Commercial Law International

By: Ainsley Brown

When an industry approaches being worth close to a trillion dollars it can no longer be considered a passing fancy or fad – Islamic banking and finance (IBF) is real and is as much a part of the global financial system as “conventional” finance.

It is this realization that has prompted Australia to conduct a review of its tax laws and their impact on IBF. The aim of the review, to be conducted by the Australian Board of Taxation, is to strategically position Australia to take advantage of the growing IBF market. As much was acknowledged by Australia’s Assistant Treasurer Senator Nick Sherry, “Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position to capitalize on that growth, but we have to ensure our tax system doesn’t unnecessarily prevent that from happening.” Moreover, according to Sherry, “if Australia continues down the path of accommodating this type of finance it will serve Australia in terms of capital attraction, jobs and growth.”

The review is less about giving IBF special treatment under the law and more about finding and then removing barriers that unnecessarily and unfairly burden IBF. In ordering the Board of Taxation to conduct this review the Assistant Treasurer made it clear that “this is not about special treatment or concessions for Islamic finance or its providers, but about securing that our system doesn’t unfairly disadvantage or preclude such instruments and, in doing so, deprive Australia of capital, jobs and growth.”

The review will be among the first to be conducted by an Organization of Economic Co-operation and Development (OECD) country.

When will it be Canada’s turn?

By: Ainsley Brown

India has needs to improve its corporate governance regime; so says, the Hong Kong based advocacy group, Asian Corporate Governance Association (ACGA).

The ACGA’s report comes in the wake of the Satyam Computer Services scandal where the companies head admitted to defrauding the company for many years. The scandal helped expose so of the obvious as well as not so obvious weaknesses in the Indian corporate governance regime.

The report, which will be presented to government officials, the Securities and Exchange Board of India (India’s securities regulator) and stock exchanges, points out several areas in need of reform. Four such areas in need of reform are:

1. Related-Party Transactions – this is an issue in India as many companies are either owned or controlled within one family and companies are sometimes run like personal fiefdoms.
2. Corporate disclosures – India needs to improve corporate transparency in a major way given for example as the report points out the misuse and abuse of warrants in India.
3. Shareholder voting rights –many investors are rob of a chance to air their views at annual meetings as annual meets are often held in far off places,  with relatively little notice.
4. The Auditing profession – the highly fragmented nature the profession in India and regulations mostly geared to insure the survival of small firms often over improvements in quality and service has done a tremendous disservice to what ought to be a cornerstone in any corporate regulatory regime.

The question that remains will law makers, regulators and corporate insiders accept or reject the reports findings and recommendations?

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: Rechtsanwalt (Attorney) Carsten Lexa, LL.M.

I´m not sure whether the following are really “secrets”. Very likely they are not. But they are definitely not commonly known – even to US-Americans, who use, on average, about 8 credit cards per person. Especially the Germans always wonder about the problems the US-Americans have with credit cards and how it is possible that a lot of them struggle with repaying their credit card depts. Well, a lot of the following was new to me and, especially from a legal perspective, it really surprised me.

1. Credit card banks can raise the interest rate automatically if someone is late on payments – but not only on payments for the credit card, but even if someone is late on payments elsewhere, for example another credit card or on a phone, car, or house payment. This practice is called “universal default” and such a clause is becoming increasingly popular in credit card agreements.

The logic behind the practice of universal default is that the credit card bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased.

2. Almost every US-American has, often unknown to them, a credit score known as FICO score. It is used to determine how much someone can borrow, or how much he has to pay for life insurance, or if someone can rent a home. Most importantly, it can be a factor in determining the interest rate someone pays on a credit card. The FICO score is usually determined by five factors, with the most important being the amount someone currently owes and the payment history on large debts.

3. In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted the existing restrictions on late penalty fees. Back then, fees ran to $5 or $10, and usually did not exceed $15. After the Court’s decision, fees soared, reaching upwards of $30. The result of the decision is that there is no limit on the amount a credit card company can charge a cardholder for being even an hour late with a payment. Since that decision, the amount of revenue the credit card companies generate from fees (including late charges, over-the-limit fees, and charges for returned checks) has doubled.

