In the last issue of The Globe, I mentioned that the International and Immigration Law Section Council had proposed a continuing legal education program entitled, “Pulling No Punches: Effective Representation of Immigrant Survivors of Domestic Violence.” That proposal has been accepted by the ISBA CLE Committee.
The date and location has now been set—it will be at the ISBA Regional Office in Chicago on February 29, 2008. Detailed publicity will be forthcoming, but please mark that date on your calendar.
This issue of The Globe is diverse both in topics and authors. “Diversity Visas for 2009: Top Five Questions asked by Clients” is by Shannon M. Shepard, formerly Shannon M. Jackson, who last year was Chair of the International and Immigration Law Section Council.
Farrah Qazi is a new appointee to the International and Immigration Law Section Council. She practices in Naperville. Her article addresses the Pakistan justice system and specifically its blasphemy laws and history.
In addition to organizing the CLE program on immigrant survivors of domestic violence, David Austin has led this year’s efforts concerning panels of attorneys presenting at law schools. David has included a description of the panels this year before Northern Illinois University, Northwestern University and The John Marshall Law School. Lei Hong is a practicing lawyer in Beijing. She is currently an LLM candidate at Chicago Kent Law School and has provided us, “No Need to Panic about China’s New Anti-Monopoly Law.” Piyatida Pavasutti is a member of the Thai Bar and a recent honor’s graduate of The John Marshall Law School with an LLM. She submitted, “Advantages and Benefits for U.S. Investors in Thailand.”
Jan Lasak is a student from the Law School of Masaryk University in the Czech Republic. He is participating in the visiting student program at The John Marshall Law School. His article is, “SEVIC Systems AG: Cross Border Mergers Come under the European Right of Establishment.”
Again we would like to thank the consistency of the law schools, both in providing us opportunities to present to their students the value of ISBA membership and participating in the International and Immigration Law Section, and as importantly, continuing to provide us articles for The Globe.
Lewis F. Matuszewich
Matuszewich, Kelly & McKeever, LLP
Telephone: (312) 726-8787
Facsimile: (773) 279-8872
Email: lfmatuszewich@mkm-law.com
The Diversity Visa (DV) lottery program for fiscal year 2009 had open registration from October 3, 2007, until midnight on December 2, 2007. Whether clients used the assistance of an attorney for the online application for the Diversity Lottery, or whether the clients registered online themselves, I find that questions as to what happens next always ensue. Following are the top five questions (and their answers) that arise in DV cases:
1. How will I know if I’ve won the DV lottery?
If an alien has been selected for a diversity visa, he/she will be notified by mail between May and July 2008. An alien who was not selected will not be notified.
2. When will I get my visa if I win the DV lottery?
For FY2009, the diversity visas will be issued between October 1, 2008, and September 30, 2009. It is important to note that after September 30, 2009, no more visas for FY 2009 will be issued, even if the delay in issuing the visa was due to Service or Department of State error or delay. Therefore, it is important to advise clients to respond timely to any requests for information they receive from CIS, and to follow up often on the status of their case, whether they will get their visa at a U.S. embassy or apply for adjustment of status here in the U.S.
3. What countries are eligible to apply for a Diversity Visa?
First, an alien has to be from a country designated as having low levels of immigration to the United States. The Department of State reviews the immigration levels from each country over the last five years in determining which countries had such low levels. Then, the 55,000 available Diversity Visas are divided up among the eligible countries, with no country allowed more the 7% of the total number available. Clients from the following countries are NOT eligible to apply:
Brazil, Haiti, Peru, Canada, India, Poland, People’s Republic of China, Jamaica, Russia, Colombia, Mexico, South Korea, Dominican Republic, Pakistan, U.K. and its dependent territories (except Northern Ireland), El Salvador, Philippines, and Vietnam.
Once the Department of State has determined the distribution of numbers, candidates from eligible countries who applied before December 2, 2007, will be selected randomly.
4. What other requirements must be met for a Diversity Visa?
Next, an alien must meet the strict eligibility requirements for visa issuance. Applicants must have a high school diploma or its equivalent, OR two years of experience in an occupation requiring two years or more experience to perform. There are no exceptions. If clients are basing eligibility on their education level, it is wise to advise them to go ahead and request an academic equivalency evaluation from an accredited agency to ensure that if they win, they have the paperwork ready to submit proving their academic eligibility. Similarly, if they base eligibility on work experience, they should request documentation from their employer.
5. If I am currently in the United States, can I adjust my status to that of a lawful permanent resident based on the Diversity Lottery?
One who is in the United States already may adjust status based on the Diversity Lottery, if they are here lawfully and meet the eligibility requirements for both the DV and adjustment of status under Section 245 of the INA. It is important to remember that no visas will be issued after September 30, 2009, so following up regularly on the status of the client’s I-485 application is crucial to securing a visa for them. The current case law says that even when the delay is the fault of the Service, there can be no visa issued once the fiscal year closes, so you should also discuss with your clients the benefits versus costs of filing with the U.S. embassy in their home country.
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Shannon M. Shepard practices with Azulay Seiden Law Group in Chicago, Illinois. She is an ex-officio of the International and Immigration Law Section Council and is a frequent contributor to The Globe. She can be reached at sjackson@azulayseiden.com.
