ISRAEL'S BANK LEUMI AIMS TO AVOID GUILTY PLEA IN SETTLING U.S. TAX PROBE
/By Armin Gray*
Bank Leumi Le-Israel Ltd. recently said it is in advanced talks to settle a U.S. investigation into whether it helped Americans evade taxes in a deal that may not include a guilty plea. Israel's second-largest bank said it has set aside 950 million shekels ($275 million) to resolve the problem. Leumi would be the first Israeli bank to settle a tax probe with the Department of Justice. U.S. persons who have deposited funds with the bank may find that their income from those deposits may be disclosed to the U.S. once a final agreement is reached.
Thus, Leumi joins the list of banks which the U.S. Department of Justice has been pursuing with respect to offshore tax evasion. In 2009, UBS AG, the largest Swiss bank, avoided prosecution by paying $780 million and handing over the names of 4,700 U.S. account holders. As noted above, a guilty plea was just secured from Credit Suisse Group AG's main bank subsidiary, along with a $2.6 billion penalty. The Department of Justice has expanded its enforcement actions to banks outside of Switzerland in recognition of the fact that non-Swiss banks and other financial institutions have also played an active role in aiding U.S. persons in avoiding U.S. taxes. The Leumi case is evidence of one such situation, but it will not be the last with efforts expanding in Israel, India, and elsewhere around the world.
Where there is a deadlock, the buy/sell arrangement is probably the best solution. It allows one of the partners to continue the business, does not force the partners to continue the business notwithstanding the disagreement, and provides the departing partner with a fair value for his ownership interest.
It is also important for any exit provision to take into account other aspects of the business. For example, in the Haley case, the parties were 50/50 owners of the limited liability company and co-guarantors of the company’s debt. The exit provision was silent as to the treatment of the debt if the buy/sell procedure was initiated. The court used this as another reason to bypass the exit provision and judicially dissolve the company.
In summary, whenever one is entering into a business venture consideration should be given to how to break a deadlock. If exit mechanisms are clearly worded and take into account all aspects of the parties’ business, resorting, or being subject to, judicial dissolution with all its inherent costs and uncertainties can be avoided.
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* The following article was published in Insights, by Ruchelman P.L.L.C. Insights was originally designed, created, and edited by Armin Gray. Kyu Kim of Kyu & A LLC, a design company, substantially assisted in its design as well. Co-authors originally included Fanny Karaman and Cheryl Magat. We thank them for their support.