International Bankruptcy: The Challenge of Insolvency in a Global Economy

International Bankruptcy

International Bankruptcy

The Challenge of Insolvency in a Global Economy

JODIE ADAMS KIRSHNER

The University of Chicago Press

Chicago and London

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2018 by The University of Chicago

All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission, except in the case of brief quotations in critical articles and reviews. For more information, contact the University of Chicago Press, 1427 East 60th Street, Chicago, IL 60637.

Published 2018

Printed in the United States of America

27 26 25 24 23 22 21 20 19 18    1 2 3 4 5

ISBN-13: 978-0-226-53197-7 (cloth)

ISBN-13: 978-0-226-53202-8 (e-book)

DOI: 10.7208/chicago/9780226532028.001.0001

Library of Congress Cataloging-in-Publication Data

Names: Kirshner, Jodie Adams, author.

Title: International bankruptcy : the challenge of insolvency in a global economy / Jodie Adams Kirshner.

Description: Chicago ; London : The University of Chicago Press, 2018. | Includes bibliographical references and index.

Identifiers: LCCN 2017054873 | ISBN 9780226531977 (cloth : alk. paper) | ISBN 9780226532028 (e-book)

Subjects: LCSH: Bankruptcy—Case studies. | Business failures—Law and legislation. | Conflict of laws—Bankruptcy. | Law and globalization.

Classification: LCC K7510 .K57 2018 | DDC 346.07/8—dc23

LC record available at https://lccn.loc.gov/2017054873

This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

Contents

Acknowledgments

Introduction: Why a Book on International Bankruptcy Law?

1  Why Have So Many Bankruptcies Crossed Borders?

2  What Problems Have the Cross-Border Developments Caused?

3  What Questions Must the Law Answer in Cross-Border Bankruptcies?

4  What Have Efforts to Harmonize Answers Accomplished?

5  In the Absence of More Harmonization, What Other Developments Have Taken Place?

Conclusion: Where Do We Go from Here?

Notes

Index

Acknowledgments

Thank you to Simon Deakin, who gave me my first opportunity to teach; Jack Coffee, Jeff Gordon, Lance Liebman, and Katharina Pistor for mentorship; others who showed me options; and my students, who also have taught me.

Introduction: Why a Book on International Bankruptcy Law?

On an autumn weekend in 2008, government officials and directors of financial companies gathered for emergency meetings in lower Manhattan at the New York Federal Reserve, part of the US central bank.¹ The authorities sought a plan to save the US financial services company Lehman Brothers.² Late Saturday night, they parted ways confident that they had arranged the sale of Lehman Brothers to the British financial services company Barclays.³ The officials and directors, however, had neglected to consider foreign law, and the consequences of their omission led to the largest international bankruptcy in world history.⁴

Lehman Brothers had pursued a growth strategy that had exposed the company to the subprime mortgage crisis and now threatened investor confidence and the stability of the broader economy.⁵ Rather than simply brokering transactions, Lehman Brothers had engaged in leveraged lending to the real estate sector and undertaken large risks in the real estate market.⁶ When the scale of the subprime crisis became apparent, the price of shares in Lehman Brothers plummeted, many investors in Lehman Brothers withdrew, short-term credit lines to Lehman Brothers terminated, and hedging risks became difficult.⁷

The US government responded by brokering the sale of Lehman Brothers to Barclays, but the first mistake, inattention to English law, derailed the sale and unexpectedly forced the company into bankruptcy.⁸ In order to complete the sale of Lehman Brothers to Barclays, English listing rules mandated that the shareholders of Barclays vote to approve the sale.⁹ The vote could have taken weeks to complete, and the regulator of the British financial services industry, the Financial Services Authority (FSA), refused to waive the requirement.¹⁰ Unable to complete the sale of Lehman Brothers to Barclays with sufficient speed and with no alternative parties prepared to acquire Lehman Brothers, the US officials viewed resolution of the company in bankruptcy as the best option for maintaining economic stability while avoiding a bailout of the company.¹¹ The holding company of Lehman Brothers, Lehman Brothers Holdings Inc. (LBHI), entered bankruptcy in the United States less than twenty-four hours after the sale to Barclays fell through.¹²

