Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning....

Copyright © 2009 South-Western Legal Studies in Business,

a part of South-Western Cengage Learning.

CHAPTER 19 Nationalizing, Expropriation, and Privatization


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.



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.



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?



Creeping Expropriation

• Gradual erosion of value.• Discriminatory taxes.• Price controls.• License cancellation.



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.



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.



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.



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.



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.



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.



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.



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.



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.



Partial Sale

Government

Underwriters

NewCompany

NewOperator

GeneralPublic

LocalGovernment

Assets

Shares(100%)

$

Shares

Shares

Shares

Shares



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

$



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.



The Sale to Employees

Government

NewCompany

Managementor

Employees

WaiversShar

es$

GovernmentManagement

orEmployees

Assets

$

Emplo

ymen

t

Contract



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 noncontrolling

interest model.• What about anticompetitive considerations?



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



Models in Combination: Joint Venture Privatization


Group

NewCompany

Assets $

GovernmentShares(50%)

Shares(50%)

ShareholderAgreement



Mixed ExampleAssets

$

Government Shares(40%)

Shares(20%)

Paymentfor Shares


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%)



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

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning....

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