With Pakistan in the news constantly, it’s a fine time to examine its justice system and human rights record.
For a young country, Pakistan’s history is fraught with turmoil, change and inequities. Perhaps one of its most glaring inconsistencies lies with its blasphemy laws. By definition, Pakistan is a democratic nation. It is a signatory to the universally accepted Charter of Human Rights. Its constitution also guarantees its people the right to choose and exercise their religion freely. Despite this, the military ruler, President Zia-ul-Haq introduced 295B to the Pakistan Penal Code in 1982.
Blasphemy Laws and Its History
Pakistan Penal Code, section 295B, punishes “defiling the Holy Quran with life imprisonment.”1 In 1986, Section 295C mandated the death penalty for “use of derogatory remarks in respect of the Holy Prophet.”2 In 1990, the Federal Shari’ah Court ruled that the penalty should be a mandatory death sentence, with no right to a reprieve or pardon. Commonly known as the blasphemy law, section 295C of the Pakistan Penal Code 1860 states that any person who ‘by words, either spoken or written, or by visible representations, or by any imputation, innuendo, or insinuation, directly or indirectly’ defiles the name of the Prophet, Mohammad or other holy personages, is liable for blasphemy.3 In addition to a fine, he shall be punished with the death sentence or life imprisonment.
The original blasphemy law dates back to when Great Britain ruled India, and what is now Pakistan. It was intended to prevent Muslims, Hindus and Sikhs from using inflammatory religious language against each other. However, under President Zia-ul-Haq, the law was changed to protect the Sunni version of Islam alone. It has become an effective tool to legitimize the discrimination and persecution of religious minorities.4
Explicit Discrimination of Religious Minorities
The law explicitly discriminates against religious minorities and mentions one group in particular.5 An entire section, section 298A-C, is devoted to the minority Muslim sect of Ahmadiyyat. Under this section, an Ahmadi Muslim who practices his/her religion is subject to fines, imprisonment and even death. Such innocuous gestures as using Arabic terminology, saying prayers, attending a mosque, or introducing oneself as a Muslim are grounds for punishment under the blasphemy law. Section 298-C specifically states:
Any person….(who call themselves Ahmadis or any other name), who directly or indirectly, posses himself as a Muslim, or calls, or refers to, his faith as Islam, or preaches or propagates his faith…, by words, either spoken or written, or by visible representation or in any manner whatsoever outrages the religious feelings of Muslims, shall be punished with imprisonment of either description for a term which may extend to three years and shall also be liable to fine.6
Since Ahmadis consider themselves to be Muslims, their religious actions are essentially the same as other Muslims. Thus, this law has the effect of a widespread ban on the public practice of their faith. Ahmadi Muslims differ from other Muslims because they believe the promised Messiah has already come in the personage of Mirza Ghulam Ahmad.7 However, the rest of the Muslim population rejects him and regard Ahmadis as non-Muslims. Under Pakistan’s blasphemy law, any Islamic action an Ahmadi takes is considered an “insult” to the religion and punishable by arrest. A rough survey shows that more than 3,000 Ahmadis have been charged or arrested for these crimes from 1984 to 2001, under this law.8 Numerous others have been killed and forced to seek asylum elsewhere.
Although Ahmadi Muslims have suffered the most under the penal code, they are not the only affected minorities. Recently, cases have emerged of Christians being arrested and sentenced to death for similar offenses. The Pakistani Catholic Bishops’ Justice and Peace Commission in 2005 estimated that since 1988, approximately 650 people had been falsely accused and arrested under the blasphemy law. During the same period about 20 Christians had been killed and 80 were in prison after being accused of blasphemy.9
Such cases have led to a widespread belief, both in and outside Pakistan, that the criminal provisions against blasphemy are being abused.10 In fact, Amnesty International, Human Rights Watch, the Human Rights Commission and other international organizations have all called for the immediate repeal of the blasphemy law. In response to protests, President Pervez Musharaff promised to modify the laws during the elections of December 2000. However, he failed to fulfill this promise. Thus, the law remains in full force today.
Abuses under the Blasphemy Laws
The Pakistan penal code allows anyone to file a claim of blasphemy against another. To initiate a blasphemy claim, anyone can file a First Information Report (FIR) at the local police station.11 Once a charge is filed, the police can arrest the accused and investigate the charge afterwards. Thus, arrests are made without any evidence to corroborate the claim.
As a result, the law is often used against political and personal enemies. It is also used by Muslim fundamentalists or for personal revenge.
Implications for immigration attorneys in the United States
For attorneys practicing immigration law, the issue of Ahmadi Muslims seeking asylum from Pakistan may arise. Given the existence of the Pakistan Penal Code, favorable arguments for asylum can be made. Of course, a practitioner must examine the individual’s facts and assess it according to the requirements outlined in the US Immigration and Nationality Act.
As a brief review, a refugee must prove three things in order to succeed on an asylum case: (1) s/he has a well-founded fear of persecution or has suffered past persecution; (2) that such persecution is on account of race, religion, nationality, membership in a particular social group or political opinion; and (3) that asylum should be granted in the exercise of discretion.12
For this purpose, a well-founded fear means a reasonable possibility of persecution.13 This can be established by showing: (1) that he or she possesses a belief or characteristic a persecutor seeks to overcome in others by means of punishment of some sort; (2) the persecutor is already aware, or could become aware, that he or she possesses this belief or characteristic; (3) the persecutor has the capability of punishing the alien; and (4) the persecutor has the inclination to punish the alien. Also, the government must inflict the persecution.
