What is Safe Harbor?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 26 November 2015
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In the financial world, the term “safe harbor” can have several different meanings. In one sense, it refers to regulations providing protection from legal liability as long as people follow the law precisely, such as laws allowing people to set up retirement accounts to avoid taxes on some income when they are using the money to save for retirement. This term can also refer to the practice of purchasing a heavily regulated company with the goal of becoming a less appealing target for takeover attempts.

In the first sense, as long as an entity performs a task in good faith, it creates a safe harbor, offering protection from legal liability. For example, publicly traded companies must file annual reports with investors, making projections about their future performance and offering information on their current activities. If an investor decides to buy more stock on the basis of this information and the company's value falls, the investor cannot sue the company. The company offered information in good faith and made sure it was accurate and complete, and thus does not have legal liability for decisions made on the basis of that information.


Likewise, board members can share information about a company with investors, shareholders, and executives and enjoy safe harbor protections. They are meeting legal obligations and providing information in the interest of transparency, and any decisions people make are their responsibility. Safe harbor also applies to financial protections for people who want to legally reduce tax liability or other expenses; for example, people claiming deductions on their tax returns to lower tax liability, as long as they do so in good faith, enjoy protection from prosecution, although tax authorities may decide the deductions are incorrect and adjust the tax bill.

In risk arbitrage, companies that know they are potential targets for takeovers and want to avoid an acquisition or merger may use a variety of tactics to address the issue, including setting up a safe harbor. The company can purchase a subsidiary or smaller company operating in a very strict regulatory environment. This makes it less appealing to potential purchasers, as they may not want to deal with the process of confirming that they comply with regulations. The purchase may also attract the attention of regulators concerned about monopolies, who may indicate that any takeover attempt could trigger antitrust laws. The company buys some protection by making itself repellent to investors.


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