International News, Volume 5, No. 3, Summer 2003
Summer 2003
Middle East Commercial Market Opportunities Abound
By Pamela Walther and David Baron (McDermott Will & Emery, Washington, D.C.)
As the Bush administration moves forward to bolster economic growth in Iraq and the Middle East region, opportunities and risks arise for U.S. and international businesses. The aftereffects of the war in Iraq will involve not only the internal situation in Iraq and the dynamics between countries in the Middle East region, but also U.S. trade with countries in that region.
On May 9, 2003, the Bush administration announced it would seek the establishment of a U.S.-Middle East free trade area (FTA) by 2013. This is one element of a larger effort to address economic issues and to establish commercial markets within Iraq. The administration’s agenda for a Middle East FTA includes a series of gradual steps. These include helping countries that are not already members of the World Trade Organization (WTO), such as Saudi Arabia, to join the WTO, and encouraging current WTO member countries to engage in bilateral trade and investment framework agreements (TIFAs) with the United States. Countries that already have TIFAs will be considered for full FTAs as stepping-stones to a larger regional agreement.
The United States currently has FTAs with Israel and Jordan and hopes to conclude FTA negotiations with Morocco by the end of 2003. The most likely new candidates for FTAs in the near-term are Egypt and Bahrain. These two countries are WTO members and have established TIFAs with the United States. Other Middle East countries that are WTO members and may soon be considered for TIFAs and then FTA agreements are Kuwait, Oman, the United Arab Emirates and Djibouti. For U.S. companies, the FTAs offer market opening opportunities and eventual duty-free access to each other’s markets for most goods and agreements to liberalize trade in services, intellectual property rights and investments. FTAs affect U.S. companies that have an interest in trading with the Middle East, and U.S. companies concerned about competition in the U.S. market from duty-free goods originating from the region.
A second approach being considered by some in the U.S. Congress to spur trade in the Middle East is the unilateral extension of duty-free access to most products from Middle East countries. Since this initiative contemplates "unilateral" duty-free access, it would open U.S. markets to preferential imports from those countries but would do nothing to increase access for U.S. exports to the region. Thus far, the Bush administration has indicated a preference for reciprocal free trade area agreements, rather than a unilateral extension of benefits.
U.S. and Multilateral Trade Restrictions Lifted
Since the 1990 Persian Gulf War, U.S. companies had been restricted from doing business with Iraq under U.S. laws and regulations as well as under multilateral UN rules. On May 22, 2003, the United Nations Security Council adopted Resolution 1483, effectively removing all of the multilateral sanctions imposed on Iraq since its 1990 invasion of Kuwait. On May 23, 2003, President Bush followed suit and removed U.S. sanctions restrictions imposed on trade with Iraq that had been administered by the Office of Foreign Assets Control (OFAC) in the U.S. Department of the Treasury.
Prohibitions still exist on trade with countries such as Cuba, Iran and Libya, however. These prohibitions remain in place and violators can be subject to significant civil and criminal penalties as well as negative publicity. Trade by U.S. entities in and with these countries remains generally prohibited for most goods and services, with license exceptions available for agricultural commodities and medicines. OFAC, the U.S. State Department and the U.S. Department of Commerce also aggressively enforce these prohibitions on trade with specified individuals and entities identified by the U.S. government as, for example, supporters of terrorism or drug traffickers. The Department of Commerce and Department of the Treasury strictly enforce U.S. anti-boycott laws, directed at practices employed by governments and countries in the Middle East in support of the Arab Boycott of Israel. Finally, because the U.S. government sanctions policies constantly change and evolve, companies should remain informed and update their trade compliance programs regularly. For example, bills now pending in Congress would impose new sanctions against Syria and Burma. Some export controls currently remain in place for the shipment of certain high-tech goods to Iraq. Such exports will continue to require export licenses issued by the U.S. Bureau of Industry and Security in the Department of Commerce.
Emerging changes in the international trade arena associated with Iraq and the Middle East are ongoing. Therefore, it is important for U.S. and international companies involved in exporting and importing to maintain up-to-date information on market openings and restrictions in the region to protect their businesses as well as to take advantage of new trade opportunities.
