CHAPTER 22 APPLICATION OF U.S. JURISDICTIONAL, TAX AND SECURITIES LAWS AND PRINCIPLES TO A FOREIGN JOINT VENTURE PARTNER
| Jurisdiction | United States |
(Feb 1991)
APPLICATION OF U.S. JURISDICTIONAL, TAX AND SECURITIES LAWS AND PRINCIPLES TO A FOREIGN JOINT VENTURE PARTNER
Debevoise & Plimpton
London, England and New York, New York
Introduction
The expansive scope of U.S. law often reaches a foreign venture partner in unanticipated and—almost without exception—unwelcome ways. Exposure to U.S. law does not, of course, occur in a vacuum. It typically arises because of commercial contacts with the U.S. or desired access to U.S. capital markets. With proper planning, however, exposure to U.S. law can be avoided or minimized.
This paper explores three areas of potential exposure—jurisdictional, tax and securities law. In the jurisdictional and tax areas, a foreign joint venture partner typically faces exposure to U.S. law because of direct or indirect activities in the United States, such as sale of the joint venture's product or output. Interposition of an affiliate, subsidiary or other person does not necessarily protect the foreign partner against the reach of U.S. law if the intermediary acts as agent for the foreign partner. In the securities area, application of U.S. law may arise, if the venture, or the foreign venture partner, seeks to raise financing in the United States.
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I. U.S. Jurisdictional Considerations
A. Private Partners
(1) General principles; doing business v. transacting business.
State or federal court jurisdiction over the parties to a lawsuit is exercised on the basis of a prospective defendant's contacts with the state in which the court sits. Such contacts with the forum state must be substantial enough that proceeding with a lawsuit would not offend traditional notions of justice and fair play. International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945); World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).
Of critical importance to a foreign party is whether it will be subject to the general or only the specific jurisdiction of U.S. courts. Under normal jurisdictional principles, a foreign corporation "doing business" in a state is subject to the jurisdiction of the courts (federal or state) sitting in that state whether or not the matter complained of has any relationship to the activities carried on within the state. (This is referred to as "general" jurisdiction.) The New York statutes, and the statutes of most other states, have been interpreted
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to permit courts to exercise general jurisdiction over foreign corporations found to be "engaged in...a continuous and systematic course of doing business" in the state (in general, sufficient activities within the state to give rise to the inference that the foreign corporation is to be found there). See, Beacon Enters, Inc. v. Menzies, 715 F.2d 757, 762 (2d Cir. 1983).
If a foreign corporation's activities within a state are not sufficiently substantial or continuous to constitute "doing business" within the state, it may still be subject to local jurisdiction (so-called "specific" jurisdiction), but then only with respect to claims arising out of or connected to business transacted within the state. Thus, courts may exercise specific jurisdiction where foreign corporations are found to have "transacted business" in the state in connection with the matter sued upon. In general, "transacting business" involves a lesser degree of contact with the forum state than "doing business" and occurs when the non-domiciliary "purposefully avails" itself of conducting activities within the state, thus invoking the benefits and protections of the state's laws. See, CutCo Indus., Inc. v. Naughton, 806 F.2d 361, 365 (2d Cir. 1986).
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(2) Interposition of Subsidiary, etc.
The interposition of a subsidiary or other person (e.g., a distribution affiliate) between the foreign party and the United States will not automatically shield the foreign party from the jurisdiction of U.S. courts. The result will depend heavily on the degree of independence of the affiliate and the nature of its relationship with the foreign party.
Thus, if the distribution affiliate is so dominated by the foreign parent (because of overly tight controls, failure to observe corporate formalities, inadequate capitalization, etc.) that the affiliate may be regarded as a "mere department" of the parent, its activities may be attributed to the parent for jurisdictional purposes. See, e.g., Taca International Airlines, S.A. v. Rolls-Royce of England, Ltd., 15 N.Y.2d 97, 256 N.Y.S.2d 129 (1965).
However, even if the distribution affiliate cannot be regarded as a "mere department", its activities may be attributed to the foreign parent if it acts as agent with power to bind its foreign parent. See, e.g., Frummer v. Hilton Hotels Int'l, Inc., 19 N.Y.2d 533, 227, N.E.2d 851, 281 N.Y.S.2d 41, cert. denied, 389 U.S. 923
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(1967); Gelfand v. Tanner Motor Tours, Ltd., 385 F.2d 116 (2d Cir. 1967), cert. denied, 390 U.S. 996 (1968).*
This suggests strongly that a distribution affiliate be constituted as a "buy-sell" distributor (i.e., purchases and resells for its own account, rather than as agent on behalf of its parent) or, if it acts as agent, that it have no power to conclude contracts on behalf of its parent. Contracts to be performed by the foreign parent should be subject to acceptance by the foreign parent outside the U.S. by authorized persons not associated with the local affiliate.
B. Entities Controlled by Foreign Sovereigns
(1) General.
Depending on the part of the world in which the mineral joint venture is located, it may well be the case that the foreign partner is an entity wholly- or majority-owned by the host country. Under the Foreign Sovereign Immunities Act ("FSIA") Publ. No. 94-583, 80 Stat. 2898 (Oct. 21, 1976) codified in relevant part at 28 U.S.C. §§ 1330, 1603, 1611, foreign sovereigns and their controlled entities enjoy a privileged and distinct regime. Historically, sovereigns enjoyed absolute immunity from
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the jurisdiction of the courts of other sovereigns—par in parem non habet jurisdictionem—unless they consented to such jurisdiction. As national governments became more involved in commercial ventures, especially after World War I, the courts of some European civil law countries began to distinguish between states' governmental and commercial actions, according full immunity only to the former category. The United States adopted this "restrictive" view of sovereign immunity in 1952. In 1976, Congress codified the restrictive theory in the FSIA.
The FSIA provides for the immunity of "foreign states" from the jurisdiction of courts in the United States, both federal and state, subject to specified exceptions and pre-existing treaty obligations. "Agencies and instrumentalities of foreign states" are defined to include a corporation or other entity "a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof." 28 U.S.C. § 1603(b)(3). Such agencies or instrumentalities are accorded essentially the same immunities as foreign states.1
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The FSIA contains exceptions to the immunity of a foreign state or instrumentality in the event that it is engaged in certain commercial activities connected with the United States. Foreign states are not immune from suits based on
— the foreign state's commercial activity in the United States;
— acts performed in the United States in connection with the foreign state's commercial activities elsewhere; or
— an act outside the United States in connection with the foreign state's commercial activity elsewhere, when such act has a direct effect in the United States.
See 28 U.S.C. § 1605(a)(2).
(2) FSIA Limits Jurisdiction to "Nexus" (Quasi-Specific) Jurisdiction.
As noted above, a private party found to be "doing business" within a state either directly or by attribution through a subsidiary, affiliate or agent would be subject to suit there even if the suit did not directly relate to the particular activity conducted in the state. Under the FSIA, foreign sovereigns, including their commercial instrumentalities, receive far more favorable
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treatment and are subject to U.S. jurisdiction only when there is a "nexus" between the subject matter of the plaintiff's claim or alleged injury and the foreign state's commercial activities in the U.S.2
Accordingly, the effect of the FSIA is to confer on foreign sovereigns and their instrumentalities the benefits...
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