Jurisprudential Basis of Nationality of Multinational Corporations in International Law

By Atty. Oscar G. Raro

I. Introduction

The need for determining the single nationality of a multinational corporation seems to be an oxymoron. On its face, the term “multinational” immediately resists single-nationality designation. To the uninitiated, it is in law, more than in any other field of intellectual pursuits, that nothing is as it seems and words have different meanings; that if not so abstrusely-formulated to be nebulous, are at least so disparately-construed to be arcane.

But there is a reason in law for stretched connotations of words beyond their literal and primary meanings. The legal semantics are, therefore, detached from the logic in language, what with shifting definitions dictated by purpose and intent. Specifically, in corporations as in individuals, we generally determine nationality to regulate rights and duties and, therefore, protection and liabilities, among others. This will become apparent as we examine the basis of nationality of multinational corporations and the relevance of such examination to enforcement of rights and imposition of liabilities in international law.

II. Determination of Nationality of Foreign Corporations in Philippine Jurisdiction

In Philippine jurisdiction, corporate nationality is important for purposes of determining a corporation’s parameters of business conduct, its right to sue and be sued, and its entitlement to incentives as foreign investors, among others. A foreign corporation is one formed, organized or existing under the laws of any country other than the Philippines, under whose laws Filipino citizens and corporations are allowed to do business in their own country or state.

As a general rule, a foreign corporation, which owes its existence to the laws of another state, has no legal existence outside of that state. However, a foreign corporation may do business in the Philippines upon obtaining a license and upon designation of a resident agent, among others. This recognition of legal standing despite the foreign nationality of a corporation is founded on international law on the basis of consent. Thus, the very component of the definition of a foreign corporation, i.e. “whose laws allow Filipino citizens and corporations to do business in its own country or state,” carries with it the policy of reciprocity. In Philippine jurisdiction, therefore, the principal test of nationality of a corporation is determined by its place of incorporation: “that a corporation is a national of the country under whose laws it has been organized and registered.”

There are, however, instances when other tests of determining corporate nationality are applied. These are:

1. The Control Test – when the nationality of a corporation is determined by the nationality of the controlling majority of its stockholders; and

2. The Principal Place of Business Test - when the nationality of a corporation is determined by the place of its principal business or center of management (siege social).

In the Philippines, we likewise apply the control test in the determining nationality of corporations in the exploitation of our natural resources where at least sixty percent (60%) of the capital stock of the corporation must be owned by Filipino citizens; in owning and operating public utilities, where aside from the requirement that the corporation must be organized under the laws of the Philippines, sixty percent (60%) of the capital stock of such locally organized corporation must likewise be owned by Filipino citizens; in engaging in businesses in the advertising industry where at least seventy (70%) percent of the capital must be owned by Filipino citizens; in cases of foreign investments where the term “Philippine national” may refer to a corporate entity locally organized of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote must be owned and held by Filipino citizens; and in times of war when the character and citizenship of its controlling stockholders will determine its foreign or local nationality regardless of the place of incorporation.

While under municipal laws, the nationality of foreign corporations may easily be determined, it is an entirely different exercise under international law. This transports us to the next point.

III. The Significance of Corporate Nationality in International Law

Corporate nationality “serves as a legal basis for subjecting the enterprise or its activities to the laws, the economic and fiscal powers, and the various social and financial policies of the state to which it is supposed to belong.” Thus, nationality is important for purposes of a state’s control by making its laws applicable to acts of its corporate nationals committed outside of its territory and for purposes of claiming treaty rights for them. It is, however, in the area of diplomatic protection that corporate nationality becomes doubly significant.

The determination of nationality of a multinational corporation is directly related to the fact that ― despite its immense and global economic reach and power ― it is not to date, recognized as a “person” or subject in the same level as that of states in international law. This is so despite the fact that in varying measures, “individuals and private juridical entities can have any status, capacity, rights, or duties given them by international law or agreement.” Thus, the principal relationships between corporations and international law will still have to pass through the state and “their place in international life will depend largely on their status as nationals of states.” Whether as individual or corporations, nationals of a state are subject, through the state to which they are identified with, to injury sustained and liability caused abroad. Thus, at least, as far as the International Court of Justice (ICJ) is concerned, contentious proceedings by an individual against a state can only be entertained “if a State, relying on international law, takes up the case of one of its nationals and invokes against another State the wrongs which its national claims to have suffered at the latter's hands, the dispute thus becoming one between States.” It was even opined that the status of the person as a national of the state presenting the claim must be continuous from the moment of injury up to the time of award. Diplomatic protection is, therefore, the underlying significance in determining corporate nationality in international law.