Privacy Rights Valid Even for Celebrities and Politicians
By Rohan Massey (McDermott, Will & Emery, London) and Kathrin Tauber (McDermott, Will & Emery, Munich)
One could be forgiven for thinking that the sanctity of marriage is one of the few things Chancellor Gerhard Schröder of Germany and the Hollywood A-list couple Michael Douglas and Catherine Zeta-Jones have in common. However, recent cases brought in Germany and the United Kingdom, respectively, highlight the approaches being taken in Europe towards the individual’s right to protect their privacy from unwanted media attention.
Germany and the United Kingdom have historically taken different paths on the development of legal rights to protect individuals. Germany has adopted a statutory personality right. The United Kingdom, on the other hand, has not legislated on privacy or personality, despite judicial calls to do so. Instead, it has seen the judicial development of the laws of confidence and data protection.
The current legal dilemma surrounding the issue of privacy in Europe has arisen because actions being brought in the courts of EU member states must be considered in light of the European Convention on Human Rights. In actions regarding an individual’s privacy, there is often a need to balance Article 8 of the European Convention on Human Rights, which grants the right to respect private and family life, and Article 10, which grants the right to freedom of expression.
Personality Rights
In Germany, the personality right is a statutory right granted in the German Constitution (Grundgesetz). The German right is broad, granting the individual the right to control the development and exploitation of his own personality, with different levels of protection being given to the individual, private and intimate aspects of a person’s life. Any illegal interference with the personality right entitles the individual to seek compensation and, where
necessary, an injunction according to sections 823 and 1004 of the German Civil Code (Bürgerliches Gesetzbuch).
For a claim of infringement of the personality right to be successful, there must be comprehensive consideration of the parties’ affected interests. This is achieved by comparing the constitutionally guaranteed freedom of speech and the personality right of the offended. This balance is weighed on the facts of the case. The balance is subjective with German courts, generally lowering the threshold of protection from media intrusion granted to individuals in the public eye. This subjective determination of protection does not signify a wholesale removal of a public figure’s right to privacy, merely a limitation of it.
Chancellor Gerhard Schröder recently took advantage of the personality right by bringing an action in the Lower Regional Court of Düsseldorf against a newspaper that had published an article reporting rumors relating to the state of the chancellor’s marriage. The newspaper purported it was not reporting a factual story on the state of the chancellor’s marriage. Instead, it was reporting on rumors circulating in Germany that the Schröders had apparently been involved in a public fight, and the chancellor had spent several nights away from his Hannover home.
The court balanced the arguments of the information being of public interest, as argued by the newspaper, against the personal interests of the chancellor. Based on the facts of the case, and because the newspaper was not holding the story out as fact but reported rumors, it was held that the chancellor’s private life was of public interest. In particular, the court recognized that media reporting prior to this case did not include specific private details about the chancellor’s marriage disputes. Such information would have been important in this case, as Chancellor Schröder’s 2002 election campaign promoted his family life. The court held that the press was allowed to report on the chancellor’s family life to the extent that it was made public, for example, that he was married. However, the court noted that the press did not have the right to report on intimate or specific details of his marriage that Chancellor Schröder had not previously made public.
Confidence in the United Kingdom
The November 2000 wedding of Catherine Zeta-Jones and Michael Douglas, which was a closely guarded and nominally private affair, was billed as the event of the year. The couple arranged a £1 million deal with OK! magazine for the exclusive rights to publish pictures of the wedding. Hello! magazine, a rival of OK!, managed to obtain and publish unauthorized photographs of the couple’s wedding prior to the publication of Hello!’s exclusive.
The couple was furious and felt their privacy had been breached. The action they brought against Hello! was based on the fact that despite commercializing the wedding by selling their photos, they had taken extreme and expensive measures to ensure the wedding itself and the photographs of it were private.
At trial, the High Court found in favor of the Hollywood couple. However, the judgment was not based on a law of privacy but, instead, based on the specific facts of the case by relying on long-established principles of the law of confidence. In being able to grant rights to publish pictures, the couple had a commodity, the value of which depended upon it being kept secret and then made public in a controlled way. Any unauthorized publication would be a breach of commercial confidence. Put simply, all photographs of the wedding were deemed to be confidential information. The unauthorized photographs of the wedding were a disclosure of information that was protected by confidence, and the publication by Hello! of the unauthorized photographs was a breach of confidence.
The judgment avoided creating a law of privacy, as the judge felt the arguments for the existence of a freestanding right of privacy had not been made. The common law breach of confidence was sufficient to protect the couple and to provide them with an adequate remedy.
