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Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
CHAPTER 19 Nationalizing, Expropriation, and Privatization
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 2
Theories Relating to Takings of Foreign Property
• Traditional theory: prohibition of all takings.• Modern-Traditional theory: “prompt, adequate
and effective” compensation for all takings.• Non-Western theories: State has sovereign
right to take, based on the Calvo Doctrine: sovereign placed ahead of foreign investor.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 3
Theories Relating to Takings of Foreign Property
• Calvo rejected the modern-traditional theory’s prerequisites: Public Purpose and Non-Discrimination.
• But sovereign rights states do take property based on “public purpose”.– Nationalization: taking an entire industry e.g. steel.– Expropriation: taking a single company.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 4
INA Corp. v. Islamic Republic of Iran
• INA Corp. v. Islamic Republic of Iran: INA acquired a 20% share of an Iranian insurance co. In 1979 Iran passed a law of Nationalization. INA sought the value of its shares with interests and costs from the Iran-US Claims Tribunal.
• The Tribunal awarded what INA was seeking.• Why? What factors were weighed?• What did the Tribunal say about nationalizations of a
“lawful” character?
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 5
Creeping Expropriation
• Gradual erosion of value.• Discriminatory taxes.• Price controls.• License cancellation.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 6
Guarding Against Political Risk
• U.S. investors in countries that once held sovereign rights theory, is now at risk from raw political power.
• Political Risk Insurance.– Government: OPIC, MIGA– Private: insurance syndicates.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 7
Resolving Disputes with Foreign Nations
• Foreign Sovereign Immunities Act.– Generally the state is immune from suit– Exceptions: waiver, commercial activity and
noncommercial torts.– In light of terrorism, Congress amended the FSIA to
allow U.S. citizens to bring suit against the sovereign for state sponsored acts of terrorism.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 8
Resolving Disputes with Foreign Nations: FSIA
• Saudi Arabia v. Nelson: FSIA warrants dismissal of the case brought by a former U.S. employee of a Saudi hospital. Supreme Court ruled that Nelsons could not bring suit in US court over actions in Saudi Arabia.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 9
Resolving Disputes with Foreign Nations: Act of State Doctrine
• Even if court can hear case under FSIA, investor must still move past Act of State doctrine, a shield to prosecution.
• Prevents court from passing on the validity of a foreign government’s action.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 10
Resolving Disputes: Act of State Doctrine
• W.S. Kirkpatrick v. Environmental Tectronics Corp.– Case allowed to go forward because it involved the successful
bidder and the unsuccessful bidder on a government contract and only tangentially brings in government’s action.
• Act of State would not be an obstacle when there is a treaty applicable to investors.
• Act of State also has commercial activity exception.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 11
International Adjudication
• National Thermal Power Corp v. The Singer Co.: foreign investor failed to structure a contract that allowed binding arbitration under local law.
• International Center for the Settlement of Investment Disputes (ICSID).
• Arbitration.• What is the role of a BIT treaty?• Insurance.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 12
Preparation for Privatization
• Creation of an Independent Government Corporation.
• Preparation of a Legal System for Privatization.– “Clearing” of any expropriation claims. – Development of property rights and contract law.– China, Russia, East Germany examples.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 13
Methods of Distribution
• Assets are transferred to new entity, run as private entity during transition.
• Private and public equity placements.• Voucher systems.• Debt-for-Equity swaps.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 14
Models of Privatization
• Sale of a Noncontrolling Interest (Partial Sale).– Advantage: simple– Disadvantage: depends upon perspective.– Lack of control, conflicting interests (full employment v.
efficiency), may not invest in what can’t be controlled.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 15
Partial Sale
Government
Underwriters
NewCompany
NewOperator
GeneralPublic
LocalGovernment
Assets
Shares(100%)
$
Shares
Shares
Shares
Shares
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 16
Trade Sale
• Stock or Asset “trade” sale.– Advantages: speedy, useful in small enterprises.– Disadvantages: backlash, require capital
infusion, conditions subsequent.
Government
NewOperating & Investment
Group
NewCompany
Assets
$
Shares
$
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 17
The Sale to Employees
• Similar to leveraged buyouts (LBO’s).• Advantages: gives government employees a
stake in the outcome, may bring in labor unions.
• Disadvantages: if management was poor- now they are owners, layoffs difficult.
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 18
The Sale to Employees
Government
NewCompany
Managementor
Employees
WaiversShar
es$
GovernmentManagement
orEmployees
Assets
$
Emplo
ymen
t
Contract
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 19
Concessions: BOTs and BOOs
• Two major types of concessions: BOT and BOO.– BOT: Build-Operate-Transfer.– BOO: Build-Operate-Own.
• Government uses private sector to build infrastructure.• Joint venture: mix of trade sale and non- controlling
interest model.• What about anticompetitive considerations?
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 20
BOT Transaction
NewCompany
EquipmentManufacturer
Contractor
ServicesGovernment
Private Users Operator
BanksDeveloper
Paymentfor Services
Concession
Equity Investment
Equ
ity In
vest
men
t
Sha
res
Con
stru
ctio
n
Con
trac
t
Con
stru
ctio
n
Fees
Payment for EquipmentEquipment
Shares
Dev
elop
er’s
Fee
s
Equi
ty In
vest
men
t
Shares Loans
RepaymentSe
rvic
esPay
men
t
for S
ervi
ces Operating Fees
Operating Agreement
Equity InvestmentShares
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 21
Models in Combination: Joint Venture Privatization
NewOperating & Investment
Group
NewCompany
Assets $
GovernmentShares(50%)
Shares(50%)
ShareholderAgreement
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 22
Mixed ExampleAssets
$
Government Shares(40%)
Shares(20%)
Paymentfor Shares
NewOperating & Investment
Group
NewCompany
EmployeesUnderwriters
GeneralPublic
Shares(30%)
Paymentfor Shares
Shares(30%) W
aivers of
Prior O
bligations
Share
s(1
0%)
New L
abor
Contract
Cap
ital
Co
ntrib
utio
n
Sh
ares
(50%)
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning. 23
Conclusion
• Major issue for business in 21st century• Transition of nonmarket economies to market
economies• Business must assess political risk and use
contracts to protect interests• Consider arbitration clause