Every asylum case is different, and no outcome is guaranteed. The mere existence of a law cannot guarantee asylum for every Ahmadi Muslim, Christian or other religious minority emigrating from Pakistan. Also, the mere membership in a particular religious group is not sufficient to establish an asylum claim.14 However, an understanding of the law and the current state of affairs in Pakistan may help to serve such a client better.
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Farrah N. Qazi received her undergraduate degree from Loyola University Chicago and her J.D. from DePaul University. She currently practices in the area of general practice with a specialty in international law and human rights and is particularly interested in human trafficking, foreign legal systems and Shariah law with office locations in Naperville and Elgin.
1. See Pakistan Penal Code 295-B.v
2. Pakistan Penal Code 295-C.
3. See Pakistan Penal Code 295-B.
4. Amnesty International. “Blasphemy Laws should be abolished.” August 21, 2001. Amnesty International states: “ The blasphemy laws of Pakistan are a handy tool to silence debate and dissent. They are also used to detain people when the real motivation includes land issues or professional rivalry. In the interest of justice, the blasphemy laws should be abolished or as a first step amended to prevent abuse.”
5. Human Rights Watch. “Pandering to Extremists Fuels Persecution of Ahmadis.” May 6, 2007.
6. Pakistan Penal Code 298-C.
7. See <www.alislam.org>.
8. United States Commission on International Religious Freedom, Report on International Freedom. May 2001.
9. See <www.AsiaNews.it>, January 9, 2006.
10. Id, May 2001.
11. Id, May 2001.
12. 8 USC §1101(a)(42)(a).
13. INS v. Cardoza-Fonseca, 480 U.S. 421 (1987).
14. Refahiyat v. INS, F.3d 553, 557(10th Cir. 1994).
Advising our students on how to pursue a career in international law is a hard task, but one that our Section Council members have taken to heart as part of our mission to inform the general public about this area of the law. The difficulty stems, in part, from the fact that international law is such an amorphous term and one that encompasses a huge spectrum of interests, pursuits and possibilities. Fortunately, the ISBA counts among its members a large number of practitioners who have built successful practices that incorporate elements of international law as well as experts and advocates in immigration law who truly serve the world. That so many of these individuals have been willing to commit their time to serving as role models and mentors to law student is something in which our entire Section should take great pride.
One way in which members have helped fulfill part of our mission is by participating in the Pathways To Employment in International Law program. The program, which was founded by the American Bar Association’s Section of International Law, brings law students and new lawyers together with experienced practitioners. In this forum, participants can get a more in-depth idea of what it means o be an “international lawyer” and, most importantly, obtain practical suggestions to further their careers in this area of the law. An invaluable ingredient to the success of these programs is the support provided by the career service offices of the law schools that host the events.
In October, three such programs were organized in Illinois law schools: Northern Illinois University, Northwestern University, and The John Marshall Law School. Panelists for the programs represented a wide range of experience and included representatives from law firms both large and small, educational institutions, non-profits, ad public interest organizations. This broad range gave students a window into the wide variety of ways in which it is possible to practice international law, and the many different paths that can help an individual achieve success in this area. Special thanks of to our speakers: David Austin (Supervising Attorney of the Asylum Project at the National Immigrant Justice Center); Violeta Balan (a member of Mayer Brown’s International Arbitration Practice Group); Amity Roxanne Boye (Executive Director of the International Law Students Association); W. David Braun (a member of the International Team of Drinker Biddle Gardner Carton’s Corporate Securities Practice Group); Scott Pollock (founder of the immigration law firm of Scott D. Pollock & Associates); Lewis F. Matuszewich (Globe Editor, Chair of our Section, and founding member of The Law Offices of Matuszewich, Kelly & McKeever); and Mark Wojcik (Professor of International Business Transactions and International Human Rights at The John Marshall Law School and member of the ISBA Board of Governors).
The panelists shared a number of practical tips with students, but one point that was repeatedly emphasized was the need to network and to maximize on the wonderful advantages that membership in a bar association can provide. Students were reminded that the ABA Section of International Law offers free student membership and has a Web site that is especially dedicated to those interested in pursuing a career in international law (www.abanet.org/intlaw/students) where information on international internships is available. Students were also reminded of the opportunities that exist within the ISBA’s Section on International and Immigration Law, and of the benefits that can flow from pursuing publication possibilities with The Globe. Other issues that were addressed included the advantages of speaking a foreign language, being familiar with foreign cultures, and clerking with specialized bodies.
China passed its first anti-monopoly law on August 30, 2007. The law goes into effect on August 1, 2008. This law is a milestone in Chinese legal development. It provides a comprehensive framework for anti-trust policy and law in the P.R.C. While this legislation governs competitive conduct of Chinese domestic businesses, as well, I will discuss the impact of the new anti-monopoly law on foreign investors.
