In April 2024, after extensive public debate and Congressional interrogation of Shou Zi Chew, TikTok’s CEO, President Biden signed into law the Protecting Americans From Foreign Adversary Controlled Applications Act (“the Act”), which will ban TikTok from the United States unless ByteDance, its parent company located in Beijing, divests TikTok’s U.S. business to approved entities within 270 days. The Act, subject to ongoing constitutional challenge, opens the door to future government regulations and expropriations of U.S. entities with foreign shareholders and may pose serious threats to shareholders’ rights.*

Investors and the government will likely hold opposite views on whether the Act, or similar future regulation, constitutes expropriation. While the Act ostensibly offers the option to divest and doesn’t “seize” any private property rights, political obstacles and logistical infeasibility may render divestment impossible (as TikTok claims to be the case), which would devalue shareholders’ interests essentially to zero. Such effective deprivation of value may amount to indirect expropriation without taking title legally. Domestic investors are protected by the Fifth Amendment against takings without just compensation, but how can foreign investors protect themselves against expropriation?

Below are a few questions that foreign investors should ask themselves when considering investing in the U.S.:

  1. Does your country have a Bilateral Investment Treaty (BIT) with the U.S.?

BITs are international treaties between two signatory countries designed to protect investors from either country against performance requirements, restrictions on transfers and arbitrary expropriation when investing in the other signatory country.

Generally, a BIT prohibits all expropriations or nationalizations, except those that are for a public purpose; carried out in a non-discriminatory manner; in accordance with due process of law; with prompt, adequate, and effective compensation. Indirect expropriations (when the value of the asset is essentially deprived without taking title) and creeping expropriation (when a series of measures is taken to incrementally destroy the value of the investment) are generally prohibited as well.

The U.S. currently has BITs with 39 countries in force, with 6 additional BITs signed but not yet in force. If an investor thinks the BIT had been violated, they may seek relief through investor-state dispute settlement (ISDS) mechanisms, which usually means arbitration.

  1. Are you a qualifying investor?

To be a qualifying investor, you must be a national of the contracting state, meaning that as a natural person, you must be a national under the definitions of the country’s domestic law; or as a company, you must be legally constituted under or organized in accordance with laws of the country.

  1. Is the investment you are making a covered investment?

Covered Investments are defined relatively broadly in BITs. Most BITs include “every kind of investments” in the territory of the U.S. owned or controlled directly or indirectly by a qualifying investor. Covered investments can include shares or valuable interests, tangible properties, or intellectual properties.

But not all BITs are identical, so foreign investors should refer to the specific BIT for their respective country and consult legal counsel on the types of investment covered and the extent of protection offered.

  1. If your country does not have an active BIT with the U.S., does it have investment protection under other international treaties such as Free Trade Agreements (FTAs)? Does the investment provision allow investor-state arbitration if there were to be expropriation?

Investors from some countries are offered protection against expropriation of investment through investment provisions within an FTA. However, dispute resolution mechanisms may be more limited under FTA investment provisions. For example, investor-state dispute resolution has been eliminated as an option for Canadian investors under the 2020 U.S.-Mexico-Canada Agreement (USMCA) and Mexican investors only retain the investor-state option in limited sectors. State-to-state dispute mechanisms are still available, but the change significantly limits individual investors’ ability to seek relief.

  1. If your country has no international agreements that offer investment protection with the U.S., can you layer your investment through another jurisdiction that does?

“Treaty shopping” may be an effective way to seek more investment protection if your original country does not have an enforceable investment agreement with the U.S. If the terms “qualifying investor” and “covered investments” are defined broadly in a specific treaty between the U.S. and a contracting state, an investor, whose home country does not offer protection, may become a national of that contracting state by constituting a shell entity in accordance with their domestic law and invest in the U.S. through that shell entity for protection and recovery through ISDS in case of expropriation. While treaty shopping may generate high rewards, it is not without risks as some tribunals have expressed concerns over the legitimacy of forum shopping.

  1. Is the industry you are considering investing in particularly vulnerable to political interference? Will the existing shareholder structure of the investment target trigger suspicions?

In light of recent escalations of international conflicts, financial investments are inevitably affected. Pre-investment risk management would be better than looking for legal remedies after the fact. Investors can look to policy tendencies and international relations trends to figure out whether the investment target is at greater risk of regulatory expropriation. Factors to consider include the investment target’s industry, concerns that the host countries may be particularly sensitive about, and existing shareholder structure. The TikTok ban is a perfect example. Today’s concerns over data privacy and national security may be a cautionary tale against investments in social media and e-commerce platforms, or a deterrence from targets with ties to China or other authoritarian governments.

Obviously, political climates and trendlines are difficult to predict, but investors should consider minimizing their losses based on all currently known risks – high risk alone never guarantees high (or any) reward.

*RKS thanks author Cody Huyan, a summer law clerk at RKS for the summer of 2024, joining us from Columbia Law School.