THE MULTINATIONALENTERPRISE

AND LEGAL CONTROL

Host State Sovereignty in an Eraof Economie Globalization

by

CYNTHIA DAY WALLACE

MARTINUS NIJHOFF PUBLISHERSTHE HAGUE / LONDON / NEW YORK

TABLE OF CONTENTS

Foreword viiAcknowledgments xiAbbreviations xxixPreface to thè Second Edition xxxi

INTRODUCTION 1

PART ONESETTING THE STAGE 7Chapter I. THE HISTORICAL CONTEXT 9

1. Preliminary Observations 9a. MNEs as 'legai persons' 9b. Multi-nationality through multiplicity of jurisdictions 11e. Interaction between MNEs and governments 12d. Development of thè legai literature and analysis 12e. Legai v. non-legal aspeets 13

2. Development Perspectives 13a. Economie and juridical evolution 14b. Politicai and developmental role of MNEs 15e. The earliest 'multinationals' 16d. Motivations for early expansion into foreign direct investment . . . . 18

3. Twentieth-Century Expansion 21a. Pre-World-War-I expansion 21b. Inter-war years expansion 21e. Post-World-War-II expansion 22

4. Contemporary History 23a. The défi américain 23b. The Drang nach Westen 25e. 'Fortress Europe' and 'forced investment'v. thè Bryant Amendment 26d. The deregulation of services 29

5. Conclusion 29

xui

xiv The Multinatìonal Enterprise and Legai Control

Chapter II. THE GLOBAL CONTEXT 331. MNEs and thè Developing Countries 33

a. The drive for economie self-determination 34b. Regional differences: Africa/Latin America/Asia 37e. The nature of'Third World' economie nationalism 40d. The changing investment climate 42

2. MNEs and thè Former State-Run Economies 45a. Joint ventures 45b. Post-Soviet investment regimes 48

3. MNEs in Industrially Advanced Nations 51a. The dynamics of foreign direct investment flows 51b. The leading investment-intensive countries 52

4. Evaluation 535. Conclusion 56

Chapter III. FEARS AND SOURCES OF CONFLICT 571. Perceptions and Misperceptions : 572. Fears of Intrusion on National Sovereignty 60

a. The traditional notionof sovereignty and thè role ofthè nation-state 60

b. The changing concept of sovereignty . *. 62e. Corporate 'national' identity and thè evolving role of thè MNE . . . 65d. The 'power' of thè MNE vis-à-vis thè host state 66e. Assessment 69

3. Fear of Neo-Colonialism and Economie Imperialism 70a. The MNE as agent of thè home government 71

i. a French perspective 71ii. a German perspective 73iii. a British perspective 73iv. a Canadian perspective 76v. an American perspective 78vi. a Japanese perspective 79vii. an historical perspective 81

b. The MNE as instrument of foreign policy 83e. The MNE and social welfare 85

4. Uncertainty Generated by Foreign-Based Decision-Making 87a. Fear of host/MNE confliet of interest 87b. Vulnerability in thè face of foreign takeovers and acquisitions . . . . 90

5. Fears of Technological Dependence 91

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a. Fear of foreign industriai dominance 92b. Fear of foreign competitive advantage 94e. Fear of foreign monopolistic infiltration 96d. Suspicion of size and growth as equating 'dominant position' 97e. Assessment 99

6. Conclusion 99

Chapter IV. LEGAL AND ORGANIZATIONAL FORMS AND MODESOF OPERATION 101

1. Definitions and Terminology Problems 102a. Definition of terms relating to thè strueture of thè MNE 102b. Analysis of current usage 103e. Defining thè MNE itself 109

i. some governmental samples 109ii. United Nations Commission on Transnational Corporations . . 1 1 1iii. International Monetary Fund 114iv. Organisation for Economie Cooperation and Development . . . 116v. Institut de Droit International 116vi. World Bank 117

d. Assessment 1182. Classification Schemes and Criteria of'Multinationality' 119

a. Classification according to 'degree of internationality' 120i. operational spectrum 120ii. structural and organizational spectrum 124

b. Orientation-based classification 126e. Quantitative and qualitative criteria 128

i. qualitative criteria 128ii. quantitative criteria 129

d. Classification according to 'national' v. 'international'multinationality 130

i. "international multinationals" 130ii. "national multinationals" 131

3. Determining Corporate Nationality as a Definitional Issue 132a. The nationality principle 132b. Contemporary applications 135

