SB2413 93RD GENERAL ASSEMBLY

LRB093 19121 JAM 44856 b

93RD GENERAL ASSEMBLY
State of Illinois
2003 and 2004
SB2413

Introduced 2/3/2004, by Carol Ronen

SYNOPSIS AS INTRODUCED:

New Act

Creates the Expatriate State Contractor Act. Prohibits executive branch State agencies from entering into contracts with expatriate corporations or their subsidiaries. Defines an expatriate corporation as a company that (i) is publicly traded in the U.S., (ii) has incorporated in a foreign tax haven, (iii) is traded primarily in the U.S., (iv) has no substantial business activity in the place of incorporation, and (v) meets other specified criteria. Exempts certain companies that were expatriates before January 1, 2005 and afford specified shareholder rights. Authorizes an agency to waive the prohibition if the contract meets a compelling public interest. Requires that contracts include the vendor's declaration of compliance and makes false declaration a Class A misdemeanor. Effective January 1, 2005.

CORRECTIONAL BUDGET AND IMPACT NOTE ACT MAY APPLY

FISCAL NOTE ACT MAY APPLY

A BILL FOR

AN ACT concerning procurement.

Be it enacted by the People of the State of Illinois, represented in the General Assembly:

Section 1. Short title. This Act may be cited as the Expatriate State Contractor Act.

Section 5. Findings. The General Assembly finds and declares all of the following:

By reincorporating in tax haven countries, a number of publicly traded United States based companies are avoiding their fair share of Illinois taxes and have undermined the interests and rights of their shareholders.

An expatriate company is a United States based company that has moved in name and on paper only to a tax haven country and has no substantial business activities in the country of reincorporation.

When a company expatriates, its shareholders are generally left without the opportunity to pursue derivative lawsuits and without the ability to enforce legal judgments against the company under the United States and Illinois securities laws. Therefore, matters relating to standard fiduciary duties of officers and directors of the corporation may be less dutifully monitored or controlled.

Further, the shareholders of expatriate companies stand to lose their rights to submit a shareholder proposal, inspect or obtain copies of the company's corporate records, or approve a sale, lease, or exchange of all or substantially all of the corporation's assets.

In some cases, an expatriate company may significantly limit shareholder voting rights or dissenting shareholders' appraisal rights.

This diminution of shareholder rights is the result of the corporate practice, known as "corporate expatriation", that is part of a larger pattern of deceptive corporate practices and accounting manipulation that continues to undermine the faith and confidence of investors in the integrity of the financial markets.

The State of Illinois and many of its residents are invested in various corporations, mutual funds, and pension plans.

The State's investments and pension funds depend on investor faith and confidence in the transparency, fairness, and integrity of the markets.

A corporate reincorporation greatly impedes the State and the State's pension funds in safeguarding shareholder rights and the State's financial interests.

Further, substandard corporate governance models and accounting practices of an expatriate corporation may impede its ability to do business with the State in a manner required by State law and sound public contracting practices. At the same time, the State's ability to enforce its contract rights or enforce judgments against the expatriate corporation may be limited as the result of corporate expatriation.

Further, an expatriate corporation, by avoiding its fair share of taxes, gains an unfair advantage over corporations that do not expatriate when competing for State contracts and thereby undermines the competitive State bidding process.

It is, therefore, in the best interests of the State to restore faith in corporate practices and in the State's financial system by safeguarding the rights of shareholders, protecting the State's pension funds and other State investments, ensuring a fair business climate, and guaranteeing that similarly situated companies doing business in the State pay their fair share of taxes. Furthermore, the preservation of State control over matters relating to procurement and expenditure of its revenues, a vital and valid public purpose, is served by prohibiting the State from doing business with publicly held expatriate companies.

Accordingly, it is the intent of the General Assembly that, absent a compelling public interest, the State not enter into any agreement or contract with any publicly held expatriate corporation.

Section 10. Definitions. As used in this Act:

"Expatriate corporation" means a foreign incorporated entity that is publicly traded in the United States to which all of the following apply:

(1) The United States is the principal market for the public trading of the foreign incorporated entity.

(2) The foreign incorporated entity has no substantial business activities in the place of incorporation.

(3) Either paragraph (i) or (ii) applies:

(i) The foreign entity was established in connection with a transaction or series of related transactions pursuant to which (A) the foreign entity directly or indirectly acquired substantially all of the properties held by a domestic corporation or all of the properties constituting a trade or business of a domestic partnership or related foreign partnership and (B) immediately after the acquisition, more than 50% of the publicly traded stock, by vote or value, of the foreign entity is held by former shareholders of the domestic corporation or by former partners of the domestic partnership or related foreign partnership. For purposes of item (B), any stock sold in a public offering related to the transaction or a series of transactions is disregarded.

(ii) The foreign entity was established in connection with a transaction or series of related transactions pursuant to which (A) the foreign entity directly or indirectly acquired substantially all of the properties held by a domestic corporation or all of the properties constituting a trade or business of a domestic partnership or related foreign partnership and (B) the acquiring foreign entity is more than 50% owned, by vote or value, by domestic shareholders or partners.

For purposes of paragraphs (i) and (ii), indirect acquisition of property includes the acquisition of a stock share, or any portion thereof, of the owner of that property.

