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e. Officers of Vessels. Foreign citizens may not act as officers of or serve in certain other positions on certain vessels. 46 U.S.C. 221.
3. Customs House Brokers. For a foreign-controlled firm to obtain a license to operate as a customs house broker, at least two of the officers must be United States citizens. 19 U.S.C. 1641.
GOVERNMENT PROCUREMENT AND BENEFITS 1. Procurement. At least two Federal statutes require that, with certain exceptions, government agencies purchase only items produced in the United States. However, neither statute restricts procurement from a foreign-controlled U.S. corporation which is producing domestically. The Buy American Act 41 U.S.C. 10a.-d. requires that government agencies acquire for public use only materials produced or manufactured in the United States. These provisions do not apply where the agency head determines that they would be "inconsistent with the public interest,” or that the cost of the domestic articles is unreasonable (generally 6–12 percent above the foreign bid price, 41 CFR 16.104-4); nor do they apply to items purchased for use outside the United States, or to items not produced in the United States "in sufficient and reasonably available commercial quantities and of a satisfactory quality."
A second restriction on Federal procurement is the “Barry Amendment" to the Defense Appropriation Act (Section 724) (86 Stat. 1200), which restricts the Department of Defense from procuring articles of food, clothing, cotton, silk, synthetic fabric or specialty metals which are not produced in the United States.
2. Subsidies, Insurance, and Other Government Benefits. Foreign-controlled enterprises operating in the United States, whether in branch or subsidiary form, may not:
(a) obtain special government loans for the financing or refinancing of the cost of purchasing, constructing or operating commercial fishing vessels or gear. 16 U.S.C. 742(cX7).
(b) sell obsolete vessels to the Secretary of Commerce in exchange for credit towards new vessels. 46 U.S.C. 1160.
(c) receive a preferred ship mortgage. 46 U.S.C. 922.
(d) obtain construction-differential or operating-differential subsidies for vessel construction or operation. 46 U.S.C. 1151 et seq., 1171 et seq., 802.
(e) purchase vessels converted by the government for commercial use or surplus war-built vessels at a special statutory sales price. 50 U.S.C. App. 1737, 1745.
(f) obtain certain types of vessel insurance unless the management restrie tions applicable to companies operating vessels in salvage are satisfied. 46 U.S.C. 1281 et seq.
(g) obtain war-risk insurance for aircraft. 49 U.S.C. 1531, 1533.
(h) purchase Overseas Private Investment Corporation insurance or guarantees. However, foreign corporations, partnerships or other associations, wholly owned by one or more United States citizens, corporations, partnerships, or other associations are eligible. (Up to 5 percent of the shares may be held by foreigners if required by law without affecting “wholly owned" status.) 22 U.S.C. 2198(c).
(i) obtain special government emergency loans for agricultural purposes after a natural disaster (7 U.S.C. 1961) or government loans to individual farmers or ranchers to purchase and operate family farms. 7 U.S.C. 1922, 1941.
1. National Banks. Under the National Bank Act, as amended, every director of a national bank must, during his whole term of service, be a citizen of the United States. 12 U.S.C. 72. Although there are no restrictions on the degree of foreign ownership of national banks, such ownership is inhibited by the citizenship requirement for directors.
2. Edge Act Corporations. An Edge Act corporation may be organized for the purpose of engaging in international or foreign banking or other international or foreign financial operations. A majority of the shares of the capital stock of an Edge Act corporation must at all times be held and owned by citizens of the United States, by corporations the controlling interest in which is owned by
citizens of the United States, chartered under the laws of the United States or of a State of the United States, or by firms or companies the controlling interest in which is owned by citizens of the United States. 12 U.S.C. 619. Moreover all of the directors must be United States citizens.
3. Bank Holding Company Act. At present, the Bank Holding Company Act contains no specific restrictions on foreign banks. However, under the general provisions of the Act, which apply equally to domestic banks, any foreign company establishing a United States banking subsidiary or acquiring control of an existing domestic bank must be approved by the Board of Governors of the Federal Reserve Board. (Acquisition of a 25 percent interest creates a conclusive presumption of control. In addition, lesser ownership amountsdown to 5 percent—are likely to be found to constitute control.) There have been a number of recently established foreign subsidiaries approved by the Board under the Act (e.g., Sanwa Bank of California, Mitsubishi Bank of California, Banco de Roma of Chicago).
