Table Of Content(B) Benyon Ch1 3/8/10 09:14 Page 1
1
Introduction
T
HE TREATY OF LISBON, signed on 13 December 2007, entered into
force—after the problems encountered with the referendum in Ireland and
the special provisions concerning the United Kingdom, Poland and, at the
last minute, the Czech Republic—on 1 December 2009. That Treaty introduced
amendments into the Treaty of European Union, most importantly on institutional
matters, and into the Treaty Establishing the European Community (the EC
Treaty), also renaming it the Treaty on the Functioning of the European Union
(TFEU). In many areas the substance of these provisions did not change, but the
numbers of the articles almost invariably didchange. Since this work is intended to
help those who, in the present and the future, have to grapple with problems involv-
ing direct investment, the new Lisbon numbers are used throughout, for example
Article 63 TFEU as the first article of the Capital chapter; but since this work was
drawn up under the ancien regime, and since those who work in this area will surely
be more familiar with the numbers of the articles in the old EC Treaty, the new arti-
cle numbers are followed each time with the old EC Treaty article numbers, for
example Article 63 TFEU (56 EC). The text becomes a little more heavy, but it will
hopefully help the understanding thereof, especially in this changeover period.
I. THE MAJOR QUESTIONS
The questions which arise in relation to direct investment are legion: not the least
important is exactly what the very notion comprises. Since the Treaty does not
define the term, it shall, for the purposes of the present study, be taken to mean an
investment made by a person from one state, one jurisdiction (‘home state’), into
another (‘host state’), which goes beyond a simple portfolio investment and
involves some control of, or at least participation in the control of, the entity the
subject of the investment; this notion has been used by the European Court of
Justice (the Court) and in secondary legislation.
Once the question of the meaning of the term has been answered—at least pre-
liminarily for the purposes of this discussion—a series of other questions arises,
including whether the home state investor has a right to invest. In other words, can
the other state, the host state, prohibit or restrict such investment, and if so, for
which reasons? Do network industries or those providing services of general
(B) Benyon Ch1 3/8/10 09:14 Page 2
2 Introduction
economic interest, somehow have a higher value or intrinsic ‘worth’ which the
host state is entitled to protect from outsiders, in particular, for example, from
investment by Sovereign Wealth Funds? Is there also room for the protection of
so-called ‘national champions’?
In considering the answers to these questions, the further question arises of how
any rights should be enforced: should it be at state level or at investor level, and
according to which procedures—arbitration or courts, national courts or higher
courts? Does enforcement of rights at investor level through arbitration under
Bilateral Investment Treaties (‘BITs’) have a special position?
II. INTERNATIONAL NORMS?
Although it has been put forward that centuries ago, trade in goods and invest-
ment were dealt with together and in the same way, in treaties of friendship, com-
merce and navigation, with rights being granted to sell goods in the host state
through trading posts established there, rules on goods and on investment began
to go their separate ways early in the nineteenth century and it was not until the
end of the twentieth century that some multilateral provision was made which can
have some relation to direct investment with the General Agreement on Trade in
Services (GATS) of 1994. However, unlike the rules laid down for trade in goods
in the General Agreement on Tariffs and Trade (GATT) of 1947, which apply
generally, those in the GATS are only partly relevant since they concern trade in
services only. Furthermore, only one of the four methods of such supply could be
relevant, namely that involving a physical presence in the host country.
Furthermore the extent and nature of the obligations depends upon the detailed
concessions offered by each party and, within the European Union (EU), by each
Member State, in the myriad of complex detailed schedules annexed to the
Agreement. One cannot therefore begin to allege any general rules in international
law on direct investment based on the GATS.
Sectoral treaties do not really offer any such basis either. For example, in avia-
tion the Chicago Convention of 1944 did deal with matters concerning the supply
of aviation services, but it left the grant thereof to a multitude of different bilateral
treaties or arrangements, which in any event did not stray into direct investment
or establishment, an area jealously guarded by each state. Furthermore, although
the International Civil Aviation Organization was established by that Convention,
it has no real power to enforce even the limited obligations contained therein.
Quite different is the situation under regional integration treaties such as the
European Free Trade Association (EFTA), North American Free Trade Association
(NAFTA) and the European Union: that for the European Union is particularly dif-
ferent, not only in view of the significant obligations of substance undertaken by its
Member States on investment, establishment and capital markets, but in particular
in view of the comprehensive legal order it established.
It is therefore this system which will be examined.
(B) Benyon Ch1 3/8/10 09:14 Page 3
The Treaty and Direct Investment 3
III. THE TREATY AND DIRECT INVESTMENT
The European Community was established to promote a harmonious, balanced
and sustainable level of economic activities, employment and social protection
(Article 2 EC) and in order to do so, was to implement a number of common
policies and establish an
internal market characterized by the abolition as between Member States of obstacles to
the free movement of goods, persons, services and capital [Article 3 EC].
Such free movement is now spelt out in Part Three of the Treaty on the Functioning
of the European Union: Title three thereof expressly grants the freedom of move-
ment for workers (Article 45 TFEU (39 EC)), the right of establishment (Article 49
TFEU (43 EC))—thus equal treatment for employees and for employers—the
freedom to provide services (Article 57 TFEU (49 EC)) and the removal of all
restrictions on the movement of capital and on payments (Article 63 TFEU
(56 EC)).
