On February 16th 2012, the Victoria Island office of the law firm of Babalaking & Co. hosted the members’ forum of the Capital Market Solicitors’ Association. The theme of the event was: Re-awakening the Capital Market through Participation of Key Players in the Economy.
The forum attended by the Mr. Oscar Onyema the CEO of the Nigerian Stock Exchange, Honorable Herman Hembe the Chairman of the House of Representatives’ Committee on Capital Market & Institutions and representatives of various key players in the Oil & Gas and Telecommunications sectors, served as a sensitization platform and prelude to Hon. Hembe’s intention to sponsor a Bill that will compel key players in the Nigerian Economy to list on the Nigerian Stock Exchange. These sectors are; Telecommunications, Oil & Gas, Power & Energy, Solid Minerals amongst many others.
At first glance, the legislative proposal seems to be in divergence with § 17 of the Nigerian Investment Promotion Council (NIPC) Act CAP N117 LFN 2004 which provides that non-Nigerian investors may own any percentage of equity of their choosing in a Nigerian business, with proponents against such a Bill arguing that such proposal is akin to indirect expropriation and likely to stifle foreign direct investments in Nigeria.
In this article, I analyze whether the overarching aim of Hon. Hembe’s legislative proposal amounts to indirect expropriation or measures having equivalent effect under Nigerian and International Investment Law.
Foreign Investment Protection in Nigeria
Protection Foreign direct investment in Nigeria is primarily guided by the provisions of the NIPC Act. Complementing the effort of the NIPC Act are foreign investment principles embedded within the framework of international investment law, this has become a necessity in the face of growing consensus amongst legal commentators in recent times, that the distinction between domestic law and international investment law is becoming blurred. Depending on the factual circumstance of each case, the interplay between the NIPC Act and international investment law will be a decisive factor in the fair resolution of a case. In practice, this will require that Nigerian law(s) incorporate aspects of international investment law. For instance, the domestic definition of an investment, domestic rules addressing jurisdiction of international investment tribunals or domestic rules on Nationality may determine the outcome of specific cases.
Claims of expropriation have traditionally involved the confiscations or forcible taking of alien property or the nationalization of key industries held by foreign interests by Government through legislative or administrative actions. Reasoning in international investment law indicates that a host state has the right to expropriate alien property in accordance with the notion of territorial sovereignty.
Expropriation is not illegal per se, however for expropriations (or compulsory acquisition) to be legal under the NIPC Act, it must be done in the national interest or for a public purpose, and must make provision for a fair and adequate compensation and a right to access the courts (for a determination of the investors’ right and or the amount of compensation s/he is entitled to). The legality of expropriation under international investment law is that it must serve a public purpose, must be non-discriminatory, must follow due process and be accompanied by prompt, adequate and effective compensation.
Expropriation will usually take one of two forms; it could either be direct or indirect. Expropriation is direct where a foreign investment is nationalized or directly taken through the formal transfer of title or outright seizure. An indirect expropriation will usually occur through interference by the host state in the use of that property or with the enjoyment of the benefits even where the property is not seized and the legal title to the property is unaffected, in essence indirect expropriation leaves the foreign investor’s title untouched but deprives him/her of the possibility to utilize the investment in a meaningful way. Generally, it is understood that the term “…equivalent to expropriation…” or “tantamount to expropriation” in international treaties related to the protection of foreign investors refers to “indirect expropriation” or “creeping expropriation” as they do not constitute an act of direct expropriation.
What Constitutes Indirect Expropriation?
To determine whether the Bill will qualify as an indirect expropriation or a measure equivalent to an expropriation, it must first be determined whether there will be a substantial loss of control or economic value of the foreign investment in the absence of a physical taking. This will usually take place through a large variety of forms of indirect interference with the foreign investor’s economic interests. In other words, if due to the actions of the Nigerian Government, the assets involved will lose their value or economic use for the foreign investor and the extent of the loss. It is not unusual in situations involving allegations of indirect expropriation that the investor retains control of his investment but the investment losses its economic viability. The overall investment will survive but important rights that determine its profitability are extinguished. This determination is important because it is one of the main elements to distinguish, between regulatory measures, which are an ordinary expression of the exercise of a state’s police power that entails a decrease in assets or rights, and a de facto expropriation that deprives those assets and rights of any real substance. The essential question is therefore to establish whether the enjoyment of the property has been effectively neutralized.
