Market Overview
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Over the years, the islands have served as a geographical vantage point to its many invaders, with architecture and traditions reflecting a wide range of influences. A bi-lingual nation, both English and Maltese are the official languages of the island state.

Back in 1994, Malta issued a series of laws aimed at making Malta attractive to the foreign investor, a strategy that bore great success. Prior to joining the European Union in 2004, Malta revamped its legislative framework to meet compliance with all prevailing EU directives and requirements. This, together with Malta integration of the region’s common currency, the Euro, continued to propel Malta’s economic success. Nonetheless, the sovereign country’s freedom of movement has been amplified upon becoming a member of the Schengen Area, enabling its citizens to move and travel freely to an additional twenty-six countries.

THE LEGAL SYSTEM

Malta has a hybrid legal system, as a result of both common and civil law influences. Malta’s EU membership binds it to transpose all EU directives into domestic law and to abide by regulations issued, and decisions taken, by any of the EU institutions.

THE ECONOMIC AND POLITICAL CLIMATE

Malta enjoys a stable and bi-partisan political scene, which is largely convergent on issues of national and economic importance. Being a parliamentary republic fully adherent to its non-alignment provisos, the country enjoys political neutrality in an international context. Indeed, Malta has very good relationships with its neighboring countries, both to the North and the South of the Mediterranean. It also benefits from a well-established network of bilateral and multi-lateral relationships across the globe.

As a crown colony, the country once relied heavily on British commerce for economic growth. However, that changed with Malta’s independence in 1964 when the foundations for a successful economy were laid down. In fact, the islands’ economy has been incredibly resilient even in times of financial turmoil. It was the only state, alongside Germany, to maintain economic growth during the financial crisis.

Over the past five years, Malta experienced increased economic activity and registered some of the highest GDP growth rates in Europe. In 2017, Malta’s GDP grew by 6.6% and registered a surplus of 3.9%. In 2018, GDP was expected to grow by more than 5% with the surplus estimated to be in the region of 1%. In 2019, Malta is set to remain one of the top performers in the European Union with a projected real GDP growth of 5%, much higher than the average 2.0% expected in the Eurozone.
Malta has additionally maintained a steady level of competitiveness, especially with regards to the cost of living, salaries and property. Whilst maintaining traditional sectors such as manufacturing and tourism, new economic sectors have emerged, namely financial services, iGaming and digital technology, as well as within the pharmaceutical industries. Political stability, and Malta’s economic performance, have resulted in a good quality of life, in turn attracting high levels of Foreign Direct Investment, as well as families and retirees choosing Malta as their place of residence.

BUSINESS ENVIRONMENT AND FDI

Malta is a well sought-after destination for businesses and investors who desire a business-ready European location. As a free-market economy, with no restrictions or legal prohibitions on FDI and no exchange controls, Malta benefits from few obstacles to trade and enterprise. The country does not impose any limitations on the inflow or outflow of funds although, business and trade dealings must be in line with EU and national legislation and regulations.

Alongside its booming economic climate, the islands possess a highly professional and multi-lingual workforce, and adopt a pro-business approach which not only encourages business, but is also attractive for new investment

In fact, in the first half of 2018, the level of foreign direct investment in Malta stood at €176.5 billion. This represents an increase of €8.6 billion over the corresponding period during the previous year. Financial and insurance activities contributed €166.4 billion representing 97.3% of the total stock of FDI in Malta.

MALTA’S SUCCESS STORIES

Malta has always been quick to legislate and to keep up with an ever-changing world and economic and social progress. It recently implemented sound laws and regulations which, while considerate to the needs of the market, allow businesses to operate in a safe yet attractive environment. In turn, the Maltese legislator has molded Malta into an onshore jurisdiction which offers numerous cost-effective opportunities which continue to entice business to its shores.

AVIATION

Malta’s aviation industry is crucial to its development, as it is one of the main sectors responsible for the country’s substantial economic growth. Apart from being a hub for international commerce and travel throughout history, the island was considered as one of the most strategic geographical points during WWII. Throughout the years, we have seen many multinational companies relocate to Malta, such as Lufthansa Technik, VistaJet and EasyJet. Nonetheless, Malta has implemented the Highly Qualified Persons Rules, which have further attracted various aviation executives to relocate their businesses to our shores.

ART & CULTURAL PROPERTY

Malta’s promotion of its arts and culture is at full-speed, thanks to Valletta’s reign as the European City of Culture for 2018. Culture and art are now prevalent on the national agenda and have an immensely important role to play. Indeed, this industry is multi-faceted in nature and addresses the rights of a very wide range of individuals – dealing with artists, art collectors, auctioneers, museum curators and owners of art work, financiers or insurers. Subsequently, art and cultural property touch upon various legislations, including intellectual property laws and taxation laws.

