Commercial Law International

By: Ainsley Brown

Art meets Financial Instrument, a new from of investment

The use of art as an investment is not a new concept, whether it is commissioning a piece for your self or buying existing works, art as an investment is centuries old. But what about investing in the right to buy an artist’s future works; that is as yet to be conceptualized future works?

Don’t think it can happen? Well welcome to the future – art as a financial instrument; a derivative or futures contract.

The emerging artist derivative contract, the brainchild of Tom Saunders, a UK conceptual artist, has the potential to change the art world forever. The contract, drafted by Ferguson Solicitors, according to the parties involved is itself a work of art and allows an art investor to spend £2,000 now for the option of buying any piece of Mr. Saunders’ work for £1 in ten years. And just in case Mr. Saunders does not fulfill his end of the bargain there are contact provisions that cover premature death or non-production.

But what exactly are derivatives?

In the most basic of terms a derivative is a financial instrument that ‘derives’ its values from something else. That is to say a derivative is a contact between two or more parties that acquires (derives) its value from the future price fluctuations in one or more underlying assets. In the case of Mr. Saunders the underlying assets are his future works.

While there are many types of derivatives (futures, forwards, options, swaps) they are generally used for one of two purposes, either to hedge against risk or to acquire risk through speculation. The emerging artist derivative contract is an example of the former and not the latter. To be more specific the emerging artist derivative contract is an option.

Options are financial instruments that give the holder the right (the option) but not the obligation to buy or sell the asset or assets that underlay the option contract on or before an expiration date at an agreed price. Because the emerging artist derivative contract is a contact that allows the option holder to buy the underlying asset it is what is known as a call option.

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

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

Verify Those Books

The Toronto Dominion Bank (TD), one of Canada’s leading financial instructions has been fined £7 million by the Financial Services Authority (FSA).

The FSA, charged with policing financial institutions in the UK, has imposed the fourth highest fine in its history on TD for repeatedly failing “to follow established procedures in ensuring the trader’s books were independently verified.” According to the FSA TD failed to ensure that price valuations by one of its traders in its London based Credit Products Group of its Investment Banking division were accurate.

There is no word yet on whether the trader in question was, is or will be subject to investigation. According to the Times the FSA declined to comment on whether these pricing issues were the result of a systematic scheme to falsify information or was just a mistake.

The large fine, while not the largest – that distinction belongs to Royal Dutch Shell in 2004 with a whopping £17 million for overstating its oil and natural gas reserves – was significant being TD’s second violation.  The FSA fined TD back in 2007 £490,000 when fixed income trader Simon Brgnall created fictitious trades to hide significant losses. The £17 million fine was imposed to send a message to TD and other financial institutions that repeated violations would not be tolerated by the FSA.

The good news for TD, like there could be good news in this situation, is that due to its full co-operation with the FSA the fine was reduced from £10 million to the current £7 million.  Despite the reduction in the fine, I wonder how financial markets on both sides of the Atlantic will respond to this news?

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: Ainsley Brown

Yes that right, I am referring to the English Rugby team – the Leicester Tigers.

Sorry but I just had to do this, being a rugby fan and all, I will make any excuse to write on the subject.

The Leicester Tigers, the current Guinness Premiership – the English Rugby Union’s top competition – it would seem are planning  to float some of its debt some time next year. The plans are to dual list on the Channel Islands Stock Exchange and either London’s AIM or the Plus Market the £3m it raised.

Could a full blow stock listing be in the offing?

Well with the club being currently advised by  the stockbrokers Cenkos on this financing maneuver the possibilities are endless.

The money was raised to help pay for £15m, 10,000 seat grand stand in their 24,000 capacity stadium. Most of the money for the grandstand was financed through a loan from HSBC and the additional £3m will be used to  pay for conference and bar facilities, according to the Times.

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: Ainsley Brown

In Canada an Ontario Superior Court of Justice ruling (McKenna v. Gammon Gold Inc.) has the potential to go viral like the latest YouTube sensation and challenge what can only be called one of the most incestuous relationships in the commercial world.