Since China joined the WTO in 2001, many foreign companies have merged with domestic companies. Because some foreign companies have acquired major state-owned enterprises or companies with famous brand names in China, these acquisitions have raised national security concerns. The Standing Committee of the National People’s Congress, China’s top legislature, enacted the anti-monopoly law in response to public outcry.1
With this law, the government has strengthened its examination and supervision of foreign mergers affecting major enterprises in sensitive sectors. It also allows the government to issue policies to improve the system of admitting foreign-invested companies. The Anti-Monopoly Law requires certain foreign companies to undergo foreign security review. The law provides that in addition to anti-monopoly checks set forth by this law, foreign mergers and acquisitions of domestic companies or foreign capital investing in domestic companies’ operations in other forms must go through national security checks under the laws and regulations that govern the related national security issues.2
The national security review system was actually in place prior to the enactment of Anti-Monopoly Law. The national security review is included in the 2002 guidelines for foreign investment, for example. It also applies to the 2006 guidelines governing the acquisition of state-owned enterprises. Under the 2006 guidelines, foreign companies may not invest in Chinese entities whose business relates to national security issues.
To address price fixing and other issues affecting consumers’ rights, the law bans trade associations from organizing companies in their own industries so as to prevent monopolistic behavior.3
Foreign investors should not panic, however. As set forth in the first chapter of the Anti-Monopoly Law, this legislation is just a tool to ensure fair competition; to prevent and check monopolistic behavior; and to maintain a regulated market place.4 Straitjacketing foreign investors’ entry to the Chinese market is neither an implicit nor an explicit aim of the statute. The sole goal of the law is to prevent foreign purchases that restrain trade. A mature market protected by laws and regulations will enhance the foreign investors’ confidence in China’s economic development prospect.
The Chinese National Development and Reform Committee has implementing and regulatory jurisdiction over the anti-monopoly law. The Committee will supervise and check the standards and procedures of acquisitions made by foreign investors.5 The purpose of this regulation is to avoid tangible or intangible losses of assets important to national security pursuant to the mergers of domestic Chinese entities with foreign companies.
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Lei, Hong is a practicing lawyer in Ray & Partners, a PRC licensed law firm, in Beijing. She is currently an LL.M. candidate in International and Comparative Law at the Chicago-Kent College of Law as well as a Ph.D. candidate in Economic Law at the China University of Political Science and Law, concentrating her doctoral studies in Competition Law and Real Estate Law. Ms. Lei can be reached at leihonglawyer@yahoo.com.cn.
1. See e.g. US Carlyle Group’s purchase of China Xugong Group. Available at <http://www.marketwatch.com/news/story/>. See further, China Supor Cookware Co Ltd Take Over by French Firm SEB. Available at <http://english.peopledaily.com.cn>.
2. See e.g. Xinhua, China Adopts Anti-Monopoly Law, CHINA DAILY, Aug. 30, 2007. Available at: <http://www.chinadaily.com.cn/china>.
3. Id.
4. Winny Wang, Anti-Monopoly Law Passed for Fair Competition, SHANGHAI DAILY, Aug. 30, 2007. Available at: <http://www.shanghaidaily.com>.
5. The law provides that “an anti-monopoly commission will be set up under the State Council to deal with anti-monopoly issues.” The commission will appoint departments to undertake enforcement. (Xinhua, supra note 2).
When recently speaking with an American investment banker, I was surprised to learn that sophisticated Americans are quite concerned with Thai politics, but less aware of an exclusive treaty between the U.S. and Thailand that offers many benefits for U.S. investors.
Thailand’s well-defined investment policies focus on liberalization and encourage free trade. The Thai government actively promotes foreign investment. In a recent survey, the United Nations Commission for Trade and Development (“UNCTAD”) ranked Thailand the third most attractive location for foreign direct investment (FDI) in Asia as well as the fourth most attractive country for FDI in the world.
The World Bank has also published very positive rankings of Thailand for ease of doing business. Not only is Thailand one of the top five countries in Asia, but it also one of the top 20 countries on the planet in this category.
Thailand has been a WTO member since 1995. Negotiations on the United States -Thai bilateral free trade agreement are in a “wait-and-see” period right now, but everyone expects them to resume as soon as our political situation is normalized.
The Thai Political Situation
As most readers are aware, we had a military coup in September of 2006. The coup d’état took place while our former prime minister was out of the country, and Thai politics clearly changed overnight. At first, foreign investors were not fully confident that they wanted to do business in Thailand. While their reaction was perfectly normal, I hasten to add that investors have been coming back to Thailand. Actually, many foreign investors never really left. The markets opened the day after the coup. The Baht is solid. It is so strong, as a matter of fact, that its strength is a source of concern to the Thai economic ministry due to the critical role of exports in the Thai GDP.
The Minister of Finance of the current government has clarified that they will continue policies of the former government and improve Thai economic growth. The Board of Investment of Thailand stated that “Thai Investment Policy Remains Unchanged.”
The Thai Legal Situation
Banks—both foreign and domestic—are operating. The courts are open; contracts are enforced. The Thai economy stabilized after the appointment of the interim government.
Recently, a committee established by the military junta drafted a new constitution for the Kingdom of Thailand, which abrogated the previous 1997 constitution. In August 2007, 57.8 percent of Thai voters approved it by referendum, and it entered into force.
