JUNE 2007 ISSUE No.66

Welcome to the June 2007 edition of
Business Leasing and Finance News

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FOUNDER'S NOTE
By David G. Mayer

Having just celebrated another birthday, I look at the calendar and wonder how can we already be facing the end of the first half of 2007? For most of you, the first half has been busy and hopefully profitable, as the economy shows signs of shrugging off the housing slump and resuming its growth at a faster clip. The Federal Reserve will, of course, keep a watchful eye on inflation and attack it by increasing interest rates should it decide such a change is required. Normally, I would say that an increasing interest rate is good for leasing. However, the margin compression is so great that many lessors, lenders and other financiers have to pursue more creative, domestic and international deals to hit their volume targets. This pressure seems relentless and will likely continue regardless of interest rate movements. I hope that, despite the vagaries of the economy, you will be able to hit your volume targets in June and still not feel as I do that time is moving far too fast again this year. 

Go for a strong finish to the first half of 2007! Feel free to contact me by telephone at (214) 758-1545 or e-mail at dmayer@pattonboggs.com to discuss BLFN’s topics or other issues affecting your business.

1. Diversity Emerges as a Business Imperative

As savvy businesses seek ways to compete more effectively, many of them have discovered the increasing value of building diversity into their workforces. Whether an industrial company, a law firm, a health care provider, a financial services firm or a technology giant, diversity has become a business imperative. For many enterprises diversity may be far more than a buzz word; it may be a ticket to a bigger pay day.

*Term to Know: Although various definitions of diversity exist, “diversity” in business generally refers to creating a balance in a workforce of race, ethnicity, religion, sexual orientation and gender that accentuates and facilitates the inclusion of people with disparate backgrounds, skills and thinking as a core value in business operations and competition.

Diversity Leaders

DuPont is an enormous industrial company that understands the importance of diversity. Jack Krol leads the diversity thinking from the top as the President and CEO of DuPont. He has said that: “Diversity in our company is itself a business imperative – vital to our ongoing renewal and our competitiveness into the 21st century.” See Changing Partner, Changing Faces: Diversity and the DuPont Legal Model, a DuPont publication (2006). DuPont has actively pursued diversity in its culture since 1992:

DuPont recognized that its stakeholders - its customers, business partners, the communities it operated in and the policymakers it dealt with - were growing in diversity at a faster pace than its workforce. The disparity impacted the company’s ability to effectively connect with increasingly diffuse segments of the business world, to reach them on an intellectual, emotional and personal level - and do it better than its competitors. “The bottom line,” said Krol, “is that we needed a work force that at least equaled our stakeholders in diversity.”

Kraft (a giant food company), Lockheed Martin (a lead systems integrator and IT company), Shell Oil (a huge oil company) and Southern Company (the largest U.S. electric generation company), to name a few, have expressed similar values and objectives for their enterprises. Banks and other financial institutions maintain networking and other programs to enhance their diversity worldwide. See Diversity is not a black-and-white issue, Investment banks are long on words but short on detail, by Tara Loader Wilkinson, DowJones Financial News Online US (May 8, 2007).

These companies take diversity seriously as a core value in their business operations. As Southern Company states on its “Diversity” web page: “The overarching objective is to execute business strategies with precision through competent leadership, technically skilled teams, and engaged individuals who feel valued and respected for their ideas, experiences, and backgrounds.” At Kraft, the company has various diversity councils “that support diversity within the organization and within the community.” Shell has made a continued commitment to diversity and inclusiveness through the adoption of the The Shell Group Commitment to Diversity & Inclusiveness standard on November 27, 2001. These principles honor the basic premise at Shell that “creating an inclusive environment that elicits the very best from our employees is fundamental to our success.”

Diversity is serious business for law firms and corporate law departments too. Diversity is increasingly treated as a fundamental element and focus in every aspect of law practice. Various associations help advance awareness of the importance of diversity in the law. The Minority Corporate Counsel Association (MCCA), which celebrates its 10th anniversary this year, promotes the importance of diversity in the legal workplace. Reflecting its purpose and actions of its members, MCCA featured three members on its web site as follows:

These three companies have impressive in-house legal departments that have made diversity a key focus of their operations. At Merck, that focus begins with its corporate mission statement. At Microsoft, it is an avowed reflection of its global customer base. At Boeing, it's the drive to become known as the "employer of choice."