RESIDENCY AND CITIZENSHIP SCHEMES

In 2013, amendments to the Maltese Citizenship Act were passed, allowing one to become a citizen of Malta, provided, of course, that the applicant satisfies the relative conditions of the said Act. These amendments provided for the LN of 2014, which kickstarted the Malta Individual Investor Programme (MIIP). The MIIP regulations provide for affluent persons of impeccable repute to be naturalized and to receive Maltese citizenship, by means of a contribution to the Maltese economy. Therefore, upon obtaining citizenship, the applicant would automatically acquire the status of a European Union citizen and obtain access to 160 visa-free destinations, including the USA.

FAMILIES AND WEALTH

The ever-growing influx of high-net-worth individuals heading to Malta to invest in the country’s extensive investment sectors brought on the demand for sustainable tax planning and legal considerations. Indeed, such a thriving and flourishing sector generally includes trusts law, foundations law and estate management. Malta’s legal system is more than well-catered to suit the needs of HNWs looking to achieve well-established succession, philanthropic and estate planning objectives.

FINANCIAL SERVICES

The Financial Services sector in Malta has grown exponentially in the past twenty-five years, as Malta sought to position itself as the jurisdiction of choice for businesses wanting to set up in a business-friendly EU jurisdiction which embraces innovation. The Malta Financial Services Authority (MFSA), which is the sole regulator for financial services in Malta, maintains a pro-business approach and an open-door policy which has led to the growth of the local capital markets, banking, insurance and investment services industries.

Despite the size of the jurisdiction, the local capital markets are steadily thriving and growing in size, liquidity and sophistication. The Malta Stock Exchange (MSE) offers various listing options for seasoned companies as well as small to medium enterprises seeking to raise finance.

The MSE plays host to numerous equity and debt transactions, providing facilities by means of which securities can be admitted to trading, and subsequently traded over a secure, well-regulated secondary market. There are various listing options through the MSE, namely the Official List, the Alternative Companies List, the Institutional Financial Securities Market, and Prospects - a multilateral trading facility aimed at small to medium enterprises and family businesses. Listing on the MSE main market is not only a cost-effective solution of raising finance, but also affords a European Passport, and the prestige and brand exposure that comes with being listed on a European capital market.

Whilst still relatively small, Malta also offers the possibility to set up securitization vehicles as an alternative means of raising finance.

Malta is also becoming an increasingly popular jurisdiction for investment services firms seeking to offer their services to persons in EU member states under the simplified passporting procedure. It is also gaining traction as a funds domicile, particularly through its home-grown hedge fund structure, the Professional Investor Fund, which itself has gained popularity for its flexibility. Malta also offers the possibility of setting up Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS), as well as has recently set up a bespoke Notified AIF (NAIF) regime. The NAIF, which is a fully EU law-compliant product, provides a fast-track possibility of accessing the market within just 10 days, by shifting the burden of regulation onto the Fund Manager and allowing the fund to be notified to the MFSA.

The local banking and financial institution sector has also evolved from a handful of domestic banks into an industry which operates across all the EU Member States, set up as both ‘brick & mortar’, as well as online. The industry is experiencing renewed vigor since the advent of Fintech, which is reshaping the services which consumers are expecting from credit institutions, electronic money institutions and payment services providers.

Malta’s insurance sector is also steadily growing since Malta’s EU accession and now comprises commercial insurance companies carrying out both general and long-term business, subsidiaries of major international insurance and reinsurance undertakings, Affiliated Insurance Companies (Captives) and Insurance Management Companies. Malta has become a particularly attractive domicile for Captives and Protected Cell Companies and is increasingly being eyed as a potential domicile of choice by UK insurance companies seeking an EU domicile post-Brexit.

FINTECH AND BLOCKCHAIN

The Maltese Government is always on the lookout to excel in emerging industries and to convert the Island into specialized centers of excellence. Throughout 2017-2018, the Malta Financial Services Authority, together with stakeholders, drafted the first regulations of the disruptive technologies of blockchain and cryptocurrencies. Towards the end of 2018, three legislative instruments became effective in regulating cryptocurrencies, referring to virtual financial assets and service providers, distributed ledger technologies, and innovative technology arrangements. A new regulatory authority called the Malta Digital Innovation Technology was also established. The new laws put Malta on the blockchain map with large renowned crypto-exchanges such as Binance, Coinvest and OKEx, as well as other international crypto-based companies, such as Yovo and Neufund, relocating headquarters or opening operations in Malta.

GAMING

The gaming industry in Malta has flourished in just a decade, making the islands the top European jurisdiction for operators. Malta has now become the foremost legal and operational infrastructure in the gaming industry, a success also synonymous with innovation, professionalism, regulation and trust. In 2018, the laws, rules and regulations governing gambling were complete overhauled in order to meet the needs of the ever-growing gaming presence in Malta. Moreover, the Malta Gaming Authority’s (MGA) role was expanded with further discretion in its compliance and enforcement functions, to better achieve regulatory objectives. To remain at the forefront of gaming laws and disruptive technologies, the MGA also launched a Sandbox Framework, pertaining to the use of Virtual Financial Assets (VFAs) and virtual tokens, as well as Innovative Technology Arrangements (ITAs) within the gaming industry as a means of payment for gaming services.

