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Private Equity and Alternative Investment Committee Newsletter Issue 1 April 21st, 2014

PRIVATE EQUITY AND ALTERNATIVE INVESTMENT COMMITTEE


About the Committee
The Private Equity and Alternative Investment Committee seeks to engage attorneys from all over the world in a continuous discussion about the most interesting and challenging topics affecting private equity and alternative investment mechanisms. We believe that one of the most valuable virtues as attorneys is the constant will to become better professionals. Through participation in this Committee, members will nurture from each others experience as well as expand their respective networks. The Committees goals are to deliver value to our members by producing top quality programs, projects and publications, to attract more active members for our Steering Committee, to increase our membership as well as to promote the discussion of interesting topics related to the international PE arena (including international Venture Capital investments as well as investments into distressed assets), and to increase general awareness, interest and membership in our Committee. The Committees activities include the sponsorship of programs at the SIL seasonal meetings. We encourage all Committee members to get involved in our planned activities as well as to freely submit your suggestions and ideas.

Committee Leadership
Co-Chairs Mattia Colonnelli David M. Silk Vice Chairs Albert Garrofe Caroline Gottschalk E. Eric Rytter Linjun Lawrence Guo Alan S. Gutterman James C. Nobles Jr. Joao Otavio Pinheiro Oliveiro Steering Committee Members Luis Fernando Gonzlez Nieves/Publications E. Eric Rytter/Membership E. Eric Rytter and Justin Vineberg/Programs Georg A. Frowein/Projects Mark Pflug and Georg A. Frowein/Policy Caroline Gottchalk/Website

Upcoming Events
-2014 ABA Annual Meeting When? August 7-12, 2014 Where? Boston Convention Center 415 Summer Street, Boston, Massachusetts 02210 -Section of International Law 2014 Fall Meeting When? October 21-25, 2014 Where? Hilton Bueno Aires Av. Macacha Guemes 351, Buenos Aires, C1106BKG, Argentina -Section of International Law 2015 Spring Meeting When? April 27-May 25, 2015 Where? Hyatt Regency Washington on Capitol Hill 400 New Jersey Ave NW, Washington D.C. 20001-2002, United States of America

DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. The International Private Equity and Alternative Investment Committee Newsletter is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in in this newsletter are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. 2014 ABA all rights reserved.

Private Equity and Alternative Investment Committee Newsletter Issue 1 April 21st, 2014

German Federal High Court drops corporate law requirements for a delisting of a company by Dr. Jorg S. Neubauer The German Federal High Court (Bundesgerichtshof) recently issued a decision (October 8, 2013, reference no: II ZB 26/12, socalled "Frosta Decision") on the corporate law requirements for a delisting of a stock corporation. The German Federal High Court (Bundesgerichtshof) thereby dropped the requirements introduced in 2002 (so-called "Macrotron Decision"). The Frosta Decision is not only applicable to a delisting of a stock corporation, but also to a 'downlisting' of the company from the regulated to the open market. By the Frosta Decision, the German Federal High Court (Bundesgerichtshof) revised its Macrotron Decision introduced 2002 when the German Federal High Court (Bundesgerichtshof) ruled that any delisting required a shareholders' resolution passed with a majority of 50% of the voting rights represented at the meeting. If, as a result of the delisting, shareholders would lose the possibility to trade their shares over an exchange, all shareholders had to be afforded with an option to sell their shares. Such offer had to be made by the company or the majority shareholder. The Frosta Decision is based on a decision by the German Federal Constitutional Court (Bundesverfassungsgericht) in 2012, stating that a compensation to minority shareholders is not constitutionally required. The Frosta Decision leaves the requirement for a delisting unaffected. others