Foreign law matters and other mistakes by US officials caused the Lehman Brothers bankruptcy to spiral into more than one hundred separate bankruptcy proceedings.¹³ The US holding company of Lehman Brothers sat at the top of a large international corporate group of more than seven thousand entities, and the holding company managed the assets of subsidiary entities.¹⁴ Many of the entities also had entered into complex financial arrangements with other entities in the group and developed transnational relationships with creditors and customers.¹⁵

All the assets in the custody of the US holding company LBHI became part of the bankruptcy estate of LBHI when LBHI entered bankruptcy in the United States, depriving subsidiary entities of operating capital and forcing some into bankruptcy proceedings through the operation of domestic law.¹⁶ The English brokerage affiliate of Lehman Brothers and the principal English and European trading company of Lehman Brothers, Lehman Brothers International (Europe) (LBIE), for example, had transferred $8 billion to LBHI just before LBHI filed for bankruptcy.¹⁷ Instead of returning to LBIE the next morning as part of a routine cash outflow from LBHI, the money became sequestered in the bankruptcy estate of LBHI.¹⁸ English law requires the directors of a company to file for bankruptcy as soon as the directors become aware that the company has become insolvent.¹⁹ Without access to funds from the holding company, LBIE met the legal definition of insolvency, and the directors of LBIE had to place LBIE into bankruptcy in England only a few hours after the holding company entered into bankruptcy in the United States.²⁰

The sudden insolvency of other subsidiaries led to further bankruptcy proceedings.²¹ In Hong Kong alone, eight subsidiaries of Lehman Brothers entered liquidation.²² Eventually, the Lehman Brothers bankruptcy encompassed eight thousand subsidiaries and affiliates, more than one hundred thousand creditors, and twenty-six thousand employees from more than forty jurisdictions.²³ The conduct of the bankruptcy proceedings ultimately served to underscore the inefficiency of resolving multinational companies within discrete national bankruptcy procedures and the need for closer coordination among national courts or better supranational resolution frameworks.²⁴

This book is about how national bankruptcy regimes interact in international bankruptcy cases. The interactions have consequences for national and international law, and new legal tools have become necessary to manage international bankruptcy cases more efficiently. This introduction to the book first explains the approach of the book, and then draws on the Lehman Brothers bankruptcy to describe the ability of the existing international bankruptcy system to manage a large international bankruptcy case.²⁵ Formal and informal measures to bypass national legal procedures have developed, and, although differences persist among national bankruptcy regimes, shared values exist and convergences have occurred in many areas.²⁶ A fully efficient mechanism for resolving a failed multinational company does not yet exist, however, and the bankruptcy of Lehman Brothers ultimately caused investor panic, reduced confidence in the economic system, and destabilized financial markets around the world.²⁷

The Approach of the Book

Although the scale of the Lehman Brothers bankruptcy broke records, modern bankruptcy practice rarely entails a single company filing a single case in a single national court.²⁸ Most companies now have international trading partners, and many companies operate and hold assets in more than one country.²⁹ In addition, there has been a proliferation of large multinational corporate groups that consist of multiple affiliated entities located in different countries.³⁰

This book therefore intends to provide a realistic perspective on the complex legal environment that modern companies face when they fail. The book examines how different legal systems interact dynamically, rather than focusing on a single national legal system or simply presenting international materials for side-by-side comparison.

Although separate national legal frameworks define the rights upon which multinational companies and their creditors depend, global competition affects the national laws.³¹ The approach of the common law to bankruptcy, for example, increasingly has dominated and become effectively an international bankruptcy law.³² Companies from countries in mainland Europe where bankruptcy continues to carry a stigma and effective restructuring procedures remain unavailable, for example, have sought to access restructuring procedures in English law and then gained recognition of the restructurings in the United States.³³

Globalization also has encouraged the creation of new legal schemes and practices that bypass national legal systems.³⁴ Regional projects have included, for example, the European Insolvency Regulation and the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (UNCITRAL).³⁵ The traditional comparative law framework, which contrasts separate legal environments in a static way, misses the nuances of these dynamics.

This book proceeds through a series of chapters, each revolving around a case study of an international bankruptcy. The book examines

the reasons bankruptcies increasingly have become international

the problems the internationalization has caused

the legal questions that have arisen in international bankruptcy

the regional and international legal solutions to the questions that have developed

the more informal practices on which parties have relied

The case studies have been selected for their instructive characteristics, rather than for their currency. The book intends to find uses in many jurisdictions and therefore includes references for more granular assessments of case law and statutes in single jurisdictions. The book concludes by offering solutions for approaching international bankruptcy more efficiently, such as new disclosure regimes, greater harmonization of private international law, bilateral rather than multilateral bankruptcy treaties, and greater reliance on mediation in bankruptcy.

