Midterm 3: Finance Flashcards
Bilateral Investment Treaty (BIT)
Binding international agreement between two countries that outlines how investments from one country’s investors will be treated in the other.
These treaties aim to create predictable and fair investment environments, offering protections for investors while safeguarding the host country’s regulatory rights.
Expropriation
Expropriation is the act of a government taking privately owned property for public use or national interest, often without the owner’s consent.
Direct Expropriation
The outright seizure of property by the government (e.g., nationalizing industries).
Indirect/Creeping Expropriation
Gradual actions by the government (e.g., regulatory changes, excessive taxation) that reduce the property’s value or ownership rights.
U.S. Model BIT
- Acts as a sample agreement used in negotiations.
- Updated in 2012 to strengthen investor protections while ensuring the U.S. retains the ability to regulate in the public interest.
- Incorporates input from Congress, businesses, labor groups, NGOs, and academics.
- exemplifies a balanced approach to investment treaties, protecting investors while promoting responsible regulation and governance
Calvo Doctrine
Equal treatment
Foreigners should receive the same treatment as citizens of the country they live in, and should not receive special treatment.
Local courts
Foreigners should seek legal recourse in the local courts of the country they live in, rather than through diplomatic channels.
Hull Formula
The U.S. standard that requires “prompt, adequate, and effective” compensation for expropriation, incorporated into U.S. investment treaties.
Mechanisms for Protecting Foreign Investments
- Insurance Mechanisms
- Overseas Private Investment Corporation (OPIC) and Multilateral Investment Guarantee Agency (MIGA) provide political risk insurance - BITs
- International Arbitration
- Treaties and agreements grant investors access to arbitration through bodies like the International Centre for Settlement of Investment Disputes (ICSID) or under the UNCITRAL rules.
Advantages of Arbitration
- reassures investors
- spares local courts
Disadvantages of Arbitration
- Expensive
- Rigid
- Predictability of awards
- Difficulty of collection
US Model BIT Article 3
National Treatment Article
US Model BIT Article 4
Most-Favored-Nation Treatment Article
US Model BIT Article 5
Minimum Standard of Treatment:
Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.
US Model BIT Article 6
Expropriation and Compensation:
Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), except:
(a) for a public purpose
(b) in a non-discriminatory manner;
(c) on payment of prompt, adequate, and effective compensation
(d) in accordance with due process of law and Article 5
US Model BIT Article 7
Transfers:
Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include:
(a) contributions to capital
(b) profits, dividends, capital gains, and proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment
(c) interest, royalty payments, management fees, and technical assistance and other fees
(d) payments made under a contract, including a loan agreement
(e) payments made pursuant to Article 5 Minimum Standard of Treatment and (5) and Article 6 [Expropriation and Compensation]
(f) payments arising out of a dispute.
US Model BIT Article 10
Publication of Laws and Decisions Respecting Investment:
Each Party shall ensure that its:
(a) laws, regulations, procedures, and administrative rulings of general application
(b) adjudicatory decisions
are made publicly available
US Model BIT Article 11
Transparency
US Model BIT Article 12
Investment and Environment
Must consider the environmental impacts of investments
US Model BIT Article 18
Essential Security
Not required to disclose info related to essential security
US Model BIT Article 20
Financial Services
A Party shall not be prevented from adopting or maintaining measures relating to financial services for prudential reasons, including for the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or to ensure the integrity and stability of the financial system
US Model BIT Article 21
Taxation
Nothing in this Treaty shall affect the rights and obligations of either Party under any tax convention.
US Model BIT Article 24
Submission of a Claim to Arbitration
the claimant, on its own behalf, may submit to arbitration under this Section a claim:
that the respondent has breached
- an obligation under Articles 3 through 10
- an investment authorization
- an investment agreement
US Model BIT Article 34
Awards
the tribunal may award, separately or in combination, only:
(a) monetary damages and any applicable interest
(b) restitution of property, in which case the award shall provide that the respondent may pay monetary damages and any applicable interest in lieu of restitution.