4. Most people, not just US-Americans, do not read the fine print on their credit card agreement. But this is where the interesting clauses can be found. Very often a clause says that the credit card company can change the interest rate (APR) at any time, for any reason, as long as they give 15 days’ or 30 days´ notice.

5. There is no federal limit on the interest rate a credit card company can charge their customers. The Federal Government of the United States once had national laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states put no new laws in place. Deleware and South Dakota for example have no caps on interest rates. But can credit card companies chartered in these states charge to customers whatever interest rate they? Yes, they can. This goes back to the 1978 Supreme Court decision Marquette National Bank v. First of Omaha Service Corp. that determined national banks only have to obey the interest-rate caps of the state they are chartered in, not that of the state where a bank’s customer lives. This means that when a bank from a state without limits on interest, like Delaware or South Dakota, issues credit cards to people living in states like Minnesota, which caps credit card interest, the customer can be charged any rate of interest. The result is that cardholders often have interest rates of 20% or more.

6. A lot of US-Americans pay only the required minimum – often as low as 2 percent – of their balance each month. Many of them could pay more than the minimum, and could possibly even pay off in full their balance. But they don’t — even though the interest rate they are paying on their credit card balance is considerably higher than what they pay on other things and compared to what they’re getting in interest income from their savings account.

It should be noted that things have changed a little bit regarding the required minimum monthly payments of 2% mentioned above. Banks are being required to increase minimum monthly payments to cover all fees and interest incurred during the month as well as covering at least 1% of the principal on the loan.

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

By Charles Wanguhu

Financial institutions offering Ethical investment in practice exclude companies with interests in armaments, oppressive regimes, nuclear power, tobacco, vivisection, gambling, alcohol and pornography. Environmental (and ethical) investments also aim to invest in companies with positive effects on the environment. Characteristics of such companies include but are not limited to: socially responsible, environmentally conscious companies, and equal opportunity employers.

With the above in mind what recourse would an ethical investor have on discovery that their funds were being deposited in a manner that did not conform to their moral expectations.

 A roman Catholic Bank in Germany was forced to offer an apology after a newspaper discovered that it had acquired stocks in defense, tobacco and birth control companies.

Der Spiegel newspaper discovered the bank had invested 580,000 euros in British arms company BAE Systems.   The bank also invested 160,000 euros in American birth control pill maker Wyeth. The Catholic Church abhors contraception and the Pope has been vocal in re-emphasising this stance. The anti-contraception stance has been present since 1968 and the current Pope Benedict XVI has not faltered on this stance.

What remedies would an investor have: Sue for breach of contract? Report for false advertising? And in light of the latter in the event the investments were actually profitable what would the investor do with the unethical returns?

By: Ainsley Brown

It is unquestionable that litigation is big business for lawyers, especially in complex commercial matters.

The billable hours that can be racked up can be astonishing – and unlike popular belief is not largely due to an over inflation in the billing procedures of lawyers, though no doubt this can be an issue for some at times but is rather the result of the litigation process itself (pleadings, motions, discovery, delaying tactics, etc). The ever increasing costs of litigation have forced many a meretricious claim not to be perused simply out of economics – a wholly unacceptable state of affairs.

What if there was a way to externally fund your claim, just like how you would find an investor to fund the start-up or expansion of a business?

Enter three enterprising UK lawyers and you get not only funding for litigation but a potential investment opportunity as well. George Brown, John Byrne and Neil Purslow know a good opportunity when they see one. This is why they launched Therium, a third party litigation fund which intends to invest between £100,000 and £5 million per case with an expected return of 250% on its investment. The fund will be commercial litigation and arbitration focused.

Moreover, Therium intends to raise £50 million by going into the capital markets and with a potential 250% rate of return it should be very attractive to many investors, institutional and individual alike. Given that London is a leading centre for the settlement of commercial disputes, Therium is posed to reshape the business dispute resolution scene in England.

However, while the concept of third party litigation is no longer a crime or a tort in England and Wales since 1967 it is still frowned upon in many circles. It is true that maintenance, the intermeddling of third parties that have no interest in the outcome of a case and champerty, the maintenance of a case with a view for profit, might have been abolished long ago but their influence on the English legal profession remains very strong.

Times they are however changing; the establishment of Therium is proof positive of this.