MARITIME

The island’s fate has always been linked to the sea. Due to its strategic location right in the center of the Mediterranean, alongside its deep and sheltered harbors, Malta has the advantage of being a thriving maritime base. In turn, the country has developed an avant-garde variety of integrated maritime services, complemented by numerous dependable marine facilities. Indeed, the Maltese Ship Registry has experienced steady growth over the years and is the 6th largest registry in the world.

Additionally, the Maltese flag is synonymous to a mature and safe jurisdiction with regard to the world of sailing. Vessels bearing the country’s flag are less susceptible to detainment and inspections at foreign harbors, as Malta’s flag belongs to the White List of the Paris and Tokyo MoU. Moreover, the country also offers cost-effective solutions for yacht owners and shipping companies, while at the same time provides state of the art services and infrastructure to a range of vessels. In the first quarter of 2019, the Commissioner for Revenue of Malta issued new guidelines in relation to the calculation of VAT on the leasing of yachts.

SETTING UP IN MALTA

CORPORATE VEHICLES

Business in Malta may be conducted through a number of different vehicles such as partnerships, sole proprietorships, branches of foreign companies, co-operatives, trusts, investment companies with varied share capital (SICAV), protected or incorporated cell companies. The most common vehicle is the limited liability company, whilst partnerships are also popular, although the latter are normally associated with the professional services sector. SICAVs are principally used in investment fund structures and incorporated or protected cell companies popular within the insurance sector.

In addition to the various structuring options, Malta offers an attractive tax regime for carrying out business or the holding of investments through Malta.

COMPANY FORMATION

The ease with which a company can be set up in Malta is a convenient feature of setting up a business here. Provided the requirements of Maltese law are complied with and the necessary due diligence procedures are carried out, a company can be incorporated in as little as 24 to 48 hours from the receipt of documentation.

ADVANTAGES OF SETTING UP IN MALTA

Malta is a popular and reputable destination for both start-ups and well-established businesses that wish to set up HQs, branches, or finance and investment companies in a European jurisdiction. Due to its pro-business approach, the islands are now home to some 70k companies, with 30% of them having been registered in the last 5 years.

As mentioned above, setting up in Malta is a relatively straightforward process. No licenses or permits are required, save for businesses operating within certain sensitive sectors such as pharma, gaming, finance, insurance and medical sectors.

A brief overview of the benefits which businesses in Malta can obtain through setting up in Malta are:

  • competitive set-up and operations costs, which are 20% to 30% lower than in other European business hubs;
  • a fast track company formation process;
  • an English-speaking, highly professional workforce;
  • business incentives by Malta Enterprise (including tax credits, soft loans and training grants);
  • a favorable tax regime and an extensive double taxation treaty network;
  • EU passporting rights for banks and financial services companies.

COMPANY TAXATION

Companies incorporated in Malta are deemed to be resident and domiciled in Malta and are therefore subject to tax on their worldwide income less permitted deductions at the corporate income tax rate of 35%. However, income or gains from qualifying investments may be exempt from tax in Malta under the participation exemption provisions.
Participation Exemption

Income or capital gains derived by Malta companies from qualifying “participating holdings” (PH) may be exempt from tax in Malta at the option of the company.

An investment qualifies as a PH where a Malta company is an equity shareholder in another company and:

(a) holds directly at least 5% (five percent) of the equity shares of such a company, which holding confers an entitlement to at least ten percent of any two of the following (“equity holding rights”): right to vote; profits available for distribution; and assets available for distribution on a winding up; or

(b) is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or

(c) is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all equity shares of that company not held by that equity shareholder company; or

(d) is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or

(e) holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of one million, one hundred and sixty-four thousand euro (€1,164,000) (or the equivalent sum in a foreign currency) and that investment is held for an uninterrupted period of not less than183 days; or

f) such shares are held for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Equity shares refer to a holding of the share capital in a company which entitles the shareholder to at least any two of the following three rights: the right to vote, the right to profits available for distribution to shareholders and the right to assets available for distribution on a winding up of the company. Capital gains derived from the disposal of such PH may be exempt from tax in Malta. Where Malta holding companies receive dividend income from a participating holding, such income may also be exempt from tax in Malta provided that the company in which the PH is held falls within one of the following safe harbors:

  • it is resident or incorporated in the EU;
  • it is subject to any foreign tax at a rate of at least 15%; or
  • less than 50% of its income is derived from passive interest or royalties .

