Academic Scientific JournalsUnbundeled Shares: Circumventing Corporate Nationality Rules Through Swaps, Options and Other Devices
DOI:
https://doi.org/10.4467/22996834FLR.18.014.9304Keywords:
corporate nationality rules, unbundled sharesAbstract
Corporate nationality clauses have a simple and seemingly innocuous language: “corporations at least X per centum of whose capital is owned by Filipino citizens”. This presupposes that “capital” is a unified bundle of economic and control rights. However, modern finance and contract law can “unbundle” economic rights from control rights through the use of options, swaps, forwards, hybrid instruments, variable interests, and a vast catalogue of contractual arrangements. Unbundled economic rights allow foreign investors to have economic interest without ownership of shares, and unbundled control rights allow foreign minority stockholders to have effective control without majority of voting rights. Does this circumvent foreign equity limitations? Do the control test, beneficial ownership doctrine and other corporate nationality rules render them illegal?
Downloads
References
Bebchuk, L.: Stock Pyramids, Cross-ownership, and Dual Class Equity: the Mechanisms and Agency Costs of Separating Control from Cash-flow Rights, Concentrated Corporate Ownership, Chicago: University of Chicago Press, 2000.
BDO International, Definition of control under IAS 27 Consolidated and Separate Financial Statements, 1 International Financial Reporting Bulletin (2006).
Black, B.: Equity Decoupling and Empty Voting: The Telus Zero-Premium Share Swap, Northwestern Law & Econ Research Paper no. 12-16 (2012), available at SSRN: http://ssrn.com/abstract=2150345.
Burkart, M. et al: The One Share – One Vote Debate: A Theoretical Perspective, ECGI, Finance Working Paper no. 176 (2007), available at SSRN: http://ssrn.com/abstract=987486.
Burton, G. et al: International Financial Reporting Standards: A Framework-based Perspective, New York: Routledge, 2015.
Claessens S. et al: The Separation of Ownership and Control in East Asian Corporations, Journal of Financial Economics no. 81 (2000).
Collins, Bruce, and Frank J. Fabozzi, OTC Equity Derivatives, Handbook of Finance (2008), available at: https://doi.org/10.1002/9780470404324.hof001019.
Corporations: Association and Control (Consolidated), Interpretation Bulletin IT-64R4 dated October 13, 2004.
Culp, C.L.: Structured Finance and Insurance: The ART of Managing Capital and Risk (Vol. 339), New Jersey: John Wiley & Sons, 2011.
De Luca, N.: On Record Date, Empty Voting, and Hidden Ownership-Some Remarks on EU Directive 2007/36/Ce from a European Perspective, available at SSRN: http://ssrn.com/abstract=1633749.
De Nardis, E. et al: Know Your Shareholders: The Use of Cash-Settled Equity Derivatives to Hide Corporate Ownership Interests (Conference Board Director Notes) no.DN-009 (2010), available at SSRN: http://ssrn.com/abstract=1648526.
Donahue, S.M.: Lessons Learned from CSX Corp. v. Children’s Investment Fund Management and Proposals for Reform, Brook. J. Corp. Fin. & Com. L no. 221 (2009).
Geens, K. et al: One Share – One Vote: Fairness, Efficiency and EU Harmonisation Revisited (2010), available at SSRN: http://ssrn.com/abstract=1547842.
Gutiérrez, U. et al: Ownership Structure and Minority Expropriation in Non-Listed Firms: The Case for Multiple Large Shareholders, ECGI – Finance Working Paper no. 053 (2004). Available at SSRN: http://ssrn.com/abstract=1106979.
Hanna, J.: Trust Receipts, The Columbia Law Review no. 545 (1929).
Hansmann, H. et al: The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption, Yale Law Journal no. 100 (2013).
Hayden, G. M. et at: The False Promise of One Share, One Vote, Hofstra Univ. Legal Studies Research Paper no. 08-01 (2008), available at SSRN: http://ssrn.com/abstract=1103160.
Hayden, G. M. et al: One Share, One Vote and the False Promise of Shareholder Homogeneity, Cardozo Law Review no. 445 (2008).
Hinnerich, M.: Equity Swaps, Encyclopedia of Quantitative Finance, New Jersey: John Wiley & Sons, 2010.
Hu, H. et al: The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership,Southern California Law Review no. 811 (2006).
Hu, H.: Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, Law and Economics Research Paper no. 70 (2006), available at SSRN: http://ssrn.com/abstract=887183.
Hu, H. et al: Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications, European Financial Management no. 663 (2008).
Hu, H. et al: Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership, Journal of Corporate Finance no. 343 (2007).
Hu, H. et al: Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, The Business Lawyer no. 1011 (2006).
Hu, H. et al: The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, Southern California Law Review no. 811 (2006).