The Treaty of Amity and Economic Relations
In 1968, Thailand and the United States entered into a bilateral treaty that remains in force today. The Treaty of Amity and Economic Relations between the United States and Thailand governs the ownership of businesses by Thais and Americans in each other’s countries.
Under the treaty terms, U.S. citizens and businesses may set up a company or a branch office in Thailand, and do almost anything a Thai company does. U.S. firms receive national treatment pursuant to the treaty. Treaty terms are reciprocal, meaning that Thai firms enjoy the same treatment here. In addition, the treaty exempts Americans and American businesses from the restrictions otherwise imposed on foreign nationals in the Foreign Business Act.
In order to come under the protection afforded by the Treaty, a party must be a U.S. citizen either by birth or by naturalization. Both Thai entities that are majority owned by Americans and American entities formed under U.S. law come under the privileges of the Amity Treaty. American entities must be both U.S. owned and U.S. managed to qualify, however. Note that the United States is the only country that receives these privileges.
A few businesses are excluded from the Amity Treaty preferences. These are: communications, transportation, fiduciary functions, banking involving depository functions (interpreted to include finance businesses), the exploitation of land or natural resources, domestic trade in indigenous agricultural products, and the liberal professions (such as law).
Just because a particular business activity does not come under the Amity Treaty provisions does not mean that Americans and American businesses cannot engage in that particular activity in Thailand. Banking is not a protected activity under the Amity Provisions, for example. Nonetheless, a number of American banks operate quite profitably in Thailand.
Finally, I’d like to be clear on one point. If an American business is not explicitly excluded from the provisions of the Amity Treaty, it is per se included.
Business Promotion Incentives
There are two governmental bodies that have authority to grant business incentives to encourage both foreign and local investment in Thailand: the Board of Investment and the Industrial Estates Authority of Thailand.
Board of Investment
The Thai Board of Investment (BOI) grants general investment privileges, based on the location of the enterprise. Foreigners who invest anywhere in Thailand enjoy the following privileges:
1. Majority interest in businesses where foreign ownership is otherwise restricted to 49 percent under the Foreign Business Act.
2. Land used in the business may be owned.
3. Exemption from certain business taxes, including withholding taxes on dividends and royalty payments.
4. Remittance of capital, profits, interest and principal on foreign loans, royalties, fees or other foreign-currency based obligations.
5. Foreign experts and technicians may be employed on more advantageous terms than otherwise permitted by the Ministry of Labor.
6. Exemption from import duties on machinery imported for use in the business.
7. Exemption from or reduction on duties imposed on imported raw or essential materials used in the business.
8. Various time-based exemptions from corporate income tax depending on the zone as well as the size of investment or number of full time employees.
9. Possible exemption from tax on dividends for a period equal to the period of exemption from corporate income tax.
10. Exemption from tax on payments of royalties and fees for up to five years.
Note that the minimum level of investment capital is one million baht (U.S. $25,000) for all types of activities eligible for promotion. This amount does not include cost of land and working capital.
The BOI has divided the country into three different zones for purposes of the type of privileges granted. Foreign investors who invest in the 58 provinces known as Zone 3, receive even greater benefits than those listed above. These less-developed provinces are designated as Investment Promotion Zones.
Industrial Estates Authority of Thailand
The Industrial Estates Authority of Thailand (IEAT) is a state enterprise established under the Ministry of Industry. The IEAT implements the government’s industrial development policy.
The IEAT may grant investment privileges to enterprises that set up business in specific industrial zones. The IEAT has developed some zones on its own. Others may be created as a joint venture between the IEAT and a private entity.
Both the General Industrial Zone and the Export Processing Zone offer benefits relating to land ownership by a foreign entity, facilitation of work permits and visas for expatriates, and remittance of foreign currency for the foreign entity. Additional benefits granted to those enterprises located in the Export Processing Zone relate to the exemption of import duties and VAT (value-added tax) for the import of capital goods and spare parts, raw materials, and packaging materials. Investors locating there are also exempt from VAT on exported goods.
U.S. – Thailand Bilateral Tax Treaty
Among the most attractive benefits under the tax treaty are reductions and exemptions from standard Thailand withholding tax rates. Moreover, Thailand does not have tax treaties in place with Hong Kong or Taiwan, which makes it more advantageous for Thai businesses to structure many types of deals with American companies.
Conclusion
The Thai government is clearly focused on inviting foreign investment in general, and U.S. investment, in particular.
When investing in Thailand, foreign investors must analyze and follow the legislation carefully. In each type of business, foreign investors need to seek local counsel.
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Piyatida Pavasutti is a member of the Thai Bar and a recent honors graduate (LL.M., Global Legal Studies) of The John Marshall Law School. This article is based on a talk Tida gave to International and Foreign Law Committee of the Chicago Bar Association in March 2007. Tida may be reached at piyatidalaw@gmail.com.
Introduction
In 2006 the European Court of Justice (hereinafter “ECJ”) delivered a breakthrough judgment in the SEVIC Systems AG case.1 This case is certainly a breakthrough in the right of establishment, particularly as this right relates to cross border mergers within the Common European Market. Right of establishment, a fundamental right set forth in European Union law, guarantees the free movement of EU businesses and entrepreneurs within the EU territory. Though not as broad as the Article 4 rights guaranteed in the U.S. Constitution, this right dates to the founding of the 1957 Treaty of Rome, the seminal document that underpins the development of European law.