To implement the delisting of a company in Germany, the company is required to file an application with the respective German stock exchange. The exchange will decide on such application within its discretion. To support this decision, a company should provide reasons why the delisting is in its best interest, e.g., because the market became illiquid and there is no sufficient trading justifying a continuance of the listing, or the low trading volume results in significant gaps between individual quotes, thereby enabling market manipulation. In general, the German stock exchange may grant the delisting application only if the shareholders are afforded sufficient protection. To this end, the German stock exchanges usually require at least that shareholders are granted sufficient time to sell their shares over the exchange before the delisting becomes effective. The time period is set by the individual stock exchange; (e.g., the Frankfurt stock exchange mandates six months). In any event, German law requires that the respective period may not exceed two years. However the Dusseldorf stock exchanges (currently still) requires (in line with the Macrotron Decision) that a delisting on the application of the company requires a shareholder's resolution to approve the delisting and also requires an offer to be made by the majority shareholder to the other shareholders of the company to buy their shares. In general, shareholders may now only seek protection against a delisting by challenging the respective delisting decision by the stock exchange. However, it is disputed among courts and scholars whether a single shareholder has the right to initiate a voidance law suit against a respective decision. It remains to be seen whether companies will chose to initiate a delisting on the basis of the

The decision on the delisting lies within the discretion of the board of the company and the board of the company has to align its decision on delisting under the general rules on the company's interest.

DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. The International Private Equity and Alternative Investment Committee Newsletter is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in in this newsletter are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. 2014 ABA all rights reserved.

Private Equity and Alternative Investment Committee Newsletter Issue 1 April 21st, 2014

Frosta Decision. However, it can be expected that companies will combine other corporate measures, e.g., a squeeze-out of minority shareholders or a domination and profit and loss pooling agreement. The compensation payable by the majority shareholder to the minority shareholders in a squeeze-out or domination and profit and loss pooling agreement process may not be less than the weighted average three months stock price prior to the announcement of the corporate measure. In case the company has already been delisted, such compensation is only based on a company valuation (discounted earnings method) that may be significantly lower than the weighted average stock price, especially in cases the market is speculating that the aforementioned corporate measures will be implemented by the majority shareholder. For more information on this collaboration, you may contact Jorg at joerg.neubauer@skadden.com The Volcker Rule - Restricted Investment in Private Equity by Manasa Reddy Gummi During the early 2000s, the bear market encouraged banks to turn to private equity as a good source of alternative investment where they aim deliver returns on a variety of market conditions. Commercial banks also became more inclined towards providing high levels of leverage on larger pools of debt. An additional advantage that bank debt brings to the table is that banks offer better terms as they want to sell other fee based services to the private equity firms and the private equity firms believe that their bank relationships are a competitive advantage. In the light of all the factors, banks have found an influential presence in the private equity industry.

When the economy was thriving, they were not concerned by bad debts and defaults. However, this was no longer the same with the dawn of the economic slump. The question that had arisen in the light of the financial crisis was about the liquidity of the private equity market. Private equity buyouts created more vulnerable acquisitions with higher levels of leverage and complex debt structures. Consequentially private equity finance developed an element of disfunctional and unstable liquidity. The instability of liquidity resulting in periodic adverse economic conditions and problems within the financial system raised the issue of whether private equity finance must be regulated and how. Paul Volcker, the former Chairman of the Federal Reserve Bank of New York advocated for the need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933- one highly regulated (and somewhat boring) set of banks to run the payments system, and a completely separate set of financial entities to help firms raise capital (and to trade securities). This view completely endorsed by the Obama administration proposed the Volcker Rule in Section 619 of the Dodd-Frank Act as a simple and common sense reform that would strengthen the financial system. Four years later, this piece of legislation that was approved by the regulators in December 2013 has shaped to be elaborate, complex and incomprehensible. Section 619 of the Dodd-Frank Act added a new Section 13 to the Bank Holding Company Act, which prohibits a banking entity from engaging in proprietary trading or acquiring or retaining an ownership interest in, or having certain relationships with, a covered fund, while permitting such entities to continue to provide client-oriented financial services. The Volcker Rule does not affect all private equity activity but aims at the part that is tied to the banking entities. It prohibits insured depository

DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. The International Private Equity and Alternative Investment Committee Newsletter is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in in this newsletter are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. 2014 ABA all rights reserved.