The result was the same in both countries despite the different legal approach. The unanswered questions are whether the UK parliament will introduce legislation to protect privacy and whether there will be harmonizing legislation at the EU level.
Ninth Circuit Determines Corporate Liability in Developing Nations
By Jeffrey Bates (McDermott, Will & Emery, Boston)
The first U.S. Congress, as a part of the Judiciary Act of 1789, enacted the Alien Tort Claims Act (ATCA). The ATCA grants jurisdiction to U.S. federal courts over claims by aliens for torts in violation of international law or treaties of the United States. This act has attracted the attention of a number of campaigner organizations and plaintiffs’ class-action firms and has provided the basis for dozens of claims against multinational corporations, alleging environmental, labor, employment and human rights wrongdoings.
One of the more long-running and celebrated of these cases is Doe v. Unocal. This case is now undergoing en banc review in the U.S. Court of Appeals for the Ninth Circuit concerning a critical question for multinational corporations engaging in projects in developing countries: whether and under what conditions they can be held liable in U.S. courts for international law human rights violations committed by their host governments. At oral argument before the court on June 17, 2003, the Ninth Circuit judges questioned counsel on whether the legal standard should be the same as used for Nazi collaborators and war criminals in Rwanda and in the former Yugoslavia.
The ATCA was revived from almost 200 years of dormancy in 1980 by the U.S. Court of Appeals for the Second Circuit in Filartiga v. Pena-Irala. There, the Second Circuit allowed a Paraguayan national residing in the United States to sue a former Paraguayan police official for torturing his son to death during the time when all parties were living in Paraguay. This decision gave rise to numerous cases in which other victims of human rights abuses sued government officials including prison guards, generals, Ferdinand Marcos and Slobodan Milosevic in U.S. courts under the ATCA.
Cases then began to be brought against multinational corporations, alleging they, too, should be held liable under the ATCA for aiding or participating in human rights and environmental abuses, along with government officials. Two key issues have arisen in these cases: what is the standard for holding a private corporation liable for acts primarily committed by foreign government officials on foreign soil, and, second, whether multinational parent companies can be held liable when the entity in the foreign country is a separate subsidiary.
The Second Circuit took the lead when a panel of that court and a New York district court on remand allowed an ATCA suit to proceed against the multinational parents of a major oil producer’s Nigerian subsidiary for the alleged murder of human rights campaigner Ken Wiwa by Nigerian security police. This was based on allegations that met the test for joint liability that holds private entities liable under the U.S. Civil Rights Act, 28 USC 1983. In so doing, the district court relied in part on Burton v. Wilmington Parking Authority for the proposition that private and state actors need not act in concert to commit each specific act that violates a plaintiff’s rights. The court contended that, in Burton, joint conduct was found where a private business leased space owned and maintained by a government entity, and the government entity derived financial benefits from the lease—a test, if accurate, sufficient to implicate many private-public foreign joint ventures.
These issues are now squarely before the Ninth Circuit for en banc determination in Doe v. Unocal. There, the court will decide what the test should be for holding multinational corporations liable under the ATCA. The case concerns allegations that, in connection with the construction of a petroleum pipeline in Myanmar (formerly, Burma), Unocal (and its European joint venturer) collaborated in numerous human rights violations, such as forced labor and torture, committed by the Myanmar government in providing security and labor for the pipeline project. The court will consider a variety of potential liability tests, from the Second Circuit’s Section 1983 test, to common law aiding and abetting, to tests derived from such international tribunals as those conducting the war crimes trials concerning the Third Reich at Nuremberg and the former Yugoslavia in The Hague.
The case has received much attention. Amicus briefs have been filed by, among others, the U.S. Department of Justice. The United States, which has recently opposed a number of ATCA suits on the grounds that they interfere with U.S. foreign policy, has now undertaken a broadside attack on the ATCA, arguing that it does not provide a private cause of action. The United States further argues that the ATCA’s history implies that it was only meant to apply to such 18th century international crimes as piracy, which were independently criminalized by federal statutes.
However, the Ninth Circuit decides these critical issues of U.S. and international law, the aggressive participation of the U.S. Department of Justice in the case may signal a push to get the ATCA before the U.S. Supreme Court. Similar attempts have failed in the Wiwa case and others.
