to help close transactions where the risk gap between them would otherwise mean that an agreement could not be reached.

What is warranty insurance?

Warranty insurance is a risk management tool for M&A transactions. For sellers, it can be a strategic tool to increase their rate of return and to achieve a clean exit from the business they are selling. For buyers, warranty insurance can increase their financial protection where there are concerns over recoverability from a seller, or afford them a powerful opportunity

to differentiate their bid in a competitive auction process. The warranties con-tinue to play a key role in the underlying M&A transaction, both in flushing-out disclosures and in clarifying contrac-tual liabilities. However, the dichotomy between the buyer’s desire for maximum protection on a warranty breach and the seller’s intent to accelerate receipt of sale proceeds can be eased or even removed through the use of warranty insurance.

Warranty insurance can be used to (a) extend the period of warranty cover-age (allowing the seller’s liability to end at, or soon after, completion, and the warranty insurance coverage to extend the period of warranty protection for the buyer) and/or (b) increase the war-ranty coverage through a “top-up” policy (where, for example, the seller –>

14 – Mergers & acquisitions – BLM – No. 2 – June 11, 2015

Warranty insurance can help bridge the risk gap between buyer and seller in

M&A transactions.

© David H. Seymour/iStock/Thinkstock/Getty Images

would be liable for the first portion of the liability under the SPA, and the war-ranty insurance coverage would apply for amounts sought by the buyer above the aggregate cap under the SPA).

Why take out warranty insurance?

Warranty insurance is commonly used where financial sponsor investors are exiting a business and not willing to give commercial warranties. For exam-ple, private equity firms usually cannot close their funds or make distribu-tions to their limited partners where warranties remain outstanding.

Notwithstanding its reputation as a private equity seller tool, warranty insur-ance should be treated just as much a tool for assisting buyers more generally (private equity or otherwise, and includ-ing corporate bidders competing with private equity bidders). It gives buyers a chance to enhance the attractiveness of their bid by taking a lower cap on the seller’s liability or a shorter warranty period, and then obtaining top-up insur-ance to extend the cap and time limits.

An effective strategy for a seller (in particular in an auction process) can be to “staple” warranty policies to bid documents in much the same way as

vendor due diligence reports, giving rise to a new auction seller control device tool. In such cases, the seller typically instructs an insurance broker early on in the transaction process, and negoti-ates an appropriate draft insurance policy on the back of a draft SPA with an insurer before distributing the SPA to bidders. The related process letter makes it clear that the seller is not prepared to accept liability for the business warran-ties, intending instead to help the buyer procure warranty insurance to cover such liability for the benefit of the buyer (and has already commenced discussions with insurers regarding such coverage). Even if the stapled warranty insurance is not used by a buyer, it can be a power-ful negotiation tool for a seller to reduce escrow amounts or escrow periods, and/or warranty thresholds or periods.

Current developments

The key development is that premium levels on buyer and seller policies are now substantially the same, being between 1% and 2% of the insured limit on European deals (commonly 1% to 1.5% in the UK), which has greatly increased the viability of buy-side warranty insurance products. We note, however, that for certain trans-actions where the insurers perceive the risk to be higher for a variety of reasons

(for example as a result of inadequate disclosure or issues raised through due diligence), the premia for warranty insur-ance could be higher (although rarely exceeding 2.5% to 3% of the insured limit on European deals). A seller’s residual warranty liability will in practice usu-ally be at least 1% of the deal value, as insurers and buyers will otherwise be sceptical about the quality of disclosure. It has also become commensurately easier to obtain warranty insurance on deals in emerging markets, increasing its usage on international transactions and the benefits it can afford when meas-uring cost against the opportunities it brings to manage risk. We note that there are currently at least 13 insurance carriers offering warranty insurance, many of whom are Lloyd’s syndicates.

A buyer can choose the desired level of cover under a buyer policy. Factors affect-ing premium levels include: the insurance limit as a percentage of deal value; excess and de minimis levels; the amount of the warrantors’ residual liability; and the scope of the warranties and seller limita-tions. Brokers’ fees are usually payable by the insurer, although in certain cases a break fee may be required if the policy is not taken out. Insurers often require the payment of a non-refundable fee to cover due diligence costs in assessing

the target and whether or not to provide the warranty insurance with respect to a transaction. This fee is normally deducted from the premium payable if the warranty insurance is secured.

