Commercial Law International

By: Eran D. Grossman

Yes that’s right.  With growing concern about a commercial real estate bust and home prices continuing to fall, real estate stocks are soaring.  What you say?

Shares of Real Estate Investments Trusts, a/k/a REITs, are lucrative investment vehicles thus far in 2010.  The IShares Dow Jones Real Estate exchange-traded fund, which owns about seventy-five real estate stocks, is up 9% in 2010.

So what is a REIT?  A REIT is a security that sells like a stock on a major exchange and invests directly in real estate, either through properties or mortgages.  The name REIT comes from its tax designation status for corporation’s investing in real estate which reduces or eliminates corporate income taxes.  A REIT is required by law to distribute 90% of its income, which may be taxable, to its investors.  The REIT structure was designed to provide for investment in real estate as mutual funds provide for investment in stocks.  Like other corporations, a REIT can be held publicly or privately, and a public REIT can be listed on a public stock exchanges like shares of common stock.  A REIT can be classified as equity, mortgage or hybrid.

An Equity REIT invests in and owns properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.  A Mortgage REIT deals in investment and ownership of property mortgages.  This type of REIT lends money for mortgages to owners of real property, or purchases existing mortgages or mortgage-backed securities.  Their revenues are generated primarily by the interest that they earn on the mortgage loans.  Evaluating the risk of default is clearly something the REIT and its investor should watch out for.  A Hybrid REIT combines the investment strategies of an equity REIT and a mortgage REIT by investing in both. REITs usually invest in commercial buildings, shopping malls, residential buildings, warehouses and hotels.  Some REITs invest specifically in one area of real estate or in one geographical region, state or country.

So what’s the attraction?  One word- Yeild.  Since REITs in the U.S. pay at least 90% of their taxable income to shareholders in the form of dividends, this exempts the REIT from paying federal income tax.  For this reason REIT’s tend to earn high dividend yields that make them more intriguing than treasury bonds, especially during a low interest rate environment such as now.

Bear in mind, as with any security, invest wisely and diversify.

By: Ainsley Brown

This forms part of the Middle Passage Law Series on Law Is Cool.

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.

By: Ainsley Brown

Credit Suisse has agreed to settle allegations of insider trading in Brazil for R$19.2 million. The fine is the second largest, after the Banco Safra case of 2007, levied on a company by the Securities and Exchange Commission of Brazil – Commissão de Valores Mobiliários (CVM).

The offer to settle is substantially more than Credit Suisse’s original offer of R$150,000 last year rejected by CVM. The new offer, which was promptly accepted by CVM, is much closer to the values of the alleged illegal trades and better reflects the magnitude of the offence, according to the Financial Times. Well, that’s one way of putting it. I would have simply said that Credit Suisse got caught with its hand in the cookie jar – allegedly – and is simply paying the consequences.

The settlement stems from alleged insider deal of shares in Embraer, the Brazilian aircraft manufacturer between October 2005 and January 2006. At the time Embraer was preparing to undergo capital restructuring with its shares then being traded on the São Paulo Stock Exchange’s Novo Mercado section. By listing on the Novo Mercado a company voluntarily binds itself to higher corporate governance and transparency standards than that required by either Brazilian law or by the CVM. These features have proven to be very attractive to many investors both domestic and foreign.

According to the CVM, Sistel, a pension fund for employees of telecommunications companies and a controlling shareholder of Embraer commissioned Credit Suisse to analyze the capital restructuring plans. However, not long after it was engaged Credit Suisse, it is alleged, began buying shares of Embraer.

The positive news for Credit Suisse is that the settlement as now drawn a line under this issue and it can now move on to doing what it does best – connecting those with money with those in need of it.

By Charles Wanguhu

In the current financial crisis the role of offshore havens have been placed in the spotlight and quite rightly so. The lack of transparency in their dealings has meant that these centres have not only been used for tax evasion, money laundering, but also as bases for special purpose entities. The role of British offshore havens has of late been highlighted with regards to the ownership of football clubs.

The Riddle of Leeds Football Club ownership has played out quite interestingly in the Royal Court of Jersey.  In January this year the Leeds Chairman Ken Bates told the court that he jointly owned the club’s holding company, Forward Sports Fund. However in an affidavit sworn for the same court in May, Bates states that he did not own any shares in Forward and that the previous statement was “incorrect” and “an error” on his part.

An interesting point to note is that Forward Sports Fund is a Cayman Islands-registered outfit, with its administrators in the very transparent capital of Switzerland. Château Fiduciaire the administrators/trustees on being pushed to reveal the beneficial owners of Forward indicated that;

“Understandably, it is not the policy of this company, a fully regulated Swiss fiduciaire, to release information on ultimate ownership without an appropriate court order, valid in Switzerland.”

