CHAPTER 19
Nationalizing, Expropriation, and
Privatization
Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Theories Relating to
Takings of Foreign Property
• Traditional theory: prohibition of all takings.
• Modern-Traditional theory: “prompt, adequate
and effective” compensation for all takings.
• Non-Western theories: State has sovereign
right to take, based on the Calvo Doctrine:
sovereign placed ahead of foreign investor.
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Theories Relating to
Takings of Foreign Property
• Calvo rejected the modern-traditional theory’s
prerequisites: Public Purpose and NonDiscrimination.
• But sovereign rights states do take property
based on “public purpose”.
– Nationalization: taking an entire industry e.g. steel.
– Expropriation: taking a single company.
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INA Corp. v. Islamic Republic of Iran
• INA Corp. v. Islamic Republic of Iran: INA acquired a
20% share of an Iranian insurance co. In 1979 Iran
passed a law of Nationalization. INA sought the value
of its shares with interests and costs from the Iran-US
Claims Tribunal.
• The Tribunal awarded what INA was seeking.
• Why? What factors were weighed?
• What did the Tribunal say about nationalizations of a
“lawful” character?
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Creeping Expropriation
•
•
•
•
Gradual erosion of value.
Discriminatory taxes.
Price controls.
License cancellation.
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Guarding Against Political Risk
• U.S. investors in countries that once held
sovereign rights theory, is now at risk from raw
political power.
• Political Risk Insurance.
– Government: OPIC, MIGA
– Private: insurance syndicates.
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Resolving Disputes with
Foreign Nations
• Foreign Sovereign Immunities Act.
– Generally the state is immune from suit
– Exceptions: waiver, commercial activity and
noncommercial torts.
– In light of terrorism, Congress amended the FSIA to
allow U.S. citizens to bring suit against the sovereign
for state sponsored acts of terrorism. 
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Resolving Disputes with
Foreign Nations: FSIA
• Saudi Arabia v. Nelson: FSIA warrants
dismissal of the case brought by a former U.S.
employee of a Saudi hospital. Supreme Court
ruled that Nelsons could not bring suit in US
court over actions in Saudi Arabia.
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Resolving Disputes with Foreign
Nations: Act of State Doctrine
• Even if court can hear case under FSIA,
investor must still move past Act of State
doctrine, a shield to prosecution.
• Prevents court from passing on the validity of a
foreign government’s action.
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Resolving Disputes:
Act of State Doctrine
• W.S. Kirkpatrick v. Environmental Tectronics Corp.
– Case allowed to go forward because it involved the successful
bidder and the unsuccessful bidder on a government contract
and only tangentially brings in government’s action.
• Act of State would not be an obstacle when there is a
treaty applicable to investors.
• Act of State also has commercial activity exception.
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International Adjudication
• National Thermal Power Corp v. The Singer Co.:
foreign investor failed to structure a contract that
allowed binding arbitration under local law.
• International Center for the Settlement of Investment
Disputes (ICSID).
• Arbitration.
• What is the role of a BIT treaty?
• Insurance.
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Preparation for Privatization
• Creation of an Independent Government
Corporation.
• Preparation of a Legal System for
Privatization.
– “Clearing” of any expropriation claims.
– Development of property rights and contract law.
– China, Russia, East Germany examples.
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Methods of Distribution
• Assets are transferred to new entity, run as
private entity during transition.
• Private and public equity placements.
• Voucher systems.
• Debt-for-Equity swaps.
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Models of Privatization
• Sale of a Noncontrolling Interest (Partial Sale).
– Advantage: simple
– Disadvantage: depends upon perspective.
– Lack of control, conflicting interests (full employment v.
efficiency), may not invest in what can’t be controlled.

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Partial Sale
Assets
Government
New
Company
Shares
(100%)
Shares
New
Operator
$
Underwriters
Shares
General
Public
Local
Government
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Trade Sale
• Stock or Asset “trade” sale.
– Advantages: speedy, useful in small enterprises.
New
– Disadvantages: backlash, require capital Operating
&
Investment
infusion, conditions subsequent.
Group
Government
Assets
$
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New
Company
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The Sale to Employees
• Similar to leveraged buyouts (LBO’s).
• Advantages: gives government employees a
stake in the outcome, may bring in labor
unions.
• Disadvantages: if management was poor- now
they are owners, layoffs difficult. 
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The Sale to Employees
Government
Assets
$
Management
or
Employees
New
Company
Government
Management
or
Employees
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Concessions: BOTs and BOOs
• Two major types of concessions: BOT and BOO.
– BOT: Build-Operate-Transfer.
– BOO: Build-Operate-Own.
• Government uses private sector to build infrastructure.
• Joint venture: mix of trade sale and non- controlling
interest model.
• What about anticompetitive considerations?
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BOT Transaction
Developer
Contractor
Banks
Concession
Government
Services
Payment
for Services
Private Users
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New
Company
Shares
Equity Investment
Payment for Equipment
Equipment
Equipment
Manufacturer
Operator
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Models in Combination:
Joint Venture Privatization
Assets
Government
Shares
(50%)
New
Company
$
Shares
(50%)
New
Operating &
Investment
Group
Shareholder
Agreement
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Mixed Example
Assets
Government
Shares
(40%)
New
Company
Shares
(30%)
$
Underwriters
Employees
New
Operating &
Investment
Group
Shares
(20%)
Shares
(30%)
Payment
for Shares
Payment
for Shares
General
Public
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Conclusion
• Major issue for business in 21st century
• Transition of nonmarket economies to market
economies
• Business must assess political risk and use
contracts to protect interests
• Consider arbitration clause
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