The technology sector is increasingly in the crosshairs of foreign and domestic regulators. As is well known, the Trump administration recently issued an executive order prohibiting transactions with TikTok due to alleged national security risks posed by the company’s collection of user data. The White House then issued a second executive order, requiring ByteDance, TikTok’s Chinese-owned parent, to divest TikTok’s US business as well as any US user data within 90 days. In response, China updated its export control rules over technologies such as TikTok’s core algorithm, which means that ByteDance’s sale of TikTok’s US operations could be subject to Beijing’s approval. The White House recently approved a deal between ByteDance, Oracle and Walmart that will see TikTok spun out as a US-headquartered company, although the deal is still subject to further US government approvals.
This is one example of the regulatory interference that technology companies are facing around the world. There are many more. For example, in July 2020, Turkey passed a law granting the government sweeping powers over social media companies, and India recently banned almost 100 apps operated by Chinese companies. Foreign governments are also increasingly using antitrust regulators and tax authorities to achieve protectionist and other aims.
Technology companies may first look to domestic courts for remedies. The prospects of justice in local courts may be slim, however. But there is an alternative, and it is very powerful: international arbitration against foreign governments under investment treaties. If a technology company is already structured (or restructures) so that it is protected by one of these investment treaties—which is very easy to do—the company is likely to qualify for the protections of that treaty. These protections frequently include the right to be treated “fairly and equitably,” which includes the right to have reasonable, investment-backed expectations respected, and the right to sue the foreign government in an independent forum—international arbitration—outside domestic courts. Even the threat of an investment treaty claim can provide meaningful leverage in negotiations with governments.
Investment treaties protect investments made by investors of one country (the home State) in the territory of another country that is also a party to the treaty (the host State). An investor can gain access to investment treaty protections by structuring its foreign investment through an entity or special purpose vehicle incorporated in a jurisdiction that has signed a favorable investment treaty with the host State. Many of these treaties exist, and “treaty planning” can take place when an investment is made or before a dispute arises. Companies often undertake treaty planning simultaneously with tax planning as part of an acquisition or investment process, or during a subsequent corporate restructuring of an existing investment.
While the precise nature and scope of the protections available to an investor will vary depending on the terms of the relevant treaty, most treaties guarantee foreign investors a basic set of rights, which include: the right to be treated fairly and equitably (as noted above); the right to be treated in a non-arbitrary and transparent manner; the right to compensation for expropriation; protections against discriminatory treatment favoring domestic competitors or competitors of third-party States; physical protection of assets; and the right to transfer funds and returns outside the host State. And when the threat of an investment treaty claim is not enough to lead to a negotiated resolution, companies may enforce their investment treaty rights in international arbitration and receive awards of damages for breaches of those rights.
Leading companies in the energy, infrastructure and telecommunications sectors have been relying on these treaties for years. Resulting arbitration awards can be sizable, ranging from tens of millions to several billion dollars. Indeed, Freshfields, which has the leading practice in this area, has obtained damages of over $10 billion for its clients in the past five years alone.
Please do not hesitate to contact us if you have any questions about how you can take advantage of investment treaties to protect your investments.