Jarrow, R. et al: Forward Contracts and Futures Contracts, Journal of Financial Economics no. 373 (1981).
Knoll, M.: Regulatory Arbitrage using Put-Call Parity, Journal of Applied Finance no. 64 (2005).
Knoll, M.: The Ancient Roots of Modern Financial Innovation: The Early History of Regulatory Arbitrage, Oregon Law Review no. 94 (2008).
Logie, M. J. et al: Equity Default Swap and the Securitization of Risk, 1 Innovations in Securitisation Yearbook no. 41 (2006).
Martin, S. et al: Encumbered Shares, The University of Illinois Law Review no. 775 (2005).
Micheler, E.: Custody Chains and Remoteness – Disconnecting Investors from Issuers (March 22, 2014), available at SSRN: http://ssrn.com/abstract=2413025.
Nenova, T.: The Value of Corporate Voting Rights and Control: A Cross-Country Analysis, Journal of Financial Economics no. 325 (2003).
OECD Steering Group on Corporate Governance, Lack of Proportionality Between Ownership and Control: Overview and Issues for Discussion (2007). Available at: www.oecd.org/daf/ca/corporategovernanceprinciples/40038351.pdf
O’Neal, F.: Giving Shareholders Power to Veto Corporate Decisions: Use of Special Charter and By-Law Provisions, Law and Contemporary Problems no. 451 (1953).
O’Neal, F.: Arrangements which Protect Minority Shareholders against Squeeze-Outs, The Minnesota Law Review no. 537 (1960).
PwC, Consolidated financial statements: redefining control, Practical Guide to IFRS (2011).
PwC, Guide to Accounting for Variable Interest Entities (2003). Available at: www.pwc.com/us/en/cfodirect/assets/.../pwc_variable_interest_2013.pdf.
Saunders, M.: American Depositary Receipts: An Introduction to US Capital Markets for Foreign Companies, Fordham International Law Journal no. 48 (1993).
Sercu, P. et al: Deviations from “one share, one vote” can be optimal: An entrepreneur’s point of view, San Diego Meetings Annual Meetings AFA 2004.
Studniberg, B.: The Concept of De Facto Control in Canadian Tax Law: Taber Solids and Beyond, The Canadian Business Law Journal no. 54 (2013).
Sullivan, B.: CSX Corp v. Children’s Investment Fund Management and the Need for SEC Expansion of Beneficial Ownership, The North Carolina Law Review no. 1300 (2008)
Waddell, C. et al: Identifying the Legal Contours of the Separation of Economic Rights and Voting Rights in Publicly Held Corporations, Stanford University Working Paper no. 90 (2010), available at SSRN: http://ssrn.com/abstract=1695183.
Wang, J.: Debt covenant design and creditor control rights: Evidence from covenant restrictiveness and loan outcomes, Unpublished Working Paper (2013).
Wehn, C.: Total Return Swap, Encyclopedia of Quantitative Finance, New Jersey: John Wiley & Sons, 2010.
Wise, R.: Closely Held Preferred Stock: A Review of the Common Value-Drivers, Business Valuation Review no. 149 (2003).
Wong, S.: Rethinking ‘One Share, One Vote’, Northwestern Law & Econ Research Paper no. 13-06 (2013), available at SSRN: http://ssrn.com/abstract=2211449.
Yermack, D: Shareholder Voting and Corporate Governance, Annual Review of Financial Economics no. 2.1, 2.12 (2010).
Court´s findings:
Allaire Corp. v. Okumus, 433 F.3d 248, 2d Cir. 2006.
BDC Fin. L.L.C. v. Barclays Bank PLC, 2012 NY Slip Op 33758 (N.Y. Sup. Ct. 2012).
Board of Trade of City of Chicago vs. SEC, 883 F.2d 525, 7th Cir. 1989).
Bruce v. Cole, 854 So.2d 47 (Ala. 2003).
Brumm v. McDonald Co. Securities, Inc., 78 Ohio App.3d 96 (Ohio Ct. App. 1992).
Buffo v. Graddick, 742 F.2d 592, 11th Cir. 1984.
Centex Homes of N.J.V. Tax. Div. Dir., 10 N.J. Tax 473 (N.J. Tax 1989).
Commodity Futures v. Erskine, 512 F.3d 309, 322 (6th Cir. 2008).
Commodity Futures Trading v. Noble Metals Int., 67 F.3d 766 (9th Cir. 1995).
COMPAQ Computer Corp. Subs. v. Commissioner, 113 T.C. 214, T.C. 1999.
Comrie v. Enterasys Networks, Inc., 837 A.2d 1 (Del. Ch. 2003).
Corre Opportunities Fund, LP v. Emmis Commc’ns Corp., 1:12-cv-491-SEB-TAB (S.D. Ind. Aug 31, 2012).
