International Bankruptcy

The Challenge of Insolvency in a Global Economy

Jodie Adams Kirshner

• Publisher: University of Chicago Press
• Year: 2018
• ISBN:
  9780226532028
• Topic: Diritto
• Subtopic: Teoria e pratica del diritto

With the growth of international business and the rise of companies with subsidiaries around the world, the question of where a company should file bankruptcy proceedings has become increasingly complicated. Today, most businesses are likely to have international trading partners, or to operate and hold assets in more than one country. To execute a corporate restructuring or liquidation under several different insolvency regimes at once is an enormous and expensive challenge.
With International Bankruptcy, Jodie Adams Kirshner explores the issues involved in determining which courts should have jurisdiction and which laws should apply in addressing problems within. Kirshner brings together theory with the discussion of specific cases and legal developments to explore this developing area of law. Looking at the key issues that arise in cross-border proceedings, International Bankruptcy offers a guide to this legal environment. In addition, she explores how globalization has encouraged the creation of new legal practices that bypass national legal systems, such as the European Insolvency Framework and the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law. The traditional comparative law framework misses the nuances of these dynamics. Ultimately, Kirshner draws both positive and negative lessons about regulatory coordination in the hope of finding cleaner and more productive paths to wind down or rehabilitate failing international companies.

1

Why Have So Many Bankruptcies Crossed Borders?

Recently an advertisement aired on Thai television that proclaimed, “The Bacardi family didn’t just survive—we thrived,” as a figure walked in a Cuban streetscape.1 Labels on bottles of Bacardi rum have showcased the Cuban history of the Bacardi spirits company.2 In fact, however, the company has expanded so far beyond its Cuban roots, and participated in such a complex web of markets, brands, suppliers, affiliates, and wholly owned subsidiaries, that today the company is only minimally connected to Cuba.3

The forces of globalization have enabled Bacardi to grow internationally, far beyond the country of its origin, and the company has developed into a complex network of subsidiaries.4 The company sells more than two hundred brands, in more than one hundred markets around the world.5 The board chairman, the great-grandson of the founder of the company, has never been to Cuba.6 He lives in Miami, and the company currently has its headquarters in Bermuda and holds its trademark in Liechtenstein.7

In 1830, the Bacardi family emigrated to Cuba from Spain and, eventually, began to adapt Cuban rum to appeal to a more international market.8 The new Bacardi company bought a distillery in Cuba in 1862 and commenced acquiring sugarcane fields.9 It shipped the rum it produced to the Spanish royal family, one of its early customers.10

From its base in Cuba, Bacardi began to expand abroad.11 In 1920, Bacardi became the first Cuban multinational company when it established a bottling facility in Barcelona.12 The company soon set up another bottling operation in New York and opened a Mexican subsidiary.13 After the repeal of Prohibition in the United States in 1933, Bacardi aggressively entered the US market.14 The company sold eighty thousand cases of rum in the United States in 1934.15

Establishing additional subsidiaries helped Bacardi to qualify for advantages in trade. The company moved its trademark from Cuba to the Bahamas, in order to benefit from British Commonwealth preferences.16 In 1937, it established a subsidiary in Puerto Rico in order to access US markets without paying US import duties.17

These international outposts became increasingly significant after Castro moved to nationalize private enterprises in Cuba.18 The Bacardi trademark, safe in the Bahamas, remained the private property of the company, while the chief executive of the company continued running the business from a boat in the Atlantic.19 He docked the boat in Miami to hold in-person meetings.20 The company ultimately reconstituted itself as Bacardi & Company Ltd. in the Bahamas.21 It also formed Bacardi International Ltd., headquartered in Bermuda, with separate areas of responsibility.22

From these foundations, Bacardi has worked to globalize further its manufacturing and customer bases. Over time, Bacardi has supplemented its factories in Mexico and Puerto Rico with manufacturing facilities in the Bahamas, Mexico, Puerto Rico, Spain, Brazil, Canada, Martinique, Panama, and Trinidad.23 It has bottled the rum produced in these locations at plants in Australia, Austria, France, Germany, New Zealand, Switzerland, the United Kingdom, and the United States.24 To expand into new markets, the company has formed alliances with partners in Hong Kong, Japan, Malaysia, the Philippines, Russia, Taiwan, and Thailand.25

More recently, Bacardi has undertaken several mergers in order to participate in the international markets for other spirits, in addition to rum: Bacardi has, for example, acquired the Italian vermouth producer Martini and Rossi,26 the Scottish whiskey and gin producers Dewar’s and Bombay Sapphire,27 the Mexican Tequila producer Cazadores,28 the French vodka producer Grey Goose,29 and the New Zealand vodka producer 42 Below.30 Through these acquisitions, Bacardi has gained contracts, suppliers, distribution networks, and foreign assets that originally belonged to the target companies.31