Where a PH does not fall within one of the safe harbors described above, a company may still opt for such income to be exempt from tax in Malta, if both anti-abuse conditions below are satisfied:

  • the equity shares held in the non-resident company do not represent a portfolio investment; and
  • the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

TAX REFUNDS

Where the participation exemption does not apply, upon receipt of a dividend, shareholders of a Malta company, or a foreign company which is resident in Malta for tax purposes, are entitled to a refund of all or part of the Malta tax paid at the level of the company on such income. The type and source of income received by the company must be considered when determining the amount of refund which may be claimed. Shareholders of companies that have a branch in Malta, who are in receipt of dividends out of branch profits subject to tax in Malta, are also eligible for the same tax refunds as shareholders of a Maltese company.

Full Imputation System

Malta operates a full imputation system of taxation whereby shareholders in receipt of dividends out of a Malta company receive a credit for the tax suffered at the company level, thus eliminating any further taxation being due on the dividend by the shareholder.

OPPORTUNITIES & FUTURE PROSPECTS

BREXIT

With the UK projected to leave the European Union by 2020, concerns regarding businesses which presently benefit from the EU market and its harmonization are on the rise. With regards to this, the UK financial services industry is weighing out the options related to the maintenance of passporting rights within the EU. Malta is well positioned to attract such business and offers the possibility of re-domiciling all manner of business and licensed financial services operators, including funds and asset managers, insurance operators, banking and electronic money institutions (EMI). Concerns related to Brexit aside, co-locating to Malta for operational aspects is an ideal prospect. Its favorable tax regime, historical and contemporary ties to the UK, the fluent use of the English language, laws based on common law equivalents, portfolio of fund options, and lastly, its stable financial services industry, all point towards a seamless integration.

PROPERTY MARKET

Malta’s tax regime has proven beneficial in many sectors and it undoubtedly features very prominently in the property market. Even despite the decade’s worth of global financial and political turmoil, Malta has continued to feature on the radar of investors interested in investing in Europe’s growing property market. The Maltese property rates, nonetheless, have remained relatively stable throughout the years.

Indeed, the tax regime alongside its favorable environmental climate, has attracted many to move their personal and business affairs to Malta or to invest in Malta. The country’s tax system protects both buyer and seller in property deals and has contributed to maintain the strength and perseverance of the Maltese property market, especially with relation to high-end properties. Moreover, residential prices in Malta saw a roughly 17% year-on-year increase from Q2 2017 to Q2 2018, putting the country in the lead worldwide in relation to house price rankings. In the first quarter of 2018 alone, residential prices had undergone a 3.6% average price increase.

The demand for property and steady price increments are nevertheless supported by a strong growth in disposable income, which continues to benefit from advantageous labor market conditions. Nevertheless, the fact that Malta has a low interest rate make it all the more attractive for investment. In turn, these factors continue to contribute to Malta’s exponential growth in lending for house purchases. Nonetheless, the increase in the foreign work force in Malta and, to a limited extent, the MIIP, have also been supporting demand for housing.

PROSPECTS FOR FAMILY BUSINESSES

Small-to-Medium Enterprises and family businesses lie at the heart of the Maltese economy and the Maltese government is aware of how crucial their contribution is. Intent on fostering the best possible thriving business environment, besides the implementation of a family business legislation which ultimately allows businesses that have a sound business plan to access financial support, the Malta Stock Exchange’s ‘Prospects MTF’ allows SMEs to access finance of between €1 to €8 million.

Therefore, SMEs can confidently seek access to funding without relinquishing ownership or control of their company, through the capital markets, traditionally associated with far higher levels of funding.

FINTECH, BLOCKCHAIN & ARTIFICIAL INTELLIGENCE HUB

Malta implemented groundbreaking legislation in the Blockchain or Distributed Ledger Technology (DLT) field in the shape of a trio of Acts that took force of law in 2018. The Malta Digital Innovation Authority Act (Cap. 591) sets out the basis for the creation of a digital authority, with the remit of regulating innovative technologies. The Innovative Technology Arrangements and Services Act (Cap. 592) sets out the legal basis under which the MDI will regulate such technologies, currently DLT platforms and smart contracts.
The Virtual Financial Assets Act (Cap. 590) regulates the launch of virtual financial assets (VFAs or cryptocurrencies) in or from Malta, as well as those providing services to VFAs, such as advisers, brokers, portfolio managers, or crypto exchanges. The VFA Regulations (S.L. 590.01) provide further guidance on how the act is to be applied in practice.
A national Artificial Intelligence (AI) taskforce has been set up with the vision of making Malta the ultimate AI launchpad, by creating an innovation sandbox and bringing together innovators, business angles, investors and users in a secure environment. No regulation has to date been announced, however the intention with technology with so many potential uses in different fields is for a light touch regime rather than a rigid approach that would stifle the necessary dynamism. The scope of both MDIA and ITAS are expected to include AI in the near future.