4. Federal Reserve Membership and FDIC Coverage. A foreign banking operation in the United States may take the form of a branch, agency, subsidiary, or representative office. Of these, only subsidiaries incorporated under State or Federal law may become members of the Federal Reserve System and/or the Federal Deposit Insurance Corporation. 12 U.S.C. 321, 1814 16. Thus, at present, neither branches nor agencies of foreign banks are members of or subject to regulation by the Federal Reserve.
Note: Pending Foreign Bank Legislation (the “Foreign Bank Act of 1975"). S. 958, the “Foreign Bank Act of 1975" has been introduced in the 94th Congress at the request of the Federal Reserve Board. The bill would place foreign bank operations in the United States under effective Federal control. It would bring United States branches and agencies of foreign banks within the purview of the Bank Holding Company Act. That Act's restrictions on multistate branching and nonbank activities would then apply to such foreign bank operations. All subsidiaries, branches, and agencies of foreign banks having worldwide assets of $500 million or more would be required to become members of the Federal Reserve System. In addition, all foreign banks covered by the bill would be required to carry coverage of the Federal Deposit Insurance Corporation.
The bill would require a foreign bank to obtain a Federal banking license from the Comptroller of the Currency as a precondition of obtaining a State charter. Licenses would be issued only with the approval of the Secretary of the Treasury after consultation with the Secretary of State and the Federal Reserve Board. The bill also would provide for chartering by the Comptroller of the Currency of a branch of a foreign bank as a “Federal branch" permitted to conduct a banking business on the same basis as a national bank in its state of operation.
The bill would make it possible for foreign banks to establish national banks and Edge corporations. It would amend the National Bank Act to allow up to half of the directors of a national bank to be noncitizens. With respect to Edge corporations, the bill would permit the Federal Reserve Board to waive the requirements of majority ownership by United States citizens and the citizenship requirement applicable to directors.
The Administration has not taken a position on many of the specific provisions of the legislation. It is likely that in the course of the legislative process, substantive changes in the proposal will be introduced. Neither the timing nor the substance of congressional action can be predicted at this time.
1. Industrial Security Program. The Executive orders and Department of Defense regulations which constitute the Industrial Security Program (Executive Orders 10450, 10865, and 11652: DoD 5220.22-R, Section II, part 2) make it very difficult for foreign-controlled corporations, except possibly subsidiaries of Canadian or U.K. parents, to obtain the security clearances necessary to carry out a classified contract. Both a “facility” clearance and individual clearances for key management personnel and others who may have access to classified information are required.
Generally, facilities which are “under foreign ownership, control or influence" are ineligible for facility clearances, and foreign nationals are ineligible for individual clearances. There are certain limited exceptions for facilities owned or controlled by foreigners, and a foreign-controlled U.S. subsidiary might obtain clearances by forming a “voting trust,” in which it gave up management rights but retained rights to profits.
2. Priority Performance Statutes. While not aimed specifically at foreign investors, the priority performance statutes bear on the operation of a United States business by foreign investors.
a. Defense Production Act. Under Title I of the Defense Production Act of 1950, the President possesses the authority to require that performance under defense contracts take priority over other contracts. The Act also authorizes the President to require acceptance and performance of such contracts by any person he finds capable in preference to other orders or contracts and further authorizes him to allocate materials and facilities in such manner and under such conditions as he deems necessary to promote the national defense. 50 U.S.C. App. 2071. Any willful failure to perform any act required by the Act is punishable by fine of $10,000 or one year in prison. 50 U.S.C. App. 2073.
b. Selective Service Act. Under Section 18 of the Selective Service Act (50 U.S.C. App. 468), the President, whenever he determines that it is in the interest of national security, may place an order for articles or materials, the procurement of which has been authorized by Congress exclusively for the use of the Armed Forces of the United States, with any person capable of producing them. Under this authority, the President may assign such contracts as “rated orders" which take priority over any unrated order. Procurements for military assistance programs are included. GENERAL LAWS AFFECTING THE CONDUCT OF BUSINESS IN THE
UNITED STATES BY FOREIGN INVESTORS*
*Excerpted and adapted from a summary prepared by the Council on International Economic Policy Interagency Working Group on Foreign Investment in the United States. Hearings on Foreign Investment in the United States before the Subcom. on Foreign Economic Policy of the House Comm. on Foreign Affairs, 93d Cong., 2d Sess. 231 (1974).
