RSS FeedTwo AIG Subsidiaries Agree To Settle Racial Discrimination Case
This is part of the Middle Passage Law Series and is cross posted on Commercial Law International .
American International Group, better know by its acronym AIG, it seems these days can rarely catch a break. It just seems negative news follows negative news for this company. This time the negative news for this too big to fail company – deeply wounded by the global credit crunch and later recession – has two of its units being accused of racial discrimination in their lending practices.
It is important to note that AIG has not been found guilty of anything; in fact it wasn’t even accused of any wrong doing.
WHAT?
I know, I know, it seem like I am saying that AIG is involved yet not involved in this case. And yes that is exactly what I am saying.
All of this may seem totally contradictory but let me assure you it is not. What we have here is a classic illustration of legal reality vs. public perception of a company’s brand. In order to be successful companies have to be mindful of the differences between these two concepts and effectively manage their interrelation.
The Department of Justice (DOJ) allegations were never directed at AIG, the parent company, but were instead directed at two of its subsidiaries –AIG Federal Savings Bank (FSB) and Willmington Finance Incorporated (WFI). Both banks were accused of not sufficiently monitoring the activities of mortgage brokers who sold mortgages that they funded. The brokers were, according to the DOJ, offered African-American borrowers less favorably borrowing terms than similarly financially situated whites. The two have agreed to settle the case with the DOJ and have agreed to pay at least $US6.1 million without admitting liability as part of the terms of settlement.
The case broke no new ground as far as banks in the US being accused of racial against minorities, namely African-American and Latino-Americans, in fact similar settlements or even full blown litigation involving other US banks will surely be making the headlines in the near future. The case however did break new legal ground in that for the first time US authorities held a lender directly responsible for the racial discriminatory acts of brokers. As a consequence, from now on banks will have a positive duty to monitor the activities/policies of brokers that they fund, to the best of their ability, in order to ensure that they are not using race to determine borrowing terms. This duty also of course carries with the co-duty to take positive action whenever a bank believes that a broker is using race.
From a strict legal perspective AIG, the parent, hands remain totally clean is this matter. It is important to reiterate that AIG was never accused of anything; the allegations were solely directed at the two subsidiaries. And no this is not a simple matter of splitting hairs, while related all three companies are separate. The legal concept of the corporate veil - the independent legal identity of companies, even if related – is a fundamental one in corporate law. The corporate veil is best understood as a shield that is used to protect all the right that come with incorporation. This is not to say that it can never be lifted/pierced, for it can, but this is only done in rear and specific instances where for example fraud is alleged or where for some reason the directing/controlling mind of a corporation needs to be identified.
However, these allegations go beyond strictures of the corporate veil and this is where public perception of the brand and effective management of that brand become important. AIG and its army of brand management specialists both know that the general public are often not so discerning as to make the distinction between parent and subsidiary; as far as the public is concerned AIG is AIG. This is the reason I believe that there was such a quick settlement – the last thing AIG, the parent, needs is a protracted legal battle involving accusations of racial discrimination, albeit involving subsidiaries. This would be a public relations nightmare.
As companies battle the recession, bartering comes in handy
First posted on Commercial Law International on Feb 24, 2010.
By: Carsten Lexa
Money helps a lot when it comes to exchanging goods. One buys the goods, pays with cash and takes the goods away. So far, so good. But what if free cash to spend is a rare thing? For example in times like today, when the economy is not doing well and money is scarce?
Today, more and more companies turn to third party networks to contribute and use barter schemes. Of course, bartering is nothing new: It is a medium in which goods or services are directly exchanged for other goods and/or services without a common unit of exchange, e.g. money (according to Wikipedia). Firms routinely arrange exchanges on their own. But cultivating relationships with business partners in such a way, that barter schemes can be discussed and established among each others takes time and presents numerous hurdles. Let´s assume the owner of a restaurant needs printing services with a value of $ 10.000,00. Where can he find a printshop with an owner who is hungry for a $10.000,00 meal?
