Dubai Ports World
Dubai Ports World
The attempted takeover of six US port terminals by Dubai Ports World (DPW), based in the United Arab Emirates (UAE), has strained the historically amicable US-UAE relationship. The future looks grim: a recent Gulf News poll reported 64 percent of readers claimed the deal’s dismissal “changed their opinion for the worst” regarding investing in the United States (Daniels, et al, 2007). The rejection of the ports deal was based largely on vote-garnering political moves, and the economic barrier imposed by the US Senate does not bode well for future business and political relations with the UAE and other foreign investors.
DPW’s expansion is an indication of the UAE’s recent economic growth. Middle Eastern countries have managed to take advantage of global oil price hikes to produce an expected US$320 billion in oil and gas revenues in 2006. This period of sustained economic growth is starkly different from the region’s last: in the oil boom that lasted from 1973 to 1985, much of the resulting revenue was saved in foreign banks. These banks in turn lent the funds to Latin American governments that could not repay their debts. As a result, the UAE’s windfall oil revenues were effectively lost in the process.
However, this time around, investors benefitting from the high price of oil in the UAE chose to avoid the low return of bank loans and instead placed their funds in more risky and lucrative investments (Helbing et al , 2005). As a result of investing in capital markets in the Middle East, these investors provided for a period of sustained growth in the UAE and other Middle Eastern countries. Middle Eastern stock markets have produced soaring gains, with a 770 percent gain in Dubai’s Financial Market Index since 2002.
The booming economy and the diversification of UAE investor funds are fueling the sort of worldwide acquisitions that have recently thrust DPW into controversy. When the US news media began reporting on DPW, US Congressmen and citizens were up in arms against the prospect of a UAE company owning US port terminals through their purchase of previous operator British P & O. In reality, foreign operation of American ports is hardly anomalous–the majority of US ports are foreign owned. In Los Angeles, for instance, only 20 percent of port terminals are domestically operated and managed.
This seems to be a commonly overlooked fact, as US Senators Hillary Clinton and Robert Menendez have suggested a ban on foreign ownership of port terminals. Their proposal does not seem to provide a clear argument that DPW represents a threat to national security. US politicians have regarded DPW’s ports deal as politically significant. Senator Chuck Schumer even ventured to ask, “Should we be outsourcing our own security? ” in order to simultaneously play on US citizens’ fear of outsourcing of jobs and opening a port for terrorists.
Yet both DPW and the Bush administration repeatedly claimed that cargo would still be checked by US Customs and Border Protection, while the Coast Guard would still be in charge of security, as required by the Maritime Transportation Security Act of 2002 (Imai, 2002). Proponents of the deal further argued that DPW is also one of the world’s most open port management companies, prescreening all containers coming from foreign ports. This policy makes possible a higher rate of container checking than is currently underway.
Senator John McCain has called for temperance regarding the deal, warning the public and Congress that the US should, “not rush to judgment on this matter without knowing all the facts … Dubai has cooperated with us … and deserves to be treated respectfully. ” Retired army general Wesley Clark echoed this concern, stating, “the real issue is not who owns the ports, it’s whether they’re secure or not. ” Workers at these ports would still be represented by the International Longshoremen’s Association for the East Coast and the International Longshore and Warehouse Union on the West Coast.
These unions employ US citizens only to unload and manage all cargo (Daniels et al, 2007). Political analysts generally agree that the deal was a non-issue. Even Israel’s Ha’aretz newspaper, which acknowledges that rumors abound about the port companies’ own discrimination against Israel, published an article titled “Policy, Politics, and Racism in the Ports. ” The article began quoting a senator’s advisor who stated, “It’s 75 percent politics and 25 percent racism. “
The alienation of an essential trade partner and war ally in an increasingly anti-US region is bad for the United States and unnecessarily costly for US-UAE trade and diplomatic relations. The UAE opens its ports to US warships while also allowing the United States to use its airfields and construct intelligence facilities. From a financial standpoint, economic analysts have even called Dubai the next Singapore or Hong Kong, recognizing its potential to be an essential trading partner in the future. However, it may well be that the controversy’s adverse effects will take some time to subside.
On March 9, 2006, DPW quietly pulled out of the deal, a move US business leaders fear may herald a future loss of contracts to more supportive nations. US public sentiment claimed a victory for port safety, while Gulf News published its understanding of the deal: “Other foreign-owned companies run US ports–but they were not Arab. That is the message. And we got it. ” Aside from souring US-UAE relations, the deal’s dismissal may affect long-term US investment growth due to what seems to be a hostile environment for foreign investment (Eisheshtawy, 2004).