The expansion of Bacardi into a complex, international corporate group is not unique.32 Increasing numbers of companies also have expanded both horizontally and vertically.33 Along the horizontal axis, the companies have broadened their multinational reach and operated across more territory in order to enlarge their markets, gain trading partners, and access new capital.34 Along the vertical axis, the companies have established chains of linked companies, many of which also have operated transnationally, in order to shield assets within separate subsidiaries, reduce their tax liabilities, ensure supplies of inputs, and exploit the benefits of local incorporation, among other advantages.35

Answering the question of why bankruptcies increasingly have raised cross-border issues therefore requires a detailed look at developments along both the horizontal and vertical axes. The chapter will trace the general trend of the increasing multinational reach of companies and the proliferation of enterprise groups. The chapter will explain the history of these expansions and the reasons for companies to continue to grow in these ways.

Development 1: The Internationalization of Business

The commercial world has globalized.36 Domestic companies now have multinational trading partners, as well as operations and assets in many countries.37 Companies have needed to open new markets in order to grow.38 As they have required increasing amounts of raw materials, capital, and labor, pressure has intensified to contract with additional international sources.39 These trends, although not new, recently have accelerated, facilitated by parallel developments in technology, free trade and regional trade blocs, international finance, and the falling cost of international transportation.40

INCENTIVES TO INTERNATIONALIZE

The essential task of a company is to engage in value-creating activities, by converting inputs into outputs of higher value.41 A company earns a profit when it sells its outputs at a price higher than the cost of its inputs.42 To maximize the profit, a company generally will seek to reduce the cost of its inputs and sell more of its outputs.43 Usually, a company will increase the volume of its outputs until the revenue from one additional output falls below the cost of producing it.44

Transacting for inputs internationally often enables a company to obtain the inputs at a lower cost,45 and selling outputs in international markets often enables a company to increase its revenues by selling more outputs.46 The lower cost of the inputs may offset the transaction costs involved in sourcing them from abroad.47 A larger market also may introduce advantages that arise from spreading costs over a greater number of outputs, a concept referred to as economies of scale.48 The consulting company Boston Consulting Group, for example, has demonstrated that doubling output can reduce production costs by as much as 30 percent.49

Three broad categories of inputs may be available internationally.50 First, a company might seek physical resources, such as minerals, raw materials, agricultural products, or financial capital.51 Each may be more expensive in the home country of the company, or it may not be available there at all.52 Bacardi, for example, has produced Scotch whiskey by obtaining from Scotland resources that would not be available in the Bahamas or Bermuda.53 Second, a company might seek to save money on labor, particularly a company in the manufacturing or services industry.54 The Japanese clothing company Uniqlo, for example, has outsourced manufacturing of its clothing to factories in China because wages in China are lower than in Japan.55 Third, a company might look abroad for specialized services, such as technological capabilities, marketing expertise, or legal advice.56 Bacardi, for example, contracted with the Spanish tennis player Rafael Nadal to promote the company in its social responsibility campaigns.57

Three primary strategies for entering international markets may be available to a company. First, a company might license a foreign entity to sell its products in a foreign location.58 Bacardi, for example, has created an alliance with Anheuser-Busch to develop, market, and distribute its Bacardi Silver brand in the United States.59 Second, a company might partner with overseas distributors and retail outlets.60 The retail shops East End Cellars in Australia and Killis Getränkehandel in Austria, for example, sell Bacardi Limón.61 Third, a company might open its own foreign outlets.62 Bacardi does not have retail stores, but the Japanese clothing company Uniqlo, for example, owns all of its own stores.63 When Uniqlo opened a flagship store in Seoul, South Korea, the company set a record for the highest one-day sales in the country on its first day in operation.64

ELEMENTS OF INTERNATIONALIZATION

The relationships that a company enters in order to secure inputs and sell outputs all have the potential to cross national borders. Consider for example the numerous relationships that the production and sale of a hypothetical bottle of rum might entail:65 Company 1 might purchase the recipe for the rum from Company 2. The rum might be produced by Company 3, which might employ people at a distillery in Mexico.66 Company 4 might bottle the rum, Company 5 might distribute it, and Company 6 might market it.67 Companies 7 and 8 might lend money to finance the production of the rum and might sell the debt to other companies downstream.68 Companies 9 and 10 might sell the rum at their retail stores.69 Company 11 might provide legal advice, a...