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.

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.

Corporate Law as an Existential Project – Go read it!

I had blogged a while back about keeping in good spirits during the tough times.

I’ve read an amazingly entertaining essay on corporate law – although I’m not sure if the author, Professor David Yosifon, would like that classification – and want to pass on that joy to my readers! I was sold the moment he made a reference to 42 from Douglas Adams’ book which this blog is named after. (There is also a bat reference for legal philosophers and a Dylan reference for everyone.)

I have referenced (but not always agreed with) Professor Yosifon’s work previously so I was not surprised to see this statement: “Wanting to know what corporate law can do for me or you is wrapped up in the question of what we can do, and might better know how to do, for society.”

I won’t add any more spoilers.

Creditor cooperation duties proposed – India should take a look

In a recent post Professors Horst Eidenmüller and Kristin van Zwieten propose that “creditor cooperation duties” should be developed to stabilise corporate workouts. At a minimum, they say that the duty would require various creditors to negotiate in good faith. Such duties would kick in only after a workout process has been initiated and to the extent that they were necessary to stabilize a workout.

They give many reasons for the need for such duties but I will focus on one reason here:

…we cannot rely on the threat to force a formal bankruptcy process such as Chapter 11 to discipline holdouts, because this threat is not credible in every jurisdiction. Bankruptcy courts are or will be overwhelmed by failing firms.  Even more important, the bankruptcy costs for firms that may fail because of the pandemic are very high (the overwhelming majority of these firms will just have a cash flow problem).

Well, in India, because of  filings under the IBC being suspended, there is no threat of filing at all. So the proposal for creditor cooperation duties is even more relevant.

 

 

Legal Feminism and Insolvency Theory – Comments after some shut-eye

We had the first INSOL ERA virtual coffee yesterday or rather in the wee hours of today (New Zealand time) and I’m glad I was able to attend! It was great to see friends but also hear a very interesting paper presentation. Dr. Lezelle Jacobs presented a paper entitled “Legal Feminism and Insolvency Theory: A Woman’s Touch?“. As someone who has researched a fair bit on gender diversity on corporate boards (and espoused contrarian views on the topic), I have to say I was pleasantly surprised when Dr. Jacobs clarified that female insolvency scholars need not always advocate feminist theories. Only a handful of board gender diversity scholars/ advocates/ activists acknowledge that women directors need not necessarily bring a “feminine” perspective to governance.

Tax havens, cruise ships and Covid-19

Companies incorporated in tax havens have come into the spotlight in the COVID-19, since many of them have asked for government bail-outs.

Countries like France, Poland and Denmark have decided not to provide bail-outs to companies incorporated in tax-havens overseas. However, concerns have been raised about European countries like Luxembourg, and Ireland being treated as tax havens, since they are subject to capital rules in the EU treaty.

Richard Branson is not the same person as the company

There is also public anger about Richard Branson who is a “tax exile” and has asked for the UK government’s support for the airline he founded, Virgin Atlantic. Yet, the company is registered in the UK and not in a tax haven. Thus, a denial based on the fact that the company founder lives in a tax haven would disregard the idea of corporate legal personality.

Cruise ships

This debate has raged in the context of cruise ships which are incorporated in tax havens like Panama, Bermuda, etc. and don’t pay federal income tax in the US. Irrespective of place of incorporation, there is an argument that there are other tools to tackle tax avoidance and the bailouts are meant to help workers. This seems to be an argument supported in the US (especially Florida where cruise lines have created a lot of jobs).

However, public anger against any possible bail-outs for cruise ships stems from a lot of issues apart from just taxes. As a student in my corporate governance class asked, how could they be getting away with poor treatment of workers? The answer again points back to tax havens – the place of incorporation allows them to be subject to lenient labour laws. They have also been infamous in recent times for becoming COVID-19 hubs. The fact that Carnival Australia’s Ruby Princess cruise ship allowed passengers infected with cornonavirus to disembark the ship has lead Australian authorities to announce a criminal investigation.

I don’t think that companies registered in tax havens should be denied help at this time. Bailouts have come in various forms and with some strings attached so there is no reason why a tailored bailout is not possible. (See my post about airline bailouts here.) However, this is a good opportunity to reflect on how companies in industries like cruise ships may be regulated better.

Papa don’t preach

CSR is usually associated with social/ moral obligations of companies. But in India, CSR has taken a mandatory flavour and has a definition. As I said in an earlier post, India requires companies of a certain size to donate 2% of their profits from the preceding three years. Despite this, corporate India has responded to the Covid crisis by going beyond the legislative definition of CSR and tried their best to ensure that employees continue to get paid. (Unlike in other countries, India has not provided subsidies to all businesses to tide over the crisis.) There have been other instances of Indian companies stepping up and helping the nation-wide covid fight in other ways. I’d discussed these innovative actions by companies in my previous post and concluded that excessive government regulation on CSR would curb such innovative approaches.

