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4th Year Honours Law Student at the University of Aberdeen, Scotland Started trading CFDs from the age of 17 then started my portfolio in a brokerage account. 90% of positions are in shares and 10% goes into CFDs to use leverage when buying dips within strong trends. Portfolio: Apple, Aberdeen... More
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  • Why Are Multinational Companies A Particular Target For Regulation?

    From the 19th century there was a prominent shift from separate national economies to a global economy with the emergence of multinational companies, particularly in the United Kingdom and later on in the US. Since then, multinational companies are constantly targets for regulation. However all countries, regardless of size or power, all face difficulties of different degrees when trying to regulate these corporations. This essay will discuss what makes multinational companies a particular target for regulation, the array of regulation used, and the many difficulties these national regulators face in attempting to regulate these multinational companies.

    MNC definition.

    In order to understand why multinational companies are targets for regulation, it is first necessary to understand the definition of multinational companies. A Multinational company (MNC) is a company that controls assets in at least 2 countries. This involves a parent company in one country, which then controls an affiliate or subsidiary company in another country. Dr. Tindall defines MNCs in his book "Multinational Enterprises" as "a combination of companies of different nationality, connected by means of shareholding, managerial control or contract and constituting an economic unit".

    Economic harm

    Lawmakers around the world have ambivalent views towards MNCs for many reasons. Many countries realise that MNCs have to be controlled because of the harm they can cause countries economically and politically. More often or not, the MNCs seem to be able to hold countries to ransom. These are not just the third world countries but also the developed countries. In the undeveloped countries there is undoubtedly more favourable laws for these corporations to operate in for several reasons. For example, the laws regulating labour in companies operating in undeveloped countries are very unfavourable towards the worker, and even if a victim did have a case they are unlikely to be able to afford to go to court or would not have access to justice in the first place. The International Labour Organisation (ILO) Declaration of Principles on Multinationals and Social Policy states,

    "Wages, benefits and conditions of work offered by multinational enterprises should be not less favourable to the workers than those offered by comparable employers in the country concerned".

    In developing countries comparable employers may not exist and the ones that do are likely to have a very low standard for workers so the Multinationals, even if they provide a better quality of employment are very likely not to offer anything close to what they offer in Western developed countries. This is attractive to MNC's as they would not have to worry about legal claims against them and could in turn pursue higher profits from spending less. Furthermore, many counties have had to drop the 'red tape' to multinational corporations to attract inward investment. A typical example of this is the United Kingdom, which, as Muchlinski describes, "has traditionally welcomed inward investment under successive Conservative and Labour administrations". Examples of this include the repealing of the Exchange Control Act in 1987, which removed the most significant restrictions on inward and outward investment under English law. The UK along with the US typically have to try and strike a balance with more favourable investment laws as they have typically higher corporation tax rates than other countries such as Luxemburg or Ireland which tend to be a favourite countries for incorporation for companies as they have very low rates of corporation tax. Author Dambisa Moyo of 'How the West was Lost' states that the poor economic policies and the loss of technological advantage over the rest of the world has led to the West's relative decline. The policies of the west, she predicts will cause the GDP of China to overtake that of the US and UK in the not too distant future. The multinationals have been acting as a vehicle for the transfer of technology to the west as they are generally western companies that operate in the east such as China as by doing so puts their costs down. This results in much more business, productivity, and amounts of exports happening in the east.

    Harm - tax avoidance

    Another evident harm that has been brought to attention of the public in recent months is the fact that in countries such as the UK, many companies operate, employ workers, and make profits while paying little to no tax at all. For many years they have been avoiding tax by using legal loopholes causing billions of pounds worth of revenues that should be going to the UK government to go to low tax rate countries. The publications from the UK Parliament show that while revenues of tax going to the government rose in value by £4.5b in the year 2011-2012 from the previous year, at the same time there was a decrease in corporation tax revenues of £6.3b. A major factor in this is major corporations such as Starbucks and Amazon using transfer pricing to send the money to a company belonging to them, which is located in a low tax rate country. Transfer pricing is where a subsidiary in a tax haven can over-invoice the charge the parent for use of patent technology or the supply of products. This effectively makes it seem as if these corporations are not making a profit, when actually they are being transferred out of the UK.