Legal considerations

Detailed consideration will need to be given to the insurance policy, to ensure it mirrors so far as possible equivalent aspects of the SPA. Ideally the policy cover should match the warranty period in the SPA, along with the de minimis and any other seller limitations. Key issues to consider will include: whether the excess will be eroded by excluded losses (important in the case of a buyer top-up policy); interaction with conduct of third party claims clauses and seller limitations on losses recovered under in-surance in the SPA; and exclusions from cover (such as known matters identified from the buyer’s due diligence or the seller’s disclosures; the insured’s fraud; forward-looking warranties and pur-chase price adjustments). Careful con-sideration will need to be given to the buyer’s knowledge exclusion, to ensure that this is limited to the knowledge of relevant identified individuals who are members of the “deal team” and re-flected in the signing/closing no claims declarations required by the insurer. –>

15 – Mergers & acquisitions – BLM – No. 2 – June 11, 2015

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Practical issues

Warranty insurance (as with any insurance) is secured through brokers who act as the interface between the insured and the insurers. Before going out to the market, the brokers will raise a series of questions with the proposed insured, designed to assess insurability of the transaction. In practice brokers do not approach insurers until they receive the buyer’s mark-up of the SPA. On the basis of the draft SPA and other the preliminary information, insurers who are willing to write the insurance will issue non-binding indications of their proposed cover. The broker will then summarise these offers in a report for the client so that the client may select its preferred insurer. Once selected, the chosen insurer will then conduct underwriting due diligence. An impor-tant part of this due diligence is an underwriting call with the client and its legal and financial advisers. The parties will then negotiate final policy terms.

It usually takes two to three weeks from when the broker is first instruct-ed to negotiate the policy. Any pro-posed transaction timeframe should take into account the fact that insurers will need to review the transaction and due diligence documents, mean-

ing that confidentiality agreements will be needed and due diligence reports will need to be released (on a non-reliance basis) to the insurer.

Conclusion

Warranty insurance on M&A transac-tions is more accessible now than ever before. Its value should be judged in the context of the pressure on sellers in the current economic climate to achieve a clean exit and the benefits that insur-ance products may afford compared to other warranty security devices. Parties would be well advised to give serious consideration to using warranty insurance may provide to facilitate M&A deals on satisfactory terms. <–

www.whitecase.com

John Cunningham, Solicitor, Partner, White & Case, London

johncunningham@whitecase.com

Andreas Stilcken, Attorney at Law, Partner, White & Case, Frankfurt

astilcken@whitecase.com

Monika FaberRegional Director - Europe

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A textbook approach is not enoughIntellectual property as security in corporate transactionsBy Christoph J. Crützen

The fact that intellectual property qualifies as an object to secure a loan or to form part of a complex

financial security transaction has become common knowledge. Nevertheless, recent practice has shown an increasing inter-est in custom made legal solutions and tools to make use of intellectual property as collateral. The reason for this is that intellectual property and particularly patents, trademarks and copyrights can have substantial value. The demand for tailored security solutions does not only derive from the monetary value of the intellectual property, but is also driven by the essential character intellectual property has for many businesses.

Various interests in legal options

Lending parties in a finance project often consider intellectual property to be much the same as any other collateral. This applies to most corporate transac-tions wherein intellectual property is of a minor importance. Unless intel-lectual property is of an outstanding importance for the business or the only

valuable asset(s), the approach to include intellectual property as an object of security follows standardized textbook procedures. In the event intellectual property plays a more prominent role in the transaction, the method of grant-ing security is chosen more carefully. And indeed, the legal system provides for a basket of options ranging from the predominant security mechanisms of the transfer of security to pledges, the granting of rights to use the intellectual property and the granting of a usufruct.

Just to what extent or what combination of measures is to be selected depends on the interest of the parties involved in the transaction. While the interest of a loan provider to obtain valuable, easy to realize and secure security is relatively easy to determine, the security grantor’s interests are as diverse as life can be. Consequently, not only the method of granting security is the result of a carefully chosen solu-tion but also the contractual rights and obligations under the security agreement vary from a simple back-license to use the intellectual property to a complex regime

of rights and obligations.

Security transfer of intellectual property

The transfer of title by way of a security transfer accompanied by the granting of a back license to the trans-ferring party is still a popular practice. The reason for the popularity is the strong position of the secured party. The secured party becomes legal owner and obtains direct control to realize the security. Legal ownership ensures that –>

17 – Intellectual property/corporate transactions – BLM – No. 2 – June 11, 2015

Intellectual property, particularly patents, trademarks and copyrights, could have substantial value in corporate transactions. © StudioM1/iStock/Thinkstock/Getty Images

the secured party has legal control on the asset and can sell the asset without greater obstacles. In particular, in relation to a third party the secured party is fully entitled to dispose of the IP rights and therefore can directly realize the security.