Most recently, in a news item that has dominated the headlines, perhaps even more so than the CNOOC affair, the Bush administration–somewhat surprisingly given its attitude towards the CNOOC/Unocal proposed transaction–approved a business deal involving the sale of six major U. S. ports to Dubai Ports World, a company substantially owned by the United Arab Emirates. (32) After CFIUS found no reason not to go forward with the proposed transaction and President Bush approved it, the U. S. Congress expressed serious concerns regarding the transaction, primarily for reasons of national security.
(33) In fact, the shareholders of Peninsular and Oriental Steam Navigation Company (P&O), the UK-based holding company currently in possession of the ports in question, went so far as to vote on and approve the transaction. (Daniels et al, 2007) To the extent that the uproar over CFIUS reform had subsided since it was on the forefront of Congress’s agenda last summer, this deal has promptly and forcefully thrown the issue of CFIUS reform back on the table. (35) Furthermore, as this situation unfolds, perhaps its most noteworthy aspects are the fundamental disagreement between the executive and legislative branches of the U.
S. government and the legislative branch’s vulnerability in the currently existing CFIUS review process. Again, there are tensions between the U. S. need for foreign investment, given a trade deficit that amounted to hundreds of billions of dollars last year, and the need for increased national security, with particular attention paid to emerging markets such as the United Arab Emirates. (Imai, 2002) This scenario stands as further proof that CNOOC was certainly not the last foreign corporation to seek U. S. assets in an economically and politically crucial industry sector.
In a development similar to what occurred in the CNOOC/Unocal transaction just a few months prior, on March 9, 2006, Dubai Ports World bowed to “extreme public and political pressure” and gave up its management stake in the U. S. seaports. (Pinder and Slack, 2004) Thus, the management of Dubai Ports World made a decision like that made by CNOOC management that the backlash that had arisen was too strong to overcome. (40) This situation gave renewed relevance to the CFIUS question and resulted in numerous pledges to reform the takeover review process in the United States.
It is clear that this is an issue that will not subside, but rather will swell in the coming years, as the effects of globalization continue to spread and cause an increasing number of economies around the world to seek overseas expansion in a variety of vital industry sectors. (Imai, 2002) Regarding China in particular, the comments of William Reinsch, president of the National Foreign Trade Council and a member of the congressionally appointed China Economic Security and Review Commission, will likely prove prescient: “China is piling up dollars, it’s only a matter of time before they start going into the acquisition of U.
S. companies. People shouldn’t be surprised. ” The Merger Corporate law in the United States is based primarily on state law regimes, with Delaware leading the way; more than half of the largest corporations in the United States, including Unocal Corporation, are incorporated in Delaware. (Pinder andSlack, 2004) Since other states have generally followed Delaware’s lead on many fundamentals of corporate law, including merger law, it is sensible to examine the relevant Delaware statutory language as a means of extrapolating the overriding norms of U. S.
merger law. (45) Of course, this statutory structure only applies to entities incorporated under the laws of Delaware, which may not be the case in cross-border transactions. However, using the Delaware statute as a base nonetheless is insightful because it reflects the fundamental principles of U. S. merger law. Delaware General Corporate Law [section] 251 sets forth the requirements for corporations incorporated in Delaware to enact a merger. (Imai, 2002) The statute first requires that the corporations adopt “an agreement of merger or consolidation.
” Section 251(b) sets forth the various provisions that must appear in this merger agreement and further specifies that it is the directors of the involved corporations who are responsible for approving the agreement and “declaring its advisability. ” (Hlebing et al, 2005) The statute also requires that any agreement adopted pursuant to [section] 251(b) be submitted to the “stockholders of each constituent corporation at an annual or special meeting for the purpose of acting on the agreement.
” The remainder of this provision delineates certain exceptions to the stockholder vote requirement, including the de minimis change exception and the short-form merger exception, but does not impose any additional requirements on the parties seeking to effect a merger. (Eisheshtawy, 2004) Notably absent from the basic statutory corporate law governing mergers in Delaware is any requirement of government approval of a particular merger agreement. Indeed, in the cross-border merger context, there is a “general absence of government regulation of foreign investment …
and exchange controls in the United States. ” By simply adhering to the requirements of [section] 251, the parties can complete a merger without government involvement, while fulfilling all requirements of state corporate law. (Pinder and Slack, 2004) Unlike the regimes in place in many other nations, the United States “exercises few controls over foreign exchange transactions by U. S. citizens or foreign exchange transactions,” as “no approval of the Treasury Department or other finance authorities is required to make an investment.
” (Imai, 2002) In fact, foreign exchange transactions of substantial size are monitored by the U. S. government only for informational purposes. There are, however, several instances in which the federal government does become involved in the merger process in the United States. The most significant occasion for government involvement in the merger process arises in the antitrust arena. Both of these instances in which federal law–and hence the federal government–becomes involved in the merger process, however, exist outside of the corporate law with which this Note is concerned.
