What’s in a mission statement?

In a wide-ranging FT Lunch article, I saw some interesting remarks from the new McDonald’s boss, Mr. Kempczinski. On the issue of McDonalds becoming the target of US labour organisers campaigning for a $15 minimum hourly wage, Mr Kempczinski is quoted to have said: “it’s not McDonald’s job to set societal policies around things like what’s the right wage rate and stuff like that”. In response, the author, Mr. Edgecliffe-Johnson, is right to wonder how that comment squared with McDonald’s mission articulated a year ago: “to make this company an example for the world”.

This is another example of companies’ mission statements not amounting to much.

Amendments to liquidation process in India & likely litigation funding boom

(With inputs from Hitoishi Sarkar)

The Insolvency and Bankruptcy Board of India (Liquidation Process) (Fourth Amendment) Regulations, 2020 were notified on 13th November. These regulations allow the liquidator to assign or transfer an asset to any person, in consultation with the stakeholders’ consultation committee, provided that the liquidator’s attempts to sell such assets have failed.

Two new regulations: 30A and 37A have been inserted.

Regulation, 37A states:

A liquidator may assign or transfer a not readily realisable asset through a transparent process, in consultation with the stakeholders’ consultation committee in accordance with regulation 31A, for a consideration to any person, who is eligible to submit a resolution plan for insolvency resolution of the corporate debtor.

What this means is that “any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions” can now be assigned to a third party.

This should help create a robust market for third party funding of litigation (particularly in the context of insolvency) in India. As the IBBI’s discussion paper noted, such assignment of assets by the liquidator is already allowed in countries like UK, Australia, Honk Kong and Singapore. The litigation funding market for liquidation claims is fairly developed in most of these jurisdictions

Bankruptcy principles remain the same for state owned firms

The restructuring of South African Airways (SAA) has been in the news for a while now. A recent Business Day piece says:

SAA was never a good candidate for business rescue. This is evidenced by it not being able to trade itself to liquidity without relying on post-commencement financing (PCF) of R10.5bn — at the taxpayers’ expense.

These “cash injections” are from the government. If this isn’t a giveaway, I’ll spell it out – the airline is wholly owned by the South African government. This particular story is about a South African business owned by the state but it rings true for many other state owned business. Businesses that are not viable should be allowed to fail even if they are owned by the state. Its a message worth repeating.

Regulated by one’s competitors

There are many good arguments against professional licensing. One argument is that it can sometimes takes away a person’s livelihood. In a recent New Zealand High Court case, an insolvency professional, Mr. Grant was denied membership of Restructuring and Insolvency Turnaround Association New Zealand (RITANZ) which meant that as per the newly introduced Insolvency Practitioners Regulation Act 2019 (IPRA) he would be unable to practice in his chosen profession (i.e. that of a liquidator) of 14 years.

The IPRA has introduced a co-regulatory model under which accredited professional bodies are responsible for licensing. As per the IPRA, insolvency professionals should be a member of the New Zealand Institute of Chartered Accounts (NZICA). There are some exceptions to this requirement, one of which is that the person should be a member of a “recognised body”. RITANZ is a recognised body as per the IPRA and since Mr. Grant is not a chartered accountant, his only route to being licensed is through membership of RITANZ. Membership decisions at RITANZ are made by empanelled members of an elected board in accordance with procedures set out in Section 5 of the Association’s Rules. One of the rules under this section states that the applicant must, amongst other things, “be of good character (as determined by the Board in its absolute discretion)”. Also listed amongst the Association’s rules is one that states that the Board is “not required to give any reason for determining not to admit an applicant to membership”.

