Eye on Emerging Markets
Q1 2024
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Debt for nature and other similar swap transactions have become more and more prevalent. In this edition, we explore why. We also look at some recent changes to China’s export control rules, the law in Mexico relating to the securities market and mutual funds and the newly launched Abu Dhabi International Arbitration Centre (named “arbitrateAD”). In addition to the updates on legal developments in the Emerging Markets, we wanted to share with you a recent article that we wrote that looks at a recent case where the UK Court of Appeal overturned a high-profile ruling relating to Italian swaps concerning corporate capacity. We look forward to continuing to assist our clients in their investments in emerging markets, across our cross-practice, global emerging markets focused team.
New Abu Dhabi International Arbitration Centre
An important first step towards building international cooperation
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Key changes and updates to the Chinese export controls in 2023
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Raid Abu-Manneh | International Arbitration
Amendments to the securities market law and the mutual funds law
Sovereign Debt Conversions or swaps
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Edition
Massimo Amuroso | Banking & Finance
Sarah Garvey | Litigation
Rob Flanigan | Corporate
James Taylor | Capital Markets
UK court of appeal overturns judgment in latest Italian swaps decision
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Eye on Emerging Markets | Q1 2024
Written by Gerard Moore, Raid Abu-Manneh, Dany Khayat, Patricia Ugalde Revilla, Antonin Sobek, Ali Auda, Jagpreet Sandhu and Lisa Dubot
New Abu Dhabi International Arbitration Centre (Arbitratead) Opens and Releases Its Arbitration Rules
Disputes filed on or after 1 February 2024 are administered by arbitrateAD under its new governance structure and its new Rules (the “arbitrateAD Rules”). ADCCAC continues to administer cases which commenced before 1 February 2024 under ADCCAC’s Arbitration Rules so a dual regime remains in the short term. The arbitrateAD Rules incorporate international best practices and standards, and provide a modern, cost-effective and flexible arbitration framework. We have summarised 12 key features of the arbitrateAD Rules (including how they differ from ADCCAC’s Arbitration Rules (2013)) and produced some useful guidance for parties in the region who have contracts containing arbitration clauses, which can be found by clicking here.
On 1st February 2024, the Abu Dhabi Commercial Conciliation and Arbitration Centre ("ADCCAC") closed and was replaced by a newly launched Abu Dhabi International Arbitration Centre branded “arbitrateAD”, an independent international arbitration centre based in Abu Dhabi. Further details of the launch can be found by clicking here.
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The project power, water and communications infrastructure similarly need to be designed and implemented with adaptability and sustainability in mind.
Partner Gerard Moore Dubai +971 4 568 2208 gmoore@mayerbrown.com
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Partner RAID ABU-MANNEH London +44 20 3130 3773 rabu-manneh@mayerbrown.com
Partner Dany Khayat Paris +33 1 53 53 36 31 Dkhayat@mayerbrown.com
counsel Patricia Ugalde revilla Dubai +971 4 375 7160 pugalderevilla@mayerbrown.com
Associate Antonin sobek Dubai +971 4 568 3918 asobek@mayerbrown.com
Global Professional support lawyer Lisa Dubot London +44 20 3130 3716 ldubot@mayerbrown.com
Associate Ali Auda Dubai +44 20 3130 3035 aauda@mayerbrown.com
Associate Jagpreet Sandhu London +44 20 3130 3648 jsandhu@mayerbrown.com
Major Changes to the Securities Law I. Introduction of the Simplified Regime Securities Registration The Reform introduces a simplified securities registration regime (the "Simplified Regime") for securities registration in the National Securities Registry (the "RNV") , facilitating access for small and medium-sized companies to the stock market. This regime reduces the National Securities Commission’s (the "Securities Commission") supervisory role over companies using this Simplified Regime (the "Simplified Issuers"), relying instead on the co-responsibility of market participants (e.g., brokerage firms and stock exchanges). Under the Simplified Regime, the process of public placement of securities involves: (i) joint structuring of the transaction by the Simplified Issuers and brokerage firms1; (ii) application for listing of the securities on an authorized exchange; and (iii) a review process of the transaction and the Simplified Issuer by the corresponding exchange. Key considerations of the Simplified Regime include: (i) exclusion of companies already in the securities market.2 ; (ii) offering and brokerage limited exclusively to institutional or qualified investors 3; (iii) supervision functions are delegated to the brokerage firms and exchanges under their self-regulatory regime 4; and (iv) non-applicability to preemptively registered securities in the RNV.5 Simplified Regime
