The employees, creditors and purchasers embroiled in the insolvency are about to discover that their claims are as affected by where the satellite company is registered as their involvement in it. To these groups, such startling disparity in global insolvency regimes must seem very much like the hand of fate is upon them.
For example, in the US, ‘Chapter 11’ insolvency is now infamous because companies operating under it can continue to disrupt marketplaces. Just as the media declare the ailing patient finished, it is allowed to operate without settling debts, which can enable more underhanded organisations to cut prices and steal from the hands of stable businesses, such as US airlines did en masse in 2006. As far as the US is concerned, then, the closing bell on Lehman may not have been rung yet.
Another facet of Chapter 11 is that the existing management of the debtor company are usually heavily involved in reorganising and refinancing the company, which allow the failing management some seemingly undeserved authority at the point of insolvency, such as seen in to Lehman’s authoritative US press release (intentions ‘to pursue discussion’ feature prominently for a company falling apart). Because of the complexity of Lehman’s position, retaining the management’s positions is likely to be justified, although considerable resentment over issues of mismanagement in the past, and the furore over bonuses in failing enterprises now, could sour the market for buyers and undo whatever advantage the management bring to the table.
Meanwhile, Japanese legislation’s Civil Rehabilitation Law is not dissimilar, seemingly assuming that the management remain in full power, and stipulating the aim as to reorganise and rescue the organisation. However, at the point of overindebtedness, shareholder rights are deemed worthless, since there is no functioning entity to hold shares in. When investment in Lehman globally seemed a safe bet not so long ago, few would have heeded the caveat that the Japanese arm was a worse place to be in the case of such a fallout.
Over in Europe, the diligent troop of PwC administrators in the UK has covered the fact that even though Lehman’s European operations could have been wound up under a single administrator, each Lehman entity is dancing to a different national anthem. Not only does this prove that global operations such as Lehman cannot be restructured, since not even a pan-European coordination seems feasible, but, because of the multiple administrations, we will find that the creditors, suppliers and employees are left a little less of the pie than they thought they were getting, and considerably less than they will think they were owed.
But what would have happened if Henry, Emanuel and Mayer Lehman did not leave Germany before founding their firm? If the Lehman headquarters were there, the court-appointed administrator would dive into realising assets, appeasing creditors but practically negating a concept for a rescue attempt by ripping out the assets straight away. By absolute contrast to the US system, the German SEC-equivalent’s has also prohibited Lehman Brothers Bankhaus AG from receiving payments other than those intended to pay its debts.
Each method has its merits as much as each has its problems. The real problem comes when considering that their often opposing natures seal the fate of global giants such as Lehman: if trustees have trouble coordinating around a table, what are the chances of getting multiple administrators and a myriad of trustees, authorities, administrators and other parties coordinating globally? For those not immediately involved in Lehman or some of the other examples reverberating around the world, we must careful not only on whom we invest at this time, but where.
Schultze & Braun’s landmark case opens ‘European capital’ for business
Crossing borders in the EU is so common an occurrence now that it can be easy to forget how just how separated their business worlds can still be. This was no more surprising than in Strasbourg, where the home of the Council of Europe was enveloped in a distinctly protectionist regime, as Schultze & Braun found out.
Strasbourg has long endeavoured to stake its claim as the capital of Europe, but the prevalence of protectionist practices and attitudes have often resulted in the creation of an ‘un-European’ sentiment.
For Schultze & Braun, this emanated from a refusal by the Strasbourg Bar Association to allow their office in the city to be entered into the legal register. However, in July 2008 France’s Supreme Court overruled the decision of the Strasbourg Bar Association in a breakthrough judgement that signals a new freedom for non-French legal firms hoping to practise in Strasbourg, as well as for clients wishing to use the same firm across Europe.
While other regional bars in France, including that of Paris, have allowed European firms to register, the Strasbourg Bar Association had consistently mounted opposition to such moves. It was maintained that while article 11 of Directive 98/5/EC allows branch offices to be set up elsewhere in the European Community, it does not mention a right for the branch or the agency to be registered. It also argued that French law does not provide any legal basis for the inscription of foreign legal entities in its register.
Following Schultze & Braun’s three and a half year battle, the French Supreme court overruled this claim. They called attention to Article 48 of the EC treaty which declares that, for the purposes of the right of establishment, firms formed in accordance with the law of a member state that have their registered office within the community must be treated in the same way as natural persons who are nationals of member states.
This case highlights the pervasive nature of the opposition to fundamental principles of European Law. Despite more than 50 years having passed since the signing of the Treaty of Rome, protectionist attitudes remain visible. For example, the Transposition Act of Directive 98/5/EC enabled European law firms to practise together with other professions such as chartered accountants. However the French government have failed to complete an additional requirement on writing the specific conditions associated with this new freedom into law. This means companies who employ a single firm for their accounting and legal services must still find each separately within French borders.
Schultze & Braun’s triumph is, however, a welcome reminder of the strong European sentiment within French courts. Thanks to the ruling, non-French firms can be entered into the legal registries of the competent bar and can practise with the same freedoms as their French counterparts. Consequently, Strasbourg can now be seriously considered as a viable location for non-French firms wishing to set up offices in France. Furthermore, it has provided a precedent which should encourage other national jurisdictions to enforce European Community law against national protectionism.
Restrictions on loss-trafficking
Changes continue in German law to reduce opportunistic purchases of loss-making companies though shareholdings, this time regarding tax loss deduction for corporate entities when purchased. The new limitations imposed on purchasing bodies will mean buying large or controlling shares in loss-making companies may now seem less appealing under the revised tax legislation.
There has been a change in German law which means that the new owner or part-owner of a company cannot use losses in the same way as they have been able to in the past. The change differs depending on the percentage of shares or voting rights acquired by the new owner, but will generally mean that the value of an acquired company will be less than it would have been before the law was changed.
The new Corporate Income Tax Act (Körperschaftsteuergesetz) sets out three categories of ownership with different impacts on use of losses:
- The quantity of the assigned shares does not exceed 25% of the shares or voting rights of the company: there is no restriction in the use of the loss carried forward bearing to the assignment.
- More than 25% up to 50% of the shares or voting rights are transferred indirectly or directly to one acquirer or to parties related to such an acquirer: the company looses the loss carried forward in the rate of the transfer.
- More than 50% of the shares or voting rights are transferred indirectly or directly to one acquirer or to parties related to such an acquirer: the company looses the whole loss carried forward.
Reference: Corporate Income Tax Act (Körperschaftsteuergesetz). Sec. 8c KStG (Corporate Income Tax Act, Körperschaftsteuergesetz) replaces sec. 8 para. 4 KStG. Sec. 8c KStG is applicable for transfers of the shares taking place after 31 December 2007. Former transfers are subject to the less restricted (old) rules of sec. 8 para 4 KStG. Both rules – new sec. 8c KStG and old sec. 8 para 4 KStG – can be applied simultaneously during a period of transition that ends 31 December 2012.