CSX Corp. v. Children’s Inv. Fund Management (UK), 654 F.3d 276 (2d Cir. 2011). Dewees v. C.I.R., 870 F.2d 21, 1st Cir. 1989.
Digital Island Securities Litigation, 357 F.3d 322 (3d Cir. 2004).
Enron Corp, 333 B.R. 205, 209 (Bankr. S.D.N.Y. 2005).
Fedders North America, Inc., 405 B.R. 527 (Bankr. D. Del. 2009).
Fleischer vs. Botica Nolasco Co., Inc., G.R. No. L-23241, March 14, 1925.
Freytag v. Commissioner of Internal Revenue, 89 T.C. 849 (T.C. 1987).
Freytag v. Commissioner of Internal Revenue, 89 T.C. 849 (T.C. 1987).
Friedman’s Inc., 452 B.R. 512 (Bankr. D. Del. 2011).
Gamboa vs. Teves (G.R. No. 176579, October 9, 2012).
Glass v. Commissioner of Internal Revenue, 87 T.C. 1087 (T.C. 1986).
Grain Land Coop. v. Kar Kim Farms, Inc., 199 F.3d 983 (8th Cir. 1999).
Gregg Co. of Delaware v. Com. of Int. Rev., 239 F.2d 498 (2d Cir. 1956).
Gulf Resorts, Inc. vs. Philippine Charter Insurance Corp., G.R. No. 156167, May 16, 2005.
J.G. Summit Holdings, Inc. vs. CA, G.R. No. 124293, January 31, 2005.
Kline vs. First W. Government Securities, Inc., 24 F.3d 480, 482 (3d Cir. 1994).
Life Ins., 76 P.3d 366, Alaska 2003.
Morton’s Rest. Grp., Inc., 74 A.3d 656Morton’s Rest. Grp., Inc., 74 A.3d 656.
Morton’s Rest. Grp., Inc., 74 A.3d 656; In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006).
Morton’s Rest. Grp., Inc., 74 A.3d 656; Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del.1989).
Morton’s Rest. Grp., Inc., 74 A.3d 656 citing In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 551–52 (Del.Ch.2003).
Nagel v. Adm Investor Servies, Inc., 217 F.3d 436 (7th Cir. 2000).
National Telecommunications Commission v. Court of Appeals, G.R. No. 127937 July 28, 1999, 311 SCRA 508.
Pearson v. Component Technology Corp., 247 F.3d 471 (3d Cir. 2001).
Peterson v. CIR, 380 F.2d 1 (9th Cir. 1967).
Philippine Health Care Providers, Inc. vs. CIR, G.R. No. 167330, June 12, 2008.
Piaoco vs. McMicking, G.R. No. L-4237, March 5, 1908.
Pinker v. Roche Holdings Ltd., 292 F.3d 361, 3d Cir. 2002).
Planters Bank Trust Co. v. Sklar, 555 So.2d 1024, 1031 (Miss. 1990).
Progressive Corp. and Subsidiaries v. U.S., 970 F.2d 188 (6th Cir. 1992).
PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006).
Republic Planters Bank vs. Agana, G.R. No. 51765, March 3, 1997.
Republic Planters Bank vs. Agana, G.R. No. 51765, March 3, 1997.
Sec. & Exch. Comm’n v. Wyly, 10-cv-5760 (SAS) (S.D.N.Y. Jul 07, 2015).
Stenehjem v. Kyn Jin Cho, 631 P.2d 482 (Alaska 1981).
Tan vs. Sycip, G.R. No. 153468, August 17, 2006.
The Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308 (6th Cir. 1998).
UPIC Co. v. Kinder-Care Learning Ctr., (S.D.N.Y. 1992).
Walter E. Heller Wester, Inc. v. Tecrim Corp., 196 Cal.App.3d 149 (Cal. Ct. App. 1987).
Weiss v. Morgan Stanley, 345 Fed.Appx. 713, 2d Cir. 2009.
Downloads
Published
How to Cite
Issue
Section
License
Financial Law Review is an open access journal which means that all the articles published are freely available without charge to the reader or his/her institution.
The articles published in Financial Law Review are available under a licence Attribution-NonCommercial-NoDerivs 3.0 Unported (CC BY-NC-ND 3.0)
The Author furnishes a non-exclusive and free-of-charge license to use the his Work without territorial limitations and for an unlimited period.
Archiving policy
All texts from the journal Financial Law Review are published in electronic version. We strive to archive texts in various databases. Archival issues are also available on the platform of the Academic Scientific Journals: https://czasopisma.bg.ug.edu.pl/index.php/flr/index
Moreover articles published in the journal are archived at the Repository of the University of Gdansk.