Lehman Brothers and the Limitations of the International Bankruptcy Environment

Efforts to harmonize bankruptcy law have failed, and resolving international companies within existing frameworks has introduced inefficiencies.³⁶ The Lehman Brothers bankruptcy offers concrete examples of the challenges that arise when national courts separately administer an international bankruptcy and the deficiencies in regional and international bankruptcy tools.³⁷ Variations in national bankruptcy law persist, particularly in areas that intersect with other core fields of national law.³⁸ The differences make coordination among jurisdictions difficult, and the regional and international regimes fail to provide meaningful assistance.³⁹ In the Lehman Brothers bankruptcy, numerous national proceedings hindered information sharing and asset distribution and led to conflicting judgments.⁴⁰

Bankruptcy overlays a collective asset collection and distribution system onto rights created and defined by other national law.⁴¹ Bankruptcy law therefore affects further areas of law that reflect national prerogatives.⁴² Bankruptcy law, for example, interacts with most aspects of national commercial law, including property law, labor law, and tax law.⁴³ When the rights of creditors and other parties change during bankruptcy, bankruptcy law affects additional national priorities.⁴⁴

National courts, consequently, seek jurisdiction over domestic assets in order to protect domestic creditors and enforce the policies advanced in domestic law.⁴⁵ Without coordination among national courts, however, multiple national bankruptcy proceedings can destroy value and cause unforeseeable losses for creditors.⁴⁶ Creditors that receive assets in one proceeding, for example, may deprive the bankrupt company of assets that would enable the company to restructure and increase collective creditor recoveries.⁴⁷ Creditors of the same class, moreover, may receive unequal returns because more assets fall within the jurisdiction of one national proceeding than fall within the jurisdiction of another.⁴⁸ Prior to bankruptcy, companies also may transfer assets among jurisdictions to take advantage of variations in national law.⁴⁹ These and other problems can make bankruptcy unnecessarily disruptive and impede the ability of creditors to predict outcomes and accurately set interest rates.⁵⁰

Lehman Brothers, for example, had conducted business in an integrated way, unrelated to its group structure, but split into separate national proceedings upon bankruptcy.⁵¹ Entities within Lehman Brothers had booked the trades of other entities within the company and separate parts of product lines.⁵² Several employees claimed not to know which legal entity within Lehman Brothers employed them.⁵³ The divisions between the national bankruptcy proceedings did not conform to the operations of the company, and information access, asset assignments, and consistency in the proceedings, among other tasks, became difficult.⁵⁴

Some entities within Lehman Brothers, for example, had recorded information that related to other entities within Lehman Brothers, and the information became sequestered in the bankruptcy proceedings of the entities that recorded the information.⁵⁵ LBIE in England developed and documented financial notes that a Dutch subsidiary, Lehman Brothers Trading, purchased and resold to downstream investors.⁵⁶ When the Dutch subsidiary entered into a Dutch bankruptcy proceeding, the English bankruptcy court winding up LBIE controlled information about the notes recorded in English data systems.⁵⁷ The Dutch court needed the information about the notes to make asset distributions to creditors participating in the Dutch proceeding, but the English court did not share the information.⁵⁸ Because LBIE carried out administrative duties for the Dutch subsidiary, coordinating the bankruptcy of LBIE with the bankruptcy of the Dutch subsidiary could have benefited creditors.⁵⁹

Uncoordinated national bankruptcy proceedings also hindered the separation of intracompany arrangements.⁶⁰ Some entities of Lehman Brothers had acted as creditors to other entities within the company, and elaborate systems of cross-collateralization and intracompany guarantees of debts to third parties also had developed.⁶¹ National courts claimed competing jurisdiction over assets, which had implications for creditor recoveries.⁶² The English liquidators of LBIE, for example, sought to distribute within the English proceeding the assets that English creditors had invested in a German subsidiary of Lehman Brothers.⁶³ The task of untangling the ownership of specific assets necessitated private agreements to base determinations on the status of Lehman Brothers’ records at a fixed point in time and private agreements on valuation methodologies.⁶⁴

