Inbound M&A and Investments Under Bilateral Investment Treaties
A comment to this blog received last month questioned whether regulatory screening of inbound mergers and acquisitions by the United States conflicts with U.S. bilateral investment treaties (BITs).
BITs generally promise that the host country will treat all inbound investors equally with investors from the host country. The rationale is clear -- based on the treaty provisions FDI will flow into the host country and will be protected. BITs promise investors fair and equitable treatment for their investments, equal treatment with the host’s own nationals and “most favored nation” treatment, as well as a guarantee of full compensation should appropriation occur. BITs also establish an agreed-on tribunal for resolving disputes under the treaty.
The objective of BITs is to generate FDI. The general model of BIT currently used by the U.S. extends equal treatment with U.S. investors not only to businesses once established but also to the period prior to the actual creation of the investment, that is, while there is an agreement to acquire or invest. On the other hand, the purpose of a regulatory screening regime, such as the Committee on Foreign Investment in the United States (CFIUS), is to filter inbound mergers and investments so that foreign ownership does not impair the ability of the U.S. to defend itself. The policy is rooted in national security, not economic security or the protection of U.S.-based businesses against external competition. CFIUS implements its policy during the pre-investment phase.
The resolution to this apparent conflict between policies and the answer to our commenter’s question is found in the BIT itself. The current U.S. model form has the following provision, entitled “Essential Security,” that describes certain “Non-Precluded Measures” that the treaty permits the U.S. or the other treaty party to take:
Nothing in this Treaty shall be construed . . . to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.
In laymen’s terms, as long as the CFIUS review is undertaken to protect essential security interests, it trumps the BIT’s provisions.
A few interesting facts about BITs, all extracted from a comprehensive and detailed overview of the topic authored by Lisa E. Sachs and Karl P. Sauvant of the Vale Columbia Center on Sustainable International Investment:
- the number of BITs worldwide have literally exploded over the past half century from one in 1959 to 2,573 in 2006, with more than 2,000 of these having been signed since 1989
- by the end of 2006, 177 countries had entered into one or more BITs
- the economies with the most BITs are Germany (135), China (119) and Switzerland (114)
- the U.S. is not listed among the 10 countries who are parties to the greatest number of BITs, although it is the country that has entered into the greatest number (148) of double taxation treaties
The Sachs/Sauvant overview is essential and interesting reading for anyone seeking an informed perspective on the interplay BITs and FDI.
Thanks to my partner Jim Silkenat for his assistance in preparing this post.