What am I talking about?

Well I am referring to the relationship, the very close relationship, between banks and law firms.

Ever wonder why, if and when, a bank or other financial institution is being sued it is very rare to find a big name law firm representing the plaintiff but they are very much present to represent the defendant bank? This my friends is no coincidence, it is a deliberate strategy on the part of the banks and other financial institutions. They set out to exploit the conflict of interest rules that lawyers are bound by – a lawyer may not generally represent two clients on opposite sides on the same matter – and they do a very good job of it. This is evidenced by the fact that banks and other financial instructions will spread the legal work they have around to as many international, national, regional and local based (powerhouse) law firms as they can in any market they operate.

The strategy is simple but effective: tie up the biggest, the brightest, the best and if need be the most belligerent legal talent out there. The benefits of this strategy accrue to banks in two significant and interconnect ways. The first is that they have the best legal talent working for them on ordinary transactions while at the same time having them in reserve ready to be unleashed like a pack of attack dogs. The second, which flows from the first, is that having such well trained and impressive attack dogs – oh sorry, I mean lawyers – at the ready will and does inspire fear in not only prospective claimants but other lawyers as well (though most would not admit it).

The law firms are not entirely innocent here, in fact not at all. They are willing subjects or is that objects of the strategy to exploit the conflict of interest rules. They enter this relationship; in fact they actively seek to forge these links, with their eyes, arms and billable hour’s dockets´ all wide open. Law firms know that the work from the banks is not only constant but very lucrative as well, so they are more than happy to be attack dogs for hire.

However, we now live in different times, as this once cozy relationship is being undone or at least it has hit a rocky patch called the current global recession. Whoever first said: it´s all about the money was so right. It is indeed all about the money for both banks and law firms. The former having less work to spread around now is also lacking a commercial rational that would satisfy shareholder costs´ accountability of having such high paid attack dogs in reserve. Consequently, the banks are now looking to cut costs and have aggressively gone after external legal costs reducing the number of attack dogs – sorry, I mean lawyers – it holds in reserve and how much it pays them.

The law firms for their part, seeing the writing on the wall have, have begun to seek out other clients.  In fact this has resulted in the once impossible, law firms, well at least in this case, have begun to represent claimants against the banks.

The conflict of interest rules once untested and applied broadly, I would say too broadly, to the bank-law firm relationship is now set for realignment. No longer will law firms simply refuse or not actively seek out work, simply because a suit might be brought against one of their clients. I know I am only an attack dog in training- pardon me, I should say student at law – but my reading of the conflicts section of the  Ontario Rules of Professional Conduct does not support such a broad application. Provided the issues are not related, the clients’ information in possession of the lawyer bares no relevance to each other and the lawyers that handle each client´s matter are different, it is difficult to see where a conflict of interest would be created.

Thankfully I don’t have to stand alone in my opinion. I now have Justice Lax in McKenna v. Gammon Gold Inc. to back me up when she ruled that Siskinds should not be disqualified for a conflict of interest from prosecuting a class action against an underwriting subsidiary of a client bank that it acts for in separate matters.

And how so? Well you are just going to have to stay tuned for part two.

By: Ainsley Brown

The US securities regulator, the Securities and Exchange Commission (SEC), has extended its long arm yet again. This time it was as a part of an operation to locate and then freeze the personal and company assets of Sir Allen Stanford and his Stanford International Bank (SIB). Mr. Stanford – oh sorry I should say Sir Allen – stands accused by US authorities of operating a Ponzi Scheme; allegedly defrauding investors of $9.2 billion.

Sir Allen of course denies all the charges.

The SEC sought and successfully got the High Court in London to freeze SIB assets – $105 million – being held in Credit Suisse bank in London. The freezing order will last until April 27, however it can be extended on further application to the court. Lawyers for SIB did not contest the order preferring to accept the inevitable.