    Environment harm

    The harm to the economy of countries is not the only evident problem. There is a huge problem with the effects MNCs are having on the environment and the health of country's citizens. Such examples of this include the case 'Re Union Carbide Gas Plant Disaster at Bhopal, India. India tried to claim $3.3 billion for compensation for the gas leak, which caused several thousand deaths and to affect the health over half a million Indian citizens. The Union Carbide Corporation US 2nd circuit case ended up being resolved out of court with Union Carbide paying around $470m, 15% of the amount claimed by India. Another example is the BP Deepwater Horizon case that involved an oil spill causing dramatic environmental effects to the Gulf of Mexico in 2010. Litigation is still going today and is bound to come to a settlement between the US and the corporations involved. The dispute over who is liable continues between BP, Transocean and Haliburton.

    Difficulty regulators face

    Countries have problems trying to regulate the MNCs for several reasons.

    One problem is that there are territorial limits of national and regional regulation. This stops powerful counties being able to impose laws in different countries where the MNCs are making advantaging from while harming them at the same time economically. This can be shown from the case of Lonrho v Shell Petroleum where the defendants refused to give up documents in the possession of their wholly owned subsidiaries in Rhodesia and South Africa where the directors of those subsidiaries refused to disclose them. The Lonrho case is an example of extraterritorial enforcement being used. This is where the enforcing jurisdiction makes direct orders against the foreign units of the MNC, or takes non-judicial measures within its jurisdiction against the assets of the foreign entity, or denies it certain privileges usually given to enterprises engaged in the same business such as import licenses or tax credits. The extraterritorial application of law can have serious political effects. It can be seen as either an attempt by the regulating state to impose its policies on others. Also, the target's state's exclusive territorial sovereignty will have been infringed. This can lead to diplomatic conflict. Developing countries who rely on foreign aid are more likely to accept extraterritorial jurisdiction by power regulating states such as the US, China or the UK.

    Race to laxity- Delaware states.

    As it is quite evident that national and regional regulation has its limits, there is possibility of an international agreement between nations to try to come to a solution. In February of 2013, the G20 leaders met in Moscow to try to crack down on tax avoidance. The main support for this was UK, France and Germany. If successful, it could cause the profits of many corporations that enjoy low tax rates to decrease by a large amount. The actions they are trying to stop are the transfer pricing and what David Charny explains to be the race to laxity. This is where when one country lowers its tax rates or tries to make itself more attractive for Foreign Direct Investment (FDI), there are certain countries who will always do one step further, therefore making it ever more attractive to MNCs. Charny explains a note able example of this in "An American perspective on the 'Race to the Bottom' in the EC". In the US, New Jersey became the most popular place in the first great merger wave in the 19th century with very favourable rules on the formation of trusts. The second wave of incorporation came 1920s and 30s. However, by this time Woodrow Wilson had tightened the state's corporate law that led to a huge shift of companies reincorporating in Delaware-drafted with the help of the multi billionaire DuPont family in a way to protect managerial and shareholder interests- appeared favourable to managers of corporations. Even now Delaware remains at the forefront of incorporation in America, with over 40% of NYSE companies and over 50% of Fortune 500 companies incorporated there. What the G20 leaders are trying to do is to stop the East becoming the international Delaware with very lax rules on incorporation that favour managerial and shareholder interests over those in the West, therefore taking away a large amount of money that was originally going to the Governments in the West.

    Difficulty- separate corporate personality

    Another problem that regulators have when trying to regulate MNCs is that of corporate personality. It is a very strong founded principle stemming from the UK case of Salomon v Salomon that stated that subsidiaries of a parent company are a different legal entity and have a different legal personality from their parent. This has a profound impact on the regulation of multinational companies as they can escape the consequences of negligence and liability to great extents by using many subsidiaries. An example of this can be seen in the case of Adams v Cape Industries where a victim of asbestos related cancer tried to sue the parent for 20m as the subsidiary only had 5m in assets. It was held he could not claim from the parent, as it was a separate legal entity. However, an important point was made in the Amoco Cadiz case, which came before the Adams case, which held that basically if the subsidiaries are wholly exercised and controlled by the parent company, the parent company will be liable for the actions of it's subsidiaries.