WHY MALTA CAN BE THE RIGHT JURISDICTION TO DO BUSINESS

Malta is a popular and reputable destination for start-ups and well-established businesses alike, who wish to set up or co-locate in Europe. Due to its long-standing pro-business approach, the islands are now home to over 70,000 international companies, with 30% of them being registered in the last 5 years.
As mentioned above, setting up operations in Malta is a relatively easy process. In general, no licenses or permits are required, save for businesses operating within certain sensitive sectors such as medical/pharma, gaming, financial services and aviation sectors. Convincingly, businesses in Malta can benefit from;

  • a competitive set-up and operational costs, which are 20% to 30% lower than in other European business hubs;
  • a fast track company formation process;
  • an English-speaking, highly professional workforce;
  • business incentives by Malta Enterprise (including tax credits, soft loans and training grants);
  • 5% net effective corporate tax rates and an efficient double taxation treaty network;
  • EU passporting rights for banks and financial services companies.

Interest or royalties are deemed to be passive when they are not derived directly or indirectly from a trade or business and where such interest or royalties have suffered foreign tax at a rate of less than 5%.

News & Developments
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The dynamics of multi-generational family businesses

Family businesses, often spanning generations, possess a unique dynamic that necessitates special attention and care. Typically initiated by one generation and passed down through time, they create a legacy that evolves with each succeeding generation. Each generation brings its own set of features and realities, often differing from those of their predecessors and successors. While teamwork, mutual support, and respect are critical for all companies, family enterprises face distinctive challenges in maintaining these principles within familial contexts. Unlike other entities brought together by shared interests, families are inherently bound together by nature, each member contributing their unique experiences, education, skills, personalities, likes and dislikes. In a family setting, authority and respect operate on different dynamics compared to a business environment, where hierarchies and professional norms govern interactions. Participating in a family business extends beyond operational involvement; it entails being part of a larger familial ecosystem encompassing home, history, space, and business. Individual goals and aspirations intertwine with familial expectations and legacies, often leading to choices that diverge from the family’s path as children mature and develop their dreams. While individuals may choose not to join family enterprises, they inherit assets and reputations that shape their roles within both the family and the business. Understanding the implications of these choices within the family context is crucial for maintaining harmony and prosperity, apart from resilience to deal with crises which invariably hit all businesses, ultimately aligning actions with shared values to foster cohesion and sustain the familial legacy beyond monetary gains. To navigate the complexities of a family business successfully, establishing and implementing a clear family plan and corporate structure is essential. This plan should delineate a limited number of reserved matters for all family members, define leadership roles for those with appropriate skills, give enough space for them to operate effectively, and promote transparency on financial matters while allowing strategic decision-making by qualified individuals. Education should be provided to all family members to equip them with the knowledge and skills needed for their chosen roles should they be interested in committing themselves to the family business. The same, of course, applies if they should choose to remain out of the business as the education could focus on assessing business performance, corporate governance and compliance which is relevant to any shareholder in a business. In either case, the important skill of restricting oneself to the proper role and parameters – avoiding egoism –  is critical. Setting clear expectations and consequences for negative behaviours within the family business framework helps maintain harmony and discourage misconduct. Utilizing third-party perspectives for sensitive decisions like employment or remuneration ensures objectivity, provided there is prior agreement within the family regarding the family plan and educational initiatives. Objective standards in the structure, remuneration, and decision-making processes uphold fairness and equity for all family members.  Ultimately, aligning individual aspirations with the collective vision of the family business enhances cohesion and prosperity whether inside or outside the business itself. Top tips for ensuring the success of a family business include pursuing and supporting the collective dream which must be clear and simple, leveraging diverse ideas and perspectives, and implementing effective business management practices such as role identification, succession planning, and goal setting. By embracing these strategies, family businesses can thrive and evolve across generations while nurturing a culture of innovation and collaboration. On November 7, Ganado Advocates and Zampa Debattista will be hosting their annual Family Business Forum at Corinthia Attard. This article was first published on the ‘Times of Malta’ on 21/07/2024. Author: Max Ganado, Christine Borg
Ganado Advocates - November 19 2024