In other words, RITANZ can make membership decisions which might determine a person’s right to practice as an insolvency professional without needing to give any reasons. This is already problematic without adding the additional fact that the market for insolvency professionals in New Zealand is a small one. Thus, what we have is a small community of professionals well-known to each other making decisions about the ability of members’ of the community to practice the profession. The court recognises this latter point when it says, “the involvement of other industry professionals (even, in a literal sense, competitors) in the decision-making process is an inevitable consequence of the statutory regime” while discussing the IPRA as against the scheme of regulation for legal professionals in New Zealand. This comment is however supplemented by a footnote where the court notes that “in the present case, …only a minority of the Panel (Mr Fisk and Ms Johnstone) were themselves insolvency practitioners. Their evidence was that, professionally, their paths seldom crossed those of Mr Grant”.

Mr. Grant had a criminal history, by his own admission. As Justice Muir notes, “in summary the position is, therefore, that Mr Grant has a serious history for dishonesty offending, albeit that the last such offences occurred 27 years ago”. However, Mr. Grant has not re-offended since 1994 and the court makes much of presenting him “as something of a “poster boy” for reform”. I reproduce the court’s words regarding his reform story below:

In prison, he recommitted himself to earlier academic studies, enrolling with the Open Polytechnic. On release, he completed his Bachelor of Commerce Degree and Honours Degree in Economics. He then worked in the gas industry. In 2006, while a consultant to that industry, he accepted his first appointment as a liquidator. He then undertook extensive private study in respect of insolvency law and practice. That is the genesis of what is now Waterstone Insolvency – a firm of which he is the principal and sole director and which has now grown to in excess of 20 employees. Mr Grant has himself been appointed to over 800 insolvencies (i.e. liquidations, receiverships and voluntary administrations). His current appointments number approximately 200.15 He says that over the last three years he has been appointed in respect of approximately three per cent of all insolvency applications in New Zealand and approximately five per cent of all non-IRD appointments.

(Footnotes omitted.)

Now, getting back to the matter of his RITANZ membership application, the said application was made after the IPRA was introduced and subsequently rejected with no reasons given for the rejection. Mr Grant then commenced judicial review proceedings which were resolved by way of agreement on the part of RITANZ to conduct a rehearing of the application. As per the agreement Mr Grant could attend the rehearing in person with counsel and RITANZ also agreed to provide a written decision with reasons within 14 days. His application was however again declined after the rehearing. As the court notes, in the rehearing, there was a “significantly greater focus on Mr Grant’s past, including the genesis of his offending, aspects relating to his apprehension and plea, the extent of any amends etcetera, than on his subsequent history as a successful member of New Zealand’s commercial community”.

In response, Mr. Grant has brought the current application for judicial review arguing that (i) the decision was made in error of law, was (ii) unreasonable and unlawful because it took into consideration irrelevant matters and failed to adequately consider relevant matters, and (iii) that the decision involved an unfair process, apparent bias and predetermination. Elaborating on the third ground, Mr. Grant submitted that “the approach adopted in the decision was in each case to focus on the most negative aspects and most negative interpretation possible and to minimise the overwhelming body of evidence indicating reform and thus present good character”. He submitted that this was indicative of apparent bias, “the origins for which may ultimately lie in the fact that Mr Grant was in direct and sometimes adversarial competition with some of the decision makers – both those involved in the initial decision and those empanelled for the rehearing”.

The court concluded that the decision was indeed problematic on the first two grounds in Mr. Grant’s submissions. With respect to the third ground however, the court said that there was no evidence of bias in the decision-making. Ultimately, the court said that although the Panel’s decision was quashed it will not substitute its own decision and make an order admitting Mr Grant to membership of RITANZ. Mr. Grant’s application was remitted to RITANZ for reconsideration.

One aspect highlighted by this case (if not by the judgement) is that professional licencing and regulation is complicated by the fact that a professional is regulated by her competitors. Although Justice Muir says at one point in this judgement that he “would not have been prepared to quash the decision on the grounds of apparent bias arising out of the professional status of the Panel members” that is simply the limitation contained within the statute and within the principles of judicial review. As Justice Muir goes on to note, “the statutory regime precludes challenge on the grounds that those adjudicating the application (or at least some of them) may (in the broadest sense) be considered competitors in Mr. Grant”.