When the nationality of this alien corporation is not or cannot be determined, a phantom entity emerges which can neither be proceeded against nor be entitled to enforce any right. Nationality of multinational corporations, therefore, becomes necessarily intertwined with legal personality in the level of a subject (through the state of its nationality) in international law.

IV. Determining Corporate Nationality Under International Jurisprudence

The Nottebohm Case

In 1955, the International Court of Justice rendered a decision in a case between the Principality of Liechtenstein and the Republic of Guatemala involving Mr. Friedrich Nottebohm, a naturalized citizen of Liechtenstein. This case has come to be referred to as the Nottebohm Case.

Nottebohm, was born at Hamburg, Germany. In 1905 he went to Guatemala which country he made the center of his business activities. From time to time, he visited Germany and Liechtenstein where in the latter, one of his brothers had lived since 1931. He continued to reside in Guatemala until March of 1939. In October of the same year, while still a German national, he applied for naturalization in Liechtenstein. The application was made more than a month after the outbreak of the Second World War signaled by Germany’s attack on Poland. In the same month or on 20 October 1939, Nottebohm was granted Liechtenstein citizenship and was later granted Liechtenstein passport and a visa by the Consul General of Guatemala in Zurich. At the beginning of 1940, he returned to Guatemala and resumed his former business activities there.

The case involved restitution and compensation claimed by Liechtenstein in behalf of Mr. Nottebohm, now its “national”, for acts committed by Guatemala against him which acts allegedly constituted violations of international law. Guatemala resisted the claim on various grounds, one of which relates to the nationality of Nottebohm, and therefore, the propriety of Liechtenstein extending diplomatic protection for him.

The ICJ denied the claim. While the Court conceded that Liechtenstein’s naturalization law is within the domestic jurisdiction of the State, the nationality of Nottebohm must be ascertained vis-à-vis the circumstances that will create obligation on the part of Guatemala to recognize the effect of such nationality. Thus, the ICJ evolved the criteria and gave preference to what it now calls “real and effective nationality” dictated by stronger factual ties between the person concerned and the State who conferred nationality. What militates against Nottebohm’s claim of nationality are the following facts: he retained his family and business connection in Germany and there is nothing to indicate that his application for a Liechtenstein citizenship was motivated by any desire to dissociate himself from Germany. Likewise, his business interests remained in Guatemala, and there is no “bond of attachment” between him and the tradition, interests, and way of life of the general population of Liechtenstein.

The effective intent and interest to acquire nationality, the “genuine link,” so to speak, beyond mere legal conferment, serves as the guidepost in the Nottebohm Case. However, this case was determined in a case involving the nationality of an individual citizen, and not a corporation. Even then, the reasoning in the case haunts succeeding cases involving corporations before the ICJ. One such case is the Barcelona Traction Case.

The Barcelona Traction Case

In 1970, the ICJ rendered a decision in a case filed by Belgium against Spain involving Barcelona Traction, Light and Power Company, Limited (hereinafter, Barcelona Traction). The case has been known as the Barcelona Traction Case. The Court rejected the claim of Belgium basically on Belgium’s lack of jus standi to bring suit for the Belgian stockholders of Barcelona Traction, the corporation having been incorporated in Canada where it likewise maintained its center of operation (siege social).

Belgium’s claim, brought before the Court on 19 June 1962, involved reparation for damages allegedly sustained by the Belgian stockholders of Barcelona Traction when it was practically forced into bankruptcy by the government of Spain.

Barcelona Traction was incorporated in 1911 in Toronto, Canada, where it maintained its head office. Its major business activities, however, were done in Catalonia, Spain, where it was engaged in the production and distribution of electric power in that area of Spain. It formed a number of subsidiary companies of which some were registered in Canada and the others in Spain. In 1936, these subsidiary companies supplied the major portion of Catalonia’s electricity requirements. After the First World War, the company’s substantial capital stocks came to be controlled by Belgian nationals. Meanwhile, to fund its continuing need for capital expenditures, the company issued series of bonds, principally denominated in sterling. These bonds were serviced out of foreign exchange transfers to Barcelona Traction in Canada effected by its subsidiary companies. In 1936, however, the servicing of the bonds was suspended on account of the Spanish Civil War. Thereafter, Spanish exchange control authorities refused to authorize foreign currency transfers which Barcelona Traction badly needed then to resume the servicing of its bonds obligations.

In 1948, three Spanish holders of the bonds petitioned the court in Reus, Province of Tarragona, for declaring Barcelona Traction bankrupt on account of its failure to pay the interests on the bonds. On 12 February 1948, a judgment was rendered declaring the bankruptcy of Barcelona Traction. Pursuant to such judgment, the assets of the company and two of its subsidiaries were seized and the principal management placed in the hands of Spanish directors. The same measures were effected against the other subsidiary companies of Barcelona Traction and new shares were created and sold by public auction to a newly formed Spanish company, Fuerzas Electricas de Cataluna, S.A. (FECSA), which thereupon acquired complete control of the business of Barcelona Traction.