1 This implies an increase in the duties and responsibilities of the brokerage firms in the process of placement of securities through the Simplified Regime. Such functions and responsibilities, among others, include: (i) review and verification of compliance with the requirements necessary to participate in the Simplified Regime, (ii) review of the information included in the disclosure documents for dissemination to the investing public, and (iii) joint subscription with the Simplified Issuer of the application for listing in the corresponding exchange. 2 Either directly or indirectly, since the Reform establishes that trusts issuing trust certificates may not register them under the Simplified Regime in the event that a company that is an issuer (e.g., a company that is not a Simplified Issuer) has contributed all or part of the assets of the trust in question. 3 Presumably through restricted public offerings, although we do not yet have secondary regulations in this respect. 4 This includes, for example, the possibility of disseminating information related to securities subject to a simplified public offering without requiring prior authorization from the Securities Commission, provided that such information is consistent with and refers to the disclosure documents of the transaction (e.g., placement prospectus, information supplement, document with key investment information, etc.) and the dissemination is carried out through an exchange, in accordance with its internal regulations. 5 This means that the securities intended to be offered under any of the three modalities of the preventive registration in the RNV (i.e., generic modality, placement program and prior listing of shares). 6 The previous text of the Securities Law allowed SABs to acquire their own shares as long as the amount of such acquisitions never exceeded 25% of the total paid-in capital stock of the corresponding SAB. 7 In the case of capitalizations by SABs, the Reform establishes that such exemption applies only to share placements made to institutional or qualified investors or to shareholders with preemptive subscription rights. This amendment is especially relevant since it will allow capitalization processes and capital calls of CKDS, CERPIs, etc., to be carried out in an agile and efficient manner, avoiding that such processes are hindered by the process of updating the registration of securities prior to the actual placement of the securities in question. 8 The purpose of this is to avoid situations that frequently occur in which issuers that do not comply with one or more of the requirements to maintain their listing on the exchanges and due to various circumstances (e.g., pulverization of shareholdings, lack of resources, etc.) are unable to comply with such requirement, thus falling into a vicious circle that keeps them in permanent involuntary non-compliance with regulatory obligations. 9 The Reform introduces Article 9 Bis, which establishes the obligation of the Ministry of Finance (with the prior opinion of the Securities Commission and the Banco de México) to issue secondary regulations applicable to all participants in the securities market regarding sustainable development, as well as to strengthen gender equity. 10 The Reform provides for the inclusion of a new paragraph in Article 105 of the LMV that allows the Securities Commission or the respective exchange to require issuers to publish a relevant event when the information existing in the market, in the opinion of the Securities Commission or the exchange in question, is insufficient, imprecise or confusing, or to rectify, ratify, deny or expand on an event that has been disclosed by third parties to the public.
Simplified Issuers
Brokerage Firms
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Securities Commission
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Training and structuring process for the public placement of securities under the Simplified Regime between Simplified Issuers and brokerage firms. Joint subscription by Simplified Issuers and brokerage firms of the application for listing the securities on a stock exchange. Upon review of the transaction documents by the respective stock exchange and, if applicable, issuance of a favourable listing opinion and simplified registration request to the Securities Commission. Once the securities are registered in the RNV, a public offering process aimed at institutional and qualified investors.
