Finding a Safe Harbor in a Financial Storm

by Investing School on May 7, 2012

The concept of a ‘safe harbor’ is common in many environments. Whether in sailing or in investing, the basic idea is very much alike: a situation where one enjoys the benefit of additional protections.

When applied to financial matters a safe harbor may be interpreted as one of three states:

  • When a company is targeted for potential takeover, it makes itself deliberately less attractive, thereby providing its own ‘safe harbor’ against attack.
  • A way of accounting that generates a simpler method of determining the taxes assessed.
  • A legal provision that will decrease or completely eliminate liability for as long as good faith is maintained.

Each of these harbors suit a specific goal.

The first makes the company so unattractive that it reduces any interest from potential acquirers. By presenting the firm as financially unstable a business may be able to avoid being taken over. Of course it is important not to actually fall into the trap of financial ruin.

The second allows some financial manipulation between firms owned by the same parent company. This may allow them to claim specific tax credits in a way that wasn’t possible before. As assets are moved around they may need to be leased back by the original ‘owner’ for a variety of other purposes.

The third is a protective measure for the management. The SEC allows companies to make financial projections, as long as they are made in good faith, that aren’t fulfilled. Since it is impossible to truly know the future, this limits liability when a projection is inaccurate and investors don’t earn what they expected.

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