The secured party’s benefit comes at the expense of the grantor’s flexibility to use and dispose of the intellectual property. By transferring the right, the collateral provider gives up its owner-ship and its rights to use the intellectual property. To compensate this loss, the transferring party is granted a back license to use its former intellectual property in the ordinary course of busi-ness. In particular, the latter can become the stumbling block. The back license requires a careful balance between the security grantor’s interest to use and exploit the intellectual property and the secured party’s security interest in receiving ownership and maintaining the value of the intellectual property.

The security transfer has two elements: the security agreement and the trans-fer of rights. Whereas the transfer of rights, in principle, requires a degree of certainty with regard to the intellectual property to be transferred, the security agreement requires more attention. The security agreement stipulates the

utilization of the collateral, the realiza-tion of the collateral and the re-transfer of the intellectual property in case of the fulfillment of all contractual obligations. It has become the balancing element between the security interest of the secured party and the collateral provider.

Such balancing of the security transfer on the basis of a back license works for many businesses. In particular, if a company’s intellectual property is of a rather passive nature—for example as measure of pro-tection for a successful brand, the com-pany name or specific products—the se-curity transfer will not affect the conduct of business and the business operations in a way that requires specific attention.

Other business models, however, are more focused on the use, disposal and de-velopment of intellectual property. While a company developing a specific product is likely to agree to a security transfer, a high-tech company or development service provider will have more issues in transferring its intellectual property. The task becomes even more complicated, if the intellectual property portfolio is particularly complex and the intellectual property is used for various purposes and is actively pursued, such as in litigation, licensing and/or cooperative ventures. In such situations a security transfer of

intellectual property can have an im-pact on relationships and obligations with third parties because it can trigger termination rights as a result of a change in ownership or may entitle a third party to exercise a first right of refusal.

The security transfer, however, seems not to be applicable to copyrights and in particular to software. A software development company being predomi-nantly engaged in the development and enhancement of its software relies heavily on its intellectual property and on its exploitation rights. The right to use its intellectual property is fundamental to the business concept and the unlimited right to use and exploit such rights is not only required by the security grant-ing company but also by its customers.

As a consequence, the strong secu-rity position of a security transfer is often softened to the benefit and flexibility of the security provider.

Pledging intellectual property

The complexity and interests of the parties involved in security transactions results in an increase of security pledges. As opposed to and distinct from a secu-rity transfer, the pledge of intellectual property has no effect on the ownership

of the rights. The creation of a pledge does not result in a transfer of ownership.

The secured party only obtains the right to receive satisfaction arising from the proceeds of the realization of the secu-rity. The pledger retains the intellectual property and in particular the right to use its intellectual property. If the intel-lectual property has been pledged, it is not necessary to agree on a back-license. This is an important difference to the security transfer for the security provider.

The interests of the collateral provider and of the secured party can be summed up as follows: On the one hand, the collateral provider does not wish to transfer the ownership of the intel-lectual property right but to retain the full control and authorization to enforce and apply the intellectual property. On the other hand, the secured party is interested in maintaining the pledged rights and the value of the collateral. Such issues can be addressed as obliga-tions in the security agreement itself.

An obstacle for the secured party is the realization of the security pledge. The parties are not entirely free to stipulate how to realize a pledged right. According to Sec. 1277 para. 1 of the German Civil Code (Bürgerliches Gesetzbuch, –>

18 – Intellectual property/corporate transactions – BLM – No. 2 – June 11, 2015

or BGB), “the pledgee may seek his satisfaction from the right only on the basis of an enforceable judgment in accordance with the provisions gov-erning execution, unless otherwise provided.” The parties may, however, agree to another type of realization, but they are always bound by manda-tory statutory law. Therefore, a di-rect sale would not be possible until the maturity of the pledge arises.

The weakness in realization of the security pledge is the main threat to the secured party. Therefore, the pledge is usually applied to situa-tions wherein a security transfer would either be too restrictive or unsuitable. However, the flex-ibility in the utilization of rights is the reason that a party having to provide collateral is eager to pledge the intellectual property rather than transferring the rights.

Grant a right of usufruct

The granting of a right of usufruct is another option of security. The crea-tion of a usufruct is applicable if the usufruct is granted to a right that is transferable. By way of creation of the usufruct, the collateral taker is enti-tled to the emoluments of the right.

If a right of usufruct is granted for an intel-lectual property right, the usufructuary would be obliged to maintain the right. This means that the secured party would be responsible to pursue legal actions against infringements of the intellectual property, to defend it against actions and to pay charges and fees. Such obligations for maintaining secured rights or defend them against third party attacks are beyond the expectations of a party requesting security. Therefore, the parties can and will agree to alter these obligations in favor of the secured party.