US Model BIT Article 37
State-State Dispute Settlement
- Disputes unresolved through diplomacy are submitted to binding arbitration under UNCITRAL rules unless otherwise agreed.
- Tribunals have three arbitrators; if not formed in 75 days, the Secretary-General appoints missing members.
- Costs are shared equally unless the tribunal decides otherwise.
- Related provisions on amicus curiae, transparency, governing law, and annex interpretation apply.
- Excludes disputes under Articles 12 and 13.
Sabbatino Case Summary and Legal Question
Backdrop: After the Cuban Revolution, the Cuban government, under Fidel Castro, nationalized U.S.-owned property in retaliation for American sanctions, including a reduced sugar quota. This nationalization affected businesses like Farr, Whitlock & Co., an American commodity broker dealing in Cuban sugar.
Core Legal Question: Does the Act of State Doctrine prevent U.S. courts from adjudicating the validity of Cuba’s expropriation of property, even if it allegedly violates international law?
Act of State Doctrine
Precludes U.S. courts from questioning the validity of public acts by a recognized foreign government conducted within its own territory.
Rationale: Judicial intervention in such cases could undermine U.S. foreign policy and strain diplomatic relations.
Sabbatino Case Ruling
The Supreme Court reversed the lower court’s decision, ruling that the Act of State Doctrine barred U.S. courts from evaluating the validity of Cuba’s expropriation.
Dissent: Justice White argued for limited application of the doctrine
Congressional Limitation (Hickenlooper Amendment): In response, Congress narrowed the doctrine’s scope in cases of confiscation violating international law
Sabbatino Case Importance
Legal Precedent: Limits judicial review of foreign sovereign acts within their borders.
Foreign Policy: Reinforces separation of powers, deferring to the executive branch on international relations.
Sovereignty: Protects foreign governments from U.S. judicial interference, even in cases of alleged international law violations.
New York Convention
Key international treaty facilitating the recognition and enforcement of foreign arbitration awards. Signed by over 170 countries, it ensures that arbitration agreements and awards are upheld globally, promoting cross-border trade and investment by providing a reliable dispute resolution mechanism.
Hickenlooper Amendment (1962)
Limits the application of the Act of State Doctrine in U.S. courts. It allows judicial review of foreign expropriations if the expropriation violates international law, particularly when property owned by U.S. nationals is seized without compensation. Enacted in response to cases like Sabbatino, it aims to protect U.S. investors from foreign governments’ unlawful actions.
United Fruit Company Case Summary
The United Fruit Company (UFCO) dominated Guatemala’s economy, owning vast unused lands.
President Jacobo Arbenz implemented land reforms, redistributing UFCO land based on its low declared tax value.
UFCO lobbied the U.S., framing the reforms as communist, prompting a CIA-backed coup (Operation PBSUCCESS).
United Fruit Company Results and Importance
Not a court case but a political intervention. Arbenz was overthrown, and military regimes reversed the reforms.
Importance:
Economic Sovereignty: Highlighted tensions between national reforms and foreign corporate interests.
Cold War Politics: Demonstrated U.S. interventionism to protect business under the guise of anti-communism.
Legacy: Destabilized Guatemala for decades, with lasting consequences for its political and social fabric.
National Association of Manufacturers (NAM) v. SEC (2014) Summary
The case challenged the SEC’s Conflict Minerals Rule (from Dodd-Frank 2010), requiring companies to disclose if their products contained minerals financing armed groups in the DRC.
NAM argued this violated the First Amendment by compelling speech (“not DRC conflict-free”) and imposed excessive burdens.
NAM v SEC Ruling and Importance
Ruling: The court upheld most of the rule but struck down the “not DRC conflict-free” requirement, ruling it violated the First Amendment. The rest of the disclosure requirements (such as de minimis exception) remained intact.
Importance:
- Reinforced limits on compelled speech by regulatory agencies.
- Highlighted challenges in enforcing supply chain transparency.
Conflict Minerals Rule
The rule aimed to curb the financing of armed groups in the Democratic Republic of Congo (DRC) by requiring companies to disclose their use of “conflict minerals” (tantalum, tin, tungsten, and gold) that originate in the DRC or adjoining countries.