National courts also issued irreconcilable judgments.⁶⁵ US and English courts, for example, awarded priority in the same collateral to two different parties.⁶⁶ Australian investors that had purchased notes from Lehman Brothers subject to English law filed claims for assets collateralizing the notes located in England.⁶⁷ The terms of the notes stated that when Lehman Brothers entered bankruptcy, the collateral would become the property of the note holders, and an English court enforced the terms of the notes.⁶⁸ A US court, however, found that the terms of the notes violated fundamental principles of US bankruptcy law and awarded the collateral to Lehman Brothers instead.⁶⁹

The Lehman Brothers bankruptcy also appears to have demonstrated the inadequacy of the few regional and multilateral statutory regimes that have developed to coordinate national proceedings.⁷⁰ Both the European regulation and the model law seemed to prove ineffective in a bankruptcy of a large group company, and not all jurisdictions participate in the regimes.⁷¹ Informal contracting to facilitate coordination also seemed limited.⁷² Although representatives of thirty-three entities within Lehman Brothers signed a private contract, known as a protocol, with the US holding company LBHI to promote cooperation and communication, the protocol took seven months to complete, could not be enforced in court, and did not bind the entities whose representatives did not sign it.⁷³ LBIE and Lehman Brothers Japan, for example, did not participate in the protocol, and their abstention from the protocol likely raised negotiation and litigation costs related to information sharing and asset reconciliation.⁷⁴ LBIE in England maintained books and records for the European and Asian operations of Lehman Brothers, and LBIE also filed $101 billion in claims against LBHI.⁷⁵ Litigation among jurisdictions wasted assets, and the unpredictable outcomes threatened to increase the cost of capital and reduce cross-border investment.⁷⁶

The Foundation for Progress in International Bankruptcy

In spite of the difficulties that Lehman Brothers illustrates, increasingly national bankruptcy law is converging on shared values that could support improvements in cooperation among national courts or new international frameworks.⁷⁷ Bankruptcy law codifies a distribution system that can determine which creditors insolvent companies will repay and in what amounts, in accordance with clear and predictable rules.⁷⁸ Shared values in national bankruptcy law include predictability, fairness, and efficiency.⁷⁹

In most countries, bankruptcy law substitutes an orderly, collective process for a race among creditors to seize the assets of a bankrupt company.⁸⁰ Otherwise, individual creditors can take assets away from other creditors and dismantle the company.⁸¹ Distributing assets to creditors within a single proceeding maximizes collective distributions and makes reorganization possible.⁸² To prevent a race, national bankruptcy law generally imposes stays that constrain individual creditor actions.⁸³ National bankruptcy systems differ, however, in permitting secured creditors to sidestep the stays and reclaim their secured collateral outside the bankruptcy process.⁸⁴

Predictability, fairness, and efficiency animate many national bankruptcy procedures, in order to contribute to confidence in the credit system and the availability of credit.⁸⁵ Most national bankruptcy systems operate to allocate risk in a predictable and fair way and to maximize the overall value of assets for creditors.⁸⁶ If creditors can predict outcomes in bankruptcy, can expect to be treated fairly in bankruptcy, and can rely on past bankruptcy cases as precedent, they can calculate interest rates accurately.⁸⁷ Reducing the risk of lending lowers the cost of credit, which encourages investment and growth.⁸⁸

The collective bankruptcy process in most national legal systems allocates risk among creditors by type.⁸⁹ National bankruptcy law generally establishes a hierarchy according to which different classes of creditors receive asset distributions from the estate of a bankrupt company.⁹⁰ Creditors at each level of the hierarchy receive the same proportion of assets owed to them and can rely on their position in the hierarchy to assess the risk they undertake in extending credit and set interest rates.⁹¹ Most national bankruptcy regimes also cancel certain asset transfers that occur prior to bankruptcy, so that the assets can be distributed to creditors in accordance with the hierarchy.⁹² Because the hierarchy reflects normative priorities, however, national bankruptcy law often establishes dissimilar distribution hierarchies.⁹³ National law, for example, ranks employees differently.⁹⁴ In Mexico and Indonesia, the bankruptcy law awards an absolute priority to employees, and employees receive distributions of assets ahead of other creditors, including secured creditors.⁹⁵ The absolute priority reflects a concern for the vulnerabilities of employees: employees may lose their sole source of income and benefits when a company enters into bankruptcy, and the employees have limited opportunities to bargain in advance for protections.⁹⁶ German bankruptcy law, by contrast, ranks employees alongside general unsecured creditors.⁹⁷ The German model instead provides support for employees outside the bankruptcy system, through a national employment insurance fund.⁹⁸