Formal barter schemes can help. One of the biggest providers for example is Bartercard, the largest exchange network with trades through its network worth more than $ 2 billion and 75.000 members in more than 9 countries. By using such a provider, the restaurant owner in the example above would owe $ 10.000,00 to the exchange network, not the printshop. The provider provides the business partners and makes sure that every member of the network honors the services of the other members. It therefore provides security and accountability, something informal bartering cannot provide in an adequate way.
What are the additional advantages of such barter schemes, other than security and accountability? The biggest advantage is the fact that no money is needed to “pay” for services and goods. Another one is the fact that a member can “buy” services first throught the network and pays later in his own services and goods – sometimes months later, if nobody wants his services or goods earlier. And finally such a scheme can work not only in one country, but – ideally – worldwide, as long as the members accept the scheme.
Even in Germany such barter schemes are tried and – especially among small and midsize compamies – found helpful. But currently, no big exchange networks exist. So, member of traditional business networks try to establish their own barter networks. Reason is that a company owner who knows another company owner through a traditional business network and has done business with him in a traditional way using cash will be more open towards doing barter transactions with this person than with a total stranger.
Is barter the holy grail for companies in recession times? Probably not. But it can be a helpful to do business if cash is scarce. The difficulty is to find the right partner.
For inquiries please contact the author: kontakt@kanzlei-lexa.de
Billing By The Hour
There has been a great deal of discussion among legal commentators about the failure of hourly billing for legal services and the need for alternatives. The most recent article I’ve seen is in the CBA’s Jan/Feb issue of National. Although I’m a law student and have never billed a single hour as a lawyer, I have worked for more than a decade as an entrepreneur and I wonder … what are the alternatives, really, but masked versions of hourly billing? Given the limited amount of hours available to work in any day/week/year/lifetime, billing by the job MUST reflect the time that the task requires.
Flat fee services must have caps on the input of resources to succeed as business models and, as a result, will tend to put a floor rather than a ceiling on the cost of any given service. At best, a flat fee will reflect the average amount of time required to perform a service. Innovators can find ways of doing things more quickly through economies of scale, computer processing, outsourcing and so forth, but price reductions that service providers choose to pass on to the clients can be built into an hourly billing model just as easily as any alternative. Innovations might put pressure on hourly rates through competition, but this has nothing to do with the method of billing.
Frankly, I fail to see how alternatives to billing by the hour will change the cost of legal services. The real pressures on cost come from the the well-known forces of the marketplace … the rest is just packaging. And if clients are becoming more sophisticated, will they really be impressed by a fancy one-size-fits-all (unless you want more) gift bag?
The real issue is value. Lawyers that provide it will gain clients and those that do not will lose clients. Those who insist on talking about how the billing is done, please explain (and be nice about it): What am I missing?
Bill C-300
A single gold ring leaves in its wake, on average, 20 tons of mine waste.
Bill C-300
Purpose
| 3. The purpose of this Act is to ensure that corporations engaged in mining, oil or gas activities and receiving support from the Government of Canada act in a manner consistent with international environmental best practices and with Canada’s commitments to international human rights standards.