Must disclose if they are necessary to their product and being used, must conduct due diligence on the origins, and must provide detailed reports to the SEC.
For two years (four years for small companies), firms could label products as “DRC conflict undeterminable” if they could not verify their supply chain’s compliance.
Challenges Raised by NAM
Administrative Procedure Act (APA) Claims:
- Failing to include a de minimis exception for minimal mineral use.
- Overextending the rule to include companies that “contract to manufacture” products.
- Imposing excessive compliance burdens without demonstrating clear benefits.
First Amendment claims as well
Conflict Mineral List
tantalum
tungsten
tin
gold
Who must comply with the conflict mineral rule
Publicly traded companies using any of the 3TG minerals must comply.
Retailers do not need to conduct due diligence on store-brand products due to successful lobbying efforts.
3 steps of Conflict Minerals Rule (Does it apply to you?)
- Covered by rule?
- “reasonable country of origin inquiry”
- “exercise due diligence on the source and chain of custody of its conflict minerals” and report, if identify products that have “not been found to be ‘DRC conflict free’”
NAM’s Challenges to Conflict Mineral Rule
- No de minimis exception
- “reason to believe”
- Cost-benefit analysis
- First Amendment - only one proven in court
Key Elements of Project Finance
- Special Purpose Vehicle (SPV): project company established specifically to undertake the project
- Revenue Generation: income starts only during the operational phase.
- Risk Allocation: Significant risks during the construction phase are borne by sponsors and contractors. Lenders have limited recourse, relying primarily on the project’s assets and future revenues.
- Non-Recourse or Limited Recourse Financing
- Off-Balance-Sheet Treatment: Project financing allows sponsors and governments to keep liabilities off their balance sheets.
Non-Recourse or Limited Recourse Financing
Lenders have minimal or no claim on the sponsors’ other assets if the SPV defaults. Recourse is generally restricted to the project’s assets, performance bonds, and guarantees. Deliberate breaches by shareholders may trigger broader liability.
Benefits of Project Finance
- Attracts private investment for large infrastructure projects.
- Provides a mechanism to allocate and manage risks among various stakeholders.
- Enables sponsors to pursue multiple projects without burdening their own balance sheets.
Limitations of Project Finance
- Complex structuring and significant upfront planning are required.
- High risk during the construction phase with no immediate revenue.
- Requires meticulous drafting of contracts to manage relationships and risks among stakeholders
Why might Basel III destroy Project Finance?
Equator Principles
Intended to serve as a common baseline and risk management framework for financial institutions to identify, assess and manage environmental and social risks when financing Projects.
10 Equator Principles
Principle 1
Review & Categorisation
Principle 2
E&S Assessment
Principle 3
Applicable E&S Standards
Principle 4
E&S Management System & EP Action Plan
Principle 5
Stakeholder Engagement
Principle 6
Grievance Mechanism
Principle 7
Independent Review
Principle 8
Covenants
Principle 9
Independent Monitoring & Reporting
Principle 10
Reporting & Transparency
NML Capital Ltd. v. Republic of Argentina Summary
Argentina defaulted on bonds in 2001 and restructured most debt in 2005/2010.
NML Capital, a holdout creditor, sued to enforce full repayment under the Pari Passu Clause, alleging discrimination as Argentina paid restructured bondholders but not holdouts.
Pari Passu Clause
Definition:
The Pari Passu Clause ensures equal treatment of creditors by requiring a debtor to treat all creditors equally and without preference in repayment. (must pay them all back)
In Sovereign Debt:
Applied in cases like NML Capital Ltd. v. Argentina, it prevents a country from favoring restructured bondholders over holdout creditors.
Courts interpreted it to require “ratable payments” to all creditors.
Importance:
Protects creditor rights and ensures fairness in debt repayment.
Influences sovereign debt restructuring, leading to the inclusion of Collective Action Clauses (CACs) to prevent holdout issues.
NML v Argentina Ruling and Importance
Ruling:
U.S. courts upheld NML’s claim, ordering Argentina to make “ratable payments” to holdouts whenever it paid restructured bondholders.