The ownership of Leeds United has been routed via a network of offshore companies ever since Ken Bates arrived at Elland Road club in 2005. Bates in his affidavit states that:

The real owners

“Neither I, Mark Taylor or Shaun Harvey are able to confirm who the ultimate beneficial owners of Forward are.”

The above not only makes a mockery of the Football associations “fit and proper test” of Club owners but just goes to show the lack of transparency in football administration.

A similar tale is being played out at league two Nott’s county club with the shareholding behind the Qadbak investment trust that now owns the club remaining unclear. A Pakistani businessman has come out to deny any shareholding in the club despite the club declaring that he was one of the key backers of the club. Qadbak, is surprise suprise registered in the British Virgin Islands.

As it stands Leeds football club is owned by the shareholders of a company registered in the Cayman Islands, administered in Geneva by trustees who pending a court order valid in Switzerland will not reveal the ultimate beneficial owners.

By: Ainsley Brown

Yes, you read right, Tim Hortons is back in Canada. I like most of you never knew it went anywhere.

I know what  you are thinking: Ainsley, you must either be playing a prank, or going crazy or were you just up late and tired and in desperate of a double double because I just brought some Timbits from TIM HORTONS yesterday and they were tasty. Well let me assure you this is no joke, I am not going crazy, and while I could do with a double double it was after all early in the Moring when I penned this piece.

Tim Hortons, the iconic Canadian Coffee shop, is now once again back on Canadian soil. Today due to a merger and re-organization of the company Tim Hortons is now a company incorporated under Canadian law – the Canadian Business Corporations Act.

The shareholders in a Special Meeting of Stockholders last week approved the move back to Canada from Delaware. Approximately 74% of the common shares – those endowed with voting rights – voted with a whopping 99% approval of the repatriation back to Canada.

By: Ainsley Brown

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.

By Charles Wanguhu

A report by the Economist Intelligence Unit indicates that protecting a firm’s reputation is the most important and difficult task facing corporations. With the development of global media and communication channels, managing reputational damage is seen as crucial with events undertaken in even the remotest areas affecting the international brand of a corporation.

For Shell the stark reality of reputational damage is all too clear. After years and years of denial and expressing its innocence of the Ogoni affair (it still maintains its innocence), Shell has decided to settle a case brought against it out of court for a sum of 15.5 Million US $. The lawsuit had accused the company of colluding with Nigeria’s former military regime over the execution of Ken Saro-Wiwa and other peaceful anti-oil protesters.

Like Nike before it Shell remains in many minds as the poster child of a lack of corporate responsibility especially in big multinationals. The Saro Wiwa case is largely sited not only in commercial classrooms but across NGO conferences worldwide. Multinationals are viewed as bulldozing their way with the help of corrupt and dictatorial regimes to fulfill their interests with complete disregard to vulnerable communities.

The perception of Shell as the irresponsible corporate persists despite the fact that it has invested millions in engaging communities in areas that it works in and has increasingly taken on human rights in its business models and stakeholder engagement strategies.

In response to the case filed Malcolm Brinded, Shell’s executive director for exploration and production, was quoted,

“While we were prepared to go to court to clear our name, we believe the right way forward is to focus on the future for Ogoni people, which is important for peace and stability in the region.”

The settlement could be seen as a magnanimous move by Shell in some quarters with some already hailing the move as groundbreaking in terms of holding corporations accountable. However when looked at broadly the settlement will be seen as a coup for Shells PR team: instead of having weeks, months or even years of a contested trial where Shells actions or lack of thereof would be once again stirred up in everyone’s mind globally, a quick settlement offers a quick escape route.

All in all $15.5Million may well be considered a bargain when factoring in legal costs, reputation risks and lost revenue. There could well have been some champagne popped at Shell HQs but am sure downstairs in the legal department the wait is on with baited breath to see whether the floodgates have been open.

By Charles Wanguhu

In original multinational thinking the lack of a significant middle class meant that investment in some emerging markets was considered not viable. The financial crisis has sprung up some few suprises.

While AIG parent company has been largely reliant on US government funds their subsidiaries in Kenya, South Africa and Uganda have been financially strong and have been declaring profits. To further embolden them they have now declared an intention to break away from their parent company AIG inc.

It seems that with initial high risks of working in emerging markets their subsidiaries had employed a robust risk strategy including sufficient reserves. The mother company operating in an increasingly deregulated market seem to have been less cautious. The subsidiaries have consequently recorded profits enabling them survive in the economic downturn and continue to be viable entities.

Eric Aouani, the chief executive of MediCapital Bank (MCB), is banking on continued growth in Africa markets and  Making inroads in africa

By: Carsten Lexa, LL.M.

During the last several months, some German midsize companies have turn to the UK to undergo insolvency proceedings. They seem to be quiet happy with their decision and, more importantly, they were successful: Today, companies like DNick Holding (formerly Deutsche Nickel AG) or Schefenacker (today separated into the two independent companies odelo and Visioncorp) prosper and even pay out dividends. Utilizing UK insolvency proceedings was made possible by the European Insolveny Regulation. It states that if insolvency proceedings are being commenced in one EU country, it cannot be commenced in another EU country.