Barrick Gold Corporation, the largest Gold Mining Corporation in the world, and Canada’s largest publicly traded company put a lot of heat on the Canadian Government in the last year when Norway’s Ministry of Finance back in January of this year, sold shares of Barrick Gold from Norway’s pension fund for ethical reasons. Norway is the best place to live. They must be doing something right. Norway’s Council on Ethics conducted a fairly comprehensive investigation spanning four years regarding the use of a natural river system to transport and dispose of mine waste in Papua New Guinea. The council established “the mining operation at Porgera entail[ed] considerable pollution.” The 2008 report went on to condemn the heavy metals contamination, particularly mercury, produced by the tailings. It concluded that severe and long-term environmental damage is likely to continue, and that it represents a serious health hazard for residents of the mining area and for the indigenous peoples living downstream from the mine. As Marie-Claude Poirier of CCODP writes, in 2008 Canada was a base for 75% of the world’s exploration and mining companies. And Canadian mining companies accounted for 43% of all global exploration spending. And at most, the Canadian government promotes mining companies to voluntarily conduct their activities in a socially and environmentally responsible manner that companies have failed to undertake. The Canadian government does nothing more than endorse current CSR standards and create administrative mechanisms, rather than legal ones, within the Department of Foreign Affairs and International Trade and at Canadian offices abroad. This is where Bill C-300 comes in. On April 22, 2009 Bill C-300, sponsored by Hon. John McKay PC, MP, passed second reading in the House of Commons with a vote sending it to the Standing Committee on Foreign Affairs and International Development for further study. C-300 passed by a close margin – Yeas: 137; Nays: 133. http://www.johnmckaymp.on.ca/newsshow.asp?int_id=80507 Marie-Claude Poirier, notes that Bill C-300 doesn’t include provisions for an ombudsperson and independent investigation into complaints from overseas, since private member’s bills cannot require the support of a budget. However, what the Bill does do is directly forward complaints to the Minister of International Trade and Foreign Affairs. Investigation ensues as to the alleged violations of the CSR standards. If any evidence of violations is found, then the stick of bad PR for those that are caught. The companies would be required to submit annual reports, which would fall under scrutiny of the House of Commons and Senate for review. Bill C-300 has baby teeth, but it’s better than no teeth. Even baby teeth are sharp. |
The RIM vs. Ericsson Beef
What’s in it for RIM?
Patents. Currently RIM pays millions of dollars for patents to use in their blackberry devices. However, RIM would save some big figures with the purchase of Nortel’s patents, because the assets RIM is mainly interested in are patents Nortel holds in next-generation wireless technology called Long-Term Evolution, or LTE.
Analysts say the patents would reduce the millions of dollars in royalty fees RIM pays annually for technology it uses in its handsets.
Nortel has said the three bidders that entered into the auction– Ericsson, Nokia Siemens Networks and U. S. private equity firm MatlinPatterson — all agreed to the same terms it gave RIM, however, the auction did not include the sale of the LTE patents, Nortel’s lawyers said in court July 28.
The transaction has ignited a political firestorm over whether the assets, which include leading-edge technology for next-generation cellphone networks, should be allowed to be sold to a foreign firm or whether Ottawa should cancel the sale through national “net benefit” and security rules newly written into the Investment Canada Act.
There are 2 ways to review under the Investment Canada Act
(1) The final decision for the sale now lies with Industry Minister Tony Clement, who has said his ministry is checking into whether the deal deserves to be reviewed to see whether it violates the foreign-investment rules. The current rules demand a federal review of any asset sale to a foreign firm that exceeds $312-million.
(2) George Riedel, Nortel’s chief strategy officer told the committee the book value of the assets being sold was US$149-million. A separate review may be required if the sale is deemed a national-security concern, which carries no monetary conditions.
A senior government official told The Globe and Mail last week that Ottawa is evaluating the assets of the transaction at book value for the purposes of deciding whether the deal must be reviewed under the Investment Canada Act. Nortel and Ericsson have set the book value of their deal at $149-million, far short of the $312-million (Canadian) threshold that triggers a review.
Book value reflects the balance sheet value of a deal’s assets not including such intangible assets as intellectual property and employee talent.
Richard Corley, a lawyer with Blake, Cassels & Graydon LLP and counsel to Ericsson, says “High technology businesses are quite often asset-light.” “You are not buying the values of the chairs and the bits and pieces. What you’re buying is the earnings capacity.”
On national security, Ericsson says that as an equipment supplier it does not manage or control sensitive information. Further reason for the government to not interfere.
RIM’s beef over the pending sale of certain wireless assets of Nortel to a foreign rival, called on Ottawa to speed up the adoption of new rules in the Investment Canada Act that could be used to cancel the controversial transaction.
“RIM thinks that a $1.13-billion (USD) transaction must be reviewed to ensure that Canada’s national interests are met.”
