Corporate Trends Worth Considering

Now that the first quarter of the calendar year is almost over, it is helpful to identify trends that might warrant particular attention from corporate executives and their counsel. A number of these trends will continue to be influenced by politics, in particular the unified Republican Congress and the inevitable posturing for the national elections in 2016. While the results of the 2014 midterm election called for cooperation and concrete actions by the federal government, the looming prize of the Presidency makes sustained cooperation unlikely.

Seven Key Trends

1. The trends discussed below involve many aspects of corporate activity. Picking just seven of particular note, we highlight the following:
2. Increased IRS attention to foreign corporate transactions and in particular corporate structures created to minimize the anticompetitive effects of worldwide taxation;
3. Onerous litigation costs including particularly electronic discovery for smaller companies and matters for all companies which cannot support a large legal budget;
4. The effort to curb overregulation of business in an “election year”;
5. The increased attention to foreign investment in U.S. real property;
6. The importance of providing more business work permits for skilled foreign workers and students;
7. The growing importance of cyber security in the face of organized worldwide threats; and
8. The increased attention to work life balance issues in a competitive marketplace for talent

Corporate Inversions and Taxation

Inversions and other efforts to minimize the very high rate of U.S. corporate taxation are easy political populist targets: Rich corporate interest trying to get richer, while ordinary workers have their taxes withheld each pay period.

At a recent tax conference in Miami, government representatives stressed how they intend to prioritize all tax-motivated transactions for review. One wonders at what point this focus might affect Corporate Mergers & Acquisitions (M&A), which are aiding the overall economic recovery. Recently, a spokesperson of a large medical devices company went so far as to say that the company is “studying treasury's actions” before pursuing its proposed acquisition of an Italian-based medical device maker.

Attempts to minimize overall tax by headquarter relocation is only a part of taxpayer attempts to deal with an antiquated Code. Overall restructuring of the Code would be an extended process that might be initiated by a Republican Congress, but would take a prolonged period of time to complete.

Rather, we might look for piecemeal reform in areas such as lowering the corporate tax rate in exchange for profit repatriations from abroad, which can be an interesting beginning if the Congress believed it is politically palatable without corresponding individual tax relief.

Litigation Costs

A long-standing trend toward increasing costs of litigation will undoubtedly continue. In fact, it has been reported that a noted trial lawyer's hourly rate is approaching $2,000. And attorneys' fees are just one component.

Discovery costs occupy an important space in the cost escalation pyramid particularly since a good deal of it involves electronic communications. Central servers, PCs, iPads, and smart phones all need to be conserved and reviewed for responsive materials. Experts usually are retained to deal with issues such as whether there have been attempts to delete relevant data. These computer experts can be as costly as some of the lawyers working on the case.

While larger corporations may be able to amortize costs into a large department budget, smaller companies may not have that luxury, and smaller matters in general cannot normally justify all of the costs for e-discovery compliance. It will be interesting to observe, in the context of a larger trend, what accommodations will be granted to those unable to shoulder the burden of these expenses.

An ever increasing number of lawsuits ' well over 90% ' are resolved by the parties before a jury is ever asked to reach a decision. The trend toward identification of those matters early in the process and crafting early settlements before “all the facts” are on the table will be a trend that successful corporate counsel can participate.

Overregulation

One noted commentator has written that the trend toward overregulation has hurt the U.S. economy to the tune of trillions of dollars in productivity losses. A great deal of compliance with these regulations often does a good job in catching the innocent.

At the outset of Sarbanes Oxley, the president of a major liquor company was forced to abandon his money-making plan for his shareholders, and instead faced the task of personally reviewing materials to be included in the company's SEC reports. At the end of a long day with lawyers and accountants, he was asked if he had further questions. “Just one.” he said. “Are the crooks also going through what I have had to today?”

Overregulation has also caused some very visible effects on the banking sector in recent months as the U.S. continues its recovery from recession. In the most recent quarterly earnings call, after a 6.6% drop in profitability from the prior year, CEO Jamie Dimon of JP Morgan Chase, elaborated: “Banks are under assault. In the old days, you dealt with one regulator when you had an issue. Now it's five or six. You should all ask the question about how American that is, how fair that is.”

While no doubt many regulations are necessary, others are holdovers from prior eras and adversely affect the cost of attracting foreign businesses, which are often accustomed to more latitude. While the general proposition that overregulation needs to be fixed is universally supported, it will be interesting to watch the efforts to deal with specifics to see how consensus can be achieved. One person's characterization of overregulation is often another person's livelihood.

Foreign Investment in The U.S. Real Estate Market

The tumultuous world in which we live has increased, notwithstanding the tax and regulatory issues discussed above, the amount of flight capital headed here. Real estate is an investment category familiar to many of those investors from their experiences in their home countries.