Although Germany has very sophisticated insolvency proceedings, there must be reasons why German companies want to “go UK” for applying UK insolvency proceedings. And there are a few:

First, the proceedings in the UK are far more flexible than and they don´t take as long as in Germany. Very often, in the UK three months into the proceedings it becomes clear whether a company can be saved or not. In Germany, very often after three months one has just received the court order of the disclosure of the proceedings.

Second, there is one very special instrument of the UK insolvency proceedings that German companies are interested in: the “Dept for Equity Swap”. With this instrument, dept can be changed into equity by majority vote: New share capital can be made from dept. And the required majority in the UK is only 75% of the attendant share capital. Therefore, major shareholders can force the creditors to become shareholders (Germany also has provisions for “Dept to Equity Swaps; but the German provisions require the dept claim to be of certain value, meaning that there must be a good chance that the claims can be honored by the company – something that is rarely the case for a company in danger of becoming insolvent). Turning dept into equity is very often an important requirement for the financial recovery of a company.

But needless to say, not every company can exert UK insolvency proceedings. According to article 3 of the European Insolvency Regulation, the law regarding  insolvency proceedings of that state apply, in which the company has its “Comi”, its “Center of Main Interest”. According to the German version of the Regulation, this is the place where the company “usually pursues the administration of its interests” – a very elastic term. That does not mean that each an every employee must be relocated to, in this case, the UK. But having only a mailbox in a city somewhere in the UK is clearly not enough. And it is not sufficient only to  transform a German company into a UK private company limited by shares but continue the business in Germany without modifications.

Therefore, if a company wants to “go UK”, it should consider the costs for the relocation of the place of residence and for the reorganisation of the administration. These costs must be weighted against the advantages of the UK insolvency proceedings. It should be clear that the decision of whether to “go UK” or not should be made with the help of competent advisors.

For inquiries please contact the author: kontakt@kanzlei-lexa.de

By: Carsten Lexa, LL.M.

The German Federal Council (Deutscher Bundesrat) does not like the European Private Company (EPC). With resolution of Oktober 10, 2008 the Federal Council criticises the conditions for the EPC, set out in the proposal for a “Regulation regarding the European Private Company Statute” by the European Commission of June 2008.

The Federal Council has two main issues with the proposal: First, the EPC lacks cross-border circumstances. The EPC can be incorporated in any member state of the European Union without an underlying cross-border connection. For example, it is not necessary that (1) the shareholders must be members of different member states or (2) the EPC must be offering services or goods in more than one member state. Second, the EPC does not require a certain amount of share capital.

The opinion of the Federal Council is well founded. However, the reasons are partially not comprehensible. Let´s glance at the three main arguments.

First, the Federal Council has the opinion that the EPC is generally not necessary. Instead, it refers entrepreneurs to the possibilities of establishing branch offices in foreign countries or establishing a German Limited Liability Company (GmbH) with registered office in the foreign country. However, several important trade associations have offered the opinion during the years of discussion before the appearance of the European Commission proposal that a branch office is not a suitable solution for a company that is interested in Europe-wide business. And foreign types of company very often appear strange and therefore limit business activities.

Second, the Federal Council criticises the missing minimum capital. This criticism is inexplicable. Germany itself has – since November 2008 – a variation of the GmbH that requires basically one Euro as minimum share capital (indeed, the GmbH itself requires 25.000,00 Euro as minimum share capital). Therefore, it is not clear why the EPC should require a certain minimum capital (however, Germany always had and still has problems with companies without a certain minimum capital – arguments are often creditor protection and “minimum capital as barrier of seriousness”).

Third, the Federal Council criticises the missing cross-border connection. This is indeed an interesting argument. On the European level, the main reason for European legislation and institutions was a cross-border link (see for example the requirements for the incorporation of a European Company, SE). By omitting the requirement of a cross-border connection the EPC could be used locally or regionally and therefore competes against national types of company, although the European Union is not entitled to “create” types of companies that can be used purely locally and therefore as a European type of company that acts only locally. If a company wants to do business only in one member state, it should utilize the national types of companies that already exist. Regarding this argument, based on legal policy considerations, one has to agree with the Federal Council. But one should not forget that entrepreneurs often are not interested in legal policies, but in practical solutions. And according to the trade unions, the lack of cross-border connections does not really bother entrepreneurs.

The discussion regarding the European Private Company is on. We will see more opinions in the future and one should not expect the EPC as a European type of company to appear soon. However, the EPC seems to be very interesting fpr entrepreneurs who are interested in Europe-wide business. Hopefully, the EPC in the end will be a suitable alternative for business owner in Europe.

For inquiries please contact the author: kontakt@kanzlei-lexa.de