A growing number of Awards from investment tribunals suggests that the continued control of an enterprise by the investor strongly militates against a finding that an indirect expropriation has occurred. The requirement of a total or substantial deprivation has led these tribunals to deny the existence of an expropriation where the investor has retained control over the overall investment even though it has deprived of specific rights. In LG & E v Argentina, 3 October 2006, 46 ILM (2007) 36, the tribunal, although finding that other standards had been violated by the Government of Argentina, denied the existence of an expropriation in view of the investor’s continuing control:
Ownership or enjoyment can be said to be ‘neutralized’ where the party no longer is in control of the investment, or where it cannot direct the day-to-day operations of the investment. … Interference with the investment’s ability to carry on its business is not satisfied where the investment continues to operate, even if profits are diminished.
Control is obviously important in analyzing an expropriation, however it is not the sole criterion as indirect expropriation also becomes obvious where the host state substantially deprives an investor of the economic value of the investment. In Telenor Mobile Communications A.S. v. Republic of Hungary ICSID Case No. ARB/04/15, the claimant who held a telecoms concession alleged that the various regulatory initiatives taken by Hungary between 2001 and 2003 to bring its telecommunications regime into line with European Union norms, as part of the EU accession process amounted to expropriation. Among other things, Hungary introduced a “universal service” program in which all telecommunications providers would pay a small portion of their revenue into a central fund, which in turn would be used to compensate fixed-line service providers for providing below-cost telephone access to individuals in poor or rural areas. The tribunal held that in order to constitute an expropriation, the conduct complained of must have a major adverse impact on the economic value of the investment. In particular the tribunal had this to say:
… the interference with the investor’s rights must be such as substantially to deprive the investor of the economic value, use or enjoyment of its investment. … In considering whether measures taken by government constitute expropriation the determinative factors are the intensity and duration of the economic deprivation suffered by the investor as a result of them.
In any event, the tribunal found that the special levy amounted to a very limited sum and fell below the threshold of the standard defining an indirect expropriation.
Another issue that is not so novel but has been receiving increased attention in recent times is the existence of legitimate expectation on the part of the foreign investor. Legitimate expectations will usually be created on the part of the host state in statutory provisions, investments agreements and also by undertakings of a more general kind. As a general rule under international investment law, “a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.” See Methanex Corporation v. United States of America, NAFTA Arbitral Tribunal, Final Award, 2005, IVD para.7.
Conclusion
In the light of the above analysis, to constitute indirect expropriation; the Bill (or the action of Nigerian Government) must lead to a substantial loss of control and depreciation of the economic value of the foreign investment, (and or fall below the legitimate expectation of the foreign investor). In this regard, it is clear that the overarching aim of the Bill falls short of the substantial loss of control and depreciation of economic value of the investment in order to constitute indirect expropriation as indicated in case laws above.
Beyond the compulsory listing of minor percentage of equity in the affected companies on the Nigerian Stock Exchange, no assets will be taken over by the Nigerian Government, the management of these companies would still be left in the hands of the Board without governmental interference, their operational permits will remain in force and will only be revoked for non-compliance with existing laid down rules, it is non-discriminatory in that it does not target only foreign investors but rather key sectors of the Nigerian economy and the companies will not be denied access to their assets, its revenues or any of its resources.
In concluding, it is my considered opinion that so far, there is no evidence to suggest that the Bill to be sponsored by Hon. Hembe remotely approaches the effect of expropriation, whether directly or indirectly.
Chukwuyere is an Associate in the Information Technology & Telecommunications Practice of Streamsowers & Köhn and also the Legal Counsel of Consumer Empowerment Organization of Nigeria. He can be contacted with This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
