Monthly Archives: October 2021

Confidential information is a basic business requirement. It plays an important role in those areas of business when talking about high technologies, scientific developments, in the field of IT. Such information is essential to protect business vitality, competitive advantage, industry leadership, and ultimately market share. How to keep relevant information secret? The best way to keep something confidential is not to disclose it. However, there are multiple instances in which parties may need to share business secrecy. One common way to disclose and at the same time protect relevant information is through the Non-Disclosure Agreement, which is sometimes also referred to as a Confidentiality Agreement or just NDA.

UK

In the UK, even absent a clear agreement, the manner of dealings can contribute significantly to creating an equitable duty of confidence. This model does not apply in a similar way in other jurisdictions; so, in that regard, the UK is more favorable to a disclosure than other jurisdictions. However, in relation to implied duties to act in good faith, the UK is significantly out of step and disclosures will generally be better off in other jurisdictions, particularly in continental Europe.

It should be noted that terms may be implied; that is, they are deemed to exist without being specified or written down. Implied terms fall into two categories:

1. • Those that are implied by law; and
   • Those that are implied by the conditions of a certain case.

USA

Information establishing a trade secret is commonly protected under US common law by the Uniform Trade Secrets Act and the duty of good faith is a well-known legal standard. Under the US law, trade secrets are a sub-category of NDAs since trade secrets are widely defined as any formula, product, design, or data not publicly known and which confers to its owner an economic and competitive advantage.

In California, Delaware and New York states, implied duties of good faith and fair dealing arise only once parties have entered into a contract. In practice, a duty implied at that stage is unlikely in most cases to do more than reinforce express obligations of confidentiality included in the contract. In the USA (as well as in UK), while discussing discloser’s preferred remedy, the courts will consider the “balance of hardships” (“balance of convenience” in the UK) by analyzing the merits of the claim and comparing the hardship suffered by the breaching party if an injunction is granted, to the hardship to the party seeking the injunction if it is not granted.

EU

In the EU region, the rules and regulations originate mainly from EC Directive 2016/943 of May 2016 and, accessorily from the Data Protection Directive (95/46/EC). Under article 3(1) of the EU Trade Secret Directive 2016/943, trade secrets are said to have been lawfully obtained whenever this acquisition has resulted from “observation, study, disassembly or testing of a product or object (…) that is lawfully in the possession of the acquirer of the information”. However, under article 4(1) of the same Directive, trade secret is misappropriated whenever there is a breach of a confidentiality agreement or of a contractual duty to limit the use of the trade secret.

France, Italy and Germany

Fixed compensation clauses are more common and may be referred to as a penalty. However, to be enforceable, the required compensation amount must be reasonable. If it is not, it may be reduced or increased by the court if manifestly excessive or insufficient or, under German law, held to be void for violation of public policy. If the discloser can prove a loss in excess of the stated amount, the excess may be recoverable.

Spain

parties usually provide for a penalty which serves as punitive damages (either in lieu of, or in addition to, the actual loss suffered) to avoid the burden of proving the actual loss. In some cases, this may be expressed as indemnification in lieu of damages. However, even here, the courts may reduce punitive damages if they consider them to be disproportionate.

Armenia

In Armenia, there is no directly expressed legal opportunity for non-disclosure agreements. However, NDAs can be drafted under the principle of freedom of contract. Also, it should be noted that, when including provisions in employment contracts, special attitude must be taken, in order not to violate guaranteed rights of employees. Nonetheless, regardless of the NDA, in Armenia confidential business information is protected by legislation. According to the article 141 of the civil code of RA, information is an official, commercial or bank secret when it has an actual or potential commercial value by virtue of it being unknown to third persons, there is no free access thereto on legal basis, and the holder of the information takes measures for the protection of its confidentiality. The persons having illegally obtained information that constitutes official, commercial or bank secret shall be obliged to compensate for the damages caused. Such obligation shall be imposed also on parties to a contract having disclosed and/or used official, commercial or bank secret in violation of a civil law or employment contract.

The structure of business models of many companies, (those which engaged in the implementation of long-term investment projects, service) are such when at the initial stage of activity companies face conditions of negative capital before receiving so-called deferred profits. In this situation many countries have adopted different approaches regarding the protection of creditors․

In the United States, corporate law provides maximum flexibility to the owners of the company, and creditors protect their interests by contract, while in Europe, the main purpose of corporate law is to protect creditors. 

