Category: Business Organizations

3 Ways for Law Firms to Advance Their Brands In a Post-Recession Environment

 

The post-recession state of professional services branding is like living in a bland, empty room. Wherever we look, we see reduced brand activity and sameness. Once creative and compelling, professional service brands (via websites, advertising and other channels) now seem less visible. Sadly, it appears to us that both the quality and quantity of firm branding efforts are regressing.

Are past failed efforts to blame? Is the stumbling economy a disincentive to act? Or is it the pendulum swing to business development, the tremendous pressure on CMOs to drive revenue? Has anyone else noticed the fall off in brand awareness and memorability? Do we still believe brand is critical to creating preference?

Good questions, we thought. So we polled CMOs and CEOs at law, accounting and consulting firms around the world for their opinions. Respondents included leaders of local, regional, national and international firms with an average size of 382 professionals (full survey results at http://www.greenfieldbelser.com/research-page/brand-regression#).

Questions, answers and insights

Here, we’ve summarized four of the most important findings, including the questions asked, the answers received and the top line takeaways.

1. Brand Health. We asked how important is brand to the success of your firm, how helpful is your brand in achieving that success, and is your brand understood by key audiences?

  • 95% of CMOs and 92% of CEOs/managing partners believe their brand is moderately or extremely important to success
  • But only 26% find their brand “very helpful”
  • On understanding, only 21% replied that their brands were well or perfectly understood by prospects.

The takeaway? Yikes! How can something perceived to be so important yield such poor scores in helpfulness and understanding? In live presentations of these findings, some of our CMO friends suggest that the answer lies in the degree of difficulty of executing branding efforts properly in any professional services firm.

One respondent shared this comment, “These days if you wish to undertake any sort of brand exercise, it must be titled ‘Strategic Positioning Initiative’ to avoid the factious response that sometimes arrives as talk turns to brand.”

Whatever you call it, our view is that pioneering brand efforts among professional service firms have given way to safer, less expensive efforts that suffer from unoriginality and are easy to ignore. Conventional wisdom suggests that in times of recession it’s better to tighten the belt and cut marketing and branding expenditures to focus on sales. However, when firms stop investing in the brand and marketing, they have fewer opportunities to sell. Healthy firms require strong commitment to both brand/marketing and business development—they go hand in hand.

2. Brand Distinction. Is your brand promise—the value proposition—unique? Is your brand expression (look, feel and voice) unique? Do you consider your brand to be innovative?

  • Only 20%say their brands are “very” or “extremely innovative.”
  • 66% respond that their promise of value is “marginally” or “moderately unique.”
  • 54% say their brand identity or expression is “marginally” or “moderately unique.”

The takeaway? Unicorns and innovative brands are as rare as hens’ teeth. Again, responding CMOs and CEOs believe brands are important to success but say uniqueness is hard to come by in the professional services space. Perhaps this relates to the fact that lawyers and law firms typically follow precedent (and one another). Meanwhile, marketers toil in the business of  awareness building and differentiation.

That’s the rub. The most innovative firms and best marketers have the courage to take risks, break with convention, and inspire interest in the brand among their audience.

3. Brand Quality. How do you rate the quality of your firm’s brand communication tools (things like websites, advertising, content marketing, etc.)?

On a scale of 1 (poor) to 5 (excellent) CEOs and CMOs graded their own efforts:

  • they gave websites a mean rating of 3.6 on the five point scale
  • core identity (logo and such) scored 3.5
  •  proposal and pitch materials were 3.5
  • videos, 3.1
  • thought leadership and content marketing, 2.8
  • advertising, 2.8
  • social media, 2.5

The takeaway? On average, brand communications quality is, well, average. Given the Type-A personalities in leading professional services firms—those accustomed to performing at the head of their class and fields—the low scores might be hard to figure. But the effect of the economy sheds light on the tough grading. During the great recession, we saw marketing attention focused heavily on business development. And why wouldn’t we? During that time, sales were hard to come by as firms hunkered down among bleak predictions. We saw marketing communication investment devalued and more do-it-yourself branding within firms. Yes, that led to savings, but at what cost to quality, awareness, memorability and preference for firms?

Previous research shows that professional services firm clients and prospects have preconceived and immediate feelings about the quality of a firm solely based on the quality of brand communications. This, in turn, can have a noticeable impact on opportunities and on revenue.

4. Brand channels and investments. Which communication channels are most important and where do the greatest investments go?

  • 85% believe firm websites are the most important channel; 92% say it is the greatest area of investment.
  • 67% rate proposals and pitch material as the second most important channel; but only 30% say it is an area of greatest investment.
  • 59% say substantive alerts, speaking and thought leadership are very important; 32% indicate investments here are highest.
  • 35% viewed firm and practice advertising as most important; 45% reported it as an area of greatest investment.

The takeaway? Tuning the channels for the clearest return is a challenge. Website investment matches its perceived importance (shocker) but other communications are either overfunded or underfunded relative to perceived importance. Major events are viewed as much less important but still command a disproportionate financial commitment (boondoggle, anyone?). Pitch materials are not getting the love CMOs and CEOs feel they deserve and blue sky thought leadership is short-changed, as well.

What to do about brand progression?

While our study and data does not prove that branding in the business-to-business services sector has regressed following the recession, it does confirm that there is significant room for improvement for professional services firms.

Firms can advance their branding by considering these three tips:

1. Increase investments in marketing and business development simultaneously:We should start by mentioning that, increasing investments does not always demand higher dollar figure. It could (and often should) be a reallocation of funds from unimportant or ineffective programs to the ones that have the most impact. Think of it as finding couch money; the dollars and cents may be rattling around your firm, but you  need to collect them from underneath the cushions and spend them wisely. This often requires doing less and doing it better.

2. Have the courage to do memorable, engaging and high quality brand communications. The great ad man, David Ogilvy, said, “You can’t bore people into buying your product or service.” Firms need to take greater creative risks in order to achieve differentiation. For those of you who see branding as lipstick or worse, take the words of another “counsel.” Andy Warhol commented, “I may be superficial, but I’m deeply superficial.”

