RSS FeedAustralian 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.
Is Tax The New Area Of Concern For Corporate Social Responsibility?
First posted on Commercial Law International on March 7, 2009 by Charles Wanguha.
In the early 1990s, Nike suffered a huge backlash from the revelation of child labour in its factories abroad. As a result, there was a drive to ensure that clothing was environmentally sound.
In early 2000, a push for carbon footprint labelling ensured that consumers were conscious of the effect of their consumption habits on the climate.
In 2009, after a Guardian expose, there has been an uproar regarding tax evasion by big corporations. These corporations, through the use of extensive webs of subsidiaries in tax havens, have managed to create a near-zero tax liability status in their country of operation. The Guardian describes it as “the triumph of technical proficiency over social responsibility”.
It is likely to spark the age-old debate about whether a corporation’s main point of existence is the creation of shareholder value. If that point of view is to be accepted, then the less tax is paid to the government, the higher the dividend or return that is passed to the shareholder.
In response, the corporations argue that in strictly legal terms they are not breaking the law or involving themselves in an illegality. In this instance, should the regulator then be blamed for the tax avoidance? And how can the regulator keep abreast of all new avoidance schemes when at the moment they face close to 200 known schemes? The corporate social responsibility debate has been pushed forward largely by the moralist argument rather than the strict legalistic interpretation of the corporate duties to society.
A corporation, like all legal persons, has a responsibility to pay taxes. In turn, the government has a duty to provide services at an acceptable level. In the example of the Johnny Walker brand, valuable royalties earned were moved from England to Holland (which had a zero rating tax on IP rights) while the production remained mostly in England. Thus, in one swoop, a huge tax gap is imposed on England tax offices. The tax gap must then be filled by the low income and small businesses who are unable to hire the services of the lawyers, accountant, and consultants that dream up these schemes.
A new incentive, similar to the carbon footprint labelling of food, has been initiated. (See more at tax ticked.) It in effect aims to reward good corporate citizenship.
If successful, the focus will return to good corporate citizenship as opposed to charitable acts easily negated by tax evasion.
Irrational Exhuberance and the Animal Spirits
This post was created and posted in real-time, before the talk was even concluded. For a more detailed article on the same talk see the UWO Law website.
People will always act rationally, right?
That’s the assumption upon which we rest our economic decisions, and one which Dr. Robert Shiller of Yale University is questioning.
Shiller is one of the world’s most well-known economists, and a bestelling author. Several weeks ago, he received the 2009 Deutsche Bank Prize in Financial Economics.
He predicted the 2000 IT bubble burst in the first edition of his book, Irrational Exuberance.
But he also predicted the 2005 housing crisis in his second edition, and outlined a recover plan in Subprime Solution: How the Global Financial Crisis Happened and What To Do About It.
He has a new book though, co-authored with Nobel Prize winner George Akerlof, on Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.
It was this most recent book that was the topic of his talk at the University of Western Ontario on March 27, 2009. He was working on this book for six years, but decided to released it now given the current economic situation.
John Keynes once said in 1936, in General Theory of Employment Interest and Money,
The outstanding fact is the extreme precarious of the basis of knowledge on whic our estimates of prespective yield have to be made… Most probably, our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be take as a result of animal spirits – of a spontaneous urge to action rather than inaction.
Nobody can predict the future. There are many people who pretend that they can, however.
Most actions are affected by what people anticipate will happen, and it’s in these animal spirits that we see the root of this economic crisis.
Postponing building new factories or laying off people leads to another round of problems; they are unable to spend, they tell others of their experiences, and there are ripple effects.
As a result we get into a period of lost opportunity.
Animal spirits are contrary to the thinking of economics, who always want to look to something concrete like the central bank, but it’s usually the animal spirits that drive things.
Real cycle business theory believes that all the drivers of the economy is technological change. Although there is some validity to this like the railroads, it doesn’t explain things like the changes we see today.
Is the AIG Bonus Scandal a Mere Distraction?
For an excellent primer on the financial crisis, watch the video below:
The Obama administration is currently seeking all legal means to prevent AIG from using federal bailout money to pay $165 million in contractual bonuses to its executives.
Today’s opinion column in the Wall Street Journal called the bonuses scandal a distraction:
[Obama] and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.