III. Clauses to Prevent Hostile Takeovers The Reform strengthens defenses against hostile takeovers. It includes increasing the quorum required for voting against resolutions at shareholders' meetings and introducing "poison pill" provisions in SABs’ bylaws from 5% to 20%. It also allows the exclusion of certain shareholders from economic benefits related to poison pills and establishes criteria for third parties attempting to acquire control. IV. Miscellaneous Modifications The Reform makes several other amendments to streamline corporate processes. These include eliminating the need to update RNV registration for specific capitalizations 7, exceptions to mandatory tender offers for deregistration in the RNV 8, introduction of secondary ESG regulations 9, expanded powers for the Securities Commission regarding public information disclosure 10, increased requirements for investment advisor registration, and various operational changes for implementing these amendments. Amendments to the Mutual Funds Law The MFL amendments primarily focus on phasing out of Limited Purpose Investment Funds (Fondos de Inversión de Objeto Limitado) and the creation of Hedge Funds. Hedge Funds are characterized by their flexibility in investment strategies and assets, with offerings limited to qualified and institutional investors. They are exempt from establishing maximum holding limits per shareholder and can be formed and operated by authorized investment advisors, bypassing the need for an investment fund operating company. Additional MFL amendments include mandatory annual evaluations of service providers, expanded reporting obligations to shareholders, empowerment of Banco de México to establish financial transaction limits, and permission for mutual fund operating companies to conduct certain transactions typically requiring brokerage firm intermediation. Note: A more extense and detailed version of this note is available at: Amendments to the Securities Market Law and the Mutual Funds Law | Perspectives & Events | Mayer Brown Disclaimer: This material should not be construed as legal advice and is provided for informational purposes only.
II. Amendments to the Securities Market Corporations Regime Significant changes have been made to the regime for Stock Exchange Corporations (Sociedades Anónimas Bursátiles, "SAB") and Stock Investment Promotion Corporations (Sociedades Anónimas Promotoras de Inversión Bursátil, “SAPIB”). For SABs, the Reform removes restrictions on issuing shares with differentiated rights, allowing the establishment of any rights or restrictions per series or class of shares. Likewise, SABs are authorized to perform unrestricted share buybacks. 6 For SAPIBs, the Reform eliminates the mandatory conversion to SAB status based on specific timelines or equity thresholds. Furthermore, SABs and SAPIBs can now delegate to their boards the power to increase share capital and set terms for share subscriptions, including the exclusion of preemptive subscription rights under certain conditions. Additionlly, if such issued shares are offered to institutional and qualified investors or shareholders with preemptive subscription rights, their placement will not require a placement prospectus or the prior update of registration in the RNV.
Partner Francisco García-Naranjo González Mexico City +52 55 9156 3690 FGarcia@mayerbrown.com
Partner Jorge Escalante Mexico City +52 55 9156 3611 jescalante@mayerbrown.com
Written by Francisco García-Naranjo González and Jorge Escalante
Last December, Mexican Congress approved an initiative (the "Reform") to amend the Mexican Securities Market Law (the "Securities Law") and the Mutual Funds Law (the "MFL"), with the purpose of providing greater depth, as well as increasing the competitiveness and dynamism of the Mexican securities market for both issuers and investors.