3. Demand that the investments made in marketing and business development yield measurable results:   When better branding initiatives are carried out, leads increase and create an improved conversion ratio.   Our study looked at brand tracking and found that the bottom line is that few in the professional services have the patience or budgets to do tracking research well(link to the study is below).

For brand skeptics, keep this in mind—following the U.S. Stock Market crash of 1987, Nike tripled its marketing spend and emerged from the recession with profits nine times higher than before the recession started. Yes, we know Nike is not a legal, accounting or consulting firm, but they are great at executing groundbreaking marketing plans—.And you have to admit a 9x increase in profits is a compelling argument to “just do it.”

Article by:

Of:

Greenfield/Belser Ltd.

Google Sticks a Fork in Guest Blogging for SEO (Search Engine Optimization)

The Rainmaker Institute mini logo (1)

Last month, Google’s Matt Cutts, who heads up the search engine giant’s webspam team, wrote this on the Google Webmaster blog:

So stick a fork in it: guest blogging is done; it’s just gotten too spammy. In general I wouldn’t recommend accepting a guest blog post unless you are willing to vouch for someone personally or know them well. Likewise, I wouldn’t recommend relying on guest posting, guest blogging sites, or guest blogging SEO as a link building strategy.

So should you halt your guest blogging efforts?  Well, in a word, no.  Because SEO is not the only reason you guest blog – either on other blogs, or hosting guests on your own blog.  Which is why Cutts later updated his original post to say this:

Google SEO Search Engine Optimization

It seems like most people are getting the spirit of what I was trying to say, but I’ll add a bit more context. I’m not trying to throw the baby out with the bath water. There are still many good reasons to do some guest blogging (exposure, branding, increased reach, community, etc.). Those reasons existed way before Google and they’ll continue into the future.

Guest blogging used to be ONE way to develop quality links back to your own website or blog. Unfortunately, those trying to game the system with low quality content have made it – as Cutts says – a spammy practice.  Those that use guest blogging as their sole source of link building will now be out of luck and may even be penalized.

But I would still recommend guest blogging as a way for attorneys to spread their authority to other audiences that may not have otherwise been engaged by your own blog or website.  It can also still be a great way for you to improve the visibility of your firm and, when shared on social media, can help your SEO efforts from that standpoint.

As this blog post and other recent developments at Google demonstrate, you can’t go wrong when it comes to SEO if you pay attention to these 3 things:

1.  Designing a website that provides users with a superb experience – from the way they navigate the site to the information they find there.

2.  Developing high quality, relevant content for your area of practice that people want to read to help them solve the problems they would hire you for, populated with relevant keywords.

3.  Being an active participant on social media networks that your prospects and clients frequent, sharing all that great content you’ve developed for your website and your blog and engaging online with your target market.

Article by:

Stephen Fairley

Of:

The Rainmaker Institute

Senior U.S. Officials Discuss Foreign Corrupt Practices Act (FCPA) Enforcement Trends and Activity

Morgan Lewis

On November 18–21, U.S. regulators attended the 30th International Conference on the Foreign Corrupt Practices Act (FCPA), where they discussed the near-record amount of FCPA penalties in 2013 and disclosed that there are more than 150 ongoing FCPA investigations. Regulators from the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) also explained new developments in cross-border cooperation as well as their efforts to prosecute individual FCPA defendants.

Combined FCPA Penalties

According to Charles E. Duross, Head of the DOJ’s FCPA Unit and Deputy Chief of the Fraud Section, the FCPA Unit is “busier today than [it] ever has been” investigating and prosecuting FCPA misconduct. Although the DOJ may not have initiated as many enforcement actions to date in 2013 as in years past, Duross characterized 2013 as “the fifth biggest year in [the FCPA’s] history in terms of overall penalties” and predicted “that the ranking will move up before the end of the year.” As explained by Duross, “We have a pretty substantial pipeline of matters, and I actually have every reason to expect that, in the coming weeks and months, you will see even more activity, [including] more standard cases as well as . . . ‘grand corruption’ cases.”

Ongoing Investigations

Duross estimated that the DOJ is currently investigating “more than 150 cases” of potential FCPA violations and expects the DOJ to bring “very significant cases, top 10 quality type cases” in 2014. Duross stated that, while the number of investigations fluctuated due to the issuance of declinations, the DOJ has received a “constant inflow” of violations information, ranging from voluntary disclosures to whistleblower complaints. On November 15, the SEC’s Office of the Whistleblower reported that it logged 3,238 whistleblower tips and complaints in 2013, resulting in a combined total of 6,573 tips and complaints since the initiation of the whistleblower program in August 2011.[1] Approximately 150 of those 3,238 tips and complaints have involved FCPA issues, including “some very, very good whistleblower complaints,” according to according to Kara N. Brockmeyer, Chief of the SEC’s FCPA Unit. While the SEC has yet to announce any whistleblower awards for FCPA cases, the agency announced its largest award to date—more than $14 million—to an anonymous whistleblower last month.[2]

Enhanced International Cooperation and Cross-Border Enforcement

Nearly all of the U.S. regulators speaking at the conference trumpeted the increase in global cooperation and cross-border enforcement. In his November 19 speech, Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement, stated that the SEC and DOJ have “capable and committed law enforcement partners worldwide, and their numbers are steadily growing.”[3] The rise in cross-border cooperation and enforcement appears to be attributable, in part, to the enactment of new anticorruption legislation in countries ranging from Brazil to Latvia. As explained by Ceresney:

Over the past five years, we have experienced a transformation in our ability to get meaningful and timely assistance from our international partners. And through our collaborative efforts, the world is becoming a smaller place for corrupt actors. In particular, many of our foreign counterparts have taken important steps this year to strengthen their own anticorruption laws and step up their enforcement efforts. For example, Brazil passed the Clean Company Law, an anticorruption law that, for the first time, imposes criminal liability on companies that pay bribes to foreign government officials. More expansive in its reach than the FCPA, this new law forbids all companies that operate in Brazil from paying bribes to any government official, whether domestic or foreign. In the U.K., the Serious Fraud Office announced its first prosecution case under the Bribery Act. In Canada, the government enacted amendments strengthening the Corruption of Foreign Public Officials Act and prevailed in its first litigated case against an individual for violating this law. And recently, Latvia became the newest country to join the [Organisation for Economic Co-operation and Development] Working Group on Bribery.