The benefit of the usufruct is that the secured party is entitled to directly take the emoluments of the right. Therefore, in par-ticular in a situation wherein the security grantor is engaged in generating royalties from licenses, the usufruct might be a good option for the secured party. It obtains the right to collect the license fees for licenses already granted and allows the secured party the right to grant new ones as well. However, the party granting the right of usufruct retains—at least on the basis of the security agreement—the flexibility and ownership in the intellectual property.

Granting of rights to use intellectual property

In some constellations, the parties could also consider the granting of a license

to the secured party. The secured party receives a right to use the intellectual property that is usually accompanied with the right to transfer the license and to grant sublicenses. The secured party can participate in the economic benefits of the intellectual property on the basis of such a license. If the exclusivity of the license excludes the right of use by the security grantor—at least conditionally in the event that the security provider is in default of its payment obligations—the exclusive license can provide a security position that prove as commercially strong as a security transfer. Obviously, granting a license for security purposes will only be useful if it is granted as an exclusive license. The exclusivity of the license, at least to a certain extent, provides the secured party the freedom to realize the intellectual property.

Combining different options to achieve balanced security mechanisms

Currently, most security transactions involving intellectual property apply, to a greater extent, one of the afore-mentioned tools to supply collateral in intellectual property. The increase of complexity in the application, use and adaption of intellectual property, how-ever, requires a more comprehensive and flexible approach. To reflect and bal-

ance the parties’ interests, the structure of the transaction to supply collateral requires a combination of different tools. A schematic textbook approach no longer lives up to the expectations and demands of complex business mod-els. The combination of security tools provides for a greater extent of flexibility and satisfies the parties’ security inter-ests. If carefully chosen, the combina-tion of different security tools provides a strong position for the secured party as well as a fair and suitable position of the party providing such security. <–

www.cliffordchance.com

19 – Intellectual property/corporate transactions – BLM – No. 2 – June 11, 2015

Christoph J. Crützen, Attorney at Law, Clifford Chance, Düsseldorf

christoph.cruetzen@cliffordchance.com

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20 – Corporate governance/company law – BLM – No. 2 – June 11, 2015

Increasing professionalismStricter requirements for the supervisory boards of listed companiesBy Dr. Martina Schmid

The recent amendments to the German Corporate Governance Code adopted by the govern-

ment commission are aimed at increas-ing the professionalism of the supervi-sory board and underline the increasingly significant role of the supervisory board.

Following a year without any mate-rial changes to the German Corporate Governance Code (GCGC), the govern-ment commission adopted this year’s amendments to the Code on May 5, 2015. Alongside some clarifications and adaptations to amendments to statutes that have taken effect in the meantime, these include new, sup-plementary recommendations for the supervisory board of listed companies.

Introduction

The German Corporate Govern-ance Code presents essential statutory regulations for the management and supervision of German listed companies and contains recognized

standards for good and responsible governance. As well as a description of the applicable statutory duties of the company and its executive bodies, the Code includes recommendations that the companies may deviate from, but are subsequently obliged to disclose and justify these deviations (“comply or ex-plain”) on an annual basis. Furthermore, the Code contains suggestions for the company and its executive bodies that can be deviated from without disclosure.

The new recommendations recently adopted by the gov-ern-

ment commission are all addressed at the supervisory board of listed companies.

Determination of term limits for supervisory board membership

Pursuant to 5.4.1 (2) GCGC, the supervi-sory board shall specify concrete objec-tives regarding its composition, whereby it shall consider the specific situation of the company. To date, these concrete ob-jectives have included an age limit to be specified for members of the supervisory

board. Now, a new criterion is being intro-

duced.

According to the new version of the recommendation, the supervisory board shall also set a (regular) limit for the term of membership of the supervisory board.

The government commission states that the expertise and knowledge of a supervisory board member increases with his or her length of service. However, a continuous renewal of the board could have a positive effect on the supervisory board’s work, giving it a “fresh outlook” and new momentum. According to press reports, another objective being pursued by the commission is to reduce the aver-age age of supervisory board members.

This new recommendation is being criticized by some as inappropriate. –>

In the future, there will be more transparency regarding the time related to supervisory board activities. © Rodolfo Fischer Lückert

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21 – Corporate governance/company law – BLM – No. 2 – June 11, 2015

Whether a supervisory board member is re-elected would have to be decided in each individual case and thereby assessed whether another period in office makes sense. This procedure would be impaired if a strict limit was specified. Moreover, doubts have also been expressed regarding whether defining an upper limit for the length of service on a supervisory board is at all suited to lowering the average age of supervisory board members. For setting a time limit for the term of membership does not necessarily mean that younger candidates would fill vacant positions. The high average age of supervisory board members in Germany is rather based among other things on the requirements placed on exercising the mandate that have increased over time. This fact, as well as the recommendation in 5.4.5 of the Code citing that a member of the management board of a listed com-pany shall not hold more than three supervisory board mandates in non-group listed companies, ultimately leads to a situation where incumbent management board members of listed companies will hardly be able to execute supervisory board man-dates in listed companies in addition to their office on the management board. In fact, management board

members are only able to serve on a supervisory board after they have retired from the management board, thus usually at an advanced age.