4. Basic Legai and Organizational Forms of Association 137a. 'Marginai' or transitional forms of MNE association 138

i. portfolio investment v. foreign direct investment 138ii. intra-enterprise licensing agreements as foreign

xvi The Multinational Enterprise and Legai Control

direct investment 140iii. thè international joint venture as a transition to thè MNE . . . . 142

b. Organizational forms of MNE association 146i. subsidiary as a form of affiliation 147ii. associate as a form of affiliation 149iii. affiliation by contract 149iv. sub-affiliation 149v. assessment 150

e. Other combinations 1505. Relation of Legai Form to Managerial Control 1526. Conclusion 156

Chapter V. IMPORTANT PRELIMINARY DISTINCTIONS RECONTROL AND CONTROL RELATIONSHIPS 159

1. 'Internai' v. 'ExternaP Control 159a. 'Internai' v. 'external' / defacto v. dejure control 159

i. juridical v. statutory basis 160ii. thè MNE in thè traditional legai framework 165iii. managerial v. corporate legai struetures 169

b. Parent/subsidiary control relationships 171e. MNE / municipal law inter-relationships 174d. Municipal/international law relationships 175e. Assessment 179

2. Incentives and Inducements v. Unilateral Restrictions 180a. Incentives and inducements 180b. Unilateral restrictions 182

3. Conclusion 186

PART TWOTECHNIQUES OF RESTRICTIVE HOST STATE CONTROL OVERFOREIGN MNE AFFILIATES: ENTRY AND ESTABLISHMENT 189Chapter VI. EXCLUSIONARY TECHNIQUES AT ENTRY 191

1. Total Exclusion 1922. Exclusion from 'Key Sectors' 194

a. Statutory mechanisms: thè United States and Exon-Florio 194b. Broad interpretations 206

i. Japan 206ii. France 208iii. Canada 210

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e. Minimal protection 211i. United States 211ii. United Kingdom 211iii. Germany 212iv. EU 212

d. Assessment 2133. Discretionary Legislation and Practice 213

a. Systematic case-by-case screening 213i. Japan's Foreign Investment Law and Foreign Exchange

Control Law 214ii. France's hi n" 66-1008 and related measures 224iii. Canada's Foreign Investment Review Act and Investment

Canada Act 235iv. assessment 246

b. Special legislation with discretionary intent 247i. France 247ii. Japan 255iii. Canada 257

e. General legislation and practice with possible deterrent effect anddiscretionary/disriminatory potential: notably, merger controls . . 258i. some U.S. examples 259ii. some Canadian examples 260iii. some British examples 261iv. some German examples 265v. EU generally 267vi. a Japanese example 270vii. assessment 273

d. General legislation and practice with possible deterrent effect anddiscretionary/discriminatory potential: environmental controls . . 274

e. Non-statutory discretionary practice 280i. governmental delay tactics 280ii. government/MNE quid prò quo 280iii. locai enterprise exclusionary tactics 280iv. structural and cultural barriers 283

f. Assessment 2864. International Standards on Entry and Establishment 288

a. Customary international law 288b. Treaty law 290

i. bilateral investment treaties 290ii. multilateral investment instruments 291

xviii The Multinational Enterprise and Legai Control

iii. NAFTA 291iv. thè Energy Charter Treaty 292

e. International codes and guidelines 293i. OECD Declaration and Capital Movements Code 293ii. World Bank Guidelines 294

5. Conclusion 295

Chapter VII. CONDITIONAL ENTRY 2971. Negotiation for Maximum Benefits to thè Host State 297

a. Some national practice 298i. Canada 298ii. United Kingdom 303iii. United States 305iv. Japan 307v. France 309

b. Some supranational/multilateral practice 309i. EC/EU 309ii. NAFTA 311

e. Some international standards 312i. GATT/WTO 312ii. OECD 312iii. World Bank 313

d. The MNE perspective 3132. Guarantees of Continuing Flows of Technology 313

a. Joint ownership 314b. Joint management 318

3. Conclusion 320

PART THREETECHNIQUES OF RESTRICTIVE HOST STATE CONTROLOVER FOREIGN MNE AFFILIATESI OPERATIONS 323Chapter Vili. GENERAL POLICY AND PRACTICE 325

1. Legai Power of Host over Established Foreign Affiliates 327a. General legislation and practice 327b. Special legislation 330

i. Canada 330ii. France 335iii. Japan 341iv. United States 348

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v. United Kingdom 354vi. Germany 356vii. EC/EU generally 359