As discussed in our prior Legal Update (China Proposed Changes to the “Catalogue of Technologies Prohibited and Restricted from Export”), China is generally considered to have two distinct export control regimes: (1) the regime pursuant to the Export Control Law of People’s Republic of China (promulgated in 2020); and (2) the regime pursuant to the Foreign Trade Law of People’s Republic of China (last revised in 2022). The year of 2023 saw important changes to both regimes. Export Control Law Regime Changes Semiconductor Production Minerals As we previously reported (China Imposes New Export Controls on Two Minerals Critical to the Manufacture of Semiconductors), on July 3, 2023, China announced that gallium and germanium, two rare minerals that are widely used in the production of semiconductors and other high-technology goods, would require a license for export from China. Drones and Related Items In the same month, on July 31, 2023, China’s Ministry of Commerce, the General Administration of Customs, and other Chinese agencies jointly issued two announcements: (1) the Announcement on the Implementation of Export Controls on Drone-Related Items1 and (2) the Announcement on the Implementation of Temporary Export Controls on Drones.2 These announcements adopt new control measures on exports of drones and related items while keeping drone-related controls imposed back in 2015 in place.3 Specifically, the 2015 controls generally apply to drones having an endurance equal to or greater than one hour and those having an endurance equal to or greater than 30 minutes and meeting certain performance threshold. Joint Announcement No. 28 added new performance thresholds for the second category (i.e., drones having an endurance equal to or greater than 30 minutes), such that certain “consumer-level” drones are now subject to a two-year temporary control to address the risk of “diverting high-performance civilian drones for military uses.”4 In addition, during the temporary control period, exports of drones not meeting the control thresholds are also prohibited if the exporter knows or should have known the item would be used for “proliferation of weapons of mass destruction, terrorist activities or military purposes.”5 The new measures also added new controls on certain items that meet the listed technical specifications: (i) drone engines; (ii) key load items, including infrared imaging equipment, synthetic aperture radar, and lasers for target designation; (iii) radio communication equipment; and (iv) civilian anti-drone systems6 Even though the two joint announcements did not mention related technology or software, these items may be controlled elsewhere under the Export Control Law regime as well as the Foreign Trade Law regime. For example, China’s Catalogue of Technologies Prohibited and Restricted from Export (which was also recently updated as discussed below), the main control list under the latter regime, restricts the export of technologies regarding drones and related items (e.g., control item nos. “203912X, drone technologies”; “233913X, laser technologies”; and “203914X, laser radar technologies”).7
1 Joint Announcement No. 27, 2023, Ministry of Commerce, General Administration of Customs, State Administration of Science, Technology and Industry for National Defense, and the Equipment Development Department of the Central Military Commission (“JA No. 27”), http://www.mofcom.gov.cn/article/zwgk/gkzcfb/202307/20230703424616.shtml. 2 Joint Announcement No. 28, 2023, Ministry of Commerce, General Administration of Customs, State Administration of Science, Technology and Industry for National Defense, and the Equipment Development Department of the Central Military Commission (“JA No. 28”), http://www.mofcom.gov.cn/article/zwgk/gkzcfb/202307/20230703424598.shtml. 3 See, e.g., JA No. 28. 4 Ministry of Commerce, Answers to Reporter Questions Regarding Drone Export Controls (Jul. 31, 2023), http://www.mofcom.gov.cn/article/syxwfb/202307/20230703424756.shtml. 5 JA No. 28. 6 JA No. 27 7 Joint Announcement No. 57, 2023, Ministry of Commerce and Ministry of Science and Technology, http://www.mofcom.gov.cn/zfxxgk/article/gkml/202312/20231203462079.shtml. 8 Joint Announcement No. 39, 2023, Ministry of Commerce and General Administration of Customs, Announcement on Optimizing and Adjusting Temporary Export Control Measures for Graphite Items, http://www.mofcom.gov.cn/article/zcfb/zcdwmy/202310/20231003447368.shtml. 9 Joint Announcement No. 66, 2023, Ministry of Commerce and General Administration of Customs, http://exportcontrol.mofcom.gov.cn/article/zcfg/gnzcfg/zcfggzqd/202312/941.html. 10 Joint Announcement No. 57, 2023, Ministry of Commerce and Ministry of Science and Technology, http://www.mofcom.gov.cn/zfxxgk/article/gkml/202312/20231203462079.shtml.
