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Lecture 4

THE MULTINATIONAL ENTERPRISE

Topics covered: • Home State Regulation of Multinational Enterprises • Host State Regulation of Multinational Enterprises

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A. HOME STATE REGULATION OF MULTINATIONAL ENTERPRISES

1. Introduction a. Some governments apply their

business regulations extraterritorially, most notably:

1) Unfair competition regulations.2) Products liability regulations.3) Sharp practices regulations.

b. Governments most willing to apply their laws extraterritorially: the United States and the European Union.

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2. Unfair Competition Laws a. United States Unfair Competition Laws

1) Sherman Antitrust Act of 1890 is the principal US law regulating anticompetitive behavior.

a) Section 1 of the Act prohibits contracts, agreements, and conspiracies which restrain interstate or international trade.

b) Section 2 of the Act forbids attempts to monopolize commerce or trade either between the states of the US or in international commerce affecting the US.

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2. Unfair Competition Laws (cont.)c. Extraterritorial Application of US Antitrust Laws

1) Sherman Act applies to conduct affecting "trade or commerce among the several states, or with foreign nations".

2) Judicially imposed limits on the extraterritorial application of the US antitrust laws.

a) Personal Jurisdiction Requirements. i. Due process forbids a court from assuming personal

jurisdiction unless a defendant has "minimum contacts" with the forum state.

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2. Unfair Competition Laws (cont.)a. United States Unfair Competition Laws (cont.)

2) Clayton Act of 1914: defines certain specific acts that constitute unfair business competition.

3) Robinson-Patman Act of 1936: makes price discrimination illegal.

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2. Unfair Competition Laws (cont.)b. Enforcement Provisions of US Antitrust Laws

1) US Justice Department may bring criminal suits for egregious violations.

2) US Federal Trade Commission may bring civil actions (notably for injunctions) to ensure full compliance.

3) Private persons may sue and recover treble damages for injuries they have suffered.

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a) Personal Jurisdiction Requirements. (cont.)i. Due process forbids a court from assuming

personal jurisdiction unless a defendant has "minimum contacts" with the forum state.

a] Minimum contacts exist if: 1] the defendant purposefully did

business in the forum state; and2] the defendant reasonably could

have anticipated that it would have to defend itself in the forum state.

JUDGE JUDY READY TO RULE--

Case: Asahi Metal Industry Co. v. Superior Ct. of California: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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2) Judicially imposed limits on the extraterritorial application of the US antitrust laws. (cont.)

b) Subject matter jurisdiction requirementi. Two tests have been created by the courts for

determining when they have subject matter jurisdiction in an American antitrust case.

a] Effects test: Companies carrying on business outside of the US will come within the subject matter jurisdiction of a US court if their business activity is:

1] Intended to affect US commerce, and2] Not de minimis.

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2) Judicially imposed limits on the extraterritorial application of the US antitrust laws. (cont.)

b) Subject matter jurisdiction requirement (cont.)i. Two tests have been created by the courts for

determining when they have subject matter jurisdiction in an American antitrust case. (cont.)

b] Balancing Test (or "choice of law" test): A court should balance the interests of the states concerned in determining if subject matter jurisdiction exists.

1] Now the prevalent test in the US.

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2. Unfair Competition Laws (cont.)d. Regulation of Anti-Competitive Behavior in

the European Union 1) The European Union Treaty (Treaty of Rome)

contains two provisions regulating business competition.

a) Article 85 prohibits normal arm's length competitors from entering into agreements or carrying on concerted practices which either prevent, restrain, or distort trade.

b) Article 86 forbids businesses with a dominant position in their marketplace from taking improper advantage of their position to the detriment of consumers.


Case: US v. Nippon Paper Industries Co. (specialty case): +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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2. Unfair Competition Laws (cont.)d. Regulation of Anti-Competitive Behavior in

the European Union (cont.)2) Compliance: EU Commission is solely responsible

for enforcing Articles 85 and 86.

3) Extraterritorial application of the EU's business competition rules.

a) EU "effects test": Articles 85 and 86 apply to a foreign firm to the extent that the firm's activities have an affect on trade or commerce within the EU.