In U. S. corporate law there exists an inherent trust of private ordering, which in turn leads to a trust of the markets at large to ensure equitable transactions in this area of the law. (Helbing et al, 2005) Moreover, private ordering increases efficiency, in that corporate mergers are often time-sensitive and government involvement would inevitably cause delay. It is sensible that these efficiency-diminishing governmental constraints would not exist, considering that Delaware courts “frequently note that mergers …
are ‘encouraged and favored. ‘” There appears to be a general consensus that private ordering is more efficient than government regulation. This provides a compelling reason to preserve at least a vestige of this trademark of U. S. corporate law which, as is demonstrated in the following section, is not necessarily a feature of many foreign corporate governance systems. Foreign Law Concerning Mergers The United Kingdom has established a Panel on Takeovers and Mergers, which acts pursuant to the City Code on Takeovers and Mergers.
“Public companies adhere to the Code and the rulings by the Panel are respected. ” Germany and Austria, other EU economic powers, have developed a similar system of takeover regulation, whereby entities exist both in and out of the government to ensure that companies are complying with statutory laws and more significantly, that those companies meet investment approval standards. Likewise, in France, the acquisition of more than 20% of a particular company requires prior authorization from the Treasury Department of the French Ministry of Economy and Finance.
(Imai, 2002) Similarly, China’s takeover law, though still in an early stage of development, appears to be moving in the same direction, with a great deal of involvement on the part of the state. However, it is worth noting that because China’s law and policy on this issue are still in a somewhat formative stage, there is a well-placed concern that U. S. policy could “prevent China from following the free-market way. ” With an eye towards foreign investment in domestic companies, where no mandatory process is in place in the Delaware General Corporation Law or the U.
S. law in general, “many countries restrict foreign ownership of commercial ventures. ” (70) This list includes India and numerous countries throughout Latin America, the Middle East, and Asia. (Helbling et al, 2005) This type of protectionism, which is apparently prevalent in many other foreign statutory constructions, is non-existent in the United States at the present. In Japan, though foreign takeovers and mergers are relatively rare, a nonresident tender offer or must file its offer with the Securities Company or bank it has appointed to manage the transaction.
(Pinder and Slack, 2004) Moreover, the Foreign Investment and Trade Control Law (FITCL) requires notice to be given to the Minister of Finance when a foreign corporation is attempting to transact with a Japanese corporation. At this point, the Minister of Finance may require a license for the transaction “if the transaction might disturb the equilibrium of Japan’s balance of international payments; might result in a drastic fluctuation of Japanese foreign exchange rates; or might result in transfers of funds between Japan and foreign countries in a large volume, thereby adversely affecting the Japanese money or capital market.
” Further, the Minister may refer the matter to the Committee on Foreign Exchange and Other Transactions for recommendations on various matters, including whether the transaction “could imperil the national security of Japan. ” Thus, there is a decided concern for the protection of Japanese assets evident in Japanese merger law. Although this has relaxed in recent years given the effects of globalization, it is nonetheless rare for parties entering a merger to be able to “contract freely, without government influence or guidance. “
Similarly, the Reserve Bank of India, which also falls under the Ministry of Finance, is the central administrative agency charged with regulating foreign investment in India. (Eisheshtawy, 2004) The Industrial Policy Statement of 1977 lays out the terms under which foreign investment and acquisition of technology are allowed, stating that such transactions will only be permitted when they are deemed to be “in the national interest. ” The document goes on to state that “majority interest in the ownership of companies, and effective control of companies, should be in the hands of Indian nations.
” In addition, the Foreign Exchange Regulation Act regulates foreign financial participation in Indian business, stating that all proposals must be cleared by the Foreign Investment Board of the Indian government and delineating an elaborate process for approval of a merger proposal. The regulatory infrastructure in place, even in a developing economy like India’s, is far more elaborate and demanding than that which is found in U. S. corporate law.
It is evident that there are more, and better developed, statutory restrictions on foreign investment in place in foreign jurisdictions than in the United States. Indeed, economists, politicians, and lawyers would likely agree that the open investment policy of the United States has been one of the hallmarks of U. S. diplomatic posturing throughout its history. The ability of this open investment policy to coexist with a new infrastructure for vetting foreign investment in the United States.
is uncertain–both in terms of its feasibility and its desirability. As the following section of this Note will demonstrate, however, there is, in fact, a mechanism within the mire known as “alphabet soup” in Washington, D. C. , that at least ostensibly was designed to perform a function similar to that of the various panels and agencies existing in the European and Asian countries described above: the Committee for Foreign Investment in the United States (CFIUS). (Pinder and Slack, 2004) Its power and role in cross-border transactions involving U. S.
entities has, however, been almost negligible up to this point. (82) Whether this will continue to hold true given new found national security concerns in the United States is a question that will be answered only in the context of future situations that mirror the proposed Unocal/CNOOC transaction. CONCLUSION As the nation’s attention turns, with increased frequency and intensity, towards reforming merger law in the United States regarding cross-border transactions, an understanding of the problems facing the current mechanism in place is essential.