Under current legislation: deals involving the sale to foreign firms of technologies in sensitive sectors such as telecommunications are subject to federal scrutiny and possible annulment. However, that applies only if the asset value exceeds $312-million. Nortel told a parliamentary committee that the book value of the wireless assets going to Ericsson was just $149-million, meaning a government review is not required.
On the other hand, the Canadian government has amended the Investment Canada Act this year to consider the “enterprise value” rather than book value in such deals. Enterprise value includes intellectual property and employees going to the foreign firm. The new rules, however, are not yet in force, leaving federal authorities to use the current framework.
Federal authorities have shown little enthusiasm for blocking the sale and Prime Minister Stephen Harper, has already stated there would be no attempt to alter Canada’s current foreign investment rules.
RIM releases a Survey: From market researcher Strategic Counsel that showed 55% of Canadians who were aware of the Ericsson sale were opposed to it.
At the end of August, the U. S. tax authorities sent chills to Nortel Networks Corp. creditors by submitting an unexpected and very large US$3-billion claim for back taxes, interest and/or penalties. If valid, the IRS claim would apply only to Nortel’s US unit, Nortel Networks Inc. Since tax claims often receive priority in a bankruptcy proceeding, this raises the possibility of wiping out a substantial majority of the claims from US bondholders, suppliers and employees owed severance pay.
The IRS claim may intensify the pressure for U. S. claimants in the meantime to prevent further transfers of cash from Nortel’s U. S. operations to Canada. Because under Nortel’s complicated global structure, the company shifts money from cash-rich regions such as the United States (where revenues from the sale of products generally exceed expenses) to jurisdictions such as Canada — which does a lot of expensive R&D but generates relatively few revenues for the company.
Canadian creditors had been concerned that Nortel Canada’s low cash balances would translate into a claims settlement ratio as low as 12¢ on the dollar, while U. S. and British claimants were expected to receive 45¢ on the dollar. But now the IRS bill could significantly deteriorate the U. S. return rate.
The New Poster Child for Shareholders’ Remedies
JLL drops Patheon bid, freezes out new suitor
Step asside BCE and Peoples, make way for Patheon v. JLL!
I must begin by declaring my personal involvement: I own a modest block of Patheon shares and I find it galling that JLL, the majority shareholder who owns 57% of the outstanding shares, sought to buy out the remaining shares for $2.00 but refuses to sell its shares for $3.50.
But is this really oppressive? The more I ponder, the less sure I am. Shouldn’t the keen entrepreneurs at JLL be allowed to make a good faith offer to buy shares at a price that they believe to be a bargain, particulalry when it is at a premium to the current market price? Is a slim majority interfering with the investment activities of a large minority or is this the bid-and-ask process of the marketplace finding the true market value? After all, both offers could fall short of the actual market value of this company despite the fact that small blocks of shares can be purchased for $3.00 on the TSX.
Australian Securities Regulators In Policy Quandary
First posted on Commercial Law international on July 1, 2009.
The question that faces Australian securities regulators is what to do about two or more Chinese state owned enterprises together owing substantial shareholdings in an Australian company?
At first blush it would appear that this is a case of China take over fear, however there is much more to the story than this. Indeed, there is a legal/regulatory story here as well. Now I am not trying to say there is or isn’t a China phobia here, it is a given that all nations have their own xenophobic tendency, however I cannot speak on this as I know very little about Australia and what I do know comes from watching Rugby, Crocodile Dundee and Steve Irwin (may he rest in peace). Moreover, while I am not versed in Australian law, I believe that my legal training and experience thus far permits me an insightful comment or two.
This question has come to the fore because of the increased interest of Chinese companies in Australia´s mineral wealth – this is in fact a global trend and not one peculiar to Australia – just take a look at the recent attempt by Chinalco to increase its stake in Rio Tinto to see my point.
In Australia it isn’t that two or more state entities is per say barred from investing in the same company, as the law currently is, not at all. Then what is the problem, you might ask? The issues here are the concepts of associated entities and substantial shareholdings.
You see in Australia, under their securities regime, two or more entities that are associated – related in some way, namely through ownership and control – that combined own more than 5% of a listed company must declare a substantial shareholding. However, due to a lack of clarity in the law and the absence of a clear policy position the question remains open if two or more Chinese state owned companies would be considered associated and required to declare a substantial shareholding?
