1 of 30 Lecture 5 FOREIGN INVESTMENT Topics covered: Introduction to Foreign Investment Regulations Sectoral and Geographic Investment Regulations Securities

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Lecture 5FOREIGN INVESTMENT

Topics covered: • Introduction to Foreign Investment Regulations • Sectoral and Geographic Investment Regulations • Securities Regulations • Enforcement of Securities Regulations Internationally

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A. INTRODUCTION TO FOREIGN INVESTMENT REGULATIONS

1. Regulation Policies and Laws a. Reasonably consistent worldwide.

b. Caveat: In some counties practice is not consistent with stated policy or law.

2. Typical Foreign Investment Regulations a. Regulations authorizing and encouraging

foreigners to invest locally. 1) Foreign investment guarantees are commonplace

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2. Typical Foreign Investment Regulations (cont.)

b. Regulations defining the business form a foreign firm must take.

1) Most regulations encourage a business form that allows for local participation, such as publicly traded stock companies.

c. Regulations limiting foreign equity investment:

1) Many states limit the percentage of equity that foreigners may own in a local firm.

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2. Typical Foreign Investment Regulations (cont.)d. Regulations to oversee the local activities of

foreign investors. 1) Commonly impose liability on foreign owners for

obligations of local subsidiaries.

e. Regulations restricting and promoting the economic sectors foreigners may invest in.

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JUDGE JUDY READY TO RULE--

Case: Arab Republic of Egypt v. Southern Pacific Properties: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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2.Typical Foreign Investment Regulations (cont.)

f. Regulations restricting and promoting the geographical areas foreigners may invest in.

g. Regulations (known as "Securities Regulations") establishing procedures for making debt and equity investments.

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B. SECTORAL AND GEOGRAPHIC INVESTMENT REGULATIONS

1. Sectoral Regulations limit or encourage investments in particular economic sectors.

a. Closed sectors: Foreigners are often forbidden from investing in sectors that host governments consider important to their national independence and security.

b. Restricted sectors: The percentage of foreign investment allowed in certain economic sectors is limited by many countries.

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1.Sectoral Regulations (cont.) c. Foreign priority

sectors: 1) Foreigners (commonly) are

encouraged to invest in sectors where:

a) Local development resources are limited.

b) Where foreign investment will increase the number of local jobs.

c) Where the foreign export trade will grow.


Case: The Bhopal Case: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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2. Geographic Regulations commonly establish Free Zones

a. "Free Zone" defined: a geographical area wherein goods may be imported and exported free from customs tariffs and in which a variety of trade-related activities may be carried on.

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2. Geographic Regulations commonly establish Free Zones (cont.)

b. Free zones categorized by their size: 1) Free Trade Areas: geographical areas made up

of two or more states that have agreed to let some or all of each others enterprises carry on their trade across and within each state's borders free from customs tariffs and other restrictions.

a) Examples: NAFTA and the EU.

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b. Free zones categorized by their size: (cont.)2) States may open their entire territory or some

part of it to international trade. a) Example of a state that has opened its entire

territory: Singapore.

b) Example of regional free zones: China's Special Economic Zones.

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b. Free zones categorized by their size: (cont.)3) Free Cities (or free port) are cities that are open

to international trade.

4) Free Trade Zone (or foreign trade zone in the US) is an area within a city or near a city that is open to international trade.

a) Subzones are special-purpose free trade areas near a free trade zone.

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c. Free zones categorized by activities 1) Export Processing Zones are zones in which

manufacturing facilities process raw materials or assemble parts from abroad, then re-export the finished product.

a) Materials and parts brought into these zones are not subject to local customs laws.

b) Example: Mexico's Maquiladora program.

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c. Free zones categorized by activities (cont.)2) Free Retail Zones in international airports and

harbors and near some border crossings.3) Bonded Warehouses are places where shippers

can store goods between the time of their arrival from overseas to the time they clear customs and are taken away by importers.

a) Found at the ports of entry of most countries.b) Privately owned and operated by transportation

firms.


Case: Nissan Motor Mfg. v. U.S.: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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C. SECURITIES REGULATIONS

1. Securities are investment contracts. a. Investment contract: An agreement, transaction,

or scheme whereby a person invests his money in a common enterprise and is led to expect profits principally from the efforts of some other person.

1) Stocks (equity securities) and bonds (debt securities) are the most common examples of securities.

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1. Securities (cont.) a. Investment contract (cont.)

2) Form: a) "Certificated Security" is a paper instrument

representing an investment contract of the "type commonly dealt in on securities exchanges.“

b) "Uncertificated Security" is an investment contract whose ownership is only recorded on the books of the issuer.

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2. Trading of Securities a. Most countries limit the persons who may

publicly trade in securities 1) Typically they are brokers who have registered

with a Securities Commission or a securities exchange.

b. Securities Exchanges are marketplaces where member brokers buy and sell securities on behalf of investors.

