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Corporate shams, New York University Law Review, Vol. 87, 2012, NYU Law and Economics Research Paper No. 12-09,available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2035057

 

Many people – perhaps most – want to make money and lower their taxes, but few want to unabashedly break the law. These twin desires have led to a range of strategies, such as the use of “paper corporations” and off-shore tax havens, that produce sizable profits with minimal costs. The most successful and ingenious plans do not involve shady deals with corrupt third-parties, but strictly adhere to the letter of the law. Yet the technically legal nature of the schemes has not deterred government lawyers from challenging them in court as “nothing more than good old-fashioned fraud”.

In this article, we focus on the government challenges to corporate financial plans – often labelled corporate shams – in an effort to understand how and why courts draw the line between legal and fraudulent behaviour. Quite a few scholars and commentators have investigated this question and nearly all agree: judicial decision making in this area of the law is erratic and unpredictable. We build on the extant literature with the help of a large dataset – the first of its kind – and uncover important and heretofore unobserved trends. Indeed, courts have not produced a confusing morass of outcomes as some have argued, but have generated more than a century of opinions that collectively highlight the point at which ostensibly legal planning shades into abuse and fraud. After discussing our empirical results, we show how they can be exploited by both government and corporate attorneys and explore how they bolster many of normative views set forth by the scholarly and policymaking communities.

CFR comment:

This is an amazing paper based on review of nearly 1,000 US Supreme Court cases involving claims of corporate tax shams. Among others, the authors identify “highly complex transactions, inconsistent tax and accounting positions, and requests for large tax refunds” as important factors in a court finding of a sham and show that “notwithstanding the nearly obsessive attention” paid to business purposes, that it is not as relevant as outsiders think. Well worth reading its 70 pages.

 

Expansive Reach – Useless guidance: An introduction to the UK Bribery Act 2010, ILSA Journal of International & Comparative Law (forthcoming), MSU Legal Studies Research Paper No 10-07,available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2037200

 

Following incessant pressure from American diplomats, in 1997 the Organisation for Economic Cooperation and Development (OECD) completed negotiation of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. This Convention, which became effective on 15 February, 1999, obligates signatories to enact domestic legislation criminalizing bribery of foreign government officials. Five other anti-bribery conventions have since come into force.

However, the nearly universal formal acceptance of the principle that overseas bribery should be criminalised, exemplified by the broad acceptance of these conventions, has done little to reduce corruption. This is likely based on a universal lack of interest in seriously enforcing the laws implementing these conventions. The UK Bribery Act 2010, enacted after more than a decade of debate, delay, and deliberation by Parliament, is the culmination of the United Kingdom’s effort to finally comply with the OECD Convention. This Article provides an overview of Bribery Act offenses, the most important of these being the strict liability corporate offense of failure to prevent bribery.

The UK Ministry of Justice has published mandated guidance about the procedures which affected entities can put into place to prevent persons associated with them from bribing. We demonstrate that the Bribery Act goes too far in its stated purpose of complying with the OECD Convention, particularly with respect to the corporate offense of failure to prevent bribery. We demonstrate that the Ministry of Justice’s guidance fails to provide any useful guidance as to how a company can avoid the strict liability offense of failing to prevent bribery and totally fails to deal with the distinct possibility that enforcement will be overly aggressive.

CFR comment:

A delightfully blunt assessment of the UK’s efforts to comply with the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (example: “the Ministry of Justice’s guidance utterly fails to explain how one can comply with the Act and avoid liability.”) This paper dissects the statute and shines a spotlight on its flaws.