As other countries begin to step up their efforts to combat corruption, it makes our job easier. Countries with strong anti-corruption laws are often great partners to us in combating corruption. Scrutiny from the local government, in addition to us, will often be a strong deterrent to bribery. More and more, our investigations are conducted in parallel with a foreign government.

In remarks made on November 19 at the FCPA conference, Brockmeyer advised attendees that the SEC would start working with more of its foreign counterparts—including those that it has not “necessarily worked with before”—in the future. Ceresney made a similar observation, noting “I am encouraged by the close collaboration [with foreign agencies] and fully expect the pace and extent of our cooperation with foreign agencies to grow in the coming years. Indeed, only recently I have been involved in a case in which we are receiving cooperation from a country that has never before provided any meaningful assistance.”

Continued Focus on Individual Prosecutions

Individuals from both the DOJ and SEC also emphasized their enduring interest in bringing individual FCPA violators to justice. As explained by Ceresney, “A core principle of any strong enforcement program is to pursue culpable individuals wherever possible. . . . Cases against individuals have great deterrent value as they drive home to individuals the real consequences to them personally that their acts can have. In every case against a company, we ask ourselves whether an action against an individual is appropriate.”

Ceresney acknowledged that FCPA enforcement actions against individuals pose unique challenges. For instance, regulators may be unable to reach individuals in foreign jurisdictions, and remedies are often limited or unenforceable. Regulators must also confront difficulties in obtaining foreign documents, collecting evidence, and gaining access to overseas witnesses. According to Ceresney, the SEC is overcoming these challenges by “expanding the availability and use of Memoranda of Understanding with international financial regulators to obtain bank records, other documents, and testimony; using border watches and other methods of obtaining information from foreign nationals; subpoenaing U.S.-based affiliates of foreign companies; and more aggressively seeking videotaped depositions that [the SEC] can use at trial if [it] cannot secure live testimony.”

The SEC currently has pending FCPA actions against executives of three companies, Magyar Telekom, Siemens, and Noble. In April 2013, the SEC obtained its sec
ond-highest penalty ever assessed against an individual in an FCPA case when one of the Siemens executives agreed to pay a $275,000 fine.[4] According to Ceresney, “these cases have sent an unambiguous message that [the SEC] will vigorously pursue cases to hold individuals accountable for FCPA violations—including executives at the highest rungs of the corporate ladder.”

The DOJ similarly has pending FCPA actions against individuals and, according to Duross, is firmly committed to holding individuals accountable for FCPA misconduct. In support of this commitment, Duross cited recent actions against executives from BizJet, Maxwell Technology, and Direct Access Partners. It is worth noting, however, that the DOJ also brought actions against individuals associated with BSG Resources Ltd. and Willbros in 2013. Duross warned that resolutions for corporations—which occasionally precede actions initiated against individuals—do not immunize individual bad actors from subsequent criminal prosecution.

Increased Personnel Resources

According to Duross, the DOJ’s FCPA Unit “has more resources today than at any time before” and is working with “every major U.S. Attorneys’ Office in the United States” on FCPA matters. Duross explained that U.S. Attorneys’ Offices “serve as a force multiplier” for the FCPA Unit and provide a “deep bench of talent” and knowledge about the local jurisdictions. The addition of human resources—including trial attorneys, paralegal assistance, and translators—has improved the DOJ’s ability to investigate and prosecute FCPA misconduct.

[1]. U.S. Sec. & Exch. Comm’n, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program at 1, 20 (Nov. 15, 2013), availablehere.

[2]. Press Release, U.S. Sec. & Exch. Comm’n, SEC Awards More Than $14 Million to Whistleblower (Oct. 1, 2013), available here.

[3]. Andrew Ceresney, Co-Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Keynote Address at the International Conference on the Foreign Corrupt Practices Act (Nov. 19, 2013), available here.

[4]. U.S. Sec. & Exch. Comm’n, Litigation Release No. 22676, Former Siemens Executive Uriel Sharef Settles Bribery Charges (Apr. 16, 2013),available here.

 

Article by:

Of:

Morgan, Lewis & Bockius LLP

How Lawyers Can Leverage LinkedIn to Build Their Practice, Part 2 of 2

The Rainmaker Institute mini logo (1)

 

Continuing from our previous post, here are 5 more tips for leveraging LinkedIn to build your client and referral base:

5. Include All Your Web Links. You can add up to three links to your firm’s websites. There are default settings, but these are also customizable. So instead of www.TheRainmakerInstitute.com, I customized it to say “law firm marketing experts”, but it still links to my website. This is another place where you should use your keywords like: “Scottsdale bankruptcy attorney” or “Chicago divorce lawyer” and link it to your website, blog or even your Facebook fan page.

6. Make Your Profile Public. Remember, it’s called “social media” for a reason—you need to be social. Be sure to make your LinkedIn profile “public”, which means all the information you put in it is available to search engines to make it easier for people to find and connect with you.

7. Don’t Use The Same Copy For Your Summary As Your Bio. The summary is not a place to talk about all the things you have done in your life. This is the place to position yourself as the go-to attorney in your particular practice area and geographical region.