As I will demonstrate, the SEVIC decision will greatly impact the legislation of the EU Members States governing cross-border mergers. The Member States of the European Union are currently drafting legislation to implement the Directive on Cross Border Mergers.2 “Cross Border Mergers,” for purposes of both this directive3 and the eventual statutes promulgated by the individual EU nations, refers to the merger of one entity created under the laws of one EU country with another entity created under the laws of a different EU country. This law does not address mergers with companies outside the EU territory. Because the Directive is “EEA Relevant,” the 27 Member states of the European Union as well as Norway, Iceland and Lichtenstein are bound to it.4
SEVIC does not interpret the language of the Directive, however. Instead, it interprets the validity of the cross-border mergers under the EC Treaty. The case was decided, however, before the EU Member states enacted legislation implementing the Directive. Nonetheless, the Member states must follow the rules set forth by the ECJ in this case. Under EU law, the Member states may choose their own legal form and method of carrying out a European Directive. They may not, however, overturn an ECJ decision through legislation. They may not ignore this decision even though it was rendered prior to the enactment of any Member state’s implementing legislation.
Background of Cross Border Mergers in the European Union
International mergers and acquisitions are both routine and vital to U.S. corporations. To the extent that they are regulated differently from domestic mergers and acquisitions,5 the relevant law has been in place for a substantial amount of time.
European law, in principle, did not regulate cross border mergers as a part of the internal European market before 2005. Moreover, Member states of the European Community (EC) had basically forbidden such mergers in their domestic law. Business entities incorporated under EC law, as opposed to French or German law, have been exempt from these national proscriptions.6 What’s more, both the merging and the merger entities had to be EC corporations. For companies organized under the laws of an individual EU Member state, the story was different. If a German company wanted to merge with a Belgian company, the disappearing firm had to dissolve and distribute its assets to its shareholders. In other words, straightforward mergers across borders were not allowed.
As the EU has grown, shareholders and companies have been demanding change. In response, the European Commission drafted Directive 2005/56/ES on Cross-Border Mergers of Limited Liability Companies (hereinafter ‘the Directive’).7 The Directive became law in 2005. Limited liability companies, as used in this article, basically include all business entities where shareholder risk is limited to shareholder investment. The aim of the Directive is to allow these companies to merge all around the European Union.
While the Directive became law before the SEVIC decision, SEVIC, rather than the Directive, is legally superior.
Facts of the SEVIC Systems AG Case
In 2002, SEVIC Systems Aktiengesellschaft (SEVIC), a German corporation, and Security Vision Concept SA (SVC), a Luxembourg corporation, entered into a merger agreement pursuant to which SVC would merge into SEVIC. SVC would not dissolve, nor would its assets be distributed to its shareholders under the terms of the merger agreement. The merger never happened however, because the German commercial register (Amtsgericht Neuwied) rejected it. The commercial register is a national entity roughly analogous to the Secretary of State (or similar state agency) in any state of the United States. According to the Registrar, German law only allowed for mergers between legal persons incorporated under the laws of Germany.
An alternative would have been for SEVIC to form a wholly owned subsidiary, in Luxembourg, under Luxembourg’s law. Then, SVC could have merged into SEVIC Luxembourg (“SEVIC – Lux”). This kind of transaction is economically irrational, however.
SEVIC challenged the merger rejection in Germany. SEVIC raised the issue of whether the German merger statutes complied with European law, in particular whether German law violated the EU legal right of establishment. The German court (“Landgericht Koblenz”) decided to stay the proceedings and refer the following question to the European Court of Justice for a preliminary ruling.8 A preliminary ruling is roughly analogous to an interlocutory appeal.
Do Articles 43 and 48 of the EC Treaty “preclude registration in the national commercial register of the merger by dissolution without liquidation of one company and transfer of the whole of its assets to another company from being refused in general in a Member State, where on of two companies is established in another Member State?”9
Right of Establishment and SEVIC Systems AG
“Right of establishment” is granted in Article 43 et seq. of the Treaty Establishing the European Community (hereinafter “TEC”).10 Title III of the TEC sets forth fundamental principles granting free movement to legal persons throughout the EU territory. ECJ case law and European Community legislation have consistently upheld these principles.11
Two guarantees are enshrined in the right of establishment. First, it guarantees a businessman the right to transfer the place of his business to a different Member state. This right is embodied in the so-called “primary” right of establishment under the Treaty.12 Secondly, the right of establishment enables corporations founded under the laws of the EU member states to found subsidiary companies or foreign branch offices in another Member state. This right is known as the “secondary” right of establishment.
Economic growth, of which mergers and acquisitions are a frequent element, has brought cross border mergers within the right of establishment. Although the language of Article 43 of the TEC mentions only agencies, branches or subsidiaries, this language must be interpreted as simply illustrative, not limiting.13 Accordingly, mergers should be seen as effective means of companies’ transformation, and thus as an integral part of the European right of establishment.
