#11169 - Foreign Direct Investment - International Law II

Foreign Direct investment

1. In General

   1. The only significant control of foreign investment, at least until the creation of the WTO and its TRIMS, has been the laws of the host nation.

      1. It is therefore the form of those host nations’ laws that is of the most concern to counsel representing an enterprise planning a foreign investment.

      2. Ever important is how multi-national organizations such as the WTO have placed limitations on what nations may adopt in the form of investment controls.

   2. Governance of Foreign Investment may be divided into three spheres:

      1. (1) U.S. regulation of investment abroad, or governance by the home nation

         1. In the U.S., this is almost exclusively a matter of federal law:

         2. These laws tend to fall into one of two classes:

            1. (1) Those laws originally enacted to deal with domestic issues, and without serious consideration given to their impact on foreign activities of U.S. enterprises.

               1. E.g., federal securities laws, federal anti-trust laws

            2. (2) Laws that address specific foreign policy issues and are intended to achieve what are largely political goals

               1. E.g., anti-boycott laws, the FCPA

      2. (2) OECD Recommendations

      3. (3) The United Nations

2. Considerations When Investing Abroad

   1. (1) Where to Establish the Foreign Investment;

      1. A frequent reason for investing abroad is to make products within the nation or free trade area where they will be sold.

      2. A major consideration is taxation.

      3. Are there foreign investment incentives?

      4. Labor costs?

      5. Material costs?

   2. (2) Restrictions on the Establishment of Foreign Investments;

      1. Restrictions upon entry tend to assume one of two forms:

         1. (1) Nations which recognize the corporate form sometimes restrict the maximum equity allowed to foreign ownership; or

         2. (2) The manner of control over permitted foreign investment in non-market economy nations which do not have corporate forms, is by means of a contract.

   3. (3) Foreign Investment by Acquisition or by Greenfields;

   4. (4) Branch or Subsidiary;

      1. A branch operation is the simplest form of foreign direct investment.

         1. The branch has no independent juridical status.

         2. It is recognized for legal purposes as a mere extension of the foreign parent company.

         3. Having a branch office will not shield the parent company from liability.

      2. A foreign subsidiary is incorporated under the laws of the foreign country, and for most purposes is subject to the laws of that foreign nation.

         1. Subsidiaries are generally treated as distinct legal personalities separate from their parent.

         2. Having a subsidiary will generally shield the parent company from liability.

   5. (5) Joint Venture or Wholly Owned;

   6. (6) What Form of Business Organization for the Subsidiary;

      1. In France:

         1. The first distinction is between a civil and commercial company.

         2. There are several forms of commercial entities (with varying extents of limited liability):

            1. (1) Societe Anonyme (SA);

            2. (2) Societe a Responsabilite Limitee (SARL); and

            3. (3) Societe par Actions Simplifiee (SAS).

   7. (7) Financing the Foreign Investment;

   8. (8) Restrictions During Operation of the Foreign Investment;

   9. (9) The Effect of a Different Currency on the Investment

   10. (10) Insuring the Overseas Risk

       1. OPIC was created for three principal reasons:

          1. (1) Inconvertibility;

          2. (2) Expropriation or confiscation; and

          3. (3) War, revolution, insurrection, or civil strife.

3. FDI Trends:

4. Legal Environment for FDI

   1. General Public International Law

      1. Diplomatic Protection (customary law): “nationality” of company is where it is incorporated: Barcelona Traction

      2. state responsibility (and obligation to repair/compensate)

      3. Int’l labor law (ILO)

      4. Int’l environmental law (depending on the business)

      5. Int’l treaties on corruption/bribery

      6. Human Rights

   2. Multilateral International Economic Law Treaties

      1. International Center for Settlement of Investment Disputes (ICSID)

         1. Convention on the International Centre for Settlement of Investment Disputes:

            1. 158 signatory states (148 ratifications)