Attempts at negotiation failed even while hundreds of cases were filed by various companies or persons in the Spanish courts but without success. In the judicial front, 2,736 orders were made, 494 judgments rendered by lower courts, and 37 by higher courts, all without favorable outcome for Barcelona Traction. Thus, Belgium, in behalf of the Belgian nationals originally controlling Barcelona Traction’ shareholdings, brought the case to the ICJ against Spain.

In rejecting the claim of Belgium for lack of personality, the ICJ pronounced: “The traditional rule attributes the right of diplomatic protection of a corporate entity to the State under the laws of which it is incorporated and in whose territory, it has its registered office. The two criteria have been confirmed by long practice and by numerous international instruments.”

In making such adjudicatory pronouncement, the Court touched on other determinants of nationality:

“This notwithstanding, further or different links are at times said to be required in order that a diplomatic protection should exist. Indeed, it has been the practice of some States to give a company incorporated under their law diplomatic protection solely when it has its seat (siege social) or management or center of control in their territory, or when a majority or a substantial proportion of the shares has been owned by nationals of the State concerned. Only then it has been held does there exist between the corporation and the State in question a genuine connection of the kind familiar from other branches of international law. However, in the particular field of diplomatic protection of corporate entities, no absolute test of the “genuine connection” has found general acceptance.” (Italics supplied.)

That being so, the nagging question here is this: Would the decision by the ICJ in this case be different if Canada (the place of incorporation and head office of Barcelona Traction) were to bring the claim instead of Belgium? But Barcelona Traction being controlled by Belgian citizens, may the Nottebohm case be used to likewise deprive Canada of jus standi, the “genuine link” of ownership and business interest being with Belgium? It would appear that a different decision will indeed be arrived at had Canada been the claimant or applicant for Barcelona Traction. The Court even insisted that here, the “genuine connection” likewise resides in Canada while maintaining inapplicability of Nottebohm:

“In this connection, reference has been made to the Nottebohm case. In fact the parties made frequent references to it in the course of the proceedings. However, given both the legal and factual aspects of protection in the present case, the Court is of the opinion that there can be no analogy with the issues raised or the decision given in that case.

“In the present case, it is not disputed that the company was incorporated in Canada and has its registered office in that country. The incorporation of the company under the law of Canada was an act of free choice. Not only did the founders of the company seek its incorporation under Canadian law but it has remained under that law for a period of 50 years. It has maintained in Canada its registered office, its accounts and its share registers. Board meetings were held there for many years; it has been listed in the records of the Canadian tax authorities. Thus, a close and permanent connection has been established, fortified by the passage of over half a century. This connection is in no way weakened by the fact that the company engaged from the very outset in commercial activities outside Canada, for that was its declared object. Barcelona Traction’s links with Canada are thus manifold.” (Emphasis supplied.)

The ELSI Case

This case, decided by the ICJ in 1989, was brought by the United States against Italy involving investor’s rights of U.S. corporate nationals under treaty stipulations between the two states. The case is worthy of mention as the holding of the Court here departs from the “place-of-incorporation” or “siege-social” determination of corporate nationality, advanced, if not settled, in Barcelona Traction.

An Italian company, Elettronica Sicula S.P.A. (ELSI), was incorporated in Palermo, Italy, where it had a manufacturing plant for the production of electronic components. In 1967, Raytheon Company, a corporation established and registered in the United States held 99.16% of the shares of ELSI, while the remaining 0.84%, held by Machlett Laboratories Incorporated, another U.S. corporation. The whole ownership of ELSI, therefore, belongs to these two U.S. corporations. Between Italy and the U.S. is the Treaty of Friendship, Commerce and Navigation (FCN Treaty).

From 1964 to 1966, ELSI made modest operating profits, but which profits were insufficient to service its debts or accumulated losses. In February 1967, Raytheon began taking steps to make ELSI self-sufficient. In 1968, however, when no progress was made despite numerous discussions with Italian officials and companies for purposes of joint business undertakings and government support, Raytheon, as the controlling shareholder of ELSI, began to seriously consider closing and liquidating the company. In March of that year, ELSI decided to cease operation. Meetings with ELSI and Italian officials continued, the latter pressing ELSI to continue operation to prevent displacement of its 900-strong Italian workforce. But on 29 March of the same year, ELSI sent letters of dismissal to its employees. A few days thereafter, or on 1 April 1968, the Mayor of Palermo issued an order requisitioning ELSI’s plant and related assets for a period of six months. In the suit filed by ELSI against the seizure, the Prefect of Palermo, in a decision rendered on 22 August 1969, annulled the requisition order. Meanwhile, ELSI filed a petition for bankruptcy, citing the seizure order as the final cause of its financial distress as the company lost control of the plant and could not avail of immediate source of liquid funds to service its debts. The Court of Appeal, in a suit filed by the trustee in bankruptcy against the Mayor of Palermo and the Minister of the Interior of Italy, awarded damages in favor of ELSI for loss of use of the plant during the period of seizure. The bankruptcy proceedings closed in November 1985 without any surplus for distribution to Raytheon and Machlett, the sole shareholders of ELSI.