One of the instruments of protection creditors by law is the rule of legal capital and its aftereffect rule recapitalize or liquidate (ROL), which means if the value of net assets falls below the minimum amount of the authorized capital, the company must be liquidated or recapitalized.        

In Armenia, generally, there is no established minimum amount of the authorized capital for companies. However, if the value of net assets is negative some consequences can be expected:

• • In the case of limited liability companies (LLC) if the value of net assets is negative the company is subject to liquidation.
  • In the case of joint stock companies (JSC), negative net asset value is admissible under certain conditions.

If the value of the company’s net assets is negative, or if the minimum amount of the authorized capital is established, the value of the company’s net assets is less than the established amount then:

• • The executive body of the company is obliged to submit to the Board of directors a request to convene an extraordinary meeting of shareholders,
  • An extraordinary meeting decides whether liquidate or continue the activities of the company,
  • A decision on continuing operations may be made if the board or the executive body has submitted a written opinion on the expediency and justification of continuing the company’s activities taking as a basis:     
•  
  • • • the directions of the company’s activities,       
      • scope of the company’s activities,       
      • its features,       
      • activity programs and other circumstances.

If such a decision is not taken, the company is subject to liquidation․

It is also should be noted, that according to the balance sheet insolvency rules, the debtor is insolvent where the liabilities of the debtor in two thousand times or more, the amount of the minimum wage established by law, exceeds the value of the debtor’s assets. Accordingly, in Armenia, the top limit of permissible negative equity is two million Armenian drams (approx. 4,170 USD).

However, some experts have suggested that legal capital rules are an ineffective and unnecessary form of creditor protection in developed economies, since the rules themselves are incapable of delivering the desired protection, and other strategies are available to provide what is necessary.

                 

Overview

The Republic of Armenia Law on Combating Money Laundering and Terrorism Financing (hereinafter referred to as the “Law”) sets forth the requirements for financial and other institutions in relation to the prevention of money laundering and terrorism financing. Under the Law several categories of institutions, including payment and settlement organizations and other financial institutions have an obligation to develop and implement anti-money laundering and terrorism financing strategies (including KYC procedures) and submit respective reports to the competent authority – the Central Bank.

Payment and settlement organizations shall undertake measures for identifying and assessing potential and existing AML risks (including most importantly a KYC procedure) and shall have efficient policies for managing and mitigating of the discovered risks, control mechanisms and procedures.

High-risk and otherwise regulated transactions. As a reporting entity, a payment and settlement organization shall report to the Central Bank on the transactions and / or business relationships subject to reporting and on all suspicious transactions (with the high-risk transactions mentioned in your inquiry potentially falling under either of those categories).

Transactions subject to reporting are non-cash transactions above the threshold of 20 million Armenian drams (approximately USD 41,650), as well as transaction with cash above the threshold of 5 million Armenian drams (approximately USD 12,250).

According to the Law, a transaction or business relationship is presumed suspicious when there are sufficient grounds to suspect that the asset has proceeded from crime or is linked to terrorism or terrorism financing, or where the transaction involves politically exposed persons or their relatives / affiliates from high risk countries (as determined by the CBA), as well as transactions with unusually high prices or otherwise unusual terms, when the economic or other lawful rationale behind it are not clear. Additionally, according to CBA regulations the following shall be criteria of high risk (which may, but does not necessarily imply that are also suspicious): transaction involves entities or arrangements that are personal asset-holding vehicles, or involves companies that have nominee shareholders or shares in bearer form, relates to businesses and business relationships that are cash-intensive, involves companies that have unusual or excessively complex ownership structure, transaction involve private banking activities, transactions are non-face-to-face business transactions or relationships.

KYC. Within the scope of the KYC procedure, the payment and settlement organization shall identify and verify the customer and the beneficiary (the individual on whose behalf or on whose benefit the customer acts and / or who actually controls the customer or the person on whose behalf or in whose benefit the transaction or business relationship is being carried out). It is generally required to identify the customer in-person, unless the payment to the customer will be made via another financial institution, in which case it is assumed that the latter will perform the in-person identification.

Outsourcing of KYC. Currently Armenian law does not allow to outsource KYC procedures to third parties. There is a possibility for allowing such outsourcing, but it is contingent on CBA regulations, and such regulations are not in place.