    "Creative compliance" idea

    It has been apparent that when national regulators try to impose certain regulations this can cause lobbying between the MNCs and politicians, or they reorder their business by shifting resources to other, more favourable jurisdictions. In turn they are, in the view of Professor Doreen McBarnet, avoiding regulations by following the letter of the law but are conflicting with the spirit of the law. This is what she calls "creative compliance".. It involves practices that might be illegal, indeed criminal, if legally structures in one way could be legally repackaged and claimed to be lawful.

    Self Regulation has become increasingly active among MNCs. Self-regulation or self-monitoring involves internally produced company codes of conduct and industry codes for groups of MNCs in the same industry, for example, the Code of Marketing Practices developed by the International Federation of Pharmaceutical Manufacturers and Associations. This type of regulation is distanced from the existing centres of law-making such as national parliaments, global legislative institutions and inter-governmental agreements.

    To conclude, multinational companies are particular target for regulation as nations try to strike a balance. They do this by having incentives to entice them to incorporate and produce jobs and bring wealth to their country. While at the same time, they try to protect the rights of their citizens and to bring wealth in through taxes. MNCs have been able to cause difficulty to the regulators as they have bargaining power from the wealth they offer and the competition from the East. The future ability of multinational company's to do this may disappear with international talks in the G20 and such proposals in the UK. These are highlighted by Professor Fiona MacMillan such as the UK Corporate Responsibility Bill, which proposes that companies with more than 5m in revenue are obliged to carry out its activities in accordance with laws and administrative practices of the countries within it operates.

    Dec 08 12:08 PM | Link | Comment!
  • Growth For Apple In The Car

    Many investors are wary about where the next phase of growth will come from in Apple (AAPL) and believe that there is nothing left that is significant to move the needle on a company with $467b market cap. I believe that there are still many avenues that have not been explored yet that have the ability to unlock new revenue streams to push growth.

    AAPL Market Cap Chart

    AAPL Market Cap data by YCharts

    Further integration of ios in the car

    I believe that further integration in the car is what can give Apple a significant boost in sales revenue.

    At the developer conference in June of this year Eddie Cue stated,

    "95 percent of cars sold today have integrated music playback and control from an iOS device. But we want to take this integration to a whole 'nother level. What if you could get iOS on the screen that is built into your car?".

    Apple has so far released details of their future plans for ios in the car. This involves: connecting your iphone to the car's built in display to be able to make and receive calls and texts; utilising siri to make voice commands; and finally having apple maps on your car dashbord. While i think this is progress into further integrating into the car, i do think Apple can do more in creating a better experience and creating additional revenue streams.

    The level of interest to move into this area is obviously significant due to the huge market that they could unlock. In 2012, according to LMC Automotive, worldwide car sales were 80.9m. Currently, the only form of Apple integration into the car is by connecting an iphone via either Bluetooth or an auxiliary cable to play music or make phone calls. The list of car manufacturers who currently support ipod/iphone integration are listed in the following link. www.apple.com/uk/ipod/car-integration/#bmw-image6

    how can Apple create another source of revenue from in car sales?

    Most mid-high value cars already all have a built in satellite navigation screen that involves functions to use the radio and mp3. If you have ever bought one to put in your car you will know it is not exactly cheap for what they can do. Below are a few examples:

    Technology package for Audi (SAT NAV, Radio, mp3, cd) - £1695.

    Media Package BMW - £990.

    Porche Communication Management including navigation with universal audio interface - £2141.

    Apple could strike deals with all the car manufacturers who currently integrate apple products to work in their cars to integrate an ipad into their cars as an alternative to the current products available. As seen from above it seems as if it would be a lot cheaper for both consumers and car manufacturers to deliver a much better in car experience.

