Ethics in Incentives

Transcription

1 Ethics in Incentives Christopher R. Grissom Partner Bradley Arant Boult Cummings Karen Dean Tax Counsel & Senior Director Level 3 Communications karen.dean@level3.com

2 Agenda Overview of ethical framework in incentive deals Some thought provokers The but for conundrum Confidentiality and public scrutiny Social media Lobbying rules Cost/Benefit Analysis Due diligence on incentive agreements 2

3 This Presentation Contains general information only and the speakers are not rendering accounting, business, legal, tax or other professional advice, other than their own feeble attempts at educational and entertainment purposes. 3

4 Our Ethical Framework Professional Requirements (State Bar and Boards of Accountancy) Professional Standards (ABA Model Rules, AICPA, State Standards of Conduct, IPT) Treasury Circular 230 Foreign Corrupt Practices Act (FCPA) Internal Corporate Policies State Statutes and Regulations Civil Penalties Criminal Sanctions 4

5 Selected IPT Canons IT IS UNETHICAL to engage in any conduct that discredits IPT, its membership, or the tax profession. IT IS UNETHICAL to offer or give anything of value to a public official to induce that official to take any action with respect to a tax matter. IT IS UNETHICAL to solicit a tax assignment by assuring a specific result or to solicit, assign, accept or perform a tax assignment that is conditioned upon producing a preconceived opinion or conclusion. IT IS UNETHICAL for a member, in the performance of a tax assignment, to fail to exercise independent judgment in advising and representing a client. IT IS UNETHICAL in the performance of a tax assignment to knowingly furnish or knowingly rely upon inaccurate, deceitful or misleading information, or to knowingly withhold information which lawfully should be revealed. IT IS UNETHICAL for a member having supervisory responsibility for another tax professional to knowingly authorize, direct, permit or ratify any subordinate's act or omission that is declared unethical by this Code, regardless whether the subordinate is a member of IPT. 5

6 Purpose and Function of Ethics Codes Reflect organizational values Articulate principles and standards Advise members of acceptable/unacceptable conduct Protect clients, members of the public, and the integrity/reputation of the organization or profession Assist members in identifying ethical issues and provide framework for resolution 6

7 Some Thought Provokers Is it ethical to... Remain silent when an official asks you about the potential growth for Product A when he should be focused on Product B? Is it ethical... To apply political pressure via the Governor s office in an attempt to get a favorable offer? Is it ethical... To change the appearance of a physical plant in the face of a visit? 7

8 More Thought Provokers Is it ethical... For a CPA or attorney to recommend posturing a project that makes the proposed location critical? Is it ethical for... A CPA or attorney to recommend a tax plan that consists of closing a Massachusetts factory and opening a new factory in Nevada where there is no income tax? Is it ethical... For a CPA or attorney to recommend language in an application in an effort to secure an award? 8

9 The but for conundrum Incentives are often conditioned on being necessary for the deal to move forward Grow New Jersey program: The provision of a grant from the Grow New Jersey Program must be a 'material factor' in a company's decision to retain/relocate/expand operations in New Jersey. When is it ethical to make that assertion? 9

10 The but for conundrum continued Hypothetical: Client comes to you and says, we have already picked out our site and signed a binding lease, now go tell the state that the project is competitive. What do you do? 10

11 The but for conundrum - continued Strategies to deal with this conundrum: Contingencies in leases and/or purchase agreements The anticipated economic development incentives provided by the [state agency] pursuant to the [incentive program] are material to [client s] decision to enter into this Lease with [landlord]. Promptly after the Execution Date, [client] shall diligently pursue obtaining the [incentive approval] and keep [landlord] fully informed of the status of such application. [Client] shall notify [landlord] immediately upon [client s] receipt of [incentive approval], and shall provide [landlord] with a copy of the [incentive approval] upon [client s] receipt thereof. If the [incentive approval] has not been received by [client] within one hundred twenty (120) days after the Execution Date, [landlord] or [client] may terminate this Lease by written notice delivered to the other party within five (5) Business Days after the last day of such 120- day period. In addition, if [client s] application for the [incentives] described above is rejected by the [state agency], [client] shall immediately notify [landlord] thereof (and provide [landlord] with a copy of such rejection), and [client] may terminate this Lease by written notice delivered to [landlord] within five (5) Business Days after the date of [client s] receipt of such rejection of such application. 11