The SEVIC holding is a crucial link between the secondary right of establishment and cross-border mergers under Article 43 of the TEC. First of all, the Court held that right of establishment relates to any conduct that enables economic activity or spurs growth in another Member State.14 In other words, it allows foreign entities to receive national treatment in other EU or an EFTA Member state. Therefore, in order to achieve an effective European internal market, the right of establishment must include all conduct that leads to profitable business within the EC, such as free movement of legal persons.15
Germany’s Arguments
In its question to the ECJ, the Koblenz Court framed the issue as whether Germany’s refusal to allow the cross-border merger violated the right of establishment. The European Court of Justice held that Articles 43 and 48 of the TEC prohibit Member states from denying cross-border mergers as a general proposition. By limiting merger approvals to entities organized under the same Member state’s law, EU Member states would breach the right of establishment. The only way in which the German nonconforming legislation could avoid a claim of breach of Treaty right is if the legislation was compatible with legitimate objectives of the Treaty. However, where pursuing a legitimate aim, Member state legislation must not go beyond what is necessary to attain the objective.16
TEC Article 46 sets forth permissible exceptions to the right of establishment: public policy, public security or public health. In support of their argument to come under the Article 46 exception, Germany testified that domestic legislation precluding cross-border mergers aims to protect interests of creditors, minority shareholders, employees and effective tax supervision.17
The ECJ Holding
The ECJ did not buy this argument. The court held that current existing rules governing mergers should not raise concerns about minority shareholders’ protection. This is so because the legislation governing mergers in all EU Member states had been already harmonized18 under the so-called Third Directive.19
The ECJ held that where a member state prohibits cross-border mergers in its national legislation, that state violates the EC Treaty (TEC). The court did not hold that states could not protect minority shareholders by refusing a cross-border merger. Such refusals, however, could only be made on a case-by-case basis. Germany’s legal approach in refusing the SEVIC merger did not meet the legal standard. In order for a country to prohibit a cross-border merger for purposes of TEC Article 46, it must do so in order to achieve the purpose of the fundamental right of establishment.20 Thus, the ECJ answered the preliminary question as follows:
right of establishment precludes registration in the national commercial register of the merger by dissolution without liquidation of one company and transfer of the whole of its assets to another company from being refused in general in a Member state where one of the two companies is established in another Member State.21
Ramifications of SEVIC
Since SEVIC has determined that cross-border mergers come under the right of establishment under articles 43 et seq. of the TEC, it might seem that there is no need for any directive or law governing cross border mergers. Not so, however. Under the Directive, the European Commission can regulate cross-border mergers of companies within the EU with less effort than through ad hoc suits before the European Court of Justice alleging violation of right of establishment. Furthermore, in the absence of a directive, Member States could misuse protective provisions limiting right of establishment under TEC article 46. All these arguments justify enacting the directive of cross-border mergers. This need is not diminished by the fact that the SEVIC System AG decision had been already made.
While the ECJ actually set forth a decision that interprets the TEC, SEVIC goes far beyond the language of the Directive. While the Directive applies only to mergers of limited liability companies, the SEVIC decision has no similar limits. Accordingly, the right of establishment, under TEC article 43, can theoretically affect mergers of entities such as partnerships and other companies with unlimited liability.
The Commission knew the benefits that a cross-border merger directive could provide to European company law. In the mid-80s, the Commission had introduced a directive proposal. Unfortunately, Member States did not accept it. The main reason why the EU member states rejected it was that they could not agree on employee participation in company management of the surviving company.22
Despite the obvious importance of this legislation, it may not conflict with or challenge the right of establishment.23 Moreover, under ECJ case law interpreting provisions of the Treaty, member states must follow certain legal principles when adopting and applying European directives into their national law. One of these principles is that no state may restrict the rights of establishment or free capital movement in its national law. As a result, companies that do not fall within the scope of the Directive still enjoy rights arising out of the right of establishment. Thus, if Member States impose any restrictions on cross-border mergers for these companies or for limited liability companies, the restriction must be properly justified in accordance with the holding in the SEVIC System AG case.
Conclusion
The European Court of Justice held that no European member state may violate the Treaty of Rome’s right of establishment by denying or restricting cross border mergers between countries created under the laws of different European member states. This decision definitely represents a significant development in the construction of the free movement of legal persons in European company law.
The ECJ shifted the burden of proof to the member states to demonstrate that a cross-border merger should be denied. Because the right of establishment belongs to companies within the scope of the Directive (limited liability) as well as those beyond its scope, SEVIC provides a basic standard of cross border mergers for all companies under TEC article 48. This standard may then be broadened in legislation, the way the Directive broadened it in addressing cross border mergers of limited liabilities.
Thus, the decision is not redundant. Instead, it will help measure whether Member States’ laws concerning cross border mergers comply with the European law.
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Jan Lasak is a student from the Law School of Masaryk University, Czech republic. He was a Czech Program visiting student at The John Marshall Law School in the fall semester of 2007. Mr. Lasak will graduate in May 2008 and plans to practice in international litigation and arbitration as well as international business transactions. He can be reached at LasakJan@seznam.cz.