Since then, the Indian government has done exactly the opposite.

The Ministry of Corporate Affairs (MCA) issued an order stating that companies’ responses to the covid crisis could be classified as CSR. The companies Act only allows spending on designated categories to be classified as CSR. Since one of the designated categories is “combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases”, the order from the MCA was not too surprising. Obviously, India’s rigid definition of CSR means that innovative responses from companies that offered their resorts to be used as temporary care facilities will not be considered CSR.

While it is laudable that some companies have responded to the need irrespective of whether such a response will be accepted as CSR, it is to be expected that most other companies would seek to clarify whether their efforts would be classified as CSR. (Let us not forget that amidst this crisis, large companies have an added obligation of spending a certain amount of their profits on CSR.) As it turns out, they have indeed sound various clarifications and the MCA has responded with answers to those questions. One interesting answer is to a question asking whether payment of “salary to employees and workers, including contract labour, during the lockdown period can be adjusted against the CSR expenditure of the companies? The MCA’s answer is no but it has also indulged in some sermonising. Here is what it says:

Payment of salary/ wages in normal circumstances is a contractual and statutory obligation of the company. Similarly, payment of salary/ wages to employees and workers even during the lockdown period is a moral obligation of the employers, as they have no alternative source of employment or livelihood during this period. Thus, payment of salary/ wages to employees and workers during the lockdown period (including imposition of other social distancing requirements) shall not qualify as admissible CSR expenditure. (Emphasis mine.)

We know that salary payment is a contractual obligation and non-payment will trigger breach. However, is it the moral obligation of employers in circumstances where employees have no other source of livelihood due to a government-imposed lockdown? Moral or not, this is a responsibility that the government has shouldered in most other countries. Granted that such financial subsidies may not be possible for the Indian government but the burden cannot be shifted to private enterprises with such moral preaching, especially when it has chosen to define CSR as mandatory spending on designated activities.

Zone of insolvency considerations for directors

Professor Amir Licht has a very interesting post on the Oxford Business Law Blog on wrongful trading in the UK (with some comparative insights). After discussing the temporary insolvency law reforms introduced to help Covid affected firms, he asks a very pertinent question. If the wrongful trading provisions are being suspended (or a safe harbour is being created) during the Covid crisis, does this imply that there is something very wrong with wrongful trading liability? Examining some of the criticisms against wrongful trading provisions, he argues that, once the Covid crisis has passed, rather than doing away with these provisions, the provisions need to be reformulated.

He argues that at the point when the duty to creditors is triggered (i.e. when the company reaches the zone/ shadow of insolvency) the directors’ duty of care changes.

Specifically, directors should change the strategic management of the company from implementing an entrepreneurial strategy to implementing a custodial strategy that focuses on protecting the company’s assets with a view to returning it to a profit-oriented, entrepreneurial strategy when practical.

He goes on to explain that the custodial strategy required of directors at this point is similar to what is required from trustees which is to preserve the trust fund.

While this is a very interesting reformulation of what should be required of directors at the zone of insolvency, such a reformulation disallows any informal restructuring efforts on the part of directors. In Australia, concerns that directors were putting the company into voluntary administration too soon under the threat of personal liability (s 588G of the Corporations Act, 2001) resulted in introduction of a safe harbour (s 588GA) even before the Covid crisis. It was thought that s 588GA would allow directors the breathing space to start developing “one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator”. The safe harbour was aimed at developing a tunaround culture in Australia. Although the reform has given rise to some uncertainty about what directors need to do to be covered by the safe harbour, I think this is a move in the right direction. We should encourage viable forms to continue trading and incentivise restructuring when possible.

Professor Licht’s suggested reformulation of the wrongful trading provision would mean that directors should prioritise preservation of the property of the company rather than attempting to restructure. The latter would naturally involve an element of risk-taking while the former would not. The safe harbour reform in Australia has the right principle at heart even if it needs more fine-tuning.

While we want to put unviable companies into liquidation, we attempt to restructure viable companies. In Australia, the voluntary administration process is an option however, that process would mean that existing management of the company loses control and the administrator takes charge of the company. (But see here for how Debenhams in the UK is attempting to keep existing management at the help even after entering into administration.) Often entering into the formal voluntary administration process and consequent transfer of managing control to the voluntary administrator results in loss of confidence amongst various stakeholders. Informal attempts to restructure the company should be allowed for viable companies.