Rejected Argentina’s defense under the Foreign Sovereign Immunities Act (FSIA).
Importance:
Debt Restructuring: Made restructuring harder by empowering holdouts.
Sovereign Immunity: Limited protections for sovereign assets in international disputes.
Precedent: Influenced sovereign debt contracts to include Collective Action Clauses (CACs) to prevent holdout litigation.
Collective Action Clauses
Collective Action Clauses (CACs) are provisions included in sovereign bond contracts that allow a majority of bondholders (percentage set ahead of time) to agree on a debt restructuring plan, which then becomes binding on all bondholders, including dissenting (holdout) creditors.
Sovereign Debt
- Oldest kind of foreign investment
- Many sovereign debt defaults
- Can you have too much sovereign debt?
—completely related to the perception of
risk of the economy of the nation in
question
Why would we want foreign states to be immune from suit in American courts?
Reciprocity – we want our officials and property to be immune from suit in their courts
Evolution of Foreign Sovereign Immunity
- Early Doctrine: Absolute Sovereign Immunity – sovereign states were granted absolute immunity in foreign courts
- The Restrictive Theory (Naples, 1886) – Sovereign immunity applies only to public or governmental acts (acta jure imperii), not to commercial or private acts (acta jure gestionis).
- The Tate Letter (1952) – formal U.S. policy shift toward the restrictive theory.
- National City Bank v. Republic of China (1955) – The Supreme Court explicitly referenced the restrictive theory, noting the State Department’s broad stance against granting immunity for the commercial activities of foreign governments.
- The Foreign Sovereign Immunities Act (FSIA) of 1976 – Codified the restrictive theory into U.S. law.. Gave U.S. courts authority over cases and created a predictable legal framework
Morrison v. National Australia Bank (2010) Summary
Shareholders sued National Australia Bank (NAB) in the U.S. for fraud involving overstatements of value by its Florida-based subsidiary, HomeSide Lending.
The plaintiffs purchased shares of NAB on foreign exchanges, raising the issue of whether Section 10(b) of the Securities Exchange Act of 1934 applied to transactions outside the U.S.
Morrison v. NAB Ruling
The Supreme Court ruled that Section 10(b) does not apply extraterritorially unless explicitly stated by Congress.
Established the Transactional Test, limiting the application of U.S. securities laws to:
1. Transactions on U.S. exchanges
2. Domestic transactions in other securities.
The Court affirmed the dismissal of the case, rejecting jurisdiction for foreign-cubed claims (foreign plaintiffs, foreign defendants, foreign transactions).
Morrison v. NAB Importance
Limits on Extraterritoriality: Restricted U.S. securities laws’ reach, reversing decades of broader interpretation under the “conduct” and “effects” tests.
Clarity for Businesses: Provided clear guidelines for international securities transactions.
Legislative Impact: Highlighted the need for Congress to explicitly extend laws beyond U.S. borders if intended.
The SEC’s Anti-Fraud Rules
1934 Act 10(b)
- Prohibits any manipulative or deceptive
device in contravention of any SEC rules
- Rule 10(b)5
- Misstatement or omission of material facts one has a duty to disclose
- Materiality: Likelihood reasonable investor would consider relevant
- SEC enforcement, or claims by private
plaintiffs if:
* Actual purchasers/sellers of securities
* Reliance (or “fraud on the market”)
* Causing investor’s loss
Why would we want a presumption against extraterritoriality?
Respect Sovereignty: Avoids conflicts with foreign nations.
Legislative Intent: Courts focus on domestic concerns unless laws explicitly state otherwise.
Clarity: Reduces uncertainty for businesses and individuals.
Judicial Restraint: Prevents courts from overstepping.
Practical Limits: Difficult to enforce laws abroad.
Advantages of Extraterritorial Laws
Protect National Interests: Addresses threats like fraud or terrorism abroad.
Fair Competition: Prevents exploitation of weak foreign regulations.
Global Accountability: Tackles issues like corruption and human rights abuses.
Safeguards Citizens: Protects businesses and investors overseas.