"State agency" means every office, department, division, authority, board, and commission of the executive branch of State government but does not include the General Assembly, any agency of the legislative branch, the courts, or any agency in the judicial branch.

Section 15. Prohibited contracts. Except as provided in Sections 20 and 25, a State agency may not enter into any contract with an expatriate corporation or its subsidiaries.

Section 20. Exemption. Notwithstanding Section 15, a State agency may contract with an expatriate corporation, or its subsidiary, if it was an expatriate corporation before January 1, 2005, to which both of the following apply:

(1) The foreign entity provides, by operation of law, by provisions of its governing documents, by resolution of its board of directors, or in any other manner, at least the following shareholders' rights:

(i) Shareholders of the entity have the right to inspect, at a principal place of business in the United States, copies of the entity's books and records, including, but not limited to, shareholder names, addresses, and shareholdings, in accordance with the corporation law of the United States jurisdiction in which the entity was previously incorporated or, if the entity was not previously incorporated, in accordance with Illinois law, provided that, if the corporate law of the United States jurisdiction in which the entity was previously incorporated or Illinois law does not provide access to the shareholder names, addresses, and shareholdings, these books and records are available for inspection by shareholders for purposes properly related to their status as shareholders of the entity.

(ii) The entity permits its shareholders to bring derivative proceedings on behalf of the entity, provided that these derivative proceedings are brought on a basis of and under the terms applicable under the law of the United States jurisdiction in which the entity was previously incorporated or, if the entity was not previously incorporated, on a basis of and under the terms set forth in Illinois law.

(iii) Entity transactions in which any director is interested are approved in accordance with the applicable law of the United States jurisdiction in which the entity was previously incorporated or, if the entity was not previously incorporated, in accordance with Illinois law.

(iv) The entity has consented to the jurisdiction, for any otherwise available cause of action by or on behalf of the entity's shareholders, including any pendent State causes of action, of all of the following courts:

(A) The state courts of one or more states.

(B) The United States federal courts in any state in which the entity consents to the jurisdiction of that state's courts pursuant to item (A).

(v) The entity has appointed an agent for service of process in the state or states in which the entity has consented to jurisdiction, as described in paragraph (iv), and the entity meets at least one of the following conditions:

(A) The entity has unencumbered assets in the United States, which may include equity or debt investments in United States companies, with a book value in excess of $50,000,000, and the entity delivers to the Secretary of State an opinion of an attorney licensed in the United States that judgments rendered against the entity may be satisfied by using these assets.

(B) The entity posts a bond or similar security in an amount of at least $50,000,000.

(C) The entity has directors' and officers' insurance in an amount of at least $50,000,000.

(vi) The entity agrees that, in connection with any lawsuit brought against it by its shareholders in any court in which the entity has consented to jurisdiction as described in paragraph (iv), the entity will provide to the court notice of the manner in which the entity complied with paragraph (v) and, if the entity complied with that paragraph in the manner specified in item (A) of paragraph (v), a copy of the opinion described in that item.

(vii) Shareholder approval is required for any sale of all or substantially all of the entity's assets in accordance with the law of the United States jurisdiction in which it was previously incorporated or, if it was not previously incorporated, in accordance with Illinois law.

(viii) The directors and officers of the entity occupy a fiduciary relationship with the entity and its shareholders and these directors and officers, in performing their duties, act in good faith in a manner that a director or officer believes to be in the best interests of the entity and its shareholders, as that standard of care is interpreted by the courts.

(ix) The entity agrees to hold no more than one of every 4 annual shareholder meetings in a location outside the United States and, in the event that the entity holds an annual meeting outside the United States, the entity agrees to provide access to that meeting through a Web cast or other technology that allows the entity's shareholders to do both of the following:

(A) Listen to the meeting, watch the meeting, or both.

(B) Send questions that will be addressed at the meeting.

(x) The entity provides a description of the shareholder rights described in paragraphs (i) to (ix), inclusive, and any subsequent changes to these rights, on the entity's Web site or in its 10K filings with the United States Securities and Exchange Commission.

(2) The entity uses worldwide combined reporting to calculate the income on which it pays taxes to the State.

Section 25. Waiver. The chief executive officer of a State agency or his or her designee may waive the prohibition specified in Section 15 if the executive officer or his or her designee has made a written finding that the contract is necessary to meet a compelling public interest. For purposes of this Section, a "compelling public interest" includes, but is not limited to, ensuring the provision of essential services, ensuring the public health and safety, or an emergency. If a waiver is granted to a vendor pursuant to this Section, the requirement to submit a declaration of compliance, as set forth in Section 30, does not apply to that vendor.

Section 30. Vendor declaration; penalty. On and after January 1, 2005, all State agencies shall, as a condition of a contract, require any vendor that is offered a contract to do business with the State to submit a declaration stating that the vendor is eligible to contract with the State pursuant to this Act.

A vendor who declares as true any material matter in a declaration described in this Section that he or she knows to be false is guilty of a Class A misdemeanor.

Section 35. Application. This Act applies to contracts that are entered into on or after January 1, 2005.

Section 99. Effective date. This Act takes effect January 1, 2005.