Chapter 18: Host-Country Regulation: Corporate Law, Taxation, and Currency Risk
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Answer: Whether Keefe is making a majority investment would depend on the
precise language and interpretation of the Mexican law then in force. If Mexican law forbade
2. Answer: If Mexico feels that it has a greater need for high technology companies, it
may, like many developing countries, be more lenient in permitting foreign majority ownership. In
3. Answer: There are quite a number of financing alternatives for the U.S. firm in such
a situation. First, the U.S. firm could enter into a joint venture with a former communist
government entity under which the government supplied the necessary plant, capital equipment,
and employment force while the U.S. firm contributed technological expertise to modernize the
4. Answer: A U.S. firm that establishes a foreign 100% owned subsidiary should
5. Answer: As the text notes, there is currently no legislation in Germany that
Chapter 18: Host-Country Regulation: Corporate Law, Taxation, and Currency Risk
6. Answer: Nationalization and expropriation refer to two ways by which private
property is taken, and, sometimes, how it is compensated. Nationalization refers to instances
where a government acquires an entire industry or type of business and converts it to a
7. Answer: The answer to this question is driven by the compensation theory to which
one adheres. A proponent of prompt, adequate, and effective compensation would argue that
Costa Azul cannot change until it earns sufficient funds to pay the foreign investor. Indeed, in
8. Answer: Under the FSIA, the essential nature of the act, rather than its purpose,
Chapter 18: Host-Country Regulation: Corporate Law, Taxation, and Currency Risk
9. Answer: Since the Cuban Government took all cigar-making concerns and did not
target anyone in particular, it was a nationalization. Obviously, a private party could not legally
10. Answer: Through its airline office, Fromage Vert would probably be conducting
sufficient business in the State of New York to give the Southern District jurisdiction over it under
New York’s long arm (jurisdiction) statute. The Foreign Sovereign Immunities Act would, however,
11. Answer: Privatization is simply the transfer of public assets to the private sector.
This is not a recent phenomenon. Indeed, as noted in The Transformation of American Law 1780-
1860, the practice of granting franchises to private parties to build roads, canals, and mills was a
12. Answer: Under the “partial sale” model, the government sells a substantial but non–
13. Answer: A trade sale is a true sale of a government entity or set of assets to
Chapter 18: Host-Country Regulation: Corporate Law, Taxation, and Currency Risk
14. Answer: First, giving shares to future management who are currently government
officials helps secure their support for the privatization. Second, lower-level employees will often
be asked to make wage concessions to the new private entity. Granting them a share in the
15. Answer: The concession model of privatization involves the granting of a franchise
to a private party to build a project in exchange for the right to collect revenues from that project.
16. Answer: Four types of adjustments to regulations that are often addressed in
17. Answer: Ortiz is entitled to prompt, adequate, and effective compensation for the
loss of the value of his shares under the “modern-traditional theory” of expropriation.
Chapter 18: Host-Country Regulation: Corporate Law, Taxation, and Currency Risk
MANAGERIAL IMPLICATIONS
It is important to know what regulations exist in the penetrated country regarding foreign
investment and control. This undertaking does not appear to be in a sensitive sector in which
the foreign government would likely have much concern and, therefore, seek to exert significant
control. While this is deemed a joint venture, students should also ask how much control will be
in the hands of the investors versus the foreign participants. How will this be translated into
managerial control and distribution of both profits and risk? This has ramifications for both
management and distribution of profits, but also for tax treatment under U.S. and Latvian law.
Indeed, issues regarding transfer pricing, source of and allocation of income, and credit for
taxes paid will also arise. The Compaq case and the brief “Additional Background” information
provided at the outset of this IM chapter may assist students in considering this venture. In light
of the significant difference in financial resources between the U.S. and foreign companies,
students might also find it prudent to consider currency risks and mechanisms to limits those
risks.
ETHICAL CONSIDERATIONS
This consideration calls for student opinion. Students may deem these takings defensible on at
least an individual basis utilizing moral relativism on the basis that courts and arbitral bodies
should not second-guess determinations by national and state sovereigns that the taking of
private property is appropriate at a given time and under the circumstances. Applying
utilitarianism, students may conclude that the greatest good for the greatest number is satisfied
to the extent that private property takings are often portrayed as decentralizing economic
concentration or preventing exploitation by large businesses for the benefit of the general public
(although this statement in and of itself is highly debatable).
Applying a deontological framework, students may conclude that these takings violate
fundamental rights to private property recognized by the natural school of law and enshrined in
national and international instruments such as the U.S. Declaration of Independence, the U.S.
Constitution, and the Universal Declaration of Human Rights. Such takings may be further
indefensible pursuant to the categorical imperative as no one would wish for the disregard of
private property rights to become a universal standard of conduct and, if individuals would
object to the taking of their property, they should not be permitted through their governments to
take the property of others. A final outcome may be reached through the application of
contractarianism, specifically, whether such takings are fair and equitable, especially to the
extent they disproportionately impact the poor and politically disenfranchised groups.