>>Setting a time limit for the term of membership of the supervisory board does not necessarily mean that younger candidates would fill vacant positions

<<Finally, issues of concern may arise from the new recommendation for companies with anchor sharehold-ers who have an understandable interest in members serving long terms on the board. The govern-ment commission stresses that the new recommendation should provide the necessary flexibility in individual cases, particularly in companies with anchor or family shareholders. It is however doubt-ful whether a majority shareholder will submit to such a duty to make new appointments to the board on a regular basis. In light of this, it is to be expected that a considerable number of companies will deviate from the new recommendation. –>

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22 – Corporate governance/company law – BLM – No. 2 – June 11, 2015

Practical consequences

Thus in future, the supervisory board must also give thought to setting a maximum term limit on membership of the supervisory board. If, taking into account the specifics of the company, the supervisory board comes to the conclu-sion that such a regular term limit does not make sense, it will have to declare a deviation from this recommendation.

More transparency regarding the time related with supervisory board activities

In future, the supervisory board shall ascertain that supervisory candidates are able to invest the expected amount of time required to fulfill their supervisory board duties (5.4.1 Abs. 4 GCGC). With this new recommendation, the commission intends to create more transparency for the supervisory board as well as for supervisory board candidates and raise awareness among future supervisory board members of the burden in terms of the time involved in fulfilling supervisory board duties. Rather than a fixed limit on the number of man-dates, a flexible, case-by-case regulation is being introduced to enable the situation of the respective candidate and the company to be taken into account, thereby ensur-ing that supervisory board members have enough time to perform their duties.

This case-by-case approach is generally to be welcomed, as in practice the time required to perform these duties varies substantially from company to com-pany. However, the weakness of the new recommendation lies in the fact that the time required to perform supervisory board duties may also greatly vary within a company. Prior to election to the super-visory board, the candidate can only be in-formed about the expected time required for regular supervisory board meetings and possible committee meetings. This “basic time requirement” may dramati-cally increase due to a special situation or crisis so that the amount of time required in the past is not a reliable indicator of how much time will be required in the fu-ture. Due to these uncertainties, the new recommendation is only suited to a lim-ited extent for ensuring that, in particular, supervisory board members with several mandates actually have the time needed to perform their supervisory board du-ties. It remains to be seen whether the recommendation can in practice curtail the often seen plurality of offices.

Practical consequences

In practice, the new recommendation means that the supervisory board (for the first time) has to assess the expected amount of time required to fulfill the

supervisory board duties and must dis-cuss and clarify this with the supervisory board candidate. If a deviation from the recommendation is not declared from the outset based on the aforementioned grounds, it is recommendable to estimate the expected amount of time generously.

Extended reporting on the par-ticipation of supervisory board members in meetings

In future, it shall be noted in the supervisory board report if a member of the supervisory board has participated in only half or less than half of the meetings of the supervisory board or of the committees that he or she belongs to within a fiscal year (5.4.7 GCGC). This constitutes a tightening of requirements compared to the previous version of the Code. Thus far, a note only had to

be made in the report if a member took part in less than half of the supervisory board meetings. In future, supervisory board members must therefore partici-pate in more than half of the meetings to avoid an entry in the report (if no deviation from the recommendation is declared). Moreover, a note in the report by the supervisory board shall in future also be made if a supervisory board member has participated in only –>

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23 – Corporate governance/company law – BLM – No. 2 – June 11, 2015

half or less than half of the committee meetings that he or she is a member of. According to the previous version of the Code, participation in committee meetings was not to be reported at all.

This tightening of the regulation is in many cases not likely to lead to an increase in notes in supervisory board reports, however, as the commission defines the term of participation in meetings in sentence 2, stating that this includes participation by tel-ephone or video conferences. This is the same way it was usually han-dled in the past. Yet the commission clearly states that participation via telephone or videoconference should not be the rule so that (mere) virtual participation in meetings should be limited to a few exceptional cases. Finally, voting by proxy still does not apply as “participation” in a meeting.

Practical consequences

For supervisory board members, the extended recommendation means that a negative entry in the super-visory board report can occur more quickly in the future than was previ-ously the case. Participation via tel-ephone or videoconference should only be used as an exception.