I. ANTITRUST LEGISLATION The antitrust laws are applied equally to both U.S. and foreign corporations in order to preserve competitive market structures and to forbid specific anticompetitive practices. By maintaining a competitive market, the antitrust laws do not discourage foreign investment in the U.S. but, rather, make the U.S. more attractive for the international investor. For example, acquisition of a U.S. company may be the easiest form of entry into the U.S., but the antitrust laws may prevent the particular acquisition by either domestic or foreign investors because of its effect on actual or potential competition. Such restrictions would, in such a case, either prevent foreign investment or direct it to de novo entry.
Section 7 of the Clayton Act is the principal statute which provides safeguards against further industrial concentration in the United States. Section 7 prohibits any merger or acquisition which may tend substantially to lessen competition or to create a monopoly in any line of commerce in any section of the United States under this statute. Foreign direct investment is subject to antitrust scrutiny when such investment involves a purchase, merger, a joint venture with an existing American firm, or with another foreign firm to operate an enterprise.
The antitrust laws are applicable in the following situations: the merger of actual competitors in the United States market; the merger of potential competitors in the United States market; joint ventures between actual competitors in the United States market; and joint ventures between potential competitors in the United States market. Relevant competition includes not only competition between firms where production facilities are located within the United States but also competition between such firms and firms where production facilities are located abroad, that is to say exporters to the United States. A merger between an important exporter to the United States and a significant United States producer will be treated much in the same way as would the merger of two Únited States producers with corresponding market shares.
In the context of foreign commerce, the importance of the concept of potential competition is somewhat greater than in the purely domestic context. Factors such as tariff rates, governmental import and export barriers and exchange rates may have an effect in determining whether or not a particular foreign firm can compete in the United States market.
In proposed mergers between United States companies and foreign firms, the factual determination of whether the two companies are substantial, actual or potential competitors in the United States market, depends on various criteria—such as whether there is objective evidence that the foreign company would have entered the United States market by de novo investment in new facilities or acquiring another firm or partner; how soon such entry might reasonably be expected; whether the market position of a large American company may be further entrenched by the acquisition and the like.
In addition to mergers involving actual or potential horizontal competitors, mergers involving firms in a buyer-seller relationship, so-called vertical acquisitions, may raise antitrust objections. An example is purchase of a United States manufacturer by a foreign supplier of raw materials. The possible hazard to competition of such an arrangement is that other domestic companies may lose a source of raw materials. Section 7 also applies to such mergers.
The basic factors affecting the legality of joint ventures are the same as those affecting the legality of mergers. Joint ventures with domestic firms may sometimes provide the only means for foreign firms to enter markets in the United States. However, joint ventures can have an adverse effect on American domestic markets. For example, joint ventures in which the foreign firm is removed as a potential competitor present substantial antitrust objections. (See, e.g., United States v. Penn-Olin Chemical, 378 U.S. 158 (1964), a case involving domestic firms only, but which describes the anticompetitive effects of such arrangements.]
A recent case in the foreign direct investment and joint venture area will show how the above-described policy is put into effect. In the 1969 BP-Sohio merger case (United States v. British Petroleum Co., Civ. No. 69-954 (N.D. Ohio 1969) settled by consent decree, 1970 Trade Cases Par. 72, 988) BP, already a major petroleum marketer on the East Coast, acquired Sohio which had about 30 percent of the Ohio market. The Department of Justice objected to the merger on the grounds that BP was a potential entrant into Ohio, Sohio's primary market and the merger would foreclose an independent entry into that market. The case was settled by a consent decree under which the merger was allowed to proceed provided that Sohio divested itself, by sale or exchange for stations in other parts of the country, of stations handling a total of 400 million gallons of fuel per year in the Ohio market. This case indicates the Department of Justice will challenge acquisition when a major foreign firm, an actual or potential competitior in the United States market, merges or enters into a joint venture with a major United States firm in a concentrated United States market and the effect is to foreclose independent entry or expansion of the foreign firm.
With respect to the second objective of the antitrust laws, prohibiting anticompetitive practices, foreign firms which invest in the U.S. (whether de novo investment in new facilities or purchase of existing facilities from other firms) are also subject to U.S. standards both concerning monopolizing under Section 2 of the Sherman Act and concerning price fixing, group boycotts, market allocation and the like under Section 1 of the Act.
