Spot Foreign Governments Disguised as Private Businesses

Coming from a country where state-owned for-profit enterprises (SOEs) are comparatively rare (e.g., Amtrak), U.S. lawyers might experience a little bit of culture shock when they first notice the extent to which foreign governments—whether democratic, undemocratic, capitalistic or socialistic—engage in their own for-profit ventures. For example, Norway does not rely solely on tax revenues, but also on majority ownership of oil giant Statoil, to fund its generous cradle-to-grave “welfare state.” Executives for private oil and gas companies will definitely appreciate the SOE concept, since up to 90 percent of the world’s oil reserves and 75 percent of its oil production are controlled by national oil companies (e.g., Brazil’s Petróleo Brasileiro S.A., or Petrobras). Moreover, the People’s Republic of China owns a majority stake in the world’s largest bank (by both profit and market capitalization): the Industrial and Commercial Bank of China Ltd. Outside the U.S., there really is a whole world of state-controlled commercial air carriers, banks, insurance companies, telecommunications providers and businesses in other sectors that look and function like private companies, more or less independent of their government masters—at least so long as they make a profit.

The U.S. Foreign Sovereign Immunities Act (FSIA) bars lawsuits against foreign governments or their agencies or instrumentalities (aside from specified exceptions for which conditions are set). And that’s a potential pitfall in doing business with these entities. Simply put, if a business relationship with one of these entities turns sour and ends up in court, the other party to the relationship—the private party—may be unpleasantly surprised to find out that the FSIA, for example, does not allow jury trials or punitive damages. The FSIA may also make the enforcement of judgments much more difficult than it would be against private persons. That’s why it’s important to learn whether a prospective business partner is controlled by or even tied to a foreign government—something that’s not always so easy to discern.

The examination is easy when a foreign government, or political subdivision thereof (e.g., a government ministry), owns a majority of an enterprise’s shares or is openly a prospective party to a transaction. During litigation, a plaintiff can consider corporate veil-piercing if there is a suspicion of complete sovereign domination of a defendant company’s finances or business to the plaintiff’s detriment. But today, one often finds companies (which may have been previously state-owned) in which governments only hold a minority stake, while retaining privileges that usually accompany majority control. A government unit may simply be a company’s single largest shareholder. Or it may hold a controversial golden share through which it can, under statute or articles of association, outvote all other shares in certain circumstances. These situations implicate another, more subjective test for determining FSIA “agency or instrumentality” status—whether a company, aside from separate legal personhood and foreign citizenship, qualifies as an “organ” of a foreign sovereign.

Such an organ performs a public function that serves a national interest, despite its outward autonomy. So any hint of government influence over a prospective business partner, even if a government entity does not have a majority ownership stake in that prospective partner, should lead one to ask whether: (1) a foreign state/government created the company (i.e., the partner) in question for a national purpose; (2) the foreign state/government supervises or financially supports the company; (3) the foreign state/government requires the hiring of public employees and pays their salaries; (4) the company in question holds some kind of exclusive right in its home country; and (5) the company otherwise receives some kind of special treatment under its home country’s law. Case law also supports more detailed questions within this framework.

Let’s break down the issues:

A company’s creation

Was a company created by a specific statute or government decree? To what extent did a foreign government otherwise influence the company’s creation (e.g., drafting articles of incorporation or bylaws, appointments of a company’s board of directors or officers)?

A company’s purpose