Corporate governance and FDI – Page 8 – Japanese Law and the Asia-Pacific

The Olympus scandal and corporate governance in Japan

On 22 October Sky News ‘Late Agenda’ interviewed me and Rick Wallace (Tokyo-based correspondent for ‘The Australian’) following an interview with Michael Woodford, former CEO of Olympus in Japan (click here and then here for 200-MB mp4 video-clips). Corporate governance in Japan is important for Australia, given the countries’ strong trade and investment relationship and recent pressure to finalise a bilateral Free Trade Agreement, as well as from broader regional and theoretical perspectives.

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Australia-Japan Business Cooperation: The Last 50 Years and a New FTA?

[A version of the second half of this Comment, on the potential impact of Australia’s new policy against treaty-based Investor-State Arbitration provisions on the pending FTA negotiations with Japan, appears also on the East Asia Forum – cited by Rowan Callick ‘Arbitration Hitch Holds Up FTAs’ The Australian (2 November 2012, p10).]
The remarkably well-attended and interactive 50th Anniversary Australia Japan Joint Business Conference took place in Sydney over 8-9 October. It was hosted by the Australian Committee, established in 1962 and comprising Australia-based firms involved with Japan. But the conference program was developed with its counterpart in Japan, which hosts there a Joint Conference in alternate years. This cooperative arrangement has become unusually close, and provides an inspiration for other bilateral business community centred relationships. (By contrast, for example, the Australia China Business Council hosts its own main events quite independently of those organised by its Chinese counterpart, comprising firms interested in doing business in Australia.) The Australia-Japan Committees’ arrangement is also very longstanding: the first joint conference took place in 1963 at the Tokyo Chamber of Commerce, with the second in 1964 at the Australian National University.
As ANU Emeritus Professor Peter Drysdale reminisced in his keynote address at this year’s conference in Sydney, this cooperative arrangement – and indeed the entire bilateral relationship between Australia and Japan – proved to be an unexpected success. After all, both countries were bitter foes during World War II. For several ensuing decades Australia maintained concerns about engaging with Asia, as well as trade liberalisation and inbound foreign investment more broadly, with Japan also habouring mercantilist tendencies.

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Abandoning all Investor-State Dispute Settlement Mechanisms Also Not Supported by the Facts (updated 17 August)

I am glad the High Court of Australia rejected today the argument by major tobacco companies that Australia’s plain packaging legislation is an unconstitutional “acquisition” of their rights. I dislike those companies’ products, their marketing and their litigation strategies, and I support the plain packaging legislation. I’ve also made numerous submissions to the Australian government since 2005 seeking to improve safety regulation for general consumer goods – partially achieved in the 2010 “Australian Consumer Law”.
But I hope that the ongoing arbitration claim of “expropriation”, initiated by Philip Morris Asia under the 1993 Hong Kong – Australia bilateral investment treaty, does not feed into blanket rejection of any forms of investor-state dispute settlement (ISDS) in investment treaties. Although that system has flaws, it also has benefits, and there is ample scope to draft treaties to provide clear and appropriate mechanisms to balancing private and public interests. With others familiar with international investment law, I provide further examples of the most promising substantive and procedural law reforms in an Open Letter dated 28 July 2012, in response to a recent OECD Public Consultation on ISDS.
My comment will therefore address points made recently on The Conversation blog by Dr Kyla Tienhaara, who remains completely opposed to any form of ISDS. In fact, she urges the Gillard Government to try to excise ISDS from all Australia’s existing FTAs and investment treaties (dating back to 1988), in addition to eschewing them for future treaties – as the Government seems to be attempting, pursuant to its policy shift on ISDS announced in the 2011 Trade Policy Statement (TPS). An alternative is for the Government to approach Hong Kong authorities to seek agreement on amending the 1993 treaty to suspend PMA’s pending claim. More generally, Australia should consider including ISDS provisions in future treaties but expressly reserve its right to agree with the treaty partner to suspend particular types of claims, for example regarding public health issues. This compromise approach is already essentially found in investment treaty practice where the claim involves allegations of “expropriatory taxation”.