2. National Treatment Principle 360a. National policy and practice, including bilateral agreements 361

i. FCN treaties and BITs 362ii. other bilateral agreements 367iii. government subsidies to foreign-controlled subsidiaries 368

b. Regional and supranational policy and practice 369i. NAFTA 369ii. EC/EU 372

e. International policy and practice and multinational agreements . . . 374i. OECD 374ii. GATT/WTO 379iii. thè Energy Charter Treaty 383

3. Conclusion 387

Chapter IX. CONTROL THROUGH DISCLOSURE LA WSAND REGULATIONS 389

1. The American v. thè European Approach 390a. United States practice 391b. European practice 394

2. International Approaches 405a. Disclosure for investor protection and transparency 405b. Disclosure to combat corrupt practices 408e. Disclosure to combat restrictive business practices 410

3. Conclusion 412

Chapter X. CONTROL THROUGH RESTRICTION OF CAPITAL

MOVEMENTS 4131. The International Framework 415

a. OECD Code of Liberalisation of Capital Movements 415b. IMF Articles of Agreement 420

2. Some Supranational and Multilateral Policy 422a. EC Treaty and Capital Movements Directive provisions 423b. NAFTA provisions 430e. World Bank and Energy Charter Treaty provisions 431

3. National Law and Practice 431a. A French manoeuvre: décret n° 71-144 431b. Exchange controls: thè U.K. example 433

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e. Exchange controls: thè French example 434d. U.S. Foreign Direct Investment Controls 438e. The German legacy 439f. The Japanese experience 441

4. Conclusion 445

Chapter XI. CONTROL THROUGH COMPETITION LAWAND POLICY 447

1. Purpose and Parameters of Anti-Combines Law 4472. American v. European Origins and Objectives 449

a. American antitrust policy goals 449b. European competition policy goals 452

3. Development of National Merger Policy and Legislation 457a. United States 457b. Canada 475e. Germany 487d. United Kingdom 511e. France 528f. Japan 533

4. Development of Regional Merger Policy and Legislation 546a. European Community 546

i. articles 85 and 86 and thè Continental Can doctrine 548ii. thè Merger Control Regulation 557iii. thè future of EC competition policy 571

b. NAFTA: Chapter Fifteen 5735. International Convergence of Competition Policies 573

a. Common trends and objectives 573b. Trends in competition law as industriai policy 576e. The EC-US Agreement and other bilateral cooperation agreements 578d. The prospeets for convergence 584

6. Conclusion 586

Chapter XII. CONTROL THROUGH JURISDICTIONAL REACH 5891. Multiple Jurisdictions: Asset or Liability for thè MNE 589

a. 'Serving two masters' 589i. case law: thè Texasgulf 'and Citibank cases 592ii. contract law: thè German Beherrschungsvertrag 595

b. Evaluation 5962. Trading with thè Enemy and Export Controls 596

a. Export controls and extraterritoriality 598

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i. thè American President Lines case 598ii. thè Fruehauf-France case 602iii. thè Dresser Industries case 605iv. thè question of ultimate destination 611

b. Trade sanctions and thè role of thè MNE 613i. thè Helms-Burton Act 613ii. thè role of thè MNE 625

e. Evaluation 6283. Jurisdictional Determinations 630

a. 'Lifting thè veiP 630i. thè traditional approach 630ii. Salomon v. Salomon 632

b. The 'legai separation' presumption 633i. thè concept of corporate 'entity' 633ii. ownership v. control - a role reversai in veil-lifting practice . . 635

e. The 'single entity' presumption 639i. European applications 639ii. North American applications 645

d. Current trends in veil-lifting 647i. contemporary American case law 649ii. contemporary European case law 653iii. inconsistency in municipal law standards 656iv. insufficiency of international law standards 656

e. Evaluation 6584. Conclusion 659

Chapter XIII. CONFLICTS OVER EXTRATERRITORIAL ANTITRUST . . . 6611. Jurisdictional Applications to Investment-Related

Competition/Antitrust Law 661a. International mergers 662

i. Merger Situation I: strict territorial principle 662ii. Merger Situation II: territorial principle with foreign

ramifications 665iii. Merger Situation III: extension of jurisdiction by home state

through domestic parent to foreign subsidiary 666iv. Merger Situation IV: extension of jurisdiction by host state

through locai subsidiary to foreign parent 668b. Some generai observations on 'extraterritorial' jurisdiction 668

i. underlying principles 670ii. a principle in flux 678

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iii. home state v. host state jurisdictional reach 680e. Defences available to thè host state 694

i. acts of state 695ii. sovereign immunity 696iii. foreign sovereign compulsion 698