    The features could include:

    • Itunes library
    • Apple Maps
    • Integrated contacts list from your iphone via Bluetooth or icloud.
    • internet access (with vehicle stationary)
    • video & tv (with vehicle stationary)
    • video link to parking cameras when reversing
    • Siri for handsfree
    • imessage and mail notifications (read out by Siri)
    • Iradio- this streaming service could provide revenue from either paying a subscription to remove adverts, or to have a small amount of adverts in between songs.

    One car marker, Tesla Motors (TSLA) has already started revolutionising the dashboard to allow it to do much more and modernise the very outdated system that cars have.

    (click to enlarge)

    If car makers were to integrate ipads into car dashboards they would need to work around the current patents held by Tesla Motors:

    • Morphing Vehicle user interface - patent no. 20110082627
    • Adaptive Vehicle user interface - patent no. 20110082620

    Conclusion

    Apple can do much more in integrating ios and it's products into car models, thus creating a superior experience than what is offered at present. This would also create a significant revenue increase through the sale of ipads to car manufacturers and an income stream through adverts aimed at users of iradio for many years to come.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: TSLA, AAPL, long-ideas
    Nov 26 2:31 AM | Link | Comment!
  • The Main Options Available To Small And Medium-Sized Companies When Seeking Finance

    The main options available to small and medium-sized companies when seeking finance for their businesses.

    This is my first article and is just for any readers who are interested.

    In the UK there are multiple options available for small and medium sized businesses to obtain financing in order for them to expand. This essay shall explore the various options available and critically review the advantages and disadvantages of each, splitting them up into internal and external types of obtaining financing for their business. Furthermore, it shall look at what problems the business have in obtaining these financial provisions and how they have an effect on what is called the funding gap.

    To understand the options available for financing small and medium sized enterprises (SMEs), it is necessary to understand the precise definition under the Companies Act 2006 for "small" and "medium" sized companies. Section 382 of the act states that a small company is one that has been within the limits of two of the following thresholds since incorporation or, if not then within the limits during the current financial year and the previous financial year of the following: a turnover of £6.5 million or less; a balance sheet total of £3.26 million or less; and the number of employees is 50 or less on a monthly average. Synonymously, a medium sized company is covered by section 465 of the same Act. It is described as one which has been within the limits of two of the following thresholds since incorporation, or if not within the limits of incorporation, then for the previous and the current financial year which has the following: a turnover of £25.9 million or less; a balance sheet total of £12.9 million or less; and finally a number of employees of 250 or less on a monthly basis.

    Firstly, this essay shall look at the internal sources of finance for small and medium sized businesses in the UK. There are three distinct options that these businesses can make use of in order to obtain finance, these are: retained profits; better financial management; and risk management through contractual provisions.

    When businesses have shareholders that receive dividends through the profits of the operations of the company they can choose the percentage yield of the dividend that is distributed to its shareholders. Instead of distributing a large dividend to its shareholders, the company can retain more of the profits so that this money can be put into expanding the business for future operations or investment.

    Alternatively, the business can protect money from the management of risk through certain contractual provisions. In contractual agreements there is the choice of inserting either exclusion or limitation clauses that either completely exclude or limit the liability the company has to another company or individual. This is used in every day contracts of purchase and sale between businesses and customers in relation to products that are sold by businesses in case they become faulty over time. The exclusion clauses are popular however are more likely to be scrutinised. Many businesses prefer using limitation clauses, as they are more appealing to the customer wanting to contract with them and this makes it look like the business have more faith in the success of their services or products. Also, the money used in limitation clauses can come from insurance that the business has. If a contract fails completely and the business cannot pay for something, it can set it off a debt that the other contracting party owes. Many businesses are willing to do this, as they want to keep the relations between themselves and businesses that they contract with on good terms.

    Another way to control risk management by a small or medium sized enterprise is to include retention of title clauses. This allows a party to keep ownership of property passed to the debtor until it is paid. A prime example of this can be seen in the case of Aluminium Industrie Vaassan BV v Rompala 1976. The plaintiffs were sellers of aluminium foil. The plaintiff's clause stated that they would remain owners of the foil and any things that the defenders made the foil into until the payment of the foil was completed. The court of appeal upheld the use of this type of retention of title clause.