 (In a forthcoming article, I have proposed a solution to incentivise restructuring in the context of India. A shorter version of the proposal is available in my own post on the OBLB)

TELEMEDICINE GETS THE GREEN LIGHT IN INDIA (WITH A MYSTERIOUS ONLINE COURSE)

The coronavirus crisis has most States on their knees. As it turns out, a slightly positive outcome of this serious situation is the temporary dismantling of red-tapism in India.

As an advisor from NITI Ayog a government think-tank said:

… There were several legal issues related to telemedicine, including medical licences, which were cleared. We were also getting demands from the digital health industry to release the guidelines. Due to the coronavirus pandemic the process got expedited, which would have otherwise taken longer.

Thus, after languishing for 10 years, the Telemedicine Practice Guidelines (Guidelines) have finally been approved on March 25, 2020.

Ikigai Law has an excellent summary of the Guidelines here.

I think this is a welcome move during this time of social distancing and also in the future. Telemedicine will improve access to healthcare in remote parts of the country and also bring down costs. The Guidelines are simple and get the essentials right – all registered medical practitioners are eligible, and the decision about the appropriateness of telemedicine in a particular case is left to the medical practitioner.

There is however one unnecessary feature that indicates our seeming inability get rid of red-tapism. The medical practitioner is also required to complete an online course; but since such a course is not yet available at the moment, it will be enough to follow the Guidelines. Once the online course is ready, it will become another condition for eligibility. There is no information about what is hoped to be achieved through such an online course.  If the idea is that medical practitioners might want more guidance, such online courses should be optional rather than a condition of eligibility.

Clearly, red-tapism is still alive in the country even if it has taken a back seat for the present moment.

CAN A CORPORATION BE HELD CIVILLY LIABLE FOR BREACHES OF CUSTOMARY INTERNATIONAL LAW? LET’S ASK GALILEO

Can a corporation be held civilly liable for breaches of customary international law? The majority decision in  Nevsun Resources Ltd. v. Araya 2020 SCC 5  seems to suggest it can.

This case came to the Supreme Court of Canada on appeal from the Court of Appeal for British Columbia. The respondents, refugees and former Eritrean nationals, claim that they were indefinitely conscripted through their military service into a forced labour regime where they were required to work at the Bisha mine in Eritrea and subjected to violent, cruel, inhuman and degrading treatment. The mine is owned by a Canadian company, Nevsun Resources Ltd, which was the appellant. Nevsun brought a motion to strike.

One of the things Nevsun argued was that it is immune from the application of international norms because it is a corporation.

The majority did not agree. It was of the opinion that “international law has long-since evolved from this state centric template.” [106] Quoting Lord Denning, Abella J, writing for the majority, says: “I would use of international law the words which Galileo used of the earth: ‘But it does move”. [106]

Has it really moved this far yet?

Noting that rights under international law may be violated by private actors, the majority made the leap that “there is no reason, in principle, why ‘private actors’ excludes corporations”. [111] This leap seems to be made by relying almost entirely on an academic work. Two paragraphs quoted in the judgement are below:

Canvassing the jurisprudence and academic commentaries, Professor Koh observes that non-state actors like corporations can be held responsible for violations of international criminal law and concludes that it would not “make sense to argue that international law may impose criminal liability on corporations, but not civil liability” (Koh, “Separating Myth from Reality”, at p. 266) [112]

[t]he commonsense fact remains that if states and individuals can be held liable under international law, then so too should corporations, for the simple reason that both states and individuals act through corporations. Given that reality, what legal sense would it make to let states and individuals immunize themselves from liability for gross violations through the mere artifice of corporate formation?  (Koh, “Separating Myth from Reality”, at p. 265) [112]

Finally, the majority concluded that the jus cogens claims of the Eritrian workers may well apply to Nevsun and that there were no Canadian laws which conflicted with the adoption of these norms into common law. The majority then went on to say that domestic common law could develop appropriate remedies for breaches of customary international law.

The dissenting judges Brown and Rowe JJ rightly did not agree with this. They pointed out that the majority seems to rely on a single law review essay by Professor Harold Koh and that there is not a single instance of such liability anywhere in the world. As they point out, the United Nations General Assembly’s Report of the Special Representative of the Secretary-General (SRSG) on the issue of human rights and transnational corporations and other business enterprises, U.N. Doc. A/HRC/4/035, February 9, 2007, “states that ‘preliminary research has not identified the emergence of uniform and consistent state practice establishing corporate responsibilities under customary international law’ (para. 34)”.

Côté J, writing for herself and Moldaver J, also says that “the extension of customary
international law to corporations represents a significant departure in this area of the
law” [268]. She also adds, rightly, that while international law “does move”, it “moves only so far as state practice will allow” [269].

As Stephen Pitel writes, although the case will go to trial, “only a very brave trial judge would hold that a corporation can be sued for a violation of customary international law given the comments of the dissenting judges as to the lack of support for that position”.