The practice of each of these companies affects the law firms that serve them or compete for their business. For example, Patton Boggs LLP writes on its Diversity web page:

A great law firm, like the clients it serves, is rich in diversity. Differences in background, gender, race, education, culture, sexual orientation, and life experience create a multidimensional and rewarding work experience, one that simultaneously nurtures and challenges each employee.

In a recent letter to certain diversity leaders, the firm wrote that its “goal is to become the premier firm for diverse individuals to achieve professional success. While we have not yet attained this goal, we are working hard and making progress.”

Eight Steps to Achieving and Sustaining Diversity

Achieving diversity in business is often easier said than done. A recent diversity survey indicates that companies may be making progress, but most of their in-house legal departments continue to lag far behind. See The Diversity Survey, InsideCounsel (2007). For example, the average legal department that responded to the survey employed 46 attorneys with only 3.5 attorneys who were not Caucasians. Only 30 percent of the departments that responded to the survey had written diversity policies.

Whether a business or service provider is involved in the diversity quest, the following eight steps may provide a useful guide to achieving positive results:

1. Focus on diversity in every task, decision and process in your business as a daily effort;

2. Form one or more diversity committees or councils (or both) that include all elements of diversity within and affecting your business enterprise, including your employees, customers, clients and suppliers;

3. Listen to the people who participate in organized efforts to enhance the process of understanding ways to effectively use their ideas and energy in building diversity in your workplace;

4. Encourage scholarship, training and stimulating work for your employees to demonstrate how you value and respect them individually and as part of a diverse workforce;

5. Increase recruitment, retention and promotion of diverse workers to create a culture that encourages, rewards and advances different kinds of people within the businesses in which they are involved;

6. Reach out to stakeholders such as your employees, customers and suppliers to inform them of the importance you place on diversity, report on your progress and interact through organized efforts to enhance diversity internally and externally;

7. Establish a method to evaluate and measure your progress in achieving and improving diversity within your enterprise; and

8. Reward commitment, progress and achievement in diversity that reinforces the notion that diversity pays. See Women Leaders Boost Profit, by Robin Cohen and Linda Kornfeld, Barron’s online (Sept. 4, 2006).

*Warning: Do not fail to take steps to create a diverse environment in your business or firm. That inaction could cost you opportunities and reduce your paycheck. Companies look more frequently at their business partners and service or product providers for diversity in their work environments as a condition to doing business. For example, DuPont often requires its law firms to demonstrate the existence of diverse environments before retaining them. Be prepared to be accountable in all aspects of this issue.

Conclusion

Diversity in the workplace is not optional; rather, it is essential to competitiveness, profitability and success in business today. The fundamentals of diversity cut across all aspects and types of businesses. Diversity creates strength in a business by enabling it to connect more effectively and dynamically with the disparate interests it serves.

Business fundamentally moves on the basis of relationships. Diverse people can create deeper and more useful relationships with others on an intellectual, emotional and personal level. These elements are and will continue to be critically important to long-term, profitable business. In short, diversity is good business, with rewards and benefits that reach far beyond the bottom line.

Thanks to Mary Beth Bosco, a leader in Patton Boggs’ diversity effort, for reviewing and editing this article.

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2. Texas Legislature Expands New “Margin” Tax

The House and Senate of the Texas Legislature amended the new margin (franchise) tax law with so-called technical corrections. In doing so, it included, for a limited time, an opportunity to make changes in entity structures to minimize the new tax, which could be construed as the first income tax in Texas. See H.B. 3928.

*Term to Know: The margin tax is a modified franchise tax in Texas, a tax on doing business in the state affecting companies with a business in Texas and perhaps other locations.

The original legislation, H.B. 3, makes two major changes in the franchise tax. First, the margin tax imposes a tax on entities that Texas did not tax under the prior regime. The franchise tax only included corporations and limited liability companies (LLCs) chartered or organized in Texas, as well as foreign corporations and LLCs doing business in Texas. The margin tax applies to corporations and LLCs, but expands the definition of taxable entities to include most active business entities called “taxable entities” under TTC Section 171.0002. Second, the margin tax establishes new mechanisms for calculating the tax. See New Margin Tax Imposed on Businesses Operating in Texas, Business Leasing News (Sept. 2006).