Non-material adaptations: deletions and specifications

Apart from the aforementioned ad-ditional recommendations, the new version of the Code includes a vari-ety of linguistic simplifications and specifications. Moreover, adaptations to statutes that have taken effect in the meantime, in particular the law on the “female quota” that recently came into effect, have also been made.

Specification of recommendations

On the one hand, it was specified that important transactions with persons or undertakings closely associated with a member of the management board shall only be carried out with the consent of the supervisory board (4.3.3 GCGC).

On the other hand, the list of dates to be published in the financial calendar was extended (6.3 GCGC). In future, the dates of balance-sheet press and ana-lysts’ conferences shall also be published. Moreover, the financial calendar shall be published on the company’s website.

Deletion of recommendations

Finally, two recommendations have been deleted. One concerns the recommen-

dation according to 6.2 GCGC, wherein any information that the company discloses abroad in line with correspond-ing capital market law provisions shall also be disclosed in Germany without delay. The other deletion concerns the former recommendation in 7.1.4 GCGC regarding the publication of a list of third party companies wherein the company is a shareholder that is not of minor importance for the enterprise. <–

www.cms-hs.com

Dr. Martina Schmid, Attorney at Law, Partner, CMS Hasche Sigle, Stuttgart

Martina.Schmid@cms-hs.com

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Please order at your convenient bookshop or go to www.germanlawpublishers.com.

GERMAN LAW PUBLISHERS – CURRENT TITLES.

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Dr. Arnd HallerGoogle Germany GmbHLegal Director, Hamburg

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Dr. Severin LöfflerMicrosoft Deutschland GmbH, Assistant General Counsel, Legal and Corporate Affairs Central & Eastern Europe, Unterschleißheim

severinl@microsoft.comwww.microsoft.com

Dr. Klaus-Peter WeberGoodyear Dunlop D-A-CH,General Counsel, Hanau

klaus-peter.weber@goodyear-dunlop.comwww.goodyear-dunlop.com

Dr. Hanns Christoph SieboldMorgan Stanley Bank AG, Managing Director,Frankfurt am Main

hanns.christoph.siebold@morganstanley.comwww.morganstanley.com

25 – Advisory board – BLM – No. 2 – June 11, 2015

Professor Dr. Stephan WernickeDIHK – Deutscher Industrie- und Handels kammertag e. V., Chief Counsel, Director of Legal Affairs, Berlin

wernicke.stephan@dihk.dewww.dihk.de

Dr. Georg RützelGeneral Electric , General Counsel Germany, Frankfurt am Main

georg.ruetzel@ge.com www.ge.com

Dr. Florian DrinhausenDeutsche Bank AG, Co-Deputy General Counsel for Germany and Central and Eastern Europe, Frankfurt am Main

florian.drinhausen@db.comwww.db.com

Dr. Hildegard BisonBP Europa SE, General Counsel Europe, Bochum

hildegard.bison@de.bp.comwww.bp.com

Carsten LüersVerizon Enterprise Solutions, Managing Counsel EMEA, Frankfurt am Main

carsten.lueers@de.verizon.comwww.verizon.com

Prof. Dr. Michael SmetsSaïd Business School, University of Oxford

michael.smets@sbs.ox.ac.ukwww.sbs.ox.ac.uk

Dr. Christian RauDavita, DV Care Netherlands B.V.,General Counsel EMEA

christian.rau@davita.comwww.davita.com

Dr. Heike Wagner, Equity Partner Corporate,Barckhausstraße 12-16, 60325 Frankfurt am MainTelephone: +49 69 71 701 322Mobile: +49 171 34 08 033 heike.wagner@cms-hs.comwww.cms-hs.com

Dr. Ole Jani, Partner,Lennéstraße 7, 10785 BerlinTelephone: +49 30 20360 1401

ole.jani@cms-hs.comwww.cms-hs.com

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Markus Hauptmann, Partner,Bockenheimer Landstraße 20, 60323 Frankfurt am MainTelephone: +49 69 29994 1231Mobile: +49 172 6943 251 mhauptmann@whitecase.comwww.whitecase.com

Dr. Robert Weber, Partner,Bockenheimer Landstraße 20, 60323 Frankfurt am MainTelephone: +49 69 29994 1370Mobile: +49 170 7615 449 rweber@whitecase.comwww.whitecase.com

Dr. Claudia Milbradt, Partner,Königsallee 59, 40215 Düsseldorf Telephone: +49 211 43 55 59 62

claudia.milbradt@cliffordchance.comwww.cliffordchance.com

Dr. Ludger Giesberts, LL.M., Partner / Head of Litigation & Regulatory,Hohenzollernring 72, 50672 KölnTelephone: +49 221 277 277 351Mobile: +49 172 261 07 24 ludger.giesberts@dlapiper.comwww.dlapiper.com

