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: Law at the End of the Day

Brazil Builds a Sovereign Wealth Fund and Norway Flexes Its Muscles: Private Participation in the Market or Regulation by Other Means

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There was a time when states minded their own business. They tended to act through formal lawmaking (regulatory) authority?either in the form of positive law or through the imposition of customary law through judicial systems designed for that very purpose. When states intervened in economic matters, they tended to focus their attention on domestic economies, and the intervention took the form of regulation or ownership. Whatever the state attempted, there was generally no question that the state was acting in its sovereign capacity (the only capacity to could exercise) and that its acts, regulatory in essence, were the subject of public law. Private law was reserved for non-sovereign (subordinate) entities.

But all that has been changing. The Americans have long distinguished between the private (participatory) and public (regulatory) actions of the state. American courts have recognized the choice of law implications of this division, treating participatory activity as a subject of private law, and regulatory activity as a matter of public law (to which, for example, the limitations on state power contained in the 14th Amendment of the American federal Constitution apply). For a recent case in which these issues were discussed and refined, see Dept of Revenue of Kentucky v. Davis, No. 06?666, argued November 5, 2007, decided May 19, 2008, slip op. at 7-10. The Europeans appear to be taking the opposite tack. Through a jurisprudence developed from out of their ?golden share? cases, the European Court of Justice appears to be embracing the position that state activity is presumptively public in character, at least when directed at domestic entities, and that such activity might contravene either the prohibitions on interference with the free movement of capital (Art, 56 EC Treaty) or with the regulation of state aid under the Competition provisions of the ECT Treaty (Art. 87 EC). (For a preliminary discussion of the cases and the development of a European conception of state activity in the market form a choice of law perspective, see Larry Cat� Backer, "The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law," Tulane Law Review, Vol. 82, 2008).

It is one thing when a state seeks to invest in economic activity within the territory over which it has regulatory authority. In that case one might more forcefully (and effectively make a variant of a ?form over substance? argument. Because states always control the legislative environment in which economic entities operate, any purported investment by states in private entities (or even the purported participation of states in the market by appearing to act like a private investor) might well retain a public character. States, in that context, are not in the same position as private investors. The state can always legislate its way around impediments?others must satisfy themselves with exit or participation within the entity. Moreover, states do not act under the same economic constraints as private individuals. Private individuals are said to seek to maximize economic value; states might be deemed to seek to maximize political capital. Assuming that those are different things, a state might not, in that context, be capable of participating in the market like a private individual. Consequently, all state activity is both regulatory and public in character. This form of reasoning is in line with the development of European thinking. But its appeal is offset by another compelling reality. First, the assumption that that states are incapable of acting like other economic actors may be misguided. If the point of economic theory is welfare maximization, and if welfare maximization is, to some extent contextual and subjective?then the facts the some entities (states) value outcomes in a way that may be different from one?s grandmother, may make no real difference. Second, the Americans have rejected the presumptions of this ?form over substance? approach in favor of a more formalist approach with its own presumptions. States are presumed to act in accordance with the form of their actions; they are also deemed to be capable of welfare maximizing behavior compatible with private law. Only where it can be shown that the participation is disguised regulation, will public law apply. Otherwise, state activity in the market, including aberrational activity, is to be guided by private law. Thus, for example, state abuse of its position as shareholder will be judged by the same standards applied to shareholder abuse generally.

But what ought to be the governing law when one state seeks to invest in the economy of another state? This question has become particularly acute since the rise, over the last decade of a number of large funds controlled by states, the purpose of which is to invest in economic entities wherever they may be domesticated. On the surface, this might suggest the best case for the equal treatment of states with private entities. In this case, unlike that in which the state always has the potential to legislate changes to its corporate law, the state stands in the same shoes as a private investor. On the other hand, the state, even as a private investor, has the power to reach deeply into the economic affairs of other states by implementing its legislative program through shareholder activism.

It may be most useful to consider the problem by way of an example from contemporary practice. Consider for the purpose the current role of Norway as an increasingly important private shareholder within the European Union, and worldwide. Norway has twice rejected the opportunity to join the European Union, once in 1972 and the last time in 1994. (See Eur. Comm?n, External Relations, Norway). Norway, however, is heavily integrated with the European Union through its participation in the European Economic Area, the terms of which are governed by the Agreement on the European Economic Area (EEA). (Id.). The EEA has been in force since January 1, 1994 ?and extends the Single Market legislation, with the exception of Agriculture and Fisheries, from the EU Member States to Norway, Iceland, and Liechtenstein.? (Id.). The EEA permits Norway to participate in many

Full post as published by Law at the End of the Day on May 24, 2008 (boomark / email).