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2. Unfair Competition Laws (cont.)e. Opposition to the Extraterritorial Application of

Unfair Competition Laws 1) Methods of opposing the extraterritorial

application of unfair competition laws (in particular, US antitrust laws).

a) Diplomatic protests.b) Blocking statutes hamper a plaintiff's ability to

obtain evidence or enforce a judgment abroad. i. "Clawback" provisions allow defendants to bring

suit in their home country to recover punitive damages they paid.

© Corel

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2. Unfair Competition Laws (cont.)e. Opposition to the Extraterritorial

Application of Unfair Competition Laws (cont.)

1) Methods of opposing the extraterritorial application of unfair competition laws (in particular, US antitrust laws).

c) Judicial injunctions prohibiting one national from initiating a foreign unfair competition suit against another national in a foreign court.

© Corel Corporation

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3. Product Liability Laws a. Product Liability: Manufacturers are required to

assume liability for the injuries their products cause.

b. Product Liability Theories. 1) Breach of contract.

2) Negligence.

3) Strict liability.

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3. Product Liability Laws (cont.)c. Extraterritorial Application of Product Liability

Laws 1) The country which has been most willing to

apply its product liability laws extraterritorially: the US.

2) Considerations of US courts in determining whether they can exercise jurisdiction in a product liability case:

a) Personal jurisdiction. i. In order to extablish a court's personal jurisdiction:

plaintiff must show that the defendant had "minimum contacts" with the forum state.

b) Forum non conveniens

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b) Forum non conveniens (cont.)i. Note: Unlike the US antitrust cases, there is no separate

test for subject matter jurisdiction. a] The forum non conveniens inquiry serves the same function.

ii. Defined: A court will not assume jurisdiction over a dispute if it could be better decided elsewhere.

iii. Criticism: Forum non conveniens allows multinational companies to avoid product liability for injuries that occur outside the US (especially in developing countries were the remedies available to claimants are often limited both legally and practically). a] Note: Some US states have statutorily forbidden their courts from applying forum non conveniens in product liability cases.

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4. Sharp Practices a. Defined: Dishonest business dealings meant to

obtain a benefit for a firm regardless of the means used.

b. Extraterritorial application of sharp practices law.

1) Organization for Economic and Cooperation and Development (OECD) recently sponsored the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

a) It should be in effect sometime in 1999.LAWS

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4. Sharp Practices (cont.)b. Extraterritorial application of sharp practices

law. (cont.)2) United States has applied its sharp practices

laws extraterritorially since 1977. a) Major advocate of the OECD Convention.

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b. Extraterritorial application of sharp practices law. (cont.)3) US Foreign Corrupt Practices Act (FCPA)

of 1977. a) Antibribery provisions.

i. Apply to: a] US companies or companies registered with the US Securities and Exchange Commission.b] Their officers, directors, agents, or employees.

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b. Extraterritorial application of sharp practices law. (cont.)3) US Foreign Corrupt Practices Act (FCPA) of

1977. (cont.)a) Antibribery provisions. (cont.)

ii. Forbid brides to: a] Foreign government officials.b] Foreign political party officials.c] Candidates for foreign political office. © Microsoft

© SoftKey

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Bribery Abroad

1. Multinational firms face an especially difficult situation because bribery is an accepted way of doing things in many cultures. Failing to pay bribes would place these firms at a disadvantage economically.

F C P AF C P A The Foreign Corrupt Practices Act of 1977 (FCPA) was The Foreign Corrupt Practices Act of 1977 (FCPA) was

amended in 1998 causing American firms to feel amended in 1998 causing American firms to feel disadvantaged internationally. Broadly, it is illegal for disadvantaged internationally. Broadly, it is illegal for American companies (and managers) to offer bribes to foreign American companies (and managers) to offer bribes to foreign officials in an attempt to secure business or an “improper officials in an attempt to secure business or an “improper advantage”. Accounting standards also make such bribes advantage”. Accounting standards also make such bribes more difficult to conceal. So the next time a business wants more difficult to conceal. So the next time a business wants to send foreign government officials to a tropical island (all to send foreign government officials to a tropical island (all expenses paid including their families) in an attempt to secure expenses paid including their families) in an attempt to secure a contract open for bids, criminal liability may attach. a contract open for bids, criminal liability may attach.