The securities regulators face several related sub-problems and they must approach this issue with some degree of sensitively to the political nature of dealing with entities belong to another state. With that in mind regulators have to be cognizant of the fact that they are not dealing with subsidiaries here but foreign state owed companies; state ownership is not equal in all these enterprises; state control is not equal in all these enterprises; and these enterprises while having the same state owner might indeed be fierce competitors with opposing interests.
I do not envy the regulators their task but it will be interesting to watch what if any policy position is developed or if the law is changed to address this issue.
Canadian Options for American Protectionism
Mitch Potter of the Star reported this week on the increase in protectionism in the U.S.,
A small army of Canadian diplomats fanned out across Washington today in a full-court press to “contain the contagion” of Buy America trade protectionism.
Stressing that the frantic round of lobbying was “to educate, not to threaten,” Canada’s Deputy Head of Mission Guy Saint-Jacques led Ottawa’s effort to reach out to more than 75 members of Congress with a barrage of raw statistics showing how the benefits of free trade flow both ways.
Does the US have an argument that there should be an exception in dire situations, such as the current economic recession?
To put a hold on NAFTA and focus their attention domestically in order to revive a severely damaged economy?
With their international trade obligations, the US cannot legitimately argue or act on protectionist measures without some sort of backlash internationally, especially from Canada and Mexico through NAFTA.
The US does have an obligation to abide by NAFTA (although any NAFTA country can opt out of NAFTA so long as a 6 month cancellation notice is provided to the other members)
If US senators do not back down from the “Buy America” mentality and the US acts on additional protectionist measures, to the extent Canadian trade and investment is hindered, possible courses of action for the Canadian government include:
- Chapter 11 of NAFTA (which includes article 1122 – requiring each member government to consent to settle disputes by arbitration) – is concerned with investor-state dispute settlement; where complainants (investors) can bring a case against a state in front of a tribunal.
- Chapter 19 of NAFTA – deals strictly with goods; and complainants can urge their own national governments to take action.
- WTO – that can also issue binding rulings that can issue a reward for damages or compensation to a country
Oil Companies Murdering Activists in Nigeria
Catherine Boyle of the TimesOnline reports:
Shell, one of the world’s biggest oil companies, will go on trial over allegations that it was complicit in the execution of a well-known Nigerian environmental activist and author…
If the action is successful, the trial will be a landmark case on how global companies can be held accountable for human rights abuses in countries in which they operate. It is a test for the Alien Torts Statute, which allows non-US citizens to file suits in US courts for alleged international human rights violations.
h/t Daniel Ho
Black Liquor Sparks New Trade Feud and Old Controversies
Is Canada listening to calls to assert our national interests?
On Thursday, Canada joined the EU, Brazil and Chile in demanding the withdrawal of tax credits in the U.S. for black liquor.
The credits are estimated at $4-8 billion, passed in 2007, and intended for energy alternatives in paper mills and cogeneration facilities. Paper manufacturers have started mixing F-T diesel with a kraft process byproduct known as black liquor to meet the definition of the tax credit, which Canada claims is hurting Canadian jobs.
Although President Obama wants to terminate the rebate on Oct. 1, Canada and the other countries are threatening action through the World Trade Organization (WTO).
In light of a global recession caused by what some consider fiscal mismanagement and overzealous deregulation in the U.S., Canada’s controversial and convoluted trade relationship with the U.S. warrants greater scrutiny.
Corporate Legal Spending Expected to Rebound Sharply
Following a significant decline in corporate expenditures on legal services in 2008 and the first half of 2009, businesses will once again begin increasing their law budgets in the second half of this year according to the results of a study announced today by legal industry research leader BTI Consulting.
The study, titled ‘BTI Mid-Year Spending Update and Outlook,’ covers 16 practices and 18 industries and is based on 370 interviews with corporate counsel at Fortune 1000 companies that average $19.4 million in outside counsel spending. Key findings of the study include:
- Clear signs of renewed legal spending after a sharp decline of 7% since year-end 2008.