In today’s heated environment of claims and counterclaims, both rhetorical and legal, based on international law, it would be interesting indeed to hear from the Supreme Court on a once obscure statute that the current president of the American Society of International Law once called "A Badge of Honor."
German Depressed Market Tempts Companies to Go Private
By Jörg Kretschmer and Christophe Samson (McDermott, Will & Emery, Munich)
In recent years, it has been common for companies to go public and become listed on the German stock exchange. However, the downward trend in the market has caused listed companies to question their stock-exchange listing and withdraw from the stock exchange. Any withdrawal of a listing is at the discretion of the authority that admits securities to the stock exchange (Börsenaufsichtsstelle), which, when making its decision, must take into account the interests of the investors. A listed company, therefore, does not have the right to withdraw its listing; it only has a right when the decision is made and the authority exercises its discretion properly and correctly.
Tapping into the Reorganization Act
Merging a listed company with a non-listed company is a common method of going private in Germany. The listed company becomes defunct, and the entire assets pass by way of universal succession to a non-listed, absorbing company. The absorbing company can be either a pre-existing corporation or partnership, or a corporation or a partnership specifically established for this purpose. Automatic delisting from the stock exchange can also be achieved by changing the legal form of a listed public corporation (Aktiengesellschaft) to a legal form that cannot be listed. The legal form can be changed either to a different form of company (e.g., a GmbH, which is a private limited company) or to a partnership (e.g., a KG, which is a limited partnership). Both methods require a resolution of consent passed with a majority of at least three-quarters of the share capital represented at the general stockholder meeting.
Going private via the Reorganization Act (Umwandlungsgesetz) is largely settled in law and, therefore, causes the least problems. However, merger and changing the legal form are not suitable methods for eliminating undesirable minority shareholders from the company because shareholders always have a right to be a member of the absorbing company or the company with the new legal form. Additionally, the minority shareholders also have the option to leave the company against payment of compensation in cash. Experience has shown that many minority shareholders exercise this right, particularly because withdrawal from the stock exchange is synonymous with the loss of the ability to freely trade shares.
As an alternative to a merger under the Reorganization Act, going private can also be achieved through transfer and liquidation. Using this method, the listed company first transfers all of its assets through an asset deal to a non-listed company, which is controlled by the principal shareholder and has usually been established specifically for this purpose. After the transfer, the listed company’s only asset is the consideration received in the purchase price. The listed company then resolves to go into liquidation, whereby the assets of the company are distributed to shareholders in accordance with their interest share. The principal shareholder can continue the business of the previously listed company in the non-listed company. Both the purchase agreement and the subsequent liquidation of the company require a resolution of consent by the general meeting, which must be adopted by a three-quarter majority of the share capital represented at the vote on the resolution.
The transfer and liquidation method is a possibility for delisting, which allows a squeeze out of some minority shareholders at the same time as going private. The sale of all of the assets can have far-reaching tax consequences, which may be a disadvantage to shareholders. Furthermore, transferring the individual assets is costly.
Another possibility for going private is integration under the law governing stock corporations. The general meeting of a listed company can resolve that the company be integrated into another public corporation (Aktiengesellschaft) if the future principal company holds at least 95 percent of the share capital of the public corporation to be integrated. The integration means that all of the shares, which are not held by the principal company, pass to the principal company. The minority shareholders cease to be members and are, instead, given a right to become a member of the principal company. The company is then delisted because, after the integration, the principal company holds all of the shares.
Integration allows the principal company to have almost unlimited control of the management and access to the assets of the integrated company. In addition, integration means that the outside shareholders cease to be members of the integrated company. However, the disadvantage of integration is that it is only possible with a 95 percent majority of the principal shareholders of the listed company’s share capital.
A shareholder holding 95 percent of the shares in a listed company can expel minority shareholders from the company against payment of reasonable compensation in cash with the consequence that the listing is revoked. The possibility of effecting a squeeze out and subsequent delisting has been newly introduced into the German Stock Corporation Act (Aktiengesetz) and is the simplest method of excluding minority shareholders and at the same time delisting. However, a prerequisite is that the majority shareholder manages to acquire at least 95 percent of the shares in the listed company.
Going private transactions offer benefits as well as perils, and the German legal system has been developed in order to protect shareholders’ interests. As a result, it is important for companies to conduct due diligence when considering changing their company’s status from public to privately held.