Dr. Lutz Englisch, Partner, Hofgarten Palais, Marstallstrasse 11, 80539 MunichTelephone: +49 89 189 33 250

LEnglisch@gibsondunn.comwww.gibsondunn.com

Dr. Dirk Stiller, Partner,Friedrich-Ebert-Anlage 35-37, 60327 Frankfurt am MainTelephone: +49 69 95 85 62 79 Mobile: +49 151 1427 6488 dirk.stiller@de.pwc.comwww.de.pwc.com

Dr. Friedrich Ludwig Hausmann, Partner, Leiter Praxisgruppe Öffentliches Wirtschaftsrecht,Lise-Meitner-Straße 1, 10589 BerlinTelephone: +49 30 2636 3467 Mobile: +49 151 2919 2225 friedrich.hausmann@de.pwc.com www.de.pwc.com

Dr. Michael J.R. Kremer,Partner,Königsallee 59, 40215 Düsseldorf Telephone: +49 211 4355 5369

michael.kremer@cliffordchance.comwww.cliffordchance.com

26 – Strategic partners – BLM – No. 2 – June 11, 2015

Dr. Benjamin Parameswaran, Country Managing Partner,Jungfernstieg 7, 20354 HamburgTelephone: +49 40 188 88 144Mobile: +49 162 249 79 23 benjamin.parameswaran@dlapiper.comwww.dlapiper.com

Michael Walther, Partner, Hofgarten Palais, Marstallstrasse 11, 80539 MunichTelephone: +49 89 189 33 180

mwalther@gibsondunn.comwww.gibsondunn.com

27 – Advisory Board – BLM – No. 1 – June 26, 2014

Dr. Florian DrinhausenDeutsche Bank AG, Co-Deputy General Counsel for Germany and Central and Eastern Europe, Frankfurt Main

florian.drinhausen@db.comwww.db.com

Dr. Hildegard BisonBP Europa SE, General Counsel Europe, Bochum

hildegard.bison@de.bp.comwww.bp.com

Dr. Severin LöfflerMicrosoft Deutschland GmbH, Assistant General Counsel, Legal and Corporate Affairs Central & Eastern Europe, Unterschleißheim

severinl@microsoft.comwww.microsoft.com

Dr. Klaus-Peter WeberGoodyear Dunlop Tires GmbH,General Counsel, Hanau

klaus-peter.weber@goodyear-dunlop.comwww.goodyear-dunlop.com

Dr. Arnd HallerGoogle Germany GmbHLegal Director, Hamburg

haller@google.comwww.google.com

Dr. Georg RützelGE Germany, General Counsel Europe, Frankfurt Main

georg.ruetzel@ge.com www.ge.com

Dr. Hanns Christoph SieboldMorgan Stanley Bank AG, Managing Director,Frankfurt Main

hanns.christoph.siebold@morganstanley.comwww.morganstanley.com

Professor Dr. Stephan WernickeDIHK – Deutscher Industrie- und Handels kammertag e. V., Chief Counsel, Director of Legal Affairs, Berlin

wernicke.stephan@dihk.dewww.dihk.de

27 – Cooperation partners – BLM – No. 2 – June 11, 2015

German-French Chamber of Industry and Commerce RA Joachim Schulz, MBA, Head of Legal and Tax Department,18 rue Balard, F-75015 Paris, FranceTelephone: +33 (0)1 4058 3534

jschulz@francoallemand.comwww.francoallemand.com

German American Chamber of Commerce, Inc.Susanne Gellert, LL.M., Attorney at Law, Director Legal Department & Business Development Consulting, 80 Pine Street, Floor 24 | New York, NY 10005Telephone: +1 (212) 974 8846sgellert@gaccny.comwww.gaccny.com

German Brazilian Chamber of Industry and CommerceDr. Claudia Bärmann Bernard, Head of Legal Department, Rua Verbo Divino, 1488, 04719-904 São Paulo - SP, BrazilTelephone: +55 11 5187 5216

juridico@ahkbrasil.comwww.ahkbrasil.com

Canadian German Chamber of Industry and Commerce Inc.Yvonne Denz, Department Manager Membership and Projects,480 University Ave, Suite 1500, Toronto, ON M5G 1V2, CanadaTelephone: +1 (416) 598 7088

yvonne.denz@germanchamber.cawww.germanchamber.ca

German American Chamber of Commerce of the MidwestJayne Riemer-Chishty, Director, Membership and Chamber Development, 321 North Clark Street, Suite 1425 | Chicago, Illinois 60654-4714 Telephone: +1 (312) 494 2169riemer-chishty@gaccmidwest.org www.gaccmidwest.org

