Response B to Sidley Summary of Legal Structure
1. Eduardo Diaz
My comments about the S-A document 20179247_3 on legal structure:
1] It is not clear who is going to decide about the concepts of designator vs. members (2nd para,
page3). Is this an item for the CCWG to resolve?
2] Items (a) & (c) in section "The weaknesses of the proposed structure are as follows." (page
3):
"(a) Requires forming a new entity and on an ongoing basis attending to a set of associated
corporate formalities, although those can be fairly minimal;"
" (c) May have some negative impact on operational efficiency due to the
functional separation, and the separate legal status will introduce some
additional costs, although those should not be significant."
I suggest to delete the two statements pointed here by an underline/italics. Both statements are seemly
subjectives and tend to steer the reader
to think that this will be easy to implement and that it will not be costly. There has not been any deep analysis
done on these to support either statement.
2. Chuck Gomes
I think that Eduardo is probably right that we really don’t know whether the increased cost for the legal
separation will be significant or not without a detailed analysis by the Finance Team. Now that we are
specifically leaning toward the legal separation approach, I suggest that we request an analysis by the
Finance Team right away. It will take them awhile to do it and they will probably have some questions
for us but the sooner we get that started the better. Xavier understands that a lot of the shared IANA
costs can still be shared so that will minimize the increase but there will still be increases. As far as the
language in © below, I suggest we say something along these lines instead saying ‘although those
should not be significant’: “The significance of the increased costs cannot be determined until a
detailed analysis is done by the ICANN Finance Team, but the CWG has requested that analysis and
expects to have at least preliminary results before the public comment period ends.”
3. Greg Shatan
Respectfully, I disagree with Eduardo and Chuck on the following issue:
2] Items (a) & (c) in section "The weaknesses of the proposed structure are as follows." (page 3):
"(a) Requires forming a new entity and on an ongoing basis attending to a set of associated corporate
formalities, although those can be fairly minimal;"
" (c) May have some negative impact on operational efficiency due to the functional separation, and the
separate legal status will introduce some additional costs, although those should not be significant."
I suggest to delete the two statements pointed here by an underline/italics. Both statements are seemly
subjectives and tend to steer the reader
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to think that this will be easy to implement and that it will not be costly. There has not been any deep analysis
done on these to support either statement.
As a general point, we have asked counsel to provide us not only with their technical expertise,
but also with the benefit of their practical experience. Here they are telling us two things based
on their experience:
-- corporate formalities "can be fairly minimal."
-- additional costs introduced by operating PTI with a separate legal status "should not be
significant."
Our counsels' practical experience certainly includes forming corporate entities and attending to
corporate formalities (sometimes called "corporate housekeeping") -- I'd daresay among our
counsel they have done and continue to do this for hundreds (if not thousands) of
corporations. From my own experience and knowledge, corporate formation and corporate
housekeeping are essentially ministerial tasks, and are neither particularly complex or timeconsuming (though it requires some familiarity and experience to do these tasks). It's really a
fairly objective and entirely reasonable statement for someone with the requisite knowledge to
say that these "can be fairly minimal." Indeed, I can't think of a scenario where attending to
corporate formalities would not be fairly minimal.
Similarly, I'm fairly sure counsel have dealt many times with the costs associated with having
business units in wholly-owned or controlled subsidiaries rather than divisions, and they are
aware of what those costs are. Again this seems like a reasonable statement and one that I'm
sure is made objectively. From my experience, the costs that are a direct result of running a
business as a subsidiary, as opposed to as a business unit within the same entity, are not
significant.
In sum, I believe these are both reasonable and very unsurprising statements. I know that it is
not the intent, but I think that giving the impression that the opposite (corporate formalities are
not fairly minimal; costs resulting from operating a business as a subsidiary (vs. as a business
unit) are significant) could be true creates FUD where there should be none. Therefore, I think it
would be appropriate to accept this advice.
If we don't want to accept counsel's advice, I don't think the appropriate response is to delete
it. Rather, I think the appropriate action would be to ask counsel to explain the basis of the
statements. Alternatively, we could insert "counsel advises" after "although" in each
statement. Let me say that I don't believe we need to do either of these things. But, if the
group is not willing to accept these and move on, these are the courses of action that should be
considered.