12 The but for conundrum - continued Strategies to deal with this conundrum (continued): Legitimate competing offers from other jurisdictions Clients that are dead set on location A often realize they are not that certain when presented with a significantly more cost-effective option in location B 12

13 The but for conundrum - continued Strategies to deal with this conundrum (continued): Working with a client at the beginning of a project Best strategy, but hardest to implement 13

14 Confidentiality and Public Scrutiny How do you ethically minimize or maximize the press surrounding the grant of incentives or announcement? Tension between company desire to protect business plans and public disclosure requirements Often also a tension between company and elected officials who want to shout news loudly Learn public record laws and exceptions 14

15 Confidentiality and Public Scrutiny - continued Counsel clients on requirements for public disclosure early in project Need to understand that some information will be public record Need to know obligations with respect to public disclosure now and in the future 15

16 Confidentiality and Public Scrutiny - continued Example: Client moving corporate headquarters from Rust Belt city to southeastern city Employee finds out about the potential move and is not happy so he leaks it to Wall Street Journal State has a requirement that incentive deal must be signed within certain number of days of public announcement of deal 16

17 Confidentiality and Public Scrutiny - continued Example (continued): Did leak constitute a public announcement? No, but company spokesperson s subsequent confirmation of the deal to the Wall Street Journal counted as one Triggered a long weekend for Bradley team 17

18 Social Media and Incentives Ethics Confidentiality Disclosure of client or client communication is still prohibited Protect Privileges Evidence Companies could be creating discoverable records (much like ) Conflict of Interests Communicating with opposing side over social media could be a violation of conflicts laws If it happens inadvertently, disclose Advertising Limitations/Disclaimers Intellectual Property Public Announcement 18

19 Registration as a Lobbyist? Some states include economic development in the definition of lobbying Lobbying includes promoting or attempting to influence the awarding of a grant or contract with any department or agency of the executive, legislative, or judicial branch of state government. Ala. Code Required to register on a project-by-project basis. Does registration breach duty of confidentiality to clients? 19

20 Registration as a Lobbyist? - continued Other states specifically exclude economic development in the definition of lobbying Illinois: Executive branch lobbyist does not include a communication regarding the award of incentives related to an economic development project negotiated by the IEDC. 25 IAC 6-1-1(7)(C). Kentucky: Executive agency lobbyist excludes persons acting to promote, oppose or otherwise influence the outcome of a decision of the Cabinet for Economic Development or any board or authority within or attached to that cabinet relating to the issuance or award of a bond, grant, lease, loan, assessment, incentive, inducement or tax credit. KY. Rev. Stat. Ann. 11A.233(1). See Gregory Burkart s excellent article on this subject in the December 2015 issue of IPT Insider 20

21 Registration as a Lobbyist? - continued Be careful of gifts. Nearly all states prohibit, or at least heavily restrict, gifts that lobbyists can give public officials/employees See also IPT guidance Alabama prohibits lobbyists from giving or even offering a thing of value to any public official or employee and defines thing of value to be essentially anything greater than $25/occasion or $50/year Alabama does have an exception for economic development function which is fairly broad 21

22 Cost/Benefit Analysis Ethical issues pop-up with regularity in preparing cost/benefit analysis for projects Which costs to include? Costs paid by landlords? Costs paid by landowners to get site ready? What about pure spec costs? Costs paid by company? (E.g. allocation of payroll expense for time spent on project.) 22

23 Cost/Benefit Analysis - continued Which benefits to include? What multiplier to use? What estimates for project? How aggressive on job/capex projections? Balanced if claw-backs 23

24 Due Diligence on Incentive Agreements Who conducts due diligence on incentive agreements? If lease structure with bargain-purchase option at end of lease term, who is legally responsible? Who has control of due diligence? Who has legal responsibility when public bid process required? I.e. if public authority bids and builds the project facility, who is responsible? 24

25 Summary Do not make decisions based on ethical ramifications on your own. Utilize the resources available to you within your company and your profession. Err on the side of caution. If you are not sure, then do not do it. Times have changed make sure your behavior has as well. 25

26 Questions? Feel free to contact us with questions you don t want to ask in public Christopher R. Grissom Partner Bradley Arant Boult Cummings cgrissom@bradley.com Karen Dean Tax Counsel & Senior Director Level 3 Communications karen.dean@level3.com 26