Preventive measures to protect companies from hostile takeover in Armenia: regional approach

Much has been written about the methods and technologies of hostile takeover. However, the issue of protection against acquisitions remains insufficiently developed. The problem is that of the companies are fully confident in their invulnerability or in the absence of potential aggressors’ interest in their companies as a possible asset, which entails neglecting elementary means of corporate protection and legal prevention. However, this often leads to the fact that the owners of the company begin to worry about protection only when the attack has already been successfully carried out and they have completely lost control over the company.

What are the main tools that can be used by a company that has become the target of an attack or may become one soon?

The system of protective measures can be roughly divided into two main blocks:

• Strategic or preventive measures aimed at creating reliable corporate protection and minimizing the risks of hostile takeover.
• Tactical or operational actions, the main purpose of which is to prevent the seizure of control over the business in the context of an attack by the aggressor.

Let’s take a closer look at preventive measures, since they are the key to ensuring reliable corporate protection. These activities include:

1. 1. Monitoring the information environment around the companies.

The emergence of unwanted interest in the business from a third party usually manifests itself in a series of characteristic signals, which, if detected in a timely manner, the business owner can take the necessary measures to repel an attack. Such characteristic indicators include attempts to buy up a part of the company’s shares, requests from minority shareholders to hold extraordinary shareholders’ meetings or to provide documents, shareholders challenging the company’s transactions, unexpected inspections by regulatory and supervisory authorities, acquisitions in each industry, etc.

1. 2. Legal diagnostics.

The beginning of any hostile takeover is the collection and analysis of information about the target company – about its corporate structure, main shareholders, management, informal leaders, assets, partners, counterparties, administrative resources, etc. The volume and quality of the collected information by 90% determines the further takeover strategy that the acquiring company will choose. Thus, the potential acquiring company conducts a kind of diagnostics of the company – the goal, and its owners and management often do not even know about it. As a result of diagnostics, the main “pain points” of the company are determined and a program of actions is developed to eliminate or minimize them.

1. 3. Business restructuring.

A weakly protected business is characterized by the consolidation of ownership, management, and operational functions in one company, which simplifies the task of the aggressor (acquiring company) – to effectively absorb the business, the aggressor needs to intercept control in one single company. Therefore, one of the most effective preventive measures aimed at protecting a company from hostile takeover is restructuring. The implementation of such a restructuring makes it possible to solve several problems at once: to remove the main production assets of the business from the risk zone, to optimize financial flows and to ensure the protection of the business owners directly.

1. 4. Amendments to the charter and other documents of the company.

All contradictions, gaps, and shortcomings of such internal documents as the charter and internal regulations on governing bodies are always skillfully used by aggressors to achieve their goals. Typical shortcomings of such documents in practice are contradictions with peremptory norms of the law, excessive procedural encumbrances, lack of proper regulation of complex corporate aspects.

1. 5. Protection of information.

This block of protective actions includes the development and implementation of a regulation on the protection of confidential information of the company. It may determine the procedure for providing documents and information to any third parties, communication with the press, etc.

1. 6. Creation of a consolidated block of shares and a “cross-ownership” scheme.

The following picture is classic for hostile takeovers: the target company has a “loose” authorized capital, in which, in the absence of a powerful consolidated package belonging to the business owner or top management, a significant number of shares are dispersed among minority shareholders, most of which are current or former “members” of the company. In this situation, the aggressors (acquiring company) simply carried out an active purchase of shares from minority shareholders, who happily got rid of unnecessary “pieces of paper”. As a result, within a short period of time, a certain block of shares required by the law was formed, allowing the aggressor to hold a repeated extraordinary meeting of shareholders and take over the management of the company.

1. 7. Legal protection of fixed assets (property).

As a rule, the end goal of the aggressor is to gain control over some attractive asset, most often real estate, and much less often the acquiring company is attracted by a working business as such. In this regard, in the complex of preventive protective measures, one of the key positions is taken by measures for the legal protection of the main property assets of the company.

1. 8. Accounts payable management.

Overdue and poorly managed company accounts payable – targets often become the main starting point at the beginning of a corporate attack by an acquiring company. The existing debt claim rights are bought by the acquiring company at a significant discount from the company’s creditors.

1. 9. Working with top management, employees, and partners of the company.

Almost any company has some actual or potential conflict, for example, a conflict between the main shareholders of the company, conflicts between shareholders and management, conflicts between management and employees. Any of these conflicts, if it is serious enough, may be used by the acquiring company which may try to activate it as much as possible and use it for its own purposes. By participating in unleashing a conflict, the acquiring company can attract one of the conflicting parties to its side or receive all the information that needs.