8. Use LinkedIn Groups. LinkedIn Groups can be a very effective way to increase your visibility among niche audiences, like your target market. It takes a little while to get used to how this works. I recommend you start by ‘listening’ before diving in. There are some places you should start with, such as alumni groups and groups in the industry segments you follow. We run several LinkedIn groups you can join for free including: Phoenix Arizona Attorneys, Personal Injury Attorney Network and the Rainmaker Law Firm Marketing Group. Simply log into your LinkedIn account and search under groups. Once you understand how groups work, start your own focusing on your target market or potential referral sources (like CPAs, financial advisors or business brokers).

9. Add LinkedIn To Your Email Signature. Most attorneys put their contact information in their email signature; add a link to your LinkedIn account. Here’s mine: http://Rainmaker.MyLinkInvitation.com. I would welcome the opportunity to connect with you on LinkedIn.

LinkedIn Logo

As soon as you start networking with LinkedIn, you increase your chances of reaching new clients and referral partners. However, be prepared, and be willing to work at it. This is not something you can “set and forget”.

If you’re not into social media or can’t make the commitment to put in the time and effort to network in several sites at the same time, this is the ONE social media site you should focus on. You may not see it at first, but with the combined use of the strategies and tips I have shared here, you will start to see your online network mature over time, leading to more prospects and referral partner relationships.

To read Part One – Click Here

Article by:

Stephen Fairley

Of:

The Rainmaker Institute

Letters of Credit Overview and Fundamentals

vonBriesen

 

Letters of Credit (“L/Cs”) have evolved over nearly three centuries of commerce into an essential tool for banks and their customers in international business transactions, financings and government contracting. This Update provides an overview of some of the key legal and practical concepts that are necessary to use this tool effectively.

The FDIC’s examiner’s handbook defines a letter of credit as “a document issued by a bank on behalf of its customer authorizing a third party to draw drafts on the bank up to a stipulated amount and with specified terms and conditions,” and states that an L/C is a bank’s “conditional commitment…to provide payment on drafts drawn in accordance with the document terms.”

Governing Law

The sources of “law” governing L/Cs are:

  • Statute: UCC Article 5 applies to “letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.” UCC Section 5-108(e) provides that an issuing bank “shall observe standard practice of financial institutions that regularly issue letters of credit.”
  • Practice codes: Derived from two sources: the UCP600 (Uniform Customs and Practice for Documentary Credits 2007 Revision, International Chamber of Commerce Publication No. 600) and the ISP98 (Institute for International Banking Law and Practice Publication 590; International Standby Practices (1998)).
  • Contract law: With some limited exceptions, any provision of Article 5 may be modified by contract. Thus, if the UCP600 or ISP98 is incorporated into an L/C, it supersedes any contrary provision of Article 5. The exceptions include the “Independence Principle” (discussed below) and certain other rights and obligations of the issuing bank.

Terminology

Certain terms are important to an understanding of the parties’ respective rights and obligations, with some of the most basic being:

  • Issuer – the bank that issues the L/C and is required to Honor a Draw by the Beneficiary;
  • Applicant – the customer for whose account the L/C is issued;
  • Beneficiary – the person in whose favor the L/C is issued and who is entitled to Present/Draw and receive payment from the Issuer;
  • Honor – performance of the Issuer’s undertaking (in the L/C) to make payment; and
  • Presentation (also called a Draw) – delivery of document(s) to an Issuer for (or to induce) Honor of the L/C.

The Independence Principle

Central to an understanding of L/C law and practice is that an L/C is a self-contained whole. This is known as the “Independence Principle” based upon language in UCC §5-103, which states that the rights and obligations of an Issuer to a Beneficiary under an L/C are “independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.”

The Independence Principle protects all parties. The Issuer is protected because, as long as the Presentation requirements in the L/C are strictly complied with, the Issuer must Honor it without looking into the relationship between the Applicant-customer and the Beneficiary making the Draw. The Applicant and Beneficiary are also both protected because the Issuer’s obligations under the L/C are not affected by the relationship between the Applicant-customer and the Issuer itself. Thus, the Applicant may be in default of its obligations to the Issuer, but the Issuer must nevertheless Honor a proper Presentation.

Types of L/Cs

L/Cs fall into two general categories: “commercial/documentary L/Cs” (which are the primary focus of the UCP600) and “everything else,” consisting mainly of what are known as “Standby L/Cs” which, themselves, come in several varieties and are covered by the ISP98.

“Commercial/Documentary L/Cs” are typically issued to facilitate specific transactions and to assure payment in trade or commerce (usually international). Generally, Presentation is made when the underlying transaction is consummated. These are referred to as “documentary L/Cs” because a Draw requires documentary proof that the underlying transaction has occurred.

For example, an exporter and importer might agree that goods will be paid for at the time of shipment. The exporter won’t ship without assurance of getting paid, and the importer won’t pay without assurance that the goods have been shipped. Thus, the importer (Applicant) arranges with its Bank (Issuer) for an L/C that gives the exporter (Beneficiary) the right to Draw when the exporter provides the Issuer with an original Bill of Lading proving shipment. Anecdotally, this is partly why documentary L/Cs were conceived – to avoid having the Issuer bank independently verify shipment, which might have involved the banker making a trip to the dock and watching the goods being loaded and the ship sailing off beyond the horizon.

“Consummation” of the underlying transaction – i.e., the goods being placed on the ship – is defined by the terms of the L/C, as are the documentation requirements, which are either spelled out in the L/C or incorporated from the UCP600.

“Standby L/Cs“. The ISP98 defines eight types of Standby L/Cs, of which the most common are “Financial Standbys.”

A Financial Standby is an irrevocable guarantee by an Issuer of Applicant’s payment or performance in an underlying transaction. The Beneficiary may Draw, and the Issuer must Honor, if its customer (Applicant) does not pay, deliver or perform. Some event, usually a default by Applicant under its contract with Beneficiary, “triggers” the Beneficiary’s right to Draw. Although independent proof of the Beneficiary’s right to Draw is not required, a Financial Standby is still “documentary” in the sense that the Beneficiary must make the Draw in writing and (typically) represent to the Issuer that Applicant has defaulted. Due to the Independence Principle, the Issuer (without verifying the default) must Honor if the Draw complies with the Presentation requirements spelled out or incorporated into the L/C.