Increasingly, national bankruptcy systems also have converged around a goal of restructuring insolvent companies, rather than liquidating the companies.⁹⁹ The value of companies has grown less related to the physical assets that the companies own and more linked to intangible qualities such as brand loyalty and technical skills.¹⁰⁰ Maintaining the business of companies, consequently, often has generated higher returns for creditors than liquidation would make available by preserving human resources and customer relationships, among other benefits.¹⁰¹ Many jurisdictions have drafted new bankruptcy law to encourage restructuring.¹⁰² In Estonia, for example, the 2008 Restructuring Act instituted new procedures for restructuring, modeled after US bankruptcy law.¹⁰³ In the United Arab Emirates, legislation enacted in 2015 also borrows from US law to facilitate restructuring, and in Uruguay, the 2008 bankruptcy law No. 18.387 created a new procedure to preserve viable companies.¹⁰⁴

*

The resolution of Lehman Brothers and other large global companies is now receiving urgent attention. In the Lehman Brothers case, regulators in the United States did not understand the dictates of English and other national law, and national bankruptcy proceedings created inefficiencies and wasted assets.¹⁰⁵ The mistakes of the regulators continue to affect the health of the global economy.¹⁰⁶ It has become crucial for lawyers to gain an awareness of bankruptcy law in comparative context and gain tools for navigating international bankruptcies more effectively. The national legal backdrop against which globalization has taken place creates tensions, but national law increasingly converges on the common law model, and international frameworks bypass national procedures.¹⁰⁷ Building on these developments could smooth the functioning of international credit markets in the future.

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, and Company 12 might create an advertising campaign.⁷⁰ Company 13 might own the distillery where the rum is produced, and Company 14 might own the equipment.⁷¹ Companies 15 and 16 might have exclusive contracts to market the rum in Asia.⁷² Company 17 might purchase the rights to produce and sell the rum in Canada and might contract with companies 18, 19, and 20 to market and distribute it there.⁷³ Company 21 might keep the accounts and manage the cash flow.⁷⁴ Finally, Company 22 might be responsible for travel, communications, and logistics.⁷⁵ These relationships illustrate factors that potentially contribute cross-border elements to a bankruptcy. Foreign assets, foreign trading partners, foreign creditors and contracts, foreign shareholders, and foreign operations all can make a bankruptcy international.⁷⁶

Foreign Property

When a company enters bankruptcy, it likely will own assets or other property located outside of the jurisdiction, which creditors will want to recoup.⁷⁷ The Bacardi company, for example, owns eight production facilities in Scotland.⁷⁸ In 2008, Bacardi acquired its Japanese distributor, which owns assets in Japan.⁷⁹ Bacardi’s competitor, the French conglomerate Pernod Ricard, owns agave fields in Mexico that supply the agave that forms the principal ingredient in tequila.⁸⁰

Foreign Trading Partners

Second, companies that enter bankruptcy may have had dealings with parties in other countries, through either engaging in trade or carrying on business beyond domestic borders, and the parties may become involuntary creditors.⁸¹ The dealings also may have tied up assets in foreign locations that other creditors will want to recover.⁸² The UK firm WPP Group, for example, produces advertising for Bacardi, and the Danish firm Bryggerigruppen sells and distributes Bacardi products in Denmark.⁸³ WPP Group would become a creditor of Bacardi until it received payment, and planned advertising campaigns could constitute an asset of Bacardi. Bryggerigruppen could have a store of excess Bacardi products awaiting sale in Denmark, all of which would be assets.

