The increasing use of corporate inversions, whereby a company via merger achieves 20 percent or more new ownership, claims non-US residence, and is then permitted to adopt that country’s lower corporate tax structure and take advantage of tax base reduction techniques, has been the subject of intense media commentary and political attention. That is perhaps not surprising given the numbers: there was approximately one inversion in 2010, four in each of 2011 and 2012, six in 2013 and sixteen signed or consummated this year to date—or more than in all other years combined. And, the threat of anti-inversion legislation appears only to be hastening the pace at which companies are contemplating such transactions.
Posts Tagged ‘Cross-border transactions’
A draft of the bill that is being considered by Senator Schumer (D-NY) to reduce some of the economic incentives for corporate inversions was made publicly available yesterday. Senator Schumer has indicated that, while the proposed bill is still the subject of discussion and is subject to change, he intends to introduce the bill into the Senate this week. The following is a summary of the provisions in the proposed bill as it currently stands.
Today [June 25, 2014], the Commission will consider a recommendation of the staff to adopt core rules and critical guidance on cross-border security-based swap activities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Title VII of the Dodd-Frank Act created an important and entirely new regulatory framework for the over-the-counter derivatives market. Transforming this framework into a series of strong rules is one of the most important tasks remaining before the Commission in discharging our responsibility to address the lessons of the last financial crisis. The events of 2008 and 2009—and the significant role derivatives played in those events—still reverberate throughout our economy.
Properly constructed, the Commission’s rules under Title VII should mitigate significant risks to the U.S. financial system, bring transparency to previously opaque bilateral markets, and provide critical new protections for swap customers and counterparties. And the vital regulatory protections of Title VII are not confined to large multi-national banks and other market participants—they are also essential to preserving the stability of a financial system that is vital to all Americans.
The SEC provided the “who” but not much else in its final rule regarding cross-border security-based swap activities (“final rule”), released at the SEC’s June 25, 2014 open meeting. Although most firms have already implemented a significant portion of the CFTC’s swaps regulatory regime (which governs well over 90% of the market), the SEC’s oversight of security-based swaps means that the SEC’s cross-border framework and its outstanding substantive rulemakings (e.g., clearing, reporting, etc.) have the potential to create rules that conflict with the CFTC’s approach. The impact that the SEC’s regulatory framework will have on the market remains uncertain, but the final rule at least begins to lay out the SEC’s cross-border position.
In a decision that could significantly limit the power of U.S. bankruptcy trustees to challenge cross-border transactions, the United States District Court for the Southern District of New York has held that the trustee overseeing the Madoff liquidation may not recover transfers made by Madoff’s foreign customers to other foreign entities. SIPC v. Bernard L. Madoff Investment Securities LLC, No. 12-mc-115 (S.D.N.Y. July 7, 2014). The court held that recovery of such “purely foreign” transfers would run afoul of the presumption against extraterritoriality reaffirmed by the Supreme Court in Morrison v. National Australia Bank.
Dealers and major participants play a crucial role in the derivatives market, a market that has been estimated to exceed $710 trillion worldwide, of which more than $14 trillion represents transactions in security-based swaps. In the United States, the Commodity Futures Trading Commission (“CFTC”) and the SEC share responsibility for regulating the derivatives market. Out of the total derivatives market, the SEC is responsible for regulating security-based swaps. As evidenced in the most recent financial crisis, the unregulated derivatives market had devastating effects on our economy and U.S. investors. In response to this crisis, Congress enacted the Dodd-Frank Act and directed both the CFTC and SEC to promulgate an effective regulatory framework to oversee the derivatives market.
1. On 10 April 2014 some of the legislation that provides for the extraterritorial effect of the European Markets Infrastructure Regulation (“EMIR”) came into force. The remaining legislation will come into force on 10 October 2014. This post considers this legislation and the counterparties to which it applies. It also considers whether some counterparties might be able to avoid the extraterritorial effect as a result of the European Commission making an equivalence decision in respect of third country jurisdictions. It considers the European Securities and Market Authority (“ESMA”) advice to date on the equivalence of the regulatory regimes in the US, Japan, Australia, Canada, Hong Kong, India, Singapore, South Korea and Switzerland and notes that even in the US ESMA did not find full equivalence. Finally this post also considers the requirements that third country central counterparties (“CCPs”) and trade repositories must meet in order respectively to provide clearing services to their EU clearing members and to provide reporting services to EU counterparties which enable those counterparties to satisfy their clearing reporting requirements under EMIR.
On May 6, 2014, the United States Court of Appeals for the Second Circuit issued the following decision in the City of Pontiac Policemen’s & Firemen’s Ret. Sys. et al. v. UBS AG et al., No. 12-4355 (2d Cir. May 6, 2014). The decision is one of first impression in the Second Circuit with respect to two questions arising out of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). First, does Morrison bar Exchange Act Section 10(b) claims with respect to the purchase or sale of securities on foreign exchanges when those same securities are cross-listed on a U.S. exchange? The Second Circuit answered with a “yes.” Second, is the mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange sufficient to allege that a purchaser incurred irrevocable liability in the United States, such that the U.S. securities laws govern the purchase of those securities under the Second Circuit’s decision in Absolute Activist Value Master Fund Ltd v. Ficeto, 677 F.3d 60 (2d Cir. 2012)? The Second Circuit answered with a “no.”
Recently, there have been a growing number of large “inversion” transactions involving the migration of a U.S. corporation to a foreign jurisdiction through an M&A transaction. Inversion transactions come in several varieties, with the most common involving a U.S. company merging with a foreign target and redomiciling the combined company to the jurisdiction of the target.
While inversion transactions tend to have strong strategic rationales independent of tax considerations, the tax benefits can be significant. These benefits are varied but start with relatively high U.S. corporate tax rates and U.S. taxation of foreign earnings when repatriated to the U.S. Among other things, an inverted company may achieve a lower effective tax rate on future earnings, be able to access its non-U.S. cash reserves in a tax-efficient way, and have a more favorable profile for future acquisition activity.
With U.S. corporate tax rates among the highest in the world, U.S.-based companies with international operations regularly look for structuring opportunities to reduce the exposure of their overseas earnings to U.S. taxes. A recent trend driving deal activity is the prevalence of acquisition-related inversions whereby the acquiring company redomiciles to a lower-tax jurisdiction concurrently with completing the transaction. While not the exclusive driver, a significant benefit of these inversions is reducing the future tax exposure of the combined company. The tax rules applicable to these inversion transactions are inherently complex and situation-specific. Below, we outline some of the very general principles, as well as some of the opportunities and challenges presented by these transactions.