    The last internal source of finance for a company can be obtained through better financial management. Businesses commonly have the problem of late-paying debtors. Businesses can make use of diligence to try to rectify this problem. The main forms of diligence in the UK are: attachment of money; arrestment and attachment of moveables; and the inhibition and attachment of land. The business can get a decree of the court to order the debtor to pay certain debts.

    SMEs are also able to get financing through various external options. One major route they could use is through potential lenders. The businesses can get external funding through the use of share issues and debt issues. The available options can be: venture capitalists, business angels, banks, family and friends. However, many problems can arise trying to get funding from these options. One main reason is that, especially for smaller companies there is a much greater risk involved when lending or buying a stake in a company that has not established itself properly yet. There is always going to be a high uncertainty as to whether the company can survive as there is a much larger percentage of smaller and medium sized companies who fail than the much larger, well established ones. This could be due to the fact of the economies of scale, the smaller companies just cannot produce products for the cheap rate that much larger companies could so everything costs more, therefore putting a strain on them to be able to compete. Alternatively, the smaller companies do not have the same amounts of cash that larger ones have to be able to experiment into new markets. The accounting and management of smaller companies can also cause failure, as they do not have the wealth of experience and knowledge compared to larger companies. Especially when there has been a recession and we are only just seeing signs of recovery this has put a struggle on SMEs to obtain funding as the economic conditions have changed the ability of banks to lend as freely as they used to be able to do.

    SMEs also have the ability of issuing shares. They can issue different classes such as: Ordinary 'A', 'B', 'C', shares; weighted voting shares; various types of preference shares and founders shares. There are both positives and complications in doing this. There can be complications over class rights and the more shares the company issues then the more of the companies voting power and potential profits are being given away. The market for shares is a lot less liquid than that for larger companies due to the lack of demand. On the other hand, the issuing of shares can be very beneficial to the company's growth as it provides a means of income that spreads the risk away from the company and to the shareholders. If the share price drops after issue, the company will not be liable to pay back the amount that the shareholders bought them for.

    Another method whereby a company can obtain finance is through trade credit. This is where goods and services delivered to a SME are not paid for immediately but are supplied in credit. The business is given an invoice for the service or goods, which states it has to be paid within a specific period. The normal credit length is 30 days, however upon negotiations this can be extended longer, maybe up to 60 days. This means the trade credit acts as a loan that you can have for longer, which in any case is favourable as seen from the Modigliani-Miller theory that argues that the optimal capital structure can be complete debt finance. The reason for this is that debt is treated preferably over equity as the interest payments of the debt can be offset against the taxable profits to the government.

    In order to obtain trade credit though it might be necessary for a company to obtain a credit check. This can be done through trade references or bank references. This is a cheap way of getting the information on a company and the bank will give an opinion of the creditworthiness of the customer. If the creditor wants to know specific information about the customer then he have to make sure his questions are not vague which could lead to the bank giving vague or ambiguous answers which could lead to a creditor giving finance to a company that then fails. This is what happened in the famous case of Hedley Byrne v Heller Ltd 1963. It was held in this case that the bank would have been negligent had it not been for a disclaimer clause that allowed it to avoid liability. The reference from the bank was given "in confidence and without responsibility". What the credit agencies would do is go through the accounts and public records of the company getting the credit check to see if any court judgements have been made against the debtor.

    There are various advantages of trade credit. Firstly, the company does not have to pay cash up from which means it can use its cash for other things in the mean time. Also, the process is informal, convenient and cheap and is widely used and accepted in all business. There is also an advantage to the suppliers of trade credit as they get more business by giving trade credit than if they did not. Lastly, it is available to any size of company but especially useful to the smaller companies who might struggle in getting finance by other means.

    The SMEs can also borrow from the banks rather than another company that gives trade credit.