2. Applications of'Extraterritoriality' and 'Effects' to Investment-Related Competition/Antitrust Law 699a. Some generai observations on thè 'effects' doctrine 700b. Origins: thè American legacy 703

i. thè foundations of antitrust 'extraterritoriality' and 'effects' . . 704ii. Alcoa and thè 'effects' doctrine 710iii. Timberlane, Hartford Fire and international 'comity' 717iv. thè Restatement (Third) and 'reasonableness' 729

e. Contemporary practice 731i. United States 731ii. Germany 737iii. United Kingdom 744iv. France 748v. Japan 749vi. Canada 751

d. EC practice: 'effects' v. 'implementation' 755e. Prospects for convergence of U.S. and EU applications 766f. Effects and international law 770

3. Conclusion 773

Chapter XIV. CONFLICTS OVER 'EXTRATERRITORIAL' DISCOVERY . 7751. Some Terminology Considerations 776

a. "Discovery" in thè context of extraterritoriality 776b. 'Pre-trial' in thè context of discovery 778e. "Extraterritoriality" in thè context of discovery 780

2. Problems of Concurrent and Conflicting Jurisdiction inExtraterritorial Discovery 786

a. The American v. thè European approach 788i. United States practice 788ii. European practice 798

b. 'Blocking statutes' 804i. Canada 805ii. United Kingdom 808iii. France 809iv. Germany 812

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v. Japan 813vi. United States: a response 814

e. The classic U.S. case law , 816i. thè Società Internationale (Interhandel) case 817ii. thè Citibank case 819iii. thè Westinghouse (Uranium Cartel) cases 821iv. thè Beecham case 825v. thè Laker case 827

d. U.S. assistance to foreign discovery in American courts 8293. International Trends in 'Extraterritorial' Discovery 838

a. 'Extraterritorial' discovery and international law 838b. The Hague Evidence Convention 845

i. 'pre-trial' discovery and article 23 848ii. thè issue of exclusivity and article 27 856iii. thè Aérospatiale legacy 861iv. evaluation 874

e. Diplomatic intervention 8744. Conclusion 878

Chapter XV. CONTROL THROUGH TAX LEGISLATION 8811. Differential Treatment 884

a. Some international and multilateral norms 884i. thè OECD perspective 885ii. thè EC/EU perspective 886iii. thè WTO perspective 889

b. Some national practice 890i. a German example 890ii. a United Kingdom example 892iii. a Canadian example ^ 894iv. some United States examples 894v. a French example 901vi. a Japanese example 903

2. Some National Law and Practice 903a. Tax incentives and tax relief schemes 903

i. some French examples 903ii. some German examples 904iii. a British example 906iv. a United States example 906v. a Japanese example 906vi. evaluation 906

xxiv The Multinational Enterprise and Legai Control

b. Tax havens: 'controlied foreign corporations' 9073. Transnational Practices 910

a. Transfer pricing 910i. thè United States example 911ii. thè Canadian example 919iii. Europe with special reference to thè French example 921iv. thè Japanese example 924v. transfer pricing and competition law 925vi. evaluation 926

b. Worldwide earnings and unitary tax 927i. U.S. practice re worldwide income 927ii. Canadian practice re worldwide income 927iii. British practice re worldwide income 927iv. French practice re worldwide income 928v. German practice re worldwide income 929vi. Japanese practice re worldwide income 929vii. unitary tax as conceived in thè United States 930viii. unitary tax and thè Barclays Bank case 932ix. unitary tax and thè European Community 939x. evaluation 939

4. Supranational and Multilateral Law and Practice 941a. EC/EU 941

i. thè 1990 EC Parent-Subsidiary and Mergers Directives andArbitration Convention '. 942

ii. thè Ruding Report 946b. NAFTA 948

5. International Law and Practice: Model Tax Conventions andDoublé Tax Treaties 950

6. Conclusion 954

PART FOURTECHNIQUES OF RESTRICTIVE HOST STATE CONTROLOVER FOREIGN MNEs: DISINVESTMENT 957Chapter XVI. CONTROLS OVER OPERATIONS RESULTING INDISINVESTMENT 9 5 9

1. Voluntary v. Involuntary Disinvestment 9592. 'Fade-out' Formula 9 6 0

3. Contract Renegotiation 962a. Shift in bargaining position 963

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b. Unreasonable economie coercion by host state 9734. Conclusion 975