The technical corrections would:

• Add limited liability partnerships (often used by law firms) as “taxable entities” under Section 171.0002 of the Texas Tax Code (TTC);

• Clarify business loss carryover rules under Section 171.001(b)(1);

• Discount the margin tax imposed on taxable entities ranging from (A) 80 percent for companies with total revenue between $300,000 and $400,000 to (B) 20 percent for companies with total revenue grossing between $700,000 and $900,000 under amended Section 171.0021 of the TTC;

• Provide alternative calculations of the tax under an “E-Z Computation and Rate” for taxable entities with up to $10 million in total revenue under amended Section 171.1016.;

• Lower the ownership threshold for “controlling interest,” which is used to determine whether a company is included in a combined group, from “80 percent” to “more than 50 percent” under Section 171.0001(8) of the TTC; and

• Delete “family limited partnerships” from exempt entities under amended Section 171.10002(c)(4) and modify important terms, including “unitary,” “reportable income” (in the context of calculating “total revenue”), and “tangible personal property.”

*Action Item: Before the June 30, 2007 deadline, consider structuring existing entities or forming new ones to minimize or avoid the new margin tax. Consult your tax advisors immediately. Follow the current legislation, H.B. 3928, for possible further changes before it is enacted. See H.B. 3928 Section 35.

Thanks to Mark McWatters of the Patton Boggs Tax Department for reviewing and editing this article.

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3. BLFN Case & Comment: Incorporating URL in Written Contract Fails in Affinity Internet

Companies more frequently include terms from their web site in their contracts by reference to the relevant URL. This practice enables a company to update its policies, terms and conditions, maintain consistent treatment of customers and avoid excessive legalese in their agreements. In Affinity Internet, Inc. v. Consolidated Credit Counseling Services, Inc., No. 4D05-1193 (March 1, 2006), the parties discovered the incorporation by reference did not work.

BACKGROUND: Consolidated Credit Counseling Services, Inc. (Consolidated) and Affinity Internet, Inc., d/b/a/ SkyNetWEB (Affinity) entered into a contract pursuant to which Affinity was to provide computer and web hosting internet services to Consolidated. In a subsequent dispute, Affinity tried to compel an arbitration. The contract between the parties stated:

“This contract is subject to all of SkyNetWEB’s terms, conditions, user and acceptable use policies located at http://www.skynetweb.com/about/legal/legal.htm. ” A copy of the document was attached to Consolidated’s Motion to Arbitrate. Paragraph seventeen of the User Agreement states that “[a]ny controversy or claim arising out of, relating to or in connection with this Agreement, or the breach thereof, shall be subject to arbitration administered by the American Arbitration Association.” Affinity’s vice-president stated in her affidavit that the contract expressly incorporated the user agreement at http://www.skynetweb.com/about/legal/user_agreement.htm.

ISSUE: (1) Did the written contract contain a valid agreement to arbitrate? (2) Did the written agreement’s incorporation by reference of the URL of Affinity (doing business as Skynetweb) contain sufficient language to enforce an agreement to arbitrate contained in a User Agreement located on Affinity’s web site? As the Court clarified:

The issue in this case is not the scope of the arbitration agreement, but rather, whether a written agreement to arbitrate exists at all. See generally Seifert v. U.S. Home Corp., 750 So. 2d 633, 636 (Fla. 1999) (elements to consider in determining whether to compel arbitration are “(1) whether a valid written agreement to arbitrate exists; (2) whether an arbitratable issue exists; and (3) whether the right to arbitration was waived.”) The intent of the parties is determinative of whether an agreement to arbitrate exists.

OUTCOME/DECISION: The answers to item (1) and (2) are no. The Court found that no agreement to arbitrate existed at all.

LAW OF THE CASE: The Court stated, in referring to another case, that:

The doctrine of incorporation “requires that there must be some expression in the incorporating document ... of an intention to be bound by the collateral document.... A mere reference to another document is not sufficient to incorporate that other document into a contract, particularly where the incorporating document makes no specific reference that it is ‘subject to’ the collateral document.” Temple Emanu-El of Greater Fort Lauderdale v. Tremarco Indus., Inc., 705 So. 2d 983, 984 (Fla. 4th DCA 1998) (citing Kantner v. Boutin, 624 So. 2d 779 (Fla. 4th DCA 1993)).

*Comment: Incorporation of terms, provisions or policies by reference to a web site saves time and money. As written contracts and web sites content become more integrated, remember this case. Stating that the written agreement is “subject to” the terms, provisions and policies on a web site may be insufficient to include them in a separate written contract, as occurred in this case. Providing that a web site is “incorporated by reference” may be a red flag for lawyers to qualify enforceability opinions in transactions. Consider the best drafting practices with your counsel to state clearly the intent to incorporate particular terms, provisions or policies. Describe them with adequate specificity to avoid this kind of result. It does not matter whether the web site contains materials relating to arbitration or any other terms. It’s simply a case of incorporator-by-reference beware!