From a policy perspective, we need to need to reconsider whether professional licensing decisions should be made by the competitors of the person about whom the decision is made. Justice Muir seems to be aware of this issue when he says that the reconsideration of Mr. Grant’s decision by RITANZ “may well be a case where the Board would benefit from the appointment of senior counsel assisting”. Justice Muir further seems to be conscious of the adverse impact of a delayed decision in this case. He notes that “Mr Grant is currently unable to accept further professional appointments” and “within 10 months he will not be able to continue to act in respect of existing appointments”. This is exactly the kind of case that should make us carefully weigh the benefits versus harm of professional licensing regimes.

Social enterprises and equity crowdfunding – A proposal to share legal infrastructure

Social enterprises the generic term used to describe for-profit companies with a social purpose, have gained popularity as Benefit Corporations, BCorps, and CICs in various jurisdictions. In a new article published in the Australian Business Law Review, I discuss, with particular reference to Australia, the synergies between these types of companies and a relatively new form of fundraising – equity crowdfunding.

Although Lemonade (a public benefit corporation and a BCorp) has made the news for its recent IPO, it is important to remember that most social enterprises are much smaller. As I note in my article, the social enterprise movement initially arose as a people’s movement. A parallel people’s movement is that of equity crowdfunding. Equity crowdfunding helps small founders access a new source of funding – that of the retail investor; and the retail investor is often drawn to social enterprises. As two new legal innovations with similar roots, my article proposes that it will be useful and also efficient for the government to use infrastructure to help and nurture both industries, perhaps even fostering a symbiotic relationship. I consider using a common regulator, common programs to educate the public which is an important stakeholder in both movements, common dispute resolution mechanisms, and even common professional bodies to provide guidance and support to founders.

Oppression remedy meets disputed debt

An interesting matter came up in Vance and Millard as trustees of the Orana Trust v Vey Group Ltd and Fugle [2020] NZHC 2592.

Bringing proceedings under the oppression remedy (s 174 of the Companies Act, 1993) cannot be used as a debt recovery proceeding, claimed one of the parties in this case. While the court agreed with this basic premise, it noted that the resolution of disputes relating to the debt was would impact the valuation of shares where the remedy (under s 174) was for minority shareholders to be bought out. It notes as follows [19]:

… the valuation prepared for Mr Fugle on the basis of the 2019 financial accounts included the Orana debt. For the purposes of this valuation, the valuers discounted the Orana debt to $1,078,433 on the basis of evidence from the trustees in support of the s 174 application. In other words, including the Orana debt as a liability has reduced the net asset value of the company and, in turn, the value of the minority shareholding in Vey. This confirms the view taken in the High Court and the Court of Appeal that a buy-out of the minority shareholding will not be achievable on a fair basis without resolution of the Orana debt. (Emphasis mine.)

Corporations in space

Elon Musk has created a buzz (so what else is new) with SpaceX supposedly claiming that it will follow “self-governing principles” on Mars – which are to be defined at the time of Martian settlement. To be clear, this is one of the terms in the “terms of service” for Starlink (SpaceX’s internet connectivity constellation).

One news story mentions the relevant term of service:

For Services provided on Mars, or in transit to Mars via Starship or other colonization spacecraft, the parties recognize Mars as a free planet and that no Earth-based government has authority or sovereignty over Martian activities. Accordingly, Disputes will be settled through self-governing principles, established in good faith, at the time of Martian settlement.”

Interestingly, the terms of service are less drastic for services provides around the earth or the moon. For these services, SpaceX will follow the law as governed by the state of California in the United States.

Why does the story change for Mars? The same article suggests that it is a publicity stunt. This is always a possibility when Mr. Musk is involved of course. As the article says:

It’s difficult to imagine Starlink’s terms trumping international laws and treaties, but if the clause was designed to draw attention to the service it worked — how many other satellite broadband providers do you know that have people sharing their terms of service on Twitter?