Chapter XVII. CONTROL THROUGH EXPROPRIATION: TRAD1TIONALCONCEPTS IN TRANSITION 977

1. Terminology 9802. The Compensation Debate 982

a. The United Nations "Formulations" and thè Chorzów Factorycase as possible standards 983

b. United Nations resolutions and thè Texaco and Calasiaticv. Libya (TOPCO) arbitration 986

e. Contemporary formulations 994i. an American national approach: thè U.S. Restatement 994ii. a European national approach: thè French example 996iii. a regional approach: thè European Energy Charter 997iv. a global approach: thè World Bank Guidelines 997v. assessment 998

3. Compensation v. Restitution: thè Federai Republic's Lex Specialisfor 'East' German Expropriations 999

4. An Innovative Compensation Scheme: The U.S.'Helms-Burton' Act • 1004

5. Conclusion 1005

Chapter XVIII. CONTROL THROUGH INDIRECT TAKING:"CREEPING EXPROPRIATION" 1009

1. Defining thè Parameters 10092. Terminology, Definitions and Interpretation 10123. Unreasonable Interference with Ownership: The

"Canadianization" Example 1020

a. Definition 1020b. Implementation and objectives 1020

i. thè Canada Development Corporation 1020ii. thè 1972 Income Tax Act 1021

e. Canadianization as discrimination under international law 1022d. The National Energy Programme 1026e. Partial relaxation of Canadianization 1028

4. Unreasonable Interference with Management:The 'Co-determination' Example 1030a. A German Constitutional Court decision:

international implications 1035

xxvi The Multinational Enterprise and Legai Control

b. A German legai opinion: international implications 1037e. The Maastricht connection 1041

5. Claims of Constructive Takings before thè InternationalCourt of Justice 1044a. Breach of government contract: thè Anglo-Iranian OH Co. case . 1045b. "Disguised expropriation": thè Barcelona Traction case 1046e. Deprivation of right to control and manage: thè ELSI case 1058

6. Constructive Takings under NAFTA: thè Ethyl case 10657. Conclusion 1066

PART FIVETHE INTERNATIONAL LEGAL FRAMEWORK . 1069Chapter XIX. THE ROLE AND FUNCTION OF INTERNATIONALINSTRUMENTS 1071

1. Some Preliminary Considerations: National v. International Rulesin 'International' Regulations 1071

2. Historical Perspective: International Codes and Guidelines 1074a. Overview of major past initiatives 1077

i. thè ICC Guidelines 1078ii. thè OECD 'package' 1078iii. thè ILO Declaration 1080iv. thè U.N. Code of Conduct 1082v. thè UNCTAD Transfer of Technology Code 1084vi. thè U.N. Draft Agreement on Illicit Payments 1084vii. thè UNCTAD RBP Set 1085viii. evaluation 1085

b. Legai character of international codes and guidelines 1086i. thè 'minimalist' position 1088ii. thè 'rnaximalist' position 1091

e. 'Implementation' of international codes and guidelines 1093d. General assessment of thè 'soft-law' approach 1094

3. Addressees of International Instruments 1096a. Directives to MNEs 1098b. Directives to home governments 1099e. Directives to host governments 1101

4. Function of International Instruments 1106a. Protection of beneficiai free-flow of private investment capitai

and maintenance of proper balance of benefits to MNE andhost respectively 1106

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b. Harmonization of national laws and/or setting of minimumstandards in certain key areas 1108

e. Coverage of those areas inadequately provided for — or notapt to be regulated - under municipal law 1109

5. Conclusion 1111

Chapter XX. CONTEMPORARY INTERNATIONAL INSTRUMENTSAND INITIATIVES 1113

1. Bilateral Investment Treaties (BITs) and Their Impact onMultilateral Agreements 1113

2. Some Significant Contemporary Multilateral Instruments ConcerningInvestment 1117a. The World Bank Guidelines 1118b. The Energy Charter Treaty 1122e. The OECD Anti-Bribery Convention 1123d. The Council of Europe Criminal Law Convention on Corruption . 1134e. The OECD Draft Multilateral Agreement on Investment 1136f. Some international agreements concerning investment issues . . . . 1140

3. The Role of thè WTO in Investment Issues 11424. The Potential for an International Antitrust Agreement 1149

a. The concept of'international antitrust' 1149b. Earlier U.N. initiatives 1151e. OECD initiatives 1157d. EC initiatives 1163e. The NAFTA 'model' 1166f. GATT/WTO initiatives 1167g. A round-up of scholars' and practitioners' views, including

thè 'Munich Group' 1168h. Evaluation 1179

5. Conclusion 1181

CONCLUSIONS 1185

BIBLIOGRAPHY OF WORKS CITED 1191INDEX 1299