Executive compensation is corporate counsel’s responsibility
Corporate counsel must put the interests of the company ahead of the interests of individual directors, and recommend the foregoing of bonus payments if appropriate.
That was the message delivered to corporate counsel at Asialaw’s In-House Counsel Summit in Hong Kong on March 18.
“You have to bite the bullet and recommend no bonuses,” said Patricia Ann T Prodigalidad, a partner at Philippine firm ACCRALAW. “Of course this is not easy as directors pay you too, but afterwards the role you played will be examined. So you have to make sure you can defend yourself if the blame is apportioned to you.”
The advice came in a week when an investigation was launched in the US into tarnished insurer AIG’s bonus payments. AIG’s decision to award US$165 million in bonuses has caused outrage in the US as the company has received $170 billion in aid from the US government.
In addition to the investigation, which has been launched by special inspector general Neil Barofsky, US lawmakers are to vote on a bill that penalises employees of companies that receive bailout money. This includes levying a 90% tax on bonuses paid to employees with family incomes over $250,000. The issue has dominated the recent agenda of the US Congress.
Prodigalidad’s fellow panel member, Pinsent Masons Hong Kong office head Vincent Connor, described corporate counsel’s accountability and obligations to the company and to individual directors as a tightrope. “You are entitled to take a very firm line on advice for the company and for individual directors because one concern is that there could be personal liability issues that you’re not aware of. The company could even be technically insolvent.”
Prodigalidad added that good corporate governance was essential during times of economic hardship because it protects both the company and its investors. “You must coordinate with your auditors on areas such as transparency and accountability, so that there are no hidden off-balance sheet transactions for example,” she said.
India tax concerns prompt advance hearings for M&A
Companies conducting M&A deals in India should seek advance hearings to protect against the Indian Tax Authority’s increasingly aggressive stance, say lawyers.
“The Indian Tax Authority takes a liberal view on what’s subject to taxation in India. If you’re planning a transaction with any underlying Indian assets, I suggest you get an advance hearing first,” said lawyer Nishith Desai of Nishith Desai Associates at the forum, on March 18.
The global recession has made efficient tax planning more critical than ever to global transactions. When India’s Income Tax Department laid claim to capital gains tax on a Vodafone transaction between non-resident entities in September 2007, the dispute became an example of the country’s aggressive tax policy.
“Advance hearings are a popular and effective tool to shield foreign investors from risk in India,” said Desai. “The Indian Supreme Court has been liberal with its support of taxpayers.”
“The Indian tax authorities are watching foreign parties’ acquisitions, reading what’s written in their 10-K,” said Desai.
He also warned that authorities listen to statements that acquirers’ chief executive officers make in newspapers and what their directors say on stock exchanges. “Then they check to see if that company has assets in India,” he said.
In what is another hurdle for investment in the country, Desai added that Indian Bar Council regulations only confer attorney-client privilege to external counsel, leaving communication between clients and their in-house counterparts in India vulnerable.
“When it comes to business in India, foreign clients had best deal with Indian lawyers,” said Desai.
Korea relaxes stance on merger reviews
South Korea’s competition regulator, the Korea Fair Trade Commission (KFTC) is now more flexible in its merger reviews. The news will be especially welcome for acquisitive multinationals following the controversial block of Coca-Cola’s acquisition of Huiyuan Juice in China.
“This is a good time to pass a merger review with the KFTC if you have plans restructure M&A activity,” said Kim & Chang lawyer Yong Lim.
Lim said he believed the KFTC’s trend of deregulation and flexibility would continue this year.
In June 2008 the Commission raised the notification threshold for merger approvals. Based on the assets or sales of a company, it was raised to US$200 million or more from US$100 million.
The amendment allowed more mergers and acquisitions to proceed without being burdened by notifications. It also saved the regulator resources from investigating mergers that were not anti-competitive in nature.
Lim also said that the KFTC showed flexibility when it assessed potential anti-competitive effects during the merger reviews of several high-profile cases. Previously the regulator presumed anti-competitiveness based on market share and adopted a more legalistic and formalistic approach to merger reviews.
However in several cases in late 2008, Lim said: “The KFTC took a rather liberal approach, taking into account factors related to market realities.”
These market realities included the dynamic nature of competition, the consumer’s ability to turn to alternate suppliers or sources, the ease of market entry and competitive pressure from adjacent markets for imports.
“All these factors were in the law, but they were never really considered by the KFTC in full until now,” said Lim.
Moon cake case exposes risks of Hong Kong bribery ordinance
Local anti-corruption laws in Hong Kong could prove to be a bigger test for compliance officers than the US Foreign Corrupt Practices Act (FCPA), following news of a harsh case in Hong Kong this month.
An employee from construction company Brilliant Ray was sentenced on March 6 by the Independent Commission Against Corruption (ICAC) to two months imprisonment for violating the Bribery Ordinance.
The employee had offered 15 boxes of moon cakes to police officers whom he had dealings with during the end of his company’s project. This occurred 11 days before the Mid-Autumn Moon Festival, a time when the cakes are traditionally offered as gifts.
The ruling “floored” Scott Lane, director of the Red Flag Group, an ethics and compliance consulting firm. He felt that the employee was “probably just doing what he thought was right at the right time of year.”
But, he acknowledges, even these customary actions cannot be overlooked.
“I think we need to re-visit the facts again,” he said during a panel discussion on anti-corruption at the forum on March 19.
Local traditions and customs cannot be taken lightly in view of the law and with the recent moon cake case, panelists agreed that it is increasingly important to consider local anti-corruption laws and not simply look to the US’ Foreign Corrupt Practices Act (FCPA).
“It comes down to good compliance because there are challenges in this mix between local and international law, “said Lane. “Obviously here in Hong Kong things are going in a direction I didn’t expect.”
Lane, a former in-house counsel recommends building a compliance system around everything a company is engaged in.
He lists setting out policies, procedures, guidelines, FAQs, and even indications to sales teams around how to deal with situations like offering “small gifts” such as moon cakes. Training staff is also crucial, he emphasized.
“People need to develop their own set of standards and principles around how they want to do business,” he said. “But also they need to be careful so that they don’t push themselves out of the competitive arena by strangling themselves and not allowing business to get done in emerging markets.”
The moon cake case is particularly ironic in light of a comment from Peter Wang, a partner at Jones Day in Shanghai when speaking to Asialaw about the FCPA in September last year. When discussing the FCPA he said: “If you give an official some moon cakes and they turn out to be made of gold then you might have a problem.”