    An SME might also which to use financial leases. This means that if they need certain equipment or buildings that they might not have the means to purchase themselves they can seek a financial company to buy whatever the SME needs and then lease it back to the SME. In this situation the financial house is called the lessor and the SME is the lessee (borrower and user of the asset for a rental payment.) This has obvious advantages to the SME in the fact that if they need to use their capital for purchasing other things then they pay smaller increments for the asset leased to them. This could also be more easily obtained than certain other forms of long-term finance, while also being cost saving. This also means that the SME can have the flexibility to get the most up-to-date equipment where there are rapid changes in technology.

    Alternatively, SMEs can raise finance by selling large assets such as their offices to a financial institution on the agreement that they would lease it back to them. This could be good in the sense they could get a large amount of capital to use, however they would lose any appreciation in capital from the buildings if they increase in value over time.

    SMEs can also save capital by acquiring assets by hire purchase so they would pay in increments that would eventually add up to the asset being purchased and owned by the SME. This however requires a deposit and if the SME pays many invoices then cannot pay anymore then they have spent a lot more money for something that they will not legally own.

    Another way a SME can get finance is by the use of factoring. It is where the factor takes over the SME's debt collection. The Factor will usually make an advance payment for the debts (up to 80% of their value) at an interest rate similar given by the banks. The advantage of this is that the company does not have to wait for the debt to mature. A factor will usually charge around 2% on the sales revenue of the SME as a service charge. When the debts mature and the factor obtains all of the money from the debtor he will pay the percentage remaining to the SME, minus any interest payments and expenses. There are two types of factoring: recourse factoring, and full factoring. Recourse factoring is where if there are bad debts in a package, for example, if someone goes bankrupt the factor will take these out and give them back to the SME to take the loss. So the factor will not be at a disadvantage here as the bad debt will be the SME's problem. On the other hand, full factoring is an alternative. This is more expensive to get however the factor will do everything such as chase up even your bad debts. In addition, the SME does not need any fixed assets as a safety net for the factor. In both cases once the factoring deal is completed, it lasts however long the contract lasts.

    One might ask why would an SME want to obtain finance through factoring rather than the more common bank loan. There are various advantages that factoring can offer over getting a bank loan: the SME does not need to be concerned that the facility might be withdrawn at very short notice, or even no notice at all -which would be the case with a bank overdraft- as the factoring arrangement can only be ended by following notice period so the SME would know for a period of time beforehand; the factor is more lenient when it comes to the financial status of the SME compared to a bank; and finally the factor does not require fixed asset backing as a condition of the loan as with what a bank would want.

    Finally there is Invoice discounting. This is described in Salinger on Factoring: the Law and Practice of Invoice Factoring as "confidential factoring". It is normally basically recourse factoring however invoice discounting gives the SME an upfront payment of 90% of the face value of the invoices. The SME has to hand over the value of the invoices at the end of the period and take in any losses from bad debts. In return, the finance house gives the client the remaining 10% value of the invoices minus any fees and expenses. The fees are normally lower than that of normal factoring. In most cases the fees are between around 0.2% to 0.8% of the SME client's sales with the rate of interest on top, which is similar to that of a bank. In invoice discounting the SME has to pay administration costs to chase up the debt and any losses from bad debts belong to the SME. Also, the invoices won't be in the name of the SME but will be the financial house as the SME is just an agent here.

    To conclude, there are various ways, both internal and external, that a SME can raise finance ranging from: retained profits; risk management through the use of contractual provisions; loans from banks; share issues; to factoring and invoice discounting. It is definitely the case that it is harder for SME's than large companies to obtain finance, this is the case due to larger companies having more assets, better credit checks and the creditors are more likely to get their money back. Especially after the financial crisis the attitude of banks to lend money has become more stringent and the SMEs have been finding it harder to get lent money or at a reasonable rate. This has created a funding gap, which is the gap between the SME growing and developing to become a large company. A proposal has been put forward by Vince Cable to create a special bank called the 'British business bank' which would provide £10b of funding to Small and Medium sized Enterprises.

    Disclosure: I am long AAPL, AMZN, EBAY, ALXN, BAC, RIG, KO.

    Apr 03 6:27 PM | Link | Comment!
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