Stock Options for Works Council Members in Germany: The Role of Oral Communications

Excerpt from EuroWatch
published by WorldTrade Executive

By Dr. Walter Ahrens (Morgan Lewis & Bockius LLP)

A recent judgment of the federal labor court underlines how important it is that the right legal entity within a group of companies grants stock options and that no misleading representations are made to the employees in this context. As the following case demonstrates, failure to sufficiently take these requirements into account can lead to unexpected financial consequences that can be substantial.

The plaintiff started employment in 1999 with a German company that was owned by a U.S. corporation. In 2000 and 2001 he received a total of 5,000 stock options from the U.S. parent corporation. In 2001 he became a member of the company’s works council. He was subsequently elected chairman of the works council and released from his obligation to work. German statutory law provides that in operations that regularly employ at least 200 employees, a certain number of works council members have to be released to enable them to fully engage in works council activities. These works council members are nevertheless entitled to the same pay and benefits as comparable employees and even take part in pay increases. This is intended to ensure that they suffer neither financially nor with respect to their professional development from their works council membership.

It probably does not come as a surprise that the plaintiff in this case did not receive any stock options from 2002 to 2005, while an employee whom the parties had agreed was comparable to the plaintiff did receive such options. The employee claimed the options from the German subsidiary in court, but lost in the first two instances.

The federal labor court set the appeal court judgment aside and remanded the case to the appeal court for further investigation. It held that the pay and benefits that works council members are entitled to may also include stock options. The court also made clear that payments and benefits that are provided by a third party and not by the employer, for example by another group company, are not to be taken into account in this context.

In this case, the U.S. parent corporation had gotten nearly everything right. The stock options had been granted by the parent corporation, and the employment contract between the German subsidiary and the employee did not include any stock options. Such clear distinction is also helpful from a conflict-of-laws point of view.

The reason, however, why the federal labor court nevertheless set aside the appeal court judgment was that the appeal court had not sufficiently taken into account the plaintiff’s submission that in his job interview, the German subsidiary had presented the stock options as an additional pay component. According to the court, this could mean that the U.S. parent entity’s stock options were benefits in addition to the regular remuneration agreed upon between the parties that could establish the employer’s secondary liability in accordance with the terms and conditions of the stock option agreements. What exactly had been said in the job interview and how it has to be construed will now have to be determined by the appeal court.

To subscribe to EuroWatch.

Canada’s Prime Minister Announces Plan to Relax Foreign Investment Restrictions

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

by Kim D. G. Alexander-Cook (Stikeman Elliott LLP)

Prime Minister and Conservative Party Leader Stephen Harper announced on September 12 that his party would seek to lift some of Canada’s restrictions on foreign investment if it is returned as the government in the October 14 federal election.

Currently, Canada’s Investment Canada Act requires review and approval of direct acquisitions of Canadian businesses by non-Canadians where Canadian assets exceed a $295 million (adjusted annually) threshold, with lower thresholds applying to direct and indirect acquisitions of Canadian businesses in four “sensitive sectors” — uranium mining, financial services, transportation services and “cultural” businesses. In addition, Canada has sector-specific legislation and/or foreign ownership restrictions in broadcasting, telecommunications, cultural industries, transportation services and uranium production. As well, the financial services sector is subject to ownership restrictions of general application (but not foreign ownership restrictions).

The Prime Minister announced that a Conservative government would open up the airline and uranium-mining sectors to allow increased foreign investment, "subject to negotiation with our trading partners and to considerations of national security." In particular, airline ownership limits would be raised to 49 per cent from the current 25 per cent, as long as Canadian companies were offered reciprocal rights in other countries.

Only foreign investments of more than $1 billion would be reviewed under the Investment Canada Act, up from the current level of $295 million that applies to direct acquisitions, with the change phased in over a four-year period.

To sign up for free International Counsel Law and Finance Briefings

MANAGING CHANNELS UNDER THE NEW PRC ANTIMONOPOLY LAW

Excerpt from Practical China Tax and Finance Strategies
published by WorldTrade Executive, Inc.

By Lefan Gong, S.J.D. (Zhong Lun Law Firm)

With the new Antimonopoly Law (AML) effective on August 1, 2008, manufacturers, distributors and others are now subject to new rules that may significantly change their existing ways of doing businesses. Some of the automakers in China reportedly have already started making changes to agreements with their dealers to be in full compliance with the new law. Antimonopoly lawsuits were filed just within a few days after the AML took effect, marking a start of a likely new wave of litigation in China against large corporations, trade associations and even government agencies.