Private Equity and Alternative Investment Committee Newsletter Issue 1 April 21st, 2014

institutions and their affiliates from sponsoring a hedge fund or private equity fund. To that effect, the final rule lays out various requirements, restrictions as well as compliance and monitoring obligations. The fundamental objective behind the Volcker Rule is a good one. However it raises more issues than it solves in terms of risk dynamics, compliance costs, pressure to meet deadlines and complexity of transactions. This pushes banks to step back from certain transactions and be stricter with their investment operations in order to avoid crossing paths with the rule. How this would impact the liquidity of the markets and financial system as a whole has to be seen. For more information on this collaboration, you may contact Manasa at mrg247@cornell.edu Proposal for a new type of share investment fund in Brazil in view of CVM efforts to develop the access by mid-size/emerging companies to the Brazilian stock market By Joo Otvio Pinheiro Olivrio As part of its recent efforts to increase the access of mid-size companies to the Brazilian stock market, the Brazilian Securities Comission (Comisso de Valores Moblilirios CVM) has once again relied on the proposals made by the CVMs Committee of Smaller Deals (Comit Tcnico de Ofertas Menores) and published on December 12, 2013, the Notice of Public Hearing SDM No. 13/2013 (SDM 13/2013) by means of which CVM proposed some amendments to the Instruction CVM No. 409/2004 aiming to include a new type of investment fund as part of the Brazilian capital markets framework to be called Fundo de Investimento em Aes Mercado de Acesso (Stock Investment Fund Access Market). CVM expects the market to send its comments and suggestions of changes with

respect to the proposed rules provided for in SDM No. 13/2013 until February 10th, 2014. As a general rule, this new type of fund shall invest at least 2/3 of its net worth on stocks issued by companies which are listed on an access market trading securities segment administered by a stock exchange or by an entity of the organized OTC market that has established contractual arrangements to ensure distinguished corporate governance practices among the companies which are listed thereto. In addition to this rule, the SDM 13/2013 also brings to the CVMs most important investment funds regulation other three rules that the Committee and CVM expect to have some influential on the development of the Brazilian access market for mid-size companies. 1. Investment on Closely-Held Companies: The new rule also innovates by allowing this type of funds, specifically when they are incorporated as a closed-end fund, to invest up of 1/3 of its network on shares, debentures, subscription bonuses or other securities convertible or exchangeable into shares issued by closely-held companies, provided that (i) such funds take part of the invested companys decision making process with influence on its strategic issues and on management (chiefly by means of the appointment of directors to the invested companies BoD), and (ii) such funds invest in companies that adopt the same level of governance practices that CVM currently requires for the Brazilian Private Equity Funds (Fundo de Investimento em Participaes FIP) by means 1 of CVM Instruction No. 391/03 .
1

The following are the corporate governance minimum standards that CVM already imposes to companies invested by FIPs in Brazil that are equal to the standards that CVM intend to impose to the Stock Investment Funds Access Markets: (i) prohibition to issue Profits Participation Certificates (Partes Beneficiarias) and the inexistence of such DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. The International Private Equity and Alternative Investment Committee Newsletter is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in in this newsletter are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. 2014 ABA all rights reserved.

Private Equity and Alternative Investment Committee Newsletter Issue 1 April 21st, 2014

CVM aims with this new rule to create an investment vehicle in which the portfolio manager can use more flexibility to invest in midsize and emerging companies. This new type of fund shall allocate part of its capital in a company that is not public yet, but that the portfolio manager believes that has potential to develop and expand to the extent that it will have to go public further to finance itself. Such hybrid funds may create a know-how and develop capabilities to assist those companies in that difficult mission, and therefore may have an important role on the creation and development of pathways for those types of companies to access the public markets for the first time. With respect to this new rule, CVM also intends with the amendments provided for in SDM 13/2013 that shares invested by Stock Investment Funds Access Market in close-held companies must be evaluated every year at a fair price under accounting rules and standards approved by CVM. 2. Repurchase of the Funds Shares: By the new rules suggested by CVM on the SDM 13/2013, Stock Investment Funds Access Market incorporated as closed-end investment funds are authorized to repurchase their outstanding shares, provided that (i) such provision is duly expressed in the funds regulation (regulamento); (ii) the repurchase is carried out in the same organized market in which the shares are traded; (iii) the repurchase