Deterrence: Discourages illegal actions internationally.
Foreign squared vs. cubed
Foreign Squared:
Definition: Cases involving foreign plaintiffs suing foreign defendants for transactions or conduct that occurred partially in the United States.
Example: A French investor suing a German company for fraud related to securities traded on a U.S. exchange.
Foreign Cubed:
Definition: Cases involving foreign plaintiffs suing foreign defendants for transactions or conduct that occurred entirely outside the United States.
Example: Australian investors suing an Australian company for securities fraud involving shares traded on Australian exchanges.
Foreign Corrupt Practices Act
Enacted in 1977, prohibits U.S. companies and individuals from bribing foreign officials to gain or retain business. It includes two key provisions:
Anti-Bribery: Makes it illegal to corruptly offer or pay anything of value to foreign officials to influence decisions or secure advantages.
Books and Records: Requires publicly traded companies to maintain accurate financial records and internal controls to prevent bribery.
FCPA Key Developments
1997 OECD Anti-Bribery Convention: Obligated member nations to criminalize bribery of foreign officials, leading to FCPA amendments in 1998.
Facilitating Payments Exception: Allows small “grease payments” for routine governmental actions, though this is controversial.
FCPA Challenges and Enforcement
Enforcement: Overseen by the DOJ and SEC, with strict liability for inaccurate records.
Criticism: U.S. companies argue the FCPA disadvantages them in corruption-prone markets. Enforcement disproportionately targets foreign companies.
Settlements: Most cases are resolved through settlements, limiting case law development.
SEC v. Leissner Summary
Tim Leissner, a former Goldman Sachs partner, was charged with violations of the Foreign Corrupt Practices Act (FCPA) for his role in the 1MDB corruption scandal.
Leissner facilitated bribes totaling over $1.6 billion to Malaysian and Abu Dhabi officials to secure lucrative bond offerings for Goldman Sachs, generating $600 million in fees.
Funds from 1MDB were diverted to personal accounts and used for lavish purchases, including luxury properties and artwork.
SEC v. Leissner Ruling
Leissner pleaded guilty to conspiracy to violate the FCPA and money laundering.
He forfeited $43.7 million and cooperated with authorities in investigations against other individuals and Goldman Sachs.
Goldman Sachs paid a $3 billion settlement for its role in the scandal.
United States v. Esquenazi Summary (2014)
Joel Esquenazi and Carlos Rodriguez, executives of Terra Telecommunications, were convicted of violating the Foreign Corrupt Practices Act (FCPA) by bribing officials at Telecommunications D’Haiti (Teleco) to secure favorable business terms.
The case centered on whether Teleco, a state-owned entity, qualified as an “instrumentality” of the Haitian government, making its employees “foreign officials” under the FCPA.
United States v. Esquenazi Ruling
The 11th Circuit Court of Appeals upheld the convictions.
It ruled that a state-owned enterprise qualifies as an “instrumentality” if it is controlled by the government and performs a function the government considers its own.
Factors for determining “control” include ownership, government-appointed leadership, financial support, and monopoly status.
Importance of United States v. Esquenazi Ruling
Clarified “Foreign Official”: Broadened the scope of the FCPA to include employees of state-owned enterprises.
Corporate Compliance: Reinforced the need for businesses to conduct due diligence when dealing with state-affiliated entities.
Precedent: Provided a framework for evaluating state-owned enterprises under the FCPA, influencing future enforcement cases.
What constitutes a foreign cubed case?
claims of foreign investors against foreign issuers to recover losses from transactions on foreign securities exchanges
Steps to comply with Conflict Mineral Rule from Dodd-Frank
- Reasonable Country of Origin Inquiry (RCOI).
- Due diligence (assess supply chains)
- Transparency (report to SEC or in yearly reports
- Work to fade them out (2 years for large companies and 4 years for small companies).
What are the main advantages and disadvantages of resolving investment disputes through ICSID arbitration?
Advantages: Neutral forum, binding awards, limited grounds for appeal.
Disadvantages: High costs, lengthy proceedings, potential biases favoring investors.