1. See Case C - 411/03 SEVIC Systems [2006] OJ C 36, 11/02/2006.
2. Council Directive 2005/56, on Cross Border Mergers of Limited Liability Companies 2005, O.J. (L 310) (EC).
3. There are three forms of law issued by the European Council and Commissioner which bind the parties involved: regulations, directives, and decisions. (Treaty Establishing the European Community (signed in Rome on Mar. 25, 1957) consolidated version, Nov. 10, 1997 (art. 249 (ex. art. 189) O.J. (C 340) 173.) [hereinafter EC Treaty, or alternatively, TEC]. A regulation applies generally applies to and binds the Member states in its entirety. (Id. at 249(2)). A directive, on the other hand, binds the Member states as to the result to be achieved, but allows each national authority its own choice of form and method to do so. (Id. at 249(3)). A decision is a form of private party law, analogous to a Private Letter Ruling or No-Action Letter. It binds the parties to whom it is addressed. (Id. at 249(4)).
4. For purposes of brevity, the European Economic Area (“EEA”) was created by treaty in 1992, and entered into force in 1994. The parties to the European Economic Area Agreement are the European Free Trade Association (EFTA) and the European Economic Community. Although discussion of the EEA is beyond the scope of this article, it is important to mention that Switzerland, while a party to the EFTA, did not ratify the EEA Agreement. Thus, Switzerland is not bound to EU legislation marked “EEA Relevant.” See e.g. PAUL CRAIG & GRAINNE DE BURCA, EU LAW 26-28 (3d ed. 2003).
5. See e.g. 50 U.S.C. Appx. § 2170 (2003), popularly known as the Exxon-Florio Amendment.
6. See Council Regulation (EC) No 2157/2001 of 8th October 2001 on the Statute for a European company (SE), OJ L 294, 10/11/2001 and Council Regulation (EEC) No. 2137/85 of 25th July 1985 on the European Economic Interest Groupings (EEIG), OJ L 124, 15/5/1990.
7. Published as Proposal for a Directive of the European Parliament and of the Council on Cross Border Mergers of Companies with Share Capital - COM (2003) 703 final - COD 2003/0277.
8. Article 234 of the EC Treaty grants jurisdiction to the European Court of Justice to give preliminary rulings concerning the interpretation of TEC, validity and interpretation of Community acts and institutions. The preliminary ruling is optional for cases heard by the lower courts of the Member States, but compulsory when the court of last instance hears the case in question.
9. OJ, 29/11/2003.
10. EC Treaty, supra note 3, arts. 43 et seq. Article 43, as construed by ECJ case-law, has “direct effect.” An article with “direct effect” under EU law is somewhat analogous to a treaty that is “self-executing” in U.S. law. This means that the EC treaty provision in question provides member state courts with jurisdiction and the parties with standing. The European Court of Justice has repeatedly held this. See e.g. case C - 2/74, June 21, 1974, (J. Reyners v. Belgian State) and case C -71/76, April 28, 1977 (Jean Thieffry v. Barrister Council in Paris).
11. The right of establishment is not the same as the free movement of workers. The free movement of workers affects employees, while the right of establishment involves both entrepreneurs and legal entities. See case C - 55/94, December 30, 1995 (Gebhard v. Consiglio dell ´Ordine degli Avvocati e Procuratori di Milano).
12. The European Court of Justice held that the primary right of establishment affects only self-employed individuals (sole proprietors) in Case C - 81/87 (the Queen v. H.M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc., “Daily Mail”).
13. See Case C-205/84 Commision v. Germany [1986] ECR 3755, at ¶ 21.
14. See SEVIC Systems, supra note 1 at ¶ 18 and Opinion of Mr. Advocate General (GA) Tizzano, 2005 ECJ (July, 7, 2005) ¶¶ 29, 30. Compare e.g. Case C-307/97 Konle [1999] ECR I-06161 or Case C-208/00 Überseering [2002] OJ C 323, 21/12/2002 for the GA’s line of reasoning.
15. See General Programme for the Abolition of Restrictions on Right of Establishment adopted by the Council on Dec. 18, 1961 (OJ No 2 of 15 January 1992).
16. See Case C-9/02 De Lasteryie du Sailant [2004] ECR I-2409, ¶ 49.
17. SEVIC Systems, supra note 1, ¶ 24.
18. “A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.“ EC Treaty, supra note 3, art. 249 (3).
19. Council Directive 78/855, based on Article 54 (3) (g) of the Treaty Concerning Mergers of Public Limited Liability Companies, 1978 O.J. (L 295) (EC).
20. The Advocate General opined that rejecting cross border mergers violated not only Article 43 et seq., right of establishment, but also the free movement of capital under article 56 of the TEC. See Opinion of Mr. Advocate General Tizzano, 2005 ECJ (Jul., 7, 2005) ¶ 73. The ECJ did not address this issue nor was it before the court. I believe that the ECJ did not speak to the free movement of capital question based on early European case law. See e.g. Case C-251/98 Baars [2000] ECR I-2787, Case C-118/96 Safir [1998] ECR I-1897. In these judgments, the ECJ held that it is unnecessary to examine whether a certain measure is in breach of another provision of TEC when one violation of primary European law has been already proven.
21. SEVIC Systems, supra note 1, ¶ 33.
22. The legal concept of “employee participation” was defined in the Council directive 2001/86/EC. “Employee participation” includes, but is not limited to, the right of employees to vote for and against supervisory body Members. These rights are not limited to collective bargaining situations, but arise from operation of law.
23. See Case C-204/90 Bachmann [1992] ECR I-249, ¶ 11.