            2. US is a party

            3. Entered into force 1966; administered by the World Bank

         2. Jurisdiction over investment disputes between states and private parties

            1. Both the state of nationality of the private party and the other state must have ratified

            2. Agreement to arbitrate at ICSID in place:

               1. BIT between the two countries involved has an arbitration clause

               2. Other agreement to arbitrate

         3. BIT and ICSID Jurisdiction: Consent

            1. Arbitration clause in favor of ICSID in BIT, eg.

               1. UK-Egypt BIT (“IPPA”) Art. 8.1:

                  1. “Each Contracting Party hereby consents to submit to the [ICSID]…any legal dispute arising between that Contracting Party and a national or party of the other Contracting Party concerning an investment of the latter in the territory of the former.

                  2. Such a company of one Contracting Party in which before such a dispute arises a majority of shares are owned by nationals or companies of the other Contracting Party shall in accordance with Article 25(2)(b) of the Convention be treated…as a company of the other Contracting Party”

      2. WTO:

         1. Agreement on Trade-Related Investment Measures (TRIMS)

            1. Applies to measures related to trade in goods

            2. Prohibits investment measures that violate the national Treatment obligation of the GATT

            3. Prohibits investment measures that violate the prohibition on quotas of the GATT

            4. “Illustrative List” incudes examples of such prohibited measures:

            5. Measures requiring the purchase or use of domestic products

            6. Measures restricting the importation of products

         2. General Agreement on Trade in Services (GATS)

            1. Opt-in system for liberalization of service sectors

            2. Once a state agrees to liberalize a sector, it is subject to:

            3. National treatment obligation

            4. Certain market access commitments, incl.:

            5. Prohibition on measures restricting the type of legal entity or joint venture through which the service supplier may operate

            6. Prohibition on limiting the number of persons employed by foreign service supplier

            7. Prohibition on limiting the number or value of transactions that foreign service suppliers can offer.

   3. Bilateral Treaties

      1. Bilateral Investment Treaties (BITs): More than 2,500 in force

         1. BIT Main Provisions: The example of the US-Argentina BIT

            1. Who are the beneficiaries of the rights?

               1. Art. 1.1.a: “investment owned or controlled…by nationals or companies of the other party”

               2. State parties to the treaty

            2. Who can bring a claim under the treaty?

               1. Art. 7: the affected persons or companies

               2. Art. 8: states

            3. Rights and Obligations

               1. MFN (art. 2): fair, equitable and non-discriminatory treatment, consistent with int’l law, protection against takings, etc.

               2. Rights not unfettered: national security, public order, etc (art. 9)

            4. National Treatment

               1. “Each Party shall permit and treat investment, and activities associated therewith, on a basis no less favorable than that accorded in like situations to investment or associated activities of its own nationals or companies, or of nationals or companies of any third country, whichever is the more favorable” (Art. II.1)

            5. Fair and equitable treatment

               1. “Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.” (Art. II.2(a))

            6. State of necessity defense

               1. “This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.” (Art. XI)

            7. Treatment in emergency cases

               1. Nationals or companies of either Party whose investments suffer losses in the territory of the other Party owing to war or other armed conflict, revolution, state of national emergency, insurrection, civil disturbance or other similar events shall be accorded treatment by such other Party no less favorable than that accorded to its own nationals or companies or to nationals or companies of any third country, whichever is the more favorable treatment (Art. IV.3)

            8. Compliance with domestic and int’l law

               1. “This Treaty shall not derogate from:

                  1. (a) laws and regulations, administrative practices or procedures, or administrative or adjudicatory decisions of either Party;

                  2. (b) international legal obligations; or

                  3. (c) obligations assumed by either Party, including those contained in an investment agreement or an investment authorization, that entitle investments or associated activities to treatment more favorable than that accorded by this Treaty in like situations” (art. X)

      2. Double Taxation treaties

         1. International Tax Basics

            1. Tax...