price of the shares must be lower than the shares net value on the day immediately prior to the repurchase; (iv) the repurchase shares must be cancelled as soon as they are repurchased; (v) the total amount of repurchases may not exceed 10% (ten percent) of the total amount of shares issued by the relevant Stock Investment Fund - Access Market during a certain period of twelve (12) months, This new rule is also relevant for these type of funds to the extent that it does allow the portfolio manager to use some mechanisms to face the gap between the fair value of the shares and the value of the shares of the trading market, which frequently happens in closed-end funds that invest in illiquid investments, provided that the portfolio manager respects the thresholds and requirements mentioned above. It is important to stress that the fund administrator must disclose the repurchase intention with at least fourteen (14) days in advance of the transaction and the repurchase of shares shall be prohibited whenever the funds administrator or portfolio manager becomes aware of any information not yet disclosed to the market relating to any invested company that could substantially change the value of the funds shares or influence the decision of the shareholder to buy, sell or hold their shares. 3. Remuneration of the Portfolio Manager Performance Fees:

securities in the market; (ii) establishment of an unified term The members of the Committee also pointed out of office of one (1) year to all the members of the BoD; (iii) to make available agreements with related parties, shareholders that it would be important if CVM allows the agreements and option plans for the acquisition of shares or performance fee to be charged over absolute other securities issued by the invested company; (iv) resolve corporate disputes through arbitration; (v) in case the returns (inflation or interest rates, for examples), invested company goes public, it shall be bound, before the by means of the creation of an exception to the fund, to join a special listing segment of a stock exchange or currently rules set forth in CVM Instruction No. organized over-the-counter market which guarantees at least the differentiated levels of corporate governance practices 409/2004. The rationale behind this suggestion is provided in the items above; and (vi) annual audit of its that there isnt nowadays any variable income financial statements by independent auditors registered with CVM. DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. The International Private Equity and Alternative Investment Committee Newsletter is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in in this newsletter are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. 2014 ABA all rights reserved.

Private Equity and Alternative Investment Committee Newsletter Issue 1 April 21st, 2014

index that reflects the evolution of the size of the companies in which CVM aims that the Stock Investment Fund Access Market invest. Therefore, the remuneration of the portfolio manager as it is provided would not create any incentive for the formation of funds as the Stock Investment Funds Access Market and CVM understands that the use of other index are in line with the best practice recognized worldwide. For this reason, CVM suggest that CVM Instruction No. 409/2004 shall also contemplates structures of remuneration which are already established in the private equity and venture capital industries, chiefly because shares of companies invested in this industry have the same illiquid features of the companies that the Stock Investment Fund Access Market eventually will invest. It is important to point out that a Stock Investment Fund - Access Market that intends to charge its shareholders using rates somehow in connection with interests or inflation rates must comply with at least one of the mechanisms between the following: (i) the performance fee shall be based on the amounts received by the shareholders that exceed the total amount of the invested capital, adjusted according to the rate used as a benchmark; or (ii) if confirmed, after the closing of the performance fees measuring period, that the value of the shares is lower than the value calculated on the last payment date of the performance fee, the administrator shall reimburse the difference between the performance fee paid and the one that should be paid considering the shares current value, on the same terms and conditions established for the payment of the performance fee. For more information on this collaboration, you may contact Joo Otvio at joao.oliverio@camposmello.adv.br

The Private Equity and Alternative Investment Committee continuously seeks inspired and committed professionals willing to join and collaborate. This is an extraordinary opportunity to meet excellent professionals from all regions of the world while deepening the understanding of new issues related to our line of work. The Private Equity and Alternative Investment Committee welcomes any suggestions, ideas or contributions to enhance this quarterly publication. Private Equity and Alternative Investment Committees WEBSITE: http://apps.americanbar.org/dch/com mittee.cfm?com=IC750001 Editorial Team: Luis Fernando Gonzlez Nieves, Esq. Bernardo Tamez Alarcn, Esq.

DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. The International Private Equity and Alternative Investment Committee Newsletter is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in in this newsletter are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. 2014 ABA all rights reserved.