Financial Standbys present an Issuer with both a credit benefit and a credit risk. Because Applicant’s default under its contract with the Beneficiary is a condition to the Issuer having to Honor the Beneficiary’s Draw, the Issuer may never have to “fund” (Honor) as long as Applicant doesn’t default; BUT, if the Issuer does have to fund, it will be on account of a customer who has already defaulted on a (probably material) business obligation.

A “Direct Pay L/C” is a type of Financial Standby. While it is also an Issuer’s guarantee of Applicant’s payment of a debt or other obligation, the difference is that Applicant’s default is not a condition to Draw – all payments are made by Draws on the L/C. Direct Pay L/Cs are useful in cases where the “Beneficiary” is a group of unaffiliated debt holders (i.e., holders of publicly-traded bonds) because this payment method provides liquidity and avoids bankruptcy preference claims against debt service payments. Because of the Independence Principle, the Issuer is the primary obligor for payment of debt service; thus, Applicant’s default is of no concern to bondholders and bonds backed by an irrevocable Direct Pay L/C are marketed on the strength of the Issuer’s credit, not the Applicant’s.

Of special note are Standby L/Cs required by governmental entities. Various Wisconsin Statutes and Administrative Rules require or permit a person transacting business with a state agency (obtaining a license or permit, for example) to provide a Standby L/C primarily to demonstrate proof of financial responsibility in cases where the license or permit, for example, creates a potential monetary obligation to the State. Many Wisconsin state agencies’ regulations make reference to such L/Cs, but only the Department of Natural Resources and the Department of Transportation have prescribed forms.

Issuer’s Risks

An Issuer’s most obvious risk is its customer’s default: failure to reimburse the Issuer after a Draw has been Honored. The reimbursement obligation can be a requirement to deposit funds with the Issuer immediately upon a Draw, but can also be part of an ongoing credit relationship where Draws are simply treated as “advances” on a term or revolving credit agreement.

Issuer banks also face other risks, such as fraud (a legitimate Beneficiary makes a fraudulent Draw), forgery (impostor Beneficiary makes a Draw) and sovereign, regulatory and legal risks. Regulatory issues created by L/Cs involving lending limits, contingent liabilities, off-balance sheet treatment and regulatory capital requirements also come into play but are beyond the scope of this overview.

Common Problems

Among the more common L/C problems we have seen with our Issuer bank clients are:

  • Standby L/Cs that incorrectly incorporate provisions of the UCP600 or, less frequently, Commercial/Documentary L/Cs that incorrectly incorporate from the ISP98;
  • not being aware of automatic renewal and reinstatement provisions, and potential post-expiry obligations;
  • failing to insist on strict adherence to the Presentation requirements, especially if they are incorporated from the UCP600 or the ISP98;
  • failing to Honor a proper Draw as an “accommodation” to its customer/Applicant who has informed the bank of a dispute with the Beneficiary; and
  • poorly-drafted L/Cs that make inappropriate reference to non-documentary issues.

Banks issuing L/Cs to assist customers in export-import transactions, or providing proof of financial responsibility or liquidity/credit support, should be aware that their obligations and rights are often not obvious from simply reading the L/C without being familiar with the underlying laws and practice codes that are summarized in this Update. As noted above, a carefully-considered and well-drafted L/C protects all parties, including the Issuer.

Article by:

von Briesen & Roper, S.C.

Business and Economic Incentives Primer

Womble Carlyle

Competition among jurisdictions to recruit and retain companies is intense. To attract business to their communities, both state and local governmental authorities will often offer discretionary economic incentives for projects that generate substantial tax revenues or create significant employment opportunities. Companies requiring new or larger facilities or facing lease expirations for their existing operations should assess whether they might qualify for an “incentives package” from the various jurisdictions they are considering for their projects. The potential benefits will typically vary depending upon the project’s key capital expenditures, job creation potential and the company’s corresponding wage parameters and associated commitments. Companies with potentially qualifying projects should evaluate how to best leverage their unique strengths to negotiate all available incentive benefits and to maximize those benefits once they are secured.

Business and economic incentives are the tax, cash and in-kind benefits offered by state and local governments to induce a company to relocate to a new community or remain in its existing jurisdiction primarily to create or retain jobs and increase tax revenue. Incentives help businesses mitigate upfront capital and ongoing operating costs for its required projects. Tax incentives include a variety of income and sales/use tax credits, exemptions, reductions and abatements. These can also include other tax-related investment incentives, such as investment and tax credits, research and development tax incentives, and accelerated depreciation of industrial equipment. The Enterprise Zone (EZ), a special kind of tax incentive program (also known as Empowerment Zones and Empowerment Communities), has been used by the federal government and even more widely by many states.

Cash incentives include monetary grants, reimbursements of transportation or infrastructure costs and other financial incentives including alternative financing subsidies. One of the most common benefits in this category is the Industrial Development Bond (IDB) that is used by jurisdictions to offer low-interest loans to firms. A variation on the IDB is the Tax Increment Financing (TIF) districts that are used by many states. A TIF allows governments to float bonds to help companies based on their anticipated future tax impact. In-kind incentives include expedited permitting by the state, county and local municipality and customized worker training programs. Some jurisdictions also offer other in-kind benefits such as watered-down environmental regulations and “right to work” laws that inhibit union organizing. Some states also have federal grant monies they are empowered to allocate towards different programs and projects depending on a project’s possible “public” infrastructure needs and other specific criteria.