Controversy exists over the FCPA because it preserves the Controversy exists over the FCPA because it preserves the ethics of American businesses but harms their ethics of American businesses but harms their competitiveness internationallycompetitiveness internationally..

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FCPAFCPA The FCPA allows for “facilitating and The FCPA allows for “facilitating and

expediting” payments to secure expediting” payments to secure business. This is an exception to the business. This is an exception to the FCPA and generally applies to routine FCPA and generally applies to routine governmental decisions. (Thus not governmental decisions. (Thus not an absolute ban on payments)an absolute ban on payments)

Liability could exist for managers & Liability could exist for managers & accountantsaccountants

Olympic Bribery---Olympic Bribery---

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B. HOST STATE REGULATION OF MULTINATIONAL ENTERPRISES

1. Rationale for Regulation a. A host state is entitled to regulate a

foreign firm if: 1) The foreign firm consents to the

jurisdiction of the host state.2) The foreign firm is part of a common

enterprise with a local firm.3) The foreign firm owns a local

subsidiary and the subsidiary's corporate veil is pierced.

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2. Consent to the Jurisdiction of the Host State a. Companies may give express and implied

consent to the jurisdiction of a state.1) Express consent is given:

a) By incorporating in the state.

b) By maintaining the firm's head office in the state.

c) By obtaining a certificate to do business in the state.

Mutual agreement

Mutual agreement

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2. Consent to the Jurisdiction of the Host State

a. Companies may give express and implied consent to the jurisdiction of a state. (cont.)

2) Implied consent: based on a foreign firm --

a) Carrying on business.b) Directly soliciting business.c) Any "persistent" conduct related to the

making of a profit.

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3. Common Enterprise Liability a. Defined: Individuals or companies (including

related subsidiary companies of a multinational firm) will be held jointly liable for each other's conduct when they function as part of a common enterprise.

1) Basis of liability: The participants are regarded as joint venturers or partners.

2) Extent of liability: Each participant has joint or joint and several liability for the obligations of the entire enterprise.

Stock Certificate

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3. Common Enterprise Liability (cont.)

b. Showing the existence of a common enterprise: Look at the intent of the parties.

1) Express intent: A formal agreement creating a partnership or joint venture.

2) Implied intent: a) A sharing of profits or losses.b) Sharing in the management.c) Joint ownership of the affiliates.© Corel

Common Stock


Case: U.S. v. Blondek, Tull, Castle, and Lowry: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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4. Piercing the Company Veil: a. Defined: Ignoring the corporate structure of a

company (i.e., "piercing the company veil") and exposing the shareholders (or a "parent" company) to liability.

b. Circumstances when a company's veil will be pierced:

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4. Piercing the Company Veil: (cont.)b. Circumstances when a company's veil

will be pierced: (cont.)1) The Controlled Company: The

corporate status of a controlled company will be ignored if both:

a) Its financing and management are so closely connected to its parent that it does not have any independent decision-making authority; and

b) It is induced to enter into a transaction beneficial to the parent but detrimental to it and to third parties.

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4. Piercing the Company Veil: (cont.)b. Circumstances when a company's veil will be

pierced: (cont.)2) The Alter Ego Company: The company veil

will be pierced if the company is not treated by its owners as a separate juridical entity (i.e., it is treated as the alter ego of its shareholders).

3) Undercapitalization: A company's veil will be set aside if, at the time it was formed, it was provided with insufficient capital to meet its prospective debts or potential liabilities.

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4. Piercing the Company Veil: (cont.)b. Circumstances when a company's veil will be

pierced: (cont.)4) Personal Assumption of Liability:

Shareholders who have (or a parent company that has) guaranteed the obligations of a company can be made to answer for those obligations.

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C. OTHER TOPICS IN CHAPTER 4 OF THE TEXT

1. The Business Form

2. The Multinational Organization.

3. International Regulation of Multinational Enterprises.

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Case: Garden Contamination Case: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

Choice of Forum Clause

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