The battle between Malacalza and the European Central Bank

Shareholders’ Rights vs Supervisory Authority In the case T-134/21, Malacalza Investimenti Srl and Vittorio Malacalza (the “Applicants”),shareholders of the Italian bank, Banca Carige, brought a case before the General Court of the European Union (the “Court”), seeking compensation for unlawful conduct of the European Central Bank (“ECB”) in exercise of its supervisory functions of Banca Carige. The Applicants claimed that the Court should order the European Union (“EU”) to pay them a sum of circa EUR 880,000,000 for the harm they suffered as a result of the actions taken by the ECB. Under Article 340 of the Treaty of Functioning of the European Union (the “TFEU”), the EU is to make good of any damage caused by its institutions in cases of non-contractual liability since it is subject to review of the conformity of their acts. Moreover, under the third paragraph of this article[1], it is the ECB that must make good of any damages that an individual may have suffered from its conduct. Facts of the case Banca Carige is an Italian credit institution listed on the stock exchange and has been subject to supervision by the ECB since 2014. Between 2015 and 2019, the ECB adopted a series of supervisory actions. The Applicants are shareholders of the bank, where Malacalza Investimenti, an investment company and Mr. Malacalza held a considerable amount of the bank’s capital. Mr. Malacalza was also a member and vice president of the bank’s board of directors between 2016 and 2018. In 2015, the ECB noted that the bank did not fulfil its own fund requirements and therefore, stepped in to adopt an early intervention measure. In 2019, the bank was placed under temporary administration until a new board was elected in 2020. Since the Applicants held considerable shares in Banca Carige, they viewed that the actions taken by the ECB were detrimental to their rights and interests as shareholders of the bank. In the Applicants’ view, the decisions taken by the ECB were against their duties associated with their supervisory functions and claimed that the EU incurred non-contractual liability on the basis of eight instances of unlawful conduct which will be explained below. Findings of the Court The Court noted that for the EU to incur non-contractual liability, applicants must first cumulatively satisfy the following three conditions: Unlawfulness of the conduct attributable to the institution confers rights on individuals; the fact of the damage; and the existence of a causal link between the alleged conduct and the damage complained of. The Court confirmed that it was satisfied with the first part of the conditions since the alleged conduct involved a rule of law intended to confer rights on individuals and undertakings and the breach alleged against the institution were sufficiently serious. For the remainder, the Applicants had to show that the ECB seriously and manifestly disregarded, beyond the discretion given to it, a rule of law which conferred rights on them. Thus, the Court proceeded to examine the eight instances of alleged unlawful conduct raised by the Applicants. In the first instance, the Applicants contended that the ECB infringed Italian law by failing to intervene to correct misleading statements made by the bank’s directors concerning its soundness. The Court referred to Council Regulation No 1024/ 2013 (the “Regulation”), pertaining to the ECB’s policies on the supervision of credit institutions, and stated that the ECB has an obligation to publish information to ensure proper functioning of the markets and that, there is no obligation on the ECB to respond to statements made by stakeholders of institutions. Thus, the argument was rejected. Under the second instance, the Applicants argued that the ECB violated Articles 4 and 16 of the Regulation[2] in relation to Banca Carige’s board of directors by limiting their powers and placing the bank under temporary administration. The Court rejected this argument, stating that these provisions enable the ECB to structure the operation of the banking in the public interest and do not impose any rights on individuals, thereby invalidating the basis for a claim of unlawful conduct. On third ground, the Applicants alleged that the ECB infringed Italian law by approving a capital increase without adhering to the pre-emption rights granted to shareholders through the bank’s statutes. In terms of the consolidated law on banking in Italy, which also applies to the ECB by virtue of Article 9 of the Regulation[3], the supervisory authority is to ensure that recommended amendments to the statutes of credit institutions are compatible with constraints arising from prudent management.[4] The Court concluded that this did not relate to the proposed amendments to the shareholders’ pre-emption rights, but rather to ensuring that the amendment was sound and prudent. Therefore, the relevant Italian law did not confer any rights on individuals, and this ground was also dismissed. The fourth argument put forward by the Applicants was also rejected by the Court. They alleged that the ECB significantly violated Italian law with the appointment of temporary administrators who had a conflict of interest, making it difficult for the Applicants, as shareholders, to bring a company action against the administrative bodies. The Court examined that when the ECB appoints temporary administrators, they should be free from conflicts of interest to perform their duties accordingly. Therefore, this principle did in fact confer a subjective right on individuals, and if breached, it could cause harm in a sufficiently serious manner. However, the Court found that the ECB exercised its discretion reasonably in appointing temporary administrators who were well acquainted with the bank’s affairs. Moreover, it was noted that once a temporary administration is lifted, shareholders can bring an action for damages against the members of the administrative bodies for up to five years after those members have ceased to hold office. Thus, the Court determined that there was no sufficiently serious breach by the ECB. In the fifth instance of the alleged unlawful conduct, the Applicants claimed that the ECB committed a sufficiently serious breach regarding its adoption of the early intervention measure (the “Measure”) and raised six complaints. They argued that the Measure breached shareholder rights, however, the Court confirmed that the ECB used its powers to protect public interest. Additionally, the Applicants alleged that the ECB’s Measures were more stringent than those imposed on other credit institutions in similar circumstances thereby breaching the principle of equal treatment. The Court stated that an applicant must precisely identify comparable situations which led to the rejection of this argument. The Applicants also alleged a breach of the principle of proportionality noting that the Measure caused a write-down of the bank’s loan, resulting in significant losses. The Court reiterated that the “ECB enjoys a broad discretion” in exercising its supervisory tasks and given the Banca Carige’s serious deterioration between 2013-2016, the ECB’s Measure was appropriate, and the argument was also dismissed. The Applicants further contended that the bank was given a short period to meet its own funding requirements. However, based on the Court’s analysis of the principle of proportionality, it was concluded that the ECB assessed this matter appropriately. Under the seventh instance, the Applicants argued that the ECB breached the principle of the protection of legitimate expectations by providing assurances to the shareholders regarding the situation of the bank. The Court spurned this argument, stating that the Applicants had not provided any evidence to support the alleged assurances from the ECB, rendering this claim, inadmissible. The final allegation concerned the breach of the shareholders’ right to property. The Applicants claimed that the value of their shares fell following the ECB’s measures.  However, they failed to establish that that the ECB’s actions directly or indirectly caused this outcome, leading to the rejection of this argument. Conclusion The Court concluded that none of the instances of unlawful conduct alleged by the Applicants against ECB for its supervision of Banca Carige gave rise to non-contractual liability within the meaning of Article 340 TFEU. This case reaffirms the ECB’s role in its prudential supervision of credit institutions under the Regulation in order to safeguard public interest and the financial industry within the EU. Author: Simay Cilingir Footnotes [1] The third paragraph of Article 340 TFEU states: “Notwithstanding the second paragraph, the European Central Bank shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by it or by its servants in the performance of their duties”. [2] Article 4 sets out the tasks conferred onto the ECB while Article 16 sets out its supervisory powers. [3] This article states that the ECB is the designated authority in the Member States to carry out its tasks conferred on it in this Regulation. [4] Referring to Article 56 of the Consolidated Law on Baking.
Ganado Advocates - November 19 2024