1) The six largest exchanges (New York, NASDAQ, Tokyo, London, Frankfurt and Paris) account for 90 percent of all securities transactions in the world.

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3. Issuance of Securities a. Securities laws require securities issuers who

offer securities to the general public to prepare and register a prospectus which they must then make available to buyers.

1) Prospectus: a printed statement setting out a full, true, and plain language disclosure of all material facts relating to the security and the issuer.

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1) Prospectus (cont.)a) Usually it must be audited.b) Must be signed by officers and

directors of an issuing corporation. 1) They certify that the prospectus is

true and complete to the best of their knowledge.

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3. Issuance of Securities (cont.)a. Securities laws require (cont.)

2) Prospectus must be registered with a state's Securities Commission or (in some countries) a Securities Exchange.

a) Not required if the issuer is a government body, a bank, or a non-profit company.

b) Not required if offer is made to a very limited number of potential buyers.

c) May be a simplified prospectus if the number of buyers or the monetary amount is limited.

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3.Issuance of Securities (cont.)

a. Securities laws require (cont.)

2) Foreign companies may offer securities if they comply with the prospectus requirements.

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4. Clearance and Settlement Procedures a. Procedure by which the buyer actually pays the

price and the seller delivers the security certificate.

b. Domestic clearance and settlement procedures. 1) In the United States:

a) Settlement is handled by the National Securities Clearing Corporation (NSCC).

b) If buyer does not need a certificate, the recording of ownership transfers is handled by the Depository Trust Company (DTC).

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4.Clearance and Settlement Procedures (cont.)

b. Domestic clearance and settlement procedures.

2) Most developed countries follow a similar procedure.

3) In developing countries the buyers and sellers actually meet to exchange money for certificates.

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4. Clearance and Settlement Procedures (cont.)c. International clearance and settlement

procedures. 1) Two clearinghouses handle most international

clearance and settlement transactions: a) Euroclear in Brussels handles $125 billion in

daily transactions

b) Cedel Bank in Luxembourg handles $60 billion in daily transactions

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4. Clearance and Settlement Procedures (cont.)c. International clearance and settlement

procedures. (cont.)2) Depository Receipts are used by clearinghouses

to facilitate international trade in securities. a) Depository Receipts are issued by a bank or

clearinghouse as a substitute for securities.b) How they are created (an example):

i. Company X stocks are deposited in a Country X bank in the name of Cedel Bank.

ii. Cedel Bank then issues Receipts which are traded as substitutes for the securities.

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4. Clearance and Settlement Procedures (cont.)c. International clearance and settlement procedures.

(cont.)2) Depository Receipts (cont.)

c) American Depository Receipts (ADRs) are issued by a US bank.

d) Advantages of Depository Receipts: i. The physical delivery requirements of many small

exchanges is avoided by trading the receipt on one of the large exchanges.

ii. Security transfer taxes imposed by some home states can be avoided since the security itself remains registered in the name of the depository bank.

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5. Takeover Regulations a. Countries without takeover regulations are

generally biased against foreign acquisitions, mergers, and takeovers.

1) Common barriers to takeover attempts include: a) Restrictions on share transferability.

b) Cross-ownership of shares.

c) Restrictions on the voting rights of publicly held shares.

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5.Takeover Regulations (cont.)

b. Countries with an active acquisitions market (UK and US) directly regulate the takeover process.

1) US: Williams Act of 1968.

2) UK: City Code on Takeovers and Mergers.

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6. Insider Trading Regulations. a. Insider trading is using material nonpublic

information about a corporation to buy or sell securities for personal gain.

1) Outlawed in the US by the Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 issued by the Securities and Exchange Commission.

2) Outlawed in the UK by the Company Securities (Insider Dealing) Act of 1985.

3) Outlawed in Japan, Germany, and France by similar laws.

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D. ENFORCEMENT OF SECURITIES REGULATIONS INTERNATIONALLY

1. Cooperative arrangements: a. Memorandums of Understanding (MOUs)

between Securities Commissions in developed countries provide for the exchange of information and mutual cooperation in the investigation of securities violations.

b. Council of Europe's Convention on Insider Trading provides for similar information exchanges and investigative cooperation

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D. ENFORCEMENT OF SECURITIES REGULATIONS INTERNATIONALLY

2.Extraterritorial Application of Securities Laws

a. The country most willing to apply its securities regulations internationally is the US.

1) Jurisdictional requirements: "minimum contacts."


Case: Securities & Exchange Commission v. Knowles: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

Choice of Law Clause

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1 of 30 Lecture 5 FOREIGN INVESTMENT Topics covered: Introduction to Foreign Investment Regulations Sectoral and Geographic Investment Regulations Securities