Lackluster Financials and Sarbanes-Oxley Encourage U.S. Going Private Transactions
By Dennis White and Patricia Johansen (McDermott, Will & Emery, Boston)
Going private filings are on the rise in the United States. Many believe this rise is due not only to the prolonged downturn in the capital markets but also to the increased financial costs and potential personal liabilities associated with maintaining a U.S. public company status in the wake of the recently enacted Sarbanes-Oxley Act (S-OX).
There are a number of different approaches a company can take to go private in the United States. The correct choice depends on a variety of factors including board composition, how much stock is held by insiders, the number of record holders, cash on hand, trading volume, private equity participation and even the company’s state of incorporation. Alternative approaches can include simple deregistration, reverse stock splits, issuer self tenders, third-party tender offers and the more traditional negotiated cash mergers.
For those public companies that already have fewer than 300 record holders (or 500 if certain asset tests are met) and no liquid market for their shares, privatization may be achieved by filing Form 15 with the U.S. Securities and Exchange Commission (SEC) to voluntarily deregister. Form 15 is a simple, one-page certification as to the number of record holders. There is no "transaction" to cash out stockholders, no need for stockholder approval and no public disclosure. A downside, however, is that deregistration does not shrink the company’s stockholder base.
Some small-cap public companies with more than 300 record holders have pursued reverse stock splits or self-tender offers to reduce their number of record holders. The reverse stock split approach involves the board of directors setting a sizable split ratio (e.g., 1 for 1,000 shares) to cash out holders of the resulting fractional interests, thereby reducing a company’s record holders below 300. The split is effected by a charter amendment, requires stockholder approval and compliance with SEC proxy solicitation rules and, depending on the state of incorporation, may trigger appraisal rights.
Alternatively, a company seeking to reduce its number of record holders may pursue an issuer self tender. A self tender entails a public company offering to repurchase its shares from the public pursuant to the SEC’s issuer tender offer rules. This process is generally faster than a reverse split because the tender offer is launched simultaneously with the SEC filing and can close as soon as 20 business days depending on SEC review. However, it does not guarantee the reduction in record holders, due to partial tenders and inattention by small stockholders.
Companies are also taken private by traditional buyout methods such as tender offers and mergers. These traditional approaches are preferred for established companies with liquid markets for their stock. The tender offer approach involves a cash tender by an entity formed by insiders for the outstanding shares in accordance with the SEC tender offer rules. The offer is usually initiated following an agreement on price with the company’s board, although controlling stockholders may proceed without the board support subject to a 90 percent tender condition. A second-step, "clean-up" transaction (such as a merger or reverse split) is typically needed to cash out any remaining untendered public shares.
Perhaps the most common buyout structure is the negotiated cash merger whereby the insider group negotiates a merger agreement with an independent committee of the board of directors. An entity formed by the insiders merges into the public company with the public stockholders receiving cash for their shares. The merger generally will require stockholder approval and compliance with SEC proxy solicitation rules and will trigger statutory appraisal rights.
Each of the foregoing approaches, other than the voluntary deregistration approach, will require compliance with the SEC going private rules and trigger extensive disclosure obligations. In addition, due to the conflicts of interest inherent in going private transactions, they are subject to heightened litigation risk. To minimize this risk, various safeguards are typically followed to go private, such as the use of special independent board committees, fairness opinions and, at times, neutralizing votes.
Regardless of the approach chosen, advance preparation and the assumption of certain risk and expense will be necessary to go private in the United States. However, with the enactment of S-OX coupled with the depressed market, the costs and burdens of staying public may now outweigh the downside risks of going private for many small-cap U.S. companies.
Extensive Reform of EU Competition Law Enforcement
By Ian Rose (McDermott, Will & Emery, London)
New European Union (EU) provisions have come into force, but they are only a part of the plan to "mod-ernize" the enforcement of EU competition law. Current rules, which are contained in legislation dating back to 1962, provide the European Commission (EC) with powers to investigate cartels and the abuse of market power and to fine offenders up to 10 percent of group worldwide annual turnover. When that legislation was put into place, there were only six member states: Belgium, France, Germany, Italy, Luxembourg and the Netherlands. Those member states were joined by Denmark, Ireland and the United Kingdom in 1972, by Greece in 1981, by Spain and Portugal in 1986 and by Sweden, Finland and Austria in 1995. Ten more countries are due to join the EU in May 2004, when there will be 25 member states.