In offering incentives, cities and counties are typically driven more by investments that increase the tax base while states focus more on jobs that pay above average wages. Some jurisdictions will provide incentives only for manufacturing projects or for specific statutory lists of facilities such as manufacturing, distribution facilities, air cargo hubs, multimodal facilities, headquarters facilities and data centers. Other states will not provide incentives for retail or hospitality facilities. In general, cities and counties have more flexibility than states in the kinds of projects for which they will provide incentives. Some states have wage tests and require that health care insurance and benefits be provided at the employer’s cost or that at least a portion of the cost be subsidized.

Whether for a corporate expansion or relocation, it is critical for a company to initiate its incentive identification and negotiation efforts early in the site-selection process for its project. Specifically, to achieve the greatest negotiating leverage, a company should begin the pursuit of economic incentives at the same time it is are undertaking its site selection efforts, since it is at this point in the process that competition readily exists between the cities, counties and/or states interested in enticing the company to relocate or remain in their jurisdictions. Since the success of this process is, in part, dependent upon “competing” the relevant state and local jurisdictions, it is important for a company to make it clear to all who are acting for the company that no decision or no public announcement may be made about the company’s plans until the company has evaluated all relevant factors.

To begin the process, a company should form a project team that will work with various economic development representatives from the relevant jurisdictions to achieve the optimal incentives package. The project team should develop a formal incentives negotiation strategy that would include some if not all of the following components:

  • Identifying and analyzing all incentive opportunities available for the project.
  • Determining the company’s short and long term capital and operating costs as well as job creation estimates.
  • Preparing a preliminary “incentives” pro forma.
  • Outlining the plan for securing the incentives and evaluating the related commitments that will be necessary from the company.
  • Identifying and integrating important components of the company’s corporate culture into the negotiation requests and strategy.
  • Determining the essential needs of the project to be included as the non-negotiable points of the company’s business case.
  • Defining the “business case” for why a jurisdiction would benefit from the company’s relocation to that state/county, such as tax (income and sales) revenues to be generated and the jobs to be created by the company.
  • Identifying how to formulate the most productive partnership between the company and the community.
  • Determining how to work creatively within the state and local framework.
  • Considering the use of a third party economic impact study to create an effective business case showing the jurisdiction how to fund the incentives.

A company that is well positioned to benefit from business and economic incentives should engage a seasoned professional who has a successful track record in achieving incentive benefits from the jurisdictions relevant to its business. Working in coordination with the governmental authorities, the right advisor can assist the company in establishing timelines for critical dates, administering applications to secure the incentives, and obtaining formal jurisdictional approvals to ensure compliance is implemented and negotiated incentives are realized. The advisor will also participate, as requested, in presentations for internal and governmental board approval and provide ongoing information and updates to the company during key phases of the incentive pursuit process.

After the final incentives package has been negotiated, the company and the jurisdiction will prepare and negotiate the required incentives agreements and then pursue the formal final governmental approvals. Public relations personnel for the company and the governmental authority are typically involved at this stage to prepare supporting media releases and project announcements. Once all necessary approvals are obtained, the company must establish internal documentation and processes to satisfy the compliance requirements to realize the negotiated incentives, which typically takes the form of a compliance manual.

Business and economic incentives can be valuable tools for a company to reduce costs, increase savings and manage risks as they pursue a signature lease transaction, building acquisition or facility development. To achieve the optimal result, the incentives process must be carefully managed from inception to completion, toward the ultimate goal of creating a meaningful partnership between the company and the community in which the company will conduct its business.

This article originally was published in the August 2013 edition of “Focus on WMACCA,” the newsletter of the Washington Metropolitan Area Corporate Counsel Association. 

This article was written with Scott R. Hoffman with Cushman & Wakefield.

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Is a Limited Liability Company (LLC) good for Canadians buying in the U.S.?

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If you are Canadian, the answer to that question is: it depends.

People purchasing real estate in the U.S. are faced with different challenges depending on whether they plan on using the property personally or renting it. In this article, we will address the latter issue and its different implications.

A Tax Efficient Structure

There are two main issues to be considered when renting property in the U.S.; income tax and liability. Because rental properties generate income, it is necessary to determine the most tax efficient structure in which to hold the property. On the other hand, because a third party (most likely a tenant) will be using the property, it is essential to create a structure that also offers creditor protection to protect against potential civil liability claims from such third party. A limited liability company (LLC) provides both those elements.

In the U.S., an LLC allows a purchaser to benefit from the low individual tax rates and therefore avoid the higher corporate tax rates inherent to owning property in a corporation. A corporation is an independent taxpayer and is taxed at a higher rate. However, an LLC is not an independent taxpayer but rather a “flow through” entity, which means that its revenue is taxed in the hands of its owner. Therefore, if the owner is an individual, the LLC’s revenue is taxed at the low individual rate.

Creditor Protection

Although one of the main goals of tax planning is to minimize tax, the main advantage of the LLC is creditor protection. When owning property in your personal name, you are exposed to liability claims from creditors such as a tenant who may have suffered injuries on your property while renting it. Should a judgement be rendered against you finding you liable for the injuries, the creditor could seek execution of this judgment not only against your U.S. property but also against the rest of your assets. However, when owning property in an LLC, only the assets in your LLC (i.e. your U.S. property) are within reach of the creditor.

The Issue for Canadian Buyers

After reading this, you may be thinking an LLC is the best solution for your U.S. real estate purchase. Unfortunately this structure can be disastrous for Canadian residents due to double taxation. Under the Canada-U.S. Tax Treaty, a Canadian resident is granted foreign tax credits for any tax paid to the Internal Revenue Service (“IRS”). Those credits can be used to offset the tax owed to the Canada Revenue Agency (“CRA”) on the same revenue or capital gain. Although the IRS considers the LLC as a flow through entity and taxes only the owner personally, the CRA does not recognize the flow through nature of the LLC but rather considers it a separate taxpayer, therefore creating a mismatch on said foreign tax credits. In this type of situation, the CRA will tax the owner of the property on the full amount of the revenue or capital gain and will not allow the use of any foreign tax credits for what was paid to the IRS. This is the known and dreaded double taxation. The owner of the property will pay taxes twice on the same revenue or capital gain, once in the U.S. and once in Canada. Depending on the values and amounts involved, Canadian residents can be required to pay in excess of 70% of taxes on their property income or capital gain due to double taxation. In extreme circumstances, this rate can even climb up to 80%.