4. Eduardo Diaz
I am not suggesting that we do not accept counsel's advice but to adjust what I consider subjective
statements. "fairly minimal and not be significant" need to be defined to make them objective. Based on my
business experience also cost is always [unpredictable] especially when you do not have all the details.
5. Chuck Gomes (responding to #3)
I do not have any problem with retaining the statements as long we add ‘counsel advises’. But I still
believe that that we should say that we cannot truly know the significance of the cost impacts until we
have further financial analysis of the legal separation model and I definitely think that we should request
the ICANN Finance Team to start that analysis now. It will probably take them several weeks to do it and
the process will involve interaction with the CWG so that they understand the model sufficiently to do
the analysis.
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Please understand that I am not suggesting that the publication of the proposal for public comment be
delayed. The first analysis can be done in parallel with the public comment period. But if we wait to
initiate the analysis until after the public comment period, it will likely not be completed when we
submit a proposal to the SOs/ACs for approval.
Finally, let me also point out that the first such analysis will not be the last. As the proposal continues to
be refined, the analysis will also need to be refined. But I think we will need more objective information
about estimated cost impacts than just counsel advice and that the Finance Team will be able to help us
in that regard.
6. Chuck Gomes (responding to #3)
Please understand that I am not suggesting that we do not accept Counsel’s advice but rather that we
validate it. As you know, I do not have the expertise on subsidiaries/affiliates that Counsel and others
have, but I do know that subsidiaries/affiliates can take many different forms. If nothing else, going
through the exercise with ICANN Finance to analyze and scope out the cost impacts would help us refine
the proposal details to further minimize cost impacts if needed or simply confirm Counsel’s advice in our
specific situation.
7. Milton Mueller (respond to #4)
I agree with Greg. This is not a subjective guess, it is based on experience, and on common sense.
(As an aside, I find it amusing that people are claiming that a one-off cost associated with legal
separation are terrifying while the ongoing costs imposed on the community by creating interminable
community working groups for internal oversight and their ‘intensive work weeks’ are all taken in
stride. ;-)
8. Milton Mueller (responding to #6)
Keep this in perspective.
The entire IANA cost is about 3.96% of ICANN’s total budget.
This is not the AT&T divestiture.
9. Milton Mueller (responding to #4)
Hello Eduardo:
Can you identify any objective reasons why we should be extremely concerned about the potential costs
associated with separating out a department that consists of only 7 people (even less, if it’s only the
“names-related part) with no heavy, specialized capital equipment?
How would the cost of these legal formalities and minor asset reshufflings compare to the cost of
sending ICANN’s CEO and assistants to the World Economic Forum for a week? How would it compare to
the costs of running 42 conference calls for the CWG over the course of 8 months, with 3-5 staff
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members present on each call? Within those parameters, I would suggest that the term “not that
significant” or “fairly minimal” is not so subjective or arbitrary.
I am not arguing against Chuck’s suggestion that ICANN accounting develop an estimate (and it will be
an estimate, not a measurement). More information can be useful. But we do have objective knowledge
of the size of the IANA functions operation and in the greater scheme of things I think these costs are
going to look pretty darn small once those estimates are developed.
Let’s also not forget the potential security advantages of separating IANA functions infrastructure from
routine, unrelated ICANN stuff. There could be significant reductions of risk, and thus cost, there.
10. Eduardo Diaz
Milton:
I am not implying that we should or not be concerned about the potential costs associated with separating out the
department. I am saying that the statements are subjective. Fairly minimal and not be significant are not really
defined. For example, fairly minimal for some may be nothing and not be significant (in relation to cost) for
others might mean 1% of ICANN's total budget. Who knows?
Thanks for the suggestion proposed in your comparison example. That is exactly what we need: real data that
will support the fairly minimal and not be significant statements.
11. Chuck Gomes (responding to #8)
Understand Milton. I don’t see the costs as an issue that would be an argument against the legal
separation approach but rather a matter of due diligence on our part to help us refine our proposal as
we move forward. Also, we need to make sure that the FY16 budget adequately provides for funding of
the transition.
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