 

Anna Gelpern
Hard, soft and embedded: Implementing principles on promoting responsible sovereign lending and borrowing,
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041027

This paper is prepared for UNCTAD’s initiative on responsible sovereign lending and borrowing. It surveys the fragmented legal landscape of sovereign debt, the onset of treaty and custom fatigue in the wake of contentious debates about sovereign bankruptcy and odious debt, and the peculiar form of soft law in the field. Against this background, the principles are unusual for their ambition and comprehensive reach: they aspire to govern debtors and creditors, rich and poor countries, official and private actors, domestic and external debt. The principles are also unusual for having mobilized diverse stakeholders among borrowers, lenders and NGOs in the drafting process. I draw on studies in soft law and new governance to recommend concrete strategies for implementing the principles. I argue against spending political capital on turning them into a treaty, which would take years to negotiate and yield weaker substantive commitments. Informed by recent experience with best practices in international finance – including project finance, extraction revenue management, foreign aid, sovereign investment and emerging market bonds – a strategy for implementing UNCTAD Principles should strive to embed compliance in multi-stakeholder arrangements for ongoing disclosure, assessment, interpretation, and adaptation. To be sure, this approach risks co-optation and cosmetic compliance; however, such risks are present in “hard law” strategies as well. In the right institutional environment, “soft” principles can encourage better monitoring and information flows, deepen and diffuse agreement about compliance, enhance legitimacy, build constituencies for implementation, and prompt a race to the top among states, market participants, and civil society monitors.

CFR comment:

Anna Gelpern is the preeminent scholar of sovereign debt – and she got to be that by doing things like spending considerable time looking at the actual terms of government bonds. But she’s also a law professor, and so has the time to immerse herself in the academic literature as well. As a result, her ideas are worth a close look. This is a thoughtful and careful examination of the UNCTAD Principles and an excellent guide to the issues likely to arise as nations work out how those Principles are likely to be implemented.

 

Augusto De la Torre, Alain Ize & Sergio L Schmukler
Financial development in Latin America and the Caribbean: The road ahead, World Bank Latin American and Caribbean Studies, 2012
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2061049

During the 1980s and 1990s, the financial sector was the Achilles heel of Latin America and the Caribbean (LAC). Since then, LAC’s financial systems have continued to gain in soundness, depth and diversity, becoming more integrated and competitive, with new actors, markets, and instruments springing up, and financial inclusion broadening. For all the gains, however, many challenges remain.

There is still a nagging contrast between the intensity of financial sector reforms that LAC implemented since the early 1990s and the actual size and depth of LAC’s financial systems. For example, bank credit has stagnated and only few firms actively use equity and bond markets. This study takes an in-depth stock-taking of LAC’s financial systems and a forward-looking assessment of the region’s financial development issues. Rather than going in detail into sector-specific issues, the study focuses on the main architectural issues, overall perspectives, and interconnections inherent to globalised financial systems.

The value added of the study thus hinges on its holistic view of the development process, its broad coverage of the financial services industry (not just the banking sector), its emphasis on benchmarking, its systemic perspective, and its explicit effort to incorporate the lessons from the 2008-09 global financial crisis.

CFR comment:

Some useful and thoughtful analysis of the state of financial development in Latin America and the Caribbean.

Christiana Hji Panayi

National Grid Indus BV v. Inspecteur Van De Belastingdienst Rijnmond/Kantoor Rotterdam: Exit taxes in the European Union revisited,  
British Tax Review, Issue 1, 2012, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2037788

An examination of the National Grid Indus case (Case C-3710) and its implications on corporate exit tax regimes in the EU.

CFR comment:

A thoughtful review of an important decision on the ability to relocate corporations within the EU.

 

Joseph Grundfest
The history and evolution of intra-corporate forum selection clauses: An empirical analysis, 37 Del. J. Corp. L. 2012 (forthcoming), Rock Center for Corporate Governance at Stanford University Working Paper No 116 & Stanford Law and Economics Olin Working Paper No 427


available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042758

 

Forum selection provisions are commonly found in the material contracts of publicly traded corporations. But they are exceedingly rare in the organic documents of the same publicly traded entities. Why?