With uncertainty surrounding many foreign governments, political turmoil, and currency inflation, many foreign companies have strategically turned toward investment in United States real estate for steady returns. In 2014 alone, Chinese companies were said to have invested over $16 billion in U.S. real estate.

It is important to note that for some foreign investors, the primary goal has been to invest in perceived safe markets where their capital will be protected, as opposed to the primary goal held by their domestic counterparts, which is to maximize current returns. Foreign investment should continue as long as first class opportunities remain in the U.S. real estate market.

It should be noted that existing U.S. real estate holding companies are increasingly becoming susceptible to IRS attack under the general scrutiny of corporate inversions discussed above. When a U.S. real estate company, owned by individual foreign shareholders, decides to transfer ownership and control to a foreign parent entity, corporate counsel should consider at what point the IRS might begin an investigation, notwithstanding that such transactions have been common practice in recent years. It may also be necessary to retool past structures in U.S. real estate for this same reason. Nevertheless, opportunities remain in what should continue to be a robust domestic real estate market.

Work Permits for Skilled Foreigners

A small part of the immigration debate and the trends toward increased emphasis on border security, and what to do with those who are undocumented in the United States, are attempts to increase the number of skilled foreign workers here. (See the article on H-1B, infra.)

No doubt the increased scrutiny of foreign nationals discourages many companies from even considering these persons using the complicated visa process even though, for example, many of our citizens who otherwise would have been engineers have turned their talents toward law and investment banking.

This is especially discouraging for foreign students in need of an F-1 visa. At a major university in Florida, for example, qualified foreign students have found it increasing difficult to find companies willing to employ specialists to guide them through the complicated visa process ' and this after they have already invested thousands of dollars in tuition. In the future, we wonder if we will see a backlash and perhaps a condition of campus recruitment will be a willingness to extend offers to foreign students who need employment visas.

As with the tax reform section above, it will be noteworthy if business advocates can decouple the business visa issues from the general debate and associated politics.

The Ongoing Threat of Cyber-Security Breaches

One of the largest areas of concern this year is the growing number of cyber-security breaches of large and small companies. With foreign hacking groups and governments apparently active, the trend seems clearly in the direction of more, rather than less, security. There can be no doubt that security breaches raise many serious questions for corporate counsel in execution of their duties.

Corporate counsel and their legal department associates are entrusted with particularly sensitive information, and required to protect such information from disclosure to outside parties. Thus, in execution of their responsibilities, corporate counsel will need to institute even stricter procedures to avert any potential breaches to confidential information.

With respect to litigated matters, the due diligence function of corporate counsel has expanded to require the installation of procedures in the event of a breach during litigation with outside parties. Many corporate counsel have resorted to the use of cyber security insurance in order to protect their firms. (See the article on cyber security, infra.)

The potential threat to merger and acquisition activity will likely require corporate counsel to address assets that have had a history of breaches in the past, maintenance of cyber security programs, and tighter protections of intellectual property. Vendor and supplier contracts appear to be an area of concern and corporate counsel would be advised to establish the responsibility of parties for safeguards in the event of a breach. More important is that supply chain security provisions will need to be explored where the product integrity is of particular importance to the business. Assignment of responsibility among parties in contracts with customers and clients will also be of particular importance. Corporate counselsare afforded the opportunity to revisit prior streamlined contracts with customers and clients of the company, and be able to include allocations of responsibility for potential cyber breaches.

The Increasing Trend Toward 'Work-Life Balance'

In an effort to attract and retain younger employees and others, many larger corporations have now increased benefits to make it more palatable for them to forsake high paying “sweatshop” jobs in law, accounting, and investment banking, as well as the lure of entrepreneurship.

For example, a recently married couple, expecting their first child, were each employed by a different Fortune 100 company. They were afforded benefits that ordinarily would not have been available in the past. The wife was given four months of paid maternity leave. The husband was given two months of paid paternity leave as well. In addition, temporary part-time employment and work at home options were available for both.

While many companies are actively reducing overall Human Resource benefits in areas such as insurance coverage, competition has made it inevitable that many of them will need to increase their benefits in work balance areas especially since the President has declared the recent recession over. It will be worth watching to see how smaller companies, which have been described as the backbone of the economy, and often cannot be competitive with employees absent for longer periods of time, continue to react competitively to this trend, computer and smart phone technology nothwithstanding..

Conclusion

Given the trends mentioned above and the fast-paced world in which we live, corporations will be most interesting workplaces for the foreseeable future. Corporate generalists, senior executives and their counsel will find more on their plates then before. With all that changes, one key principle remains: Persistence and patience will undoubtedly rule the day.

Steven Naclerio and George Metcalfe, Jr. are attorneys in the Miami office of Richman Greer. They may be reached at [email protected] and [email protected].