A. Direct Investment—A Treaty Freedom?
Although the notion of ‘Direct Investment’ is only briefly mentioned in the Treaty,
in Article 64 TFEU (57 EC), the jurisprudence of the Court and secondary legisla-
tion of the institutions, has clearly stated that such investment falls within the free-
doms so granted. Article 49 TFEU (43 EC) provides that the right of establishment
includes the right ‘to set up and manage undertakings’ while ‘capital’, the free
movement of which is ensured by Article 63 TFEU (56 EC), is to include ‘Direct
investments—participation in (an) undertaking with a view to establish lasting
economic links’, and this by virtue of Directive 88/361. Although now repealed,
the directive has been ‘retained’ by the Court for the purposes of the definition.
These two Treaty articles are, however, not identical since establishment rights are
only granted to EU nationals and only for establishment in another Member State,
while the free movement of capital is accorded irrespective of the nationality, or
even residence, of those involved and both for movements within the Union and
movements to and from third countries.
In the light of such difference, another important question to be clarified in
relation to Member State restrictions, in particular on direct investment, is which
of the freedoms applies, and a number of specific Treaty articles1 as well as the
Court’s pronouncements—in particular the recent judgment in Fidium Finanzon
‘competing freedoms’—will be examined.
1 Articles 57 TFEU (50 EC), 58 TFEU (51 EC) and 65 TFEU (58 EC).
(B) Benyon Ch1 3/8/10 09:14 Page 4
4 Introduction
B. Restrictions on Treaty Freedoms
And yet another question to consider is exactly what is to be regarded as a ‘restric-
tion’ on the Treaty freedoms?
The Court has clearly established that any measure which ‘hinders or renders
less attractive’ a movement shall be considered to restrict these Treaty freedoms.
However, the jurisprudence must be examined to see whether a clear line is to be
drawn between obviously protective measures at one end of the scale and, at the
other end, measures, particularly in the area of company law for example, which
rather reflect a societal choice applicable plainly to all and thus perhaps simply a
form of ‘regulatory competition’ between Member States. The recent judgment in
Caixa-Bank, which struck down a long-standing business rule because of the
‘competitive disadvantage’ suffered in particular by a foreign newcomer to the
market, will need study, namely in relation to the history of the Court’s pro-
nouncements in the free movement of goods concerning access to the market and
rules of the market.
Although Articles 49 TFEU (43 EC) and 63 TFEU (56 EC) are not addressed to
Member States only, the Court’s pronouncements have essentially concerned
measures enacted by Member States or by those exercising similar authority. Some
recent judgments, however—for example, Viking—have extended the prohibition
outside those limits to catch restrictions by other bodies, and this may have reper-
cussions on the question of private enforcement, including in relation to Bilateral
Investment Treaties (BITs).
C. Justifications for Restrictions
But are there not justifications for such restrictions?
Indeed there are. The Treaty articles in question, in slightly different degrees, do
foresee protective measures for public policy, public security or public health rea-
sons or, in relation to capital, for tax or prudential reasons. Furthermore, the Court
has incorporated into these two articles the justifications allowed for the free move-
ment of goods, which of course do not specify the exact limit of the ‘overriding
requirements in the general interest’, but do nevertheless always require that the
restrictions be both ‘necessary for’ and ‘proportionate to’ the achievement of the
requirements in question. It is here that a number of Member States have alleged
that certain sectors or industries, in particular network industries, must remain
subject to restrictions, restrictions on ownership for example. Sometimes reference
has been made to the requirement to preserve services of general economic inter-
est, and for this purpose an examination of Article 16 of the EC Treaty, introduced
at Maastricht, now Article 14 TFEU, will be useful. At other times obstacles appear
to represent simply the protection of ‘national champions’.
A number of pronouncements of the Court have greatly clarified the contours
of these justifications.
(B) Benyon Ch1 3/8/10 09:14 Page 5
The Treaty and Direct Investment 5
D. Who is Competent to Introduce Restrictions on Investment?
Although the rules on the freedoms of establishment and of services did not envis-
age measures by anyone other than a Member State, the Maastricht rules on the
free movement of capital foresee the introduction of restrictions concerning third
countries by the Community acting alone (Articles 57, 59 and 60 EC) as well as by
Member States (Article 58 EC). How and whether such measures may co-exist is
not clear but has recently been discussed by the Court in a case concerning BITs.2
Articles 56, 57, 58 and 59 EC form the nucleus of the chapter on capital as Articles
63, 64, 65 and 66 in the TFEU. The former Article 60 EC has been detached there-
from and is to be found essentially in Article 75 TFEU, but also relevant is Article
215. The whole interrelationship of the Capital chapter articles has of course been
affected significantly upon the entry into force of the Treaty of Lisbon, since
Article 207 TFEU expressly provides that foreign direct investment shall form part
of the common commercial policy and thus lies within the exclusive competence
of the Community.