That being said, even though LLCs should be avoided in the above-described situation, LLCs can be a valuable tool in a carefully planned structure. As general partner of a Limited Partnership for example. When used in such a structure, an LLC can help provide an extra layer of creditor protection to a Canadian resident while creating very limited tax consequences.

As you probably realised by now, the way you own property in the U.S. is crucial and putting your asset(s) in the wrong structure can lead to very unpleasant surprises. Always talk to a cross-border legal advisor before making any decisions in order to make sure you are aware of all the tax implications.

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For Small Business Owners, Suing in Small Claims Court Can Become a Big Headache

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I recognize that when a business owner believes a monetary debt of $5,000 or less is owed to the business, there may be a temptation to control litigation costs by filing a lawsuit in the Small Claims Division of a Virginia General District Court.  Admittedly, there are some benefits, including:

  • Expeditious justice between the litigants, so the cases are not protracted
  • Formal rules of evidence do not apply, and neither side can be represented by an attorney
  • A corporation or partnership has discretion to send the owner, general partner, officer or employee to handle the case
  • Limited discovery afforded to either side, and judges tend to allow all relevant evidence to be considered with a goal towards determining the merits of the dispute

What’s the downside?  I will name a few:

  • You are not guaranteed to stay in Small Claims Court even if you start off there. If the other side hires counsel, the case can no longer be adjudicated in the Small Claims Court and it will be removed to General District Court where there is greater formality and the rules of evidence apply.  Even if the other side does not hire counsel, a defendant still has the right to remove a case to General District Court prior to the court rendering a decision.
  • You could be countersued. There are often two sides to every story.  Be aware that if the defendant files a counterclaim against the business, you as the plaintiff no longer have the ability to unilaterally discontinue the litigation.
  • You could potentially enter a protracted and expensive appeal process. Even if you are awarded a judgment, the defendant has an automatic right to appeal the case to Circuit Court when the judgment exceeds $50.  If this happens, the litigation can go on for a year in a more formal forum with considerably broader discovery allowed.

Suing in Small Claims Court may be a valid choice in some cases. However, it is always wise that a business owner consult a litigation attorney before deciding to file a lawsuit in Small Claims Court.

Financial Innovation for Clean Energy Deployment: Congress Considers Expanding Master Limited Partnerships for Clean Energy

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Technological innovation is driving renewable energy towards a future where it is cost competitive without subsidies and provides a growing share of America’s energy. But for all the technical progress made by the clean energy industry, financial innovation is not keeping pace: access to low-cost capital continues to be fleeting, and the industry has yet to tap institutional and retail investors through the capital markets. This is why a bipartisan group in Congress has proposed extending master limited partnerships (MLPs), a financial mechanism that has long driven investment in traditional energy projects, to the clean energy industry.

Last month Senators Chris Coons (D-DE) and Jerry Moran (R-KS) introduced the Master Limited Parity Act (S. 795); Representatives Ted Poe (R-TX), Mike Thompson (D-CA), and Peter Welch (D-VT) introduced companion legislation (H.R. 1696) in the House of Representatives. The bills would allow MLP treatment for renewable energy projects currently eligible for the Sec. 45 production tax credit (PTC) or 48 investment tax credit (ITC) (solar, wind, geothermal, biomass, hydropower, combined heat and power, fuel cells) as well as biofuels, renewable chemicals, energy efficient buildings, electricity storage, carbon capture and storage, and waste-heat-to-power projects. The bill would not change the eligibility of projects that currently qualify as MLPs such as upstream oil and gas activities related to exploration and processing or midstream oil and gas infrastructure investments.

MLPs have been successfully utilized for traditional fossil-fuel projects because they offer an efficient means to raise inexpensive capital. The current total market capitalization of all energy-related MLPs exceeds $400 billion, on par with the market value of the world’s largest publicly traded companies. Ownership interests for MLPs are traded like corporate stock on a market. In exchange for restrictions on the kinds of income it can generate and a requirement to distribute almost all earnings to shareholders (called unitholders), MLPs are taxed like a partnership, meaning that income from MLPs is taxed only at the unitholder level. The absence of corporate-level taxation means that the MLP has more money to distribute to unitholders, thus making the shares more valuable. The asset classes in which MLPs currently invest lend themselves to stable, dividend-oriented performance for a tax-deferred investment; renewable energy projects with long-term off-take agreements could also offer similar stability to investors. And since MLPs are publicly traded, the universe of potential investors in renewable projects would be opened to retail investors.

The paperwork for MLP investors can be complicated, however. Also, investors are subject to rules which limit their ability to offset active income or other passive investments with the tax benefits of an MLP investment. Despite the inherent restrictions on some aspects of MLPs, the opportunities afforded by the business structure are generating increasing interest and support for the MLP Parity Act.

Proponents of the MLP Parity Act envision the bill as a way to help renewable energy companies access lower cost capital and overcome some of the limitations of the current regime of tax credits. Federal tax incentives for renewable energy consist primarily of two limited tools: tax credits and accelerated depreciation rates. Unless they have sizeable revenue streams, the tax credits are difficult for renewable project developers to directly use. The reality is only large, profitable companies can utilize these credits as a means to offset their income. For a developer who must secure financing though a complicated, expensive financing structure, including tax equity investors can be an expensive means to an end with a cost of capital sometimes approaching 30%. Tax credits are a known commodity, and developers are now familiar with structuring tax equity deals, but the structure is far from ideal. And as renewable energy advocates know all too well, the current suite of tax credits need to be extended every year. MLP treatment, on the other hand, does not expire.