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Open Letter – Assessing Treaty-based Investor-State Dispute Settlement

Some are concerned about treaty-based Investor-State Dispute Settlement (ISDS), especially binding Investor-State Arbitration procedures in investment treaties and Free Trade Agreements. One response includes public calls for states to eschew such procedures completely in future treaties, for example in the expanded Trans-Pacific Partnership Agreement presently under negotiation. This approach would essentially leave foreign investors to approach local courts if host states illegally interfere with their investments, or to encourage their home states to activate an inter-state dispute resolution process, or to try to negotiate individualised arbitration agreements with host states.
An alternative approach is to identify and address more specific concerns with treaty-based ISDS. An example is the scoping paper and Public Consultation on ISDS generated by the Organisation for Economic Cooperation and Development, over 16 May – 23 July.
As a constructive contribution to this debate, we created an online form asking for views on whether ISDS should be left as is, abandoned completely, or adapted in various listed ways. As explained below, no respondents favoured eschewing ISDS completely. Yet that position represents the policy shift announced by Australia in the “Gillard Government Trade Policy Statement” (April 2011), resulting in ISDS being omitted from the Australia-Malaysia FTA (May 2012) but difficulties in negotiating other bilateral treaties (with Korea, and Japan) and the TPPA. Implications and other topics related to the TPPA negotiations will be discussed at a Roundtable in Canberra on 8 August, hosted by the Crawford School of Public Policy (ANU College of Asia and the Pacific).

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TPP negotiations and the IBA’s Draft Rules on Investor-State Mediation

As NZ lawyer Daniel Kalderimis points out recently, concerns about treaty-based investor-state arbitration (ISA) have been:

stirred up by the release of an “Open Letter from Lawyers to the Negotiators of the Trans-Pacific Partnership Urging the Rejection of Investor-State Dispute Settlement” on 8 May 2012. The letter is backed by well-meaning, and several well-known, signatories; most of whom are not especially well-informed about investor-state arbitration. The fact of the letter is welcome, as the issues are important. But the letter itself contains several overstatements and does not make a balanced contribution to the debate.

Another oddity about the “Open Letter” is that it refers generically to “Investor-State Dispute Settlement” (ISDS) and ends by calling on “all governments engaged in the TPP [Trans-Pacific Partnership FTA] negotiations to follow Australia’s example by rejecting the Investor-State dispute mechanism and reasserting the integrity of our domestic legal processes”. ISDS incorporates both ISA (where the parties agree to be bound by the arbitrators’ decision) and investor-state mediation (“ISM”) or conciliation procedures (where the parties agree to negotiate a settlement but are not obliged to accept any proposals made by the third-party neutral mediator). At least the rest of the “Open Letter” indicates that the primary objection is to binding ISA.
By contrast, the “Gillard Government Trade Policy Statement” (April 2011) simply eschews ISDS in Australia’s future treaties, including the TPP. Perhaps the Statement meant only ISA, which allows greater inroads into host state sovereignty, given that overall it draws on the Productivity Commission’s recommendations from a 2010 Trade Policy Review report. But, by seemingly eschewing all forms of ISA, the Statement seems to go beyond the Commission’s recommendation on ISA itself.
Hopefully the Australian government, other states involved in FTA negotiations (such as the TPP) and those who wish to improve the ISA system (such as myself) or abandon it altogether (as do some signatories to the Open Letter) will not simply transpose their objections over to ISM too. There is significant scope for mediating investor-state disputes, and indeed the Draft Rules on ISM published recently by the International Bar Association (IBA) are a valuable guide to conducting mediation more effectively. Below I set out some preliminary analysis of those Draft Rules, prepared for the Law Council of Australia but representing my own personal views – particularly regarding the scope for arbitrators to adopt them as a means of settling ISA claims earlier and more effectively (ie ‘Arb-Med‘). A fully-footnoted version of my views is available on request, and I encourage feedback.

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Book Review – “The Derivative Action in Asia” (CUP 2012)