Foreign Finance and Contracts

Third, insolvent companies may have borrowed money from creditors in various countries, or they may have signed contracts governed by foreign law.⁸⁴ As companies have had to fund more complex research and development and sustain high levels of technological capability, they have required more capital and generally have sought it from the cheapest source.⁸⁵ In 2013, for example, Bacardi raised money on the euro bond market, with the help of fourteen international investment banks.⁸⁶ The Russian metals company Mechel arranged a $1 billion syndicated loan from the foreign banks ING, Société Générale, UniCredit, Commerzbank, and Raiffeisen.⁸⁷

In addition, employment contracts, supply contracts, service contracts, and joint venture contracts, among other agreements, all might specify foreign law or foreign jurisdiction.⁸⁸ Bacardi, for example, has employees in close to thirty countries, and national wage and hour law applies to the employment contracts of locally hired employees as well as expatriates working within the host country.⁸⁹ British-American Insurance (Kenya) Ltd. entered contracts with a Lebanese company and a Kenyan company to insure the construction of a power plant in Kenya and entered reinsurance contracts with Swiss Re, Munich Re, and Africa Re.⁹⁰ The contracts stated that they would be governed by and construed in accordance with the law of England and Wales[,] and each party agrees to submit to the exclusive jurisdiction of the Courts of Kenya.⁹¹

Foreign Shareholders

In addition, shares in a company may have passed into the hands of foreign owners, and in bankruptcy the shareholders would become creditors.⁹² Bacardi is private and family held; its competitor, Diageo, by contrast, is listed on both the London Stock Exchange and the New York Stock Exchange.⁹³ Its shareholders include several Canadian investment funds such as Mawer International Equity, Manulife World Investment Class, and Value Partners Investments.⁹⁴ Diageo, in turn, holds shares in East African Breweries Limited, which is based in Kenya and listed on the Nairobi Stock Exchange, the Uganda Securities Exchange, and the Dar es Salaam Stock Exchange.⁹⁵

Foreign Operations

Finally, insolvent companies may have moved administrative or production functions to countries where labor costs or rents are cheaper, which could result in additional foreign assets, trading partners, creditors, and contracts.⁹⁶ On the basis of fluctuating market demand, Nike Corporation contracts with South Korean subcontractors to produce and assemble its shoes in Indonesia on an Indonesian wage scale, creating a series of international employee relationships that could result in international employee-creditors and the accumulation of assets in Indonesia.⁹⁷ The Brazilian shoe company Schmidt Irmãos Calçados imports leather to assembly factories in Nicaragua and exports the finished shoes to the United States.⁹⁸ The iPad tablet device sold by Apple contains more than 450 components sourced internationally and assembled in China through a Taiwanese subcontractor, FoxConn.⁹⁹

ACCELERATING TREND TOWARD INTERNATIONALIZATION

The elements of increased internationalization are not new, but the trend toward internationalization has accelerated since the 1950s, as a result of changes in global infrastructure.¹⁰⁰ Beginning in the Han Dynasty in 206 BC, the Chinese traded along the four-thousand-mile Silk Road through Asia.¹⁰¹ Tasked with stretching the influence of the crown and adding to its resources at the start of the seventeenth century, the Dutch East Indies Company established sugar plantations in Latin America and East India,¹⁰² and the British East India Company traded basic commodities throughout India, China, the North-West Frontier Province, and Baluchistan.¹⁰³ More recently, the rise of information technologies, converging consumer tastes, expanding trading blocs, international investment flows, and low-cost transportation have facilitated increases in economic openness and geographic integration.¹⁰⁴ Companies have gained more choice in where to obtain inputs, where to locate production facilities, where to seek funding, and where to market their final products.¹⁰⁵

Technology

Advances in technology have reduced geographic barriers.¹⁰⁶ Communications can now move faster than people can travel, and satellites and fiber-optic cables have made transmitting information nearly costless.¹⁰⁷ The Internet has connected people and markets more closely, shrinking physical distances and making it possible for companies to buy and sell in an instantly international marketplace. As digitization substitutes virtual flows of people for physical flows, companies can more easily engage with other firms to carry out activities jointly.¹⁰⁸ Technology, for example, has made it possible for programmers at Indian information technology companies such as Aura Teknology and Online Productivity Solutions to assist foreign companies from India, freeing foreign companies from providing the service in-house.¹⁰⁹

Technology has made possible the free flow of information, leading to increasing convergence in consumer tastes in some industries, which has enabled companies in those industries to sell in broader markets.¹¹⁰ People around the world increasingly see the same films, watch the same television programs, and play the same digital computer games.¹¹¹ Shared preferences make high-end products such as Gucci bags and Mercedes Benz cars popular around the world, even without changing the design or marketing from one place to another.¹¹² A taste for rum has penetrated countries