Regulatory competition spawns regulatory divergence, which in turn drives up the cost of legal compliance. Divergence also accelerates regulatory arbitrage, where legal counsel and allied professionals exploit divergence (and other gaps in regulation) on behalf of their clients to engineer transactions and sometimes the very structure of business organisations, e.g, corporate inversions, to avoid unfavourable regulation. Heightened regulatory risk occasionally compels companies to “derisk” by abandoning transactions, entire lines of business or categories of clients, which in turn drives the riskiest business to the unregulated shadows, eventually triggering a new cycle of regulation. Frequently, however, counsel develop a solution to enable the client to engage in the desired transaction with minimal short-term risk.
Multinationals are only now beginning to appreciate the fact that regulatory divergence quietly--but continuously--generates countless legal blind spots, often in places where most people do not think to look. And arbitrage transactions intended to solve one problem can expose the company to new obstacles that are hiding in plain sight.
The failure to anticipate and mitigate the impact of blind spots can have game-changing consequences. The most startling example is the saga of Teva Pharmaceuticals’ unsolicited bid to acquire Mylan N.V., and Mylan’s unsolicited bid to acquire Perrigo Company. Mylan and Perrigo are US companies that engaged in corporate inversions to move their headquarters from Pennsylvania and Michigan (respectively) to tax-favourable Netherlands and Ireland (respectively). But in making these moves, the companies exposed themselves to Dutch and Irish corporate governance laws that differ significantly from US law in their treatment of pro-management initiatives (e.g., poison pills and staggered boards) designed to thwart hostile takeovers and shareholder activism. For example, Dutch law allows an independent foundation called a Stichting to exercise temporary control over the company, which in effect gives the foundation the power to approve proposed corporate transactions while taking into consideration the interests of not only the shareholders, but (in a nod to the stakeholder theory of corporate governance) the company’s customers, employees and other stakeholders.
Even relatively mundane decisions can have unintended consequences. For example, companies around the world are anticipating the impact of the OECD’s Action Plan to combat Base Erosion and Profit Shifting (BEPS). BEPS refers to tax arbitrage strategies used by multinationals to reduce taxes by “artificially” allocating profits to tax-favourable jurisdictions. The Action Plan aims to help high-tax jurisdictions recapture tax revenue lost to BEPS by reallocating profits to countries where real economic activity occurs. If multinationals act as anticipated, they will transplant more of their real economic activity (e.g., research and development) to developed low-tax jurisdictions. One hypothetical consequence of such a move is to expose the company to the laws of a country that may have a very different view about the enforceability of the non-compete agreements that the company might enter into with its scientists.
General Counsel sit at the intersection of their clients’ legal, risk and business affairs. They are uniquely positioned to spearhead the kind of proactive, hyper-integrated due diligence required to anticipate, surface and mitigate the impact of blind spots in our increasingly complex regulatory environment.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
