Prepared Remarks of Senator Chuck Grassley
Chairman, Senate Judiciary Committee
State Owned Enterprises and the Foreign Services Immunities Act
Tuesday, June 21, 2016
Mr. President, I rise today to speak about the changing nature of globalization. Everyone is aware that globalization has changed how economies work. Some people have embraced globalization, while others are fighting to slow its effects.
In America, most people are familiar with the modern multi-national corporation. These corporations are privately owned by shareholders and operate in countries around the world.
However, there is a new trend that is becoming increasingly evident in commerce today. We are now seeing entities that are owned by governments competing with private companies in the automotive, food and airline industries that represent more traditional commerce.
Over the last several decades, governments, through entities called state-owned enterprises, have become highly involved in international commerce.
We have seen state-owned enterprises buy the assets of private companies such as Smithfield Foods and start up completely new companies such as the new airlines from the Middle East.
There is nothing inherently wrong with state-owned enterprises paying a premium on market value to purchase a company. However, the actions of the company and its legal obligations after the transaction is complete are what I intend to focus on today.
The United Nations estimated in a 2014 report that there are over 550 state-owned trans-national companies with cumulative assets over $2 trillion. Many would argue that the estimate of $2 trillion in assets under management is a conservative number.
There are major differences between state-owned companies and companies that are publicly traded.
First, state-owned companies are not subject to the same transparency requirements as publicly traded companies. Publicly traded companies must adhere to GAAP accounting standards and file quarterly and annual reports—like 10Qs and 10Ks—with the SEC.
Second, state-owned enterprises have the implicit backing of governments—giving them access to credit, often times at cheaper rates than individual companies could hope to find.
The most valuable companies in America based on market capitalization are worth between $500 and 600 billion on any given day. While Fortune 100 companies are large, their resources pale in comparison to government wealth.
Finally, state-owned enterprises report their strategies, profits, and losses to governments. They’re not accountable to shareholders in the way that publicly traded companies are.
Therefore, it is prudent that we take time to consider how foreign state-owned enterprises are participating in the American economy.
In agriculture, state-owned enterprises have started to buy publicly traded American companies. Smithfield Foods was sold to China’s Shuanghui in 2013 for $4.7 billion in cash.
ChemChina is currently trying to buy the Swiss-based seed and chemical company Syngenta for $43 billion. About a third of Syngenta’s $12 billion in revenue comes from North America, which is what makes this transaction so concerning for me.
While some could argue these investments are similar to foreign direct investment, what these Chinese state-owned enterprises are really buying is our resources and our expertise in food production, including the intellectual property that fuels development and growth in the agricultural sector.
Even if these transactions function seamlessly for the first ten or fifteen years, there are strategic questions we need to consider today before approving the sale of any more of our agricultural assets to another government.
For that reason, Senator Stabenow and I asked the Committee on Foreign Investment in the United States to thoroughly review the proposed Syngenta acquisition with the help of the Department of Agriculture. CFIUS is responsible for reviewing the national security implications of transactions that result in foreign control of U.S. businesses and critical infrastructure. There is shared sentiment among lawmakers, military officials, and everyday Americans that protecting the safety and resiliency of our food system is core to American national security. The food security of our country is not something we can take for granted, as I have said before, at any given time we are only nine meals away from revolution.
As I mentioned, I also have concerns about the legal obligations and accountability of foreign state-owned companies, particularly as they relate to those companies’ interactions with American companies and consumers. Now, I’ve heard several recent reports noting cases where companies owned by foreign governments have claimed that they are immune to suits by American companies or consumers in our courts. They’ve made this claim even when a foreign state-owned company or one of its corporate affiliates has been engaged in commerce with American consumers or companies. In making this argument, the companies would try both to take advantage of our markets and to avoid the rules and potential liability that every other market actor must face. That doesn’t seem right to me. And it’s not the way our laws are set up to work.
It’s an age-old rule of international law that one sovereign nation should not subject another country acting in its sovereign capacity to the authority of domestic courts.
Our courts recognized this principle long before Congress wrote it in a statute. The theory developed at a time when personal sovereigns ruled foreign powers—the sovereign was the state. Chief Justice John Marshall acknowledged it in an 1812 Supreme Court opinion when he explained that our courts had no jurisdiction to hear Americans’ claims against France to recover a ship seized by order of Napoleon.
But there have long been important exceptions to the doctrine of foreign sovereign immunity. One of those is the so-called “commercial activity” exception. Just twelve years after his opinion about Napoleon’s ship, Chief Justice Marshall explained that “[w]hen a government becomes a partner in any trading company, it devests itself . . . of its sovereign character, and takes that of a private citizen.”
For that reason, over the last several decades, both the State Department and the Supreme Court have recognized that the original purposes of foreign sovereign immunity—respect for the person and governmental acts of a foreign sovereign—are not served when the doctrine is invoked to protect a sovereign’s private acts.
This development resulted from the need to ensure stability and predictability in international commerce after state monopolization in industries like transportation and communication. And it’s based on the notion that when a sovereign nation enters the competitive marketplace, it’s no longer acting as a sovereign at all—and must follow the same rules as every other market participant.