The Unites States in behalf of its shareholder-nationals, Raytheon and Machlett, filed claim before the ICJ against Italy purportedly for the latter’s acts against ELSI which violated their FCN Treaty. Italy, aside from raising prematurity of the suit due to the failure of the U.S. to exhaust local remedies available in Italy, raised the issue of jus standi in that ELSI being a corporation organized and being operated in Italy, has Italian nationality. Therefore, the U.S. has no standing to extend diplomatic protection to ELSI, even while the ownership of ELSI’s shares belongs to U.S. nationals. While the claim for reparation by reason of breach under the FCN Treaty was rejected by the ICJ against the U.S., this case assumed importance on the basis of ICJ’s mere cognizance of the case. In effect, and despite its previous holdings in the Barcelona Traction Case, the standing of the U.S. to extend diplomatic protection to mere shareholders of a corporation -- whose nationality if determined under the holding of Barcelona would obviously be Italian -- is recognized. Does this amount to erosion of the dictum in Barcelona Traction on the issue of determining nationality of multinational corporations as dictated by place of incorporation or siege social?

V. Conclusion

In finding rhyme and reason for the holdings of the ICJ in the three cases discussed, the differing facts of the cases provide reconciling factors. Nottebohm may not be applied in determining nationality of multinational corporations because it involves an individual person. The difference between an individual person whose interest is wholly identifiable to him as against a corporation with shareholders of different nationalities, is obvious. Application of Nottebohm to corporations would render nugatory its separate personality from that of its stockholders, a point likewise emphasized by the Court in Barcelona Traction.

The ELSI Case, on the other hand, seems to clash with the doctrine enunciated in the Barcelona Traction Case on the issue of determining the nationality of corporations. However, it is clear that ELSI was decided under factual environment and imperatives, so different from Barcelona Traction’s.

The ELSI Case involves a claim under a bilateral agreement, where under the FCN Treaty between Italy and the United States the only claimant-state is limited to the United States or Italy as parties to the agreement. It would appear that recognition of jus standi of the United States is based on this agreement and not on principles of nationality dictated by Barcelona Traction. The application of ELSI, therefore, would be limited to similar cases governed by such bilateral agreements. After all, nationality for purpose of diplomatic protection may be the subject of stipulation in bilateral or multilateral agreements on consent of the parties.

The diplomatic protection being exercised by the United States in behalf of its two nationals who controlled the shares of the Italian company is actually an exercise to protect foreign investment even when such investment is in the form of an interest in a locally incorporated company. Thus, the ICJ focused on the provisions of the FCN Treaty dealing with foreign investment holding that in respect of acts committed against a corporation, such treaty provisions conferred rights on shareholders as well, taking into account the “meaning and purpose” of the Treaty.

Therefore, in the normal course of determining nationality for purposes of diplomatic protection unqualified by treaty stipulations, the place of incorporation or siege social dictates corporate nationality as enunciated in Barcelona Traction. This seems to be a safe proposition in international law under the current state of jurisprudence.

References:

Brownlie, Principles of International Law, 5th ed. (1998), 482-483; S.D. Murphy (ed.), 96 AJIL 706-707 (2002).

Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 1965, 17 U.S.T. 1270, T.I.A.S. No. 6090, 575 U.N.T.S. 159 (Article 25) cited as Footnote 4, Restatement of the Law, The Foreign Relations Law of the United States 213.

Corporation Code of the Philippines, Sections 123, 125, 140.

Davis Winship v. Philippine Trust Co., 90 Phil. 744 [1952].

Filipinas Compania de Seguros v. Christen, 89 Phil. 54 [1951].

Philippine Constitution (1987). Article XII, Sections 2 and 11 and Article XVI, Section 11.

Salonga, Private International Law 344 (1979 ed.).

Villanueva, Philippine Corporate Law 781 (2001 ed.) citing Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 [1997]

Restatement of the Law, The Foreign Relations Law of the United States 70, 71.

“Parties to International Disputes” citing as examples Ambatielos, Anglo-Iranian Oil Co., Nottebohm, Interhandel, Barcelona Traction, Light and Power Company, Limited, Elettronica Sicula S.p.A. (ELSI)).

http://www.icj-cij.org/icjwww/igeneralinformation/
ibbook/Bbookchapter3.HTM