In particular, the AML will likely have a profound impact on channel management. For instance, Article 14 the AML prohibits “monopoly agreements” that fix resale prices or specify minimum resale prices. Now a host of questions emerge:

• Can a company use methods other than “agreements” to impose minimum resale prices on its distributors?
• Can a company suggest and advertise minimum retail prices for its products?
• Can it terminate those distributors that fail to obey such “suggested retail prices”?
• Can a franchisor continue to impose price and territorial restrictions on its franchisees?

For more information on channel agreements under the China Antimonopoly Law

To sign up for free email alerts on international law of interest to corporate counsel

Audits in China -How Do They Differ?

Excerpt from Practical China Tax and Finance Strategies
published by WorldTrade Executive

by Tony Upson (Director of Assurance and Advisory at PKF Beijing)


If you are contemplating investing in or trading with a Chinese company or are already doing so, you will want to satisfy yourself about the company’s financial position and results and will no doubt consider the company’s financial statements. Do you know the differences between Chinese audits and financial statements, particularly for private companies, and Western standards?

Here are some items to consider:

Firstly, financial statements for unlisted Chinese companies are not generally on the public record. This is similar to the USA but dissimilar to Europe, where the financial statements of all limited companies are on the public record (in theory, at least). Financial statements of private companies in China have to be prepared for the tax authorities and various other government bodies.

Listed companies have to use modern Chinese accounting standards (Accounting Standards for Business Enterprises or ASBEs), which are similar to International Financial Reporting Standards (IFRS), but private companies often still use the previous system. This form of financial statements is of limited use to a potential investor or other trading partner. Unlike financial statements prepared under IFRS, they are not designed to provide information of use to investors. Areas where differences often exist between financial statements prepared under the old Chinese system and under IFRS include:

• accounting for land use rights as intangible assets rather than operating leases
• doubtful debt provisions based on ageing formulae, rather than realistic appraisal of recoverable amounts
• use of ‘standard’ asset lives and residual values, rather than realistic estimation
• deferral of expenditure such as start-up costs and R & D
• lumping together taxes on income with indirect, sales and other taxes
• deferred tax
• inclusion of the results of subsidiaries in the parent company’s individual accounts

In addition to these differences between the old Chinese rules and IFRS, unaudited financial statements of private companies often do not even comply with the old Chinese rules. Adjustments are only made when financial statements are audited and submitted to the tax bureau. So in Unaudited accounts it is common to find that:

• revenue recognition is on a cash basis rather than an accruals basis
• recognition of costs depends on whether an invoice has been received, not on whether the goods or services have been received.

For more on China tax and finance

To sign up for free International Corporate Law and Finance Briefings

Canada: Trade Implications of Proposed Consumer Products Safety Act

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

By Cliff Sosnow AND Elysia Van Zeyl
(Blake, Cassels & Graydon LLP)

The federal government recently introduced new legislation that, when passed, will dramatically increase the obligations of Canadian companies and impose particularly onerous requirements on companies that import consumer products from foreign suppliers. This legislation, referred to as the Consumer Products Safety Act, follows several recent high-profile recalls affecting toys, food, and pharmaceuticals.

Recalls Will No Longer Be Voluntary
When approved, Bill C-52 will provide the Minister of Health with extensive powers to deal with products that pose health or safety risks to consumers, including the ability to issue mandatory recalls. This new power represents a significant change from the current system whereby product recalls are entirely voluntary. The Minister will also be given the authority to ban any product that poses an “existing or potential hazard”. Moreover, the Minister will be granted the ability to disclose confidential company information in the absence of company consent where it is believed that a product poses a “serious and imminent” health risk.

New Ministerial Powers to Order Health Safety Tests
The proposed legislation empowers the Minister to order an importer or manufacturer to conduct tests on consumer products and to compile any information that the Minister considers necessary to verify compliance with the Act or regulations. The Minister may also require importers or manufacturers to provide documents that contain information on the results of such tests within the timeframe to be determined by the Minister. Failure to comply with any such order by the Minister is an offence under the Act.

These obligations could pose difficulties for importers who may not have access to thorough and accurate information from their foreign suppliers. Furthermore, considering that international suppliers may not be required to comply with equivalent standards in their home country, there is no guarantee that such information or records even exist. Thus, in the absence of full co-operation by foreign suppliers, importers may have to choose between conducting tests themselves and providing the requisite information, facing penalties, or choosing new sources of supply from co-operating foreign suppliers.

To sign up for the free International Corporate Counsel Briefing

More information on North American Free Trade & Investment Report

What Will Happen to US Trade Agenda This Year?