I certainly agree that the “larger outrage” is just that.
But the bonus scandal is not just a distraction. It’s not just a politically-motivated attempt to throw some water on the rage that burns inside taxpayers’ hearts.
It has a great deal of value beyond saving the federal coffers $165 million (which, admittedly, is not a lot of money in the grand scheme of things).
The real value in nullifying the bonuses is the message that it sends.
* * *
Alan Greenspan recently admitted that he had made a “mistake” in believing that banks, operating in their own self-interest, would never create such a poisonous economy that they would themselves collapse. Greenspan called the mistake:
“a flaw in [my] model … that defines how the world works.
…
I still do not fully understand why it happened.”
Well I have a pretty simple theory.
Greenspan’s mistake was failing to recognize that there is no such thing as corporate self-interest. It’s an illusory concept.
When it comes down to it, the corporation is run by a board of directors, each of whom acts in their own personal self-interest.
That personal self-interest can generally be summed up as: making as much money as possible as quickly as possible.
When these personal interests overlap with what we perceive as the “interests” of the corporation, we are fine and dandy. The corporation makes money and the shareholders make money. The system flourishes. The economy grows.
The system becomes poisonous when the board of directors is willing to sacrifice the corporation for short-term gain. That’s precisely what happened here.
It’s not that the “banks” would never allow “themselves” to collapse. There is no “themselves.” There are just the individual directors that were perfectly willing to allow the banks and insurance companies to collapse if it meant a quick dollar in their pockets.
They milked and milked their golden calf for all the money it could give. When finally the milk ran out, they dispatched it to the slaughterhouse. This despite the fact that shareholders were relying on that cow. So were insurance policyholders. But these people never factored into the executives’ self-interest equations.
* * *
Some argue that to deny contractually-obligated bonuses would be a mistake. They say that doing so would cause these executives to leave their posts for greener pastures. In short, it would mean that talented individuals would find other jobs at precisely the time when we need the best people at the helm.
And it’s true. These people do have remarkable talent.
But they also have few – if any – scruples when it comes to using that talent.
They have demonstrated their astonishing ability – and willingness – to take legally dubious and ethically debaucherous steps to enrich themselves, personally, at the expense of the companies they work for and the economy as a whole.
At best, these men and women have shown reckless disregard for their shareholders. They have failed in their fiduciary duty of loyalty to millions of hardworking Americans (and Canadians) who hold stock in their company.
They have shown a duty of loyalty to one thing only: their own wallets.
Are these the people we want to keep at their posts?
* * *
This brings me full circle to my original point. There’s more to the denial of these bonuses than just distraction. It’s a warning message.
Under our old system, these directors had nothing to lose. They knew that they would earn huge bonuses while the bubble was expanding. They made millions. And they knew that in the near future, when the bubble was set to burst, they would STILL get their contractually obligated bonuses.
And now AIG wants to fulfill that depraved fantasy.
Retroactively canceling the bonuses (e.g. through legislation) would send the message that acting in personal self-interest without regard for the corporation’s interests – let alone the wider economy’s interests – will get you nothing in the end.
That’s probably precisely the message we want to send to the next generation of corporate executives.
Mitch Kowalski, Man to Watch in Tough Legal Times
Last week I met with Mitch Kowalski of the Legal Post. He mentioned our conversation earlier today on the site, which is the kick in the butt I needed to do my own write-up on it during our break from school.
Mitch is an alumn from my school, Western Law, but has chosen a career path unique from most. After practicing for many years on Bay St. he decided to open a writing center, first at Yorkville, and then moving to a more central location on Bloor West.
And just like those television infomercials, Mitch not only runs the place, but he’s a client too.
Mitch’s column on the Legal Post (RSS) has become a popular one among many lawyers and law students wary of these tough economic times.
Mitch forecasts that current graduates (2009) will probably have it the worst because nobody really knows what to expect. Canadian law school grads might just be fighting for shifts at Tim Horton’s for a few years. They should probably be looking at other careers such as NGOs or trying their hands at magic. In any case, it’s probably still better than doing porn.
Major law firms continue to be in denial in a scenario scarier than Halloween. Most of these firms have come into existence well after the Great Depression, and their size has never been tested by a serious and prolonged recession.