This article documents that, as of 30 June, 2011, only 133, or 1.49 per cent, of publicly traded entities had forum selection provisions in their charters or bylaws. The vast majority of these provisions, 117 (88.0 per cent), were adopted after Delaware Chancery’s 15 March, 2010, decision in Revlon observing that corporations could avoid forum disputes by adopting forum selection provisions in corporate charters. Of the forum selection provisions adopted by corporations, 58.6 per cent appear in corporate charters and 41.4 per cent appear in bylaws adopted without prior shareholder consent. More than 91 per cent of these provisions follow the form introduced by Netsuite in conjunction with its 2006 IPO, and approximately 16.06 per cent of all IPOs declared effective since Revlon are of corporations whose charters contain forum selection provisions. Corporations headquartered in California are over-represented in the population of corporations that have adopted these provisions.

The historic scarcity of forum selection provisions in the organic documents of publicly traded entities is consistent with the observation that, prior to the early part of this century, intra-corporate litigation was almost always brought in the state of incorporation. In such an environment, the selection of a state of incorporation acted as a de facto forum selection clause, and these clauses could reasonably have been viewed as surplusage. But as plaintiff counsel began to litigate intra-corporate claims with vastly greater frequency in courts away from the state of incorporation, a demand emerged for a contractual provision that could restore the pre-existing jurisdictional equilibrium in which each state’s courts specialized in the interpretation of that state’s corporate law.

Viewed from this perspective, the intra-corporate forum selection clause is not an innovation that seeks to disrupt traditional litigation processes: it is, instead, better viewed as an effort to restore an equilibrium that had prevailed for decades and that reflected the natural expectation of corporations and shareholders alike that courts would “stay in their lane” as they specialised in the interpretation of their own state’s corporation laws.

A careful and thoughtful look at a developing topic, with snappy prose a bonus.

 

Stephen J Lubben

Resolution, orderly and otherwise: B of A in OLA, University of Cincinnati Law Review (forthcoming), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2037915

What precisely does it mean to “resolve” financial distress in a complex financial institution? What are the goals – liquidation, reorganisation or simple contagion avoidance? And, more precisely, how might such a resolution look under realistic conditions? This paper begins to examine these issues through a practical exercise: by examining the legal and financial structure of a specific, actual financial institution (Bank of America).

What this analysis reveals is that no matter how complex Lehman was, the remaining “too big to fail” financial institutions are infinitely more complex. The exercise reveals some serious doubts about the ability of Dodd-Frank to perform in its most idealised way, it also shows how the Bankruptcy Code, at least as currently drafted, would be equally unsuited to the task. Moreover, this paper explain why adapting the code to the resolution of large financial institutions would involve something far more substantial than a few “tweaks”, as is often suggested. Ultimately it would involve adopting something that takes many features from both OLA and Chapter 11, while applying the name bankruptcy to the resulting beast.

CFR comment:

A fascinating thought experiment – using publicly available information, Lubben tries to forecast how Bank of America might be liquidated if it failed. The results are terrifying. Here’s just a small taste:

Bank of America’s entry into the orderly liquidation process would trigger state insurance receiverships in California, New York, Arizona, South Carolina and Vermont. Six FDIC bank receiverships would commence. At least four SIPA brokerage liquidations would be filed.

And the holding company and any unregulated, domestic subsidiaries would enter OLA proceedings, where they would come under the control of the FDIC.

The assets in the foregoing entities would be immediately severed from the assets in key foreign subsidiaries, like Merrill Lynch SA or Banc of America Securities Limited. Based on the experience in Lehman, this may result in these subsidiaries losing access to shared computer and cash management systems, threatening their ability to survive as independent entities. Thus, even if these companies are separately capitalized and otherwise viable, they will experience extreme business disruption unless contingency plans are in place well before the occurrence of financial distress.

As this paper conclusively demonstrates, the US regulatory system is not yet equipped to handle the failure of a significant financial institution.                         

 

 
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