Post-termination non-compete clauses in employment contracts

On April 23, the US’ Federal Trade Commission (US FTC) published the final version of a rather controversial new rule, which will introduce a nationwide ban on the use of post-termination non-competition clauses (NCCs) by employers. The final rule will become effective after the lapse of 120 days from its publication in the Federal Register. NCCs are not only prevalent in the US, but are also quite widespread in the EU. Will the EU follow the US lead in proposing some form of EU-wide regulation restricting the use of post-termination NCCs in employment relationships? And if so, should post-termination NCCs in employment contracts be completely banned as proposed by the US FTC, or simply limited to reduce their anti-competitive and restrictive effects? What are non-competition clauses? While there is no single universal definition of the term ‘non-competition clause’, or in short, ‘non-compete clause’, this generally refers to a contractual promise undertaken by an employee, binding himself/herself to refrain from conducting business of a similar nature to that of the employer. NCCs typically impose restrictions on what an employee can do after the employment relationship has been terminated, regardless of whether the employee has resigned from said employment, or whether the employment relationship has been terminated by the employer. These types of NCCs are typically referred to as ‘post-termination’ NCCs. The main function of a NCC in the context of an employment relationship is that of protecting a company’s business interests, by preventing employees from making use of ‘insider’ knowledge and skills which they would have gained through their employment with a particular company to the benefit of an existing competitor, or to start their own business in competition with that of their former employer. The US FTC’s rule banning the use of non-competes The final rule which was published by the US FTC on April 23, in essence, provides that it is an unfair method of competition (and thus in violation of Section 5 of the US Federal Trade Commission Act which deems ‘unfair methods of competition’ to be unlawful) for employers: to enter into or attempt to enter into a post-termination NCC with a worker; to maintain a post-termination NCC with a worker; or to represent to a worker that he/she is subject to a post-termination NCC where the employer has no basis to believe that the worker is subject to an enforceable NCC. Under the final rule, existing NCCs for senior executives can be retained but cannot be enforced by employers, and employers are prohibited from entering into new NCCs with senior executives. The final rule defines senior executives as workers who occupy policymaking roles, and who earn more than $151,164 annually. Additionally, employers will also be obliged to inform workers bound by an existing NCC that the NCC will not be enforced against them in the future. A look at the EU situation In terms of the situation in Europe, in view of the virtually non-existent intervention of the EU in regulating the use of post-termination NCCs in employment contracts, member states have been predominantly left to their own devices and thus, there is quite frankly a ‘hodgepodge’ of widely varying frameworks in place across the different member states. The regulation of post-termination NCCs in employment contracts varies quite significantly across the different member states, both in terms of form and content, with some member states having elaborate and clear statutory provisions regulating the validity of NCCs in employment contracts, and others with a largely uncertain approach on the topic, characterised by ambiguity and in certain cases, conflicting rulings. In contrast with the socio-political context surrounding the US FTC’s proposed rule, it appears that while traces of a similar sentiment can indeed be identified across the EU, the issue does not seem be as critical so far. It is, however, submitted that the rule which has been published by the US FTC may indeed have the effect of encouraging EU researchers in the field to look into this matter further, and in the event that increased EU-based research were to reveal the existence of abusive practices in this field for example, this may lead to a situation where the EU may decide to step in and legislate on the matter. In any case, it is clear that the EU is monitoring the situation quite closely, and in a press conference held in February 2023, European Commissioner for Competition Margrethe Vestager noted that “the US has done quite an impressive work, they have made it a priority to look at labour market issues”, and that “we don’t see that many [in the EU]… if we did, we would definitely look into it”. Concluding remarks In the field of social policy, previous legislative intervention has shown that the EU often steps in as a response to certain trending issues which, in one way or another, have an impact on the world of work. A number of trends, including the ongoing war for talent that most employers are currently facing, the vast labour shortages which are being reported all over the world, and the emergence of numerous new forms of work, will likely all contribute to the increased scrutiny of NCCs within the EU in the years to come. Therefore, while the issue may currently not appear to be as pressing in the EU, if this matter were to continue gaining momentum across the EU, there is indeed a good chance that the EU will decide to step in and regulate this matter. Author: Nina Fauser
Ganado Advocates - November 19 2024

