US Companies Can Use International Law to Reduce Foreign Investment Political Risk
US companies operating abroad face regulation and interference from foreign governments. The dark side of regulation can be arbitrary and protectionist measures, refusal to honor commitments made to attract investment, or even expropriation. As the global economy has evolved, countries have turned their regulatory sights on new business models, assets and investments:
Disruptive tech innovators have faced adverse national and local restrictions, some of it obviously intended to protect local competitors.
Social media platforms have faced restrictions on data collection through privacy regimes and otherwise.
Life sciences and big pharmaceutical companies have faced country refusals to license their drugs in order to protect local companies.
In turn, US companies operating in other countries should consider taking advantage of international investment law to mitigate political and legal risks associated with their investment. International investment law grants you access to neutral international arbitration if a country unlawfully interferes with your investment. This allows investors to avoid lengthy and sometimes partial and unpredictable domestic legal proceedings.
How does international investment law protect foreign investments?
There are three key mechanisms granting investors access to international arbitration to protect their investments.
1. International investment agreements (IIAs)
IIAs are international treaties between two or more countries protecting investors from one country (the investor’s home country) from unlawful interference when investing in another country (the host country). They may be bilateral investment or trade treaties or multilateral treaties, such as the North American Free Trade Agreement (NAFTA). Importantly, investment treaties provide foreign investors with a private right of action to enforce these protections through international arbitration against the host country.
2. National investment law
Some countries have passed domestic legislation protecting foreign investors and giving them access to international arbitration in case of breach of these protections by the host country.
3. Investment contracts with international arbitration clauses
In their contracts with investors, countries may agree to submit disputes to international arbitration tribunals to be decided in accordance with domestic or international investment law.
What protections do investors have under international investment law?
International investment law offers multiple protections to foreign investors.
Protection against discrimination
Host countries must not give better treatment to domestic or other foreign investors than the one they give to your investment. For example, a country that implements a tax that only applies to foreign investors could be in breach of this protection.
Protection against ‘expropriation’
International investment law requires host countries to pay prompt and adequate compensation if they seize or nationalize investors’ assets. Critically, the protection also covers “indirect expropriation,” which occurs when the country does not directly take the property, but rather takes measures that largely deprive you of the benefits or value of your investment. This may include, for example, arbitrary denials of operating permits or new laws prohibiting or restricting your business.
Protection against unfair treatment
Host countries must treat investors fairly and equitably. This means a country should not treat investors arbitrarily or unreasonably, frustrate investors’ legitimate expectations, or abruptly introduce changes to the country’s regulatory framework.
Protection against insecurity
Host countries must actively afford the investor and the investment physical and legal security to be able to fully develop the investment’s economic activities in the host country.
How can investors qualify for protection under investment instruments?
In order to be protected, you must be a qualifying investor – and you must have carried out a “protected investment” in the host country.
Investment treaties usually define protected investments and qualifying investors. Critically, in order to take advantage of an investment treaty, the investor must be a national of the home country. The nationality of companies is determined by the country where they are incorporated.
Investment definitions in international investment treaties are typically comprehensive, encompassing tangible and intangible assets (intellectual property, licenses, etc.) in the host country. Whether an investment qualifies for protection is often a key question.
When structuring investments, it is important to consider whether there are treaties or laws that you would like to protect you, usually alongside tax structuring.
How can international investment disputes be resolved?
Under international investment law, an investor can sue the country before an international arbitration tribunal. Usually, these tribunals are composed of three arbitrators – one chosen by the investor, another by the country, and the parties agree on the appointment of the third, who will serve as president of the tribunal.
The decision of the arbitral tribunal is binding on the parties to the legal dispute and can be enforced against the country, if the claim is successful. The awards are enforceable as local judgments.
There are various institutions that administer investor-country arbitral proceedings. One of the most famous is the International Centre for Settlement of Investment Disputes (ICSID), based in Washington, DC. However, there are others, such as the International Chamber of Commerce (ICC) and the Permanent Court of Arbitration (PCA).
International investment law gives you an effective process to obtain compensation if a country tries to interfere with your foreign investment. But before making any foreign investment, consider what protections are available and how to obtain them.
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