Now that the first quarter of the calendar year is almost over, it is helpful to identify trends that might warrant particular attention from corporate executives and their counsel. A number of these trends will continue to be influenced by politics, in particular the unified Republican Congress and the inevitable posturing for the national elections in 2016. While the results of the 2014 midterm election called for cooperation and concrete actions by the federal government, the looming prize of the Presidency makes sustained cooperation unlikely.

Seven Key Trends

1. The trends discussed below involve many aspects of corporate activity. Picking just seven of particular note, we highlight the following:
2. Increased IRS attention to foreign corporate transactions and in particular corporate structures created to minimize the anticompetitive effects of worldwide taxation;
3. Onerous litigation costs including particularly electronic discovery for smaller companies and matters for all companies which cannot support a large legal budget;
4. The effort to curb overregulation of business in an “election year”;
5. The increased attention to foreign investment in U.S. real property;
6. The importance of providing more business work permits for skilled foreign workers and students;
7. The growing importance of cyber security in the face of organized worldwide threats; and
8. The increased attention to work life balance issues in a competitive marketplace for talent

Corporate Inversions and Taxation

Inversions and other efforts to minimize the very high rate of U.S. corporate taxation are easy political populist targets: Rich corporate interest trying to get richer, while ordinary workers have their taxes withheld each pay period.

At a recent tax conference in Miami, government representatives stressed how they intend to prioritize all tax-motivated transactions for review. One wonders at what point this focus might affect Corporate Mergers & Acquisitions (M&A), which are aiding the overall economic recovery. Recently, a spokesperson of a large medical devices company went so far as to say that the company is “studying treasury's actions” before pursuing its proposed acquisition of an Italian-based medical device maker.

Attempts to minimize overall tax by headquarter relocation is only a part of taxpayer attempts to deal with an antiquated Code. Overall restructuring of the Code would be an extended process that might be initiated by a Republican Congress, but would take a prolonged period of time to complete.

Rather, we might look for piecemeal reform in areas such as lowering the corporate tax rate in exchange for profit repatriations from abroad, which can be an interesting beginning if the Congress believed it is politically palatable without corresponding individual tax relief.

Litigation Costs

A long-standing trend toward increasing costs of litigation will undoubtedly continue. In fact, it has been reported that a noted trial lawyer's hourly rate is approaching $2,000. And attorneys' fees are just one component.

Discovery costs occupy an important space in the cost escalation pyramid particularly since a good deal of it involves electronic communications. Central servers, PCs, iPads, and smart phones all need to be conserved and reviewed for responsive materials. Experts usually are retained to deal with issues such as whether there have been attempts to delete relevant data. These computer experts can be as costly as some of the lawyers working on the case.

While larger corporations may be able to amortize costs into a large department budget, smaller companies may not have that luxury, and smaller matters in general cannot normally justify all of the costs for e-discovery compliance. It will be interesting to observe, in the context of a larger trend, what accommodations will be granted to those unable to shoulder the burden of these expenses.

An ever increasing number of lawsuits ' well over 90% ' are resolved by the parties before a jury is ever asked to reach a decision. The trend toward identification of those matters early in the process and crafting early settlements before “all the facts” are on the table will be a trend that successful corporate counsel can participate.

Overregulation

One noted commentator has written that the trend toward overregulation has hurt the U.S. economy to the tune of trillions of dollars in productivity losses. A great deal of compliance with these regulations often does a good job in catching the innocent.

At the outset of Sarbanes Oxley, the president of a major liquor company was forced to abandon his money-making plan for his shareholders, and instead faced the task of personally reviewing materials to be included in the company's SEC reports. At the end of a long day with lawyers and accountants, he was asked if he had further questions. “Just one.” he said. “Are the crooks also going through what I have had to today?”

Overregulation has also caused some very visible effects on the banking sector in recent months as the U.S. continues its recovery from recession. In the most recent quarterly earnings call, after a 6.6% drop in profitability from the prior year, CEO Jamie Dimon of JP Morgan Chase, elaborated: “Banks are under assault. In the old days, you dealt with one regulator when you had an issue. Now it's five or six. You should all ask the question about how American that is, how fair that is.”

While no doubt many regulations are necessary, others are holdovers from prior eras and adversely affect the cost of attracting foreign businesses, which are often accustomed to more latitude. While the general proposition that overregulation needs to be fixed is universally supported, it will be interesting to watch the efforts to deal with specifics to see how consensus can be achieved. One person's characterization of overregulation is often another person's livelihood.

Foreign Investment in The U.S. Real Estate Market

The tumultuous world in which we live has increased, notwithstanding the tax and regulatory issues discussed above, the amount of flight capital headed here. Real estate is an investment category familiar to many of those investors from their experiences in their home countries.