In 1976, we codified these principles in statutory law by enacting the Foreign Sovereign Immunities Act (FSIA). Under the FSIA, foreign sovereign immunity extends not only to foreign sovereigns, but also to political subdivisions and even corporate entities owned by foreign sovereigns. But importantly, the FSIA also codifies exceptions to the foreign sovereign immunity principle, including the commercial activity exception.
As I said, I’ve seen reports noting cases where companies owned by foreign governments have claimed that they are immune to suits by American companies or consumers in our courts. And sometimes, their arguments have succeeded—which raises concerns that the exception may not be working as designed.
Let me give you one example. Americans bought much of the drywall used to rebuild New Orleans after Hurricane Katrina from Chinese manufacturers. Thousands of homes built with that drywall turned out to be uninhabitable because, residents say, the drywall made them sick. So these Americans tried to sue the Chinese manufacturers, including the manufacturers’ parent company—China National Building Materials Group (CNBM).
The problem for the consumers is that the Chinese government is heavily invested in these manufacturers—among many other commercial enterprises. Under the general principles of foreign sovereign immunity, a foreign government selling Americans a product is not acting as a sovereign, but as a market competitor. One would assume that the “commercial activity” exception to foreign sovereign immunity applies. But the state-owned manufacturer argued otherwise.
Here’s how it works under the statute. Foreign companies are sued in our courts all the time. Commonly these lawsuits, like the drywall case, involve claims of American consumers or companies that the foreign company engaged in some behavior that harmed them.
When a foreign company is sued in one of our courts, it has a chance to show at the beginning of the case that a foreign government owns a majority of its shares. If the foreign company makes that showing, it then enjoys a presumption of immunity under the FSIA, meaning that the plaintiffs’ lawsuit will be dismissed.
But before that happens, the plaintiffs have one more chance to save their case from early dismissal. This is where the “commercial activity” exception comes into play. The plaintiffs can defeat the presumption of immunity by showing that the foreign state-owned company was acting as a market participant—that is, engaging in commercial activity that takes place in or affects the United States—when it caused the harm the plaintiffs complain about.
This principle—the “commercial activity” exception—saves a case from early dismissal and gives plaintiffs the chance to move forward and try to prove up their claims against a foreign state-owned corporation behaving like a market actor.
But as it turns out, that can be a complicated showing for plaintiffs to make at such an early stage in the case. Here’s why. Companies owned by foreign states are often governed through very complicated corporate structures.
Take, for example, the large Chinese insurance company backed by the Chinese state bank in its recent attempt to purchase an American hotel chain. In describing the attempted takeover, the Wall Street Journal described the Chinese company’s ownership structure as “opaque.” Yet in implementing the FSIA, courts require plaintiffs to meet the commercial activity exception at every level of corporate organization. Or, they must show that various levels of organization acted only as corporate pass-throughs, and therefore can be ignored.
Here’s why I think that may be a problem. Corporate parents can exercise an extraordinary level of control over subsidiaries without concluding that the subsidiary is a mere pass-through. Requiring plaintiffs to show commercial activity at every level of corporate organization—at such an early stage in the lawsuit—runs the risk of ignoring high-level involvement in the conduct that allegedly hurt the plaintiffs. If plaintiffs don’t satisfy this showing against a parent company at an early stage in their case, they may lose the chance to establish their claims.
Now, what this means as a practical matter is that this mechanism puts foreign companies that happen to be owned by sovereign states at a distinct advantage over private foreign companies.
A private foreign company has no mechanism for early dismissal of a lawsuit on these grounds. A private foreign company would be required to respond to the plaintiffs’ allegations. And it would have to produce evidence during the course of the lawsuit relating both to its control over other parts of the conglomerate and also to its involvement in the activities alleged.
As a result of this early-dismissal mechanism, the plaintiffs’ case in New Orleans could only proceed against one subsidiary of CNBM. The case against CNBM itself was dismissed. Now, it may be that these plaintiffs still wouldn’t have been able to establish liability on the part of CNBM in the end—but they didn’t have the opportunity.
This is something I want to consider carefully. If a foreign state-owned company is able to shield parts of its organization behind the FSIA—to avoid having to answer a lawsuit entirely in a way the FSIA doesn’t contemplate—when a privately-owned foreign company wouldn’t enjoy the same luxury, a fix may be in order. The point of the commercial activity exception to foreign sovereign immunity is to treat foreign governments like any other market actor when they enter into commerce.
Nothing about the principles of foreign sovereign immunity or the FSIA is designed to afford extra early defenses to foreign companies’ commercial actions just because the companies happen to be owned by foreign states. But currently, foreign state-owned companies are arguing that many of their affiliates don’t have to answer the claims of American companies and consumers, even when it’s clear that at some level the company engaged in market activity that may have harmed Americans. Sometimes, like in the New Orleans case, the companies are succeeding.
I think that may be a problem and I want to look at it carefully.
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