It’s giving season, and big corporations are doling out not millions but billions of dollars in end-of-year giving. But the greatest gift a corporation can give to shareholders is legal: By obtaining a new corporate charter, corporations can give their investors everything they have on their wish lists.
NEW YORK – The Christmas shopping season is here. Regardless of whether or not one is a believer, it is almost impossible to resist the urge to shop and give gifts at this time of year. But those who give the most are inanimate creatures without any capacity to believe in anything. I am not referring to any artificial intelligence innovation, but to legal persons known as ordinary corporations.
Corporations are currently doling out not millions, but billions, of dollars in end-of-the-year gifts. In the financial sector, bonds were up 20-35% compared to last year, representing a carousel that puts several hundred thousand dollars, on average, in the pockets of all recipients. However, while the amount of these gifts is substantial, the greatest gift a corporation can make is legal. By securing a new corporate charter, companies can gift investors with everything on their wish lists.
Royal Dutch Shell is the latest corporation to make headlines for gifting a new charter to its shareholders, by moving its parent company from The Hague to London. The company will jettison its real title in exchange for the extra cash for its shareholders. Two other Dutch corporations, Unilever and RELX (Elsevier), have already taken similar steps. And more generally, many merger transactions are in fact poorly disguised transactions designed to reap the benefits of a different legal order.
Where does the extra money come from for Shell shareholders? One possible source is the new legal and regulatory environment. The fact that shareholder protections in the UK are stronger than those in the Netherlands is likely to give the company an incentive. After all, the research that exists on law and finance suggests that countries with better shareholder protection tend to have more developed financial markets.
But extending this argument specifically to Shell’s decision raises several objections. At the level of an individual company, there are too many variables at play for corporate governance to have a significant effect on the bottom line. Also, when the standard measure for the quality of corporate law – the (corrected) Antidirector Rights Index – is applied, the difference between Dutch and English law is not that great.
The real benefit to shareholders is not governance but cash, which is determined by current tax law. The Netherlands taxes both dividends and corporate share buybacks at 15%, while UK tax law allows for exemption of buybacks, provided a company has a good tax lawyer on its side.
For Shell and other big polluters just getting started in the process of moving from oil and coal to cleaner energy sources, keeping shareholders happy is ultimately more important than making a successful transition. As The Financial Times reports, executives and investors in the energy sector have reached a “silent conclusion … As companies invest less in oil, shareholders should receive more money when energy prices are high.”
Likewise, Shell is using its departure from the Netherlands to put some distance between the company and the Dutch courts, which reprimanded the company twice in the past year for not legally complying with the required climate commitments, proclaimed by the relationship materials themselves. company publics. And the private sector is still believed to lead the transition to a green economy.
Where does all this leave us? In short, polluters plan to indulge their shareholders with handouts and tax evasion schemes while their customers pay the bill for the energy transition, and while governments grapple with the political fallout. Worse still, the gift lavished on shareholders is not a return on a particularly good investment, nor does it denote some progress in the energy transition. Rather, it reflects the cash value of a legal arbitration scheme that is designed to evade the laws of a democratic country – the same laws that breathe life into legal entities like Shell and the rest of the corporations to begin with.
Given its legal pedigree, it is perhaps not surprising that corporations prefer to treat the law like any other asset that can be exploited for profit. They typically look for cheaper supplies and outsource production to countries with lower labor costs and weaker worker protections. Why not look for advantages also in relation to the law?
Legal arbitration is often seen as a form of healthy competition that will lead legislators to write optimal rules. But for whom should the law be optimized? Obviously, shareholders preferred zero taxes, and polluters would prefer zero emission standards. The tens of millions of people who are concerned about the future of their children on a warming planet may have different preferences.
In 1811, New York State became one of the first states to adopt a statute of free incorporation. This allowed the establishment of a corporate entity without prior state approval, but stipulated that corporations could be created only by natural persons and only for a specific purpose. The law prevented having shares in other corporations and this implicitly prohibited groups of companies. A corporation had a limited useful life of just 20 years, at which point it had to apply for an extension of its statute or face liquidation. Finally, companies could accumulate no more than $ 100,000 ($ 2 million to today’s dollars) in capital.
One has the feeling that the New York State Legislature was afraid of what it was about to provoke: a world of legal entities that would be hard to control. But even these cautious legislators would be surprised to see how far today’s corporations have turned the law into a money-minting machine.
If further evidence of this practice is needed, it can be found in the adoption by the large law firms of cash bonds for their partners. Not long ago, this practice would have been considered unseemly – damaging to their reputations and incompatible with their role as guardians of the law. Seeing how law firms openly compete for the highest payouts while being cheered on by the business press shows just how far the commodification of the law has come. That is the greatest gift of all.
The author
Katharina Pistor, Professor of Comparative Law at Columbia Law School, is the author of The Code of Capital: How the Law Creates Wealth and Inequality (Princeton University Press, 2019).
Copyright: Project Syndicate, 2020
Reference-www.eleconomista.com.mx