With uncertainty surrounding many foreign governments, political turmoil, and currency inflation, many foreign companies have strategically turned toward investment in United States real estate for steady returns. In 2014 alone, Chinese companies were said to have invested over $16 billion in U.S. real estate.

It is important to note that for some foreign investors, the primary goal has been to invest in perceived safe markets where their capital will be protected, as opposed to the primary goal held by their domestic counterparts, which is to maximize current returns. Foreign investment should continue as long as first class opportunities remain in the U.S. real estate market.

It should be noted that existing U.S. real estate holding companies are increasingly becoming susceptible to IRS attack under the general scrutiny of corporate inversions discussed above. When a U.S. real estate company, owned by individual foreign shareholders, decides to transfer ownership and control to a foreign parent entity, corporate counsel should consider at what point the IRS might begin an investigation, notwithstanding that such transactions have been common practice in recent years. It may also be necessary to retool past structures in U.S. real estate for this same reason. Nevertheless, opportunities remain in what should continue to be a robust domestic real estate market.

Work Permits for Skilled Foreigners

A small part of the immigration debate and the trends toward increased emphasis on border security, and what to do with those who are undocumented in the United States, are attempts to increase the number of skilled foreign workers here. (See the article on H-1B, infra.)

No doubt the increased scrutiny of foreign nationals discourages many companies from even considering these persons using the complicated visa process even though, for example, many of our citizens who otherwise would have been engineers have turned their talents toward law and investment banking.

This is especially discouraging for foreign students in need of an F-1 visa. At a major university in Florida, for example, qualified foreign students have found it increasing difficult to find companies willing to employ specialists to guide them through the complicated visa process ' and this after they have already invested thousands of dollars in tuition. In the future, we wonder if we will see a backlash and perhaps a condition of campus recruitment will be a willingness to extend offers to foreign students who need employment visas.

As with the tax reform section above, it will be noteworthy if business advocates can decouple the business visa issues from the general debate and associated politics.

The Ongoing Threat of Cyber-Security Breaches

One of the largest areas of concern this year is the growing number of cyber-security breaches of large and small companies. With foreign hacking groups and governments apparently active, the trend seems clearly in the direction of more, rather than less, security. There can be no doubt that security breaches raise many serious questions for corporate counsel in execution of their duties.

Corporate counsel and their legal department associates are entrusted with particularly sensitive information, and required to protect such information from disclosure to outside parties. Thus, in execution of their responsibilities, corporate counsel will need to institute even stricter procedures to avert any potential breaches to confidential information.

With respect to litigated matters, the due diligence function of corporate counsel has expanded to require the installation of procedures in the event of a breach during litigation with outside parties. Many corporate counsel have resorted to the use of cyber security insurance in order to protect their firms. (See the article on cyber security, infra.)

The potential threat to merger and acquisition activity will likely require corporate counsel to address assets that have had a history of breaches in the past, maintenance of cyber security programs, and tighter protections of intellectual property. Vendor and supplier contracts appear to be an area of concern and corporate counsel would be advised to establish the responsibility of parties for safeguards in the event of a breach. More important is that supply chain security provisions will need to be explored where the product integrity is of particular importance to the business. Assignment of responsibility among parties in contracts with customers and clients will also be of particular importance. Corporate counselsare afforded the opportunity to revisit prior streamlined contracts with customers and clients of the company, and be able to include allocations of responsibility for potential cyber breaches.

The Increasing Trend Toward 'Work-Life Balance'

In an effort to attract and retain younger employees and others, many larger corporations have now increased benefits to make it more palatable for them to forsake high paying “sweatshop” jobs in law, accounting, and investment banking, as well as the lure of entrepreneurship.

For example, a recently married couple, expecting their first child, were each employed by a different Fortune 100 company. They were afforded benefits that ordinarily would not have been available in the past. The wife was given four months of paid maternity leave. The husband was given two months of paid paternity leave as well. In addition, temporary part-time employment and work at home options were available for both.

While many companies are actively reducing overall Human Resource benefits in areas such as insurance coverage, competition has made it inevitable that many of them will need to increase their benefits in work balance areas especially since the President has declared the recent recession over. It will be worth watching to see how smaller companies, which have been described as the backbone of the economy, and often cannot be competitive with employees absent for longer periods of time, continue to react competitively to this trend, computer and smart phone technology nothwithstanding..

Conclusion

Given the trends mentioned above and the fast-paced world in which we live, corporations will be most interesting workplaces for the foreseeable future. Corporate generalists, senior executives and their counsel will find more on their plates then before. With all that changes, one key principle remains: Persistence and patience will undoubtedly rule the day.

Steven Naclerio and George Metcalfe, Jr. are attorneys in the Miami office of Richman Greer. They may be reached at [email protected] and [email protected].