Dr. Nils Seibert, BeijingTelephone: +86 10 6539 6621

info@bj.china.ahk.de

Yu Rong, ShanghaiTelephone: +86 21 5081 2266 1629

info@sha.china.ahk.de

Steffi Ye, GuangzhouTelephone: +86 20 8755 2353 232

info@gz.china.ahk.de

German Industry and Commerce Greater ChinaWolfgang Ehmann, Executive Director, 3601 Tower One, Lippo Centre, 89 Queensway, Hong KongTelephone: +852 2526 5481

ehmann.wolfgang@hongkong.ahk.dewww.china.ahk.de / www.hongkong.ahk.de

Kelly Pang, TaipeiTelephone: +886 2 8758 5822

info@taiwan.ahk.de

Heads of Legal and Investment Departments

German-Dutch Chamber of CommerceUlrike Tudyka, Head of Legal Department,Nassauplein 30, NL – 2585 EC Den Haag, NetherlandsTelephone: +31 (0)70 3114 137

u.tudyka@dnhk.org www.dnhk.org

German Emirati Joint Council for Industry & Commerce Anne-Friederike Paul, Head of Legal Department,Business Village, Office 618, Port Saeed, Deira, P.O. Box 7480, Dubai, UAETelephone: +971 (0)4 4470100 anne.paul@ahkuae.comwww.ahkuae.com

Indo-German Chamber of Commerce Zarir Desai, Director Finance, Administration and Company AffairsMaker Tower ‚E‘, 1st floor, Cuffe Parade, Mumbai (Bombay) 400 005, IndiaTelephone: +91 22 66652 150zarir.desai@indo-german.comwww.indo-german.com

28 – Cooperation partners and imprint – BLM – No. 2 – June 11, 2015

Imprint

Publisher: Professor Dr. Thomas Wegerich News staff: Thomas Wegerich (tw), Karin Gangl (kgl) Publishing companies:

FRANKFURT BUSINESS MEDIA GmbH – Der F.A.Z.-Fachverlag Managing Directors: Dr. André Hülsbömer, Jürgen KiehlFrankenallee 68-72, 60327 Frankfurt Main, GermanyNumber in the commercial register: 53454 Local Court Frankfurt Main Telephone: +49 69 7591 2217 Fax: +49 69 7591 80 2217

German Law Publishers GmbH Managing Director and Publisher: Professor Dr. Thomas Wegerich Stalburgstraße 8, 60318 Frankfurt Main, Germany Telephone: +49 69 9564 9559 Fax: +49 69 7591 80 2217 E-mail: editorial@businesslaw-magazine.com www.businesslaw-magazine.com

Annual subscription: free of charge, frequency of publication: quarterly

Project management: Karin Gangl Telephone: +49 69 7591 2217 Fax: +49 69 7591 80 2217 karin.gangl@frankfurt-bm.com

Graphic-design concept and layout: Rodolfo Fischer Lückert

German-Saudi Arabian Liaison Office for Economic AffairsChristian Engels, LL.M., Legal Affairs / Public Relations,Futuro Towers, 4th Floor, Al Ma‘ather Street, P.O.Box: 61695Riyadh: 11575, Kingdom of Saudi ArabiaTelephone: +966 11 405 0201engels@ahk-arabia.com www.saudiarabien.ahk.de/en/

Southern African – German Chamber of Commerce and Industry NPCCordelia Siegert, Legal Advisor and Project Manager Competence Centre: Corporate Social Responsibility, PO Box 87078, Houghton, 2041, 47, Oxford Road, Forest Town, 2193Johannesburg, South AfricaTelephone: +27 (0)11 486 2775csiegert@germanchamber.co.za / www.germanchamber.co.za

German Chamber of Commerce and Industry in Japan Patrick Bessler, Director, Editor in Chief JAPANMARKT,Sanbancho KS Bldg., 5F, 2-4 Sanbancho, Chiyoda-ku102-0075 Tokyo, Japan Telephone: +81 (0) 3 5276 8741

pbessler@dihkj.or.jp / www.dihkj.or.jp

German-Polish Chamber of Industry and CommerceThomas Urbanczyk, LL.M., Attorney at Law,Member of the Management Team Legal and Tax Servicesul. Miodowa 14, 00-246 Warsaw, PolandTelephone: +48 22 5310 519turbanczyk@ahk.plwww.ahk.pl

ACC Europe – Association of Corporate Counsel Carsten Lüers, Board Member & Country Representatives Coordinator c/o Verizon Deutschland GmbH, Sebrathweg 20, 44149 Dortmund

carsten.lueers@de.verizon.comwww.acce.com