Partner Jing Zhang Washington DC +1 202 263 3385 jzhang@mayerbrown.com
Partner Tamer A. Soliman Washington DC +1 202 263 3292 TSoliman@mayerbrown.com
Graphite Materials On October 20, 2023, the Ministry of Commerce and the General Administration of Customs jointly issued an announcement (Joint Announcement No. 39, 2023) modifying the temporary export control measures on graphite materials originally imposed in 2016.8 2024 Dual-Use Catalogue Finally, on December 29, 2023, the Ministry of Commerce and the General Administration of Customs jointly announced the 2024 version of the Catalogue of Dual-use Items and Technologies Subject to Import and Export Licensing (the “2024 Dual-Use Catalogue”).9 The 2024 Dual-Use Catalogue incorporated some but not all of the new and updated controls announced earlier in the year, and, as noted above, some control measures imposed in earlier years remain in force and must also be complied with. Foreign Trade Law Regime Changes Following the comment process we covered previously (China Proposed Changes to the “Catalogue of Technologies Prohibited and Restricted from Export”), on December 21, 2023, the Ministry of Commerce and the Ministry of Science and Technology jointly issued a revised Catalogue of Technologies Prohibited or Restricted from Export, which took effect immediately upon announcement.10 The revised catalogue reduced the number of controlled items from 164 to 134 through 34 deletions, four additions, and 37 modifications. These changes affect several industries and technical areas. Notable changes include new controls on laser radar systems and modified controls on metallurgical technologies for non-ferrous metals. These changes and updates announced in 2023 reflect the complex and evolving nature of China’s export control measures. Of particular note, despite rapid developments after 2020, many pre-2020 Chinese export control authorities and discrete control lists (ones that have not been consolidated into the two catalogues discussed in this Legal Update) remain in force. Thus, interested parties should ensure careful review of the application of these export control measures to their operations and continue to monitor relevant developments.
Partner Jennifer L. Parry Washington DC +1 202 263 3185 jparry@mayerbrown.com
Partner Shelby L. Colson Washington DC +1 202 263 3118 Scolson@mayerbrown.com
Written by Jing Zhang, Tamer A. Soliman, Jennifer L. Parry and Shelby L. Colson
China made significant changes to the country's export control rules in 2023, imposing new controls and modifying existing controls across multiple industries and technical areas.
In its judgment, the Court of Appeal reversed the Commercial Court's finding that English law governed swaps under the 1992 ISDA Master Agreement entered into shortly before the financial crisis of 2007-2008 were void for lack of capacity, and instead found that the swaps were valid and binding in accordance with their terms. This decision follows a series of cases in the Italian and English courts in recent years arising out of swaps entered into by Italian public bodies who have sought to challenge the validity of the swaps following the financial crisis; in particular, since the case of Banca Nazionale del Lavoro SpA v Comune di Cattolica, where the Italian Supreme Court held that certain interest rate swaps entered into by Italian local authorities were unenforceable as a matter of Italian law because the local authorities had no corporate capacity to enter into them. To read the full article, please click here.
Partner Stephen Moi London +44 3130 3000 smoi@mayerbrown.com
Partner Sarah Garvey London +44 20 3130 3855 sgarvey@mayerbrown.com
Counsel Lauren Theodoulou London +44 20 3130 3624 ltheodoulou@mayerbrown.com
Professional Support Lawyer Sarah Shearman London +44 20 3130 3247 sshearman@mayerbrown.com
Associate Samantha Green London +44 3130 3945 samantha.green@mayerbrown.com
Partner Ashley Mcdermott London +44 3130 3120 amcdermott@mayerbrown.com
Partner Nanak Keswani London +44 3130 3710 nkeswani@mayerbrown.com
Associate Robyn Llewellyn London +44 3130 3990 rllewellyn@mayerbrown.com
UK court of appeal overturns judgement in latest Italian swaps decision concerning corporate capacity
Written by Stephen Moi, Sarah Garvey, Lauren Theodoulou, Sarah Shearman, Samantha Green, Ashley McDermott, Nanak Keswani and Robyn Llewellyn
In December 2023, the England & Wales Court of Appeal unanimously overturned the high-profile ruling handed down by the Commercial Court in October 2022 in the case of Banca Intesa Sanpaolo and Dexia v Comune di Venezia [2023] EWCA Civ 1482.