By: Ainsley Brown

The African Development Bank (AfDB) has engineered a legal support wing charged with the responsibility of evening out the imbalance in legal expertise that many African nations face when negotiating complex commercial transactions. It will also serve as a necessary firewall for these nations by providing top notch legal advocacy when facing litigation, especially from vulture funds.

Vulture funds?

Vulture´s Sunset?

The aptly named vulture funds or as better known in investment circles:  distressed debt or special situations funds, are those hedge or private equity funds that buy up debt  -in this case sovereign debt – at very low rates in the market or directly from a company or nation at a point when either is illiquid and distressed.  Circling like vultures they buy up this debt with the intention of later bringing suit for recovery at grossly inflated prices as compared to what they paid for the debt.

Most of the cases brought by Vulture funds are either brought in US or UK courts, a point that has not gone unnoticed by NGO´s and legislators alike in both countries. Due to pressure and effective information dissemination by NGO´s, they have managed to bring the issue to the fore enough to see legislation introduced in both the US and UK aimed at curbing the vultures.

The question now is whether these new pieces of legislation, if passed, when combined with the new AfDB legal support facility will be enough to keep the vultures at bay?

It is my hope that either by themselves or combined they are not so watered down and ineffective that they are paper tigers but are the roaring lions they need to be to take on such a monumental task – let’s hope.

By: Ainsley Brown

I just dont get it.

I must say that I consider myself a relatively intelligent person – though admittedly not an economic guy – I believe myself able to grasp practically any concept once explained. And the Obama toxic asset plan, I just don’t get it.

Please do not read this as either a general criticism of the President or the specific criticism of the plan, for it is not. I am a big fan of Mr. Obama and I wish him all the success in the world. In fact I hope, even thought I don’t understand it, that this plan does indeed work; for as much as non-Americans don’t like it, it remains as true as ever: so goes America, so goes the world.

The plan unveiled yesterday is designed to buy up the toxic assets, for example those now infamous sub-prime mortgages, in order to remove then from the banks’ balance sheets. In so doing it is hope that this will unclog the credit markets and get credit flowing again without the need to fully nationalize the major financial players. This is the part of the plan that I fully get, it sounds all so logical. However, it is the rest of the plan that I just don’t get.

You will see what I mean or at least empathize with my confusion when you consider the following questions I have:

1. What exactly is a toxic asset? Surely this will vary with in and between the financial players. That is to say as between banks and banks; banks and insurers; insurers and insurers, etc. Will there be an object if measure of what is and is not a toxic?
2. Who will define what a toxic asset is? Please don’t tell me it will be the financial sector, the very people who got us in the mess in the first place and who continue to just don’t get it – AIG, need I say any more.
3. If an asset is indeed classified as a toxic asset, must it relate to the current economic crisis or can long standing toxic assets be included?
4. What if the financial players do not wish to sell these assets, is here any way of forcing a sale? It might seem obvious that they would jump at a chance to off-load these toxic assets but it must always be remember that these are the people that got us in this mess and so far they have show very little in terms of change in behavior.
5. How will the price be set? Surly it cannot be book value, if these assets were sold in the market they could not fetch that value, in fact there is no market for them, the market is being created.
6. Even with government guarantees, why would I buy some that is called a toxic asset? I know I am not all that investor savvy but toxic just doesn’t sound good.
7. What is to stop the troubled financial players from buying the toxic assets of another financial player once the market for these assets get going?
8. Is there any provision made for the un-bundling of mortgages and other assets bundled together, to form a new asset – a derivative? It strikes me as oh so simple; if they can be bundled they can be un-bundled. As well un-bundling will assist in the over all freeing up of the credit markets by allowing people to know which institution holds there mortgage; and it will facilitate re-negotiations for lower more affordable rates as there will no longer be one derivative asset but individual mortgages.
9. And lastly I really don’t get the Public-Private Investment Program. Yes I get that there will be government guarantees but where are the private investors going to come from? Why would they want some one else’s toxic assets? The fund managers that are going to manage this whole thing, how much time will they be given to raise funds? What if they fall short?

May be it is my lack of economic/ financial knowledge that is the reason for my confusion or maybe I am just jumping the gun and I need to give the plan some time to work before I can get my answers. In either case, I just don’t get it.

Best of luck President Obama, I really hope this and your other plans work.