The problem is that lawyers don’t have a lot of work during a recession.
Some of the potential growth areas such as labour and employment, IP, and even bankruptcy and insolvency, won’t make up for shortages in major corporate work that employs massive numbers of lawyers within the major firms.
With every economic threat there are also opportunities, and Mitch thinks this is an opportunity to transform the legal profession. The very nature of law firms may change, with some even incorporating other professionals like accountants into their partnership structure, and others even going public.
Cost-saving may force firms to look overseas, instead of using inexpensive articling students (who get paid just over twice minimum wage in some firms when salary/hours is calculated).
The days of sending armies of students to the law library to photocopy into the wee hours of the morning may be ending, because these students still cost too much resources for their office space, workstations and training. Overhead from downtown rent continues to be one of the major costs after salaries in most large law firms. Associate turnover due to burnout and mismanagement is completely ignored and accepted as the price of doing business.
The billable hour also attracts considerable wrath from Mitch’s scrutiny.
Naysayers might shun worrying over the ‘sky is falling’ rhetoric. New grads might feel like they’ve been slipped a mickey by the legal industry. But those who want it raw and are entering the brave new economic world willing to turn to the blogs for advice, Mitch’s column is a good place to start for a translation of things to come.
The Legal Post is also up for an ABA Award, and you can vote for them here to help make Canadian blogs a prominent landmark in the legal blogosphere.
Cross-posted to Slaw
Absolute Liability of Corporations
When Areas of Law Intersect
The Re B.C. Motor Vehicle Act eluciated some interesting challenges in the intersection of different areas of law.
The court cited Joseph Eliot Magnet of the University of Ottawa,
The transposition of the administrative law principle to a constitutional context is problematic. In the administrative law cases, the issue of intent concerns the intent of a specific person. In the constitutional cases, the issue of intent concerns the legislature, an incorporeal body made up of hundreds of persons. It may be said that such a body, like a corporation, is a legal fiction and has no intention in the relevant sense. It would follow that legislative intent, in the constitutional setting, is a hollow concept.
A corporation could therefore be preclued from the protections in s. 7 of the Charter.
Company’s Freedom of Speech?
In Irwin Toy Ltd. v. Quebec, the respondant sought protection from s. 248 and 249 of the Consumer Protection Act,
Advertising for persons under 13.
248. Subject to what is provided in the regulations, no person may make use of commercial advertising directed at persons under thirteen years of age.
1978, c. 9, s. 248.
Criteria of intent.
249. To determine whether or not an advertisement is directed at persons under thirteen years of age, account must be taken of the context of its presentation, and in particular of
(a) the nature and intended purpose of the goods advertised;
(b) the manner of presenting such advertisement;
(c) the time and place it is shown.
Irwin cited freedom of expression rights under s. 7 of the Charter. Dickson C.J. found,
We have already noted that it is nonsensical to speak of a corporation being put in jail. To say that bankruptcy and winding up proceedings engage s. 7 would stretch the meaning of the right to life beyond recognition.
As a result, corporations are generally assumed to be vicariously liable for the actions of its employees, but this liability can be extended further to primary liability.
Senior Directing Mind
R. v. Canadian Dredge & Dock Co. used the English identification doctrine, where a senior individual in a corporation can be metaphorically held to represent the mens rea and actus reus for a crime as the directing mind. Laskin C.J. stated,
Therefore, even in mens rea offences, if the court finds the officer or managerial level employee to be a vital organ of the company and virtually its directing mind in the sphere of duty assigned him so that his actions and intent are the action and intent of the company itself, the company can be held criminally liable. The wrongful action of the primary representative, by attribution to the corporation, creates primary rather than vicarious liability. The identity doctrine merges the board of directors, the managing director, the superintendent, the manager or anyone else to whom was delegated the governing executive authority of the corporation, and the conduct of any of the merged entities is thereby attributed to the corporation. A corporation may, by this means, have more than one directing mind.
Rhône (The) v. Peter A.B. Widener (The) elaborated on this further, establishing the requirements for a directing mind,
The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis…
[senior officer in this case] had certain decision-making authority… [and] important operational duties, [whereas] governing authority over the management and operation… lay elsewhere.
Directing mind in this case was found to be an employee given central authority that provides discretion, rather than necessity or tradition of duties.