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4. BLFN’s Finance 101: What is an “Industrial Loan Company,” or “ILC”?

According to the Federal Deposit Insurance Corporation (FDIC), industrial loan companies and industrial banks (collectively, ILCs) are FDIC-supervised financial institutions whose distinct features include the fact that they can be owned by commercial firms that are not regulated by a federal banking agency.

*Technical Point: On May 21, 2007, H.B. 698, the “Industrial Bank Holding Company Act of 2007,” passed in the House of Representatives. The purpose of the bill is to set limits on the ability of commercial companies such as Home Depot and Wal-Mart from owning ILCs. Section 3(a) of the Federal Deposit Insurance Act (12 USC 1813(a)) adds the following definition of an industrial bank:

(4) INDUSTRIAL BANK- The term ‘industrial bank’ means any insured State bank that is an industrial bank, industrial loan company, or other institution that is excluded, pursuant to section 2(c)(2)(H) of the Bank Holding Company Act of 1956, from the definition of the term ‘bank’ for purposes of such Act.

ILCs have become lightning rods for controversy relating to the nature and scope of supervision required or prudent by federal banking regulators. Congress has been attempting to impose on ILCs an acceptable level of regulation after identifying risks attendant to their operations that remain free of regulation by the FDIC or other federal agencies. Risks of ILCs allegedly include their unsupervised ability to enter into bad intercompany transactions and incur credit or reputational risk that otherwise would not be permitted by a regulated bank.

Congressional testimony suggests that ILCs threaten the safety and soundness of banking, present inherent conflicts of interest (due to the interests of the owners) and damage the bank payment system. See Testimony by James P. Ghiglieri, Jr., President. Alpha Community Bank, Toluca, IL & Chairman Independent Community Bankers of America, Washington, DC., United States House of Representatives Committee on Financial Services (April 25, 2007).

*Legislative Alert: According to the American Banker, these legislative actions face opposition from Senator Bob Bennett (R-Utah), whose state is home to a majority of ILCs. Reps. Barney Frank (D-Mass.) and Paul Gillmor (R-Ohio), who sponsor the bill, may compromise by exempting automobile companies and certain other commercial businesses from a ban. Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is expected to schedule hearings in the committee.

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About Patton Boggs LLP

Patton Boggs LLP is a law firm of more than 500 attorneys and other professionals located throughout the United States and internationally in Doha, Qatar.

Patton Boggs has major practice areas in Business, Intellectual Property, Public Policy, and Litigation. These areas are composed of many practice groups designed specifically to meet client needs and the trends in developing legal markets. David G. Mayer often focuses on aviation, power, transportation, infrastructure, and technology matters.

The firm provides a broad array of skills in domestic and international business transactions, including equipment finance and leasing, corporate finance, secured transactions, syndications, mezzanine finance, federal leasing, project finance, real estate, health care, pharmaceuticals, technology transactions, and public policy work.

Publications

The following list offers a sample of articles by David G. Mayer:

• Managed Service Providers Use Innovative Capital Structures to Fund CAPEX, Financier Worldwide, by David G. Mayer (forthcoming May 2007).

• The USA PATRIOT Act Renewed: Reassessing Money Laundering Risk in Finance Transactions, by Stephen J. McHale and David G. Mayer, LNJ Leasing Newsletter (Two Parts: Nov. & Dec. 2006).

• Unique Pad Gas Lease Supports Project Financing and Development of Gas Storage Facility in U.S., by David G. Mayer (with Fortis Capital Corp.), Asset-Based Lending Review, Financier Worldwide (Nov. 2006).

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Thanks to BLFN’s Team

I would like to thank BLFN’s team at Patton Boggs LLP. The team includes J. Atwood Jeter, a senior associate in the firm’s business transactions, real estate, and wind energy groups; the Patton Boggs staff editors, Paul Dumansky and Adrian Nicole McCoy; our Project Manager, Melissa Green; Claire Campbell; and our designer, Winston Jackson. Thanks also to Douglas C. Boggs, a Business Group/Securities partner and web site reviewer for BLFN, and our Marketing Chief, Mary Kimber, for assisting BLFN through our firm’s editing, design, and posting process.All the best,

David

David G. Mayer
Founder: Business Leasing and Finance News
(formerly Business Leasing News)
Partner: Patton Boggs LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)

E-Mail: dmayer@pattonboggs.com

© David G. Mayer 2007

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