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

By Steven J. Mulder
(Greenberg Traurig)

It was with a certain amount of amusement -- if not disbelief -- when I recently read in an “Inside the Beltway” publication that there was “Still a Big Trade Agenda” for Congress to address this year. Huh? Really? While there may be a lot of trade legislation pending in Congress, it seems unlikely Congress will be able to approve much of it -- particularly before the elections -- in the current political environment, where anti-trade sentiment is clearly on the rise.

For one thing, the “trade agenda” is largely a priority of the Bush White House and the Democrats are in no mood to grant anything the Administration wants in its remaining months. The Democrats in the House and Senate are expected to make major gains in the November elections and thus they seem willing to simply “wait out” President Bush on most major legislative initiatives, including trade-related measures.

The Colombia Free Trade Agreement is a perfect example. The agreement, concluded over a year-and-a-half ago, is strongly supported by the President, who rarely misses an opportunity to raise the importance of its passage.

The President formally presented the agreement under the so-called “fast track” rules for Congressional consideration of free trade agreements back in April (fast track protects free trade agreements from amendment and filibusters in the congress).

However, the President took his action without the consent of the Democratic leadership, which clearly does not want to have to deal with the agreement. No problem: Speaker of the House Nancy Pelosi (D-California) presented a Resolution to the House that simply removed fast track timeline (which vitiates the need for congress to consider it within 90 days), the Resolution passed with overwhelming Democratic support, and the agreement is now effectively “in limbo.”

Never mind that over 100 newspapers (even the New York Times!), too many former Democratic officials to count, and every business organization in the United States supports passage of the agreement -- unfortunately for the agreement, U.S. labor organizations have “drawn a line in the sand” against it and that would seem to be enough to stop its movement.

Supporters of the agreement are hoping that the Speaker will have a change of heart and allow the agreement to come up for a vote in a “lame duck” session of congress that would take place after the elections of November 4th. However, there is no assurance that such a session will take place. Democratic leaders are working hard to avoid such a scenario, but given that there is a range of “must pass” legislation that has to be enacted this year -- not the least of which are the 13 annual appropriations bill that keep the government running, none of which have been enacted at this point -- a lame duck session seems likely.

Other free trade agreements that are on the agenda include ones with Panama and Korea. For more information.

Managing Shop Committee Consultation in French Business Transfers

Excerpt from EuroWatch
published by WorldTrade Executive, Inc.

By Eric Cafritz, Frédérique Jaïs and Olivier Genicot (Fried, Frank, Harris, Shriver & Jacobson LLP)

French law requires employers to share information and consult with the shop committee in cases of M&A, and there are EU requirements as well.

There is controversy as to the appropriate time for management to disclose a transaction with potentially exposive labor consequences if the timing is wrong. It can also be surprising as to when the shop committee rules apply such as in cases where the transction is negotiated and managed entirely outside of France.

General Scope of Obligation to Consult with Shop
Committees with Respect to Business Combinations
Companies on both ends of acquisition transactions are required to inform and consult with their shop committees. Under Article L. 2323-19 of the Labor Code, an employer must inform and consult with the shop committee “regarding any modification in the economic or legal organization of the company, notably in the event of a merger, sale, (...), or acquisition or sale of a subsidiary within the meaning of Article L. 233-1 of the French Commercial Code.” The employer must consult with committee members regarding the effects that the contemplated transaction may have on employees.

Furthermore, where there are “exceptional circumstances affecting the employees’ interests to a considerable extent, particularly in the event of relocations, the closure of establishments or undertakings or collective redundancies,” the European shop committee (or, if applicable, the select committee),8 has the right to request a meeting with the employer so as to be informed and consulted regarding the contemplated transaction. It has the right to meet, at its request, the central management, or any other more appropriate level of management within the EU-wide company or group of companies having its own powers of decision, so as to be informed and consulted on measures significantly affecting employees’ interests.

Direct Changes of Control
The nature of the information and consultation duty differs as between the acquirer, the seller, and the target company.

With respect to the acquiring company, its shop committee must be informed and consulted prior to acquiring a stake in another entity. Although the acquisition of a stake is separately defined by Article L. 233-2 of the French Commercial Code as the acquisition of 10% to 50% of the share capital of another entity, the French Supreme Court has held that in the absence of a specific cross-reference to the Commercial Code in Article L. 2323-19 of the Labor Code, the acquisition of less than 10% of the equity of a target company triggers the obligation to inform and consult with the shop committee.

With respect to the seller, its shop committee must also be informed and consulted if it sells a subsidiary in which it holds more than 50% of the equity. According to case law, the seller’s shop committee must be informed and consulted no matter how insignificant the subsidiary may be to the seller.

For more information on EuroWatch

To sign up for the free International Corporate Counsel Briefing