Some supporters have noted that clean energy MLPs would “democratize” the industry because private retail investors today have no means to invest in to any meaningful degree in clean energy projects. Having the American populace take a personal, financial interest in the success of the clean energy industry is not trivial. The initial success of ‘crowd-funded” solar projects also provides some indication that there is an appetite for investment in clean energy projects which provide both economic and environmental benefits.

Sen. Coons has assembled a broad bipartisan coalition, including Senate Finance Energy Subcommittee Chair Debbie Stabenow (D-MI) and Senate Energy and Natural Resources Ranking Member Lisa Murkowski (R-AK). Republican and Democratic cosponsors agree that this legislation would help accomplish the now-familiar “all-of-the-above” approach to energy policy.

However, some renewable energy companies that depend on tax credits and accelerated depreciation are concerned that Republican supporters of the legislation will support the bill as an immediate replacement for the existing (but expiring) suite of renewable energy tax credits. Sen. Coons does not envision MLP parity as a replacement for the current production tax credits and investment tax credits but rather as additional policy tool that can address, to some degree, the persistent shortcomings of current financing arrangements. In this way, MLPs could provide a landing pad for mature renewable projects as the existing regime of credits is phased out over time, perhaps as part of tax reform.

So would the clean energy industry utilize MLP structures if Congress enacts the MLP Parity Act? The immediate impact may be hard to predict, and some in renewable energy finance fear MLP status will be less valuable than the current tax provisions. This is in part because the average retail investor would not be able to use the full share of accompanying PTCs, ITCs, or depreciation unless Congress were also to change what are known as the “at-risk” and “passive activity loss and tax credit” rules. These rules were imposed to crack down on perceived abuse of partnership tax shelters and have tax implications beyond the energy industry. Modifying these rules is highly unlikely and would jeopardize the bipartisan support the bill has attracted so far. But other renewable energy companies believe they can make the structure work for them now, and industries without tax credits — like renewable chemicals, for instance — would not have the same concerns with “at-risk” and “passive activity loss” rules. Furthermore, over the long term, industry seems increasingly confident the structure would be worthwhile. Existing renewable projects that have fully realized their tax benefits and have cleared the recapture period could be rolled up into existing MLPs. Existing MLP infrastructure projects could deploy renewable energy assets to help support the actual infrastructure. Supporters of the legislation see the change as a starting point, and the ingenuity of the market will find ways to work within the rules to deliver the maximum benefit.

The future of the MLP Parity Act will be linked to the larger conversation in Congress regarding tax reform measures. The MLP Parity Act is not expected to pass as a stand-alone bill; if it were to be enacted, it would most likely be included as part of this larger tax-reform package. Congress currently is looking at ways to lower overall tax rates and modify or streamline technology-specific energy provisions. This has many renewable energy advocates on edge: while reform provides an opportunity to enact long-term policies (instead of one-year extensions) that could provide some level of stability, it also represents a chance for opponents of renewable energy to exact tough concessions or eliminate existing incentives. As these discussions continue in earnest this year, the reintroduction of the MLP Parity Act has already begun to generate discussions and mentions in policy white papers at both the House Ways and Means Committee and the Senate Finance Committee. Whether a highly partisan Congress can actually achieve such an ambitious goal as tax reform this year remains uncertain. But because of its bipartisan support, the MLP Parity Act certainly will be one of the many potential reforms Congress will consider seriously.

Final Section 336(e) Regulations Allow Step-Up in Asset Tax Basis in Certain Stock Acquisitions

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Final regulations were issued last month under IRC Section 336(e). These regulations present beneficial planning opportunities in certain circumstances.

For qualifying transactions occurring on or after May 15, 2013, Section 336(e) allows certain taxpayers to elect to treat the sale, exchange or distribution of corporate stock as an asset sale, much like a Section 338(h)(10) election. An asset sale can be of great benefit to the purchaser of the stock, since the basis of the target corporation’s assets would be stepped up to their fair market value.

To qualify for the Section 336(e) election, the following requirements must be met:

  1. The selling shareholder or shareholders must be a domestic corporation, a consolidated group of corporations, or an S corporation shareholder or shareholders.
  2. The selling shareholder or shareholders must own at least 80% of the total voting power and value of the target corporation’s stock.
  3. Within a 12-month period, the selling shareholder or shareholders must sell, exchange or distribute 80% of the total value and 80% of the voting power of the target stock.

Although the rules of Section 338(h)(10) are generally followed in connection with a Section 336(e) election, there are a few important differences between the two elections:

  1. Section 336(e) does not require the acquirer of the stock to be a corporation. This is probably the most significant difference; and, to take advantage of this rule, purchasers other than corporations may wish to convert the target without tax cost to a pass-through entity (e.g., LLC) after the purchase.
  2. Section 336(e) does not require a single purchasing corporation to acquire the target stock. Instead, multiple purchasers—individuals, pass-through entities and corporations—can be involved.
  3. The Section 336(e) election is unilaterally made by the selling shareholders attaching a statement to their Federal tax return for the year of the acquisition. Purchasers should use the acquisition agreement to make sure the sellers implement the anticipated tax strategy

Section 336(e) offers some nice tax planning opportunities, by allowing a step up in tax basis in the target’s assets where a Section 338(h)(10) election is not allowed.

Example: An S corporation with two shareholders wishes to sell all of its stock to several buyers, all of which are either individuals or pass-through entities with individual owners. A straight stock purchase would not increase the basis of the assets held inside the S corporation, and an LLC or other entity buyer would terminate the pass-through tax treatment of the S corporation status of the target. A Section 338(h)(10) election is not available since the purchaser is not a single corporation. However, a Section 336(e) election may be available, whereby the purchase of the stock would be treated as a purchase of the corporation’s assets (purchased by a “new” corporation owned by the purchasers). The purchasers could then convert the purchased corporation (the “new” corporation with the stepped-up assets basis) into an LLC, without tax, thereby continuing the business in a pass-through entity (single level of tax) with a fully stepped-up tax asset basis.

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