CJEU annuls resolution board’s decision due to lack of transparency

Introduction and Background On the 8th of May 2024 following an action for annulment by German credit institution Max Heinr. Sutor OHG (“The Applicant”), the General Court annulled a decision by the Single Resolution Board (“SRB”) in regard to the setting of 2021 contributions to the Single Resolution Fund (“SRF”). The SRB is a Board responsible for determining the annual contributions from financial institutions to the SRF as part of the Single Resolution Mechanism (“SRM”), which acts as an operation framework designed to ensure the orderly resolution of failing banks with minimal impact on the Union and Member States’ public finance. Such action was brought by the applicant due to failure of the Board to fulfil its obligation to provide reasons as regards to the determination of the annual target level. The ruling underscores the necessity for the SRB to offer a clear and comprehensive explanation for their financial determinations, ensuring transparency and accountability within the Union’s financial regulatory framework. The Court delved into whether the SRB’s decision adhered to the procedural and substantive requirement set out within EU legislation, including but not limited to Regulation 806/2014 and Delegated Regulation 2015/63 dealing with ex ante contributions and whether sufficient reasoning was provided in its decision to allow for the applicant to verify and understand the calculations of its contribution. The Court’s Findings Transparency and duty to provide reasons Amongst other pleas brought forward by the applicant the decision of the SRB was mainly contested for not meeting the requirements in light of the SRB’s obligation to provide reasons, as while the Court outright rejected the former pleas of the applicant, it examined ex officio whether the SRB was in breach of its duty to provide reasons regarding determination of the annual target level (i.e. at least 1% of the amount of covered deposits)as encompassed within Article 69(1) of Regulation 806/2014. The Court in regard to the issue of transparency recalled that failure to provide reasons constitutes a plea of public policy as provided for in C-89/08 and must therefore take into account any failure of the SRB to state reasons in determining the annual target level as well as the method of calculating such contributions as held in C-584/20. In terms of the content of such obligation, the Court further notes that the statement of reasons for a decision taken by any institution or body of the Union, including the SRB, must be free of contradiction so as to enable the persons concerned to ascertain the real reason for that decision, with a view of defending their rights and enabling an exercise of its power of review. Furthermore, when explanations regarding such grounds for that decision are given such explanations must be consistent with the consideration set out within the judgment. However, this was not the case within SRB decision taken against the applicant as the method of calculation actually applied by the SRB did not correspond to the method described within the contested decision, therefore making the reasons on the basis of which the target level was established unidentifiable by the institutions as well as the Court. Decision In view of such defects found in regard to consistency and transparency of the method employed by the SRB, the contested decision was vitiated by defect of the statement of reasons, and consequently lead to the annulment of the contested decision insofar as the applicant was concerned. However, recognising the potential disruption which such ruling may cause to the SRF, the Court maintained the effects of the annulled decision for six months, allowing for the SRB to adopt a new decision taking into consideration the judgment and findings of the Court. Concluding Remarks The General Court’s decision in case T-393/21 to annul the decision of the SRB in regard to Max Heinr. Sutor OHG underscores the importance of transparency and the duty to provide reasons within the decision-making processes of EU bodies. The Court in their judgment identified significant defects in the SRB’s decision drawing particular attention to inconsistencies and contradictions which led to annulment of the contested decision. This ruling serves as a reminder to EU bodies of their obligation to provide thorough and transparent reasoning in their decisions, with such practice serving as a fundamental aspect of good governance, ensuring both accountability and the protection of rights within the EU legal system. This article was first published on ‘The Malta Independent’ on 17/07/2024 and co-authored by Elena Sissons a Student Intern at Ganado Advocates. Author: James Debono
Ganado Advocates - July 24 2024