As such, this Note has first and foremost attempted to lay out the current problem and the most prominent situations in which the issue has arisen in recent years. Secondly, the guidelines for overhaul of the CFIUS process are informed by a thorough understanding of the needs of the areas in which the current process is lacking–namely that it has not been created with an appreciation for heightened security risks and changing standards of economic prosperity given the U. S. trade deficit.
One critique that will undoubtedly be leveled at the factors mentioned above as guidelines for revising the CFIUS process–and thereby substantially changing the face of U. S. merger law with respect to cross-border acquisitions of U. S. assets by foreign entities–is that such change of longstanding principles of U. S. merger law and, indeed, U. S. foreign policy as it relates to corporate law (respect for private ordering, openness to foreign investment, etc. ) will not be easy to effect.
Concededly, this type of change would require cooperation and endorsement from a number of parties in different sectors of our business and political communities–from politicians in Washington, to corporate executives at home and abroad. Indeed, these are individuals who operate in very different spheres of society, but efforts must begin soon to inform these parties of the need to intensify scrutiny of these transactions for national security reasons, while still eschewing protectionism and maintaining the openness to foreign investment that has played an integral role in U.
S. economic and social growth since its founding. There is no doubt that this is a fine line to walk, but the appropriate foresight at this relatively early juncture, combined with the cooperation and understanding of all necessary parties, a compromise can surely be reached that will reflect these new needs but not stray too far in the direction of either extreme. For decades, men have been dreaming to surpass their limitations by uniting the world spiritually, intellectually, emotionally, and economically.
Spiritually, in a sense of spreading the gospels of each groups’ religion to convert as many as they can. Intellectually, in a sense of passing common knowledge to take away the naivete of the world. Emotionally, by updating each other about the current situations to be able to sympathize or reach out to those countries in need. And finally, economically united, progressive and productive without the shackles of poverty and misery. As ambitious as the human beings can get, none of these dreams have been achieved yet.
The world is still divided in all these forms perhaps because of men’s nature of individuality – especially in the battlefield of international business, where survival is a necessity. When one says international business, what does one means? In the book “International Business: An Operational Theory,” by Richard A. Farmer and Barry M. Richman (1966), International Business (I. B. ) is generally business operations of any sort by one firm which take place within or between two or more independent countries.
Farmer and Richman (1966) also included that the general study of I. B. is subdivided into various branches of study (which will be later discussed) such as: The operation of domestic firm in domestic branches; export and import trade; comparative management; comparative economics system; and functional business analysis. A more recent definition of I. B. is that it consists of transactions and activities that occur between people or organizations from different countries, which take on various forms (Arpan, 1993).
All in all, international business is usually defined as the transfer of factors of production owned by organizations across national borders, or the transfer of parts of that organization across national borders. (Agmon, 1989). On the other hand, the government plays an important role in international business. Loasby (2001) states that the international business has a new agenda, which is based in four principles.
The first is that the primary focus should not be on the specific attributes or policies of particular firms but on a general systems view. The second principle is that the primary determinants of the organizational structure of multinational enterprise are the volatility of the environment and the costs of acquiring the information needed for high-quality decisions. The third is to link the MNE and entrepreneurship, in particular by locating entrepreneurship within information networks.
Finally the study of international business should be embedded within a broader psychological and social context, recognizing the importance of non-pecuniary objectives and social structures, which support high-trust relationships rather than opportunistic behavior. References Daniels,J. D. , Radebaugh, L. H. and Sullivan, D. P. (2007) International Business: Environment and Operations. Upper Saddle River,NJ: Pearson Prentice Hall. Elsheshtawy, Y. (Ed. ). (2004).
Planning Middle Eastern Cities: An Urban Kaleidoscope in a Globalizing World. New York: Routledge. Helbling, T. , Batini, N. , & Cardarelli, R. (2005). Chapter III: Globalization and External Imbalances. 109+. Imai, K. (2002). The Impact of Globalization on Civil Liberties: Asian vs. Non-Asian States. International Journal on World Peace, 19(1), 39+. Pinder, D. & Slack, B. (Eds. ). (2004). Shipping and Ports in the Twenty-First Century: Globalization, Technological Change and the Environment. New York: Routledge.