Sovereign debt conversions or swaps
Written by Ashley McDermott, Robert Flanigan and Peter Pears
Developing countries with histories of debt vulnerabilities are often also vulnerable to climate change. Whilst debt-for-nature swaps have been around for decades, they have become more prevalent as a means of addressing three major problems facing less-wealthy nations: high-levels of debt, the impact of climate change and biodiversity loss. They are also attractive to investors keen to purchase assets with an ESG element. But what are "debt-for" transactions, how have they worked to date and how might they evolve in the future? These so-called "swaps" are not to be confused with financial derivatives contracts whereby there is an exchange of cashflows based on a notional principal amount. Rather, they typically involve existing, hard currency debt obligations (usually in the form of bonds) of a heavily-indebted country being cancelled or reduced in exchange for debtor-country investments in biodiversity protection and critical climate initiatives. The debtor country uses a portion of the proceeds of a new debt issuance to tender its existing debt at the discounted market price. The new debt is often issued by an SPV that is set up specifically for the transaction and often has the benefit of a guarantee or political risk insurance from a credit-worthy entity – often a DFI such as the US International Development Finance Corporation (DFC) or the Inter-American Development Bank (IADB) – thereby reducing its debt service costs going forward. This usually means that a country's debt needs to be trading at a discount, although the amount of the discount in the buyback of debt securities has varied. For example, Ecuador bought back its debt at between 38 and 52 cents on the dollar whereas for Gabon this was between 85 and 96.75 cents on the dollar. If a country and its creditors agree to a swap, a portion of that nation's debt can be cancelled, with the savings being dedicated to achieving specific, measurable and traceable outcomes in climate or nature projects. Debt-for-development and debt-for-impact swaps may be more appropriate for countries which are less impacted by climate change and do not have biodiversity challenges but which have other challenges such as access to clean water. Belize, Ecuador, Barbados, Gabon and Cabo Verde have all done debt-for-nature swaps in recent years. The IIED report suggests that Ghana, Gambia, Pakistan and Sri Lanka are amongst countries which may benefit from some form of debt swap. The IIED's analysis focuses on the 49 countries most at risk of defaulting on their external debts for which data could be found. According to IMF/World Bank figures for 2022 public external debt stocks – the most recent available – such countries collectively owe $431 billion. Using a methodology derived from previous international debt-reduction schemes, IIED estimates that $103.4 billion of that total could be available for climate / nature related schemes, although this would obviously depend on the market's appetite for a vast increase in the amount of such debt swaps.
Case study In the case of Ecuador, the government repurchased around $1.6 billion of existing debt for $644 million, saving the country around a billion dollars in repayments over 17 years. In return, the government has committed to using more than $450 million of the savings for marine conservation in the Galápagos Islands over 20 years, including protecting a marine reserve set up last year, which is used as a migratory corridor by sharks, whales, sea turtles and manta rays. The old debt was replaced with a cheaper-to-service $656 million "Galapagos Bond" maturing in 2041, with the US International Development Finance Corporation providing more than $656 million in political risk insurance (PRI) on the new bonds.
A new study by the International Institute For Environment & Development (IIED) has suggested that more than US$100 billion of debt in developing countries could be cancelled to spend on restoring nature and adapting to climate change by using debt-for-climate and debt-for-nature swaps.
Despite the opportunities for more debt swap transactions, there are also challenges to overcome. Some have argued that they can be complex, time-consuming and costly considering that the overall debt reduction is typically low compared to a country's overall debt. Also, for such swaps to have a real impact, "the number and size of transactions must be scaled up significantly", the IMF’s Managing Director Kristalina Georgieva said last year. These are not dissimilar to the challenges initially faced by other sustainable finance instruments and, as is the case with other financial products, complexity, time and cost will reduce the more transactions there are. Indeed, the reasons why debt swaps are becoming more prevalent (primarily debt sustainability and climate vulnerability) do not seem likely to become less urgent anytime soon. There is currently broad interest in debt swaps from sovereigns, DFIs and investors. Whilst they are not a panacea and may not be appropriate for some countries, we expect the size and volume of such deals to continue to increase throughout the rest of 2024 and beyond.
Partner Robert Flanigan London +44 3130 3488 rflanigan@mayerbrown.com
Partner Peter Pears London +44 3130 3297 ppears@mayerbrown.com