It should hopefully also draw attention to the need for space law puzzles to be answered sooner rather than later. Corporate activity in the space sector is booming and while issues of what law is applicable in space are likely to be answered with the help of both international law and private international law, specific laws relating to space activities may be useful. Orbital pollution is one issue that has already become significant. The accumulation of space debris has been one issue; reflected light and radio waves from satellites threatening to ruin observations by their sensitive telescopes is another issue. Companies like SpaceX have begun to voluntarily address the latter issue by giving satellites a less reflective coating. Rather than relying on such voluntary measures by companies, nation states would do well to start thinking about national laws or even broad policy principles in this regard. For their part, corporations engaging in the space sector would do well to anticipate regulations in this regard and act responsibly (à la Professor John Armour’s “forward compliance” model). As Professor Armour explains:

… a firm that engages seriously in forward compliance will stand a far better chance of weathering any subsequent reputational storm, as the internal communications that emerge will show the firm grappling proactively with the problem rather than seeking to bury it.

Government policy papers on these new areas ( as precursors to formal laws) will help corporations engage in such forward compliance.

Rent obligations in a pandemic – new tricks/ desperate efforts

MACs may be all the rage in the Covid times for getting out of M&A deals, but are there any tricks for retailers trying to getting out of rent obligations?

This week’s Canadian Business Law Blog has reported on an interesting “doing business in the midst of a pandemic” issue. Hudson’s Bay Co. (HBC) filed a lawsuit against Oxford Properties Retail Holdings, the landlord of several of its department stores, alleging a failure to operate and maintain “first class shopping centres.” HBC argues that Oxford “has refused to deliver suitable premises since reopening after COVID-19 shutdowns”…”and no longer provides a retail environment viewed as safe or attractive by the public”. HBC is not only seeking a declaration that it does not have to pay rent until these issues are fixed by the landlord but also asking for the “disgorgement” of rent paid to Yorkdale Shopping Centre Holdings Inc., Square One Shopping Centre Holdings Inc. and other Oxford subsidiaries since April of this year.

The other side of the story is that HBC has not paid rents owed to Oxford for seven months and according to Oxford, “recurring attempts to engage the company in a constructive dialogue were repeatedly ignored” by HBC. Retail stores have struggled to pay rent in the post Covid world. In the UK, many high street companies are using restructuring and other insolvency processes to deal with the situation. HBC seems to have decided to find other avenues to handle its non-payment of rent.

Less is more – in any language

A recent news story about the woes of an Italian bakery in Montreal is interesting. Apparently, the bakery in question was asked to change words like “espresso” and “cheese cake” into French by Quebec’s French language watchdog. The news story quotes the bakery’s owner saying that the government had its priorities wrong and that “sales have dropped so much”.

The story is just one example of regulatory over-reach harming small businesses. But the language politics (or over-regulation) issue is not unique to Quebec. There was a pre-Covid regulation in Bangalore requiring shop signs to have 60% signage in Kannada. Failing this, the shop owners would lose their trade license. The regulation was later challenged.

If customers in either Montreal or Bangalore were offended by the absence of local language on menus and signs respectively, they would have stopped visiting these shops.

Even beyond language politics, the two stories remind us of the wisdom of avoiding over-regulation and letting businesses do business. The Montreal story is particularly sad since it comes in the backdrop of Covid when businesses are already struggling to stay afloat.

Danone and Friedman’s statue

Danone had made news in June for getting onto the “business with purpose” bandwagon. Danone became an enterprise à mission, or purpose driven company which requires it to generate profit for its shareholders, and do so in a way that it says will benefit its customers’ health and the planet. Danone’s CEO Emmanuel Faber even spoke of toppling Friedman’s statue. The Financial Times has reported yesterday that Danone has taken a bigger hit from the pandemic than its competitors and is looking to prune its business. The news article went on to say that investors have been skeptical of the focus on ESG, and “frustrated by Danone’s inability to deliver on its financial targets”. It is the latter part of this statement that I want to highlight. Investors will likely not object to ESG so long as financial targets are being met. In other words, profits matter (especially in times of crisis) and Friedman’s statue is not so easily toppled.