Should a foreign firm alone control a sufficiently high percentage of the U.S. market, or should a foreign firm engage in conduct with its competitors which amounts to express collusion on prices, division of markets, or group boycotts, then the Sherman Act provisions would be applied with equal impact on the foreign and domestically owned companies involved.
Foreign firms which contemplate an investment in the United States by purchase or merger of an existing firm may wish to consider using the Business Review Procedure of the Antitrust Division (28 C.F.R. 50.6) whereby the Division will state its present enforcement intentions as to proposed business conduct, such as a merger or purchase of an American firm. Under this procedure, businessmen may inform the Division of proposed domestic or foreign activities, alone or jointly with other firms and receive a statement of the Division's enforcement intentions with respect to their specific proposal. Firms may, of course, if they wish, make any purchase agreement or major outflow of funds dependent on receiving information via the Business Review Procedure from the Division on its present enforcement intentions, based upon the material submitted by the firms seeking review.
II. SECURITIES LAWS AND REGULATIONS
Our securities laws and practices are generally more rigorous than those in many foreign countries and foreigners in certain cases may consider our system burdensome. U.S. securities laws and practices apply equally to U.S. and foreign investors or issuers. However, in applying the securities laws the SEC has tended to accommodate foreign investors through exemptions from and modification of certain provisions of the laws. Our high standards of disclosure and fair practice may be important factors in attracting foreign capital.
1. Federal Securities Laws. If a foreign direct investment project is partly dependent on U.S. sources of financing, the foreign issuer-investor may be subject to the provisions of the U.S. securities laws. Certain types of transactions (commercial bank loans and private placements) may be exempt from the laws; however, if the investor wishes to raise funds from an offering of securities to the public, the issue in most cases must be registered under the Securities Act of 1933. Upon completion of a public offering, the issuer would be subject to the reporting requirements of the Securities Exchange Act of 1934.
In addition, Section 13(d) of the Securities Exchange Act of 1934 requires an investor acquiring more than 5% of the beneficial ownership of a class of securities registered under Section 12 (which applies to most public companies) to file with the Securities and Exchange Commission the name and occupation of the purchaser, the source of funds employed, the purpose of the transaction and other pertinent data. Section 14 requires an investor intending to make a tender offer or takeover bid for more than 5% of the shares of a company to file the information called for on Schedule 13D with the SEC prior to commencing the tender offer.
Section 16 of the 1934 Act calls for investors owning beneficially more than 10% of a public company and “insiders" (e.g. directors or officers) to file with the SEC a statement of the amount of securities owned and to file an updated statement each time the amount of shares owned changes. Furthermore, with a very limited exception, 10% owners and insiders of a company are liable to turn over to the company any profit realized on certain purchases and sales of the company's securities which take place within a six month period.
The U.S. securities laws often call for more disclosure than foreigners are accustomed to providing. Furthermore, the form and content of the financial statements, as well as the requirement for independent audits, can present foreign issuers with difficult problems. The Commission has proved willing in the past to accommodate foreign issuers as to the nature of information disclosed and to permit reconciliation, rather than reconstruction, of accounting data. The U.S. laws apply even if a substantial portion of the offering is sold to foreigners.
2. Membership on the New York and American Stock Exchanges. The rules of the New York and American Stock Exchanges do not permit membership by foreigners. Since the SEC has not disapproved of these rules, they are, in a sense, an extension of the Federal securities laws. Foreigners may establish a U.S. based brokerage or investment banking business, which can become a member of the National Association of Securities Dealers, Inc. (NASD) and participate in underwritings and in brokerage transactions of the New York and American exchanges. However, such a dealer generally must work through a member should it seek to execute brokerage transactions in securities listed on either exchange and pay a commission to the member firm.
3. State and Local Securities Laws. Although registration laws vary from State to State, a model act has been adopted by many States which presents few problems to establish companies. Furthermore, offerings by companies with securities listed on major national securities exchanges in the U.S. are generally exempted from qualification under most State laws. However, this exemption does not eliminate the issuer's potential liability for any violation of the laws of States in which the offering is made.
Many State securities laws are disclosure statutes similar to the Securities Act of 1933. However, a number of States attempt to evaluate securities and prohibit offerings which are considered too speculative or the terms of which