In 1962, it seemed sensible to ensure the centralized development of EU competition policy and enforcement practices. To this end, the Commission was given the exclusive power to enforce the EU competition rules, including powers of investigation, the power to levy penalties and the power to exempt individual agreements from rules prohibiting anticompetitive agreements, when those agreements were notified to the Commission by the parties concerned.
This situation has enabled the Commission to develop jurisprudence on the types of behavior it regards as serious infringements of EU competition law, as well as the kinds of agreements that are capable of exemption from the prohibition of anticompetitive agreements because of overriding economic benefits. The situation has also suited companies. Companies benefit from immunity from fines when an agreement is notified to the Commission, as well as being provided with the legal certainty of an exemption from the Commission. This is because national courts have been unable to rule on the enforceability of provisions of an agreement that were the subject of a notification.
It is believed that EU competition policy and jurisprudence have evolved sufficiently so that UK competition authorities and courts are quite capable of applying EU laws on competition. The exclusivity of the Commission to enforce the rules and to decide on exemptions is no longer necessary. Moreover, relieving the Commission from its obligations to review notifications will, it is believed, free up the Commission to concentrate on "hard core" cartels and the most serious abuses of market power within the European Union. Retaining the 1962 arrangements is regarded as not only anachronistic, but also as unworkable, particularly given the accession to the EU of 10 more countries.
The Council of Ministers, therefore, agreed in November 2002 on new legislation, and Council Regulation 1/2003 was adopted on December 16, 2002. It will come into force on May 1, 2004, coinciding with the accession of the 10 new member states to the European Union.
The current notification and clearance system for commercial agreements will be abolished, and companies will have to assess their commercial activities, together with their legal advisers, to ensure that they do not infringe the EU competition rules. Moreover, competition authorities and courts will be able to enforce the EC prohibition of anticompetitive agreements and the abuse of market power. This will include the ability to decide whether a restrictive agreement satisfies the criteria for an exemption. These changes are in addition to the new powers of enforcement and information sharing between competition authorities. (See International News, Spring 2003.)
The new regime will have a major impact on the systems put in place for compliance with the competition rules by companies doing business in the European Union. In particular, companies will need to review existing and new commercial arrangements to ensure that they do not in-fringe the EU competition rules. Companies will no longer have the option of referring the arrangements to the Commission. The new regime, with its emphasis on national courts and competition authorities working together with the Commission, will also encourage private litigation within the European Union. Companies will need to be aware of the consequences of action being taken against them under EU competition law by aggrieved commercial partners and third parties. They will also need to be aware of the opportunities that the new regime will provide to deal with anticompetitive arrangements and behavior that are causing damage to their own business.
U.S. Laws Enacted by Terrorism Force Businesses to Rethink Strategies
By Joe Andrew and Douglas Richardson (McDermott, Will & Emery, Washington, D.C.)
The creation of the U.S. Department of Homeland Security (DHS) offers unique challenges and opportunities for the business community. Under terms of the Homeland Security Act of 2002, signed into law by President Bush in November 2002, the federal government is undertaking one of the largest reorganizations in modern history. When fully implemented, this reorganization will consolidate 22 existing federal agencies¾ with a variety of missions, an annual budget of nearly $40 billion and approximately 170,000 employees¾ under the umbrella of the new Department of Homeland Security.
Businesses that have in the past dealt with individual agencies now contained within the new department will find themselves facing a bureaucracy guided by laws and regulations enacted by the U.S. Congress in the wake of the terrorist attacks of September 11, 2001. The scope of these broad changes extends beyond the federal government, with state and local jurisdictions forced to confront new security mandates. Therefore, nearly every business that deals with a governmental entity on an issue related to U.S. security will discover new challenges, opportunities and responsibilities in the years ahead.
Homeland Security Undersecretaries Oversee Programs
Begun in March 2003, reorganization of federal agencies such as the Coast Guard, U.S. Federal Emergency Management Agency, the U.S. Secret Service and the U.S. Customs and Immigration and Naturalization Service under the Department of Homeland Security is scheduled to be completed in phases by September 30, 2003. Once completed, the new DHS will be organized under five undersecretaries with a myriad of functions.
