Legal gift that is still a hoax

It’s the season of giving, and big companies don’t give away millions of dollars but billions of dollars at the end of the year. But the greatest gift a corporation can give shareholders is a legal gift: By obtaining a new corporate charter, corporations can give their investors everything they have on their wish lists.

NEW YORK – It’s Christmas shopping season. Regardless of whether a person is a believer or not, it is almost impossible to resist the urge to shop and give gifts at this time of year. But those who give more are inanimate creatures who have no ability to believe in anything. I am not referring to any AI innovation, but to legal persons known as ordinary companies.

Corporations currently don’t give away millions of dollars, but rather billions of dollars in end-of-year gifts. In the financial sector, bonds are up 20-35% compared to last year, which is a carousel that puts hundreds of thousands of dollars, on average, in the pockets of all beneficiaries. However, while the amount of these gifts is significant, the greatest gift a company can give is legal. By securing a new corporate charter, companies can give investors everything on their wish lists.

Royal Dutch Shell is the latest company to make headlines to award a new charter to its shareholders, moving the parent company from The Hague to London. The company will give up its real ownership in exchange for the extra money to its shareholders. Two other Dutch companies, Unilever and RELX (Elsevier), have already taken similar steps. More generally, many merger transactions are in fact poorly disguised transactions designed to reap the benefits of a different legal system.

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Where does the extra money for Shell shareholders come from? One potential 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 incentive to the company. After all, existing research on law and finance indicates that countries with better shareholder protection tend to have more developed financial markets.

But extending this argument specifically to the Shell decision raises several objections. At the individual company level, there are many variables that corporate governance must play to have a significant impact on the bottom line. Also, when applying the standard measure of corporate law quality – the Anti-Directors Rights Index (corrected) – the difference between Dutch law and English law is not significant.

The real benefit to shareholders is not governance but cash, which is determined by the current tax law. The Netherlands taxes both dividends and corporate share buybacks at 15%, while British tax law allows for exemption from buybacks, provided the company has a good tax attorney on its side.

For Shell and other big polluters just beginning the transition from oil and coal to cleaner energy sources, keeping shareholders happy is ultimately more important than making a successful transition. As the Financial Times reported, energy sector executives and investors came to a “silent conclusion…because 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 distance between the company and Dutch courts, which have twice reprimanded the company last year for not legally complying with required climate commitments, made public by the same relationship articles. . The private sector is still believed to be driving the transition to a green economy.

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Where does all this leave us? In short, polluters plan to saturate their shareholders with grants and tax avoidance schemes while their customers pay the bill for the energy transition, and as governments grapple with the political fallout. Even worse, the giveaway to shareholders is not a particularly good return on investment, nor does it indicate some progress in the energy transition. Instead, it reflects the monetary value of a legal arbitration system designed to evade the laws of a democratic country – the same laws that breathe life into legal entities such as Shell and the rest of the companies for a start.

Given its legal lineage, it is perhaps not surprising that companies prefer to treat the law like any other assets that can be exploited for profit. They usually look for cheaper supplies and outsource production to countries with lower labor costs and weaker worker protections. Why not also look for advantages related to the law?

Legal arbitration is often seen as a form of healthy competition that will lead lawmakers to write optimal rules. But to whom should the law be improved? Clearly, contributors prefer zero taxes, and polluters prefer zero-emissions standards. Tens of millions of people interested in their children’s future on a warming planet may have different preferences.

In 1811, New York State became one of the first states to adopt the Free Foundation Act. This allowed the creation of a legal entity without prior approval from the state, but it stipulated that companies could only be created by natural persons and only for a specific purpose. The law prohibits owning shares in other companies and this implicitly forbids combinations of companies. The company had a limited useful life of only 20 years, at which time it had to file for an extension of its statute or face liquidation. Finally, companies cannot accumulate more than $100,000 ($2 million to today’s dollars) of capital.

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One senses that the New York State legislature was terrified of what was about to provoke: a world of legal entities difficult to control. But even these cautious lawmakers will be surprised to see the extent to which companies today have been able to turn the law into a mint.

If more evidence of this practice is needed, it can be found in the adoption of large law firms’ cash bonds for their partners. Not so long ago, this practice was seen as indecent – it damages their reputations and conflicts with their role as guardians of the law. Seeing how law firms openly compete for the highest payouts while being encouraged by the business press shows the reach of the law’s commodification. This is the greatest gift ever.


Katharina Bestor, Professor of Comparative Law at Columbia Law School, is the author of The Law of Capital: How Law Creates Wealth and Inequality (Princeton University Press, 2019).

Copyright: Project Syndicate, 2020

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