- Corporate legal spending at large companies will grow nearly 5% over the next 6 months, bringing overall market growth to only negative 1.4 percent for the year.
- Leading the growth in spending will be the practice areas of regulatory compliance, employment, securities and bankruptcy/corporate restructuring law.
- Year-to-date, the hardest hit core practice areas have been corporate, securities and finance, and intellectual property.
“We have all read the headlines detailing drops in business spending across every category, including legal services. This study presents a big ray of sunshine in what has been a very stormy environment. The reversal of this negative spending trend will help buoy flailing legal markets and offers some hopeful news about business spending in general,” explains Michael B. Rynowecer, President of The BTI Consulting Group.
Rynowecer suggests the increase in spending will not, however, alleviate law firm lay-offs which have been rampant in recent months. “Rather than a wholesale recovery, we are seeing a shift of resources to specific firms and practices that are well-positioned,” Rynowecer warns. “Large companies are sharing this renewed spending with a smaller group of law firms than just 6 months ago. Those firms caught unaware or unprepared for this shift will continue to face significant challenges and not reap the benefits of this increased spending.”
Flexibility, Please
Blame the current economic crisis on too much debt taken on with too little research.
Nobel Prize winning economist Myron Scholes lectured at the University of Western Ontario’s Faculty of Law on March 19, packing the faculty’s largest classroom to overflowing with students, professors and businesspersons curious to know what the Professor (Emeritus) of Finance from Stanford University had to say about today’s financial doldrums.
Scholes, who won the Nobel Prize in 1997 for work on the Black-Scholes Options Pricing Theory, was speaking as part of the Torys LLP Business and Law Pre-Eminent Scholars Series.
When financing operations, business organizations can choose between raising equity by selling shares, or taking on debt. Often they prefer debt financing because interest on debt is tax deductible.
Leading up to the crisis, financial institutions leveraged debt heavily, which means the outcomes, whether positive or negative, would be magnified.
One of the main problems with the current debt market, Scholes suggested, is the debt rating system. Under the current regime, debt that is considered high quality is low risk for investors. By comparison, debt that is rated lower is considered more risky — and with that weighting comes a greater promised rate of return.
Scholes offered several criticisms of the rating system.
First, he suggested that rating agencies use too little data in making their assumptions. The agencies used data from only the last few years and assumed – incorrectly, as it turned out – that housing prices wouldn’t fall. Had agencies used older data, they would have seen different long-term trends.
Secondly, rating agencies assumed that any losses on housing prices would occur idiosyncratically. In other words, their models did not have a built-in contagion or domino effect.
Thirdly, the current rating system suffers from a “cheapest to deliver” problem. Scholes compared the problem to buying wheat. If wheat vendors are only allowed to put up to X amount of sawdust in their wheat, then those vendors will put exactly X amount of sawdust in their wheat. Likewise, when rating agencies specify precisely what criteria will achieve a high rating of, say, AAA, then companies will do just enough to pass that test and no more. Indeed, they will keep pushing the envelope to get away with doing less.
In the future, Scholes said our economies will need a design with more flexibility. Flexibility refers to the ability to protect oneself with financial reserves.
During prosperous times, keeping reserves, such as money in the bank, instead of investing is seen as costly. However, a policy based on the preservation of some flexibility will signal to people that having options is a part of life. By example, carrying an umbrella when it does not rain is burdensome; not carrying an umbrella when it starts to rain is more burdensome. As people become afraid, they build up excess amounts of reserves and money stops flowing through the economy.
Ultimately, Scholes argued that the cost of being reactive is gigantic. Financial and political leaders should think about developing proactive solutions that build flexibility into our economy.
The Torys LLP Business and Law Pre-Eminent Scholars series is one of Western Law’s most popular courses. Each month one of the world’s top legal and business scholars presents a paper in his or her area of expertise to Western law students.
Cross-posted from the Financial Post Executive Blog and the UWO Law site.
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