An information analysis and infrastructure protection undersecretary will coordinate information sharing and intelligence analysis with the Federal Bureau of Investigation and the Central Intelligence Agency. Under the science and technology moniker, the undersecretary will coordinate and integrate research, development and testing of scientific and technological objectives. This undersecretary will also work to protect the homeland from weapons of mass destruction. Another undersecretary will oversee border and transportation security, which was developed to protect U.S. borders, territorial waters and transportation systems. An emergency preparedness and response undersecretary will manage one emergency response plan to be used at all levels of government, ensuring that first responders receive proper training and equipment. Under the management umbrella, an undersecretary will consolidate management and administrative functions, including budget and expenditures.
Operational Changes Due to Reorganization
Beyond instituting the widespread reorganization of government agencies charged with providing homeland security, legislation creating the new DHS addresses several operational issues. Certain functions will be consolidated; certain agencies will remain in tact. The functions, personnel, records and other assets of pre-existing agencies will be transferred to the new department. In general, these transfers are not expected to affect completed actions such as contracting, issuance of determinations, licenses and permits or pending proceedings. Both the Coast Guard and the Secret Service will be preserved as distinct entities. The U.S. Transportation Security Administration will operate as a distinct entity for two years.
The private sector is expected to work with the undersecretary of information analysis and infrastructure protection to provide information on vulnerability of infrastructure to terrorism, to identify priorities for infrastructure protection and to receive specific warnings, threat information and advice on protective action.
The department is directed to establish procedures to ensure the security and confidentiality of information shared with the department and to protect the rights of individuals who are the subjects of that information. When a private entity voluntarily submits "critical infrastructure information" to the department for official use, that information is accompanied by an express statement regarding expectation of non-disclosure. Specifically, the information will be exempt from disclosure under the Freedom of Information Act and cannot be used in any civil action arising under federal or state law, if the information is submitted in good faith. A new program is to be established to improve the security of federal information systems, which could include systems used or operated by contractors.
A new law establishes special protections for suppliers of qualified anti-terrorism technologies if they are sued as the result of an act of terrorism. These protections include a bar on punitive damages. It also includes a restriction on non-economic damages, a rebuttable presumption that the "government contractor defense" applies to the lawsuit and a limitation on liability to the amount of liability coverage "reasonably available from private sources on the world market at prices and terms that will not unreasonably distort the sales price of the company’s anti-terrorism technologies." The law also offers full legal protection to the manufacturers of, and medical personnel who administer, smallpox vaccine.
While the U.S. Department of Health and Human Services will retain responsibility for human health-related research and development, the new department’s undersecretary for science and technology is charged with setting U.S. priorities for systems and technologies for homeland security. The undersecretary is also responsible for establishing a central federal repository for information on these systems, ensuring that colleges, universities, research institutes and private companies from as many areas of the United States as possible participate in the research and development program and distributing funds for research and development.
Finally, the U.S. Immigration and Naturalization Service will be abolished, and its functions split into two components: immigration enforcement and citizenship.
Challenges, Opportunities
As the Department of Homeland Security takes shape, new issues and disputes are sure to arise and to be addressed in the Congress, the courts and administrative proceedings. However, certain trends have emerged that are worth noting. The department will soon become a major consumer of commercial products and services, including significant purchases of commercial information technologies and software. The department’s Directorate of Science and Technology will become a new focus for public-private collaboration on technologies addressing chemical, biological, radiological, nuclear and other terrorist threats.
Companies that have not worked with the government previously may make new inroads into government work. The law establishing the department requires the federal government to make ongoing efforts to identify "new entrants" with innovative technologies that should be considered for government contracts.
State and local governments are receiving billions of dollars in homeland security assistance to be spent, in many cases, on products and services that many jurisdictions have not contracted for in the past. In just the last five months, nearly $4 billion has been sent to the states and localities for equipment, training and planning to improve homeland security. Another $3.5 billion has been requested for fiscal year 2004.
Opening a "Window" for Tax-Preferred Repatriation of Overseas Earnings
By Jim Gould (McDermott, Will & Emery, Washington, D.C.)
U.S. taxpayers that conduct business abroad through foreign corporations generally are subject to U.S. income tax on the earnings of the foreign corporations when the earnings are repatriated to the United States as dividends. A credit against U.S. tax is available for taxes paid to other countries on the earnings, but limitations on the credit often prevent the credit from shielding the repatriated funds from U.S. tax. The imposition of U.S. tax at the time of repatriation has led many U.S. taxpayers to put off repatriating their overseas earnings in favor of accumulating the earnings abroad free of U.S. tax.