Written by Fady Aoun & Luke Nottage, Sydney Law School
[This is an earlier manuscript version, without footnote references, of our review published in the (March 2012) special issue 34(1) of the Sydney Law Review, on Asian investment and finance law. The final and complete version, along with eight articles and an introduction by the guest editors (Vivienne Bath and Luke Nottage), can also be downloaded here.]
Dan W Puchniak, Harald Baum and Michael Ewing-Chow (eds) The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, 2012), 434pp, ISBN-13: 9781107012271
A decade or so ago, in the aftermath of the Asian Financial Crisis (1997), international institutions like the World Bank saw corporate governance as deeply problematic in many parts of Asia — contributing to so-called ‘crony capitalism’ and economic instability. The proposed solution was often reform based on Anglo-American models, aimed at promoting more transparent securities markets by, for example, protecting minority shareholders. Some Asian jurisdictions made changes in that direction, at least according to the ‘law in books’, but they varied in scope and impact. Within a decade, moreover, large-scale corporate collapses in the West — particularly in the United States — and the Global Financial Crisis (2008) had called into question some fundamental assumptions and prescriptions of the Anglo-American approach to corporate governance. Intellectually, therefore, it is timely to revisit the situation in Asia from a broader comparative and historical perspective. Analysis of corporate governance in Asia also has obvious and immediate practical merit, given the region’s strong economic growth relative to Europe and the US, and especially in light of burgeoning cross-border investment flows arguably needed to sustain ‘the next convergence’ of developing and developed economies.
This book therefore represents an admirable and successful step towards a better understanding of what many commentators have proposed as an important potential contributor to minority shareholder protection and effective corporate governance: namely, the derivative suit brought by a shareholder on behalf of the company.

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Renegotiating Indonesian Investments in the Shadow of International Treaty Law

Written by: Simon Butt, Luke Nottage and Brett Williams
with special thanks (but no responsibility attributed) to Vivienne Bath and Chester Brown (University of Sydney Law School)
[Updated 18 April, with a shorter version at http://www.eastasiaforum.org/]
Indonesia’s new Mining Law regulation requiring divestment of majority foreign investments is unlikely to generate many formal investor-state arbitration (ISA) claims against Indonesia, based on existing bilateral or regional free trade agreements (FTAs) or investment treaties. But that assessment is based primarily on immediate pragmatic considerations. This situation leaves considerable scope for the international investment law framework to begin unraveling, risking complex adverse effects on cross-border investment particularly in the rapidly evolving Asia-Pacific region.

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Divestment of foreign mining interests in Indonesia meets the ‘Gillard Government Trade Policy Statement’

By: Simon Butt and Luke Nottage (University of Sydney Law School)
[with a shorter version at http://www.eastasiaforum.org/]
Professor Chris Findlay recently wrote on the East Asia Forum about ‘Australia’s FDI challenges in the Asian Century’, highlighting problems reported recently by ANZ Bank and Qantas in the region. His proposals including ‘innovation in negotiating modalities’, including a possible new plurilateral agreement in the WTO that would cover all investments (not just in some services sectors). That’s a nice idea, but it’s proving hard enough to complete the current round of Doha Round negotiations. In light also of recent problems in Indonesia, the Australian government should meanwhile reconsider its abrupt policy shift last April regarding an important protection found in most of its bilateral and regional Free Trade Agreements (FTAs) and bilateral investment agreements (BITs): investor-state arbitration (ISA).

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Book Launch (22 March): Foreign Investment and Dispute Resolution Law and Practice in Asia

Allens Arthur Robinson and Sydney Law School are pleased to invite you to celebrate the launch of Foreign Investment and Dispute Resolution Law and Practice in Asia. Edited by Professors Vivienne Bath and Luke Nottage of Sydney Law School, the book critically assesses the laws and policies affecting investment flows in major Asian economies. It brings together valuable insights from some of the region’s leading practitioners and academics about investment treaties and foreign direct investment regimes in Asia. Foreign Investment and Dispute Resolution Law and Practice in Asia will be launched by Professor Michael Pryles, Chairman of the Singapore International Arbitration Centre. [A recording of his 13-minute speech is available via Sydney Law School’s Youtube channel here.]

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Investor-state Arbitration Policy and Practice after Philip Morris v Australia

[Updated 3 August 2011]
Justice Oliver Wendell Holmes famously remarked in Northern Securities Co v United States 193 US 197 (1904) that:

“Great cases like hard cases make bad law. For great cases are called great, not by reason of their importance… but because of some accident of immediate overwhelming interest which appeals to the feelings and distorts the judgment”.

We might take this reasoning a step further: big cases make or entrench bad policy. A contemporary example is the request for arbitration (in Singapore) initiated on 27 June by tobacco giant Philip Morris Asia (PM) against Australia, pursuant to the 1993 “Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments”. PM seems to be alleging that proposed legislation mandating plain packaging of cigarettes amounts to “expropriation” of its trademarks (Art 6) and possibly a violation of “fair and equitable treatment” obligations (Art 2(2)).

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