Then what of the Member States’ Bilateral Investment Treaties? Can they exist
alongside the Treaty provisions on capital and on the common trade policy in par-
ticular, and if so, how? Equally importantly, if not more so, can BITs between
Member States exist not only alongside particular Treaty provisions but rather in
the whole context of membership of the Community?
E. Treaty Freedoms and Competition Law
The Treaty of course not only concerns the grant of rights to operators, to
investors, but also imposes duties, including that of ensuring that competition in
the internal market is not distorted. The common competition policy foreseen in
Article 3(g) EC, provided for a
system ensuring that competition in the internal market is not distorted.
Clearly direct investment by means of the acquisition of a competitor in another
Member State may distort competition and thus not be in the interest of the
Union. It was for this reason that mergers of a certain scale need approval by the
Commission under the Merger Regulation.3In order to avoid conflicts of compet-
ence, this Regulation provides that Member States may not rule on any merger
which the Community has approved except for reasons outside the sphere of
competition, namely to protect legitimate public interests, prudential supervision
etc, provided that these are compatible with the general principles and other pro-
visions of Union law. Certain mergers, particularly those which have concerned
2 See Case C-205/06 Commission v Austria(ECJ, 3 March 2009), ch 10, fn 2 below.
3 Council Regulation (EC) 139/2004 of 20 January 2004 on the control of concentrations between
undertakings (the EC Merger Regulation), replacing Council Regulation (EEC) 4064/89 of 21 December
1989.
(B) Benyon Ch1 3/8/10 09:14 Page 6
6 Introduction
‘national champions’, have formed the object of disputes, decisions and Court
judgments under this Regulation, but for reasons outside the competition rules.
These will be examined also to indicate in particular the important adjunction,
by this Regulation, to the classic infringement procedures of Article 258 TFEU
(226 EC), of a new instrument for the enforcement of cross-border investment
rights.
IV. THE STRUCTURE OF THIS WORK
The problems introduced above will be dealt with by examining in turn:
• The free movement of capital;
• The freedom of establishment;
• The contours of justification of restrictions for alleged strategic or public inter-
est reasons, in particular for services of general economic interest;
• The Merger Regulation;
• The free movement of companies including the Take-over and Merger directives;
• The particular problems concerning cross-border direct investment in and
from third countries, including Sovereign Wealth Funds and the question of
Union/Member State competence to take measures particularly after the Lisbon
Treaty; and
• Lastly, the question of the enforcement of rights concerning investment, in par-
ticular in relation to BITs.
Before beginning, a word should be said on the nature of the chapters that
follow.
Given the number and breadth of the subjects concerned with the question of
Direct Investment—two, if not three, fundamental freedoms and two common
policies, competition and trade—this study will not deal with each subject in
depth, nor consider every Court pronouncement. Only those judgments of semi-
nal importance, which set the boundaries for discussion, will be examined.
Furthermore, where these judgments are clear and given by the Full Court, in par-
ticular recent judgments, then what the Court should have said or could have said
will not be discussed. Rather, in an endeavour to find solutions to open questions
and the optimal way forward, we shall reflect on Court pronouncements which,
for example, have accepted the objectives pursued by an investment restriction—
for instance security of energy supply—but rejected the means used; or, another
example, judgments which have rejected a particular form of investment treaty
without indicating the appropriate means to deal with the problem.
Hopefully, these reflections could then be of use to all concerned with invest-
ment now and in the future, to investors, private lawyers advising investors,
Member States considering the need for protective measures or participating
in the work of the Union institutions, and the Union institutions themselves, in
particular the Commission.
(C) Benyon Ch2 3/8/10 09:14 Page 7
2
The Free Movement of Capital
I. INTRODUCTION
Although Articles 56 to 60 EC of the Treaty, on free movement of capital, now
Articles 63 to 66 and 75 TFEU, were only introduced into the Treaty from January
1994—thus well after the contours of the other Treaty freedoms had been estab-
lished in detail by the European Court of Justice (the Court)—it is proposed to
start with consideration of the capital freedom since it is within the legal frame-
work of capital movements that the specific term ‘direct investment’ is to be
found.
Then in the next chapter we shall examine the freedom of establishment, since
the two have a number of similarities and crossing-points in relation to direct
investment in particular, and in chapter eight, concerning third countries, we shall
look at the interrelation of the two Chapters, since third countries only have rights
under the capital freedom, not the establishment freedom and, furthermore, are
subject to the measures taken by the Union under its common commercial policy.
II. PRE-MAASTRICHT REGIME
Prior to Maastricht, the provisions on capital movements in the original EEC
Treaty were much more limited in scope and in nature than the corresponding
provisions on the free movement of goods, persons and services.
Basically, they provided that Member States should
to the extent necessary for the proper functioning of the Common Market, progressively
abolish as between themselves restrictions on the movement of capital belonging to
persons resident in Member States . . . [Article 67(1) EEC],
and required directives to be adopted in the course of the first transitional stages
for the progressive implementation of such provision (Article 69 EEC). As for
third countries, Article 70 EEC merely foresaw that the Commission should
propose to the Council measures for
the progressive co-ordination of the exchange policies of Member States in respect of the
movement of capital between those States and third countries.