Several bills recently have been introduced in the U.S. Congress to open a one-time "window" during which U.S. taxpayers would be permitted to repatriate overseas earnings at a sharply reduced income tax rate. H.R. 767, introduced in February 2003 by a group of republicans in the U.S. House of Representatives led by Ways and Means Committee Member Phil English (PA) would establish a flat tax rate of 5.25 percent on eligible amounts repatriated. S. 596, introduced in the U.S. Senate in March 2003 by a bipartisan team led by John Ensign (R-NV) and Barbara Boxer (D-CA) would take the same approach. A third bill, H.R. 1162, introduced in March 2003 by a group of U.S. House Democrats led by Adam Smith (OR) would provide a deduction of 85 percent of the eligible amounts repatriated (a percentage which, for corporations, is equivalent to imposing the 5.25 percent tax rate on the amounts repatriated).
The sponsors of the foregoing bills believe the bills would trigger a large volume of repatriations that could act as a stimulus for the U.S. economy. The staff of the Congressional Joint Committee on Taxation has estimated that the bills could trigger the repatriation of as much as $130 billion; a leading private estimate puts the figure at $300 billion.
The following are several salient features of the bills:
- All three of the bills apply only to "excess" distributions, i.e., amounts repatriated in excess of the foreign corporation’s historic annual dividend distributions. The sponsors do not intend to make the reduced tax rate available for amounts that normally would be repatriated in the absence of the legislation.
- The one-time period for repatriations under the bills would be the U.S. taxpayer’s first taxable year ending at least 120 days (90 days in the case of the Smith bill) after the date of enactment of the legislation.
- The Smith and Ensign-Boxer bills would provide the reduced tax rate only to corporate taxpayers; the English bill would apply to both corporate and individual taxpayers.
An unsettled issue is the extent to which the legislation, as it moves forward, will attach strings to the use of the low-taxed repatriated funds. The English bill does not propose to attach any strings, while the Smith and Ensign-Boxer bills would require the U.S. taxpayer to formulate a plan for the reinvestment of the funds. The bills provide little detail on the reinvestment requirement. If the requirement remains in the legislation as the legislation moves through the U.S. Congress, congressional tax writers can be expected to flesh out the requirement to provide taxpayers with the certainty they will need to repatriate substantial amounts of earnings in a short window period.
A major factor in the possible success of the legislation is its bipartisan nature. In particular, the support from Senator Boxer, Congressman Smith and a number of other democrats has helped to blunt the criticism that normally would be expected from congressional opponents of corporate tax reductions.
The legislation received a major boost during the recent Senate consideration of President Bush’s economic growth tax cut package. Senators Ensign and Boxer offered their bill, S. 596, as an amendment to the package on the Senate floor. By a vote of 75-25, the measure was included in the Senate’s version of the bill. (The vote actually occurred on a procedural motion to waive a point of order against the amendment.) The vote puts the Senate solidly on record in favor of the proposal. Although the final House-Senate compromise version of the tax-cut package did not include the proposal (for reasons that did not have to do with the merits of the proposal or its level of support in Congress), the Senate vote means that the proposal will go into the next round of tax legislation in Congress with a considerable head start.
House Ways and Means Committee chairman Bill Thomas (R-CA) reportedly is poised to give the repatriation legislation another major boost; he has told his committee colleagues that he intends to include the legislation in a broad proposal that he is now writing to reform the U.S. taxation of overseas income. Although such tax reform efforts have failed repeatedly in the past, this year congressional tax writers are under pressure to act because of the possible implementation of tariffs by the European Union in retaliation for the U.S. "Extraterritorial Income Exclusion" (EIE) tax incentive for exporters. The World Trade Organization has ruled the EIE regime to constitute an impermissible export subsidy. Tax writers in both the House and the Senate understand the necessity of repealing the EIE regime to avoid the retaliatory tariffs; the repeal of the EIE regime will be the centerpiece of Thomas’s new legislation and could drive the tax reform effort to fruition.
It appears that the repatriation legislation has a serious chance of enactment this year. The possible economic stimulus from the rapid repatriation of $100 to $300 billion is enticing to the many members of Congress who are concerned about the United States’ extended economic slow-down. For U.S. taxpayers with overseas operations, the legislation represents a chance to get a "fresh start" overseas¾ a chance to bring accumulated overseas earnings home at a low tax rate while continuing to operate abroad.
